Philadelphia Indemnity Insurance Company v. Gregory Herrman, P.C., No. 3:2017cv00431 - Document 29 (S.D. Cal. 2017)
Court Description: ORDER granting in part and denying in part 17 Plaintiff's Motion to Strike Affirmative Defenses. The Court grants the Surety's motion without leave to amend with respect to Herrman's "Additional Affirmative Defenses", and denies the motion as to the remaining affirmative defenses. Signed by Judge Thomas J. Whelan on 11/15/2017. (jao)
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Philadelphia Indemnity Insurance Company v. Gregory Herrman, P.C. Doc. 29 1 2 3 4 5 6 7 8 9 UNITED STATES DISTRICT COURT 10 SOUTHERN DISTRICT OF CALIFORNIA 11 12 13 14 PHILADELPHIA INDEMNITY INSURANCE COMPANY, Plaintiff, 15 16 17 Case No.: 17-CV-431 W (BGS) v. GREGORY HERRMAN, P.C. A/K/A HERRMAN & ASSOCIATES, 18 ORDER GRANTING-IN-PART AND DENYING-IN-PART PLAINTIFF’S MOTION TO STRIKE AFFIRMATIVE DEFENSES [DOC. 17]. Defendant. 19 20 21 Pending before the Court is Plaintiff’s motion to strike Defendant’s affirmative 22 defenses under Federal Rule of Civil Procedure 12(f). (Mot. [Doc. 17].) Defendant 23 opposes. (Opp’n [Doc. 18].) The Court decides the matter on the papers submitted and 24 without oral argument. See Civ. L. R. 7.1(d.1). For the reasons discussed below, the 25 Court GRANTS-IN-PART and DENIES-IN-PART Plaintiff’s motion [Doc. 17]. 26 // 27 // 28 // 1 17-CV-431 W (BGS) Dockets.Justia.com 1 I. BACKGROUND 2 On March 2, 2017, Plaintiff Philadelphia Indemnity Insurance Company (the 3 “Surety”) initiated this action for negligent misrepresentation against Defendant Gregory 4 Herrman, P.C. a/k/a Herrman & Associates (“Herrman”), a certified public accountant. 5 (Compl. [Doc. 1].) The Surety alleges Herrman failed to meet the standard of care in 6 reviewing NEI Contracting and Engineering, Inc.’s (“NEI”) financial statements (the 7 “Reviews”), which caused the Surety to issue bonds it would not otherwise have issued. 8 (Id., ¶ 21.) Herrman’s Amended Answer raises nine affirmative defenses and reserves 9 the right to amend and supplement the answer as discovery progresses. (See Am. Answer 10 [Doc. 12].) Plaintiff now seeks to strike all nine of the affirmative defenses on the basis that 11 12 the defenses “are not legally recognized in the case of a negligent misrepresentation 13 claim,” “facially invalid in light of the pleadings,” or “insufficiently pled so as to provide 14 the Surety ‘fair notice’ of the defenses.” (P&A [Doc 17-1], 2:2–3:5.) 15 16 17 II. LEGAL STANDARDS Under Federal Rule of Civil Procedure 12(f), a court “may strike from a pleading 18 an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” 19 “[T]he function of a 12(f) motion to strike is to avoid the expenditure of time and money 20 that must arise from litigating spurious issues by dispensing with those issues prior to 21 trial.” Sidney-Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir. 1983). At the 22 same time, 12(f) motions are “generally regarded with disfavor because of the limited 23 importance of pleading in federal practice, and because they are often used as a delaying 24 tactic.” Neilson v. Union Bank of Cal., N.A., 290 F. Supp. 2d 1101, 1152 (C.D. Cal. 25 2003). Unless it would prejudice the opposing party, courts freely grant leave to amend 26 stricken pleadings. Wyshak v. City Nat’l Bank, 607 F.2d 824, 826 (9th Cir. 1979); see 27 also Fed. R. Civ. P. 15(a)(2). 28 2 17-CV-431 W (BGS) 1 An affirmative defense may be insufficient as a matter of pleading or as a matter of 2 law. Sec. People, Inc. v. Classic Woodworking, LLC, 2005 WL 645592, at *2 (N.D. Cal. 3 2005). “The key to determining the sufficiency of pleading an affirmative defense is 4 whether it gives the plaintiff fair notice of the defense.” Wyshack, 607 F.2d at 827 5 (citing Conley v. Gibson, 355 U.S. 41 (1957)) (emphasis added); Simmons v. Navajo, 6 609 F.3d 1011, 1023 (9th Cir. 2010); Schutte & Koerting, Inc. v. Swett & Crawford, 298 7 Fed. Appx. 613, 615 (9th Cir. 2008). Fair notice generally requires that the defendant 8 state the nature and grounds for the affirmative defense. See Conley, 355 U.S. at 47. It 9 does not, however, require a detailed statement of facts. Id. at 47–48. On the other hand, 10 an affirmative defense is legally insufficient only if it clearly lacks merit “under any set 11 of facts the defendant might allege.” McArdle v. AT&T Mobility, LLC, 657 F. Supp. 12 1140, 1149–50 (N.D. Cal. 2009). 