Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_11-cv-00740/USCOURTS-caed-2_11-cv-00740-3/pdf.json

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

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

ALLIED PROPERTY AND CASUALTY 

INSURANCE COMPANY,

Plaintiff,

v.

ALVIN ROBERTS, SHIRLEY 

ROBERTS, ALFONSO GARCIA, 

JESSIE HERNANDEZ, ALBERT 

HUNG, MANUEL A.P. GONZALEZ 

AND ALLSTATE INSURANCE 

COMPANY,

Defendants.

No. 2:11-cv-00740-MCE-KJN

MEMORANDUM AND ORDER

Plaintiff Allied Property and Casualty Insurance Company (“Plaintiff”) brought this 

action seeking rescission of a homeowners insurance policy issued to Defendants Alvin 

and Shirley Roberts (“Defendants”) and a declaratory judgment that Plaintiff owes no 

duty or obligation to defend or indemnify Defendants in a tort action brought against 

them in Sacramento County Superior Court. On June 20, 2011, the Court stayed the 

federal action pending resolution of the state court proceedings. Currently before the 

Court is Plaintiff’s Motion to Lift Stay of the federal proceedings. For the reasons set 

forth below, Plaintiff’s Motion to Lift Stay is denied.1

 1 Because oral argument will not be of material assistance, the Court orders this matter submitted 

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BACKGROUND

This action arises from a dispute over insurance coverage and the defense of a 

tort claim brought in Sacramento County Superior Court (“Underlying Action”) against 

Defendants. (Defs.’ Opp’n. to Pl.’s Mot. to Lift Stay at 2, ECF No. 33.) The Underlying 

Action stems from a fire which took place on September 16, 2008, in a warehouse 

located on the property owned by Defendants in Galt, California, in which two individuals 

were killed and property was destroyed. Id. At the time of the fire there was a Rental 

Dwelling Policy in place (“Allied Policy”), issued by Plaintiff to Defendants, which covered 

the home located on the Galt property where the warehouse was located. (Pl.’s Mem. of 

P.&A. in Supp. of Pl.’s Mot. to Lift Stay at 2, ECF No. 30.) Based on the Allied Policy, 

Plaintiff provided a defense to the Underlying Action on behalf of Defendants, subject to 

a reservation of rights. (Compl. ¶ 31, ECF No. 2.)

Prior to obtaining the Allied Policy, Defendant had a homeowners insurance 

policy with Allstate (“Allstate Policy”) that purportedly covered both the home that existed 

on the property and the warehouse. (ECF No. 33 at 4, 10.) The Allstate Policy was in 

effect from October 3, 2006 to October 3, 2007. Id. at 4. On October 3, 2007, 

Defendants switched coverage in their homeowners policy to the Allied Policy, after 

speaking with “Chris” from Meyer & Cook Insurance Agency. Id. The Allied Policy was 

in effect from October 3, 2007 to October 3, 2008. Id. According to Defendants, “Chris” 

represented to Defendant Shirley Roberts that the new coverage under the Allied Policy 

would be the same or better than the Allstate Policy. Id. However, in acquiring the 

Allied Policy, Defendants did not mention the fact that the warehouse was located on the 

property, nor that any business activities were taking place on the property. (ECF No. 2 

¶ 14.)

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 on the briefs. E.D. Cal. Local Rule 78-230(g).

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At the time the fire occurred, the warehouse was being rented to Defendant Jesse 

Hernandez, who was using the warehouse to store materials and to facilitate his 

equipment rental business. (ECF No. 30 at 2.) The warehouse was also being used by 

Defendant Albert Hung for storage and to facilitate his artificial flower business. Id. at 

2-3. Additionally, several people were sleeping in the warehouse and the adjacent trailer 

at the time of the fire due to the ongoing business operations. Id. at 3. Two of the

individuals that were sleeping on the premises were killed in the fire and property was 

destroyed. Id. at 3. Defendants Hernandez and Hung are two of the plaintiffs in the 

Underlying Action, which alleges that Defendants knew or should have known that the 

warehouse was being used for business purposes. (ECF No. 33 at 2-3.) The 

Defendants have defended the Underlying Action by claiming that they had no 

knowledge of the business activities. Id.

PROCEDURAL HISTORY

On February 18, 2011, Plaintiff filed this action for rescission of the Allied Policy

and declaratory relief based on Plaintiff’s reservation of rights in the defense of the 

Underlying Action. Defendants’ Motion to Stay the proceeding was filed on April 26, 

2011. The Court granted the motion on June 20, 2011. The Court’s decision was based

in part on the fact that the Court’s determination of certain issues—namely, whether 

Defendants had knowledge of the business operations in the warehouse—could 

prejudice Defendants in the Underlying Action. (Mem. and Order Granting Defs.’ Mot. to 

Stay at 8-9, ECF No. 28.)

