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Dale M. Wallis, D.V.M., James v. Centennial Insurance Company

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA


February 27, 2013

DALE M. WALLIS, D.V.M., JAMES
L. WALLIS, AND HYGIEIA BIOLOGICAL LABORATORIES, INC., A CALIFORNIA CORPORATION, PLAINTIFFS,
v.
CENTENNIAL INSURANCE COMPANY, INC., A NEW YORK CORPORATION, ATLANTIC MUTUAL INSURANCE, CO., INC., A NEW YORK CORPORATION, DEFENDANTS,

MEMORANDUM AND ORDER RE: MOTION AND RELATED COUNTERCLAIMS AND THIRD-PARTY COMPLAINT. FOR JUDGMENT ON THE PLEADINGS

Plaintiffs Dale M. Wallis ("Dr. Wallis"), James L. Wallis ("Mr. Wallis"), and Hygieia Biological Laboratories Inc. ("Hygieia") brought this action against defendants Centennial Insurance Company Inc. ("Centennial") and Atlantic Mutual Insurance Co., Inc. ("Atlantic Mutual") arising from plaintiffs' veterinarian professional liability insurance policy. Atlantic Mutual now moves for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c).

I. Factual and Procedural Background

Dr. Wallis is a research veterinarian. (Compl. ¶ 3 (Docket No. 1).) Plaintiffs allege that defendants issued her their standard veterinarian professional liability insurance (the "Policy"). (Id. ¶ 8.) Dr. Wallis was the named insured under the Policy, and the Policy also covered Mr. Wallis and Hygieia because of their relationship with Dr. Wallis. (Id.)

Beginning in 1993, Dr. Wallis was involved in a lawsuit over the intellectual property rights to a bovine vaccine she had developed while working for Poultry Health Laboratories ("PHL"). (Id. ¶¶ 11-14.) Dr. Wallis tendered the defense of that action to defendants pursuant to the Policy, but they did not accept. (Id. ¶ 16.) Dr. Wallis then filed an action in this court in which defendants were found to owe Dr. Wallis a duty to defend. (Id. ¶¶ 16-17.)

A related lawsuit ensued, which involved a complaint by Dr. Wallis against PHL and its shareholders alleging that she had created the vaccine and that PHL had defrauded her of her invention. (Id. ¶ 18.) In that action, PHL filed a cross-complaint against Dr. Wallis, Mr. Wallis, and Hygieia alleging unfair competition, interference with contractual relations and prospective economic advantage, misappropriation of trade secrets, and conversion. (Id. ¶ 19.)

Defendants provided the defense to the PHL cross-complaint under a reservation of rights pursuant to the Policy.

(Id. ¶ 21.) Due to defendants' reservation of rights, plaintiffs obtained counsel of their choice, and defendants proceeded to pay the legal fees and costs incurred by plaintiffs' counsel. (Id. ¶¶ 21-22.) However, defendants have allegedly begun "to impose unreasonable and illegal limitations upon the fees and costs that will be paid" and have "attempt[ed] to control the litigation by refusing to abide by the terms of the Policy." (Id. ¶¶ 22-23.)

Plaintiffs bring claims for breach of insurance contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty. They also request a judicial determination as to the rights and duties of the parties under the Policy. Presently before the court is Atlantic Mutual's motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). Plaintiff requests sanctions under 28 U.S.C. § 1927, the court's inherent authority, or Federal Rule of Civil Procedure 11, on the grounds that Atlantic Mutual's motion is vexatious and frivolous.

II. Discussion

A. Legal Standard "After the pleadings are closed--but early enough not to delay trial--a party may move for judgment on the pleadings." Fed. R. Civ. 12(c). For the purposes of such a motion, the factual allegations of the non-moving party are taken as true and construed in the light most favorable to that party. Fleming v. Pickard, 581 F.3d 922, 925 (9th Cir. 2009) (citing Turner v. Cook, 362 F.3d 1219, 1225 (9th Cir. 2004)). "Judgment on the pleadings is properly granted when there is no issue of material fact in dispute, and the moving party is entitled to judgment as a matter of law." Id.

