Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_16-cv-02127/USCOURTS-casd-3_16-cv-02127-0/pdf.json

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

---

1 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF CALIFORNIA 

TRAVELERS PROPERTY CASUALTY 

COMPANY OF AMERICA, a 

Connecticut corporation, 

Plaintiff,

v. 

MOUNTAIN MOVERS ENGINEERING 

COMPANY, INC., a California 

corporation; et al., 

Defendants.

 Case No.: 3:16-cv-02127-H-WVG 

ORDER GRANTING IN PART, 

DENYING IN PART, DEFENDANTS’ 

MOTION FOR LEAVE TO FILE 

COUNTERCLAIMS 

[Doc. No. 41] 

 

On April 3, 2017, Defendants Old Republic General Insurance Corporation 

(“ORGENCO”) and Pacific Building Group (“PBG”) (collectively, “Defendants”), filed a 

motion for leave to file counterclaims. (Doc. No. 41.) Defendants seek to assert claims 

against Travelers Property Casualty Company of America (“Plaintiff”), including both 

direct causes of action as judgment creditors and claims assigned to ORGENCO by 

Defendant Mountain Movers (“Mountain”). (Id.) On April 24, 2017, Plaintiff opposed 

Defendants’ motion. (Doc. No. 43.) Defendants filed a reply on April 26, 2017. (Doc. 

No. 44.) 

/// 

/// 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 1 of 13
2 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

BACKGROUND 

The following facts are taken from the allegations in Defendants’ proposed 

counterclaims. (Doc. No. 41-1.) Defendant PBG was the general contractor hired to 

complete an improvement of real property located in Carlsbad, California (the “Carlsbad 

Property”). (Id. at ¶ 11.) PBG subsequently contracted Mountain to perform work in 

connection with the improvement. (Id. at ¶ 13.) As part of the agreement between PBG 

and Mountain, Mountain agreed to indemnify PBG for any claims arising from 

Mountain’s performance. (Id. at ¶ 14.) Mountain also agreed to reimburse PBG for any 

loss, including extra expenses and attorneys’ fees, related to Mountain’s failure to 

perform. (Id. at ¶ 15.) As part of its contractual obligations, Mountain obtained a 

commercial general liability insurance policy, No. DTE-CO-9323B76 (the “Traveler’s 

Policy”), from Plaintiff. (Id. at ¶ 16.) 

On September 8, 2012, while working at the Carlsbad Property, Mountain 

damaged a sewer cleanout, causing a sewer backup and flooding an adjacent building. 

(Id. at ¶¶ 17-18.) Plaintiff was notified promptly of the damage but did not participate in, 

or fund, the repairs. (Id. at ¶ 20.) The total cost of the damage was $141,880.61, of 

which ORGENCO paid $131,880.61 (representing the cost minus a $10,000 deductible). 

(Id. at 22.) Mountain agreed to reimburse PBG for the $10,000 deductible. (Id. at ¶ 23.) 

On October 8, 2012, Plaintiff informed Mountain that the Traveler’s Policy did not 

cover the September 8, 2012 damage because the policy included a Pollution Exclusion, 

as well as a Bacteria/Fungi Exclusion. (Id. at ¶ 24.) On October 19, 2012, Defendants 

submitted a claim to Plaintiff for the costs they incurred and were told that Plaintiff was 

in the process of investigating the claim. (Id. at ¶¶ 25-26.) On December 11, 2012, 

Plaintiff informed Defendants the Pollution Exclusion precluded coverage under the 

Traveler’s Policy because the accident involved sewage. (Id. at ¶ 27.) 

Following the denial of coverage, Defendants filed suit in state court, seeking 

indemnification and reimbursement from Plaintiff and Mountain. (Id. at 28.) Mountain 

retained The Law Offices of Gregory Hout to defend it and, although Plaintiff agreed to 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 2 of 13
3 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

pay for Mountain’s defense, Plaintiff’s payments were late and sporadic. (Id. at ¶ 31.) 

Throughout the course of the litigation, Plaintiff repeatedly claimed that the September 8, 

2012 incident was excluded from coverage and refused Defendants’ settlement offers. 

(Id. at ¶¶ 36-41.) 

