Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-00312/USCOURTS-caed-2_05-cv-00312-3/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1331 Fed. Question: Breach of Contract

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

SOVEREIGN GENERAL INSURANCE No. 2:05-cv-0312-MCE-DAD

SERVICES, INC., a California 

corporation, Consolidated with

2:05-cv-1389-MCE-DAD

Plaintiff,

v. MEMORANDUM AND ORDER

SCOTTSDALE INSURANCE COMPANY,

an Ohio corporation, NATIONAL

CASUALTY COMPANY, a Wisconsin

corporation, SCOTTSDALE

INDEMNITY COMPANY, an Ohio

corporation, WESTERN HERITAGE

INSURANCE COMPANY, an Arizona

corporation, R. MAX

WILLIAMSON, an individual,

JOSEPH A. LUGHES, an

individual, and DOES 1 through

100, inclusive,

Defendants.

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Case 2:05-cv-00312-MCE -DAD Document 41 Filed 03/09/06 Page 1 of 12
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The instant Motion is alternatively framed as a Motion to 1

Dismiss under Federal Rule of Civil Procedure 12(f), and as a

Motion for More Definite Statement under Rule 12(e). 

All further references to “Rule” or “Rules” are to the 2

Federal Rules of Civil Procedure unless specified otherwise.

2

This consolidated litigation arises from the termination of

agency agreements between Sovereign General Insurance Services,

Inc. (“SGI”), a surplus line broker, and four insurance

companies, Scottsdale Insurance Company and its subsidiaries,

Scottsdale Indemnity Company, National Casualty Company and

Western Heritage (hereinafter collectively referred to as

“Scottsdale” unless otherwise noted). SGI’s initial lawsuit,

filed against Scottsdale in state court, was removed to this

Court on diversity of citizenship grounds pursuant to 28 U.S.C.

§§ 1332 and 1441. That lawsuit alleges that Scottsdale

improperly deprived SGI of contingent commissions and loss of

prospective business in terminating its agreements. Scottsdale

subsidiary Western Heritage then proceeded to file its own action

in the United States District Court of Arizona, contending that

SGI wrongfully failed to remit insurance premiums due Western

Heritage. SGI’s Amended Counterclaim and Cross-Claim in that

action (hereinafter referred to as the “Counterclaim”) is the

subject of the Motion to Dismiss now before the Court. 1

Scottsdale’s Motion is multi-pronged. First, it argues that

SGI’s Counterclaim is duplicative of the allegations made in its

own lawsuit and should be stricken as redundant under the

provisions of Federal Rule of Civil Procedure 12(f). 

2

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Because oral argument would not be of material assistance, 3

this matter was deemed suitable for decision without oral

argument. E.D. Local Rule 78-230(h).

This section is derived from the allegations contained in 4

SGI’s Amended Counterclaim.

3

Scottsdale next contends that the Counterclaim fails to state a

viable cause of action in any event and should be dismissed for

failure to state a claim upon which relief can be granted

pursuant to Rule 12(b)(6). Finally, Scottsdale asks that the

Counterclaim be dismissed for uncertainty under Rule 12(e)

inasmuch as the role of certain parties added as counterclaimants

cannot reasonably be ascertained.

Scottsdale’s Motion will be granted in part and denied in

part as set forth below.3

BACKGROUND4

In 1995, SGI entered into general agency and profit-sharing

agreements with the Scottsdale entities pursuant to which SGI

placed insurance business written by Scottsdale. While the

agency agreements themselves could be terminated at-will, they

also contained provisions specifying that the rights to renewal

of existing policies placed by SGI would remain the property of

SGI. Moreover, the profit-sharing agreements specified that

additional commission payments were payable to SGI depending on

the underwriting profits realized by Scottsdale on business

placed by SGI.

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4

According to SGI’s Amended Counterclaim, in 2000 it

purchased an errors and omissions policy from one of the

Scottsdale subsidiaries, National Casualty, to satisfy

contractual obligations imposed by Scottsdale that required such

coverage. After a claim was made against that policy in 2001,

National General reserved its rights and filed a declaratory

relief action seeking judicial determination that it owed no duty

to defend or indemnify SGI as to the pending claim. After

learning that National had commenced its declaratory relief

lawsuit, SGI contacted Scottsdale’s President and Chief Operating

Officer, R. Max Williamson. SGI expressed concern with respect

to National Casualty’s attempt to disclaim coverage for what SGI

considered to be normal conduct and activities of a surplus line

broker falling within the scope of the errors and omissions

policy.

SGI alleges that Williamson responded to that concern by

causing SGI’s agency and profit-sharing ageements with Scottsdale

to be terminated on June 28, 2004, just two days before

Scottsdale owed SGI in excess of $400,000.00 in additional

commission payments. SGI further alleges that although it was

also entitled to ownership, use and control of residual

commission income following policy renewals, Scottsdale deprived

them of that right by soliciting and accepting renewals through

competing surplus line brokers and SGI’s retailers. SGI alleges

that this loss of renewal business between August 2004 and August

2005 exceeded $650,000.00.

