Opinion
l:03-cv-1151-LJM-WTL
November 7, 2003
ORDER ON DEFENDANT'S MOTION TO DISMISS
This matter comes before the Court on Defendant's, Royal Insurance Company of America ("Royal" or "Defendant"), Motion to Dismiss and/or Motion to Strike pursuant to Rules 12(b)(6) and 12(f) of the Federal Rules of Civil Procedure. Plaintiff, Sanyo Laser Products, Inc. ("Sanyo" or "Plaintiff'), filed this insurance coverage action against Royal in August 2003, including the following counts in its complaint: (1) breach of contract; (2) declaratory judgment; and (3) bad faith (duty to defend). Each of the counts requests, in part, attorney's fees incurred in connection with this suit. In the instant motion, Royal requests that the Court dismiss the bad faith (duty to defend) count ("Count in"), and strike Sanyo's claim for attorney's fees with regard to all counts. The parties have fully briefed their arguments, and the motion is now ripe for ruling.
I. BACKGROUND
This is a dispute about an insurance policy (the "Policy") between Sanyo and their umbrella insurance provider, Royal. Sanyo is in the business of replicating compact discs from master discs or tapes provided to Sanyo by its customers. Comp. ¶ 1. In October 2001, Sanyo received a letter from the Recording Industry Association of America ("RLAA") threatening to initiate legal action against Sanyo for copyright infringement. Id. ¶ 12. In response to the threatened litigation, Sanyo filed a declaratory action in this Court against a number of recording companies (the "Recording Companies"), styled Sanyo Laser Products v. Arista Records, et al., IP 01-1649 Y/K (the "Indiana Litigation"). Id. If 13. That action remains pending before Judge Young in this district. Id.
In November 2001, the Recording Companies filed an action against Sanyo in the Central District of California for copyright infringement (the "California Litigation"). Comp. f 16. In May 2002, the California Litigation was dismissed, and the Recording Companies' copyright infringement claims were refiled as counterclaims in the Indiana Litigation. Id. ¶ 17.
In August 2003, Sanyo filed the instant suit, in which it seeks a declaration that, pursuant to the Policy, Royal has a duty to defend and/or indemnify Sanyo for (1) attorney's fees and costs associated with the recently dismissed California Litigation; and (2) attorney's fees and costs incurred in defending the counterclaims in the Indiana Litigation. Royal filed an answer to Sanyo's complaint, and also counterclaimed for declaratory judgment. Royal seeks a ruling that it has no defense or indemnity obligation with regard to the copyright litigation against Sanyo. In the instant motion, Royal requests that the Court dismiss the bad faith (duty to defend) claim, and strike Sanyo's request for attorney's fees.
II. STANDARDS A. MOTION TO DISMISS
When ruling on a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), the Court accepts as true all well-pleaded factual allegations in the complaint and the inferences reasonably drawn from them See Baxter by Baxter v. Vigo County Sch. Corp., 26 F.3d 728, 730 (7th Cir. 1994). Dismissal is appropriate only if it appears beyond doubt that Plaintiff can prove no set of facts consistent with the allegations in the complaint that would entitle it to relief. See Hi-Lite Prods. Co. v. Am. Home Prods. Corp., 11 F.3d 1402, 1405 (7th Cir. 1993). This standard means that if any set of facts, even hypothesized facts, could be proven consistent with the complaint, then the complaint must not be dismissed. See Sanjuan v. Am. Bd. of Psychiatry and Neurology, Inc., 40 F.3d 247, 251 (7th Cir. 1995).
Further, Plaintiff is "not required to plead the particulars of [its] claim[s]," Hammes v. AAMCO Transmissions, Inc., 33 F.3d 774 (7th Cir. 1994), except in cases alleging fraud or mistake where plaintiffs must plead the circumstances constituting such fraud or mistake with particularity. See FED. R. Civ. P. 9(b); Hammes, 33 F.3d at 778. "Particularity" requires plaintiffs to plead the who, what, when, where, and how of the alleged fraud. See Ackerman v. Northwestern Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir. 1999); DiLeo v. Ernst Young, 901 F.2d 624, 627 (7th Cir. 1990).
Finally, the Court need not ignore facts set out in the complaint that undermine Plaintiffs claims, see Homeyer v. Stanley Tulchin Assoc., 91 F.3d 959, 961 (7th Cir. 1996) (citing Am. Nurses' Ass'n v. Ill, 783 F.2d 716, 724 (7th Cir. 1986)), nor is the Court required to accept Plaintiffs legal conclusions. See Reed v. City of Chi., 77 F.3d 1049, 1051 (7th Cir. 1996); Gray v. Dane County, 854 F.2d 179, 182 (7th Cir. 1988).
