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Seabright Insurance Company v. Matson Terminals

October 31, 2011

SEABRIGHT INSURANCE COMPANY,,
PLAINTIFF,
v.
MATSON TERMINALS, INC., MATSON NAVIGATION COMPANY, INC., DEFENDANTS.



The opinion of the court was delivered by: Leslie E. Kobayashi United States District Judge

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR JUDGMENT ON THE PLEADINGS OR FOR SUMMARY JUDGMENT

Before the Court is Defendants Matson Terminals, Inc. and Matson Navigation Company, Inc.'s (collectively "Matson" or "Defendants") Motion for Judgment on the Pleadings or for Summary Judgment ("Motion"), filed on June 17, 2011. Plaintiff Seabright Insurance Company ("Seabright" or "Plaintiff") filed its memorandum in opposition on September 29, 2011, and Matson filed its reply on September 19, 2011. This matter came on for hearing on September 29, 2011. Appearing on behalf of Matson were Brett Tobin, Esq., and John Lacy, Esq., and appearing telephonically on behalf of Seabright was Richard Wootton, Esq. After careful consideration of the Motion, supporting and opposing memoranda, and the arguments of counsel, Matson's Motion is HEREBY GRANTED IN PART AND DENIED IN PART for the reasons set forth below. The Motion is DENIED as to Plaintiff's First Cause of Action (Equitable Subrogation) and GRANTED as to Plaintiff's Second Cause of Action (Equitable Indemnity).

BACKGROUND

Plaintiff seeks reimbursement of attorneys' fees and costs that it paid on behalf of its insured, Brewer Environmental Industries ("Brewer"), in a workers' compensation matter. Plaintiff filed its original Complaint for breach of contract on April 16, 2010 against Matson and Brewer. On April 28, 2011, this Court granted in part and denied in part Defendants' motion for judgment on the pleadings, dismissing with prejudice the breach of contract claim as to Seabright and Brewer, and the equitable indemnity claim as to Brewer. [Dkt. no. 46 ("April 28, 2011 Order").] The Court granted Seabright leave to amend its Complaint as follows:

Plaintiffs raise the issue of "equitable subrogation" for the first time in their Memorandum in Opposition. [Mem. in Opp. at 16.] While Plaintiffs argue that they "specifically pled Seabright's right of subrogation in the complaint[,]" subrogation is only referenced in passing in its "Facts" and "First Cause of Action (Breach of Contract)" sections. [Complaint at ¶¶ 13, 25 ("SEABRIGHT is additionally subrogated to the claims of BREWER, under the aforementioned insurance policy issued by SEABRIGHT to BREWER, and as a matter of law, for compensation benefits paid on behalf of BREWER, as well as attorneys' fees and costs expended by SEABRIGHT on behalf of BREWER.").] Unlike Plaintiffs' equitable indemnity claim ("Second Cause of Action (Equitable Indemnity)"), equitable subrogation is not clearly pled as an independent cause of action.

Although Federal Rule of Civil Procedure 8(a)(2) requires only that a complaint include "a short and plain statement of the claim showing that the pleader is entitled to relief[,]" such a statement must sufficiently put the defendants on fair notice of the claims asserted and the grounds on which they rest. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citation omitted). The Court FINDS that Plaintiffs have failed to plead equitable subrogation in a manner that provides such notice. The Court therefore DECLINES to review this claim.

The Court, however, GRANTS Seabright leave to amend its Complaint for the limited purpose of pleading its equitable subrogation claim. The equitable subrogation claim must be based on facts currently alleged in the Complaint, and Plaintiffs must file their Amended Complaint no later than May 30, 2011. [Id. at 40-41.]

Seabright filed its First Amended Complaint on May 20, 2011, alleging two separate causes of action: (1) equitable subrogation; and (2) equitable indemnity. The facts alleged are similar to those listed in the original Complaint. Briefly, on November 10, 2004, longshormen Kyle Soares suffered an aggravation and worsening of a pre-existing degenerative disc disease of his lower back while working for and employed by Plaintiff's insured, Brewer. [First Amended Complaint at ¶ 5.] The injury occurred in the course and scope of Mr. Soares' employment as a covered employee under § 902(3) of the Longshore and Harbor Workers' Compensation Act, 33 U.S.C. § 901 et seq. ("LHWCA" or the "Act"). [Id.]

