Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_07-cv-00515/USCOURTS-azd-2_07-cv-00515-3/pdf.json

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

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Henry J. Wojtunik, 

Plaintiff, 

v.

Carolina Casualty Insurance Company,

Defendant. 

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No. CV-07-00515-PHX-SMM

MEMORANDUM OF DECISION AND

ORDER

Pending before the Court is a Motion to Dismiss filed by Defendant Carolina Casualty

Insurance Company (“Defendant”). (Dkt. 26) After considering the arguments raised in the

parties' briefs, the Court issues the following Memorandum of Decision and Order.

BACKGROUND

This action arises out two previous lawsuits. In February 2001, Plaintiff Henry J.

Wojtunik (“Plaintiff”) sold his business, Anacom Systems, Inc., to International

FiberCom, Inc. (“IFC”). One year later, IFC and its subsidiaries filed for bankruptcy

protection. In November 2002, Plaintiff filed suit against certain former IFC officers and

directors (“Insureds”) in a securities claim (“Wojtunik Lawsuit,” CV 03-2161-PHXPGR). The Insureds were insured by Defendant, under directors and officers policy

number 1283115 (“Policy”).

The Insureds notified Defendant of the Wojtunik Lawsuit, requesting that

Defendant advance and otherwise cover the costs of litigating the Wojtunik Lawsuit. 

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Defendant denied the request on the basis that the Wojtunik Lawsuit fell within an

“insured vs. insured” exception to the Policy. The Insureds then sued Defendant in

November 2004 (“Coverage Lawsuit,” CV-05-0911-PHX-FJM), seeking damages and a

declaration that the Policy covered the costs and any judgment rendered in the Wojtunik

Lawsuit.

In March 2005, Plaintiff issued a demand letter to Defendant offering to settle his

claims if Defendant tendered the balance of its $2.5 million policy limits. Defendant

rejected Plaintiff’s settlement offer. On December 4, 2006, Plaintiff and Insureds entered

into a Damron agreement by which several of Insureds assigned their rights against

Defendant to Plaintiff. On December 19, 2006, final judgment in favor of Plaintiff was

entered in the Wojtunik Lawsuit in the amount of $8 million.

On January 16, 2007, cross motions for summary judgment were decided in the

Coverage Lawsuit and the court granted Insureds’ motion for summary judgment with

respect to coverage of loss arising from the Wojtunik Lawsuit. On January 26, 2007,

Plaintiff again contacted Defendant regarding payment of the judgment obtained in the

Wojtunik Lawsuit. Defendant did not accede to this demand. On February 9, 2007, final

judgment in the Coverage Lawsuit was entered. That judgment declared that coverage for

the Wojtunik Lawsuit exists under the Policy, and dismissed with prejudice all other

claims in the complaint, including claims for breach of contract, bad faith, and punitive

damages.

On March 7, 2007, Plaintiff filed the complaint in the instant case. Plaintiff seeks

a declaration of his rights as assignee and judgment creditor of the Insureds to recovery

under the Policy, and damages for breach of contract and bad faith arising from the

settlement offers. Defendant now moves to dismiss the complaint on the grounds that it is

barred by principles of res judicata.

Jurisdiction is proper under 28 U.S.C. § 1332 as this is an action between citizens

of different states in which the amount in controversy exceeds $75,000 exclusive of

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interest and costs. Venue is proper under 28 U.S.C. § 1391(a).

STANDARD OF REVIEW

A complaint may be dismissed pursuant to Rule 12(b)(6) of the Federal Rules of

Civil Procedure only if "it appears beyond doubt that the plaintiff can prove no set of

facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355

U.S. 41, 45-46 (1957); Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th

Cir. 1995). When deciding a Motion to Dismiss, all allegations of material fact in the

complaint are taken as true and construed in the light most favorable to the plaintiff. W.

Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).

DISCUSSION

Under res judicata, a final judgment on the merits of an action precludes parties or

their privies from relitigating issues that were or could have been raised in that action. 

Holcombe v. Hosmer, 477 F.3d 1094, 1097 (9th Cir. 2007), citing Allen v. McCurry, 449

U.S. 90, 93 (1980). Res judicata bars both claims actually litigated and those that arise

from the same transaction and could have been litigated in a prior proceeding. Western

Systems, Inc. v. Ulloa, 958 F.2d 864, 868 (9th Cir. 1992).

A federal court in a diversity case must apply the res judicata law of the state in

which the federal court sits. Semtek Int’l Inc. v. Lockheed, 531 U.S. 497, 508 (2001). In

Arizona, federal law governs the preclusive effect of federal judgments in diversity cases. 

Corbett v. Manorcare of America, Inc., 146 P.3d 1027, 1032 (Ariz. Ct. App. 2006). 

Federal law requires three elements for res judicata to apply: (1) the present action must

involve the same claim sued upon in the previous action; (2) the present action must

involve the same parties or persons in privity of interest; and (3) the previous action must

have resulted in a final judgment on the merits. See Blonder-Tongue Laboratories, Inc. v.

Univ. of Illinois Foundation, 402 U.S. 313, 350 (1971); see also Headwaters Inc. v. U.S.

Forest Service, 399 F.3d 1047, 1052 (9th Cir. 2005).

Defendant argues that all three elements of res judicata are present in Plaintiff’s

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claim. As assignee under the Damron agreement, Plaintiff stands in privity with the

Insured, and the Coverage Lawsuit ended with a final judgment on the merits. Moreover,

Defendant argues, the present action involves the same claim as the Coverage Lawsuit

insofar as both actions center on Defendant’s obligations under the Policy. By this logic,

the final judgment in the Coverage Lawsuit dismissing with prejudice Insureds’ claims

for breach of contract and bad faith bars Plaintiff’s claims for breach of contract and bad

faith in this action.

Defendant’s argument fails to recognize that res judicata only bars claims that

could have been litigated in the earlier action. See Western Systems, Inc., supra, 958

F.2d at 868. Accepting Plaintiff’s allegations as true, as the Court must in a motion to

dismiss, Plaintiff’s claims could not have been litigated in the Coverage Lawsuit. 

Although the final judgment in the Coverage Lawsuit dismissed Insureds’ claims for

breach of contract and bad faith, Plaintiff alleges separate violations of the Policy

occurred in March 2005 and January 2007. Additionally, Plaintiff seeks a declaration of

his rights under the Policy based on his status as assignee under the Damron agreement

and judgment creditor under the Wojtunik Lawsuit, circumstances which did not exist

when the Coverage Lawsuit was filed.

In sum, although the claims in the instant action relate to and center on

Defendant’s obligations under the Policy, these claims are separate and distinct from

those sued upon in the Coverage Lawsuit.

Accordingly,

IT IS HEREBY ORDERED DENYING Defendant’s Motion to Dismiss (Dkt.

26).

DATED this 20th day of September, 2007.

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