Kimberly Mueller, UNITED STATES DISTRICT JUDGE.
In this case, Lennar Mare Island, LLC (LMI), CH2M Hill Constructors, Inc. (CCI), and Steadfast Insurance Company dispute their obligations with respect to the clean-up of Mare Island, a former U.S. Navy shipyard. This order addresses LMI's and CCI's motions to dismiss Steadfast's Amended Counterclaim under Federal Rules of Civil Procedure 12(b)(6) and 12(b)(7). The matter was submitted without a hearing. For the following reasons, the motions are granted in part.
First, to avoid confusion, a preliminary note on the parties' identities: LMI is the plaintiff in this action, and Steadfast is the defendant. See Am. Compl. ¶¶ 1-2, ECF No. 22. Steadfast asserts counterclaims against LMI and CCI. See Am. Countercl. ¶¶ 2-3, ECF No. 164-1.
Because LMI and CCI bring motions under Federal Rule of Civil Procedure 12(b)(6), the court assumes the allegations of Steadfast's amended counterclaim are true. See Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir.2011). On its own motion, the court takes judicial notice of the parties' previous stipulated description of this case's general background. See Joint Stmt. Disc. Dispute (JS), ECF No. 63; W. Radio Servs. Co. v. Qwest Corp., 678 F.3d 970, 976 (9th Cir.2012) (a court may consider proper subjects of judicial notice on a motion to dismiss); Do v. Am. Home Mortgage Servicing, Inc., No. 11-324, 2011 WL 5593935, at *1 n. 1 (C.D.Cal. Nov. 17, 2011) (citing Kelly v. Johnston, 111 F.2d 613, 615 (9th Cir.1940)) (taking judicial notice of the parties' previous stipulation on a motion under Rule 12(b)(6)).
The United States Navy operated a base at Mare Island in the City of Vallejo, California for nearly 150 years. JS at 2. Over the years, Mare Island was contaminated. In 1996, the Navy closed the base, and in 2002, it conveyed the land to Vallejo. Id. The Navy, however, was obligated to investigate and remediate pollution on Mare Island. Id. In 2001, the City, the Navy, Steadfast, LMI and CCI entered several contracts. Id. at 2-3.
First, the Navy and the City entered the Environmental Services Cooperative Agreement, or ESCA. Id. at 2. In the ESCA, the Navy agreed to pay the City about $78 million and the City agreed to remediate certain environmental problems on Mare Island. Id. But the Navy agreed to retain responsibility for certain conditions, i.e., the "Navy-Retained Conditions." Id. These Navy-Retained Conditions included a defined set of known conditions for which the costs of clean-up exceed $114.3 million. Id. Second, in the Mare Island Remediation Agreement, or MIRA, LMI agreed it would take on the City's obligations under the ESCA to remediate pollution on Mare Island. Id. at 2-3. This agreement anticipated the City's later transfer of some of Mare Island to LMI. Id. at 2. Third, LMI and CCI entered into a Guaranteed Fixed Price Contract, or GFPC. Id. at 3; Am. Countercl. ¶ 9. In the GFPC, CCI agreed to remediate specific contamination problems on Mare Island in return for a fixed price. JS at 3; Am. Countercl. ¶ 9. CCI also agreed to remediate other pollution for additional compensation when LMI requested. JS at 3.
In conjunction with the GFPC, Steadfast, LMI and CCI negotiated a series of insurance policies. Id.; Am. Countercl. ¶ 10. These policies' premiums were paid for indirectly with Navy funds. JS at 3. Steadfast, LMI and CCI are all parties to these policies, but their rights and obligations differ or conflict. Am. Countercl. ¶ 10. Two of the policies are the subject of this lawsuit. Copies of both are attached as exhibits to the amended counterclaim. See id. Exs. A, B.
Second, the Environmental Liability Insurance or ELI. policy: Steadfast issued the ELI policy to both CCI and LMI. Id. ¶ 12, Ex. B. Among other things, the ELI policy "affords coverage for certain cleanup costs required by a `Governmental Authority' as a result of a `Pollution Event' that is not a `Known Pollution Condition' and that is first discovered by an insured during the policy period." Id. ¶ 12. The ELI policy is set to expire on March 30, 2021, ten years after the RSL policy expired. Id.
According to the amended counterclaim, when the RSL and ELI policies were drafted and signed, LMI, CCI and Steadfast intended for the RSL policy to provide coverage for known pollution conditions and the ELI policy to provide coverage for unknown pollution conditions. Id. In particular, Steadfast alleges that whether a particular pollution condition or event was "known" or "unknown" depends on a reference to two sources: first, the Scope of Work Endorsement appended to the policies, and second, other various documents available to CCI or LMI at the time. Id. These documents included "certain environmental reports" exchanged between Steadfast, LMI and CCI before inception of the policies. Id. ¶ 13. These "environmental reports and Technical Summaries were part of the applications for the RLS and ELI Policies," and both policies' preambles make the applications "a part hereof." Id.
Steadfast alleges LMI's and CCI's actions after 2001 matched this understanding. Id. ¶ 15. For example, LMI conceded in private discussions with CCI that "the underwriting materials" should be considered when deciding whether a pollution condition was known or unknown. Id. But after the policies were signed, LMI and CCI eventually adopted a different interpretation of the policies in their communications with Steadfast. Id. To Steadfast, they argued that if a pollution event is not listed in the tables and figures appended to the policies, then it is unknown, regardless of anything to the contrary in the "Applications" or "underwriting documents." Id. This has also been LMI's position in this action. See Mot. Summ. J., ECF No. 187.
"Fundamentally," Steadfast charges LMI and CCI with "a pattern of improper conduct throughout their contractual relationship with Steadfast...." Id. ¶ 20. First, LMI and CCI "attempted to convert
Steadfast claims LMI and CCI took these actions because the RSL policy expired earlier than the ELI policy; if claims could no longer be submitted under the RSL policy, then LMI and CCI attempted to submit them under the ELI policy, which has not expired. Id. ¶ 21(a). LMI also intended to use both the RSL and ELI policies to "finance its infrastructure development at the Mare Island project." Id. ¶ 21(b). In other words, LMI attempted to pass off its real estate development costs as pollution cleanup costs. See id. But, Steadfast says, the policies were never intended for this purpose. Id. In all, LMI and CCI sought to maximize their profits, regardless of the policy terms or the effects on Steadfast's own bottom line. Id. § 21(c).
After laying out this general theory, Steadfast's counterclaim describes several dozen instances of wrongdoing. See id. ¶¶ 23-69. It divides these allegations into several groups:
On the basis of these allegations, Steadfast advances ten claims against both LMI and CCI: (1) accounting; (2) breach of contract; (3) negligence; (4) restitution; (5) unjust enrichment; (6) intentional interference with contractual relations; (7) negligent misrepresentation; (8) intentional misrepresentation; (9) reformation; and (10) declaratory relief. Id. at 22-31. It seeks relief in the form of an accounting, restitution, reformation of the policies, cancellation of the ELI policy, compensatory damages, punitive damages, a declaration of its rights under the contracts, and whatever other relief is proper. Id. at 31.
