Landmark Am. Ins. Co. v. Navigators Ins. Co., Case No. 18-cv-05504-CRB

• Decision Date: 14 December 2018
• Docket Number: Case No. 18-cv-05504-CRB
• Citation: 354 F.Supp.3d 1078
• Parties: LANDMARK AMERICAN INSURANCE COMPANY, Plaintiff, v. NAVIGATORS INSURANCE COMPANY, et al., Defendants.
• Court: U.S. District Court — Northern District of California

354 F.Supp.3d 1078

LANDMARK AMERICAN INSURANCE COMPANY, Plaintiff,

v.NAVIGATORS INSURANCE COMPANY, et al., Defendants.

Case No. 18-cv-05504-CRB

United States District Court, N.D. California.

Signed December 14, 2018

Teresa Cho, Musick Peeler Garrett LLP, Los Angeles, CA, for Plaintiff.

Robert Lee Sallander, Jr., Greenan Peffer Sallander & Lally LLP, San Ramon, CA, Tung Khuu, James Christian Nielsen, Nielsen Haley and Abbott LLP, San Rafael, CA, for Defendants.

ORDER GRANTING MOTION FOR JUDGMENT ON THE PLEADINGS AND TO DISMISS CLAIM

CHARLES R. BREYER, United States District Judge

In this motion, Defendant Navigators' Insurance Company ("Navigators") argues that under the terms of its policy, it has no duty to defend its insured, Independent Adoption Center ("IAC"), in a Trustee's Adversary Proceeding ("Trustee's Suit"). See generally Nav. Mot. (dkt. 24). Navigators is correct, for at least two reasons.

I. Background

IAC was a nonprofit that matched birth mothers with adopting parents and provided related counseling services to adopting parents. Compl. (dkt. 1) ¶ 11. Plaintiff Landmark American Insurance Company ("Landmark") issued a D & O policy to IAC that was in effect from March 24, 2015, to March 24, 2016 ("Landmark Policy"). Id. ¶ 8; id. Ex. 1. Navigators issued the D & O policy that began as soon as Landmark's ended; it was in effect from March 24, 2016 to March 24, 2017 ("Navigators Policy"). Id. ¶ 9; id. Ex. 2.¹ In January of 2016, during the Landmark Policy, the California Department of Social Services issued a Complaint Investigation Report ("CDSS Report") "regarding a complaint made to the agency that IAC was not financially able to provide the services which it offers." Id. ¶ 13; id. Ex. 4. The CDSS Report stated that "an investigation was going to be conducted regarding" the allegation. Id. Ex. 4 at 5. The CDSS investigation triggered IAC to give Landmark a "notice of circumstances." See Nav. Mot. at 2; Opp'n to Nav. Mot. (dkt. 34) at 6; RJN Ex. C (dkt. 22-3) (Declaration of Landmark counsel filed in Bankruptcy Court) at ¶ 3 ("Before the Landmark D & O Policy expired, IAC gave notice of an administrative complaint about IAC made to [CDSS] by two adopting parents, clients of IAC. In accordance with the provisions of the Landmark D & O Policy, the notice of circumstances preserved coverage for any Claims made after the Policy expiration that arose from those circumstances reported to Landmark during the Policy Period.").²

On February 3, 2017, IAC filed for bankruptcy under Chapter 7. See Compl. ¶ 15. On March 21, 2017, during the Navigators Policy, the Bankruptcy Trustee initiated the Trustee's Suit against seven of IAC's former directors and an officer. Id. ¶ 16. The Trustee also sued Navigators, alleging that the Navigators Policy covered the directors' and officers' liability. Id. On January 16, 2018, the Trustee filed a First Amended Complaint ("FAC"), which is the operative complaint in the Trustee's Suit. Id. ¶ 17; RJN Ex. A (FAC).³