Brewer was covered under a Seabright insurance policy for claims brought by its employees under the LHWCA, and Seabright timely initiated payment of compensation benefits to Mr. Soares for medical expenses associated with his injury. [Id. at ¶ 6.] Plaintiff alleges that the policy contractually required it to provide legal representation to Brewer in any legal action arising from a claim for compensation made by an employee of Brewer. [Id.]

On January 31, 2005, Brewer and Defendants entered into an Asset Purchase Agreement ("Agreement") whereby Brewer agreed to sell and Defendants agreed to purchase HT&T Stevedoring, a business providing stevedoring services on the island of Hawai'i. [Id. at ¶ 9.] Paragraph 5.3 of the Agreement provides that Defendants shall: indemnify, defend and hold harmless [BREWER] from and against any and all loss, damage, claim, cost and expense and any other liability whatsoever (including, without limitation, reasonable attorneys' fees, charges and costs) incurred by [BREWER] by reason of any claim, demand or litigation relating to the Property Employees which arise from any act, omission, occurrence or matters that take place after the Cut-off Time. [Id. at ¶ 10 (alteration in original).] The "Cut-off Time" of the Agreement was defined as January 31, 2005 at 11:59 p.m., and Mr. Soares was designated a "Property Employee" in Schedule 1.27 of the Agreement. [Id. at ¶ 11.] After January 31, 2005, Soares became an employee of Defendants.

On June 10, 2005, Mr. Soares filed his first claim for compensation under the LHWCA against Brewer and Seabright for his November 10, 2004 injury. [Id. at ¶ 13.] During his employment with Defendants, he suffered a further aggravation and worsening of his lower back degenerative disc disease. [Id. at ¶ 12.] On February 21, 2006, Mr. Soares filed a second claim for compensation for "cumulative trauma." [Id. at ¶ 13.]

Brewer tendered the defense and indemnity for Mr. Soares' "cumulative trauma" claims to Defendants on June 5, 2006, but Defendants refused to acknowledge liability, and Seabright paid compensation, medical benefits, and the costs and fees of defending Brewer. [Id. at ¶ 14.]

Following a full hearing before the federal Office of Workers' Compensation Programs, Administrative Law Judge ("ALJ") Gerald Etchingham held that Mr. Soares' back injury worsened as a result of his work for Defendants, and that Defendants were the "last responsible employer" pursuant to the LHWCA. [Id. at ¶ 16.] Brewer and Defendants both disputed full liability for Mr. Soares' claims before the ALJ. The ALJ ordered Defendants to reimburse Seabright and Brewer for compensation and medical expenses paid to Soares for the time period after he began working for Defendants on January 31, 2005. [Id.]

Seabright alleges that it has paid in excess of $139,527.04 in legal fees and costs in defense of Brewer in connection with Mr. Soares' claims pursuant to the insurance policy. Defendants continue to refuse to reimburse Seabright for the legal fees and costs incurred in defending Brewer. [Id. at ¶¶ 17-18.]

In their First Cause of Action ("Equitable Subrogation"), Seabright alleges that, under its insurance policy with Brewer, it is contractually required to pay all attorneys' fees and costs incurred by Brewer in connection with Mr. Soares' claim. Seabright alleges it is subrogated to the rights and claims of Brewer against Defendants for all attorneys' fees and costs expended on behalf of Brewer, for which Brewer would have been entitled to recover from Defendants. [Id. at ¶¶ 20-21.]

In their Second Cause of Action ("Equitable Indemnity"), Seabright alleges that, as a result of Defendants' failure and refusal to pay Mr. Soares' compensation and to accept the tender of Brewer's defense, Seabright has expended legal fees and costs on behalf of Brewer, and continues to expend significant legal fees and costs asserting this claim against Defendants, for which Seabright is equitably entitled to indemnification from Defendants. [Id. at ¶¶ 23-26.]

I. Matson's Motion

Matson moves for judgment on the pleadings or for summary judgment on the grounds that: (1) Plaintiff's equitable state law claims are preempted by the LHWCA and must be dismissed; (2) Plaintiff's claims are not properly pled; and (3) the American Rule bars Plaintiff's claims for attorneys' fees and the "wrongful act" exception does not apply.

