Wallis et al v. Centennial Insurance Company Inc et al

Filing 212

ORDER signed by Senior Judge William B. Shubb on 2/27/2013 GRANTING 185 Motion for Judgment on the Pleadings; ALLOWING Plaintiffs to file an Amended Complaint consistent with this Order within 20 days; DENYING Plaintiffs' Request for Sanctions. (Michel, G)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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NO. CIV. 08-02558 WBS GGH

DALE M. WALLIS, D.V.M., JAMES
L. WALLIS, and HYGIEIA
BIOLOGICAL LABORATORIES, INC.,
a California Corporation,
Plaintiffs,

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MEMORANDUM AND ORDER RE: MOTION
FOR JUDGMENT ON THE PLEADINGS

v.
CENTENNIAL INSURANCE COMPANY,
INC., a New York corporation,
ATLANTIC MUTUAL INSURANCE,
CO., INC., a New York
corporation,
Defendants,
/

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AND RELATED COUNTERCLAIMS AND
THIRD-PARTY COMPLAINT.
/

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----oo0oo---Plaintiffs Dale M. Wallis (“Dr. Wallis”), James L.

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Wallis (“Mr. Wallis”), and Hygieia Biological Laboratories Inc.

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(“Hygieia”) brought this action against defendants Centennial

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Insurance Company Inc. (“Centennial”) and Atlantic Mutual

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Insurance Co., Inc. (“Atlantic Mutual”) arising from plaintiffs’
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veterinarian professional liability insurance policy.

Atlantic

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Mutual now moves for judgment on the pleadings pursuant to

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Federal Rule of Civil Procedure 12(c).

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I.

Factual and Procedural Background

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Dr. Wallis is a research veterinarian.

(Compl. ¶ 3

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(Docket No. 1).)

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their standard veterinarian professional liability insurance (the

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“Policy”).

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the Policy, and the Policy also covered Mr. Wallis and Hygieia

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Plaintiffs allege that defendants issued her

(Id. ¶ 8.)

Dr. Wallis was the named insured under

because of their relationship with Dr. Wallis.

(Id.)

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Beginning in 1993, Dr. Wallis was involved in a lawsuit

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over the intellectual property rights to a bovine vaccine she had

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developed while working for Poultry Health Laboratories (“PHL”).

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(Id. ¶¶ 11-14.)

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to defendants pursuant to the Policy, but they did not accept.

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(Id. ¶ 16.)

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which defendants were found to owe Dr. Wallis a duty to defend.

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(Id. ¶¶ 16-17.)

Dr. Wallis tendered the defense of that action

Dr. Wallis then filed an action in this court in

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A related lawsuit ensued, which involved a complaint by

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Dr. Wallis against PHL and its shareholders alleging that she had

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created the vaccine and that PHL had defrauded her of her

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invention.

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complaint against Dr. Wallis, Mr. Wallis, and Hygieia alleging

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unfair competition, interference with contractual relations and

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prospective economic advantage, misappropriation of trade

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secrets, and conversion.

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(Id. ¶ 18.)

In that action, PHL filed a cross-

(Id. ¶ 19.)

Defendants provided the defense to the PHL crosscomplaint under a reservation of rights pursuant to the Policy.
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(Id. ¶ 21.)

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obtained counsel of their choice, and defendants proceeded to pay

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the legal fees and costs incurred by plaintiffs’ counsel.

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¶¶ 21-22.)

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unreasonable and illegal limitations upon the fees and costs that

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will be paid” and have “attempt[ed] to control the litigation by

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refusing to abide by the terms of the Policy.”

(Id.

However, defendants have allegedly begun “to impose

(Id. ¶¶ 22-23.)

Plaintiffs bring claims for breach of insurance

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Due to defendants’ reservation of rights, plaintiffs

contract, breach of the implied covenant of good faith and fair

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dealing, and breach of fiduciary duty.

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judicial determination as to the rights and duties of the parties

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under the Policy.

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Mutual’s motion for judgment on the pleadings pursuant to Federal

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Rule of Civil Procedure 12(c).

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under 28 U.S.C. § 1927, the court’s inherent authority, or

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Federal Rule of Civil Procedure 11, on the grounds that Atlantic

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Mutual’s motion is vexatious and frivolous.

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II.

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They also request a

Presently before the court is Atlantic

Plaintiff requests sanctions

Discussion
A.

Legal Standard
“After the pleadings are closed--but early enough not

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to delay trial--a party may move for judgment on the pleadings.”