LMI filed its original complaint in state court, and the case was removed to this court in August 2012. ECF No. 1. Steadfast filed an answer and its original counterclaim the same month. ECF Nos. 4, 5. Since then, the parties have engaged in extensive litigation.
LMI and CCI filed the pending motions to dismiss on September 4, 2015. CCI joined LMI's motion in full. ECF No. 298. In opposition to these motions, Steadfast agreed to withdraw its claim for negligence. Opp'n LMI Mot. at 20; Opp'n CCI Mot. at 17. The court construes this agreement as a stipulation to dismissal of the claim for negligence with prejudice, and grants the request.
LMI and CCI request relief under both Rules 12(b)(6) ("failure to state a claim upon which relief can be granted") and 12(b)(7) ("failure to join a party under Rule 19"). The court addresses first the motions under Rule 12(b)(7).
Rule 12(b)(7) allows a party to request dismissal for "failure to join a party under Rule 19." Fed. R. Civ.P. 12(b)(7).
The inquiry is fact-specific and practical. N. Alaska Envtl. Ctr. v. Hodel, 803 F.2d 466, 468 (9th Cir.1986); Camacho v. Major League Baseball, 297 F.R.D. 457, 460-61 (S.D.Cal.2013). For this reason, it may be necessary to review evidence beyond the pleadings. Camacho, 297 F.R.D. at 461 (quoting McShan v. Sherrill, 283 F.2d 462, 464 (9th Cir.1960)). LMI and CCI, the moving parties, "`bear the burden in producing evidence in support of the motion.'" Id. (quoting Biagro W. Sales Inc. v. Helena Chem. Co., 160 F.Supp.2d 1136, 1141 (E.D.Cal.2001)).
Here, LMI and CCI argue the United States Navy is a necessary party to the reformation claim and the request to cancel the ELI policy. LMI Mot. at 16-19; CCI Mot. at 13-15. They argue however that the Navy cannot be joined because the United States has not waived its sovereign immunity, and equity and good conscience do not allow Steadfast to seek reformation and cancellation in the Navy's absence. LMI and CCI both move to dismiss the reformation claim, LMI Mot. at 16-19, and CCI moves to strike Steadfast's requests for reformation and cancellation, CCI Mot. at 15. The court first considers whether the Navy is necessary under Rule 19(a).
"A party may be necessary under Rule 19(a) in three different ways." Salt River, 672 F.3d at 1179. "First, a person is necessary if, in his absence, the court cannot accord complete relief among existing parties." Id. (citing Fed. R. Civ. P. 19(a)(1)(A)). "Second, a person is necessary if he has an interest in the action and resolving the action in his absence may as a practical matter impair or impede his ability to protect that interest." Id. (citing Fed. R. Civ. P. 19(a)(1)(B)(i)). "Third, a person is necessary if he has an interest in the action and resolving the action in his absence may leave an existing party subject to inconsistent obligations because of that interest." Id. (citing Fed. R. Civ. P. 19(a)(1)(B)(ii)). As a fourth consideration, however, even when a party has an interest in the litigation, that party may not be necessary under Rule 19(a) if it is "adequately represented" by a present party. Id. at 1180-81. The court considers each possibility in turn.
"Complete relief `is concerned with consummate rather than partial or hollow relief as to those already parties, and with precluding multiple lawsuits on the same cause of action.'" Alto v. Black, 738 F.3d 1111, 1126 (9th Cir.2013) (quoting Disabled Rights Action Comm. v. Las Vegas Events, Inc., 375 F.3d 861, 879 (9th Cir.2004)). "To be `complete,' relief must be `meaningful relief as between the parties.'" Id. (quoting Disabled Rights, 375 F.3d at 879 (emphasis in Alto)).
Here, LMI and CCI argue "resolving Steadfast's reformation claim without the Navy would mean LMI could not obtain complete relief vis-a-vis Steadfast or CCI because the very bases on which these parties entered into contracts and did business for some fifteen years could be altered retrospectively." LMI Mot. at 18. The relationships between LMI, CCI, the Navy and Steadfast are the subject of several lengthy written agreements, including the GFPC, the ELI policy, the RSL policy, and the ESCA, among others. The parties' obligations under these agreements are interdependent; the agreements cite one another and define terms by reference
That said, LMI and CCI have argued in only general and abstract terms that the policies' entire structure would collapse if the Navy is not joined. This does not suffice to satisfy the fact-specific standard of Rule 19. For example, LMI has not shown that if the Navy remains absent, LMI will be precluded from later seeking indemnification from the Navy. Cf., e.g., E.E.O.C. v. Peabody W. Coal Co., 610 F.3d 1070, 1081 (9th Cir.2010). Neither has it shown that follow-on litigation with the Navy would render any relief granted here "hollow." Alto, 738 F.3d at 1126 (citing Dawavendewa v. Salt River Project Agr. Imp. & Power Dist., 276 F.3d 1150, 1155-58 (9th Cir.2002)). Because LMI bears the burden to produce relevant evidence, but has not, a dismissal under Rule 12(b)(7) cannot be based on a theory of the Navy's necessity under Rule 19(a)(1)(A).
Rule 19 does not protect every interest an absentee may have. For example, "a financial stake in the outcome of the litigation" does not give rise to Rule 19(a)(2) necessity. Disabled Rights, 375 F.3d at 880, 883. Only "legally cognizable interests," id. at 880, or "legally protected interests" are within the Rule's scope, id. at 883 (citing Makah Indian Tribe v. Verity, 910 F.2d 555, 558 (9th Cir.1990)).
LMI and CCI point out three interests the Navy may have in adjudication of the amended counterclaim: (1) the Navy paid the policy premiums, and should Steadfast succeed, the policies would be gutted, LMI Mot. at 16-17; (2) should Steadfast's reformation claim succeed, the policies' overall structure would be undermined and the Navy's intent ignored, LMI Mot. at 17; and (3) the Navy is a party to the contract Steadfast seeks to reform, and should Steadfast succeed, the Navy is at risk of incurring greater liability, LMI Mot. at 17-18; CCI Mot. at 13-14.
The first and second arguments are similar. In effect, LMI and CCI argue that if the ELI policy is cancelled or reformed, Steadfast would have retroactively changed the terms of the insurance scheme the Navy bought into. In other words, the "very foundation on which the Navy, the City of Vallejo, LMI, and CCI entered into their 2001 agreements" was that "all cleanup costs were to be directly funded by the Navy's payment or insured with Navy-paid premium dollars." LMI Mot. at 17. LMI does not support this assertion with citations to evidence. Nevertheless, assuming LMI had proven this fact, its argument describes only prejudice in the abstract. It leaves the court to surmise the implications of Steadfast's claims for the Navy's interests and assumes without explanation that the Navy has an interest in ensuring it (and not Steadfast, LMI, CCI, the City of Vallejo or anyone else) paid for pollution clean-up.
