Opinion
No. 2:13-cv-02311 JAM AC
02-07-2014
JAMES LENNANE, an Individual, and JC PRODUCE, LLC, a California limited liability company, Plaintiffs, v. AMERICAN ZURICH INSURANCE COMPANY, an Illinois corporation; and Does 1 through 30, inclusive, Defendants.
ORDER GRANTING DEFENDANT'S
MOTION TO DISMISS
This matter is before the Court on Defendant American Zurich Insurance Company's ("Defendant") Motion to Dismiss (Doc. #7) Plaintiffs James Lennane ("Plaintiff Lennane") and JC Produce, LLC's ("Plaintiff JCP") (collectively "Plaintiffs")third, fourth and sixth causes of action in the Complaint (Doc. #1) pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("FRCP") for failure to state a claim upon which relief may be granted. Plaintiffs oppose the motion ("Opposition") (Doc. #11). Defendant filed a reply (Doc. #13). For the following reasons, Defendant's motion is GRANTED.
This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled for January 22, 2014.
I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND
Plaintiff Lennane is a resident of Florida. Compl. ¶ 1. Plaintiff JCP is a California limited liability company. Compl. ¶ 2. Defendant American Zurich Insurance Company is an Illinois corporation. Compl. ¶ 3.
On April 1, 2006, Plaintiff JCP purchased a workers' compensation insurance policy ("the Policy") from Defendant. Compl. ¶ 7. Under the Policy, Defendant agreed to pay the benefits required of Plaintiff JCP by the California workers' compensation laws. Compl. ¶ 8. The Policy required Plaintiff JCP to reimburse Defendant for each claim, up to the deductible amount of $250,000. Compl. ¶ 11. Plaintiff JCP collateralized its deductible by providing Defendant with a $25,000 "loss fund" and two standby letters of credit, in the aggregate amount of $780,000 (the "Standby Letters"). Compl. ¶ 12. Bank of the West (the "Bank") issued the required Standby Letters to Defendant. Compl. ¶ 12. The Bank required Plaintiff Lennane to personally guarantee repayment of the Standby Letters, in the event that Plaintiff JCP failed to repay the Bank. Compl. ¶ 12.
At some point in 2006, the Bank declined to renew the Standby Letters, which were set to expire. Compl. ¶ 13. In approximately December 2006, Defendant "exercised its rights under the . . . Policy to present to Bank the [Standby Letters] for payment, and monetized the amount of $780,000." Compl. ¶ 13. Consequently, Defendant had possession of $805,000, which it allegedly held "in trust" for Plaintiffs' benefit. Compl. ¶ 13. Plaintiff Lennane subsequently reimbursed the Bank for its funding of the Standby Letters. Compl. ¶ 14. In October 2008, Plaintiff JCP's business failed. Compl. ¶ 15.
Previously, in October 2006, Hugo Arreola ("Arreola") filed a claim under the California workers' compensation laws against Plaintiff JCP. Compl. ¶ 18. This claim was subject to the Policy, as Arreola claimed to have suffered an injury while working for Plaintiff JCP. Compl. ¶ 18. Defendant paid "significant sums of money" to Arreola and his health care providers, under the Policy, until August 2010. Compl. ¶ 20. Between October 2006 and December 2006, Defendant billed Plaintiff JCP under the deductible provision of the Policy for Arreola's claim. Compl. ¶ 20. After Defendant monetized the Standby Letters in December 2006, Defendant continued to make payments to Arreola from the $805,000 fund held by Defendant. Compl. ¶¶ 13, 20.
In June 2010, Plaintiff Lennane obtained records that suggested Arreola had concealed a prior injury which would have impacted his workers' compensation claim. Compl. ¶ 21. Plaintiff Lennane shared the information with Defendant, which then proceeded to investigate Arreola's claim. Compl. ¶ 21. Defendant had allegedly failed to conduct a proper investigation at the time of Arreola's original claim. Compl. ¶ 21. On September 20, 2010, Defendant "shared with Plaintiffs, for the first time, that they had obtained sufficient information to believe Arreola was a fraudster." Compl. ¶ 21.
On September 18, 2013, Plaintiffs filed the Complaint (Doc. #1) in California Superior Court, Sacramento County. The Complaint includes the following causes of action: (1) breach of contract; (2) tortious breach of the implied covenant of good faith and fair dealing; (3) unfair insurance business practices in violation of California Insurance Code section 790.03; (4) breach of fiduciary duty; (5) unfair business practices in violation of California Business and Professions Code section 17200; (6) negligence; and (7) conversion. On November 6, 2013, Defendant removed the action to this Court and on November 13, 2013 filed its motion herein to dismiss the third, fourth and sixth causes of action. The Court has original jurisdiction over this action pursuant to 28 U.S.C. § 1332.
