© 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O SHEPPARD, MULLIN, RICHTER & HAMPTON LLP FRANK FALZETTA, Cal. Bar No. 125146 JENNIFER M. HOFFMAN, Cal. Bar No. 240600 333 South Hope Street, 43rd Floor ELECTRONICALLY Los Angeles, California 90071-1422 FILED Telephone: 213.620.1780 / Facsimile: 213.620.1398 ots TN E mail: ffalzetta@smrh.com 06/17/2020 Jhottman(@smrh, com Clerk of the Court BY: EDNALEEN ALEGRE Deputy Clerk SHEPPARD, MULLIN, RICHTER & HAMPTON LLP JEFFREY S. CROWE, Cal. Bar No. 216055 KATHERINE COMAN SAMPLE, Cal. Bar No. 259325 650 Town Center Drive, 10th Floor Costa Mesa, California 92626 Telephone: ~~ 714.513.5100 / Facsimile: Email: jcrowe @smrh.com ksample @smrh.com 714.513.5130 Attorneys for Defendant LIBERTY MUTUAL INSURANCE COMPANY and Defendant and Cross-Complainant THE OHIO CASUALTY INSURANCE COMPANY SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF SAN FRANCISCO Lead Case No. CGC-18-564705 Consolidated Case No. CGC-19-572725 OAK TRUCKING, LLC, Plaintiff, DEFENDANT LIBERTY MUTUAL Vv. INSURANCE COMPANY’S AND DEFENDANT AND CROSS- COMPLAINANT THE OHIO CASUALTY INSURANCE COMPANY'S: JLIS, INC. and DOES 1 through 100, Defendants. a) NOTICE OF DEMURRER AND DEMURRER TO PLAINTIFFS’ CONSOLIDATED FIRST AMENDED COMPLAINT; AND, GLENN F. PASILIAO and JOSSELIN GARCIA PASILIAO, et al., Plaintiffs, 2) MEMORANDUM OF POINTS Vv. AND AUTHORITIES IN SUPPORT THEREOF. LIBERTY MUTUAL INSURANCE COMPANY; THE OHIO CASUALTY INSURANCE COMPANY; JLIS, Inc. and DOES 1 through 50, inclusive, Defendants. AND RELATED CROSS-ACTION. (Concurrently Filed with the Declaration of Katherine Sample and Request for Judicial Notice) Date: July 14, 2020 Dept.: 302 Time: 9:30 a.m. Complaint Filed: January 11, 2019 Trial Date: February 10, 2021 -1 SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD: PLEASE TAKE NOTICE that, on July 14, 2020 at 9:30 a.m., in Department 302 of the San Francisco County Superior Court, located at 400 McAllister Street, San Francisco, California, Defendant Liberty Mutual Insurance Company (“LMIC”) and Defendant and Cross-Complainant The Ohio Casualty Insurance Company (“Ohio Casualty”), will and hereby do demur, pursuant to California Civil Procedure Code § 430.10 ef segq., to Plaintiffs’ Consolidated First Amended Complaint (“FAC”) on the following grounds: FIRST CAUSE OF ACTION 1. LMIC demurs, as to Plaintiffs’ First Cause of Action for Breach of Contract, because the FAC fails to state facts sufficient to constitute a cause of action against LMIC, which owed no obligations under the insurance contract, as is apparent from Exhibit B attached to the FAC, of which the Court may take judicial notice pursuant to Cal. Evidence Code § 452(d). [Code of Civil Procedure § 430.10(d)-(e), (g)]. SECOND CAUSE OF ACTION 2. LMIC demurs, as to Plaintiffs’ Second Cause of Action for Breach of the Implied Covenant of Good Faith and Fair Dealing, because the FAC fails to state facts sufficient to constitute a cause of action against LMIC, which owed no obligations under the insurance contract, as is apparent from Exhibit B attached to the FAC, of which the Court may take judicial notice pursuant to Cal. Evidence Code § 452(d). [Code of Civil Procedure § 430.10(d)-(e), (g)]. THIRD CAUSE OF ACTION 3. LMIC and Ohio Casualty demur, as to Plaintiffs’ Third Cause of Action for Fraud, because the FAC fails to state facts sufficient to constitute a cause of action against them. [Code of Civil Procedure § 430.10(e)]. FOURTH CAUSE OF ACTION 4. LMIC and Ohio Casualty demur, as to Plaintiffs’ Fourth Cause of Action for Misrepresentation, because the FAC fails to state facts sufficient to constitute a cause of action against them. [Code of Civil Procedure § 430.10(e)]. 9 SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O FIFTH CAUSE OF ACTION 5. LMIC demurs, as to Plaintiffs’ Fifth Cause of Action for Direct Action by Judgement Creditor Pursuant to Insurance Code § 11580, because the FAC fails to state facts sufficient to constitute a cause of action against LMIC, which owed no obligations under the insurance contract, as is apparent from Exhibit B attached to the FAC, of which the Court may take judicial notice pursuant to Cal. Evidence Code § 452(d). [Code of Civil Procedure § 430.10(d)-(e), (2)]. SIXTH CAUSE OF ACTION 6. LMIC and Ohio Casualty demurs, as to Plaintiffs” Sixth Cause of Action for Concert of Action/Aiding and Abetting, because the FAC fails to state facts sufficient to constitute a cause of action. [Code of Civil Procedure § 430.10(e)]. SEVENTH CAUSE OF ACTION Ts LMIC and Ohio Casualty demur, as to Plaintiffs’ Seventh Cause of Action for Economic Interference, because the FAC fails to state facts sufficient to constitute a cause of action. [Code of Civil Procedure § 430.10(e)]. LMIC and Ohio Casualty base their Demurrer on this Notice, the attached Memorandum of Points and Authorities, the records attached to the concurrently-filed Request for Judicial Notice, the concurrently-filed Declaration of Katherine C. Sample, all pleadings and papers on file herein, the arguments and comments of counsel presented at the hearing on this Demurrer, and upon such other matters or evidence as may be presented at the time of the hearing. Prior to filing this Demurrer, counsel for LMIC and Ohio Casualty met and conferred with Plaintiffs’ counsel on June 8, 2020, June 9, 2020 and June 10, 2020, in compliance with California Civil Procedure Code § 430.41(a). (Sample Declaration, 2-3). PLEASE TAKE FURTHER NOTICE that the San Francisco Superior Court has adopted CRC 3.1308, as the tentative ruling procedure in civil law and motion and discovery matters. Parties may obtain a tentative ruling issued by the Law and Motion and Discovery Departments by telephoning (415) 551-4000 or visiting the court’s website at www .sfsuperiorcourt.org and clicking the online services link. Changes in telephone numbers will appear in the official 3. SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O newspapers. A party who fails to appear at the hearing is deemed to submit to the tentative ruling. However, no party may submit to a tentative ruling that specifies that a hearing is required. Parties intending to appear at the hearing must give notice to opposing parties and the court promptly, but no later than 4:00 p.m. the day before the hearing, unless the tentative ruling has specified that a hearing is required. Notice of contesting a tentative ruling must be provided by sending an email to the court to contestdept302tr @sftc.org, or other email designated by the court in the tentative ruling, with a copy to all other parties, stating, without argument, the portion(s) of the tentative ruling that the party contests. A party may not argue at the hearing if the opposing party is not so notified, and the opposing party does not appear. If no party appears, or if a party does not appear because the opposing party failed to give sufficient notice of intent to argue, then the tentative ruling will be adopted. Tentative rulings are generally available by 3:00 p.m. the day before the hearing. A tentative ruling that does not become available until after 3:00 p.m. is a late tentative ruling. A late tentative ruling will indicate that the ruling is late. If a tentative ruling is late, the parties must appear, unless all parties agree to submit to a late tentative ruling in which case the Court will adopt the late tentative ruling as per Local Rule 8.3. Dated: June 17, 2020 SHEPPARD, MULLIN, RICHTER & HAMPTON LLP \UA modu N\_ FRANK FALZFTTA °* JENNIFER M. HOFFMAN JEFFREY S. CROWE KATHERINE COMAN SAMPLE Attorneys for Defendant LIBERTY MUTUAL INSURANCE COMPANY and Defendant and Cross- Complainant THE OHIO CASUALTY INSURANCE COMPANY By 4 SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION This Demurrer renews many of the same arguments raised, but not ruled upon, earlier this year. In February 2020, Ohio Casualty and LMIC filed a Motion for Judgment on the Pleadings, and Plaintiffs filed a competing Motion for Leave to Amend the Complaint. Given the liberal policy favoring amendment, the Court allowed Plaintiffs to amend their complaint without prejudice to Ohio Casualty’s and LMIC’s right to demur to an amended pleading and granted Plaintiffs’ motion without reaching the merits of Ohio Casualty’s and LMIC’s arguments. After nearly three months, Plaintiffs finally filed their First Amended Complaint (“FAC”), which does nothing to cure the pleading deficiencies that LMIC and Ohio Casualty previously detailed. As a threshold matter, the FAC still fails to allege a valid cause of action against LMIC. Longstanding California law establishes that claims for breach of contract and “bad faith” lie only against a party to the insurance contract. See McKell v. Wash. Mut., Inc., 142 Cal.App.4th 1457, 1489 (2006); Henry v. Associated Indem. Corp., 217 Cal. App.3d 1405, 1416-17 (1990); Austero v. National Cas. Co. of Detroit, Mich., 62 Cal.App.3d 511, 515 (1976); see also Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 576 (1973). The same is true for a judgment creditor claim under Insurance Code § 11580(b). All of Plaintiffs’ claims against LMIC and Ohio Casualty center