On the other hand, the Navy's interest in the insurance policy is far weightier. The Ninth Circuit has "repeatedly held that `[n]o procedural principle is more deeply imbedded in the common law than that, in an action to set aside a lease or a contract, all parties who may be affected by the determination of the action are indispensable.'" Peabody, 610 F.3d at 1082 (quoting Lomayaktewa v. Hathaway, 520 F.2d 1324, 1325 (9th Cir.1975)) (alteration in Peabody). See also Dawavendewa, 276 F.3d at 1157 ("[A] party to a contract
The "United States Department of Defense, Department of the Navy" is an "additional insured" under the ELI policy, "to the extent of Claims arising out of the activities, liabilities and obligations of the Navy at the Covered Location: Coverage A.1 only." Am. Countercl. Ex. B, at 183. As an additional insured, the Navy has an interest in preventing Steadfast from canceling the insurance policy. See Peabody, 610 F.3d at 1082 (an action to "set aside" a contract requires the signatories' presence). Whether the Navy has an interest in Steadfast's reformation claim, however, depends on whether and how the proposed reformation would impact the Navy's contract rights. The court therefore turns to the proposed reformation.
Steadfast seeks reformation of the definition of "Known Pollution Condition," through alteration of the ELI policy as follows:
LMI and CCI argue that should Steadfast succeed on this front, the ELI policy's coverage will be reduced. They argue the Navy would face greater liability. See LMI Mot. at 17. The court has reviewed the terms of the ELI policy and ESCA, and agrees that were the ELI and RSL policy definition of "Known Pollution Condition" to expand, the ELI policy's coverage would contract, and the Navy could arguably face greater liability. See Werner Decl. Ex. 2A, at 3, ECF No. 296-2 ("The Navy shall remain responsible ... for Navy-Retained Conditions...."); id. at 4-5 (defining "Navy-Retained Conditions"); id. at 6 (defining "Known Conditions" and "Unknown Conditions"); id. at 7 (defining "Insured Unknown Conditions"). Steadfast does not dispute this general conclusion, and it has made similar statements in previous filings. See, e.g., Joint Rep. 3, ECF No. 16 ("Under the ESCA, the City [of Vallejo] declined responsibility for certain of the Navy's potential environmental liabilities, including, inter alia, natural resource damages, certain unknown conditions, and known conditions once remediation costs for known conditions exceeded $114.3 million (collectively, `Navy Retained Conditions').").
If the court were to reform the ELI policy as Steadfast requests, the Navy's liability could arguably increase. The Navy's legally cognizable interests may therefore be impaired or impeded by both reformation and cancellation of the ELI policy. In sum, under Rule 19(a)(1)(B)(i), the Navy is a necessary party to Steadfast's counterclaim for reformation and Steadfast's requests for cancellation and reformation.
LMI argues reformation would subject LMI to "cleanup obligations under the ESCA that are inconsistent with its insurance coverage for cleanup costs under the ELI policy, even though ELI policy coverage was consideration for the original deal." LMI Mot. at 18. This possible conflict does not require the Navy's joinder. LMI has not shown, for example, that should Steadfast prevail, the reformed ELI policy would subject LMI to a contractual obligation contrary to another duty LMI owes the Navy. Cf., e.g., Peabody, 610 F.3d at 1081. LMI has not shown it cannot defend its financial interests in the ELI policy in the Navy's absence. The Navy is not necessary under Rule 19(a)(1)(B)(ii).
Although the Navy has an interest in the adjudication of Steadfast's counterclaim, it may not be necessary under Rule 19(a) if it is "adequately represented" here. Salt River, 672 F.3d at 1180-81. The parties do not address this possibility, but were the court to dismiss Steadfast's claims without doing so, the error may be reversible. See id. 1180-82.
As the Ninth Circuit has explained, "If a legally protected interest exists, the court must further determine whether that interest will be impaired or impeded by the suit. Impairment may be minimized if the absent party is adequately represented in the suit." Makah Indian Tribe v. Verity, 910 F.2d 555, 558 (9th Cir.1990). The court considers three factors in determining whether a present party adequately represents the interests of an absent party:
Salt River, 672 F.3d at 1180 (quoting Shermoen v. United States, 982 F.2d 1312, 1318 (9th Cir.1992)).
The Salt River court's decision illustrates how these rules may be applied. In that case, two non-tribal entities, the owner and operator of a power plant on Navajo Nation land, were defendants in an employment case brought in tribal courts. Id. at 1177. In a federal-court complaint against Navajo officials, the power plant sought to bar the application of tribal law in the employment case, arguing the tribe lacked authority to do so under its lease agreement with the power plant. Id. at 1177-78. The tribe was absent from the federal case, however, and the tribal officers argued the case could not proceed without the tribe because the complaint challenged the lease agreement. Id. at 1178. The district court agreed and dismissed the federal case under Rule 19. Id.
On appeal, the Ninth Circuit reversed, finding the tribal officials adequately represented the tribe. Id. at 1180-81. The officials' interests were "aligned" with the tribe's interests. Id. at 1180. No evidence suggested the officials would be unable to make every reasonable argument the tribe itself would make. Id. And no evidence suggested the tribe would "offer any necessary element to the action that the Navajo official defendants would neglect." Id. at 1180-81. The Navajo Nation was therefore not a necessary party, and the case could go forward without it. Id. at 1182.
Here, LMI's and CCI's interests are similarly "aligned" with the Navy's. All are insureds under the ELI policy. In defending Steadfast's counterclaim, LMI and CCI attempt to rebuff an interpretation they claim would "gut" the ELI Policy for the same reasons the Navy would: to preserve the structure of insurance for the Mare Island project as they see it and to prevent coverage reductions. The Navy arguably faces increased liability should Steadfast succeed. LMI faces the same danger.
The Navy's rights under the ELI policy may differ from LMI's and CCI's rights generally, but their interests all align with respect to Steadfast's counterclaim. First, Steadfast seeks cancellation of the ELI policy for fraud. LMI and CCI have the same if not a greater interest in defending against this claim as does the Navy: not only could they lose coverage if Steadfast prevails, but they would be branded fraudsters. Second, Steadfast seeks reformation
The court also concludes LMI and CCI are as capable of defending against the counterclaim as the Navy would be. LMI and CCI have not suggested the Navy has evidence they do not or can make arguments they cannot, and the progression of the case to date also suggests no such shortfall. Neither has any party suggested the Navy's presence would contribute any element necessary to this case. The Navy is adequately represented in this case, and for this reason it is not a necessary party under Rule 19(a).
The Navy's public or sovereign status does not lead to the opposite conclusion. In some cases, third party litigants may not adequately represent a public entity's sovereign interests. See, e.g., W. Watersheds Project v. U.S. Forest Serv., No. 10-612, 2012 WL 262573, at *4 (D.Idaho Jan. 30, 2012); In re Chocolate Confectionary Antitrust Litig., No. 08-1935, 2008 WL 4960194, at *1 (M.D.Pa. Nov. 18, 2008).