B. MOTION TO STRIKE
Under Rule 12(f) of the Federal Rules of Civil Procedure, "the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." FED. R Civ. PRO. 12(f). Motions to strike are generally disfavored because they may serve only to cause delay. See Hellerv. Midwhey Powder Co., Inc., 883 F.2d 1286, 1294 (7th 1989). However, where "motions to strike remove unnecessary clutter from the case, they serve to expedite, not delay." Id.III. DISCUSSION
Royal seeks dismissal of the bad faith duty to defend count. Royal first argues that dismissal is appropriate because Indiana courts have not recognized a bad faith cause of action with respect to an insurer's duty to defend. In the alternative, Royal asserts that none of the conduct described in the complaint rises to the level of bad faith conduct necessary to maintain such a claim. Royal characterizes the instant disagreement as a bona fide, good faith dispute about the existence and/or scope of coverage under the Policy. Last, citing the American Rule that parties pay their own attorney's fees absent any statute or agreement to the contrary, Royal argues that Sanyo's attorney's fees claim is improper.Sanyo asserts that Royal takes a very narrow view of Indiana case law on the insurer's duty of good faith to its insured, and argues that a fair reading of the cases illustrates that bad faith duty to defend is a viable cause of action in Indiana. Sanyo further asserts that its bad faith claim meets the liberal notice pleading standards established by Rule 8 of the Federal Rules of Civil Procedure. Finally, Sanyo maintains that it may be entitled to attorney's fees if it demonstrates that Royal denied coverage in bad faith. Each argument will be addressed in turn.
A. BAD FAITH CAUSE OF ACTION IN INDIANA 1. The Existence of a Bad Faith Duty to Defend Cause of Action in Indiana
The seminal case in Indiana on bad faith in the insurance context is Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind. 1993). The Erie litigation stemmed from an insurer's denial of coverage to its insured after a car accident. After her claim was denied, the plaintiff/insured sued the defendant/insurer for breach of the insurance contract and punitive damages. After discussing the background of the general rule that punitive damages are not available in a breach of contract action, the Indiana Supreme Court recognized a new cause of action sounding in tort:
Indiana law has long recognized that there is a legal duty implied in all insurance contracts that the insurer deal in good faith with its insured . . . [R]ecognition of a cause of action for the tortious breach of an insured's duty to deal with its insured in good faith is appropriate.
We need not determine the precise extent of that duty today. However, we make these general observations. The obligation of good faith and fair dealing with respect to the discharge of the insurer's contractual obligation includes the obligation to refrain from (1) making an unfounded refusal to pay policy proceeds; (2) causing an unfounded delay in making payment; (3) deceiving the insured; and (4) exercising any unfair advantage to pressure an insured into a settlement of his claim.Erie, 622 N.E.2d at 518-19. Although the Indiana Supreme Court did not precisely define the contours of the tort, it provided the following guidance:
[A] good faith dispute about the amount of a valid claim or about whether the insured has a valid claim at all will not supply the grounds for a recovery in tort for the breach of the obligation to exercise good faith . . . Similarly, the lack of diligent investigation alone is not sufficient to support an award. On the other hand, for example, an insurer which denies liability knowing that there is no rational, principled basis for doing so has breached its duty.Id. at 520.
Royal argues that the Erie holding is limited to the first-party insurance context. According to Royal, Indiana courts do not recognize a cause of action for the tortious breach of an insured's duty to deal with its insured in good faith in the third-party setting. The Court disagrees with this characterization of Indiana law. Although Indiana first recognized the tort in the first-party context, language in Erie and subsequent Indiana Supreme Court case law demonstrate that the tort is viable in both first-party and third-party litigation.
As Sanyo notes, "first-party" insurance is a contract between the insurer and insured protecting the insured's own actual losses and expenses, while "third-party" insurance protects the insured from potential liability to a third party.
In Erie, the Indiana Supreme Court recognized the tort in the first-party setting, but observed in a footnote that "a majority of states recognize a cause of action in tort in the context of third-party claims and a lesser number for first-party claims . . ." Erie, 622 N.E.2d at 519. As Sanyo notes, nothing in the Erie opinion indicates that the Indiana Supreme Court was taking the unusual approach of adopting the tort in the first-party context (less common in other states), but rejecting it in the third-party context (more commonly recognized in other states). Instead, it appears that the Erie Court adopted the tort more generally, and decided to wait and see how it developed in courts throughout the state and other states before defining the precise parameters of the tort. See Donald v. Liberty Mut. Ins. Co., 18 F.3d 474, 484 (7th Cir. 1994) (describing the Indiana Supreme Court's description of the new tort as "broad").
