stroock & stroock & lavan llp2 i. introduction 3 defendants, twin city fire insurance...

1 STROOCK & STROOCK & LAVAN LLPMichael F. Penis (State Bar No. 095992)

2 Email: [email protected] R. Johnson (State Bar No. 198117)

3 Email: rjohnsonstroock.com2029 Century Park East

4 Los Angeles, CA 90067-3 086Telephone: 310-556-5800

5 Facsimile: 310-556-5959Email: [email protected]

6for DefendantsAttom

CITY FIRE INSURANCE COMPANY andTHE HARTFORD FINANCIAL SERVICES GROUP, INC.

8

UNITED STATES DISTRICT COURT

10 CENTRAL DISTRICT OF CALIFORNIA

11

12 MARIO R. FERLA, an individual; ) Case No. CV 09-4490 VBF (FFMX)STEVE SALEEN, an individual;

13 THOMAS DEL FRANCO, an The Honorable Valerie Bakerindividual; MARTIN H. KARO, an

14 individual; and JACK PITLUK, an Fairbankindividual

15 Plaintiffs, TWIN CITY INSURANCECOMPANY AND THE HARTFORD

16 vs. FINANCIAL SERVICES GROUP,

17 TWIN CITY FIRE INSURANCEINC.’S MOTION TO DISMISS THE

18 COMPANY, an Indiana Corooration; COMPLAINTTHE HARTFORD FINANCIAL Date: Sejtember 14, 2009

19 SERVICES GROUP, INC., a Delaware Time: 1: 0 p.m.corporation, Ctrm: 920 Defendants.21

(Declaration of Michael F. Perlisand (Proposed] Order filed

22 concurrently herewith]

23 Complaint Filed: June 22, 2009

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LA 51169255v1

Case 2:09-cv-04490-VBF-FFM Document 15 Filed 07/29/2009 of 30

1 TABLE OF CONTENTS

2 I. iNTRODUCTION 2

3 II. BACKGROUND 4

4 A. THE RELEVANT iNSURANCE POLICY 5

5 B. THE UNDERLYING THOMASON ACTION 5

6 III. ARGUMENT 6

7 A. STANDARDS APPLICABLE TO THIS MOTION TO DISMISS 6

8 B. THE COMPLAINT VIOLATES FRCP 8 7

9 C. PLAINTIFFS CANNOT STATE A CLAIM FOR BREACH OF ANYCONTRACTUAL DUTY TO DEFEND OR TO iNDEMNIFY THE

10 THOMASON ACTION 11

z 11 1. The Thomason Action Is Uninsurable Pursuant to Section 533 11

12 a. Section 533 Precludes Indemnity Coverage for the ThomasonAction 11

-° 13b. While the Breach-of-Contract Claim Is Moot Because Twin

14 City Has Agreed To Provide A Defense, Twin City Has NoDuty To Defend the Thomason Action Because There Is No

15 Potential for Indemnity Coverage 14

16 2. The “Duty to Indemnify” Claim Is Unripe In Any Event 150

17 D. PLAINTIFFS CANNOT STATE A CLAIM FOR “BAD FAITH.” 16

18 E. PLAINTIFFS CANNOT STATE AN “UNFAIR BUSINESS PRACTICES”CLAIM 17

19F. PLAINTIFFS’ ALTER EGO ALLEGATIONS ARE LEGALLY

20 INSUFFICIENT 20

21 G. PLAINTIFFS CANNOT STATE A CLAIM FOR TORTIOUSINTERFERENCE 22

22H. PLAINTIFFS’ DECLARATORY RELIEF CLAIM SHOULD BE

23 DISMISSED 23

24 IV. CONCLUSION 24

25

26

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LA 51 169255v1


1 TABLE OF AUTHORITIES

2 CASES

3 Aetna Life Insurance Co. of Hartford, Conn. v. Haworth,300 U.S. 227, 57 S. Ct. 461 (1937) 23

4Agnew v. Moody,

5 330F.2d868(9thCir. 1964) 10

6 Allstate Insurance Co. v. Hansten,765 F. Supp. 614 (N.D. Cal. 1991) 12

7Applied Equip. Corp. v. Litton Saudi Arabia Ltd.,

8 7 Cal. 4th 503, 28 Cal. Rptr. 2d 475 (1994) 22

9 Bank of the West v. Superior Court,2 Cal. 4th 1254, 10 Cal. Rptr. 2d 538, 833 P.2d 545 (1992) 5

10Bradley v. Chiron Corp.,

z 11 136F.3d 1317 (Fed. Cir. 1998) 23

12 Buss v. Supenor Court,16 Cal. 4th35 (1997) 15

- 13Calderon v. Ashmus,

14 523U.S.740, 118 5. Ct. 1694(1998) 23

Hc) . .

15 Carngan v. California State Legislature,263 F.2d 560 ( 9th Cir. 1959) 10

16Cholla Ready Mix, Inc. v. Civish,

17 382 F.3d 969 (9th Cir. 2004) 7

18 Communist Party of the USA v. 522 Valencia, Inc.,35 Cal. App. 4th 980 (1995) 20

19Downey Venture v. LMI Insurance Co.,

20 66 Cal. App. 4th 478 (1998) 5, 12, 15, 18

21 Dykstra v. Foremost Insurance Co.,14 Cal. App. 4th 361 (1993) 12

22Ellingson v. Burlington Northern, Inc.,

23 653F.2d1327(9thCir. 1981) 23

24 Empl. Insurance of Wausau v. Musick, Peeler, & Garrett,871 F. Supp. 381 (S.D. Cal. 1994) 12

25Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc.,

26 896F.2d1542(9thCir. 1989) 7

27 Hatch v. Reliance Insurance Co.,758 F.2d409(9thCir. 1985) 10

28

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1 Hurley Construction Co. v. State Farm Fire & Casualty Co.,10 Cal. App. 4th 533 (1992) 14