Because motions made pursuant to Rules 12(c) and 12(b)(6) "are functionally identical," the same legal standard of review is used. Dworkin v. Hustler Magazine Inc., 867 F.2d 1188, 1192 (9th Cir. 1989). Thus, the pleading standard articulated in Ashcroft v. Iqbal, 556 U.S. 662, 677-80 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 554-563 (2007), applies to a motion for judgment on the pleadings. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054-55 & n.4 (9th Cir. 2011); Lowden v. T-Mobile USA Inc., 378 F. App'x 693, 694 (9th Cir. 2010). To survive a Rule 12(c) motion premised on the plaintiff's failure to state a claim, the complaint must contain sufficient factual matter, accepted as true, that states a claim to relief that is "plausible on its face." Iqbal, 556 U.S. at 678. "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." Id. Allegations that are merely consistent with liability fall short of plausibility of entitlement to relief. Id.

B. Judicial Notice

In general a court may not consider items outside the

pleadings when deciding a motion for judgment on the pleadings, but may consider items of which it can take judicial notice. Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 981 n.18 (9th Cir. 1999) (internal citations omitted); Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir. 1994). A court may take judicial notice of facts "not subject to reasonable dispute" because they are either "(1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201.

Plaintiffs have submitted a Request for Judicial Notice ("RJN"), (Docket No. 206), that contains the complaint, (RJN Ex. A (Docket No. 206-1)), answer, (RJN Ex. B (Docket No. 206-2)), counter-complaint, (RJN Ex. C (Docket No. 206-3)), "Separate Statement of Undisputed Material Facts in Support of Counter Motion for Summary Judgment," (RJN Ex. D (Docket No. 206-4)), Declaration of Dale M. Wallis in Support of Motion For Partial Summary Judgment, (RJN Ex. E (Docket No. 206-5)), November 9, 1993 Memorandum and Order on cross motions for summary judgment and counter-claim, (RJN Ex. F (Docket No. 206-6)), and Stipulation for Dismissal with Prejudice, (RJN Ex. G (Docket No. 206-7)), in the action Dale M. Wallis, D.V.M. v. Centennial Insurance Company, Inc. and Atlantic Mutual Insurance Company, Inc., Case No. Civ. 93:1322-LKK-JFM (later 93:1322-WBS-GGH). Defendants do not object to the request.

The court will take judicial notice of these exhibits with the caveat that "[w]hile the authenticity and existence of a particular order, motion, pleading or judicial proceeding, which is a matter of public record, is judicially noticeable, veracity and validity of its contents (the underlying arguments made by the parties, disputed facts, and conclusions of applicable facts or law) are not." United States v. S. Cal. Edison Co., 300 F. Supp. 2d 964, 974 (E.D. Cal. 2004); see also Harris v. County of Orange, 682 F.3d 1126, 1131 (9th Cir. 2012) (explaining that courts may judicially notice documents on file in federal or state courts and taking judicial notice of a declaration filed by defendant in an earlier litigation); Lee v. City of Los Angeles, 250 F.3d 668, 690 (9th Cir. 2001) (court may take judicial notice of another court's opinion, not for the truth of the facts recited therein, but for the existence of the opinion). The court likewise takes judicial notice of the decisions in Atlantic Mutual Insurance Company v. Commission of Internal Revenue, 523 U.S. 382 (1998), Atlantic Mutual Insurance Company v. Commission of Internal Revenue, 111 F.3d 1056 (1997), and First United Methodist Church of San Jose v. Atlantic Mutual Insurance Company, Civ. No. 94-20036 RPA, 1995 WL 150429 (N.D. Cal. 1995).

The court will not take judicial notice of the fact that prior to liquidation, Centennial Insurance Company was a wholly-owned subsidiary of Atlantic Mutual Insurance company. Plaintiffs argue that this fact is a matter of public record, but point the court to no public record asserting as much. See Fed.

R. Evid. 201(b) (fact may be judicially noticed if "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned"). In its opposition, plaintiff requests that the court notice this fact because it is in a Supreme Court case. As explained above, the court will take judicial notice of the case for its existence, but may not notice the facts recited within for their truth.*fn1 Lee, 250 F.3d at 690.

Defendants request that the court take judicial notice of the Complaint, defendants' Answer and Centennial's Counterclaim and Third Party Complaint, plaintiff's Answer to Centennial's Counterclaim and Third Party Complaint, and the October 31, 2012 Order vacating the pretrial conference dates and trial date in this case. Plaintiffs do not oppose this request and the court grants it. See Harris, 682 F.3d at 1131.

