Colony Insurance Company v. Fladseth et al

Filing 39

ORDER by Judge Claudia Wilken DENYING DEFENDANTS 23 MOTION TO DISMISS OR STAY. (ndr, COURT STAFF) (Filed on 6/11/2012)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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COLONY INSURANCE COMPANY,

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No. C 12-1157 CW

Plaintiff,

ORDER DENYING
DEFENDANTS’ MOTION
TO DISMISS OR STAY
(Docket No. 23)

v.
DOUGLAS FLADSETH; and LAW OFFICES
OF DOUGLAS C. FLADSETH,
Defendants.
________________________________/

United States District Court
For the Northern District of California

Defendants Douglas Fladseth and the Law Offices of Douglas C.
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Fladseth, a sole proprietorship, move to dismiss the first amended
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complaint (1AC) of Plaintiff Colony Insurance Company, or to stay
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proceedings in this case until the resolution of certain
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underlying lawsuits pending in state court.

Plaintiff opposes

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Defendants’ motion.

The Court takes Defendants’ motion under

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submission on the papers and DENIES it.
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BACKGROUND

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Plaintiff initiated this action on March 8, 2012 and filed
its 1AC on April 10, 2012.

The following facts are taken from the

1AC and the documents attached thereto.
Plaintiff insured Defendants pursuant to a Lawyers
Professional Liability Policy number EO404193, valid from August
20, 2010 to August 20, 2011.

1AC ¶ 1.

The policy provides in

relevant part,

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SECTION I - COVERAGES

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1. Insuring Agreement

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a. We will pay, in excess of the Deductible shown
in the Declarations, those sums any insured becomes

legally obligated to pay as “damages” because of an
act, error or omission arising out of your “legal
services” rendered or that should have been
rendered. We will have the right and duty to
defend any insured against a “claim” seeking those
“damages.” However, we will have no duty to defend
any insured against any “claim” seeking “damages”
for “legal services” to which this insurance does
not apply. . . .

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2. Exclusions

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This Policy does not apply to any “claim”:

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. . .

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d. Based on or directly or indirectly arising out
of the rights or duties under any agreement
including disputes over fees for services;

United States District Court
For the Northern District of California

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. . .

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j. Based on or directly or indirectly arising out
of or resulting from:

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. . .

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(2) The gaining by any insured of any personal
profit, gain or advantage to which an insured
is not legally entitled; . . .

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1AC, Ex. C, 40-42.

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The policy also contains an addendum that provides,

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SECTION I - COVERAGES, 2. Exclusions is amended and the
following added:

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This insurance does not apply to any “claim” for or
awards of:

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1. Punitive, exemplary or multiple damages; or

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2. Equitable or non-pecuniary relief;

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including any fines, penalties, court imposed
sanctions, return or restitution of legal fees,
costs or other expenses associated with such
awards.

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Id. at 52.
Defendants have been named in two lawsuits currently pending
in the Sonoma County Superior Court, Scholz v. Fladseth, Case No.
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SCV249442, and Christiansen v. Fladseth, Case No. SCV250126, the

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latter of which is a putative class action.

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complaints in each lawsuit are materially identical for the

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purposes of this action.

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that Defendants failed to disclose to them the limitation on

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attorneys’ fees in medical malpractice claims under California

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state law, charged fees in excess of those amounts and assert that

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their contingency fee agreements were void for illegality.

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¶¶ 10-13, Exs. A and B.

The contents of the

In both cases, the plaintiffs assert

1AC

The causes of action asserted in each

United States District Court
For the Northern District of California

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include (1) money had and received, (2) fraud, (3) conversion,

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(4) accounting, and (5) violation of California Business and

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Professions Code section 17200.

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asserts a claim for professional negligence.

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plaintiffs seek, among other things, punitive damages, accounting

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and restitution of funds unlawfully obtained.

In one, the plaintiff also
In both actions, the

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In the 1AC in this action, Plaintiff seeks a determination

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that coverage does not exist for the underlying actions against

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Defendants, because the claims asserted therein are based upon a

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dispute over fees and upon Defendants gaining personal profit,

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gain or advantage to which they are not legally entitled, and

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because the plaintiffs in the underlying actions seek punitive,

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exemplary or multiple damages, or equitable or non-pecuniary

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relief, which are expressly excluded from the insurance policy.

