FPI Management, Inc. v. DB Ins. Co., Ltd. ( 2021 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 FPI MANAGEMENT, INC., No. 2:21-cv-00340-MCE-DB 12 Plaintiff, 13 v. MEMORANDUM AND ORDER 14 DB INSURANCE CO., LTD., 15 Defendant. 16 17 By way of this action, Plaintiff FPI Management, Inc., (“Plaintiff”) challenges a 18 variety of coverage decisions Defendant DB Insurance Co., Ltd. (“Defendant”) has made 19 with respect to claims Plaintiff has tendered. Presently before the Court is Defendant’s 20 Motion to Dismiss two of Plaintiff’s causes of action. ECF No. 17.1 For the reasons that 21 follow, that motion is GRANTED with leave to amend in part and DENIED in part. 22 /// 23 /// 24 /// 25 /// 26 /// 27 1 Because oral argument will not be of material assistance, the Court ordered this matter 28 submitted on the briefs. E.D. Cal. Local R. 230(g). 1 BACKGROUND2 2 3 A. The Policies 4 Plaintiff is the property manager for the Lakeview Towers Apartment Homes (the 5 “Lakeview Property”), which is owned by the Lee/Wei Family Trust, whose trustees are 6 Shiuh-Kai Lee and Shu Yin J. Wei (collectively “Lakeview Owner”). Defendant issued 7 insurance policies (“Lakeview Policies”) to Lakeview Owner as the named insured and 8 Plaintiff as an insured. 9 The Business Liability Coverage section of the Lakeview Policies provides that 10 Defendant will “pay those sums that the insured becomes legally obligated to pay as 11 damages because of ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ 12 to which this insurance applies.” It further provides that Defendant has “the right and 13 duty to defend the insured against any ‘suit’ seeking those damages.” The Lakeview 14 Policies exclude coverage, however, for, among other things, “‘[b]odily injury’, ‘property 15 damage’ or ‘personal and advertising injury’ which would not have occurred, in whole or 16 in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, 17 exposure to, existence of, or presence of, any ‘fungi’ or bacteria on or within a building or 18 structure, including its contents, regardless of whether any other cause, event, material 19 or product contributed concurrently or in any sequence to such injury or damage.” The 20 Lakeview Policies also exclude coverage for “[a]ny loss, cost or expenses arising out of 21 the abating, testing for, monitoring, cleaning up, removing, containing, treating, 22 detoxifying, neutralizing, remediating or disposing of, or in any way responding to, or 23 assessing the effects of, ‘fungi’ or bacteria, by any inured or by any other person or 24 entity.” “Fungi” is defined as “any type or form of fungus, including mold or mildew and 25 any mycotoxins, spores, scents or by-products produced or released by fungi.” 26 /// 27 2 The following recitation of fact is taken, almost entirely verbatim, from Plaintiff’s operative 28 Second Amended Complaint (“SAC”). 1 B. Campana Litigation 2 On June 24, 2019, twenty-three tenants at the Lakeview Property filed a 3 complaint against the Lakeview Owner, Plaintiff, and Plaintiff’s employee, Claudine 4 Hileman, the onsite manager at the Lakeview Property (“Hileman”), for damages, 5 equitable and injunctive relief. According to the Campana complaint, the Lakeview 6 Property suffers from water intrusion issues which have caused substantial damage to 7 those plaintiffs’ units and common areas of the Lakeview Property, rendering portions of 8 the Property uninhabitable. In addition, the complaint alleges that the Lakeview Property 9 suffers from a variety of other habitability issues, including mold growth, a lack of heat, 10 and pest control problems. 11 B. Defendant’s Response to Plaintiff’s Tender of the Campana Action 12 On August 1, 2019, Plaintiff tendered the defense and indemnity of the Campana 13 action to Defendant under the Lakeview Policies on behalf of itself and Hileman. 14 Defendant subsequently sent Plaintiff a letter accepting the defense of Plaintiff and 15 Hileman, subject to a reservation of rights. As is relevant here, Defendant reserved its 16 right to deny coverage: (1) if Plaintiff and/or Hileman were not acting as the Owner’s 17 property manager in doing the acts alleged in the Campana action; and (2) for any 18 “bodily injury,” “property damage” or “personal and advertising injury” caused “in whole 19 or in part” by any “fungi” or bacteria (i.e., mold). That same day, counsel sent a separate 20 letter to Plaintiff asserting that “no information at this time that would suggest a conflict of 21 interest[.]” 