Fay et al v. The Hartford Insurance Company et al

Filing 27

MEMORANDUM OPINION AND ORDER by Magistrate Judge Steven C. Yarbrough granting 20 Motion For Leave To File Amended Complaint. (kfg)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
LESEY FAY, et al.,
Plaintiffs,
v.

Civ. No. 17-1054 MV/SCY

THE HARTFORD INSURANCE
COMPANY, et al.,
Defendants.
MEMORANDUM OPINION AND ORDER GRANTING LEAVE TO AMEND
COMPLAINT
THIS MATTER comes before the Court on Plaintiffs’ Motion For Leave To File
Amended Complaint, filed May 8, 2018. Doc. 20. Defendant Sentinel Insurance Company
(Sentinel) filed a response in opposition on June 1, 2018. Doc. 22. Plaintiffs filed a reply on
June 15, 2018. Doc. 24. The Court orders that Plaintiffs’ Motion be GRANTED for the reasons
explained below.
I. Background
On June 23, 2017, Plaintiffs filed the present lawsuit in state court bringing claims for
breach of fiduciary duty, breach of contract, and bad faith. Doc. 1-1 at 2-3.1 According to
Plaintiffs, they operated a business in Taos, New Mexico called Graham’s Grille. Doc. 1-1 at 5.
Due to “difficulties with the municipal sewer system that served the restaurant, the business was
forced to close in September 2013.” Doc. 1-1 at 7. Plaintiffs had purchased “Business
Interruption insurance” from Defendants for the restaurant in 2006, so they made a claim for
damages due to being forced to shut down. Doc. 1-1 at 6-7. As of the date of the filing of the

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Throughout this opinion, the Court uses the page numbers generated in the headers of filed
documents by the CM-ECF system.

lawsuit, Defendants had neither paid nor denied the claim. Doc. 1-1 at 7.
On July 30, 2017, also in state court, Plaintiffs filed a First Amended Complaint,
asserting claims for Breach of Contract, Insurance Bad Faith, Violation of Insurance Code,
Violation of Unfair Practices Act, and Punitive Damages. Doc. 1-1 at 5-10. Defendant Sentinel
represents that it was served on September 27, 2017. Doc. 1 at 9. On October 20, 2017, Sentinel
removed this case to federal court, alleging the existence of subject matter jurisdiction based on
diversity of citizenship due to the fraudulent joinder of the sole defendant who is a citizen of
New Mexico—Craig Beaudry, who allegedly sold the insurance policy in question. Doc. 1 at 35. Plaintiffs did not file a motion to remand.
Sentinel filed a motion to dismiss on November 10, 2017. Doc. 6. In that motion, Sentinel
argued that Plaintiffs’ claim for lost business income is excluded by the applicable insurance
policy and, furthermore, is untimely. Id. Also on November 10, Defendant Hartford Financial
Services Group (HFSG) moved to dismiss all claims against it for lack of personal jurisdiction.
Doc. 7. Plaintiffs did not oppose that motion. Doc. 13.
On May 8, 2018, Plaintiffs moved for leave to file a Second Amended Complaint. Doc.
20. Plaintiffs wish to add more detail to their factual allegations regarding the defects with the
Taos municipal sewer system, and regarding Plaintiffs’ claim against Defendant Beaudry. Doc.
20 at 2.2 Defendant Sentinel filed an opposition, arguing that the proposed amendment about the
sewer system would be futile because the Second Amended Complaint would still fail to state a
claim against Sentinel. Doc. 22. No other defendant filed a response.