A. LHWCA Preemption

Matson argues that Seabright's claims are barred because they are preempted by the LHWCA as matters of express preemption as well as conflict preemption. [Mem. in Supp. of Motion at 6-7.]

1. Express Preemption

According to Matson, the LHWCA's exclusivity provision, which limits employer liability, amounts to an express preemption of Plaintiff's claims. Section 905 of the LHWCA expressly states that "[t]he liability of an employer prescribed in section 4 shall be exclusive and in place of all other liability of such employer to the employee, his legal representative . . . and anyone otherwise entitled to recover damages from such employer at law or in admiralty on account of such injury or death." 33 U.S.C. § 905(a). Matson argues that Congress has placed an express limitation on the kinds of claims that can be brought relating to longshore injuries. [Mem. in Supp. of Motion at 8.]

Matson acknowledges that courts allow certain types of state-law claims to be raised, but argues that the weight of authority limits such instances to cases wherein the plaintiff alleges an independent contractual duty that has been breached. [Id. at 8-9. (citing cases).] Matson notes that this Court previously cited to the case of Johnson v. National Steel & Shipbuilding Co., 742 F. Supp. 1062 (S.D. Cal. 1990), for the proposition that third-party claims against employers are not always barred by the LHWCA. Even Johnson, however, acknowledged that generally only "third party actions based on contractual indemnity are not barred by the statute." [Id. at 9 (citing 742 F. Supp. at 1066).] According to Matson, under the prevailing view, Seabright's claims are barred by § 905(a), unless it can demonstrate a contractual duty that brings the claims outside the LHWCA context.

Based on this Court's earlier ruling that "§ 905(a) can be overcome where the action is 'on account of' an independent duty owed by the employer to the third party[,]" Matson asserts that this Court found that the exclusivity provision of § 905(a) did not bar Seabright from bringing its claim. Matson requests that the Court revisit that position in light of the following new circumstances brought by the new posture of the case and the amended claims. [Id. at 9.]

First, Seabright has now limited its claims to attorneys' fees and costs by removing any allegation of outstanding compensation benefits. Additionally, this Court ruled that Seabright cannot base its equitable indemnity claims upon the Agreement between Matson and Brewer. Instead, Matson contends that Seabright can only make claims stemming from the rights assigned to it under Brewer's insurance policy. This Court also ruled that any such assigned rights are limited to the rights Brewer possessed at the time of the issuance of the insurance policy. Matson argues that the legal fees incurred by Seabright arose out of the agency proceeding under the LHWCA. If those fees are deemed to be "on account of" that claim, they are barred by the LHWCA. If they are not "on account of" the injury, Seabright must allege an independent duty to support the claim. Matson argues that Seabright failed to do so in the First Amended Complaint. [Id. at 10.]

Next, Matson asserts that this Court's analysis in the prior order was limited to the claim of equitable indemnity. Matson claims it could locate no authority allowing for an equitable subrogation claim for attorneys' fees in LHWCA cases. While some cases such as Johnson speak of implied rather than contractual indemnity, none appear to allow for equitable subrogation. In sum, Matson argues that, to the extent these claims arise under the LHWCA, they are expressly preempted. To the extent they are outside of the LHWCA, Seabright must allege an independent duty to support the remedy it seeks, which it has not done. [Id. at 11.]

2. Conflict Preemption

Even if the LHWCA does not expressly preempt Plaintiff's claims, Matson argues that the claims are preempted because they conflict with the purposes of the LHWCA. The LHWCA was designed to strike a balance between the concerns of the longshoremen and harbor workers on the one hand, and their employers on the other. Employers relinquished their defenses to tort actions in exchange for limited and predictable liability. Employees accept limited recovery because they receive prompt relief without the expense, uncertainty, and delay that tort actions entail. [Id. at 13 (citing Morrison-Knudsen Constr. Co. v. Dir., Office of Worker's Comp. Programs, 461 U.S. 624, 635-36 (1983)).]

Matson argues that § 905(a)'s exclusivity clause limits employer liability to a single agency proceeding, which makes sense in light of the provision in § 904(b) that "[c]ompensation shall be payable irrespective of fault as a cause of injury." [Id. (quoting 33 U.S.C. § 904(b)).] Matson contends that the LHWCA is a compromise in which employers essentially concede liability, even in the absence of fault, but only if it comes in exchange for a predictable limitation on the amount of that liability. Allowing claims to be brought in other forums, like this one, takes away that predictable limitation and upsets the balance as well as the efficiency of a uniform compensation scheme. [Id.]

