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Park Townsend, LLC v. Clarendon America Insurance Co.

United States District Court, N.D. California, San Jose Division

January 2, 2013

PARK TOWNSEND, LLC; GKB Development Co., LLC; Warren L. Breslow Trust; and Warren L. Breslow, an individual and Trustee of the Warren L. Breslow Trust, Plaintiffs,
v.
CLARENDON AMERICA INSURANCE COMPANY and Does 1-500, inclusive, Defendants.

Page 1046

Thomas Eben Ladegaard, Joseph Louis Oliva, Oliva and Associates, San Diego, CA, for Plaintiffs.

George D. Yaron, Henry Ming-Cheng Su, Kevin Chi Chau, Yaron & Associates, San Francisco, CA, for Defendants.

Page 1047

ORDER GRANTING MOTION TO DISMISS

LUCY H. KOH, District Judge.

Plaintiffs Park Townsend, LLC (" Park Townsend" ), GKB Development Co., LLC, Warren L. Breslow Trust, and Warren L. Breslow (collectively, " Plaintiffs" ) bring this insurance coverage action against Clarendon America Insurance Company (" Clarendon" ) and Does 1 through 500 (collectively, " Defendants" ) alleging breach of contract and breach of the implied covenant of good faith and fair dealing. In addition, Plaintiffs seek declaratory relief. Pursuant to Civil Local Rule 7-1(b), the Court finds this matter appropriate for determination without oral argument. Accordingly, the January 3, 2013 hearing on Defendants' Motion to Dismiss is VACATED. The case management conference set for January 3, 2013, remains as set. Having considered the submissions of the parties and the relevant law, the Court hereby GRANTS Defendants' Motion to Dismiss with leave to amend.

I. BACKGROUND

A. Factual Allegations

This diversity action arises from Defendants' alleged breach of its duty to defend Plaintiffs in an ongoing construction defect lawsuit. Park Townsend was the developer of a 98-unit condominium construction project in San Jose, California, commonly known as the Park Townsend Development. First Am. Compl. (" FAC" ) ¶ 12, ECF No. 1-3. In 2001, Park Townsend entered into an insurance contract with Defendants. FAC ¶ 11 (citing Clarendon Policy No. WT0991170 (the " Policy" )).[1] Although the Policy states that Clarendon " will pay those sums that the insured becomes legally obligated to pay as damages because of ‘ bodily injury’ or ‘ property damage’ to which this insurance applies," ECF No. 1-3, at 58, the Policy also includes exceptions for coverage. See, e.g., id. at 60-61.

On August 1, 2008, the Park Townsend Homeowners Association (" PTHA" ) filed suit against Plaintiffs in Santa Clara Superior Court (the " Underlying Action" ) alleging numerous violations of building standards and construction defects involving the construction of the condominiums and the common areas. FAC ¶ 15. Clarendon agreed to defend Plaintiffs in the Underlying Action " on account of alleged liability caused by an occurrence falling within and/or potentially falling within the coverage defined in the policy," subject to a reservation of rights. FAC ¶¶ 16, 35. Clarendon then hired the law firm of Green & Hall to defend Plaintiffs in the Underlying Action.[2] FAC ¶ 27.

On November 9, 2011, Plaintiffs wrote to Clarendon to demand the appointment of independent counsel under California Civil Code Section 2860.[3] FAC ¶ 17. Clarendon

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denied Plaintiffs' request. FAC ¶ 18.

On or around November 23, 2011, Clarendon provided Plaintiffs with a summary of defects alleged in PTHA's Defect List and Cost of Repair, itemizing alleged defects that Clarendon contended are covered and not covered by the insurance policy. FAC ¶ 19. In this correspondence, Clarendon notified Plaintiffs that approximately 40% of the costs of repair would not be covered under the Policy, though later amended this amount to approximately 49.51% based on a revised Defect List and Cost of Repair. FAC ¶¶ 19, 21. Given the disparity between covered and noncovered repair costs, Clarendon stated that it would " continue to defend Plaintiff[s] through Clarendon's appointed defense counsel Green & Hall," FAC ¶ 19, but reserved its right to recover any indemnity and defense costs from Plaintiffs, FAC ¶¶ 20, 21. Clarendon also stated that Plaintiffs could reject a settlement offer and assume their own defense at their own expense. FAC ¶ 21.

Plaintiffs responded to Clarendon's reservation of rights by alleging that Clarendon created a conflict of interest between the insurer and insureds. FAC ¶ 22. According to Plaintiffs, " Green & Hall is currently defending the Underlying Action in a manner calculated to assist Clarendon in its coverage position." FAC ¶ 27. Consequently, Plaintiffs retained independent defense counsel, Alyssa B. Klausner. FAC ¶ 32. Plaintiffs now seek to have Clarendon pay Ms. Klausner's fees, as well as to allow Ms. Klausner to play an active role in the defense of the Underlying Action. FAC ¶ ¶ 32, 33.

B. Procedural History

Plaintiffs filed this action against Defendants in the Superior Court of California for the County of Santa Clara on July 13, 2012, ECF No. 1-2, and subsequently filed the First Amended Complaint on July 20, 2012. See ECF No. 1-3. Plaintiffs' FAC alleges three causes of action: (1) declaratory relief; (2) breach of contract— failure to defend; and (3) breach of the implied covenant of good faith and fair dealing— failure to defend.

Clarendon removed the case to this Court on August 22, 2012. ECF No. 1. Clarendon then filed a Motion to Dismiss Plaintiffs' First Amended Complaint based on Rule 12(b)(6) of the Federal Rules of Civil Procedure. Mot. to Dismiss Pl.'s FAC (" Mot." ), ECF No. 9. Plaintiffs filed a timely opposition to the motion, see Pl.'s Opp. to Defs.' Mot. to Dismiss FAC (" Opp'n" ), ECF No. 11, to which Clarendon filed a timely reply, see Defs.' Reply Supp. Mot. to Dismiss Pl.'s FAC (" Reply" ), ECF No. 12. On November 14, 2012, Clarendon also filed a Counterclaim for Declaratory Relief, ECF No. 15, to which Plaintiffs filed an Answer, ECF No. 16. Presently before the Court is Clarendon's Motion to Dismiss Plaintiffs' First Amended Complaint. ECF No. 9.

II. LEGAL STANDARDS

A. Rule 12(b)(6)

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a defendant may move to dismiss an action for failure to allege " enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). " A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a ‘ probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal citation omitted). For purposes of ruling on a Rule 12(b)(6) motion, the Court " accept[s]

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factual allegations in the complaint as true and construe[s] the pleadings in the light most favorable to the nonmoving party." Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir.2008).

Nonetheless, the Court need not accept as true allegations contradicted by judicially noticeable facts, and the " [C]ourt may look beyond the plaintiff's complaint to matters of public record" without converting the Rule 12(b)(6) motion into one for summary judgment. Shaw v. Hahn, 56 F.3d 1128, 1129 n. 1 (9th Cir.1995); see Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir.2002); Shwarz v. United States, 234 F.3d 428, 435 (9th Cir.2000). Nor is the Court required to " ‘ assume the truth of legal conclusions merely because they are cast in the form of factual allegations.’ " Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir.2011) (per curiam) (quoting W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir.1981)). Mere " conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss." Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir.2004); accord Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (stating that " a complaint [does not] suffice if it tenders ‘ naked assertion [s]’ devoid of ‘ further factual enhancement.’ " ) ...


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