UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA
December 6, 2012
PROGRESSIVE CASUALTY INSURANCE COMPANY,
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
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).
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. § 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 case or controversy requirement is satisfied when the plaintiff has "a real and reasonable apprehension that he will be subject to liability." Societe de Conditionnement en Aluminum v. Hunter Eng'g Co., Inc., 655 F.2d 938, 944 (9th Cir. 1981).
That a defendant's liability may be contingent does not necessarily defeat jurisdiction of a declaratory judgment action, and the Act allows a plaintiff to bring a claim in certain cases of unresolved contingencies. Bancard Serv., Inc. v. E*Trade Access, Inc., 292 F. Supp. 2d 1235, 1238 (D. Or. 2003) (citing Assoc. Indem. Corp. v. Fairchild Indus., Inc., 961 F.2d 32, 35 (2d Cir. 1992)).
The Second Circuit has noted that "litigation over insurance coverage has become a paradigm for asserting jurisdiction despite contingencies that will determine whether a controversy ever becomes real." Id. Furthermore, the Act may "bring to the present a litigable controversy, which otherwise might only be tried in the future." Societe de Conditionnement en Aluminum, 655 F.2d at 943. Parties "whose interests are jeopardized or challenged even before a right of action exists or cause of action accrues" may benefit from a declaratory judgment. Maryland Cas. Co. v. Hubbard, 22 F. Supp. 697, 699 (S.D. Cal. 1938). Indeed, the existence of a cause of action is not essential to a declaration. Id. at 702.
While no clearly-defined and standardized rule exists, courts have found an actual controversy when an insurer seeks a ruling on its obligation to defend the insured in an underlying claim by bringing a declaratory judgment action against its insured. Am. States Ins. Co. v. Kearns, 15 F.3d 142, 144 (9th Cir. 1994). The declaratory judgment action was "sufficiently ripe, even when the underlying liability action in state court had not yet proceeded to judgment." Id. Moreover, courts have "consistently held that a dispute between an insurer and its insureds over the duties imposed by the insurance contract satisfies Article III's case and controversy requirement." Gov't Emps. Ins. Co. v. Dizol, 133 F.3d 1220 n.2 (9th Cir. 1998).
The present case involves an insurer, Progressive, seeking a declaratory judgment that there is no obligation to provide coverage to the insured, the Directors and Officers, for the damages asserted in the Letter from the FDIC. (ECF No. 1 at 2.) The court in North River Insurance Co. v. Leffingwell AG Sales Co. considered a similar situation involving an insurance company's duty to defend the insured and held that a "dispute over insurance coverage provides a sufficient basis for an 'actual controversy.' Thus, a controversy exists between the parties." 2011 WL 304579, *3 (E.D. Cal. Jan. 27, 2011). Furthermore, Progressive demonstrates a case or controversy because the Letter requesting at least $23 million in damages could reasonably cause Progressive to believe "that [it would] be subject to liability." Societe de Conditionnement en Aluminum, 655 F.2d at 944. As indicated above, the Letter by its express terms states its intent as "to provide formal written notice of claims against certain individuals who are former directors and officers of the Bank...."
It is also clear that a declaration of the rights, duties, obligations and interests of Progressive and the Directors and Officers would affect the "substantive legal rights of the parties." Hillblom, 896 F.2d at 430. Thus, a ruling regarding the rights and interests of Progressive and the Directors and Officers would serve the intended purpose of a declaratory judgment, by clarifying the current uncertainty surrounding the parties' legal relations.
Additionally, this is a case in which an action for a declaratory judgment brings to the present a litigable controversy "which might otherwise be tried in the future," as Progressive may very well seek reimbursement for legal expenses and other costs once any underlying action is resolved.
Accordingly, the Court finds that Progressive has pleaded facts against Defendants sufficient to state a claim or controversy under the Act.
2. Decision to Exercise Jurisdiction
Once a district court has determined whether a case or controversy exists under the Act, the court must then determine whether it will exercise its subject matter jurisdiction. Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 669. In making this determination, courts generally assess whether there is a parallel state court proceeding and analyze the Brillhart factors. Mitsui Sumitomo Ins. Co. of Am. v. Delicato Vineyards, 2007 WL 1378025, *7 (E.D. Cal. May 10, 2007); Am. Nat'l Prop. & Cas Co. v. Dragonfly Ventures, Inc., 2006 WL 1582300, *2 (E.D. Cal. June 5, 2006). The "Brillhart factors remain the philosophic touchstone for the district court." Gov't Emps. Ins. Co. v. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1998). The Brillhart factors require that in deciding whether to exercise its subject matter jurisdiction, the court should (1) avoid needless determination of state laws; (2) discourage litigants from filing declaratory actions as a means of forum shopping; and (3) avoid duplicative litigation.