Plaintiff filed the current motion on June 20, 2013, seeking to lift the stay for the 

limited purpose of filing a motion for summary adjudication of two coverage defenses. 

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Specifically, Plaintiff seeks summary adjudication of two issues: (1) whether the 

warehouse/shop building where the fire took place was the “insured premises” under the 

subject insurance policy, and (2) whether the exclusion for “bodily injury” or “property 

damages” “that arises out of the business activity conducted on the insured premises” 

applies to bar insurance coverage. (ECF No. 30 at 1-2.) Plaintiff argues the Court’s 

adjudication of these issues would not involve the potential conflicts or prejudices that 

resulted in the stay. (ECF No. 30 at 1-2.) Defendants timely opposed Plaintiff’s motion, 

arguing that the same conflicts and prejudices still apply and that the stay should not be 

lifted. (ECF No. 33 at 15.)

STANDARD

A federal district court has broad discretion in deciding whether to issue a stay. 

Fed. Sav. & Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989). Indeed, “[a] 

trial court may, with propriety, find it is efficient for its own docket and the fairest course 

for the parties to enter a stay of an action before it, pending resolution of independent 

proceedings which bear upon the case.” Leyva v. Certified Grocers of Cal., Ltd., 

593 F.2d 857, 863 (9th Cir. 1979). This rule “does not require that the issues in such 

proceedings are necessarily controlling of the action before the court.” Id. at 863-64. 

Nonetheless, “[w]here it is proposed that a pending proceeding be stayed, the competing 

interests which will be affected by the granting or refusal to grant a stay must be 

weighed.” CMAX, Inc. v. Hall, 300 F.2d 265, 268 (9th Cir. 1962). “Among these 

competing interests are the possible damage which may result from the granting of a 

stay, the hardship or inequity which a party may suffer in being required to go forward, 

and the orderly course of justice measured in terms of the simplifying or complicating of 

issues, proof, and questions of law which could be expected to result from a stay.” Id. 

The corollary to the power to stay an action is “the ability to lift a stay previously 

imposed.”

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Boyle v. Cnty. of Kern, 1:03-cv-05162 OWW GSA, 2008 WL 220413, at *5 (E.D. Cal. 

Jan. 25, 2008).

Additionally, “district courts possess discretion in determining whether and when 

to entertain an action” seeking a declaratory judgment. Wilton v. Seven Falls Co., 

515 U.S. 277, 282 (1995). “In the declaratory judgment context, the normal principle that 

federal courts should adjudicate claims within their jurisdiction yields to considerations of 

practicality and wise judicial administration.” Id. at 288.

ANALYSIS

A. Request for Judicial Notice

Defendants’ Opposition to the current motion asks the Court to take judicial notice 

of several documents from the Underlying Action, including the ex parte application and 

motion for order to continue the trial date and the order continuing the trial. (Defs.’ Req. 

for Judicial Notice in Supp. of Defs.’ Opp’n to Pl.’s Mot. to Lift Stay.) The Court may take 

judicial notice of matters of public record. Fed. R. Evid. 201(b)(2); Lee v. City of L.A., 

250 F.3d 668, 689 (9th Cir. 2001) (“Under Fed. R. Evid. 201, a court may take judicial 

notice of ‘matters of public record.’”). Accordingly, judicial notice of these documents is 

appropriate.

Defendants also attached a document, which Defendants assert is a portion of 

the Allstate Policy, to a signed declaration of Defendant Shirley Roberts. Plaintiff objects 

to this document and asks the Court to strike the document from evidence, as it is not 

properly authenticated. However, the Court need not, and does not, consider this 

document in ruling on the instant motion, and therefore the objection is denied as moot.

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B. Motion to Lift Stay

A federal court sitting in diversity over a state law claim, as here, shall apply the 

law of the state where it is located. U.S. Fidelity and Guar. Co. v. Lee Investments LLC, 

641 F.3d 1126, 1133-34 (9th Cir. 2011). Thus, the Court must apply California law to 

determine whether lifting the stay previously ordered in this case is appropriate. 

Under California law, an insurer’s duty to defend the insured is broader than the 

duty to indemnify, and that duty continues until the underlying lawsuit is resolved or the 

issue of insurance coverage can be determined without prejudice to the insured. 

Montrose Chem. Corp. v. Super. Ct. (Montrose II), 25 Cal. App. 4th 902, 909 (1994). 

Plaintiff in this case argues that the while the underlying lawsuit has not yet resolved, the 

issue of insurance coverage can be determined without prejudice to the insured. 

