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 has filed a second motion for leave to 17 amend its complaint and for reconsideration of the Court’s order staying this case. Doc. 38. 18 The motion is fully briefed. Docs. 46, 52. Defendants’ request oral argument is denied 19 because it will not aid the Court’s decision. See Fed. R. Civ. P. 78(b); LRCiv 7.2(f). For 20 reasons stated below, the Court will grant the motion. 21 I. Background. 22 Plaintiff issued a medical professional insurance policy to Dr. Phillip Gear and Just 23 for Kids, P.L.C. Wendee Thompson and her parents, Joseph and Mildred, sued Dr. Gear 24 and Just for Kids in state court, asserting medical malpractice claims based on Dr. Gear’s 25 alleged failure to discover and prevent Wendee’s sexual abuse at a long-term care facility 26 and her resulting pregnancy. See Thompson v. Gear, No. CV2019-057584 (Maricopa Cty. 27 Super. Ct. Dec. 24, 2019); http://www.superiorcourt.maricopa.gov/docket/CivilCourt 28 Cases/caseInfo.asp?caseNumber=CV2019-057584 (last visited April 23, 2021). 1 Pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201(a), Plaintiff brought 2 this federal action against Dr. Gear and Just for Kids to establish that there is no coverage 3 for the Thompsons’ state court tort claims. Doc. 1. The Court allowed the Thompsons to 4 intervene as Defendants after they had dismissed Just for Kids from the state court case 5 and Dr. Gear had assigned to the Thompsons his rights under the policy pursuant to a 6 Morris agreement. Docs. 15, 17, 24.1 Defendants filed an answer and counterclaims for 7 declaratory relief, breach of contract, and bad faith. Doc. 26. 8 In November 2020, the Court granted Defendants’ motion to stay this action in favor 9 of resolving all issues in state court, finding that a stay was warranted under both the 10 Brillhart and Colorado River doctrines. Docs. 27, 35; see Brillhart v. Excess Ins. Co. of 11 Am., 316 U.S. 491, 494-95 (1942); Colo. River Water Conservation Dist. v. United States, 12 424 U.S. 800, 814-17 (1976). Defendants’ breach of contract and bad faith claims were 13 dismissed without prejudice, to be litigated in state court. Docs. 34 at 3, 35 at 3. 14 In December 2020, Plaintiff sought leave to amend its complaint and assert a 15 rescission claim, asserting that newly discovered evidence shows Dr. Gear made a 16 fraudulent misrepresentation on his 2018 renewal application. Doc. 38 at 2-7.2 Plaintiff 17 stated that in November 2020 it obtained what appears to be an entry written by Dr. Gear 18 in the Transverse Myelitis Association Journal in January 2011. Doc. 38 at 4 (citing 19 Doc. 38-4). Dr. Gear described his November 2002 diagnosis with transverse myelitis and 20 his ongoing symptoms. Doc. 38-4 at 1-2.3 21 Plaintiff claimed that Dr. Gear failed to disclose this chronic illness on the 2018 22 insurance application. Doc. 38 at 7. Specifically, Plaintiff alleged that Dr. Gear answered 23 “no” to question number 12 of the application, which, according to Plaintiff, asked whether 24 1 See United Servs. Auto. Ass’n v. Morris, 741 P.2d 246 (Ariz. 1987). 25 2 The application is dated January 22, 2018, and the policy was in effect for one year 26 beginning March 13, 2018. See Doc. 43-1 ¶¶ 24-25. 3 Generally speaking, transverse myelitis is an inflammation of the spinal cord 27 that can cause pain, sensory problems, and weakness in the legs and arms. See National Institute of Neurological Disorders and Stroke, https://www.ninds.nih.gov/Disorders/ 28 Patient-Caregiver-Education/Fact-Sheets/Transverse-myelitis-fact-sheet (last visited Apr. 23, 2021). 1 he had been diagnosed with or treated for a “chronic physical illness.” Doc. 38-1 ¶¶ 25-27. 2 But question 12 actually asked whether Dr. Gear had been diagnosed with or treated for a 3 “chronic physician illness.” Doc. 38-2 at 3 (emphasis added). 4 The Court found that the amended complaint failed to state a plausible fraudulent 5 misrepresentation on the part of Dr. Gear because he clearly did not misrepresent that he 6 had no “physical” illness as the proposed claim alleged – that question was not asked in 7 the application. Doc. 42 at 3. Because Plaintiff made no allegation that Dr. Gear failed to 8 disclose a “physician” illness, what such an illness might be, or why it was material, the 9 Court denied leave to amend as futile. Id. at 3-4. Given the denial, Plaintiff’s request for 10 reconsideration of the stay order was denied as moot. Id. at 4; see Doc. 38 at 7-8. 