Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_06-cv-02395/USCOURTS-casd-3_06-cv-02395-2/pdf.json

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

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-1- 06cv2395 WQH (NLS)

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

AMERICAN ECONOMY INSURANCE

COMPANY, an Indiana Corporation,

Plaintiff,

CASE NO. 06cv2395 WQH (NLS)

ORDER

(Doc. # 28)

vs.

NICEFORO HERRERA, individually and

doing business as Acapulco’s Produce

Market; NICHOLAS M. FINTZELBERG

doing business as MILNIK TRUST

PROPERTIES; LUIS BENITEZ; and

JOHANNA BENITEZ, by and through

her guardian ad litem, Luis Benitez,

Defendants.

HAYES, Judge:

The matter before the Court is the Motion to Dismiss the Complaint filed by Defendant

Nicholas M. Fintzelberg doing business as Milnik Trust Properties (“Milnik”). (Doc. # 28.)

I. Background

On February 22, 2007, Plaintiff American Economy Insurance Company (“AEI”) filed

the First Amended Complaint for Declaratory Relief and Rescission (“FAC”). (Doc. # 22.)

The FAC alleges as follows:

On January 19, 2006, Defendant Herrera applied for a business owners insurance policy

Case 3:06-cv-02395-WQH-CAB Document 43 Filed 09/11/07 Page 1 of 5
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with AEI. (FAC ¶ 9.) In his application, Herrera represented that his business was a “produce

store” and that he did not sell any imported products. (FAC ¶¶ 9-10.) Herrera failed to

disclose that he sold penicillin and syringes imported from Mexico to customers in his store.

(FAC ¶ 11-12.) AEI issued a business owners insurance policy to Herrera for the Janaury 23,

2006 to January 23, 2007 policy period. (FAC ¶ 14.) Milnik, the landlord of Herrera’s store,

was named on the policy as an additional insured. (FAC ¶ 14.)

On March 11, 2006, Andrea Suastegui, wife of Defendant Luis Benitez and mother of

Defendant Johanna Benitez, entered Herrera’s store and purchased, without a prescription,

penicillin and a syringe. (FAC ¶ 15.) Suastegui suffered medical distress immediately after

injecting the penicillin on March 11, 2006, and died later that day. (FAC ¶ 15.) On July 10,

2006, Defendant Luis Benitez and Defendant Johanna Benitez made a claim with AEI under

Herrera’s policy for the death of Suastegui. (FAC ¶ 15.)

In the FAC, AEI asserts the following five claims against all Defendants: (1) for

declaratory relief for rescission based upon concealment and misrepresentation of material

facts; (2) for rescission; (3) for declaratory relief for voidance of the policy based upon

concealment and misrepresentation; (4) for declaratory relief that no duty to defend is owed

and no duty to indemnify exists for the claim based upon the “professional services” exclusion

in the policy; (5) for declaratory relief that no duty to defend is owed and no duty to indemnify

exists under the policy for the claim based upon California Civil Code § 1668. (FAC at 1, 4,

5, 6, 8.)

On April 25, 2006, Milnik filed the Motion to Dismiss, arguing that subject-matter

jurisdiction does not exist. (Doc. # 28.) AEI opposes the motion. (Doc. # 34.)

II. Discussion

District courts have jurisdiction in civil actions where there is complete diversity of

citizenship among the parties and the amount in controversy exceeds $75,000, exclusive of

interest and costs. See 28 U.S.C. § 1332(a). “Generally, the amount in controversy is

determined from the face of the pleadings. The sum claimed by the plaintiff controls so long

as the claim is made in good faith. To justify dismissal, it must appear to a legal certainty that

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1

 Milnik has not filed a “speaking motion,” that is, Milnik has not attacked jurisdiction

with extrinsic evidence. See Trentacosta v. Frontier Pac. Aircraft Indus., Inc., 813 F.2d 1553,

1558 (9th Cir. 1987). Because Milnik has made a “facial” attack of jurisdiction, AEI may meet

its burden of showing jurisdiction by pleading sufficient allegations to show a proper basis for

the Court to assert subject-matter jurisdiction over the action. See McNutt v. Gen. Motors

Acceptance Corp., 298 U.S. 178, 189 (1936); Fed. R. Civ. P. 8(a)(1).

2

 Milnik argues that because the FAC alleges that Defendant Luis Benitez and

Defendant Johanna Benitez made a claim with AEI, but the FAC does not allege that they have

filed a lawsuit, the amount in controversy is too speculative to satisfy § 1332. (Doc. # 35 at

4.) In support of this argument, Milnik relies upon General Insurance Co. of America v.

Lawrence Walner & Associates, No. 98C5472, 1999 WL 412645 (N.D. Ill., May 28, 1999).

In Walner, the court stated:

[Th]ere is no subject matter jurisdiction over the rescission counts. . . . The

instant suit is based on possible claims by Walner, and it is only those possible

claims that would create an amount in controversy in excess of the jurisdictional

amount. However, because possible claims cannot be considered, there is no

basis for finding the jurisdictional amount required by 28 U.S.C. § 1332.

Id. at *1 (emphasis in original). By contrast, the FAC alleges that the Benitezes have made a

claim with AEI for the death of Suastegui. (FAC ¶ 15.) The Benitezes’ claim is no longer a

“possible” claim, but is alleged to be an actual claim. Therefore, Walner is inapposite.

