1 2 3 4 5 UNITED STATES DISTRICT COURT 6 SOUTHERN DISTRICT OF CALIFORNIA 7 8 SENTRY INSURANCE A MUTUAL CASE NO.: 18-cv-2664-WQH- COMPANY, a Wisconsin Corporation; KSC 9 and SENTRY CASUALTY COMPANY, 10 a Wisconsin Corporation, ORDER

11 Plaintiffs, 12 v. 13 NEW ALTERNATIVES, INC., a 14 California nonprofit corporation; and 15 DOES 1-100,

16 Defendants, 17

18 NEW ALTERNATIVES, INC., a 19 California nonprofit corporation,

20 Cross-Claimant, 21 v.

22

SENTRY INSURANCE A MUTUAL

23 COMPANY, a Wisconsin Corporation and SENTRY CASUALTY 24 COMPANY, a Wisconsin Corporation, 25 Cross-Defendants. 26

27

28 1 HAYES, Judge: 2 The following matters are pending before the Court: 1) the Motion to Dismiss the 3 Third Cause of Action (Fraud) in the Cross-Complaint filed by Plaintiffs (ECF No. 22) and 4 2) the Motion to Dismiss for Failure to State a Claim filed by Plaintiffs (ECF No. 27). 5 BACKGROUND 6 On November 21, 2018, Plaintiffs Sentry Insurance A Mutual Company (“Sentry 7 Insurance”) and Sentry Casualty Company (“Sentry Casualty”) initiated this action by 8 filing a Complaint against Defendant New Alternatives, Inc. (“New Alternatives”) for 9 breach of contract. (ECF No. 1). Plaintiffs allege that Defendant breached Sentry Policies 10 and Casualty Insurance Agreements regarding workers’ compensation insurance coverage 11 by failing to pay an outstanding balance of $573,290.35. (ECF No. 24 at 9). Plaintiffs 12 seek a money judgment, reasonable costs and attorneys’ fees incurred, and further relief as 13 the court deems just and proper. 14 On February 26, 2019, Defendant filed an Answer, Affirmative Defenses, and a 15 Counterclaim against Plaintiffs. (ECF No. 8). On July 24, 2019, Plaintiffs filed a Motion 16 to Dismiss the Third Cause of Action (Fraud) in the Cross-Complaint filed by Defendant. 17 (ECF No. 22). 18 On August 8, 2019, Defendant filed an Answer, Affirmative Defenses, and the First 19 Amended Counterclaim. (ECF No. 24). Defendant admits that Plaintiffs provided workers 20 compensation insurance coverage for Defendant from January 1, 2013 until January 1, 21 2017. (ECF No. 24 at 2). Defendant admits that it agreed to pay premiums to Plaintiffs. 22 Id. at 4. Defendant alleges that one or more of Plaintiffs’ Policies are illegal, void, and 23 unenforceable because Plaintiffs supplemented the Sentry Policies with Casualty Insurance 24 Agreements contrary to California Insurance Code § 11658. Id. at 8-9. Defendant alleges 25 the following five claims in the Amended Counterclaim: 1) declaratory relief and 26 rescission, 2) tortious breach of the implied covenant of good faith and fair dealing, 3) 27 fraud (nondisclosure and misrepresentation), 4) declaratory relief, and 5) unjust 28 enrichment. Defendant seeks a declaration that the Casualty Insurance Agreements are 1 void and unenforceable; rescission of the Casualty Insurance Agreements; general and 2 special damages against Plaintiffs in a sum to be proven at trial with pre and post-judgment 3 interest; and recovery of all attorneys’ fees and consultants’ fees, costs, and expenses. 4 On August 29, 2019, Plaintiffs filed a Motion to Dismiss Defendant’s Amended 5 Counterclaim for Fraud (Counterclaim 3). (ECF No. 27). Plaintiffs contend that Defendant 6 failed to plead its fraud counter-claim with specificity required by Fed. R. Civ. Proc. 9(b) 7 and that the fraud counter-claim is time-barred. (ECF No. 27-1 at 3). On September 23, 8 2019, Defendant filed a Response in Opposition to Plaintiffs’ Motion to Dismiss 9 Defendant’s Amended Counterclaim for Fraud (Counterclaim 3). (ECF No. 28). On 10 September 30, 2019, Plaintiffs filed a Reply. (ECF No. 31). 11 ALLEGATIONS OF THE FIRST AMENDED COUNTERCLAIM FOR FRAUD 12 Defendant alleges that Plaintiffs 13 represented that the Sentry Policies and Casualty Insurance Agreements complied with California law, including the relevant applicable statutes and 14 regulations. . . . These representations were false at the time made based on 15 the specific violations of California law separately alleged, including the usage of an unapproved and illegal side agreement intended to bind New 16 Alternatives prior to the required regulatory approval. Alternatively, Sentry 17 did not disclose that the Casualty Side Agreement had not been approved by the California Insurance Commissioner . . . . 18

