Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-02079/USCOURTS-cand-3_05-cv-02079-1/pdf.json

Parties Involved:
James E. Roberts-Obayashi Corporation
Plaintiff
Steadfast Insurance Company
Defendant

Document Text:

United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

JAMES E. ROBERTS-OBAYASHI

CORPORATION, a corporation,

Plaintiff,

 v.

STEADFAST INSURANCE COMPANY, a 

corporation, and DOES 1 through 

5, inclusive,

Defendant. /

No. C 05-02079 MJJ

ORDER GRANTING DEFENDANT’S

MOTION TO DISMISS THE FIRST AND

SECOND CAUSES OF ACTION AND

DENYING DEFENDANT’S MOTION TO

DISMISS THE THIRD CAUSE OF

ACTION

INTRODUCTION

Before the Court is Defendant Steadfast Insurance Company’s (“Defendant”) motion to

dismiss the complaint filed by James E. Roberts-Obayashi Corp. (“Plaintiff”). Defendant moves to

dismiss the first two causes of action for failure to state a claim or, in the alternative, that a more

definite statement should be ordered. As to the Third Cause of Action, Defendant moves for

dismissal based on the statute of limitations. For the following reasons, the Court GRANTS

Defendant’s motion to dismiss the First and Second Causes of Actions with leave to amend and

DENIES Defendant’s motion to dismiss the Third Cause of Action.

FACTUAL BACKGROUND

In December 1996, Plaintiff entered a contract to build a ninety-eight unit condominium

project. As part of the contract, Plaintiff agreed to make the developer, Old Oakland Housing

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For the Northern District of California

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Development Corp. (“Old Oakland”), and its agent, Keating Housing Initiations, Inc. (“Keating”),

additional insureds on its general liability insurance policy. Plaintiff further agreed to defend,

indemnify and hold Old Oakland harmless with respect to any third-party claims arising out of the

construction. Plaintiff served as the general contractor for the condominium project from December

1996 through September 1998. Following construction, Old Oakland sold the condominium units to

the public and conveyed its interest in the common areas to the Old Town Square I Owners

Association (“Homeowners’ Association”).

One and a half years after the construction was completed, Defendant issued Plaintiff a

commercial general liability insurance policy, effective August 31, 2000 through August 31, 2001. 

Plaintiff renewed the policy for a second one-year term on August 31, 2001. Plaintiff alleges that

both Old Oakland and Keating are additional insureds under the two policies.

In September 2000, the Homeowners’ Association for the condominium project delivered to

Plaintiff a list of some 200 “observations,” most of which were punch list or clean-up items, that

needed repair.

A month later, in October 2000, the Homewoners’ Association alerted Plaintiff to additional

mechanical and electrical problems. During the same month, Plaintiff settled a year and a half old

lawsuit it had initiated against Old Oakland. The terms of that settlement called for Old Oakland to

pay Plaintiff $1,122,700 plus interest over several phased payments and for Keating to pay an

additional $300,000. The final phased payment of $410,799.19 was conditioned, inter alia, on the

following: (1) Plaintiff agreeing to defend, indemnify, and hold harmless Old Oakland and Keating

with respect to the defects reported in September and October 2000; and (2) Plaintiff agreeing to

have Old Oakland and Keating named as additional insured on its liability policy.

Almost a year later, in September 2001, the Homeowners’ Association served Plaintiff with a

“Notice to Builder” detailing defective workmanship which they claimed caused property damage. 

Plaintiff tendered the “Notice to Builder” to Defendant and Defendant accepted the tender. Old

Oakland and Keating were also served with the “Notice to Builder” which they tendered to

Defendant. Defendant rejected their tenders.

When the construction defects had not been corrected by May 2002, the Homeowners’

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Association brought suit in state court against Plaintiff, Old Oakland, and Keating. Plaintiff, Old

Oakland, and Keating, all tendered their defenses to Defendant. Defendant refused to defend and

indemnify Plaintiff, Old Oakland, and Keating. At the same time, the Alameda County Superior

Court entered a Judgment Pursuant To Settlement requiring Old Oakland and Keating to pay

Plaintiff the remaining $410,799.19 conditioned upon, inter alia, Plaintiff adding Old Oakland and

Keating to its insurance policy and defending and indemnifying them.

