2013-00147390-CU-BC

Centex Homes vs. Adland Venture

Nature of Proceeding: Motion for Judgment on the Pleadings

Filed By: Martin, Angela

Defendants and Cross-Complainants St. Paul Fire & Marine Insurance Company,
Travelers Property Casualty Company of America, and Travelers Indemnity Company
of Connecticut (collectively, “Travelers”) filed a Motion for Judgment on the Pleadings.
Plaintiff and Cross-Defendant Centex Homes (“Centex”) opposed the motion.
Travelers’ Motion for Judgment on the Pleadings is DENIED.

A trial date has not yet been set.

Wrong Address in Notice of Motion

The Court notes that moving party has indicated the incorrect address in its notice of
motion. The correct address for Department 54 of the Sacramento County Superior
Court is 800 9th Street, Sacramento, California 95814. Moving party shall notify
responding party(ies) immediately.

Requests for Judicial Notice

Travelers filed a Request for Judicial Notice (“Travelers RJN”), which attaches court
filings and orders in other cases (Exhs. A-F), as well as Centex’s operative pleading in
this action (Exh. G), in support of its motion.

Likewise, Centex filed a Request for Judicial Notice (“Centex RJN”), which attaches
court filings, orders, and tentative rulings in other cases (Exhs. A-W) in opposition to
the motion.

Both RJNs are unopposed and granted. However, the Court only takes judicial notice
of the existence of the judicially-noticed documents, not the truth of the factual
contents stated therein. (Evid. Code § 452(d) (“Records of . . . any court of this state
or . . . any court of record of the United States . . .” are records that “may be judicially
noticed.”); Professional Engineers v. Dep’t of Transp. (1997) 15 Cal.4th 543, 590
(judicial notice of findings of fact does not mean that those findings of fact are true);
Steed v. Department of Consumer Affairs (2012) 204 Cal.App.4th 112, 120-121;
Herrera v. Deutsche Bank Nat’l Trust Co. (2011) 196 Cal.App.4th 1366, 1375; Joslin
v. H.A.S. Ins. Brokerage (1986) 184 Cal.App.3d 369, 374 (“[t]aking judicial notice of a
document is not the same as accepting the truth of its contents.”).)

Motion for Judgment on the Pleadings

“A motion for judgment on the pleadings is analogous to a general demurrer.” (
Bettencourt v. Hennessy Industries, Inc. (2012) 205 Cal.App.4th 1103, 1111.) “Like a
general demurrer, it tests the sufficiency of the complaint.” (Id.) The factual
allegations in the pleading are taken as true, and given a liberal construction. (Id.)
However, “conclusions of fact or law, opinions, speculation, or allegations contrary to
law or judicially noticed facts” are not considered in determining the sufficiency of the
pleading. (Id.) If the facts alleged in the complaint do not support any the cause of
action, the trial court’s inquiry is whether the complaint could reasonably be amended
to do so. (Id.) “Leave to amend is liberally allowed.” (Id.) “The trial court abuses its
discretion if it denies leave to amend when there is a reasonable possibility the defect
in the pleading could be cured by amendment.” (Id.)

Here, Travelers’ notice of motion frames two challenges to Centex’s pleading: (1) “[t]he
seventh cause of action against Travelers seeking an allocation of fees fails to state
facts sufficient to constitute a cause of action as a matter of law; and (2) [t]he “eight
cause of action against Travelers seeking a declaration that Centex is entitled to
independent counsel fails to state facts sufficient to constitute a cause of action as a
matter of law.” (Notice of Motion at 2.)

Centex’s Allegations

This litigation arises out of alleged defects in residential construction. Centex
contracted with various subcontractors (the “Subcontractors”), named parties in this
action, to build various homes in neighborhoods in Elk Grove, California. (Compl. ¶
46.) Various homeowners commenced legal action against Centex (the “Acevedo
Action”) for certain alleged construction defects, and alleged resulting property
damage. (Id.) Centex alleges that, to the extent any such defects and property
damage exist, they were caused by the Subcontractors. (Id.)

Centex alleges that Travelers allegedly issued insurance policies in connection with
the relevant residential construction projects, naming Centex as its insured. (Compl. ¶
87.) Centex also alleges that Travelers issued insurance policies to Subcontractors in
connection with the relevant residential construction projects, naming the
Subcontractors as insureds (“Subcontractor Policies”) and naming Centex as an
“additional insured” on various policies. (Id. ¶¶ 87-89, 100-101.) Accordingly, Centex
alleges that Travelers’ various insurance policies “provide or potentially provide
coverage for all or a portion of the claims made against Centex Homes” by the
homeowners in the Acevedo Action. (Id. ¶¶ 89, 91.)