II. OPINION
A. Legal Standard
A party may move to dismiss an action for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). To survive a motion to dismiss a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 556 U.S. 662, 570 (2007). In considering a motion to dismiss, a district court must accept all the allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322 (1972). "First, to be entitled to the presumption of truth, allegations in a complaint or counterclaim may not simply recite the elements of a cause of action, but must sufficiently allege underlying facts to give fair notice and enable the opposing party to defend itself effectively." Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011), cert. denied, 132 S. Ct. 2101, 182 L. Ed. 2d 882 (U.S. 2012). "Second, the factual allegations that are taken as true must plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation." Id. Assertions that are mere "legal conclusions" are therefore not entitled to the presumption of truth. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 555). Dismissal is appropriate when a plaintiff fails to state a claim supportable by a cognizable legal theory. Balistreri v. Pacifica Police Department, 901 F.2d 696, 699 (9th Cir. 1990).
Upon granting a motion to dismiss for failure to state a claim, a court has discretion to allow leave to amend the complaint pursuant to Federal Rule of Civil Procedure 15(a). "Dismissal with prejudice and without leave to amend is not appropriate unless it is clear . . . that the complaint could not be saved by amendment." Eminence Capital, L.L.C. v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003).
B. Discussion
1. Third Cause of Action—Unfair Business Practices
Defendant argues that Plaintiffs' third cause of action, which alleges unfair business practices in violation of California Insurance Code section 790.03(h) - also referred to as the Unfair Insurance Practices Act ("UIPA") - must be dismissed because "[t]he California Supreme Court has repeatedly held that insureds have no private right of action for alleged violations of section 790.03(h)." Mot. at 4. Plaintiffs "concede that [the UIPA] does not lead to a private cause of action." Opp. at 3. Therefore, Defendant's motion to dismiss Plaintiffs' third cause of action is GRANTED.
Plaintiffs argue that they "may plead violation of the UIPA as the basis for [their] UCL claim" and seek leave "to amend the complaint relating thereto." Opp. at 3. Plaintiffs appear to be requesting leave to amend their fifth cause of action - an Unfair Competition Law ("UCL") claim - with an additional allegation that Defendant violated the UIPA. This is expressly prohibited. Zhang v. Superior Court, 57 Cal.4th 364, 384 (2013) (noting that "a litigant may not rely on the proscriptions of section 790.03 as the basis for a UCL claim" because "[p]rivate UIPA actions are absolutely barred"). Plaintiffs can draw no support from the holding of Zhang, which is merely that "the UIPA does not immunize insurers from UCL liability for conduct that violates other laws in addition to the UIPA." Zhang, 57 Cal.4th at 384 (emphasis added). Zhang is clear that "a plaintiff may not use the UCL to 'plead around' an absolute bar to relief[.]" Zhang, 57 Cal.4th at 369 (emphasis in original). Permitting Plaintiffs to "plead violation of the UIPA as the basis for [the] UCL claim" would be in direct contravention of Zhang. Opp. at 3. Therefore, Defendant's motion to dismiss Plaintiffs' third cause of action is GRANTED WITHOUT LEAVE TO AMEND.
2. Fourth Cause of Action—Breach of Fiduciary Duty
Defendant argues that Plaintiffs' fourth cause of action for breach of fiduciary duty must be dismissed because, under California law, a fiduciary relationship does not exist between an insurer and an insured. Mot. at 5. Plaintiffs argue that California law does not rule out the existence of a fiduciary relationship between an insurer and an insured, citing Frommoethelydo v. Fire Ins. Exch., 42 Cal.3d 208 (1986) and Tran v. Farmers Grp., Inc., 104 Cal.App.4th 1202 (2002). Opp. at 3. Plaintiffs additionally argue that Defendant acted as an "attorney-in-fact" by "handling $805,000 in Plaintiffs' funds Plaintiffs entrusted to [Defendant]," and therefore owed a fiduciary duty to Plaintiffs. Opp. at 4.
Under California law, "an insurer is not a fiduciary for its insured in the traditional sense and cannot be held liable for breach of fiduciary duties." Casey v. Metro. Life Ins. Co., 688 F.Supp.2d 1086, 1100 (E.D. Cal. 2010). Although "special and heightened duties" are owed by insurers to insureds, the "insurer-insured relationship is not a true 'fiduciary relationship.'" Casey, 688 F.Supp.2d at 1100. Accordingly, an insured may not normally bring a cause of action against his insurer for breach of fiduciary duty. See Solomon v. North American Life & Cas. Ins. Co., 151 F.3d 1132, 1138 (9th Cir. 1998) (holding that an insurer "owed no fiduciary duty to [the insured] as a result of their insurer-insured relationship"); Casey, 688 F.Supp.2d at 1101 (holding that "a separate claim does not exist for breach of fiduciary duty").
