Travelers Property Casualty Company of America et al v. KB Home North Bay, Inc. et al

Filing 23

MEMORANDUM and ORDER signed by Senior Judge William B. Shubb on 9/28/2015 re 18 Planitiff's MOTION to DISMISS COUNTERCLAIMS: IT IS ORDERED that the allegations in paragraph 24 of both complaints that Travelers will soon attempt to enter in to one or more secretly negotiated settlement agreements with plaintiffs' counsel in the Bamborough Action and then withdraw its defense of KB without ever providing KB a complete defense be and the same are hereby, STRICKEN; AND IT IS FURTHER ORDERED that Travelers motions to dismiss be, and the same hereby are, DENIED. (Kirksey Smith, K)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

EASTERN DISTRICT OF CALIFORNIA

10

----oo0oo----

11
12
13
14
15
16
17
18
19

TRAVELERS INDEMNITY COMPANY
OF CONNECTICUT, a Connecticut
corporation, and TRAVELERS
PROPERTY CASUALTY COMPANY OF
AMERICA, a Connecticut
corporation,

MEMORANDUM AND ORDER RE: MOTIONS
TO DISMISS COUNTERCLAIMS
CIV. NO. 2:15-352 WBS EFB

Plaintiffs,
v.
KB HOME NORTH BAY, INC., a
California corporation; KB
HOME SACRAMENTO, INC., a
California corporation; and
DOES 1 through 10 inclusive,
Defendants.

20
21
22
23

TRAVELERS PROPERTY CASUALTY
COMPANY OF AMERICA, a
Connecticut corporation,
FIDELITY & GUARANTY INSURANCE
COMPANY, an Iowa corporation,

24
25
26
27
28

CIV. NO. 1:15-481 WBS EFB

Plaintiffs,
v.
KB HOME NORTH BAY, INC., a
California corporation; and
DOES 1 through 10 inclusive,
Defendants.
1

1
2

AND RELATED COUNTERCLAIMS.
----oo0oo----

3
4

The insurance coverage actions Travelers Indemnity Co.

5

of Connecticut v. KB Home North Bay, Inc., Civ. No. 2:15-352 WBS

6

EFB (E.D. Cal. filed Feb. 11, 2015) (“KB I”), and Travelers

7

Indemnity Co. of America v. KB Home North Bay, Inc., Civ. No.

8

1:15-481 WBS EFB (E.D. Cal. filed Mar. 26, 2015) (“KB II”), were

9

filed in this court and turn on the rights and obligations under

10

the terms of plaintiffs’ insurance policies.

In the two actions,

11

plaintiffs Travelers Indemnity Company of Connecticut, Travelers

12

Property Casualty Company of America, and Fidelity and Guaranty

13

Insurance Company (collectively, “Travelers”) filed suit against

14

their insureds, defendants KB Home Sacramento, Inc. and KB Home

15

North Bay, Inc. (collectively, “KB”) for declaratory relief,

16

breach of contract, and equitable reimbursement.
KB filed counterclaims against Travelers for

17
18

declaratory relief, breach of contract, and breach of the

19

covenant of good faith and fair dealing.

20

dismiss KB’s counterclaims under Federal Rules of Civil Procedure

21

12(b)(1) for lack of subject matter jurisdiction and 12(b)(6) for

22

failure to state a claim upon which relief can be granted.1

23

I. Factual and Procedural Background
KB is a group of residential homebuilders incorporated

24
25

Travelers now moves to

in California.

(Countercl. ¶¶ 1, 8 (KB I Docket No. 10; KB II

26
27
28

1

The parties’ briefs for the motions to dismiss are
nearly identical in both cases. (Compare KB I Docket Nos. 17,
20–21, with KB II Docket Nos. 18, 20–21.)
2

1

Docket No. 9).)

2

incorporated in Connecticut and Iowa.

3

Travelers issued commercial general liability policies to four

4

subcontractors as named insureds.

5

subcontractors then entered into contracts with KB to work on

6

certain residential properties and added KB as additional

7

insureds under their policies.

8

required Travelers to indemnify and defend claims against the

9

insureds that fell within the scope of coverage, gave Travelers

Travelers is a set of insurance carriers
(Id. KB I & II ¶¶ 2–3.)

