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Certain Underwriters at Lloyd's of London v. Mandell

September 17, 2008

CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON, SUBSCRIBING TO CERTIFICATE NO. EPL-20044M, PLAINTIFF,
v.
MANDELL, MENKES, & SURDYK, AN ILLINOIS CORPORATION, AND LEONARD S. SURDYK, DEFENDANTS.



The opinion of the court was delivered by: Anthony W. Ishii Chief United States District Judge

ORDER ON DEFENDANTS' MOTION TO DISMISS

This is a legal malpractice claim brought by Plaintiff Certain Underwriters at Lloyd's of London against the law firm of Mandell, Menkes, & Surdyk and attorney Leonard Surdyk (collectively "MMS"). The case stems from insurance coverage advice that Plaintiff received from Defendants about a case in California. Defendants are from Illinois, and Plaintiffs brought a legal malpractice action against Defendants in Cook County Illinois Circuit Court ("Illinois Court"). The Illinois Court dismissed that lawsuit on the basis that the statute of limitations had run. Plaintiff appealed, but later voluntarily dismissed its appeal. Shortly before dismissing the appeal, Plaintiff filed this malpractice suit in the Stanislaus County Superior Court. Defendants removed to this Court and now move to dismiss the case under Rule 12(b)(6) based on the rulings of the Illinois Court. For the reasons that follow, the motion to dismiss will be granted.

LEGAL FRAMEWORK -- RULE 12(b)(6)

Under Federal Rule of Civil Procedure 12(b)(6), a claim may be dismissed because of the plaintiff's "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). A dismissal under Rule 12(b)(6) may be based on the lack of a cognizable legal theory or on the absence of sufficient facts alleged under a cognizable legal theory. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001); Balistreri v. Pacifica Police Dep't., 901 F.2d 696, 699 (9th Cir. 1988).In reviewing a complaint under Rule 12(b)(6), all allegations of material fact are taken as true and construed in the light most favorable to the non-moving party. Newman v. Sathyavaglswaran, 287 F.3d 786, 788 (9th Cir. 2002); Vignolo v. Miller, 120 F.3d 1075, 1077 (9th Cir. 1999). The Court must also assume that general allegations embrace the necessary, specific facts to support the claim. Smith v. Pacific Prop. and Dev. Corp., 358 F.3d 1097, 1106 (9th Cir. 2004); Peloza v. Capistrano Unified Sch. Dist., 37 F.3d 517, 521 (9th Cir. 1994). But, the Court is not required "to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001); see also Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003); Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). Courts will not "assume the truth of legal conclusions merely because they are cast in the form of factual allegations." Warren, 328 F.3d at 1139; Western Mining Council, 643 F.2d at 624.Furthermore, Courts will not assume that plaintiffs "can prove facts which [they have] not alleged, or that the defendants have violated . . . laws in ways that have not been alleged." Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 526 (1983). As the Supreme Court has recently explained:

While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).

Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007). In deciding whether to dismiss a claim under Rule 12(b)(6), the Court is generally limited to reviewing only the complaint, but may review materials which are properly submitted as part of the complaint and may take judicial notice of public records outside the pleadings. See Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001); Campanelli v. Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996);MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986).

If a Rule 12(b)(6) motion to dismiss is granted, "[the] district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc) (quoting Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995)). In other words, leave to amend need not be granted when amendment would be futile. Gompper v. VISX, Inc., 298 F.3d 893, 898 (9th Cir. 2002).

BACKGROUND*fn1

Allegations Made In The Case At Bar Plaintiff retained MMS to act as a claims, monitoring, and coverage counsel for Plaintiff's nationwide employment practices insurance program. Plaintiff issued an Employment Practices Liability insurance policy ("the Policy") to CLS, B&H, and Bright Development (collectively "CLS"). In August 2000, a suit was filed against CLS by the children of Lyn Bright for an alleged refusal to pay moneys owed. In September 2000, CLS filed a cross complaint against Lyn Bright (managing partner of CLS), alleging breach of fiduciary duty, conversion, and constructive fraud. In October 2000, a cross-complaint was filed against Lyn Bright by his sisters, who were partners in CLS. In January 2001, Lyn Bright filed an amended cross-complaint that included thirteen causes of action, three of which were potentially covered by the Policy. Later in January 2001, CLS tendered notice of Lyn Bright's amended cross-complaint. MMS wrote a letter on behalf of Plaintiff and accepted the defense of CLS against Lyn Bright's cross-complaint.

In April 2003, MMS erroneously advised Plaintiff to file a Declaratory Relief Action ("DRA") in California against CLS seeking to recover defense costs incurred for the claims in Lyn Bright's cross-complaint that were not covered by the Policy. The DRA was erroneous since Buss v. Superior Court, 16 Cal.4th 35 (1997) requires an insurer to pay for both covered and non-covered causes of action as long as some of the claims are potentially covered. Plaintiff filed a DRA on May 21, 2003, in California against CLS.

