Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_07-cv-01188/USCOURTS-cand-5_07-cv-01188-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Injunctive &amp; Declaratory Relief

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United States District Court

For the Northern District of California

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ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

CYY/MAG

United States District Court

For the Northern District of California

E-FILED on 11/30/07

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

HOUSTON CASUALTY COMPANY,

Plaintiff,

v.

INTERNATIONAL GRAND TOURS, INC.;

NORMAN RONNIE HANSEN a/k/a

NORMAN RONNIE HANSEN, JR. a/k/a RON

HANSEN; and DOES 1 to 10,

Defendants, 

EDWARDSVILLE [Ill] COMMUNITY

SCHOOL DISTRICT NO. 7, on Its Own

Behalf and as Assignee for Katie Bachman, et

al.,

Intervenors.

No. C-07-01188 RMW

ORDER GRANTING MOTION TO

INTERVENE; DENYING MOTION FOR

DEFAULT JUDGMENT

[Re Docket No. 26, 27]

Shortly before plaintiff Houston Casualty Company ("HCC") moved for default judgment

against defendants International Grand Tours, Inc. ("IGT") and its principal, Norman Ronnie Hansen

("Hansen"), the Edwardsville Community School District No. 7 ("School District") and thirty-three

individuals from the Edwardsville High School Spanish Club ("Spanish Club") filed a motion to

intervene (collectively referred to as "Applicants"). The court considers these two motions together. 

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 HCC's complaint notes that at least five suits have been filed against Hansen and IGT and that

numerous claims against defendants have been submitted directly to HCC. HCC Compl. ¶¶ 15-24.

ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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For the reasons set forth below, the court grants Applicants' motion to intervene and denies HCC's

motion for default judgment.

I. BACKGROUND

Defendant IGT is an educational travel agency in the business of selling group educational

tours through Mexico, Europe and other destinations worldwide. Compl. for Decl. Judgment by

HCC ("HCC Compl.") ¶ 6. IGT started its business around July 2004 and ceased operating in June

2005. Id. ¶ 7. In 2004, defendant Hansen negotiated to purchase the assets of JM Travel Selections,

Inc. ("JM Travel"), a company owned by Joseph and Sharon Maloof ("Maloofs"). Id. ¶ 9. The

result of the negotiation was a verbal purchase agreement between the Maloofs and Hansen. As part

of the agreement, the Maloofs were to sell their entire customer database and other intellectual

property to IGT, and IGT would employ the Maloofs as its directors of operations and sales. Id. ¶

10. According to HCC, the sale was never completed. Id. Beginning in 2005, IGT began canceling

pre-paid trips. Id. ¶ 11. It provided written notice of the cancellation and provided the participants

with various options including: (1) joining another tour group; (2) rescheduling the tour for a

different time; or (3) refunding all amounts paid. Many of the participants, including the Spanish

Club, chose the third option and demanded that IGT forward the funds as soon as possible. Id.

However, IGT failed to issue refunds as requested, so many of the participants filed suit against

defendants, or made claim directly against HCC as IGT's insurer.1

 Id. ¶ 12. 

HCC issued IGT a Professional Liability Errors & Omissions Insurance Policy, Policy No.

H704-16117 ("Policy"), with limits of liability of $5,000,000 per claim. The Policy provides

coverage for "any Claim first made against the insured" between October 19, 2004 and October 19,

2005, subject to a Retroactive Date of October 19, 2003 ("Policy Period"). Id. ¶¶ 25-26. 

Prior to the issuance of the Policy, defendants executed and submitted an application for

insurance dated August 23, 2004 ("Application"), which contains the following certification

statement:

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ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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I HEREBY DECLARE that, after inquiry, the above statements and particulars are true

and that I have not suppressed or misstated any, material fact and that I agree that this

application shall be the basis of the contract with the Underwriters. 