(Id. KB I & II ¶ 13.)2

(Id.)

The

The insurance policies

10

the right to appoint their choice of defense counsel, and

11

required the insureds to cooperate with Travelers regarding such

12

litigation.

13

(Id. KB I ¶¶ 45–58; KB II ¶¶ 39–52.)

Subsequently, homeowners on properties that KB and the

14

subcontractors worked on filed construction defect actions

15

against KB in California state courts entitled Bamborough v. KB

16

Home Sacramento, Inc., Civ. No. CVCS-09-1211 (Cal. Sup. Ct. filed

17

May 14, 2009) (“Bamborough”), and Aldawood v. KB Home North Bay,

18

Inc., Civ. No. 673190 (Cal. Sup. Ct. filed Mar. 2, 2012)

19

(“Aldawood”).

20

defenses of Bamborough and Aldawood to Travelers under the

21

policies, and Travelers agreed to defend KB subject to a full

22

reservation of rights.

23

19–20.)3

(Countercl. KB I & II ¶¶ 9–10.)

KB tendered the

(Id. KB I ¶¶ 18, 20–21; KB II ¶¶ 15–16,

24
2

25
26
27
28

The subcontractors are: All American Fence Corp. (“All
American”), Simas Floor Company, Inc. (“Simas”), Duracite, and
Norcraft. (Id.)
3
KB pleads that although it did not tender the defense
of Bamborough to Travelers under the All American insurance
policy, Travelers nonetheless agreed to defend KB under that
policy. (Id. KB I ¶¶ 17–18.) The parties’ joint status report,
3

1

Travelers appointed the law firms of Rivera &

2

Associates (“Rivera”); Lee, Hernandez, Landrum, Garofalo & Blake

3

(“Lee”); Clapp, Moroney, Bellagamba, Vucinich, Beeman & Scheley

4

(“Clapp”); and later, Calkins, Specht & Collinsworth

5

(“Collinsworth”) to defend KB in the actions.

6

were allegedly unqualified to defend KB because of conflicts of

7

interest arising from (1) their representation of other parties

8

adverse to KB in substantially similar cases, and (2) their work

9

as “monitoring counsel” for Travelers in which they monitored and

(Id.)

These firms

10

reported information about lawsuits involving KB to Travelers

11

without KB’s knowledge.

12

(Id. KB I ¶¶ 25–34; KB II ¶¶ 25–32.)4

Specifically, KB alleges that Rivera and Lee’s websites

13

listed clients who were adverse to KB in the past.

(Id. KB I

14

¶¶ 25, 31.)

15

firm concurrently represented parties who were adverse to KB in

16

other actions.

17

Clapp with Collinsworth, KB requested full conflict disclosures

18

from Travelers and Collinsworth, including payment arrangements,

19

invoices, billing guidelines, retention letters, rate structures,

20

and updated lists of all insurers that Collinsworth had attorney-

21

client relationships with other than tri-partite relationships.

22

(Id. KB II ¶¶ 21, 29, 31–32.)

Travelers also allegedly appointed Clapp when that

(Id. KB II ¶¶ 25–29.)

After Travelers replaced

KB requested similar disclosures

23
24
25
26
27
28

however, states that KB did in fact tender the defense of
Bamborough to Travelers. (Joint Status Report at 2 (KB II Docket
No. 16).)
4
On January 2, 2013, the Lee firm withdrew from KB’s
defense in Bamborough under the Simas policy. (Id. KB I ¶ 35.)
On June 14, 2013, Travelers withdrew in Aldawood under the
Duracite policy. (Id. KB II ¶ 17.) On March 20, 2014, Travelers
replaced the Clapp firm with the Collinsworth firm in Aldawood
under the Norcraft policy. (Id. KB II ¶ 21.)
4

1

from Rivera and Lee.

2

neither Travelers nor the appointed firms provided KB the

3

requested information.

4

(Id. KB I ¶ 61.)

It is alleged that

(Id. KB I ¶ 61; KB II ¶ 32.)

As a result, KB refused Travelers’ appointments and

5

retained its own defense counsel in the underlying actions, and

6

Travelers subsequently stopped paying KB’s defense expenses.

7

(Id. KB I ¶¶ 26, 32, 67; KB II ¶¶ 55, 61.)