13 14 III. DISCUSSION 15 A. First Affirmative Defense 16 Herrman’s first affirmative defense alleges that “insofar as [the Surety] bases its 17 negligent misrepresentation claims upon a statement of opinion by Herrman, there is no 18 actionable alleged false representation or misrepresentation of existing fact.” (Am. 19 Answer 5:11–14.) The Surety argues this affirmative defense is facially invalid in light of 20 the pleadings under Bily, which clarified that an independent accountant’s professional 21 opinion is actionable under a negligent misrepresentation cause of action. (P&A 8:3–6.) 22 The Court is not persuaded. 23 In Bily v. Aruthur Young & Co., 3 Cal.4th 370 (1992), the California Supreme 24 Court stated that “[u]nder certain circumstances, expressions of professional opinions are 25 treated as representations of fact.” Id. at 408. As the moving party, the Surety bears the 26 burden of demonstrating that this case fits within the “certain circumstances” limitation 27 described in Bily. The Surety has not done so and thus has not established that the first 28 3 17-CV-431 W (BGS) 1 affirmative defense is conclusively negated. The Court DENIES the Surety’s motion to 2 strike the first affirmative defense. 3 4 B. Second and Third Affirmative Defenses 5 Herrman’s second and third affirmative defenses assert the Surety’s negligent 6 misrepresentation claim is barred because Herrman provided the Reviews for the benefit 7 of NEI, and it had no specific intent for the Surety to rely upon the Reviews. (Am. 8 Answer 5:16–26.) The Surety argues that because Herrman admits it knew NEI would 9 provide the reviewed financial statements to third parties, the second and third 10 affirmative defenses are conclusively negated. (P&A 8:9–12.) The Surety’s argument 11 lacks merit. 12 In Bily, 3 Cal.4th 370, the California Supreme Court adopted the Restatement 13 Second of Torts’ “limited class” approach in evaluating the scope of an auditor’s duty. 14 Under this approach, an auditor is liable for negligent misrepresentation where his report 15 was “made with the intent to induce plaintiff, or a particular class of persons to which 16 plaintiff belongs, to act in reliance upon the representation in a specific transaction, or a 17 specific type of transaction, that defendant intended to influence.” Id. at 414. 18 In the Amended Answer, Herrman admits it “knew that NEI may provide reviewed 19 financial statements to third parties for various purposes and transactions.” (Am Answer ¶ 20 28.) Under Bily, this admission is insufficient to establish liability because there is no 21 indication Herrman knew NEI belonged to the particular class of third parties “to whom 22 or for whom the representations in the audit report were made.” Bily, 3 Cal.4th at 414. 23 Nor does Hermann admit that it was aware of the specific transaction involving NEI or 24 that it intended the Surety to rely on the report. Accordingly, the second and third 25 affirmative defenses are not conclusively negated by Herrman’s admission in the 26 Amended Answer. 27 In its reply, the Surety raises the alternative argument that standing is not an 28 affirmative defense because it is an element of the case-in-chief, and using it as an 4 17-CV-431 W (BGS) 1 affirmative defense is redundant. (Reply [Doc 20], 8:3–5.) The Court will not consider 2 new arguments raised for the first time in the reply For these reasons, the Court DENIES the Surety’s motion to strike the second and 3 4 third affirmative defense. 