Scottsdale Insurance Company v. The Spirit Hills Homeowners' Association et al

Filing 29

ORDER granting 15 Motion to Dismiss as to Defendants Terry Neal and Kelli Neal. Signed by Judge Brian Morris on 7/29/2022. (MMS)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
BUTTE DIVISION
SCOTTSDALE INSURANCE
COMPANY, an Ohio Corporation,

CV-22-0017-BU-BMM

Plaintiff,
ORDER
vs.
THE SPIRIT HILLS HOMEOWNERS’
ASSOCIATION, TERRY NEAL, KELLI
NEAL, JAYSON THOMPSON, HEIDI
THOMPSON, NORTHLAND CASUALTY
COMPANY, and DOES 1-50,
Defendants.

INTRODUCTION
Defendants Terry Neal and Kelli Neal (“Neals”) filed a Motion to Dismiss
Plaintiff Scottdale Insurance Company’s (“Scottsdale”) claims against them
pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6). (Doc. 16). Neals contend that the
Court lacks subject matter jurisdiction to review Scottsdale’s claims and that
Scottsdale fails to state a claim upon which relief may be granted. The Court held a
hearing on the matter on July 12, 2022. (Doc. 28.) The Court will grant Neals’
motion to dismiss for the reasons discussed below.
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BACKGROUND
Neals own real property located at Lot 78 of the Spirit Hills Subdivision in
Bozeman, Montana. (Doc. 1 at ¶¶ 14-15.) Neals filed a lawsuit in Montana’s
Eighteenth Judicial District Court, Gallatin County, Case No. DV-20-1054A (the
“Underlying Action”), against Jayson Thompson and Heidi Thompson (collectively,
“Thompsons”), Spirit Hills HOA, and the Spirit Hills Homeowners’ Association
Board of Directors (“Spirit Hills HOA BOD”) on or about September 22, 2020. (Id.
at ¶ 16.) Neals allege that breaches of covenants and other causes of action with
respect to construction of Thompson’s home, which is bordered by, adjacent to, and
uphill from the Neals’ property. (Id. at ¶ 16.) Neals allege that Thompsons submitted
designs for their home to the Spirit Hills HOA Architectural Committee (the
“Committee”) in August 2018. The Committee required the Thompsons to obtain
consent from the Neals. (Id. at ¶ 16.) Thompsons and the Neals agreed to certain
setback and garage window designs for Thompsons’s home in August 2018. (Id. at
16.) The designs were submitted to the Committee and approved. (Id. at ¶ 16.)
Neals complain of various issues with the construction of the Thompsons’
home, the Thompsons’ deviations from the approved plans, and the effect
Thompsons’ home had on the Neals’ property. (Id. at ¶¶ 18-19.) Neals assert that
the failure of the Spirit Hills HOA and the Spirit Hills HOA BOD to enforce the
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HOA Covenants to comply with the approved plans and prevent construction of the
Thompsons’ home in a manner inconsistent with the Covenants resulted in harm to
the character, quality, and value of Neals’ property. (Id. at ¶ 20.) Neals claim breach
of Spirit Hills HOA’s Covenants, breach of the implied covenant of good faith and
fair dealing, and negligence. (Id. at ¶ 20.) Thompsons subsequently brought
counterclaims against Neals and crossclaims against Spirit Hills HOA. (Id. at ¶ 22.)
Spirit Hills HOA then tendered the Underlying Actions to Northland Casualty
Company (“Northland”) seeking defense and indemnification as its primary insurer.
(Id. at ¶ 23.) Spirit Hills HOA also tendered the Underlying Action to Scottsdale.
Scottsdale serves as Spirit Hills HOA’s excess insurer. (Id. at ¶¶ 24-25.)
Northland denied the tenders by Spirit Hills HOA. Northland asserted that the