8

brought these two actions against KB over which the court has

9

diversity jurisdiction under 28 U.S.C. § 1332.

Travelers then

(See Pls.’ Compl.

10

(KB I & II Docket Nos. 1); Status Order at 2 (KB I & II Docket

11

Nos. 19).)

12

declaratory relief, breach of contract, and breach of the

13

covenant of good faith and fair dealing.

14

¶¶ 59-82; KB II ¶¶ 53–76.)

15

KB filed counterclaims against Travelers for

(See Countercl. KB I

Travelers now moves to dismiss KB’s counterclaims on

16

the ground that they are not ripe on their face and therefore

17

subject to dismissal under Rule 12(b)(1) and, alternatively, fail

18

to state a claim upon which relief can be granted under Rule

19

12(b)(6).

20

18).)

21

II. Legal Standard

22

(See Pls.’ Mot. (KB I Docket No. 17; KB II Docket No.

On a motion to dismiss, the court must accept the

23

allegations in the complaint as true and draw all reasonable

24

inferences in favor of the claimant.

25

232, 236 (1974), overruled on other grounds by Davis v. Scherer,

26

468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322 (1972).

27

survive a motion to dismiss, a claimant must plead “only enough

28

facts to state a claim to relief that is plausible on its face.”
5

Scheuer v. Rhodes, 416 U.S.

To

1

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).

2

The plausibility standard “does not require detailed

3

factual allegations.”

Ashcroft v. Iqbal, 556 U.S. 662, 678

4

(2009).

5

pleading stage.”

6

2011).

7

expectation that discovery will reveal evidence to support the

8

allegations.”

9

Ultimately, “[d]etermining whether a complaint states a plausible

Nor does it “impose a probability requirement at the
Starr v. Baca, 652 F.3d 1202, 1213 (9th Cir.

It “simply calls for enough facts to raise a reasonable

Id. at 1217 (quoting Twombly, 550 U.S. at 556).

10

claim for relief will . . . be a context-specific task that

11

requires the reviewing court to draw on its judicial experience

12

and common sense.”

13

Iqbal, 556 U.S. at 679.

When ruling on a motion to dismiss, a court may

14

generally not consider materials other than the facts alleged in

15

the complaint.

16

Cir. 1996).

17

briefings.

18

Docket Nos. 18-1 to 18-2, 20-1.)

19

the court intends to rely only on the facts alleged in KB’s

20

counterclaims.5

21
22
23
24
25
26
27
28

5

See Anderson v. Angelone, 86 F.3d 932, 934 (9th

Here, both parties attached exhibits to their
(See KB I Docket Nos. 17-1 to 17-3, 20-1; KB II
Constrained by Rule 12(b)(6),

Travelers requests the court to take judicial notice of
sixteen prior court orders from other cases. Travelers argues,
for the first time in its replies, that under California Code of
Civil Procedure section 1909, prior determinations of issues
between the same parties “litigating [] the same thing under the
same title and in the same capacity” create a presumption that
those decisions should govern this action. (Reply at 3 (KB I &
II Docket Nos. 21.) Even if that section of the California Code
of Civil Procedure applied in a federal court proceeding, it
would be inapposite here because only four of the proffered
orders involve KB, and none of the cases are based on Bamborough
or Aldawood as underlying actions. Furthermore, when a court
takes judicial notice of another court’s opinion, it may do so
6

1

III. Discussion

2

The Ninth Circuit has “consistently held that a dispute

3

between an insurer and its insureds over the duties imposed by an

4

insurance contract satisfies Article III’s case and controversy

5

requirement.”

6

n.2 (9th Cir. 1998) (citing Am. Nat’l Fire Ins. v. Hungerford, 53

7

F.3d 1012, 101–16 (9th Cir. 1995)).

8

dispute before the court.

9

counterclaims has occurred.

Gov’t Emps. Ins. Co. v. Dizol, 133 F.3d 1220, 1223

This is exactly the kind of

Most of the conduct alleged in KB’s
KB also alleges losses it has

10

incurred in defending the underlying actions.

11

KB I ¶ 67; KB II ¶ 61.)

12

(E.g., Countercl.

