Morden et al v. XL Specialty Insurance
Filing
92
MEMORANDUM DECISION and ORDER granting 81 Motion to Dismiss Remaining Counterclaim without prejudice; denying 82 Motion to Amend Complaint. Signed by Judge Clark Waddoups on 7/29/2016. (blh)
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION
JAMES MORDEN, et al.,
Plaintiffs,
MEMORANDUM DECISION AND
ORDER
v.
XL SPECIALTY INSURANCE CO.,
Defendant.
Case No. 2:14-cv-00224
Judge Clark Waddoups
Before the court are Defendant XL Specialty Insurance Company’s (XL’s) motion to
voluntarily dismiss its counterclaim (Dkt. No. 81) and Plaintiffs James, Jenalyn, and Wade
Morden’s (collectively, the Mordens’) motion to amend the complaint (Dkt. No. 82). For the
reasons that follow, the court now grants the motion to dismiss and denies the motion to amend.
BACKGROUND
This case arises out of the Mordens’ complaint against XL for bad faith denial of
insurance coverage and breach of its fiduciary duty to its insureds, Terry Deru and Belsen Getty
(collectively, Belsen Getty), stemming from XL’s determination that the Mordens’ claim was not
covered under Belsen Getty’s policy because it was excluded by the policy’s interrelated
wrongful acts provision. (Dkt. No. 2). XL answered the complaint, asserting twenty-five
affirmative defenses and claiming that various policy exclusions, in addition to the interrelated
wrongful acts exclusion, applied to exclude coverage for the Mordens’ claim. (Dkt. No. 12). XL
also filed a counterclaim for declaratory judgment that “no coverage exists under the Policy for
any aspect of the Morden Action, that no coverage exists under the Policy for any part of the
Mordens’ and the [Belsen Getty’s] alleged settlement of the Morden Action, that XL is not
obligated to pay any part of any such settlement, and that XL did not act in bad faith with respect
to the Morden Action” because 1) the Mordens’ claim was excluded from coverage under the
policy’s interrelated wrongful acts provision, and 2) the Mordens’ claim was excluded from
coverage because it was based on Belsen Getty’s rendering of investment services. (Id.).
The Mordens sought partial summary judgment on eight of XL’s affirmative defenses
and on XL’s declaratory judgment counterclaim involving the interrelated wrongful acts
provision. In turn, XL sought judgment that it had not acted in bad faith or breached its fiduciary
duties in denying the Mordens’ claim. Five motions and cross-motions for summary judgment,
(Dkt. Nos. 25, 30, 46, 50, 53), a lengthy oral argument, and supplemental briefing (Dkt. Nos. 67,
70, 71, 72, 76, 77, 78, 79) followed. Ultimately, the court issued a memorandum decision and
order granting the Mordens’ motion for summary judgment on XL’s counterclaim that the
Mordens’ claim did not fall within the policy’s interrelated wrongful acts exclusion. (Dkt. No.
80). But the court nevertheless concluded that XL was entitled to summary judgment on the
Mordens’ complaint because, irrespective of whether there was coverage under the policy, XL
did not act in bad faith or breach its fiduciary duties in concluding that the Morden claim was not
covered. (Id.).
XL has now sought to dismiss its remaining counterclaim for declaratory judgment
without prejudice. (Dkt. No. 81). The Mordens oppose the motion and have moved to amend
their complaint to add a claim that XL is contractually obligated to indemnify Belsen Getty for
the Mordens’ claim up to the policy limit of $1,000,000. (Dkt. Nos. 82, 85). The Mordens assert
that amendment is necessitated by XL’s dismissal of its counterclaim because the counterclaim is
the inverse of an indemnification claim and, therefore, resolution of the counterclaim would have
required the court to determine whether there was coverage under the policy. (Id.). Thus, the
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Mordens argue, it was unnecessary for them to affirmatively plead an indemnification claim
against XL so long as XL’s counterclaim was in play. (Id.). Alternatively, the Mordens request
that the court award them attorney fees incurred litigating XL’s counterclaim.
Because the Mordens’ basis for amendment is XL’s dismissal of its counterclaim (see
Dkt. No. 86 pp. 3–4), the court begins by considering the motion to dismiss. Because the court
concludes XL is entitled to voluntarily dismiss its counterclaim, the court next considers whether
this dismissal establishes good cause for amendment. Ultimately, the court concludes
amendment is not appropriate in these circumstances.