Matson asserts that the LHWCA extends this balance even further by expressly addressing attorneys' fees in § 928 and only allowing them to be paid "to the attorney for the claimant." According to Matson, the intent to limit attorneys' fees to the claimant alone is also clear from the legislative history of the 1972 amendments to the LHWCA: both the Senate and House Reports make clear that attorneys' fees may only be awarded to a successful claimant and that "[a]ttorneys fees may not be assessed against employers (or carriers) in other cases." [Id. at 14 (quoting S. Rep. No. 92-1125, at 70 (1972) and H.R. Rep. No. 92-1441, at 215 (1972))]. Matson argues that the object of such a limitation is to maintain the balance by limiting potential liability and creating a predictable regime while also allowing a claimant, and only a claimant, to make sure his compensation is not decreased by having to pay for litigation to secure it. [Id.]

According to Matson, the current suit represents a transparent attempt to circumvent the limitations of the LHWCA, where compensation was fully paid. The LHWCA prevented Seabright from getting a fee award in the agency action, so it brought its claims here instead. If allowed to go forward, there would be nothing preventing parties from seeking in actions under state law that which the LHWCA statutory scheme expressly forbids. This would defeat the protections for employers which are built into the statutory bargain, thus leaving them with no defense to liability and no predictable limitation in exchange. It would also defeat the efficiency gains of having a uniform compensation system, instead opening issues up to ancillary litigation in multiple forums. [Id. at 15.]

B. Plaintiff's Claims Are Insufficiently Pled

Matson next argues that Plaintiff fails to state claims that are plausible on their face, rather than mere conclusory statements.

First, with respect to the equitable subrogation claim, Matson contends that any assignment of rights from Brewer to Seabright must be based solely on the insurance policy and not on the Agreement. Further, any assignment of rights is limited to the rights Brewer possessed at the time the policy was issued, and here, Brewer did not possess any rights against Matson at the time the insurance policy was issued because the parties had not yet negotiated the Agreement. [Id. at 16-17.]

To the extent Brewer arguably had any right to recover attorneys' fees from Matson, that right would have been based on the Agreement, to which Seabright was not a party. Outside of the Agreement, Matson argues that Brewer had no rights at all because the LHWCA forbids the awarding of attorneys' fees as between employers. [Id. at 17 (citing 33 U.S.C. § 928(a)).] Matson asserts that, under the doctrine of equitable subrogation, Seabright might be allowed to step into Brewer's shoes, "but only as those shoes existed at the time of the issuance of the insurance policy - which indisputably occurred prior to Soares' injury and prior to negotiation of the [Agreement]." [Id.] At that time, Brewer had no right of recovery against Matson for attorneys' fees, and, as a result, Seabright necessarily also lacks any right of recovery. Matson argues that Seabright cannot allege any set of facts under which it has a right of equitable subrogation entitling it to an award of attorneys' fees. [Id.]

As to equitable indemnity, Matson notes that this Court instructed Plaintiff to plead and prove that: (1) he or she discharged a legal obligation owed to a third party; (2) the defendant was also liable to the third party; and (3) as between the claimant and defendant, the obligation ought to be discharged by the latter. Matson recognizes that this Court found that the prior Complaint alleged sufficient factual matter to support a claim for equitable indemnity, but it brings the current Motion on the basis that the alleged facts in the First Amended Complaint are not the same as those alleged in the original Complaint. Namely, Seabright has removed its allegations related to the $1,700 in compensation benefits, which it previously alleged it was owed by Matson. Matson argues this change alters the analysis entirely. [Id. at 17-19.]

The first element of equitable indemnity is that the claimant must allege that he or she discharged an obligation to a third party, but, unlike with any compensation benefits, which would have been paid to Mr. Soares, the attorneys' fees, which are the sole basis for this suit, were never paid to Mr. Soares or any third party (unless Seabright's attorneys are deemed to be a third party). Even if Seabright's attorneys were deemed to be a third party, Matson argues it was never liable to them for anything. Further, the third element, that of balancing the competing obligations, does not make sense in this context and is likely not applicable on these facts - essentially an effort at fee-shifting after a dispute. Matson posits that, to find otherwise would be to say that, in any case, a party could ...


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