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Wallis v. Centennial Insurance Company

May 12, 2009




Plaintiffs Dale M. Wallis ("Dr. Wallis"), James L. Wallis ("Mr. Wallis"), and Hygieia Biological Laboratories Inc. ("Hygieia") brought this action against defendants Centennial Insurance Company Inc. ("Centennial") and Atlantic Mutual Insurance Co. Inc. ("Atlantic Mutual") to resolve disputes involving a professional liability insurance policy ("Policy") issued by defendants. Plaintiffs and third party defendant Joanna R. Mendoza (collectively "moving parties") now move to dismiss Centennial's Third Party Complaint ("TPC") pursuant to Federal Rule of Civil Procedure 12(b)(6).

I. Factual and Procedural Background

Beginning in 1993, Dr. Wallis, a research veterinarian, was involved in a lawsuit over the intellectual property rights to a bovine vaccine she had developed while working for Poultry Health Laboratories ("PHL"). (Compl. ¶¶ 8, 11-14.)*fn1 Several related lawsuits ensued, one of which involved a complaint by Dr. Wallis against PHL and its shareholders alleging that she had created the vaccine and that PHL had defrauded her of her invention. (Id. ¶¶ 11-18.) In that action, PHL filed a cross-complaint ("PHL cross-action") against Dr. Wallis, Mr. Wallis, and Hygieia alleging unfair competition, interference with contractual relations and prospective economic advantage, misappropriation of trade secrets, and conversion. (Id. ¶ 19.)

Pursuant to the Policy, defendants in this case provided the defense of the PHL cross-action under a reservation of rights, including the right to seek reimbursement for the expenditure of any funds in the defense of a claim not covered by the Policy.*fn2 (See id. ¶¶ 8, 21; TPC 7:27-8:1.) Because defendants provided the defense under a reservation of rights, plaintiffs retained Ms. Mendoza as independent counsel--known as Cumis counsel--and defendants proceeded to pay the legal fees and costs incurred.*fn3 (Compl. ¶¶ 21-22.)

Subject to a protective order in the PHL cross-action, the parties had to file certain documents with the state trial court under seal. (TPC 8:9-13.) In January 2006, PHL filed under seal a declaration and attachments in which some of the pages were marked confidential pursuant to the protective order but many were not. (Id. at 8:17-23.) Though the declaration was delivered to the trial court using a sealed envelope, it was apparently placed in its entirety in the public court file. (Id. at 24-26.) Ms. Mendoza--plaintiffs' attorney in both the PHL cross-action and this case--allegedly informed her clients of the public availability of the declaration, which contained information about the trade secrets at issue in that litigation, and Dr. Wallis and Mr. Wallis subsequently sent several non-parties to view the public file and/or copy the contents of the declaration. (Id. at 9:1-15.)

After the trial court eventually ordered the declaration sealed and marked confidential under the protective order, PHL moved for sanctions pursuant to California Code of Civil Procedure section 128.5 against Dr. Wallis, Mr. Wallis, and Mendoza. (Id. at 9:20-10:4.) The trial court found that Dr. Wallis, Mr. Wallis, and Ms. Mendoza had violated the protective order in bad faith and imposed a $43,534.50 sanction jointly and severally against them. (Id. at 10:6-8.) The state court of appeal upheld the award of sanctions. (Id.)

Plaintiffs thereafter filed their Complaint in this case on October 27, 2008, asserting diversity jurisdiction, 28 U.S.C. § 1332(a), and alleging breach of insurance contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty. Centennial then filed counterclaims against plaintiffs for declaratory relief regarding the reasonableness of Cumis counsel's fees and the duty to indemnify or defend plaintiffs for breach of the protective order. (Id. at 10:22-12:7.)

Centennial also filed the TPC alleging a single claim against Ms. Mendoza for declaratory relief and reimbursement of any and all sums paid for the purpose of defending Ms. Mendoza against the motion for sanctions. (Id. at 12:11-24.) As pled, the TPC seeks a determination only as to whether Centennial's duties under the Policy include the payment of defense costs for Ms. Mendoza; it does not contain allegations concerning whether defendants had a duty to defend the insured against the sanctions motion, and thus the court will not address that issue for the purposes of the instant motion.*fn4

II. Discussion

On a motion to dismiss, the court must accept the allegations in a complaint as true and draw all reasonable inferences in favor of the complainant. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322 (1972). To survive a motion to dismiss, a complainant needs to plead "only enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Dismissal is appropriate, however, where the complainant fails to state a claim supportable by a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990); see also Conley v. Gibson, 355 U.S. 41, 47 (1957) (complaint must "give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests"), abrogated on other grounds by Twombly, 550 U.S. at 563.

The moving parties contend that the TPC against Ms. Mendoza must be dismissed because public policy considerations regarding the attorney-client relationship prohibit claims by an insurer against Cumis counsel concerning representation of the insured. (See Mem. Supp. Mot. Dismiss 9:4-7; Reply 3:22-4:17.) In support of this contention, they cite case law creating an exception to the general rule of implied equitable indemnity among joint tortfeasors for claims against an adverse party's attorney because even the threat of such claims could impinge on the attorney's duty of loyalty to the client. See, e.g., Cal. State Auto. Ass'n v. Bales, 221 Cal. App. 3d 227, 230-31 (1990) (holding that an insurance company may not seek equitable indemnity from the third party claimant's attorney); Gibson, Dunn & Crutcher v. Superior Court of Los Angeles County, 94 Cal. App. 3d 347, 352 (1979) (providing that a client's former attorney may not seek equitable indemnity from the client's current attorney). See generally Schick v. Lerner, 193 Cal. App. 3d 1321, 1329 (1987) ("[P]ublic policy dictates that attorneys must remain free to counsel their clients without fear of subjecting themselves to liability as a result of the proper discharge of their professional obligations.").

These authorities, however, do not support the broad proposition that an insurer may never bring a claim against Cumis counsel. The TPC as pled in this case does not seek to hold Cumis counsel personally liable for damages or equitable indemnity to Centennial. Nor does it allege that Cumis counsel breached a duty of care owed to Centennial.*fn5 Rather, it seeks a judicial determination that Centennial was not obligated under the Cumis counsel arrangement to pay for the costs of defending a party other than the insured---namely, Mendoza herself--against a successful motion for sanctions.*fn6

The Supreme Court of California has recognized that an insurer that has provided a defense under a reservation of rights "has a right of reimbursement that is implied in law as quasi-contractual" for defense costs with respect to claims that are not even potentially covered by the applicable policy. Buss v. Superior Court of Los Angeles County, 16 Cal. 4th 35, 50-51 (1997); see Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 659, 663 (2005) (holding that an insurer could seek determination of rights under the policy and reimbursement after it had "prophylactically financed the defense of claims as to which it owed no duty of defense"). Such claims are typically asserted by an insurer against an insured. E.g., Walbrook Ins. Co. V. Goshgarian, 726 F. Supp. 777 (C.D. Cal. 1989); Scottsdale Ins. Co., 36 Cal. 4th at 643. But cf. Fireman's Fund Ins. Cos. v. Younesi, 48 Cal. App. 4th 451 (1996) (action by insurer against Cumis counsel alleging that attorney had fraudulently billed insurer). Nevertheless, the moving parties have not identified case law precluding the assertion of such claims directly against a party other than the insured when, as alleged here, the ...

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