Carolina Casualty Insurance Company v. Jones Helsley, PC et al, No. 1:2010cv00916 - Document 66 (E.D. Cal. 2011)
Court Description: FINDINGS and RECOMMENDATIONS recommending that Defendant's Motion to Stay Be Granted re 29 MOTION to STAY filed by Timothy Jones, Jones Helsley, PC, Jack Hindmarsh. referred to Judge Lawrence J O'Neill; Objections to F&R due in thirty days signed by Magistrate Judge Michael J. Seng on 1/13/2011. (Yu, L)
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Carolina Casualty Insurance Company v. Jones Helsley, PC et al Doc. 66 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 EASTERN DISTRICT OF CALIFORNIA 9 10 11 CAROLINA CASUALTY COMPANY, 12 13 14 INSURANCE CASE NO. ORDER RECOMMENDING THAT DEFENDANTS’ MOTION TO STAY BE GRANTED Plaintiff, v. (ECF No. 44) JONES HELSLEY, PC, et al., OBJECTIONS DUE WITHIN THIRTY DAYS 15 16 17 18 1:10-cv-916-LJO-MJS Defendants. / Before the Court is Defendants’ and Counterclaimants’ Motion to Stay of All 19 20 21 Proceedings. (ECF No. 44.) The Court considered all the papers filed in support of and in opposition to the Motion and heard argument on the Motion on December 10, 2010. 22 For the reasons stated at the hearing and modified and supplemented below, the 23 Court recommends that Defendant and Counterclaimants’ Motion for a Stay be GRANTED 24 until the underlying action, James A. Bratton and Bratton Investments, LLC v. Timothy 25 Jones, et al., pending in California Superior Court, Fresno County, as action number 26 27 10CECG02212AM (the “Bratton Action” or the “Underlying Action” ) is resolved. However, it is further recommended that Plaintiff be given the right to seek relief from the stay if and Dockets.Justia.com 1 2 3 when it in good faith believes and represents that circumstances have changed so that the reasons for the stay no longer exist, provided no such motion for relief from the stay be initiated for at least six months.. 4 5 I. LEGAL STANDARD 6 Courts have the discretion to stay insurance coverage actions until after the 7 underlying actions have been decided. Courts may stay an insurance coverage action to 8 avoid inconsistent determinations that could prejudice an insured; a stay is appropriate 9 10 unless the facts to be litigated in the coverage case are unrelated to issues of consequence in the underlying case . Montrose Chemical Corp. of Calif. v. Superior Court, 11 12 13 6 Cal. 4th 287, 24 Cal. Rptr. 2d 467 (1994) (“Montrose I”); Montrose Chemical Corp. of Calif. v. Superior Court, 25 Cal. App.4th 902, 31 Cal. Rptr. 2d 38 (1994) (“Montrose II”); 14 California Ins. Guarantee Assoc. v. Superior Court, 231 Cal. App.3rd 1617, 283 Cal. Rptr. 15 104 (1991). Even where there are no issues overlapping between the coverage and the 16 underlying cases, the Court is to use its discretion and balance prejudice to the insured 17 (In having to wage a two-front war if the coverage action is not stayed) against the 18 19 20 prejudice to the insurer (in having to pay defense costs in a case where there may be no duty to defend if the stay is granted), giving consideration to the anticipated length of the 21 underlying case, as to whether the insured has independent counsel in the underlying case 22 and as to whether the insured has other insurance. Great American Insurance Co. vs 23 Superior Court, 178 Cal. App. 4th 221, 100 Cal. Rptr. 3d 258 (2009). 24 Courts also “possess discretion in determining whether and when to entertain an 25 action under the Declaratory Judgment Act, even when the suit otherwise satisfies the 26 27 subject matter jurisdictional prerequisites.” Wilton v. Seven Falls Co., 515 U.S. 277 (1995); 1 2 3 Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942). In explaining this authority, the Supreme Court has stated: “Consistent with the nonobligatory nature of the remedy, a district court is authorized, in the sound exercise of its discretion, to stay or to dismiss an action seeking 4 5 6 a declaratory judgment before trial or after all arguments have drawn to a close. In the declaratory judgment context, the normal principle that federal courts should adjudicate 7 claims within their jurisdiction yields to considerations of practicality and wise judicial 8 administration.” Wilton, 515 U.S. at 288. 9 II. 10 FACTS The facts essential to this Motion are summarized briefly as follows: 11 12 13 At all times relevant to this motion Defendants and Counterclaimants Jones Helsley PC, a California Professional Corporation, Timothy Jones, Esq., Jack Hindmarsh, Esq., 14 and Jack Hindmarsh, PLC, a California Professional Law Corporation (collectively the 15 “Jones defendants”) have been attorneys at law insured against professional errors and 16 omissions under Lawyers Professional Liability Insurance Policy No. 9904986 (the “CCIC 17 Policy” or the “Policy”) issued by Carolina Casualty Insurance Company (“CCIC”). 