United States District Court,
N.D. Texas,
Dallas Division.
CENTEX HOMES, a Nevada
General Partnership, Plaintiff,
v.
LEXINGTON INSURANCE COMPANY, Defendant.
No. 3:13–cv–719–BN. | Signed
March 24, 2014. | Filed March 25, 2014.

Opinion
MEMORANDUM OPINION & ORDER ON
DEFENDANT’S MOTION FOR PARTIAL
SUMMARY JUDGMENT REGARDING
RIGHT TO CONTROL DEFENSE
DAVID L. HORAN, United States Magistrate Judge.
*1 Defendant Lexington Insurance Company (“Defendant”
or “Lexington”) has filed a motion for partial summary
judgment. See Motion for Partial Summary Judgment
regarding Right to Control Defense [Dkt. No. 43]. Plaintiff
Centex Homes (“Plaintiff” or “Centex”) filed a Response
[Dkt. Nos. 60 & 61], and Defendant filed a Reply [Dkt. No.
67].
Plaintiff also filed a motion to strike evidence submitted by
Defendant with its reply, see Dkt. No. 68, to which Defendant
filed no response. No response having been filed, and the
Court having not considered any of the evidence in reaching
its decision, Plaintiff’s motion to strike [Dkt. No. 68] is
DENIED as moot.
The Court makes the following rulings with respect to
Defendant’s Motion for Partial Summary Judgment.
Background
This case involves a coverage dispute between an insured and
insurer. Plaintiff is primarily in the business of designing,
developing, and constructing condominiums and other
housing complexes throughout the country. See Dkt. No. 66
at 2. In constructing these condominium projects, Plaintiff
purchases “wrap” insurance policies that cover Plaintiff as
a general contractor and all subcontractors performing work
in connection with the insured project. See id. at 3. Plaintiff
purchased five such wrap policies from Defendant, but only
two of these policies are at issue in Defendant’s Motion for
Partial Summary Judgment, so the Court will only summarize
the facts related to the two relevant policies.
The following facts are undisputed. The Element
Development Project (“Element”) involves an eight-story
condominium built by Plaintiff in San Diego, California. See
Dkt. No. 66 at 3. Plaintiff purchased a “wrap” policy on
the Element Project (the “Element Policy”). See id. Under
the Element Policy, there is an “each occurrence” limit
of $5,000,000 and a “Retained Amount” of $500,000 for
“each occurrence.” See Dkt. No. 63–2 at 1. In other words,
Defendant is not obligated to make any payments under
the Element Policy until Plaintiff has reached its Retained
Amount of $500,000. The Element Policy mandated a “Joint
Defense Approach,” which reflects that the named insured
would cooperate with Defendant in connection with the
investigation, defense, and resolution of any occurrence,
offense, claim, or suit under the Policy. See Dkt. No. 43–1
at 65. In April 2009, members of the Element Homeowners’
Association filed suit in California against Plaintiff (the
“Element Litigation”) for several causes of action, including
construction defects. See id. at 4; Dkt. No. 63–5 at 1 (Second
Amended Complaint in Element Litigation). Plaintiff and
Defendant offer different accounts as to what transpired after
the Element Litigation was filed, as detailed below.
The Astoria Development Project (“Astoria”) involves a
15–building condominium project located in Sacramento,
California. See Dkt. No. 66 at 5. Plaintiff purchased a
“wrap” policy on the Astoria Project (the “Astoria Policy”).
See Dkt. No. 66 at 3. Under the Astoria Policy, there is
an “each occurrence” limit of $5,000,000 and a “Retained
Amount” of $150,000 for “each occurrence.” See Dkt. No.
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63–2 at 1. In other words, Defendant is not obligated to make
any payments under the Astoria Policy until Plaintiff has
reached its Retained Amount of $150,000. The Astoria Policy
also mandated a “Joint Defense Approach,” which reflects
that the named insured would cooperate with Defendant in
connection with the investigation, defense, and resolution
of any occurrence, offense, claim, or suit under the Policy.
See Dkt. No. 43–1 at 22. In February 2011, members of the
Astoria Owners’ Association filed suit in California against
Plaintiff (“Astoria Litigation”) for several causes of action,
including construction defects. See Dkt. No. 43–1 at 85.
Plaintiff and Defendant offer different accounts as to what
transpired after the Astoria Litigation was filed, as detailed
below.
*2 Plaintiff and Defendant disagree with respect to the
following: Plaintiff’s exhaustion of the retention amounts
under the Policies; the timing of Defendant’s agreement
to provide a defense; Defendant’s reservation of rights
explanation; Defendant’s payment of defense costs; and
when Defendant provided notification that Plaintiff’s selected
counsel—Newmeyer & Dillion—was not acceptable.
Defendant claims that Plaintiff did not provide the proof
of its payment and satisfaction of the applicable Retained
Amounts for both the Astoria Litigation and Element
Litigation (collectively, the “Underlying Litigation”), as
required under the Policies, until much later than Plaintiff
claims that it did. See Dkt. No. 43 at 5. Defendant further
contends that it immediately told Plaintiff that it would not
agree to Newmeyer & Dillion’s continuing its representation
of Plaintiff in the Underlying Litigation and that this
information is covered in its Claim Account Instructions,
which Defendant provided to its insureds. See Dkt. No. 43–
1 at 119–136. Defendant takes the position that, in the face
of Defendant’s stance on legal counsel, Plaintiff refused to
switch counsel in violation of Plaintiff’s obligations under the
Element and Astoria Policies. See Dkt. No. 43–1 at 140–142.
Plaintiff counters that it properly provided Defendant with
notice of the Underlying Litigation and that, in that timely
notice, Plaintiff informed Defendant that Newmeyer &
Dillion was acting as counsel. See Dkt. No. 63–4 at 75 (¶¶ 9–
11) (Element); Dkt. No. 63–6 at 23 (Astoria). Plaintiff claims
that it provided the proof of its payment and satisfaction
of the applicable Retained Amounts sooner than Defendant
alleges: April 2012 for Astoria, see Dkt. No. 63–6 at 35, and
November 15, 2011 for Element, see Dkt. No. 63–3 at 90.
Plaintiff contends that Defendant did not agree to defend the
Astoria Litigation until November 2012, see Dkt. No 63–1 at
4 (¶ 20), and did not agree to defend the Element Litigation
until April 2012, see id. at 5 (¶ 31). Plaintiff reports that
Defendant made no payments on the Astoria Litigation until
April 2013 and did not provide a reservation of rights until
October 2013. See Dkt. No. 63–1 at 3 (¶ 18). As for the
Element Litigation, Plaintiff states that Defendant made no
payments until April 2013 and did not provide a reservation of
rights until April 2012. See Dkt. No. 63–1 at 6 (¶ 33); Dkt. No.
63–3 at 52–89. Plaintiff contends that Defendant has not made
all payments required under the Policies and has improperly
refused to let Plaintiff select its defense counsel.
Plaintiff brought this lawsuit against Defendant on January
10, 2013 in Texas state court. See Dkt. No. 1. The case
was removed to this Court. Plaintiff asserts several causes
of action, which Defendant denies. Defendant also brings
counterclaims, including the declaratory judgment action on
which it now seeks summary judgment.
Legal Standards
*3 Under Fed.R.Civ.P. 56, summary judgment is proper
“if the movant shows that there is no genuine dispute as to
any material fact and the movant is entitled to judgment as
a matter of law.” FED. R. CIV. P. 56(a). A factual “issue
is material if its resolution could affect the outcome of the
action.” Weeks Marine, Inc. v. Fireman’s Fund Ins. Co., 340
F.3d 233, 235 (5th Cir.2003). “A factual dispute is ‘genuine,’
if the evidence is such that a reasonable [trier of fact] could
return a verdict for the nonmoving party.” Crowe v. Henry,
115 F.3d 294, 296 (5th Cir.1997).
If the moving party seeks summary judgment as to his
opponent’s claims or defenses, “[t]he moving party bears the
initial burden of identifying those portions of the pleadings
and discovery in the record that it believes demonstrate the
absence of a genuine issue of material fact, but is not required
to negate elements of the nonmoving party’s case.” Lynch
Props., Inc. v. Potomac Ins. Co., 140 F.3d 622, 625 (5th
Cir.1998). “Once the moving party meets this burden, the
nonmoving party must set forth”—and submit evidence of
—“specific facts showing a genuine issue for trial and not rest
upon the allegations or denials contained in its pleadings.” Id.;
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994)
(en banc).