11 Plaintiff now seeks leave to amend “to correct the reference to the application 12 question and the wording including ‘chronic physician illness.’” Doc. 43 at 7. Plaintiff 13 asserts that “[t]he plain and ordinary meaning of ‘chronic physician illness’ is a chronic 14 illness that a physician has[,]” and that Dr. Gear was a physician who failed to disclose his 15 chronic transverse myelitis on the 2018 application. Id. at 6. Plaintiff argues that leave to 16 amend should be granted under Rule 15’s liberal amendment policy, and that the stay order 17 should be vacated because the rescission claim takes this case outside the Brillhart 18 abstention doctrine and Colorado River does not support a stay. Id. at 5-10. 19 II. Leave to Amend. 20 Rule 15 provides that the Court “should freely give leave [to amend] when justice 21 so requires.” Fed. R. Civ. P. 15(a)(2). The liberal amendment policy must not only be 22 heeded, Foman v. Davis, 371 U.S. 178, 182 (1962), it must be applied with “extreme 23 liberality,” Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001). 24 The Court may deny a motion to amend where there is undue delay or bad faith on the part 25 of the amending party, undue prejudice to the opposing party, or futility of the proposed 26 amendment. Foman, 371 U.S. at 182. 27 As the parties opposing amendment, Defendants “bear[] the burden of establishing 28 futility or one of the other permissible reasons for denying a motion to amend.” World 1 Nutrition Inc. v. Advanced Enzymes USA, No. CV-19-00265-PHX-GMS, 2021 WL 2 632684, at *1 (D. Ariz. Feb. 18, 2021); see DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 3 187 (9th Cir. 1987). Defendants contend that leave to amend should be denied on each of 4 the four grounds articulated in Foman. Doc. 46 at 7. 5 A. Futility. 6 The standard for assessing whether a proposed amendment is futile is the same as 7 the standard for motions to dismiss under Rule 12(b)(6), “although ‘viewed through the 8 lens of the requirement that courts freely give leave to amend when justice so requires.’” 9 SCI Collaboration, LLC v. Sports Car Int’l, LLC, No. 3:20-CV-170-AC, 2020 WL 10 6531912, at *5 (D. Or. Nov. 5, 2020) (citations omitted). Under Rule 12(b)(6), the 11 well-pled factual allegations of the complaint are taken as true and construed in the light 12 most favorable to the plaintiff. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). 13 A complaint that sets forth a cognizable legal theory will survive a motion to dismiss if it 14 contains “sufficient factual matter, accepted as true, to ‘state a claim to relief that is 15 plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. 16 v. Twombly, 550 U.S. 544, 570 (2007)).4 17 Arizona law allows an insurer to rescind a policy because of a misrepresentation in 18 the application where “(1) the misrepresentation is fraudulent, (2) the misrepresentation is 19 material either to the acceptance of the risk, or to the hazard assumed by the insurer, and 20 (3) the ‘insurer in good faith would not have issued the policy if the true facts had been 21 made known to the insurer as required either by the application for the policy or 22 otherwise.’” James River Ins. v. Hebert Schenk, P.C., 523 F.3d 915, 920-21 (9th Cir. 2008) 23 (quoting A.R.S. § 20-1009; ellipses omitted); see also Loza v. Am. Heritage Life Ins., 434 24 25 4 Plaintiff asserts that an amendment is futile only if “no set of facts can be 26 proved . . . that would constitute a valid and sufficient claim[.]” Doc. 52 at 2; see Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988); Conley v. Gibson, 355 U.S. 41, 27 45-46 (1957). But Twombly put to rest Conley’s “no set of facts” language. 550 U.S. at 561-63; see Fulton v. Advantage Sales & Mktg., LLC, No. 3:11-CV-01050-MO, 2012 28 WL 5182805, at *2 (D. Or. Oct. 18, 2012) (“Conley’s ‘no set of facts’ standard is no longer the Rule 12(b)(6) standard as it was abrogated by . . . Twombly[.]”). 1 F. App’x 687, 689 (9th Cir. 2011); Principal Life Ins. Co. v. Zaki, No. CV-15-1337-PHX- 2 SMM, 2018 WL 10811261, at *4 (D. Ariz. Mar. 7, 2018). 3 Plaintiff alleges in the proposed amended complaint that Dr. Gear was diagnosed 4 with transverse myelitis in 2002, that transverse myelitis is a chronic illness, and that Dr. 5 Gear had been treated continuously for the illness since his diagnosis. Doc. 43-1 ¶¶ 2, 7-9. 6 Plaintiff further alleges that Dr. Gear fraudulently misrepresented that he had not been 7 treated for a chronic physician illness in the 2018 application, that this misrepresentation 8 was material to Plaintiff’s acceptance of the risk or to the hazard it assumed, and that 9 Plaintiff in good faith would not have issued the policy if the true facts were known. Id. 10 ¶¶ 64-67. Accepting these allegations as true and drawing all reasonable inferences in 11 Plaintiff’s favor, see Cousins, 568 F.3d at 1067, the Court finds that the proposed 12 amendment pleads a rescission claim that is plausible on its face. See A.R.S. § 20-1009; 13 Iqbal, 556 U.S. at 678. 