on a single business auto policy (“the Policy”) that Ohio Casualty issued to cross-defendant Oak Trucking, LLC (“Oak”). It is undisputed that LMIC is not a party to that insurance contract. Exhibit B to the FAC demonstrates that fact. Nevertheless, Plaintiffs misleadingly describe the Policy as the “LMIC/[Ohio Casualty] policy,” and refer to “LMIC/[Ohio Casualty]” as a single enterprise to perpetuate their alter ego theory of liability. (FAC, {{29, 31-42). As discussed further below, this theory against LMIC fails, and “[f]alse allegations of fact, inconsistent with annexed documentary exhibits or contrary to facts judicially noticed, may be disregarded.” Hoffman v. Smithwoods RV Park, LLC, 179 Cal.App.4th 390, 400 (2009). There is also no “Economic Interference” tort, and “Aiding and Abetting” is not a stand- alone cause of action. “Aiding and Abetting” is merely a method of joining defendants who _5- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O purportedly acted in concert to commit an intentional tort. Nasrawi v. Buck Consultants, LLC, 231 Cal.App.4th 328, 343 fn. 7 (2014). To the extent Plaintiffs allege that LMIC intentionally induced a breach of the Policy, or aided and abetted Ohio Casualty in breaching the Policy, implied covenants, and insurance regulations, those claims fail under the agent’s immunity rule. Reynolds v. Bement, 36 Cal.4th 1075, 1090 (2005); Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal.4th 503, 512 (1994) (“duly acting agents and employees cannot be held liable for conspiring with their own principals”). Next, the “economic loss” rule bars Plaintiffs’ Fraud, Misrepresentation, Aiding and Abetting, and Economic Interference claims. This rule precludes recovery in tort “for purely economic loss,” unless the plaintiff “can demonstrate harm above and beyond a broken contractual promise.” Robinson Helicopter Co., Inc. v. Dana Corp., 34 Cal.4th 979, 988 (2004). To circumvent this rule, Plaintiffs allege “emotional upset” and “anxiety” by cross-defendant Gary Liu (“Mr. Liu”), without any accompanying physical injury. (FAC, qq 70, 90, 99). But Mr. Lui is not a plaintiff here, and his purported distress claims are not assignable to Plaintiffs. Murphy v. Allstate Ins. Co., 17 Cal.3d 937, 942 (1976). Finally, the Fraud and Misrepresentation claims also fail as to both LMIC and Ohio Casualty, because Plaintiffs have not alleged, and cannot allege, justifiable reliance to their detriment on any purported misrepresentation. McLaughlin v. Nat'l Union Fire Ins. Co., 23 Cal. App.4th 1132, 1148 (1994). In short, Plaintiffs have not pled facts sufficient to support any cause of action against LMIC, or Fraud, Misrepresentation, Aiding and Abetting or Economic Interference claims against Ohio Casualty. The attached Policy and black letter law demonstrate that Plaintiffs cannot cure these pleading deficiencies. As this is now Plaintiffs’ second failed attempt to state valid claims, the Court should grant LMIC’s and Ohio Casualty’s Demurrer without leave to amend. II. FACTUAL AND PROCEDURAL BACKGROUND A. The Complaint. On January 28, 2019, Plaintiffs filed a Complaint alleging six causes of action against -6- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O LMIC and Ohio Casualty: (1) Breach of Contract; (2) Breach of the Implied Covenant of Good Faith and Fair Dealing; (3) Fraud and Concealment; (4) Negligent Misrepresentation; (5) Direct Action by Judgment Creditor; and (6) Conspiracy. Plaintiffs also alleged the Conspiracy claim against insurance broker JLIS. The Complaint generally referred to LMIC and Ohio Casualty as one entity and the Policy as being issued by both, despite the fact that the Policy, which Plaintiffs had attached as an exhibit to their Complaint, showed that only Ohio Casualty underwrote and issued the Policy. (Complaint, q 10; Complaint, Exhibit 1.) Plaintiffs also alleged conclusory Fraud, Negligent Misrepresentation, and Conspiracy claims, without including any specific facts supporting those claims, and falling well short of the heightened pleading standard required for Fraud/Misrepresentation. On February 21, 2020, LMIC and Ohio Casualty filed a Motion for Judgment on the Pleadings, and Plaintiffs brought a counter-motion for leave to amend. In the March 16, 2020 Order granting leave, this Court did not reach the merits of LMIC and Ohio Casualty’s motion and stated, "Defendants are free to test the sufficiency of the amended complaint by demurrer, motion for judgment on the pleadings or other appropriate proceedings." (Request for Judicial Notice [“RIN’], Exhibit 7, March 