ANALYSIS
A. XL is entitled to dismiss its counterclaim.
XL asks the court to dismiss its counterclaim pursuant to Federal Rule of Civil Procedure
41(a)(2). Rule 41(a)(2) permits a party to dismiss an action voluntarily “only by court order, on
terms that the court considers proper.” Brown v. Baeke, 413 F.3d 1121, 1123 (10th Cir. 2005)
(internal citation omitted). But “[a]bsent legal prejudice to the defendant, the district court
normally should grant such a dismissal.” Ohlander v. Larson, 114 F.3d 1531, 1537 (10th Cir.
1997) (internal quotation marks omitted). Although the “parameters of what constitutes ‘legal
prejudice’ are not entirely clear,” the Tenth Circuit has identified several non-exhaustive factors
a court should consider, including: “the opposing party’s effort and expense in preparing for
trial; excessive delay and lack of diligence on the part of the movant; insufficient explanation of
the need for a dismissal; and the present stage of the litigation.” Id. The district court is cloaked
with wide discretion in evaluating whether dismissal is appropriate given the unique
circumstances presented by any given case. Brown, 413 F.3d at 1124 (explaining that a district
court’s exercise of this discretion will be upheld unless it was “arbitrary, capricious, whimsical,
3
or manifestly unreasonable”). Considering XL’s motion to dismiss under the factors identified by
the Tenth Circuit and the circumstances presented here, the court concludes that voluntary
dismissal is appropriate.
To begin, XL’s justification for dismissal is persuasive. XL’s position in this litigation
was that if there is no coverage under the policy, it could not have acted in bad faith in denying
the Mordens’ claim. The determination that XL neither acted in bad faith nor breached any
fiduciary duties—irrespective of whether the Mordens’ claim was covered—renders declaratory
judgment as to coverage, from XL’s perspective, irrelevant. Likewise, there does not appear to
be excessive delay or lack of diligence on XL’s part in bringing this motion because it made the
request shortly after the court’s ruling that it had not acted in bad faith, rendering moot XL’s
interest in obtaining a declaratory judgment as to coverage. There is currently no trial date set
and the court has resolved all of the pending dispositive motions. Accordingly, dismissal at the
present stage of the litigation is appropriate.
Also weighing strongly in favor of dismissal is the fact that the Mordens do not identify
any significant effort or expense that will be lost if XL is entitled to dismiss its counterclaim.
And the court finds it is unlikely that the Mordens expended significant efforts in litigating the
coverage issue. Indeed, the Mordens only moved for partial summary judgment as to several
exclusions under the policy and the interrelated wrongful acts counterclaim. No party moved for
summary judgment on the ultimate issue of coverage. Moreover, there are other exclusions in the
policy that might preclude coverage for the Mordens’ claim, the applicability of which have not
been litigated. For instance, the policy contains an exclusion that precludes coverage for claims
that are based upon Belsen Getty’s rendering of investment banking services1 or for claims that
1
This exclusion is the subject of XL’s counterclaim.
4
are brought about by any intentionally dishonest, fraudulent or criminal act or omission. (Dkt.
12-1, pp. 21, 22). The court would be required to resolve the applicability of these—or any other
exclusions—before it granted XL declaratory judgment as to the issue of coverage.
Finally, the court finds that dismissal will not unfairly prejudice any relief the Mordens
may seek against XL. Although the Mordens are correct that XL sought declaratory judgment
that no coverage exists under the policy, their decision to rely on XL’s counterclaim to provide
them affirmative relief in the form of indemnification does not preclude voluntary dismissal.
Contrary to the Mordens’ argument, XL’s claim for declaratory judgment is not the inverse of an
affirmative claim for indemnification. In an analogous circumstance, a district court in the Tenth
Circuit considered whether a counterclaim for a declaratory judgment determining whether an
insurer had any liability in connection with its insurance policy was the mirror image of the
insured’s claims for breach of contract, negligence, and bad faith. Blue Cross & Blue Shield of
Kansas, Inc. v. St. Paul Mercury Ins. Co., No. 89-4114-R, 1990 WL 41403, at *1 (D. Kan. Mar.
23, 1990). In concluding that the claims were not the inverse of each other, the court reasoned
that
[d]efendants would have every right to seek a judgment declaring that their
interpretation of the contract is the correct one. A ruling adverse to plaintiff on
plaintiff’s claim would merely result in a judgment that plaintiff was not entitled
to the relief requested; although it might logically follow from that judgment that
defendants’ interpretation of the contract was the correct one, defendants would
not be entitled to a judgment to that effect unless they specifically requested one.
Id. (quoting Iron Mountain Sec. Storage v. Am. Specialty Foods, Inc., 457 F.Supp. 1158, 1161–
62 (E.D.Pa. 1978)). The court believes this reasoning applies with equal force here.