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Fed. R. Civ. 12(c).

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factual allegations of the non-moving party are taken as true and

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construed in the light most favorable to that party.

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Pickard, 581 F.3d 922, 925 (9th Cir. 2009) (citing Turner v.

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Cook, 362 F.3d 1219, 1225 (9th Cir. 2004)).

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pleadings is properly granted when there is no issue of material

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fact in dispute, and the moving party is entitled to judgment as

For the purposes of such a motion, the

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Fleming v.

“Judgment on the

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a matter of law.”

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Id.

Because motions made pursuant to Rules 12(c) and

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12(b)(6) “are functionally identical,” the same legal standard of

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review is used.

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1192 (9th Cir. 1989).

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Ashcroft v. Iqbal, 556 U.S. 662, 677-80 (2009), and Bell Atlantic

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Corp. v. Twombly, 550 U.S. 544, 554-563 (2007), applies to a

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motion for judgment on the pleadings.

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C4 Sys., Inc., 637 F.3d 1047, 1054-55 & n.4 (9th Cir. 2011);

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Lowden v. T-Mobile USA Inc., 378 F. App’x 693, 694 (9th Cir.

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2010).

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plaintiff’s failure to state a claim, the complaint must contain

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sufficient factual matter, accepted as true, that states a claim

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to relief that is “plausible on its face.”

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678.

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factual content that allows the court to draw the reasonable

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inference that the defendant is liable for the misconduct

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alleged.”

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liability fall short of plausibility of entitlement to relief.

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Id.

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Dworkin v. Hustler Magazine Inc., 867 F.2d 1188,
Thus, the pleading standard articulated in

Cafasso v. Gen. Dynamics

To survive a Rule 12(c) motion premised on the

Iqbal, 556 U.S. at

“A claim has facial plausibility when the plaintiff pleads

B.

Id.

Allegations that are merely consistent with

Judicial Notice

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In general a court may not consider items outside the

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pleadings when deciding a motion for judgment on the pleadings,

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but may consider items of which it can take judicial notice.

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Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 981 n.18

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(9th Cir. 1999) (internal citations omitted); Barron v. Reich, 13

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F.3d 1370, 1377 (9th Cir. 1994).

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notice of facts “not subject to reasonable dispute” because they

A court may take judicial

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are either “(1) generally known within the territorial

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jurisdiction of the trial court or (2) capable of accurate and

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ready determination by resort to sources whose accuracy cannot

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reasonably be questioned.”

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Fed. R. Evid. 201.

Plaintiffs have submitted a Request for Judicial Notice

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(“RJN”), (Docket No. 206), that contains the complaint, (RJN Ex.

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A (Docket No. 206-1)), answer, (RJN Ex. B (Docket No. 206-2)),

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counter-complaint, (RJN Ex. C (Docket No. 206-3)),

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Statement of Undisputed Material Facts in Support of Counter

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Motion for Summary Judgment,” (RJN Ex. D (Docket No. 206-4)),

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Declaration of Dale M. Wallis in Support of Motion For Partial

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Summary Judgment, (RJN Ex. E (Docket No. 206-5)),

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1993 Memorandum and Order on cross motions for summary judgment

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and counter-claim, (RJN Ex. F (Docket No. 206-6)), and

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Stipulation for Dismissal with Prejudice, (RJN Ex. G (Docket No.

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206-7)), in the action Dale M. Wallis, D.V.M. v. Centennial

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Insurance Company, Inc. and Atlantic Mutual Insurance Company,

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Inc., Case No. Civ. 93:1322-LKK-JFM (later 93:1322-WBS-GGH).

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Defendants do not object to the request.

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“Separate

November 9,

The court will take judicial notice of these exhibits

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with the caveat that “[w]hile the authenticity and existence of a

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particular order, motion, pleading or judicial proceeding, which

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is a matter of public record, is judicially noticeable, veracity

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and validity of its contents (the underlying arguments made by

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the parties, disputed facts, and conclusions of applicable facts

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or law) are not.”

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Supp. 2d 964, 974 (E.D. Cal. 2004); see also Harris v. County of

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Orange, 682 F.3d 1126, 1131 (9th Cir. 2012) (explaining that

United States v. S. Cal. Edison Co., 300 F.

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courts may judicially notice documents on file in federal or

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state courts and taking judicial notice of a declaration filed by

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defendant in an earlier litigation); Lee v. City of Los Angeles,

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250 F.3d 668, 690 (9th Cir. 2001) (court may take judicial notice

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of another court’s opinion, not for the truth of the facts

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recited therein, but for the existence of the opinion).