Id. ¶ 37. In response to Question 10 of the Application "Is the Application Firm controlled, owned

or associated with any other firm, corporation or company?" Defendants answered "Yes" and stated

that IGT's previous name was "Travel Selections, Inc." Id. ¶ 35. Defendants also stated in the

Application that similar insurance was currently in force by HCC with an expiration date of October

19, 2004 with an October 19, 2003 retroactive date. Id. ¶ 36. HCC contends that it issued the Policy

based upon this information, but subsequently discovered that IGT had not previously operated

under the name "Travel Selections, Inc.," and that IGT was not incorporated until August 2004. Id.

¶ 39. HCC asserts that had it known this information it would not have issued the Policy, or at least

increased premiums or excluded claims such as the ones that have been asserted against it by

participants in IGT's cancelled tours. On August 18, 2005, defendants were notified that the Policy

was cancelled effective August 18, 2005. Id. ¶ 34.

On February 28, 2007, HCC filed a complaint for declaratory relief on various grounds,

seeking rescission of the Policy due to fraud, misrepresentation and concealment of material facts

and an injunction preventing IGT and Hansen from prosecuting any proceeding against HCC

regarding the policy. See id. ¶¶ 52-58. On July 31 and August 28, 2007, HCC obtained a clerk's

entry of default against all defendants. Mot. for Default Judgment, Exs. A-C. Since defendants

never answered or otherwise responded to HCC's complaint, on October 9, 2007, HCC filed a

motion for default judgment pursuant to Fed. R. Civ. P. 54(c) for all the relief requested in HCC's

complaint for declaratory judgment, including an award of costs. Mot. for Default Judgment at 5. 

On September 25, 2007, prior to HCC filing its motion for default judgment, the School

District, one of the groups that has submitted a claim to HCC, moved to intervene, submitting a

complaint in intervention for declaratory relief ("School Dist. Compl.") against HCC. The School

District alleges that groups from the School District had traveled with JM Travel on a number of

occasions. Ms. Thompson, a Spanish teacher for the School District, had conducted regular business

with the Maloofs throughout the years. The School Dist. Comp. ¶ 14. Sometime in 2003,

Thompson received a brochure from the Maloofs regarding a trip to three South American

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ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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destinations. Id. ¶¶ 15-16. Based on the Maloofs' representations, Thompson showed her interest

and started to organize the trip for the members of the Spanish Club. Id. ¶¶ 17-18. Around March

2004, Thompson sent JM Travel an initial deposit of $300 per person, plus $95 per person for

registration and materials fee that she collected from the interested students. Id. ¶¶ 19-20. In

September 2004, Thompson received an undated letter from Joseph Maloof stating that he had

decided to cease JM Travel's operation, and he wanted to introduce the Spanish Club to IGT. The

Maloofs promised the Spanish Club that their contractual arrangements with JM Travel would

continue with IGT, and that IGT would be a more efficient and better operation. Id. ¶ 21. Later,

IGT sent a letter to the Spanish Club, stating that most of JM Travel's staff had joined IGT, and IGT

made the same promises as the Maloofs had made. Id. ¶ 22. Thereafter, the Spanish Club members

completed new applications and forwarded further payments to IGT as instructed. Id. ¶¶ 23-25. 

Beginning in December 2004, the Spanish Club began having surcharge problems with IGT. 

Id. ¶ 29. On May 19, 2005, Hansen notified Thompson that the Spanish Club's trip was canceled,

and informed the Spanish Club members that they could elect one of the three alternatives stated

above. Id. ¶¶ 32-36. All members requested a refund, however, IGT has not issued any refunds to

Spanish Club members. Id. ¶¶ 37-38. 

On September 12, 2006, the School District filed an action in the Superior Court of Santa

Clara County, Case No. 106-CV-070951, against IGT and Hansen, seeking recovery based on

negligence, breach of statutory duty and negligent misrepresentation ("State Action"). Id. ¶ 40. 