14 Defendants make several arguments as to why the rescission claim is futile. Doc. 46 15 at 7-14. None has merit. 16 1. Ambiguity. 17 Defendants argue that the phrase “chronic physician illness” in question 12 is 18 “wildly ambiguous” and therefore “cannot be relied upon as the basis for a rescission 19 claim.” Doc. 46 at 12 (citing Loza, 434 F. App’x at 689-90 (“We hold that AHL was not 20 entitled to rescission because the term ‘diagnostic test for cancer’ is ambiguous[.]”); James 21 River, 523 F.3d at 921-22 (finding no fraud because the application question was 22 ambiguous and reasonable persons could conclude that the question elicited an opinion)). 23 But in determining whether a proposed claim is futile for purposes of leave to amend, “[a]ll 24 ambiguities or doubts must . . . be resolved in the plaintiff’s favor.” Gifford v. Kampa, No. 25 2:17-CV-2421-TLN-DMC, 2021 WL 1143507, at *7 (E.D. Cal. Mar. 25, 2021) (citing 26 Jenkins v. McKeithen, 395 U.S. 411, 421 (1969)); see Hearn v. R.J. Reynolds Tobacco Co., 27 279 F. Supp. 2d 1096, 1102 (D. Ariz. 2003) (the court “must resolve any ambiguities in 28 the considered documents in the plaintiff’s favor” in ruling on a Rule 12(b)(6) motion); 1 Rajasundaram v. Maricopa Cty. Cmty. Coll. Dist., No. CV-20-01544-PHX-SPL, 2021 WL 2 1117324, at *2 (D. Ariz. Mar. 24, 2021) (the court “will take the terms of the [policies] as 3 true and resolve any ambiguities in favor of [p]laintiff” in deciding the motion to dismiss). 4 To the extent the phrase “chronic physician illness” is ambiguous, as Defendants assert, 5 the Court must accept Plaintiff’s interpretation of the phrase – a chronic illness that a 6 physician has – in deciding whether to grant leave to amend. See id. 7 Defendants cite James River, 523 F.3d at 922, and Stewart v. Mutual of Omaha 8 Insurance, 817 P.2d 44, 49 (Ariz. Ct. App. 1991), for the proposition that ambiguities in 9 insurance applications are interpreted against the insurer. Doc. 46 at 12. In its original 10 opinion in James River, the Ninth Circuit relied on Stewart in stating that Arizona 11 “construes ambiguity in insurance applications in favor of the insured[.]” 523 F.3d at 917. 12 But that opinion was later amended in light of Employers Mutual Casualty v. DGG & 13 CAR, Inc., 183 P.3d 513 (Ariz. 2008), which explained: 14 In interpreting an insurance policy, we apply “a rule of common sense” thus, “when a question of interpretation arises, we are not compelled in every case 15 of apparent ambiguity to blindly follow the interpretation least favorable to 16 the insurer.” 17 183 P.3d at 515 (quoting State Farm Mut. Auto. Ins. v. Wilson, 782 P.2d 727, 733 (1989)). 18 The amended opinion in James River clarified that Arizona “tends to construe ambiguity 19 in insurance applications in favor of the insured[.]” 523 F.3d at 917, 922 (emphasis added); 20 see also James River Ins. v. Hebert Schenk, P.C., 519 F.3d 917 (9th Cir. 2008), opinion 21 amended and superseded on denial of reh’g, 523 F.3d at 917. Contrary to Defendants’ 22 assertion, James River does not require the Court to construe any ambiguity in question 12 23 against Plaintiff. See Emps. Mut. Cas., 183 P.3d at 515 (“‘Neither language nor apparent 24 ambiguity alone is dispositive.’ Rather, even if a policy is apparently ambiguous, a 25 decision to require coverage follows after consideration of ‘legislative goals, social policy, 26 and examination of the transaction as a whole.’”) (citations and alterations omitted). 27 What is more, the cases on which Defendants rely all concerned summary judgment 28 motions. See James River, 523 F.3d at 921; Stewart, 817 P.2d at 53; Loza, 434 Fed. App’x 1 at 690; see also Emps. Mut. Cas., 183 P.3d at 515, 519. Defendants cite no legal authority 2 suggesting that the Court, in deciding at the pleading stage whether Plaintiff’s proposed 3 rescission claim is futile, must resolve any ambiguity in question 12 in Defendants’ favor. 4 Cf. Toce v. Rentch, No. 17-cv-0603-AJB-BLM, 2018 WL 280024, at *4 (S.D. Cal. Jan. 3, 5 2018) (ambiguity cannot be resolved on a motion to dismiss); Picketfence Inc. v. R.R. 6 Donnelley & Sons, No. C 07-1551 JL, 2007 WL 9811030, at *2 (N.D. Cal Nov. 6, 2007) 7 (ambiguity would be prematurely decided on a motion to dismiss); Intel Corp. v. Via Techs. 