Hartford Casualty Insurance Company v. Fireman's Fund Insurance Company et al

Filing 34

ORDER GRANTING MOTION TO DISMISS 20 (Illston, Susan) (Filed on 9/3/2015)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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HARTFORD CASUALTY INSURANCE
COMPANY,
Plaintiff,

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ORDER GRANTING MOTION TO
DISMISS

v.

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Case No. 15-cv-02592-SI

FIREMAN'S FUND INSURANCE
COMPANY, et al.,

United States District Court
Northern District of California

Defendants.
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Defendant Fireman’s Fund Insurance Company moves to dismiss plaintiff Hartford
Casualty Insurance Company’s cause of action for reformation (Count 3). The motion, which

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seeks dismissal for lack of subject matter jurisdiction and failure to state a claim, is scheduled for a
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hearing on September 18, 2015. Pursuant to Civil Local Rule 7-1(b), the Court determines this
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motion is appropriate for resolution without oral argument and VACATES the hearing. For the
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reasons set forth below, the Court GRANTS Fireman’s Fund’s motion to dismiss Count 3 for

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reformation, with leave to amend.
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BACKGROUND
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The following allegations are taken from plaintiff’s complaint. Docket No. 1, Complaint.

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In September 2013, a wrongful death lawsuit ultimately resulted in an approximately
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$8,800,000 judgment against Herndon Partners, LLC (“Herndon”), a California corporation
owned by Paul Owhadi.1 Compl. ¶¶ 4, 11, 14, 17-19. The lawsuit arose after Francisco Martinez

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In June 2013, a jury verdict resulted in an approximately $14,000,000 judgment against
Herndon. Compl. ¶ 15. In August 2013, the Fresno Superior Court issued a remittitur, reducing
the award to approximately $8,800,000, which plaintiffs subsequently accepted. Id. ¶¶ 17-18.

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Moreno was electrocuted while working at a home located at 31522 Broad Beach Road in Malibu,

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California (“Subject Premises”) in September 2009. Id. ¶¶ 11-12. Only Herndon held title to the

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Subject Premises. Id. ¶¶ 13, 29.

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Prior to the wrongful death lawsuit, plaintiff Hartford issued to Herndon a business

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liability policy with both primary coverage ($2,000,000 limit) and excess coverage ($1,000,000

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limit). Id. ¶¶ 21-23. The Hartford policies were in effect from March 19, 2009 to March 1, 2010.

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Id. ¶ 21.
Defendant Fireman’s Fund issued a primary homeowner’s policy, listing the Subject

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Premises, with a $300,000 limit and named “Paul Owhadi c/o Herndon Partners LLC” as the

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insured and “Herndon Partners LLC” as an additional insured. Id. ¶¶ 25-26. The Fireman’s Fund

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United States District Court
Northern District of California

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Primary Policy was effective from October 29, 2008 to October 29, 2009. Id. ¶ 25. Fireman’s

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Fund also issued an excess liability policy with a $5,000,000 limit, effective October 2, 2008 to

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October 2, 2009. Id. ¶ 28. The Fireman’s Fund Excess Policy covered the Subject Premises,

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among seventeen other properties. Id. ¶¶ 28, 35. Although only Herndon held title to the Subject

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Premises, the Fireman’s Fund Excess Policy only named “Paul Owhadi [and] Susan Owhadi” as

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insureds. Id. ¶ 29. The Fireman’s Fund Excess Policy contained exclusions for business activity,

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business property, and workers’ compensation. Id. ¶¶ 44-45.

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Hartford provided a defense to Herndon in the wrongful death lawsuit in 2011 under its

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primary coverage and excess coverage. Id. ¶¶ 38-39. Fireman’s Fund also agreed to provide a

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defense to Herndon, but only under its primary policy. Id. ¶¶ 41, 44. Fireman’s Fund refused to

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provide coverage under the excess policy because Herndon was not a named insured. Id. ¶ 44.

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Fireman’s Fund also cited the exclusions for business activity, business property, and workers’

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compensation in the excess policy as reasons not to provide excess coverage. Id. ¶¶ 44-45.

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In August 2014, Hartford, on behalf of its insureds, entered into a confidential settlement

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with the plaintiffs in the wrongful death lawsuit. Id. ¶ 49. The settlement was finalized in

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December 2014. Id. Because Fireman’s Fund refused to contribute to the settlement, Hartford

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alone paid the settlement on behalf of Herndon. Id. ¶¶ 49, 51.

