Defendant National Farm Financial Corp. agreed to sell Business Alliance Insurance Co. (BAIC) to PSM Holding Corp. After National Farm walked away from the deal, PSM sued National Farm, BAIC, and BAIC’s president, Larry Chao, in the District Court for the Central District of California alleging breach of contract. A jury found in favor of PSM and awarded it $40 million.
After taking possession of BAIC, PSM and BAIC entered into an intercompany quota share reinsurance agreement (QSA). The district court’s ruling was then reversed on appeal and remanded, and upon remand, the court concluded that the defendants were entitled to specific restitution of the BAIC shares and an accounting of the profits earned while PSM held BAIC, diminished by expenses necessarily incurred in the protection of the property and the payment of taxes and liens. Thereafter, the defendants filed a motion for an award of PSM’s profits totaling $14 million. PSM opposed the motion, arguing that it actually suffered a $1.5 million loss as a result of its temporary possession and control of BAIC and sought to rescind the QSA. The court decided that defendants would receive the return of BAIC’s shares, but that PSM would receive restitution of $1.1 million. The court also held that PSM could not rescind the QSA.
The parties cross-appealed to the Ninth Circuit, which concluded that the district court erred in allowing PSM – the judgment creditor – to recover in restitution. Regarding rescission of the QSA, however, the Ninth Circuit affirmed, agreeing with the district court that the QSA could not be rescinded since it was “an improvement” to BAIC rather than a necessary cost of protecting BAIC. , Case Nos. 15-55026, 15-55941 (9th Cir. Mar. 7, 2018).