Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-01548/USCOURTS-casd-3_15-cv-01548-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332in Diversity-Insurance Contract

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

ST. PAUL MERCURY INSURANCE

COMPANY,

Plaintiff,

CASE NO. 15cv1548 JM(BLM)

ORDER GRANTING MOTION TO

DISMISS COUNTERCLAIM;

v. GRANTING LEAVE TO AMEND

MCMILLIN HOMES

CONSTRUCTION, INC.;

MCMILLIN HOMES, INC.;

MCMILLIN MANAGEMENT

SERVICES, LP; SERENO

RESIDENTIAL INVESTORS, LLC;

and IMPERIAL VALLEY

INVESTORS, LLC,

Defendants.

_______________________________

AND RELATED COUNTERCLAIM

Plaintiff St. Paul Mercury Insurance Company (“St. Paul”) movesto dismiss the

Counterclaim (“CC”) filed by Defendants McMillin Homes Construction, Inc.,

McMillin Homes, Inc, McMillin Management Services, LP, Sereno residential

investors, LLC, and Imperial Valley Investors, LLC. (collectively “Defendants”). 

Defendants oppose the motion. Pursuant to Local Rule 7.1(d)(1), the court finds the

matters presented appropriate for decision without oral argument. For the reasons set

forth below, the court grantsthe motion to dismiss and grants Defendants 15 days leave

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to amend from the date of entry of this order.

BACKGROUND

On July 13, 2015, St. Paul commenced this diversity action by alleging three

claims for relief: declaratory relief, breach of contract, and equitable reimbursement. 

For the time period from May 19, 2003 to June 30, 2009, St. Paul issued a commercial

general liability policy (“Policy”) to Executive Landscape, Inc. Defendants are

additional insureds under the Policy. St. Paul’s claims arise from the following

generally described allegations.

Defendants developed and acted asthe general contractor on a project known as

“Serano.” On May 12, 2012, various homeowners in the Sereno development, located

in the City of Calexico, California, filed a first amended complaint in the lawsuit

entitled Yanez v. SerenoResidentialInvestors,LLC. The homeowners commenced the

action in Imperial County Suerior Court, alleging several claims for construction

defects. The Yanez action was subsequently consolidated with a related construction

defect lawsuit, Vizcarra v. Sereno Residential Investors, LLC (unless otherwise noted,

both actions are collectively referred to as the “Yanez Action”). 

On August 8, 2012, Defendants, through their legal representative Simpson

Delmore Greene (“SDG”), tendered the Yanez Action to St. Paul as an additional

insured under the Policy. (Compl. ¶16). On November 2, 2012, St. Paul agreed to fully

and completely defend Defendants in the Yanez Action as additional insureds under

the Policy, subject to a reservation of rights. 

On June 26, 2013, St. Paul allegedly asserted its contractual right to retain

counsel of its choosing and advised Defendants that it retained the law firm of Clapp,

Moroney,Bellagamba, Vucinich, Beeman& Scheley (“Clapp”) to represent and defend

Defendants in the Yanez Action. Defendants allegedly refused, and continue to refuse,

to accept Clapp as counsel in the Yanez Action. 

St. Paul seeks a declaration that (1) St. Paul has the right to control the defense

in the Yanez action; (2) Defendants are not entitled to the appointment of independent

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counsel under Cal. Civil Code §2860; (3) Defendants breached the Policy by refusing

to acknowledge St. Paul’s right to control the defense, including the selection of

counsel, and (4) St. Paul has no obligation under the Policy to pay any fees or costs

incurred by Defendants’ retained counsel. The breach of contract claim is based upon

allegations that Defendants refused to accept the counsel provided by St. Paul. Finally,

the third claim seeks equitable reimbursement for certain defense fees and costs paid

by St. Paul.

The Counterclaims

On August 13, 2015, Defendants and Counter-Claimants filed a Counterclaim,

alleging three claims for relief: (1) declaratory relief; (2) breach of contract; and

(3) breach of the implied covenant of good faith and fair dealing. As set forth in the

complaint, on August 8, 2012, Defendants tendered the Yanez Action to St. Paul. 

Nearly four months later, on December 31, 2012, St. Paul agreed to defend Defendants

in the Yanez Action, subject to a full reservation of rights. (Counterclaim “CC” ¶27). 

Counter-Claimants allege that St. Paul paid only a portion of the defense costs

incurred by SDG. On June 26, 2013, ten months after Defendants tendered its defense

to St. Paul, St. Paul retained Clapp to represent the defense. Shortly thereafter, on

July 22, 2013, Defendants provided St. Paul with a Joint Consent to Representation

(“Joint Consent”) pursuant to Cal. Civ, Code §2860. When St. Paul did not respond

to the Joint Consent, Defendants again provided the Joint Consent to St. Paul on

September 4, 2013, and December 13, 2013. On February 11, 2014, St. Paul advised

Defendants that it would only pay for defense fees incurred by Clapp, and not SDG.

Defendants allege that the delay between tender and the notification by St. Paul

that it would provide a defense constitutes a waiver and/or estopps St. Paul from

asserting its right to control the defense. Defendants further allege that St. Paul

fraudulently promised to provide a full, complete, and conflict-free defense but then

appointed Clapp knowing of the existence of an unidentified conflict. (CC ¶10).