However, California law also states that when an insurer seeks a declaratory 

judgment regarding the coverage of an insured, and there is an underlying third-party 

action against the insured, “a stay of the declaratory judgment action pending resolution 

of the underlying third-party suit is appropriate ‘when the coverage question turns on 

facts to be litigated in the underlying action.’” Montrose Chem. Corp. v. Super. Ct.

(Montrose I), 6 Cal. 4th 287, 301 (1993)). In particular, “[t]here are three concerns which 

the courts have about the trial of coverage issues which necessarily turn upon the facts 

to be litigated in the underlying action.” Haskel, Inc. v. Super. Ct., 33 Cal. App. 4th 963, 

979 (1995) (citing Montrose II, 25 Cal. App. 4th at 910). The first concern is that by 

bringing the action for a declaratory judgment regarding coverage, the “insurer . . . 

effectively attacks its insured and thus gives aid and comfort to the claimant in the 

underlying suit.” Id. The second concern is that the suit addressing insurance coverage 

forces the insured to fight a two-front war, thereby “expending precious resources” 

fighting both the insurer and the third-party action, which “undercuts one of the primary 

reasons for purchasing liability insurance.” Id. The third concern is the “real risk that, if 

the declaratory relief action proceeds to judgment before the underlying action is 

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resolved, the insured could be collaterally estopped to contest issues in the latter by the 

results in the former.” Id. Thus, “[i]t is only where there is no potential conflict between 

the trial of the coverage dispute and the underlying action that an insurer can obtain an 

early trial date and resolution of its claim that coverage does not exist.” Id. (emphasis in 

original). 

When issuing the stay in the present case, the Court found that each of the three 

concerns were present and would prejudice Defendants. (ECF No. 28 at 9.) 

Specifically, the Court stated that “[f]irst, Plaintiff, who is supposed to be defending 

Defendants in the underlying tort actions in state court, is effectively attacking 

Defendants’ defenses and counter-claims in the underlying suit.” Id. “Second, requiring 

defendants to litigate the coverage dispute with Plaintiff while the underlying tort actions 

are still pending would require Defendants to fight a two front war.” Id. “Third, in light of 

Plaintiff’s theories for rescission and the claims pending against Defendants in the 

[U]nderlying [A]ction, there is a real risk that if the declaratory action proceeds to 

judgment before the [U]nderlying [A]ction is resolved, Defendants could be collaterally 

estopped to contest issues in the [U]nderlying [A]ction due to findings made by this Court 

in this lawsuit.” Id. The prejudice to Defendants stemmed from a conflict at the heart of 

both the Underlying Action and the action before the Court—whether Defendants had 

prior knowledge of the business activities taking place within the warehouse. Id. at 8-9.

Plaintiff asserts that lifting the stay in the present case will not prejudice 

Defendants because Plaintiff seeks to lift the stay for the limited purpose of allowing 

Plaintiff to file a summary adjudication on two issues: (1) whether the warehouse/shop 

building where the fire took place was the “insured premises” under the subject 

insurance policy, and (2) whether the exclusion for “bodily injury” or “property damages” 

“that arises out of the business activity conducted on the insured premises” applies to 

bar coverage. (ECF No. 30 at 1-2.) Plaintiff argues that to adjudicate these two issues,

the Court need only determine whether there were business activities taking place in the 

warehouse prior to the fire, and whether those activities result in the denial of coverage. 

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(ECF No. 30 at 8.) According to Plaintiff, summary adjudication of these two discrete 

issues does not require the Court to determine Defendants’ knowledge of the business 

activities. Therefore, Plaintiff contends, adjudication of these issues does not conflict 

with the Underlying Action and thus there is no prejudice to Defendants. Id.

However, Defendants assert that the Allied Policy should be reformed to replicate 

the previous Allstate Policy on the property, based on representations made by the

insurance agent “Chris” to Defendants. (ECF No. 33 at 1, 4-5, 7.) According to 

Defendants, extensive discovery will be required to determine the issue of reformation.

(ECF No. 33 at 2.) 

A contract may be revised through mutual mistake of the parties, or a mistake of 

one party which the other knew or suspected did not truly express the intention of the 

parties. Cal. Civ. Code § 3399 (2013). Defendants assert that reformation is 

appropriate because Defendants were under the mistaken belief that the Allied Policy 

fully covered the property and the warehouse, as Defendants’ previous Allstate Policy 

had, and because “Chris” either had the same mistaken belief, or knew that Defendants 

wrongly had that belief. (ECF No. 33 at 4-5.) A similar situation was presented in

Beach v. United States Fidelity & Guaranty Company. 205 Cal. App. 2d 409 (1962). 