16, 2020 Order). B. The First Amended Complaint. On May 29, 2020, Plaintiffs filed their FAC, which includes the first five causes of action noted above, as well as three others: Aiding and Abetting (in place of the prior Conspiracy claim), “Economic Interference” and Professional Negligence. Plaintiffs allege the Professional Negligence claim against JLIS only. The crux of the amendments relate to Plaintiffs’ alter ego or single enterprise theory against LMIC. Plaintiffs now allege that LMIC and its other subsidiaries wholly own and control Ohio Casualty. As purported support for that theory, Plaintiffs attach a Statement of Interested Parties filed by LMIC and Ohio Casualty. (FAC, Exhibit A). Plaintiffs also attach Ohio Casualty’s 2014 and 2015 financial statements, claiming that Ohio Casualty: (1) did not have its own employees; (2) shared officers and directors with LMIC; (3) did not have its own _7- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O infrastructure and owned only $68,000 in furniture and $2,479 in computers; (4) filed a consolidated tax return with 110 other companies owned and operated by LMIC’s parent, Liberty Mutual Group, Inc.; and (5) ceded 100% of its business and underwriting to LMIC, for which LMIC purchased reinsurance coverage and under which Ohio Casualty held no right to repayment. (FAC, qq 4-5; FAC, Exhibits C-D). The FAC repeatedly concludes that “‘LMIC/[Ohio Casualty]’ entered into a contract of insurance with OAK,” and that Ohio Casualty “did not serve as an insurer, but rather, served as a bank account and instrumentality for LMIC.” (FAC, { 31, 45, 64, 74, 80, 86, 94). For the Fraud and Misrepresentation claims, the FAC alleges that claims specialist Bob Carr misrepresented to Plaintiffs that Oak had no vehicles or responsible representatives on site when the accident occurred, and that the tractor-trailer driven by Mr. Pasiliao was being loaded at the time of the accident. (FAC, (51-52). The FAC then states that Oak and Mr. Liu somehow relied on these alleged misrepresentations made only to Plaintiffs, while simultaneously pleading that Plaintiffs still demanded payment on the Policy (FAC, {qj 14-15, 17), and conceding that Ohio Casualty agreed to participate in Oak’s defense prior to the purported arbitration in the underlying actions. (FAC, (22). Finally, under the claims for Aiding and Abetting and Economic Interference, Plaintiffs allege that LMIC induced Ohio Casualty to breach the insurance contract, implied covenant, and insurance regulations. (FAC, qq 88, 95). As explained below, Plaintiffs’ claims against LMIC are baseless, and the Third, Fourth, Sixth and Seventh claims against Ohio Casualty likewise fail as a matter of law. III. LEGAL STANDARD A court must sustain a demurrer where the complaint fails to state facts sufficient to constitute a cause of action. Cal. Civ. Proc. Code § 430.10(e). To survive a demurrer, the complaint must allege “facts sufficient to establish every element of each cause of action.” Rakestraw v. Cal. Physicians’ Serv., 81 Cal.App.4th 39, 43 (2000). Doubt may be resolved against the plaintiff, and facts not alleged are presumed not to exist. Kramer v. Intuit, Inc., 121 _8- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O Cal.App.4th 574, 578 (2004). While courts should assume the truth of facts that are properly pled, they should not accept “contentions, deductions, or conclusions of fact or law and may disregard allegations that are contrary to the law or to a fact which may be judicially noticed.” Black v. Dep't of Mental Health, 83 Cal.App.4th 739, 745 (2000). III. LEGAL ARGUMENT A. Plaintiffs Cannot Plead Breach of Contract, Bad Faith, or Judgment Creditor Claims Against LMIC, Because LMIC Is Not a Party to the Insurance Contract. To plead a cause of action for breach of contract, Plaintiffs must allege facts that, if proven, would demonstrate: (1) the existence and terms of a contract; (2) the plaintiff’s performance or excuse for nonperformance of its own obligations under the contract; (3) defendant’s breach; and (4) resulting damages. Reichert v. General Ins. Co., 68 Cal.2d 822, 830 (1968); Gautier v. General Tel. Co., 234 Cal.App.2d 302, 305 (1965). It is axiomatic that, for a breach of contract claim to lie, a contract must exist between the plaintiff and the defendant. See McKell, supra, 142 Cal. App.4th at 1489. A party not in privity to an insurance contract cannot be liable for its breach. Henry, supra, 217 Cal. App.3d at 1416-17. It is also well-established law that “[t]here is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.” Kransco