Because the court concludes the Navy is not a necessary party, it does not address whether the Navy may feasibly be joined as a party.
Even if the Navy were necessary under Rule 19(a), the court could not grant the motion to dismiss based on Rule 12(b)(7). LMI and CCI have not carried their burden to show that Steadfast's requests for reformation and cancellation cannot proceed "in equity and good conscience." Fed. R. Civ. P. 19(b).
Rule 19 lists several specific considerations the court should weigh when joinder of a necessary party is not feasible:
Fed. R. Civ. P. 19(b). The court's decision on this question is one of discretion. Salt River, 672 F.3d at 1179.
First, LMI and CCI do not argue they or Steadfast will be prejudiced by the Navy's absence. Neither does it appear they will be. As to the Navy, as noted above, the course of this litigation shows LMI's and CCI's interests parallel the Navy's. Their vigorous prosecution of this case will substantially reduce any risk of prejudice to the Navy. Moreover, were evidence to be uncovered that showed the Navy faces prejudice, the court may revisit its decision, or the Navy could seek to provide amicus curiae briefing. See, e.g., Bordallo v. Camacho, 475 F.2d 712, 713 n.1 (9th Cir.1973) (per curiam) (finding the United States was not an indispensable
Second, if judgment in Steadfast's favor would prejudice the Navy, the court could shape that judgment to minimize prejudice. For example, should Steadfast prevail on its reformation claim, the court may equitably refine the definition of "Known Pollution Condition" to fit the parties' total pre-contract expectations, including the Navy's, whatever the evidence may establish those expectations were.
Third, were Steadfast's counterclaim dismissed with prejudice, it would likely have no other avenue for relief. See Fed. R. Civ. P. 19(b)(4). Although the lack of an alternative forum is not dispositive, see Makah, 910 F.2d at 560, in this case, this factor weighs against dismissal.
Finally, when a person or agency is aware of an action but chooses not to claim an interest, the district court does not err by finding joinder unnecessary. United States v. Bowen, 172 F.3d 682, 689 (9th Cir.1999). Steadfast's position in this litigation has always been that the definition of "Known Pollution Conditions" included more than the Tables and Figures in the endorsements, even before its counterclaim was filed. The Navy has remained silent despite its awareness of this action's nature and pendency. See, e.g., Joint Status Rep. 3, ECF No. 110 (Steadfast reports (1) it sent the Navy requests for documents under the Freedom of Information Act, (2) the Navy agreed to produce documents related to Mare Island; and (3) it later also served the Navy with discovery subpoenas in this case); Minutes, ECF No. 121 (noting the Navy's participation in settlement efforts in this case); Order Apr. 7, 2015, at 9, ECF No. 263 (ordering LMI to produce "any written agreement or agreements it has entered into with the Navy that establish that the Navy is assisting LMI in its payment of attorneys' fees in this litigation and that the Navy is entitled to reimbursement for some or all of the attorneys' fees for which it is paying").
The motions to dismiss and strike under Rules 12(b)(7) and 19 are denied.
The court now turns to the motions to dismiss for failure to state a claim.
"A defendant's counterclaims are held to the same pleading standard as a plaintiff's complaint." First Serv. Networks, Inc. v. First Serv. Maint. Grp., Inc., No. 11-01897, 2012 WL 5878837, at *1 (D.Ariz. Nov. 21, 2012) (citing Starr, 652 F.3d at 1216). A party may move to dismiss a counterclaim for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). The motion may be granted only if the counterclaim lacks a "cognizable legal theory" or if its factual allegations do not support a cognizable legal theory. Hartmann v. Cal. Dep't of Corr. & Rehab., 707 F.3d 1114, 1122 (9th Cir.2013). The court assumes the counterclaim's factual allegations are true and draws reasonable inferences from them. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
A counterclaim need contain only a "short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), not "detailed factual allegations," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). But this rule demands more than unadorned accusations; "sufficient factual matter" must make the claim at least plausible. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. In the same vein, conclusory or formulaic recitations of elements do not alone suffice. Id. (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Evaluation under Rule 12(b)(6) is a context-specific task drawing on "judicial experience and common sense." Id. at 679, 129 S.Ct. 1937. And aside from the counterclaim, district courts have discretion to examine documents incorporated by reference, Davis v. HSBC Bank Nevada, N.A., 691 F.3d 1152, 1160 (9th Cir.2012); affirmative defenses based on the complaint's allegations, Sams v. Yahoo! Inc., 713 F.3d 1175, 1179 (9th Cir. 2013); and proper subjects of judicial notice, W. Radio Servs., 678 F.3d at 976.
Federal Rule of Civil Procedure 9(b) imposes a heightened pleading standard on fraud allegations: "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). "Fraud can be averred by specifically alleging fraud, or by alleging facts that necessarily constitute fraud (even if the word `fraud' is not used)." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir.2003). Although state law governs the substantive adequacy of the pleading here, Rule 9(b) nonetheless applies to any claims or allegations of fraud. Id. at 1103. If fraud is not an essential element of a particular claim, "only those allegations... which aver fraud are subject to Rule 9(b)'s heightened pleading standard." Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir.2009). If an allegation does not meet the heightened pleading standard, it is disregarded. Id. Non-fraud allegations need satisfy only the standard of Rule 8. Id.
To meet the Rule 9(b) standard, a pleading must "`be specific enough to give defendants notice of the particular misconduct... so that they can defend against the charge and not just deny that they have done anything wrong.'" Sanford v. MemberWorks, Inc., 625 F.3d 550, 558 (9th Cir.2010) (quoting Kearns, 567 F.3d at 1124) (alteration in original). Normally this standard requires allegations of "the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation." Id. (quoting Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004)) (quotation marks and alterations omitted).
LMI and CCI challenge the amended counterclaim as a whole, as insufficiently specific under Rule 9(b). Their motions also advance several claim-specific arguments for dismissal, targeting the claims for breach of contract, negligence, intentional interference with contractual relations, and reformation. Each is a state law claim. Therefore California substantive law applies. See Bell Lavalin, Inc. v. Simcoe & Erie Gen. Ins. Co., 61 F.3d 742, 745 (9th Cir.1995). The court first addresses LMI's and CCI's claim-specific arguments, then turns to Rule 9(b).
California courts define a claim for breach of contract in four parts: "(1) the existence of the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to the plaintiff." Oasis W. Realty, LLC v. Goldman, 51 Cal.4th 811, 821, 124 Cal.Rptr.3d 256, 250 P.3d 1115 (2011). Here, the parties dispute only the third element: whether Steadfast can allege LMI and CCI breached the ELI and RSL policies.
The amended counterclaim lists four alleged breaches:
The court addresses each claim in turn.
Steadfast alleges as follows:
Am. Countercl. ¶ 75.
