Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-01548/USCOURTS-casd-3_15-cv-01548-1/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 DENYING MOTION TO

DISMISS COUNTERCLAIMS

v.

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

Amended Counterclaim (“ACC”) filed by Defendants McMillin Homes Construction,

Inc., McMillin Homes, Inc., McMillin Management Services, LP, Sereno Residential

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

McMillin opposes 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 denies the motion.

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BACKGROUND

The Complaint

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. McMillin is an

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

generally described allegations.

McMillin developed and acted as the general contractor on a project known as

“Sereno.” 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. SerenoResidential Investors, LLC. The homeowners commenced the

action in Imperial County Superior 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, McMillin, through its legal representative Simpson Delmore

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

the Policy. (Compl. ¶16). On December 31, 2012, St. Paul agreed to fully and

completely defend McMillin in the Yanez Action as an additional insured 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 McMillin that it had retained the law firmof Clapp,

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

McMillin in the Yanez Action. McMillin allegedly refused, and continues 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) McMillin is not entitled to the appointment of independent

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counsel under Cal. Civil Code §2860; (3) McMillin 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

McMillin’s retained counsel. The breach of contract claim is based upon allegations

that McMillin refused to accept the counsel provided by St. Paul. Finally, the third

claimseeks equitable reimbursement for certain defense fees and costs paid by St. Paul.

The Counterclaims

On November 12, 2015, McMillin filed the ACC, 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, McMillin

tendered the Yanez Action to St. Paul. Nearly four months later, on December 31,

2012, St. Paul agreed to defend McMillin in the Yanez Action, subject to a full

reservation of rights. (ACC ¶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 McMillin tendered its defense

to St. Paul, St. Paul retained Clapp to represent the defense. (ACC ¶31). Shortly

thereafter, on July 22, 2013, McMillin 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, McMillin again provided the Joint Consent to St. Paul

on September 4, 2013, and December 13, 2013. On February 24, 2014, St. Paul

advised McMillin that it would only pay for defense fees incurred by Clapp, and not

SDG.

At the heart of the counterclaim is the allegation that St. Paul failed to provide

an immediate defense upon tender on August 8, 2012, and to appoint independent

counsel. (ACC ¶48). The ACC alleges that St. Paul withdrew from participating in

McMillin’s defense once it requested the association of independent counsel, (ACC

¶58), and St. Paul ignored the conflicts of interests that arose as to who had the right

to control McMillin’s defense. McMillin also identifies that it and Executive

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Landscape had sufficient adverse interests to warrant the appointment of independent

counsel. Furthermore, McMillin alleges that St. Paul placed its own interests ahead of

the insured by (1) failing to provide an immediate defense without proper cause, (2)

failing to conduct a reasonable investigation, (3) representing that it would provide a

complete defense and then failing to provide one, (4) refusing to consent to joint

representation, and (5) using McMillin’s request for independent counsel as a pretext

for refusing to defend. (ACC ¶64(a) - 64(i)). 

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). 

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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).

The Motion

The thrust of McMillin’s counterclaims is that St. Paul breached its duty to

defend, and lost the right to control the defense, when it waited four months after

tender before agreeing to defend McMillin in the Yanez action. The law is wellestablished that an insurer who breaches its duty to defend forfeits its right to control

the defense of the action. J.R. Mktg., L.L.C. v. Hartford Casualty Ins. Co., 216

Cal.App.4th 1144 (2013). Here, McMillin alleges that it tendered the defense on

August 8, 2012, and St. Paul accepted the defense subject to a reservation of rights on

December 31, 2012, thereby forfeiting its right to control the defense. These 1

allegations, viewed in the best light for McMillin, state a counterclaimfor breach ofthe

insurance contract.

In response to these allegations, St. Paul comes forward with evidence to show

that on August 27, 2012, it acknowledged McMillin’s tender and requested the

submission of what it considered necessary information to complete its coverage

analysis. (Vandermoore Decl. ¶6). The requested information included the contract

between McMillin and Executive Landscape and scope of work matrices. Id. About

two and one half months later, on or about November 8, 2012, St. Paul received the

requested information and, on December 31, 2012, St. Paul accepted the defense. 

(Vandermoore Decl. ¶9). 

California Code of Regulations, Title 10, Chapter 5, Subchapter 8, §2695.7(b)

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provides that an insurer must accept or deny a claim withing 40 days.

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The difficulty with St. Paul’s argument is that it is dependent upon evidentiary

matters not properly considered on a motion to dismiss. See Levine, 950 F.2d at 1482. 

Here, whether St. Paul timely and reasonably accepted tender presents a question of

fact not properly resolved on a motion to dismiss. Moreover, discovery is required to

provide context to the reasonableness of the period of time between tender and

providing a defense and whether McMillin suffered any injury as a result. See Cal.

Shoppers Inc. v. Royal Globe Ins. Co., 175 Cal.App.3d 1, 38 (1985) (insurer entitled

to a reasonable time to investigate claim in order to identify potential coverage). The

four-month delay in accepting the defense may, or may not, be reasonable, depending

on circumstances arising outside the four corners of the complaint. 

In sum, the court denies the motion to dismiss the ACC.

IT IS SO ORDERED.

DATED: March 2, 2016

 Hon. Jeffrey T. Miller

 United States District Judge

cc: All parties

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