Centex also alleges that Travelers “eventually agreed to participate in the defense of
Centex,” but did so “subject to multiple reservations of rights,” and alleged various
issues as to which Travelers reserved rights. (Id. ¶¶ 106-107.)

Travelers’ “Rebuttable Presumption” Argument

Travelers argues that Code of Civil Procedure § 1909, which states that judicial orders
create a “disputable presumption” as to the matter “directly determined, between the
same parties and their representatives and successors in interest . . . litigating for the
same thing under the same title and in the same capacity.” (Traveler’s Ps & As at 3-4
(quoting Code Civ. Proc. § 1909); Travelers’ RJN Exhs. A-E.) Travelers directs the
Court to rulings in other cases involving Travelers and Centex, but Travelers has not
cited to a single case involving the use of such “disputable presumption” in the context
of a demurrer or motion for judgment on the pleadings, in the manner Travelers urges
here. Travelers has not shown such presumption to be applicable in the context of a
demurrer or motion for judgment on the pleadings on the basis of a “failure to state
facts sufficient to constitute a cause of action.” Further, while Travelers identifies court
orders that it contends are in its favor and that arose in other actions involving
Travelers and Centex in the same or similar capacities, Centex’s Opposition
distinguishes those cases as involving factual issues not identical to the ones in this
case, and also identifies other court orders it contends are in Centex’s favor. (Centex
Oppo. at 7-8; Centex RJN Exhs. M-W.) Accordingly, even assuming arguendo that the
presumption applied, here each party has identified conflicting court orders. Travelers’ Reply did not address whether and how the presumption has been applied where prior
court orders in different cases conflict. The Court declines to apply any presumption in
Travelers’ favor on this motion, and the demurrer is OVERRULED in this regard.

Seventh Cause of Action (Allocation of Fees)

In general, a declaratory relief action requires an actual controversy of legal rights and
duties between the parties. (Code Civ. Proc. § 1060.) Such an action is appropriate
only where there is an actual controversy between the parties, not an abstract or
academic dispute. (Connerly v. Schwarzenegger (2007) 146 Cal.App.4th 739, 746.)

Here, Centex alleges that “a dispute has arisen and an actual controversy now exists
between Centex Homes, on the one hand, and [Travelers], on the other hand, with
respect to the allocation which needs to be made between [Travelers] and
Subcontractor Defendants regarding the costs and fees associated with Centex
Homes’ defense in the [Acevedo] Action.” (Compl. ¶ 109.) Centex alleges that
“declaratory judgment is both proper and necessary, so that the respective rights,
duties, and obligations of [Travelers] as to the allocation of Centex’s defense fees and
costs related to, and/or arising from, the Acevedo Action may be determined.” (Id. ¶
110.)

Travelers argues that Centex’s pleading prematurely seeks declaratory relief in the
form of an allocation of defense fees, “the total amount of which is unknown because
the fees continue to be incurred, between parties who are not yet all known and based
upon facts which have yet to be discovered in the homeowner plaintiffs’ construction
defect action.” (Travelers’ Ps & As at 1, 4-5 (citing cases).)

Travelers also argues that the requested “allocation” cause of action is thus “not yet
ripe for adjudication” and moreover, that when it is ripe, Centex “will have no standing
to maintain such an action because it will not be a party to any resulting actual
controversy.” (Id. at 1, 4-5 (citing cases).)

Travelers also argues that Centex’s declaratory relief action “take[s] away” Travelers’
“quasi-contractual right of reimbursement against insureds” and cites Buss v. Superior
Court (1997) 16 Cal.4th 35 (insurer has against insured right of reimbursement of
defense costs implied in law as quasi-contractual as to claims that are not potentially
covered). (Travelers’ Ps & As at 5.)

The Court OVERRULES Travelers’ demurrer to the seventh cause of action. This
declaratory relief claim in does not interfere with any rights Travelers may have against
its insureds pursuant to Buss v. Superior Court and the mere fact that the total of
defense costs sought to be allocated is not yet final or known (Travelers’ Ps & As at 4)
does not preclude a valid claim for declaratory relief. To be sure, apportionment of
defense costs can be done by percentages without need for the actual dollar amounts,
which can be determined at a later date when the underlying homeowner claims are
ultimately resolved via settlement or trial. Moreover, this Court finds that resolution of
this dispute over defense costs in this action, rather than in a separate action filed
subsequently, will promote judicial efficiency and ease the burden on already limited
finances. Finally, the Court rejects Travelers’ argument that the need for allocation of
defense costs may become unnecessary if the homeowners are unable to establish
Centex’s liability (id.) since the defense costs at issue here are being incurred now and
will be unaffected even if Centex prevails over the homeowners.