In response to the DRA, CLS filed a motion to stay that proceeding. CLS argued that Plaintiff filed the DRA because it grew concerned about the legal fees being incurred. CLS stated that they were nothing short of surprised and dismayed by Plaintiff's ambush.

The California court asked MMS as counsel for Plaintiff to wait until the underlying litigation was concluded before bringing the DRA, but expressed concern that the underlying litigation was only in embryonic stages. In order to avoid prejudice to CLS and possible inconsistent factual determinations, the California court granted CLS's motion for stay and stayed the case pending resolution of the underlying litigation. During the pendency of the stay, Plaintiff continued to pay CLS's defense costs in the underlying litigation.*fn2

On December 19, 2005, Lyn Bright filed a second amended cross-complaint which dropped all causes of action that were potentially covered by the Policy. As a result, in January 2006, Plaintiff sent a formal notice of withdrawal to CLS and ceased payment for further defense costs.

Of particular note, Plaintiff specifically alleges:

26. The filing of the DRA constituted legal malpractice because it served no purpose and provided no benefit to [Plaintiff], particularly since it was stayed by the court until such time as the Underlying Litigation was resolved. It served only to cause CLS to completely terminate all communication with [Plaintiff] during the pendency of the Underlying Litigation.

27. While not necessarily unusual, the termination of communication is important because, during the pendency of the Underlying Litigation, documents were produced and depositions were taken that revealed [CLS] submitted material misrepresentations in the insurance policy applications. These material misrepresentations would have, if known by [Plaintiff], permitted [Plaintiff] to unilaterally rescind the Policy without ever having to file a declaratory relief action.

28. [Plaintiff] possess no other means of obtaining the documents which revealed [CLS]'s material misrepresentations because the DRA had been stayed until the Underlying Litigation resolved. Thus, [Plaintiff]'s access to the relevant documents turned wholly on the goodwill of [CLS]'s counsel, and MMS destroyed that goodwill by employing the DRA.

29. As it was, [Plaintiff] was not given access to the documents produced and the transcripts of the depositions taken until such time as the Underlying Litigation had concluded. The reason [Plaintiff] was not given access to those documents is because MMS filed the purposeless DRA, so angering [CLS] that [CLS] terminated all communications with [Plaintiff].

30. To exacerbate matters, the filing of the DRA in and of itself foreclosed [Plaintiff]'s ability to unilaterally rescind the Policy, since unilateral rescission is not available once an "action on the contract" is commenced.

31. MMS's malpractice relates to the very procedure of filing the DRA, which (a) prevented Underwriters from determining the existence of grounds for immediate rescission of the Policy until after the Underlying Litigation was resolved and [CLS] permitted [Plaintiff] to review a limited amount of documents and transcripts from the Underlying Litigation; and (b) prevented [Plaintiff] from immediately rescinding the Policy even if such information had been available.

32. MMS breached its duty to Underwriters by advising Underwriters to file a fruitless DRA and such breach proximately caused damages -- the loss of access to information that would support immediate rescission -- to [Plaintiff].

33. As a result of the erroneous coverage advice by Defendants, [Plaintiff] incurred general and special damages which included but are not limited to attorneys' fees and costs to file and prosecute the improper [DRA].

42. . . . MMS's erroneous and fruitless DRA prevented [Plaintiff] from discovering the existence for grounds for unilateral and immediate rescission . . . after the Underlying Litigation was resolved. Not only did the DRA alienate [CLS]'s counsel, which precluded [Plaintiff]'s access to documents in the Underlying Litigation, but since the DRA was stayed by the court, [CLS] did not have ability to conduct discovery and obtain these documents and deposition transcripts which reveal the misrepresentations.

Court's Docket Doc. No. 1-3 at ¶¶ 26-33, 42; see also ¶¶ 46-53, 57-65.

Allegations Made In Illinois Action

From the Complaint filed in the Illinois case, in pertinent part Plaintiff alleged:

42. In or about April 2003, Defendants erroneously advised Underwriters to file a declaratory relief action seeking to recover defense costs incurred against B&H for non-covered claims asserted in the Bright Cross-Complaint. Such advice was erroneous as Buss requires the insurer to pay for both covered and non-covered causes of action as long as some of the claims are potentially covered.

43. Said Declaratory Relief action was filed on May 21, 2003. . . . . . . .*fn3

49. The California Court granted a stay of the [DRA] pending the outcome of the underlying litigation. During the California Court's imposed stay of the [DRA], Underwriters continued to ...


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