18 19 20 According to the Jones Defendants, in 2006, James A. Bratton and Bratton Investments LLC (the “Brattons”) engaged the Jones defendants, or some of them, and/or 21 their predecessor firm, to provide legal services to the Brattons. Defendants provided legal 22 services to the Brattons in connection with the formation of various limited liability 23 companies organized to pursue real estate development ventures in specified locations in 24 Central California. (Decl. of Timothy Jones (“Jones Decl.”), ECF No. 31, ¶ 2.) Upon the 25 organization of two of these LLCs, defendant Timothy Jones received a membership 26 27 interest in each. Jones later transferred his interest in these two LLCs to Central Pacific 1 2 3 Ventures, LLC, an LLC in which Mr. Jones individually holds a fifty percent membership interest. (Id. at ¶¶ 6, 8-9.) The Brattons claim that they suffered losses in connection with the above 4 5 6 transactions and in the real estate ventures associated therewith, and they have filed suit against the Jones Defendants in California Superior Court, Fresno County, action number 7 10CECG02212AM, entitled James A. Bratton and Bratton Investments, LLC v. Timothy 8 Jones, et al., (the “Bratton Action” or the “Underlying Action”). The Brattons allege, inter 9 alia, that the Jones Defendants performed negligently and breached professional duties 10 in their legal representation of the Brattons and/or in connection with the LLCs which were 11 12 13 formed. They also allege that the Jones Defendants (and others with interest in the LLCs) breached fiduciary duties and committed fraud in connection with the operation and 14 ownership of the LLCs. The complaint attributes significant ownership and/or control of the 15 LLCs to Defendant Jones and/or companies owned by him. 16 compensatory damages of at least nine million dollars, punitive damages, the 17 The Brattons seek establishment of a constructive trust, and various other relief. (Decl. of Barry W. Lee (“Lee 18 19 20 Decl.”), ECF No. 32, Ex. 1.) The Bratton suit is in its infancy. At least one demurrer under California law (motion to strike or dismiss under federal law) is pending. 21 The Jones Defendants tendered the suit to CCIC and requested defense and 22 indemnity under the CCIC policy. (Jones Decl. ¶ 15.) CCIC agreed to defend the Bratton 23 24 action for the Jones Defendants but did so under a reservation of rights, and also filed this action seeking a declaration that it has no duty to defend or indemnify the Jones 25 26 27 Defendants in the Bratton action. (Id., Ex. B.) CCIC contends that two exclusions in the CCIC policy, Exclusions E and F, bar coverage. 1 2 3 Briefly summarized, Exclusion E precludes coverage for claims arising out of the insured’s acting as an officer, director, partner, trustee, or employee of any business other than the insured law business. (Jones Decl. Ex. A.) 4 5 Exclusion F excludes coverage for a claim made “in connection with . . . [a business] 6 . . . in which the Insured owns more than a 10 percent interest, or in which any Insured 7 is an owner, partner, or employee, or which is directly or indirectly controlled, operated or 8 managed by any Insured, . . .”1 (Id.) 9 10 The Jones Defendants filed the instant motion asking the Court to stay this case in its entirety until the underlying Bratton litigation is resolved. They claim that the issues 11 12 raised by CCIC here cannot be adjudicated without adjudicating facts at issue in the 13 Bratton action and that doing so exposes them to inconsistent, and potentially prejudicial, 14 determinations in the two cases. They note that findings made in this case could bind 15 them, but not the Brattons, in the Bratton case. They also claim that they will be prejudiced 16 17 by having to proceed with the coverage action while simultaneously having to defend the Bratton action and by being represented in the Bratton case by counsel who are employed 18 19 20 by and owe professional duties to CCIC and who thus may share Jones Defendants’ confidences with CCIC. 21 CCIC responds, in essence, that the facts necessary to resolve the Exclusion E and 22 F issues are a matter of record and not subject to legitimate factual dispute. CCIC also 23 contends that it would suffer more prejudice by having to provide a defense in the Bratton 24 action—which will be very expensive litigation—than Defendants would by having to 25 26 27 1 The Jones Defendants assert, and the parties briefs devote a great deal of print to debating, that this and other Exclusionary language is vague and am biguous. The Court need not and will not address those claim s in connection with this m otion. 