Opinion
Case No. 00-2207-JWL
February 8, 2001.
MEMORANDUM AND ORDER
This matter comes before the court on plaintiff's motion to strike portions of the defendants' answer to the amended complaint and to dismiss the defendants' counterclaim (Doc. 68). For the reasons set out below, the plaintiff's motion is denied.
Background
On August 13, 1997, a lawsuit captioned Balee v. Primeline Securities Corp. was filed in Kansas state court against Stoico Restaurant Group, Inc. ("SRG") and SRG directors and officers alleging that they committed acts of securities fraud in connection with an initial public offering of stock on December 19, 1996. In March, 1998, SRG filed for relief under Chapter 11 of the Bankruptcy Code. The parties to the lawsuit submitted a proposed settlement in the amount of $410,000 to the bankruptcy court for approval. On March 6, 1999, defendant Cynthia Grimes was appointed as designated representative of SRG. On October 7, 1999, Ms. Grimes filed a motion to withdraw the proposed settlement and the bankruptcy court granted the motion on December 2, 1999. On January 6, 2000, counsel for SRG filed an answer that admitted the allegations in the complaint and did not assert any defenses. Subsequently, the parties agreed to settle the lawsuit for $1,700,000.
This lawsuit was filed by the lead underwriter of Syndicate No. 79 of Lloyd's, London (the "underwriters") and seeks a declaration by this court that the underwriters are not liable on an insurance contract it held with SRG. Under the contract, the underwriters agreed to pay for losses resulting from a claim for any "wrongful act" committed by SRG directors and officers. The contract contains a "Cooperation Clause" requiring that the "Assureds . . . shall not take any action which in any way increases Underwriters' exposure under this Certificate" and excludes from coverage any claim brought "by, on behalf of, or at the direction of any of the Assureds." The amended complaint, filed on October 7, 2000, alleges that SRG breached the Cooperation Clause by filing an answer that admitted the allegations of the Balee complaint and did not assert any defenses, and that the Balee lawsuit was brought "on behalf of, or at the direction of an Assured, SRG, against other Assureds."
Motion to strike
The plaintiff moves to strike portions of the defendants' answer to the amended complaint arguing that the answer contains "verbose, argumentative and redundant statements in violation of Fed.R.Civ.P. 8(e)" and that it "fail[s] to comply with Fed.R.Civ.P. 8(b), which requires that the Defendants admit or deny the 'substance of the averments.'" The plaintiff also moves to strike two of the affirmative defenses set out in the answer arguing that they do not constitute a defense under Kansas law.
Federal Rule of Civil Procedure 12(f) provides that "the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed.R.Civ.P. 12(f). A defense is insufficient if, as a matter of law, it cannot succeed under any circumstances. See Resolution Trust Corp. v. Schonacher, 844 F. Supp. 689, 690 (D.Kan. 1994). Motions to strike, however, are disfavored and are generally denied unless the allegations have no possible relation to the controversy and may cause prejudice to one of the parties. See Resolution Trust Corp. v. Scaletty, 810 F. Supp. 1505, 1515 (D.Kan. 1992); FDIC v. Niver, 685 F. Supp. 766, 768 (D.Kan. 1987). In order for a motion to strike to succeed, "it must be shown that the allegations being challenged are so unrelated to plaintiff's claims as to be unworthy of any consideration as a defense and that their presence in the pleading through the proceeding will be prejudicial to the moving party." 5A Wright Miller, Federal Practice and Procedure: Civil § 1380 at 650 (2d ed. 1990).
The defendants make numerous allegations in their answer that are related to the controversy but are beyond simply admitting or denying the averments of the amended complaint. These additional allegations set out defenses to the claims in the amended complaint. The plaintiff is not prejudiced by the presence of these additional allegations in the answer. The defendants admit or deny the substance of every allegation in the complaint. The court finds no merit to the plaintiff's conclusory assertions that discovery will be rendered "unreasonably broader" and that the plaintiff will be unable to determine which facts have been admitted or denied, evaluate settlement possibilities, or prepare for trial. Because the plaintiff has not carried his burden of showing that the allegations are not related to the controversy and that the plaintiff is prejudiced by their presence in the answer, the motion to strike portions of the defendants' answer is denied.
Rule 8(b) directs the parties to set out the terms of their defense in "short and plain terms." While the defendants' allegations are neither short nor plain, this alone is not a basis to strike the allegations in the answer.
The plaintiff's motion to strike two affirmative defenses also fails. Paragraph 32 of the answer alleges that the underwriters "breached their duties to the Assureds" by insisting that any settlement include a release from future liability, refusing to appoint a "nonconflicted adjusting representative," and refusing to consent to the $1,700,000 settlement. Paragraph 35 of the answer alleges that the underwriters acted in bad faith in breaching their duties under the contract. The plaintiff moves to strike these two paragraphs because Kansas does not recognize the tort of bad faith or "the existence of the duty pled in paragraph 32." While an underwriter does not necessarily owe any of the duties listed in paragraph 32, it is a question of fact whether, as the defendants allege, the underwriters owed the duties under this particular contract. While Kansas does not recognize the tort of bad faith, see Associated Wholesale Grocers, Inc v. Americold Corp., 261 Kan. 806, 845 (1997), Kansas does recognize in all contracts an implied duty to act in good faith, see Hartford v. Tanner, 22 Kan. App.2d 64, Syl. 5 (1996). Whether the underwriters breached their duty of good faith and thereby relieved the defendants of their duties under the contract is also a question of fact. Because defenses stated in paragraphs 32 and 35 could succeed under certain facts, the defenses are not insufficient as a matter of law and are not subject to a Rule 12(f) motion to strike.