8 Inc., No. C 99-03062 WHA, 2001 WL 777085, at *6 (N.D. Cal. Mar. 20, 2001) (“contract- 9 interpretation questions should not be resolved on a motion to dismiss”). 10 2. Question 12. 11 Defendants note that question 12 of the 2018 application asked whether Dr. Gear 12 had been diagnosed with or treated for a chronic physician illness “[s]ince your last 13 application to us.” Doc. 46 at 7-8 (quoting Doc. 43-2 at 3). Dr. Gear’s last application was 14 submitted on February 17, 2017. Docs. 46 at 8, 52 at 4. According to Defendants, Plaintiff 15 can prove fraud only with evidence that Dr. Gear had been treated for a chronic physician 16 illness between his 2017 and 2018 applications. Doc. 46 at 8. Defendants argue that the 17 rescission claim is futile because Plaintiff does not allege Dr. Gear was treated for any 18 illness in 2017 or 2018. Id. 19 But the amended complaint alleges that Dr. Gear had been “continuously treated for 20 transverse myelitis since his diagnosis,” Doc. 43-1 ¶ 9 (emphasis added), an allegation 21 Defendants do not address. This allegation is plausible given the apparent permanent 22 nature of the symptoms caused by transverse myelitis. See Docs. 43-4 at 1-2 (2011 journal 23 entry describing the early stages of the disease after the 2002 diagnosis and the chronic 24 symptoms experienced over the next nine years); 52 at 5 (discussing the journal entry and 25 the alleged ongoing nature of Dr. Gear’s illness). Accepting this allegation as true and 26 drawing all reasonable inferences in Plaintiff’s favor, the Court finds that Plaintiff plausibly 27 has pled that Dr. Gear was treated for a chronic illness between the 2017 and 2018 28 applications. See Doc. 43-1 ¶¶ 7-9. 1 3. Plaintiff’s Alleged Lack of Evidence. 2 Defendants claim that “there is no evidence that Dr. Gear was diagnosed with or 3 treated for a chronic ‘physician’ illness” between 2017 and 2018, that “no reasonable jury 4 . . . could ever return a verdict in favor of [Plaintiff] on its proposed rescission claim[,]” 5 and that “judgment as a matter of law against [Plaintiff] would be the only appropriate 6 outcome.” Doc. 46 at 12. Plaintiff counters that Defendants misapprehend the standard 7 for leave to amend under Rule 15 and that their summary-judgment-type arguments are 8 premature. Doc. 52 at 1-2. The Court agrees. 9 Defendants contend that Plaintiff can offer no evidence to support the claim and that 10 judgment as a matter of law is therefore warranted. Doc. 46 at 11-12 (citing Diaz v. Eagle 11 Produce Ltd. P’Ship, 521 F.3d 1201, 1207 (9th Cir. 2008) (setting forth the summary 12 judgment standard under Rule 56)); see id. at 11-12 (repeatedly asserting that “there is no 13 evidence that Dr. Gear had TM in 2017-18”). But Defendants “cite[] no controlling 14 authority, and the Court is aware of none, holding that a court should use a summary 15 judgment standard to determine whether a proposed amendment is futile before the plaintiff 16 has had an opportunity to engage in discovery.” Weber v. Allergan Inc., No. CV-12-02388- 17 PHX-SRB, 2016 WL 8114210, at *2 (D. Ariz. Feb. 17, 2016); see also Celotex Corp. v. 18 Catrett, 477 U.S. 317, 322 (1986) (summary judgment may be appropriate “after adequate 19 time for discovery and upon motion”).5 20 4. Estoppel and Waiver. 21 Defendants argue that Plaintiff is estopped from asserting, and has waived, any 22 rescission claim because Plaintiff knew of Dr. Gear’s medical condition prior to filing this 23 declaratory judgment action and before issuing its reservation of rights letter. Doc. 46 24 at 12-13. But estoppel and waiver are affirmative defenses that should be pled in 25 Defendants’ answer to the rescission claim and, if appropriate, raised on summary 26 judgment. See Doc. 52 at 2; Fed. R. Civ. P. 8(c); Quintana v. Gates, No. CV-00-07166- 27 28 5 As explained above, Defendants’ reliance on James River and Loza is misplaced because those cases involved summary judgment. See Doc. 46 at 9, 12. 1 GAF (AJWXAA), 2004 WL 1661540, at *4 (C.D. Cal. July 20, 2004) (“Rule 8(c) explicitly 2 lists affirmative defenses which must be set forth in the answer, including . . . waiver [and] 3 estoppel[.]”); Polk Cty., Iowa v. Populous, Inc., No. 4:11-cv-00235-REL-RAW, 2012 WL 4 13026668, at *2 (S.D. Iowa Oct. 15, 2012) (“Populous also alleges the proposed 5 amendment is futile as beyond the limitations period and subject to such affirmative 6 defenses as waiver, laches or equitable estoppel. Affirmative defenses must be pleaded. 7 The amendment is not futile on its face.”). 8 5. Futility Conclusion. 