v. American Empire Surplus Lines Ins. Co., 23 Cal.4th 390, 400 (2000)(emphasis added); see also Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 658 (1958). This principle also applies to insurance policies. Id. In analyzing insurance bad faith claims, California courts first determine whether the insurer breached its duties under the insurance contract. Griffin Dewatering Corp. v. Northern Ins. Co. of New York, 176 Cal.App.4th 172, 194-95 (2009); Major v. Western Home Ins. Co., 169 Cal.App.4th 1197, 1209 (2009) (bad faith requires the insurer to withhold benefits due under the policy); Jordan v. Allstate Ins. Co., 148 Cal. App.4th 1062, 1073 (2007) (“[a]n insurer is said to act in ‘bad faith’ when it not only breaches its policy contract but also breaches its implied covenant to deal fairly and in good faith with its insured.”). 9. SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O California courts, therefore, recognize the “fundamental rule that ‘privity of contract with the insurer is essential to an implied covenant action against the insurer.” Seretti v. Superior Nat’l Ins. Co., 71 Cal.App.4th 920, 929 (1999) (citation omitted). “‘[S]omeone who is not a party to the contract has no standing to enforce the contract or to recover extra-contractual damages for wrongful withholding of benefits to the contracting party.” Id. at 930 (quoting Hatchwell v. Blue Shield of Cal., 198 Cal.App.3d 1027, 1034 (1988)). Similarly, “one who is not a party to the underlying contract may not be held liable for breach of an implied covenant of good faith and fair dealing, for as to him no such implied covenant exists.” Austero, supra, 62 Cal.App.3d at 515; Gruenberg, supra, 9 Cal.3d at 576 (“[T]he non-insurer defendants were not parties to the agreements for insurance; therefore, they are not, as such, subject to an implied duty of good faith and fair dealing.”); Rainbow Sandals, Inc. v. Liberty Mutual Ins. Co., 2014 WL 12577084 *2 (C.D. Cal. 2014) (“[A] party cannot breach a contract or the implied covenant of good faith and fair dealing if it was not a party to the contract at issue.”); American Steel & Stairways, Inc. v. Lexington Ins. Co., 2012 WL 4097711 *2 (N.D. Cal. 2012) (“Under California law, claims for breach of contract and breach of duty of good faith and fair dealing, whether brought in the insurance context or otherwise, require the existence of a contract between a plaintiff and the defendant.”); Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 36 (1995) (“the covenant is implied as a supplement to the express contractual covenants”). Plaintiffs also seek recovery under Insurance Code § 11580(b)(2) of the October 31, 2018 Judgment against Oak. (FAC, 82; RIN, Exhibit 4). Insurance Code § 11580(b)(2) gives an injured party, as a judgment creditor, standing to seek payment under the insurance policy. See Royal Indem. Co. v. United Enterprises, Inc., 162 Cal.App.4th 194, 205 (2008) (“a third party who is not in privity of contract with the liability insurer ...would normally lack standing to sue the insurer to resolve coverage questions about a tortfeasor”). But the judgment creditor’s action against the tortfeasor’s liability insurer is still “subject to [the] terms and limitations” of the policy. Cal. Ins. Code § 11580(b)(2) (emphasis added). Here, Plaintiffs lump “LMIC/[Ohio Casualty] together, and make a sweeping - and inaccurate - claim that LMIC issued the Policy. (FAC, |] 31, 45, 64, 74, 80, 86, 94). However, -10- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O the documents attached to the FAC disprove this allegation. Indeed, Exhibit B shows that only Ohio Casualty issued the Policy, and that Ohio Casualty is the only contracting defendant here. See Cal. Ins. Code § 381 (an insurance policy must state the parties to it). Plaintiffs’ allegations to the contrary should be disregarded. Hoffman, supra, 179 Cal.App.4th at 400 (“Under the doctrine of truthful pleading, the courts ‘will not close their eyes to situations where a complaint contains allegations of fact inconsistent with attached documents. ..”). Accordingly, Plaintiffs cannot state plausible claims against LMIC for Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing, and Direct Judgment Creditor Action, in relation to an insurance contract to which LMIC was not a party and under which it owed no contractual duties to Oak or Plaintiffs as Oak’s assignee. This Court should, therefore, sustain the Demurrer to the First, Second, and Fifth Causes of Action without leave to amend. B. Plaintiffs’ Alter Ego Theory Against LMIC