Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-05752/USCOURTS-cand-4_06-cv-05752-4/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1441 Petition for Removal- Insurance Contract

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CITI APARTMENTS INC.; PRIME APARTMENT

PROPERTIES, LLC; PRIME APARTMENT

PROPERTIES I, LLC; RMSV BAY CITI

PROPERTIES I DE, LLC; RMSV BAY CITI

PROPERTIES I, LLC; 124 MASON, DE,

LLC; TROPHY PROPERTIES, VI, LLC; LRL

CITI PROPERTIES I DE, LLC; FRANK

LEMBI; WALTER LEMBI; and ANDREW K.

HAWKINS,

Plaintiffs,

v.

MARKEL INSURANCE COMPANY; and DOES 1

through 100, inclusive,

Defendants.

 /

Nos. C 06-5752 CW

C 06-7086 CW

ORDER GRANTING

DEFENDANT'S MOTIONS

FOR SUMMARY

JUDGMENT, DENYING

PLAINTIFFS' CROSSMOTION FOR PARTIAL

SUMMARY JUDGMENT AND

GRANTING PLAINTIFFS'

MOTION FOR LEAVE TO

FILE A FIRST AMENDED

COMPLAINT

Defendant Markel Insurance Company moves for summary judgment

in these two related actions. Plaintiffs oppose the motions,

cross-move in both cases for partial summary judgment and move for

leave to file a consolidated first amended complaint (FAC). 

Defendant opposes Plaintiffs' cross-motion. The matter was heard

on May 11, 2007. Having considered all of the papers filed by the

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parties, the evidence cited therein and oral argument on the

motions, the Court GRANTS Defendant's motions for summary judgment,

DENIES Plaintiffs' cross-motion for partial summary judgment, and

GRANTS Plaintiffs' motion for leave to file a FAC.

BACKGROUND

This insurance coverage and bad faith action arises out of a

commercial general liability insurance policy issued by Defendant

to Plaintiffs with policy dates covering December 31, 2005 through

December 31, 2006. Plaintiffs are owners, managers, employees or

shareholders of residential apartment buildings in San Francisco. 

In April and August, 2006, Plaintiffs were sued by groups of

tenants in two separate wrongful eviction suits. Those underlying

suits are Dungca v. Citi Apartments (S.F. Super. Ct. 06-451694) and

Moninger v. Citi Apartments (S.F. Super. Ct. 06-454082). The suits

alleged the same four causes of action: (1) violation of the San

Francisco Rent Ordinance, (2) violation of California Civil Code 

§ 1940.2, (3) and (4) breach of the implied covenant of quiet

enjoyment under contract and tort law, (5) nuisance, (6) and (7)

breach of the implied warranty of habitability under contract and

tort law, (8) negligence, (9) intentional infliction of emotional

distress, and (10) unfair business practices. Plaintiffs' Exhibits

2 and 14. 

On June 6, 2006, Defendant sent a reservation of rights letter

to Plaintiffs indicating that it intended to represent them in the

Dungca suit, but that it reserved its right to limit its

indemnification to the policy period and limits. Plaintiffs

contended that Defendant's reservation of rights created a conflict

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of interest entitling them to independent counsel under California

Civil Code § 2860. Defendant disagreed and continued to assert

that there was no conflict of interest sufficient to trigger the

right to independent counsel. 

After exchanging several letters with Defendant, reiterating

their arguments for the right to independent counsel, Plaintiffs

filed the suit based on the Dungca action on September 16, 2006. 

They filed their suit based on the Moninger action on November 15,

2006, after receiving Defendant's reservation of rights letter in

that case on September 28, 2006. Plaintiffs seek compensatory

damages, reimbursement, and costs and fees based on their breach of

contract, declaratory relief, bad faith and reimbursement claims in

each suit. Defendant's motion for summary judgment argues that

there were no conflicts of interest entitling Plaintiffs to

independent counsel. In the alternative, Defendant moves for

summary judgment on the bad faith claim, arguing that there was a

genuine dispute regarding its duty to provide independent counsel. 

