139 F. Supp. 3d 1141
E.D. Cal.2015Background
- Mare Island, a former Navy shipyard, was contaminated; Navy, City of Vallejo, LMI (developer), CCI (contractor/CH2M) and insurer Steadfast entered agreements and two insurance policies in 2001 (RSL and ELI) allocating coverage for "Known" vs. "Unknown" pollution conditions.
- RSL (Remedial Stop Loss) insured CCI for large, known-condition costs and expired in 2011; ELI (Environmental Liability) insured LMI and CCI for unknown-condition cleanup costs and expires in 2021.
- Steadfast alleges LMI and CCI shifted claims between policies, submitted inflated or unnecessary remediation claims, concealed information and otherwise mischaracterized claims to extract coverage under ELI after RSL expired. Steadfast brought an amended counterclaim asserting multiple causes of action (contract, fraud-based claims, restitution, reformation, declaratory relief, etc.).
- LMI and CCI moved to dismiss under Fed. R. Civ. P. 12(b)(6) and 12(b)(7), arguing (inter alia) that the United States Navy is a required party for reformation/cancellation claims and that many counterclaims fail under pleading and substantive law.
- The court (Mueller, J.) denied dismissal for failure to join the Navy (Rule 19) because the Navy is adequately represented by existing parties, but granted dismissal in part under Rule 12(b)(6) and Rule 9(b), dismissing several claims with prejudice and giving leave to amend most remaining claims subject to particularity requirements.
Issues
| Issue | Steadfast's Argument | LMI/CCI's Argument | Held |
|---|---|---|---|
| Whether the U.S. Navy is a required party under Rule 19 to Steadfast's reformation/cancellation claims | The Navy has an interest in the insurance scheme and would be prejudiced if policies are reformed/cancelled | The Navy is a necessary party whose absence requires dismissal because reformation would affect Navy rights and the Navy cannot be involuntarily joined | Navy is not a required party: its interests are aligned and adequately represented by LMI/CCI; Rule 12(b)(7) dismissal denied |
| Whether Steadfast pleaded reformation timely and sufficiently | The parties intended a broader definition of "Known Pollution Condition" that should be reformed; newly discovered documents support fraud/mistake | Reformation claim is time-barred (accrued in 2001) and lacks adequate allegations of fraud or mutual mistake | Reformation claim dismissed for statute-of-limitations and pleading defects but leave to amend granted to plead fraud/mistake within Rule 11 limits |
| Whether breach-of-contract allegations based on submitting claims under the "wrong" policy, submitting non-Governmental-Authority work, or unreasonable claims state a contract claim | Steadfast alleges LMI/CCI breached policy terms by submitting improper, excessive, or misallocated claims | Policies permit denial of such claims but do not prohibit submission; no contractual duty was breached by merely submitting claims | Claims that submission of a claim under the "wrong" policy, for non-Governmental-Authority work, or as "unreasonable" constituted breach were dismissed with prejudice (no leave to amend) |
| Whether fraud-based claims meet Rule 9(b) particularity | Steadfast alleges systemic fraud/omissions across dozens of transactions and requests leave to amend with documents it obtained | LMI/CCI argue fraud allegations are insufficiently particular and lump defendants together | Most fraud-based allegations fail Rule 9(b); court strips insufficiently particular fraud allegations, allows declaratory claim to proceed to the extent it does not rest on fraud, and grants 14 days leave to file a more particular second amended counterclaim |
Key Cases Cited
- Starr v. Baca, 652 F.3d 1202 (9th Cir. 2011) (standard for accepting factual allegations on a Rule 12(b)(6) motion)
- Salt River Project Agricultural Improvement & Power Dist. v. Lee, 672 F.3d 1176 (9th Cir. 2012) (three-step Rule 19 inquiry and adequate-representation factors)
- Alto v. Black, 738 F.3d 1111 (9th Cir. 2013) (definition of "complete relief" under Rule 19)
- E.E.O.C. v. Peabody Western Coal Co., 610 F.3d 1070 (9th Cir. 2010) (parties to a contract are often necessary for actions attacking the contract)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading standard: plausibility)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (context-specific pleading analysis and drawing inferences)
- Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003) (Rule 9(b) applies to fraud allegations and fraudulent claims must meet particularity requirements)
- Swartz v. KPMG LLP, 476 F.3d 756 (9th Cir. 2007) (Rule 9(b) requires differentiating allegations against multiple defendants)
- Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993) (particularity requirements: time, place, content of false representations)
- Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal.4th 503 (Cal. 1994) (California rule that a party to the same contract generally cannot maintain intentional interference claims)
- Kransco v. American Empire Surplus Lines Ins. Co., 23 Cal.4th 390 (Cal. 2000) (contractual implied covenant of good faith and fair dealing and insurer/insured duties)