See id.; Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942).
Additionally, courts may consider whether a declaratory judgment "will settle all aspects of the controversy; . . . serve a useful purpose in clarifying the legal relations at issue; . . . is being sought merely for the purposes of procedural fencing or to obtain a 'res judicata' advantage; or . . . will result in entanglement between the federal and state court systems." Dizol, 133 F.3d at 1225 n.5. The Brillhart factors, as well as these supplemental considerations, "balance the concerns of judicial administration, comity, and fairness to the litigants." State Farm Fire & Cas. Co. v. McIntosh, 837 F. Supp 315, 316 (N.D. Cal 1993). The Court will now address each of those factors in turn.
A. Parallel State Court Proceeding
While it is undisputed that there is no underlying state court action, the FDIC asserts that "[t]he existence of a parallel state court proceeding is not a prerequisite for this Court to abstain from exercising its discretion." (ECF No. 54 at 6.) Instead, "the mere potential for [a parallel action] suffices." (ECF No. 28 at 11.) Progressive counters that the Court should decide this declaratory judgment action because not only has the FDIC declined to bring a parallel proceeding, but "[n]either the FDIC nor the Directors and Officers have filed or expressed any intention to file litigation in state court concerning the coverage issues presented by this matter." (ECF No. 53 at 15-16.)
"[W]hen a party requests declaratory relief in federal court and a suit is pending in state court presenting the same state law issues, there exists a presumption that the entire suit should be heard in state court." Chamberlain v. Allstate Ins. Co., 931 F.2d 1361, 1366-67 (9th Cir. 1991). However, cases "'in which there are no parallel state court proceedings,' lie at the 'outer boundaries' of the district court's discretion under the  Act." Maryland Cas. Co. v. Knight, 96 F.3d 1284, 1289 (9th Cir. 1996) (citing Wilton v. Seven Falls Co., 515 U.S. 277, 290 (1995)). Furthermore, courts have exercised jurisdiction over a declaratory judgment action when the state court action was filed less than a month after the federal court action. Aetna Cas. & Sur. Co. v. Merritt, 974 F.2d, 1196, 1198-99 (9th Cir. 1992).
In the present case, the lack of an underlying court action establishes that no parallel state court proceeding exists. Furthermore, because the FDIC is not expected to name Progressive as a party in an underlying claim, the Court finds that a parallel action is highly unlikely. Although the Court's authority to entertain a declaratory judgment action does not turn solely on whether or not a parallel proceeding has been filed, in the absence of exceptional circumstances, the Court declines to invoke the "outer boundaries" of its discretion. Moreover, Defendants fail to provide evidence of a "pending or impending [lawsuit] at the time the federal action was filed." Knight, 96 F.3d at 1289. In fact, Defendants continue to offer insufficient proof of a future court action, even though more than six months have lapsed since Progressive first filed its complaint.
Therefore, the lack of a parallel state court proceeding weighs in favor of the Court retaining jurisdiction.
B. Avoid Needless Determination of State Laws
In considering this factor, courts often examine whether adjudicating the declaratory judgment action will require the determination of novel questions of state law. Carolina Cas. Ins. Co. v. Bolling, Walter & Gawthrop, 2005 WL 1367096, *5 (E.D. Cal. May 31, 2005). While the interpretation of an insurance policy "is governed by state law, the principles of contract interpretation are well settled, and [a federal district] court is an appropriate forum to adjudicate [the] matter." Mitsui Sumitomo Ins. Co. of Am., 2007 WL 1378025, *6.
The present case essentially involves a determination of whether the insurance policy issued to the Directors and Officers provides coverage for the alleged $23 million in losses claimed in the Letter. This evaluation should involve a relatively straightforward analysis of the policy, without infringing on novel state law issues. Furthermore, Defendants fail to provide evidence that any other court is presently ruling on this matter. As a result, this Brillhart factor weighs in favor of the Court retaining jurisdiction.