22 Defendant thereafter appointed David V. Roth of Manning & Kass, Ellrod, 23 Ramirez & Trester (“Counsel”) to jointly represent all three defendants in the Campana 24 Action: the Lakeview Owner, Plaintiff, and Hileman. Plaintiff expressly objected to that 25 joint representation, referring Defendant to California Rule of Professional Conduct 1.7, 26 which precludes joint representation under certain circumstances absent the informed 27 written consent of each client. More specifically, Plaintiff argued that in the Campana 28 action Ms. Hileman would require separate counsel because of an inherent conflict of 1 interest, arising out of allegations concerning Ms. Hileman’s conduct, as to which 2 Plaintiff’s interest might best be served by a defense arguing her conduct was outside 3 the course and scope of employment. 4 Plaintiff also asserted that Defendant’s reservation of rights created conflicts that 5 gave rise to the right to independent (“Cumis”) counsel under California Civil Code 6 section 2860. According to Plaintiff, Defendant’s reliance on the Lakeview Policies’ 7 exclusion for damages caused in whole or in part by “fungi” or mold gave rise to the right 8 to independent counsel. This is because the Campana action alleged that plaintiffs 9 there suffered damages due to both water intrusion and mold, so it would be in the 10 insureds’ interests to demonstrate any and all such damages were caused solely by 11 water intrusion and not “fungi,” whereas it would be in Defendant’s interests to 12 demonstrate such damages were caused at least in part by “fungi” and therefore 13 excluded from coverage. According to Plaintiff, because counsel appointed by the 14 insurer could, through his defense strategy or decisions, affect the outcome of these 15 coverage issues, Civil Code section 2860 requires that the insureds be provided 16 independent counsel. Defendant referred these issues to Counsel who determined 17 there were no conflicts. 18 Accordingly, Plaintiff initiated this action raising a number of claims challenging 19 Defendant’s conduct in the handling of the subject claims.3 Defendant has now moved 20 to dismiss the Sixth Cause of Action for Declaratory Relief as to Plaintiff’s request for 21 Cumis counsel and the Seventh Cause of Action for Declaratory Relief as to Plaintiff’s 22 request for separate counsel. 23 /// 24 /// 25 /// 26 /// 27 3 The SAC also alleges wrongdoing with respect to certain other claims, but since they are not the 28 subject of Defendant’s Motion, they are not discussed here. 1 STANDARD 2 3 Under Federal Rule of Civil Procedure 12(b)(6), all allegations of material fact 4 must be accepted as true and construed in the light most favorable to the nonmoving 5 party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) 6 “requires only ‘a short and plain statement of the claim showing that the pleader is 7 entitled to relief’ in order to ‘give the defendant fair notice of what the . . . claim is and the 8 grounds upon which it rests.’” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) 9 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint attacked by a 10 Rule 12(b)(6) motion to dismiss does not require detailed factual allegations. However, 11 “a plaintiff’s obligation to provide the grounds of his entitlement to relief requires more 12 than labels and conclusions, and a formulaic recitation of the elements of a cause of 13 action will not do.” Id. (internal citations and quotations omitted). A court is not required 14 to accept as true a “legal conclusion couched as a factual allegation.” Ashcroft v. Iqbal, 15 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). “Factual allegations must 16 be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 17 555 (citing 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure 18 § 1216 (3d ed. 2004) (stating that the pleading must contain something more than “a 19 statement of facts that merely creates a suspicion [of] a legally cognizable right of 20 action”)). 21 Furthermore, “Rule 8(a)(2) . . . requires a showing, rather than a blanket 22 assertion, of entitlement to relief.” Twombly, 550 U.S. at 555 n.3 (internal citations and 23 quotations omitted). Thus, “[w]ithout some factual allegation in the complaint, it is hard 24 to see how a claimant could satisfy the requirements of providing not only ‘fair notice’ of 25 the nature of the claim, but also ‘grounds’ on which the claim rests.” Id. (citing Wright & 26 Miller, supra, at 94, 95). A pleading must contain “only enough facts to state a claim to 27 relief that is plausible on its face.” Id. at 570. If the “plaintiffs . . . have not nudged their 28 claims across the line from conceivable to plausible, their complaint must be dismissed.” 1 Id. However, “[a] well-pleaded complaint may proceed even if it strikes a savvy judge 2 that actual proof of those facts is improbable, and ‘that a recovery is very remote and 3 unlikely.’” Id. at 556 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). 