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5

On December 16, 2004, SGI filed suit against Scottsdale in

San Joaquin County Superior Court, alleging causes of action for

breach of contract, breach of the implied covenant of good faith

and fair dealing, and interference with prospective economic

advantage. SGI also sought an accounting from Scottsdale as to

its profit-sharing loss ratios. As indicated above, this action

was removed by Scottsdale to federal court on diversity grounds

on or about February 16, 2005.

Despite the pendency of SGI’s action, Scottsdale subsidiary

Western Heritage proceeded to file a separate action seeking to

recoup more than $1,000,000.00 in premiums collected by SGI and

allegedly not paid to Western Heritage. Although Scottsdale

cites this purported failure on SGI’s part as a defense to any

ownership interest pertaining to policy renewals (see

Scottsdale’s Moving Papers, 9:10-12), Western Heritage

nonetheless elected to file a separate action rather than

counterclaim in SGI’s already pending lawsuit. 

In response to the Western Heritage action, SGI asserted its

Counterclaim which offered a similar but expanded version of the

allegations already pled in its own action. Five of the six

claims were repeated, albeit with slight modifications, and SGI’s

initial claim for interference with prospective economic

advantage was broken into separate variants premised

alternatively on negligent and intentional conduct. 

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6

In addition, SGI’s Counterclaim asserts a claim premised on

fraud, arguing that Scottsdale issued its errors and omissions

policy with no intention of honoring that policy for its stated

purpose of providing professional liability coverage for SGI as a

wholesaler, general agent and surplus line broker. Finally, the

SGI Counterclaim adds two new individuals, Martin F. Sullivan and

Gloria Sullivan, as counterclaimants.

As enumerated above, Scottsdale’s various objections to the

Counterclaim are the basis for the Motion now before the Court.

STANDARD

Turning first to Scottsdale’s Motion premised on Rule 12(f),

any portion of a pleading may be stricken as redundant under that

subsection, although such motions are rarely granted and are

generally disfavored. See, e.g., Sapiro v. Encompass Ins., 221

F.R.D. 513, 516-17 (N.D. Cal. 2004). 

With respect to that portion of Scottsdale’s motion seeking

dismissal for failure to state a claim under Rule 12(b)(6), all

allegations of material fact must be accepted as true in

considering such a motion and construed in the light most

favorable to the nonmoving party. Cahill v. Liberty Mut. Ins.

Co., 80 F.3d 336, 337-38 (9 Cir. 1996). A pleading will not be th

dismissed for failure to state a claim “‘unless it appears beyond

doubt that [its proponent] can prove no set of facts in support

of [the] claim that would entitle [it] to relief.’” 

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7

Yamaguchi v. Dep’t of the Air Force, 109 F.3d 1475, 1480 (9 Cir. th

1997) (quoting Lewis v. Tel. Employees Credit Union, 87 F.3d

1537, 1545 (9 Cir. 1996). th

Finally, with regard to Scottsdale’s request for a more

definite statement of SGI’s claims, such a motion is permitted

before interposing a responsive pleading “[i]f a pleading . . .

is so vague or ambiguous that a party cannot reasonably be

required to frame a responsive pleading.” Fed. R. Civ. P. 12(e). 

A Rule 12(e) motion is proper only when a pleading is so

indefinite that the party to whom it is directed cannot ascertain

the nature of the claim being asserted. Gay-Straight Alliance

Network v. Visalia Unified Sch. Dist., 262 F. Supp. 2d 1088, 1099 

(E.D. Cal. 2001). Such a motion must be denied if the pleading

is specific enough to apprise the responding party of the claim’s

substance. Id. The Court should also deny a motion for more

definite statement if the detail sought by way of the motion is

available through discovery. Id.

ANALYSIS

A. Scottsdale’s Rule 12(f) Motion

Scottsdale urges the Court to strike SGI’s Counterclaim in

its entirety, arguing that the allegations contained therein are

“largely duplicative” of the claims already made by SGI in its

own lawsuit. 

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8

The Counterclaim, however, contains both new causes of action

(for both intentional and negligent interference with prospective

economic advantage), new parties (Martin R. Sullivan and Gloria

Sullivan) and new allegations (even Scottsdale concedes that

additional paragraphs and other miscellaneous changes have been

made, see Moving Papers, 13:3-5). Particularly in view of the

disfavor with which motions under Rule 12(f) are viewed (Sapiro

v. Encompass Ins., 221 F.R.D. at 516-17), the Court declines at

this time to parse through each and every allegation of the

Counterclaim to determine just which contentions were already

voiced in SGI’s initial Complaint. Moreover, while Scottsdale

complains of the duplicity of litigation posed by SGI’s

Counterclaim, it contributed to the procedural complexity of

these cases by electing to file an entirely new lawsuit rather

than registering its defenses to SGI’s action (in the form of

alleging policy premium nonpayment) by way of counterclaim/crossclaim to SGI’s lawsuit. The Court will accordingly not strike

SGI’s Counterclaim as redundant and/or duplicative, and denies

Scottsdale’s Motion in that regard.

