Hotchalk, Inc. v. Scottsdale Ins. Co.
| Decision Date | 15 November 2016 |
| Docket Number | No. C 16–3883 CW,C 16–3883 CW |
| Citation | 217 F.Supp.3d 1058 |
| Parties | HOTCHALK, INC., Plaintiff, v. SCOTTSDALE INSURANCE CO., Defendant. |
| Court | U.S. District Court — Northern District of California |
Peter Roldan, Christopher Allen Wimmer, Emergent Legal, San Francisco, CA, for Plaintiff.
Alexis Rogoski, Jonathan Andrew Sorkowitz, Skarzynski Black LLC, New York, NY, Hee Young Lee, Herman & Lee, LLP, Sonoma, CA, for Defendant.
ORDER GRANTING DEFENDANT SCOTTSDALE'S MOTION FOR JUDGMENT ON THE PLEADINGS
Defendant Scottsdale Insurance Co. files a motion under Rule 12(c) which provides for a motion for judgment on the pleadings, although Scottsdale titled it a motion to dismiss Plaintiff HotChalk Inc.'s complaint. Docket No. 16. HotChalk has filed a response, and Scottsdale has filed a reply. Also before the Court is Scottsdale's request for judicial notice. Docket No. 16–1. Having considered oral argument on the motions and the papers submitted by the parties, the Court GRANTS Scottsdale's motions. The Court grants HotChalk leave to file an amended complaint within seven days, if it can properly do so.
This case arises out of an insurance coverage dispute between HotChalk and Scottsdale. HotChalk alleges Scottsdale sold it a business and management indemnity policy, EKS3115498, providing directors and officers coverage for the period November 13, 2013 to November 13, 2014. HotChalk alleges Scottsdale violated the policy when it refused to defend and indemnify HotChalk in a lawsuit alleging violations of the False Claims Act.
HotChalk helps universities create or expand their online degree programs. HotChalk's services broadly include promoting and administering those programs, including recruiting students.
On April 10, 2014, former employees of HotChalk filed a qui tam complaint against the company and its university clients, alleging violations of the False Claims Act, 31 U.S.C. § 3729, which prohibits knowingly submitting false claims to the government for payment or approval. The False Claims Act allows private citizens to sue on behalf of the United States. 31 U.S.C. § 3729(b). The qui tam plaintiffs alleged HotChalk falsely certified to the United States Department of Education that it complied with Title IV of the Higher Education Act of 1965. The Higher Education Act prohibits any institution that participates in the grant and loan programs authorized under the Act from paying employees charged with admissions or financial aid "any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid." 20 U.S.C. § 1094(a)(20) ; see also 34 C.F.R. § 668.14(b)(22). The qui tam plaintiffs alleged HotChalk provided numerous forms of incentive payments to employees charged with recruiting students, and committed other violations. HotChalk is a for-profit corporation, but the qui tam plaintiffs alleged that it was required to comply with the incentive compensation ban, as were the co-defendant universities. See 20 U.S.C. § 1094(c) (); 34 C.F.R. § 668.25 ().
On May 14, 2014, HotChalk tendered the lawsuit to its insurers including Scottsdale. On June 11, Scottsdale denied coverage on the grounds that the claims against HotChalk arose out of the company's professional services rendered to its customer universities and were therefore excluded from coverage under the policy.
Although the United States did not formally intervene in the case, it convened settlement negotiations. On August 20, 2015, HotChalk reached a settlement with the United States and the qui tam plaintiffs under which it agreed to pay $500,000 to the United States and $470,000 to the plaintiffs for their attorneys' fees. HotChalk asserts it incurred $986,746 in attorneys' fees and costs to defend itself in the qui tam litigation.
On June 10, 2016, HotChalk filed a complaint against Scottsdale in San Francisco Superior Court for breach of contract and breach of the implied covenant of good faith and fair dealing. On July 11, the case was removed. HotChalk demands compensatory and consequential damages and its attorneys' fees.
A motion for judgment on the pleadings, like a motion to dismiss for failure to state a claim, addresses the sufficiency of a pleading. The motions are "functionally identical" and the test established in Ashcroft v. Iqbal , 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), applies to motions brought under either rule. Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc. , 637 F.3d 1047, 1055 n.4 (9th Cir. 2011) (quoting Dworkin v. Hustler Magazine Inc. , 867 F.2d 1188, 1192 (9th Cir. 1989) ).