Underlying Action did not seek damages according to the provisions of the policy
between Spirit Hills HOA and Northland. (Id. at ¶ 24.) Scottsdale advised Spirit
Hills HOA that it would provide a defense to the Underlying Action despite
Scottsdale conclusion that it owed no duty to defend or indemnify Spirit Hills HOA
with respect to the Underlying Action pursuant to their policy. (Id. at ¶ 26.)
Scottsdale filed their Complaint for Declaratory Judgement and Reimbursement of
defense fees and costs from Northland on March 4, 2022. Scottsdale asserts that
Northland breached its duty to defend Spirit Hills HOA in the Underlying Actions.
(Id. at ¶ 33.) Scottsdale now seeks a declaratory judgement against Defendant Spirit
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Hills Homeowners’ Association (“Spirit Hills HOA”) that it owes no defense and/or
duty to indemnify Spirit Hills HOA in connection with any and all of the alleged
claims, causes of action, or damages alleged in the underlying actions between Neals
and Thompsons. (Id. at ¶ 1.)
Neals filed a Motion to Dismiss for Lack of Subject Matter Jurisdiction and
for Failure to State a Claim on May 5, 2022. (Doc. 16.) Neals contend that Scottsdale
erroneously seeks to bind Neals by the findings, rulings and orders of this Court
related to the Spirit Hills HOA’s policy with Scottsdale. (Id. at 4.) Neals assert that
Scottsdale’s claims against Neals are premature, not ripe, and should be dismissed
for lack of subject matter jurisdiction and failure to state a claim upon which relief
may be granted. (Id. at 4-5.)
LEGAL STANDARDS
Neals move to dismiss for lack of subject-matter jurisdiction. Fed. R. Civ. P.
12(b)(1). A party invoking the federal court’s jurisdiction has the burden of proving
the actual existence of subject matter jurisdiction. Thompson v. McCombe, 99 F.3d
352, 353 (9th Cir. 1996). In reviewing a facial attack, like the Neals’ Motion, the
Court must take as true the allegations in Scottsdale’s Complaint. Wolfe v.
Strankman, 392 F.3d 358, 362 (9th Cir. 2004).
To survive a Rule 12(b)(6) motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to state a claim to relief that is plausible
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on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged. Id.
A Rule 12(b)(6) motion should be granted if the “plaintiff can prove no set of facts
in support of his claims which would entitle him to relief.” SmileCare Dental Group
v. Delta Dental Plan of Cal., Inc., 88 F.3d 780, 783 (9th Cir. 1996).
ANALYSIS
Neals contend that the Court should grant their Rule 12(b)(6) motion to
dismiss, as well as their Rule 12(b)(1) motion to dismiss, on the grounds that
Scottdale’s claim is not ripe for adjudication and that by being joined to the present
lawsuit, any future claims the Neals may have against Scottsdale would be unfairly
precluded. (Doc. 16 at 1-2.)
Neals argue that they are not parties to the insurance policies between
Scottsdale, Northland, and Spirit Hills HOA, and that they are not in privity with
Scottsdale or Northland. (Doc. 16 at 4-5.) For these reasons, Neals maintain that the
Complaint should be dismissed for failure to state a claim upon which relief can be
granted. (Doc. 16 at 1-2.) Neals cite to Cincinnati Insurance Co. v. Northwest.
Painting Inc., in support of their assertion that deciding the interest of a third-party
to an insurance contract regarding “favorable coverage determination” involves

