State National Insurance Company v. Khatri et al

Filing 26

ORDER GRANTING IN PART AND DENYING IN PART 19 DEFENDANTS' MOTION TO DISMISS PLAINTIFF'S FIRST AMENDED COMPLAINT. State National's first claim is DISMISSED WITH PREJUDICE (again), its second, third, and fourth claims SURVIVE, and its fifth claim is DISMISSED WITHOUT PREJUDICE. State National may file a Second Amended Complaint by September 30, 2013. Signed by Magistrate Judge Laurel Beeler on 9/13/2013.(lblc2, COURT STAFF) (Filed on 9/13/2013)

1
2
3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

Northern District of California

10

San Francisco Division
STATE NATIONAL INSURANCE
COMPANY,

No. C 13-00433 LB

12
For the Northern District of California

UNITED STATES DISTRICT COURT

11

ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANTS’
MOTION TO DISMISS PLAINTIFF’S
FIRST AMENDED COMPLAINT

Plaintiff,
13
v.
14
PRADEEP KANTILAL KHATRI, et al.,

[Re: ECF No. 19]

15
16

Defendants.
_____________________________________/

17

INTRODUCTION

18

Plaintiff State National Insurance Company (“State National”) filed this action against Pradeep

19

Kantilal Khatri and VNS Hotels, Inc. (“VNS”) (collectively, “Defendants”) seeking reimbursement

20

of defense fees and costs incurred and indemnity of payments made in relation to a state court action

21

in which State National defended Defendants and ultimately settled with the state court plaintiffs.

22

See generally Complaint, ECF No. 1.1 Defendants move to dismiss State National’s First Amended

23

Complaint. Motion to Dismiss FAC, ECF Nos. 19 & 19-1. Pursuant to Civil Local Rule 7-1(b), the

24

court finds these matters suitable for determination without oral arguments and vacates the

25

September 19, 2013 hearing. Upon consideration of the applicable authority, the parties’ arguments,

26

and the record in this case, the court GRANTS IN PART and DENIES IN PART Defendants’

27
28

1

Citations are to the Electronic Case File (“ECF”) with pin cites to the electronicallygenerated page numbers at the top of the document.
C 13-00433 LB
ORDER

1

motion.

2

STATEMENT

3

State National provided coverage to Defendants under a Commercial General Liability Policy

4

(the “Policy”) for the period August 19, 2009 to August 19, 2010 (the “Coverage Period”). FAC,

5

ECF No. 17 ¶ 12, Exh. A (Policy). The Policy names VNS as the “First Insured” and Mr. Khatri is

6

an “Additional Insured,” Policy, ECF No. 17 at 17; id., ECF No. 17-1 at 30, and it contains liability

7

coverage for “Advertising Injury,” “Bodily Injury,” “Personal Injury,” and “Property Damage,” id.,

8

ECF No. 17-1 at 25-29. “Advertising Injury” includes “injury arising out of . . . [o]ral or written

9

publication of material that slanders or libels a person or organization or disparages a person’s or

bodily injury, sickness or disease sustained by a person, including death resulting from any of these

12
For the Northern District of California

organization’s goods, products or services.” Id., ECF No. 17-1 at 33. “Bodily Injury” “means

11
UNITED STATES DISTRICT COURT

10

at any time.” Id., ECF No. 17-1 at 33. “Personal Injury” includes “injury, other than ‘bodily injury,’

13

arising out of . . . [o]ral or written publication of material that slanders or libels a person or

14

organization or disparages a person’s or organization’s goods, products or services.” Id., ECF No.

15

17-1 at 35. And “Property Damage” means “[p]hysical injury to tangible property, including

16

resulting loss of use of that property,” as well as “[l]oss of use of tangible property that is not

17

physically injured.” Id., ECF No. 17-1 at 36. The Policy also states that it “applies to ‘bodily

18

injury’ and ‘property damage’ only if: (1) [t]he ‘bodily damage’ or ‘property damage’ is caused by

19

an ‘occurrence’ . . . .” Id., ECF No. 17-1 at 25. An “occurrence,” in turn, is defined as “an accident,

20

including continuous or repeated exposure to substantially the same general harmful conditions.”

21

Id., ECF No. 17-1 at 35. The Policy also includes an “Employment-Related Practices Exclusion”

22

that excludes from coverage an employee’s “‘personal injury’ arising out of . . . coercion . . . [or]

23

defamation.” Id., ECF No. 17-2 at 3.

24

With the Policy’s relevant terms stated, the court now turns to the alleged events. On June 23,

25

2011, Veena and Arjun Mackrani (collectively, the “Mackranis”) filed a complaint against

26

Defendants in San Mateo County Superior Court arising out of conduct that allegedly occurred in

27

part within the Coverage Period (the “Mackrani Action”). Id., ECF No. 17 ¶ 13, Exh. B (the

28

“Mackrani Complaint”). They alleged claims for: (1) Non-payment of Wages, (2) Waiting Time

C 13-00433 LB
ORDER

2

Se, (5) Unfair Business Practices, (6) Assault, (7) Battery, (8) False Imprisonment, (9) Intentional

3

Infliction of Emotional Distress, and (10) Negligent Infliction of Emotional Distress. Mackrani

4

Complaint, ECF No. 17-2 ¶¶ 4-69. On July 19, 2011, Defendants’ counsel tendered the defense and

5

indemnification of the Mackrani Action to State National and demanded that their personally-

6

retained counsel represent them pursuant to California Civil Code § 2860. FAC, ECF No. 17 ¶ 14.