On May 31, 2016, Defendants offered to settle with Mountain for a stipulated 

judgment of $372,000 against Mountain in exchange for a covenant not to execute the 

judgment against Mountain. (Id. at ¶ 46.) Mountain reviewed the settlement offer and 

forwarded it to Plaintiff. (Id. at ¶ 48.) Plaintiff refused to fund the settlement offer and 

threatened to sue Mountain if it settled with Defendants. (Id. at ¶ 49.) On August 2, 

2016, Mountain entered into the Settlement Agreement with Defendants. (Id. at 34-44.) 

As part of the Agreement, Mountain also assigned all of its claims against Plaintiff to 

ORGENCO. (Id. at ¶ 52.) 

On August 24, 2016, Plaintiff filed a complaint in federal court against Defendants 

alleging causes of action for (1) declaratory judgment that there was no duty to defend 

the underlying state court action, (2) declaratory judgment that there has been satisfaction 

of the duty to defend in the underlying action, (3) declaratory judgment that coverage was 

voided by an unauthorized settlement agreement; and (4) unjust enrichment. (Doc. No. 1 

¶¶ 21-44.) 

By the present motion, Defendants move pursuant to Federal Rule of Civil 

Procedure 15 for leave to file counterclaims against Plaintiff. Defendants’ proposed 

counterclaims allege eleven causes of action, including (1) a judgment creditor action 

pursuant to California Insurance Code Section 11580, (2) an action for breach of contract, 

(3) multiple actions for breach of the implied covenant of good faith and fair dealing, (4) 

a declaratory judgment action seeking to disqualify Plaintiff’s counsel, and (5) an action 

for punitive damages. 

/// 

/// 

/// 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 3 of 13
4 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

DISCUSSION 

I. LEGAL STANDARDS FOR A MOTION TO AMEND PLEADINGS 

Federal Rule of Civil Procedure 15(a) allows a party leave to amend its pleading 

once as a matter of right within twenty-one days after service of a responsive pleading. 

Fed. R. Civ. P. 15(a). Thereafter, “a party may amend its pleading only with the 

opposing party’s written consent or the court’s leave. The court should freely give leave 

when justice so requires.” Id. In the Ninth Circuit, this policy is “applied with extreme 

liberality.” Owens v. Kaiser Foundation Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 

2001) (quoting Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 

1990)). 

“The court considers five factors in assessing the propriety of leave to amend—bad 

faith, undue delay, prejudice to the opposing party, futility of amendment, and whether 

the plaintiff has previously amended the complaint.” United States v. Corinthian 

Colleges, 655 F.3d 984, 995 (9th Cir. 2011) (citing Johnson v. Buckley, 356 F.3d 1067, 

1077 (9th Cir. 2004)); accord In re W. States Wholesale Natural Gas Antitrust Litig., 715 

F.3d 716, 738 (9th Cir. 2013). The five factors do not share “equal weight” and “it is the 

consideration of prejudice to the opposing party that carries the greatest weight.” 

Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003). “Absent 

prejudice, or a strong showing of any of the remaining [] factors, there exists a 

presumption under Rule 15(a) in favor of granting leave to amend.” Id. The decision 

whether to grant leave to amend “is entrusted to the sound discretion of the trial court.” 

Pisciotta v. Teledyne Indus., 91 F.3d 1326, 1331 (9th Cir. 1996). 

II. ANALYSIS 

A. Prior Amendments, Undue Delay, Prejudice, and Bad Faith 

The present motion is the first time Defendants have sought to introduce 

counterclaims or amend their pleadings. (Doc. No. 41.) As such there are no prior 

amendments for the Court to weigh in deciding whether to grant leave to amend. 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 4 of 13
5 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Defendants did not unduly delay in filing their counterclaims. The Scheduling 

Order, entered on March 3, 2017, required the parties to bring any motions to amend the 

pleadings on or before April 3, 2017. (Doc. No. 40.) The present motion was filed on 

April 3, 2017 and, thus, complies with the Court’s scheduling order. 

Plaintiff has not alleged any prejudice they would suffer if the Court granted 

Defendants’ motion. (See generally Doc. No. 43.) The case is still at a relatively early 

stage and discovery remains open. (See Doc. No. 40 ¶ 6.) As such, there is time for 

Plaintiff to prepare to respond to Defendants’ counterclaims. See e.g., Coleman v. 