C. Discourage Litigants from Filing Declaratory Actions as a Means of Forum Shopping
Defendants argue that Progressive's declaratory judgment action is simply a reactive suit designed to forum shop and secure a 'res judicata' advantage. (ECF No. 28 at 13.) Defendants further allege that they could not resolve this claim in a manner of their choosing because Progressive raced to the courthouse to file this action. (Id.) "This factor is usually understood to favor discouraging an insurer from forum shopping,
i.e., filing a federal court declaratory action to see if it might fare better in federal court at the same time the insurer is engaged in a state court action." Am. Cas. Co. v. Krieger, 181 F.3d 1113, 1119 (9th Cir. 1999). Moreover, "[a] declaratory judgment action by an insurance company against its insured during the pendency of a non-removable state court action presenting the same issues of state law is an archetype of what we have termed 'reactive' litigation." Continental Cas. Co. v. Robsac Indus., 947 F.3d 1367, 1372 (9th Cir. 1991) (overruled on other grounds). However, even when the underlying claim and the federal declaratory judgment action are based on similar facts, the court may find enough differences to conclude that the declaratory judgment action is not reactive. Nat'l Union Fire Ins. Co. v. NVIDIA Corp., 2009 WL 2566719, *5 (N.D. Cal. Aug. 18, 2009).
Progressive's declaratory judgment action is not the result of forum shopping.
All parties acknowledge that the FDIC has yet to file a lawsuit in state court, demonstrating both that Progressive is not a party in an underlying lawsuit and that the coverage issues before the Court are not being litigated in any other forum. Additionally, the FDIC claims that it has not completed its investigation, implicitly recognizing that even if there will be an underlying lawsuit, it likely will not be filed in the near future.
The declaratory judgment action is also not reactive. Reactive lawsuits entail filing a federal court action to preempt a non-removable state court action, with both lawsuits generally involving identical state law issues. As discussed above, there is no underlying state court lawsuit, and the evidence militates against any finding that Progressive knew the FDIC would file a non-removable state court action. Significantly, more than a year lapsed between the time the FDIC sent the Letter and Progressive's filing of this declaratory judgment action. As such, the FDIC had sufficient time to file a lawsuit, and there is accordingly no viable claim that Progressive participated in a race to the courthouse.
In a similar action regarding insurance coverage, the court found that the "[insurer's] claim [was] not reactive as it [did] not present any of the same issues involved in the [underlying] action. In the latter case, the two causes of action [were] malpractice and breach of the legal services contract. By contrast, this [declaratory judgment action] require[d] interpretation of an entirely different contract." Carolina Cas. Ins. Co., 2005 WL 1367096, *5.
Accordingly, even if the FDIC files a lawsuit or pursues an underlying action, the Letter indicates that the causes of action against the Directors and Officers will likely include negligence, gross negligence and breach of fiduciary duty. In contrast, Progressive's declaratory judgment action requires interpreting an insurance policy to see whether the policy covers the alleged $23 million in losses.
Thus, while some of the basic information involved in this declaratory judgment action may overlap with an underlying claim or a future lawsuit, Progressive's action regarding coverage issues will raise the subject of policy interpretation and will not adjudicate an underlying action's disputed facts. The Court will examine contract law to interpret the policy's language, and this inquiry is separate from whether the Directors and Officers negligently performed their duties. Furthermore, any future action between the FDIC and the Directors and Officers will not hinge on the legal findings involved in resolving this declaratory judgment action's coverage questions. Likewise, an underlying action against the Directors and Officers for negligence and breach of fiduciary duty will not resolve coverage questions. "[B]ecause the same issues [would not be] involved in the state court and federal court proceedings," Progressive's lawsuit should not be deemed reactive. Am. Nat'l Prop. & Cas Co., 2006 WL 1582300, *4. Therefore, this Brillhart factor weighs in favor of the Court retaining jurisdiction.
D. Avoid Duplicative Litigation
Considerations of judicial economy and avoiding duplicative litigation are particularly relevant to this factor. Continental Cas. Co., 947 F.2d at 1373. Once a court is prepared to rule on fully briefed motions, if the court "were to abstain, [the insurer] would be required to start over by filing a new complaint in state court, which would needlessly delay resolution of the issues presented, and would require the state court to expend time and resources becoming familiar with the factual and legal issues involved." Carolina Cas. Ins. Co., 2005 WL 1367096, *6. Similarly, should the Court decline to exercise jurisdiction in this case and leave undetermined Progressive's rights and obligations with respect to the FDIC's $23 million claim against the Directors and Officers, Progressive may still bring an action for a declaratory judgment at a later date. Additionally, because any potential future court action as to the Directors and Officers will undoubtedly involve causes of action unrelated to the issues presented in this declaratory judgment action, the risk of duplicative litigation is minimal. As a result, the Court determines that this Brillhart factor weighs in favor of the Court retaining jurisdiction.