Because of Defendant’s refusal to defend and indemnify, Plaintiff was contractually

obligated to do so for Old Oakland and Keating in the May 2002 litigation brought by the

Homeowners’ Association. By February 2005, Plaintiff had incurred $51,726 in attorneys’ fees

defending Old Oakland and Keating. Moreover, the Alameda Superior Court awarded Old Oakland

$25,209.35 in attorneys’ fees – incurred defending the “Notice to Builder” and attempting to have

Defendant accept the defense of Old Oaklnad and Keating – from Plaintiff. Finally, in responding to

that suit, Plaintiff incurred attorneys’ fees in the amount of $10,715.60.

Thus, Plaintiff brought the instant action alleging three causes of action. In the First Cause

of Action, Plaintiff alleges a breach of contract resulting in $498,450.14 in damages for Defendant’s

unreasonable failure to assume its defense obligations with respect to Old Oakland and Keating. In

the Second Cause of Action, Plaintiff seeks a declaratory judgment that Defendant is obligated to

defend and indemnify Old Oakland and Keating. The Third Cause of Action alleges that Defendant

breached the implied covenant of good faith and fair dealing by denying tender of defense to

Plaintiff and the additional insureds.

Defendant has brought the instant Rule 12(b)(6) motion to dismiss the first two causes of

action for lack of standing and to dismiss the third cause of action as barred by the statute of

limitations. 

LEGAL STANDARD

A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of the claims asserted in the

complaint. See Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337 (9th Cir. 1996). Dismissal of an

action pursuant to Rule 12(b)(6) is appropriate only where it “appears beyond doubt that the plaintiff

can prove no set of facts in support of his claim which would entitle him to relief.” Levine v.

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For the Northern District of California

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Diamanthuset, Inc., 950 F.2d 1478, 1482 (9th Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41,

45–46 (1957)). In reviewing such a motion, the Court must assume all factual allegations to be true

and must construe them in the light most favorable to the nonmoving party. See N. Star v. Ariz.

Corp. Comm., 720 F.2d 578, 580 (9th Cir. 1983). In the context of a motion to dismiss, review is

limited to the contents of the complaint. Allarcom Pay Television, Ltd. v. Gen. Instrument Corp., 69

F.3d 381, 385 (9th Cir. 1995). However, matters properly presented to a court, such as those

attached to the complaint and incorporated within its allegations, may be considered as part of the

motion to dismiss. See Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n.19

(9th Cir. 1989).

Motions to dismiss for failure to state a claim “are generally viewed with disfavor.” Ramos

v. Cal. Comm. of Bar Exam’rs of the State Bar of Cal., 857 F. Supp. 702, 704 (N.D. Cal. 1994). 

“Each averment of a pleading shall be simple, concise, and direct.” FED. R. CIV. P. 8(e)(1). Courts

must assume that all general allegations “embrace whatever specific facts might be necessary to

support them.” Peloza v. Capistrano Unified Sch. Dist., 37 F.3d 517, 521 (9th Cir. 1994). If the

complaint does not meet the liberal pleading standard, a court must grant leave to amend unless “it is

absolutely clear that the deficiencies of the complaint [cannot] be cured by amendment.” Noll v.

Carlson, 809 F.2d 1446, 1448 (9th Cir. 1987). 

ANALYSIS

Defendant argues that based on Rule 12(b)(6) of the Federal Rules of Civil Procedure, the

first two claims (breach of contract and declaratory relief) should be dismissed because Plaintiff is

not the real party in interest and the third claim (breach of the implied covenant of good faith and

fair dealings) should be dismissed because it is barred by the statute of limitations. 

A. Rule 17(a) Dictates The First Two Causes Of Action Should Not Be Dismissed.

Rule 17(a) of the Federal Rules of Civil Procedure requires that “every action shall be

prosecuted in the name of the real party in interest.” Rule 17(a) also prohibits dismissal of an action

“on the ground that it is not prosecuted in the name of the real party in interest until a reasonable

time has been allowed after objection for ratification of commencement of the action by, or joinder

or substitution of, the real party in interest.” FED. R. CIV. P. 17(a). But, a court can dismiss the

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action when it grants leave to amend. See, e.g., Raynor Bros. v. Am. Cyanimid Co., 695 F.2d 382,

384 (9th Cir. 1982); Cigarette King v. Phillip Morris USA, 2005 WL 1405122, at *5 (E.D. Cal. Jun

15, 2005).