No provision of the RSL or ELI policies forbids LMI or CCI from submitting claims for unknown pollution events under the RSL policy or known events under the ELI policy. First, the RSL policy provides coverage for "any Loss arising out of the Insured Project that exceeds the Self Insured Retention(s), provided the loss is the result of a Claim first reported to the Company, in writing by the Named Insured, during the Policy Period." Am. Countercl. Ex. A, at 35 (bold typeface omitted). The "Insured Project" is "the project designated in Item 5 of the Declarations as specifically described in and limited by the appended Scope of Work endorsement." Id. at 37. Item 5 lists "Remediation of the Covered Location as described by the Scope of Work Endorsement... to this policy." Id. at 33. The Scope of Work endorsement provides, "The conditions and activities identified in Tables 1, 2, and 3 and listed below represent the Scope of Work of the Insured Project and are Known Pollution Conditions or actions with respect to such Known Pollution Conditions authorized under
Second, the ELI policy provides coverage for (1) "Cleanup Costs in excess of the applicable Self Insured Retention required by Governmental Authority as a result of a Pollution Event on, at or under a Covered Location that is not a Known Pollution Condition and that is first discovered during the Policy Period"; and (2) "Cleanup Costs in excess of the applicable Self Insured Retention where the Insured is legally obligated to pay as a result of a Claim first made against the Insured during the Policy Period of Cleanup Costs caused by a Pollution Event on, at, under or coming from a Covered Location that is not a Known Pollution Condition." Id. Ex. B, at 131 (bold typeface omitted). Therefore, Steadfast may deny a claim submitted under the ELI policy because the claim is for a known condition, but submitting such a claim is not a breach of contract.
The motion to dismiss is granted as to this claim with prejudice and without leave to amend. See, e.g., Cafasso, 637 F.3d 1047, 1058 (9th Cir.2011) (leave to amend need not be granted if amendment would be an exercise in futility); Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295-96 (9th Cir.1998) (the court does not assume the truth of allegations contradicted by documents referred to in the complaint).
Steadfast alleges as follows:
Am. Countercl. ¶ 76. The court has carefully reviewed the RSL and ELI policies. No provision of either policy forbids LMI or CCI from submitting claims for costs not required by governmental authority. Rather, the terms quoted above show Steadfast may deny claims for cleanup not required by government authority, but the policies impose no contractual duty to refrain from submitting such a claim. See supra pages 1158-59. This claim is dismissed with prejudice and without leave to amend.
Steadfast alleges CCI and LMI "submitted claims that were not reasonable in amount or kind, all in violation of the terms of the RSL and ELI Policies." Am. Countercl. ¶ 75. The RSL Policy provides, "Allowable Expenses of the Named Insured include the sum of [specific items listed in the policy], to the extent they are reasonable and necessary to complete the agreed Scope of Work." Am. Countercl. Ex. A, at 35 (bold typeface omitted). Similarly, the ELI policy provides, "[I]tems which will comprise and which are Allowable Expenses of the First Named Insured include the sums of [certain items], to the extent they are reasonable and necessary to complete the agreed Covered Work." Id. Ex. B, at 132 (bold typeface omitted). No provision prohibits LMI or CCI from submitting unreasonable claims; rather, the policies allow Steadfast to deny unreasonable claims. As above, this claim is dismissed with prejudice and without leave to amend.
Steadfast alleges as follows:
Am. Countercl. ¶ 77. Under the ELI Policy, "The Insureds agree with the Company to assist and cooperate in the fulfillment of the policy's terms, including the investigation, adjustment, defense or settlement of Claim(s)." Am. Countercl. Ex. B, at 154.
Under longstanding California law, if an insured breaches a covenant to cooperate, the insurer may enjoy a defense in an action under that policy. See, e.g., Billington v. Interinsurance Exch. of S. Cal., 71 Cal.2d 728, 742, 79 Cal.Rptr. 326, 456 P.2d 982 (1969); Campbell v. Allstate Ins. Co., 60 Cal.2d 303, 305, 32 Cal.Rptr. 827, 384 P.2d 155 (1963); Truck Ins. Exchange v. Unigard Ins. Co., 79 Cal.App.4th 966, 976, 94 Cal.Rptr.2d 516 (2000). California courts appear to have assumed the breach of a cooperation clause creates a defense only; disputes tend to center on the correct classification of the condition imposed: subsequent or precedent. See, e.g., Billington, 71 Cal.2d at 742, 79 Cal.Rptr. 326, 456 P.2d 982 ("It has been said that a cooperation clause constitutes a condition subsequent or a condition precedent in an insurance policy...."); O'Morrow v. Borad, 27 Cal.2d 794, 800, 167 P.2d 483 (1946) ("[R]egardless of the name given to provisions of this kind [that is, condition subsequent or condition precedent], the insurer is ordinarily released from its contract by the total and unjustifiable refusal of cooperation by the insured...."); Valladao v. Fireman's Fund Indem. Co., 13 Cal.2d 322, 337, 89 P.2d 643 (1939) ("[T]he condition of the policy requiring cooperation by the assured is in the nature of a condition precedent to liability on the company's part....").
Some California federal court decisions are consistent with these state cases. See Pac. Dental Servs., LLC v. Homeland Ins. Co. of N.Y., No. 13-749, 2013 WL 3776337, at *4 (C.D.Cal. July 17, 2013); Allstate Ins. Co. v. Madan, 889 F.Supp. 374, 379 (C.D.Cal.1995) (citing West v. State Farm Fire & Cas. Co., 868 F.2d 348, 350 (9th Cir.1989)). In an unpublished 2007 decision, the Ninth Circuit also understood California law to require an insurer to present cooperation-clause breaches in its defense, and not in an affirmative contract claim. See Ins. Co. State of Pa. v. The Roman Catholic Archbishop of L.A., 227 Fed.Appx. 643, 644 (9th Cir.2007) ("California courts have long characterized the insured's duty to cooperate as a condition precedent to coverage, not as a basis on which to assert an independent cause of action. For these reasons, we believe that the California Supreme Court would require plaintiffs to present their theories as to how the [defendant] breached his duty to cooperate as a defense to liability under the policies." (emphasis in original) (citing Valladao, 13 Cal.2d at 337, 89 P.2d 643)).
In recent years, however, some federal district courts have held otherwise, allowing insurers to pursue an affirmative contract claim under California law for breach of a cooperation clause. See Travelers Indem. Co. of Connecticut v. Centex Homes, No. 14-451, 2014 WL 2801050, at *3 (E.D.Cal. June 19, 2014); Centex Homes v. Lexington Ins. Co., No. 13-719, 2014 WL 1225501, at *17 (N.D.Tex. Mar. 25, 2014);
The rule that requires the court to apply California law here famously stems from Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), whose "twin aims" are "discouragement of forum-shopping and avoidance of inequitable administration of the laws." Hanna v. Plumer, 380 U.S. 460, 468, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965). The U.S. Supreme Court has interpreted Erie to reject "a particular way of looking at law":
Guar. Trust Co. of N.Y. v. York, 326 U.S. 99, 102, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945). In other words, "the court `must apply the law as it believes the California Supreme Court would apply it.'" Kairy v. SuperShuttle Int'l, 660 F.3d 1146, 1150 (9th Cir.2011) (quoting Gravquick A/S v. Trimble Navigation Int'l, Ltd., 323 F.3d 1219, 1222 (9th Cir.2003)).
