United States Fid. v. Lee Investments Llc

• Decision Date: 18 April 2011
• Docket Number: 09–16962.,Nos. 08–17753,s. 08–17753
• Citation: 641 F.3d 1126,76 Cal. Comp. Cases 472
• Court: U.S. Court of Appeals — Ninth Circuit
• Parties: UNITED STATES FIDELITY AND GUARANTY COMPANY, Plaintiff–Appellee,v.LEE INVESTMENTS LLC, dba The Island, Defendant–Appellant,andAmerican Specialty Insurance Services; American Specialty Risk Management Services LLC, Counter–defendants–Appellees,Aon Risk Services, Inc., Defendant–3rd–party–plaintiff–counter–defendant–Appellee.United States Fidelity and Guaranty Company, Plaintiff–counter–defendant–Appellee,v.Lee Investments LLC, dba The Island, Defendant–counter–claimant–Appellant,v.American Specialty Insurance Services; American Specialty Risk Management Services LLC, Counter–defendants–Appellees,andRichard K. Ehrlich; Rexford Properties, LLC, a California limited liability company, Defendants-counter-claimants,v.Aon Risk Services, Inc., Third–party–defendant–Appellee.

641 F.3d 1126

76 Cal. Comp. Cases 472

11 Cal. Daily Op. Serv. 4513

2011 Daily Journal D.A.R. 5462

UNITED STATES FIDELITY AND GUARANTY COMPANY, Plaintiff–Appellee,

v.LEE INVESTMENTS LLC, dba The Island, Defendant–Appellant,andAmerican Specialty Insurance Services; American Specialty Risk Management Services LLC, Counter–defendants–Appellees,Aon Risk Services, Inc., Defendant–3rd–party–plaintiff–counter–defendant–Appellee.United States Fidelity and Guaranty Company, Plaintiff–counter–defendant–Appellee,

v.Lee Investments LLC, dba The Island, Defendant–counter–claimant–Appellant,

v.American Specialty Insurance Services; American Specialty Risk Management Services LLC, Counter–defendants–Appellees,andRichard K. Ehrlich; Rexford Properties, LLC, a California limited liability company, Defendants-counter-claimants,

v.Aon Risk Services, Inc., Third–party–defendant–Appellee.

Nos. 08–17753

09–16962.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 16, 2011.Filed April 18, 2011.

Daniel O. Jamison and Keith M. White, Dowling, Aaron & Keeler, Inc., Fresno, CA, for appellant/defendant, counter-claimant, third-party plaintiff, and third-party counter-defendant Lee Investments, LLC.Jeffrey A. Charlston and Bruce T. Smyth, Charlston, Revich & Wollitz, LLP, Los Angeles, CA, for appellee/plaintiff United States Fidelity and Guaranty Company and for appellees/counter-defendants American Specialty Insurance Services, Inc., and American Specialty Risk Management Services, LLC.Margaret L. Parker, Matthew S. Covington, and Stephen Chiari, DLA Piper LLP, San Francisco, CA, for appellee/defendant, third-party plaintiff, counter-defendant Aon Risk Services, Inc.Appeal from the United States District Court for the Eastern District of California, Oliver W. Wanger, Senior District Judge, Presiding. D.C. No. 1:99–cv–05583–OWW–SMS.Before: MARY M. SCHROEDER and SIDNEY R. THOMAS, Circuit Judges, and SAMUEL CONTI, Senior District Judge.^*

OPINION

THOMAS, Circuit Judge:

In this appeal, we consider whether a federal district court had subject matter jurisdiction over an insurance company's diversity action seeking rescission of a workers' compensation policy and, if so, whether it was required to dismiss the case because exclusive jurisdiction was vested by state law in a state workers' compensation agency. We conclude that the district court had subject matter jurisdiction and properly denied the motion to dismiss. We affirm.

I

This seemingly ab aeterno litigation originated in a simple event: an accident at “The Island,” a California waterpark. The incident spawned parallel actions that proceeded in different venues over many years, ultimately resulting in a judgment in which The Island's insurer prevailed.

The mishap occurred when a maintenance worker (“the Employee”) was helping to assemble a five-story water slide. A metal bar fell from a forklift and struck her head, causing serious injuries. Prior to the accident, The Island's owner, Lee Investments, LLC (“the Employer” or “Lee”), had purchased a workers' compensation policy (“the Policy”) underwritten by United States Fidelity & Guaranty Co. (“the Insurer”).¹

The Insurer contends that it agreed to issue the Policy contingent on the Employer's representations that Island employees would not be “performing construction operations, as opposed to performing duties in the day-to-day operation of a water park.” Thus, the Insurer claimed that the Employer had not told the whole truth in its insurance application, and that the lie had wrongfully induced it to provide coverage.

