Philadelphia Indemnity Insurance Company v. Olympia Early Learning Center

[7] UNITED STATES DISTRICT COURT [8] WESTERN DISTRICT OF WASHINGTON AT TACOMA [10] PHILADELPHIA INDEMNITY CASE NO. 3:12-cv-05759-DGE 11 INSURANCE COMPANY, ORDER GRANTING PLAINTIFF’S 12 Plaintiff, MOTION TO LIFT STAY (DKT. v. NO. 106) [13] OLYMPIA EARLY LEARNING CENTER 14 et al, 15 Defendants. [16] 17 I INTRODUCTION 18 This matter comes before the Court on Plaintiff Philadelphia Indemnity Insurance 19 Company’s Motion for Relief from Stay (Dkt. No. 106). For the reasons articulated herein, we 20 GRANT Plaintiff’s motion to lift the stay and sua sponte GRANT Defendants leave to amend 21 their answer to assert their compulsory counterclaims. 22 II BACKGROUND 23 On November 21, 2013, this Court issued an order staying these proceedings “pending 24 the outcome of the state court, affirmative bad faith litigation.” (Dkt. No. 97 at 7.) On 1 December 5, 2013, Plaintiff moved for reconsideration of the stay. (Dkt. No. 99.) The Court 2 reaffirmed its issuance of the stay and denied Plaintiff’s motion for reconsideration on August 3 22, 2014. (Dkt. No. 106.) On September 1, 2022, Plaintiff filed a motion to lift this Court’s stay 4 (Dkt. No. 106), which Defendants opposed (Dkt. No. 117). Plaintiff also filed a motion for 5 summary judgment on September 1, 2022 (Dkt. No. 108), which they thereafter withdrew (Dkt. 6 No. 121). Reasonableness hearings in a related state court action in the Superior Court of 7 Washington for Thurston County concerning the appropriateness of covenant judgments between 8 the families of victims of Elisha Tabor’s sexual abuse (the “Families” or “Underlying Plaintiffs”) 9 and Olympia Early Learning Center (“OELC”) and its officers (together the “Underlying 10 Defendants”) concluded after almost ten years and the superior court issued its findings of facts 11 and conclusions of law on October 26, 2022. (See Dkt. No. 122-1 at 2.) The court determined 12 that the covenant judgments between the Families and the Underlying Defendants were 13 reasonable. (Id. at 5.) As part of the settlement between the Families and OELC, the Families 14 were assigned rights against Plaintiff. (Id. at 5, 14.) 15 III DISCUSSION 16 A. Defendants’ Bad Faith Claims are Compulsory Counterclaims 17 Plaintiff moves this Court to lift its stay now that a reasonableness hearing in state court 18 has been conducted and the Superior Court of Washington for Thurston County has issued its 19 findings of fact and conclusions of law approving the proposed covenant judgments between the 20 Families and the Underlying Defendants. (Dkt. Nos. 106 at 5; 122-1 at 5.) 21 The operative stay in this case provides that “[t]he Court will STAY (and statistically 22 terminate) this litigation until a bad faith claim is asserted here, or the results of a state court 23 action are reported here.” (Dkt. No. 105 at 3.) The Court issued this stay in response to [24] 1 Plaintiff’s motion for reconsideration that sought to stay this action until the conclusion of a 2 pending state court reasonableness hearing. (Dkt. No. 99 at 5.) The Court, in issuing the stay, 3 was concerned by the prospect of issuing an advisory opinion since the Defendants have not yet 4 filed any bad faith claims against Plaintiff in any court and did not assert their bad faith claims as 5 counterclaims but instead listed them as affirmative defenses. On review, the Court has 6 determined that a ruling on the merits of Plaintiff’s claim seeking absolution from liability is 7 within this Court’s jurisdiction. Any alleged breach of duties to the insured parties under the 8 policy at issue would be compulsory counterclaims. 9 Defendants’ bad faith claims against Plaintiff are thus compulsory counterclaims that 10 arise out of the same transaction or occurrence at the heart of Plaintiff’s interpleader claim and, 11 as a result, must be asserted in this forum or risk waiver. Federal Rule of Civil Procedure 13 12 provides that a party must assert a counterclaim “that—at the time of its service—the pleader has 13 against an opposing party if [it] . . . (A) arises out of the transaction or occurrence that is the 14 subject matter of the opposing party's claim; and (B) does not require adding another party over 15 whom the court cannot acquire jurisdiction.” Fed. R. Civ. P. 13(a). “The Rule bars a party who 16 failed to assert a compulsory counterclaim in one action from instituting a second action in 17 which that counterclaim is the basis of the complaint.” Seattle Totems Hockey Club, Inc. v. Nat’l 18 Hockey League, 652 F.2d 852, 854 (9th Cir. 1981). The Ninth Circuit applies the liberal logical 19 relationship test to determine whether a counterclaim is compulsory. Mattel, Incv. MGA Ent., 20 Inc., 705 F.3d 1108, 1110 (9th Cir. 2013). A counterclaim has a logical relationship to the 21 underlying action where it ‘“arises from the same aggregate set of operative facts as the initial 22 claim, in that the same operative facts serve as the basis of both claims or the aggregate core of 23 facts upon which the claim rests activates additional legal rights otherwise dormant in the [24] 1 defendant.”’ Id. (quoting In re Pegasus Gold Corp., 394 F.3d 1189, 1196 (9th Cir. 2005)). 2 Washington applies the same test as the Ninth Circuit to determine whether a counterclaim is 3 compulsory. Schoeman v. New York Life Ins. Co., 726 P.2d 1, 7 (Wash. 1986) (“The 4 considerations behind compulsory counterclaims include judicial economy, fairness and 5 convenience. Of the four tests, the logical relationship test is the most widely recognized and it 6 best fosters these important considerations. We find the logical relationship test applicable.”) 7 Here, Defendants’ alleged bad faith claims stem from Plaintiff’s handling of settlement 8 negotiations and thus arise from the same set of operative facts as Plaintiff’s underlying claim. 9 Plaintiff filed suit seeking a declaratory judgment regarding the applicable maximum insurance 10 policy limit for claims against the Underlying Defendants. (Dkt. No. 1 at 18.) Defendants have 11 alleged in this litigation that Plaintiff failed to adequately investigate the claims levied against 12 the Underlying Defendants, failed to investigate whether former OELC employee Tabor 13 committed child sex abuse, failed to put forward an adequate defense of the Underlying 14 Defendants, failed to pursue settlement negotiations, and failed to timely inform the Underlying 15 Defendants of a potential coverage dispute. (See generally Dkt. No. 61.) 16 Defendants previously argued that their bad faith claims were not compulsory 17 counterclaims. (See Dkt Nos. 101 at 6–8; 117 at 10.) To support this claim, they relied primarily 18 on Fid. Nat. Title Co. v. U.S. Small Bus. Admin., No. 2:13-CV-02030-KJM-AC, 2014 WL 19 1883939 (E.D. Cal. May 12, 2014), where a national title company filed an interpleader action to 20 determine proper ownership of surplus proceeds from a non-judicial foreclosure. The defendants 21 in the action filed several counterclaims against the stakeholder, Fidelity National Title 22 Company, and other parties, including breach of contract and violations of California’s elder 23 protection laws. Id. at *4. The court in Fid. Nat. Title Co. determined that the defendants’ [24] 1 claims were not compulsory because their counterclaims focused on allegedly wrongful acts 2 leading to the foreclosure rather than facts related to the order of priority of competing interests 3 in the interpleader action. Id. at *6. 4 Defendants assert that the current case parallels Fid. Nat. Title Co. as Plaintiff’s 5 interpleader claims focus on the amount of indemnification owed by Plaintiff and who Plaintiff is 6 obligated to pay. (Dkt No. 101 at 7.) These facts, Defendants assert, do not logically relate to 7 “whether Philadelphia Indemnity is liable in tort for bad faith based on its breaches of its duty to 8 defend its insureds leading up to the covenant judgments and this interpleader action.” (Id.) The 9 Court disagrees. 10 Fid. Nat. Title Co. is distinguishable as the case did not involve a dispute over an 11 insurer’s obligations under an insurance policy and the defendants in the case did not raise any 12 claims of bad faith as against the interpleading party. The various claims that defendants raised 13 related to underlying “wrongful acts of the parties involved in an allegedly wrongful foreclosure 14 action.” 2014 WL 1883939 at *6. Here, by contrast, Defendants’ allegations of bad faith are 15 related to Plaintiff’s obligations to the Underlying Defendants under the insurance policy 16 between the parties—the same policy which Plaintiff seeks to clarify through this interpleader 17 action. Specifically, Plaintiff seeks a determination of “the maximum insurance policy limit to 18 which all claimants could be entitled”, to “[d]ischarge [Plaintiff] from all liability in connection 19 with this litigation and the policies,” and to “[d]eclare that . . [Plaintiff] will have no further duty 20 to defend or indemnify [OELC]” from the claims of the Underlying Plaintiffs. (Dkt. No. 1 at 18– 21 19.) The Underlying Plaintiffs, however, now sit in the shoes of OELC pursuant to the covenant 22 judgments between the Underlying Plaintiffs and OELC. (See Dkt. No. 122-1.) [24] 1 Allegations that an insurer did not act in good faith are inextricably linked to an insurer’s 2 fiduciary obligations to an insured pursuant to their policy agreement. See Tank v. State Farm 3 Fire & Cas. Co., 715 P.2d 1133, 1136 (Wash. 1986) (noting that the source of obligation for an 4 insurer to act in good faith “is the fiduciary relationship existing between the insurer and insured. 