Valley Imp. Ass'n, Inc. v. U.S. Fidelity & Guar. Corp., s. 95-2144

• Citation: 129 F.3d 1108
• Decision Date: 13 November 1997
• Docket Number: Nos. 95-2144,95-2154,s. 95-2144
• Parties: 97 CJ C.A.R. 2823 VALLEY IMPROVEMENT ASSOCIATION, INC., formerly known as Horizon Communities Improvement Association of New Mexico, Inc., Plaintiff-AppelleeCross-Appellant, and Insurance Company of North America, Plaintiff-Intervenor-Appellee, v. UNITED STATES FIDELITY AND GUARANTY CORPORATION, Defendant-AppellantCross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1108

129 F.3d 1108

97 CJ C.A.R. 2823

VALLEY IMPROVEMENT ASSOCIATION, INC., formerly known as

Horizon Communities Improvement Association of New

Mexico, Inc., Plaintiff-AppelleeCross-Appellant, and Insurance Company of North America, Plaintiff-Intervenor-Appellee, v. UNITED STATES FIDELITY AND GUARANTY CORPORATION,

Defendant-AppellantCross-Appellee.

Nos. 95-2144, 95-2154.

United States Court of Appeals, Tenth Circuit.

Nov. 13, 1997.

John M. Eaves (David A. Garcia and Lisabeth L. Occhialino with him on the brief), of Eaves, Bardacke & Baugh, P.A., Albuquerque, New Mexico, for Appellee and Cross-Appellant Valley Improvement Association of New Mexico, Inc.

Alan R. Wilson (Lawrence M. Glenn and Christina Gratke Nason with him on the brief), of Dines, Wilson & Gross, P.C., Albuquerque, New Mexico, for Appellee Insurance Company of North America.

Joe A. Sturges (Matthew P. Holt with him on the brief), of Sager, Curran, Sturges & Tepper, P.C., Albuquerque, New Mexico, for Appellant and Cross-Appellee United States Fidelity & Guaranty Company.

Before KELLY, HOLLOWAY, and WEIS, ^* Circuit Judges.

HOLLOWAY, Circuit Judge.

Plaintiff-appellee/cross-appellant Valley Improvement Association, Inc. (hereinafter VIA or the insured) brought a state court declaratory judgment action in New Mexico against defendant-appellant/cross-appellee United States Fidelity & Guaranty Corporation (hereinafter USF & G) which was removed to federal court and consolidated with other declaratory actions. These consolidated actions concerned whether VIA's general liability insurance carriers, including USF & G, were obligated to defend on VIA's behalf claims made against VIA in certain state court litigation. All of the liability insurance carriers except USF & G eventually settled with VIA, including plaintiff-in-intervention/appellee Insurance Company of North America (hereinafter INA). INA, having undertaken the defense of the claims made against VIA, intervened in the instant case seeking to compel USF & G to contribute to the cost of that defense.

USF & G appeals from the federal district court's judgment, which followed a bench trial, holding that USF & G breached its duty to defend VIA in the underlying litigation in New Mexico state court. In the alternative, USF & G also contests the amount of the judgment entered in favor of INA (68.4% of some $1.6 million) and VIA (some $498,000). USF & G also appeals the district court's award of attorneys' fees to VIA for the instant case (some $301,000 and some $60,800 of prejudgment interest).

VIA cross-appeals from the district court's decision to strike VIA's third amended complaint, by which VIA had attempted to raise for the first time, claims of bad faith breach of the insurance obligation and a statutory claim of unfair practices. VIA also cross-appeals from the final judgment on the contention that the district judge erred in not awarding VIA punitive damages for bad faith or unfair practices. In this part of its cross-appeal, VIA argues that even after the third amended complaint had been stricken, VIA should have been awarded all relief supported by the evidence, as provided by Fed.R.Civ.P. 54(c). The following summary of some of the district court's findings of fact, although merely a sketch in broad terms, will serve as the context for the issues to be addressed.

I

Background. The background of this litigation is an apparently ill-fated effort to develop large tracts of land in Valencia County, New Mexico, which lie about 30 miles south of Albuquerque. The area now referred to as the Rio Communities consists of approximately 55,000 acres which have been platted into two subdivisions of approximately 100,000 lots. Our record does not reveal how many of these lots were sold by the developer, but we are informed that only about 6,000 people actually live on these lands.

