James River Insurance Company v. Gear ( 2021 )

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 James River Insurance Company, No. CV-20-01052-PHX-DGC 10 Plaintiff/Counterdefendant, ORDER 11 v. 12 Wendee Thompson, et. al, 13 Defendants/Counterclaimants 14 15 16 Plaintiff James River Insurance Company moves for leave to amend its complaint 17 and for reconsideration of the Court’s order staying this case. Doc. 38. The motion is fully 18 briefed (Docs. 40, 41), and oral argument will not aid the Court’s decision, see Fed. R. Civ. 19 P. 78(b); LRCiv 7.2(f). For reasons stated below, the Court will deny the motion. 20 I. Background. 21 Plaintiff insured Dr. Phillip Gear and Just for Kids, P.L.C. under a medical 22 professional insurance policy. Wendee Thompson and her parents, Joseph and Mildred, 23 sued Dr. Gear and Just for Kids in state court, asserting medical malpractice claims based 24 on Dr. Gear’s alleged failure to discover and prevent Wendee’s sexual abuse at a long-term 25 care facility and her resulting pregnancy. See Thompson v. Gear, No. CV2019-057584 26 (Maricopa Cty. Super. Ct. Dec. 24, 2019). 27 Pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201(a), Plaintiff brought 28 this federal action against Dr. Gear and Just for Kids to establish that there is no coverage 1 for the Thompsons’ state court tort claims. Doc. 1. The Court allowed the Thompsons to 2 intervene as Defendants after they had dismissed Just for Kids from the state court case 3 and Dr. Gear had assigned to the Thompsons his rights under the policy pursuant to a 4 Morris agreement. Docs. 15, 17, 24.1 Defendants filed an answer and counterclaims for 5 declaratory relief, breach of contract, and bad faith. Doc. 26. 6 In November 2020, the Court granted Defendants’ motion to stay this action in favor 7 of resolving all issues in state court. Docs. 27, 35. Defendants’ breach of contract and bad 8 faith claims were dismissed without prejudice, to be litigated in state court. Docs. 34 at 3, 9 35 at 3. 10 Plaintiff requests leave to bring a rescission claim pursuant to Rule 15 of the Federal 11 Rules of Civil Procedure, claiming that the policy should be rescinded and declared void 12 because newly discovered evidence shows that Dr. Gear made a misrepresentation on a 13 renewal application. Doc. 38 at 2-7; see Doc. 38-1 ¶¶ 7-9, 25-27, 63-68. Plaintiff also asks 14 the Court to reconsider its order staying this action if leave to amend is granted. Doc. 38 15 at 2, 7-10. Defendants oppose both requests. Doc. 40. 16 II. Leave to Amend. 17 Rule 15 provides that the Court “should freely give leave [to amend] when justice 18 so requires.” Fed. R. Civ. P. 15(a)(2). The liberal amendment policy must not only be 19 heeded, Foman v. Davis, 371 U.S. 178, 182 (1962), it must be applied with “extreme 20 liberality,” Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001). 21 The Court may deny a motion to amend a complaint if the amendment would be futile. 22 Foman, 371 U.S. at 182.2 The Court finds that granting Plaintiff leave to bring its proposed 23 rescission claim would be futile. 24 25 1 See United Servs. Auto. Ass’n v. Morris, 741 P.2d 246 (Ariz. 1987); Damron v. 26 Sledge, 460 P.2d 997 (Ariz. 1969). 2 “The standard for assessing whether a proposed amendment is futile is the same 27 as the standard imposed under Rule 12(b)(6) of the Federal Rules of Civil Procedure, although ‘viewed through the lens of the requirement that courts freely give leave to amend 28 when justice so requires.’” SCI Collaboration, LLC v. Sports Car Int’l, LLC, No. 3:20- CV-170-AC, 2020 WL 6531912, at *5 (D. Or. Nov. 5, 2020) (citations omitted). 1 Plaintiff states that in November 2020 it obtained what appears to be an entry written 2 by Dr. Gear in the Transverse Myelitis Association Journal. Doc. 38 at 4 (citing Doc. 3 38-4). In the entry, Dr. Gear described his diagnosis with transverse myelitis in November 4 2002 and the permanent physical effects he continued to suffer. Doc. 38-4 at 1-2. Plaintiff 5 claims that Dr. Gear failed to disclose this illness on his 2018 renewal application. Doc. 38 6 at 7. Specifically, Plaintiff alleges in its proposed amended complaint that Dr. Gear 7 answered “no” to question number 12 of the application, which asked whether he had been 8 diagnosed with or treated for a “chronic physical illness.” Doc. 38-1 ¶¶ 25-27. But that is 9 not what question 12 asked. It asked whether Dr. Gear had been diagnosed with or treated 10 for a “chronic physician illness[.]” Doc. 38-2 at 3 (emphasis added).3 11 Plaintiff has not addressed this discrepancy, even after Defendants raised it in their 12 response brief. See Docs. 38 at 3, 40 at 2-3 & n.2. The closest Plaintiff comes is its 13 assertion that Defendants are attempting to