United States District Court, N.D. California
ORDER GRANTING MOTION TO STAY AND DENYING MOTION TO DISMISS Re: Dkt. No. 13
MARIA-ELENA JAMES, Magistrate Judge.
Plaintiff Atain Specialty Insurance Company ("Atain") filed this action seeking a declaratory judgment that it has no duty to defend or indemnify Defendants 20 Parkridge LLC, LHJS Investments LLC, Magnate Fund #2, or John Simonse ("Defendants") with respect to any claim arising out of litigation related to the conversion of an apartment building at 20 Parkridge Drive, San Francisco, California. Compl. at 14, Dkt. No. 1. Defendants have moved to dismiss the action pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(6), or alternatively to stay the case pending the resolution of the underlying action. Dkt. No. 13. Plaintiff has filed an Opposition (Dkt. No. 22), and Defendants have filed a Reply (Dkt. No. 27). The Court held a hearing on this matter on April 30, 2015. Dkt. No. 31. Having considered the parties' positions, relevant legal authority, and the record in this case, the Court DENIES Defendants' Motion to Dismiss, but GRANTS Defendants' Motion to Stay for the reasons set forth below.
Atain, an insurance company, brings this action against its insured, the Defendants, asking the Court to declare that its insurance policy excludes certain claims tendered by Defendants. Defendants argue that the Court should dismiss the action or abstain from making such a determination at this stage. The following factual background is taken from Atain's Complaint, except where otherwise noted.
Atain, formerly known as USF Insurance Company, issued insurance to 20 Parkridge LLC under Policy No. CIP91849 (the "Policy"), which provides commercial general liability coverage to the premises located at 20 Parkridge Drive, San Francisco, California (the "Property"). Compl. ¶ 11 & Ex. B. The Policy became effective on October 19, 2010. Compl., Ex. B.
On July 21, 2014, 20 Parkridge LLC tendered defense of claims asserted against it to Atain. Compl. ¶ 18. The month before, 20 Parkridge TIC ("TIC") sued 20 Parkridge LLC and the other Defendants in San Francisco Superior Court, 20 Parkridge TIC v. 20 Parkridge, LLC, et al, Case No. CGC-14-539904 (the "Underlying Action"). Id. ¶ 13. Atain alleges that the Underlying Action arises out of the conversion of the apartment building at the Property into residential condominiums (the "Project"). Id. ¶ 14. According to Atain, TIC seeks damages for injuries allegedly sustained as a result of defective conditions including, but not limited to: unintended water intrusion through the building envelope including windows, doors, exterior walls, flashing and roofs causing damage to the interior finishes and/or other property and other defects/deficiencies in the Project. Id. ¶ 15. The Complaint filed in the Underlying Action asserts claims for Strict Liability; Negligence; Improper Distribution of Assets; Breach of Implied Warranty; Negligence Per Se; Breach of Contract-Third Party Beneficiary; Breach of Contract; Breach of Contract TIC Agreements. Id. ¶ 15 & Ex. C, Dkt. No. 1-3 ("State Court Compl."). TIC's Complaint seeks special and general damages in excess of $5, 000, 000, attorney's fees, costs and expenses. Id. ¶ 15 & State Court Compl. at 21-23.
Atain initially declined 20 Parkridge LLC's tender, finding that three policy exclusions- the Classification Limitation Endorsement, the "Multi-Unit Habitational Conversion" exclusion, and the "Malpractice/Professional Services" exclusion-removed all potential for coverage for the claims asserted against 20 Parkridge LLC. Compl. ¶ 19. But on September 10, 2014, 20 Parkridge LLC provided Atain with a copy of a letter from TIC's counsel in the Underlying Action regarding certain deficiencies at the Property. Id. ¶ 20. According to this letter, certain of the claimed deficiencies existed prior to the time the apartment complex was converted to condominiums, and thus 20 Parkridge LLC argued that they fell within an exception to the "Multi-Unit Habitational Conversion." Id. On September 16, 2014, Atain accepted 20 Parkridge LLC's tender of defense, subject to a complete reservation of its rights to decline coverage and to seek a judicial determination of its coverage obligations. Id. ¶ 21 & Ex. D.
On October 21, 2014, counsel for 20 Parkridge LLC also tendered to Atain the defense of Defendants LHJS, Magnate, and Simonse. Id. ¶ 22. 20 Parkridge LLC contended that Defendants were insureds by definition under the Policy issued to 20 Parkridge LLC, as Defendants LHJS and Magnate are members of 20 Parkridge LLC, and Simonse is a member of both LHJS and Magnate. Id. ¶¶ 7-9. Magnate conveyed the Property to 20 Parkridge LLC around July 12, 2010, and LHJS manages 20 Partridge LLC. Waite Decl. ¶¶ 2-4, Dkt. No. 15. On December 15, 2014, Atain notified counsel for Defendants that in addition to providing a defense to 20 Parkridge LLC, Atain would also provide a defense to them. Compl. ¶ 25. On January 12, 2015, Atain formally accepted the tender of LHJS, Magnate, Simonse, and 20 Parkridge LLC subject to a complete reservation of its rights to decline coverage and to seek a judicial determination of its coverage obligations. Id., Ex. E.
On February 11, 2015, Atain also tendered the defense of the Underlying Action to Dennis Lehane and Lehane Construction. Weschler Decl. ¶ 9 & Ex. I, Dkt. No. 16. 20 Parkridge LLC had previously entered into an agreement with Lehane Constructions to perform the repairs and construction at the Property. Waite Decl. ¶ 6 & Ex. C.
A dispute subsequently arose between Atain and Defendants regarding the coverage afforded under the Policy. Compl. ¶ 26. Atain believes that it has no duty to defend or indemnify 20 Parkridge LLC, LHJS, Magnate, or Simonse. Id . ¶¶ 26, 28. At bottom, Atain contends that its Policy does not cover the damage for which Defendants seek its defense and indemnity. See id. ¶¶ 33-34, 37, 40, 44, 48, 50. It filed this action on January 15, 2015, requesting declaratory judgment that it has no duty to defend (first cause of action) and no duty to indemnify (second cause of action) Defendants in the Underlying Action. Id. ¶¶ 30-61.
Defendants now file this Motion to Dismiss pursuant to Rule 12(b)(6). Mot. at 6-10. Alternatively, Defendants request that Atain's case for declaratory judgment be stayed pending the outcome of the Underlying Action. Id. at 10-15. In the Underlying Action, the Superior Court recently granted Defendants' petition to compel arbitration, as well as their motion to stay that action pending the conclusion of arbitration. Wechsler Decl. ¶ 8, Dkt. No. 16, & Ex. H, Dkt. No. 16-11. No arbitration has been scheduled in the Underlying Action, nor any discovery conducted. Wechsler Decl. ¶ 8.
A. Dismissal under Rule 12(b)(6)
As an initial matter, the Court finds no grounds for dismissing this action at this time under Federal Rule of Civil Procedure 12(b)(6). Rule 12(b)(6) permits a party to file a motion to dismiss based on the failure to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(6). "[D]ismissal may be based on either a lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 1121 (9th Cir. 2008) (quotations omitted). While Defendants assert that Attain "has not and cannot state a basis for declaratory judgment at this time, while the Underlying Action is pending, and has been stayed pending judicial arbitration in the Superior Court[, ]" Mot. at 7, the Court is not persuaded that the presence of the underlying action necessarily removes Atain's ability to put forward a cognizable legal theory.
Defendants' only significant argument on this front appears to be that the "first-to-file" rule prevents Atain from pursuing this action at all because the Underlying Action was filed before this action. The first-to-file rule is "a generally recognized doctrine of federal comity" permitting a district court to exercise its discretion to decline jurisdiction over an action. Inherent.com v. Martindale-Hubbell, 420 F.Supp.2d 1093, 1097 (N.D. Cal. 2006) (citing Pacesetter Sys., Inc. v. Medtronic, Inc., 678 F.2d 93, 94-95 (9th Cir. 1982)); see also Alltrade, Inc. v. Uniweld Prods. Inc., 946 F.2d 622, 628 (9th Cir. 1991) ("The most basic aspect of the first-to-file rule is that it is discretionary."). The rule is primarily meant to alleviate the burden placed on the federal judiciary by duplicative litigation and to prevent the possibility of conflicting judgments. Church of Scientology of Cal. v. U.S. Dep't of Army, 611 F.2d 738, 750 (9th Cir. 1979) (citations omitted). Courts analyze three factors in determining whether to apply the first-to-file rule: (1) chronology of the actions; (2) similarity of the parties; and (3) similarity of the issues. Alltrade, 946 F.2d at 625. Atain filed this action after the Underlying Action, but as it notes, "Atain is not a party to that action" and "[t]he state court is not being asked to determine insurance coverage issues; rather the issues before the state court are whether Defendants caused the claimed damages and, if so, the amount it will take to reimburse TIC for those damages." Opp'n at 5. As such, Atain argues that its "coverage claims [cannot] be satisfactorily adjudicated in the Underlying Action." Id.
The Court agrees. Although exact identity of parties and issues is not required to satisfy the first-to-file rule, see discussion in Wallerstein v. Dole Fresh Vegetables, Inc., 967 F.Supp.2d 1289, 1292-98 (N.D. Cal. 2013), Defendants have not shown that outright dismissal is appropriate, by, for instance, demonstrating that the Underlying Action has such similar parties and issues that this action is duplicative and unnecessary. While some of the factual determinations to be resolved in this action and the Underlying Action may overlap, given the current facts presented and the record before the Court, the presence of the first-filed, Underlying Action does not persuade the Court that dismissal is appropriate.
Otherwise, while Defendants make it clear that the Court has discretion in whether to consider Atain's claims, they do not show how Atain fails to allege a cognizable legal theory or what facts are lacking in the Complaint to state a claim for relief. Rather, Defendants' challenge to Atain's claims rest much more heavily on their arguments that the Court should exercise its discretion to dismiss this action in favor of the Underlying Action or stay the case until that action is resolved. Given the lack ...