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court likewise takes judicial notice of the decisions in Atlantic

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Mutual Insurance Company v. Commission of Internal Revenue, 523

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U.S. 382 (1998), Atlantic Mutual Insurance Company v. Commission

The

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of Internal Revenue, 111 F.3d 1056 (1997), and First United

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Methodist Church of San Jose v. Atlantic Mutual Insurance

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Company, Civ. No. 94-20036 RPA, 1995 WL 150429 (N.D. Cal. 1995).

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The court will not take judicial notice of the fact

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that prior to liquidation, Centennial Insurance Company was a

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wholly-owned subsidiary of Atlantic Mutual Insurance company.

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Plaintiffs argue that this fact is a matter of public record, but

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point the court to no public record asserting as much.

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R. Evid. 201(b) (fact may be judicially noticed if “capable of

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accurate and ready determination by resort to sources whose

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accuracy cannot reasonably be questioned”).

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plaintiff requests that the court notice this fact because it is

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in a Supreme Court case.

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judicial notice of the case for its existence, but may not notice

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the facts recited within for their truth.1

See Fed.

In its opposition,

As explained above, the court will take

Lee, 250 F.3d at 690.

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Plaintiffs state that in a declaration to an earlier
motion in this case, an employee of Atlantic Mutual stated that
Atlantic Mutual is the parent company of Centennial. (Schumann
Decl. to Mot. to Compel ¶ 1 (Docket No. 24).) Plaintiffs did not
allege this relationship in their Complaint, however, and the
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Defendants request that the court take judicial notice

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of the Complaint, defendants’ Answer and Centennial’s

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Counterclaim and Third Party Complaint, plaintiff’s Answer to

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Centennial’s Counterclaim and Third Party Complaint, and the

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October 31, 2012 Order vacating the pretrial conference dates and

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trial date in this case.

Plaintiffs do not oppose this request

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and the court grants it.

See Harris, 682 F.3d at 1131.

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C.

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

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In general, a non-party, or nonsignatory, to an

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insurance contract is not liable for a breach of that contract.2

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See, e.g., Britton v. Co-op Banking Group, 4 F.3d 742, 744 (9th

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Cir. 1993) (noting that a “contractual right may not be invoked

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by one who is not a party to the agreement”); Henry v. Ass’n

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Indem. Corp., 217 Cal. App. 3d 1405, 1416-17 (4th Dist. 1990)

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(determining that where “[t]here was no direct contractual

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relationship between [the parties],” there was no basis from

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which “a breach of contract action could properly spring . . .”

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(citing Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 576 (1973))).

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Likewise, “a ‘bad faith’ action [generally] lies only against the

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insurer as the party to the contract which gives rise to the

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court does not rely on this declaration in reaching its decision.
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Atlantic Mutual gives much weight--and plaintiffs spend
much time rebutting--the assertion that “[n]ot only is it
illogical and legally impossible for two different insurance
companies to issue the same insurance policy, but the attachments
to the Complaint bely [sic] the impermissibly vague allegations.”
(Mem. in Supp. of Mot. 4: 25-27 (Docket No. 185-1).) Not only
does Atlantic Mutual cite no authority for this apparently plain
proposition, but it is also besides the point. Whether or not
Atlantic Mutual issued the Policy is not conclusive as to whether
it is a party to the Policy and liable for its obligations.
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implied covenant.”

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06-07021 MJJ, 2007 WL 420139, at *4 (N.D. Cal. Feb. 6, 2007);

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Tran v. Farmers Group, Inc., 104 Cal. App. 4th 1202, 1216-17 (1st

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Dist. 2002).

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there can be no breach of the implied covenant of good faith and

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fair dealing.”

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F.3d 1025, 1034 (9th Cir. 2008) (citing Waller v. Truck Ins.

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Exch., Inc., 11 Cal.4th 1, 35-36 (1995)).

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Monaco v. Liberty Life Assur. Co., Civ. No.

Thus, “without a breach of the insurance contract,

Manzarek v. St. Paul Fire & Marine Ins. Co., 519

Here, the Complaint and attached documents show that

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Atlantic Mutual is not a party to the insurance contract.

Fed.

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R. Civ. P. 10(c) (“A copy of a written instrument that is an

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exhibit to a pleading is a part of the pleading for all

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purposes.”); Barany-Snyder v. Weiner, 539 F.3d 327, 332 (6th Cir.