In its Reply, Travelers raises an additional argument: that Centex’s failure to join in this
action all insurers which owe a duty to defend will make it impossible for the Court to
grant complete relief and/or will expose Travelers to a risk of additional liability and/or
inconsistent obligations. (Reply at 4.) The Court disagrees and therefore, the
demurrer on this ground is overruled.

Eighth Cause of Action (Independent Counsel)

In its eighth cause of action, Centex alleges that because of conflicts of interest
between itself and Travelers and because Travelers issued a reservation of rights,
Centex should be provided with independent counsel under California Civil Code §
2860. (Compl. ¶¶ 111-118.) Relevant here, Civil Code § 2860(b) provides, “[W]hen an
insurer reserves its rights on a given issue and the outcome of that coverage issue can
be controlled by counsel first retained by the insurer for the defense of the claim, a
conflict of interest may exist.” Accordingly, Centex will state a cause of action for
declaratory relief regarding Travelers’ duty to provide independent counsel if the
factual allegations in Centex’s pleading, taken as true, support counsel’s ability to
“control” the “outcome of” the “coverage issue” upon which Travelers issued its
reservation of rights.

In its pleading, Centex alleges that Travelers’ reservation of rights on various issues,
including: the “right to recover by subrogation from the Subcontractor Defendants the
same money which Centex Homes is seeking to recover from those same
Subcontractor Defendants by reimbursement,” the “right to be reimbursed by Centex
for all defense fees and costs that relate to the work of subcontractors other than the
subcontractors that it insures,” the “right to be reimbursed for defense fees and costs
in proportion to the ultimate amount it pays for indemnity,” and the “right to
reimbursement for all defense fees and costs because it never had a duty to provide
Centex Homes with a defense.” (Compl. ¶ 107.) Centex also alleges, “Centex Homes
believes that Travelers would use its control over Centex Homes’ defense [in the
Acevedo Action] to instruct counsel to only pursue certain theories of liability, engage
in specific expert discovery issues, and focus on certain allegations made by the
Acevedo Claimants . . . which would . . . be aimed at supporting Travelers’ contention
that the Travelers’ Policies do not provide coverage to Centex Homes against the
allegations in the Acevedo Action.” (Id. ¶ 120.) Centex also alleges that “there is a
conflict of interest because the interests of Centex Homes and the subcontractor[s]
insured by Travelers are adverse to each other,” yet Travelers “seeks to control the
defense of Centex Home[s] in the Acevedo Action as well as the defense of the
subcontractor[s] insured by Travelers,” such that “Travelers would be controlling both
sides of the same litigation.” (Id. ¶ 122.) Centex alleges that Travelers’ appointed
counsel might “control” Centex’s defense in the Acevedo Action by “instruct[ing]
counsel to only pursue certain theories of liability, engage in specific expert discovery
issues, and focus on certain allegations made by the Acevedo Claimants . . . which
would . . . be aimed at supporting Travelers’ contention that the Travelers’ Policies do
not provide coverage to Centex Homes against the allegations in the Acevedo
Action.” (Id. ¶¶ 118-20.) Centex also alleges, “there is a present conflict as to the
rights and obligations between Travelers and Centex Homes requiring this Court to
issue a declaratory judgment as to Centex Homes’ right to independent counsel in this
matter.” (Id. ¶ 127.)

Travelers argues that Centex’s pleading includes “not a single fact evidencing that
Travelers can in any way manipulate the defense,” and not “a single fact evidencing
that Travelers’ and Centex’s interests are not aligned.” (Travelers’ Ps & As at 1.)
Travelers argues that “no facts have been plead which actually evidence a conflict
counsel could control.” (Id.) However, as described above, Centex has alleged that
Travelers’ appointed counsel can “manipulate the defense” of the Acevedo Action
through strategic tactics with respect to expert discovery, among other things, and
Centex has alleged that its interests are not aligned with Travelers’ in the Acevedo
Action given that, among other things, Travelers has an interest in proving the liability
of non-Travelers-insured subcontractors. (Centex Oppo. at 9-10.)

Here, the issue is whether Centex’s pleading adequately supports its theory that
Travelers’ counsel can “control” the conduct of Centex’s defense in the Acevedo
Action, i.e., that counsel can emphasize certain theories or evidence or expert
opinions, and can thereby “control” the outcome of issues upon which Travelers has
reserved its rights. (Centex Oppo. at 9-10 (“Whether particular property damage[s]
were caused by the faulty work of the Travelers Subcontractors or the work of another
subcontractor(s) is a question of fact that is directly at issue in [the Acevedo Action]
and that can be impacted by the attorneys involved in defending Centex and the
experts retained by those attorneys. For example, the attorney can decide to argue
that a subcontractor other than the Travelers insured subcontractors caused [] the
alleged damage at issue. In this way, Travelers’ appointed defense counsel can
shape and determine the coverage dispute between Travelers and Centex by
determining how Centex’s defense against the homeowner’s claims is handled and
can attempt to shift liability away from the Travelers insured subcontractors to other
subcontractors.”).)