The Employee filed a claim for benefits with California's Workers' Compensation Appeals Board (“the State Board”) and the Insurer began paying benefits to the Employee pursuant to the Policy. Shortly thereafter, the Insurer filed this federal action against the Employer seeking Policy rescission and related relief on account of the Employer's alleged misrepresentations.

The Employee initially filed, but later abandoned, a request that the State Board arbitrate the claims asserted by the Insurer in the federal action. Years later, the Employer revived the Employee's request. The Insurer objected, and a state administrative law judge decided to hold a hearing on the objections. The hearing never occurred, and the issue was left adrift.

In federal court, the Employer joined a motion to dismiss raised by another party alleging that California law committed adjudication of the Insurer's action to the State Board. The district court denied the dismissal motion. Subsequently, the Employer, the Insurer, the Insurer's Agent, and the Broker filed claims against one another and additional parties.²

The case was bifurcated, with some of the claims tried to a jury and others reserved for bench trial. The jury returned special verdicts in favor of the Insurer and against the Employer. The jury found that the Employer had made an intentional misrepresentation of material fact and concealed material facts during the policy application process. Based on that determination, the jury found that the Insurer was entitled to rescind the Policy and to recover restitution of payments it made under it. The jury found against the Employer on all of its affirmative defenses and counterclaims, and found in favor of the Insurer on all but one of its affirmative defenses to the Employer's counterclaims.

The district court entered partial judgment on the jury verdict. The Employer appealed, but its appeal was dismissed as premature. The Employer filed various post-trial motions seeking relief, which the district court denied. The district court then held a bench trial on some of the remaining issues, including the Insurer's claims to restitution of attorneys fees it paid to defend the Employer in the State Board proceedings and to prejudgment interest.

More than a year after the federal jury entered verdicts in favor of the Insurer on its claims against the Employer, and while the district court was deliberating on the issues presented in the bench trial, the Employer attempted an exodus from the federal action and again requested that the State Board arbitrate the Insurer's claims. The Insurer asked the federal court to enjoin the State Board proceedings. The court granted the Insurer's motion, observing that:

The issues surrounding issuance of the insurance policy have been fully litigated and jury verdicts entered. Lee sought a jury trial, and only when the jury decided every issue against Lee, now seeks to avoid the effects of the trial following which the Partial Judgment was entered. It will be the height of judicial waste to permit Lee to yet again, a fourth time, seek to relitigate the issues, going backward to an administrative hearing.

The court also noted that “Lee's revisionist assertion that it was dragged kicking and screaming into the federal litigation is categorically belied by the record.”

The court then granted the Insurer's motion for summary judgment on the Employer's counterclaims for breach of contract and the implied covenant of good faith and fair dealing. The court subsequently issued its decision on the issues presented in the bench trial and granted the Insurer's request for the entry of judgment pursuant to Rule 54(b). In addition to the amounts awarded by the jury, the court awarded the Insurer restitution of the amount it spent for the Employer's legal defense in the State Board proceedings and pre-judgment interest.

In sum, after a jury trial, a bench trial, and post-trial motions, the Insurer won its claim for rescission, and was awarded restitution damages from the Employer in the amount of $841,708.13, to reimburse the Insurer for the benefits it paid under the Policy less premiums the Employer paid the Insurer. The Insurer was granted prejudgment interest against the Employer in the amount of $394,955.03 and was permitted to recover all costs of suit. Judgment was entered in favor of the Insurer on all claims the Employer brought against it. The Broker was granted judgment on all of the Employers's claims against it and, conversely, the Employer was granted judgment on all of the Broker's claims against it. No damages were awarded as between the Broker and the Employer and each side was ordered to bear its respective costs. The court also resolved certain claims involving the Alter Egos.³

Meanwhile, over in the state proceedings, the request that the State Board re-adjudicate the Insurer's claims for rescission and restitution remained enjoined. The Employer and the Employee reached a settlement of their separate disputes before the State Board, but the deal did not resolve any of the issues in the instant case.⁴

In the end, when the smoke cleared, the Insurer prevailed in the main action and the parallel proceeding remained in limbo. This appeal followed.

II

The Employer contends that the district court lacked subject matter jurisdiction over the Insurer's claims. We disagree. The Insurer is a corporation duly organized and existing under the laws of the State of Maryland, with its principal place of business located in that state. The Employer is a business entity organized and existing under the laws of the State of California with its principal place of business located in Fresno. Because the parties are diverse and because the amount in controversy exceeded $75,000, the district court had subject matter jurisdiction over the action. 28 U.S.C. § 1332.

The Employer's arguments to the contrary are not persuasive. First, the Employer argues that by filing the present action the Insurer improperly removed the Employee's state workers' compensation claim to federal court, thus running afoul of 28 U.S.C. § 1445(c). Section 1445(c) provides that “[a] civil action in any State court arising under the workmen's compensation laws of such State may not be removed to any district court of the United States.” However, the federal action did not involve an adjudication of the...