2J.B. Aguerre, thc. v. American Guarantee & Liability Insurance Co.,

3 59 Cal. App. 4th 6 (1997) 6

4 J.C. Penney Casualty Insurance Co. v. M.K.,52 Cal. 3d 1009 (1991) 5,12

5Jaffe v. Cranford Insurance Co.,

6 168 Cal. App. 3d930(1985) 5

7 Kasparian v. County of Los Angeles,38 Cal. App. 4th 242, 45 Cal. Rptr. 2d 90 (1995) 22

8Love v. Fire Insurance Exch.,

9 221 Cal. App. 3d 1136, 271 Cal. Rptr. 246 (1990) 16

10 Madrid v. Perot Systems Corp.,130 Cal. App. 4th440 (1990) 20

z 11Maloney v. Scottsdale Ins. Co.,

12 256 Fed. Appx. 29 (9th Cir. 2007) 22

- 13 McHenry v. Renne,U 84F.3d 1172 (9thCir. 1996) 10

14McLoughlin v. Blooms Sons Company, Inc.,

15 206 Cal. App. 2d 848 (1962) 21

16 Papasan v. Allain,o 478 U.S. 265, 106 S. Ct. 2932,92 L. Ed. 2d209 (1986) 7

17H Schmidt v. Herrman,

18 614F.2d1221 (9thCir. 1980) 10

19 Sonora Diamond Corp. v. Superior Court,83 Cal. App. 4th 523 (2000) 20

20State Farm General Insurance Co. v. Mintarsih,

21 No. B202888, 2009 WL 1801243 (Cal. Ct. App. June 25, 2009) 13, 15

22 Thomason Automobile Group, LLC v. Ferla, et al.,Case No. 08-cv-04143-JLL-CCC (D. N.J. Aug. 14, 2008) passim

23In re Tobacco II Cases,

24 46 Cal. 4th 298, 93 Cal. Rptr. 3d 559 (May 18, 2009) 17

25 Turner v. Cook,362 F.3d 1219 (9th Cir. 2004) 12

26Uhrich v. State Farm Fire & Casualty Co.,

27 109 Cal. App. 4th598 (2003) 15

28 Vess v. Ciba-Geigy Corp. USA,317 F.3d 1097 (9th Cir. 2003) 19

— 111 —

LA 51169255v1


1 Wady v. Provident Life & Ace. Insurance Co. of America,216 F. Supp. 2d 1060 (C.D. Cal. 2002) 21

2Wailer v. Truck Insurance Exchange. Inc.,

3 11 Cal.4thl,44Ca1.Rptr.2d370(1995) 16

4 Washington v. Baenziger,656 F. Supp. 1176 (N.D. Cal. 1987) 10

5Wyatt, Virgin Islands, Inc. v. Government of Virgin Islands,

6 385 F.3d 801 (3rd Cir. 2004) 23

7 STATUTES

8 18U.S.C.1341 12

9 18U.S.C.1343 12

10 18U.S.C.1964 6

11 18U.S.C.1962(d) 6

12 18U.S.C.1962(c) 6

- 13 Cal. Bus. & Prof. Code § 17200 passimU

14 Cal. Bus. & Prof. Code § 17204 3, 17

15 Cal. Civ. Code § 1485 14

16 Cal. Ins. Code § 533 passimo

17 Fed R. Civ. Proc. 8(a)(2) 7

18 FedR.Civ.Proc.8(d)(1) 7

19 Fed R. Civ. Proc. 9(b) 19

20OTHER AUTHORITY

21

22 Croskey, et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2008) 16, 17

23 Wright & Miller, Federal Practice & Procedure, 3rd ed., Vol. 5, Ch. 4, § 1271 10

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1 TO THE COURT, ALL PARTIES AND THEIR ATTORNEYS OF RECORD:

2 PLEASE TAKE NOTICE that on September 14, 2009 at 1:30 p.m., or as

3 soon thereafter as this matter may be heard before the Honorable Valerie Baker

4 Fairbank, in Courtroom 9 of the above-captioned Court, located at 312 North Spring

5 Street, Los Angeles, California 90012, defendants Twin City Fire Insurance

6 Company and The Hartford Financial Services Group, Inc. will and hereby do move

7 this Court, pursuant to Rules 8(a) and 12(b)(6) of the Federal Rules of Civil

8 Procedure, to dismiss all claims for relief alleged in the Complaint filed plaintiffs

9 Mario R. Ferla, Steve Saleen, Thomas Del Franco, Martin H. Karo, and Jack Pitluk,

10 for: (1) failure to make a short and plain statement of the claim; and (2) failure to

z 11 state a claim upon which relief can be granted.

12 This Motion is made following the conference of counsel pursuant to Local

- 13 Rule 7-3, which took place on July 17, 2009. The Motion is based upon this NoticeU

14 of Motion and Motion, the accompanying Memorandum of Points and Authorities,c)

15 the Declaration of Michael F. Perlis, the pleadings and papers on file herein, all other

16 matters of which the Court may take judicial notice and upon such other or further

17 material as may be presented at or before the hearing on the Motion.18

Dated: July 29, 2009 Respectfully submitted,

STROOCK & STROOCK & LAVAN LLP20 MICHAEL F. PERLIS

RICHARD R. JOHNSON21

22 By: /s/Michael F. PenisMichael F. Penis

23Attorneys for Defendants

24 TWIN CITY FIRE INSURANCECOMPANY and THE HARTFORD

25 FINANCIAL SERVICES GROUP, INC.

26

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1 MEMORANDUM OF POINTS AND AUTHORITIES

2 I. INTRODUCTION

3 Defendants, Twin City Fire Insurance Company (“Twin City”) and The

Hartford Financial Services Group, Inc. (“HFSG”), hereby move to dismiss the

5 Complaint of Mario R. Ferla, Steve Saleen, Thomas Del Franco, Martin H. Karo, and

6 Jack Pitluk (“Plaintiffs’), pursuant to Federal Rules of Civil Procedure 8(a) and

1 2(b)(6), for: (1) failure to make a short and plain statement of the claim; and

8 (2) failure to state a claim upon which relief can be granted. The Complaint should

be dismissed because it says too much to be comprehensible and yet too little to be

10 viable.

ii While this action boils down to a straightforward insurance coverage dispute,

12 i.e., a breach-of-contract claim (albeit one that is both untenable and unripe),

13 Plaintiffs’ 62-page narrative is so prolix and convoluted as to make it difficult toU

14 discern the alleged factual basis for Plaintiffs’ purported claims. In short, Plaintiffs

15 appear to allege that Twin City has breached the relevant insurance policy (the

16 “Policy”) by refusing to defend, or to indemnity any settlement of or judgment in, the

17 underlying RICO lawsuit, Thomason Auto Group, LLC v. Ferla, et al., Case No. 08-

18 cv-04143-JLL-CCC (D. N.J.) (the “Thomason action”). This breach-of-contract

19 claim, which is the underpinning of the whole action, fails as a matter of law,

20 because, as shown below, Twin City has no duty to defend or to indemnify the

21 Thomason action.

22 As a matter of well-established California law, Twin City has no duty to

23 defend or to indemnify the Thomason action because the Thomason action alleges

24 only wilful, fraudulent, and deliberately criminal conduct that is uninsurable pursuant

25 to California Insurance Code Section 5331 Plaintiffs’ breach-of-contract claim is not

26 only untenable in light of Section 533; it is also unripe (and merely hypothetical), in

271 While there are also exclusions and other pplicable bases for disclaiming or

28 limiting coverage under the Policy for the Thomason action, those additionalcoverage issues need not be addressed here, as they are unnecessary to the resolutionof this motion.

-2-LA 51169255v1


1 light of the fact that there is no settlement or judgment for Twin City to indemnifr.

2 (Moreover, in an abundance of caution, Twin City has agreed to defend the Plaintiffs

3 in the Thomason action, subject to a full reservation of rights.) Accordingly,

4 Plaintiffs have not stated, and at this time based upon the facts at issue here cannot

5 state, any breach-of-contract claim upon which relief can be granted.

6 In an apparent attempt to compensate for and distract from the absence of a

7 viable contract claim, Plaintiffs embellish their Complaint with a panoply of equally

8 non-meritorious tag-along allegations regarding “bad faith,” “unfair business

9 practices,” “alter ego,” and “tortious interference.” As we show, each of these tag-

10 along claims is fatally defective. The “bad faith” claim fails as a matter of law

ii because there can be no “bad faith” claim in the absence of an underlying breach of

12 contract. Accordingly, California courts dismiss insurance “bad faith” claims where,

-13 as here, the insurer has not withheld any benefits actually due under the Policy.

U

14 Likewise, the “unfair business practices” claim (Business and Professions Code

15 Section 17200) fails in absence of any immediate injury in fact. A plaintiff cannot

16 satisfSi the “injury in fact” standing requirement (Section 17204) when, as in this

17 case, its relationship with the defendant is circumscribed by a contract, and there has

18 been no breach.

19 Plaintiffs’ alter-ego allegations against Twin City’s parent, I{FSG, are also

20 non-meritorious. While Plaintiffs devote approximately twenty pages of the

21 Complaint to allegations regarding the relationship between Twin City and HFSG

22 (see, pp. 2-22), they fail to satisfSr the alter-ego pleading requirements under

23 California law, because they fail to state facts showing: (1) that there is such a unity

24 of interest between Twin City and HFSG as to render them inseparable; and

25 (2) (most significantly) that respecting the separate existence of Twin City and

26 HFSG would result in grave injustice or inequity to Plaintiffs. For example,

27 plaintiffs give no indication that Twin City is insolvent, undercapitalized, or

28 otherwise unable to pay any judgment awarded against it on Plaintiffs’ contract

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1 claim. Accordingly, the conclusory, factually-unsupported alter-ego allegations

2 against HFSG should be rejected by the Court.

3 In addition, Plaintiffs’ claim against HFSG for “tortious interference with

4 insurance contract” is untenable in light of Plaintiffs’ alter-ego allegations (which are

5 expressly incorporated by reference into the interference claim). It is well-settled

6 California law that a party to a contract cannot be held liable for tortiously interfering

7 with its own contract. Accordingly, since HFSG is identical with Twin City

8 according to Plaintiffs’ alter-ego allegations, it ipso facto cannot be held liable for

9 interfering with the insurance contract between itself (i.e., Twin City) and Plaintiffs.

