United States: D. Cummins Corporation v. United States Fidelity & Guaranty Company

(Controlling Shareholder Lacks Standing to Bring Declaratory Relief Action Against Subsidiary Corporation's Insurer)

In D. Cummins Corporation v. United States Fidelity & Guaranty Company, 246 Cal. App. 4th 1484 (2016), the California First District Court of Appeal affirmed the trial court's decision to sustain without leave to amend the demurrer of the United States Fidelity and Guaranty Company ("U.S. Fidelity") and United States Fire Insurance Company ("U.S. Fire") (collectively, "insurer defendants") to D. Cummins Holding LLC's ("Holding Co.") complaint for declaratory relief regarding interpretation of insurance policies issued by the insurer defendants to D. Cummins Corporation ("Cummins Corp.").

Cummins Corp. installed asbestos containing products in California, resulting in "hundreds of asbestos bodily injury claims including many lawsuits, based on exposure to its asbestos containing materials." Between 1969 and 1992, Cummins Corp. purchased numerous policies from U.S. Fidelity and the predecessor to U.S. Fire, including primary, umbrella, and excess policies. Holding Co. is the parent and controlling shareholder of Cummins Corp.

Cummins Corp. and Holding Co. ("plaintiffs") filed a complaint for declaratory relief against the insurer defendants, seeking a declaration under Code of Civil Procedure section 1060 ("Section 1060") that the insurer defendants are obligated to defend and/or indemnify Cummins Corp. in full and without limitation for past, present, and future asbestos suits under the policies triggered by those suits. The complaint also alleged that the insurer defendants disputed the relief asserted, creating an actual and justiciable controversy.

U.S. Fidelity removed the matter to federal court, alleging Holding Co.'s citizenship should be ignored as it was "fraudulently joined as a plaintiff." The District Court found complete diversity did not exist and, therefore, the Court did not have subject-matter jurisdiction, requiring remand to the state trial court.

U.S. Fidelity filed a demurrer to Holding Co.'s cause of action, arguing its cause of action failed as there were no allegations that Holding Co. is an insured under any of the policies or otherwise in privity with U.S. Fidelity and, therefore, Holding Co. lacked standing. The trial court sustained the demurer without leave to amend, finding that Holding Co. did not, and could not, plead facts needed to establish that Holding Co. is a "person interested under a written instrument" so as to have standing to seek a declaration under Section 1060, and plaintiffs did not demonstrate that they could amend the complaint to address this issue.

Holding Co. filed a notice of appeal. Holding Co. argued "the trial court incorrectly concluded it did not have standing to participate in the declaratory relief action [and] the court abused its discretion when it found that Holding Co. could not successfully amend the complaint."

The Court quoted the relevant portions of Section 1060 which requires, in part, a "person interested under a written instrument . . . or under a contract, or who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property." The Court noted that while this statute "appears to allow for an extremely broad scope of an action for declaratory relief," the Court must "evaluat[e] the nature of the rights and duties that the plaintiff is asserting" to determine if the request for relief is properly before the court (quoting Otay Land Co. v. Royal Indemnity Co., 169 Cal. App. 4th 556, 562 (2008)). The Court also quoted California Code of Civil Procedure section 1061 ("Section 1061"), which allows a court to refuse to exercise this power where "not necessary or proper at the time under all the circumstances." Additionally, Section 1600 must be read in conjunction with Section 1061, and a trial court's determination that a declaration "is not necessary or proper is discretionary, subject to reversal only for an abuse of that discretion."

The Court referenced the decision in Otay, where an owner of real property attempted to bring a declaratory relief action against the former owner's liability insurer, regarding anticipated coverage for contamination problems at the property, arguing "'that declaratory relief should be 'expansively' allowed'" (id. at 565). The Otay Court disagreed – finding the trial court properly sustained the insurer's demurrer without leave to amend "because the plaintiff could not plead sufficient facts to establish it had standing to sue the insurer to determine the applicability of the former owner's insurance." The Court found Holding Co.'s position to be analogous to the plaintiff in Otay, as both were claiming to be interested persons under Section 1060 despite that they were neither party to nor directly affected by the subject insurance policies and they did "not otherwise fit into any of the categories of exceptions to the requirement of contractual privity."

Holding Co. attempted to assert that it has a practical interest in the interpretation of the policies, given its relationship to Cummins Corp., and the fact it is the sole entity responsible for managing Cummins Corp.'s affairs, including decision making regarding litigation strategy. The Court found this argument to be "not persuasive." The Court found that Holding Co. had not demonstrated that its "indirect interest—no matter how enthusiastic it may be . . . –translates into a legally cognizable theory of declaratory relief'" (id. at 562). Only Cummins Corp. itself "has a direct interest in the interpretation of the policies in question." The Court also found "notable that California courts have held that a corporation's shareholders generally do not have standing to sue the corporation's insurer." The Court rejected Holding Co.'s attempt to distinguish this case law (by claiming that those decisions involved bad faith causes of action where here Holding Co. is only requesting declaratory relief), finding Holding Co. "presented no additional facts or legal authority showing that it has standing as Cummins Corp.'s controlling shareholder to pursue a declaratory relief action against Cummins Corp.'s insurers." The Court also pointed to Holding Co.'s formation mere days prior to the filing of the complaint, and that the matter was continuing in the trial court despite the dismissal of Holding Co.

The Court then distinguished the case law cited to by Holding Co. in support of its standing argument, noting that in those cases, "all of the parties included in the declaratory relief actions had a legal interest in, or would be directly affected by, any interpretation of the terms of the insurance policies or regulation in question," whereas Holding Co. had not established anything more than "an indirect interest" in the policies. The Court also distinguished those cases cited to by Holding Co. in support of its argument that an actual controversy exists.

The Court concluded Holding Co. "does not have a contractual relationship with the insurers and is not otherwise interested in the contract between the corporation and the insurers" and "the trial court acted within its discretion when it concluded that a declaration of Holding Co.'s rights was 'not necessary or proper at the time under all the circumstances'" (quoting Section 1061). The Court also concluded the trial court's decision to sustain the demurrer without leave to amend was not an abuse of discretion, as "Holding Co. has not shown that there is a reasonable possibility it could amend the complaint to plead facts" to establish standing or an actual controversy between itself and the defendant insurers.

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