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Pursuant to an Assignment Agreement executed in July 2013, Hartford is an assignee of
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Herndon, Paul Owhadi, and Susan Owhadi for claims against Fireman’s Fund related to the

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wrongful death lawsuit and the two Fireman’s Fund policies. Id. ¶ 5; Compl., Ex. A. However,

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the Fireman’s Fund policies contain clauses prohibiting assignment without Fireman’s Fund’s

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consent. See Compl., Ex. D; Ex. E.
On June 11, 2015, Hartford filed a complaint alleging causes of action for: (1) indemnity;

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(2) contribution; (3) reformation; (4) declaratory judgment; and (5) professional negligence. See

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Compl. As to Count 3, Hartford alleges that Fireman’s Fund “knew or should have known” that

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Herndon—not Paul Owhadi—held title to the Subject Premises, which was covered by the

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Fireman’s Fund Excess Policy, but still failed to name Herndon as an insured. Id. ¶¶ 70-71, 73.

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Hartford also alleges that Fireman’s Fund “knew” that some of the eighteen covered properties

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United States District Court
Northern District of California

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listed on the Fireman’s Fund Excess Policy were rental properties, and not personal residences,

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based on the application for the policy. Id. ¶ 72. As a result of “Fireman’s Fund’s errors,”

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Hartford claims that it is entitled to reformation of both Fireman’s Fund policies to delete the

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business exclusions and name Herndon as an insured. Id. ¶¶ 76-77.

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By the present motion, made pursuant to Federal Rules of Civil Procedure 12(b)(1) and

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12(b)(6), Fireman’s Fund moves to dismiss Count 3 for reformation based on lack of standing and

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failure to allege facts sufficient to state a claim. Docket No. 20, Def.’s Mot. to Dismiss.

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LEGAL STANDARD

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I.

Rule 12(b)(1) Motion to Dismiss.

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Federal Rule of Civil Procedure 12(b)(1) allows a party to challenge a federal court’s

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jurisdiction over the subject matter of the complaint. See Fed. R. Civ. P. 12(b)(1). The party

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invoking the jurisdiction of the federal court bears the burden of establishing that the court has the

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requisite subject matter jurisdiction to grant the relief requested. See Kokkonen v. Guardian Life

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Ins. Co. of Am., 511 U.S. 375, 377 (1994) (citation omitted). A complaint will be dismissed if,

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looking at the complaint as a whole, it appears to lack federal jurisdiction either “facially” or

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“factually.” Thornhill Publ’g Co., Inc. v. Gen. Tel. & Elecs. Corp., 594 F.2d 730, 733 (9th Cir.

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1979). When the complaint is challenged for lack of subject matter jurisdiction on its face, all
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material allegations in the complaint will be taken as true and construed in the light most favorable

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to the plaintiff. NL Indus.v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). In deciding a Rule

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12(b)(1) motion which mounts a factual attack on jurisdiction, “no presumptive truthfulness

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attaches to plaintiff’s allegations, and the existence of disputed material facts will not preclude the

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trial court from evaluating for itself the merits of jurisdictional claims. Moreover, the plaintiff will

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have the burden of proof that jurisdiction does in fact exist.” Mortensen v. First Fed. Sav. & Loan

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Ass’n, 549 F.2d 884, 891 (3d Cir. 1977).

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II.

Rule 12(b)(6) Motion to Dismiss.
Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint

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United States District Court
Northern District of California

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if it fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). To survive a

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Rule 12(b)(6) motion to dismiss, the plaintiff must allege “enough facts to state a claim to relief

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that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This “facial

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plausibility” standard requires the plaintiff to allege facts that add up to “more than a sheer

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possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009).

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The Court must assume that the plaintiff’s allegations are true and must draw all reasonable

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inferences in the plaintiff’s favor. Usher v. City of L.A., 828 F.2d 556, 561 (9th Cir. 1987).

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Although factual allegations are generally accepted as true for the purposes of the motion,

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the Court is not required to accept as true “allegations that are merely conclusory, unwarranted

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deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049,

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1055 (9th Cir. 2008). The Court, for example, need not accept as true “allegations that contradict

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matters properly subject to judicial notice or by exhibit.” Sprewell v. Golden State Warriors, 266

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F.3d 979, 988 (9th Cir. 2001); see also Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295-96

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(9th Cir. 1998) (“[W]e are not required to accept as true conclusory allegations which are

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contradicted by documents referred to in the complaint.”); Van Hook v. Curry, No. C 06-3148 PJH

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(PR), 2009 WL 773361, at *3 (N.D. Cal. Mar. 23, 2009) (“When an attached exhibit contradicts

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the allegations in the pleadings, the contents of the exhibits trump the pleadings.”).