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The Court is required to view all facts and draw all reasonable
inferences in the light most favorable to the nonmoving party
and resolve all disputed factual controversies in favor of the
nonmoving party—but only if both parties have introduced
evidence showing that an actual controversy exists. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct.
2505, 91 L.Ed.2d 202 (1986); Boudreaux v. Swift Transp.
Co., Inc., 402 F.3d 536, 540 (5th Cir.2005); Lynch Props.,
140 F.3d at 625. “Unsubstantiated assertions, improbable
inferences, and unsupported speculation are not sufficient
to defeat a motion for summary judgment,” Brown v. City
of Houston, 337 F.3d 539, 541 (5th Cir.2003), and neither
will “only a scintilla of evidence” meet the nonmovant’s
burden, Little, 37 F.3d at 1075. Rather, the non-moving party
must “set forth specific facts showing the existence of a
‘genuine’ issue concerning every essential component of its
case.” Morris v. Covan World Wide Moving, Inc., 144 F.3d
377, 380 (5th Cir.1998). If, “after the nonmovant has been
given an opportunity to raise a genuine factual issue,” “the
record, taken as a whole, could not lead a rational trier of fact
to find for the non-moving party, then there is no genuine
issue for trial.” DIRECTV, Inc. v. Minor, 420 F.3d 546,
549 (5th Cir.2005); Steadman v. Texas Rangers, 179 F.3d
360, 366 (5th Cir.1999). The Court will not assume “in the
absence of any proof … that the nonmoving party could or
would prove the necessary facts” and will grant summary
judgment “in any case where critical evidence is so weak
or tenuous on an essential fact that it could not support a
judgment in favor of the nonmovant.” Little, 37 F.3d at 1075.
“Rule 56 does not impose upon the district court a duty to
sift through the record in search of evidence to support a
party’s opposition to summary judgment,” and “[a] failure on
the part of the nonmoving party to offer proof concerning
an essential element of its case necessarily renders all other
facts immaterial and mandates a finding that no genuine issue
of fact exists.” Adams v. Travelers Indem. Co. of Conn.,
465 F.3d 156, 164 (5th Cir.2006) (internal quotation marks
omitted).
*4 If, on the other hand, “the movant bears the burden of
proof on an issue, either because he is the plaintiff or as
a defendant he is asserting an affirmative defense, he must
establish beyond peradventure all of the essential elements
of the claim or defense to warrant judgment in his favor.”
Fontenot v. Upjohn Co. ., 780 F.2d 1190, 1194 (5th Cir.1986).
The “beyond peradventure” standard imposes a “heavy”
burden. Cont’l Cas. Co. v. St. Paul Fire & Marine Ins. Co.,
No. 3:04–cv–1866–D, 2007 WL 2403656, at *10 (N.D.Tex.
Aug.23, 2007). The moving party must demonstrate that there
are no genuine and material fact disputes and that the party
is entitled to summary judgment as a matter of law. See,
e.g., Martin v. Alamo Cmty. Coll. Dist., 353 F.3d 409, 412
(5th Cir.2003). On such a motion, the Court will, again,
“draw all reasonable inferences in favor of the non-moving
party.” Chaplin v. NationsCredit Corp., 307 F.3d 368, 372
(5th Cir.2002).
Analysis
Lexington moves for summary judgment on Count One of
its counterclaims, which seeks declaratory judgment on the
following three issues: (a) Defendant has the right to control
the defense of Centex in the Astoria and Element Litigation;
(b) Plaintiff is not entitled to the appointment of independent
counsel under California Civil Code § 2860; and (c) Plaintiff
breached its duty to cooperate under the Astoria Policy and
Element Policy by refusing to acknowledge that Defendant
had a right to control the defense and select counsel and
by insisting that Defendant continue to pay Newmeyer &
Dillion’s fees and costs.
As an initial matter, the parties disagree as to whether
California or Texas law applies to Defendant’s declaratory
judgment claims. Defendant argues that California law
applies and that, under California Civil Code section 2860,
Plaintiff was not entitled to independent counsel. See Dkt. No.
43; Dkt No. 67. Plaintiff contends that Texas law applies and
that, under Texas law, Plaintiff was entitled to independent
counsel. See Dkt. No. 61. Both parties argue that, even if the
other jurisdiction’s law applies, its position is correct.
Because the parties disagree on which law applies, and on
whether the outcome under each law differs, the Court must
first undertake a choice-of-law analysis. Once the choiceof-
law analysis is complete, the Court will turn to whether
summary judgment is appropriate on any of Defendant’s
declaratory judgment causes of action.
1. Texas Law Applies to Defendant’s Declaratory
Judgment Claims Regarding Right to Control and
Selection of Independent Counsel.
Before deciding which state’s substantive law should control
the issues raised by the parties here, “the Court must first
determine which choice-of-law rules should be applied.” In
re Soporex, Inc. ., 446 B.R. 750, 761 (Bankr.N.D.Tex.2011).
Here, both parties assert that Texas choice-of-law rules should
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determine the applicable laws in this case. See Dkt. No. 43 at
8–9; Dkt. No. 61 at 20–21.
*5 Texas courts utilize the “most significant relationship”
test to determine which state’s law applies to a particular
substantive issue. See Coghlan v. Wellcraft Marine Corp.,
240 F.3d 449, 452 n. 2 (5th Cir.2001) (citing Duncan v.
Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex.1984)). This
test is based on the Restatement (Second) of Conflict of
Laws and utilizes a multi-factor methodology to determine
which state has the most significant relationship to the
substantive issues involved in a dispute. See Duncan, 665
S.W.2d at 421. Deciding which state’s laws should govern
an issue “is a question of law for the court to decide.”
Hughes Wood Products, Inc. v. Wagner, 18 S.W.3d 202,
204 (Tex.2000) (citing Duncan, 665 S.W.2d at 421); see
also McKinney BB v. U.S. Realty Advisors, LLC, No. 01–
11483, 2003 U.S.App. LEXIS 28011, at *18 (5th Cir. Jan.
24, 2003) (“[T]he question of which state’s law to apply
is a question of law.”); Janvey v. Suarez, No. 3:10–cv–
2581–N, 2013 WL 5663107, at *3 (N.D.Tex. Oct.17, 2013).
But this legal determination involves a factual inquiry. See
Hughes Wood Products, 18 S.W.3d at 204; Janvey, 2013
WL 5663107, at *3. That is, “the party urging application of
another state’s substantive law [must] furnish the Court with
‘sufficient information’ to establish that the law of another
state applies.” Janvey v. Alguire, 846 F.Supp.2d 662, 671
(N.D.Tex.2011) (quoting Holden v. Capri Lighting, Inc., 960
S.W.2d 831, 833 (Tex.App.-Amarillo 1997, no pet.)) (internal
quotations omitted). Absent such sufficient information, “
‘the failure to provide adequate proof of choice of law …
results in a presumption that the law of the foreign jurisdiction
is identical to the law of Texas.’ ” Id. (quoting Pittsburgh
Corning Corp. v. Walters, 1 S.W.3d 759, 769 (Tex.App.-
Corpus Christi 1999, pet. denied)) (internal brackets omitted).
When two states’ laws are substantially the same, this
precludes the need to undertake a choice-of-law analysis. See
Lexxus Int’l, Inc. v. Loghry, 512 F.Supp.2d 647, 668 n. 17
(N.D.Tex.2007); cf. Fraud–Tech, Inc. v. Choicepoint, Inc.,
102 S.W.3d 366, 377–78 (Tex.App.-Fort Worth 2003, pet.
denied) (“Before undertaking a choice of law analysis, we
look to whether a conflict of law exists. If no conflict exists on
the issues, we need not decide which state’s laws govern.”).