Quaker Oats Co., 232 F.3d 1271, 1292 (9th Cir. 2000) (finding prejudice where plaintiff 

attempted to add a new theory at the summary judgment stage); City of Los Angeles v. 

San Pedro Boat Works, 635 F.3d 440, 454 (9th Cir. 2011) (affirming a finding of undue 

prejudice where plaintiff sought to amend complaint after five out of 6 key witnesses had 

been deposed). 

The bad faith element looks at whether litigants’ amendments are driven by an 

improper motive, for example, “seeking to prolong the litigation by adding new but 

baseless legal theories.” Griggs v. Pace American Group, Inc., 170 F.3d 877, 881 (9th 

Cir. 1999). Plaintiff broadly alleges that Defendants are bringing their counterclaims for 

improper purposes but provides no specific details or factual support. (Doc. No. 43 at 6.) 

As such, the Court does not find Defendants counterclaims have been brought in bad 

faith. 

B. Futility of Amendment 

In opposing Defendants’ motion for leave to file counterclaims, Plaintiff relies 

primarily on the futility of amendment factor. Specifically, Plaintiff argues that 

Defendants’ proposed counterclaims would be futile because the stipulated judgment 

between Mountain and Defendants is unenforceable, Defendants have no viable assigned 

claims from Mountain, and Defendants have no standing to pursue the declaratory relief 

they seek. (Doc. No. 43 at 5-6.) In response, Defendants argue that Plaintiff’s opposition 

is inconsistent with previous legal positions, Mountain properly assigned its claims to 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 5 of 13
6 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Defendants, and Defendants have standing to seek their proposed declaratory relief. 

(Doc. No. 44 at 3-8.) 

1. Legal Standards for Futility 

The Court may reject a motion for leave to amend if the proposed amendment 

would be futile. Carrico v. City & Cty. Of San Francisco, 656 F.3d 1002, 1008 (9th Cir. 

2011). A proposed amendment is futile where it would be subject to dismissal if allowed. 

Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1298 (9th Cir. 1998); see also Jones v. 

Community Redevelopment Agency of City of Los Angeles, 733 F.2d 646, 650 (9th Cir. 

1984) (denying leave to amend complaint where “proposed complaint would still fail to 

state a section 1983 claim”). “In assessing futility, the district court must apply the 

standard which applies to motions to dismiss under Fed. R. Civ. P. 12(b)(6).” F.D.I.C. v. 

Twin Development, LLC, 2012 WL 1831639, *6 (S.D. Cal. May 18, 2012) (quoting 

Adorno v. Crowley Towing & Transp. Co.., 443 F.3d 122, 126 (1st Cir. 2006)). 

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal 

sufficiency of the pleadings and allows a court to dismiss a complaint if the plaintiff has 

failed to state a claim upon which relief can be granted. See Conservation Force v. 

Salazar, 646 F.3d 1240, 1241 (9th Cir. 2011). A complaint will survive a motion to 

dismiss if it contains “enough facts to state a claim to relief that is plausible on its face.” 

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility 

when the plaintiff pleads factual content that allows the court to draw the reasonable 

inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 

U.S. 662, 678 (2009). “A pleading that offers ‘labels and conclusions’ or ‘a formulaic 

recitation of the elements of a cause of action will not do.’” Id. (quoting Twombly, 550 

U.S. at 555). “Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of 

‘further factual enhancement.’” Id. (quoting Twombly, 550 U.S. at 557). Accordingly, 

dismissal for failure to state a claim is proper where the claim “lacks a cognizable legal 

theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela 

Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 6 of 13
7 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

In determining whether a plaintiff has adequately stated a claim for relief, a district 

court must accept as true all facts alleged in the complaint, and draw all reasonable 

inferences in favor of the plaintiff. See Retail Prop. Trust v. United Bhd. of Carpenters & 

Joiners of Am., 768 F.3d 938, 945 (9th Cir. 2014); In re Bill of Lading Transmission & 

Processing Sys. Patent Litig., 681 F.3d 1323, 1331 (Fed. Cir. 2012). But, a court need 

not accept “legal conclusions” as true. Iqbal, 556 U.S. at 678. Further, it is improper for 

a court to assume the plaintiff “can prove facts which it has not alleged or that the 

defendants have violated the . . . laws in ways that have not been alleged.” Associated 

Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 

(1983). 