Defendant argues that Plaintiff seeks to have the Court enforce or obtain a judicial

declaration of contractual rights that allegedly exist between: (1) Defendant and Old Oakland; and

(2) Defendant and Keating. Defendant notes that Rule 17(a) “requires that the party who brings an

action actually posses, under the substantive law, the right sought to be enforced.” United

HealthCare Corp. v. Am. Trade Ins. Co., 88 F.3d 563, 569 (8th Cir. 1996). Because Old Oakland

and Keating are not the real parties in interest, Defendant contends that the case should be dismissed

outright based on Rule 17(a).

Plaintiff concedes that the first and second causes of action, with respect to Old Oakland and

Keating, are not brought by the real parties in interest. (Plaintiff’s Opposition to Defendant’s

Motion to Dismiss (“Opp.”) at 7:1–9). However, Plaintiff argues that dismissal at the current time

based on the plain language of Rule 17(a) would be premature since the defect can be cured by

joinder, substitution, or an amended complaint.

Under California law, an insurer’s obligation to an additional insured is separate and distinct

from those owed to the named insured. See Am. Home Ins. Co. v. Travelers Indemnity Co., 122 Cal.

App. 3d 951, 968 (1981). Moreover, only a party to the policy or an assignee thereunder may sue to

enforce the policy or for a judicial declaration of the parties’ rights and duties owed under the

policy. Id. The Travelers Indemnity court stated that the “question of standing to sue is one of the

right to relief and goes to the existence of a cause of action against the defendant.” Id. It further

noted that “where the complaint states a cause of action in someone, but not in the plaintiff, a

general demurrer for failure to state a cause of action will be sustained.” Id. However, the court

also noted that “sustaining a general demurrer without leave to amend is not an abuse of discretion if

it appears from the complaint that under applicable substantive law there is no reasonable possibility

or probability that the defect can be cured by amendment.” Id. (quoting Fireman’s Fund Ins. Co. v.

Sec. Pacific Nat. Bank, 85 Cal. App. 3d 797, 832 (1978)) (emphasis added). Since Defendant only

raised its objection to the real party in interest a month and a half ago, the Court finds a reasonable

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time has not yet passed to allow Plaintiff to ratify the complaint by joinder or substitution of the real

party in interest. Additionally, the Court notes that since there is a reasonable possibility or

probability that the defect can be cured by amendment, substitution, or joinder, dismissal without

leave to amend is inappropriate. See Travelers Indemnity, 122 Cal. App. 3d at 968. Furthermore,

the Court believes that dismissal with leave to amend best serves the interests of justice. Such a

dismissal allows Plaintiff an opportunity to correct the defect and ensures the Court and the parties

avoid an unnecessary rehearing on the instant motion to dismiss – thirty days from now – in the

event Plaintiff fails to do so. Accordingly, the Court GRANTS Defendant’s motion to dismiss the

First and Second Causes of Action without prejudice and allows Plaintiff thirty days leave to amend.

B. The Statute of Limitations Has Not Yet Run On The Third Cause of Action.

Defendant argues that since the denial of benefits occurred on December 24, 2002, Plaintiff’s

lawsuit, filed on April 8, 2005, is past the two-year statute of limitations which ended on December

24, 2004. Plaintiff contends that the statute of limitations tolls until a judgment in the underlying

action is finalized and thus the lawsuit is timely filed.

The statute of limitations for a tortious bad faith claim is two years. Love v. Fire Ins. Exch.,

221 Cal. App. 3d 1136, 1143–44 n.4 (1990) (“[T]ort remedies on [a] claim for breach of the

covenant of good faith and fair dealing . . . is barred by the two-year statute of limitations under

Code of Civil Procedure section 339.”) However, the California Supreme Court has unambiguously

declared that the statute of limitations period tolls until a judgment in an underlying action is

finalized. Lambert v. Commonwealth Land Title Ins. Co., 53 Cal. 3d 1072, 1075, 1080 (1990). In

Lambert, the court explicitly rejected the contention that an “action for breach of the duty to defend

a claim under a title insurance policy accrues when tender of the defense is refused.” Id. at 1074. 