Fails. Plaintiffs try to circumvent the contractual privity requirement for their First, Second, and Fifth causes of action against LMIC based on an alter ego or single enterprise theory. These allegations fail for three reasons. First, Ohio Casualty and LMIC are separate corporate entities. California Department of Insurance records attached to LMIC and Ohio Casualty’s Request for Judicial Notice show that both are separately licensed to conduct the business of insurance in this state. (Ohio Casualty “authorized in California” since 2008; LMIC “authorized in California” since 1929). Both Ohio Casualty, a New Hampshire corporation, and LMIC, a Massachusetts corporation, are also separately registered with, and recognized by, the California Secretary of State’s Office as different corporate entities. (See RIN, Exhibits 2-3.) Additionally, Plaintiffs misconstrue Exhibit A, C and D to the FAC, which provide further evidence of Ohio Casualty’s separate corporate form. Exhibit A (Statement of Interested Parties) supports that LMIC owns only part of Ohio Casualty’s direct parent corporation, and that several other corporations also have an ownership interest in Ohio Casualty. Exhibits C and D, which are Ohio Casualty’s Annual Financial Statements for 2014-2015, show that Ohio Casualty: (1) maintains its own NAIC Company Code and Employer ID Number; (2) has its own statutory -11- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O home office; and (3) had total assets of $5.428 billion in 2014 and $5.598 billion in 2015. (FAC, Exhibit C, pp. 1-2; FAC, Exhibit D, pp. 1-2). Second, there “is a general presumption in favor of respecting the corporate entity.” Calvert v. Huckins, 875 F.Supp. 674, 678 (E.D. Cal. 1995). Disregarding the corporate entity is an “extreme remedy” that requires “exceptional circumstances.” Id. Third, California law requires “clear evidence” of two threshold elements to support allegations of alter ego liability, as follows: “(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.” Mesler v. Bragg Mgmt. Co., 39 Cal.3d 290, 300 (1985); Calvert, supra, 875 F.Supp. at 678; Ryder Truck Rental, Inc. v. Acton Foodservices Corp., 554 F.Supp. 277, 279 (C.D. Cal. 1983). Plaintiffs have not, and cannot, allege facts to support either predicate element. As to the first element, the allegations, that Ohio Casualty (1) owned only a nominal amount of furniture and computers, (2) used LMIC employees to adjust claims, and (3) shared LMIC’s officers and directors, do not satisfy Plaintiffs’ burden. Those allegations do not reflect that Ohio Casualty operated as a mere “shell” or instrumentality of LMIC. Institute of Veterinary Pathology, Inc. v. California Health Laboratories, Inc., 116 Cal. App.3d 111, 119 (1981). Where, as here, a party merely relies on well-accepted corporate relationships between related entities, California courts have repeatedly rejected alter ego and single enterprise theories of liability. See Drazan v. Atlantic Mut. Ins. Co., 2010 WL 3447712 **2-3 (N.D. Cal. 2010) (rejecting that a corporate relationship alone was sufficient to state a claim against a non- contracting insurer entity defendant, and dismissing breach of contract and implied covenant claims against non-contracting insurer); Alta Bates Summit Medical Center v. United of Omaha Life Ins., 2009 WL 57108 **4-5 (N.D. Cal. 2009) (dismissing claims against insurer that did not issue the policy where plaintiff alleged only conclusory alter ego allegations against the non- contracting insurer). Calvert, supra, 875 F.Supp. at 674, is instructive. There, the court rejected “unity of interest” allegations based on claims that: (1) parent entities had an ownership interest in and -12- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O shared some “interlocking” directors and officers with its subsidiary; (2) the parent entity incorporated the subsidiary’s figures into the parent’s financials; (3) the parent entity guaranteed a promissory note issued by the subsidiary; and (4) the parent provided legal services to its related and subsidiary entities. Id. at 678-679. Those allegations simply reflected “a normal feature of 99 CC parent-subsidiary relationships,” “generally accepted accounting principles,” and “broad oversight typically indicated by common ownership and common directorship.” Id. at 679. They were not adequate to demonstrate such a “unity of interest” that the subsidiary entity became the “mere instrumentality” of its parent. Id. Similarly, in Institute of Veterinary Pathology, Inc., supra, 116 Cal.App.3d at 111, the Institute