At the hearing on Travelers’ motions to dismiss, KB

13

agreed to strike from its pleadings the allegation that Travelers

14

will soon attempt to secretly negotiate settlement agreements

15

with plaintiffs’ counsel in Bamborough and Aldawood and then

16

withdraw its defense of KB.

17

Pursuant to Federal Rule of Civil Procedure 12(f), the court will

18

strike that allegation from the pleadings.

19

KB’s counterclaims as now modified are ripe for review, the court

20

must deny Travelers’ motions to dismiss under Rule 12(b)(1).

21

(Countercl. KB I & II ¶ 24.)

Accordingly, because

Under the Declaratory Judgment Act, 28 U.S.C. § 2201,

22

district courts have discretion in determining whether to decide

23

declaratory relief actions.

Wilton v. Seven Falls Co., 515 U.S.

24
25
26
27
28

“not for the truth of the facts recited therein, but for the
existence of the opinion.” Lee v. City of Los Angeles, 250 F.3d
668, 690 (9th Cir. 2001); see also United States v. S. Cal.
Edison Co., 300 F. Supp. 2d 964, 974–75 (E.D. Cal. 2004) (Wanger,
J.) (stating that courts may consider only the existence of a
prior order, not its validity or the truth of its findings).
7

1

277, 286 (1995).6

2

is set forth “in Brillhart v. Excess Ins. Co. of Am., 316 U.S.

3

491 (1942), and its progeny.”

4

court must analyze whether declaratory relief will: (1) result in

5

a needless determination of state law issues, (2) encourage forum

6

shopping, (3) lead to duplicative litigation, (4) clarify the

7

legal relations at issue, and (5) terminate and afford relief

8

from the uncertainty, insecurity, and controversy giving rise to

9

the proceeding.

Guidance for the court’s exercise of authority

Dizol, 133 F.3d at 1223.

The

Principal Life Ins. Co. v. Robinson, 394 F.3d

10

665, 672 (9th Cir. 2005); Eureka Fed. Sav. & Loan Assn. v. Am.

11

Cas. Co., 873 F.2d 229, 231 (9th Cir. 1989).

12

This action presents issues involving California

13

insurance coverage law, while the underlying state court actions

14

are construction defect cases in which no coverage questions are

15

raised and to which Travelers is not a party.

16

filed any similar claims against Travelers in state court, there

17

are no pending “parallel state proceedings involving the same

18

issues and parties.”

19

determination of the issues in this action will thus be original,

20

rather than repetitive, and will not result in a needless

21

determination of state law issues, encourage forum shopping, or

22

lead to duplicative litigation.

23
24
25
26
27
28

6

Dizol, 133 F.3d at 1225.

Because KB has not

The court’s

Travelers argues that KB’s sole recourse for
reimbursement of its defense costs is an action under California
Civil Code section 2860, not declaratory relief. However, “there
is no presumption in favor of abstention in declaratory actions
generally, nor in insurance coverage cases specifically.” Dizol,
133 F.3d at 1225. California courts encourage prompt declaratory
relief actions for establishing an insured’s right to independent
counsel. U.S. Fid. & Guar. Co. v. Sup. Ct., 204 Cal. App. 3d
1513, 1526 (4th Dist. 1988).
8

1

Declaratory relief will also clarify the parties’

2

rights and obligations under the insurance policies, including

3

whether Travelers breached its duty to defend and whether KB

4

breached its duty to cooperate.

5

expedite rather than delay the resolution of both KB’s

6

counterclaims and Travelers’ initial claims.

7

finds that the Brillhart factors weigh in favor of retaining

8

jurisdiction over the declaratory relief counterclaims.

9

Clarifying these issues should

The court therefore

To state a claim for breach of contract, KB must prove

10

the existence of a contract, its performance or excuse for non-

11

performance, Travelers’ breach, and damage to KB caused by that

12

breach.

13

Dist. 1969).

14

underlying action, the insurer owes a duty to defend the insured

15

by providing an immediate and complete defense with competent

16

counsel.

17

Cal. App. 4th 1185, 1189 (4th Dist. 2004); Hartford Accident &

18

Indem. Co. v. Civil Serv. Emps. Ins. Co., 33 Cal. App. 3d 26, 35

19

(3d Dist. 1973).