7

On August 24, 2011, State National agreed to defend the Mackrani Action under a reservation of

8

rights to seek reimbursement of attorney’s fees, costs, and expenses and to seek indemnification “of

9

claims that are not potentially covered under the policy.” Id., ECF No. 17 ¶ 15. State National also

10

agreed to Defendants’ designation of counsel under Civil Code § 2860. Id. Pursuant to Civil Code

11

§ 1860, State National asked Defendants and their counsel to provide reports to it “advising it of

12
For the Northern District of California

Penalties, (3) Interference with Employment by Misrepresentation, (4) Defamation by Slander Per

2

UNITED STATES DISTRICT COURT

1

information learned during discovery and investigation in the Mackrani [Action], which is necessary

13

to permit State National to evaluate [Defendants’] liability and damages exposure . . . .” Id., ECF

14

No. 17 ¶ 16.

15

In August 2012, Defendants notified State National of an upcoming mediation—it was scheduled

16

to take place in September 2012—in the Mackrani Action. Id., ECF No. 17 ¶ 17. State National

17

participated in the mediation. Id. At the mediation, Defendants “demanded that [State National]

18

fully indemnify in full and final settlement of the [Mackrani Action].” Id. The mediation resulted in

19

a two-pronged Mediator’s Proposal, “which required the parties to (1) agree to a full and final

20

settlement of the [Mackrani Action] for $125,000; and (2) for [D]efendants to mutually release all

21

claims that may have against the Mackranis.” Id. “The proposed mutual release,” State National

22

alleges, “was an agreement separate from the proposed settlement of the [Mackrani Action], but was

23

material to the Mackranis’ acceptance of the settlement of their complaint against [D]efendants.”

24

Id., ECF No. 17 ¶ 18.

25

Defendants “agreed [that] the Mediator’s Proposal was a reasonable settlement of the [Mackrani

26

Action],” and they also agreed “to mutually release the Mackranis’ from any and all future claims

27

[they] may have against the Mackranis.” Id., ECF No. 17 ¶ 19. Defendants also demanded that

28

State

C 13-00433 LB
ORDER

3

1

National “fund the entire Mediator’s Proposal in settlement of the [Mackrani Action] for $125,000,”

2

and “threatened to sue State National for tortious breach of [the Policy] if [it] did not fund the entire

3

settlement of the claims [D]efendants admitted were not covered by [the Policy].” Id. State

4

National alleges that Mackranis and Defendants both accepted the Mediator’s Proposal, but

5

Defendants “refused to contribute to settle claims [D]efendants admitted were not covered under the

6

[P]olicy.” Id., ECF No. 17 ¶ 20.

7

On September 28, 2012, “hours before the Mediator’s Proposal was to expire, and in the face of

the entire $125,000 in settlement of the [Mackrani Action] under a strict reservation of rights to seek

10

reimbursement from [D]efendants for moneys it paid to defend a claim not potentially covered under

11

the [P]olicy and to indemnify claims not actually covered under the [P]olicy.” Id., ECF No. 17 ¶ 21.

12
For the Northern District of California

[D]efendants’ acceptance of both prongs of the Mediator’s Proposal,” State National “agreed to fund

9

UNITED STATES DISTRICT COURT

8

State National agreed to do so even though Defendants continued to refuse to contribute to the

13

settlement amount. Id.

14

Thereafter, the Mackranis’ counsel and Defendants’ counsel mutually drafted a written

15

settlement agreement (which included Defendants’ release of all claims they may have against the

16

Mackranis), but only the Mackranis signed it. Id., ECF No. 17 ¶ 22. Nevertheless, State National

17

alleges that Defendants “performed the settlement agreement b demanding that State National

18

forward the $125,000 settlement payment to the Mackranis.” Id., ECF No. 17 ¶ 23. Defendants also

19

filed a Notice of Settlement of the Mackrani Action in the Superior Court. Id.

20

On October 22, 2012, State National “complied with [D]efendants’ demand and transmitted the

21

$125,000 [in] settlement funds to the Mackranis’ attorney in full and final settlement of the

22

[Mackrani Action] under the reservation of rights to seek reimbursement.” Id., ECF No. 17 ¶ 24.

23

By November 27, 2012, “the Mackranis had not received the settlement agreement with

24

[D]efendants’ signatures and notified State National and [D]efendants that they would void the

25

settlement” if they did not receive a fully executed copy with Defendants’ signatures on it by

26

December 4, 2012. Id., ECF No. 17 ¶ 25. On November 30, 2012, Defendants “notified State

27

National that they would not sign their agreement to mutually release the Mackranis because State

28

National was reserving its right to seek reimbursement.” Id., ECF No. 17 ¶ 25. On December 3,

C 13-00433 LB
ORDER

4

1

2012, State National “notified [D]efendants that they should assume their own defense if they did

2

not want State National to settle the [Mackrani Action] under [its] express right to reimbursement.”