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Despite the fact that the Plaintiffs did not oppose the dismissal of HFSG, Doc. 13, the proposed
Second Amended Complaint still purports to bring claims against it. Doc. 20-1 at 1, 3.
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II. Jurisdiction
Because the Court always has a sua sponte duty to ensure it has subject-matter
jurisdiction, the Court carefully examined the Notice of Removal filed Defendants filed. See
Image Software, Inc. v. Reynolds & Reynolds Co., 459 F.3d 1044, 1048 (10th Cir. 2006)
(“Federal courts have an independent obligation to determine whether subject-matter jurisdiction
exists, even in the absence of a challenge from any party . . . .”).
As set forth above, the Notice of Removal contends that Defendant Beaudry was
fraudulently joined. The Court does not necessarily agree. “‘The defendant seeking removal
bears a heavy burden of proving fraudulent joinder, and all factual and legal issues must be
resolved in favor of the plaintiff.’” Dutcher v. Matheson, 733 F.3d 980, 988 (10th Cir. 2013)
(quoting Pampillonia v. RJR Nabisco, Inc., 138 F.3d 459, 461 (2d Cir. 1998)). To succeed on
fraudulent joinder, removing defendants must clear a “high hurdle.” Id. at 989. The question of
fraudulent joinder is not to be confused with whether “plaintiffs have stated a valid claim”
against the allegedly fraudulently joined parties. Id. In sum, the argument that “conclusory
allegations” against Defendant Beaudry should be disregarded simply will not satisfy this
standard. Cf. Doc. 1 at 5. Statute-of-limitations arguments, if they are factually complicated, will
likewise fail to satisfy this standard. See, e.g., Riverdale Baptist Church v. Certainteed Corp.,
349 F. Supp. 2d 943, 950 (D. Md. 2004).
Nonetheless, even if Defendant Beaudry is not fraudulently joined, the Notice of
Removal does adequately allege facts supporting the Court’s original jurisdiction, pursuant to the
alienage provision of 28 U.S.C. § 1332(a)(2) and a sufficient amount in controversy. See Doc. 1
at 2-3 (Plaintiffs are citizens of Mexico; Defendants are citizens of Connecticut, Arizona, New
Mexico, and Delaware). To be sure, the First Amended Complaint alleges that Plaintiffs are

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residents of Mexico. First Am. Compl. ¶ 1. But “[a]n individual’s residence is not equivalent to
his domicile and it is domicile that is relevant for determining citizenship.” Siloam Springs
Hotel, L.L.C. v. Century Sur. Co., 781 F.3d 1233, 1238 (10th Cir. 2015). Plaintiffs should
promptly inform the Court if the Notice of Removal’s allegations are incorrect.
Since original jurisdiction is established by the allegations in the Notice of Removal, the
Court may not sua sponte remand to state court. Feichko v. Denver & Rio Grande W. R. Co., 213
F.3d 586, 591 (10th Cir. 2000) (“[R]emoval in violation of a statutory provision does not deprive
a federal district court of subject matter jurisdiction so long as the court would have had original
jurisdiction over the case had it been filed there in the first instance.”). To the extent there are
any procedural or statutory defects in removal due to Defendants’ potentially incorrect fraudulent
joinder assertions, Plaintiffs have waived them by failing to move to remand the case to state
court within 30 days. 28 U.S.C. § 1447(c). Sua sponte remand to state court would therefore be
inappropriate. City of Albuquerque v. Soto Enters., Inc., 864 F.3d 1089, 1093 (10th Cir. 2017).
The Court will proceed to the merits of Plaintiffs’ Motion.
III. Discussion
Federal Rule of Civil Procedure 15 permits a plaintiff to amend a complaint as of right
within 21 days after serving it or 21 days after service of a Rule 12(b) motion. Fed. R. Civ. P.
15(a)(1). “In all other cases, a party may amend its pleading only with the opposing party’s
written consent or the court’s leave.” Fed. R. Civ. P. 15(a)(2). Plaintiffs here have already
amended their complaint once as a matter of right and so must now seek leave of court. Id.3

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The First Amended Complaint was filed in state court, but after removal, “the Court is to treat
all pleadings filed in state court as if they were filed in federal court.” Van Leeuwen v. SIB
Mortg. Corp., No. 2:10-CV-730-TS, 2011 WL 13798, at *2 (D. Utah Jan. 4, 2011) (unpublished)
(citing Fed. R. Civ. P. 81(c)(2)). “Accordingly, this Court must treat the amendment Plaintiff
made to her original complaint while in state court as the single ‘matter of course’ amendment