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Plaintiff also seeks a declaration that it does not owe a defense

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or indemnity to Defendants for those claims.

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LEGAL STANDARD

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Under the Declaratory Judgment Act, a two-part test is used

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to determine whether jurisdiction over a claim for a declaratory
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judgment is appropriate.

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F.3d 665, 669 (9th Cir. 2005).

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an actual case or controversy exists within its jurisdiction.

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Second, if so, the court must decide whether to exercise its

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jurisdiction.

Principal Life Ins. Co. v. Robinson, 394
First, the court must determine if
Id.

Id.

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A district court has “discretion in determining whether and

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when to entertain an action under the Declaratory Judgment Act.”

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Wilton v. Seven Falls Co., 515 U.S. 277, 282 (1995).

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“there is no presumption in favor of abstention in declaratory

However,

United States District Court
For the Northern District of California

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actions generally, nor in insurance coverage cases specifically.”

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Government Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1225 (9th

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Cir. 1998).

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actions over which it has jurisdiction is guided by the Supreme

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Court’s announcements in [Brillhart v. Excess Ins. Co., 316 U.S.

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491 (1942)].”

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Brillhart factors are non-exclusive and state that, ‘[1)] the

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district court should avoid needless determination of state law

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issues; [2)] it should discourage litigants from filing

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declaratory actions as a means of forum shopping; and [3)] it

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should avoid duplicative litigation.’”

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Employees Ins. Co., 133 F.3d at 1225) (alterations in original).

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“Essentially, the district court must balance concerns of judicial

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administration, comity, and fairness to the litigants.”

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(internal quotations omitted).

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additional and potentially relevant considerations,” including

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“whether the declaratory action will serve a useful purpose in

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clarifying the legal relations at issue” and “whether the

“The district court’s discretion to hear declaratory

Principal Life Ins. Co., 394 F.3d at 672.

“The

Id. (quoting Gov’t

Id.

The Ninth Circuit has also “noted

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declaratory action is being sought merely for the purposes of

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procedural fencing or to obtain a ‘res judicata’ advantage.”

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Id.

DISCUSSION
Defendants do not assert that the Court lacks jurisdiction

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over Plaintiff’s claims for declaratory judgment.

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this motion, Defendants request that this Court exercise its

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discretion to decline jurisdiction over this matter, or stay it

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pending resolution of the underlying litigation.

Instead, in

Defendants contend that this action will be duplicative of

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United States District Court
For the Northern District of California

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the state court actions, because the factual questions here are

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the same as in those actions.

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state law cases that counsel that when there is a “risk of

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inconsistent factual determinations that could prejudice the

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insured,” because the “coverage question turns on facts to be

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litigated in the underlying action,” a stay pending resolution of

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the underlying suit is appropriate.

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Superior Court, 6 Cal. 4th 287, 301 (1993).

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that, “when the coverage question is logically unrelated to the

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issues of consequence in the underlying case, the declaratory

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relief action may properly proceed to judgment.”

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Defendants rely on a variety of

Montrose Chemical Corp. v.
These cases also note

Id. at 302.

In the instant action, the Court is not being asked to

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determine if Defendants actually gained profits to which they were

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not entitled or if the contingency fee agreements were actually

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void, and the Court would not have to determine these issues in

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adjudicating this coverage action.

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asked if Defendants’ potential liability on the state court

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actions would be covered by the underlying insurance policy.

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Instead, the Court is being

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Thus, the “coverage question is logically unrelated to the issues

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of consequence” in the underlying actions.

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The other factors relevant to this determination also do not

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favor abstention.

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cases, those actions will not determine the coverage issues that

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are asserted here, and there are not any other pending cases in

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which these issues would be decided.

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duplicative and was not filed as a means of forum shopping.

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Further, this action will serve a useful purpose to clarify the

Plaintiff is not a party to the underlying

Thus, this litigation is not

United States District Court
For the Northern District of California

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legal obligations of Plaintiff regarding the underlying state

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actions.

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CONCLUSION
For the reasons set forth above, the Court DENIES Defendants’
motion to dismiss or stay (Docket No. 23).
IT IS SO ORDERED.

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Dated: 6/11/2012

CLAUDIA WILKEN
United States District Judge

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