3

Id., ECF No. 17 ¶ 27. Defendants did not assume their own defense and instead “repudiated” their

4

“separate agreement to release the Mackranis from all claims.” Id. Following this repudiation, the

5

Mackranis nevertheless “agreed to accept $125,000 to settle all claims in [the Mackrani Action]

6

against [D]efendants.” Id. And on December 6, 2012, State National “consented to the Mackranis’

7

execution of its $125,000 payment in full and final settlement of the [Mackrani Action] under a strict

8

reservation of rights to seek reimbursement from [D]efendants.” Id., ECF No. 17 ¶ 28. The

9

Mackranis “allocated” the $125,000 as follows: $60,000 for attorney’s fees; $20,000 for
compensation for unpaid wages; $39,000 for emotional distress damages for assault and loss of

11

consortium; and $6,000 for civil penalties. Id., ECF No. 17 ¶ 29.

12
For the Northern District of California

UNITED STATES DISTRICT COURT

10

Thereafter, State National alleges that the Mackranis said they would sue Defendants for their

13

breach of their release of all claims they may have against the Mackranis. Id., ECF No. 17 ¶ 31.

14

“[T]o settle their inchoate claim,” the Mackranis demanded $50,000. Id. So, on December 11, 2012

15

and apparently after negotiation, “as an accommodation to [Defendants],” State National agreed to

16

pay the Mackranis $12,500 to settle” the claim. Id., ECF No. 17 ¶ 32. State National says that it

17

was not required to notify Defendants of their right to assume their own defense with respect to the

18

Mackranis’ “specific performance and breach of contract claims because the claims were not yet

19

filed and were inchoate.” Id. In other words, “[t]here was nothing at that time to defend.” Id.

20
21
22

State National alleges that it paid $66,576.42 in attorney’s fees and costs related to the defense of
the Mackrani Action. Id., ECF No. 17 ¶ 33.
State National filed the instant action on January 30, 2013. See generally Original Complaint,

23

ECF No. 1. It initially brought claims for: (1) reimbursement of all expenses incurred in defense of

24

the Mackrani Action because there were no potentially covered claims under the Policy; (2)

25

reimbursement of some expenses incurred in defense of the Mackrani Action because not all claims

26

were potentially covered under the Policy; (3) reimbursement of all expenses incurred in settlement

27

of the Mackrani Action because State National indemnified Defendants for claims not covered under

28

the Policy, and (4) reimbursement of some expenses incurred in settlement of the Mackrani Action

C 13-00433 LB
ORDER

5

1

because State National indemnified Defendants for claims not covered under the Policy. See id. ¶¶

2

31-52. On Defendants’ motion, the court dismissed with prejudice State National’s first claim

3

because it found that the Mackranis’ defamation, assault, battery, false imprisonment, and negligent

4

infliction of emotional distress were potentially covered under the Policy. 5/7/2013 Order, ECF No.

5

14 at 7-11. The court dismissed without prejudice State National’s second claims because it was not

6

sufficiently specific, and dismissed without prejudice State National’s third and fourth claims

7

because State National did not allege all of the requirements needed for reimbursement of settlement

8

expenses. Id. at 11-14. The court granted State National leave to file a First Amended Complaint.

9

Id. at 16.

10

State National did so. FAC, ECF No. 17. In it, State National realleged its first claim—the one
that the court previously dismissed with prejudice—as well as its second, third, and fourth claims,

12
For the Northern District of California

UNITED STATES DISTRICT COURT

11

and it also added a fifth claim for breach of contract. Id. ¶¶ 34-61.2

13

Defendants now move to dismiss State National’s First Amended Complaint under Rule 12(b)(6)

14

for failure to state a claim upon which relief can be granted. Motion to Dismiss FAC, ECF Nos. 19

15

& 19-1. State National opposes the motion. Opposition, ECF No. 22.

16
17

ANALYSIS
I. LEGAL STANDARD

18

A court may dismiss a complaint under Federal Rule of Civil Procedure 12(b)(6) when it does

19

not contain enough facts to state a claim to relief that is plausible on its face. See Bell Atlantic Corp.

20

v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads

21

factual content that allows the court to draw the reasonable inference that the defendant is liable for

22

the misconduct alleged.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). “The plausibility standard

23

is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a

24

defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S. at 557.). “While a complaint

25

attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s

26
2

27
28

In its First Amended Complaint, State National noted with respect to its first claim that it
intended to file a motion asking the court to reconsider its dismissal of that claim with prejudice.
FAC, ECF No. 17 at 9 n.1. State National filed such a motion, Motion for Reconsideration, ECF
No. 18, and on August 8, 2013, the court denied it, 8/8/2013 Order, ECF No. 24.
C 13-00433 LB
ORDER

6

1

obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and

2

conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual

3

allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S.

4

at 555 (internal citations and parentheticals omitted).

5

In considering a motion to dismiss, a court must accept all of the plaintiff’s allegations as true

6

and construe them in the light most favorable to the plaintiff. See id. at 550; see also Erickson v.

7

Pardus, 551 U.S. 89, 93-94 (2007); Vasquez v. Los Angeles County, 487 F.3d 1246, 1249 (9th Cir.

8

2007).

9

If the court dismisses the complaint, it should grant leave to amend even if no request to amend

facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (quoting Cook, Perkiss and Liehe, Inc.

12
For the Northern District of California

is made “unless it determines that the pleading could not possibly be cured by the allegation of other

11
UNITED STATES DISTRICT COURT

10

v. Northern California Collection Serv. Inc., 911 F.2d 242, 247 (9th Cir. 1990)). But when a party

13

repeatedly fails to cure deficiencies, the court may order dismissal without leave to amend. See

14

Ferdik v. Bonzelet, 963 F.2d 1258, 1261 (9th Cir. 1992) (affirming dismissal with prejudice where

15

district court had instructed pro se plaintiff regarding deficiencies in prior order dismissing claim

16

with leave to amend).