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Sentinel argues that Plaintiffs should not get a third bite at the apple, having failed to
state viable claims in their first two complaints. Doc. 20 at 1. The Court does not necessarily
agree that Plaintiffs are precluded from amending simply because they have amended previously.
“The court should freely give leave [to amend] when justice so requires.” Fed. R. Civ. P.
15(a)(2). “[T]his mandate is to be heeded.” Foman v. Davis, 371 U.S. 178, 182 (1962). “In the
absence of any apparent or declared reason—such as undue delay, bad faith or dilatory motive on
the part of the movant, repeated failure to cure deficiencies by amendments previously allowed,
undue prejudice to the opposing party by virtue of allowance of the amendment, futility of
amendment, etc.,” leave should be granted. Id.
Sentinel argues that the proposed amendment would be futile. Doc. 20 at 2. “A proposed
amendment is futile if the complaint, as amended, would be subject to dismissal.” Gohier v.
Enright, 186 F.3d 1216, 1218 (10th Cir. 1999). Therefore, “[t]he futility question is functionally
equivalent to the question whether a complaint may be dismissed for failure to state a claim
. . . .” Id. Sentinel argues that the proposed amendment does not cure the identified defects in the
First Amended Complaint: coverage would still be excluded under the policy language; the
lawsuit would still be untimely; and the Unfair Practices Act (UPA) claim would still be subject
to dismissal. Id. at 2-5. The Court disagrees that the Second Amended Complaint would be
subject to dismissal on these grounds, and so orders that the amendment be permitted.
A. Without More Facts, the Court Cannot Agree with Sentinel that There Is No
Insurance Coverage Under The Policy.
The proposed Second Amended Complaint contains the following allegations pertaining
to the closure of Plaintiffs’ business:

permitted under Rule 15.” Cwiak v. City of Phx., No. CV09-1858-PHX-MHM, 2010 WL
1742531, at *2 (D. Ariz. Apr. 29, 2010) (unpublished).
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11. During the entirety of the existence and operation of the restaurant, the
restaurant had difficulties with the municipal sewer system that served the
restaurant. The difficulties were because the sewer pipes owned by the Town
of Taos and leading to the Plaintiffs’ business were old, were probably clay
pipes, were collapsed, were clogged with rocks and roots and the Town of
Taos refused to replace or otherwise repair the sewer pipes.
12. In or about September 2013 Graham’s Grille was forced to close for business
as a result to of the defects in the municipal sewer system.
Doc. 20-1 at 2-3 (emphasis in original, to demonstrate the differences between the First
Amended Complaint and the proposed Second Amended Complaint).
Sentinel asserts that there is no coverage under its insurance policy given these facts.
Doc. 22 at 2-3; see also Doc. 6 at 2-4 (motion to dismiss). Because the insurance policy language
is “referred to by the complaint and [is] integral and central to the plaintiff’s claim,” the Court
may rely upon it without converting the present motion into a motion for summary judgment. See
New Mem’l Assocs. v. Credit Gen. Ins. Corp., 973 F. Supp. 1027, 1029 (D.N.M. 1997) (relying
on the underlying insurance policy as attached to the response to the motion to dismiss).
The insurance policy covers “direct physical loss of or physical damage to Covered
Property at the premises described in the Declarations (also called ‘scheduled premises’ in this
policy) caused by or resulting from a Covered Cause of Loss.” Doc. 6-1 at 29. “Business
Income” is a covered loss, if the suspension of business operations is “caused by direct physical
loss of or physical damage to property . . . caused by or resulting from a Covered Cause of
Loss.” Id. at 38. “Covered Causes of Loss” are defined as “RISKS OF DIRECT PHYSICAL
LOSS unless the loss is: a. Excluded in Section B., EXCLUSIONS; or b. Limited in Paragraph
A.4. Limitations; that follow.” Id. at 30. One of the “Section B” exclusions is: “Water that backs
up from a sewer or a drain.” Id. However, the policy also includes a “Restaurant Stretch,” which

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specifically adds “Additional Coverage” for “direct physical loss or physical damage to Covered
Property solely caused by water that backs up from a sewer or a drain.” Id. at 92.
Finally, the policy includes an endorsement entitled “PERILS SPECIFICALLY
EXCLUDED.” Id. at 130. A warning at the top of the page explains: “THIS ENDORSEMENT
CHANGES THE POLICY. PLEASE READ IT CAREFULLY.” Id. The endorsement provides:
As used herein, “Peril” means a cause of physical loss or damage to property. It
has this meaning whether or not it is called a “Peril” or a “Cause of Loss” in this
policy.
Even if any of the terms of this policy might be construed otherwise, the
following Perils, as described in Paragraphs A. and B. below, are
SPECIFICALLY EXCEPTED FROM THIS POLICY. WE DO NOT COVER
OR INSURE AGAINST LOSS OR DAMAGE DIRECTLY OR INDIRECTLY
CAUSED BY, RESULTING FROM, CONTRIBUTED TO OR AGGRAVATED
BY, OR WHICH WOULD NOT HAVE OCCURRED BUT FOR, EITHER OF
THESE PERILS:
A. ACTS, ERRORS OR OMISSIONS by you or others in:
....
3. The design, specifications, workmanship, repair, construction, renovation,
remodeling, grading or compaction of all or any part of the following:
....
b. Roads, water or gas mains, sewers, drainage ditches, levees, dams, or other
facilities . . . .
Id.
Plaintiffs argue that the policy materially contradicts itself, rendering coverage
ambiguous in a way that must be construed against the insurer. Doc. 15 at 4-5. This argument
cannot be presently characterized as futile. The policy is indeed difficult to read and does appear
to contain internal contradictions. The exclusion for damage caused by water backed up from the
sewer is hard to reconcile with the subsequent inclusion for the same thing. Compare Doc. 6-1 at