10 Finally, Plaintiffs’ claim for declaratory relief should be dismissed because

ii there is no coverage for the Thomason action, and thus no actual and justiciable

12 controversy between the parties. Moreover, Twin City has agreed to defend the

- 13 Thomason action subject to a full reservation of rights (despite the fact that it has noU

14 duty to do so according to Section 533) and there is currently no judgment or

j 15 settlement for Twin City to indemnify. Therefore, since federal courts do not issue

16 advisory opinions regarding unripe hypothetical disputes, the declaratory relief claim

17 should be dismissed without prejudice, pending the materialization of some actual

18 and justiciable controversy between the parties (e.g., after a judgment or settlement

19 in the Thomason action).2

20 II. BACKGROUND

21 The only facts relevant to this Motion to Dismiss are those that can be

22 ascertained from the contents of two documents that are attached as exhibits to the

23

24

25 2 In an effort to avoid burdening the Court with this Motion to Dismiss, and pursuantto Civil Local Rule 7-3, Defendants’ counsel notified Plaintiffs’ counsel by letter

26 dated July 16, 2009 of the grounds on which it would bring this Motion, askedPlaintiffs to dismiss the Complaint voluntarily without preudice, and further met and

27 conferred telephonically with Plaintiffs’ counsel on Jul,r 17, 2009 regarding the sameissues. (Penis Declaration, ¶J 2-3, Ex. A.) Plaintiffs counsel advised Defendants’

28 counsel that he would wait to see the Motion before deciding whether to dismiss oramend the Complaint. (Id., ¶ 3.) Therefore, Defendants have no alternative underthe Federal Rules of Civil Procedure but to file the instant Motion.

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1 Complaint, and subject to judicial notice: (1) the Policy (Complaint, Ex. A); and

2 (2) the complaint in the underlying Thomason action (Complaint, Ex. B).

A. THE RELEVANT INSURANCE POLICY:

The relevant insurance policy is Twin City Fire Insurance Company Private

Choice Encore! Policy Number 00 KB 023 1655-07 (the “Policy”). While Plaintiffs

6 devote at least six pages of their Complaint to the quotation of various terms and

7 provisions of the Policy, those various terms and provisions are not relevant to, and

8 need not be considered in connection with any ruling on, this Motion to Dismiss.

9 Likewise, while Twin City has identified various Policy-based defenses to coverage,

10 and has reserved its right to decline coverage on any applicable basis, the other

z defenses need not be considered in connection with this Motion to Dismiss, because12 this entire coverage dispute can be resolved pursuant to California Insurance Code13 Section 533 (and/or the longstanding common-law prohibition against

Oç . . . . .. 3indemnification of restitutionary disgorgement).

15 Section 533 provides:

16 An insurer is not liable for a loss caused by the willful act of theinsured; but he is not exonerated by the negligence of the insured, or of

17 the insured’s agents or others.

18Cal. Ins. Code § 533.

19Section 533 is “an implied exclusionary clause which, by statute, must be read

20into all insurance policies.” Downey Venture v. LMI Ins. Co., 66 Cal. App. 4th 478,

21499-500 (1998), quoting, IC. Penney Casualty Ins. Co. v. MK., 52 Cal. 3d 1009,

1019 (1991).22

23 B. THE UNDERLYING THOMASON ACTION

24 The underlying litigation for which Plaintiffs seek coverage is Thomason Auto

25 Group, LLC v. Ferla, et al., Case No. 08-cv-04143-JLL-CCC (D. N.J.) (the

26 “Thomason action”). While the Thomason action was filed in the District of New

27 See e.g. Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1266, 10 Cal. Rptr.2d 58 83 P. 2d 545 (1992) (“It is well established that one may not insure against

28 the nsfc of being ordered to return money or property that has been wrongfullyacquired”); citing, Jaffe v. Cranford Ins. Co., l6S Cal. App. 3d 930, 934 935 (1985)(restitution of medical overpayments not insurable ‘damages’).

LA 51 169255v1


1 Jersey, Plaintiffs are currently moving to transfer venue to the Central District of

2 California, which is where the facts and circumstances giving rise to the Thomason

3 action occurred in substantial part. (See, Complaint, ¶15.)

4 The complaint in the Thomason action asserts the following causes of action

5 against the Plaintiffs herein: (1) Violations of the Racketeer Influenced and Corrupt

6 Organizations Act (“RICO”), 18 U.S.C. § 1962(c); (2) RICO Violations, 18 U.S.C.

7 § 1962(c); (3) RICO Conspiracy, 18 U.S.C. § 1962(d); (4) Tortious Interference with

8 Prospective Business Relations; (5) Fraud in the Inducement; (6) Unjust Enrichment;

9 (7) Conversion; (8) Common Law Fraud; (9) Intentional Misrepresentation;

10 (10) Negligent Misrepresentation; (11) Equitable Fraud; (12) Aiding and Abetting

11 the Commission of a Tort; (13) Conspiracy to Commit a Tort; (14) Breach of

12 Fiduciary Duty; and (15) Constructive Trust. (Complaint, Exhibit E, pp. 47-74,

13 ¶J21-328.)U

14 The Thomason complaint seeks the following remedies: (a) a declaration thatR

15 benefits acquired by defendants as a result of breaches of fiduciary duty are held in

16 constructive trust for the benefit of plaintiff; (b) an order directing defendants to pay

17 the monies held in the constructive trust to plaintiff; (c) compensatory damages and

18 prejudgment interest; (d) RICO treble damages pursuant to 18 U.S.C. § 1964;

19 (e) disgorgement of amounts by which defendants have been unjustly enriched; (f) an

20 award of plaintiffs’ attorneys’ fees and costs; and (g) punitive and exemplary

21 damages.4

22 III. ARGUMENT

23 A. STANDARDS APPLICABLE TO THIS MOTION TO DISMISS24 This Motion to Dismiss is based solely upon the allegations in the Complaint

25 and other matters of which this Court may properly take judicial notice, including:26

The unjust enrichment and constructive trust remedies are uninsurable as a matter27 of law pursuant to California’s longstanding prohibition on indemnification of

restitutionary disgorgement. Punitive damages, and settlement paid to avoid the28 imposition of punitive damages, are also uninsurable pursuant to Section 533. See,

e.g., lB. Aguerre, Inc. v. American Guarantee & Liability Ins. Co., 59 Cal. App. 4th6, 14, 16 (1997).

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1 (1) the Policy (Complaint, Ex. A); and (2) the Thomason complaint (Complaint, Ex.

2 E). Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 (9th

3 Cir. 1989).

4 This Motion to Dismiss accepts as true, and construes in the light most

5 favorable to Plaintiffs, all facts pled in the Complaint. However, it does not, nor

6 need this Court, accept any legal conclusions pled in the Complaint, or any

7 “allegations that are merely conclusory, unwarranted deductions of fact, or

8 unreasonable inferences.” Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932,

9 2944, 92 L. Ed. 2d 209 (1986); Cholla Ready Mix, Inc. v. Civish, 382 F.3d 969, 973

10 (9thCir. 2004).

B. THE COMPLAINT VIOLATES FRCP 8.12 Federal Rule of Civil Procedure 8(a)(2) provides that a “pleading that states a

claim for relief must contain . . . a short and plain statement of the claim showing

o that the pleader is entitled to reliefl.] Similarly, Federal Rule of Civil Procedure

4 15 8(d)(l) requires that “each allegation must be simple, concise, and direct.” The

16 requirement of “a short plain statement” protects a defendant’s constitutional due

17 process right to notice of the charges asserted against it in an intelligible format that

18 permits a meaningful response.

19 This Complaint is precisely the opposite of “a short and plain statement of the

20 claim showing that [Plaintiff] is entitled to reliefl.]” It is a rambling, disorganized,

21 confusing, and repetitive — and yet incomplete and uninformative — statement that

22 fails to show that Plaintiffs are entitled to any relief.