19 (ECF No. 24 at 13). 20 Defendant alleges the Plaintiffs’ misrepresentations and non-disclosures were 21 material and relied upon. Id. at 13-14. Defendant alleges that Plaintiffs’ 22 misrepresentations and non-disclosures “served as a preface to irregularities in the manner 23 and method of determining premiums all in furtherance of [Plaintiffs’] scheme starting with 24 the Program Inception Date and continuing to the present.” Id. at 14. Defendant alleges 25 that “Alternatively, [Plaintiffs’] intentional failure to disclose the alleged material facts 26 commenced during the Policy application process, existed as of the Program Inception Date 27 and continued without correction until June 7, 2013.” Id. Defendant alleges that it did not 28 discover that Plaintiffs’ alleged misrepresentations and non-disclosures until after Sentry 1 Policies had been in force. Id. at 15. Defendant alleges that Plaintiffs’ alleged conduct 2 increased Defendant’s insurance premiums and resulted in unnecessary and excessive, 3 fees, costs, and expenses. Id. 4 LEGAL STANDARD 5 Federal Rule of Civil Procedure 12(b)(6) permits dismissal for “failure to state a 6 claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Federal Rule of Civil 7 Procedure 8(a) provides that “[a] pleading that states a claim for relief must contain . . . a 8 short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. 9 R. Civ. P. 8(a)(2). Dismissal under Rule 12(b)(6) is appropriate where the complaint lacks 10 a cognizable legal theory or sufficient facts to support a cognizable legal theory. See 11 Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). 12 When reviewing a motion to dismiss, a court must accept as true all “well-pleaded 13 factual allegations.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). However, a court is not 14 “required to accept as true allegations that are merely conclusory, unwarranted deductions 15 of fact, or unreasonable inferences.” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 16 (9th Cir. 2001). “In sum, for a complaint to survive a motion to dismiss, the non-conclusory 17 factual content, and reasonable inferences from that content, must be plausibly suggestive 18 of a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F. 3d 962, 969 19 (9th Cir. 2009) (quotations omitted). 20 DISCUSSION 21 Plaintiffs/Cross-Defendants contend that Defendant fails to plead fraud with 22 sufficient particularity. (ECF No. 27-1 at 6). Plaintiffs contend that Defendant’s fraud 23 claim is based upon alleged misrepresentations and nondisclosures that occurred at a point 24 prior to the issuance of the 2013 Policy. Id. at 9. Plaintiffs contend that Defendant’s fraud 25 Counterclaim is time-barred by a three-year statute of limitations because Defendant first 26 filed its Counterclaims in February 2019. Id. Plaintiffs contend that the discovery rule 27 cannot be applied to toll the statute of limitations because Defendant has failed to plead 28 any facts that would support application of the rule. Id. 1 Defendant/Cross-Claimant contends that the Counterclaim adequately alleges 2 Plaintiffs’ sale of an unapproved and illegal insurance product. (ECF No. 28 at 6). 3 Defendant contends that there are multiple instances of fraud, which started with the 4 issuance of the 2013 Policy and continue to the present. Id. at 8. Defendant contends that 5 the separate instances of fraud include (i) fraudulent misrepresentations and nondisclosures 6 regarding premiums; (ii) fraudulent inflation of premiums; and (iii) fraudulent 7 misappropriation of $300,000 in Defendant’s pre-funded deposit. Id. 8 Claims sounding in fraud or mistake must comply with the heightened pleading 9 requirements of Federal Rule of Civil Procedure 9(b), which requires that a complaint 10 “must state with particularity the circumstances constituting fraud or mistake.” Fed. R. 11 Civ. P. 9(b). Rule 9(b) “requires . . . an account of the time, place, and specific content of 12 the false representations as well as the identities of the parties to the misrepresentations.” 13 Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (quotation omitted); see also Vess 14 v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (averments of fraud must 15 be accompanied by “the who, what, when, where, and how of the misconduct charged”) 16 (quotation omitted). “To comply with Rule 9(b), allegations of fraud must be specific 17 enough to give defendants notice of the particular misconduct which is alleged to constitute 18 the fraud charged so that they can defend against the charge and not just deny that they 19 have done anything wrong.” Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001) 20 (citation and internal quotations omitted). “[A] plaintiff must set forth more than the 21 neutral facts necessary to identify the transaction. The plaintiff must set forth what is false 22 or misleading about a statement, and why it is false.” Vess, 317 F.3d at 1106. 23 Defendant’s Amended Counterclaim alleges that Plaintiffs 24 represented that the Sentry Policies and Casualty Insurance Agreements complied with California law. . . . These representations were false at the time 25 made based on the specific violations of California law separately alleged, 26 including the usage of an unapproved and illegal side agreement intended to bind New Alternatives prior to the required regulatory approval. 27 Alternatively, Sentry did not disclose that the Casualty Side Agreement had 28 not been approved by the California Insurance Commissioner . . . . 1 (ECF No. 24 at 13). 2 The Court concludes that Defendant’s allegations of fraud are not “specific enough 3 to give [Plaintiffs] notice of the particular misconduct which is alleged to constitute the 4 fraud charged . . . .” Bly-Magee, 236 F.3d at 1019 (9th Cir. 2001). The Amended 5 Counterclaim fails to “state with particularity the circumstances constituting fraud or 6 mistake.” Fed. R. Civ. P. 9(b). 7 “A federal court sitting in diversity applies the substantive law of the state, including 8 the state’s statute of limitations [including tolling rules].” Albano v. Shea Homes Ltd. 9 P’ship, 634 F.3d 524, 530 (9th Cir. 2011) (citing Nev. Power Co. v. Monsanto Co., 955 10 F.2d 1304, 1306 (9th Cir. 1992)). Section 338(d) expressly provides a three-year limitation 11 on 12 An action for relief on the ground of fraud or mistake. The cause of action in 13 that case is not to be deemed to have accrued until the discovery, by the 14 aggrieved party, of the facts constituting the fraud or mistake.