A reservation of rights does not itself necessarily give rise to a conflict requiring
independent counsel under Civil Code § 2860(b). (Gafcon, Inc. v. Ponsor &
Associates (2002) 98 Cal.App.4th 1388, 1421 (“Consistent with section 2860,
subdivision (b), courts of appeal, including ours, repeatedly recognize a conflict of
interest does not arise every time the insurer proposes to provide a defense under a
reservation of rights. There must also be evidence that the outcome of [the] coverage
issue can be controlled by counsel first retained by the insurer for the defense of the
[underlying] claim.” (quotation marks omitted).) Here, however, Centex has alleged
more than the fact that Traveler issued a reservation of rights. Centex has also
alleged that Travelers’ appointed counsel has the ability to “control” the outcome of the
same issues as to which Travelers allegedly reserved its rights (Compl. ¶ 107). For
instance, Centex has alleged that Travelers’ appointed counsel has the ability to
“select[] experts” and the ability to provide those experts only certain information upon
which to render opinions, and that through such tactics counsel might effectively
“control” the outcome of causation and damages issues in that case and therefore in
this coverage dispute (Compl. ¶¶ 115-18). Travelers has not shown that Centex’s
allegations, if true, could not support the claim that the outcome of coverage issues
“can be controlled” by Travelers’ appointed counsel as described by Civil Code § 2860
(b).

Travelers relies in part upon the Blanchard case, but that case turned in part upon a
failure to produce any evidence that an attorney “could have controlled the outcome” of
certain issues. In Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th
345, 348-50, the insured “produced no evidence to show in what specific way the
defense attorney could have controlled the outcome of the damage issue to appellant’s
detriment, or had incentive to do so,” instead, it “merely referred to an unspecified
possibility of a conflict.” (Id. (quotation marks omitted).) The appellate court held that
the mere “possibility” of a conflict was “insufficient” because “[t]he coverage issue
involved only damages” and because “[i]nsurance counsel had no incentive to attach
liability to appellant” such that the attorneys hired by the insurer faced no conflict, and
that the trial court should have decided the independent counsel issue as a matter of
law on a motion for nonsuit or directed verdict because “no evidence” had been
produced as to “what specific way” the attorney could have “controlled” the outcome of
the issue upon which the insurer had reserved its rights. (Id.) Here, on the procedural
posture of the instant case, however, Centex is not required to produce any “evidence”
of the attorney’s ability to “control.”

Moreover, Blanchard clarified that the insured’s right to independent counsel “depends
upon the nature of the coverage issue, as it relates to the issues in the underlying
case” (id. at 350), and Travelers has not shown that the Court can properly determine,
on this pleadings motion, that the various specific issues upon which Travelers
allegedly reserved its rights (Compl. ¶¶ 106-07) do not in any way relate to the alleged
“issues in the underlying case.” The Court must construe the pleadings in Centex’s
favor on the instant motion. Travelers has not shown that Blanchard or Travelers’
other cited authorities require dismissal of the eighth cause of action as a matter of
law.

Travelers’ moving papers did not cite to authorities involving dismissal of an analogous
claim for declaratory relief with analogous alleged facts at the demurrer or motion for
judgment on the pleadings stage. Whether evidence will ultimately support the cause
of action is not currently before the Court. Further, while the pleading’s allegations
describe what Travelers’ appointed counsel has the ability to do in conducting the
litigation rather than what counsel has actually done already, in assessing whether a
conflict exists the text of Civil Code § 2860(b) speaks to what counsel “can” do. On the briefing currently before the Court, Travelers has not shown that Centex’s
allegations cannot, if taken as true, support a cause of action for declaratory relief
regarding a duty to provide independent counsel. If evidence were to ultimately show,
for instance, that Travelers’ appointed counsel could strategically withhold certain
information from expert witnesses in efforts to “control” the determination of issues
upon which Travelers allegedly reserved its rights (Compl. ¶ 107), Travelers has not
shown that such evidence could not support a conflict warranting the appointment of
independent counsel under Civil Code § 2860(b) in this particular case. Travelers has
not shown that Centex’s allegations are insufficient to support a cause of action for
declaratory relief regarding a duty to provide independent counsel, and the demurrer is
DENIED as to the eighth cause of action.

This minute order is effective immediately. No formal order or other notice is required.
(Code Civ. Proc. § 1019.5; CRC Rule 3.1312.)