Instead, the California Supreme Court specifically noted that it would be unfair “to require an

insured . . . to defend the underlying action, at [their] own expense, and simultaneously to prosecute

– again at [their] own expense – a separate action against the title company for failure to defend.” 

Id. at 1078. The court held that fairness and justice required “equitable tolling of the insured’s

action to establish coverage until resolution of the underlying claim.” Id. at 1081. 

Here, the May 2002 Homeowners’ Association Lawsuit is the underlying claim to the

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present action; Defendant’s failure to defend and indemnify in that lawsuit prompted Plaintiff to file

the instant case. Since the moving party has not established that the underlying action—the May

2002 Homeowner’s Association Lawsuit—is complete, Lambert permits equitable tolling of

Plaintiff’s instant action until resolution of the underlying action so that Plaintiff will not have to

simultaneously prosecute separate actions at its expense. Accordingly, the Court finds that the

instant suit is not barred by the two-year statute of limitations.

Alternatively, even if the Court agreed that equitable tolling should not apply, Plaintiff’s

Complaint alleges claims in both tort and contract law. (Notice of Removal, Ex. A at ¶ 4, 43.) The

statute of limitations for breach of the implied covenant of good faith and fair dealing in contract law

is four years. CAL. CODE CIV. PROC. § 337. Additionally, a plaintiff need not elect between tort and

contract causes of action at the pleading stage. Frazier v. Metropolitan Life Ins. Co., 169 Cal. App.

3d 90, 100–102 (1985). Thus, barring Plaintiff’s Third Cause of Action based on the statute of

limitations would deny Plaintiff the opportunity to pursue its contract law claim. The instant

lawsuit, therefore, is well within the four-year statute of limitations that applies to contract claims

for breach of the implied covenant of good faith and fair dealing and dismissal would be

inappropriate.

Therefore, the Court finds that the instant suit is not barred by the statute of limitations and

DENIES Defendant’s motion to strike the Third Cause of Action.

CONCLUSION

For the foregoing reasons, the Court GRANTS Defendant’s motion to dismiss the First and

Second Causes of Actions with leave to amend and DENIES Defendant’s motion to dismiss the

Third Cause of Action.

IT IS SO ORDERED.

Dated: July _28_, 2005 

MARTIN J. JENKINS

UNITED STATES DISTRICT JUDGE

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

JAMES E. ROBERTS-OBAYASHI

CORPORATION, a corporation,

Plaintiff,

 v.

STEADFAST INSURANCE COMPANY, a 

corporation, and DOES 1 through 

5, inclusive,

Defendant. /

No. C 05-02079 MJJ

ORDER GRANTING DEFENDANT’S

MOTION TO DISMISS THE FIRST AND

SECOND CAUSES OF ACTION AND

DENYING DEFENDANT’S MOTION TO

DISMISS THE THIRD CAUSE OF

ACTION

INTRODUCTION

Before the Court is Defendant Steadfast Insurance Company’s (“Defendant”) motion to

dismiss the complaint filed by James E. Roberts-Obayashi Corp. (“Plaintiff”). Defendant moves to

dismiss the first two causes of action for failure to state a claim or, in the alternative, that a more

definite statement should be ordered. As to the Third Cause of Action, Defendant moves for

dismissal based on the statute of limitations. For the following reasons, the Court GRANTS

Defendant’s motion to dismiss the First and Second Causes of Actions with leave to amend and

DENIES Defendant’s motion to dismiss the Third Cause of Action.

FACTUAL BACKGROUND

In December 1996, Plaintiff entered a contract to build a ninety-eight unit condominium

project. As part of the contract, Plaintiff agreed to make the developer, Old Oakland Housing

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United States District Court

For the Northern District of California

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Development Corp. (“Old Oakland”), and its agent, Keating Housing Initiations, Inc. (“Keating”),

additional insureds on its general liability insurance policy. Plaintiff further agreed to defend,

indemnify and hold Old Oakland harmless with respect to any third-party claims arising out of the

construction. Plaintiff served as the general contractor for the condominium project from December

1996 through September 1998. Following construction, Old Oakland sold the condominium units to

the public and conveyed its interest in the common areas to the Old Town Square I Owners

Association (“Homeowners’ Association”).

One and a half years after the construction was completed, Defendant issued Plaintiff a

commercial general liability insurance policy, effective August 31, 2000 through August 31, 2001. 