15 Cal. Civ. Proc. Code § 338(d). “The limitations period, the period in which a plaintiff must 16 bring suit or be barred, runs from the moment a claim accrues.” Aryeh v. Canon Bus. 17 Solutions, Inc., 55 Cal.4th 1185, 1191 (2013); see Cal. Civ. Proc. Code § 312 (an action 18 must “be commenced within the periods prescribed in this title, after the cause of action 19 shall have accrued.”) “[O]rdinarily, the statute of limitations runs from ‘the occurrence of 20 the last element essential to the cause of action.’” Aryeh, 55 Cal.4th at 1191 (quoting Neel 21 v. Magana, 6 Cal.3d 176, 187 (1971)). 22 “An important exception to the general rule of accrual is the ‘discovery rule,’ which 23 postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, 24 the cause of action.” Fox v. Ethicon Endo-Surgery, Inc., 35 Cal.4th 797, 806 (2005). Under 25 the delayed discovery rule, “a cause of action accrues and the statute of limitations begins 26 to run when the plaintiff has reason to suspect an injury and some wrongful cause . . . .” 27 Fox, 35 Cal.4th at 803. Stated differently, “the limitations period begins once the plaintiff 28 1 has notice or information of circumstances to put a reasonable person on inquiry.” Jolly v. 2 Eli Lilly & Co., 44 Cal.3d 1103, 1110-11 (1988). “A plaintiff has reason to discover a 3 cause of action when he or she ‘has reason at least to suspect a factual basis for its 4 elements.’” Fox, 35 Cal 4th at 807 (quoting Norgart v. Upjohn Co., 21 Cal.4th 383, 398 5 (1999)). “[T]o rely on the discovery rule for delayed accrual of a cause of action, ‘[a] 6 plaintiff whose complaint shows on its face that his claim would be barred without the 7 benefit of the discovery rule must specifically plead facts to show (1) the time and manner 8 of discovery and (2) the inability to have made earlier discovery despite reasonable 9 diligence.’” Id. at 808 (second alteration and emphasis in original) (citation omitted). 10 In the Amended Counterclaim, Defendant alleges that Plaintiffs’ misrepresentations 11 and nondisclosures “spanned the course of the application process for the Policies, prior to 12 the Program Inception Date and as of the date of issuance of the first Sentry Policy on 13 January 1, 2013.” (ECF No. 24 at 13). Defendant alleges that Plaintiffs’ 14 misrepresentations and nondisclosures “continu[e] to the present.” Id. at 14. Defendant 15 alleges that 16 Alternatively, Sentry’s intentional failure to disclose the alleged material facts commenced during the Policy application process, existed as of the Program 17 Inception Date and continued without correction until June 7, 2013[, 18 (allegedly when the Casualty Insurance Agreement were approved by the California Insurance Commissioner)]. 19

