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Travelers Indemnity of Connecticut, A v. Arch Specialty Insurance Company

December 15, 2011

TRAVELERS INDEMNITY OF CONNECTICUT, A CONNECTICUT CORPORATION, AND TRAVELERS PROPERTY CASUALTY COMPANY OF TRAVELERS' AMERICA, A CONNECTICUT
CORPORATION,
PLAINTIFFS,
v.
ARCH SPECIALTY INSURANCE COMPANY, A NEBRASKA CORPORATION, DEFENDANT. ARCH SPECIALTY INSURANCE COMPANY, COUNTER- CLAIMANT,
v.
TRAVELERS INDEMNITY OF CONNECTICUT, A CONNECTICUT CORPORATION, AND TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA, A CONNECTICUT CORPORATION, COUNTER-DEFENDANTS. THIS MATTER IS BEFORE THE COURT ON PLAINTIFFS/COUNTER



ORDER GRANTING MOTION TO DISMISS AND MOTION TO STRIKE

Defendants' Travelers Indemnity of Connecticut and Travelers 2 Property Casualty Company of America (collectively "Travelers") 3 Motion to Dismiss (Doc. #19) the third claim for relief in 4 Defendant/Counterclaimant Arch Specialty Insurance Company's 5 ("Arch") First Amended Counterclaim ("FAC") (Doc. #15), for failure 6 to state a claim pursuant to Federal Rule of Civil Procedure 7 12(b)(6). Also before the Court is Travelers' Motion to Strike 8 Claims for Attorney's Fees and Punitive Damages (Doc. #20) from the 9 FAC, pursuant to Federal Rule of Civil Procedure 12(f). Arch opposes both motions (Doc. #21). For the reasons set forth below, the motion to dismiss and motion to strike are GRANTED.*fn1

I. FACTUAL ALLEGATIONS AND SUMMARY OF ARGUMENTS

The FAC was filed in response to the Complaint (Doc. #1) filed by Travelers, which brought one claim for declaratory relief against Arch. Travelers issued a primary policy (the "primary policy") and umbrella policy (the "umbrella policy") to United Salad Co., and its affiliate Freeway Transport, Inc. ("Freeway Transport"). Both policies were in effect from September 1, 2004 to September 1, 2005. Compl., ¶ 4. Arch insured United Salad Co. and Freeway Transport under an excess liability policy (the "excess policy"), also in effect from the September 1, 2004 to September 1, 2005. Compl., ¶ 5. In 2006, Freeway Transport was sued in Sacramento Superior Court in a case entitled Malaquias Mejia as guardian ad litem for Diana Yuleidy Loza-Jimenez v. Loza Trucking, et al. (the "Mejia Action"). The Mejia Action sought damages for 2 catastrophic personal injuries suffered by the plaintiff as a 3 result of an accident that occurred in November 2004. Following a 4 trial, Freeway Transport reached an agreement to settle the Mejia 5 Action for $22.5 million. Travelers contributed the combined $2 6 million limits of the primary and umbrella policies. Arch funded 7 the $20.5 million balance of the settlement. Travelers asserts 8 that it is not obligated to reimburse Arch for the $20.5 million, 9 and seeks a declaratory judgment to that affect.

The FAC alleges that Travelers received an offer under California Code of Civil Procedure § 998 (the "§ 998 offer") to settle the Mejia Action for $2 million, but let the offer expire without informing Freeway Transport or Arch. FAC, ¶¶ 17-24. Instead, the Mejia action proceeded to trial, and Freeway Transport's liability was established. Shortly before the trial entered the damages phase, Arch negotiated a "High-Low" agreement, which set a damages floor of $9 million and a ceiling of $22.5 million. The jury awarded damages of $24,307,273.56 against Freeway Transport, which was reduced to $22.5 million pursuant to the settlement.

The FAC brings four claims against Travelers: (1) breach of contract and the implied covenant of good faith and fair dealing; (2) tortuous breach of the implied covenant of good faith and fair dealing; (3) breach of the duty of care; and (4) declaratory relief. Arch argues that Travelers acted in bad faith and with negligence when it failed to inform Freeway Transport and Arch of the initial § 998 offer. Accordingly, Arch seeks reimbursement of the $20.5 million that it ultimately paid to settle the Mejia Action. 2

Travelers' motion to dismiss argues that under California and 3 Oregon law it did not owe a direct duty of care to Arch, thus the 4 third claim for relief should be dismissed for failure to state a 5 claim. Additionally, the motion to strike argues that at most 6 Arch could recover the amount it paid, but that its additional 7 claims for attorneys' fees and punitive damages should be stricken. 8 Arch contends that the Court should follow Oregon law, and that 9 under Oregon law the third claim for relief should not be dismissed and the claims for attorneys' fees and punitive damages should not be stricken.

II. OPINION

A. Legal Standard

1. Motion to Dismiss

A party may move to dismiss an action for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). In considering a motion to dismiss, the court must accept the allegations in the complaint or counterclaim as true and draw all reasonable inferences in favor of the plaintiff. 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). Assertions that are mere "legal conclusions," however, are not entitled to the assumption of truth. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009), citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). To survive a motion to dismiss, a plaintiff or counterclaimant needs to plead "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. 2

Dismissal is appropriate where the plaintiff or counterclaimant 3 fails to state a claim supportable by a cognizable legal theory. 4

Balistreri v. Pacifica Police Department, 901 F.2d 696, 699 (9th 5 Cir. 1990). 6

Upon granting a motion to dismiss for failure to state a 7 claim, the court has discretion to allow leave to amend the 8 complaint or counterclaim pursuant to Federal Rule of Civil 9 Procedure 15(a). "Dismissal with prejudice and without leave to amend is not appropriate unless it is clear . . . that the complaint could not be saved by amendment." Eminence Capital, L.L.C. v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003).

2. Motion to Strike

Federal Rule of Civil Procedure 12(f) governs motions to strike: Rule 12(f) provides in pertinent part that the Court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter. . . . Motions to strike are disfavored and infrequently granted. A motion to strike should not be granted unless it is clear that the matter to be stricken could have no possible bearing on the subject matter of the litigation.

Bassett v. Ruggles et al., 2009 WL 2982895 at *24(E.D. Cal. Sept. 14, 2009) (internal citations omitted).

B. Claims

1. Third Claim for Relief: Breach of ...


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