2. California Insurance Code § 11580 Claim 

California Insurance Code Section 11580 requires that insurance policies issued or 

delivered in California include a provision that “whenever judgment is secured against 

the insured in an action based on bodily injury, death, or property damage, the judgment 

creditor may sue the insurer on the policy, subject to its terms and limitations, to recover 

on the judgment.” Wright v. Fireman’s Fund Ins. Companies, 11 Cal.App.4th 998, 1015 

(1992). To establish a claim under § 11580, a third party claimant must prove: 

1) it obtained a judgment for bodily injury, death, or property damage, 2) the 

judgment was against a person insured under a policy that insures against 

loss or damage resulting from liability for personal injury or insures against 

loss of or damage to property caused by a vehicle or draught animal, 3) the 

liability insurance policy was issued by the defendant insurer, 4) the policy 

covers the relief awarded in the judgment, 5) the policy either contains a 

clause that authorizes the claimant to bring an action directly against the 

insurer or the policy was issued or delivered in California and insures 

against loss or damage resulting from liability for personal injury or insures 

against loss of or damage to property caused by a vehicle or draught animal. 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 7 of 13
8 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Id. The only element at issue here is the first one. Plaintiff claims the stipulated 

judgment between Mountain and Defendants is void and cannot bind Plaintiff. 

As a general rule, “a stipulated judgment between the insured and the injured 

claimant, without the consent of the insurer, is ineffective to impose liability upon the 

insurer.” Safeco Ins. Co. v. Superior Court ̧71 Cal.App.4th 782, 787 (1999). However, as 

an exception to this rule, stipulated judgments may bind the insurer if the insurer 

“wrongfully refuses to defend” or unreasonably refuses to settle. Id. at 788; accord 

Wright v. Fireman’s Fund Ins. Companies, 11 Cal.App.4th 998 (1992) (collecting cases). 

Defendants’ allege that Plaintiff failed to promptly pay Mountain’s defense counsel and, 

at the time of settlement, Mountain had no assurances that Plaintiff would continue 

paying defense counsel. (Doc. No. 41-1 ¶ 45.) Furthermore, Defendants allege that 

Plaintiff refused to consider their settlement offers and maintained a “zero offer” 

settlement position throughout the course of litigation. (Id. at ¶¶ 42-44.) Accepting these 

facts as true, and drawing all reasonable inferences in Defendants’ favor, Defendants 

have adequately alleged that Plaintiff wrongfully refused to defend Mountain or 

unreasonably refused to settle. Iqbal, 556 U.S. at 678. As such, questions of fact remain 

as to whether the stipulated judgment is binding on Plaintiff. 

Plaintiff also argues the stipulated judgment is unenforceable because the total 

judgment amount, $372,000, includes costs and attorneys’ fees which should have been 

fixed by the court, but were not. Plaintiff argues that under California Civil Code § 1717, 

“[t]he reasonable attorney’s fees shall be fixed by the court, and shall be an element of 

the costs of suit.” (Doc. No. 43 at 10.) Plaintiff, however, cites no cases holding that a 

stipulated judgment is unenforceable because the parties’ included attorney’s fees in their 

settlement amount. Indeed, California Code of Civil Procedure § 1033.5(c)(5) provides 

precisely for such a situation: “[a]ttorney’s fees allowable as costs . . . shall be fixed 

either upon a noticed motion or upon entry of a default judgment, unless otherwise 

provided by stipulation of the parties.” Cal. Civ. C. Proc. §1033.5(c)(5). The fact that 

these additional costs increased the amount of the stipulated judgment does not, without 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 8 of 13
9 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

more, render it void. In their counterclaims, Defendants seek “all or part of” the 

stipulated judgment and Plaintiff may contest the actual amount of insured’s damages. 

See Wright v. Fireman’s Fund Ins. Companies, 11 Cal.App.4th 998, 1018 (1992) (“in a 

later suit against the insurer the reasonable settlement may be used as presumptive 

evidence of the insured’s liability on the underlying claim and the amount of such 

liability”). As such, Plaintiff has failed to prove futility. 