5 6 C. Fourth and Fifth Affirmative Defense 7 Herrman’s fourth and fifth affirmative defenses allege that the Surety’s claims are 8 barred in whole or in part by the doctrines of contributory negligence and comparative or 9 proportionate responsibility. (Am. Answer 6:2–17.) The Surety argues that contributory 10 negligence and comparative negligence are not defenses to a negligent misrepresentation 11 claim. (P&A 8:21–24.) In its Reply, however, the Surety acknowledges that under Van 12 Meter v. Bent Const. Co., 46 Cal.2d 588, 595 (1956), comparative negligence may be a 13 defense when a plaintiff's conduct is “preposterous or irrational.” (Reply 4:24–27.) 14 Thus, the Surety has failed to establish that the fourth and fifth affirmative defenses are 15 not valid defenses. 1 16 In its reply, the Surety again attempts to raise a new argument: that Herrman’s 17 Amended Answer fails to state facts indicating the Surety’s conduct was “preposterous or 18 irrational.” (Reply 4:28–5:2.) Because the argument was not included in its moving 19 papers, the Court declines to decide the issue. For these reasons, the Court DENIES the Surety’s motion to strike the fourth and 20 21 fifth affirmative defenses. 22 // 23 // 24 25 26 27 28 1 The Surety also suggests the “continued vitality of Van Meter after the more recent decision in Garcia is questionable.” In support of this assertion, the Surety cites the following language from Garcia v. Superior Court, 50 Cal.3d 728 (1990): “comparative negligence is not a defense to the tort of negligent misrepresentation under California law.” The problem is this language is found in Justice Mosk’s dissent. As such, the Court is not persuaded that the language was meant to overrule Van Meter. 5 17-CV-431 W (BGS) 1 D. 2 Herrman’s seventh affirmative defense asserts the Surety’s “claims are barred, in 3 whole or in part, by the Statute of Limitation found in Code of Civil Procedure § 339.” 4 (Am. Answer 7:9–10.) The Surety argues that Herrman has not provided a date by which 5 the 2-year statute of limitations could have run and the defense is therefore facially 6 invalid. (P&A 2:19–21.) 7 Seventh Affirmative Defense “The key to determining the sufficiency of pleading an affirmative defense is 8 whether it gives plaintiff fair notice of the defense.” Wyshak, 607 F.2d at 827. In 9 Wyshak, the Ninth Circuit found that plaintiffs had sufficient notice of defendant’s 10 statute of limitations affirmative defense because defendant identified the specific 11 California statute upon which the defense was based. Id. 12 Here, Herrman’s Amended Answer specifies the applicable statute of limitations, 13 which is sufficient under Wyshak to give the Surety fair notice of the defense. The 14 Court, therefore, DENIES the Surety’s motion to strike the seventh affirmative defense. 15 16 E. Sixth and Ninth Affirmative Defenses 17 The Surety contends that Herrman’s sixth affirmative defense (failure to mitigate 18 damages) and ninth affirmative defense (damages caused by other parties) fail to provide 19 fair notice of which damages the Surety did not mitigate, or which other parties caused 20 which particular damages of the Surety. (P&A 8:26–9:2.) 21 “The key to determining the sufficiency of pleading an affirmative defense is 22 whether it gives the plaintiff fair notice of the defense.” Wyshack, 607 F.2d at 827 23 (citing Conley v. Gibson, 355 U.S. 41 (1957)) (emphasis added); Simmons v. Navajo, 24 609 F.3d 1011, 1023 (9th Cir. 2010); Schutte & Koerting, Inc. v. Swett & Crawford, 298 25 Fed. Appx. 613, 615 (9th Cir. 2008). Fair notice generally requires that the defendant 26 state the nature and grounds for the affirmative defense. See Conley, 355 U.S. at 47. It 27 does not require a detailed statement of facts. Id. at 47–48. 28 Herrman’s sixth affirmative defenses provides: 6 17-CV-431 W (BGS) 1 2 3 4 Plaintiff’s claims are barred, in whole or in part, by failure to mitigate damages, in that, without limitation Plaintiff issued bonds and continued to issue bonds on behalf of NEI with knowledge of NEI’s poor and/or deteriorating financial condition, and upon information and belief, Plaintiff may have paid out on bond claims on NEI jobs without proper assessment of such claims. 