-3- 06cv2395 WQH (NLS)

the claim is really for less than the jurisdictional amount.” Crum v. Circus Circus Enter., 231

F.3d 1129, 1131 (9th Cir. 2000) (quotation and citations omitted).1

 

The FAC alleges that there exists complete diversity between AEI and all Defendants

(FAC ¶¶ 1-5), and “[t]he amount in controversy, exclusive of interest and costs, exceeds the

sum of $85,000” (FAC ¶ 6). These allegations are sufficient to allege diversity jurisdiction

pursuant to 28 U.S.C. § 1332.2

California law “permits an insurer to rescind a policy when the insured has

misrepresented or concealed material information in connection with obtaining insurance.”

TIG, Ins. Co. of Mich. v. Homestore, Inc., 137 Cal. App. 4th 749, 755-56 (2006) (citing Cal.

Ins. Code § 331). A rescission “effectively renders the policy totally unenforceable from the

outset, so that there never was any coverage. . . .” Atmel Corp. v. St. Paul Fire & Marine, 426

F. Supp. 2d 1039, 1044 (N.D. Cal. 2005); see also Imperial Cas. & Indem. Co. v. Sogomonian,

198 Cal. App. 3d 169, 182 (1988). A rescission extinguishes an insurance policy ab initio,

“as though it never existed,” and those claiming to be insureds “in law, never were insureds

under [the] policy of insurance.” Atmel Corp., 426 F. Supp. 2d at 1045; see also Sogomonian,

198 Cal. App. 3d at 184. Thus, “there is no duty to defend if an insurer has unilaterally

rescinded a policy unless and until the rescission has been set aside.” Atmel Corp., 426 F.

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Supp. 2d at 1044-46; see also Sogomonian, 198 Cal. App. 3d at 182-84. A rescission avoids

liability even on claims pending at the time of rescission. See Atmel Corp., 426 F. Supp. 2d at

1044; Sogomonian, 198 Cal. App. 3d at 182. 

AEI has adequately alleged a rescission action under California law. The FAC alleges

that “the insured has misrepresented or concealed material information in connection with

obtaining insurance.” TIG, Ins., 137 Cal. App. 4th at 755-56 (citing Cal. Ins. Code § 331).

Moreover, a rescission applies “to all insured under the contract, including additional insureds,

unless the contract provides otherwise.” Cal. Ins. Code § 650; see also TIG, Ins., 137 Cal.

App. 4th at 756; see also U.S. Specialty Ins. Co. v. Bridge Capital Corp., 482 F. Supp. 2d

1164, 1169 (C.D. Cal. 2007). Milnik is alleged to be an additional insured under the policy

AEI issued to Herrera. (FAC ¶ 14.) Therefore, AEI has stated a rescission claim against

Milnik.

“Because claims of . . . rescission provide an independent basis for federal diversity

jurisdiction, the district court is without discretion to remand or decline to entertain these

causes of action. Indeed, the district court has a ‘virtually unflagging’ obligation to exercise

jurisdiction over these claims.” Gov’t Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1226 n.6

(9th Cir. 1998) (quoting First State Ins. Co. v. Callan Assoc., 113 F.3d 161, 163 (9th Cir.

1997)). Because the FAC adequately alleges diversity jurisdiction, and because Milnik is a

proper party to AEI’s rescission claim, this Court has a “virtually unflagging” obligation to

exercise jurisdiction over Milnik.

The sole remaining issue is whether the Court will exercise jurisdiction over AEI’s

separate claims for declaratory relief.

The Declaratory Judgment Act allows a federal court to “declare the rights and other

legal relations” of parties to a “case of actual controversy.” 28 U.S.C. § 2201; see also

Spokane Indian Tribe v. U.S., 972 F.2d 1090, 1091 (9th Cir. 1992). “First, the court must

inquire whether there is a case of actual controversy within its jurisdiction. Jurisdiction to

award declaratory relief exists only in a case of actual controversy. We have held that this

requirement is identical to Article III’s constitutional case or controversy requirement.” Am.

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States Ins. Co. v. Kearns, 15 F.3d 142, 143 (9th Cir. 1994) (citations omitted). The test is

“whether ‘there is a substantial controversy, between parties having adverse legal interests, of

sufficient immediacy and reality to warrant the issuance of a declaratory judgment.’”

Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 671 (9th Cir. 2004) (quoting Maryland Cas.

Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941)).

The FAC alleges that the Benitezes have made a claim for benefits under the AEI policy

issued to Herrera. Coverage under the policy has been implicated, and as to all of the insureds

under the policy–including Milnik–there is now more than “an abstract or hypothetical

disagreement” over the issues of whether the policy should be declared rescinded (as alleged

in the First Claim), or void, (as alleged in the Third Claim), or subject to a policy exclusion (as

alleged in the Fourth Claim), or in violation of California public policy (as alleged in the Fifth

Claim). Id. The Court finds that there is a case or controversy.

“[I]f there is a case or controversy within its jurisdiction, the court must decide whether

to exercise that jurisdiction. The statute gives discretion to courts in deciding whether to

entertain declaratory judgments; it states that the court ‘may declare the rights . . . of any

interested party.’” Am. States Ins., 15 F.3d at 144-45 (quoting 28 U.S.C. § 2201(a) (emphasis

added)). However, “when other claims are joined with an action for declaratory relief (e.g.,

. . . rescission . . .), the district court should not, as a general rule, remand or decline to

entertain the claim for declaratory relief. If a federal court is required to determine major

issues of state law because of the existence of non-discretionary claims, the declaratory action

should be retained to avoid piecemeal litigation.” Gov’t Employees Ins. Co. v. Dizol, 133 F.3d

1220, 1225-26 (9th Cir. 1998). Therefore, because of the presence of the rescission claim, this

Court will retain the claims for declaratory relief in the FAC.

III. Conclusion

The Motion to Dismiss the Complaint (Doc. # 28) is DENIED.

DATED: September 11, 2007

WILLIAM Q. HAYES

United States District Judge

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