1 2 3 proceed with this declaratory relief action. III. ANALYSIS The parties agree that the primary issue in determining whether a stay is appropriate 4 5 is whether factual issues central to the resolution of the instant action substantially overlap 6 with factual issues at the heart of the underlying action. If resolution of disputed factual 7 issues in the coverage action might prejudice the insured in the underlying action, a stay 8 is appropriate. See Great Am. Ins. Co. v. Superior Court, 178 Cal App 4th 221, 235 (Cal. 9 10 Ct. App. 2009). “However, if the declaratory relief action can be resolved without prejudice to the insured in the underlying action—by means of undisputed facts, issues of law, or 11 12 13 factual issues unrelated to the issues in the underlying action-the declaratory relief action need not be stayed.” Id.; “To eliminate the risk of inconsistent factual determinations that 14 could prejudice the insured, a stay of the declaratory relief action pending resolution of the 15 third party suit is appropriate when the coverage question turns on facts to be litigated in 16 the underlying action.” Montrose I, 6 Cal. 4th at 301). 17 In determining whether to grant a stay, the Court must also consider the possible 18 19 20 prejudice to the insured. This prejudice goes beyond having to defend against two actions simultaneously. The Court must consider whether allowing the coverage action to proceed 21 would put the insured in the untenable position of having to prove facts in the coverage 22 case which could be adverse to him in the underlying case and/or having findings entered 23 against him in the coverage case which he may be collaterally estopped to deny in the 24 underlying case (while the plaintiff in the underlying case would not be so bound.) See 25 Montrose Chem. Corp. v. Superior Court, 25 Cal. App. 4th 902, 910 (Cal. Ct. App. 1994) 26 27 (“If the declaratory relief action is tried before the underlying litigation is concluded, the 1 2 3 insured may be collaterally estopped from relitigating any adverse facutal findings in the third party action, notwithstanding the fact that any fact found in the insured’s favor could not be used to its advantage.”). However, the relative prejudice to the insurer in having to 4 5 6 7 proceed with and perhaps pay hundreds of thousands of dollars in defense costs on an underlying claim which may not be covered must be balanced against the prejudice to the insureds in proceeding with the Coverage action. 8 The Court will address each of these factors in turn below. 9 A. 10 Overlapping Facts. 1. Exclusion E 11 12 13 As the Jones Defendants assert and CCIC does not vigorously dispute (at least insofar as the two cases are presently postured), the issues raised by Exclusion E clearly 14 overlap with the issues raised in the Bratton action. The Brattons allege that the Jones 15 Defendants, or some of them, were officers and/or directors and/or trustees of the LLCs, 16 and that they breached their duties and used their positions as such to defraud the 17 Brattons. (Lee Decl. Ex. A.) In determining whether Exclusion E barred coverage, the 18 19 20 Court would have to evaluate whether any of the Jones Defendants was an officer, director, partner, trustee, or employee of any of the LLCs. The Jones Defendants argue 21 that they were not and CCIC must establish otherwise to prevail on Exclusion E. Findings 22 on this issue adverse to the Jones Defendants could bind them in the Bratton action, but 23 findings favorable to the Jones Defendants would not so bind the Brattons. It is a lose-lose 24 situation for the Jones Defendants. 25 The Court therefore recommends that the coverage action be stayed as to Exclusion 26 27 E. The Court recommends that this stay remain in effect until the underlying action is 1 2 3 resolved or until there is a showing in this Court that circumstances have changed such that the elements of Exclusion E are no longer in dispute in the underlying action or no longer can be legitimately disputed. 4 2. 5 6 “Part 2" of Exclusion F Exclusion F has two separate provisions that could bar coverage in this case. What 7 the Court will refer to as “Part 2" excludes coverage where a claim is made in connection 8 with any business in which the insured is an owner, partner or employee or which is directly 9 or indirectly controlled, operated or managed by any insured. For the reasons stated in 10 connection with the Court’s discussion of Exclusion E, the Court finds that these issues 11 12 13 overlap with facts disputed in the underlying action. The Court therefore recommends that the action be stayed with respect to “Part 2" of Exception F until the underlying action is 14 resolved or until there is a showing in this Court that circumstances have changed such 15 that these elements of the Exclusion are no longer in dispute in the underlying action or no 16 longer can legitimately be disputed. 