Lennar Mare Island, LLC v. Steadfast Ins. Co., 2:12–cv–02182–KJM–KJN

• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Eastern District of California
• Citation: 139 F.Supp.3d 1141
• Decision Date: 16 October 2015
• Docket Number: No. 2:12–cv–02182–KJM–KJN,2:12–cv–02182–KJM–KJN
• Parties: Lennar Mare Island, LLC, Plaintiff, v. Steadfast Insurance Company, Defendant. And Related Counterclaims.

139 F.Supp.3d 1141

Lennar Mare Island, LLC, Plaintiff,
v.
Steadfast Insurance Company, Defendant.

And Related Counterclaims.

No. 2:12–cv–02182–KJM–KJN

United States District Court, E.D. California.

Signed October 16, 2015

139 F.Supp.3d 1145

Ryan L. Werner, Pennington Lawson LLP, San Francisco, CA, John A. Whitesides, Serena M. Warner, Angelo Kilday and Kilduff, Sacramento, CA, for Plaintiff.

Dale Hugh Oliver, John Sherman Purcell, Quinn Emanuel Urquhart & Sullivan LLP, David William Skaar, Neil R. O'Hanlon, Hogan Lovells US LLP, Los Angeles, CA, Benjamin T. Diggs, Hogan Lovells U.S., LLP, Blaise Stephen Curet, Jane Karren Baker, Stephen Wong, William David Campagne, Sinnott, Puebla, Campagne & Curet, APLC, Brandon Patrick Rainey, Ethan Allen Miller, Hogan Lovells US LLP, Merri Anne Baldwin, Rogers Joseph O'Donnell, San Francisco, CA, for Defendant.

Amanda D. Hairston, Deborah S. Ballati, Farella Braun and Martel LLP, San Francisco, CA, for Counter Claimant, CH2M Hill Constructors, Inc.

ORDER

Kimberly Mueller, UNITED STATES DISTRICT JUDGE

In this case, Lennar Mare Island, LLC (LMI), CH2M Hill Constructors, Inc. (CCI), and Steadfast Insurance Company dispute their obligations with respect to the clean-up of Mare Island, a former U.S. Navy shipyard. This order addresses LMI's and CCI's motions to dismiss Steadfast's Amended Counterclaim under Federal Rules of Civil Procedure 12(b)(6) and 12(b)(7). The matter was submitted without a hearing. For the following reasons, the motions are granted in part.

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I. BACKGROUND

First, to avoid confusion, a preliminary note on the parties' identities: LMI is the plaintiff in this action, and Steadfast is the defendant. See Am. Compl. ¶¶ 1–2, ECF No. 22. Steadfast asserts counterclaims against LMI and CCI. See Am. Countercl. ¶¶ 2–3, ECF No. 164–1.¹ CCI also asserts counterclaims against Steadfast, but not LMI. See CCI Answer & Countercl., ECF No. 12. The matter is before the court on LMI's and CCI's motions to dismiss Steadfast's amended counterclaim. LMI Mot., ECF No. 293; CCI Mot., ECF No. 297.

A. Steadfast's Allegations

Because LMI and CCI bring motions under Federal Rule of Civil Procedure 12(b)(6), the court assumes the allegations of Steadfast's amended counterclaim are true. See Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir.2011). On its own motion, the court takes judicial notice of the parties' previous stipulated description of this case's general background. See Joint Stmt. Disc. Dispute (JS), ECF No. 63; W. Radio Servs. Co. v. Qwest Corp., 678 F.3d 970, 976 (9th Cir.2012) (a court may consider proper subjects of judicial notice on a motion to dismiss); Do v. Am. Home Mortgage Servicing, Inc., No. 11–324, 2011 WL 5593935, at *1 n. 1 (C.D.Cal. Nov. 17, 2011) (citing Kelly v. Johnston, 111 F.2d 613, 615 (9th Cir.1940) ) (taking judicial notice of the parties' previous stipulation on a motion under Rule 12(b)(6) ).

The United States Navy operated a base at Mare Island in the City of Vallejo, California for nearly 150 years. JS at 2. Over the years, Mare Island was contaminated. In 1996, the Navy closed the base, and in 2002, it conveyed the land to Vallejo. Id. The Navy, however, was obligated to investigate and remediate pollution on Mare Island. Id. In 2001, the City, the Navy, Steadfast, LMI and CCI entered several contracts. Id. at 2–3.