9 Defendants have not met their burden of proving futility. The Court will not deny 10 leave to amend as futile. 11 B. Prejudice. 12 Defendants assert that the proposed amendment would cause “prejudice through 13 possible reconsideration of the stay order [.]” Doc. 46 at 12. But Defendants develop no 14 argument in support of this assertion, nor do they explain how lifting the stay would result 15 in unfair prejudice. “To overcome Rule 15(a)’s liberal policy with respect to the 16 amendment of pleadings[,] a showing of prejudice must be substantial.” Gen. Star Indem. 17 Co. v. First Am. Ins. Co. of Napa, No. 20-CV-03210-TSH, 2021 WL 1299044, at *4 (N.D. 18 Cal. Apr. 7, 2021) (citations omitted). Defendants have made no such showing. 19 C. Bad Faith. 20 Defendants assert that Plaintiff, in its first motion to amend, intentionally edited 21 question 12 and declined to address the actual wording. Doc. 46 at 13-14. Asserting that 22 there is no excuse for this failure, Defendants contend that Plaintiff should not be permitted 23 to address the actual language now. Id. at 14. But Defendants cite no legal authority in 24 support of this contention and have not otherwise made a strong showing of bad faith on 25 the part of Plaintiff. See Eminence Cap., LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th 26 Cir. 2003) (leave to amend generally should be granted absent prejudice or a strong 27 showing of any of the remaining Foman factors). 28 / / / 1 D. Undue Delay. 2 Defendants assert that Plaintiff had evidence of Dr. Gear’s medical condition before 3 denying coverage and has not explained how it discovered the 2011 journal entry about 4 transverse myelitis. Doc. 46 at 2. Plaintiff counters that it never knew Dr. Gear suffered 5 from transverse myelitis or the full extent of his medical condition until it discovered the 6 journal entry in November 2020. Doc. 52 at 9. Plaintiff states that it promptly sought leave 7 to amend. Id. at 10. Plaintiff also notes that this information would have come to light 8 during discovery, but claims that Defendants have managed to thwart discovery at every 9 stage of these proceedings. Id. 10 The parties’ disagreement on whether Plaintiff unduly delayed its rescission claim 11 provides no basis for denying leave to amend. “[T]he Ninth Circuit has instructed that 12 ‘delay alone no matter how lengthy is an insufficient ground for denial of leave to amend.’” 13 Terpstra v. Hamstra Heating & Cooling, Inc., No. CV 12-0850-TUC-JR, 2013 WL 14 12040005, at *1 (D. Ariz. Aug. 26, 2013) (quoting United States v. Webb, 665 F.2d 977, 15 980 (9th Cir. 1981)); see also Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 16 1079 (9th Cir. 1990) (a “delay of nearly two years [was] not alone enough to support 17 denial” of leave to amend). 18 E. The Stay Order. 19 Defendants claim that Plaintiff’s request for leave to amend violates the stay order 20 (Doc. 46 at 7), but Plaintiff also seeks reconsideration of the stay order (Doc. 43 at 7-10). 21 Defendants’ reliance on Wave Loch, Inc. v. Am. Wave Machines, Inc., No. 08-CV-928 BAS 22 NLS, 2014 WL 7261552, at *3 (S.D. Cal. Oct. 1, 2014), is misplaced. See Doc. 46 at 7. 23 While the district court case noted in passing that the stay prevented the plaintiffs from 24 filing a motion to amend, the court considered the motion on the merits. Wave Loch, 2014 25 WL 7261552, at *3. 26 F. Amendment Conclusion. 27 This Circuit has made clear that, “[a]bsent prejudice, or a strong showing of any of 28 the remaining Foman factors, there exists a presumption under Rule 15(a) in favor of 1 granting leave to amend.” Eminence Cap., 316 F.3d at 1052 (emphasis in original). 2 Defendants have failed to establish any of the Foman factors, and the proposed amendment 3 states a plausible claim for rescission under A.R.S. § 20-1109. The Court will grant 4 Plaintiff leave to file its proposed amended complaint. Doc. 43-1. 5 III. Reconsideration of the Stay Order. 6 A motion for reconsideration requires a showing of manifest error or new facts or 7 legal authority that could not have been brought to the Court’s attention earlier with 8 reasonable diligence. LRCiv 7.2(g)(1); see United Nat’l Ins. Co. v. Spectrum Worldwide, 9 Inc., 555 F.3d 772, 780 (9th Cir. 2009). The motion may not repeat previous arguments, 10 and mere disagreement with an order is an insufficient basis for reconsideration. See id.; 11 Motorola, Inc. v. J.B. Rodgers Mech. Contractors, 215 F.R.D. 581, 582 (D. Ariz. 2003).6 12 Plaintiff argues that the newly added rescission claim takes this case outside of 13 Brillhart and that Colorado River no longer supports a stay. Docs. 43 at 5-10, 52 at 8-10. 