17

II. APPLICATION

18

A. State National’s First Claim

19

As noted above, State National realleges its first claim for reimbursement of all of the expenses

20

it incurred in defending the Mackrani Action because, it contends, none of the claims were

21

potentially covered under the Policy. See FAC, ECF No. 17 ¶¶ 34-38. Also as noted above, the

22

court previously dismissed this claim with prejudice after finding that the Mackranis’ defamation,

23

assault, battery, false imprisonment, and negligent infliction of emotional distress were potentially

24

covered under the Policy. 5/7/2013 Order, ECF No. 14 at 7-11. The court also denied State

25

National’s motion for reconsideration of this decision. 8/8/2013 Order, ECF No. 24. State

26

National’s first claim, then, still is DISMISSED WITH PREJUDICE.

27

B. State National’s Second Claim

28

State National also realleges its second claim for reimbursement of some of the expenses it

C 13-00433 LB
ORDER

7

1

incurred in defending the Mackrani Action because not all of the claims were potentially covered

2

under the Policy. FAC, ECF No. 17 ¶¶ 39-44.

3

Under California law, “in a ‘mixed’ action, in which some of the claims are at least potentially

4

covered and the others are not, the insurer has a duty to defend as to the claims that are at least

5

potentially covered, having been paid premiums by the insured therefor, but does not have a duty to

6

defend as to those that are not, having not been paid therefor.” Buss v. Superior Court, 16 Cal. 4th

7

35, 47-48 (1997). While in such a mixed action “the insurer has a duty to defend the action in its

8

entirety,” id. at 48 (citing Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081 (1993)), if the

9

insurer reserved its rights to later seek reimbursement of defenses costs, it may do so “[a]s to the

be reimbursed for “[d]efense costs that can be allocated solely to the claims that are not even

12
For the Northern District of California

claims that are not even potentially covered,” id. at 50, 61 n.27. Even so, the insurer still may only

11
UNITED STATES DISTRICT COURT

10

potentially covered,” id. at 52, and it is the insurer’s burden to show that it is entitled to

13

reimbursement beyond a preponderance of the evidence, id. at 53.

14

In the last round, Defendants argued that State National’s claim simply was not sufficiently

15

alleged. Motion to Dismiss Original Complaint, ECF No. 9-1 at 13-14. The court agreed, stating:

16
17
18
19
20
21

It is true that State National’s allegations in support of this claim are few and
lacking in specificity. See Complaint, ECF No. 1 ¶¶ 36-40. State National, as
Defendants point out, does not even allege which of the Mackranis’ claims it believes
were potentially not covered. And while it need not “prove its damages in the
complaint,” it does need to provide Defendants with some notice about which of the
Mackranis’ claims will be at issue. Presumably, State National did not allege, in its
second claim, which of the Mackranis’ claims were potentially not covered because it
did not want to undermine its first claim, which alleged that all of the Mackranis’
claims were potentially not covered. But because the court dismisses State National’s
first claim with prejudice, State National may have an easier time alleging its second
claim with more specificity next time. For this reason, the court dismisses State
National’s second claim without prejudice.

22
23
24

5/7/2013 Order, ECF No. 14 at 11-12.
Defendants again say that State National’s claim is not sufficiently alleged, but this time the

25

court disagrees. In its First Amended Complaint, State National identifies five of the Mackranis’

26

claims that it believes were not potentially covered by the Policy, namely, the Mackranis’ claims for

27

nonpayment of wages, waiting time penalties, interference with employment by misrepresentation,

28

unfair and illegal business practices, and intentional infliction of emotional distress. FAC, ECF No.

C 13-00433 LB
ORDER

8

1

17 ¶ 42. State National also alleges that “[o]f the $66,516.42 that [it] paid to defend, [it] is informed

2

and believes that 5.4% of those expenses are related to claims this court has found were potentially

3

covered under the [P]olicy and 94.6% are related to claims not potentially covered.” Id., ECF No.

4

17 ¶ 44. State National therefore seeks reimbursement of $62,981.29 in defense costs. Id.

5

Citing Buss, Defendants argue that “[i]t is not enough to state a mere percentage of the amount

6

of defense costs that the insurer believes to be covered versus non-convered” and thus “State

7

National must allege that such ‘percentages’ were attributed solely to noncovered claims,” Motion to

8

Dismiss FAC, ECF No. 19-1 at 15, but Buss says only that the insurer still may only be reimbursed

9

for “[d]efense costs that can be allocated solely to the claims that are not even potentially covered,”

beyond a preponderance of the evidence, id. at 53. Buss does not say that an insurer must always

12
For the Northern District of California

16 Cal. 4th at 52, and that it is the insurer’s burden to show that it is entitled to reimbursement

11
UNITED STATES DISTRICT COURT

10

use the word “solely” in its allegations, lest the complaint be deemed insufficient. Having seen State

13

National’s revised allegations—which point out specifically which claims it believes were not

14

potentially covered—Defendants’ assertion that they “have not been given fair notice of exactly

15

what allocation of defense costs” to which State National believes it is entitled is not persuasive. To

16

the extent that Defendant wish to argue that some of the costs that State National asserts are

17

“related” to claims that were not potentially covered are not “solely” attributed to those claims, that

18

is a matter for summary judgment or trial. State National’s second claim SURVIVES.