Plaintiffs cross-move for partial summary judgment, arguing that

they were entitled to independent counsel as a matter of law. In

the alternative Plaintiffs move to continue Defendant's motion for

summary judgment pursuant to Federal Rule of Civil Procedure 52(f). 

After these cases were filed, Defendant's counsel settled both

of the underlying actions on behalf of Plaintiffs. Plaintiffs also

seek to file a consolidated amended complaint that includes

allegations regarding those settlements. 

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LEGAL STANDARD

I. Summary Judgment

Summary judgment is properly granted when no genuine and

disputed issues of material fact remain, and when, viewing the

evidence most favorably to the non-moving party, the movant is

clearly entitled to prevail as a matter of law. Fed. R. Civ. P.

56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir.

1987).

The moving party bears the burden of showing that there is no

material factual dispute. Therefore, the court must regard as true

the opposing party's evidence, if supported by affidavits or other

evidentiary material. Celotex, 477 U.S. at 324; Eisenberg, 815

F.2d at 1289. The court must draw all reasonable inferences in

favor of the party against whom summary judgment is sought. 

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

587 (1986); Intel Corp. v. Hartford Accident & Indem. Co., 952 F.2d

1551, 1558 (9th Cir. 1991). 

Material facts which would preclude entry of summary judgment

are those which, under applicable substantive law, may affect the

outcome of the case. The substantive law will identify which facts

are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986).

Where the moving party does not bear the burden of proof on an

issue at trial, the moving party may discharge its burden of

production by either of two methods. Nissan Fire & Marine Ins.

Co., Ltd., v. Fritz Cos., Inc., 210 F.3d 1099, 1106 (9th Cir.

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2000). 

The moving party may produce evidence negating an

essential element of the nonmoving party’s case, or,

after suitable discovery, the moving party may show that

the nonmoving party does not have enough evidence of an

essential element of its claim or defense to carry its

ultimate burden of persuasion at trial. 

Id. 

If the moving party discharges its burden by showing an

absence of evidence to support an essential element of a claim or

defense, it is not required to produce evidence showing the absence

of a material fact on such issues, or to support its motion with

evidence negating the non-moving party's claim. Id.; see also

Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 885 (1990); Bhan v.

NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991). If the

moving party shows an absence of evidence to support the non-moving

party's case, the burden then shifts to the non-moving party to

produce "specific evidence, through affidavits or admissible

discovery material, to show that the dispute exists." Bhan, 929

F.2d at 1409. 

If the moving party discharges its burden by negating an

essential element of the non-moving party’s claim or defense, it

must produce affirmative evidence of such negation. Nissan, 210

F.3d at 1105. If the moving party produces such evidence, the

burden then shifts to the non-moving party to produce specific

evidence to show that a dispute of material fact exists. Id.

If the moving party does not meet its initial burden of

production by either method, the non-moving party is under no

obligation to offer any evidence in support of its opposition. Id.

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This is true even though the non-moving party bears the ultimate

burden of persuasion at trial. Id. at 1107.

Where the moving party bears the burden of proof on an issue

at trial, it must, in order to discharge its burden of showing that

no genuine issue of material fact remains, make a prima facie

showing in support of its position on that issue. UA Local 343 v.

Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1471 (9th Cir. 1994). That

is, the moving party must present evidence that, if uncontroverted

at trial, would entitle it to prevail on that issue. Id.; see also

Int’l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th

Cir. 1991). Once it has done so, the non-moving party must set

forth specific facts controverting the moving party's prima facie

case. UA Local 343, 48 F.3d at 1471. The non-moving party's

"burden of contradicting [the moving party's] evidence is not

negligible." Id. This standard does not change merely because

resolution of the relevant issue is "highly fact specific." Id.