Subsequent Indiana case law confirms this reading of Erie. The Indiana Supreme Court addressed the bad faith tort in the third-party context in 2002. See Freidline v. Shelby Ins. Co., 774 N.E.2d 37 (Ind. 2002). The (third-party) plaintiffs in Freidline were sued by occupants of a commercial building they owned in South Bend. See Freidline, 774 N.E.2d at 38-39. The occupants sought damages for injuries sustained from toxic fumes from substances used to install new carpeting in the building. See id. The plaintiffs notified their insurance carrier of the suit, and asked the carrier to defend them in the suit and indemnify them in case of judgment. See id. Citing an exclusion in the policy, the insurer refused to defend or indemnify the building owners in the suit. See id. The owners then filed a third-party complaint against the insurer to enforce their rights under the insurance policy, including a bad faith duty to indemnify and defend count in the complaint. See id. Although the plaintiffs lost on the bad faith claim before the Indiana Supreme Court, the Freidline Court addressed the merits of the claim, and made no mention of the fact that it was third-party insurance. See id. In the Court's view, this resolves any doubt about whether Indiana recognizes a cause of action for tortious breach of an insured's duty to deal with its insured in good faith in the third-party context. See also Hoosier Ins. Co. v. Audiology Found, of Am., 745 N.E.2d 300 (Ind.App. 2001) (concluding that genuine issue of material fact existed regarding whether insurer acted in bad faith in third-party claim). Consequently, the Court rejects Defendant's argument that Count III of the complaint must be dismissed because the cause of action does not exist in Indiana.
2. Failure to State a Claim
Royal contends that even if Indiana recognizes a bad faith duty to defend tort, Sanyo's complaint fails to properly plead such a cause of action. In support of this contention, Royal argues that none of the conduct described in the complaint rises to the level of bad faith conduct necessary to maintain such a claim. According to Royal, "the complaint contains nothing more than unsupported allegations . . ." Def.'s Memo in Support at 5. In addition, Royal asserts that Sanyo makes no allegations that Royal had the requisite state of mind for a bad faith claim.
The Court disagrees with all of Royal's arguments regarding the sufficiency of the complaint. In its complaint, Sanyo alleges that Royal arguably had a duty to defend and/or indemnify Sanyo in copyright litigation; that Sanyo notified Royal of covered litigation in 2001 and Royal made no response until more than a year later in 2003; that Royal refused to provide any defense or indemnification and "has made repeated and continued requests for documents and information that have no relevance to its duty to defend Sanyo;" that Royal has improperly attempted to limit its duty to defend Sanyo; and that there are other acts and omissions that demonstrate Royal's bad faith.
Royal contends that the above-summarized allegations in the complaint do not rise to the level of bad faith conduct necessary to maintain such a claim. While it is true that Indiana courts have set a high threshold for establishing bad faith, Royal's argument would be more appropriate at the summaryjudgment stage than it is on a motion to dismiss. Plaintiffs in federal court are not required to include allegations that (if proved) would be sufficient to prevail at trial. See, e.g., Bennett v. Schmidt, 153 F.3d 516, 518 (7th Cir. 1998). If the Court were to grant Royal's Motion to Dismiss on the grounds that the allegations do not rise to the level of bad faith required to prevail under Indiana law or because it contains "unsupported allegations," it would be imposing a fact-pleading requirement on Sanyo. As Sanyo argues, a dismissal for lack of factual specificity is inconsistent with Rule 8's notice pleading standard. See Hoskins v. Poelstra, 320 F.3d 761, 764 (7th Cir. 2003) ("The complaint does not contain all of the facts that will be necessary to prevail, but a filing under Rule 8 is not supposed to do that") (emphasis in original); Higgs v. Carver, 286 F.3d 437, 439 (7th Cir. 2002) ("All that need be specified is the bare minimum facts necessary to put the defendant on notice of the claim so that he can file an answer."); Kirksey v. R.J. Reynolds Tobacco Co., 168 F.3d 1039, 1041 (7th Cir. 1999) ("The courts keep reminding plaintiffs that they don't have to file long complaints, don't have to plead facts, don't have to plead legal theories."). Accordingly, the Court rejects this argument.