C. Breach of Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing (Bad Faith)

In general, a non-party, or nonsignatory, to an insurance contract is not liable for a breach of that contract.*fn2

See, e.g., Britton v. Co-op Banking Group, 4 F.3d 742, 744 (9th Cir. 1993) (noting that a "contractual right may not be invoked by one who is not a party to the agreement"); Henry v. Ass'n Indem. Corp., 217 Cal. App. 3d 1405, 1416-17 (4th Dist. 1990) (determining that where "[t]here was no direct contractual relationship between [the parties]," there was no basis from which "a breach of contract action could properly spring . . ." (citing Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 576 (1973))). Likewise, "a 'bad faith' action [generally] lies only against the insurer as the party to the contract which gives rise to the implied covenant." Monaco v. Liberty Life Assur. Co., Civ. No. 06-07021 MJJ, 2007 WL 420139, at *4 (N.D. Cal. Feb. 6, 2007); Tran v. Farmers Group, Inc., 104 Cal. App. 4th 1202, 1216-17 (1st Dist. 2002). Thus, "without a breach of the insurance contract, there can be no breach of the implied covenant of good faith and fair dealing." Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1034 (9th Cir. 2008) (citing Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 35-36 (1995)).

Here, the Complaint and attached documents show that Atlantic Mutual is not a party to the insurance contract. Fed. R. Civ. P. 10(c) ("A copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes."); Barany-Snyder v. Weiner, 539 F.3d 327, 332 (6th Cir. 2008) (court properly considers exhibits attached to the complaint on a Rule 12(c) motion); Callan v. Merrill Lynch & Co., Inc., Civ. No. 09-0566 BEN, 2010 WL 3452371, at *2 (S.D. Cal. Aug. 30, 2010) (court may consider documents attached to a complaint without turning the motion for judgment on the pleadings into a motion for summary judgment). Copies of the Policy for 12/1990-12/1991 and 12/1991-12/1992 are attached to the Complaint and the upper left-hand corner of each copy bears the text "Centennial Insurance Company" followed by "A member of the Atlantic Mutual Companies".*fn3 (Compl. Exs. A (Docket No. 1-1), B (Docket No. 1-2).) There is no other insurer listed on the Policy. Because Atlantic Mutual is not a signatory to the Policy, it cannot be found to be a party to the Policy on the ground that it issued the Policy.*fn4 Salido v. Allstate Ins. Co., Civ. No. 98-04616 CRB, 1999 WL 977944, at *1 (N.D. Cal. Oct. 21, 1999) (where policy unambiguously provided that Allstate Indemnity insured the plaintiff's vehicle, Allstate Insurance was not a party to the insurance contract at issue).

Plaintiffs make numerous allegations contrary to the conclusion that Atlantic Mutual is not a party to the Policy, such as it issued the Policy, accepted premiums under the Policy, and accepted the duty to defend Dr. Wallis under the Policy. (Compl. ¶¶ 36, 43.) These allegations, however, cannot defeat what is indicated by the Policy itself. Dent v. Cox Commc'ns Las Vegas, Inc., 502 F.3d 1141, 1143 (9th Cir. 2007) (a district court must accept as true the allegations in a plaintiff's complaint, unless contradicted by documents properly accompanying the complaint and incorporated therein); Garcia v. Wachovia Mortg. Corp., 676 F. Supp. 2d 895, 900 (C.D. Cal. 2009) (a "court may disregard allegations in the complaint if contradicted by facts established by exhibits attached to the complaint" (quoting Sumner Peck Ranch, Inc. v. Bureau of Reclamation, 823 F. Supp. 715, 720 (E.D. Cal. 1993)).

General contract principles notwithstanding, there are several doctrines that may bind a nonsignatory to a contract, including the presence of an agency relationship.*fn5 Under California law, an agent is defined as "one who represents another, called the principal, in dealings with third persons." Cal. Civ. Code § 2295. A principal-agent relationship exists if an agent or apparent agent holds the power to alter the relations between the principal and third persons, if an agent is a fiduciary, or if the principal has a right to control the conduct of the agent with matters entrusted to him.*fn6 Garlock Sealing Techs., LLC v. NAK Sealing Techs. Corp., 148 Cal. App. 4th 937, 964 (3d Dist. 2007).

Here, plaintiff has alleged that as to the relationship between Atlantic Mutual and Centennial:

[E]ach defendant[] was acting as agent, employee, servant, partner, and/or joint venture of the remaining defendant, and all the acts complained of herein were done within the course and scope of said agency, employment, servitude, partnership and/or joint venture, and that all acts alleged herein committed by each defendant were ratified and approved by the remaining defendant and/or done with the knowledge, consent and permission of the other defendant. (Compl. ¶ 7.)