23 First, after acknowledging in the “Introductory Statement” on page 1 that this

24 is basically a coverage dispute, Plaintiffs fail to discuss any specific details regarding

25 the dispute until page 35. The lengthy, thirty-four page interval consists largely of

26 extraneous background material.

27 Next, after taking only half a page to identify themselves ([J 1-5, pp. 1-2),

28 Plaintiffs devote seven-and-a-half pages to “identifying” Defendants. (JJ 6-1 1, pp.

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1 2-10.) In so doing, Plaintiffs, inter alia, cite several websites, quote from some

2 unrelated court filing in Texas, display a picture of the Hartford logo, quote from the

3 Policy’s Kidnap and Ransom/Extortion Coverage, and discuss Hartford’s SEC filings

4 — none of which have anything to do with this case.

5 This rambling narrative is punctuated with dramatic accusations about

6 irrelevant matters (e.g., “this assertion is demonstrably false” [J 9, p. 8 {emphasis in

7 original — discussing whether HFSG is a “holding company”}]), and legally

8 insignificant buzzwords (e.g., “unopposed diktat” ( 9(u), p. 8)), but fails to

9 communicate how, if at all, the allegations are actionable or relevant to any claim

10 upon which relief can be granted. Defendants should not be required to wade, at

11 their peril, through this morass of irrelevant details, in search of the basis for

12 Plaintiffs’ purported claims.

-

13 Next, Plaintiffs devote eight pages to what they characterize as a discussion ofU

14 Jurisdiction and Venue. (JJ 12-15, pp. 10-17.) To the contrary, the bulk of this

j 15 section consists of a litany of accusations, on information and belief, that HFSG is

16 “secretly engaged in the business of insurance in this forum . . . acting as the

17 puppeteer for. . . Hartford subsidiaries” and should know that it would be “haled into

18 court in this forum as a result of its [unspecified] bad faith conduct directed to and

19 harming individuals and entities who reside and do business in this forum.” (J 14(a)-

20 (n), pp. 11-17.) None of this irrelevant innuendo changes the fact that Twin City is

21 the party with whom Plaintiffs contracted for insurance coverage; nor does it

22 adequately allege that HFSG is the alter ego of Twin City. It is all beside the point.

23 (Twin City does not even dispute jurisdiction and venue.) Then, Plaintiffs devote

24 over four pages to Agency, Alter Ego, and Joint Venture/Enterprise Liability

25 Allegations that add nothing to the Complaint, let alone any valid basis for naming

26 HFSG as a defendant in this contract dispute between Plaintiffs and Twin City.

27 (J 16-19, pp. 17-22.)

28

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1 It is not until page 22 that Plaintiffs begin to discuss the central issue of

2 “insurance coverage.” Unfortunately, the only discussion Plaintiffs offer is six pages

3 of lengthy, verbatim quotations from various definitions and other provisions in the

4 Policy, without any explanation of how, if at all, they are relevant to the instant

5 dispute. (JJ 20-28, pp. 22-27.) For the most part, they are not.

6 Plaintiffs do not get around to discussing the “Background” until page 28.

7 This Background consists of six pages of confusing, and again largely irrelevant,

8 details regarding various business entities, distributorship agreements, bankruptcy

9 proceedings, and other lawsuits between Insureds that even Plaintiffs concede are not

10 covered under the Policy. (J 29-42, pp. 28-33.) Only the last half-page of this

11 section, ¶ 42 at page 33, addresses the Thomason action, even though Plaintiffs

12 concede that it is “the primary subject of the parties’ coverage dispute.” Id.

-13 It is not until page 33 that Plaintiffs begin to address, for five pages (albeit in a

g 14 very incomplete and uninformative manner), the “coverage dispute” regarding the

15 Thomason action. (J 43-53, pp. 33-38.) Then, at page 38, plaintiffs move on from

16 the coverage issue and, despite the fact that they have not demonstrated that they are

17 entitled to any coverage for the uninsurable Thomason action, begin to argue that

18 Twin City has breached the Policy “willfully and in bad faith.” This five page

19 discussion consists of repetitive, boilerplate allegations to the effect that Defendants

20 “deliberately, unjustifiably and unreasonably” did various things that are simply not’

21 actionable, given the fact that no benefits are due under the Policy. (JJ 54-59, pp.

22 38-43.)

23 Finally, on page 43, Plaintiffs finally get around to stating their purported

24 claims for relief. Even the “claims for relief’ are unduly prolix, and clogged with

25 irrelevant details. Yet, Plaintiffs’ sixteen-page statement of purported “claims for

26 re1ief,” even though it is by itself longer than the entire Complaint needs to be, fails

27 to state any claims upon which relief can be granted. (JJ 60-111, pp. 43-59.)

28

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1 Thus, the Complaint is virtually a textbook example of the type of complaint

2 that is subject to dismiss under Rule 8. The Ninth Circuit Court of Appeals, in

3 affirming the dismissal of a complaint that violated Rule 8, explained the evil that

4 Rule 8 is designed to avoid:

5 Prolix, confusing complaints such as the ones plaintiffs filed in this caseimpose unfair burdens on litigants and judges. As a practical matter, the

6 judge and opposing counsel, in order to perform their responsibilities,cannot use a complaint such as the one plaintiffs filed, and must prepare

7 outlines to determine who is being sued for what. Defendants are thenput at risk that their outline differs from the judge’s, that plaintiffs will

8 surprise them with something new at trial which they reasonably did notunderstand to be in the case at all and that res judicata effects of

9 settlement or judgment will be different from what they reasonablyexpected. “Tjhe rights of the defendants to be free from costly and

10 harassing litigation must be considered.” [Citation.]

The judge wastes half a day in chambers preparing the “short and plain11 statement” which Rule 8 obligated plaintiffs to submit. He then must

manage the litigation without knowing what claims are made againstwhom. This leads to discovery disputes and lengthy trials, prejudicing

13litigants in other cases who follow the rules, as well as defendants in thecase in which the prolix pleading is filed.

° 14 .

McHeniy v. Renne, 84 F.3d 1172, 1179-80 (9th Cir. 1996) (citations omitted).5C)

15 . . . .

Because it rambles on with convoluted recitations of irrelevant details, leaving< 16

the Court and Defendants to guess as to which of the many confusing accusationso 17

form the purported basis of the various claims asserted, the Complaint is subject to18

dismissal for violation of Rule 8. Moreover, as shown below, to the extent that the19

20Courts have found parties in violation of FRCP 8 where the complaint was:

21 (1) needlessly long; (2) highly repetitive; (3) confusing; or (4) consisted ofincomprehensible rambling. See, Wright & Miller, Federal Practice and Procedure,

22 Ch. 4 § 1217; see also, e.g., Agnew v. Moody, 330 F.2d 868, 870 (9th Cir. 1964)(finding that complaint which was 55 pages, excluding the prayer for relief and

23 exhibits, violated the rule); Washington v. Baenziger 656 F. Supp. 1176, 1177 (N.D.Cal. 1987) (86 page complaint which contained 3 causes ot action against 21

24 defendants was properly dismissed for failure to contain plain and short statement);Carrigan v. Ca1fornia State Legislature 263 F.2d 560, 566-567 (9th Cir. 1959)

25 (finding that complaint violated Rule requirement where legal theories werealleged in 27 pages, the relief demanded in the last 9 pages, and the intervening 150

26 pages contained hearsay conversations and other such matters); Hatch v. Relianceins. Co., 758 F.2d 409 415 (9th Cir. 1985) (district court did not abuse discretion in

27 concluding that complaints, which including attachments, exceeded 70 pages inlength, were confusing and conclusory and not in compliance with the “short and

28 plain” statement requirement); Schmidt v. Herrman, 614 F.2d 1221, 1224• (9th Cir.1980) (district court did not abuse discretion by striking confusing, distracting,ambiguous, and unintelligible pleadings).

LA 51 169255v1


1 Complaint is intelligible, it is also subject to dismissal pursuant to Rule 12(b)(6), for

2 failure to state a claim upon which relief can be granted.