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2008) (court properly considers exhibits attached to the

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complaint on a Rule 12(c) motion); Callan v. Merrill Lynch & Co.,

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Inc., Civ. No. 09-0566 BEN, 2010 WL 3452371, at *2 (S.D. Cal.

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Aug. 30, 2010) (court may consider documents attached to a

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complaint without turning the motion for judgment on the

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pleadings into a motion for summary judgment).

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Policy for 12/1990-12/1991 and 12/1991-12/1992 are attached to

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the Complaint and the upper left-hand corner of each copy bears

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the text “Centennial Insurance Company” followed by “A member of

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the Atlantic Mutual Companies”.3

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1), B (Docket No. 1-2).)

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Policy.

Copies of the

(Compl. Exs. A (Docket No. 1-

There is no other insurer listed on the

Because Atlantic Mutual is not a signatory to the

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Plaintiffs attached to the Complaint copies of the
Policy relevant to the underlying litigation for which plaintiffs
allege that defendants have breached their duty to defend. (See
Compl. ¶ 19.)
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Policy, it cannot be found to be a party to the Policy on the

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ground that it issued the Policy.4

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Civ. No. 98-04616 CRB, 1999 WL 977944, at *1 (N.D. Cal. Oct. 21,

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1999) (where policy unambiguously provided that Allstate

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Indemnity insured the plaintiff’s vehicle, Allstate Insurance was

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not a party to the insurance contract at issue).

Salido v. Allstate Ins. Co.,

Plaintiffs make numerous allegations contrary to the

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conclusion that Atlantic Mutual is not a party to the Policy,

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such as it issued the Policy, accepted premiums under the Policy,

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and accepted the duty to defend Dr. Wallis under the Policy.

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(Compl. ¶¶ 36, 43.)

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what is indicated by the Policy itself.

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Vegas, Inc., 502 F.3d 1141, 1143 (9th Cir. 2007) (a district

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court must accept as true the allegations in a plaintiff’s

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complaint, unless contradicted by documents properly accompanying

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the complaint and incorporated therein); Garcia v. Wachovia

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Mortg. Corp., 676 F. Supp. 2d 895, 900 (C.D. Cal. 2009) (a “court

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may disregard allegations in the complaint if contradicted by

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facts established by exhibits attached to the complaint” (quoting

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Sumner Peck Ranch, Inc. v. Bureau of Reclamation, 823 F. Supp.

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715, 720 (E.D. Cal. 1993)).

These allegations, however, cannot defeat
Dent v. Cox Commc’ns Las

General contract principles notwithstanding, there are

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several doctrines that may bind a nonsignatory to a contract,

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Plaintiffs do not allege that Atlantic Mutual Insurance
Co., Inc., the defendant in this case, is the same entity as the
“Atlantic Mutual Companies.”
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including the presence of an agency relationship.5

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California law, an agent is defined as “one who represents

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another, called the principal, in dealings with third persons.”

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Cal. Civ. Code § 2295.

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an agent or apparent agent holds the power to alter the relations

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between the principal and third persons, if an agent is a

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fiduciary, or if the principal has a right to control the conduct

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of the agent with matters entrusted to him.6

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Techs., LLC v. NAK Sealing Techs. Corp., 148 Cal. App. 4th 937,

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Under

A principal-agent relationship exists if

Garlock Sealing

964 (3d Dist. 2007).

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Plaintiffs curiously devote significant portions of
their opposition to attempting to establish that Atlantic Mutual
is the parent corporation of Centennial. However, a parent is
not liable for the contractual obligations of its subsidiary
absent special circumstances. The instances where a parent
corporation is liable for the acts of its subsidiary are:
(1) where the circumstances of the organization of the
two entities are such that the corporate form should be
disregarded (often referred to as ‘alter ego’ liability);
(2) where the subsidiary acts as an agent of the parent
corporation; and, (3) where the parent corporation aids,
abets or ratifies the acts of the subsidiary corporation.
E. & J. Gallo Winery v. EnCana Energy Servs., Inc., Civ. No.
03-5412 AWI LJO, 2008 WL 2220396, at *5 (E.D. Cal. May 27, 2008).
Plaintiffs did not allege that either defendant is the
parent or subsidiary of the other and on a Rule 12(c) motion, the
court considers only the pleadings and documents properly subject
to judicial notice.
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“A subsidiary corporation may be considered an agent of
the parent ‘where the nature and extent of the control exercised
over the subsidiary by the parent is so pervasive and continual
that the subsidiary may be considered nothing more than an agent
or instrumentality of the parent, notwithstanding the maintenance
of separate corporate formalities.’” Salkin v. United Servs.
Auto. Ass’n, 767 F. Supp. 2d 1062, 1068 (C.D. Cal. 2011) (quoting
Sonora Diamond Corp. v. Superior Court, 83 Cal. App. 4th 523, 541
(2d Dist. 2000)).
Had plaintiffs alleged that Atlantic Mutual is the
parent corporation of Centennial, the sufficiency of their
allegations would have to be evaluated in light of this higher
standard for establishing an agency relationship between a parent
corporation and its subsidiary.
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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.)