This court adopts the position of the court in Insurance Company of the State of Pennsylvania as persuasively comprehending what the California Supreme Court's decision would be. Steadfast must pursue its cooperation-clause theories as a defense, not an independent, affirmative contract claim. The court reaches this conclusion on the basis of four considerations. First, California courts have final authority to define and interpret California law. See, e.g., Mullaney v. Wilbur, 421 U.S. 684, 691, 95 S.Ct. 1881, 44 L.Ed.2d 508 (1975); Fid. Union Trust Co. v. Field, 311 U.S. 169, 177, 61 S.Ct. 176, 85 L.Ed. 109 (1940). This court applies the law as defined by California courts; it does not assume a claim may proceed in the absence of contrary authority. See U.S. Fid. & Guar. Co. v. Lee Investments LLC, 641 F.3d 1126, 1134 (9th Cir.2011) ("In assessing how the California Supreme Court would resolve [a] question — absent controlling state authority — federal courts look to existing state law without predicting potential changes in that law.").
Second, California courts have treated an insurer's defensive posture in this situation as axiomatic. In deciding decades of case law, no California court has even taken up the question of an affirmative cooperation-clause claim, which suggests adopting Steadfast's position would be a ground-breaking move better left to the state courts as a matter of comity.
Third, as a practical matter, allowing Steadfast to pursue an affirmative claim in
Finally, the California Supreme Court has emphasized differences between an insurer's and an insured's position in a contract action. See, e.g., Kransco, 23 Cal.4th at 402, 97 Cal.Rptr.2d 151, 2 P.3d 1 (citing, inter alia, Foley v. Interactive Data Corp., 47 Cal.3d 654, 684, 254 Cal.Rptr. 211, 765 P.2d 373 (1988)). Both insurers and insureds owe one another a duty of good faith and fair dealing, but only an insured may pursue tort remedies for breaches of this duty. Id. In addition, an insured's breach of a cooperation clause does not excuse the insurer's duty of good faith and fair dealing; "the insurer's duty is unconditional and independent of the insured's contractual obligations." Id. (quoting Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 576-78, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973)) (emphasis in Kransco). This also suggests the California Supreme Court would require an insurer to advance cooperation-clause theories in a defensive rather than an offensive posture.
The motion is granted with prejudice and without leave to amend as to this claim.
Steadfast does not allege a claim for breach of the covenant of good faith and fair dealing in its amended counterclaim. It does advance this theory in its opposition brief to LMI's motion. See Opp'n LMI Mot. at 13-14. "In determining the propriety of a Rule 12(b)(6) dismissal, a court may not look beyond the [pleadings] to a [party's] moving papers, such as a memorandum in opposition to a... motion to dismiss." Schneider v. Cal. Dep't of Corr., 151 F.3d 1194, 1197 n. 1 (9th Cir.1998) (emphasis omitted). The court therefore construes Steadfast's argument as a request for leave to amend.
California law recognizes the implied covenant of good faith and fair dealing in every contract. Kransco, 23 Cal.4th at 400, 97 Cal.Rptr.2d 151, 2 P.3d 1. Each party promises not to do "anything which will injure the right of the other to receive the benefits of the agreement." Id. "[T]he covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct that frustrates the other party's rights to the benefits of the agreement." Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 36, 44 Cal.Rptr.2d 370, 900 P.2d 619 (1995). It "applies equally to insurance policies, which are a category of contracts." Kransco, 23 Cal.4th at 400, 97 Cal.Rptr.2d 151, 2 P.3d 1. An insured's breach of the covenant of good faith and fair dealing is separately actionable as a contract claim. Id. at 408, 97 Cal.Rptr.2d 151, 2 P.3d 1.
Here, it appears the counterclaim could be amended to state a claim for LMI's and CCI's breach of the covenant of good faith and fair dealing. Steadfast alleges LMI and CCI attempted to shift claims from one policy to another, to conjure government authority, and to submit inflated claims in bad faith. Steadfast is therefore granted leave to amend to allege a claim for breach of the implied covenant of good faith and fair dealing.
California law recognizes a tort claim for intentional interference with existing contractual rights. Woods v. Fox Broad. Sub., Inc., 129 Cal.App.4th 344, 350, 28 Cal.Rptr.3d 463 (2005). The claim
In an action for intentional interference with contractual relations, the plaintiff and defendant may not both be parties to the contract in question. Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7 Cal.4th 503, 514, 28 Cal.Rptr.2d 475, 869 P.2d 454 (1994). Otherwise a plaintiff could improperly recast contract claims as tort claims. See id. at 514-17, 28 Cal.Rptr.2d 475, 869 P.2d 454. In Applied Equipment, the California Supreme Court expressed this rule in broad terms:
Id. at 514, 28 Cal.Rptr.2d 475, 869 P.2d 454. This rule is commonly known as the "not-a-stranger" principle. See, e.g., Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1126 (9th Cir.2014).
The Applied Equipment court's language has "spawned much controversy" in both California state and federal courts. Id. Many courts have held, relying on Applied Equipment, that California law recognizes "no tort duty not to interfere falling on non-contracting parties who do have a legitimate interest in the scope or course of the contract's performance, concluding... that such third-parties are not strangers to the relationship." Id. (citing Exxon Corp. v. Super. Ct., 51 Cal.App.4th 1672, 1688, 60 Cal.Rptr.2d 195 (1997); Kasparian v. Cnty. of L.A., 38 Cal.App.4th 242, 262, 45 Cal.Rptr.2d 90 (1995); Mintz v. Blue Cross of Cal., 172 Cal.App.4th 1594, 1603, 92 Cal.Rptr.3d 422 (2009)).
In a few recent decisions, California appellate courts have "limited [Applied Equipment] to its specific holding that only parties to a contract are excluded from asserting an intentional interference claim." Id. at 1026-27. For example, in Powerhouse Motorsports Group, Inc. v. Yamaha Motor Corp., the Court of Appeal allowed a motorcycle dealer to sue its distributor for interfering in a contract between the dealer and a prospective buyer. 221 Cal.App.4th 867, 883, 164 Cal.Rptr.3d 811 (2013). In Woods v. Fox Broadcasting Sub., Inc., the Court of Appeal also interpreted Applied Equipment narrowly and held that a person with an ownership interest in a corporation may be liable for interfering with the corporation's contractual obligations despite that ownership interest. 129 Cal.App.4th 344, 353, 28 Cal.Rptr.3d 463 (2005). Moreover, the Ninth Circuit recently decided that the rule of Applied Equipment could be applied only to parties to the same contract. United Nat'l Maint., 766 F.3d at 1007-08. The law remains in flux. Fresno Motors, 771 F.3d at 1127.