C. PLAINTIFFS CANNOT STATE A CLAIM FOR BREACH OF ANY4 CONTRACTUAL DUTY TO DEFEND OR TOINDEMNIFY THE

THOMASON ACTION.5

6 Plaintiffs cannot state a breach-of-contract claim. Plaintiffs allege that Twin

City has breached its purported contractual duties to defend and indemnify the

8 Thomason action. This claims fails, however, since Twin city has no duty to defend

or indemnify the Thomason action, because: (1) there is no potential for indemnity

10 coverage of the Thomason action, as it alleges only willful conduct (and attendant

conduct that is inextricably linked to the willful conduct); and (2) Twin City

12 therefore has no duty to defend the Thomason action.

13 Moreover, any claim for breach of the duty to defend is moot in light of the

14 fact that Twin City has, in an abundance of caution, agreed to defend the uninsurable

15 Thomason action, subject to a full reservation of rights. Likewise, any claim for

16 breach of the duty to indemnify is unripe, as the Plaintiffs are not currently “legally

17 obligated to pay” any judgment or settlement as to which Twin City could be called

18 upon to provide any indemnity.

19 1. The Thomason Action Is Uninsurable Pursuant to Section 533.

20 Section 533 precludes indemnity coverage for the Thomason action in its

21 entirety, given the deliberately fraudulent and intentionally harmful conduct alleged

22 as the basis of the claims made therein. Therefore, since there is no potential for

23 indemnity coverage, Twin City also has no contractual duty to defend the Thomason

24 action.a. Section 533 Precludes Indemnity Coverage for the Thomason

25 Action.

26 As noted above, Section 533 expressly prohibits the indemnification of “wilful

27 acts[.]” A “wilful act[,]” for purposes of Section 533, may be either: (1) an act done

28 with the intent to injure (i.e., “an act deliberately done for the express purpose of

causing damage or intentionally performed with knowledge that damage is highly-11-

LA 51169255v1


1 probable or substantially certain to result”); or (2) an inherently harmful act (i.e., “an

2 intentional and wrongful act in which the harm is inherent in the act itself’).

3 Downey Venture v. LMI Ins. Co., 66 Cal. App. 4th 478, 500 (1998) (emphasis added,

4 internal quotes omitted); see also, J.C. Penney Cas. Ins. Co. v. M.K, 52 Cal. 3d

5 1009, 1025 (1991).

6 The conduct alleged as the gravamen of the Thomason action is “wilful” in

7 both senses of the word. Plaintiffs allegedly made the misrepresentations at issue in

8 the Thomason action deliberately and with the express purpose of inducing

9 Thomason to invest $6,000,000 in a company that they were planning to force into

10 bankruptcy, so that they could misappropriate corporate opportunities for their own

11 personal gain. Thus, they intended to injure Thomason. In addition, fraud in the

12 inducement, intentional misrepresentation, common law fraud, equitable fraud, mail

13 fraud, wire fraud, racketeenng, and tortious interference are all inherently harmful

14 acts, in that the intent to engage in such acts is, ipso facto, an intent to harm.c L)

j 15 Likewise, aiding and abetting and conspiracy require that the defendant know that

16 the principals’ or co-conspirators’ conduct is tortious and harmful, and intentionally

17 assist that conduct. Thus, there is no doubt that the overwhelming majority of the

18 claims in the Thomason action are uninsurable as a matter of law under Section 533.

19 Specifically, the RICO claims require proof of criminal conduct. Turner v.

20 Cook, 362 F.3d 1219, 1229 (9th Cir. 2004). The alleged pattern of racketeering

21 activity underlying the RICO claims in the Thomason action includes the following

22 crimes: (1) Mail Fraud in violation of 18 U.S.C. § 1341 (cx. E, ¶J 229-23 1); and

23 (2) Wire Fraud in violation of 18 U.S.C. § 1343 (ex. E, ¶J 232-233).

24 Likewise, the claims for tortious interference, fraud in the inducement,

25 common law fraud, intentional misrepresentation, negligent misrepresentation,

26 equitable fraud, aiding and abetting, and conspiracy require proof of intentional

27 wrongdoing.6

286 For example to prove the intentional tort of negligent misrepresentation, a plaintiffmust prove that the defendant intended to induce the plaintiff to rely upon a

LA 51169255v1


1 In fact, the Thomason complaint is replete with allegations of fraud and

2 intentional wrongdoing. (See, e.g., ¶ 66-95 [“Defendants’ Fraudulent

3 Misrepresentations to Thomason”]; ¶J 96-102 [“Defendants’ Intentional

4 Concealment of Material Information from Thomason”].) The paragraph of the

5 Thomason complaint entitled “Nature of the Action and Relief Sought” perhaps best

6 summarizes the gravamen of the Thomason action as follows:

7 This case involves an astoundingly brazen fraud in which officers anddirectors of CHAMCO and ZXAuto NA have admitted, under oath,

8 that Thomason Auto’s execution of the Distributorship Agreement andits resultant $6,000,000.00 investment, was procured through

9 intentional, material false representations. The Officer/DirectorDefendants intentionally failed to disclose these misrepresentations to

10 Thomason Auto until such time as its disclosure served theiroverarching purpose of illicitly gaining control of CHAMCO and

11 ZXAuto NA, usurping those entities’ corporate opportunities andultimately driving those entities into bankruptcy so as to reap the

12 benefits of those opportunities for their own individual personal gain.(Complaint, Ex. E, ¶ 18, p.4.)

13Moreover, while conversion and breach of fiduciary duty may sometimes be

14premised upon conduct that is less than willful, the Thomason complaint incorporates

HL)15

its allegations of fraud, and further alleges additional intentionally fraudulent conduct16

by defendants as the gravamen of the claims. (See, e.g., Ex. E, ¶J 270, 272, 315,17

317-322.) Accordingly, these causes of action are also precluded from coverage

under Section 533, because they are “so closely related to the intentional misconduct19

as to be inseparable from it.” State Farm Gen. Ins. Co. v. Mintarsih, No. B202888,20

2009 WL 1801243 at *8 (Cal. Ct. App. June 25, 2009) (Section 533 bars

indemnification for loss caused by “conduct that, standing alone, could be

23

24 statement which the defendant had no reasonable basis for believing to be true. Forthat reason, negligent misrepresentation has been held uninsurable under Section

25 533. See, e.g., Empi. Ins, of Wausau v. Musick, Peeler, & Garrett, 871 F. Supp. 381,386 387 (S.D. Cal. 1994) (fraud and negligent misrepresentation uninsurable under

26 Section 533 and Section 1668); citing, Dykstra v. Foremost Ins. Co., 14 Cal. App.4th 361, 366 (1993) (negligent misrepresentation), Allstate Ins. Co. v. Hansten, 765

27 F. Supp. 614, 616 (N.D. Cal. 1991) (“[u]nder California law, no contractualagreement may indemnify anyone from his own fraud .... [n]egligent

28 misrepresentation is included within the definition of fraud”). (Moreover, theThomason complaint makes clear that the negligent misrepresentation alleged in thatcase is an inseparable part of the same dehberately fraudulent scheme.)

LA 51169255v1


1 characterized as negligent rather than intentional, but that is so closely related to the

2 intentional misconduct as to be inseparable from it”).

3 Therefore, since all of the conduct alleged in the Thomason complaint is

4 inherently harmful, committed with the intent to harm, and/or so closely related to

5 the intentional conduct as to be inseparable from it, the Thomason action is

6 unlnsurable as a matter of law. There is simply no potential for indemnity

7 coverage.7

8 b. While the Breach-of-Contract Claim Is Moot Because Twin9 City Has Agreed To Provide A Defense, Twin City Has No

Duty To Defend the Thomason Action Because There Is No10 Potential for Indemnity Coverage.

z 11 As stated above, Twin City has agreed to provide a defense in this matter

12 (subject to further ruling by this Court), so any claim that Twin City is in breach of

13 its duty to defend is moot.8 Moreover, even if Twin City were not providing ag 14 defense, California case law provides that when, as in this case, Section 533

15 eliminates any potential for indemnity coverage, the Insurer has no duty to defend.