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As a general rule, the Court may not consider materials beyond the pleadings when ruling
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on a Rule 12(b)(6) motion. Lee v. City of L.A., 250 F.3d 668, 689 (9th Cir. 2001). However,

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pursuant to Federal Rule of Evidence 201, the Court may take judicial notice of “matters of public

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record,” such as prior court proceedings. Id. at 688-89. The Court may also consider “documents

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attached to the complaint [and] documents incorporated by reference in the complaint . . . without

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converting the motion to dismiss into a motion for summary judgment. United States v. Ritchie,

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342 F.3d 903, 908 (9th Cir. 2003).
If the Court dismisses the complaint, it must then decide whether to grant leave to amend.

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The Ninth Circuit has “repeatedly held that a district court should grant leave to amend even if no

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request to amend the pleading was made, unless it determines that the pleading could not possibly

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be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000)

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United States District Court
Northern District of California

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(citations and internal quotation marks omitted).

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DISCUSSION

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I.

Subject Matter Jurisdiction.

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If a party lacks Article III standing, a complaint will be dismissed for lack of subject matter

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jurisdiction under Federal Rule of Civil Procedure 12(b)(1). Maya v. Centex Corp., 658 F.3d

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1060, 1067 (9th Cir. 2011). A claim for reformation may be brought by an “assignee of an

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original contracting party.” Am. Home Ins. Co. v. Travelers Indem. Co., 122 Cal. App. 3d 100,

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964-65 (Cal. Ct. App. 1981). Under the Assignment Agreement, Paul Owhadi, Susan Owhadi,

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and Herndon assign to Hartford their rights to claims against Fireman’s Fund. Compl., Ex. A.

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Paul Owhadi and Herndon, as a named insureds on Fireman’s Fund Primary Policy, are original

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contracting parties. Compl. ¶¶ 25-26. Paul Owhadi and Susan Owhadi, as named insureds on

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Fireman’s Fund Excess Policy, are also original contracting parties. Id. ¶ 29. Thus, Hartford is an

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assignee of original contracting parties to both of Fireman’s Fund policies.

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An assignee may have standing even if the contract contains a clause prohibiting

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assignment without consent. Under California Insurance Code § 520, “[a]n agreement not to

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transfer the claim of the insured against the insurer after a loss has happened, is void if made

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before the loss except as otherwise provided in” the Insurance Code. In a recent decision, the
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California Supreme Court held that Insurance Code § 520 applies to third party liability policies

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and that “after personal injury (or property damage) resulting in loss occurs within the time limits

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of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to

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invoke defense or indemnification coverage regarding that loss.” 2 Fluor Corp. v. Superior Court,

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No. S205889, 2015 WL 4938295, at *12, 29 (Cal. Aug. 20, 2015) (overruling Henkel Corp. v.

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Hartford Accident & Indemnity Co., 29 Cal.4th 934 (Cal. 2003)).
The Fluor court noted that “[t]he recognized rationale for enforcing a consent-to-

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assignment clause is to protect an insurer from bearing a risk or burden relating to a loss that is

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greater than what it agreed to undertake when issuing a policy.” Id. at *25. But this rationale no

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longer applies when a loss has already happened because the insurer’s risk or burden does not

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United States District Court
Northern District of California

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change based on an assignment. Cf. id. at *14-16 (collecting cases). Instead, the rule allowing

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assignment embodied in Insurance Code § 520 “contribut[es] to the efficiency of business by

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minimizing transaction costs and facilitating economic activity and wealth enhancement.” Id. at

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*25.

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Defendant contends that plaintiff lacks standing as an assignee of Herndon because the

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Fireman’s Fund policies prohibit assignment without Fireman Fund’s consent.3 Docket No. 20-1,

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Def.’s Mot. to Dismiss, at 3. Further, defendant argues that Fluor does not apply to a reformation

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cause of action because such a claim does not seek “defense or indemnification coverage.”

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Docket No. 29, Def.’s Reply, at 5 (citing Fluor, 2015 WL 4938295, at *29). However, the statute

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applies broadly to the assignment of “the claim of the insured against the insurer.” See Insurance

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Code § 520. Nothing in the text of Insurance Code § 520 limits its applicability to only claims

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involving “defense or indemnification.”