Plaintiff renewed the policy for a second one-year term on August 31, 2001. Plaintiff alleges that

both Old Oakland and Keating are additional insureds under the two policies.

In September 2000, the Homeowners’ Association for the condominium project delivered to

Plaintiff a list of some 200 “observations,” most of which were punch list or clean-up items, that

needed repair.

A month later, in October 2000, the Homewoners’ Association alerted Plaintiff to additional

mechanical and electrical problems. During the same month, Plaintiff settled a year and a half old

lawsuit it had initiated against Old Oakland. The terms of that settlement called for Old Oakland to

pay Plaintiff $1,122,700 plus interest over several phased payments and for Keating to pay an

additional $300,000. The final phased payment of $410,799.19 was conditioned, inter alia, on the

following: (1) Plaintiff agreeing to defend, indemnify, and hold harmless Old Oakland and Keating

with respect to the defects reported in September and October 2000; and (2) Plaintiff agreeing to

have Old Oakland and Keating named as additional insured on its liability policy.

Almost a year later, in September 2001, the Homeowners’ Association served Plaintiff with a

“Notice to Builder” detailing defective workmanship which they claimed caused property damage. 

Plaintiff tendered the “Notice to Builder” to Defendant and Defendant accepted the tender. Old

Oakland and Keating were also served with the “Notice to Builder” which they tendered to

Defendant. Defendant rejected their tenders.

When the construction defects had not been corrected by May 2002, the Homeowners’

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Association brought suit in state court against Plaintiff, Old Oakland, and Keating. Plaintiff, Old

Oakland, and Keating, all tendered their defenses to Defendant. Defendant refused to defend and

indemnify Plaintiff, Old Oakland, and Keating. At the same time, the Alameda County Superior

Court entered a Judgment Pursuant To Settlement requiring Old Oakland and Keating to pay

Plaintiff the remaining $410,799.19 conditioned upon, inter alia, Plaintiff adding Old Oakland and

Keating to its insurance policy and defending and indemnifying them.

Because of Defendant’s refusal to defend and indemnify, Plaintiff was contractually

obligated to do so for Old Oakland and Keating in the May 2002 litigation brought by the

Homeowners’ Association. By February 2005, Plaintiff had incurred $51,726 in attorneys’ fees

defending Old Oakland and Keating. Moreover, the Alameda Superior Court awarded Old Oakland

$25,209.35 in attorneys’ fees – incurred defending the “Notice to Builder” and attempting to have

Defendant accept the defense of Old Oaklnad and Keating – from Plaintiff. Finally, in responding to

that suit, Plaintiff incurred attorneys’ fees in the amount of $10,715.60.

Thus, Plaintiff brought the instant action alleging three causes of action. In the First Cause

of Action, Plaintiff alleges a breach of contract resulting in $498,450.14 in damages for Defendant’s

unreasonable failure to assume its defense obligations with respect to Old Oakland and Keating. In

the Second Cause of Action, Plaintiff seeks a declaratory judgment that Defendant is obligated to

defend and indemnify Old Oakland and Keating. The Third Cause of Action alleges that Defendant

breached the implied covenant of good faith and fair dealing by denying tender of defense to

Plaintiff and the additional insureds.

Defendant has brought the instant Rule 12(b)(6) motion to dismiss the first two causes of

action for lack of standing and to dismiss the third cause of action as barred by the statute of

limitations. 

LEGAL STANDARD

A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of the claims asserted in the

complaint. See Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337 (9th Cir. 1996). Dismissal of an

action pursuant to Rule 12(b)(6) is appropriate only where it “appears beyond doubt that the plaintiff

can prove no set of facts in support of his claim which would entitle him to relief.” Levine v.

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For the Northern District of California

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Diamanthuset, Inc., 950 F.2d 1478, 1482 (9th Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41,

45–46 (1957)). In reviewing such a motion, the Court must assume all factual allegations to be true

and must construe them in the light most favorable to the nonmoving party. See N. Star v. Ariz.

Corp. Comm., 720 F.2d 578, 580 (9th Cir. 1983). In the context of a motion to dismiss, review is

limited to the contents of the complaint. Allarcom Pay Television, Ltd. v. Gen. Instrument Corp., 69

F.3d 381, 385 (9th Cir. 1995). However, matters properly presented to a court, such as those

attached to the complaint and incorporated within its allegations, may be considered as part of the

motion to dismiss. See Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n.19

(9th Cir. 1989).