20 Id. at 14. 21 Section 338(d) expressly provides a three-year limitation on “[a]n action for relief 22 on the ground of fraud or mistake. . . .” Cal. Civ. Proc. Code § 338(d). On February 26, 23 2019, Defendant filed its fraud Counterclaim against Plaintiffs. On August 8, 2019, 24 Defendant filed the Amended Counterclaim against Plaintiffs. Based on the June 7, 2013 25 date that Defendant provides in the alternative, Defendant’s fraud Counterclaim is time- 26 barred. 27 Although Defendant asserts facts regarding the time of discovery, the manner of 28 discovery, and the inability to have made earlier discovery in its Response in Opposition, 1 ||in the Amended Counterclaim, Defendant alleges that it “did not discover that the acts of 2 || [Plaintiffs] were wrongful until after the Policies had been in force.” (ECF No. 24 at 15). 3 || Defendant’s Amended Counterclaim fails to specifically plead facts to show “(1) the... 4 ||manner of discovery and (2) the inability to have made earlier discovery despite reasonable 5 || diligence.” Fox, 35 Cal.4th at 808. Defendant’s Amended Counterclaim does not 6 adequately plead tolling under the delayed discovery rule. See Yumul v. Smart Balance, 7 733 F.Supp.2d 1134, 1144-45 (C.D. Cal. 2010) (granting Defendant’s Motion to 8 || Dismiss without prejudice because Plaintiff “has not alleged in any form the manner of her 9 discovery, her complaint does not adequately plead tolling under the delayed discovery 10 || rule.”’) 11 CONCLUSION 12 IT IS HEREBY ORDERED that Plaintiffs’ Motion to Dismiss New Alternatives, 13 ||Inc.’s First Amended Counterclaim for Fraud (Counterclaim 3) (ECF No. 27) is 14 || GRANTED. 15 IT IS FURTHER ORDERED that Plaintiffs’ Motion to Dismiss the Third Cause of 16 || Action (Fraud) in the Cross-Complaint Filed by New Alternatives, Inc. (ECF No. 22) is 17 || DENIED as moot. 18 Any motion for leave to file an amended pleading must be filed within 20 days of 19 || this Order. 20 || Dated: November 13, 2019 itt Z. A a 21 Hon. William Q. Hayes United States District Court 23 24 25 26 27 28