Such bare legal conclusions are insufficient to show that Atlantic Mutual and Centennial are in an agency relationship, partners, and/or in a joint venture.*fn7 Butler v. Resurgence Fin., LLC, 521 F. Supp. 2d 1093, 1095 (C.D. Cal. 2007) (citing In re Syntex Corp. Sec. Litig., 95 F.3d 922, 926 (9th Cir. 1996)) (explaining that conclusory allegations and unwarranted inferences are insufficient to defeat a motion for judgment on the pleadings.). Plaintiffs additionally allege that both defendants accepted premiums for the Policy. (Id. ¶ 43.) They also allege that in a prior action, this court "ruled that defendants owed Dr. Wallis a duty to defend [under the Policy]," (id. ¶¶ 16, 25), and that defendants then tendered defense when PHL filed a cross-claim in a later action, (id. ¶¶ 21, 25). Plaintiffs also allege that the defendants paid the fees and costs incurred by plaintiffs in the PHL action and that "[b]y agreement the defendants allowed plaintiffs' attorneys to send their bills directly to the insurance company for payment." (Id.

¶ 22.)

These additional factual allegations, however, do not go to establishing that Atlantic Mutual is the agent, partner, or joint venturer of Centennial. The court's best guess is that plaintiffs are relying on the theory that Atlantic Mutual is Centennial's undisclosed principal. "A principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal." Restatement (Third) Of Agency § 1.04 (2006). When an agent with actual authority makes a contract on behalf of an undisclosed principal, the principal is a party to the contract (unless excluded by it), as are the agent and the third party. Id. § 6.03(1)-(2). If the principal is a party to the contract, it and the third party have the same rights, liabilities, and defenses against each other as if the principal had made the contract personally. Id. § 6.03(3). Actual authority arises when the principal manifests it assent to an agent that the agent take action on the principal's behalf. Id. § 3.01.

Fatally, plaintiffs have not alleged that Atlantic Mutual gave actual authority to Centennial to enter into an insurance contract with plaintiffs as its agent. It would be difficult for plaintiffs to have done so, given that they fail to differentiate between the defendants at any point in the Complaint. Nor have plaintiffs alleged any facts even suggesting that such authority was given, like a statement from either party acknowledging an agency relationship. Instead, plaintiffs' allegations depict Centennial merely acting consistent with its own obligations on the Policy, rather than in a manner consistent with being Atlantic Mutual's agent. While it is entirely possible that Atlantic Mutual was Centennial's undisclosed principal, or even its disclosed principal, "plaintiffs here have not nudged their claims across the line from conceivable to plausible."*fn8 Twombly, 550 U.S. at 570.

Because a Rule 12(c) motion is essentially equivalent to a Rule 12(b)(6) motion, a district court may "dispos[e] of the motion by dismissal rather than judgment." Sprint Telephony PCS, L.P. v. County of San Diego, 311 F. Supp. 2d 898, 902-03 (S.D. Cal. 2004). Courts have discretion to grant leave to amend, but leave is generally only denied if it clear that the deficiencies of the complaint cannot be cured by amendment. Norton v. Independence Tech., LLC, Civ. No. 2:10-03218, 2011 WL 3584491, at *2 (E.D. Cal. Aug. 15, 2011) (England, J.) Here, because it is not clear that plaintiffs cannot cure their Complaint, plaintiffs' claims for breach of contract and breach of the implied covenant of good faith and fair dealing against Atlantic Mutual must be dismissed with leave to amend.

D. Declaratory Relief and Fiduciary Duty Plaintiffs allege that defendants acquired a fiduciary duty by issuing the Policy and accepting premiums for it. (Compl. ¶ 43.) California law is unsettled as to whether there is an action for the breach of fiduciary duty between an insured and insurer. See, e.g., Casey v. Metro. Life Ins. Co., 688 F. Supp. 2d 1086, 1100-01 (E.D. Cal. 2010) (adopting "the sounder approach that a breach of fiduciary duties is analyzed under the covenant of good faith and fair dealing" and therefore "a separate claim does not exist for breach of a fiduciary duty"). The court need not resolve this issue, however, because plaintiffs have not sufficiently alleged that Atlantic Mutual is a party to the Policy and liable for obligations under it as plaintiffs' insurer. See Negrete v. Fid. & Guar. Life Ins. Co., 444 F. Supp. 2d 998, 1003 (C.D. Cal. 2006) (to plead a claim for breach of fiduciary duty, plaintiff must allege the existence of a fiduciary relationship giving rise to a fiduciary relationship (citing Pierce v. Lyman, 1 Cal. App. 4th 1093, 1101 (1991))).

