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AKH Company, Inc. v. Universal Underwriters Insurance Co.

United States District Court, D. Kansas

April 21, 2015

AKH COMPANY, INC., Plaintiff/Counter-Defendant,


JULIE A. ROBINSON, District Judge.

This is an insurance coverage dispute filed by AKH Company, Inc. ("AKH") against its insurance carrier, Universal Underwriters Insurance Company ("UUIC"), arising out of a trademark infringement action by and against AKH which UUIC defended and settled under a reservation of rights. Before the Court are the parties' motions to dismiss (Docs. 228, 233) several claims and counterclaims that were added to the amended pleadings in November, as well as cross motions for partial summary judgment (Docs. 236, 256) on a discrete issue raised by AKH's claim for declaratory judgment that UUIC had a duty to defend the underlying suit: whether UUIC's reservation of rights letters triggered a duty to acknowledge AKH's right to independent counsel and whether that duty was breached. UUIC has also moved to strike (Doc. 264) AKH's reply in support of its motion for partial summary judgment, arguing that it raises new issues not addressed in the initial motion. These motions are ripe for decision.

As described in detail below, the Court denies AKH's motion for partial summary judgment and grants UUIC's motion for partial summary judgment on the limited issue of whether UUIC had a duty to acknowledge a right to independent counsel and whether it breached that duty. The motion to strike AKH's reply is moot because the Court declines to consider any new arguments raised in AKH's reply brief. The Court largely denies the motions to dismiss with two exceptions: (1) AKH's motion to dismiss Count IX of UUIC's counterclaim is granted with leave to amend for failure to plead fraud with particularity; and (2) UUIC's motion to dismiss is granted as to AKH's Fifth Cause of Action for Negligence.

I. Procedural History

After two years of litigation, the Court is poised to decide the seventh substantive dispositive motion presented by these parties. Notwithstanding the fairly straightforward nature of the claims presented in this case, the parties' seriatim motions have failed to nudge this case toward either clarity or resolution. Instead, they have hampered discovery and multiplied these proceedings. The Court thus finds it helpful to set forth the protracted procedural history of the case thus far.

AKH filed its original Complaint on January 2, 2013, for declaratory relief that UUIC had a duty to defend and settle its underlying consolidated trademark infringement action. As part of its claim that UUIC breached its duty to defend, AKH alleges that UUIC's reservation of rights constituted a conflict of interest that triggered its obligation to appoint independent counsel to represent AKH in the underlying lawsuit under Cal. Civil Code § 2860. AKH alleges further that UUIC refused to pay AKH's independent counsel for all of the time to which they are entitled, or at the rates required by the statute. AKH also asserted a claim for breach of the covenant of good faith and fair dealing. Two weeks after serving its Complaint and approximately one week before UUIC's answer was due, AKH filed a motion for partial summary judgment that: (1) UUIC has duties to defend and settle the consolidated lawsuits under the policy dated May 1, 2008 to May 1, 2009; (2) no exclusion bars UUIC's duties to defend or settle the consolidated lawsuits; and (3) UUIC has no right to reimbursement of any of its expenses in the consolidated lawsuits despite its stated reservation of rights.

UUIC answered and brought counterclaims for declaratory relief and breach of contract arising out of its defense and settlement of the underlying lawsuit. UUIC also immediately sought transfer of this case to the Central District of California. After considering the requisite factors, the Court denied transfer, finding no countervailing factors that outweighed AKH's choice of Kansas forum.

Unsurprisingly, the Court denied AKH's premature motion for summary judgment, finding that there were genuine issues of material fact on all matters raised by AKH. In particular, the Court noted that the parties heavily disputed the choice of law that would apply to their respective contract claims, which must be determined by the place the insurance policy was "made." UUIC maintained that the contract was made in California while AKH contended that it was made in Kansas. The Court found that material facts relating to the making and performance of the contract were at issue, thereby precluding a pronouncement as to which state's law applies. And the Court noted that the parties had taken inconsistent positions at various points throughout their multiple motions and lengthy briefs on these early issues, "seemingly tailoring their positions for the sake of expediency." Recognizing that because AKH's summary judgment motion was filed on the heels of service of process, the parties did not have a scheduling order and had not engaged in case management discussions with Magistrate Judge Gale, this Court denied UUIC's motion to bifurcate with respect to discovery without prejudice, in deference to Magistrate Judge Gale's rulings throughout his supervision of the case.