Because no choice-of-law analysis would be required if
California and Texas law were consistent on the issues, the
Court must first determine if the laws of each jurisdiction
differ with respect to (1) duty to defend, and by extension
duty to control the defense, and (2) the independent counsel
analysis.
a. Duty to Control the Defense.
Neither party appears to dispute the allegation that Defendant
had a duty to defend the lawsuit, subject to Defendant’s
reservation of rights. See Dkt. No. 117 at 2–3. Under Texas
law, once the insured has a duty to defend, included in
that duty right is the right to control the defense and to
select counsel. See N. County Mut. Ins. Co. v. Davalos, 140
S.W.3d 685, 688 (Tex.2004) (finding that an insurer’s “right
to defend” a lawsuit encompasses “the authority to select
the attorney who will defend the claim and to make other
decisions that would normally be vested in the insured as the
named party in the case.”). Similarly, under California law,
if an insurer has a duty to defend, it may control the defense,
including the selection of counsel. See Safeco Ins. Co. of Am.
v. Sup.Ct., 71 Cal.App.4th 782, 787, 789–90, 84 Cal.Rptr.2d
43 (Cal.Ct.App.1999).
*6 But Plaintiff contends that summary judgment is
not warranted on Defendant’s declaratory judgment count
regarding duty to control because, at the least, there is a
fact issue regarding whether Defendant breached its duty
to defend by its unreasonable delay in accepting its duty
to defend, paying Plaintiff’s defense costs, and/or providing
Defendant’s coverage position with respect to the Underlying
Litigation, see Dkt. No. 66 at 11–12, in which case Defendant
had no right to control the defense or select counsel. The
choice-of-law issue with respect to duty to defend, then, is
whether Texas and California law are consistent with respect
to what constitutes a breach of a duty to defend and whether a
breach of a duty to defend forfeits the insured’s right to control
the defense.
Under California law, when the insured breaches its duty to
defend, it forfeits its right to control the defense of the action
or settlement. See Intergulf Dev. v. Sup.Ct., 183 Cal.App.4th
16, 20–21, 107 Cal.Rptr.3d 162 (Cal.Ct.App.2010). An
insurer will breach its duty to defend where it unreasonably
fails to provide benefits due under the policy, such as
providing counsel. See id.; Dynamic Concepts v. Truck
Ins. Exch., 61 Cal.App.4th 999, 1010, 71 Cal.Rptr.2d 882
(Cal.Ct.App.1998). Similarly, under Texas law, where a
breach of the duty to defend is caused by an unreasonable
delay, the insurer forfeits its right to defend and, by extension,
its right to select the counsel of its choosing. See Kirby Co.
v. Hartford Casualty Ins. Co., No. 3:02–cv–1616, 2004 WL
2165367, at *4 (N.D.Tex. Sept.23, 2004) (citing Rhodes v.
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Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir.1983)). Thus,
the laws of each jurisdiction are consistent on this issue, and
Texas law will apply.
The next issue is whether each jurisdiction’s law is the same
with respect to when an exception to the insurer’s right to
select counsel exists.
b. Selection of Independent Counsel.
Under Texas law, the insurer with a duty to defend has a
right to select the insured’s counsel unless a conflict of interest
exists. See State Farm Mut. Auto. Ins. Co. v. Traver, 980
S.W.2d 625, 627–28 (Tex.1998); Rx.com Inc. v. Hartford
Fire Ins. Co., 426 F.Supp.2d 546, 559 (S.D.Tex.2006). A
reservation of rights letter may create a potential conflict,
but the fact that an insurer issues a reservation of rights
letter or provides a defense subject to a reservation of rights
does not, standing alone, create a conflict that permits the
insured to select its own counsel. See Partain v. Mid–
Continent Specialty Ins. Servs., Inc., 838 F.Supp.2d 547,
567 (S.D.Tex.2012) ( “[R]eservation of rights letters do not
‘necessarily create a conflict between the insured and the
insurer.’ Rather, a reservation of rights letter ‘only recognizes
the possibility that such a conflict may arise in the future.’
” (internal citations omitted)); Davalos, 140 S.W.3d at 689.
To determine whether a conflict of interest exists, the Court
must determine whether “the facts to be adjudicated in the
liability lawsuit are the same facts upon which coverage
depends,” and, if so, the conflict of interest will prevent the
insurer from conducting the defense. Davalos, 140 S.W.3d
at 689. Thus, for a real conflict of interest to exist, it must
be apparent that the facts on which coverage depends will be
ruled on judicially in the underlying lawsuit. See Partain, 838
F.Supp.2d at 567.
*7 Under California law, an insurer may also select the
insured’s counsel unless a conflict of interest exists. See
CAL. CIV.CODE § 2860(a) (“If the provisions of a policy
of insurance impose a duty to defend upon an insurer and
a conflict of interest arises which creates a duty on the part
of the insurer to provide independent counsel to the insured,
the insurer shall provide independent counsel to represent the
insured unless … the insured expressly waives, in writing, the
right to independent counsel.”).
Thus, under both Texas and California law, an insurer having
the right to control the defense has the right to select the
insured’s defense counsel unless a conflict of interest exists.
The only remaining issue is whether the conflict of interest
standard is the same under California and Texas law.
According to California Civil Code § 2860(b), a conflict of
interest may exist where an insurer has reserved its rights
on an issue and the outcome of the coverage issue can be
controlled by the counsel retained by the insurer. See CAL.
CIV.CODE § 2860(b). In California, as in Texas, merely
tendering a reservation of rights does not create a conflict of
interest warranting independent counsel. See Park Townsend,
LLC v. Clarendon Am. Ins. Co., No. 12–CV–04412, 2013
WL 3475176, at *8 (N.D.Cal. July 10, 2013). Likewise, the
conflict of interest must be actual, not merely potential. See
Dynamic Concepts, 61 Cal.App.4th at 1007, 71 Cal.Rptr.2d
882.
California courts, and the legislature, have provided several
scenarios in which an actual conflict of interest may exist. See
CAL. CIV.CODE § 2860; Gafcon, Inc. v. Ponsor & Assocs.,
Inc., 98 Cal.App.4th 1388, 1421–22, 120 Cal.Rptr.2d 392
(Cal.Ct.App.2002); Park Townsend, 2013 WL 3475176, at
*8. Included in those scenarios are two situations that might
apply in the instant case: (1) the insurer reserves its rights
on a given issue and the outcome of that coverage issue can
be controlled by the insurer’s retained counsel, or (2) any
other situation where an attorney who represents the interests
of both the insurer and the insured finds that his or her
representation of the one is rendered less effective by reasons
of his or her representation of the other. See Park Townsend,
2013 WL 3475176, at *8.
While the language in Texas decisions describing an actual
conflict of interest may be different from that found in Texas
cases, the analysis is not. Accord Rx.com Inc., 426 F.Supp.2d
at 559 (“A conflict of interest does not arise unless the
outcome of the coverage issue can be controlled by counsel
retained by the insurer for the defense of the underlying
claim.”). At bottom, California cases hold that, if the issues in
the underlying lawsuit would also resolve the coverage issues,
the counsel selected by the insurer might have reason to take
a position that would undermine the insured’s best position
in the underlying lawsuit. One way to reach that conclusion
is for a court to analyze whether the issue or issues related
to the coverage dispute would be those that the court in the
underlying litigation would adjudicate. See Park Townsend,
2013 WL 3475176, at *10 (analyzing whether the results of
underlying lawsuit will disadvantage insured’s position in the
coverage dispute).
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*8 As such, the conflict of interest standard is essentially the
same under both Texas and California law. Having found that
there is no difference in the two states’ laws as it relates to this
conflict of interest standard, Texas law will apply.
2. Summary Judgment is Not Warranted on Defendant’s
Declaratory Judgment Causes of Action.
