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Atain Specialty Insurance Co. v. Slocum

United States District Court, E.D. California

July 8, 2019

ATAIN SPECIALTY INSURANCE COMPANY, a Michigan corporation, Plaintiff
RAYMOND SLOCUM, an individual d/b/a Mountain Property Service, et al., Defendants


         This is an insurance dispute that arises between Plaintiff Atain Specialty Insurance Co. (“Atain”) and its insureds, Defendants Raymond Slocum and Matthew Marvin both doing business as Mountain Property Services (collectively “MPS”). MPS is being sued in state court by co-defendant Adrian Porter (who is a minor). Atain seeks a declaration under 28 U.S.C. § 2201 that it owes no duty defend and no duty to indemnity MPS against Porter's claims. Currently before the Court are Rule 12(b)(6) and 12(c) motions by Porter and a Rule 12(b)(6) motion by MPS. For the reasons that follow, the motions will be denied without prejudice.


         From the Complaint, Porter's family rented a cabin at Shaver Lake, California for a weekend getaway. Prior to the family's arrival at the cabin, the owners of the cabin hired MPS to perform tree cutting services and to clear away brush at the cabin. After the family's arrival, on July 1, 2017, Porter fell into a smoldering pile of debris on the cabin's premises that had been left by MPS. Porter sustained injuries from falling into the debris, and Porter's family sued MPS in state court (hereinafter the “State Case”).

         The State Case alleges in part that MPS “was negligent in the use and/or maintenance of the property by creating a condition that was an unreasonable risk of harm (i.e. having the burn pile unattended); and (2) MPS “knew or, through the exercise of reasonable care, should have known about the dangerous condition that the burn pile created [and] failed to repair this condition, protect patrons against harm from this burn pile or give adequate warning of the dangers of a smoldering burn pile.” From these allegations, Porter seeks several million dollars in damages under theories of general negligence and premises liability (including sub-counts for negligence and failure to warn).

         After MPS was served with the State Case complaint, it tendered its defense to Atain. Atain had issued a commercial general liability policy to MPS that was in effect from August 2016 to August 2017 (“the Policy”).

         On May 4, 2018, Atain accepted MPS's tender under a reservation of rights. The reservation of rights explains that Atain has concerns over its obligations to defend and indemnify based on the definition of the term “occurrence” (which is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”), an exclusion for bodily injuries “arising out of” “all controlled burns and fire mitigation operations, ” application of the classification limitation endorsement (which provides coverage only for specifically identified classifications/activities), application of an exclusion regarding contractual liability, and application of a $500 deductible. See Complaint Ex. 3.

         On February 20, 2019, Atain filed this action for declaratory relief. Atain contends that the State Case complaint does not allege the potential for coverage under the Policy, while MPS and Porter contend that the State Case complaint alleges both potential and actual coverage. The Complaint alleges that there is no duty to defend and no duty to indemnify because: (1) the state complaint does not allege an “occurrence, ” (2) the Classification Limitation applies to preclude coverage, and (3) the exclusion for designated ongoing operations (which appears to refer to bodily injury arising out of controlled burns and fire mitigation efforts) applies.


         Rule 12(b)(6)

         Under Federal Rule of Civil Procedure 12(b)(6), a claim may be dismissed because of the plaintiff's “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). A dismissal under Rule 12(b)(6) may be based on the lack of a cognizable legal theory or on the absence of sufficient facts alleged under a cognizable legal theory. See Mollett v. Netflix, Inc., 795 F.3d 1062, 1065 (9th Cir. 2015). In reviewing a complaint under Rule 12(b)(6), all well-pleaded allegations of material fact are taken as true and construed in the light most favorable to the non-moving party. Kwan v. SanMedica, Int'l, 854 F.3d 1088, 1096 (9th Cir. 2017). However, complaints that offer no more than “labels and conclusions” or “a formulaic recitation of the elements of a cause of action will not do.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Johnson v. Federal Home Loan Mortg. Corp., 793 F.3d 1005, 1008 (9th Cir. 2015). The Court is “not required to accept as true allegations that contradict exhibits attached to the Complaint or matters properly subject to judicial notice, or allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Seven Arts Filmed Entm't, Ltd. v. Content Media Corp. PLC, 733 F.3d 1251, 1254 (9th Cir. 2013). To avoid a Rule 12(b)(6) dismissal, “a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 678; Mollett, 795 F.3d at 1065. “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.” Iqbal, 556 U.S. at 678; Somers v. Apple, Inc., 729 F.3d 953, 959 (9th Cir. 2013). “If a motion to dismiss is granted, “[the] district court should grant leave to amend even if no request to amend the pleading was made . . . .” Ebner v. Fresh, Inc., 838 F.3d 958, 962 (9th Cir. 2016). However, leave to amend need not be granted if amendment would be futile or the plaintiff has failed to cure deficiencies despite repeated opportunities. Garmon v. County of L.A., 828 F.3d 837, 842 (9th Cir. 2016).