The FAC alleges that IAC's business model depended on the formation of new contracts with adopting parents, as well as the availability of birth mothers. FAC ¶¶ 34–35. It alleges that, in or before 2016, there was a decline in both the availability of birth mothers and new contracts with adopting parents, leading to a disruption in the business model and "a financial crisis that demanded that the Director Defendants and Officer Defendants take action." Id. ¶¶ 36–37. The FAC alleges that "a confluence of events" triggered IAC's financial crisis, including: IAC's difficulty locating birth mothers; an extended time period for locating babies; a decrease in the number of new contracts with adopting parents; a rise in overhead; adopting parents complaining that IAC was not providing the services promised; IAC relying on financial reserves; IAC losing money each month, with no turnaround in sight; and insufficient assets. Id. ¶ 38. The FAC further alleges that IAC had obligations to hundreds of adopting parents who had paid for adoption services but had not been provided with a child, and hundreds of adopting parents who had. Id. ¶¶ 39–40. It alleges that IAC continued to seek and accept fees from newly signed adopting parents, though the directors and officers "knew or should have known that [IAC] could not perform its outstanding obligations to adopting parents who had already paid the Debtor for adoption services."Id. ¶ 42. The FAC alleges that IAC did not give adopting parents or government regulators advance notice of its closure, and did not take steps to deal with its confidential adoption records. Id. ¶¶ 46, 47, 49. And the FAC alleges that IAC's directors and officers were not knowledgeable about applicable laws and regulations governing the closure of its operations, and shut down without seeking to comply with them. Id. ¶¶ 50–51. The FAC bring claims for breach of fiduciary duty, negligence, and declaratory relief. See generally id. It seeks over $7.8 million in damages. Id. at 18.

The directors' and officer's defense in the Trustee's Suit was tendered to Navigators, and later to Philadelphia and Landmark. Compl. ¶ 22. Navigators assigned counsel for IAC. Id. ¶ 23. In a letter on July 8, 2017, Landmark agreed to defend the directors and officer under a reservation of rights, stating:

IAC gave notice of circumstance during the Policy Period in the form of the CDSS Report prompted by a complaint that IAC was not financially able to render the offered services, such that any Claim later made arising out of such facts or circumstances will be deemed first made during the Policy Period. The Trustee's Complaint alleges that IAC had financial difficulties and did not render services to its clients. To that extent, the Trustee's Complaint shares facts or circumstances in common with the acts or circumstances alleged in the CDSS Report. However, the Trustee's Complaint alleges numerous other facts and circumstances not alleged in the CDSS Report....

Nav. Mot. Ex. A at 12 (emphasis added).⁴ Navigators stated on July 10, 2017 that it "continues to stand by its position that [an] exclusion ... precludes coverage ... of this matter" and "intends to seek a declaration that coverage does not exist for this matter under the Policy," but that, "[i]n the meantime, Navigators will continue to provide the insureds with a defense subject to a full reservation of all of its rights." Compl. ¶ 24; Compl. Ex. 5 (Navigators 7/10/2017 letter); see also Compl. Ex. 6 (Navigators 7/12/2017 letter). Subsequently, Navigators advised that it was withdrawing from IAC's defense. Compl. ¶ 26. The Trustee's Suit is ongoing. Id. ¶ 33.

Landmark brought this suit against Navigators and Philadelphia, "seeking a declaration of rights of two liability insurers as to the defense of directors and officer[ ]" in the Trustee's Suit, id. ¶ 1, and alleging that "each Defendant with a duty to defend should be required to reimburse Landmark and ordered to contribute its equitable share," id. ¶ 43. Navigators moves for a judgment on the pleadings on the request for declaratory relief and moves to dismiss the claim for contribution. See Nav. Mot.

II. Legal Standard

A motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) is proper " when the moving party clearly establishes on the face of the pleadings that no material issue of fact remains to be resolved and that it is entitled to judgment as a matter of law." Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1550 (9th Cir. 1990) (citation omitted). When a party invokes Rule 12(c) to raise the defense of failure to state a claim, the motion faces the same test as a motion under Rule 12(b)(6). Wood v. Cnty. of Alameda, 875 F.Supp. 659, 661 (N.D. Cal. 1995). "A dismissal on the pleadings for failure to state a claim is proper only if ‘the movant clearly establishes that no material issue of fact remains to be resolved....’ " McGlinchy v. Shell Chem. Co., 845 F.2d 802, 810 (9th Cir. 1988) (citing Doleman v. Meiji Mut. Life Ins. Co., 727 F.2d 1480, 1482 (9th Cir. 1984) ).

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) asserts that the complaint fails to state a claim upon which relief may be granted. Dismissal may be based on either "the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). For purposes of evaluating a motion to dismiss, a court "must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. City of L.A., 828 F.2d 556, 561 (9th Cir. 1987). A complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

III. Discussion

A liability insurer owes a duty to defend when a suit brought against its insured seeks damages that potentially fall within the policy's coverage. Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 19, 44 Cal.Rptr.2d 370, 900 P.2d 619 (1995). "Where there is no possibility of coverage, there is no duty to defend." Id. (internal quotation marks omitted). "To prevail, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential." Montrose Chem. Corp. of Calif. v. Sup. Ct., 6 Cal. 4th 287, 301, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993). To determine whether an insurer owes a duty to defend, a court is to "compar[e] the allegations of the complaint with the terms of the policy." Id.

Navigators contends that, based on the terms of...