Hansen defaulted in the State Action. Id. ¶ 45. Because Applicants believe that their losses are

insured under the Policy, they move to intervene as of right pursuant to Fed. R. Civ. P. 24(a)(2),

seeking declaratory judgment that their recovery in the State Action are losses covered by the

Policy. Id. at 10; Mot. for Intervention at 3. 

II. ANALYSIS

Applicants assert that they are entitled to intervene of right under Rule 24(a)(2) because their

claims for general damages and emotional distress resulting from defendants' negligent

misrepresentations are covered by the Policy that HCC seeks to rescind by its declaratory relief

action. In the alternative, they seek permissive intervention under Rule 24(b), on the grounds that

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ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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the Applicants' claims and the coverage in dispute share common issues of law and fact. Applicants

also oppose HCC's motion for default judgment.

A. Motion for Intervention 

Rule 24(a)(2) permits intervention as of right:

[u]pon timely application . . . (2) when the applicant claims an interest relating to the

property or transaction which is the subject of the action and the applicant is so

situated that the disposition of the action may as a practical matter impair or impede

the applicant's ability to protect that interest, unless the applicant's interest is

adequately represented by existing parties.

Fed. R. Civ. P. 24(a)(2). The Ninth Circuit has set forth four requirements that must be met by a

party to support intervention as of right:

(1) the applicant must timely move to intervene; (2) the applicant must have a

significantly protectable interest relating to the property or transaction that is the

subject of the action; (3) the applicant must be situated such that the disposition of the

action may impair or impede the party's ability to protect that interest; and (4) the

applicant's interest must not be adequately represented by existing parties. 

Arakaki v. Cayetano, 324 F.3d 1078, 1083 (9th Cir. 2003). 

A proposed intervenor "bears the burden of showing that all the requirements for

intervention have been met." United States v. Alisal Water Corp., 370 F.3d 915, 919 (9th Cir.

2004). Courts traditionally interpret Rule 24 liberally in favor of applicants for intervention.

Donnelly v. Glickman, 159 F.3d 405, 409 (9th Cir. 1998). In considering a motion to intervene, the

district court must accept as true nonconclusory allegations of the motion and proposed complaint in

intervention "absent sham, frivolity or other objections." Southwest Center for Biological Diversity

v. Berg, 268 F.3d 810, 819 (9th Cir. 2001). 

1. Timeliness

The determination of timeliness is left to the district court's discretion. Dilks v. Aloha

Airlines, 642 F.2d 1155, 1156 (9th Cir. 1981). Courts weigh three factors in determining whether a

motion to intervene is timely: (1) the stage of the proceeding at which an applicant seeks to

intervene; (2) the prejudice to other parties; and (3) the reason for the length of the delay. Alisal

Water Corp., 370 F.3d at 921. In considering these factors, "any substantial lapse of time weighs

heavily against intervention." League of United Latin American Citizens v. Wilson, 131 F.3d 1297,

1302 (9th Cir. 1997). 

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ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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The School District filed the State Action in September 2006. HCC filed the instant action in

February 2007. In April and May 2007, counsel for HCC and counsel for the School District

discussed the underlying State Action as well as the instant declaratory relief action by HCC. 

During one of those conversations, counsel for the School District advised HCC that he would file a

motion to intervene in the instant action. HCC Opp'n at 3. However, Applicants did not file a

motion to intervene until September 25, 2007. Applicants provide no explanation for the delay in

seeking to intervene.

Although delay can strongly weigh against intervention, the mere lapse of time, without

more, is not necessarily a bar to intervention. United States v. Oregon, 745 F.2d 550, 552 (9th Cir.

1984). Here, HCC claims that it is more than a lapse of time that causes Applicants' motion to

intervene to be untimely. According to HCC, the proceedings are now significantly advanced: it

has obtained default against all defendants and now seeks default judgment that it is entitled to

rescind the Policy. Accordingly, HCC contends that it will be prejudiced if intervention is granted. 

