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Progressive Casualty Insurance Company v. Michael L. Dalton

December 6, 2012

PROGRESSIVE CASUALTY INSURANCE COMPANY,
PLAINTIFF,
v.
MICHAEL L. DALTON, ET. AL., DEFENDANTS.



The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge

MEMORANDUM AND ORDER

Through this action, Plaintiff Progressive Casualty Insurance Company ("Progressive") seeks a declaratory judgment with respect to the liability insurance policy it issued to Pacific State Bank ("the Bank").

Specifically, Progressive asks the Court to find that its policy provides no coverage for a purported $23 million claim asserted by Defendant Federal Deposit Insurance Corporation ("the FDIC") against various Bank Officers and Directors, including Defendants Michael L. Dalton, Harold Hand, Kathleen M. Verner, Patricia A. Hatton, Maxwell L. Freeman, Yoshikazu Mataga, George M. Schofield, Rick Simas, Gary A. Stewart, Russell Munson, Steven Kikuchi, Steve Rosso, Justin Garner, Laura Maffei, and Linda Ogato ("the Directors and Officers"). Moreover, Progressive seeks a judicial declaration of the rights, duties, obligations and interests of all the parties pursuant to the Declaratory Judgment Act ("the Act"). 28 U.S.C. § 2201(a) (2006).

Presently before the Court are Defendants' Motions to Dismiss Progressive's Complaint for failure to state a claim, pursuant to Federal Rule of Civil Procedure 12(b)(6).*fn1

Alternatively, Defendants also move the Court to stay Progressive's complaint until any underlying claims between the FDIC and the Directors and Officers are resolved. The FDIC's motion was filed on June 8, 2011. (ECF No. 28.) Director and Officer Defendants Garner, Maffei, Stewart and Rosso filed their motions on June 15, 2012. (ECF Nos. 32 and 33.)*fn2

Although Defendants collectively filed three different motions, the FDIC's motion contains the bulk of Defendants' arguments, and the Directors and Officers incorporate the FDIC's motion either by reference or word-for-word. Progressive filed a timely opposition to Defendants' motions (ECF No. 53), and the FDIC filed a timely reply (ECF No. 54). For the reasons set forth below, Defendants' motions are DENIED.*fn3

BACKGROUND*fn4

This action arises from a dispute over insurance coverage. In 2008, Progressive issued a Directors & Officers/Company Liability Policy ("the policy") to the Bank that, including the discovery period, spanned from October 2008 to October 2010. (ECF No. 1 at ¶¶ 22, 23.) Under the policy, Progressive was required to pay for losses resulting from wrongful acts by the Directors and Officers. (Id. ¶ 24.) In August 2010, the Bank was closed, and the FDIC became the Bank's receiver. (Id. ¶ 1.) In October 2010, the FDIC sent a letter ("the Letter") to Progressive and the Directors and Officers seeking $23 million for losses pertaining to irresponsible business strategies arising from negligence, gross negligence and/or breaches of fiduciary duties by the Directors and Officers. (Id. ¶ 29.)

Progressive then filed its complaint, requesting a judicial declaration that it has no duty to provide payment for the claims asserted in the Letter. (Id. ¶ 1.) The FDIC has yet to commence litigation against the Directors and Officers and states that its investigation is ongoing.

According to Progressive, the Letter outlined four bases for the purported $23 million in damages. (Id. ¶ 30.) First, the Directors and Officers allegedly displayed imprudent risk management and underwriting standards by becoming overly concentrated in commercial real estate loans. (Id. ¶ 31.) Second, the Directors and Officers are alleged to have provided insufficient supervision over Bank personnel. (Id. ¶ 32.) Third, the Bank's poor securities investments led to approximately $5 million in write-downs for which the Directors and Officers are purportedly responsible. (Id. ¶ 33.) Fourth, Progressive also cites allegedly inadequate underwriting and credit administration practices that caused over $18 million in charge-offs, and also are allegedly attributable to the Directors and Officers. (Id. ¶ 34.)

Progressive contends that no insurance coverage exists for the FDIC's claims against the Directors and Officers. (Id. ¶ 1.) Specifically, Progressive alleges that the $23 million in damages asserted in the Letter falls outside the policy's definition of "loss," and, moreover, that the policy also contains an "Insured v. Insured" provision that effectively bars coverage of the FDIC's claims. (Id. ¶¶ 39, 45.)*fn5 Under the policy's terms, "loss" does not include "any unpaid, unrecoverable or outstanding loan, lease or extension of credit to any customer or any forgiveness of debt." (Id. ¶ 39.) "Loss" also cannot constitute "the depreciation (or failure to appreciate) in value of any investment product, including securities, commodities, currencies, options or futures due to market fluctuations unrelated to any Wrongful Act." (Id.) Additionally, the policy's "Insured v. Insured" provision states that Progressive is not liable for "any payment for Loss in connection with any claim by, on behalf of, or at the behest of the [Bank], any affiliate of the [Bank] or any Insured Person in any capacity." (Id. ¶ 45.)