Defendant seeks summary judgment on three counts for both
the Astoria and Element causes of action. First, Defendant
seeks a declaration that it has the right to control the
defense of Centex in the Astoria and Element causes of
action. Defendant also seeks a declaration that Plaintiff is
not entitled to the appointment of independent counsel under
California Civil Code § 2860. Finally, encompassing both of
the first two declaratory judgment requests, Defendant seeks
a declaration that Plaintiff breached its duty to cooperate
under the Astoria Policy and Element Policy by refusing to
acknowledge Defendant had a right to control the defense
and select counsel and by insisting Defendant continue to pay
Newmeyer & Dillion’s fees and costs.
a. Defendant’s claim that it has the right to control the
defense of Centex in the Astoria and Element causes of
action.
Because the parties do not dispute the duty to defend,
and by extension the right to control the defense, the only
issue is whether there was a breach by Defendant that
precluded it from exercising its right to control. If so, then
no declaratory judgment claim is warranted. Plaintiff argues
against summary judgment on the grounds that Defendant
unjustifiably and unreasonably delayed in acknowledging its
duty to defend, issuing its reservation of rights, and paying the
applicable defense costs, thereby forfeiting its right to control
the defense of the Underlying Litigation. See Dkt. No. 61 at
27–29.
Plaintiff relies primarily on the holding in Kirby Co.
v. Hartford Cas. Ins. Co., No. 3:02–cv–1616, 2004 WL
4528937 (N.D.Tex. Sept. 23, 2004), but the Court finds that
the circumstances in the instant case are not as clear cut.
The court in Kirby found that the evidence conclusively
established that the insurer’s delay was not warranted and was
unreasonable. See id. at *3. Here, the parties have presented
conflicting evidence regarding the extent of Defendant’s delay
in responding to Plaintiff’s request for coverage; the reasons
for any alleged delay, which bears on whether it was justified
or excusable; and generally whether the length of any alleged
delay was such that it constituted a breach. For instance,
Defendant presents evidence that, pursuant to the terms of
the Astoria and Element Policies, once it received evidence
that Plaintiff had actually exhausted the Retained Amounts
on the Astoria and Element Policies—meaning it received
the invoices and evidence of payments made—it accepted
defense of the actions, subject to a general reservation of
rights. See Dkt. No. 67 at 17; Dkt. No. 43–1 at 141 & 194.
But Plaintiff contends and presents evidence that it exhausted
the Retained Amounts earlier than Defendant states and that
Defendant delayed by an allegedly unreasonable amount of
time in responding to Plaintiff’s request for defense and
payment of its defense costs. See Dkt. No. 61 at 27–29; Dkt.
No. 63–6 at 35; 63–3 at 12, 83, & 90. Defendant claims
that any alleged delay on its party was justified by Plaintiff’s
failure to provide the appropriate documents, see Dkt. No. 67
at 17–18.
*9 Having a established a conflict of evidence exists, the
Court must view all evidence of record in the light most
favorable to Plaintiff. In doing so, the Court concludes that
Defendant has failed to show that there is no genuine dispute
as to any material fact and that summary judgment is not
warranted on Defendant’s first declaratory judgment claim at
this time.
The Court also notes that Plaintiff argues that, because
Defendant stated in a deposition that, if Texas law applied,
Plaintiff would have the right to control the defense,
including its selection of counsel, summary judgment is
inappropriate. See Dkt. No. 61 at 23. The Court is not denying
summary judgment on the basis of this testimony alone. First,
Defendant did not make such an explicit statement but rather
said “it would likely be allowed.” Dkt. No. 61 at 23. Second,
Defendant clearly is not arguing as much and says so in
its briefing. See Dkt. Nos. 43 & 67. This testimony does,
however, lend support to a finding that a fact issue exists as
to what Defendant believes and what the facts support.
Having reviewed the evidence of record, the Court finds
nothing to support a finding that summary judgment is proper
as a matter of law, and therefore Defendant’s motion for
summary judgment is DENIED as to this claim.
b. Defendant’s claim that Plaintiff is not entitled to the
appointment of independent counsel under California
Civil Code § 2860.
As explained above, under Texas law, an insured is entitled
to independently select his counsel in certain circumstances.
But a reservation of rights letter alone does not necessarily
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create such circumstances. See Partain, 838 F.Supp.2d at
567; Davalos, 140 S.W.3d at 689. Rather, it is only when
“the facts to be adjudicated in the liability lawsuit are the
same facts upon which coverage depends” that a conflict of
interest exists that prevents the insurer from conducting the
defense. Davalos, 140 S.W.3d at 689. In other words, it must
be apparent that the facts on which coverage depends will also
be adjudicated in the underlying litigation. See Partain, 838
F.Supp.2d at 567.
In the Astoria Litigation, the plaintiffs alleged four causes
of action. See Dkt. No. 43–1 at 95–104. The plaintiffs
first alleged that the construction violated several sections
of California Civil Code § 896, a de facto building code
defining the standards a structure must meet. See CAL.
CIV.CODE § 896. The plaintiffs’ allegations include the
following violations: structural and other defects permitting
unintended water to enter the structure; construction
that does not meet government codes; electrical and
mechanical systems defects causing unreasonable risk of fire;
cracks that display significant vertical displacement or are
excessive in the exterior of the building; roofing materials
improperly installed; air conditioning not meeting California
Code Regulations; dryer ducts improperly installed; and
construction of structures in a manner so as to impair
the occupants safety. See Dkt. No. 43–1 at 96–97. The
plaintiffs further allege the defendants, including Plaintiff,
made negligent misrepresentations regarding the building’s
components; regarding whether the structures had been
properly inspected and met all applicable building codes;
regarding whether all known defects had been disclosed and
reserve budgets met certain standards; regarding whether
the defendants anticipated a need for special assessments
related to major components; and regarding whether
any obligations could be properly discharged under the
appropriate documents. See id. at 98. The plaintiffs also
brought causes of action for breach of fiduciary duty for many
of the same reasons on which their other causes of action were
based and for violating the Governing Documents of the sale.
See id. at 100–103.
*10 Defendant agreed to defend Plaintiff, subject to a
reservation of rights. Defendant offered both a general and
a specific reservation of rights. See Dkt. No. 63–3 at 13–16.
The reservation of rights stated that “Lexington reserves the
right to decline coverage for the claim to the extent that it
does not constitute property damage as defined in the policy.”
Dkt. No. 63–3 at 14. While there are several more specific
reservations of rights, the only one that Plaintiff indicates
might conflict with the causes of action to be litigated in the
Astoria Litigation is the reservation of rights for any coverage
for certain “business risks.” See Dkt. No. 61 at 25; Dkt. No.
63–3 at 15.
In the underlying Element Litigation, the plaintiffs asserted
two causes of action in the second amended complaint. See
Dkt. No. 63–5 at 1. The first cause of action again relates
to violations of the California Civil Code building standards,
including structural violations resulting in ongoing significant
cracks in concrete foundations and exterior walls; unintended
water and/or leaks and intrusion; violations in fire safety
systems; and defects in the windows, doors, and component
systems. See Dkt. No. 63–5 at 13–17. The plaintiffs also
allege the defendants breached the fiduciary duty owed to the
plaintiffs as a result of the alleged deficiencies and violations.
See id. at 17–18.
Again, Defendant agreed to defend, subject to a reservation
of rights. See Dkt. No. 43–1 at 197–204. In its reservation of
rights, Defendant states that the Policy at issue does not cover
“property damage … arising out of … a defect, deficiency,
inadequacy, or danger condition in ‘your product’ or ‘your
work.’ ” Dkt. No. 61 at 25; 63–3 at 56.
The Court cannot grant summary judgment on Defendant’s
declaratory judgment claim as requested because California
law does not apply to the selection of independent counsel
in this case. That said, after reviewing the current record, the
Court does not find that summary judgment in Defendant’s
favor is proper at this juncture, even under Texas law. A
review of the reservation of rights and the accompanying facts
does not establish as a matter of law that any findings in the
Underlying Litigation would not affect Defendant’s coverage
claims. Defendant argues that, because the construction
causes of action are based upon strict liability—either the
defects exist or they do not—and because other causes of
action will make no findings of intent or on whether the
claims constitute property damage caused by an occurrence,
the results of the Underlying Litigation would have no bearing
on coverage. See Dkt. No. 67 at 12–14.