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44 and 92. In addition, “Covered Causes of Loss” include all risks of physical loss unless they
are excluded in “Section B” or “Limited in Paragraph A.4.” Id. at 30. The section on “Perils
Specifically Excluded,” however, is located in neither Section B nor Paragraph A.4, but instead
in a seemingly stand-alone attachment that can only be found a hundred pages later in the policy.
Id. at 130.
Without more information, the Court cannot actually determine whether the policy is
ambiguous. There is no information as to whether all the policies, inclusions, and endorsements
were issued at the same time, or whether (for example) Plaintiffs paid an additional price for any
additional coverage or received a discount for additional exclusions. There is no information as
to whether Plaintiffs were ever made aware that the “Perils Specifically Excluded” modified the
grant of coverage, even though it is not located in Section B or Paragraph A.4 but is instead
found a hundred pages later in a policy that spans a total of 154 pages. Doc. 6-1. As a matter of
law, at this stage of the case, the Court cannot conclude whether it is reasonable to adopt
Sentinel’s interpretation of the policy.
Sentinel argues that none of these contradictory sections are relevant because coverage
depends on the existence of “direct physical loss of or physical damage to property,” and
Plaintiffs did not submit a claim for direct physical loss or physical damage. Doc. 19 at 4; see
Doc. 15 at 6 (“Plaintiffs are not making a claim for physical damage to the restaurant . . . .”).
While Plaintiffs may not be asking for reimbursement for physical damages, that does not mean
that no physical damage to their restaurant ever took place. If Plaintiffs did suffer physical
damage to their property, they presumably could choose to waive a claim for those repairs but
proceed on their claim for “Business Income,” if the suspension of business operations is
“caused by direct physical loss of or physical damage to property.” Doc. 6-1 at 38. Indeed,

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materials submitted by Sentinel demonstrate that Plaintiffs frequently had to pay for a contractor
to come fix their restaurant after sewage backups. Doc. 1-5 at 3.
The Court does agree with Sentinel that, if the rest of the contract is not found to render it
ambiguous, the endorsement for “Perils Specifically Excepted” does preclude Plaintiffs’ claims
here. It excludes loss that in any way results from “acts, errors or omissions by . . . others in . . .
[t]he design, specifications, workmanship, repair, construction, renovation, remodeling, grading
or compaction of . . . sewers . . . .” Doc. 6-1 at 130. Plaintiffs’ factual allegations in the proposed
Second Amended Complaint fit squarely within this language. Plaintiffs allege that Taos had
“old” sewer pipes (i.e., Taos omitted to renovate or remodel the sewer) that were “probably made
out of clay” (i.e., Taos erred in the design and construction of the sewer) and were “collapsed”
and “clogged with rocks and roots” (i.e., Taos omitted to repair the sewer). As discussed above,
however, it is not clear whether other sections of the policy render the inclusion of this
endorsement ambiguous.
B. Plaintiffs’ Allegations Sufficiently Establish that Their Claim Is Timely.
The insurance policy requires that a “legal action” against Sentinel be brought “within 2
years after the date on which the direct physical loss or physical damage occurred.” Doc. 6-1 at
48. Because Plaintiffs went out of business in September 2013, Sentinel argues this suit should
have been brought by September 2015 (almost two years before the June 23, 2017 date on which
Plaintiffs filed their lawsuit). Doc. 22 at 5.
The limitations period relied on by Sentinel is contractual, rather than statutory. Plaintiffs
argue that a breach of contract by the insured does not relieve the insurer of its own obligations
under the contract. Doc. 24 at 2 (citing Foundation Reserve Ins. Co. v. Esquibel, 1980-NMSC019, ¶ 15, 607 P.2d 1150, 1152). In Foundation Reserve, the New Mexico Supreme Court held

