Scottsdale Ins. Co. v. Fineman

SCOTTSDALE INSURANCE COMPANY, Plaintiff, v. DAVID FINEMAN, Defendant.

DAVID FINEMAN, Counterclaimant, v. SCOTTSDALE INSURANCE COMPANY, Counter-Defendant.

Case No. 4:20-cv-00368-YGR

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

February 5, 2021

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT DAVID FINEMAN'S MOTIONS TO DISMISS AND GRANTING DEFENDANT SCOTTSDALE INSURANCE COMPANY'S MOTION TO DISMISS

Re: Dkt. Nos. 21, 24

Plaintiff Scottsdale Insurance Company ("Scottsdale") brings this action against defendant David Fineman, asserting three causes of actions: (1) declaratory judgment as to the application of the "Conduct Exclusion"; (2) declaratory judgment as to the application of the "Bodily Injury Exclusion"; and (3) declaratory judgment as to "Uncovered Loss". (Dkt. No. 1.) Fineman has counterclaimed, asserting two causes of action: (1) breach of implied covenant of good faith and fair dealing; and (2) breach of contract. (Dkt. No. 20.)

Now before the Court are the parties' cross-motions to dismiss: Fineman moves to dismiss the operative complaint, and Scottsdale moves to dismiss Fineman's counterclaims. The matter is fully briefed. (See also Dkt. Nos. 21, 24, 28, 29, 31, 32.)

Having carefully considered the pleadings in this action and the papers submitted on each motion, as well as oral argument from counsel on August 11, 2020, and more fully set forth below, Fineman's motion to dismiss is GRANTED IN PART and DENIED IN PART, and Scottdale's motion to dismiss is GRANTED.

I. BACKGROUND

This Order summarizes the allegations contained in the parties' complaint and counterclaim.¹ Thus:

Scottsdale seeks to recover amounts from Fineman that Scottsdale paid in defense and resolution of a "Claim" that was commenced against Fineman by plaintiff Chad Gold alleging that Fineman breached fiduciary duties and made misrepresentations to investors for the purpose of inducing investments (the "Claim") in KineMed, Inc. ("KineMed"). KineMed is an innovative biotechnology company working to commercialize biomarker technology in order to test the efficacy and toxicity of drugs. Scottsdale issued Business and Management Indemnity Policy number EKS3164350 (the "Policy") to KineMed effective for the period from August 24, 2015 to August 24, 2016 (the "Policy Period"). Subject to the Policy's terms, conditions, limitations, exclusions, and endorsements, the Policy provides coverage under a Directors and Officers and Company Coverage Section (the "D&O Coverage Section").

The Policy contains several exclusions, including as relevant here: (1) the "Conduct Exclusion," which states that Scottsdale is not liable for loss under the D&O Coverage Section on account of any Claim alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving any dishonest, deliberately fraudulent, or criminal act of an insured provided that the exclusion does not apply until there is a final judgment against such Insured as to such conduct (including the exhaustion of all appeals, petitions and rehearings in such Claim); and (2) the "Bodily Injury Exclusion," which states that Scottsdale is not liable for loss under the D&O Coverage Section on account of any Claim for emotional distress, among other things. (See D&O Coverage Section §§ C(1)(f), as amended by Endorsement No. 2, and C(1)(a).) The Conduct Exclusion further states that, if it applies, the insured shall reimburse Scottsdale for any "Costs, Charges or Expenses" that Scottsdale has incurred in defense of the Claim.

Scottsdale provided Fineman with a complete defense in connection with the Claim andresolved the Claim on behalf of Fineman under a reservation of rights. Fineman paid nothing to defend or resolve the Claim. Specifically: the underlying action, commenced in Los Angeles County Superior Court, concerned alleged negligent misrepresentation and a breach of fiduciary duties in connection with an alleged fraudulent inducement of an individual, Chad Gold, to invest in a private placement equity investment in KineMed. After KineMed provided Scottsdale with notice of the underlying action and requested coverage for it under the Policy, on October 6, 2016, Scottsdale sent a letter to Fineman in which it stated that it would defend Fineman in the action subject to a full and complete reservation of its rights under the Policy and at law.