II. Leave to File a First Amended Complaint

Federal Rule of Civil Procedure 15(a) provides that leave of

the court allowing a party to amend its pleading "shall be freely

given when justice so requires." Leave to amend lies within the

sound discretion of the trial court, which discretion "must be

guided by the underlying purpose of Rule 15 to facilitate decision

on the merits, rather than on the pleadings or technicalities." 

United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981) (citations

omitted). Thus, Rule 15's policy of favoring amendments to

pleadings should be applied with "extreme liberality." Id.; DCD

Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987)

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(citations omitted).

The Supreme Court has identified four factors relevant to

whether a motion for leave to amend should be denied: undue delay,

bad faith or dilatory motive, futility of amendment, and prejudice

to the opposing party. Foman v. Davis, 371 U.S. 178, 182 (1962). 

The Ninth Circuit holds that these factors are not of equal weight;

specifically, delay alone is insufficient ground for denying leave

to amend. Webb, 655 F.2d at 980. Further, the "liberality in

granting leave to amend is not dependent on whether the amendment

will add causes of action or parties." DCD Programs, 833 F.2d at

186. Rather, the court should consider whether the proposed

amendment would cause the opposing party undue prejudice, is sought

in bad faith, or constitutes an exercise in futility. Id. (citing

Acri v. Int’l Ass'n of Machinists & Aerospace Workers, 781 F.2d

1393, 1398-99 (9th Cir. 1986); United States v. City of Twin Falls,

806 F.2d 862, 876 (9th Cir. 1986); Howey v. United States, 481 F.2d

1187, 1190-91 (9th Cir. 1973); Klamath-Lake Pharm. Ass’n v. Klamath

Med. Serv. Bureau, 701 F.2d 1276, 1293 (9th Cir. 1983)).

Prejudice typically arises where the opposing party is

surprised with new allegations which require more discovery or will

otherwise delay resolution of the case. See, e.g., Acri, 781 F.2d

at 1398-99; Guthrie v. J.C. Penney Co., 803 F.2d 202, 210 (5th Cir.

1986). The party opposing the motion bears the burden of showing

prejudice. See DCD Programs, 833 F.2d at 186; Beeck v. Aquaslide

'N' Dive Corp., 562 F.2d 537, 540 (8th Cir. 1977).

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28 8

DISCUSSION

I. Summary Judgment

A. Entitlement to Independent Counsel

Under California law, "If the provisions of a policy of

insurance impose a duty to defend upon an insurer and a conflict of

interest arises which creates a duty on the part of the insurer to

provide independent counsel to the insured," the insurer must do so

unless the insured expressly waives in writing its right to

independent counsel. Cal. Civ. Code § 2860(a). Further, "a

conflict of interest does not exist as to allegations or facts in

the litigation for which the insurer denies coverage; however when

an insurer reserves its rights on a given issue and the outcome for

that coverage issue can be controlled by counsel first retained by

the insurer for the defense of the claim, a conflict of interest

may exist." Cal. Civ. Code § 2860(b). 

Plaintiffs contend that the terms of the policy and

Defendant's reservation of rights letters in the two underlying

cases created conflicts of interest entitling them to independent

counsel pursuant to § 2860 for several reasons.

1. Exclusion for any act committed "with the knowledge 

that the act would violate the rights of another"

Plaintiffs first argue that the policy exclusion for personal

and advertising injury "[c]aused by or at the direction of the

insured with the knowledge that the act would violate the rights of

another and would inflict personal and advertising injury" creates

a conflict of interest under California Civil Code § 2860. 

Plaintiffs' Exhibit 1 at 5. Plaintiffs characterize this exception

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1Cumis is the case that established the right to independent

counsel when there is a conflict of interest between the insurer

and insured in defending an action against an insured based on the

insurance policy's coverage. Many courts refer to the independent

counsel in situations such as this as "Cumis counsel." In 1987,

the California legislature codified the right to independent

counsel in California Civil Code § 2860. 