Motions to dismiss for failure to state a claim “are generally viewed with disfavor.” Ramos

v. Cal. Comm. of Bar Exam’rs of the State Bar of Cal., 857 F. Supp. 702, 704 (N.D. Cal. 1994). 

“Each averment of a pleading shall be simple, concise, and direct.” FED. R. CIV. P. 8(e)(1). Courts

must assume that all general allegations “embrace whatever specific facts might be necessary to

support them.” Peloza v. Capistrano Unified Sch. Dist., 37 F.3d 517, 521 (9th Cir. 1994). If the

complaint does not meet the liberal pleading standard, a court must grant leave to amend unless “it is

absolutely clear that the deficiencies of the complaint [cannot] be cured by amendment.” Noll v.

Carlson, 809 F.2d 1446, 1448 (9th Cir. 1987). 

ANALYSIS

Defendant argues that based on Rule 12(b)(6) of the Federal Rules of Civil Procedure, the

first two claims (breach of contract and declaratory relief) should be dismissed because Plaintiff is

not the real party in interest and the third claim (breach of the implied covenant of good faith and

fair dealings) should be dismissed because it is barred by the statute of limitations. 

A. Rule 17(a) Dictates The First Two Causes Of Action Should Not Be Dismissed.

Rule 17(a) of the Federal Rules of Civil Procedure requires that “every action shall be

prosecuted in the name of the real party in interest.” Rule 17(a) also prohibits dismissal of an action

“on the ground that it is not prosecuted in the name of the real party in interest until a reasonable

time has been allowed after objection for ratification of commencement of the action by, or joinder

or substitution of, the real party in interest.” FED. R. CIV. P. 17(a). But, a court can dismiss the

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For the Northern District of California

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action when it grants leave to amend. See, e.g., Raynor Bros. v. Am. Cyanimid Co., 695 F.2d 382,

384 (9th Cir. 1982); Cigarette King v. Phillip Morris USA, 2005 WL 1405122, at *5 (E.D. Cal. Jun

15, 2005).

Defendant argues that Plaintiff seeks to have the Court enforce or obtain a judicial

declaration of contractual rights that allegedly exist between: (1) Defendant and Old Oakland; and

(2) Defendant and Keating. Defendant notes that Rule 17(a) “requires that the party who brings an

action actually posses, under the substantive law, the right sought to be enforced.” United

HealthCare Corp. v. Am. Trade Ins. Co., 88 F.3d 563, 569 (8th Cir. 1996). Because Old Oakland

and Keating are not the real parties in interest, Defendant contends that the case should be dismissed

outright based on Rule 17(a).

Plaintiff concedes that the first and second causes of action, with respect to Old Oakland and

Keating, are not brought by the real parties in interest. (Plaintiff’s Opposition to Defendant’s

Motion to Dismiss (“Opp.”) at 7:1–9). However, Plaintiff argues that dismissal at the current time

based on the plain language of Rule 17(a) would be premature since the defect can be cured by

joinder, substitution, or an amended complaint.

Under California law, an insurer’s obligation to an additional insured is separate and distinct

from those owed to the named insured. See Am. Home Ins. Co. v. Travelers Indemnity Co., 122 Cal.

App. 3d 951, 968 (1981). Moreover, only a party to the policy or an assignee thereunder may sue to

enforce the policy or for a judicial declaration of the parties’ rights and duties owed under the

policy. Id. The Travelers Indemnity court stated that the “question of standing to sue is one of the

right to relief and goes to the existence of a cause of action against the defendant.” Id. It further

noted that “where the complaint states a cause of action in someone, but not in the plaintiff, a

general demurrer for failure to state a cause of action will be sustained.” Id. However, the court

also noted that “sustaining a general demurrer without leave to amend is not an abuse of discretion if

it appears from the complaint that under applicable substantive law there is no reasonable possibility

or probability that the defect can be cured by amendment.” Id. (quoting Fireman’s Fund Ins. Co. v.