B. Failure to State Viable Claims

Scottsdale moves to dismiss four of the eight claims pled in

SGI’s Counterclaim by arguing that at-will provisions contained

in the agency agreements at issue necessarily preclude any breach

of contract claim, as stated in Second and Fourth Causes of

Action. 

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9

The same at-will status, according to Scottsdale, also prevents

SGI from asserting a viable claim for breach of the covenant of

good faith and fair dealing (in the First and Third Causes of

Action) since any claim for breach of the covenant depends on an

underlying contractual relationship.

SGI does not dispute the at-will provisions which permitted

Scottsdale to terminate its agency relationship, but points out

that Scottsdale’s right to terminate any ongoing relationship

does not give it a corresponding right to forego all obligations

contemplated by the agreement between the parties. The fact that

Scottsdale could terminate its agency agreement with SGI, for

example, does not mean that it can also refrain from paying

additional commissions already earned, as alleged by SGI. Nor

does it means that Scottsdale can usurp SGI’s vested ownership

interest in policy renewal rights. These are the obligations

upon which SGI’s contractually based claims appear to rest, and

the Court must assume those rights are genuine for purposes of

ruling on the present motion. To the extent that the agreements

guaranteed SGI certain rights, as SGI contends, claims sounding

in contract are available to redress breaches of those rights. 

In addition, it is axiomatic that the covenant of good faith and

fair dealing is designed to protect a party’s rights to receive

benefits under an agreement, which again is invoked by SGI’s

allegations in this case. See Foley v. Interactive Data Corp.,

47 Cal. 3d 654, 681 (1988). Hence Scottsdale’s motion as

directed to the First through Fourth Causes of Action stated in

SGI’s Counterclaim is denied.

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10

While Scottsdale argues that SGI’s rights in this respect

are defeated because it has not paid Scottsdale certain premium

payments owed, the Court will not, and cannot, resolve that

factual dispute in the context of a motion to dismiss. Because

Scottsdale’s challenge to the interference with prospective

advantage claims, as well as SGI’s claim for an accounting, are

also premised on such claims, they too fail. This leaves

Scottsdale’s challenge to the sufficiency of SGI’s fraud claim as

the only remaining substantive issue to be addressed.

In asserting fraud, SGI contends that Scottsdale issued an

errors and omissions policy to SGI, knowing of SGI’s reliance

that such policy would cover its potential professional liability

as a surplus line broker, with no intention of honoring that

policy for the purpose for which it was written. SGI

specifically contends that Carol Chamberlain, a managing general

agent for Scottsdale, made representations during the course of

negotiations for the purchase of such policy that she knew to be

false with respect to the scope of coverage being offered. SGI

further contends that it was damaged by having to expend defense

costs in excess of $100,000 to secure coverage that Scottsdale

had no intention of otherwise extending.

While Scottsdale correctly asserts that claims for fraud

must be pled with specificity in accordance with Rule 9(b), the

Court believes that SGI’s allegations are sufficient to survive a

pleading challenge at this stage of the litigation. SGI has not

only specified the requisite fraudulent misrepresentation, but it

has alleged the manner in which the representations were made and

from whom they purportedly emanated. 

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That suffices to state a potentially viable claim. See In re

GlenFed, Inc. Secur. Litig, 42 F.3d 1541, 1547, n.7 (9th Cir.

1994). Scottsdale’s Motion to Dismiss as to the Eighth Cause of

Action, for fraud, is therefore also denied.

C. Claim for Uncertainty under Rule 12(e)

As indicated above, a claim for uncertainty properly lies

where a pleading is so vague and ambiguous that a response cannot

be reasonably formulated. Fed. R. Civ. P. 12(e). Scottsdale

alleges that while Martin F. Sullivan and Gloria Sullivan are

ostensibly listed as counterclaimants/cross-claimants in the

preamble to SGI’s Amended Counterclaim, their role in claims

being asserted is not otherwise clarified. Their status as

parties is not explained, the causes of action themselves refer

only to Sovereign General, and the prayer for relief contains no

mention of their alleged damage. The only substantive reference

to the Sullivans appears in the Eighth Cause of Action, for

fraud, but even that claim does not specify just who the

Sullivans are or what role they occupy in this litigation. 

Scottsdale’s claim of uncertainty is therefore well taken, and

its request for a more definite statement under Rule 12(e) will

accordingly be granted in order to properly clarify the

Sullivans’ place in this lawsuit.

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CONCLUSION 

 

For the reasons stated above, Scottsdale’s Motion is denied,

except to the extent that SGI’s Amended Counterclaim is fatally

uncertain as the role of Martin F. Sullivan and Gloria Sullivan

in this litigation. Plaintiff will be accorded ten (10) days

following the date of this Order to make a more definite

statement in that regard; otherwise, the Sullivan’s inclusion in

the Counterclaim is deemed stricken.

 IT IS SO ORDERED.

DATED: March 8, 2006

_____________________________

MORRISON C. ENGLAND, JR

UNITED STATES DISTRICT JUDGE

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