Rather than be the inverse of an indemnification claim, there could be many reasons why
XL’s counterclaim could fail, even without the court reaching the coverage issue. The Mordens’
affirmative defenses illustrate this point well. As the Mordens asserted in their reply to XL’s
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counterclaim, XL’s own unclean hands might bar its claim for declaratory judgment. Or perhaps
XL’s counterclaim is “barred . . . based on its own breaches of the [p]olicy.” (Dkt. No. 19).2 But
certainly if the Mordens had successfully moved for summary judgment on XL’s counterclaim
on the basis of one of these (or any other) affirmative defenses, the court could have dismissed
XL’s counterclaim without ever reaching the coverage issue. And in this instance the Mordens
would have no enforceable judgment for indemnification in any particular amount. If the
Mordens wished to have a policy determination as to coverage that would entitle them to a
judgment for indemnification, they could have included a claim for indemnification in their
complaint. Nothing prevented them from asserting such a claim in addition to the bad faith
claims. See Fed. R. Civ. P. 8(d) (permitting a party to plead alternative and inconsistent claims).
Thus, any possible prejudice to the Mordens as a result of their reliance on XL’s counterclaim to
provide them affirmative relief, which the court could have dismissed at any time without
making a coverage determination, is prejudice of their own making. Accordingly, the Mordens
have not established that they will be unfairly prejudiced by dismissal of XL’s counterclaim and
XL is entitled to dismissal under Rule 41(a)(2).
B. The Mordens have not established good cause for amendment.
The court’s dismissal of XL’s counterclaim requires the court to determine if this
dismissal should entitle the Mordens to amend their complaint. Because the Mordens seek to
amend the complaint after the time for amendment under the court’s scheduling order has
2
Of course, asserting that a defendant’s own contractual breaches preclude recovery is fundamentally
different from asserting an affirmative claim for indemnification. There could be breaches that preclude recovery
that are different from the breach of the obligation to indemnify. Importantly, the Mordens do not assert an
affirmative defense that XL’s claim for declaratory judgment fails because there was coverage under the Policy. (See
Dkt. No. 19, pp. 6–7).
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expired,3 they must demonstrate both “(1) good cause for seeking modification under Fed. R.
Civ. P. 16(b)(4) and (2) satisfaction of the Rule 15(a) standard.” Gorsuch, Ltd., B.C. v. Wells
Fargo Nat. Bank Ass’n, 771 F.3d 1230, 1240 (10th Cir. 2014). The court begins by considering
Rule 16’s good cause requirement.
The court has the discretion to determine whether the moving party has established good
cause in any particular case. Birch v. Polaris Indus., Inc., 812 F.3d 1238, 1249 (10th Cir. 2015).
In the Tenth Circuit, good cause “requires the movant to show the scheduling deadlines cannot
be met despite [the movant’s] diligent efforts.” Id. “Rule 16’s good cause requirement may be
satisfied, for example, if a plaintiff learns new information through discovery or if the underlying
law has changed.” Id. But “[i]f the plaintiff knew of the underlying conduct but simply failed to
raise [the appropriate] claims, however, the claims are barred.” Id.; accord Woolsey v. Marion
Labs., Inc., 934 F.2d 1452, 1462 (10th Cir. 1991) (“Where the party seeking amendment knows
or should have known of the facts upon which the proposed amendment is based but fails to
include them in the original complaint, the motion to amend is subject to denial.”). Good cause
to amend does not exist where a party fails to bring an available claim due to an error of law or
fact, a strategic decision, or a mere oversight. Two cases illustrate this principle.
In Gorsuch, the Tenth Circuit considered whether the plaintiffs had established good
cause to amend the complaint, after the time permitted by the scheduling order, when they
attempted to add tort claims after the district court dismissed their third-party beneficiary
contract claims. 771 F.3d at 1242. In support of amendment, the plaintiffs argued that the
economic loss doctrine barred them from bringing tort claims while their third-party beneficiary
claims were pending. Thus, they asserted that they had good cause for the belated amendment
3
Under the scheduling order, amendment was to occur no later than December 19, 2014. (Dkt. No. 21).
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because the tort claims were made available only after the district court’s dismissal of the
contractual claims. The Tenth Circuit disagreed. It rejected the argument that the economic loss
rule was applicable to the tort claims and reasoned, therefore, that because plaintiffs could have
asserted their tort claims within the deadline established by the court’s scheduling order, they
had not established good cause for amendment. Id.