Plaintiffs' reliance on Frommoethelydo v. Fire Ins. Exch., 42 Cal.3d 208 (1986) is misplaced. To the extent that Frommoethelydo suggests that an insured may bring a claim for breach of fiduciary duty against an insurer, the California Supreme Court has since rejected this approach. Vu v. Prudential Prop. & Cas. Ins. Co., 26 Cal.4th 1142, 1150-1151 (2001) (noting that "the insurer-insured relationship . . . is not a true 'fiduciary relationship' in the same sense as the relationship between a trustee and a beneficiary, or attorney and client"). Likewise, Plaintiffs' reliance on Tran v. Farmers Grp., Inc., 104 Cal.App.4th 1202 (2002) is misplaced. The Tran court notes its agreement with "the authorities suggesting that an insurer's breach of its 'fiduciary-like duties' is adequately redressed by a claim for breach of the covenant of good faith and fair dealing implied in the insurance contract." Tran, 104 Cal.App.4th at 1212. Accordingly, Plaintiffs' claim for breach of fiduciary duty cannot be based solely on the existence of the insurer-insured relationship.
Plaintiffs concede as much, acknowledging that Defendant "was not acting as a 'fiduciary' when carrying out the terms of its insurance policy." Opp. at 4. However, Plaintiffs argue that Defendant "undertook to do more" and acted as a fiduciary "in handling the $805,000 in Plaintiffs' funds Plaintiffs entrusted to [Defendant]." Opp. at 4. This argument falls short given Plaintiffs' own allegation that Defendant "exercised its rights under the . . . Policy" when it monetized the $780,000 from the Bank. Compl. ¶ 13 (emphasis added). Thus, Plaintiffs themselves acknowledge that Defendant did not "undert[ake] to do more" by monetizing the Standby Letters and holding the $805,000 as a collateralized deductible: rather, Defendant was merely carrying out the terms of the Policy. Compl. ¶ 13.
Finally, Plaintiffs' contention that, "in handling these funds, [Defendant] acted as an attorney-in-fact, owing to Plaintiffs a fiduciary duty" finds no support in the Complaint. Opp. at 4. An attorney-in-fact must be duly appointed through a written agreement. See Delos v. Farmers Grp., Inc., 93 Cal.App.3d 642, 652 (1979) (noting that attorneys-in-fact, in the insurance context, are empowered in written underwriters agreements). Plaintiffs fail to allege the existence of a written agreement, separate from the Policy, that grants Defendant authority with regard to Plaintiffs' funds. Accordingly, Defendant's motion to dismiss Plaintiffs' fourth cause of action is GRANTED WITHOUT LEAVE TO AMEND.
3. Sixth Cause of Action--Negligence
Defendant argues that Plaintiffs' sixth cause of action, a negligence claim, must be dismissed because "California courts have made clear that the only tort remedy available for the breach of an insurance contract is 'bad faith,' a claim that requires more than a showing of 'mere negligence.'" Mot. at 8. Plaintiffs respond that Defendant owed Plaintiffs a duty to investigate the testimony of workers' compensation claims made under the Policy and a duty to not pay fraudulent claims. Opp. at 5-6. Plaintiffs also cite Erlich v. Menezes, 21 Cal.4th 543 (1999) for the rule that "where a social policy exists, or where a traditional common law tort accompanies the breach [of a contract], such as fraud or conversion, the courts allow" a tort claim. Opp. at 6.
In California, "negligence is not among the theories of recoveries generally available against insurers." Tento Int'l, Inc. v. State Farm Fire & Cas. Co., 222 F.3d 660, 664 (9th Cir. 2000). When "an insured seeks to recover in tort for an insurer's mishandling of a claim, it must allege more than mere negligence." Adelman v. Associated Int'l Ins. Co., 90 Cal.App.4th 352, 369 (2001) (emphasis in original). Rather, in the context of an insurance contract, California courts "rel[y] on the covenant of good faith and fair dealing, implied in every contract, to justify tort liability." Erlich, 21 Cal.4th at 552.
To the extent Plaintiffs rely on Erlich, their agrument fails . The Erlich court unequivocally asks and answers the very question posed in the present case: "[I]s the mere negligent breach of a contract sufficient [to impose tort liability]? The answer is no." Erlich, 21 Cal.4th at 552. Erlich goes on to describe "the familiar paradigm of tortious breach of [an insurance] contract," in which courts "rel[y] on the covenant of good faith and fair dealing . . . to justify tort liability." Id. at 552. The remainder of Erlich's language, quoted by Plaintiffs, is specifically limited to circumstances "outside the insurance context" and is inapplicable to the present case. Id. at 553-54.
Furthermore, Plaintiffs' apparent contention that its negligence claim is viable because Defendant committed the "traditional common law tort" of conversion simply does not follow. Opp. at 6-7. If anything, the allegation of conversion supports a tort claim for conversion, not negligence.
Accordingly, Defendant's motion to dismiss Plaintiffs' sixth cause of action is GRANTED WITHOUT LEAVE TO AMEND.
III. ORDER
For the reasons set forth above, the Court GRANTS Defendant's Motion to Dismiss. Plaintiff's third, fourth, and sixth causes of action are DISMISSED WITHOUT LEAVE TO AMEND.
IT IS SO ORDERED.
__________
JOHN A. MENDEZ,
UNITED STATES DISTRICT JUDGE