E. Additional Considerations
In exercising discretion over whether or not to entertain a declaratory judgment action, courts are permitted to take into account the additional considerations mentioned above. Dizol, 133 F.3d at 1225 n.5. Because Defendants claim that Progressive's declaratory judgment action will negatively impact settlement negotiations and prevent the parties from controlling their own claims, Defendants implicitly allege that Progressive's action does not serve the useful purpose of clarifying the parties' legal relations.*fn6 (ECF No. 28 at 12.) Defendants contend that, through this action, Progressive can "potentially and (negatively) affect the outcome of any resolution between the FDIC and the [Directors and Officers]" by "forcing an 'on the cheap' settlement by pointing to a potential ruling of no coverage." (Id. at 14.)
"[O]n the other hand, resolution of a coverage dispute could resolve legal questions which could ultimately facilitate settlement." Evanston Ins. Co. v. Barkandbrew, Inc., 2010 WL 25732209, *4 (S.D. Cal. June 22, 2010). Furthermore, "a decision on the coverage action could very well break the apparent stalemate in settlement discussions because the parties and the insurer . . . will know the sum available for settlement."
(Id.) When the insurer and the insured encounter a disagreement about coverage, adjudicating each party's obligations is an important means of determining which party is ultimately responsible and thus bears the risks inherent in any settlement. Am. Nat'l Prop. & Cas Co., 2006 WL 1582300, *4.
While the Court is cognizant that Progressive's declaratory judgment action could indeed hinder settlement negotiations between the FDIC and the Directors and Officers, the Court agrees with Progressive that this action may also encourage negotiations by "clarify[ing] the collectability of a judgment and assist[ing] with the parties' evaluation of the claim for pre-suit settlement negotiations." (ECF No. 53 at 21.) Additionally, once the Court decides the fundamental aspect of financial responsibility for the alleged damages, the parties will be able to enter into more meaningful and productive settlement discussions. Especially in light of Defendants' own admission that investigation is ongoing, a resolution of the coverage issue at this juncture may very well help guide the FDIC's inquiries and negotiations.
In addition, Defendants allege that Progressive's declaratory judgment action encumbers their ability to control their own claims. (ECF No. 28 at 12.) The FDIC further expresses concern that Progressive's action forces the plaintiff and defendant to reverse roles. (ECF No. 54 at 7.) Those hypothetical concerns fail to convince the Court that it should abstain from jurisdiction. Progressive's action does not alter the FDIC's ability to seek legal redress against the Directors and Officers.
Moreover, Progressive only requests adjudication regarding the damages put forth in the Letter and does not ask the Court to issue a ruling on all possible future claims. Furthermore, Progressive waited over a year before filing this declaratory judgment action, more than enough time for the FDIC to file a lawsuit against the appropriate parties. Although the Court acknowledges that Progressive's declaratory judgment action will not settle all aspects of the controversy, the Court is confident that Progressive's action will serve a useful purpose in clarifying the legal relations at issue. Thus, the Court determines that this consideration weighs in favor of the Court retaining jurisdiction.
Because Progressive states an actual case or controversy and the Brillhart factors and other considerations weigh in favor of the Court exercising jurisdiction over this action, Progressive has adequately stated a claim for a declaratory judgment action. Therefore, Defendants' Motions to Dismiss pursuant to Rule 12(b)(6) are DENIED.
MOTION TO STAY
"[T]he power to stay proceedings is incidental to the power inherent in every court to control disposition of the cases on its docket with economy of time and effort for itself, for counsel, and for litigants." Landis v. N. Am. Co., 299 U.S. 248, 254 (1936).
"This rule applies whether the separate proceedings are judicial, administrative, or arbitral in character, and does not require that the issues in such proceedings are necessarily controlling of the action before the court." Levya v. Certified Grocers of Cal., Ltd., 593 F.2d 857, 863-64 (9th Cir. 1979), cert. denied, 444 U.S. 827 (1979). "The exertion of this power calls for the exercise of sound discretion." CMAX, Inc. v. Hall, 300 F.2d 265, 268 (9th Cir. 1962). A federal district court has broad discretion in deciding whether to issue a stay, and the court's decision will not be reversed unless it has abused its discretion. Fed. Sav. & Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989).