Likewise, in Zisumbo v. Ogden Regional Medical Center, the Tenth Circuit considered
whether amendment beyond the scheduling order date should be permitted. 801 F.3d 1185, 1196
(10th Cir. 2015), cert. denied, 136 S. Ct. 1660 (2016). There, the plaintiff sued his employer for
race discrimination and retaliation in violation of Title VII and for breach of the implied duty of
good faith and fair dealing under Utah law. He subsequently moved to amend his complaint to
add a § 1981 claim and additional state law claims based on the same facts underlying the Title
VII race discrimination claims. Id. at 1194. He offered two explanations for the untimely
amendment: first, that his lawyer did not realize until later that he could assert a § 1981 claim
and second, that he only learned of the facts necessary to assert the state law claims in discovery.
Id. at 1196. The Court rejected both arguments, holding that amendment was not appropriate
because the plaintiff possessed all of the facts necessary to assert these claims well before the
deadline for amending the complaint had expired. Id. The court explained, “belated realizations”
that a claim not previously pled may be available, absent new facts, “do not justify granting an
untimely motion to add new claims.” Id.4
Considering the Mordens’ motion to amend in light of this authority, the court must
conclude that the Mordens have not shown good cause for amendment. Here, the Mordens do not
4
Notably, the Court in Zisumbo considered this issue under Rule 15’s more lenient standard. 801 F.3d
1185, 1196 (10th Cir. 2015).
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dispute that they failed to raise any affirmative claim for breach of the contractual obligation to
indemnify Belsen Getty within policy limits within the time permitted by the scheduling order.5
Nor do they argue that they learned of new information or relevant law that would implicate an
express breach of contract claim. To the contrary, it is undisputed that the Mordens knew all of
the facts and law necessary to raise an indemnification claim at the time they filed their initial
complaint. Nevertheless, the Mordens contend there is good cause to amend due to XL’s
dismissal of its counterclaim because they relied on the existence of the counterclaim to provide
them affirmative relief in the form of indemnification at policy limits. This argument is
unpersuasive.
As explained, XL’s declaratory judgment action is not the inverse of a claim that XL had
a duty to indemnify Belsen Getty for the Mordens’ claim. True, if XL successfully pursued the
counterclaim it would have a judicial declaration that it was under no obligation to indemnify
Belsen Getty. But the inverse is not automatically true. There are many scenarios in which the
court could have rejected XL’s counterclaim without ever making a definitive coverage
determination. And even if the court did decide the declaratory judgment issue in the Mordens’
favor, the Mordens still would not have enforceable judgment for damages in any particular
amount. If the Mordens wanted a judgment for indemnification up to policy limits, nothing
prevented them from bringing such a claim at the time they filed their complaint. Thus, as in
Gorsuch and Zisumbo, the Mordens’ decision not to plead an affirmative claim for relief in
reliance on the counterclaim—whether the result of a strategic decision, an erroneous assumption
5
This is confirmed by reference to the Mordens complaint, which seeks damages in the amount of
$5,434,730 (Dkt. No. 2) and the Mordens’ briefing in support of its motions for summary judgment, (see, e.g., Dkt.
No. 25 (stating, “this is an action to recover against XL for its bad-faith failure to settle claims”); Dkt. No. 46
stating, “the Mordens assert third-party bad faith claims against XL”). Notably, the Mordens do not assert that they
have always pled an express breach of contract claim, nor do they ask the court to reconsider its prior ruling that its
resolution of the Mordens’ bad faith claims resolved the Mordens’ complaint in its entirety.
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of law or fact, or mere oversight—does not present grounds for amendment now that the
counterclaim has been dismissed. Accordingly, amendment is prohibited by Rule 16(b)(4).6
CONCLUSION
For the foregoing reasons, the court GRANTS XL’s motion to voluntarily dismiss its
remaining counterclaim without prejudice (Dkt. No. 81). The court further DENIES the
Mordens’ request for attorney fees as a result of litigating XL’s counterclaim because the
Mordens have not identified any fees they incurred litigating this issue. The court also DENIES
the Mordens’ motion to amend the complaint (Dkt. No. 82). This ruling now resolves all the
claims with respect to all the parties. Therefore, the Clerk of Court is directed to enter final
judgment in XL’s favor as to the Mordens’ bad faith and breach of fiduciary duty claims, and
enter judgment in the Mordens’ favor as to XL’s counterclaim for declaratory judgment related
to the interrelated wrongful acts provision.
SO ORDERED this 29th day of July, 2016.
BY THE COURT:
____________________________________
Clark Waddoups
United States District Judge
6
This conclusion makes it unnecessary for the court to consider whether amendment would be permitted
under Rule 15(a)’s more lenient standard. See Gorsuch, 771 F.3d at 1242 (“Having concluded [plaintiffs] lacked
good cause to amend their pleadings after the scheduling order deadline, we need not reach the Rule 15(a) issue, and
decline to do so.”).
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