Because Defendants have plead facts sufficient to make out a case under § 11580, 

the Court finds that amending the pleadings to allow their first cause of action would not 

be futile and grants their motion as to that cause of action. 

3. Mountain’s Assigned Causes of Action 

The remaining causes of action are brought by ORGENCO as an assignee of 

Mountain’s rights, which were assigned to ORGENCO as part of the stipulated judgment. 

(Doc. No. 41-1 ¶ 61.) These rights include “all rights [Mountain] may have against 

[Plaintiff] . . . including but not limited to the right to indemnity under the Travelers’ 

insurance policies and the right to pursue a cause of action for breach of the implied 

covenant of good faith and fair dealings.” (Doc. No. 41-1 at 40.) In return for the 

assignment, as well as the stipulation to judgment, Defendants agreed not to execute the 

judgment against Mountain. (Id.) Plaintiff argues that none of Mountain’s assigned 

causes of action are enforceable because Mountain has suffered no damages in light of 

the covenant not to execute. 

“California, as set forth both in case law and by statute, maintains a policy 

encouraging the free transferability of all types of property.” Essex Ins. Co. v. Five Star 

Dye House, Inc., 38 Cal.4th 1252, 1259 (2006) (“We start from the proposition that 

assignability is the rule.”) Accordingly, “[a]ctions for bad faith against an insurer have 

generally been held to be assignable, including claims for breach of the duty to defend.” 

Id. at 1263 (citations omitted). Plaintiff argues this general rule of assignability does not 

apply when the stipulated judgment includes a covenant not to execute. (Doc. No. 43 at 

12-13.) But as the Court explained in the previous section, where an insurer fails to 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 9 of 13
10 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

defend an insured, or unreasonably refuses to settle, Courts will enforce settlements not 

approved by the insurer regardless of whether they contain covenants not to enforce. 

Safeco Ins. Co. v. Superior Court ̧71 Cal.App.4th at 787, 789 (“The insured’s remedy to 

protect himself from an excess judgment is to assign to the claimant his cause of action 

for bad faith refusal to settle in exchange for a covenant not to enforce the judgment 

against the insured’s personal assets.”) This analysis is not affected by the inclusion of 

non-recoverable fess in the stipulated judgment. “Although some damages potentially 

recoverable in a bad faith action, including damages for emotional distress and punitive 

damages, are not assignable, the cause of action itself remains freely assignable.” Essex 

Ins. Co., 38 Cal.4th at 1263. 

As Defendants have adequately alleged that Mountain was entitled to assign its 

claims against Plaintiff, ORGENCO’s counterclaims are not futile, and the Court grants 

leave to file the second through the ninth causes of action. 

4. Declaratory Relief Claim 

Defendants’ tenth cause of action seeks declaratory relief disqualifying Plaintiff’s 

counsel from working on any matter to which Mountain is a litigant or has an interest in, 

as well as equitably estopping Plaintiff from contesting the economic damages in the 

underlying state court action. (Doc. No. 41-1 at 27.) Plaintiff opposes this counterclaim 

on the grounds that Defendants lack standing to disqualify Plaintiff’s counsel or, 

alternatively, the issue should be raised through a motion to disqualify. (Doc. No. 43 at 

14-16.) 

The Declaratory Judgment Act grants courts the power to “declare the rights and 

other legal relations of any interested party.” 28 U.S.C. § 2201. This power is 

discretionary and courts consider various prudential factors in deciding whether to 

exercise it. American States Ins. Co. v. Kearns, 15 F.3d 142, 144 (9th Cir. 1994) (“The 

statute gives discretion to courts in deciding whether to entertain declaratory 

judgments.”). These prudential factors include “concerns of judicial administration, 

comity, and fairness to the litigants.” Id. (quoting Chamberlain v. Allstate Ins. Co., 931 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 10 of 13
11 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

F.2d 1361, 1367 (9th Cir. 1991)). None of these factors weigh in favor of allowing 

Defendants to proceed with their declaratory judgment cause of action. 