14 The Court agrees. 15 A. Brillhart. 16 “Brillhart concerns the question of whether a federal court should ‘abstain from 17 issuing a declaration in a diversity action where an action is pending in a state court 18 between the same parties presenting the same issues to avoid vexatious interference with 19 the state court’s jurisdiction.’” Zurich Am. Ins. Co. v. Omnicell, Inc., No. 18-CV-05345- 20 LHK, 2019 WL 570760, at *3 (N.D. Cal. Feb. 12, 2019) (quoting Gov’t Emps. Ins. v. Dizol, 21 133 F.3d 1220, 1225 (9th Cir. 1998)). Brillhart provides three primary factors to consider 22 in deciding whether to stay an action for declaratory relief: “[t]he district court should avoid 23 24 6 Plaintiff’s citation to Rule 59(e), which allows a court to “alter or amend a judgment,” and Rule 60(b), which allows a court to relieve a party from a “final judgment 25 [or] order,” is misplaced because the stay order is not a final order or judgment in this case. See Doc. 43 at 7-8; see also Nat’l Tr. for Historic Pres. v. Suazo, No. CV-13-01973-PHX- 26 DGC, 2015 WL 3613850, at *2 (D. Ariz. June 9, 2015) (discussing Rules 59 and 60); Balla v. Idaho State Bd. of Corr., 869 F.2d 461, 466 (9th Cir. 1989) (“Rule 59(e) ‘clearly 27 contemplates entry of judgment as a predicate to any motion.’”) (citation omitted); VienPhuong Ti Ho v. City of Long Beach, No. 2:19-cv-09430- DOC (KES), 2020 WL 28 8617674, at *8 (C.D. Cal. Nov. 10, 2020) (an “order that ‘did not resolve all the issues in this case’ was not a final order under Rule 60(b)”) (citation omitted). 1 needless determination of state law issues; it should discourage litigants from filing 2 declaratory actions as a means of forum shopping; and it should avoid duplicative 3 litigation.” Dizol, 133 F.3d at 1225.7 4 This Circuit has made clear that “there is no presumption in favor of abstention in 5 declaratory actions generally, nor in insurance coverage cases specifically.” Id. (citing 6 Aetna Cas. & Sur. v. Merritt, 974 F.2d 1196, 1199 (9th Cir. 1992) (“We know of no 7 authority for the proposition that an insurer is barred from invoking diversity jurisdiction 8 to bring a declaratory judgment action against an insured on an issue of coverage.”)). 9 “Indeed, when other claims are joined with an action for declaratory relief (e.g., bad faith, 10 breach of contract, breach of fiduciary duty, rescission, or claims for other monetary relief), 11 the district court should not . . . decline to entertain the claim for declaratory relief.” Id. 12 (citing Chamberlain v. Allstate Ins., 931 F.2d 1361, 1367 (9th Cir. 1991)); see Hartford 13 Underwriters Ins. v. Masters, No. CIV. 10-00629 JMS, 2011 WL 2173779, at *7 (D. Haw. 14 June 2, 2011) (“The Brillhart factors . . . do not apply ‘when other claims are joined with 15 an action for declaratory relief[.]’”) (quoting Dizol, 133 F.3d at 1225). 16 Plaintiff notes, correctly, that its new rescission claim is an independent, non- 17 declaratory claim that does not turn on any policy exclusion or limitation. Doc. 43 at 8. 18 Because “the Ninth Circuit holds that Brillhart abstention of the declaratory judgment 19 claim is not appropriate if the declaratory judgment claim co-exists with other independent 20 claims, such as . . . rescission[,]” Integon Preferred Ins. v. Camacho, No. 1:16-cv-01496- 21 AWI-SAB, 2018 WL 6620342, at *9 (E.D. Cal. Dec. 18, 2018), the Court “must analyze 22 whether it may . . . stay the claims under the jurisdictional doctrine set forth in Colorado 23 River[,]” United Specialty Ins. v. Bani Auto Grp., Inc., No. 18-CV-01649-BLF, 2018 WL 24 5291992, at *4 (N.D. Cal. Oct. 23, 2018). See also Nautilus Ins. v. Day to Day Fashion, 25 26 7 Other considerations may include “whether the declaratory action will settle all aspects of the controversy; whether the declaratory action will serve a useful purpose in 27 clarifying the legal relations at issue; whether the declaratory action is being sought merely for the purposes of procedural fencing or to obtain a ‘res judicata’ advantage; or whether 28 the use of a declaratory action will result in entanglement between the federal and state court systems.” Id. at 1225 n.5. 