5 Such a relationship exists not only as a result of the contract between insurer and insured, but 6 because of the high stakes involved for both parties to an insurance contract and the elevated 7 level of trust [between the parties].”). Courts have also regularly recognized allegations of an 8 insurer’s bad faith as compulsory counterclaims. See, e.g., Neuropathy Sols., Inc. v. 9 Massachusetts Bay Ins. Co., No. SACV2201263DOCJDE, 2022 WL 6589002 , at *5 (C.D. Cal. 10 Sept. 7, 2022) (finding that insured party’s bad faith claim against insurer was a compulsory 11 counterclaim); Hans v. Homesite Indem. Co., No. CV08-0393-PHX-JAT, 2009 WL 2169170 , at 12 *1 (D. Ariz. July 17, 2009) (finding that a claim that insurer’s refusal to provide coverage and to 13 pay for a defense for an insured party involved in an altercation was a compulsory counterclaim). 14 As such, we find that OELC’s bad faith claims, now assigned to the Underlying Plaintiffs, 15 against Plaintiff are compulsory counterclaims and must be raised in this forum. 16 B. Defendants Should be Granted Leave to Amend Their Answer 17 The Court also finds sua sponte that Defendants should be granted leave to amend their 18 answer to affirmatively assert their bad faith counterclaims as opposed to affirmative defenses. 19 The Ninth Circuit has held that leave to amend pursuant to Federal Rule of Civil Procedure 20 15(a)(2) should be granted with ‘“extreme liberality.’” Herring Networks, Inc. v. Maddow, 8 21 F.4th 1148 , 1160 (9th Cir. 2021) (quoting Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 22 708, 712 (9th Cir. 2001). “In determining whether leave to amend is appropriate, the district 23 court considers ‘the presence of any of four factors: bad faith, undue delay, prejudice to the [24] 1 opposing party, and/or futility.’” Owens, 244 F.3d at 712 (quoting Griggs v. Pace Am. Group, 2 Inc., 170 F.3d 877 , 880 (9th Cir.1999)). 3 None of these factors weigh against granting the Defendants leave to amend. First, there 4 is no evidence of bad faith on the part of Defendants. Second, any delay in asserting bad faith 5 claims against Plaintiff is not attributable to Defendants but to significant delays in state court in 6 approving the covenant judgments between the Families and Underlying Defendants. Third, 7 granting leave to amend does not prejudice Plaintiff since they have consistently sought to bring 8 Plaintiff’s bad faith claims into this forum for resolution. (See, e.g., Dkt. No. 103 at 4) 9 (“Defendants’ putative bad faith claims derive from the same basic operative facts already at 10 issue in this lawsuit and should be litigated in this suit.”). Finally, the Court has already 11 determined that these claims have merit. (See Dkt. No. 61 at 7.) As such, the Court GRANTS 12 Defendants with leave to amend their answer to affirmatively assert their bad faith 13 counterclaims. 14 The Court does not at this time address whether the inclusion of a non-diverse party 15 would defeat this Court’s jurisdiction over Plaintiff’s interpleader claim. (See Dkt. No. 106 at 16 10.) Additionally, the Court reserves judgment on the issue of whether Plaintiff has judicially 17 estopped itself from seeking this Court’s determination of the Families’ bad faith damages 18 claims. (See Dkt. No. 117 at 11.) 19 Finally, we deny Defendants’ motion for sanctions since, at this time, Plaintiff has 20 withdrawn their motion for summary judgment. We caution Plaintiff’s counsel against filing 21 future motions in contravention of this Court’s orders. [24] 1 IV CONCLUSION 2 Accordingly, and having considered Plaintiff’s motion (Dkt. No. 106), the briefing of the 3 parties, and the remainder of the record, the Court finds and ORDERS that Plaintiff’s motion to 4 lift this Court’s stay is GRANTED. We further GRANT Defendants with leave to amend their 5 answer to assert their bad faith claims as counterclaims rather than affirmative defenses. 6 1. Defendants shall AMEND their answer within three weeks of the issuance of 7 this order. 8 2. The Parties shall meet pursuant to Federal Rule of Civil Procedure 26(f) and 9 shall issue a joint status report no later than 30 days after Defendants files 10 their amended answer. 11 Dated this 23rd day of November, 2022. [12] A [13] David G. Estudillo 14 United States District Judge