First, the Navy and the City entered the Environmental Services Cooperative Agreement, or ESCA. Id. at 2. In the ESCA, the Navy agreed to pay the City about $78 million and the City agreed to remediate certain environmental problems on Mare Island. Id. But the Navy agreed to retain responsibility for certain conditions, i.e., the "Navy–Retained Conditions." Id. These Navy–Retained Conditions included a defined set of known conditions for which the costs of clean-up exceed $114.3 million. Id. Second, in the Mare Island Remediation Agreement, or MIRA, LMI agreed it would take on the City's obligations under the ESCA to remediate pollution on Mare Island. Id. at 2–3. This agreement anticipated the City's later transfer of some of Mare Island to LMI. Id. at 2. Third, LMI and CCI entered into a Guaranteed Fixed Price Contract, or GFPC. Id. at 3; Am. Countercl. ¶ 9. In the GFPC, CCI agreed to remediate specific contamination problems on Mare Island in return for a fixed price. JS at 3; Am. Countercl. ¶ 9. CCI also agreed to remediate other pollution for additional compensation when LMI requested. JS at 3.

In conjunction with the GFPC, Steadfast, LMI and CCI negotiated a series of insurance policies. Id. ; Am. Countercl. ¶ 10. These policies' premiums were paid for indirectly with Navy funds. JS at 3. Steadfast, LMI and CCI are all parties to these policies, but their rights and obligations differ or conflict. Am. Countercl. ¶ 10. Two of the policies are the subject of this lawsuit. Copies of both are attached as exhibits to the amended counterclaim. See id. Exs. A, B.

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First, there is the Remedial Stop Loss Policy or RSL policy: Steadfast issued the RSL policy to CCI. Id. ¶ 11, Ex. A. The "Insuring Agreement" it describes is as follows: "To pay the Named Insured any Loss arising out of the Insured Project that exceeds the Self Insured Retention(s), provided the Loss is the result of a Claim first reported to the Company, in writing by the Named Insured, during the Policy Period." Id. Ex. A, at 35² (bold typeface omitted). CCI is the "Named Insured," see id. at 33, 39, and Steadfast is the "Company," id. at 33, 36. In simpler terms, the RSL policy covers clean-up costs in excess of about $57.5 million, but only for the clean-up of "Known Pollution Conditions." Id. ¶ 11. Steadfast's liability, the maximum it would pay under the policy, was an additional $57.5 million; that is, total costs would be about $115 million. Id. Steadfast's obligation to pay claims under this policy ended on March 30, 2011, when the policy expired. Id. ¶ 11, Ex. A, at 33, 39. The RSL policy also includes a "Scope of Work Endorsement" listing many "Known Pollution Conditions." Id. Ex. A, at 54–79.

Second, the Environmental Liability Insurance or ELI policy: Steadfast issued the ELI policy to both CCI and LMI. Id. ¶ 12, Ex. B. Among other things, the ELI policy "affords coverage for certain cleanup costs required by a ‘Governmental Authority’ as a result of a ‘Pollution Event’ that is not a ‘Known Pollution Condition’ and that is first discovered by an insured during the policy period." Id. ¶ 12. The ELI policy is set to expire on March 30, 2021, ten years after the RSL policy expired. Id.

According to the amended counterclaim, when the RSL and ELI policies were drafted and signed, LMI, CCI and Steadfast intended for the RSL policy to provide coverage for known pollution conditions and the ELI policy to provide coverage for unknown pollution conditions. Id. In particular, Steadfast alleges that whether a particular pollution condition or event was "known" or "unknown" depends on a reference to two sources: first, the Scope of Work Endorsement appended to the policies, and second, other various documents available to CCI or LMI at the time. Id. These documents included "certain environmental reports" exchanged between Steadfast, LMI and CCI before inception of the policies. Id. ¶ 13. These "environmental reports and Technical Summaries were part of the applications for the RLS and ELI Policies," and both policies' preambles make the applications "a part hereof." Id.

Steadfast alleges LMI's and CCI's actions after 2001 matched this understanding. Id. ¶ 15. For example, LMI conceded in private discussions with CCI that "the underwriting materials" should be considered when deciding whether a pollution condition was known or unknown. Id. But after the policies were signed, LMI and CCI eventually adopted a different interpretation of the policies in their communications with Steadfast. Id. To Steadfast, they argued that if a pollution event is not listed in the tables and figures appended to the policies, then it is unknown, regardless of anything to the contrary in the "Applications" or "underwriting documents." Id. This has also been LMI's position in this action. See Mot. Summ. J., ECF No. 187.

"Fundamentally," Steadfast charges LMI and CCI with "a pattern of improper conduct throughout their contractual relationship with Steadfast...." Id. ¶ 20. First, LMI and CCI "attempted to convert

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claims for known pollution conditions into claims for unknown pollution conditions, and vice versa." Id. ¶ 20(a). Second, CCI did significantly more work than necessary and billed Steadfast for that unnecessary work. Id. ¶ 20(b). Third, LMI and CCI "charged Steadfast for substantially more environmental cleanup than was required by the regulators and permissible under the policies." Id. ¶ 20(c). And fourth, LMI and CCI are guilty of "[o]ther misrepresentations and failures to disclose information critical to the fair and proper disposition of claims under the Policies." Id. ¶ 20(d).

Steadfast claims LMI and CCI took these actions because the RSL policy expired earlier than the ELI policy; if claims could no longer be submitted under the RSL policy, then LMI and CCI attempted...