9

as one for intentional conduct and therefore argue that this is a

classic case of a need for independent counsel. 

In San Diego Navy Federal Credit Union v. Cumis Insurance

Society, Inc.,1 the California Court of Appeal held, 

Opposing poles of interest are represented on the one

hand in the insurer's desire to establish in the third

party suit [that] the insured's liability rested on

intentional conduct, and thus [there was] no coverage

under the policy, and on the other hand in the

insured's desire to obtain a ruling [that] such

liability emanated from the non-intentional conduct

within his insurance coverage.

162 Cal. App. 3d 358, 364 (1984) (internal quotations omitted).

Defendant acknowledges the classic Cumis situation but argues that

the exclusion in its policy, which it characterizes as a knowledge

exclusion, does not create a conflict of interest for two reasons. 

First, Defendant argues that it did not reserve its rights

under that provision and, if anything, its failure to do so

constitutes a waiver of the right to seek reimbursement under the

exclusion. Plaintiffs argue that Defendant included general

reservations, stating that it reserved the right "To assert any and

all bases for the denial of coverage under the policy, at law, or

in equity, regardless of whether or not such bases have been set

forth in this letter." Plaintiffs' Exhibits 7 & 16. 

In support of its argument that failure to assert a specific

exclusion constitutes a waiver of its rights under that exclusion,

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Defendant cites Miller v. Elite Insurance Co., 100 Cal. App. 3d 739

(1980). In Miller, the California court noted that "if a liability

insurer, with knowledge of a ground of forfeiture or noncoverage

under the policy, assumes and conducts the defense of an action

brought against the insured, without disclaiming liability and

giving notice of its reservation of rights, it is thereafter

precluded in an action upon the policy from setting up such ground

of forfeiture or noncoverage." 100 Cal. App. 3d at 755 (quoting

Insurance Co. of North America v. Atlantic Nat'l Ins. Co., 329 F.2d

769, 775-76 (4th Cir. 1964)). The court concluded that an

"insurer's unconditional defense of an action brought against its

insured constitutes a waiver of the terms of the policy and an

estoppel of the insurer to assert such grounds." Id. Because the

insurer "was in possession of all facts bearing on the [relevant]

claim[,] including potential coverage problems, the amount of

damage claimed, offers to compromise the claim and probable

liability estimates," but did not reserve its rights, it was

"estopped from asserting its coverage defenses" after settling the

case on behalf of the insured. Id. 

Similarly in Canadian Insurance Co. v. Rusty's Island Chip

Co., 36 Cal. App. 4th 491, 498 (1995), the court held that an

insurer's "failure to reserve its right to contest coverage under"

specific policy provisions "waived its right to assert those

exclusions as a basis for denying coverage." 

Because Defendant did not assert the knowledge exclusion,

thereby precluding it from asserting any coverage defense based

upon that exclusion, there could be no conflict of interest and no

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right to independent counsel on that basis.

2. Prior Publication and Timing

Plaintiffs also argue that Defendant's assertion of the "prior

publication" exclusion in its reservations of rights created a

conflict of interest establishing Plaintiffs' right to independent

counsel. The "prior publication" exclusion "precludes coverage for

the re-publication during the policy period, of publications that

were first made before the policy incepted." Defendant's exhibit 4

at 11. 

As Defendant points out, although it raised this exception, it

did so only as prophylactic measure. There was no present conflict

because the allegations regarding any statements made were included

as foundational support for the underlying plaintiffs' claims

rather than independent causes of action for defamation or invasion

of privacy. In the reservation of rights letters, Defendant

clearly stated, 

if a potential eventually does develop for damages

because of the 'personal and advertising injury'

offenses of oral or written publication of material that

slanders or libels a person or violates a person's right

of privacy, committed during the policy period, Markel

will indemnify the Defendants for such damages awarded 

. . ., subject to the prior publication exclusion if

applicable.