4 A court granting a motion to dismiss a complaint must then decide whether to 5 grant leave to amend. Leave to amend should be “freely given” where there is no 6 “undue delay, bad faith or dilatory motive on the part of the movant, . . . undue prejudice 7 to the opposing party by virtue of allowance of the amendment, [or] futility of the 8 amendment . . . .” Foman v. Davis, 371 U.S. 178, 182 (1962); Eminence Capital, LLC v. 9 Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (listing the Foman factors as those to 10 be considered when deciding whether to grant leave to amend). Not all of these factors 11 merit equal weight. Rather, “the consideration of prejudice to the opposing party . . . 12 carries the greatest weight.” Id. (citing DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 13 185 (9th Cir. 1987)). Dismissal without leave to amend is proper only if it is clear that 14 “the complaint could not be saved by any amendment.” Intri-Plex Techs. v. Crest Group, 15 Inc., 499 F.3d 1048, 1056 (9th Cir. 2007) (citing In re Daou Sys., Inc., 411 F.3d 1006, 16 1013 (9th Cir. 2005); Ascon Props., Inc. v. Mobil Oil Co., 866 F.2d 1149, 1160 (9th Cir. 17 1989) (“Leave need not be granted where the amendment of the complaint . . . 18 constitutes an exercise in futility . . . .”)). 19 20 ANALYSIS 21 22 A. Sixth Cause of Action – Cumis Counsel 23 As indicated, Plaintiff contends that Defendant’s reservation of rights creates a 24 conflict of interest requiring the appointment of Cumis counsel. Defendant moves to 25 dismiss, arguing that “[a]s a matter of law . . . [it] did not reserve any coverage issues 26 that created a disqualifying conflict of interest for . . . appointed counsel.” Def.’s Mot., 27 ECF No. 17, at 8-9. 28 /// 1 California Civil Code § 2860 provides as follows: 2 (a) If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which 3 creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent 4 counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the 5 insured expressly waives, in writing, the right to independent counsel. An insurance contract may contain a provision which 6 sets forth the method of selecting that counsel consistent with this section. 7 (b) For purposes of this section, a conflict of interest does not 8 exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves 9 its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer 10 for the defense of the claim, a conflict of interest may exist. No conflict of interest shall be deemed to exist as to allegations of 11 punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy 12 limits. 13 Plaintiff has adequately stated a claim for declaratory relief pursuant to the 14 foregoing section because Defendant reserved its rights under the “fungi” exclusion, and 15 whether the damages alleged in the Campana action derive from water, which would be 16 covered, or fungi, which would not, may be controlled by Counsel. Defendant’s Motion 17 to Dismiss the Sixth Cause of Action is thus DENIED. 18 B. Seventh Cause of Action – Separate Counsel 19 Plaintiff also contends that Defendant must appoint separate, conflict-free counsel 20 for Plaintiff pursuant to California Rule of Professional Conduct 1.7. Defendant 21 challenges this claim because it is not a lawyer whose conduct is governed by those 22 Rules and because violation of the Rules does not give rise to a private cause of action. 23 The Court agrees. Plaintiff has pointed to no authority standing for the proposition that a 24 non-lawyer can be held accountable under the State Bar of California’s Rules of 25 Professional Conduct. Moreover, “[t]here is no independent cause of action for the 26 breach of a disciplinary rule.” Ross v. Creel Printing & Publishing Co., 100 Cal. App. 4th 27 736, 746 (2002). Because the Seventh Cause of Action specifically turns on 28 /// 1 | Defendant's purported obligations under Rule 1.7, Defendant’s Motion to Dismiss this 2 || cause of action is GRANTED with leave to amend. 3 4 CONCLUSION 5 6 For the foregoing reasons, Defendant’s Motion to Dismiss (ECF No. 17) is 7 | GRANTED with leave to amend in part and DENIED in part. Not later than twenty (20) 8 || days following the date this Memorandum and Order is electronically filed, Plaintiff may, 9 | but is not required to, file an amended complaint. If no amended complaint is timely 10 | filed, the cause of action dismissed above shall be deemed dismissed with prejudice 11 || upon no further notice to the parties. 12 IT IS SO ORDERED. 13 | Dated: December 13, 2021 14 tes LES, Whig { AX Xo - SENIOR UNITED STATES DISTRICT JUDGE 16 17 18 19 20 21 22 23 24 25 26 27 28