In response, Plaintiff does not specifically point this Court
to evidence of a conflict that absolutely exists or of
Defendant’s selected counsel’s taking a position that is at odds
with Plaintiff’s favored course of action in the Underlying
Litigation. Rather, Plaintiff presents arguments regarding,
and evidence that, the findings in the Underlying Litigation
could ultimately affect Plaintiff’s coverage rights. See Dkt.
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No. 61 at 25. For instance, it could be that product defects
or workmanship errors by other parties could exist in the
Underlying Litigation, and the Court cannot determine, based
on the record before it, whether it would behoove any party, in
the Underlying Litigation or the coverage litigation, to focus
blame on those entities or defects. Plaintiff appears to indicate
that any such decisions could create a conflict of interest.
See Dkt. No. 61 at 25. Defendant has presented insufficient
evidence that it is not planning to take any positions that might
affect its coverage responsibilities.
*11 Defendant did not present evidence that proves, as a
matter of law, it would not be in its interest to take positions
in the Underlying Litigation that might support its position
regarding coverage. Viewing all facts and draw all reasonable
inferences in the light most favorable to Plaintiff, the Court
cannot, on this record or at this time, conclude that there is
no genuine dispute as to any material fact and grant summary
judgment in Defendant’s favor on this declaratory judgment
claim. As such, Defendant’s motion for summary judgment
on this claim is DENIED.
c. Defendant’s claim that Plaintiff breached its duty to
cooperate under the Astoria Policy and Element Policy
by refusing to acknowledge Defendant had a right to
control the defense and select counsel and by insisting
Defendant continue to pay Newmeyer & Dillion’s fees
and costs.
Defendant’s remaining request for summary judgment on its
declaratory judgment counterclaim also fails. As the Court
has found that summary judgment is proper on neither
Defendant’s right to control defense or Plaintiff’s right (or lack
thereof) to select independent counsel, a finding that Plaintiff
breached its duty to cooperate under the Astoria Policy and
Element Policy by refusing to acknowledge Defendant had a
right to control the defense and select counsel and by insisting
Defendant continue to pay Newmeyer & Dillion’s fees and
costs likewise cannot be made at this time. Neither party
presents evidence to the contrary.
As such, Defendant has not shown that there is no genuine
dispute as to any material fact, and Defendant’s motion for
summary judgment on this declaratory judgment action is
DENIED.
Conclusion
Defendant’s Motion for Partial Summary Judgment [Dkt. No.
43] is DENIED, and Plaintiff’s motion to strike [Dkt. No. 68]
is DENIED as moot.
SO ORDERED.
MEMORANDUM OPINION & ORDER
ON PLAINTIFF’S MOTION TO DISMISS
DEFENDANT’S COUNTERCLAIMS
This is a civil action related to the defendant’s duty to
defend and accompanying obligations. See Dkt. No. 66.
Plaintiff Centex Homes filed a Motion to Dismiss certain
of Defendant Lexington Insurance Company’s affirmative
defenses and counterclaims. See Dkt. No. 35. Defendant
filed its response [Dkt. No. 51] and Plaintiff filed a reply
[Dkt. No. 56], asserting their respective positions. Plaintiff’s
Motion to Dismiss Defendant’s Counterclaims [Dkt. No. 35]
is DENIED.
Background
In its most recent pleading, Plaintiff asserts causes of action
for breach of contract and violations of Chapters 541 and
542 of the Texas Insurance Code. See Dkt. No. 66 at 11–
13. 1 In its Answer to Plaintiff’s Fourth Amended Complaint
and Counterclaim (“Answer”), Defendant asserted numerous
affirmative defenses and certain counterclaims. Plaintiff
argues that the Court should strike or dismiss Defendant’s
counterclaims because they are subsumed by, and redundant
of, Plaintiff’s affirmative claims and Defendant’s affirmative
defenses and because they fail to state a claim on which
relief can be granted. More specifically, Plaintiff argues that
Defendant’s claim for declaratory relief is “nothing more
than a recitation of the same affirmative defenses it has
pleaded in opposition to Plaintiff’s Second Amended Original
Complaint” and therefore does not raise any new issue that is
not already subsumed within Plaintiff’s complaint. See Dkt.
No. 35 at 2. Plaintiff claims that Defendant’s counterclaims
for breach of contract and breach of the implied covenant of
good faith should be dismissed for failure to state a claim
on which relief can be granted. See id. Plaintiff contends
that, under both Texas and California law, an insured’s duty
to cooperate is only a condition precedent to coverage and
cannot give rise to an affirmative cause of action by an insurer.
See id.; Dkt. No. 56 at 14–20.
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1 Plaintiff filed its Motion to Dismiss in relation to its
Second Amended Complaint and Defendant’s Second
Amended Answer. However, at an August 9, 2013
hearing, the Court requested that Plaintiff file an
amended Complaint to properly identify the member
entities of Centex Real Estate Holding, L.P. as well
as the principal place of business of each of Centex’s
general partners. Plaintiff further amended its complaint
on November 6, 2013. The amendments were all
related to the party identification. Defendant filed its
Fourth Amended Answer in response to the amended
complaints. As such, the substance of the allegations in
the Fourth Amended Complaint and Answer remain the
same as those found in the second amended complaint
and answer. Because the Fourth Amended Answer and
Complaint are the live pleadings, however, the Court will
refer to those documents throughout the course of this
Opinion.
*12 Defendant responds that its request for declaratory
relief duplicates neither Plaintiff’s claims nor Defendant’s
affirmative defenses and that Plaintiff does not provide any
examples or evidence suggesting otherwise. See Dkt. No. 51
at 3–6. As to Defendant’s breach of contract and covenant
of good faith claims, Defendant argues that California law
and Texas law differ on the issue, that California law does
recognize such affirmative causes of action, that California
law applies, and that Defendant therefore sufficiently stated a
viable claim on which relief may be granted.
Legal Standards
1. Motions to Strike under Federal Rule of Civil Procedure
12(f).
Under Federal Rule of Civil Procedure 12(f), the Court
“may strike from a pleading an insufficient defense or any
redundant, immaterial, impertinent, or scandalous matter.”
FED. R. CIV. P. 12(f). The power to strike a pleading is
within the Court’s discretion but should be sparingly used. See
United States v. Coney, 689 F.3d 365, 379 (5th Cir.2012). The
motion to strike on grounds of immateriality or impertinence
“ ‘should be granted only when the pleading to be stricken
has no possible relation to the controversy.’ ” Id. (quoting
Augustus v. Bd. of Pub. Instruction, 306 F.2d 862, 868 (5th
Cir.1962)). Further, matter is not “scandalous” for purposes
of Rule 12(f) if it is “directly relevant to the controversy at
issue and [is] minimally supported in the record.” Id.
With regard to striking alleged defenses, “although motions to
strike a defense are generally disfavored, a Rule 12(f) motion
to dismiss a defense is proper when the defense is insufficient
as a matter of law.” Kaiser Aluminum & Chemical Sales,
Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1057 (5th
Cir.1982).
“Both because striking a portion of a pleading is a drastic
remedy, and because it often is sought by the movant simply
as a dilatory tactic, motions under Rule 12(f) are viewed with
disfavor and are infrequently granted.” Jacobs v. Tapscott,
No. 3:04–cv1968–D, 2004 WL 2921806, at *2 (N.D.Tex.
Dec.16, 2004), aff’d on other grounds, 277 F. App’x 483 (5th
Cir.2008). And Rule 12(f) only applies to pleadings as defined
by Fed.R.Civ.P. 7(a). See, e.g., 5C Charles Alan Wright et
al., FED. PRAC. & PROC. 1380 & n. 8.5 (3d ed. 2012)
(“Rule 12(f) motions only may be directed towards pleadings
as defined by Rule 7(a); thus motions, affidavits, briefs, and
other documents outside of the pleadings are not subject to
Rule 12(f).”); Groden v. Allen, No. 3:03–cv–1685–D, 2009
WL 1437834, at *3 (N.D.Tex. May 22, 2009) (Rule 12(f)
“does not permit the Court to strike motions or matters within
them because the rule applies only to pleadings”).