litigate the merits of the rescission claim in 14 arguing that “the application is ambiguous[.]” Doc. 41 at 1-2. But Defendants do not argue 15 that the application is ambiguous. They instead argued that Plaintiff cannot seek rescission 16 by arguing that the application it wrote is ambiguous. Doc. 40 at 11-12 ; see Loza v. Am. 17 Heritage Life Ins., 434 F. App’x 687, 689 (9th Cir. 2011) (“We hold that AHL was not 18 entitled to rescission because the term ‘diagnostic test for cancer’ is ambiguous[.]”); James 19 River Ins. v. Hebert Schenk, P.C., 523 F.3d 915, 922 (9th Cir. 2008) (“Because Arizona 20 tends to construe ambiguity in insurance applications in favor of the insured, Question 21 10(c) is more appropriately viewed as eliciting a subjective determination.”).4 22 Arizona law allows an insurer to rescind a policy because of a misrepresentation in 23 the application where “(1) the misrepresentation is fraudulent, (2) the misrepresentation is 24 ‘material either to the acceptance of the risk, or to the hazard assumed by the insurer,’ and 25 3 The Court can consider the application in deciding whether to grant leave to amend 26 because it forms the basis for the proposed rescission claim and is referenced in the amended complaint. See id. ¶¶ 25, 64; United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 27 2003). 4 Defendants note that because Dr. Gear is deceased, he will never be able to testify 28 as to what he thought “physician illness” could have meant when completing the application. Doc. 40 at 12. 1 (3) the ‘insurer in good faith would not have issued the policy if the true facts had been 2 made known to the insurer as required either by the application for the policy or 3 otherwise.’” James River Ins., 523 F.3d at 920-21 (quoting A.R.S. § 20-1009; ellipses 4 omitted); see Loza, 434 F. App’x at 689 (“To support a claim to rescission of an insurance 5 contract under Arizona law, AHL must establish that Loza made a fraudulent 6 misrepresentation in his insurance application.”) (citing § 20-1109 and James River); 7 Principal Life Ins. Co. v. Zaki, No. CV-15-1337-PHX-SMM, 2018 WL 10811261, at *4 8 (D. Ariz. Mar. 7, 2018) (same). 9 Plaintiff’s proposed rescission claim fails to state a plausible claim for relief because 10 Dr. Gear clearly did not misrepresent that he had no “physical” illness as the proposed 11 claim alleges. That question was not asked in the application. Thus, the very premise of 12 the proposed claim, and the basis for Plaintiff’s allegation of materiality, does not exist. 13 Plaintiff makes no allegation that Dr. Gear failed to disclose a “physician” illness, what 14 such an illness might be, or why it was material. Because the proposed amendment alleges 15 no plausible fraudulent misrepresentation on the part of Dr. Gear, it is futile as a matter of 16 law. See § 20-1109; State Comp. Fund v. Mar Pac Helicopter Corp., 752 P.2d 1, 5 (Ariz. 17 Ct. App. 1987) (“The three subparagraphs of § 20-1109 are conjunctive. All three therefore 18 must be satisfied.”); Valley Farms, Ltd. v. Transcon. Ins. Co., 78 P.3d 1070, 1074 (Ariz. 19 Ct. App. 2003) (“An insurer may not deny coverage under a policy unless the insurer can 20 prove that all three conditions of § 20-1109 have been satisfied.”). The Court therefore 21 will deny leave to amend. See Brown v. Newrez LLC, 831 F. App’x 335, 335 (9th Cir. 22 2020) (“The district court did not abuse its discretion in denying Brown’s motion for leave 23 to amend her complaint because Brown’s proposed amended complaint failed to allege 24 facts sufficient to state any plausible claim for misrepresentation . . . and therefore 25 amendment would have been futile.”); Smith v. Accredited Home Lenders, No. 2:15-cv- 26 01130-KJD-VCF, 2016 WL 1045507, at *3 (D. Nev. Mar. 15, 2016) (“The Court finds that 27 Plaintiff’s motion to amend is futile because he cannot factually support his claims of 28 1|| fraudulent misrepresentation.... Therefore, the Court denies Plaintiff’s motion to amend.’). 3|| III. Reconsideration of the Stay Order. 4 Plaintiff seeks reconsideration of the stay order only if the Court grants leave to 5|| amend. See Doc. 38 at 2, 7-8; Doc. 41 at 2, 5-6 (arguing that the Brillhart doctrine would 6|| not apply if leave to amend were to be granted, and the presence of the rescission claim would require application of the Colorado River doctrine). Given the denial of leave to 8 || amend, the request for reconsideration will be denied as moot. 9 IT IS ORDERED that Plaintiff's motion for leave to amend the complaint and for 10 || reconsideration of the order staying the case (Doc. 38) is denied. 11 Dated this 8th day of February, 2021. 12 14 David G. Campbell I5 Senior United States District Judge 16 17 18 19 20 21 22 23 24 25 26 27 28