As a result, "[d]ismissal under Rule 12(b)(6), and by analogy under 12(c), is appropriate only where the complaint ‘lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.’ " Nazomi Commc'ns, Inc. v. Nokia Corp. , 2011 WL 2837401, at *1 (N.D. Cal.)(citing Cafasso and quoting Mendiondo v. Centinela Hosp. Med. Ctr. , 521 F.3d 1097, 1104 (9th Cir. 2008) ); see Iqbal , 556 U.S. at 663, 129 S.Ct. 1937 (citing Fed. R. Civ. P. 8(a)(2) and Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555–56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). In considering whether the complaint is sufficient to state a claim, the court will take all material allegations as true and construe them in the light most favorable to the plaintiff. NL Indus., Inc. v. Kaplan , 792 F.2d 896, 898 (9th Cir. 1986). However, this principle is inapplicable to legal conclusions; "threadbare recitals of the elements of a cause of action, supported by mere conclusory statements," are not taken as true. Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly , 550 U.S. at 555, 127 S.Ct. 1955 ). The court may consider, in addition to the face of the pleadings, exhibits attached to the pleadings, Durning v. First Boston Corp. , 815 F.2d 1265, 1267 (9th Cir. 1987), and facts which may be judicially noticed, Mullis v. United States Bankr. Court , 828 F.2d 1385, 1388 (9th Cir. 1987).
When granting a motion to dismiss, the court is generally required to grant the plaintiff leave to amend, even if no request to amend the pleading was made, unless amendment would be futile. Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc. , 911 F.2d 242, 246–47 (9th Cir. 1990) ; see Pac. W. Grp., Inc. v. Real Time Sols., Inc. , 321 Fed.Appx. 566, 569 (9th Cir. 2008). In determining whether amendment would be futile, the court examines whether the complaint could be amended to cure the defect requiring dismissal "without contradicting any of the allegations of [the] original complaint." Reddy v. Litton Indus., Inc. , 912 F.2d 291, 296 (9th Cir. 1990).
As a preliminary matter, Scottsdale has asked the Court to take judicial notice of certain documents, and both parties cite the documents throughout their papers. Scottsdale seeks judicial notice of the complaint in the underlying False Claims Act litigation, the complaint in the instant lawsuit, and attachments to both complaints including the underlying insurance policy and a service agreement between HotChalk and one of its customer universities. HotChalk has not opposed. On a Rule 12(c) motion, the Court may consider certain materials beyond the pleadings, including exhibits to the non-moving party's pleading, Durning , 815 F.2d at 1267, and facts that can be judicially noticed, Mullis , 828 F.2d at 1388. Documents in public court records may be judicially noticed. Biagro W. Sales Inc. v. Helena Chem. Co. , 160 F.Supp.2d 1136, 1140 (E.D. Cal. 2001) (). A court may also take judicial notice of documents that are referenced in the complaint or central to the claims and undisputedly authentic. EFK Investments, LLC v. Peerless Ins. Co. , 2014 WL 4802920, at *2 (N.D. Cal.) (). Accordingly, Scottsdale's request for judicial notice is GRANTED.
California substantive insurance law governs this diversity case. See Encompass Ins. Co. v. Coast Nat'l Ins. Co. , 764 F.3d 981, 984 (9th Cir. 2014). Under California law, interpretation of an insurance policy and whether it provides coverage is a question of law to be decided by the court. Waller v. Truck Ins. Exch., Inc. , 11 Cal.4th 1, 18, 44 Cal.Rptr.2d 370, 900 P.2d 619 (1995), as modified on denial of reh'g (1995).
An insurance carrier "owes a broad duty to defend its insured against claims that create a potential for indemnity."
Horace Mann Ins. Co. v. Barbara B. , 4 Cal.4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993) ; see also Gray v. Zurich Ins. Co. , 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168 (1966) . "Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded." Horace Mann Ins. , 4 Cal.4th at 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792. However, the duty to defend is not unlimited; it is measured by the nature and kinds of risks covered by the policy. Waller , 11 Cal.4th at 19, 44 Cal.Rptr.2d 370, 900 P.2d 619. The duty to defend is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded. Montrose Chem. Corp. v. Super. Ct. , 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993).
The burden is on the insured to establish the existence of a potential for coverage. Montrose Chem. , 6 Cal.4th at 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153. Any doubt as to whether the facts establish the...
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