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Stonington Insurance Co. v. Adams

United States District Court, E.D. California

July 13, 2017

STONINGTON INSURANCE COMPANY, Plaintiff,
v.
ROBERT ADAMS; CREATIVE FRONTIERS SCHOOL, INC.; SAUNDRA ADAMS; AO DOE; BR DOE, BY AND THROUGH HER GUARDIAN AD LITEM, C DOE; and DOES 1 through 20, inclusive, Defendants.

          MEMORANDUM AND ORDER

          MORRISON C. ENCJLAND, JR UNITED STATES DISTRICT JUDGE

         Through this action, Plaintiff Stonington Insurance Company (“Plaintiff”) seeks rescission of certain insurance policies it issued to a private school, Creative Frontiers, owned and operated by Robert and Saundra Adams. In suing Creative Frontiers and the Adamses (collectively referred to as “Defendants” unless otherwise specified), Plaintiff further seeks a declaratory judgment that it owes no coverage for seven tort actions brought against Robert Adams and Creative Frontiers in Sacramento County Superior Court by AO Doe and BR Doe (collectively the “underlying litigants”[1]), who claim they were molested by Robert Adams while students at Creative Frontiers.

         Presently before the Court is Defendants' Motion to Dismiss brought pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) on grounds that the Court should decline to exercise jurisdiction over these proceedings while the underlying tort lawsuits are pending. As an alternative to dismissal, Defendants argue that both cases share the same facts and issues and consequently ask the Court to stay this case pending resolution of the underlying tort proceedings filed against them in state court. Defendants' Motion was filed on January 10, 2017. (Defs.'s Mot. to Stay, ECF No. 11). Plaintiff filed a timely opposition to that Motion on February 9, 2017 (Pl.'s Opp'n, ECF No. 18), to which Defendants filed a timely reply (Defs.' Reply, February 16, 2017, ECF No. 19). For the reasons set forth below, Defendants' Motion to Dismiss is DENIED, but their alternative request to stay is GRANTED.[2]

         BACKGROUND

         Since 1974, Robert Adams has owned and operated Creative Frontiers, a private daycare/preschool and elementary school previously located in Citrus Heights, California. In 1982, the California Department of Social Services issued a daycare license to both Robert Adams and his wife, Saundra Adams. Robert Adams also formed a California corporation, Creative Frontiers, Inc., in 2000 whose sole business was the operation and management of the school. According to Plaintiff, Robert Adams has been the Chief Executive Officer, president, and sole shareholder of the corporation since its inception. See Compl., ¶¶ 13-17.

         On February 27, 2004, Robert Adams submitted a “Childcare Application” for the procurement of an insurance policy for Creative Frontiers from Plaintiff. The February 27, 2004 Application, as well as the similar Childcare Applications completed by Adams on March 1 and 2, 2005, and March 5, 2008, (collectively the “Policy Applications”) instructed Adams, as the insured, to disclose any prior instances or allegations of sexual or physical abuse at the school. In response to these inquiries, Adams stated there had been no instances or allegations of sexual or physical abuse. Id. ¶¶ 19-20. In reliance on the representations made by Adams in the policy applications, Plaintiff issued eight consecutive multi-line insurance policies to Robert and Saundra Adams d/b/a Creative Frontiers Elementary Preschool (collectively “the Insureds”). Id. ¶ 23.

         On July 29, 2016, AO Doe filed a complaint in the Sacramento County Superior Court against Adams and Creative Frontiers, and on September 13, 2016, BR Doe, by and through her Guardian ad Litem, C Doe, also filed a complaint in the Sacramento County Superior Court against Adams and Creative Frontiers (collectively the “underlying lawsuits”).[3] The underlying lawsuits each allege the following causes of action against Creative Frontiers, alone: (1) negligent supervision and retention of an employee (Adams) which allowed Adams to commit sexual abuse upon AO Doe and BR Doe; (2) negligent supervision of a minor which allowed Adams to engage in a harmful relationship with AO Doe and BR Doe; (3) negligent failure to warn, train or educate minors, including AO Doe and BR Doe, and their parents to deal with/avoid the risk of childhood sexual abuse by Adams; and (4) negligent failure to report suspected abuse despite the fact school employees had a reasonable suspicion that Adams had committed acts of sexual abuse against children at the school, including AO Doe and BR Doe. Each of the underlying lawsuits also asserts claims for (1) intentional infliction of emotional distress, against both Creative Frontiers and Adams, and (2) sexual battery of a minor, against Adams alone. Id. ¶¶ 48-64.

         Plaintiff agreed to provide Defendants with a defense for both underlying lawsuits, subject to a reservation of rights. Plaintiff filed the current coverage action on October 28, 2016, asserting causes of action for declaratory relief and rescission as to the policies it issued. According to Plaintiff, Adams failed to disclose knowledge that, in 2000, two former students alleged to local authorities that they had been sexually molested by Adams while attending Creative Frontiers. Id. ¶ 120. Plaintiff alleges that, due to these material misrepresentations by Adams, it is entitled to rescind its policies. Id. ¶ 123.

         While Defendants ostensibly seek dismissal of this action in its entirety on grounds that the Court should simply decline to exercise its jurisdiction pending the resolution of the underlying lawsuits, that argument is misplaced. The legal objectives of the two actions are entirely different despite the fact they share common factual characteristics. The underlying actions seek damages for sexual molestation whereas the instant lawsuit disputes the availability of insurance coverage for the defense and indemnification of the Insureds against those molestation allegations. Under those circumstances any argument that this Court should defer to the initially filed underlying actions under the so-called “first to file” rule makes no sense since the issues to be decided are not duplicative.[4] Moreover, it is undisputed that this Court has subject matter jurisdiction over these proceedings pursuant to 28 U.S.C. § 1332 since there is complete diversity of citizenship between the parties and the amount in controversy exceeds $75, 000, exclusive of interest and costs. The Court cannot decline to exercise that jurisdiction absent a compelling reason to do so, and no such rationale is present here.

          With regard to their alternative request for a stay, Defendants assert that there is an overlap of the factual issues to be decided in the present declaratory relief and rescission action and in the underlying lawsuits in state court. Given that overlap, Defendants argue they will be prejudiced unless the present action is stayed until after the underlying state tort actions have been concluded. In its Opposition to this Motion, Plaintiff agrees that it is indeed proper to stay litigation of the declaratory relief causes of action pending conclusion of the underlying lawsuits. Opp., 2:17-34. In light of that concession, and the Court's determination as indicated above that outright dismissal would be inappropriate, this Motion proceeds on Defendants' request to stay Plaintiff's request for rescission, only.

         STANDARD

         The power to issue a motion to stay derives from a federal district court's power to control its docket and ensure that cases before it are justly determined. Levya v. Certified Grocers of Cal., Ltd., 593 F.2d 857, 864-65 (9th Cir. 1979), cert. denied, 444 U.S. 827 (1979). Indeed, “a trial court may, with propriety, find it is efficient for its own docket and the fairest course for the parties to enter a stay of an action before it, pending resolution of independent proceedings which bear upon the case.” Id. at 863-64. “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.” Id. A federal district court has broad discretion in deciding whether to issue a stay. Fed. Sav. & Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989).

         ANALYSIS

         Whenever an insurer defends a third-party action against its insureds under a reservation of rights, “an a-typical insurer-insured relationship is created . . . . [F]actual determinations made in the coverage case, were that to be litigated first, could be binding in the third-party action to the disadvantage to the insured.” Home Indem. Co. v. Stimson Lumber Co., 229 F.Supp.2d 1075, 1091 (D. Or. 2001). Thus, 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 ...


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