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Carolina Casualty Insurance Company v. Jones Helsley

January 12, 2011

CAROLINA CASUALTY INSURANCE COMPANY, PLAINTIFF,
v.
JONES HELSLEY, PC, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Michael J. Seng United States Magistrate Judge

OR DE R R E C O M M E N D IN G TH AT DEFENDANTS' MOTION TO STAY BE GRANTED

(ECF No. 44)

OBJECTIONS DUE WITHIN THIRTY DAYS

Before the Court is Defendants' and Counterclaimants' Motion to Stay of All Proceedings. (ECF No. 44.) The Court considered all the papers filed in support of and in opposition to the Motion and heard argument on the Motion on December 10, 2010.

For the reasons stated at the hearing and modified and supplemented below, the Court recommends that Defendant and Counterclaimants' Motion for a Stay be GRANTED until the underlying action, James A. Bratton and Bratton Investments, LLC v. Timothy Jones, et al., pending in California Superior Court, Fresno County, as action number 10CECG02212AM (the "Bratton Action" or the "Underlying Action" ) is resolved. However, it is further recommended that Plaintiff be given the right to seek relief from the stay if and when it in good faith believes and represents that circumstances have changed so that the reasons for the stay no longer exist, provided no such motion for relief from the stay be initiated for at least six months..

I. LEGAL STANDARD

Courts have the discretion to stay insurance coverage actions until after the underlying actions have been decided. Courts may stay an insurance coverage action to avoid inconsistent determinations that could prejudice an insured; a stay is appropriate unless the facts to be litigated in the coverage case are unrelated to issues of consequence in the underlying case . Montrose Chemical Corp. of Calif. v. Superior Court, 6 Cal. 4th 287, 24 Cal. Rptr. 2d 467 (1994) ("Montrose I"); Montrose Chemical Corp. of Calif. v. Superior Court, 25 Cal. App.4th 902, 31 Cal. Rptr. 2d 38 (1994) ("Montrose II"); California Ins. Guarantee Assoc. v. Superior Court, 231 Cal. App.3rd 1617, 283 Cal. Rptr. 104 (1991). Even where there are no issues overlapping between the coverage and the underlying cases, the Court is to use its discretion and balance prejudice to the insured (In having to wage a two-front war if the coverage action is not stayed) against the prejudice to the insurer (in having to pay defense costs in a case where there may be no duty to defend if the stay is granted), giving consideration to the anticipated length of the underlying case, as to whether the insured has independent counsel in the underlying case and as to whether the insured has other insurance. Great American Insurance Co. vs Superior Court, 178 Cal. App. 4th 221, 100 Cal. Rptr. 3d 258 (2009).

Courts also "possess discretion in determining whether and when to entertain an action under the Declaratory Judgment Act, even when the suit otherwise satisfies the subject matter jurisdictional prerequisites." Wilton v. Seven Falls Co., 515 U.S. 277 (1995);

Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942). In explaining this authority, the Supreme Court has stated: "Consistent with the nonobligatory nature of the remedy, a district court is authorized, in the sound exercise of its discretion, to stay or to dismiss an action seeking a declaratory judgment before trial or after all arguments have drawn to a close. In the declaratory judgment context, the normal principle that federal courts should adjudicate claims within their jurisdiction yields to considerations of practicality and wise judicial administration." Wilton, 515 U.S. at 288.

II. FACTS

The facts essential to this Motion are summarized briefly as follows: At all times relevant to this motion Defendants and Counterclaimants Jones Helsley PC, a California Professional Corporation, Timothy Jones, Esq., Jack Hindmarsh, Esq., and Jack Hindmarsh, PLC, a California Professional Law Corporation (collectively the "Jones defendants") have been attorneys at law insured against professional errors and omissions under Lawyers Professional Liability Insurance Policy No. 9904986 (the "CCIC Policy" or the "Policy") issued by Carolina Casualty Insurance Company ("CCIC").

According to the Jones Defendants, in 2006, James A. Bratton and Bratton Investments LLC (the "Brattons") engaged the Jones defendants, or some of them, and/or their predecessor firm, to provide legal services to the Brattons. Defendants provided legal services to the Brattons in connection with the formation of various limited liability companies organized to pursue real estate development ventures in specified locations in Central California. (Decl. of Timothy Jones ("Jones Decl."), ECF No. 31, ¶ 2.) Upon the organization of two of these LLCs, defendant Timothy Jones received a membership interest in each. Jones later transferred his interest in these two LLCs to Central Pacific Ventures, LLC, an LLC in which Mr. Jones individually holds a fifty percent membership interest. (Id. at ¶¶ 6, 8-9.)

The Brattons claim that they suffered losses in connection with the above transactions and in the real estate ventures associated therewith, and they have filed suit against the Jones Defendants in California Superior Court, Fresno County, action number 10CECG02212AM, entitled James A. Bratton and Bratton Investments, LLC v. Timothy Jones, et al., (the "Bratton Action" or the "Underlying Action"). The Brattons allege, inter alia, that the Jones Defendants performed negligently and breached professional duties in their legal representation of the Brattons and/or in connection with the LLCs which were formed. They also allege that the Jones Defendants (and others with interest in the LLCs) breached fiduciary duties and committed fraud in connection with the operation and ownership of the LLCs. The complaint attributes significant ownership and/or control of the LLCs to Defendant Jones and/or companies owned by him. The Brattons seek compensatory damages of at least nine million dollars, punitive damages, the establishment of a constructive trust, and various other relief. (Decl. of Barry W. Lee ("Lee Decl."), ECF No. 32, Ex. 1.) The Bratton suit is in its infancy. At least one demurrerunder California law (motion to strike or dismiss under federal law) is pending.

The Jones Defendants tendered the suit to CCIC and requested defense and indemnity under the CCIC policy. (Jones Decl. ΒΆ 15.) CCIC agreed to defend the Bratton action for the Jones Defendants but did so under a reservation of rights, and also filed this action seeking a declaration that it has no duty to defend or indemnify the Jones Defendants in the Bratton action. ...


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