Defendant's exhibit 4 at 10-11. California courts have held, "A

mere possibility of an unspecified conflict does not require

independent counsel. The conflict must be significant, not merely

theoretical, actual, not merely potential." Dynamic Concepts v.

Truck Ins. Exch., 61 Cal. App. 4th 999, 1007 (1998) (citing Lehto

v. Allstate Ins. Co., 31 Cal. App. 4th 60, 71 (1994)).

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Plaintiffs similarly argue that Defendant's statement that it

would only cover those statements made "during the policy period"

created a conflict of interest. Not only was this conflict

theoretical as discussed above, but to the extent that the timing

of the statements would be essential to any possible claims,

whether the statements were made before, during or after the policy

period would be a factual issue outside of counsel's control. See

Cal. Civil Code § 2860(b) ("when an insurer reserves its rights on

a given issue and the outcome of that coverage issue can be

controlled by counsel first retained by the insurer for the defense

of the claim, a conflict of interest may exist"). 

The reservations of rights related to the timing of

Plaintiffs' acts did not create a conflict of interest entitling

them to independent counsel.

3. Ambiguity of Coverage Position

Plaintiffs next argue that the reservation of rights created a

conflict of interest "by virtue of its ambiguity." Plaintiffs'

Cross-Motion at 20. However, Plaintiffs provide no authority for

requiring independent counsel when an insurer's reservation of

rights is not clear. As with the unasserted knowledge exclusion

discussed above, the California courts have held that where an

insurer fails to raise an exclusion in its reservation of rights or

to "properly advise its insured of the reservation of rights," the

insurer "waives its right to assert those exclusions as a basis for

denying coverage." Canadian Ins. Co., 36 Cal. App. 4th at 498.

4. Settlement of Cases

Finally, Plaintiffs argue that Defendant's settlement of the

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2However, the Court notes that the cases Plaintiffs cite in

support of their argument are distinguishable. In those cases, the

courts found fault with the insurers' failure to inform the

insureds of offers to settle within policy limits when a finding of

liability was likely, thereby harming the plaintiffs when they were

later found liable for amounts in excess of their policy limits. 

See, e.g., Cain v. State Farm Mutual Auto. Ins. Co., 47 Cal. App.

3d 783, 791 (1975) (insurer rejected policy limit settlement offer

without notifying insured even though insurer knew that liability

likely would exceed the policy limits and there were credibility

problems with insured's testimony). As Defendant notes, California

courts have clearly held that where an insurance policy includes a

provision allowing an insurer to investigate and settle cases, the

insurer "has no liability to the insured for settling within the

policy limits." New Plumbing Contractors, Inc. v. Edwards, Sooy &

Byron, 99 Cal. App. 4th 799, 802 (2002). The policy in this case

states, "We may, at our discretion, investigate any 'occurrence'

and settle any claim or 'suit' that may result." Defendant's

Exhibit 1 at 1. Further, the Court is unaware of any case law

indicating that the settlement of a case without notice to an

insured creates a retroactive right to independent counsel. 

13

case without their knowledge or consent is evidence of a conflict

of interest that entitled them to independent counsel. However, as

presently plead, the complaint does not contain allegations

regarding the settlement of the cases. Therefore the Court

declines to address arguments related to the settlement of the

cases.2

 

Because there was no conflict of interest entitling Plaintiffs

to independent counsel, the Court grants Defendant's motion for

summary judgment on the breach of contract, declaratory relief and

reimbursement claims, which are based on allegations of the right

to independent counsel, and denies Plaintiffs' motion for partial

summary judgment on these claims. 

B. Breach of Implied Covenant of Good Faith and Fair Dealing

As stated above, the Court finds that Defendant did not breach

its contract with Plaintiffs by refusing to appoint independent

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3

Plaintiffs' motion to continue these motions for further

discovery pursuant to Federal Rule of Civil Procedure 56(f) is

DENIED. Plaintiffs seek to depose Defendant's claims people. 