16 See, e.g., Uhrich v. State Farm Fire & Cas. Co., 109 Cal. App. 4th 598, 620-23

17 (2003).

18 It is a well-established principle of California law that an Insurer has no duty

19 to defend a claim when there is no potential for indemnity coverage. Buss v.

20 Superior Court, 16 Cal. 4th 35, 47-48 (1997). There is a limited exception to this

21 principle, which applies when an insurance policy expressly promises to provide

22 coverage for willful conduct that is legally uninsurable pursuant to Section 533. In

23 such cases, the court may impose a duty to defend in order prevent the policy’s

24 promise of coverage from being entirely illusory. Thus, for example, while

25 malicious prosecution is legally uninsurable pursuant to Section 533, the court in

26In determining its coverage obligations, an insurer need not consider claims that are

27 not pled. Cf, e.g., Hurley Construction Co. v. State Farm Fire & Casualty Co. 10Cal. App. 4th 533, 538 (1992) (“the insured may not speculate about unpied third

28 party cairns to manufacture coverage”).See, California Civil Code Sections 1485 (“[a]n obligation is extinguished by an

offer of performance”).14

LA 51 169255v1


1 Downey Venture held that the insurer nevertheless had a duty to defend such claims,

2 because the policy expressly promised to cover malicious prosecution. Downey

3 Venture, 66 Cal. App. 4th, at 508 509. However, when, as in this case, the policy

4 promises no coverage for willful conduct, then the insurer has no duty to defend a

5 claim that is precluded from indemnity coverage by Section 533. See, e.g., Uhrich v.

6 State Farm Fire & Cas. Co., 109 Cal. App. 4th, at 620-23; State Farm Gen. Ins. Co.

7 v. Mintarsih, 2009 WL 1801243, at *4..*6 (Cal. Ct. App. June 25, 2009).

8 Therefore, even if the duty to defend issue had not been rendered moot by the

9 fact that Twin City is providing a defense is this matter, this Court should find that

10 Twin City has no duty to defend the Thomason action, because Section 533

z 11 eliminates any potential for indemnity coverage.

12 2. The “Duty to Indemnify” Claim Is Unripe In Any Event.

13 Plaintiffs’ claim for breach of the duty to indemnify also fails because it is

o 14 hypothetical and unripe, as there is currently no settlement or judgment for Twinv()

4 15 City to indemnify. The Policy promises indemnity coverage, subject to its terms and

16 conditions (and applicable law), only for Loss that the Insureds have become

17 “legally obligated to pay[.]” (See, Complaint Ex. A [the Policy], page 83, ¶ (I)

18 (“Loss means the amount that the Insureds are legally obligated to pay as a result of

19 a Claim, including. . . damages, settlements, judgments . . .“). It is hombook law,

20 and a matter of basic logic, that a defendant cannot held liable for failing to discharge

21 an obligation that has not yet arisen.

22 While Plaintiffs apparently attempt to put the cart before the horse by arguing

23 that Twin City has “unjustifiably and unreasonably refus[ed] to attempt in good faith

24 to make a prompt, fair and equitable settlement of’ the Thomason action (J 69), an

25 insurer has no legal duty to settle a claim for which coverage is not available under

26

27

28

- 15 -

LA51169255v1


1 the Policy (and Plaintiffs have not alleged that any settlement is even possible).9 For

2 all of these reasons, Plaintiffs have failed to state any claim for breach of contract.

D. PLAINTIFFS CANNOT STATE A CLAIM FOR “BAD FAITH.”4 Plaintiffs’ other claims all piggyback on, and stand or fall with, their breach-

of-contract claims. While well-taken allegations of “bad faith” may sometimes

6 increase the value of a breach-of-contract claim by an order of magnitude, zero

7 multiplied by any number is still zero. Likewise, conduct that does not constitute a8 breach of contract is simply not actionable, no matter how many allegations of “bad

faith” are tacked onto it. Plaintiffs cannot state a claim for “bad faith” without

10 showing that Twin City is withholding benefits due under the Policy.

z 11 The fundamental principle that “a bad faith claim cannot be maintained unless

12 policy benefits are due is in accord with the policy in which the duty of good faith is

13 (firmly) rooted.” Love v. Fire Ins. Exch., 221 Cal. App. 3d 1136, 1153, 271 Cal.

14 246, 256 (1990) (parentheses added). It is well settled under California law,

15 that an insured cannot base a claim for breach of the implied covenant of good faith

16 and fair dealing upon conduct by an insurer which does not violate the express terms

17 of the insurance policy. See, Wailer v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 36,

18 44 Cal. Rptr. 2d 370, 390 (1995) (“the covenant is implied as a supplement to the

19 express contractual covenants, to prevent a contracting party from engaging in

20 conduct that frustrates the other party’s rights to the benefits of the agreement”);

21 citing, Love v. Fire Ins. Exchange, 221 Cal. App. 3d, at 1153 (1990) (the implied

22 covenant of good faith and fair dealing “should not be endowed with an existence

23 independent of its contractual underpinnings”).

24 Therefore, since Plaintiffs have stated no valid breach-of-contract claim, they

25 have ipsofacto failed to state a claim for “bad faith.”

26

27

28 Moreover, “[a]bsent an excess judgment, there can be no bad faith action based ondeclining a reasonable offer to settle within policy limits.” Croskey, et al., Cal.Practice Guide: Insurance Litigation (The Rutter Group 2008), ¶ 12:359, p. 12B-34.

LA 51 169255v1


1 E. PLAINTIFFS CANNOT STATE AN “UNFAIR BUSINESS

2PRACTICES” CLAIM.

3Plaintiffs have not pled a Section 17200 claim upon which relief can be

granted because: (1) Plaintiffs have not alleged the requisite standing; (2) Plaintiffs

have not alleged the absence of an adequate remedy at law; and (3) Plaintiffs are not

6entitled to the injunctive, restitutionary, and disgorgement remedies they request.

7First, Plaintiffs’ Section 17200 claim fails for lack of standing. Section 17204

8of the Business and Professions Code, which was modified by Proposition 64 in an

attempt to curtail frivolous and vexatious litigation by imposing a standing

10requirement, provides: “Actions for relief pursuant to this chapter shall be

prosecuted exclusively in a court of competent jurisdiction by the Attorney General

or a district attorney. . . or by a person who has suffered injui in fact and has lost

money or property as a result of the unfair competition.” Cal. Bus. & Prof. Code-°‘ 13

. ‘ § 17204 (emphasis added); see also, In re Tobacco II Cases, 46 Cal. 4th 298, 312-14

327, 93 Cal. Rptr. 3d 559 (May 18, 2009) (finding that a challenged practice must be15

16the “immediate” cause of an alleged injury).10

While Plaintiffs’ Unfair Competition claim is just as rambling and convoluted

as their entire Complaint, it appears to be premised upon the following alleged

19practices: (1) Defendants’ alleged “bad faith” nationwide corporate policy and

20practice of withholding insurance policy benefits Defendants know to be due to their

21insureds (J 95-96); and (2) HFSG’s alleged practice of issuing insurance policies in

22the name of various subsidiaries, while secretly acting as the “puppeteer” pulling the

23

24 10 Generally the allegations necessary to plead a claim for violation of the UCL are:(1) “plaintif1f’s status as an insured or intended beneficiary of the insurer’s policy”;

25 (2) “the existence of that pohcy” (3) “the insurer’s conduct and that such conductwas an ‘unfair, unlawful or fraudulent’ business practice in violation of Ca Bus &

26 Prof § 17200”; (4) “plaintiff sustained injury and/or loss of money or property as aresult of the insured’s ‘unfair unlawtul or fraudulent’ business practice’; (5)

27 “plaintiff has no adequate remedy at law”; (6) “a request for injunctive relief andlorrestitution”; and (7) ‘a request for attornçy fees.” Croskey et al., Cal. Practice

28 Guide: Insurance Litigation (The Rutter (Jroup 2008), 15: 112, p. 3242. WhilePlaintiffs’ allegations as to element 3 are dubious, Plaintiffs utterly fail to pleadelements 4 and 5.