Under California law, when an insurer seeks a declaratory judgment under an insurance policy and there is an underlying third-party action against the insureds, a stay of the declaratory judgment action pending resolution of the underlying third-party suit is appropriate "when the coverage question turns on facts to be litigated in the underlying action." Montrose Chem. Corp. v. Super. Ct. (Montrose I), 861 P.2d 1153, 1162 (1993). Granting a stay in such cases serves to "eliminate the risk of inconsistent factual determinations that could prejudice the insured." Id. Such factual inconsistencies may arise "because the [insurer's] duty to defend frequently turns on coverage, and . . . coverage frequently turns on factual issues to be litigated in the third party liability action."
Montrose I, 861 P.2d at 1164. Federal courts in California have followed the Montrose rule. OneBeacon Ins. Co. v. Parker, Kern, Nard & Wenzel, 2009 WL 2914203, *4 (E.D. Cal. Sept. 9, 2009) (citing Cort v. St. Paul Fire & Marine Ins. Cos., 311 F.3d 979 (9th Cir. 2002); Conestega Servs. Corp. v. Exec. Risk. Indem., 312 F.3d 976 (9th Cir. 2002)).
Courts have noted three major concerns surrounding the trial of coverage issues which necessarily turn upon the facts to be litigated in the underlying action. First, the insurer, who is supposed to be defending the insured and with whom the insured has a special relationship, is effectively attacking its insured and thus aiding the claimant in the underlying suit. Haskel, Inc. v. Super. Ct., 33 Cal. App. 4th 963, 979 (1995) (citing Montrose Chem. Corp. v. Super. Ct. (Montrose II), 25 Cal. App. 4th 902, 910 (Cal. App. 4th 1994)). Second, litigating the coverage dispute while the underlying action is still pending requires the insured to "fight a two front war, litigating not only with the underlying claimant, but also expending precious resources fighting an insurer over coverage questions." Haskel, Inc., 33 Cal. App. 4th at 979 (citing Montrose II, 25 Cal. App. 4th at 910). Third, "there is a real risk that, if the declaratory relief action proceeds to judgment before the underlying action is resolved, the insured could be collaterally estopped to contest issues in the latter by the results in the former." Id. (citing Montrose II, 25 Cal. App. 4th at 910).
"It is only when there is no potential conflict between the trial of the coverage dispute and the underlying action that an insurer can obtain an early trial date and resolution of its claim that coverage does not exist." Montrose II, 25 Cal. App. 4th at 910 (emphasis added). When such a potential conflict exists, a district court should enter a stay. "By contrast, when the coverage question is logically unrelated to the issues of consequence in the underlying judgment, the declaratory relief action may properly proceed to judgment." Montrose I, 861 P.2d at 1162.
In the present case, the FDIC has not filed an underlying lawsuit, but the Letter sent to Progressive and the Directors and Officers requests payment for damages. (ECF No. 1 at 5.) While the FDIC attributes the damages to negligence and breaches of fiduciary duty by the Directors and Officers in relation to imprudent business strategies, the Letter actually allocates the $23 million in losses to write-downs and charge-offs involving loans and investments. (Id. at 5-7.) In response to the FDIC's claim that its investigation is still underway, Progressive states that it only asks for a declaratory judgment regarding the damages already sought in the Letter. (ECF No. 53 at 12.)
Defendants allege that Progressive's declaratory judgment action overlaps with any underlying claim, and, as a result, this Court will be forced to resolve factual issues that are intertwined with the FDIC action against the Directors and Officers.*fn7 In order to establish the negligence and breach of fiduciary duty discussed in the Letter, the FDIC will need to prove that the Directors and Officers had a duty regarding the Bank and its assets, breached that duty, and caused the alleged damages through that breach. Presumably, the Directors and Officers will rely on disputed facts, information and documents to demonstrate that they performed their responsibilities properly and lawfully. Their behavior and knowledge will be crucial elements of the potential underlying claim. The Directors and Officers may also argue that currently unnamed third parties were involved in the alleged damages.