         Rule 12(c)

         Under Federal Rule of Civil Procedure 12(c), “[a]fter the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings.” Fed. R. Civ. Pro. 12(c). Because the motions are functionally identical, the same standard of review applicable to a Rule 12(b)(6) motion applies to a Rule 12(c) motion. Dworkin v. Hustler Magazine, Inc., 867 F.2d 1188, 1192 (9th Cir. 1989). The non-moving party's allegations are accepted as true, and all reasonable inferences are drawn in the non-moving party's favor. Hines v. Youseff, 914 F.3d 1218, 1227 (9th Cir. 2019); Living Designs, Inc. v. E.I. DuPont de Nemours & Co., 431 F.3d 353, 360 (9th Cir. 2005). Any allegations made by the moving party that have been denied or contradicted are assumed to be false. See MacDonald v. Grace Church Seattle, 457 F.3d 1079, 1081 (9th Cir. 2006); Hal Roach Studios v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1550 (9th Cir. 1989).


         Defendants' Argument

         Defendants collectively argue that the Court should either decline to exercise jurisdiction or stay this matter for several reasons. First, the state action involves no federal issues or principles, so a declaration would only address state issues. Second, this case would require the Court to delve into the state actions' legal issues, when those legal issues will otherwise be resolved by the state court. This includes interpreting regulatory provisions (primarily fire regulations), examining the factual circumstances giving rise to the underlying action, and interpreting the regulations in relation to the facts. More specifically, Porter explains: “The nature of the work being performed, the presence of any warning devices, the presence of a required person to monitor the pile until it was extinguished are all issues central to the underlying state action. Of necessity, whether defendant MPS was operating a ‘controlled burn and fire mitigation operation' will be the subject of evidence presented in the state court action.” Doc. No. 14 at 7:22-25. Third, the issues that will be resolved in the state action will moot the issues raised by Atain in this case. Thus, judicial economy favors dismissal of this case. Fourth, the reservation of rights issued by Atain eliminates the need for this proceeding. If there is a defense verdict, there is no need to indemnify and the cost of defense can be litigated later. If there is a plaintiff's verdict, Atain can refile its § 2201 action, but will have the benefit of factual and legal disputes that were resolved by the state action. Fifth, as recognized by Zurich Ins. Co. v. Alvarez, 669 F.Supp. 307 (C.D. Cal. 1987) and State Farm and Casualty Co. v. McIntosh, 837 F.Supp. 315 (N.D. Cal. 1993), entertaining Atain's action could adversely interfere with Porter's ability to settle and pursue his claims and upset the balance of any settlement negotiations. Sixth, this case will not resolve the issue of MPS's liability to Porter, which means that the parties will have to engage in piecemeal litigation. Seventh, the action is Atain's improper attempt at forum shopping, procedural fencing, and benefitting from res judicata. For these reasons, the Court should either dismiss this case or stay this case pursuant to Landis v. North Am. Co., 299 U.S. 248 (1936).

         Additionally, Porter argues that the dispute against him is not ripe. Atain is attempting to do in this Court what it unsuccessfully attempted in Atain Specialty Ins. Co. v. Sanchez, 2018 U.S. Dist. LEXIS 71041 (M.D. Fla. Apr. 27, 2018) by seeking a declaration against both the insured and the individual who had brought a lawsuit against the insured. The Sanchez court found that the matter was not ripe and dismissed the declaratory judgment action. This Court should follow Sanchez.

         Plaintiff's Opposition

         Atain argues that, contrary to Defendants' arguments, there are no factual or legal issues that would be adjudicated in this suit that would impact the state action because the duty to defend is determined simply by comparing the allegations in the complaint to the terms of the Policy. Further, this declaratory action will provide clarity for all parties by determining with certainty whether there is a duty to defend. If there is no duty, all will know that there will be no indemnity from Atain for any damages that may awarded in the state action. Courts recognize that insureds and insurers have a mutual interest in the speedy resolution of a duty to defend lawsuit. Atain argues that reliance on the McIntosh case is misplaced because the declaratory relief and the underlying action in that case involved a common question of fact as to whether an act was “willfully” committed. There are no such common questions of fact in this case, rather, the only question is whether the allegations are sufficient to show a potential for coverage. A declaration on the duty to defend, based on the allegations in the complaint, will decide the controversy. Thus, there are no dangers of inconsistent factual holdings between this case and the state action, there will be no needless determinations of state law or duplicative litigation, there will be no dangers regarding collateral estoppel, and there will be no piecemeal litigation. Atain states that it is not seeking to adjudicate whether it has a duty to indemnify in the state action, “[r]ather it is seeking an adjudication that it does not have a duty to defend MPS due to the facts alleged in the complaint not alleging the potential for coverage for a duty to defend to exist.” Doc. No. 17 at 8:15-17. Therefore, there is no basis to either dismiss or stay this action.

         With respect to Porter's arguments, Atain argues that Sanchez is not applicable. In Sanchez, a declaration regarding the duty to indemnify was sought. Here, however, Atain states that it is not seeking a declaration regarding the duty to indemnify, rather it seeks only a declaration regarding the duty to defend. Doc. No. 16 at 6:24-7:1. Also, Porter is properly named as a party because he is a potential creditor under Cal. Ins. Code § 11580(b)(2).

         Legal Standard

         Pursuant to the Declaratory Judgment Act, federal courts “may declare the rights and other legal relations of any interested party” in a declaratory judgment action. 28 U.S.C. § 2201(a); R.R. St. & Co. v. Transp. Ins. Co., 656 F.3d 966, 975 (9th Cir. 2011). Two issues arise from this statute: whether the case is an actual case or controversy within the court's jurisdiction, and if so, whether the court should exercise that jurisdiction over the matter. Principal ...

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