1 Inc., No. CV 17-01649 AFM, 2017 WL 5643182, at *1 (C.D. Cal. Aug. 8, 2017) 2 (“[P]laintiff seeks rescission in addition to declaration relief; therefore, the Court applies 3 the standard from Colorado River to assess defendant’s motion to stay[.]”) (citing Seneca 4 Ins. v. Strange Land, Inc., 862 F.3d 835 (9th Cir. 2017)); Zurich Am. Ins. v. Omnicell, Inc., 5 No. 18-CV-05345-LHK, 2019 WL 570760, at *5 (N.D. Cal. Feb. 12, 2019) (“Other courts 6 in the Northern District have also found Brillhart inapplicable when an action includes an 7 independent claim[.]”) (citations omitted); Atain Specialty Ins. v. Hernandez, No. 2:13- 8 CV-00530-MCE, 2014 WL 295202, at *4 (E.D. Cal. Jan. 24, 2014) (“[T]he Court must 9 exercise its diversity jurisdiction over Atain’s claim for rescission, and Hernandez’s 10 request that the Court dismiss the case under the Brillhart factors is denied.”) (emphasis 11 omitted). 12 B. Colorado River. 13 1. Standard for Staying Actions Under Colorado River. 14 Colorado River is not an abstention doctrine. United States v. State Water Res. 15 Control Bd., 988 F.3d 1194, 1202 (9th Cir. 2021). Indeed, “[t]he instances in which a court 16 can stay an action pursuant to Colorado River ‘are considerably more limited than the 17 circumstances appropriate for abstention.’” Id. (quoting Colorado River, 424 U.S. at 818). 18 “Pursuant to Colorado River, in rare cases, [and] . . . [i]n the interest of ‘wise judicial 19 administration, giving regard to conservation of judicial resources and comprehensive 20 disposition of litigation,’ a district court can dismiss or stay ‘a federal suit due to the 21 presence of a concurrent state proceeding.’” Id. (quoting Colorado River, 424 U.S. 22 at 817-18). But “[b]ecause of ‘the virtually unflagging obligation of the federal courts to 23 exercise the jurisdiction given to them, only the clearest of justifications will warrant a 24 dismissal’ or stay.” Id. (quoting Colorado River, 424 U.S. at 817-19) (internal citations 25 and brackets omitted). 26 The court’s task in such cases “is not to find some substantial reason for the exercise 27 of federal jurisdiction[, but] to ascertain whether there exist ‘exceptional’ circumstances, 28 the ‘clearest of justifications,’ that can suffice under Colorado River to justify the surrender 1 of that jurisdiction.” Id. at 1203 (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. 2 Corp., 460 U.S. 1, 25 (1983)) (emphasis in original). “‘If there is any substantial doubt as 3 to’ whether ‘the parallel state-court litigation will be an adequate vehicle for the complete 4 and prompt resolution of the issues between the parties[,] it would be a serious abuse of 5 discretion to grant the stay[.]’” Id. (quoting Moses H. Cone, 460 U.S. at 28). 6 This Circuit has identified eight factors to be considered in determining whether a 7 Colorado River stay is appropriate: “(1) which court first assumed jurisdiction over any 8 property at stake; (2) the inconvenience of the federal forum; (3) the desire to avoid 9 piecemeal litigation; (4) the order in which the forums obtained jurisdiction; (5) whether 10 federal law or state law provides the rule of decision on the merits; (6) whether the state 11 court proceedings can adequately protect the rights of the federal litigants; (7) the desire to 12 avoid forum shopping; and (8) whether the state court proceedings will resolve all issues 13 before the federal court.” Id. (citing R.R. St. & Co. Inc. v. Transp. Ins. Co., 656 F.3d 966, 14 978 (9th Cir. 2011)). These factors are not a “mechanical checklist” and should be applied 15 “in a pragmatic, flexible manner with a view to the realities of the case at hand.” Id. 16 (quoting Moses H. Cone, 460 U.S. at 16, 21). “‘The weight to be given to any one factor 17 may vary greatly from case to case,’ . . . and, in some cases, a single factor may decide 18 whether a stay is permissible[.]” Id. (quoting Moses H. Cone, 460 U.S. at 21; citing Intel 19 Corp. v. Advanced Micro Devices, Inc., 12 F.3d 908, 913 (9th Cir. 1993)). 20 2. A Stay Is No Longer Appropriate Under Colorado River. 21 In this case, “the eighth factor – ‘whether the state court proceedings will resolve 22 all issues before the federal court,’ R.R. St., 656 F.3d at 979 – controls the outcome.” Id. 23 This factor should be addressed “as a preliminary matter,” id. at 979 n.9, and asks about 24 the similarity between the state and federal suits – “[t]hough exact parallelism is not 25 required, substantial similarity of claims is necessary before [as stay] is available[,]” State 26 Water Res., 988 F.3d at 1203 (quoting Seneca Ins., 862 F.3d at 845). 27 The state court cannot resolve Plaintiff’s rescission claim because Plaintiff has not 28 raised the claim there. The Court therefore cannot have “full confidence that the parallel 1 state proceeding will end the litigation.” Intel, 12 F.3d at 913. “[T]here exists a substantial 2 doubt as to whether the state court proceedings will resolve all of the disputed issues in this 3 case, [rendering] it is unnecessary for [the Court] to weigh the other factors included in the 4 Colorado River analysis.” Id. at 913 n.7; see State Water Res., 988 F.3d at 1204 (“We have 5 repeatedly emphasized that a Colorado River stay is inappropriate when the state court 6 proceedings will not resolve the entire case before the federal court.”) (citing Intel). 