Motion to dismiss
The plaintiff moves to dismiss the defendants' counterclaim under Rule 12(b)(6) for failure to state a claim. The defendants assert a counterclaim for "a declaration of their rights and obligations under the [insurance contract]." In this respect, the defendants' counterclaim is identical to the plaintiff's cause of action and both state a proper claim under 28 U.S.C. § 2201. The counterclaim, however, differs in that the defendants request that the declaration include fourteen specific findings, most pointing to the conclusion that the underwriters must pay for the Balee lawsuit settlement and costs. The complaint, on the other hand, seeks a declaration that includes two specific findings and reaches the conclusion that the underwriters are not obligated to pay for the Balee settlement and costs. The individual findings that the parties request as part of the declaratory judgment are not individual claims. The cause of action asserted by both parties is one for a declaration of "the rights and legal relations" of the parties under the insurance contract pursuant to 28 U.S.C. § 2201. A rule 12(b)(6) motion to dismiss for failure to state a claim, therefore, is not a proper vehicle for attacking the individual requested findings.
Even if the motion to dismiss were properly brought, the plaintiff's challenges to the requested findings lack merit. The plaintiff argues that it would be inappropriate for the court to decide whether the contract covers SRG in the Balee lawsuit because the issue is not ripe until the Balee lawsuit has concluded with a judgment against SRG. Declaratory judgment is sometimes proper "even though there are future contingencies that will determine whether a controversy ever actually becomes real." 10B Wright Miller, Federal Practice and Procedure: Civil, § 2757 at 476 (1998). A common example of this is when an insurer seeks a declaration that it will not be liable to indemnify an insured for any damages that may be awarded against the insured. See id; North Eastern Insurance Co. v. Northern Brokerage Co., 780 F. Supp. 381, 320 (D.Md. 1991) ("Within recent years courts have increasingly recognized the propriety of exercising jurisdiction under § 2201 to declare the rights and liabilities of parties to an insurance contract before any judgment has been rendered against the insured."). Declaratory judgment on the underwriters' liability under the insurance contract, therefore, is appropriate even without a judgment against SRG in the Balee case. See Allendale Mutual Insurance Co. v. Kaiser Engineers, 804 f.2d 592, 594 (10th Cir. 1986) ("The contingent nature of the right or obligation in controversy will not bar a litigant from seeking declaratory relief when the circumstances reveal a need for a present adjudication.").
In attacking the counterclaim as not ripe, the plaintiff inadvertently attacked his own claim for declaratory judgment. If it is premature to render a declaratory judgment that the underwriters are liable under the insurance contract, it is also premature to render a declaratory judgment that the underwriters are not liable.
The plaintiff argues that it would be inappropriate for this court to find that the underwriters acted in bad faith because Kansas does not recognize the tort of bad faith. Kansas recognizes an implied duty of good faith in all contracts, see Hartford v. Tanner, 22 Kan. App.2d 64, Syl. 5 (1996), and the defendants assert in the counterclaim that by acting in bad faith, the underwriters breached the contract. Just as it is appropriate for the court to determine whether the defendants breached the Cooperation Clause of the contract, it is appropriate for the court to consider whether the underwriters breached the contract by acting in bad faith.
The plaintiff argues that paragraph 12(h) of the counterclaim "appears to premise the relief sought upon a claim for interference with contractual relations" and that the claim should be dismissed for failure to plead the elements of tortious interference with contract. Paragraph 12(h) seeks a declaration by the court that the underwriters do not have a right to interfere with the settlement between SRG and the Balee plaintiffs or the SRG bankruptcy reorganization plan. The paragraph does not seek a declaration by the court that the underwriters have committed the tort of intentional interference with contract, but that the underwriters do not have the right to refuse to consent to the settlement.
The plaintiff argues that paragraphs 12(c) and 12(i) request a finding that has already been rejected by this court in its September 27, 2000 order. In the order, the court decided that the plaintiff has subject matter jurisdiction to bring the suit pursuant to 28 U.S.C. § 1334(b). Paragraph 12(c) of the counterclaim seeks a declaration that the plaintiff cannot bring the suit in an individual or a representative capacity because a provision in the contract precludes an action by an individual underwriter. Paragraph 12(i) seeks a declaration that the underwriters do not have grounds to contest the actions by the bankruptcy trustee, such as agreeing to settle the Balee lawsuit. This court did not decide either of these two issues in its September 27 order.
The plaintiff also argues that the defendants fail to allege facts that support the findings sought in the counterclaim. The counterclaim incorporates by reference all of the allegations made by the defendants in the answer to the amended complaint. The answer sets out sufficient allegations to support the findings sought in the counterclaim.
The fact that the defendants' answer sets out these additional allegations was the basis for the plaintiff's motion to strike the allegations.
Because a rule 12(b)(6) motion is not a proper vehicle to attack the individual findings requested by the defendants in their counterclaim for declaratory judgment and because the plaintiff's attacks on the requested findings lack merit, the motion to dismiss the counterclaim is denied.
IT IS THEREFORE ORDERED BY THE COURT THAT the plaintiff's motion to strike portions of the answer and two affirmative defenses and to dismiss the counterclaim is denied.
IT IS SO ORDERED this _____ day of February, 2001.