2. Motions to Dismiss under Federal Rule of Civil
Procedure 12(b)(6).
In deciding a Federal Rule of Civil Procedure 12(b)(6)
motion, the Court must “accept all well-pleaded facts as true,
viewing them in the light most favorable to the plaintiff.” In
re Katrina Canal Breaches Litig., 495 F.3d 191, 205–06 (5th
Cir.2007) (internal quotations omitted). To state a claim on
which relief may be granted, plaintiff must plead “enough
facts to state a claim to relief that is plausible on its face,”
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct.
1955, 167 L.Ed.2d 929 (2007), and must plead those facts
with enough specificity “to raise a right to relief above the
speculative level,” id. at 555. “A claim has facial plausibility
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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). “The
plausibility standard is not akin to a ‘probability requirement,’
but it asks for more than a sheer possibility that a defendant
has acted unlawfully.” Id. “A claim for relief is implausible on
its face when ‘the well-pleaded facts do not permit the court to
infer more than the mere possibility of misconduct.’ ” Harold
H. Huggins Realty, Inc. v. FNC, Inc., 634 F.3d 787, 796 (5th
Cir.2011) (quoting Iqbal, 556 U.S. at 679).
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*13 While, under Federal Rule of Civil Procedure 8(a)(2),
a complaint need not contain detailed factual allegations, the
plaintiff must allege more than labels and conclusions, and,
while a court must accept all of the plaintiff’s allegations as
true, it is “ ‘not bound to accept as true a legal conclusion
couched as a factual allegation.’ ” Iqbal, 556 U.S. at
678 (quoting Twombly, 550 U.S. at 555). A threadbare or
formulaic recitation of the elements of a cause of action,
supported by mere conclusory statements, will not suffice.
See id.
A court cannot look beyond the pleadings in deciding a Rule
12(b) (6) motion. See Spivey v. Robertson, 197 F.3d 772,
774 (5th Cir.1999). Pleadings in the Rule 12(b)(6) context
include attachments to the complaint. See In re Katrina Canal
Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007). Documents
“attache[d] to a motion to dismiss are considered to be part of
the pleadings, if they are referred to in the plaintiff’s complaint
and are central to her claim.” Collins v. Morgan Stanley
Dean Witter, 224 F.3d 496, 498–99 (5th Cir.2000) (internal
quotation marks omitted). “Although the Fifth Circuit has not
articulated a test for determining when a document is central
to a plaintiff’s claims, the case law suggests that documents
are central when they are necessary to establish an element
of one of the plaintiff’s claims. Thus, when a plaintiff’s
claim is based on the terms of a contract, the documents
constituting the contract are central to the plaintiff’s claim.”
Kaye v. Lone Star Fund v. (U.S.), L.P., 453 B.R. 645, 662
(N.D.Tex.2011). “However, if a document referenced in the
plaintiff’s complaint is merely evidence of an element of the
plaintiff’s claim, then the court may not incorporate it into the
complaint.” Id.
In addition, “it is clearly proper in deciding a 12(b)(6) motion
to take judicial notice of matters of public record.” Norris v.
Hearst Trust, 500 F.3d 454, 461 n. 9 (5th Cir.2007); accord
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2008) (directing courts
to “consider the complaint in its entirety, as well as other
sources courts ordinarily examine when ruling on Rule 12(b)
(6) motions to dismiss, in particular, documents incorporated
into the complaint by reference, and matters of which a court
may take judicial notice”).
Analysis
Plaintiff argues that the Court should strike Defendant’s
declaratory judgment claims because they are subsumed by
the resolution of Plaintiff’s affirmative claims and because
they are redundant of Defendant’s affirmative defenses.
Plaintiff also contends that Defendant’s remaining causes
of action must be dismissed because such claims do not
constitute affirmative causes of action for a defendant under
Texas or California law.
1. Defendant’s declaratory judgment actions are not
redundant.
Plaintiff moves to strike Defendant’s claim for declaratory
relief because the claims are “nothing more than a recitation”
of the same affirmative defenses that Defendant pleaded and
the affirmative claims that Plaintiff asserted. See Dkt. No. 35
at 2. More specifically, Plaintiff claims that the declaratory
relief sought overlaps with Defendant’s Second, Fifth, Ninth,
Tenth, and Seventeenth Affirmative Defenses. See id. at 3–
4. Plaintiff does not specifically identify the overlap between
its claims and Defendant’s claims but states only that the
counterclaims are “subsumed” by matters raised in Plaintiff’s
complaint. Id. at 4.
*14 In response Defendant argues that Plaintiff does
not identify any of its allegations that mirror Defendant’s
request for declaratory relief and that all of the cases on
which Plaintiff relies involve a situation wherein a plaintiff’s
affirmative claims and a defendant’s counter claims mirror
one another. See Dkt. No. 51 at 3. Even if that were not the
case, Defendant contends that its affirmative defenses and
requests for declaratory relief are distinct. See id .
Federal courts have broad discretion to grant or refuse
declaratory judgment. See Torch, Inc. v. LeBlanc, 947 F.2d
193, 194 (5th Cir.1991). Federal Rule of Civil Procedure 12
does permit a court to strike or dismiss a counterclaim on the
basis that it is redundant. To do so, however, the Court should
consider “whether the declaratory judgment ‘serves a useful
purpose’ by asking ‘whether resolution of plaintiff’s claim,
along with the affirmative defenses asserted by defendants,
would resolve all questions raised by the counterclaim.’ ” In
re ATP Oil & Gas Corp., No. 12–36187, 2013 WL 5308862,
at *1 (Bankr.S.D.Tex. Sept.18, 2013); see also Redwood
Resort Props., LLC v. Homes Co. Ltd., No. 3:06–cv–1022–
D, 2007 WL 1266060, at *4–*5 (N.D.Tex. Apr.30, 2007).
This analysis requires the Court to determine whether what
a counterclaim requests is the opposite of the affirmative
causes of action pleaded. See ATP Oil & Gas Corp., 2013
WL 5308862 at *1; Redwood Resort Props., LLC, 2007 WL
1266060 at *4–*5. In undertaking this analysis, the Court
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should consider “potential qualitative differences between
merely prevailing in Plaintiff’s lawsuit, and receiving an
affirmative declaration of rights to a declaratory judgment.”
Blackmer v. Shadow Creek Ranch Development Co. Ltd.
P’ship, No. H–07–681, 2007 WL 7239968, at *1 (S.D.Tex.
June 26, 2007). This is so even when “[t]here is a high
degree of congruence” between Defendant’s counterclaims
and affirmative defenses. Id.
Plaintiff did not specify which of its affirmative causes of
action subsumed Defendant’s declaratory judgment actions.
In its Breach of Contract cause of action, Plaintiff alleges
that—and thereby necessitates a judicial finding whether
—Defendant breached its obligations by (1) its failure to
pay and/or (2) its unreasonable delay in (i) accepting its
duty to defend and/or pay Plaintiff’s defense costs and (ii)
providing Defendant’s coverage position with respect to the
underlying litigation. See Dkt. No. 66 at 11–12. This cause
of action would also include determining whether Defendant
had a duty to defend, but neither party seems to dispute
that allegation. See Dkt. No. 117 at 2–3. Plaintiff also
alleges the Defendant’s failure to make payments, or its delay
in making payments, violated the Texas Insurance Code.
Plaintiff alleges additional violations of the Texas Insurance
Code, including Defendant’s failure to attempt in good faith to
effectuate a prompt, fair, and equitable settlement of a claim
with respect to which Defendant’s liability had become clear;
to provide a reasonable explanation of Defendant’s failure
to pay all claims; to provide a reservation of rights letter
within a reasonable time frame; and to conduct a reasonable
investigation before failing to pay defense costs. See Dkt. No.
66 at 12–13.