17 3. “Part 1" of Exclusion F 18 What the Court will refer to as “Part 1" of Exclusion F excludes coverage for a claim 19 20 21 made in connection with a business in which the Insured owns more than a ten percent interest. 22 As expressed at the hearing on this Motion, the Court initially believed that the 23 issues raised by CCIC with respect to Part 1 of Exclusion F did not overlap with the issues 24 in the Bratton case. Thus, the Court’s tentative ruling was that the case could proceed as 25 to this discrete issue alone. This is because it is not clear that the Bratton parties would 26 27 find it necessary to litigate the percentage of ownership issue in the underlying case; their 1 2 3 case does not appear to rest on proving ownership. Also the Court tends to agree with CCIC’s argument that the facts of ownership are unlikely to be legitimately disputed; they should be simple matters of record. 4 5 6 However, on further consideration of the parties’ argument at the hearing as well as further reflection on the record before the Court at this juncture, the Court finds that this 7 case is so postured that discovery into the ownership issue could not reasonably be 8 conducted without potentially forcing the Jones Defendants to take positions adverse to 9 their interests in the Bratton action. If this action were allowed to proceed on whether 10 coverage was barred by Part 1 of Exclusion F, there would be dispute as to what 11 12 13 “ownership” means in the context of this case. The parties have made it clear that they disagree as to whether Jones’s acknowledged fifty percent “membership” in Central Pacific 14 Ventures (which is, in turn, a “member” of the LLCs at the core of this dispute) is an 15 “ownership” interest within the meaning of the insurance policy. 16 17 The Court is concerned that the Brattons’s claims, or at least the potential appeal of those claims to the trier of fact, could be strengthened by a finding in the coverage case 18 that the Jones Defendants either directly or indirectly “owned” a significant portion of the 19 20 entities in which the Brattons suffered losses. The Court is also concerned with the likely 21 scope of inquiry into those and potentially related issues (e.g., which LLCs and companies 22 did what, out of what businesses “the claims arose”, with which businesses the claims were 23 “connected”, which entities had “ownership” in which others, whether “membership” carried 24 with it the rights, privileges, and obligations and, perhaps, control inherent in other forms 25 of “ownership”, etc.). Such issues could not likely be addressed without significant 26 27 discovery into how the businesses operated and how they were interrelated. Any findings 1 2 3 on these issues could prejudice the Jones Defendants defense of the claims in the Bratton action. Thus, the Court finds that allowing this action to proceed with respect to Part 1 of Exclusion F could prejudice the Jones Defendants in the underlying action. 4 5 6 Moreover, allowing this case to proceed on the single issue of whether the Jones Defendants owned more than a ten percent interest in a particular entity would make 7 discovery difficult for both parties. The Court believes that trying to carve out this narrow 8 issue from such a complex case in which there are multiple, intertwined business entities 9 would almost certainly generate otherwise unnecessary discovery disputes. The Court 10 finds that allowing this litigation to proceed in a piece-meal fashion does not conform “to 11 12 13 considerations of practicality and wise judicial administration.” Wilton, 515 U.S. at 288. B. Prejudice 14 Beyond the potential prejudice resulting from the overlapping factual issues, the 15 Court must also consider the prejudice to both parties if the stay is not granted. As stated 16 at the hearing on this Motion, the Court agrees with CCIC’s argument that if having to fight 17 a two-front war constituted sufficient prejudice to justify a stay of a declaratory relief action, 18 19 20 an insurer could never avail itself of this judicial remedy while an underlying case proceeded. The Court acknowledges that in such a case, because the duty to defend is 21 so much broader than the duty to indemnify, the insurer would have to pay defense costs 22 throughout the underlying case even where it might be clear coverage did not exist. That 23 would be unjust. However, in this case, the prejudice to the Jones Defendants goes 24 beyond that associated with simply having to defend against two actions simultaneously. 