The case then proceeded to pretrial management with Judge Gale. The parties litigated a motion for a protective order and delayed the scheduling conference pending resolution of that motion until January 2014. At that time, the parties asked for a ninety-day period to resolve discovery disputes among themselves and set a February 28, 2014 deadline by which to file motions to compel. Both parties ultimately litigated their respective motions to compel and a supplemental scheduling order was entered in April 2014. The parties agreed to a July 2014 deadline for filing choice of law motions, which they represented to be a threshold issue in this case, and set a deadline of May 2014 to file motions to dismiss and motions to amend. The parties proceeded to file their motions to determine choice of law, focusing solely on the issue of choice of law on the contract claims, which required a determination about where the contract was made and performed. Those motions went under advisement in August 2014. While those motions were pending, the parties continued to litigate a motion to compel concerning whether the crime-fraud exception to the attorney-client privilege applied to certain documents withheld by AKH concerning settlement of the underlying lawsuit filed against it by the Reinalt-Thomas Corporation ("RT"). Judge Gale ordered in camera review of certain documents, and in October 2014, ultimately ordered AKH to produce 77 of the documents at issue to UUIC.

In November 2014, the parties jointly moved for leave to amend their pleadings, which was granted. Both parties added tort claims based on the other's alleged conduct before, during, and after settlement of the underlying lawsuits. On November 14, 2014, UUIC filed its Third Amended Answer and Counterclaim, adding counterclaims for negligent misrepresentation, intentional or affirmative misrepresentation, concealment or fraud by silence, and statutory claims under California and Kansas insurance codes.[1] UUIC alleges that AKH made the following misrepresentations in conjunction with the settlement: (1) RT was demanding a very high amount to settle the claims; (2) RT was pushing for settlement immediately and demanding settlement within days of the demands conveyed to UUIC; (3) RT had issued a time-sensitive demand when AKH demanded UUIC's policy limits; (4) a reasonable settlement value for the consolidated underlying lawsuits was at or above policy limits; (5) that the policy limits as paid by UUIC would be used to protect AKH, compensate RT, and resolve RT's claims; and (6) that settlement needed to occur immediately upon AKH's demands or UUIC would be exposing AKH to significant damage and injury. UUIC further alleges that it later learned that these representations were not true; that AKH either made these misrepresentations knowingly or failed to exercise reasonable care or competence to obtain or communicate true information; that UUIC justifiably relied on this information in paying $5 million to settle the claim, which it would not have paid had it known all of the true facts; and that the misrepresentations and resulting reliance caused UUIC to pay more to settle the underlying lawsuits than it otherwise would have paid.

UUIC also alleges a claim of fraudulent concealment, claiming that AKH intentionally concealed material facts from UUIC during and in relation to the RT lawsuit, including the following: (1) that the $5 million payment, which UUIC paid directly to RT, was immediately transferred to AKH upon receipt by RT; (2) AKH and RT had fully executed settlement documents prior to UUIC's payment; (3) that RT and AKH had filed stipulations of dismissal of the consolidated underlying lawsuits prior to UUIC's payment; (4) that RT had proposed a global settlement in November 2012 by which UUIC would not pay any money; (5) that AKH and RT had been engaged in settlement discussions from September to December 2012; (6) that AKH and RT had agreed to final settlement amounts before UUIC tendered its policy limits upon AKH's demand; (7) RT and its counsel raised concerns to AKH and its agents in December 2012 regarding whether UUIC was being properly informed as to the terms and progression of settlement, whether UUIC had agreed to the settlement structure, and whether the settlement structure was appropriate; (8) communications between AKH and RT regarding settlement structure and amounts; and (9) basic information sufficient for UUIC to make a fully informed decision on the reasonableness of the settlement or of AKH's demands for policy limits.

In addition to these tort claims, UUIC alleges a California statutory claim that applies when independent counsel is selected by the insured.[2] UUIC alleges that AKH breached a statutory duty to disclose to the insurer all information concerning the underlying action except privileged materials, and to timely inform and consult with the insurer on matters relating to the action. UUIC further alleges a statutory claim under K.S.A. § 40-2, 118 for restitution and declaratory relief under the Kansas Fraudulent Insurance Act, claiming AKH knowingly and with intent to defraud presented a claim for payment and other benefit, along with written statements in support of that claim, knowing it contained materially false information.