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Such bare legal conclusions are insufficient to show

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that Atlantic Mutual and Centennial are in an agency

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relationship, partners, and/or in a joint venture.7

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Resurgence Fin., LLC, 521 F. Supp. 2d 1093, 1095 (C.D. Cal. 2007)

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(citing In re Syntex Corp. Sec. Litig., 95 F.3d 922, 926 (9th

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Cir. 1996)) (explaining that conclusory allegations and

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unwarranted inferences are insufficient to defeat a motion for

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judgment on the pleadings.).

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both defendants accepted premiums for the Policy.

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They also allege that in a prior action, this court “ruled that

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defendants owed Dr. Wallis a duty to defend [under the Policy],”

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(id. ¶¶ 16, 25), and that defendants then tendered defense when

Butler v.

Plaintiffs additionally allege that
(Id. ¶ 43.)

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Defendants state that plaintiffs have argued that
Atlantic Mutual should be jointly liable under the alter ego
theory or by piercing the corporate veil. Plaintiffs, however,
allege no supporting facts upon which to hang those theories and
do not attempt to argue that they have done so in their
opposition.
Defendants also rely heavily on Henderson v. Farmers
Group, Inc., 210 Cal. App. 4th 459 (2d Dist. 2012), review
granted and opinion superseded sub nom. Henderson v. Farmers
Group, 291 P.3d 327 (Cal. 2013). It is no longer proper to cite
that case, however, because review has been granted. Trader
Joe’s Co. v. Progressive Campaigns, 73 Cal. App. 4th 425, 430 n.2
(1st Dist. 1999).
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PHL filed a cross-claim in a later action, (id. ¶¶ 21, 25).

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Plaintiffs also allege that the defendants paid the fees and

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costs incurred by plaintiffs in the PHL action and that “[b]y

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agreement the defendants allowed plaintiffs’ attorneys to send

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their bills directly to the insurance company for payment.”

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¶ 22.)

(Id.

These additional factual allegations, however, do not

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go to establishing that Atlantic Mutual is the agent, partner, or

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joint venturer of Centennial.

The court’s best guess is that

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plaintiffs are relying on the theory that Atlantic Mutual is

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Centennial’s undisclosed principal.

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if, when an agent and a third party interact, the third party has

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no notice that the agent is acting for a principal.”

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(Third) Of Agency § 1.04 (2006).

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authority makes a contract on behalf of an undisclosed principal,

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the principal is a party to the contract (unless excluded by it),

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as are the agent and the third party.

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principal is a party to the contract, it and the third party have

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the same rights, liabilities, and defenses against each other as

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if the principal had made the contract personally.

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6.03(3).

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assent to an agent that the agent take action on the principal’s

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behalf.

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“A principal is undisclosed

Restatement

When an agent with actual

Id. § 6.03(1)-(2).

If the

Id. §

Actual authority arises when the principal manifests it

Id. § 3.01.
Fatally, plaintiffs have not alleged that Atlantic

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Mutual gave actual authority to Centennial to enter into an

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insurance contract with plaintiffs as its agent.

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difficult for plaintiffs to have done so, given that they fail to

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differentiate between the defendants at any point in the
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It would be

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Complaint.

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that such authority was given, like a statement from either party

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acknowledging an agency relationship.

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allegations depict Centennial merely acting consistent with its

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own obligations on the Policy, rather than in a manner consistent

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with being Atlantic Mutual’s agent.

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possible that Atlantic Mutual was Centennial’s undisclosed

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principal, or even its disclosed principal, “plaintiffs here have

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not nudged their claims across the line from conceivable to

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Nor have plaintiffs alleged any facts even suggesting

plausible.”8

Instead, plaintiffs’

While it is entirely

Twombly, 550 U.S. at 570.