Sec. Pacific Nat. Bank, 85 Cal. App. 3d 797, 832 (1978)) (emphasis added). Since Defendant only

raised its objection to the real party in interest a month and a half ago, the Court finds a reasonable

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time has not yet passed to allow Plaintiff to ratify the complaint by joinder or substitution of the real

party in interest. Additionally, the Court notes that since there is a reasonable possibility or

probability that the defect can be cured by amendment, substitution, or joinder, dismissal without

leave to amend is inappropriate. See Travelers Indemnity, 122 Cal. App. 3d at 968. Furthermore,

the Court believes that dismissal with leave to amend best serves the interests of justice. Such a

dismissal allows Plaintiff an opportunity to correct the defect and ensures the Court and the parties

avoid an unnecessary rehearing on the instant motion to dismiss – thirty days from now – in the

event Plaintiff fails to do so. Accordingly, the Court GRANTS Defendant’s motion to dismiss the

First and Second Causes of Action without prejudice and allows Plaintiff thirty days leave to amend.

B. The Statute of Limitations Has Not Yet Run On The Third Cause of Action.

Defendant argues that since the denial of benefits occurred on December 24, 2002, Plaintiff’s

lawsuit, filed on April 8, 2005, is past the two-year statute of limitations which ended on December

24, 2004. Plaintiff contends that the statute of limitations tolls until a judgment in the underlying

action is finalized and thus the lawsuit is timely filed.

The statute of limitations for a tortious bad faith claim is two years. Love v. Fire Ins. Exch.,

221 Cal. App. 3d 1136, 1143–44 n.4 (1990) (“[T]ort remedies on [a] claim for breach of the

covenant of good faith and fair dealing . . . is barred by the two-year statute of limitations under

Code of Civil Procedure section 339.”) However, the California Supreme Court has unambiguously

declared that the statute of limitations period tolls until a judgment in an underlying action is

finalized. Lambert v. Commonwealth Land Title Ins. Co., 53 Cal. 3d 1072, 1075, 1080 (1990). In

Lambert, the court explicitly rejected the contention that an “action for breach of the duty to defend

a claim under a title insurance policy accrues when tender of the defense is refused.” Id. at 1074. 

Instead, the California Supreme Court specifically noted that it would be unfair “to require an

insured . . . to defend the underlying action, at [their] own expense, and simultaneously to prosecute

– again at [their] own expense – a separate action against the title company for failure to defend.” 

Id. at 1078. The court held that fairness and justice required “equitable tolling of the insured’s

action to establish coverage until resolution of the underlying claim.” Id. at 1081. 

Here, the May 2002 Homeowners’ Association Lawsuit is the underlying claim to the

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present action; Defendant’s failure to defend and indemnify in that lawsuit prompted Plaintiff to file

the instant case. Since the moving party has not established that the underlying action—the May

2002 Homeowner’s Association Lawsuit—is complete, Lambert permits equitable tolling of

Plaintiff’s instant action until resolution of the underlying action so that Plaintiff will not have to

simultaneously prosecute separate actions at its expense. Accordingly, the Court finds that the

instant suit is not barred by the two-year statute of limitations.

Alternatively, even if the Court agreed that equitable tolling should not apply, Plaintiff’s

Complaint alleges claims in both tort and contract law. (Notice of Removal, Ex. A at ¶ 4, 43.) The

statute of limitations for breach of the implied covenant of good faith and fair dealing in contract law

is four years. CAL. CODE CIV. PROC. § 337. Additionally, a plaintiff need not elect between tort and

contract causes of action at the pleading stage. Frazier v. Metropolitan Life Ins. Co., 169 Cal. App.

3d 90, 100–102 (1985). Thus, barring Plaintiff’s Third Cause of Action based on the statute of

limitations would deny Plaintiff the opportunity to pursue its contract law claim. The instant

lawsuit, therefore, is well within the four-year statute of limitations that applies to contract claims

for breach of the implied covenant of good faith and fair dealing and dismissal would be

inappropriate.

Therefore, the Court finds that the instant suit is not barred by the statute of limitations and

DENIES Defendant’s motion to strike the Third Cause of Action.

CONCLUSION

For the foregoing reasons, the Court GRANTS Defendant’s motion to dismiss the First and

Second Causes of Actions with leave to amend and DENIES Defendant’s motion to dismiss the

Third Cause of Action.

IT IS SO ORDERED.

Dated: July _28_, 2005 

MARTIN J. JENKINS

UNITED STATES DISTRICT JUDGE

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