sued a lab and its parent corporation after the lab terminated its contract with the Institute. In support of its alter ego theory against the parent corporation, the Institute argued: (1) that the parent company owned 100% of the lab’s stock; (2) had interlocking directors and officers with the lab; (3) maintained the lab’s minute and stock books at its New York corporate headquarters; and (4) filed consolidated financial statements with the lab. Id. at 119-120. The court, however, concluded that such allegations and purported evidence merely established a corporate relationship between the entities, and failed “to set forth any direct evidence of [the parent’s] manipulative control of its subsidiaries which would require imposition of liability.” Id. at 120. The Court concluded that “[t]here is nothing to support a finding that the validly formed and existing corporate subsidiaries were only instrumentalities or conduits.” Id. Even assuming a “unity of interest” exists, which it does not, Plaintiffs have failed to demonstrate the second element of alter ego liability, i.e., an inequitable result. Tomaselli v. Transamerica Ins. Co., 25 Cal.App.4th 1269, 1285 (1994). Plaintiffs must allege facts showing that recognizing the corporate form would “defeat the rights and equities of third persons.” Mesler, supra, 39 Cal.3d at 301. However, “simply availing oneself of the protections provided by corporate charters is not misconduct sufficient to justify a court in finding a corporation to be an alter ego.” Tatung Co., Ltd. v. Shu Tze Hsu, 217 F.Supp.3d 1138, 1176 (C.D. Cal. 2016). Rather, an injustice must occur, such as when a parent undercapitalizes a subsidiary or strips it of assets to avoid recovery by the plaintiff. See Sonora Diamond Corp. v. Superior Court, 83 _13- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O Cal.App.4th 523, 539 (2000); Las Palmas Associates v. Las Palmas Center Associates, 235 Cal.App.3d 1220, 1251 (1991); see also RRX Indus., Inc. v. Lab-Con, Inc., 772 F.2d 543, 546 (9th Cir. 1985) (finding alter ego where undercapitalized entity was formed “merely to market” parent’s products and “was simply an empty shell”). Plaintiffs allege no facts that recognizing Ohio Casualty’s separate corporate status would result in any injustice here. Recently, in Lorbeer Enterprises, LP v. Liberty Mutual Ins. Co., 2019 WL 6655267 *2 (C.D. Cal. 2019), the court dismissed alter ego claims against LMIC on this very ground: Plaintiff pleads no facts to suggest that it would be unable to recover on its claims against Ohio Casualty directly. Indeed, the court fails to see how dismissal of Liberty Mutual will have any bearing whatsoever on Lorbeer’s suit, or should it prevail, on its likely recovery. Plaintiff alleges a straightforward wrongful denial of coverage under an insurance policy, not a scheme to abuse the corporate form to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose. The extreme remedy of alter ego liability is inappropriate where Plaintiff appears entirely capable of recovering in the normal course. Similarly, here, the FAC falls woefully short of establishing any inequitable result arising from recognition of Ohio Casualty’s corporate form. Plaintiffs offer no facts suggesting that they cannot obtain full relief against Ohio Casualty. Thus, even if Plaintiffs could identify facts meeting the first prong of alter-ego liability, which they have not, their inability to meet the second prong bars the claim. For these additional reasons, Plaintiffs’ First, Second, and Fifth Causes of Action against LMIC fail and cannot be cured by amendment. C. The Agent’s Immunity Rule Defeats Plaintiffs’ Claims for ‘Economic Interference,” “Aiding and Abetting,” and Alter Ego Liability. There is no tort of “Economic Interference.” Similarly, “Aiding and Abetting” is not a stand-alone cause of action, but, instead, is a method of joining defendants who purportedly acted in concert to commit an intentional tort. Nasrawi, supra, 231 Cal.App.4th at 343 fn. 7 (“There can be no aiding and abetting liability absent the commission of an underlying tort”). In their Sixth and Seventh Causes of Action, Plaintiffs re-styled their prior Conspiracy claim to allege that LMIC intentionally induced breaches of, or aided and abetted Ohio Casualty in -14- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O breaching, the insurance contract and duties owed under that contract and the Insurance Code. (FAC, 1988, 95). Plaintiffs also allege the existence of a “management services agreement,” authorizing LMIC to act for Ohio