*15 In its declaratory judgment cause of action, Defendant
seeks a declaration that (1) Defendant has a right to control
the defense of the relevant claims; (2) Plaintiff is not entitled
to appoint independent counsel under California Civil Code;
and (3) Plaintiff’s refusal to acknowledge that Defendant has
the right to control the defense and select counsel and its
insistence that Defendant continue to pay the fees and costs
of the law firm selected by Plaintiff was a breach of Plaintiff’s
duty to cooperate under the relevant policies. See Dkt. No. 73
at 19–20.
These claims are not redundant. If Defendant had requested a
declaratory judgment that it had timely and properly accepted
its duty to defend and to pay Plaintiff’s defense costs and that
it had provided Defendant’s coverage position with respect to
the underlying litigation, then the claims would be redundant.
So too would there be redundancy if Defendant sought a
declaration that it did not fail (1) to make payments in a
timely fashion; (2) to attempt in good faith to effectuate
a prompt, fair, and equitable settlement of a claim; (3) to
provide a reasonable explanation of Defendant’s failure to pay
all claims; (4) to provide a reservation of rights letter within
a reasonable time frame; and (5) to conduct a reasonable
investigation before failing to pay defense costs.
Instead, Defendant seeks a different declaration—essentially,
that it had the right to control the defense and appoint
the counsel. Under Plaintiff’s Complaint, the Court could—
hypothetically—find that Defendant breached its duties and
violated the Texas Insurance Code without an affirmative
determination regarding whether Defendant had a right to
control the defense and appoint counsel.
Plaintiff provides the Court with a comparison of the
affirmative defenses that it contends are redundant to
Defendant’s declaratory judgment actions. See Dkt. No. 56
at 11. The Court reviewed the requests and the affirmative
defenses, and, while some level of similarity does exist,
they are not redundant. A declaration that Defendant has a
right to control the defense is not the same as an assertion
that Defendant has no liability because Plaintiff’s acts were
unauthorized. The Court could—again, hypothetically—find
that Plaintiff’s acts were unauthorized but make no finding as
to why they were unauthorized. And a reservation of rights
to contend that a law other than Texas law applies is not a
declaration that Plaintiff cannot appoint independent counsel
under California law. These examples demonstrate “the
potential qualitative difference between merely prevailing in
Plaintiff’s lawsuit, and receiving an affirmative declaration of
rights pursuant to a declaratory judgment .” Blackmer, 2007
WL 7239968 at *1.
The Court also notes that in many decisions on which
Plaintiff relies, the courts dismissed the plaintiff’s declaratory
judgment actions because they were redundant of other
causes of action pleaded by plaintiff.See Dkt. No. 56 at 13
(citing Cypress/Spanish Ft. I, L.P. v. Prof’l Serv. Indus., Inc.,
814 F.Supp.2d 698, 710 (N.D.Tex.2011); Kougl v. Xspedius
Mgmt. Co. of Dallas/Fort Worth, L.L.C., No. 3:04–cv–2518–
D, 2005 U.S. Dist. LEXIS 10557, at *14–*15 (N.D. Tex. June
1, 2005)). That is not the situation here.
*16 In light of the fact that Rule 12(f) motions are
often viewed with disfavor and are infrequently granted, the
Court concludes that Plaintiff did not meet its burden under
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Rule 12(f) for the Court to strike Defendant’s declaratory
judgment claims. The Court finds that declaratory judgment
counterclaim is not a mirror image of Plaintiff’s causes of
action or redundant of its own affirmative defenses.
As such, the Court DENIES Plaintiff’s motion to strike
Defendant’s declaratory judgment causes of action.
2. Dismissal of Defendant’s counterclaims under Rule
12(b)(6) is not warranted.
To determine whether Defendant sufficiently pleaded a cause
of action under Rule 12(b)(6), the Court must determine
whether the alleged causes of action—breach of contract and
good faith—can stand as affirmative causes of action. This
turns on a choice-of-law analysis.
Before deciding which state’s substantive law should control
the issues raised by the parties here, “the Court must first
determine which choice-of-law rules should be applied.” In
re Soporex, Inc. ., 446 B.R. 750, 761 (Bankr.N.D.Tex.2011).
Here, both parties assert that Texas choice-of-law rules should
determine the applicable laws in this case. See Dkt. No. 51 at
6; Dkt. No. 56 at 9.
As noted by both parties, Texas courts utilize the “most
significant relationship” test to determine which state’s law
applies to a particular substantive issue. See Coghlan v.
Wellcraft Marine Corp., 240 F.3d 449, 452 n. 2 (5th Cir.2001)
(citing Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421
(Tex.1984)). This test is based on the Restatement (Second)
of Conflict of Laws and utilizes a multi-factor methodology
to determine which state has the most significant relationship
to the substantive issues involved in a dispute. See Duncan,
665 S.W.2d at 421. Deciding which state’s laws should govern
an issue “is a question of law for the court to decide.”
Hughes Wood Products, Inc. v. Wagner, 18 S.W.3d 202, 204
(Tex.2000) (citing Duncan, 665 S.W.2d at 421). See also
McKinney BB v. U.S. Realty Advisors, LLC, No. 01–11483,
2003 U.S.App. LEXIS 28011, at *18 (5th Cir. Jan. 24, 2003)
(“[T] question of which state’s law to apply is a question
of law.”); Janvey v. Suarez, No. 3:10–cv–2581–N, 2013
WL 5663107, at *3 (N.D.Tex. Oct.17, 2013). But, this legal
determination involves a factual inquiry. See Hughes Wood
Products, 18 S.W.3d at 204; Suarez, 2013 WL 5663107, at
*3. That is, “the party urging application of another state’s
substantive law [must] furnish the Court with ‘sufficient
information’ to establish that the law of another state applies.”
Janvey v. Alguire, 846 F.Supp.2d 662, 671 (N.D.Tex.2011)
(quoting Holden v. Capri Lighting, Inc., 960 S.W.2d 831,
833 (Tex.App.-Amarillo 1997, no pet.)) (internal quotations
omitted). Absent such sufficient information, “the failure
to provide adequate proof of choice of law … results in
a presumption that the law of the foreign jurisdiction is
identical to the law of Texas.” Alguire, 846 F.Supp.2d at 671
(quoting Pittsburgh Corning Corp. v. Walters, 1 S.W.3d 759,
769 (Tex.App.-Corpus Christi 1999, pet. denied)) (internal
brackets omitted). When two states’ laws are substantially
the same, this precludes the need to undertake a choice-oflaw
analysis. See Lexxus Int’l, Inc. v. Loghry, 512 F.Supp.2d
647, 668 n. 17 (N.D.Tex.2007); cf. Fraud–Tech, Inc. v.
Choicepoint, Inc., 102 S.W.3d 366, 377–78 (Tex.App.-Fort
Worth 2003, pet. denied) (“Before undertaking a choice of
law analysis, we look to whether a conflict of law exists. If no
conflict exists on the issues, we need not decide which state’s
law applies.”).
*17 Because no choice-of-law analysis would be required
if California and Texas law were consistent on this issue,
the Court must first determine if these jurisdictions’ laws
differ with respect to whether Defendant’s alleged breach
constitutes an affirmative cause of action. Defendant alleges
Plaintiff was “mandated to cooperate” with Defendant under
the terms of some of the policies and that Plaintiff breached
this duty. Dkt. No. 73 at 21. Defendant’s breach of implied
covenant of good faith and fair dealing claim is also based on
Plaintiff’s alleged failure to cooperate. See id.