However, this information is relevant to Defendant's intentions

during the claims processing period. Because the Court finds that

there was no conflict of interest entitling Plaintiffs to

independent counsel as a matter of law, the information Plaintiffs

might obtain cannot create a genuine issue of material fact. See

Rule 56(f); Mackey v. Pioneer Nat'l Bank, 867 F.2d 520, 524 (9th

Cir. 1989) ("A Rule 56(f) motion must show how additional discovery

would preclude summary judgment and why a party cannot immediately

provide 'specific facts' demonstrating a genuine issue of material

fact."). 

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counsel. Absent a breach of contract, there can be no breach of

the implied covenant of good faith and fair dealing. Waller v.

Truck Ins. Exchange, 11 Cal. 4th 1, 35-36 (1995), modified, 1995 WL

630039 (October 26, 1995) (citing Love v. Fire Ins. Exchange, 221

Cal. App. 3d 1136, 1153 (1990)).3 Therefore, the Court grants

Defendant's motion for summary judgment on this claim. 

II. Motion for Leave to File an Amended Complaint

Plaintiffs also move for leave to file an amended complaint,

"because additional information relating to the subject matter of

the existing dispute has been discovered since the filing and

serving of the original Complaint." Plaintiffs' opposition and

cross-motion at 33. They seek to include allegations regarding

Defendant's "failure to provide a full and complete defense to

Plaintiffs in the underlying Dungca and Moninger actions,"

including Defendant's "settling of the Dungca and Moninger actions 

without the insureds' knowledge, without advising the insureds,

without notifying the insureds of related offers and without

including them in the settlement process." Id. Defendant does not

oppose this motion to the extent it seeks to add new allegations. 

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4Defendant's objection to evidence submitted by Plaintiffs is

overruled as moot. The Court did not consider any improper or

inadmissible evidence in deciding these motions. 

The parties also request that the Court take judicial notice

of the complaints in the underlying lawsuits. The Court may take

judicial notice of a document filed in another court, not for the

truth of the matter asserted in the other litigation, but rather to

establish the fact of such litigation and filing. Simmons v. Am.

Airlines, 2002 WL 102604, *1 (N.D. Cal.) (applying Fed. R. Evid.

201). The documents presented by the parties serve to establish

the fact that the underlying litigation took place and the

allegations that were made against Plaintiffs. Accordingly, the

Court GRANTS Plaintiffs' request for judicial notice (Docket No. 60

in 06-5752) and GRANTS Defendant's requests for judicial notice

(Docket No. 15 in 06-5752 & Docket No. 14 in 06-7086)

15

Because leave to amend is freely given, the Court grants

Plaintiffs' motion for leave to file an amended complaint, provided

that it is consistent with this order and filed in good faith. 

CONCLUSION

For the foregoing reasons, the Court GRANTS Defendant's

motions for partial summary judgment (Docket No. 11 in 06-5752 and

Docket No. 12 in 06-7086), DENIES Plaintiffs' cross-motion for

partial summary judgment and GRANTS Plaintiffs' motion for leave to

file an amended complaint (Docket No. 53).4

 Plaintiffs may file an

amended consolidated complaint within ten days of the date of this

order. The complaint must be consistent with the Court's findings

in this motion. Defendant shall answer the complaint or file a

motion to dismiss within twenty days of the date the 

consolidated amended complaint is filed. Any motion to dismiss

will be heard on Thursday, August 23 at 2:00 PM. A case management

conference shall be held at that time whether or not a motion to 

Case 4:06-cv-05752-CW Document 74 Filed 06/11/07 Page 15 of 16
United States District Court

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dismiss is filed. Case management statements should be filed a

week in advance. 

IT IS SO ORDERED.

Dated: 6/11/07 

CLAUDIA WILKEN

United States District Judge

Case 4:06-cv-05752-CW Document 74 Filed 06/11/07 Page 16 of 16