- 17 -

LA51169255v1


1 strings by making the relevant underwriting and coverage decisions (JJ 97-104).”

2 However, Plaintiffs do not, and cannot, explain how they have been harmed by either

3 alleged practice, when the Thomason action is uninsurable pursuant to Section 533.

4 While Plaintiffs claim to have suffered “concrete and substantial monetary

5 harm directly as a result of Hartford’s unfair, illegal and fraudulent conduct[,]” the

6 only such purported harm they specifically identify is the “attorneys’ fees and costs

7 incurred in the Thomason Federal Action (and in the State Court Actions).”

8 (Complaint, ¶ 101.) However, as shown above the Thomason action is uninsurable

9 as matter of law under Section 533, and Twin City has agreed to provide a defense.

10 Moreover, Plaintiffs do not allege anywhere in the Complaint that the State Court

ii Actions (which are barred by the Policy’s “insured versus insured” exclusion) are

12 even covered.

-13 When, as here, the relevant obligations of the parties to each other are

U

14 circumscribed by a written contract, then one party cannot characterize as “injury”

15 the failure of another party to do something that was not required by the contract. In

16 this case, since Twin City has no duty to defend or indemnify the Plaintiffs in the

17 Thomason action, Plaintiffs cannot allege, as the injury that purportedly gives them

18 standing, Twin City’s purported failure to discharge duties to defend or indemnify

19 that it does not have.12

20

21Of course, it is common knowledge that parent companies often make significant

22 decisions on behalf of their wholly-owned subsidiaries, and that insurance groups ormanagement companies handle claims and underwriting on behalf of affiliated

23 insurance companies. But who cares? If Twin City is correct in its determinationthat there is no coverage available for the Thomason action, what difference does it

24 make whether it is Twin City itself, or HFSG, that is “pulling the strings?” None.12 In fact, Twin City is positively forbidden, by Section 533, trom providing

25 indemnity coverage tor the Thomason action, even if it wanted to. See, DowneyVenture, 66 Cal. App. 4th, at 517. Courts simply do not enjoin parties from

26 complying with the law. And yet, that is precisely what a Section 17200 injunctioncompelling Twin City to provide coverage for the legally uninsurable Thomason

27 action would do. Plaintiffs would not be entitled to any injunction in any event,however, as they have not pled the absence of an adequate remedy at law. Ot course

28 Plaintiffs cannot plead the absence of an adequate legal remedy, because they willhave an adequate legal remedy, in the form of a breach-of-contract claim, it TwinCity ultimately declines to provide indemrnty coverage for a judgment or settlement.

LA 51169255v1


1 Similarly, Plaintiffs could not have suffered any actual injury as a result of

2 HFSG’s purportedly secret practice of acting as the puppeteer of its subsidiaries, like

3 Twin City, given that: (1) the Policy that they accepted conspicuously states, on the

4 Declarations page and every Endorsement, that “Twin City” is the Insurer; and

5 (2) Plaintiffs found every other fact allegedly showing that “HFSG” is the

6 “puppeteer” in Hartford’s SEC filings, website and other publicly available sources

7 of information. Indeed, Plaintiffs do not even specifically claim to have been injured

8 by Defendants’ purported concealment of these facts, nor could they. These facts

9 were right in front of Plaintiffs’ eyes. (Besides, any such allegations would be

10 subject to FRCP 9(b)’s heightened pleading requirements for fraud, which Plaintiffs

ii do not even attempt to satisfy.’3) Accordingly, given the absence of any injury in

12 fact, Plaintiffs lack standing to assert their Section 17200 claim.

-

13 Moreover, while plaintiffs also seek “restitution and disgorgement of all illU

14 gotten gains,” they do not plead a factual basis for restitution or disgorgement.

15 Instead, Plaintiffs allege that “Defendants have been unjustly enriched in an amountC

16 as yet unascertained, which will be determined according to proof at trial, but which

17 includes their ill-gotten receipt from Plaintiffs or the proceeds from their purchase of

18 the Securities at issue.” (J 100 [emphasis added].) This lone reference to

19 unspecified “Securities” suggests that Plaintiffs’ Section 17200 claim has been cut

20 and pasted from a complaint in a different action. It has no place in this action.

21 In addition, while Plaintiffs have alleged that “Defendants’ unlawful insurance

22 practices as alleged herein have caused Defendants to gain a cash windfall in the

23 form of earned premiums and unpaid claims” such that Plaintiffs are purportedly

24 entitled to “an accounting, restitution and disgorgement of all ill-gotten gains,

25 earnings, profits, compensation and benefits obtained by Defendants” (J 103), it is

26 well-settled that a Section 17200 Plaintiff is not entitled to non-restitutionary

2713 See, Vess v. Ciba-Geigy Corp. USA,317 F.3d 1097) 1102-05 (9th Cir. 2003) (Rule

28 9(b) applies to state claims “grounded in fraud” even if elements of fraud need not beestablihed to state a claim; only allegations of fraudulent conduct need be pleadedwith particulanty).

19LA 51 169255v1


1 disgorgement (i.e., disgorgement of monies in excess of plaintiffs’ loss). See, e.g.,

2 Madrid v. Perot Systems Corp., 130 Cal. App. 4th 440, 453 (l990).’

3 Accordingly, even if Plaintiffs had standing (which they do not), they would

4 not be entitled to any of the Section 17200 remedies they seek.’5 Therefore, the

5 Section 17200 claim should be dismissed for failure to state a claim upon which

6 relief can be granted.

F. PLAINTIFFS’ ALTER EGO ALLEGATIONS ARE LEGALLY

8 INSUFFICIENT.

9 The alter-ego doctrine arises “where a corporation is used.. .by an individual

or .. .another corporation to perpetrate fraud, circumvent a statute, or accomplish

ii some other wrongful or inequitable purpose...” Communist Party of the USA v. 522

12 Valencia, Inc., 35 Cal. App. 4th 980, 993 (1995). Alter ego is an “extreme remedy,

13 sparingly used” and with great caution to prevent misuse of the corporate laws by the‘

14 devise of a sham corporate entity formed for the purpose of committing fraud or

15 other misdeeds. See, Sonora Diamond Corp. v. Superior Court, 83 Cal. App. 4th

< 16 523, 538-539 (2000).

17 Plaintiffs must allege two conditions to plead alter-ego liability: (1) a unity of

18 interest and ownership between the corporations alleged to be alter egos of each

19 other, such that their individual identities no longer exist; and (2) that observance of

20 separate existence would, under the circumstances, promote an injustice upon a third

21

2214 While Plaintiffs are simply not entitled to non-restitutionary disgorement under

23 Section 17200 in any event, the frivolous character of Plaintiffs request fordisgorgement becomes obvious when one considers how such an award would be

24 measured. It would require the Court to examine all policies issued, and all claimshandled, by any Hartford entity, to identify each and every instance in which a

25 covered claim was improperly denied, and to determine the amount of premiums,earnings, profits, compensation and benefits attributable to each of those claims.

26 However, there would be no reason to award any of those monies to Plaintiffs.Restitution under Section 17200 is limited to the amount of money or property with

27 which Plaintiffs have parted — in this case, the premiums Plaintiffs paid tor thePolicy. (Of course, Plaintiffs cannot seek to recover both the premium they paid for

28 the Policy and the benefits allegedly owed pursuant to the Policy.)15 For this reason, it appears that the Section 17200 claim is merely a device forobtaining an award of attorneys’ fees to which Plaintiffs’ counsel is not entitled.

LA 51 169255v1


1 party. See, McLoughlin v. Blooms Sons Company, Inc., 206 Cal. App. 2d 848, 851

2 (1962). Plaintiffs fail to satisfy either requirement.