Plaintiff states that the cases on which Defendant relies
do not support Defendant’s contention that these causes of
action are plausible even under California law. Rather than
explicitly citing to or relying on cases denying that such
a cause of action exists, however, Plaintiff distinguishes
the cases on which Defendant relies and cites to several,
mostly dated California cases that, on review, do not fully
support its position. See Dkt. No. 56 at 15–18. While an
insured’s breach of a cooperation clause can act as a defense
to its breach of contract claim, see Cybernet Ventures,
Inc. v. Hartford Ins. Co. of the Midwest, 168 F. App’x
850, 852 (9th Cir. Feb.23, 2006), California courts also
recognize an affirmative cause of action, sounding in breach
of contract, for the causes of action asserted by Defendant,
see Sierra Pac. Indus. v. Am. States Ins. Co., 883 F.Supp.2d
967, 976–77 (E.D.Cal.2012); Travelers Prop. v. Centex
Homes, No. C 10–02757 CRB, 2011 WL 1225982, at *6
(N.D.Cal. Apr.11, 2011) (“The right to control the defense
imposes upon an insured the duty to cooperate with the
insurer with regards to its defense. Failure to comply with a
Centex Homes v. Lexington Ins. Co., Slip Copy (2014)
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policy’s cooperation clause constitutes breach of the insurance
contract.” (internal citations omitted)); Cal. Fair Plan Assoc.
v. Politi, 220 Cal.App.3d 1612, 1618–19, 270 Cal.Rptr. 243
(Cal.Ct.App.1990) (finding that an insurer could bring an
affirmative breach of covenant of good faith and fair dealing
claim but could only recover contract damages). In fact,
under California law, an “insurer’s duty is unconditional
and independent of the performance of plaintiff’s contractual
obligations.” Gruenberg v. Aetna Ins. Co. ., 9 Cal.3d 566, 108
Cal.Rptr. 480, 510 P.2d 1032, 10401 (Cal.1973). This stands
in contrast to the position put forth by Plaintiff that “ ‘the only
applicable case law treats cooperation clauses as conditions
precedent, relieving an insurer of liability rather than creating
an affirmative cause of action against its insured.’ ” Dkt. No.
35 at 6–7 (quoting The Phila. Indem. Ins. Co. v. Stebbins Five
Companies, Ltd., No. 3:02–cv–1279–M, 2002 WL 31875596
(N.D.Tex. Dec.20, 2002)).
Plaintiff correctly points out that Texas does not recognize
an affirmative cause of action for a breach of cooperation
clause or breach of good faith. See Progressive County Mut.
Ins. Co. v. Trevino, 202 S.W.3d 811, 815–16 (Tex.App.-San
Antonio 2006, no pet.); Evanston Ins. Co. v. Tonmar, L.P.,
669 F.Supp.2d 725, 732 (N.D.Tex.2009); Phila. Indem. Ins.
Co., 2002 WL 31875596 at *6. To support its contention
that Texas recognizes such a cause of action, Defendant
relies on cases that are not on point. See Dkt. No. 51 at
9 (citing USAA County Mut. Ins. Co. v. Cook, 241 S.W.3d
93, 101 (Tex.App.-Houston [1st Dist.] 2007, no pet.); CGL
Underwriters v. Edison Chouest Offshore, inc., 8 F.3d 21,
at *7–*8 (5th Cir. Oct.22, 1993)). The decisions on which
Defendant relies do discuss a “breach of the co-operation
clause” found in insurance policies but do so in the context of
a breach of cooperation clause defense. Such a defense does
exist: A defendant may assert that a breach of such a duty
relieved the insurer of liability under the policy, see Filley v.
Ohio Cas. Ins. Co., 805 S.W.2d 844, 847 (Tex.App.-Corpus
Christi 1991, writ denied), but that is not the same as an
affirmative cause of action.
*18 Thus, Texas and California law do differ on this issue.
The Court must therefore undertake a choice-of-law analysis
to determine which law applies.
“Under Texas choice-of-law principles, contract disputes are
governed by ‘the law of the state with the most significant
relationship to the particular substantive issue.’ ” W.R. Grace
& Co. v. Cont’l Cas. Co., 896 F.2d 865, 873 (5th Cir.1990)
(citing Duncan, 665 S.W.2d at 421); Schneider Nat. Transp.
v. Ford Motor Co., 280 F.3d 532, 536 (5th Cir.2002).
This is the test articulated by the Restatement (Second) of
Conflict of Laws sections 188 and 193 and their comments.
Defendant maintains that the location of the insured risk
receives controlling weight in determining the proper law to
be applied. See Dkt. No. 51 at 6. According to Defendant,
because the insurance contracts cover insured projects located
in California—the Astoria Project and the Element Project—
the parties’ presumed intention would be that California law
applies because that is almost certainly where any liability for
property damages or bodily injury would arise. See id. at 6–
7. Plaintiff did not reply to Defendant’s argument, relying on
its contention that no conflict of law exists.
Restatement (Second) of Conflict of Laws section 188
provides that “[t]he rights and duties of the parties with
respect to an issue in contract are determined by the local law
of the state which, with respect to that issue, has the most
significant relationship to the transaction and the parties….”
RESTATEMENT (SECOND) OF CONFLICT OF LAWS
§ 188(1) (1971). Section 188 attempts to “unearth[ ] and
uphold[ ] contracting parties’ intent as to the governing law.”
Mayo v. Hartford Life Ins. Co., 354 F.3d 400, 404 (5th
Cir.2004). While several types of contacts are provided in
Section 188, Section 193 further provides that the validity
of an insurance contract, and the rights created thereby,
should be determined by the law of the state where the
insured risk is located. See RESTATEMENT (SECOND)
OF CONFLICT OF LAWS § 193; see also Fulcrum Ins.
Co. v. Barber, 2006 WL 4511947, at *3 (W.D.Tex. Oct.24,
2006) (“It does not matter where the particular act which
invokes the policy’s coverage happens. ‘Instead, the court
must look to the principle location of the insured risk during
the term of the policy to determine the location of the subject
matter of the contract.’ ” (internal citations omitted)). Section
193 also states that its choice-of-law provision based on the
location of the insured risk applies “unless with respect to
the particular issue, some other state has a more significant
relationship … to the transaction and the parties, in which
event the local law of the other state will be applied.” Id.;
see also Zurich Am. Ins. Co. v. Vitus Marine, LLC, No. H–
11–3022, 2011 WL 4972025, at *4 (S.D.Tex. Oct.19, 2011)
(finding a state to have more significant relationship than
the insured’s location where the dispute involved contract
negotiation and the negotiation occurred in a state other than
the one in which the insured was located).
*19 The Court is of the opinion that California law applies to
Defendant’s counterclaims. Defendant’s counterclaims relate
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only to the Astoria Policy and Element Policy. These policies
cover condominiums located in California. See Dkt. No. 73 at
22–23. Moreover, Plaintiff alleges that Defendant breached
its duty to defend related to cases filed and litigated in
California, the causes of action asserted against Plaintiff in
those cases involve primarily California law, and Plaintiff’s
counsel representing it in connection with the California
condominiums is located in California. See Dkt. No. 66 at 4–
5. Where the events giving rise to the litigation, the defense
costs, and the attorneys are all located in one state, that
state’s law applies. See Schneider Nat. Transp., 280 F.3d
at 536 (where the litigation giving rise to a case occurred
in Texas, the defense costs were incurred in Texas, and
the defending attorneys were located in Texas, Texas has
the most significant relationship to the substantive issues to
be resolved and Texas law was appropriate). Accordingly,
California law should apply.
As explained above, this Court is not persuaded by Plaintiff’s
argument that, under California law, Defendant cannot
proceed on its breach of duty to cooperate and breach of
duty of good faith and fair dealing claims as a matter of law.
Moreover, accepting all well-pleaded facts as true, viewing
them in the light most favorable to Defendant, as the Court
must, Defendant has met its pleading burden. See In re
Katrina Canal Breaches Litig., 495 F.3d at 205–06. In its
counterclaims, Defendant provides a factual foundation and
allegations that put Plaintiff on notice of its claims. See Dkt.
No. 73 at 21–22. Plaintiff does not seem to argue otherwise. In
any event, such allegations constitute more than a threadbare
or formulaic recitation of the elements of a cause of action.
See Iqbal, 556 U.S. at 678.
As such, Plaintiff’s motion to dismiss Defendant’s second and
third causes of action is DENIED.
Conclusion
Plaintiff’s Motion to Dismiss Defendant’s Counterclaims
[Dkt. No. 35] is DENIED.
SO ORDERED.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.