19

C. State National’s Third and Fourth Claims

20

State National also once again realleges its claims for reimbursement of all (third claim) or some

21

(fourth claim) of the expenses it incurred in settlement (as opposed to the defense) of the Mackrani

22

Action because State National indemnified Defendants for claims not covered under the Policy.

23

FAC, ECF No. 17 ¶ 45-56. Defendants argue that these claims should be dismissed for three

24

reasons: (1) the allegations in the First Amended Complaint are so different from those in the

25

Original Complaint that they are not plausible and, in fact, suggest that State National is acting in

26

bad faith; (2) even if the allegations are accepted, State National does not sufficiently allege an

27

agreement; and (3) even if State National does sufficiently allege an agreement, it does not allege

28

that it met all of the requirements under Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489 (2001).

C 13-00433 LB
ORDER

9

1

Motion to Dismiss FAC, ECF No. 19-1 at 16-24. Defendants also argue that State National’s fourth

2

claim should be dismissed because it has not sufficiently alleged which of the Mackranis’ claims

3

actually were not covered by the Policy. Id. at 24-25. The court addresses Defendants’ challenges

4

in turn.

5

1. State National’s May Allege Facts in Its First Amended Complaint that Are Different

6

from or even Contradictory to Those Alleged in Its Original Complaint and Doing So Does

7

Not Necessarily Make Its Claims Implausible

8
9

In their motion, Defendants point out that State National’s story appears to have changed from
its Original Complaint to its First Amended Complaint. This is true. In its Original Complaint,

led to a single settlement of $137,500: first there was a negotiation that led to a settlement offer of

12
For the Northern District of California

State National alleged that there were two distinct attempts to settle the Mackrani Action and which

11
UNITED STATES DISTRICT COURT

10

$125,000 that Defendants initially agreed to but later repudiated and then there was a second

13

negotiation that led to a settlement offer of $137,500. It was this $137,500 offer that was accepted

14

by State National and resulted in the settlement of the Mackrani Action. Based on these allegations

15

and others, the court ruled that State National had not fulfilled all of the Blue Ridge requirements

16

after the second negotiation and before it and the Mackranis agreed to settle the Mackrani Action for

17

$137,500. Now, State National alleges that there was only one negotiation, and it led to a settlement

18

of the Mackrani Action for $125,000. Thereafter, because Defendants refused to execute the mutual

19

release of claims, State National and the Mackranis had negotiations unrelated to the Mackrani

20

Action and which resulted in State National paying the Mackranis an additional $12,500.

21

Defendants argue that this sudden switch in factual allegations demonstrates that State National

22

does not allege plausible claims for reimbursement of the amounts it paid to settle the Mackrani

23

Action.3 While they are correct that courts may, and have, looked to a plaintiff’s prior allegations

24
25
26
27
28

3

Defendants also suggest that State National’s switch also demonstrates its bad faith attempt
to “play fast and loose” with the judicial system. Motion to Dismiss FAC, ECF No. 19-1 at 6; see
id. at 20-23 (positing that State National intentionally fabricated allegations in either the Original
Complaint or the First Amended Complaint). But as the Ninth Circuit has made clear, this
suggestion is to be taken up on a motion pursuant to Rule 11, not a motion pursuant to Rule 12. See
PAE Gov’t Servs, 514 F.3d at 859 (“This does not mean, of course, that allegations in a complaint
can never be frivolous, or that a district court can never determine that a complaint or answer was
C 13-00433 LB
ORDER

10

1

when deciding whether the plaintiff’s operative allegations suggest a plausible claims, see Fasugbe

2

v. Willms, No. CIV. 2:10-2320 WBS KJN, 2011 WL 2119128 (E.D. Cal. May 26, 2011); Cole v.

3

Sunnyvale, No. C-08-05017 RMW, 2010 WL 532428 (N.D. Cal. Feb. 9, 2010) (Whyte, J.), it also is

4

true that “there is nothing in the Federal Rules of Civil Procedure to prevent a party from filing

5

successive pleadings that make inconsistent or even contradictory allegations,” PAE Gov’t Servs.,

6

Inc. v. MPRI, Inc., 514 F.3d 856, 860 (9th Cir. 2007). One of the reasons for this is that at the outset

7

of a case, a plaintiff may not have all of the facts completely nailed down. As the Ninth Circuit has

8

explained:

9
10

12
For the Northern District of California

UNITED STATES DISTRICT COURT

11

13
14
15

At the time a complaint is filed, the parties are often uncertain about the facts and
the law; and yet, prompt filing is encouraged and often required by a statute of
limitations, laches, the need to preserve evidence and other such concerns. In
recognition of these uncertainties, we do not require complaints to be verified, see
Fed. R. Civ. P. 11(a), and we allow pleadings in the alternative—even if the
alternatives are mutually exclusive. As the litigation progresses, and each party
learns more about its case and that of its opponents, some allegations fall by the
wayside as legally or factually unsupported. This rarely means that those allegations
were brought in bad faith or that the pleading that contained them was a sham.
Parties usually abandon claims because, over the passage of time and through diligent
work, they have learned more about the available evidence and viable legal theories,
and wish to shape their allegations to conform to these newly discovered realities.
We do not call this process sham pleading; we call it litigation.