20

forfeits the right to control the defense and the insured becomes

21

entitled to retain independent counsel.

22

Ct., 183 Cal. App. 4th 16, 20 (4th Dist. 2010).

23

See Lortz v. Connell, 273 Cal. App. 2d 286, 290 (1st
When an insured tenders the defense of an

Gray Cary Ware & Freidenrich v. Vigilant Ins. Co., 114

If an insurer breaches its duty to defend, it

Intergulf Dev. v. Super.

Here, Travelers’ duty to defend KB under its insurance

24

contracts is not disputed.

KB alleges that Travelers appointed

25

defense counsel with conflicts of interest in breach of that

26

duty, forcing KB “to incur loss, adjustment, mitigation, repair,

27

and investigative costs, including attorneys’ fees, expert fees,

28

court costs, and other expenses” in defending the Bamborough and
9

1

Aldawood actions.

2

these allegations as true, KB has stated a plausible claim for

3

relief that Travelers breached its contractual duties under the

4

insurance policies.

5

(Countercl. KB I ¶ 67; KB II ¶ 61.)

Accepting

To state a claim that Travelers breached the covenant

6

of good faith and fair dealing, KB must prove that Travelers

7

withheld benefits under an insurance policy and that the reason

8

for withholding those benefits was unreasonable or without proper

9

cause.

Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir.

10

2001).

KB alleges that Travelers has attempted to avoid its

11

defense obligations to KB under the policies by deliberately

12

appointing defense counsel with conflicts of interest, using KB’s

13

“concerns as a pretext for wrongfully denying policy benefits,”

14

and then suing KB for breaching its duties to cooperate “in the

15

hope that KB will simply stop tendering its defense” under

16

Travelers’ policies in the future.

17

¶¶ 38-44; KB II ¶¶ 33–38.)

(E.g., Countercl. KB I

18

KB lists seventeen other insurance coverage lawsuits

19

that Travelers has filed against KB involving forty underlying

20

construction defect actions that KB has tendered to Travelers.

21

(See id. KB I ¶ 74; KB II ¶ 68.)7

22
23
24
25
26
27
28

7

“In many of the cases, there

Travelers incorrectly argues that KB’s references to
these lawsuits violates California Civil Code section 47(b)’s
litigation privilege. To the contrary, Civil Code section 47 is
a limitation on liability and has “never been thought to bar the
evidentiary use” of litigation statements. Oren Royal Oaks
Venture v. Greenberg, Bernhard, Weiss & Karma, Inc., 42 Cal. 3d
1157, 1168 (1986); White v. W. Title Ins. Co., 40 Cal. 3d 870,
887–89 (1985). “Accordingly, when allegations of misconduct
properly put an individual’s intent at issue in a civil action,
statements made in the course of a judicial proceeding may be
used for evidentiary purposes.” Oren Royal, 42 Cal. 3d at 1168.
10

1

were significant delays in Travelers’ responses to KB’s tenders

2

such that Travelers [] breached its duty to provide KB with an

3

immediate defense.”

4

Travelers did not intend to defend KB in good faith, but rather

5

“wanted to create the illusion that it was defending KB in order

6

to explain and attempt to justify the coverage lawsuits it was

7

filing against KB.”

(Id. KB I ¶ 39; KB II ¶ 34.)

KB claims that

(Id.)

8

Accepted as true, KB’s factual allegations are

9

sufficient to state a plausible claim that Travelers unreasonably

10

withheld benefits under its insurance policies and thus breached

11

the covenant of good faith and fair dealing.

12

alleged sufficient facts in its counterclaims for all three

13

causes of action to withstand dismissal under Rule 12(b)(6).

14

Accordingly, KB has

IT IS THEREFORE ORDERED that the allegations in

15

paragraph 24 of both complaints that Travelers will soon attempt

16

to enter into one or more secretly negotiated settlement

17

agreements with plaintiffs’ counsel in the Bamborough Action and

18

then withdraw its defense of KB without ever providing KB a

19

complete defense be and the same are hereby, STRICKEN;

20

AND IT IS FURTHER ORDERED that Travelers’ motions to

21

dismiss be, and the same hereby are, DENIED.

22

Dated:

September 28, 2015

23
24
25
26
27
28
11