Progressive, on the other hand, asserts that it will only litigate two coverage issues in this declaratory judgment action. First, the losses articulated in the Letter do not fall within the definition of "loss" as defined in the policy. (ECF No. 1 at 7-8.) Second, the policy's Insured v. Insured clause permits Progressive to avoid liability for the FDIC's claims, as the bank's receiver, against the Directors and Officers. (Id. at 9-10.)
According to Progressive, the "declaratory judgment action presents threshold coverage issues that can be resolved by comparing the pertinent terms of the [p]olicy to the allegations [in the Letter]." (ECF No. 53 at 23.) As such, Progressive contends that adjudicating the policy's terms will not affect Defendants' potential future actions against each other. Progressive further claims that these coverage issues can be decided without litigating any of the underlying action's disputed items. (Id.)
Because the limited issues asserted in this declaratory judgment action are separate from any underlying claim between the FDIC and the Directors and Officers, the Court can adjudicate the issues in this action without rendering conclusions regarding an underlying action. As the court in Allstate Insurance Co. v. Huerta noted under analogous circumstances, "[t]he extent of coverage does not depend on whether defendants are found liable in the underlying action. The declaratory judgment action simply seeks a determination as to whether the allegations in the underlying action are of the nature intended to be covered by the insurance policy." 2006 WL 2655239, *3 (E.D. Cal. Sept. 13, 2006). The court went on to state that "the underlying action turns on factual questions relating to liability . . . [that] are not present in the action for declaratory relief." Id. Similarly, Progressive only seeks a determination as to whether the policy encompasses the damages alleged in the Letter, and Progressive takes no position on an underlying claim.
Moreover, while the Court's analysis of the policy involves legal conclusions, resolution of a claim against the Directors and Officers will require factual determinations. Because the coverage issues do not turn on an underlying action's liability questions, this Court can adjudicate the coverage obligations without impeding any underlying claim.
Additionally, in Century Surety Co. v. Byal, involving an insurance company's coverage obligations, the court denied a motion to stay after finding that "the issues in [the declaratory judgment action] and the [underlying] actions [were] sufficiently distinct such that no competing factual or legal determinations [were] likely." 2001 WL 2550832, *4 (N.D. Cal. June 27, 2011). Here, the Court can also premise its decision on uncontroverted facts wholly unrelated to potential future litigation or an underlying action between the FDIC and the Directors and Officers. Litigating whether the policy covers the damages alleged in the Letter will not require litigating whether the Directors and Officers engaged in unlawful conduct. Thus, the Court can resolve the declaratory judgment action by interpreting the policy's terms and examining the damages sought in the Letter. In doing so, the Court need not inquire into the possible negligence or breach of fiduciary duty by the Directors and Officers.
Furthermore, because the Court does not find a conflict between the declaratory judgment action and an underlying action, the concerns that generally favor the Court granting a motion to stay are not present in this case.
First, the Court is not persuaded that Progressive will attack the Directors and Officers and offer aid to the FDIC in an underlying action. Progressive appears to assert no position regarding claims by the FDIC against the Directors and Officers. Second, the present situation will not require the Directors and Officers to fight a two-front war. This concern is most prevalent when a contemporaneous state lawsuit has been filed, unlike the declaratory judgment action at hand. Third, the Court does not find that this declaratory judgment action will collaterally estop the FDIC and Directors and Officers from contesting issues in an underlying action. The Directors and Officers are not only able to argue that the $23 million in losses is covered by the insurance policy while at the same time not admitting to the truth of the underlying action, but "the mere possibility of collateral estoppel does not justify a stay of the declaratory proceeding." M.D. Sass Investors Servs., Inc. v. Reliance Ins. Co., 810 F. Supp. 1082, 1090 (N.D. Cal. 1992).
Additionally, while "[a] stay should not be granted unless it appears likely that the other proceedings will be concluded within a reasonable time," the FDIC has yet to even finish its investigation, let alone file a lawsuit. See Levya v. Certified Grocers, Ltd., 593 F.2d 857, 864 (9th Cir. 1979).
Given the foregoing, the Court does not find a potential conflict between the trial of the coverage dispute in this Court and a potential underlying action. Because the coverage question can be resolved without litigating facts that may be disputed in an underlying action, Defendants' Motions to Stay are DENIED.
As a matter of law, and for the reasons set forth above, Defendant's Motions to Dismiss Plaintiff's Complaint, which alternatively request a stay of these proceedings (ECF Nos. 28, 32 and 33), are DENIED.
IT IS SO ORDERED.