Because entry of default judgment is at the court's discretion, HCC is not automatically

entitled to default judgment simply because it has obtained default against IGT and Hansen. And

because the court has not entered default judgment, Applicants' motion to intervene does not

implicate the concerns of granting intervention following the entry of judgment. See Calvert v.

Huckins, 109 F.3d 636, 638 (9th Cir. 1997) (post-judgment intervention generally disfavored

because it creates "delay and prejudice to existing parties"). The court finds that aside from

requiring HCC to prove its case on the merits, any delay will not result in prejudice to HCC. The

case has only been pending since February 2007 – a relatively short amount of time and, aside from

entry of default, no action has been taken. The court acknowledges that denying the entry of default

judgment may permit those who have claims against IGT to come forward, however requiring HCC

to at least prove up the allegations in its complaint in order to obtain a judgment in this matter does

not result in prejudice to HCC. Here, the court finds that although there appears to have been an

unexplained delay between the parties' discussion about intervention and the School District's

motion to do so, the motion for intervention is nevertheless timely because the delay has not resulted

in prejudice to HCC. 

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 The court expresses no opinion as to theories under which Applicants may proceed directly against

HCC. 

ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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2. Protectable Interest

The requirement of a significant protectable interest is generally satisfied when the interest is

protectable under some law, and that there is a relationship between the legally protected interest

and the claims at issue. Arakaki, 324 F.3d at 1084. An applicant generally satisfies the

"relationship" requirement only if the resolution of the plaintiff's claims actually will affect the

applicant. Id. 

Here, Applicants assert that their losses are of the type insured by the Policy. Applicants

further contend that because all defendants in the State Action have entered bankruptcy, their only

realistic possibility of recovery for the cancelled trip will likely be under the Policy. Mot. for

Intervention ¶¶ 9-10. 

HCC nevertheless contends that Applicants' interest is not a protectable one because they are

not parties to the Policy. HCC asserts that "absent an assignment of rights or a final judgment, a

third-party claimant may not bring direct action against an insurance company on the contract

because the insurer's duty flows to the insured." Reply at 2. Even assuming without deciding that

this is a true statement of the law, Applicants may nonetheless have a stake in the outcome of HCC's

lawsuit because they have filed the State Action against IGT. Should they obtain a money judgment

against HCC (which, taking the complaint in intervention as true would be likely, as IGT is alleged

to be in default in the State Action), Applicants would become judgment creditors, which may

permit them to proceed against directly against HCC under the Policy.2

 Their interest in the Policy,

thus supports their intervention in the instant action. 

 3. Impairment of Interest

"Having found that appellants have a significant protectable interest, we have little difficulty

concluding that the disposition of this case may, as a practical matter, affect it." Calif. ex rel.

Lockyer v. United States, 450 F.3d 436, 442 (9th Cir. 2006). Nevertheless, the mere fact that a

lawsuit would affect the proposed intervenors' interests is not enough if their interests would not be

impaired if they have "other means" to protect them. Id.

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ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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Although it is true that Applicants are not currently judgment creditors, it appears that they

have attempted to preserve their option to recover under the Policy: they filed the State Action

against defendants and made a demand on the insureds, providing proof of these demands to counsel

for HCC. The outcome of the instant action, particularly a judgment by default entitling HCC to

rescind the Policy, would materially impair Applicants' interest in recovering for their cancelled trip

if they were not permitted to intervene in this matter because absent the Policy there may be no other

means of recovering against defendants. 

4. Representation of Interest

The court considers three factors in determining the adequacy of representation: (1) whether

the interest of a present party is such that it will undoubtedly make all of a proposed intervenor's

arguments; (2) whether the present party is capable and willing to make such arguments; and (3)

whether a proposed intervenor would offer any necessary elements to the proceeding that other

parties would neglect. Arakaki, 324 F.3d at 1086 (9th Cir. 2003). The burden on proposed

intervenors in showing adequate representation is minimal, and would be satisfied if they could

demonstrate that representation of their interests "may be" inadequate. Id. (citing Trbovich v. United

Mine Workers of America, 404 U.S. 528, 538 (1972)). 