7 The Court accordingly will grant Plaintiff’s motion for reconsideration and vacate 8 the stay order. See State Water Res., 988 F.3d at 1208 (finding the eighth factor 9 “dispositive” in concluding that a stay was not appropriate where the United States’ 10 immunity claim was not raised in the state court action); Dizol, 133 F.3d at 1226 n.6 11 (“Because claims of . . . rescission provide an independent basis for federal diversity 12 jurisdiction, the district court is without discretion to remand or decline to entertain these 13 causes of action.”) (quoting First State Ins. v. Callan Assocs., 113 F.3d 161, 163 (9th Cir. 14 1997)); Atain Specialty Ins., 2014 WL 295202, at *3 (“Because claims for rescission 15 ‘provide an independent basis for federal diversity jurisdiction,’ courts have repeatedly 16 found that the district court ‘is without discretion to remand or decline to entertain these 17 causes of action.’”) (quoting Dizol); United Specialty Ins., 2018 WL 5291992, at *4 18 (“Resolution of the [state court action] will clearly not resolve USIC’s rescission or 19 recoupment claims. As such, the Court cannot dismiss under Colorado River.”).8 20 Defendants contend that the rescission claim is so intertwined with the existing 21 declaratory claims that the stay should remain in place. Doc. 46 at 15-16 (citing United 22 Nat’l Ins. Co. v. R&D Latex Corp., 242 F.3d 1102, 1112 (9th Cir. 2001) (noting that on 23 two occasions the Ninth Circuit has “concluded that, despite requests for monetary relief, 24 the actions were primarily declaratory in nature and therefore jurisdiction remained 25 8 Although not requested by Defendants, the Court finds that this case does not 26 present the “rare circumstances in which [the Court] could properly issue a partial Colorado River stay.” State Water Res., 988 F.3d at 1206. The Court cannot conclude that 27 Plaintiff has sought to bring the rescission claim solely to avoid state court adjudication. See id. at 1206-07 (finding a partial stay inappropriate absent “clear-cut evidence of forum 28 shopping”); see also Doc. 35 at 1-2 (explaining that the Court cannot conclude that either party has engaged in inappropriate forum shopping). || discretionary”)). But Plaintiff's rescission claim “is independent in the sense that it could be litigated in [this Court] even if no declaratory claim had been filed.” United Nat’l Ins., || 242 F.3d at 1113. Plaintiff clearly has a right to seek rescission of the policy under A.R.S. § 20-1109, see James River, 523 F.3d at 920-21, and the Court has subject matter 5 || jurisdiction over the claim under 28 U.S.C. § 1332, see Doc. 43-1 43. The Court therefore 6 || must exercise federal jurisdiction over the claim. See United Nat’l Ins., 242 F.3d at 7\| 1113-15 (district court abused its discretion by remanding the action to state court where 8 || the district court’s subject matter jurisdiction over the insurer’s reimbursement claim was 9|| not in dispute and the “claim [was], in all probability, sufficiently independent under 10 || California law to trigger mandatory federal jurisdiction’). 11 Defendants further contend that Plaintiff has been aware of Dr. Gear’s physical 12 || condition for more than a year and could have asserted a rescission claim earlier with 13 || reasonable diligence. Doc. 46 at 14. But as noted, Plaintiff states that it did not know Dr. Gear suffered from transverse myelitis or the full extent of his medical condition until 15 || it discovered the journal entry in November 2020. Doc. 52 at 9. Defendants have not 16 || shown that any delay on the part of Plaintiff warrants keeping the stay in place. 17 IT IS ORDERED: 18 1. Plaintiffs second motion for leave to amend the complaint and for 19 || reconsideration of the order staying the case (Doc. 43) is granted. 20 2. The Court’s stay order (Doc. 35) is vacated. 21 3. Plaintiff shall file the proposed complaint (Doc. 43-1) by May 14, 2021. 22 4. The parties shall file a new joint report proposing scheduling deadlines (see 23 || Doc. 28 at 8-11) by May 21, 2021. The Court will enter a case management order after 24 || receiving the report. 25 Dated this 7th day of May, 2021. □□□ 6 Cou 27 wv an plhtl 28 David G. Campbell Senior United States District Judge 16