The underlying action was eventually submitted to arbitration, where Daniel and Patrick Haffner were added as claimants. Scottsdale continued to provide Fineman with a full defense to the Claim in the arbitration. On August 22, 2019, a Final Award was entered in the arbitration (the "Arbitration Award") in which the arbitrator found that the Haffners prevailed on their causes of action for breach of fiduciary duty and negligent misrepresentation, but not on their causes of action for fraud. The arbitrator awarded the Haffners compensatory damages, pre-judgment interest, emotional-distress damages, and attorneys' fees. The arbitrator did not award any amounts to Gold in the Arbitration Award. After the entry of the Arbitration Award, the Haffners, Fineman, and Scottsdale entered into a Confidential Settlement Agreement² that resolved the Claim, and under which Scottsdale agreed to pay an amount in full satisfaction of the Arbitration Award (the "Settlement Sum"). Notably, there was: (1) never any final judgment; (2) never any order from a court confirming the Arbitration Award; and (3) never any finding that Fineman acted anything more than negligently.

On January 16, 2020, Scottsdale filed this coverage action in which it seeks to recoup from Fineman the Settlement Sum based upon the application of the Conduct Exclusion and the Bodily Injury Exclusion, and because all or a portion of the Settlement Sum does not constitute covered loss under the Policy. In addition, Scottsdale seeks to recoup from Fineman the defense costs thatit paid on Fineman's behalf based upon the application of the Conduct Exclusion.

On April 24, 2020, Fineman filed a Counterclaim, which contains causes of action for breach of contract and bad faith. In his Counterclaim against Scottsdale, Fineman alleges that Scottsdale breached the Policy by (a) failing to inform its insured in a timely manner of his right to and payment of independent counsel in its October 6, 2016 reservation of rights letter; (b) refusing to settle the Arbitration when it allegedly had an opportunity to do so within policy limits; (c) delaying for months before settling the underlying action after issuance of the arbitration award; (d) filing this coverage action and seeking reimbursement of defense fees and costs it paid in the defense of the arbitration and underlying action without a reasonable basis for doing so; (e) filing this coverage action and seeking reimbursement of the settlement payment without a reasonable basis for doing so; (f) misrepresenting the terms of the Policy in an attempt to support its alleged wrongful conduct; and (g) additional wrongful conduct to be proven at trial.

II. LEGAL STANDARD

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed for failure to state a claim upon which relief may be granted. Dismissal for failure to state a claim under Rule 12(b)(6) is proper if there is a "lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Conservation Force v. Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (quoting Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988)).

The complaint must plead "enough facts to state a claim [for] relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is plausible on its face "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). If the facts alleged do not support a reasonable inference of liability, stronger than a mere possibility, the claim must be dismissed. Id. at 678-79; see also In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (stating that a court is not required to accept as true "allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.").

A complaint that falls short of the Rule 8(a) standard may be dismissed if it fails to state aclaim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). "Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory." Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). For purposes of ruling on a Rule 12(b)(6) motion, the Court "accept[s] factual allegations in the complaint as true and construe[s] the pleadings in the light most favorable to a nonmoving party." Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). Mere "conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss." Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004).

III. ANALYSIS

The Court first addresses Fineman's motion to dismiss Scottsdale's complaint, before addressing Scottdale's motion to dismiss Fineman's counterclaims.

A. Plaintiff David Fineman's Motion to Dismiss Complaint

Fineman moves to dismiss Scottsdale's complaint on the following grounds: (1) Scottsdale failed to appropriately reserve its rights to later deny coverage and seek reimbursement; and (2) Counts One, Two, and Three fail to state a claim under Rule 12(b)(6).

1. Reservation of Rights

In general, California law requires that insurers timely and expressly reserve their rights as to the specific exclusions they may later rely on to deny coverage and seek reimbursement. Canadian Ins. Co. v. Rusty's Island Chip Co., 36 Cal. App. 4th 491, 498...