Courts “properly may refuse declaratory relief if the alternative remedy is better or 

more effective.” Federal Practice & Procedure § 2758 (collecting cases); accord Gov’t 

Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1223 n.5 (9th Cir. 1998) (en banc) (courts 

can consider “the availability and relative convenience of other remedies”). Here, 

Defendants have a superior remedy available: a motion to disqualify. Such a motion is 

regularly employed to disqualify attorneys. E.g., Ultimate Fitness Center, LLC v. 

Wilson, 2016 WL 6834001, *6 (S.D. Cal. Nov. 21, 2016) (considering a motion to 

disqualify counsel who might be called as a witness); United States v. Hall Family Trust 

Dated June 8, 2001, 2017 WL 1135593, *4 (S.D. Cal. March 27, 2017) (“if [the party] 

had any reason to believe he was not proper counsel, they should have raised the issue in 

a motion to disqualify”). Furthermore, a motion to disqualify squarely frames the issue 

for the Court and provides a timely resolution of an issue that affects the ongoing 

litigation. In contrast, an action seeking a declaratory judgment that an attorney should 

be disqualified likely will not be resolved until the case itself is resolved; at which point 

there is little point to disqualifying counsel. 

In addition to being an inferior remedy, Defendants’ proposed declaratory relief 

raises concerns of comity. In addition to seeking to disqualify Plaintiff’s counsel in the 

federal court action, Defendants seek to disqualify counsel in the underlying state court 

action and equitably estop Plaintiff from contesting the economic damages in that case. 

(Doc. No. 41-1 ¶ 119-20.) Generally, federal courts disfavor interfering with state court 

proceedings. See Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716-17 (1996) 

(reviewing cases holding federal courts should refrain from hearing because they would 

interfere with pending state proceedings); Gov’t Employees Ins. Co., 133 F.3d at 1223 

n.5 (courts should consider “whether the use of a declaratory action will result in 

entanglement between the federal and state court systems”). This general principle is 

“out of deference to the paramount interests of another sovereign, and the concern is with 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 11 of 13
12 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

principles of comity and federalism. Quackenbush, 517 U.S. at 723. Defendants cite no 

authority showing that disqualifying counsel is an exception to the general rule and the 

Court can see no reason to deviate from the general principle of avoiding entanglement 

with state court proceedings. 

Finally, Defendants have provided no reason to think it would be unfair to require 

they pursue their relief through a motion to disqualify, rather than a declaratory 

judgment. Indeed, if Defendants believe they are injured by Plaintiff’s counsel’s 

involvement in the matter, a motion to disqualify will be most likely to remedy the injury 

because it can be decided promptly, while the case is ongoing. 

For the foregoing reasons, the Court finds that the various prudential factors weigh 

against allowing Defendants to pursue their declaratory judgment action. As such, the 

Court exercises its discretion and denies their motion to amend with regard to the 

proposed tenth cause of action. Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995). 

5. Punitive Damages Claim 

Defendants’ last cause of action is styled as a cause of action for punitive damages. 

(Doc. No. 41-1 ¶¶122-27.) However, “[i]n California, it is settled there is no separate 

cause of action for punitive damages. Instead, a claim for punitive damages is merely an 

additional remedy that is dependent on a viable cause of action for an underlying tort.” 

569 East County Boulevard LLC v. Backcountry Against the Dump, Inc., 6 Cal.App.5th 

426, 429 n.3 (2016). Accordingly, the Court exercises its discretion and denies 

Defendants’ motion to amend with regard to the proposed eleventh cause of action. 

Defendants may seek any damages available by law under their other causes of action. 

/// 

/// 

/// 

/// 

/// 

/// 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 12 of 13
13 

3:16-cv-02127-H-WVG 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

CONCLUSION 

For the foregoing reasons, the Court grants, in part, and denies, in part, 

Defendants’ motion for leave to amend. (Doc. No. 41.) Defendants may file proposed 

counterclaims one through nine. The Court however, in its discretion, denies the motion 

with regards to counterclaims ten and eleven. 

 IT IS SO ORDERED. 

DATED: May 3, 2017 

 Hon. Marilyn L. Huff 

 United States District Judge 

Case 3:16-cv-02127-H-WVG Document 46 Filed 05/04/17 PageID.<pageID> Page 13 of 13