16

Id. at 858-59. Here, the court believes that, in light of the authority described above, State

17

National’s previous allegations do not necessarily render its new allegations implausible such that

18

the court should dismiss its claims at this time.4 It may be that the allegations in State National’s

19

First Amended Complaint turn out to be true, or it may not, but that is a matter to be addressed later.

20
21
22
23
24
25
26
27
28

filed in bad faith. But the mechanism for doing so is in Rule 11, which deals specifically with bad
faith conduct.”). That said, the Ninth Circuit also has stated that “the fact that an amended
complaint (or answer) contains an allegation that is apparently contrary to an earlier iteration of the
same pleading” does “[n]ot necessarily” “render the later pleading a sham.” Id. at 858.
4

Still, State National’s previous allegations may still bear upon its credibility in a trial in this
action or its ability to argue a different version in a different action. See PAE Gov’t Servs, 514 F.3d
at 859 n.2 (“PAE’s earlier allegation may or may not have relevance to further proceedings in the
case . . . . To the extent the superseded pleading is verified, it becomes something akin to a sworn
declaration, and the party that presented it may suffer a loss of credibility before the trier of fact,
which may be less inclined to believe a party that has sworn to inconsistent material statements.
Also, a party’s representations may judicially estop it from taking a contrary position in later
proceedings.”).
C 13-00433 LB
ORDER

11

1

2. State National’s Allegation of an Agreement is Sufficient to Withstand a Motion to

2

Dismiss

3

Defendants also argue that, even the allegations are accepted, State National does not sufficiently

4

allege an agreement. Specifically, Defendants say that “State National merely alleges that

5

Defendants agreed to agree to a settlement of the Mackrani [Action] for $125,000, as well as a

6

release of the Mackranis from any possible future claims by Defendants.” Motion to Dismiss FAC,

7

ECF No. 19-1 at 16. What they accepted was “only a proposal,” and they “did not accept or sign the

8

yet-drafted separate, final and actual settlement agreement once [they] learned that State National

9

would seek reimbursement against its insureds for any and all of the indemnification amount.” Id.

the fairness of the terms that would need a later agreement written and signed by both the

12
For the Northern District of California

They say that, “[a]s alleged, the Mediator’s Proposal was essentially an agreement merely regarding

11
UNITED STATES DISTRICT COURT

10

Defendants and the Mackranis at some future date and time.” Id. at 17.

13

The court disagrees, at least at this time. State National alleges that Defendants and the

14

Mackranis agreed to the Mediator’s Proposal, see FAC, ECF No. 17 ¶¶ 19, 20, 21, “which required

15

the parties to (1) agree to a full and final settlement of the [Mackrani Action] for $125,000; and (2)

16

for [D]efendants to mutually release all claims that may have against the Mackranis,” id., ECF No.

17

17 ¶ 17. State National’s allegations do not state that the Mediator’s Proposal “was essentially an

18

agreement merely regarding the fairness of the terms that would need a later agreement written and

19

signed by both the Defendants and the Mackranis at some future date and time,” as Defendants

20

argue. Whether Defendants are correct about that, though, is a matter for summary judgment and/or

21

trial. At this stage, State National’s allegations of an agreement are sufficient.

22

3. State National Sufficiently Alleges All of the Blue Ridge Requirements

23

Defendants also argue that State National’s third and fourth claims fail because, once again, it

24

does not allege that it met all of the requirements under Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th

25

489 (2001). As the court previously explained, California law is clear that “[i]nsurers have a

26

quasi-contractual right to seek reimbursement for settlement payments made for claims not covered

27

by the policy.” Burlington Ins. Co. v. Devdhara, No. C 09-00421 SBA, 2010 WL 3749301, at *7

28

(N.D. Cal. Sept. 23, 2010) (citing Blue Ridge, 25 Cal. 4th at 503). To seek reimbursement for

C 13-00433 LB
ORDER

12

1

non-covered claims in a reasonable settlement, an insurer must make: (1) “a timely and express

2

reservation of rights”; (2) “an express notification to the insureds of the insurer’s intent to accept a

3

proposed settlement offer”; and (3) “an express offer to the insureds that they may assume their own

4

defense when the insurer and insureds disagree whether to accept the proposed settlement.” Blue

5

Ridge, 25 Cal. 4th at 502.

6

As Defendants point out in their moving papers, State National alleges that it agreed to settle the

settlement of the [Mackrani Action] under a strict reservation of rights,” or on October 22, 2012,

9

when it “transmitted the $125,000 [in] settlement funds to the Mackranis’ attorney in full and final

10

settlement of the [Mackrani Action] under the reservation of rights.” See Motion to Dismiss FAC,

11

ECF No. 19-1 at 23-24. Defendants then note that State National does not allege that it fulfilled the

12
For the Northern District of California

Mackrani Action either on September 28, 2012, when it “agreed to fund the entire $125,000 in

8

UNITED STATES DISTRICT COURT

7

second Blue Ridge requirement by making “an express notification to [Defendants] of [its] intent to

13

accept a proposed settlement offer” or the third Blue Ridge requirement by making an express offer

14

to Defendants that they may assume their own defense, before either of those dates. Id.

15

Citing Markel Am. Ins. Co. v. G.L. Anderson Ins. Servs., Inc., 715 F. Supp. 2d 1068, 1076 (E.D.