There, the court determined that reformation of the contract due to mutual mistake was 

appropriate because the agent mistakenly failed to provide insurance coverage that he 

meant to. Similarly, in Modica v. Hartford Accident & Idemnity Co., 236 Cal. App. 2d 588 

(1965), the court determined that contract reformation was appropriate based on 

unilateral mistake, as the insured believed that he was covered and the agent knew the 

insured held this belief and the agent was aware that the insured was mistaken. While 

in this case it is unclear what “Chris” knew or did not know, discovery may establish that 

either “Chris” mistakenly failed to provide that insurance coverage that he intended to 

provide to Defendants, or that “Chris” knew that Defendants mistakenly believed they 

had certain coverage. If such facts are established, the Allied Policy may be subject to 

reformation.

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Without determining the merits of the reformation claim, there is at least the 

possibility that the Allied Policy may be reformed. If it were determined that contract

reformation is appropriate, a potential conflict would then exist because the Allied Policy 

would be reformed to emulate the Allstate Policy. The question of whether Defendants 

knew about the business activities being conducted on the premises would then be 

brought back to the forefront of the federal action, as under the Allstate Policy, 

Defendants’ knowledge of business activities is key to determining whether the business 

exception contained in the Allstate Policy is violated. (ECF No. 33 at 10-13.) This issue, 

and the potential conflicts it gives rise to, is the very issue that necessitated the stay in 

this action. 

While this potential conflict between the current action and the Underlying Action 

is certainly attenuated, there is still a potential for conflict. That is to say, each of the 

Court’s three concerns would still be present as: (1) by seeking a determination that 

Defendants had knowledge of the business activities, Allied will have effectively joined

forces with the plaintiffs in the Underlying Action; (2) Defendants will be forced to fight a 

two-front war on the issue of knowledge; and (3) Defendants may be collaterally 

estopped from asserting the defense of lack of knowledge in the Underlying Action if this 

Court were to determine that Defendants did in fact have knowledge of the business 

activities. The Court does not have to determine that this conflict is likely, only that it

potentially exists. Montrose II, 25 Cal. App. 4th at 910. Only where there is “no potential 

conflict” “may” the insurer move forward with the declaratory action. Id. 

To avoid this potential conflict, Plaintiff asks the Court to sever the issue of 

knowledge and proceed with the case until Defendants’ knowledge of the business 

activities is involved. While this tactic may resolve the concern that Defendants may be 

collaterally estopped from arguing the knowledge issue in state court, this tactic does not 

resolve the remaining concerns. The parties will still deplete resources to only partially 

determine the outcome of the issues, with the potential that everything comes to a halt 

because it becomes evident that Defendants’ knowledge is at issue. 

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Indeed, as Defendants argue, “[i]t would not be fair, and would cause significant 

prejudice to [Defendants] if they were forced to pursue discovery only regarding the 

issue of whether the warehouse/shop building is covered as an ‘Insured Premises’ and 

not regarding whether coverage is excluded under the ‘Business Activities’ Exclusion.” 

(ECF No. 33 at 10.) In short, severing the issues as Plaintiff requests would 

unnecessarily burden all parties involved by complicating litigation, and, in particular,

Defendants because they would still be fighting a two-front war. For example, if the 

Court were to limit discovery to certain discrete issues as Plaintiff requests, Defendants 

would later need to re-do depositions and written discovery, wasting both their own and 

the Court’s resources. 

Plaintiff argues that it will be prejudiced if the Court does not lift the current stay, 

as Plaintiff faces the possibility of defending the Underlying Action only to have this 

Court later determine that Plaintiff had no duty to defend or indemnify Defendants. 

However, in light of the concerns described above, the balance tips in favor of 

Defendants; the potential prejudice to Defendants far outweighs the potential prejudice 

to Plaintiff in this case. 

Finally, the present case is a declaratory judgment, which the Court has discretion 

to entertain. Wilton, 515 U.S. at 282. The Court must consider the practicality and 

wisdom of pursuing a declaratory judgment action. Id. With this in mind, in addition to 

the potential prejudice to Defendants, allowing the action to go forward for the limited 

purpose of Plaintiff’s summary adjudication motion would be neither a wise nor practical 

use of judicial resources. 

In light of the above, the Court finds that lifting the stay is inappropriate at this 

time. Plaintiff’s Motion to Lift Stay is therefore DENIED.

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CONCLUSION

For the reasons just stated, Plaintiff’s Motion to Lift Stay (ECF No. 30) is DENIED.

IT IS SO ORDERED.

Dated: September 12, 2013

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