On November 25, 2014, AKH filed an Amended Complaint adding claims for negligent misrepresentation, negligence, and intentional misrepresentation.[3] AKH alleges that UUIC made the following false and misleading statements with regard to its defense and indemnity of the R-T lawsuits: (1) that AKH was not entitled to select personal counsel to defend AKH in the underlying action at UUIC's expense; (2) that its reservation of rights letters did not trigger a Cumis obligation entitling AKH to personal counsel pursuant to Cal. Civil Code § 2860; (3) that AKH was not entitled to personal counsel to defend the underlying action at the carrier's expense; (4) that it was entitled to assign panel counsel of UUIC's choice to defend AKH in the underlying action and to leave AKH to its own resources with respect to funding the defense of the underlying action by personal counsel; (5) that it was entitled to assign the panel firm of Gordon & Rees to defend AKH in the underlying action; (6) that AKH would have to agree to the terms that UUIC was willing to offer in return for being permitted to use Paul Hastings as personal counsel; (7) that AKH was required to accept not 100 percent of the defense of the claims against it, but only 50%; (8) that Paul Hastings was not entitled to be compensated for actions undertaken to defend AKH if those actions were also required to prosecute the affirmative claims by AKH; (9) that Paul Hastings had to accept a drastically reduced hourly rate of $285, a fraction of Paul Hastings' normal rate and well below the rates that UUIC had agreed to pay to Gordon & Rees; (10) that it was entitled to audit the bills of Paul Hastings to deny payment of any bills that were not consistent with UUIC guidelines for panel counsel; (11) that it was entitled to deny payment for all block billings by Paul Hastings, and assigned its own arbitrary meaning to block billing; (12) that it was entitled to refuse to pay bills for serendipitous reasons, or for no real reason at all, such as without explanation simply because of a choice of words, e.g., the use of words such as "schedule, " or "continue preparation" in the bill; (13) that it could defend a case by paying for an estimated 15% of the defense fees; (14) that there was a standard other than reasonableness which governed its responsibility for the payment of the Paul Hastings bills; (15) that it was fully defending the insured even though it had materially breached every aspect of the defense obligation and left AKH drowning in legal fees; (16) that it did not know the $5, 000, 000 it agreed to pay in settlement was part of a settlement of the entire trademark dispute as to which AKH was receiving a payment for transfer to RT of trademark rights; (17) that it did not know prior to the issuance of its settlement check the nature of the underlying settlement and did not know that monies paid to RT would "triangle" to AKH; (18) that it would not have issued the check if it had known that $13, 000, 000 was being paid by RT to AKH; (19) the reasons for its payment of $5, 000, 000 and that it lacked knowledge regarding the terms of the underlying settlement; (20) that the underlying case had settled prior to its payment of $5, 000, 000; (21) that it has certain policy exclusions though these have no possible application.

AKH alleges what it claims are the true facts contrary to the misrepresentations, that these misrepresentations were negligently made, that UUIC induced AKH to accept interim funding of the defense based on false terms and representations, and that it sustained losses based on inadequate defense of the underlying lawsuits.

AKH's negligence claim alleges that UUIC had a duty to act in good faith and fair dealing so that AKH would receive the benefits it owed under the policy, that the parties had a fiduciary relationship, and that UUIC should have known that its laundry list of misrepresentations were false. AKH alleges that the "reservation of rights letters, including as to intentional acts exclusions, contained the plainest of Cumis triggers, " and that there is no reason a reasonable insurance carrier would have believed the representations made by UUIC.

AKH's intentional misrepresentation claim alleges that several written statements by UUIC representatives contain fraudulent statements. AKH identifies both reservation of rights letters, as well as subsequent emails and other correspondence following up on UUIC's positions during the course of the underlying lawsuit. AKH attached these documents to the Amended Complaint. Most of these emails concern the payment formula UUIC agreed to with respect to AKH's counsel in the underlying suit. AKH alleges that these material, untrue statements induced it to pay interim funding for its counsel, and to settle the underlying lawsuit, causing damages.

UUIC subsequently filed a Fourth Amended Answer and Counterclaim[4] in response to the Amended Complaint. The allegations in the Fourth Amended Counterclaim are the same as those in the Third Amended Counterclaim, so the Court construes AKH's motion to dismiss as applying to this more recent pleading.

On December 12, 2014, AKH filed its motion for partial summary judgment on the following issue: that UUIC had a "duty and breach[ed that] duty regarding the acknowledgment of a right to Cumis counsel."[5] UUIC responded, denying that its reservation of rights created a conflict of interest or triggered a duty to acknowledge such a conflict, and cross-moved for summary judgment that it did not breach an alleged duty to acknowledge AKH's right to independent counsel.

On March 11, 2015, this Court ruled on the parties' choice of law motions. It found several issues for which a conflict existed, and ruled that because the contract was both made and performed in California, California law would apply. On April 1, 2015, the parties filed a joint motion to revise the scheduling order yet again. They sought an extension of 90 days, because the claims in this case are still "unsettled, " given the pending motions to dismiss and for partial summary judgment. They stated in their motion that:

At this point, the parties are not only unaware of what claims remain between them, but they are also unaware of each other's positions on and defenses to the claims alleged against them. Both parties believe that to continue with the current schedule while the pleadings are not final would not be productive and would require the parties to expound costs that may not ultimately move the case forward. If the motions are successful, even if only in part, they would narrow the scope of the allegations and claims ultimately to be litigated, which would impact the issues to be addressed by the parties in discovery and motions. The same is true for the Cross-Motions for Partial Summary Judgment that are outstanding.
In addition, the parties need to take additional discovery that may impact the outstanding issues. The parties are also discussing the possibility of a second mediation.[6]

Judge Gale granted the parties request, and extended the discovery deadline to November 2014, the dispositive motions deadline to January 4, 2016, and the bench trial date to October 3, ...

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