16

Cal. 2010), State National responds by arguing that it did not need to make an express notification of

17

its intent to accept the proposed settlement or make an express offer to Defendants that they may

18

assume their own defense because Defendants told it to pay the $125,000 settlement amount and

19

threatened to sue it for bad faith if it did not. See Opposition, ECF No. 22 at 10-11. In Markel,

20

Tiffany Cole sued G.L. Anderson Insurance Services, Inc. and Gary Anderson (collectively, the

21

“Anderson Defendants”). 715 F. Supp. 2d at 1071. The Anderson Defendants tendered the defense

22

of the lawsuit to their insurer, Markel American Insurance Company. Id. at 1071-72. On February

23

25, 2008, Ms. Cole made a settlement demand for the policy limit of $500,000. Id. at 1072. On

24

March 26, 2008, Markel told the Anderson Defendants that it would defend them under a reservation

25

of rights and that they could retain independent counsel. Id. at 1072-73. Thereafter, Markel

26

discussed with the Anderson Defendants whether they would contribute to settlement, and while the

27

Anderson Defendants refused to pay anything, they still demanded that Markel settle the lawsuit. Id.

28

at 1073. Markel then told the Anderson Defendants that it had authorized acceptance of the

C 13-00433 LB
ORDER

13

1

settlement demand and shortly thereafter officially accepted Ms. Cole’s $500,000 offer. Id.

2

After this, Markel sued the Anderson Defendants to recover the amount it paid to settle Ms.

3

Cole’s lawsuit. Id. The Anderson Defendants argued in part that Markel did not fulfill the second

4

and third Blue Ridge requirements. Id. at 1074. The court rejected their argument, though, stating

5

that

6
7
8

because defendants hired independent counsel after Markel’s explicit notification of
their right to do so and because defendants demanded that Markel accept Cole’s
settlement offer, defendants cannot demonstrate that plaintiff failed to inform them of
their right to assume their own defense or that plaintiff failed to make an express
notification of the its intent to accept the settlement offer.
Id. at 1076. In other words, because the Anderson Defendants knew that Markel was reserving its

10

rights and still demanded that Markel accept Ms. Cole’s settlement offer, Markel’s did not need to

11

expressly notify the Anderson Defendants of its intent to accept the offer.

12
For the Northern District of California

UNITED STATES DISTRICT COURT

9

The court finds Markel’s reasoning to be persuasive and applicable to this case. Here, State

13

National alleges that Defendants demanded at the September 2012 mediation that State National pay

14

the $125,000 settlement amount and threatened to sue it for beach of contract if it did not do so.

15

FAC, ECF No. 17 ¶19. But as Defendants make clear, Defendants’ demand was made before State

16

National told them that it would pay the settlement only under a reservation of rights. Compare id.,

17

ECF No. 17 ¶ 19 with id., ECF No. ¶ 21. Defendants use this fact to argue that they then withdrew

18

their demand that State National settle the Mackrani Action (which would distinguish this case from

19

Markel). See Reply, ECF No. 23 at 7 (“[O]nce State National expressly reserved their rights to seek

20

reimbursement, Defendants no longer requested that State National settle the claim, as evidenced by

21

the fact that Defendants themselves became unwilling to participate in the settlement.”) (citing FAC,

22

ECF No. 17 ¶ 26). The problem with this argument is that it does not appear from State National’s

23

allegations that Defendants did anything to indicate their withdrawal of their demand until

24

November 30, 2012, well after State National allegedly accepted the Mackranis’ settlement offer in

25

either September or October 2012. See FAC, ECF No. 17 ¶¶ 19-26. In fact, State National

26

allegations suggest that Defendants’ conduct before that time—which includes Defendants’

27

counsel’s participation in drafting a written settlement agreement and Defendants’ filing of a Notice

28

of Settlement of the Mackrani Action in the Superior Court—continued to indicate that they

C 13-00433 LB
ORDER

14

1

supported the settlement. See id., ECF No. 17 ¶¶ 22-23. Thus, based on State National’s version of

2

the facts and under the reasoning described in Markel, State National sufficiently alleges that it

3

complied with the second and third Blue Ridge requirements.

4
5

4. State National’s Fourth Claim Is Sufficiently Alleged
Finally, Defendants argue that State National’s fourth claim should be dismissed because it has

6

not sufficiently alleged which of the Mackranis’ claims actually were not covered by the Policy.

7

Motion to Dismiss FAC, ECF No. 19-1 at 24-25. They analogize to State National’s second claim,

8

which, like its fourth claim, seeks reimbursement of a portion, rather than the entirety, of an amount

9

paid. Id.

10

The court, however, sees things differently. When dismissing State National’s second claim in
its Original Complaint, the court found State National’s allegations insufficient because it did not

12
For the Northern District of California

UNITED STATES DISTRICT COURT

11

specifically mention which of the Mackranis’ claims it believes were not even potentially covered

13

under the Policy. 5/7/2013 Order, ECF No. 12. But this decision was based on the fact that the

14

court dismissed with prejudice State National’s first claim, which was for reimbursement of the

15

entire defense amount. Id. For that reason, requiring State National to allege in a First Amended

16

Complaint which of the Mackranis’ claims were not even potentially covered would not undermine

17

any of State National’s other claims.