25 Even though CCIC has provided counsel for the Jones Defendants in the underlying action 26 27 under a reservation of rights, the Jones Defendants have hired independent counsel to 1 2 3 represent them at their own expense because CCIC has reportedly declined to provide independent counsel (also known as Cumis counsel). (Jones. Decl. ¶ 29.) Most significantly, the Jones Defendants have no other insurance coverage for the Bratton 4 5 6 action. (Id. ¶ 20.) Accordingly, the Court finds that even if there were no overlapping issues and the Court were simply balancing prejudice, the prejudice to the Jones 7 Defendants in allowing this case to proceed would substantially outweigh the prejudice to 8 CCIC in having to provide a defense under reservation of rights. See Great Am. Ins. Co., 9 178 Cal. App. 4th at 271. 10 IV. FINDINGS 11 12 13 14 For all the reasons announced on the record at the time of oral argument on this motion, and elaborated on above, the Court finds: 1. The parties’ evidentiary Objections (ECF Nos. 55 & 58) need not and will not 15 be ruled on by the Court. The objected-to evidence was not considered by 16 the Court in making these Findings and Recommendations. 17 2. Disputed issues raised by Plaintiff’s claims under Exclusion E overlap with 18 the issues in the Bratton action such that it would be prejudicial to 19 Defendants to have to litigate those issues here while the Bratton action is 20 still pending. 21 22 23 24 3. The disputed issues raised by Plaintiff’s claims under Exclusion F overlap with the issues in the Bratton action such that it would be prejudicial to Defendants to have to litigate those issues here while the Bratton action was 25 still pending. Discovery into ownership issues could not reasonably be 26 27 conducted without potentially forcing Defendants to take positions adverse 1 to their interests in the Bratton action and create unduly expensive and 2 time-consuming discovery disputes and motions. 3 4. The prejudice to CCIC in having to expend funds to represent the Jones 4 Defendants in the Bratton action is substantially less than the prejudice to 5 the Jones Defendants in having to proceed with the litigation of this case 6 while also litigating the Bratton case. 7 8 5. 9 Because of the possibility of overlapping factual issues and the impact these factual issues would likely have on the discovery process in the instant action 10 plus consideration of relative prejudice to the parties, the Court finds that a 11 stay is appropriate. See Montrose Chemical Corp. v. Superior Court, 25 Cal. 12 App. 4th 902, 907-08 (1994) (“It is only where there is no potential conflict 13 14 between the trial of the coverage dispute and the underlying action that an 15 insurer can obtain an early trial date and resolution of its claim that coverage 16 does not exist.”) (emphasis added). 17 V. CONCLUSION 18 19 20 For the reasons stated on the record at the December 10, 2010 hearing, supplemental by the findings made herein, the Court RECOMMENDS that Defendants’ 21 Motion to Stay be GRANTED until the underlying action, James A. Bratton and Bratton 22 Investments, LLC v. Timothy Jones, et al., pending in Fresno County Superior Court as 23 action number 10CECG02212AM, is resolved but WITHOUT PREJUDICE to Plaintiff 24 seeking relief from the stay if and when it in good faith believes and represents that 25 26 27 circumstances have changed so that the reason for the stay no longer exists (provided no such motion for relief from the stay be initiated within six months of the date of the Court’s 1 order). 2 3 These Findings and Recommendations are submitted to the United States District Judge assigned to the case, pursuant to the provisions of Title 28 U.S.C. § 636(b)(1). 4 5 6 Within thirty days after being served with these Findings and Recommendations, any party may file written objections with the Court and serve a copy on all parties. Any reply to the 7 Objections shall be served and filed within ten days after service of the Objections. The 8 parties are advised that failure to file objections within the specified time may waive the 9 right to appeal the District Court’s order. Martinez v. Ylst, 951 F.2d 1153 (9th Cir. 1991). 10 11 12 IT IS SO ORDERED. 13 Dated: 14 ci4d6 15 16 17 18 19 20 21 22 23 24 25 26 27 January 12, 2011 /s/ Michael J. Seng UNITED STATES MAGISTRATE JUDGE
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