HCC asserts that the declaratory relief it seeks under the Policy is the same relief sought by

Applicants, and it therefore adequately represents the Applicants' interests. HCC Opp'n at 6-7. This

argument clearly lacks merit. Here, HCC would certainly not make Applicants' arguments that the

Applicants' claims are covered under the Policy, because HCC seeks recession of the Policy and an

injunction preventing IGT and Hansen from prosecuting any action based on that Policy. It is

obvious that HCC's and Applicants' interests conflict and that HCC will not adequately represent the

Applicants' interests in this matter. 

For these reasons, the court concludes that the School District's motion for intervention

should be granted pursuant to Rule 24(a)(2). Because the court finds that Applicants may intervene

as of right, it does not consider the alternative argument that permissive intervention would be

appropriate.

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ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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B. Motion for Default Judgment

Rule 55(b)(2) permits the court, following a defendant's default, to enter a final judgment in a

case. "The district court's decision whether to enter a default judgment is a discretionary one." 

Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). In exercising its discretion, the court may

consider a number of factors including: "(1) the possibility of prejudice to the plaintiff, (2) the merits

of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in

the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due

to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure

favoring decisions on the merits." Eitel v. McCool, 782 F.2d 1470, 1471-1472 (9th Cir. 1986)

As set forth above, HCC is prejudiced only to the extent that it will be required to prove up

its allegations against defendants in order to obtain judgment. TCI Group Life Ins. Plan v.

Knoebber, 244 F.3d 691, 701 (9th Cir. 2001) (to be prejudicial to plaintiff, the setting aside of a

judgment must result in greater harm than simply delaying resolution of the case). HCC argues that

there is no way for it to prosecute this action without some sort of response from the defendants,

however, HCC may submit a motion for summary judgment (which will likely be unopposed by

defendants unless they move to set aside the default against them). Additionally, the court has

concerns about the merits of HCC's claim. In defaulting, defendants are deemed to have admitted all

well-pleaded factual allegations contained in the complaint, see Fed. R. Civ. P. 55(a); Benny v.

Pipes, 799 F.2d 489, 495 (9th Cir. 1986), nevertheless, the court needs to be convinced that the

allegedly false representations by defendants on the insurance application would have been

sufficiently material to warrant rescission of the Policy, particularly in light of the potential impact

of that rescission on claimants against IGT and Hansen.

The court concludes that disposition of this case by motion supported by evidence and in

which the School District may argument is preferable to default judgment. To the extent that

denying the entry of default judgment results in prejudice to HCC, this prejudice is certainly

outweighed by the court's interest in resolving matters on the merits rather than by default. The

court thus denies HCC's motion for entry of default judgment. 

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ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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III. ORDER

For the foregoing reasons, the court grants Applicants' motion to intervene and denies HCC's

motion for default judgment. The parties shall appear for a case management conference on Friday,

January 11, 2008 at 10:30 a.m.

DATED: 11/30/07

RONALD M. WHYTE

United States District Judge

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ORDER GRANTING MOTION TO INTERVENE; DENYING MOTION FOR DEFAULT JUDGMENT —No. C-07-01188 RMW 

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Notice of this document has been electronically sent to:

Counsel for Plaintiff:

Louis Harrison Castoria louis.castoria@wilsonelser.com 

Sara J. Savage sara.savage@wilsonelser.com 

Counsel for Defendants:

No appearance

Counsel for Intervenors:

William Francis Abbott billabbott@earthlink.net

Counsel are responsible for distributing copies of this document to co-counsel that have not

registered for e-filing under the court's CM/ECF program.

Dated: 11/30/07 /s/ MAG

Chambers of Judge Whyte

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