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DISCUSSION

Legal Standards

Federal Rule of Civil Procedure 12(b)(6) dismissal is proper only in

"extraordinary" cases. United States v. Redwood City, 640 F.2d 963, 966 (9th Cir.

1981). Courts should grant 12(b)(6) relief only where a plaintiff's complaint lacks a

"cognizable legal theory" or sufficient facts to support a cognizable legal theory. 

Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1990). Courts should

dismiss a complaint for failure to state a claim when the factual allegations are

insufficient “to raise a right to relief above the speculative level.” Bell Atlantic Corp.

v. Twombly, 550 U.S. 544, 555 (2007) (the complaint’s allegations must “plausibly

suggest[]” that the pleader is entitled to relief); Ashcroft v. Iqbal, 556 U.S. 662 (2009)

(under Rule 8(a), well-pleaded facts must do more than permit the court to infer the

mere possibility of misconduct). “The plausibility standard is not akin to a ‘probability

requirement,’ but it asks for more than a sheer possibility that a defendant has acted

unlawfully.” Id. at 678. Thus, “threadbare recitals of the elements of a cause of action,

supported by mere conclusory statements, do not suffice.” Id. The defect must appear

on the face of the complaint itself. Thus, courts may not consider extraneous material

in testing its legal adequacy. Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1482

(9th Cir. 1991). The courts may, however, consider material properly submitted as part

of the complaint. Hal Roach Studios, Inc. v. Richard Feiner and Co., 896 F.2d 1542,

1555 n.19 (9th Cir. 1989). 

Finally, courts must construe the complaint in the light most favorable to the

plaintiff. Concha v. London, 62 F.3d 1493, 1500 (9th Cir. 1995), cert. dismissed,

116 S. Ct. 1710 (1996). Accordingly, courts must accept astrue all material allegations

in the complaint, as well as reasonable inferences to be drawn from them. Holden v.

Hagopian, 978 F.2d 1115, 1118 (9th Cir. 1992). However, conclusory allegations of

law and unwarranted inferences are insufficient to defeat a Rule 12(b)(6) motion. In

Re Syntex Corp. Sec. Litig., 95 F.3d 922, 926 (9th Cir. 1996).

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The Declaratory Relief Counter-Claim

Counter-Claimants seek a declaration that St. Paul (1) owes an immediate duty

to pay for “full, complete and conflict-free defense and indemnity in” Yanez; (2) is

obligated to pay for all reasonable unpaid attorneys’ fees and costs related to Yanez;

(3) owes a duty to provide independent and conflict-free counsel selected exclusively

by Counter-Claimants; (4) breached its obligations under the Policy; and (5) failed to

provide an “immediate, complete, and conflict-free defense to Counter-Claimants,

[and] has forfeited its right to appoint counsel and to control Counter-Claimant’s

defense.” (CC ¶41). 

To obtain declaratoryrelief,Counter-Claimants must show an actual controversy

regarding a matter within the court’s subject matter jurisdiction. See Calderon v.

Ashmus, 523 U.S. 740, 745 (1998). There must exist an “actual controversy relating

to the legal rights and duties of the respective parties, not an abstract or academic

dispute. Centex Homes v. St. Paul Fire and Marine Ins. Co., 237 Cal.App.4th 23, 29

(2015).

Here, Counter-Claimants central allegation is that St. Paul was under a duty,

pursuant to Cal. Civ. Code §2860, to provide a full, complete, and “conflict-free”

defense counsel, and that it failed to do so. However, Iqbal and Twombly require more

than speculative allegations. Nowhere could the court locate in the CC the nature of

the alleged failure to provide “conflict-free” counsel. As noted in Iqbal,“threadbare

recitals of the elements of a cause of action, supported by mere conclusory statements,

do not suffice” to state a claim. Iqbal, 556 U.S. at 678. Counter-Claimants must set

forth plausible allegations showing that Clapp constituted conflicted counsel.

Next, Counter-claimantsrepeatedly argue that St. Paul waived its right to control

the defense by not immediately providing “conflict-free” counsel. The court notes that

waiver is an affirmative defense, and not a claim. See McKennon v. Nashville Banner

Pul’g Co., 513 U.S. 352, 360(1995). 

Finally, absent additional allegations showing that St. Paul beached its duty to

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defend, and caused damage to Counter-Claimants, Counter-Claimants fail to state a

claim for either breach of contract or breach of the covenant of good faith and fair

dealing. The court notes that the Yanez action appears to involve numerous parties

represented by numerousinsurers. It is unclear fromthe allegations whether the failure

to provide immediate “conflict-free” counsel is the cause of any harm to Defendants

or whether St. Paul was under any duty to accept joint representation as proposed by

Counter-Claimants. Lacking clarity,the court grants Counter-Claimants an opportunity

to file a First Amended Counterclaim.

In sum, the court grants the motion to dismiss the Counterclaim with 15 days

leave to amend from the date of entry of this order.

IT IS SO ORDERED.

DATED: October 28, 2015

 Hon. Jeffrey T. Miller

 United States District Judge

cc: All parties

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