5 6 7 8 9 10 11 12 13 14 15 (Am. Answer 7:3–7.) The ninth affirmative defense provides: Plaintiff’s alleged damages, if any, were caused in whole or in part by other parties over whom Herrman had no control and for whom Herrman had no responsibility, in that Plaintiff received, accepted and relied upon information and explanations from parties other than Herrman in deciding to underwrite and issue bonds on behalf of NEI, including without limitation, NEI, the bonding agent and their representatives. (Id. 7:17–22.) The Court finds at this stage in the litigation, these explanations provide sufficient notice of the basis for the affirmative defenses. To the extent the Surety wants a more detailed explanation, it may conduct discovery on these affirmative defenses. Consequently, the Court DENIES the Surety’s motion to strike the sixth and ninth affirmative defenses. 16 17 18 19 20 21 22 23 24 25 26 27 F. Eighth Affirmative Defense – Disclaimers and Limitations Herrman’s eighth affirmative defense argues, “[the Surety]’s claims are barred, in whole or in part, by disclaimer, in that [the Surety] ignored and/or misconstrued clear limitations, disclaimers and admitted “red flags” regarding NEI, its financial information and the review of NEI’s financial information in the Review.” (Am. Answer 7:11–15.) The Surety argues the “red flags” portion of the defense should be struck because California case law does not support such a defense to a negligent misrepresentation claim. (P&A 5:10–12.) The Surety’s labeling of the defense as the “Red flags” defense is somewhat misleading because the language appears to primarily focus on the disclaimers and limitations identified in the Reviews. Regardless, there are California cases which point 28 7 17-CV-431 W (BGS) 1 to the existence of red flags as a defense. See, e.g., Buttonwood Tree Value Partners, LP 2 v. Sweeney, 910 F.Supp.2d 1199, 1206 at fn. 2 (C.D. Cal. 2012) [discussing apparent red 3 flags]; see also Batwin v. Occam Networks, Inc., 2008 WL 2676364, * 17 (C.D. Cal. 4 2008) [defining red flags]; Easton v. Strassburger, 152 Cal.App.3d 90, 96 (1984) 5 [considering red flags in case where negligent misrepresentation was alleged]; Padgett v. 6 Phariss, 54 Cal.App.4th 1270, 1282 (1997) [noting lack of red flags in negligent 7 misrepresentation case]. Because there is some authority support the red-flags defense, 8 the Court DENIES the Surety’s motion to strike the eighth affirmative defense. 9 10 G. Reserving the Right to Amend and Supplement 11 In the Amended Answer, Herrman also reserves the right to amend and supplement 12 its answer as discovery progresses. (Am. Answer 7:23–25.) The Surety argues this is 13 inappropriate under the Federal Rules. (P&A 3:14–15.) The Court agrees. The 14 “‘reservation of affirmative defenses’ is not an affirmative defense.” E.E.O.C. v. 15 Timeless Investments, Inc., 734 F.Supp. 2d 1035, 1055 (E.D. Cal. 2010). Herrman may 16 assert additional affirmative defenses later by amending its pleadings in compliance with 17 Rule 15. See Fed. R. Civ. P. 15; U.S. v. Global Mortg. Funding, Inc., 2008 WL 5264986 18 at *5 (C.D. Cal. 2008) (“[I]f a Defendant seeks to add affirmative defenses, it must 19 comply with the procedure set out in Federal Rule of Civil Procedure 15.”); Timeless 20 Investments, Inc., 734 F.Supp. 2d at 1055 (“Rule 15 does not require a defendant to 21 “expressly reserve” unnamed affirmative defenses in its answer.”). In short, Herrman “is 22 either entitled to raise additional defenses at a later time or he is not; his right to reserve 23 his rights to do so is a legal nullity.” Global Mortg. Funding, Inc., 2008 WL 5264986 at 24 *5. Accordingly, the Court STRIKES WITHOUT LEAVE TO AMEND Herrman’s 25 reservation of right to assert additional defenses. 26 // 27 // 28 // 8 17-CV-431 W (BGS) 1 2 IV. CONCLUSION For the foregoing reasons, the Court GRANTS the Surety’s motion [Doc. 17] 3 WITHOUT LEAVE TO AMEND with respect to Herrman’s “Additional Affirmative 4 Defenses”, and DENIES the motion as to the remaining affirmative defenses. 5 6 IT IS SO ORDERED. Dated: November 15, 2017 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 17-CV-431 W (BGS)
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