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In applying Insurance Code § 520, the Fluor court held that “a loss has happened” when “a

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loss [is] sustained by a third party that is covered by the insured’s policy, and for which the

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The California Supreme Court decided Fluor after defendant Fireman'sFund filed its
motion to dismiss in this case, but before plaintiff Hartford filed its opposition.
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The Fireman’s Fund Excess Policy states: “Assignment of this policy or a claim will not
be valid unless we give our written consent.” Compl., Ex. E at 91.
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insured may be liable.” Fluor, 2015 WL 4938295, at *26. Here, the loss happened when a third

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party individual was electrocuted on the Subject Premises in September 2009. Compl. ¶ 12. The

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Assignment Agreement was executed in July 2013, after the loss had happened. Id., Ex. A. Thus,

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under Insurance Code § 520, the clause prohibiting the assignment of claims against Fireman’s

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Fund is void, and plaintiff has standing to bring its claim for reformation.

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II.

Reformation.
While plaintiff has standing to assert a claim for reformation, plaintiff failed to allege facts

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sufficient to state a claim for reformation. When “a written contract does not truly express the

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intention of the parties” because of “fraud or a mutual mistake of the parties, or a mistake of one

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United States District Court
Northern District of California

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party, which the other at the time knew or suspected,” a court may reform the contract, “on the

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application of an aggrieved party, so as to express that intention.” Cal. Civ. Code § 3399 (West).

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In order to state a claim for reformation, a plaintiff must “allege what the real agreement was,

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what the agreement as reduced to writing was, and where the writing fails to embody the real

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agreement.” Lane v. Davis, 172 Cal. App. 2d 302, 309 (Cal. Ct. App. 1959) (citing Johnson v.

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Sun Realty Co., 138 Cal. App. 296, 300 (Cal. Ct. App. 1934)). A court can “only reform the

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writing to conform with the mutual understanding of the parties at the time they entered into it, if

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such an understanding exists.” Hess v. Ford Motor Co., 27 Cal. 4th 516, 524 (Cal. 2002).

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Additionally, the complaint must allege “facts showing how the mistake was made, whose mistake

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it was, and what brought it about, so that mutuality may appear.” Lane, 172 Cal. App. 2d at 309.

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Plaintiff does not allege what the “real agreement was,” or on what basis—fraud, mutual

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mistake, or unilateral mistake—the Fireman’s Fund policies did not meet the real agreement. A

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cause of action for reformation must contain a “showing of a definite intention or agreement on

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which the minds of the parties had met which pre-existed and conflicted with the instrument in

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question.” Philips Med. Capital, LLC v. Med. Insights Diagnostics Ctr., Inc., 471 F. Supp. 2d

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1035, 1047 (N.D. Cal. 2007); see also Gillis v. Sun Ins. Office, Ltd., 238 Cal. App. 2d 408, 414

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(Ct. App. 1965) (“It is also axiomatic that the court cannot reform and remake a contract for

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alleged mistake where there was never any such common intent.”). Plaintiff acknowledges this
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rule in its opposition, but the complaint only alleges that: (1) Paul Owhadi purchased the

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Fireman’s Fund policies to protect Herndon from liability from business activities or business

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properties, among other things; (2) Fireman’s Fund knew or should have known that Herndon

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alone held title to the Subject Premises; (3) Fireman’s Fund knew that several of the properties

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covered under the Fireman’s Fund Excess Policy were rental properties, not personal residences;

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and (4) Fireman’s Fund failed to list Herndon as a named insured on the Fireman’s Fund Excess

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Policy and included a business exclusion to the policy. See Docket No. 25, Pls.’ Opp’n, at 8;

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Compl. ¶¶ 69-73. Although plaintiff’s allegations make clear that the Fireman’s Fund Excess

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policy, as written, did not meet Paul Owhadi’s intent, plaintiff fails to allege that there was an

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actual agreement with Fireman’s Fund that was different than the written policies. Because

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United States District Court
Northern District of California

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plaintiff failed to allege facts demonstrating an actual agreement, the complaint does not allege

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facts sufficient to state a claim for reformation.

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CONCLUSION

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For the foregoing reasons, the Court GRANTS defendant’s motion to dismiss, with leave
to amend. Plaintiff may file a First Amended Complaint no later than September 18, 2015.

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IT IS SO ORDERED.
Dated: September 3, 2015

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________________________
SUSAN ILLSTON
United States District Judge

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