3 Plaintiffs’ alter-ego allegations against Twin City’s parent, HFSG, are a

4 textbook case of inadequate pleading. The mere existence of a parent/subsidiary

5 corporate relationship is not sufficient to pierce the corporate veil, and California

6 courts have held the types of allegations against a parent that are made by Plaintiffs

7 here to be inadequate to state a claim for alter ego.

8 For example, in Wady v. Provident Lfe & Acc. Ins. Co. of America, 216 F.

9 Supp. 2d 1060, 1068 (C.D. Cal. 2002) (applying California law), the disability

10 insurer, Provident, was owned by another corporation, UnumProvident. They shared

ii officers and directors, and the insurer had “loaned” a large sum of money to the

12 parent. Correspondence and claims forms bore only the parent’s name and address.

-13 But since there was no showing of such unity of interest and threat of inequitable

C-)

14 result that would support alter ego liability (e.g., no evidence of undercapitalizationc L)

15 or commingling of funds or disregard of corporate formalities), the parent,

16 UnumProvident, was not liable for alleged bad faith by the subsidiary, Provident.o

17 While the Complaint contains a single, conclusory, boilerplate statement that

18 “[i]f Twin City’s acts and omissions were treated as its alone, a manifestly

• 19 inequitable result would follow” (J 19(d), at pp. 21-22), Plaintiffs fail to explain

20 anywhere in the Complaint how or why it would be inequitable for Twin City to be

21 the only defendant on a claim based solely upon a contract to which it was the only

22 counterparty. Plaintiffs do not allege that Twin City is insolvent, undercapitalized, or

23 unable for any other reason to satisfy any judgment against it in this action, nor can

24 they: Twin City is a solvent and well-funded insurance company that is perfectly

25 capable of paying claims and judgments. Accordingly, Plaintiffs have not pled an

26 adequate basis for alter ego liability. Therefore, HFSG should be dismissed from

27 this action with prejudice.

28

-21-LA51169255v1


1 G. PLAINTIFFS CANNOT STATE A CLAIM FOR TORTIOUS

2INTERFERENCE.

3While Plaintiffs’ alter ego allegations are insufficient to impose liability on

HFSG in this action, they do deal a fatal blow to Plaintiffs’ tortious interference

claim. If HFSG is really the same entity as Twin City, then it ipso facto cannot be

6held liable for interfering with Twin City’s contract with the Plaintiffs. It is well-

settled that a party to a contract cannot be held liable on the theory of intentional

8interference with that contract. Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7

Cal. 4th 503, 514, 28 Cal. Rptr. 2d 475, 480 (1994).

10Contracting parties owe a duty to perform the contract according to its terms.

But this is a contract duty, not a tort duty. The tort duty not to interfere with the

contract falls only on strangers to the contract. Id.; see also, Kasparian v. County of

Los Angeles, 38 Cal. App. 4th 242, 262-263, 45 Cal. Rptr. 2d 90, 100-101 (1995).13

Therefore, in light of Plaintiffs’ allegation that HFSG is in reality the same14

15entity as Twin City, their tortious interference claim must be dismissed for failure to

16state a claim upon which relief can be granted. While Plaintiffs’ counsel has

U

indicated that he did not mean to incorporate the alter ego allegations by reference

into his tortious interference count (although he did), and that Plaintiffs have the

19right under Rule 8(d) to plead inconsistent claims in the alternative, Plaintiffs do not,

20in fact, have the right to plead inconsistent facts. That type of inconsistency would

21violate Rule 11, which requires that factual contentions have evidentiary support.

22Accordingly, courts have no problem dismissing claims that are inconsistent with,

23and rendered legally untenable by, a plaintiff’s underlying factual allegations.

24Maloney v. Scottsdale Ins. Co., 256 Fed. Appx. 29, 32 (9th Cir. 2007).

25In addition, while plaintiffs allege 13 different ways in which HFSG

26purportedly induced Twin City to breach the contract, all of these alleged acts of

27interference by HFSG are identical to the alleged independent breaches of contract

28by Twin City. (Compare ¶ 57(a)-(n) [thirteen alleged “bad faith” breaches by Twin

City] with ¶ 87(a)-(n) [thirteen alleged acts of interference by HFSG].) Thus, the

- 22 -

LA51169255v1


1 whole claim suffers from the alter-ego defect, even absent the incorporation of the

2 alter-ego allegations.

3 Moreover, the interference claim cannot possibly be re-pled to overcome this

4 difficulty by removing the paragraph incorporating the alter-ego allegations into the

5 claim (or the paragraphs admitting that the purported acts of interference are

6 identical to the purported breaches of contract), because the authorities on point hold

7 that the Court must read the harmful allegations from the prior complaint back into

8 any amended complaint. Bradley v. Chiron Corp. 136 F.3d 1317, 1324 (Fed. Cir.

9 1998); Ellingson v. Burlington Northern, Inc., 653 F.2d 1327, 1329-1330 (9th Cir.

10 1981). Therefore, the Court should dismiss the tortious interference claim with

ii prejudice.

12 H. PLAINTIFFS’ DECLARATORY RELIEF CLAIM SHOULD BE- 13 DISMISSED.

14 Given the fact that Plaintiffs’ breach-of-contract claims are both untenable and

15 unripe, their Declaratory Relief claims should also be dismissed, lest the Court be putc

16 into the position of rendering an advisory opinion. The “case or controversy”

17 requirement set forth in Article III of the United States Constitution shields federal

18 courts from being drawn into disputes as to abstract or hypothetical cases. Thus,

19 federal courts do not render advisory opinions as to what the law ought to be or

20 affecting a dispute that has not yet arisen. Aetna Life Ins. Co. ofHartford, Conn. v.

21 Haworth, 300 U.S. 227,240,57 S.Ct. 461, 494 (1937).

22 Accordingly, courts may issue declaratory judgments only when the parties’

23 dispute is of sufficient “immediacy and reality” to constitute a “controversy” in the

24 constitutional sense. Id. On the other hand, there is no subject matter jurisdiction to

25 grant declaratory relief as to rights or liabilities that do not yet exist or are not certain

26 to arise. Calderon v. Ashmus, 523 U.S. 740, 746-747, 118 S.Ct. 1694, 1698-1699

27 (1998) (no “case or controversy” where action seeks declaratory relief as to validity

28 of a defense the defendant may or may not raise in subsequent litigation); Wyatt,

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LA 51 169255v1


1 Virgin Islands, Inc. v. Government of Virgin Islands, 385 F.3d 801, 805-806 (3rd Cir.

2 2004).

3 Therefore, to the extent that the Court agrees with Defendants that the

4 Thomason action is uninsurable pursuant to Section 533, it should dismiss Plaintiffs’

5 declaratory relief claim with prejudice.

6 IV. CONCLUSION

7 For the foregoing reasons, Defendants respectfully request that this Court

8 dismiss the Complaint, in its entirety as to all Defendants, with prejudice.

9

10 Dated: July 29, 2009 Respectfully Submitted,

z 11 STROOCK&STROOCK&LAVANLLPMICHAEL F. PERLIS

12 RICHARD R. JOHNSON

-°‘ 13. By: /s/ Michael F. Perlis

14 Michael F. PerlisHu

15 Attorneys for DefendantsTWIN CITY FIRE INSURANCE

16 COMPANY and THE HARTFORDFINANCIAL SERVICES GROUP,

17 INC.

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LA 51169255v1


1 CERTIFICATE OF SERVICE

2 I hereby certify that, on July 29, 2009, a copy of the foregoing TWIN CITY

3 INSURANCE COMPANY AND THE HARTFORD FINANCIAL SERVICES

4 GROUP, INC.’S MOTION TO DISMISS THE COMPLAINT was filed

5 electronically and served by mail on anyone unable to accept electronic filing.

6 Notice of this filing will be sent by e-mail to all parties by operation of the court’s

7 electronic filing system or by mail to anyone unable to accept electronic filing as

8 indicated on the Notice of Electronic Filing. Parties may access this filing through

9 the court’s EM/ECF System.

10

ii By: /s/ Michael F. Perhs

< C 12qD

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LA 51 169255v1


stroock & stroock & lavan llp2 i. introduction 3 defendants, twin city fire insurance...

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