Whatever the exact contours of the not-a-stranger rule may be, no court, federal or state, has interpreted California law to allow a claim for intentional interference with contractual relations to proceed between parties to the same agreement. State and federal courts in other states,
Here, Steadfast alleges, "Although Steadfast, CH2M and LMI are parties to the same contracts, their rights and obligations thereunder are not co-terminus and, in fact, conflict in many regards." Am. Countercl. ¶ 93. "In other words," Steadfast alleges, "the contours of Steadfast's coverage obligations under the RSL and ELI Policies are not congruently owed to CH2M and LMI." Id. Steadfast acknowledges that no California cases have adopted an exception to the not-a-stranger rule along the lines of the out-of-state cases cited above. Opp'n LMI Mot. at 18; Opp'n CCI Mot. at 15. It requests this court extend California law to allow an exception here. Id. The court declines to do so. Steadfast may pursue contract remedies in this action.
The motion is therefore granted with prejudice and without leave to amend with respect to this claim.
Under California Civil Code section 3399, a party to a written agreement may request reformation of that agreement:
Cal. Civ. Code § 3399. "`[T]he purpose of the remedy is to make the written contract truly express the intention of the parties.'" Century Sur. Co. v. Weir Bros. Const. Corp., No. 14-0687, 2015 WL 1608874, at *9 (S.D.Cal. Apr. 9, 2015) (quoting Shupe v. Nelson, 254 Cal.App.2d 693, 700, 62 Cal.Rptr. 352 (1967)).
Here, as noted above, Steadfast alleges, "At the time the RSL and ELI Policies were drafted and agreed to by LMI, CH2M and Steadfast, the parties intended that a prerequisite for coverage under the ELI Policy was that the Pollution Event was not known to CH2M or LMI at policy inception." Am. Countercl. ¶ 12. The parties meant to define "known" conditions and events to include both those listed in the "tables appended to or incorporated into the policies" and in other "documentation available to CH2M and/or LMI at that time." Id. But "[b]y mutual mistake or inequitable conduct of CH2M and LMI," the tables and figures in the policies "do not include all known pollution conditions." Id. ¶ 106. Steadfast therefore claims the
LMI and CCI argue this claim is barred by the applicable statute of limitations.
The statute of limitations for a reformation claim is three years. Cal. Civ. Proc. Code § 338(d); N. Star Reins. Corp. v. Super. Ct., 10 Cal.App.4th 1815, 1818, 13 Cal.Rptr.2d 775 (1992). "The cause of action... is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake." Id.
Here, the ELI and RSL Policies were signed in 2001. Am. Countercl. ¶¶ 11-12. A person who signs a contract has a general duty to read it. Century Sur. Co., 2015 WL 1608874, at *10 (citing, inter alia, Jefferson v. Cal. Dept. of Youth Auth., 28 Cal.4th 299, 303, 121 Cal.Rptr.2d 391, 48 P.3d 423 (2002)). This duty applies to insurance contracts. Id. (citing, inter alia, Madden v. Kaiser Found. Hosps., 17 Cal.3d 699, 710, 131 Cal.Rptr. 882, 552 P.2d 1178 (1976)). Steadfast therefore had notice of the alleged omissions in 2001: upon reading the terms of the policy, it would have discovered the mistake, whether unilateral or mutual. The reformation claim therefore accrued in 2001 unless the "facts constituting [a] fraud" remained undiscovered until a later date. Cal. Civ. Proc. Code § 338(d).
The amended counterclaim alleges LMI and CCI made misrepresentations and withheld information when they submitted claims after 2001. It also includes allegations that after 2001, the parties behaved as though the definition of "Known Pollution Condition" was written as Steadfast would have it reformed. See Am. Countercl. ¶ 106. But it includes no allegations of fraud in the crafting of the definition of "Known Pollution Condition" or the tables and figures in the endorsements. Steadfast does not allege, for example, that LMI and CCI actually were aware of several pollution events and conditions at the time they negotiated and signed the policies, but did not disclose this knowledge to Steadfast. Neither does Steadfast allege, for example, that LMI and CCI knew or suspected Steadfast was mistaken but kept quiet.
Instead, in its opposition briefs, Steadfast argues "by mutual mistake or inequitable conduct, LMI's and CCI's positions that the meaning of `Known Pollution Condition' is limited to only the Tables and Figures to the Scope of Work Endorsement did not become apparent until the onset of this litigation." Opp'n LMI Mot. at 19; Opp'n CCI Mot. at 16-17. But Steadfast alleges LMI's and CCI's intent in 2001 was consistent with Steadfast's current position. See Am. Countercl. ¶ 12. LMI's and CCI's current positions on contract interpretation have no bearing on the alleged defect in the written policy. Whatever legal interpretation CCI and LMI have adopted in recent years, the words of the written policies remain unchanged.
The reformation claim is dismissed; however, because the deficiency could be cured by additional factual allegations of fraud or mistake, Steadfast is granted leave to amend if possible within the confines of Rule 11. See, e.g., Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1039 (9th Cir.2002) ("[I]n the normal course district courts should freely grant leave to amend when a viable case may be presented.").
The court now turns to LMI's and CCI's arguments under Rule 9(b). Each of Steadfast's claims draws on the same foundational allegations, and these allegations include many averments of fraud. See,
Steadfast also alleges fraud in defining all of the counterclaims that the court has not dismissed with prejudice. See, e.g., Am. Countercl. ¶ 72 (Accounting: "CH2M and LMI submitted false, misleading and/or inflated claims and information under the RSL and ELI Policies...."); id. ¶ 77 (Breach of Contract: "CH2M and LMI ... have concealed information from Steadfast, have misrepresented the facts of the claims submitted, have refused to allow Steadfast to hire proper consultants, and have otherwise withheld information from both Steadfast and each other."); id. ¶ 85 (Restitution: "CH2M and LMI have both... submitt[ed] false, misleading and/or inflated claims under the RSL and ELI Policies...."); id. ¶ 89 (Unjust Enrichment: "CH2M and LMI submitted false, misleading and/or inflated claims under the RSL and ELI Policies."; id. ¶ 99 (Negligent Misrepresentation: "CH2M and LMI made material misrepresentations as to past or existing facts...."); id. ¶ 101 (Intentional Misrepresentation: "CH2M and LMI made material misrepresentations as to past or existing facts...."); id. ¶¶ 108-109 (Declaratory Relief: incorporating all previous allegations and noting Steadfast's right to cancel the ELI policy "as set forth under Section VIII.D of that policy," which provides for cancellation in the event Steadfast "discovers material misrepresentation or fraud by an Insured"). The court therefore finds that each of these claims either includes fraud as a necessary element or rests chiefly on allegations of fraud.