18

It is different with respect to State National’s third and fourth claims. As explained above, State

19

National’s third claim survives, so requiring State National to specify which of the Mackranis’

20

claims are not actually covered by the Policy would undermine its third claim. Defendants know by

21

virtue of State National’s third claim that State National seeks all of the $125,000 it paid in

22

settlement of the Mackrani Action, and they know by virtue of State National’s fourth claim that

23

State National, alternatively, seeks some lesser amount of that. Thus, Defendants’ argument that

24

they are denied of “fair notice” and that it is “impossible to infer . . . what State National believes it

25

is entitled” is not persuasive. See Motion to Dismiss FAC, ECF No. 19-1 at 24.

26
27

*

*

*

Accordingly, State National’s third and fourth claims therefore SURVIVE.

28

C 13-00433 LB
ORDER

15

1

D. State National’s Fifth Claim

2

State National’s fifth claim—which is new to the First Amended Complaint—is for breach of

contract on September 28, 2014 (the court assumes that this is a typographical error and that State

5

National meant to allege the year 2012) whereby Defendants agreed to release the Mackranis from

6

any and all claims that they might have against the Mackranis, and the Mackranis agreed to release

7

Defendants from any and all claims they might have against Defendants. Id., ECF No. 17 § 59.

8

State National alleges that this contract was made for its benefit because the parties’ performance of

9

it would terminate State National’s duties to defend and indemnify Defendants with respect to the

10

Mackrani Action. Id. In other words, it alleges that it is a third party beneficiary of the contract.

11

So, when Defendants breached this contract by refusing to sign a written mutual release, State

12
For the Northern District of California

contract. FAC, ECF No. 17 §§ 57-61. It alleges that the Mackranis and Defendants entered into a

4

UNITED STATES DISTRICT COURT

3

National was damaged in the amount of $12,500, which is the amount of money that State National

13

agreed to pay, “as an accommodation to” Defendants, to settle the Mackranis’ “inchoate claim” for

14

breach of contract. Id., ECF No. 17 §§ 32, 60-61.

15

Defendants argue that State National is not a third party beneficiary to this alleged contract.

16

Motion to Dismiss FAC, ECF No. 19-1 at 26-27. They are correct. As the Ninth Circuit has

17

explained:

18
19
20
21
22
23
24
25
26

California’s contract principles on third party beneficiaries are well known. Under
California law, a “contract, made expressly for the benefit of a third party, may be
enforced by him at any time before the parties thereto rescind it.” Cal. Civ. Code §
1559. “A third party qualifies as a beneficiary under a contract if the parties intended
to benefit the third party and the terms of the contract make that intent evident.”
Karo v. San Diego Symphony Orchestra Ass’n, 762 F.2d 819, 821–22 (9th Cir. 1985)
(citing Strauss v. Summerhays, 157 Cal. App. 3d 806, 204 Cal. Rptr. 227, 233
(1984)). Although a third party need not be expressly named or identified in a
contract, a party must demonstrate “that [it] is a member of a class of persons for
whose benefit it was made.” Spinks v. Equity Residential Briarwood Apartments, 171
Cal. App. 4th 1004, 90 Cal. Rptr. 3d 453, 469 (2009) (internal quotation marks and
citations omitted) (citing Kaiser Eng'rs, Inc. v. Grinnell Fire Prot. Sys. Co., 173 Cal.
App. 3d 1050, 1055, 219 Cal. Rptr. 626 (1985)). “Whether the third party is an
intended beneficiary . . . involves construction of the intention of the parties, gathered
from reading the contract as a whole in light of the circumstances under which it was
entered.” Prouty v. Gores Tech. Gr., 121 Cal. App. 4th 1225, 18 Cal. Rptr. 3d 178,
184 (2004).

27

Balsam v. Tucows, Inc., 627 F.3d 1158, 1161 (9th Cir. 2010). Here, there is no indication that the

28

Mackranis and Defendants, by entering into the mutual release contract, intended to benefit State

C 13-00433 LB
ORDER

16

1

National. This contract, even as alleged by State National, was separate from the agreement to settle

2

the Mackrani Action. See FAC, ECF No. 17 § 18. Moreover, as Defendants point out, State

3

National had no obligation to settle a potential breach of contract dispute between the Mackranis and

4

Defendants: as State National alleges, it had already settled the Mackrani Action by that time. See

5

id., ECF No. 17 § 28. As alleged, State National’s attempt to characterize itself as a third party

6

beneficiary to the alleged mutual release contract between the Mackranis and Defendants lacks

7

merit. Nonetheless, given that this is the first time that State National has alleged this claim, the

8

court will give it another chance. Accordingly, State National’s fifth claim is DISMISSED

9

WITHOUT PREJUDICE.

10

For the reasons stated above, the court GRANTS IN PART and DENIES IN PART

12
For the Northern District of California

UNITED STATES DISTRICT COURT

11

CONCLUSION

Defendants’ motion to dismiss State National’s First Amended Complaint. State National’s first

13

claim is DISMISSED WITH PREJUDICE (again), its second, third, and fourth claims SURVIVE,

14

and its fifth claim is DISMISSED WITHOUT PREJUDICE. State National may file a Second

15

Amended Complaint by September 30, 2013.

16

IT IS SO ORDERED.

17

Dated: September 13, 2013
_______________________________
LAUREL BEELER
United States Magistrate Judge

18
19
20
21
22
23
24
25
26
27
28

C 13-00433 LB
ORDER

17