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“nothing more than speculation about a future event.” No. CV 20-176-M-DLC, 2021
WL 3142163 at *6 (D. Mont. July 26, 2021).
The plaintiff in Cincinnati Insurance Co. sought a declaration that it had no
duty to indemnify or defend the defendant as to an underlying lawsuit involving a
third-party. Id. at *2. The third-party and others had sued the defendant for property
damage involving defective siding installation. Id. at *1. The defendant argued that
the third-party must be joined as an indispensable party to the declaratory action. Id.
at *5.
The Ninth Circuit previously had reasoned that, in deciding whether a party
is indispensable, “we must determine: (1) whether an absent party is necessary to the
action; and then, (2) if the party is necessary, but cannot be joined, whether the party
is indispensable such that in equity and good conscience the suit should be
dismissed.” Dawavendewa v. Salt River Project Agr. Imp. & Power Dist., 276 F.3d
1150, 1155 (9th Cir. 2002). The Ninth Circuit in Cincinnati Insurance Co. concluded
that the third-party was not indispensable and declined to join her to the action. 2021
WL 3142163 at *5. The Ninth Circuit expressed skepticism that the third-party had
a legally protected interest in the action. Id. at *6. The Ninth Circuit reasoned that
although the third party could “possibly prevail” against the defendants, the mere
possibility of prevailing proved insufficient to constitute a legally protected interest
under Rule 19(a). Id.
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This case differs from Cincinnati Insurance Co. There a defendant sought to
join a third-party allegedly to avoid a risk of multiple or inconsistent legal
obligations. Id. at *5. Neals seek to dismiss Scottdale’s Complaint because Neals are
not Scottsdale’s insureds and have no contractual relationship with Scottsdale. Neals
assert that their legal interests against Scottsdale are “hypothetical and contingent
and do not present a controversy that Scottsdale can ask the Court to resolve at this
time.” Id. at *6.
Neals argue that the Ninth Circuit’s reasoning in Cincinnati Insurance Co.
applies to this case: (1) complete relief can be afforded if the action is limited to the
parties of Scottsdale, Northwind and Sprit Hills HOA, as they are the parties that
stand in privity with one another; and (2) Neals may have third-party claims against
Scottsdale and Northland based on their handling of the claims against their insured
Spirit Hills HOA. Neals contend that they are not indispensable to the resolution of
Scottsdale’s declaratory action against Spirit Hills HOA and Northwind and should
not be bound by that resolution.
The Court agrees with Neals’ application of the reasoning in Cincinnati
Insurance Co. Scottsdale’s attempt to bar any future claims that Neals may have
proves premature. Similar to Cincinnati Insurance Co., any such claims will not
arise or be ripe for resolution by Scottsdale or by Neals unless and until the
underlying claims between the Neals and the Spirit Hills HOA have been resolved.
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(Doc. 24 at 2-3.) Unlike Cincinnati Insurance Co., where the Court ultimately held
that the interests of third-party and Northwest were sufficiently aligned to justify the
conclusion that collateral estoppel or res judicata likely would bar re-litigation of the
coverage dispute in a subsequent action if the third-party were presently joined,
Scottsdale’s and Neals’ interests are not similarly aligned.
Neither claim (res judicata) or issue (collateral estoppel) preclusion will apply
“to a party that was not a party in the prior proceeding” unless they stand in privity
with a party to that prior proceeding. Denturist Ass’n of Mont. v. State Dept. of Labor
and Indus., 372 P.3d 466, 469 (Mont. 2016). Neals are not Scottdale’s insureds and
have no contractual relationship with Scottsdale. (Doc. 24 at 2.) Neals do not stand
in privity with Scottsdale. Their removal from the present action will not bar any
potential future claims by Scottsdale against them.
Scottsdale also cites to Cincinnati Insurance Co. to support its assertion that
if an insurer intends to recoup the costs incurred in defending its insured, it should
timely and explicitly reserve “its right to recoup defense costs.” (Doc. 22 at 3
(quoting Cincinnati Insurance Co., 2021 WL 3142163 at *3).) Scottsdale contends
that the insurer should expeditiously file a separate declaratory judgment action so
that the dispute regarding the contractual duty to defend can be resolved. (Id. at 3.)
If there were no pending Underlying Action, Scottsdale would be persuasive in
making this argument because filing a separate declaratory action likely would
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“facilitate judicial economy” by preventing adjudication of third-party claims until
after they pass the first hurdle. The first hurdle, of course, will be the question of any
liability for which the insurer may be responsible. Safeco Ins. Co. of Ill v. Mont.
Eighth Jud. Dist. Ct., 2000 MT 153, ¶ 28, 300 Mont. 123, 2 P.3d 834. The
Underlying Action has yet to be resolved. As a result, the timeliness of filing a
separate declaratory action regarding Scottsdale’s duty to defend should not factor
into the Court’s decision as to Neals’ desire to not be bound by said declaratory
action.
Neals point to the language of Montana Code Annotated § 33-18-242(6)(b) to
support their motion. (Doc. 24 at 2.) Montana law prevents third-party claims against
insurers before resolution of the underlying claim. Mont. Code Ann. § 33-18242(6)(b) (2021). Neals contend that that same purpose applies with equal force
whether a claim is prematurely initiated by a third-party or an insurer; any action to
determine an insurer’s liability to a third-party claimant is premature unless and until
the underlying claim has been resolved by judgement or settlement. (Doc 16 at 6.)
Scottsdale attempts to circumvent this language by claiming a need to
“expeditiously file a separate declaratory judgment.” (Doc. 22 at 3.) Scottdale’s
reasoning fails to persuade as it cites to cases where resolution of the Underlying
Action is not an issue in the proceedings. The Court agrees with Neals’ application
of Montana Code Annotated § 33-18-242(6)(b) to Scottdale’s position as an insurer
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bringing a claim against a third-party. Scottsdale should not be permitted to file for
declaratory judgement against a third-party until the Underlying Action has been
resolved.
The Underlying Action has not been resolved. Neals’ 12(b)(1) motion to
dismiss should be granted. Moreover, Neals lack any contractual relationship with
Scottsdale or Northland. To keep Neals attached to Scottsdale’s declaratory action
proves unnecessary and would be an inefficient use of judicial resources.
ORDER
Accordingly, IT IS ORDERED that Defendants’ Motion to Dismiss
Without Prejudice (Doc. 16) is GRANTED.
Dated this 29th day of July, 2022.

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