Casualty. (FAC, {{89, 97). According to Plaintiffs, that agreement required “that [Ohio Casualty]’s underwriting, policy sales, claims investigation, claims handling and coverage determinations all take place at the hands of LMIC.” (FAC, (89). All of these claims and allegations fail under the agent’s immunity rule. California courts have long recognized that an agent cannot be held liable for conspiring with its principal. Reynolds, supra, 36 Cal.4th at 1090; Applied Equipment Corp., supra, 7 Cal.4th at 512 (“duly acting agents and employees cannot be held liable for conspiring with their own principals”); Gruenberg, supra, 9 Cal.3d at 576 (“corporate agents and employees acting for and on behalf of the corporation cannot be held liable for inducing a breach of the corporation’s contract since being in a confidential relationship to the corporation their action in this respect is privileged”); Wise v. Southern Pacific Co., 223 Cal.App.2d 50, 72 (1963) (“[a]gents and employees of a corporation cannot conspire with their corporate principal or employer where they act in their official capacities on behalf of the corporation and not as individuals for their individual advantage.); Farrar v. American Natl. Prop. & Cas. Co., 2019 WL 2369930, **1, 5-6 (E.D. Cal., June 5, 2019) (claims management and services entity acting on behalf of underwriting entity not liable for breach of contract or bad faith). Likewise, “the representative of a contracting party may not be held liable for the tort of interfering with its principal’s contract.” Mintz v. Blue Cross of California, 172 Cal.App.4th 1594, 1607 (2009); Asahi Kasei Pharma Corp. v. Actelion Ltd., 222 Cal.App.4th 945, 964 (2013) (one “specifically authorized” to act for a contracting party cannot be liable for intentional interference with the contract). In Gruenberg, supra, 9 Cal.3d 566, the owner of a bar and restaurant damaged by fire sued his insurers and their agents, including a third party adjusting firm, a law firm, and individual employees of those firms, alleging a conspiracy to deprive him of benefits under his policies. The court dismissed that claim against the non-insurer defendants, holding that as agents, they cannot be liable for conspiring to breach the insurance contract. Id. at 576. -15- SMRH:4824-1832-9536.1 DEMURRER TO THE FIRST AMENDED COMPLAINT © 00 39 O N Un BA W N N N N N N N ND N N Em e m e m e m e m e m e m e m c o NN O N Ln B R A W N = O OO 0 N N N R E W I N D = O Similarly, in Doctors’ Co. v. Superior Court, 49 Cal.3d 39 (1989), claims against an insurer’s agents for conspiring to breach insurance regulations failed for two reasons. First, statutory duties were owed only by the insurer, and second, the agents were shielded from liability under the agent’s immunity rule. Id. at 45-46, 49. Here, Plaintiffs allege that LMIC provided underwriting and claim handling services on behalf of Ohio Casualty pursuant to a “management services agreement.” (FAC, |] 89, 97). Because California law does not impose contract-based liability under the agent’s immunity rule, Plaintiffs can state no claim against LMIC for breach of contract, bad faith, or inducing/aiding and abetting a breach of the contract. Finally, in so far as Plaintiffs allege that Ohio Casualty and LMIC are a single enterprise, a corporation cannot conspire with itself. Black v. Bank of Am., 30 Cal. App. 4th 1, 6 (1994). As a result, this Court should sustain the Demurrer to the Sixth and Seventh Causes without leave to amend. D. The Economic Loss Rule Bars Plaintiffs’ Claims for Fraud, Misrepresentation, Economic Interference, and Aiding and Abetting. The “economic loss” rule precludes recovery in tort “for purely economic loss,” unless the plaintiff “can demonstrate harm above and beyond a broken contractual promise.” Robinson Helicopter Co., supra, 34 Cal.4th at 988. The function of the economic loss rule is to “prevent the law of contract and the law of tort from dissolving into each other.” Id. at 989 (quoting Erlich v. Menezes, 21 Cal.4th 543, 551 (1999)). In Warrick v. Travelers Commercial Insurance Co., 2015 WL 11921403 (S.D. Cal. October 29, 2015), the Court held that the economic loss rule barred a fraud claim “premised on Travelers’ breach of the insurance policy by inadequately investigating the claim and denying coverage.” Id. at *3. The Court explained that allowing such a claim “would open the door to fraud claims in every instance where a policyholder disagrees with an insurer’s coverage decision and is unhappy with the insurer’s handling of their claims.” Id. The Court concluded that the 9