Finally, because plaintiffs have not pled any cognizable claims for relief against Atlantic Mutual, their request for declaratory relief against Atlantic Mutual also falls. See Winding v. Cal-W. Reconveyance Corp., Civ. No. 10-0041, 2011 WL 221321, at *11 (E.D. Cal. Jan. 24, 2011) (O'Neill, J.) ("The failure of the complaint as a whole demonstrates the absence of an actual controversy subject to declaratory relief. A declaratory relief action 'brings to the present a litigable controversy, which otherwise might only be tried in the future.'" (quoting Societe de Conditionnement en Aluminium v. Hunter Eng. Co., 655 F.2d 938, 943 (9th Cir. 1981))). Accordingly, plaintiffs' claim for breach of fiduciary duty and request for declaratory relief against Atlantic Mutual must be dismissed with leave to amend.

E. Collateral Estoppel and Judicial Estoppel In a diversity action, the court must apply the collateral estoppel rules of the forum state. Bates v. Union Oil Co. of Cal., 944 F.2d 647, 649 (9th Cir. 1991). Therefore, California law applies to the issue of collateral estoppel in this case. Under California law, the preclusive effect of a prior federal court judgment is resolved according to federal law. Lumpkin v. Jordan, 49 Cal. App. 4th 1223, 1230 (1st Dist. 1996).

To preclude relitigation of an issue under the doctrine of collateral estoppel: "(1) the issue at stake must be identical to the one alleged in the prior litigation; (2) the issue must have been actually litigated in the prior litigation; and (3) the determination of the issue in the prior litigation must have been a critical and necessary part of the judgment in the earlier action." Clark v. Bear Stearns & Co., Inc., 966 F.2d 1318, 1320-21 (9th Cir. 1992). "The party asserting preclusion bears the burden of showing with clarity and certainty what was determined by the prior judgment." Id. at 1321. Collateral estoppel does not apply if there is any doubt as to whether an issue was actually litigated in the prior action. Steen v. John Hancock Mut. Life Ins. Co., 106 F.3d 904, 912 (9th Cir. 1997). Trial courts have broad discretion to determine when to apply offensive collateral estoppel. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 331 (1979).

Plaintiffs request that the court apply collateral estoppel, or claim preclusion, to prevent Atlantic Mutual from arguing that it is not a party to the Policy with Centennial. Plaintiffs first request that the court apply preclusive effect to a stipulated dismissal with prejudice from an earlier action before this court that plaintiffs contend involved the same parties and the same Policy. (See RJN Ex. G.) Under federal preclusion law, however, in a dismissal with prejudice, none of the issues is actually litigated. In re Daley, 776 F.2d 834, 838 (9th Cir. 1985). Thus, the second prong of the collateral estoppel test cannot be met and the court will not give preclusive effect to the stipulated dismissal with prejudice.

Plaintiffs next direct the court to a summary judgment order issued by this court in the same action. (See RJN Ex. F.) "An insurance company's duty to defend arises from the contractual provisions contained in its standard comprehensive or commercial general liability insurance policies." Zurich Ins. Co. v. Smart & Final Inc., 996 F. Supp. 979, 985 (C.D. Cal. 1998) (citing Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38, 56 (1997)). In its summary judgment order, this court never decided, nor did it intend to decide, whether Atlantic Mutual was a party to the insurance contract at issue. Rather, it considered whether the allegations of the underlying action against Dr. Wallis gave rise to a duty to defend under the Policy. (RJN Ex. F at 10.) The court never stated on what theory Atlantic Mutual was liable under the Policy; the issue appears not to have been raised.*fn9

Furthermore, the Supreme Court has cautioned against applying offensive collateral estoppel because "[i]f a defendant in the first action is sued for small or nominal damages, he may have little incentive to defend vigorously, particularly if future suits are not foreseeable." Parklane Hosiery Co., 439 U.S. at 330. Here, where Atlantic Mutual and Centennial are at the least related companies, Atlantic Mutual might have known that Centennial would accept the duty to defend and that even if the court found Atlantic Mutual liable under the Policy, Centennial would cover any expenses. It might also not have reasonably expected future suits involving Dr. Wallis. For both reasons, it is not surprising--nor Machiavellian, as plaintiffs suggest--that Atlantic Mutual did not contest that it is a party to the Policy until this point. Plaintiffs have not met their burden of showing that the issue of whether Atlantic Mutual is a party to the Policy had been decided in the earlier action. Accordingly, the court will not give its earlier order any preclusive effect at this time.