Because "[t]he damages alleged by the FDIC in [the Letter] consist solely of losses based on charge-off loans and write downs on sub-investment quality securities," Progressive states that the Letter "does not involve any damages that could be considered 'loss' covered by the [p]olicy." (ECF No. 53 at 23.) Progressive argues that the policy does not cover the write-downs because they are subject to the "loss" exception for investment depreciation caused by market fluctuations unrelated to wrongful acts. (ECF No. 1 at ¶ 41.) Similarly, the charge-offs meet the "loss" exception for unpaid or unrecoverable loans to customers, thus falling outside the policy's scope. (Id. ¶ 40.) Furthermore, Progressive contends that the FDIC, as the bank's receiver, is asserting the Bank's claim against the Directors and Officers. (Id. ¶ 48.) As a result, the FDIC is stepping into the Bank's shoes, and the "Insured v. Insured" provision prevents the FDIC from pursuing a claim against the Directors and Officers. (Id. ¶ 50.) As indicated above, Defendants' motions to dismiss or stay Progressive's action are now before the Court for adjudication.

MOTION TO DISMISS STANDARD

On a motion to dismiss for failure to state a claim under Rule 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief" in order to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests."

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 554-55 (2007) (internal citations and quotations omitted). Though "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." Id. at 555 (internal citations and quotations omitted).

A plaintiff's factual allegations must be enough to raise a right to relief above the speculative level. Id. (citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-36 (3d ed. 2004) ("The pleading must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action")).

Moreover, "Rule 8(a)(2) . . . requires a 'showing,' rather than a blanket assertion of entitlement to relief. Without some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirements of providing not only 'fair notice' of the nature of the claim, but also 'grounds' on which the claim rests." Twombly, 550 U.S. at 555, n.3 (internal citations omitted). A pleading must contain "only enough facts to state a claim to relief that is plausible on its face." Id. at 570; see also Ashcroft v. Iqbal, 556 U.S. 662, 677-79 (2009). If the "plaintiffs . . . have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed." Twombly, 550 U.S. at 570; Iqbal, 556 U.S. at 680.

A court granting a motion to dismiss a complaint must then decide whether to grant leave to amend. Rule 15(a) empowers the court to freely grant leave to amend when there is no "undue delay, bad faith[,] dilatory motive on the part of the movant, . . . undue prejudice to the opposing party by virtue of . . . the amendment, [or] futility of the amendment. . . ." Foman v. Davis, 371 U.S. 178, 182 (1962). However, leave to amend is generally denied when it is clear the deficiencies of the complaint cannot be cured by amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992); Balistieri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1990) ("A complaint should not be dismissed under Rule 12(b)(6) unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.") (internal citations omitted).

ANALYSIS

The Act states that "in a case of actual controversy within its jurisdiction . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C. § 2201(a). Accordingly, the Ninth Circuit has "long held that the district court must first inquire whether there is an actual case or controversy within its jurisdiction.

Second, if the court finds that an actual case or controversy exists, the court must decide whether to exercise its jurisdiction . . . ." Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 669 (9th Cir. 2005)(internal citation omitted).

1. Existence of Actual Case or Controversy

In the present case, Defendants assert that Progressive's premature pleadings fail to state a claim. (ECF No. 28 at 2, 7.) Specifically, Defendants note that "the FDIC has not yet completed its investigation, including the calculation of damages." (ECF No. 28 at 17.) The FDIC also maintains that until the investigation is finished, "neither the court, nor the [Directors and Officers], nor Progressive knows the full particulars of the FDIC's claim." (ECF No. 54 at 9.) Progressive responds that "[a]lthough the FDIC's investigation may be ongoing, the FDIC is not considering whether to assert a claim against the Directors and Officers. It has already done so." (ECF No. 53 at 12.) Progressive then states that the Directors and Officers have demanded coverage under the policy and that Progressive seeks adjudication regarding only the wrongdoing already alleged in the Letter. (Id.) As delineated above, the Court must consider the factual allegations of Progressive's complaint to be true, and determine whether the facts as pleaded establish a case or controversy.

The Act requires the existence of an actual case or controversy in order for a district court to exercise its subject matter jurisdiction.

28 U.S.C. ยง 2201(a); Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 669 (9th Cir. 2005). However, there is not always a bright line test for determining whether an actual controversy exists under the Act. MedImmune, Ind. v. Genentech, Inc., 549 U.S. 118, 127 (2007); Maryland Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941). The Supreme Court has stated that the question is essentially "whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Pac. Coal & Oil Co., 312 U.S. at 273. Stated another way, "a justiciable case or controversy exists if a declaration would affect substantive legal rights of the parties." Mason v. Genisco Tech. Corp., 960 F.2d 849, 853 (9th Cir. 1992) (citing Hillblom v. United States, 896 F.2d 426, 430 (9th Cir. 1990)). Indeed, the Act's ...


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