As noted above, the counterclaim must "be specific enough to give [LMI and CCI] notice of the particular misconduct ... so that they can defend against the charge and not just deny that they have done anything wrong." Sanford, 625 F.3d at 558 (citation and quotation marks omitted). The counterclaim must "specify such facts as the times, dates, places, benefits received, and other details of the alleged fraudulent activity." Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir.1993). The Ninth Circuit has repeated this requirement in many opinions. See, e.g., Cafasso, 637 F.3d at 1055; Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir.2010); Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir.2007) (per curiam); Edwards, 356 F.3d at 1066; Schreiber Distributing Co. v. Serv-Well Furniture Co., Inc., 806 F.2d 1393, 1401 (9th Cir.1986); Misc. Serv. Workers Local # 427 v. Philco-Ford Corp., 661 F.2d 776, 782 (9th Cir. 1981). In addition, when fraud is alleged against a corporation, federal courts often have required that a pleading "allege the
Here, the counterclaim's allegations generally do not clear this high bar. In none of its allegations does Steadfast clarify who at LMI or CCI made a particular fraudulent statement, on what date or dates a false statement or omission was made, or to whom the false statement was made. Steadfast also omits details about how false statements were communicated, for example by in-person conversation, phone, fax, email or letter. In many instances where the counterclaim does provide specific details, it does so in terms of examples, hinting at additional instances of fraud excluded from the pleading without explanation. And in several instances, Steadfast simply lumps LMI and CCI together, without distinguishing and clarifying their respective roles. "Rule 9(b) does not allow a complaint to merely lump multiple defendants together but requires plaintiffs to differentiate their allegations when suing more than one defendant and inform each defendant separately of the allegations surrounding his alleged participation in the fraud." Swartz, 476 F.3d at 764 (citations, quotation marks, and alterations omitted).
Federal courts have on occasion applied a more lenient standard to fraud claims under Rule 9(b). For example, when a claimant "cannot be expected to have personal knowledge of the relevant facts," the particularity requirement may be relaxed. Sanford, 625 F.3d at 558 (quoting Neubronner, 6 F.3d at 672). This may be the case for "matters within the opposing party's knowledge." Neubronner, 6 F.3d at 672; cf., e.g., Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 540 (9th Cir.1989) ("Instances of corporate fraud may also make it difficult to attribute particular fraudulent conduct to each defendant as an individual. To overcome such difficulties in cases of corporate fraud, the allegations should include the misrepresentations themselves with particularity and, where possible, the roles of the individual defendants in the misrepresentations."). Here, however, it is reasonable to expect Steadfast, the insurer, to have meaningful information about the insurance claims it received from LMI and CCI.
In some cases courts have also applied a less stringent test if the plaintiff alleges fraudulent omissions. UMG Recordings, 117 F.Supp.3d at 1107-08, 2015 WL 4606077, at *8; accord, e.g., In re Apple & AT & TM Antitrust Litig., 596 F.Supp.2d 1288, 1310 (N.D.Cal.2008). But here, Steadfast's claims are based on more than just omissions, and many descriptions of claimed omissions lack details Steadfast may reasonably be expected to provide. For example, Steadfast alleges LMI and CCI concealed their disputes "arising from LMI's efforts to convert numerous claims from RSL Policy claims to ELI policy claims." Am. Countercl. ¶ 40. After Steadfast learned of these disputes, it requested information. Id. It alleges one particular omission: "With respect to Building 206/208, LMI provided some technical documents but omitted documents covering an 18-month period from 2009 to 2010." Id. Steadfast does not specify the subject matter of these "technical documents," why these documents were related to disputes between LMI and CCI, and why the omissions were material.
The Third Circuit has allowed plaintiffs "to use alternative means of injecting precision and some measure of substantiation into their allegations of fraud." Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir.1984). In Seville, the plaintiff satisfied Rule 9(b) "by incorporating into the complaint a list identifying with great specificity the pieces of machinery that were the subject of the alleged fraud." Id. He "divided this list into five `exhibits' and identified which pieces of equipment were the subject of which alleged fraudulent transaction." Id. The Eleventh Circuit also appears to consider an alternative approach permissible. See United States ex rel. Clausen v. Lab. Corp. of Am., 290 F.3d 1301, 1310 n. 18 (11th Cir.2002) ("challenged complaints — read together with other documents in the record — [may] be sufficient" in place of "allegations of date, time or place" to plead the circumstances of fraud with particularity). A pair of district court decisions from this circuit also cite Seville with approval, see David K. Lindemuth Co. v. Shannon Fin. Corp., 637 F.Supp. 991, 994 (N.D.Cal.1986); In re Nat'l Mortgage Equity Corp. Mortgage Pool Certificates Sec. Litig., 636 F.Supp. 1138, 1159 (C.D.Cal. 1986). The Ninth Circuit appears not to have taken any position on such an "alternative" standard.
Even assuming the court may apply a more lenient approach to Rule 9(b), the current counterclaim does not provide the sort of detail necessary to apprise LMI and CCI of the fraud claims against them. It must contain at minimum sufficiently granular allegations of fraud to serve as blueprints of the alleged scheme. See, e.g., Clausen, 290 F.3d at 1314 n. 25. Steadfast argues LMI and CCI already know enough about this case to understand the basis of its claims for fraud. See, e.g., Opp'n LMI Mot. at 8 ("The [amended counterclaim] is not a case-initiating document. It was not filed at the outset of a
As noted above, when a particular allegation of fraud does not meet the Rule 9(b) standard, it is "stripped from the claim." Vess, 317 F.3d at 1105. Stripping the insufficiently particular allegations of fraud from Steadfast's amended counterclaim deprives all but one of Steadfast's claims of necessary support. The claim for declaratory relief is premised on more than fraud. See Am. Countercl. ¶ 109 ("Steadfast hereby requests a judicial declaration of its rights and duties [under the RSL and ELI policies]" as to the definitions of "Known Pollution Condition," "Cleanup Costs," "Limited Further Investigation," "Loss," "Governmental Authority," "allowable expense," and coverage under the policies for the claims asserted by LMI and CCI). The declaratory relief claim may therefore proceed, without amendment, to the extent it does not sound in fraud and does not rely on allegations of fraud.
Given the circumstances of this case, and considering Rule 15's liberal policy on amendments, the court grants Steadfast leave to amend to bring its counterclaim into compliance with Rule 9(b). The majority of Steadfast's claims were asserted for the first time in the amended counterclaim, which was prepared hastily in late 2014 after Steadfast received large numbers of documents from CCI. Because discovery and motion deadlines rapidly approach, and because Steadfast has argued it has ample documentation of LMI's and CCI's wrongdoing, see Mot. Am. 2, ECF No. 162, a second amended counterclaim must be filed within fourteen days.
LMI's and CCI's motions are GRANTED IN PART as follows:
This order resolves ECF Nos. 293 and 297.
IT IS SO ORDERED.