Judicial estoppel bars a party from taking inconsistent positions in the same litigation. New Hampshire v. Maine, 532 U.S. 742, 749 (2001); Morris v. State of Cal., 966 F.2d 448, 452 (9th Cir. 1991). The court must have relied on the party's previously inconsistent statement to apply the doctrine. Interstate Fire & Cas. Co. v. Underwriters at Lloyd's, 139 F.3d 1234, 1239 (9th Cir. 1998). Plaintiffs request that the court bar Atlantic Mutual from taking an inconsistent position regarding whether it is a party to the Policy. As to this litigation, plaintiffs point to defendants' admission that the court ruled that they owed Dr. Wallis a duty to defend in an earlier action. (Answer ¶ 17 (Docket No. 9).) They argue that this admission contradicts Atlantic Mutual's argument on this motion that it is not a party to the Policy.

However, there is a difference between admitting that the court ruled defendants had the duty to defend and admitting that they actually had that duty. If the court ruled Atlantic Mutual owed plaintiff a duty to defend, the court may have been wrong. There could be many reasons that such a ruling might have been mistaken. The parties may not have called to the court's attention the different roles played in the transaction by Centennial and Atlantic Mutual. Alternatively, the court may have misspoke. Or the court may have been just plain wrong, and while its ruling may have been the law of that case it is not the law of this case. There is also a difference between admitting to the fact that the court found that Atlantic Mutual had a duty to defend under the Policy and admitting to being a party to the Policy. If Atlantic Mutual simply declined to contest its liability under the Policy in the earlier action, the fact that Atlantic Mutual was found to have a duty to defend is not necessarily inconsistent with Atlantic Mutual's position in the instant motion. Most importantly, the court has not relied on the admission. Thus, it declines to apply judicial estoppel.

F. Sanctions "A motion for sanctions must be made separately from any other motion and must describe the specific conduct that allegedly violates Rule 11(b)." Fed. R. Civ. P. 11(c)(1). It must not be filed until 21 days after it is served pursuant to Rule 5. Id. (c)(2). Plaintiffs failed to comply with these requirements by requesting Rule 11 monetary and issue sanctions in their opposition. They must therefore rely on the Court's inherent authority or 28 U.S.C. 1927 to seek sanctions. Section 1927 provides, in relevant part: "Any attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, and attorney's fees reasonably incurred because of such conduct." 28 U.S.C. 1927. To award sanctions under both the court's inherent authority and § 1927 requires evidence of bad faith. Fink v. Gomez, 239 F.3d 989, 992 (9th Cir. 2001); In re Keegan Mgmt. Co., Sec. Litig., 78 F.3d 431, 436 (9th Cir. 1996).

There is insufficient proof of bad faith to award sanctions at this time. Plaintiffs argue that Atlantic Mutual acted in bad faith because its counsel declined plaintiffs' counsel's request that the instant motion be withdrawn and because its motion is frivolous and vexatious. However, given the plain language of the Policy, plaintiffs' insufficient allegations of agency, and the court's finding that neither collateral nor judicial estoppel applies, Atlantic Mutual's motion presented a close question on which it ultimately prevailed.

Defendants' arguments were thus not vexatious or frivolous, but well-taken. Although Atlantic Mutual has not contested its liability under the Policy before, the court will not penalize the choice to wait to do so until this point by issuing sanctions. This is especially so because of the lesser motivation Atlantic Mutual may have had to defend itself in the earlier litigation.

Atlantic Mutual appears to have taken some actions in the past consistent with plaintiffs' contention that it is a party to the Policy. Its motion may therefore be disingenuous. But it may also be good lawyering, for the reasons just explained. The call is close enough that the court cannot find that Atlantic Mutual's motion was made in bad faith. Accordingly, plaintiffs' request for sanctions will be denied.

IT IS THEREFORE ORDERED that Atlantic Mutual's motion for judgment on the pleadings be, and the same hereby is, GRANTED with leave to amend. Plaintiffs have twenty days from the date of this Order to file an amended complaint, if they can do so consistent with this Order.

IT IS FURTHER ORDERED that plaintiffs' request for sanctions be, and the same hereby is, DENIED.


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