The developer of this ambitious project was Horizon Corporation. Horizon formed VIA (which was originally named the Horizon Communities Improvement Association) and deeded all of the lands to it. VIA retained some of the lands, which were unplatted and were to be used for purposes such as school sites, parks and green belts. As to the bulk of the lands, VIA recorded indentures to run with the land and conveyed the properties back to Horizon. The indentures require, inter alia, the purchasers of lots to pay assessments to VIA, and require VIA to use these funds for the benefit of the properties collectively, such as for improvements including streets and drainage systems.

Horizon marketed the properties as risk free and suitable for short term investment. In administrative proceedings the Federal Trade Commission later determined that Horizon's marketing practices constituted a "vicious consumer fraud" and that the lands were particularly ill-suited for short term investment because the size of the development and its distance from Albuquerque virtually A group of purchasers of lots within the communities (hereinafter the landowners or the Yates plaintiffs) brought suit in 1986 against VIA and its individual directors. This underlying litigation (hereinafter the Yates action or the state court action) is still pending so far as our record shows. It has been the subject of one published opinion. Yates Exploration, Inc. v. Valley Improvement Association, 108 N.M. 405, 773 P.2d 350 (1989). ¹ Approximately one year after the state court action began, VIA made demand on USF & G for defense of the action. USF & G declined to assume the defense. The instant litigation concerns primarily whether USF & G was bound to defend the state court action on behalf of its insured, VIA. As we discuss below, USF & G's duty, if any, depends on the language of the policy and the allegations made against VIA by the landowners, which we shall briefly summarize.

precluded full development until well into the next century. The FTC found that Horizon had never intended to pursue full development of the properties.

Allegations made against VIA in the state court litigation. The landowners (sometimes hereinafter the Yates plaintiffs) in the state court litigation sought but were denied certification of their suit as a class action. The complaint was denominated as a "Complaint for Accounting, Declarative and Injunctive Relief, Turn Over of Funds, Damages, and Other Legal and Equitable Relief." II Aplt.App. at 515. The Yates plaintiffs have amended their complaint at least three times, but many core allegations have remained essentially unchanged. The original complaint, the one on which VIA's demand to USF & G for defense was based, is over thirty pages long. II Aplt.App. at 514-50. The primary thrust of the complaint is that the landowners had paid as much as $15 million in assessments to VIA over the years, for which the landowners had received little benefit in improvements to the subdivisions. Some of the funds received from the assessments were allegedly used unlawfully, while the bulk of the funds were simply invested rather than spent for the benefit of the properties as intended.

The landowners alleged that the assessments are unfairly made, varying greatly from lot to lot on some unknown, arbitrary basis having no relationship to the relative value of the lots. It was alleged that VIA had foreclosed against many of the properties to collect unpaid assessments, while other former owners had permitted the state to seize and sell their properties for unpaid taxes because the value of the lots had been so diminished by the failure of the development plans and the burden of the assessments imposed by the indentures. The landowners prayed for various forms of relief including dissolution of VIA, an accounting for all assessments received by VIA, invalidation of the indentures, restitution of the collected assessments, and a catch-all request for other forms of legal and equitable relief.

The Yates plaintiffs' complaint also alleged wrongful acts and conduct by VIA and Horizon to the "detriment and damage" of plaintiffs and their class, II Aplt.App. at 531; that VIA entered into a lease with one Burris permitting him to graze cattle on certain lands for five years; and that Burris grazed his cattle on the Properties during and after this period. Id. at 521. The landowners aver that their properties were grazed and overgrazed, which was wrongful conduct by VIA and Horizon. Id. at 531, 534. These allegations are important in the consideration of the insurance coverage issues in the instant case, as we shall discuss below.

VIA's insurance coverage. The Yates landowners' allegations in the state court action arguably address conduct by VIA and its directors going back to VIA's formation in 1969. From a chart prepared by the district court, II Aplt.App. 471-473, it appears that VIA first obtained general liability insurance in 1975 from USF & G. USF & G remained VIA's liability insurer for six years, after which coverage was obtained from a variety of other insurers, including appellee INA, which provided the coverage for three years.

We are told that all of the insurance carriers other than USF & G have settled with VIA.

Terms of the USF & G policy. ² The USF & G policy provided coverage for bodily injury or property damage as follows:

The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of

A. bodily injury or

B. property damage

to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the Insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent....

II Aplt.App. at 476 (emphasis added). The policy defines "property damage" as

(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting...