Cal. Dep't of Toxic Substances Control v. Jim Dobbas, Inc.

• Decision Date: 01 December 2022
• Docket Number: 20-15029
• Citation: 54 F.4th 1078
• Parties: CALIFORNIA DEPARTMENT OF TOXIC SUBSTANCES CONTROL; Toxic Substances Control Account, Plaintiffs-Appellees, v. JIM DOBBAS, INC., a California corporation; Continental Rail, Inc., a Delaware corporation; David Van Over, individually; Pacific Wood Preserving, a dissolved California corporation; West Coast Wood Preserving, LLC, a Nevada limited liability company; Collins & Aikman Products, LLC, a Delaware limited liability company, Defendants, v. Century Indemnity Company ; Allianz Underwriters Insurance Company; Chicago Insurance Company; Fireman's Fund Insurance Company ; The Continental Insurance Company, Proposed Intervenors, Movants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

54 F.4th 1078

CALIFORNIA DEPARTMENT OF TOXIC SUBSTANCES CONTROL; Toxic Substances Control Account, Plaintiffs-Appellees,

v.JIM DOBBAS, INC., a California corporation; Continental Rail, Inc., a Delaware corporation; David Van Over, individually; Pacific Wood Preserving, a dissolved California corporation; West Coast Wood Preserving, LLC, a Nevada limited liability company; Collins & Aikman Products, LLC, a Delaware limited liability company, Defendants,

v.Century Indemnity Company ; Allianz Underwriters Insurance Company; Chicago Insurance Company; Fireman's Fund Insurance Company ; The Continental Insurance Company, Proposed Intervenors, Movants-Appellants.

No. 20-15029

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 9, 2021 Pasadena, California

FILED DECEMBER 1, 2022

Nicholas M. Gedo (argued) and Thomas F. Vandenburg, Wood Smith Henning & Berman LLP, Glendale, California; Stratton P. Constantinides, Wood Smith Henning & Berman LLP, Los Angeles, California, for Movants-Appellants Century Indemnity Company, Allianz Underwriters Insurance Company, Chicago Insurance Company, and Fireman's Fund Insurance Company.

Sara M. Thorpe and Randall P. Berdan, Nicolaides Fink Thorpe Michaelides Sullivan LLP, San Francisco, California, for Movant-Appellant The Continental Insurance Company.

Laura J. Zuckerman (argued), Deputy Attorney General; Dennis L. Beck Jr., Supervising Deputy Attorney General; Rob Bonta, Attorney General of California; Office of the California Attorney General, Oakland, California; Timothy M. Thornton Jr., Gray Duffy LLP, Encino, California; for Plaintiffs-Appellees.

Before: Daniel P. Collins and Kenneth K. Lee, Circuit Judges, and M. Miller Baker,^* Judge.

Opinion by Judge Baker;

Concurrence by Judge Collins

OPINION

BAKER, Judge:

In this environmental tort action, two primary insurers and an excess insurer timely sought to intervene in the district court to defend their defunct insured and set aside its default. The district court denied their motions to intervene as of right under Federal Rule of Civil Procedure 24(a)(2), reasoning that they lacked any protected interest because the primary carriers didn't reserve their rights and the excess insurer had no duty or right to defend. The court then denied their motions to set aside the clerk's default for reasons that are unclear.

We hold that under the California direct action statute, see Cal. Ins. Code § 11580, all three insurers had a legally protected interest in defending their helpless insured and preventing the entry of default judgment. We therefore reverse the district court's denial of intervention as of right. We lack jurisdiction, however, over the insurers' appeal from the denial of their motions to set aside the default. On remand, the district court may reconsider that order given our decision today.

I

In 2014, the California Department of Toxic Substances Control and the Toxic Substances Control Account (collectively DTSC or the Department) filed suit in the district court against the current and various former owners of land in Elmira, California, as well as others who conducted operations on the site. The complaint sought relief under both state law and the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §§ 9601 – 75 (CERCLA), relating to the remediation of hazardous materials alleged to be present at the site due to business operations since 1972.

A former owner of the property during the relevant time but missing from the suit was a defunct Delaware limited liability company, Collins & Aikman Products (Collins & Aikman). In 2005, Collins & Aikman filed a Chapter 11 bankruptcy petition.

In the Collins & Aikman bankruptcy, DTSC filed a claim against the estate based on the Elmira site. To resolve that claim, the bankruptcy court's final order approving a plan of reorganization in 2007 included a stipulation preserving the Department's ability to sue Collins & Aikman in the future for the sole purpose of securing a judgment to "be paid from insurance proceeds."

Under that stipulation, the estate agreed to carve out from the bankruptcy stay an exception for "any action filed against [Collins & Aikman] to establish liability and to seek recovery of insurance proceeds." DTSC agreed that if it obtained any judgment against Collins & Aikman, the former would not "collect any money or other forms of remuneration or relief" from the latter. The bankruptcy court's approval of this stipulation thus cleared a path for DTSC to sue Collins & Aikman to access the latter's insurance coverage while leaving no skin in the game for the insured.

In 2013, a certificate of cancellation filed with the Delaware Secretary of State terminated Collins & Aikman's legal existence. See also 6 Del. Code § 18-203(a) (providing for filing such a certificate "upon the dissolution and the completion of winding up of a limited liability company").

The following year, DTSC brought this litigation. Shortly after doing so, the Department petitioned the Delaware Court of Chancery to appoint a receiver "to allow DTSC to add [Collins & Aikman] as an additional defendant" in this suit.¹ The Department explained that it wanted

to add [Collins & Aikman] as a defendant ... as the first step in pursuing historic insurance coverage of [Collins & Aikman] for DTSC's costs of cleaning up a contaminated property in California. Under California law, a judgment against [Collins & Aikman] is necessary before DTSC can pursue a direct action against the company's historic insurers. DTSC seeks to add [Collins & Aikman] as a defendant in DTSC v. Dobbas to obtain such a judgment, which in turn would allow a direct action against the company's historic insurers. DTSC will not seek enforcement of the judgment directly against [Collins & Aikman], but only as a means to pursue a direct action against the company's historic insurers. To ensure that [Collins & Aikman] has the capacity to be sued in DTSC v. Dobbas , DTSC requests that a receiver be appointed for the company under 6 Del. C. § 18-805.

(Emphasis added).² Because Collins & Aikman had no known assets, DTSC proposed "to pay the reasonable costs of the receiver appointed by the Court, unless and until an insurer of [Collins & Aikman] begins defending the company."

On December 8, 2014, the Court of Chancery granted the Department's petition and appointed a receiver with "the power, but not the obligation , to defend, in the name of [Collins & Aikman], any claims made against it in DTSC v. Dobbas. " In re: Collins & Aikman Prods., LLC , C.A. No. 10348-CB, 2014 WL 6907689, at *1 (Del. Ch.) (emphasis added). The order (drafted by DTSC) further provided that the Department would pay the receiver, "unless and until [DTSC] shows good cause why [it] should no longer be required to pay that cost." Id.

Three days later, DTSC amended its complaint to add Collins & Aikman as a defendant. After being served, the receiver—unsurprisingly as he was appointed at the behest of, and paid by, the Department—declined to file an answer or otherwise defend the suit on behalf of Collins & Aikman. DTSC promptly moved under Federal Rule of Civil Procedure 55(a) for entry of default. The clerk entered the default on March 26, 2015.

More than four years later—and after settling with the other defendants in the meantime—DTSC moved for a default judgment of around $3.2 million against Collins & Aikman on August 21, 2019. In so doing, DTSC also asked the district court to enter a declaratory judgment that Collins & Aikman "is jointly and severally liable ... for all [remediation] costs incurred after May 31, 2019, and future response costs incurred by [the Department]" in cleaning up contamination at the site.

A few weeks later, the Department's insurance consultant and agent, the Arcina Risk Group, notified the three liability insurers involved in this appeal—Allianz,³ Century, and Continental—that the Department had applied for a default judgment "against your insured [Collins & Aikman]." This notice ostensibly requested that the insurers "defend and indemnify your insured immediately" and directed them to respond to both the receiver and DTSC. It was only then—over four years after DTSC filed its initial complaint—that the insurers learned that the Department had sued Collins & Aikman in this case.

The insurers immediately moved to intervene as of right under Rule 24(a)(2) on the theory that they had an "interest" in the case—preventing the entry of default judgment as to their insured—that would likely be impaired by their absence. Fed. R. Civ. P. 24(a)(2).⁴ They also moved to set aside the district court clerk's entry of default as to Collins & Aikman. DTSC opposed these motions, all of which the district court denied. See generally Cal. Dep't of Toxic Substances Ctrl. v. Jim Dobbas, Inc. , No. 2:14-CV-00595 WBS EFB, 2019 WL 6528954 (E.D. Cal. Dec. 4, 2019).

In denying intervention as of right, the district court first observed that it had previously denied intervention by another of Collins & Aikman's insurers, Travelers, after finding that the latter's disclaimer of coverage and "refusal to defend [Collins & Aikman] under a reservation of rights forfeited its interest in the litigation" for purposes of intervention as of right under Rule 24(a)(2). Id. at *1 (citing Cal. Dep't of Toxic Substances Ctrl. v. Jim Dobbas, Inc. , No. 2:14-CV-00595 WBS EFB, 2019 WL 5390551, at *1–2 (E.D. Cal. Oct. 22, 2019) ).⁵

The district court then noted that in moving to intervene, Continental, Century, and Allianz "offer[ed] many of the same arguments Travelers did in its motion." Id. The court then rejected Continental's and Century's arguments for largely the same reasons that it rejected those made by Travelers.

As to Continental—which, unlike Travelers, did not disclaim coverage—the district court found it critical that DTSC "offered to stipulate to Continental's intervention" if Continental either accepted coverage or agreed to defend...