Because a Rule 12(c) motion is essentially equivalent

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to a Rule 12(b)(6) motion, a district court may “dispos[e] of the

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motion by dismissal rather than judgment.”

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L.P. v. County of San Diego, 311 F. Supp. 2d 898, 902-03 (S.D.

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Cal. 2004).

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leave is generally only denied if it clear that the deficiencies

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of the complaint cannot be cured by amendment.

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Independence Tech., LLC, Civ. No. 2:10-03218, 2011 WL 3584491, at

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*2 (E.D. Cal. Aug. 15, 2011) (England, J.)

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not clear that plaintiffs cannot cure their Complaint,

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plaintiffs’ claims for breach of contract and breach of the

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implied covenant of good faith and fair dealing against Atlantic

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Mutual must be dismissed with leave to amend.

Sprint Telephony PCS,

Courts have discretion to grant leave to amend, but

Norton v.

Here, because it is

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Plaintiffs’ reliance on First United Methodist Church
of San Jose v. Atl. Mut. Ins. Co., Civ. No. 94-20036 RPA, 1995 WL
150429 (N.D. Cal. Mar. 29, 1995), is misplaced. That case
involved a motion for summary judgment and did not consider
whether the plaintiff’s allegations were sufficient to allege a
claim for breach of contract, bad faith, or breach of fiduciary
duty against a party that is a nonsignatory to the contract.
First United, 1995 WL 150429, at *10-11.
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D.

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Declaratory Relief and Fiduciary Duty
Plaintiffs allege that defendants acquired a fiduciary

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duty by issuing the Policy and accepting premiums for it.

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(Compl. ¶ 43.)

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is an action for the breach of fiduciary duty between an insured

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and insurer.

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Supp. 2d 1086, 1100-01 (E.D. Cal. 2010) (adopting “the sounder

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approach that a breach of fiduciary duties is analyzed under the

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covenant of good faith and fair dealing” and therefore “a

California law is unsettled as to whether there

See, e.g., Casey v. Metro. Life Ins. Co., 688 F.

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separate claim does not exist for breach of a fiduciary duty”).

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The court need not resolve this issue, however, because

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plaintiffs have not sufficiently alleged that Atlantic Mutual is

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a party to the Policy and liable for obligations under it as

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plaintiffs’ insurer.

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444 F. Supp. 2d 998, 1003 (C.D. Cal. 2006) (to plead a claim for

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breach of fiduciary duty, plaintiff must allege the existence of

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a fiduciary relationship giving rise to a fiduciary relationship

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(citing Pierce v. Lyman, 1 Cal. App. 4th 1093, 1101 (1991))).

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See Negrete v. Fid. & Guar. Life Ins. Co.,

Finally, because plaintiffs have not pled any

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cognizable claims for relief against Atlantic Mutual, their

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request for declaratory relief against Atlantic Mutual also

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falls.

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10-0041, 2011 WL 221321, at *11 (E.D. Cal. Jan. 24, 2011)

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(O’Neill, J.) (“The failure of the complaint as a whole

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demonstrates the absence of an actual controversy subject to

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declaratory relief.

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present a litigable controversy, which otherwise might only be

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tried in the future.’” (quoting Societe de Conditionnement en

See Winding v. Cal-W. Reconveyance Corp., Civ. No.

A declaratory relief action ‘brings to the

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Aluminium v. Hunter Eng. Co., 655 F.2d 938, 943 (9th Cir.

2

1981))).

3

duty and request for declaratory relief against Atlantic Mutual

4

must be dismissed with leave to amend.

5

Accordingly, plaintiffs’ claim for breach of fiduciary

E.

6

Collateral Estoppel and Judicial Estoppel
In a diversity action, the court must apply the

7

collateral estoppel rules of the forum state.

Bates v. Union Oil

8

Co. of Cal., 944 F.2d 647, 649 (9th Cir. 1991).

9

California law applies to the issue of collateral estoppel in

Therefore,

10

this case.

Under California law, the preclusive effect of a

11

prior federal court judgment is resolved according to federal

12

law.

13

1996).

Lumpkin v. Jordan, 49 Cal. App. 4th 1223, 1230 (1st Dist.

14

To preclude relitigation of an issue under the doctrine

15

of collateral estoppel: “(1) the issue at stake must be identical

16

to the one alleged in the prior litigation; (2) the issue must

17

have been actually litigated in the prior litigation; and (3) the

18

determination of the issue in the prior litigation must have been

19

a critical and necessary part of the judgment in the earlier

20

action.”

21

1320-21 (9th Cir. 1992).

22

the burden of showing with clarity and certainty what was

23

determined by the prior judgment.”

24

estoppel does not apply if there is any doubt as to whether an

25

issue was actually litigated in the prior action.

26

Hancock Mut. Life Ins. Co., 106 F.3d 904, 912 (9th Cir. 1997).

27

Trial courts have broad discretion to determine when to apply

28

offensive collateral estoppel.

Clark v. Bear Stearns & Co., Inc., 966 F.2d 1318,
“The party asserting preclusion bears

Id. at 1321.

Collateral

Steen v. John

Parklane Hosiery Co. v. Shore,
15

1

439 U.S. 322, 331 (1979).

2

Plaintiffs request that the court apply collateral

3

estoppel, or claim preclusion, to prevent Atlantic Mutual from

4

arguing that it is not a party to the Policy with Centennial.

5

Plaintiffs first request that the court apply preclusive effect

6

to a stipulated dismissal with prejudice from an earlier action

7

before this court that plaintiffs contend involved the same

8

parties and the same Policy.

9

preclusion law, however, in a dismissal with prejudice, none of

(See RJN Ex. G.)

Under federal

10

the issues is actually litigated.

11

(9th Cir. 1985).

12

estoppel test cannot be met and the court will not give

13

preclusive effect to the stipulated dismissal with prejudice.

14

In re Daley, 776 F.2d 834, 838

Thus, the second prong of the collateral

Plaintiffs next direct the court to a summary judgment

15

order issued by this court in the same action.

(See RJN Ex. F.)

16

“An insurance company’s duty to defend arises from the

17

contractual provisions contained in its standard comprehensive or

18

commercial general liability insurance policies.”

19

Co. v. Smart & Final Inc., 996 F. Supp. 979, 985 (C.D. Cal. 1998)

20

(citing Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38,

21

56 (1997)).

22

decided, nor did it intend to decide, whether Atlantic Mutual was

23

a party to the insurance contract at issue.

24

considered whether the allegations of the underlying action

25

against Dr. Wallis gave rise to a duty to defend under the

26

Policy.

27

theory Atlantic Mutual was liable under the Policy; the issue

Zurich Ins.

In its summary judgment order, this court never

(RJN Ex. F at 10.)

Rather, it

The court never stated on what

28
16

1

appears not to have been raised.9

2

Furthermore, the Supreme Court has cautioned against

3

applying offensive collateral estoppel because “[i]f a defendant

4

in the first action is sued for small or nominal damages, he may

5

have little incentive to defend vigorously, particularly if

6

future suits are not foreseeable.”

7

U.S. at 330.

8

the least related companies, Atlantic Mutual might have known

9

that Centennial would accept the duty to defend and that even if

Parklane Hosiery Co., 439

Here, where Atlantic Mutual and Centennial are at

10

the court found Atlantic Mutual liable under the Policy,

11

Centennial would cover any expenses.

12

reasonably expected future suits involving Dr. Wallis.

13

reasons, it is not surprising--nor Machiavellian, as plaintiffs

14

suggest--that Atlantic Mutual did not contest that it is a party

15

to the Policy until this point.

16

burden of showing that the issue of whether Atlantic Mutual is a

17

party to the Policy had been decided in the earlier action.

18

Accordingly, the court will not give its earlier order any

19

preclusive effect at this time.

It might also not have
For both

Plaintiffs have not met their

Judicial estoppel bars a party from taking inconsistent

20

New Hampshire v. Maine, 532

21

positions in the same litigation.

22

U.S. 742, 749 (2001); Morris v. State of Cal., 966 F.2d 448, 452

23

(9th Cir. 1991).

The court must have relied on the party’s

24
25
26
27
28

9

Plaintiff also points to allegations in the counterclaim filed by defendants in that case, in which defendants
alleged that they issued and renewed a policy of veterinarian
professional liability insurance to Dr. Wallis. (RJN Ex. C ¶ 6.)
Plaintiff, however, directs the court to no case holding that
mere allegations in a counter-claim are given preclusive effect
when the issue they implicate is not decided in the litigation.
17

1

previously inconsistent statement to apply the doctrine.

2

Interstate Fire & Cas. Co. v. Underwriters at Lloyd’s, 139 F.3d

3

1234, 1239 (9th Cir. 1998).

4

bar Atlantic Mutual from taking an inconsistent position

5

regarding whether it is a party to the Policy.

6

litigation, plaintiffs point to defendants’ admission that the

7

court ruled that they owed Dr. Wallis a duty to defend in an

8

earlier action.

9

this admission contradicts Atlantic Mutual’s argument on this

10

Plaintiffs request that the court

(Answer ¶ 17 (Docket No. 9).)

As to this

They argue that

motion that it is not a party to the Policy.

11

However, there is a difference between admitting that

12

the court ruled defendants had the duty to defend and admitting

13

that they actually had that duty.

14

Mutual owed plaintiff a duty to defend, the court may have been

15

wrong.

16

been mistaken.

17

attention the different roles played in the transaction by

18

Centennial and Atlantic Mutual.

19

have misspoke.

20

while its ruling may have been the law of that case it is not the

21

law of this case.

22

to the fact that the court found that Atlantic Mutual had a duty

23

to defend under the Policy and admitting to being a party to the

24

Policy.

25

liability under the Policy in the earlier action, the fact that

26

Atlantic Mutual was found to have a duty to defend is not

27

necessarily inconsistent with Atlantic Mutual’s position in the

28

instant motion.

If the court ruled Atlantic

There could be many reasons that such a ruling might have
The parties may not have called to the court’s

Alternatively, the court may

Or the court may have been just plain wrong, and

There is also a difference between admitting

If Atlantic Mutual simply declined to contest its

Most importantly, the court has not relied on
18

1
2

the admission.
F.

Thus, it declines to apply judicial estoppel.

Sanctions

3

“A motion for sanctions must be made separately from

4

any other motion and must describe the specific conduct that

5

allegedly violates Rule 11(b).”

6

must not be filed until 21 days after it is served pursuant to

7

Rule 5.

8

requirements by requesting Rule 11 monetary and issue sanctions

9

in their opposition.

Id. (c)(2).

Fed. R. Civ. P. 11(c)(1).

It

Plaintiffs failed to comply with these

They must therefore rely on the Court’s

10

inherent authority or 28 U.S.C. 1927 to seek sanctions.

11

1927 provides, in relevant part: “Any attorney . . . who so

12

multiplies the proceedings in any case unreasonably and

13

vexatiously may be required by the court to satisfy personally

14

the excess costs, and attorney’s fees reasonably incurred because

15

of such conduct.”

16

the court’s inherent authority and § 1927 requires evidence of

17

bad faith.

18

re Keegan Mgmt. Co., Sec. Litig., 78 F.3d 431, 436 (9th Cir.

19

1996).

20

28 U.S.C. 1927.

Section

To award sanctions under both

Fink v. Gomez, 239 F.3d 989, 992 (9th Cir. 2001); In

There is insufficient proof of bad faith to award

21

sanctions at this time.

Plaintiffs argue that Atlantic Mutual

22

acted in bad faith because its counsel declined plaintiffs’

23

counsel’s request that the instant motion be withdrawn and

24

because its motion is frivolous and vexatious.

25

the plain language of the Policy, plaintiffs’ insufficient

26

allegations of agency, and the court’s finding that neither

27

collateral nor judicial estoppel applies, Atlantic Mutual’s

28

motion presented a close question on which it ultimately
19

However, given

1

prevailed.

2

Defendants’ arguments were thus not vexatious or

3

frivolous, but well-taken.

4

contested its liability under the Policy before, the court will

5

not penalize the choice to wait to do so until this point by

6

issuing sanctions.

7

motivation Atlantic Mutual may have had to defend itself in the

8

earlier litigation.

9

Although Atlantic Mutual has not

This is especially so because of the lesser

Atlantic Mutual appears to have taken some actions in

10

the past consistent with plaintiffs’ contention that it is a

11

party to the Policy.

12

But it may also be good lawyering, for the reasons just

13

explained.

14

that Atlantic Mutual’s motion was made in bad faith.

15

Accordingly, plaintiffs’ request for sanctions will be denied.

16

Its motion may therefore be disingenuous.

The call is close enough that the court cannot find

IT IS THEREFORE ORDERED that Atlantic Mutual’s motion

17

for judgment on the pleadings be, and the same hereby is, GRANTED

18

with leave to amend.

19

of this Order to file an amended complaint, if they can do so

20

consistent with this Order.

21

Plaintiffs have twenty days from the date

IT IS FURTHER ORDERED that plaintiffs’ request for

22

sanctions be, and the same hereby is, DENIED.

23

DATED:

February 27, 2013

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