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that an insurer “must demonstrate substantial prejudice as a result of a material breach of the
insurance policy by the insured before it will be relieved of its obligations under a policy.” 1980NMSC-019, ¶ 15. However, that case was not decided in the context of a time-to-sue provision.
As Sentinel points out, other cases in New Mexico have held that time-to-sue provisions are
generally enforceable. Doc. 6 at 4 (citing Young v. Seven Bar Flying Serv., Inc., 1984-NMSC069, ¶ 8, 101 N.M. 545, 547). And the New Mexico Supreme Court has specifically found that
“[w]here the insurer raises the affirmative defense of violation of a time-to-sue provision, it need
not show that it was prejudiced by violation of the provision.” Green v. Gen. Acc. Ins. Co. of
Am., 1987-NMSC-111, ¶ 9, 106 N.M. 523, 525.
The insurer, however, “may be estopped from raising the affirmative defense of a timeto-sue provision.” Id. “‘Estoppel arises when an individual has been induced by the conduct of
another to do, or forebear from doing, something he would or would not have done but for such
conduct.’” Id. ¶ 10 (quoting Young, 101 N.M. at 547-48). “‘The acts and conduct generally held
to constitute a waiver of a time-to-sue provision are those acts which would lull the insured into
reasonably believing that its claim would be settled without suit.’” Id. (quoting Peoples State
Bank v. Ohio Casualty Ins. Co., 96 N.M. 751, 752-53 (1981)).
Here, Plaintiffs might possibly be able to show that estoppel should apply. See Doc. 15 at
7; Doc. 24 at 2. The First Amended Complaint alleges that Sentinel failed to timely respond to or
process the claim even though “Plaintiffs maintained contact” with the insurer and “provided
Defendants with all of the information they requested from Plaintiffs.” First Am. Compl. ¶ 20. It
also alleges that “Defendants made false statements to Plaintiffs that they were covered for their
business loss.” Id. ¶ 36. Under New Mexico law, “‘waiver of a time-to-sue provision may be
accomplished by slight acts and circumstances, and must be determined by the facts of the

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case.’” Green, 1987-NMSC-111, ¶ 12 (quoting Peoples State Bank, 96 N.M. at 752; alterations
omitted). An estoppel argument would therefore require much more factual development in order
to adjudicate it. The Court does not adopt Sentinel’s argument regarding the limitations provision
at this time.
C. The Allegations Against Defendant Beaudry May Be Amended.
The proposed Second Amended Complaint contains additional allegations concerning
Defendant Beaudry’s alleged UPA violation. See Doc. 20-1 at 5. Sentinel argues that the
proposed amendments to the UPA claim would be futile. Doc. 22 at 4-5. But both Sentinel and
Plaintiffs agree that the additional language proposed with respect to the UPA claim is not
directed to Sentinel. Doc. 22 at 4 (“the Unfair Trade Practices Act claim in Plaintiffs’ amended
complaint was not directed to Sentinel; none of the factual allegations concerned it.”); Doc. 24 at
2 (“The Unfair Trade Practices Claim (Count IV) is an alternate count directed against Defendant
Beaudry . . . .”).
Defendant Sentinel has no basis to object to a proposed amendment concerning
Defendant Beaudry. Defendant Beaudry has not been served, entered an appearance, or moved to
dismiss any claims against him.4 Thus, the Court orders that Plaintiffs may file an amended
complaint that includes additional allegations that pertain to Defendant Beaudry.
IV. Conclusion
For the above stated reasons, Plaintiffs’ Motion For Leave To File Amended Complaint
is GRANTED. Plaintiffs shall file a Second Amended Complaint within 10 days of the date of

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The parties agree that Defendant Beaudry has not been served. Doc. 22 at 1 n.1; Doc. 24 at 2.
Plaintiffs’ time for serving Defendant Beaudry has long since expired. Fed. R. Civ. P. 4(m). The
Court issues a concurrent Order to Show Cause under Rule 4(m).

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this Order. The filing of the Second Amended Complaint will moot Sentinel’s pending motion to
dismiss the First Amended Complaint (Doc. 6),5 and the Court directs Sentinel to file a notice
withdrawing that motion after the Second Amended Complaint is filed. If Sentinel wishes to
move to dismiss the Second Amended Complaint, it shall file a new motion within the time
frame permitted by Federal Rule of Civil Procedure 15(a)(3).

_____________________________________
STEVEN C. YARBROUGH
United States Magistrate Judge

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See Baca v. Quick Bail Bond & Tax Serv., No. CV 18-16 JCH/GBW, 2018 WL 3862744, at *1
(D.N.M. Aug. 14, 2018) (unpublished).
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