Royal fares no better with its argument that dismissal is appropriate because Sanyo made no allegations that Royal had the requisite state of mind for a bad faith claim. See Colley v. Indiana Farmers Mut. Ins. Group, 691 N.E.2d 1261 (Ind.App. 1998) (bad faith requires "evidence of a state of mind reflecting dishonest purpose, moral obliquity, furtive design, or ill will."). Royal would have the Court require more than is mandated by Rule 8:
[A] "complaint need not spell out every element of a legal theory" to provide notice. See Hemenway v. Peabody Coal Co., 159 F.3d 255, 261 (7th Cir. 1998) (contrasting notice pleading with heightened pleading, i.e., "the who, what, when, where and how" required for fraud claims); see also Jackson v. Marion County, 66 F.3d 151, 154 (7th Cir. 1995) (stating that a plaintiff can plead conclusions as long as those conclusions provide the defendant with minimal notice ofthe claim). Similarly, in Payton v. Rush-Presbyterian-St. Luke's Med. Ctr., 184 F.3d 623, 627 (7th Cir. 1999), we recently rejected a district court's use of a heightened pleading standard in dismissing a plaintiff s complaint under 42 U.S.C. § 1983 that he had been beaten by a private security guard who allegedly acted under color of state law. We held in Payton that a pleading need contain only enough "`to allow the defendant[s] to understand the gravamen ofthe plaintiffs complaint.'" See id. (quoting Doherty v. City of Chicago, 75 F.3d 318, 326 (7th Cir. 1996)).Scott v. City of Chicago, 195 F.3d 950, 951-52 (7th Cir. 1999). See also Alper v. Altheimer Gray, 257 F.3d 680, 687 (7th Cir. 2001) (warning that "a court must be careful not to require more than what is mandated by Rule 8: `a short and plain statement ofthe claims showing that the pleader is entitled to relief'"). Because Sanyo's pleading contains enough to allow Royal to understand the gravamen of the complaint and to respond to it, the Court DENIES Royal's Motion to Dismiss Count III.
B. ATTORNEY'S FEES
Noting Indiana's adherence to the American Rule that parties to litigation must pay their own attorney's fees, Royal asks the Court to rule as a matter of law that Sanyo is not entitled to attorney's fees. See, e.g., Harco, Inc. of Indianapolis v. Plainfield Interstate Family Dining Assocs., 758 N.E.2d 931, 940 (Ind.App. 2001). See also Summit Valley Indus., Inc. v. Local 112, United Bhd. of Carpenters Joiners, 456 U.S. 717, 721 (1982) ("[I]t is well established that attorney's fees are not ordinarily recoverable in the absence of a statute or enforceable contract providing therefor."). However, it appears that Indiana courts have carved out an exception to the American Rule in cases of bad faith. See Learman v. Auto-Owners Ins. Co., 769 N.E.2d 1171, 1178 (Ind.App. 2002) ("Because we have determined that Learman is an insured under the policy, his claim for attorney's fees depends upon whether Auto-Owners acted in bad faith in denying coverage to Learman."); Freidline v. Shelby Ins. Co., 739 N.E.2d 178, 185 (Ind.App. 2001) ("[A]n insured's claim for attorney's fees requires bad faith by the insurer."), rev'd and vacated on other grounds, 774 N.E.2d 37 (Ind. 2002); Mikel v. Am. Ambassador Cas. Co., 644 N.E.2d 168, 172 (Ind.App. 1994).
Although the Indiana Supreme Court has not ruled that attorney's fees are recoverable when a plaintiff/insured prevails on a bad faith claim, the Court declines Royal's invitation to rule as a matter of law that Sanyo cannot recover attorney's fees in this action. First, as related above, Sanyo's position draws support from Indiana Courts of Appeals case law. Second, the bad faith tort in the insurance context is still developing in Indiana, and the Indiana "Supreme Court has not yet fully explored the scope of recoverable damages under the tort." Am. Family Mut. Ins. Co. v. Jeffrey, 1999 WL 1893258 (S.D. Ind.) (Hamilton, J.). Third, an award of attorney's fees to a party forced into litigation due to another's bad faith is not a foreign principle under Indiana law. See Ind. Code § 34-52-1-1(b); Ind. App. Rule 66(E). Accordingly, the Court DENIES Defendant's Motion to Strike Plaintiffs claim for attorney's fees.
The parties also dispute whether or not the Declaratory Judgment Act permits an award of attorney's fees. Case law conflicts as to whether the language in the Declaratory Judgment Act giving courts the power to fashion "further or necessary relief based on a declaratory judgment" permits courts to award attorney's fees. Compare Gant v. Grand Lodge of Texas, 12 F.3d 998 (10th Cir. 1993), with Mercantile Nat'l Bank at Dallas v. Bradford Trust Co., 850 F.2d 215 (5th Cir. 1988). The Seventh Circuit has not addressed the issue. The Court defers ruling on this unsettled issue at this early stage of the proceedings, and will revisit the issue later in the litigation if it becomes necessary.
IV. CONCLUSION
For the reasons stated herein, the Court DENIES Defendant's Motion to Dismiss in its entirety.IT IS SO ORDERED.