Pinon Sun Condominium Association, Inc. v. Atain Specialty Insurance Co.

          REPORT AND RECOMMENDATION ON JOINT MOTION TO AMEND ANSWER TO COUNTERCLAIMS AND THIRD PARTY CLAIMS TO ADD COUNTERCLAIMS AGAINST DEFENDANTS (DKT. #190)

          N. Reid Neureiter, United States Magistrate Judge.

         This matter comes before the Court on Plaintiff Pinon Sun Condominium Association Inc.'s ("Pinion Sun") and Third Party Defendants Claim Solutions LLC ("Claim Solutions") and Scott Benglen's ("Benglen") (collectively "Movants") Joint Motion to Amend Their Answer to Defendants' Counterclaims and Third-Party Claims to Add Counterclaims Against Defendants (Dkt. #190). For the reasons stated below, I recommend that the Motion to Amend be DENIED.

         1. BACKGROUND

         This is a bad faith insurance lawsuit, originally brought by Pinion Sun against three insurers, including Great Lakes Insurance, SE's ("Great Lakes"), for breach of insurance contract, statutory unreasonable delay, breach of the covenant of good faith and fair dealing, and violation of the Colorado Consumer Protection Act. (Dkt. #1). Great Lakes responded to the complaint with counterclaims against Pinion Sun, as well as third-party claims against Claim Solutions, Benglen, Shalz Construction and Bradley Shalz. Great Lakes' counterclaims and third party claims were for fraud, civil theft, civil conspiracy, and both state and federal racketeering, specifically alleging violations of the Colorado Organized Crimes Act (COCCA) and the federal Racketeer Influenced and Corrupt Organizations Act (RICO). (Dkt. #49.) Great Lakes' counterclaims were based generally on allegations that Pinion Sun and the Third Party Defendants had conspired to commit insurance fraud by claiming an amount for roofing repairs in excess of the actual damage. The targets of Great Lakes' counterclaims allegedly did this by (1) failing to obtain open competitive bidding for the replacement of the allegedly damaged roof, (2) failing to enter into a written contract setting forth the scope of work and the cost of the services, as required by Colorado law; (3) creating and submitting a false invoice for repairs; (4) making various false claims concerning the siding repairs; and (5) submitting multiple Sworn Statements of proof of loss far in excess of the reasonable cost of repair or replacement. (Dkt. #49 ¶¶ 21 -29 & #51 ¶¶ 210-18.)

         On June 29, 2018, Judge Watanabe recommended that Great Lakes' COCCA and RICO counterclaims be dismissed without prejudice for failure to allege with sufficient particularity facts that would support the necessary predicate acts of racketeering. (Dkt. #167 at 13-17.) However, Judge Watanabe declined to recommend dismissal of Great Lakes' non-racketeering claims for fraud, civil conspiracy, civil theft, and declaratory judgment. (Id. at 16-17.) On July 18, 2018, Judge Arguello issued an order affirming and adopting Judge Watanabe's recommendation. (Dkt. #174.)

         In light of the dismissal of Great Lakes' COCCA and RICO claims, and also because of the alleged lack of evidence produced to date in discovery to support Great Lakes' remaining counterclaims, Movants Pinon Sun, Claim Solutions, and Benglen, seek to amend their pleadings to add two counterclaims of their own against Great Lakes for (1) abuse of process and (2) malicious prosecution. Movants' primary basis for these counterclaims is that Great Lakes has no factual basis for any of its fraud and conspiracy counterclaims or third-party claims. As Movants assert in their Motion:

Now with substantial deposition discovery in this matter, it has become apparent that there are no facts or law supporting [Great Lakes'] insurance fraud and related claims. Furthermore, from the October 6, 2017 letter from Great Lakes, it would appear that the counterclaims were brought to coerce Plaintiff into abandoning its claims and allowing CAG to adjust [the] claim without further consequence.

         (Dkt. #190 at 4.) Or, as summarized in the Movant's Conclusion to their Motion, "Movants seek to amend their answer to Counterlcaim Plaintffs Counterclaims as those counterclaims are without legal and factual merit and were brought for the improper purpose of intimidating Plaintiff to abandon its lawful claims for insurance bad faith. . . . The Court should grant Plaintiff's Motion to protect it from improper retaliatory litigation." (Id. at 15.)

         The Court heard oral argument on the Motion to Amend on December 14, 2018. At that time, I cited to the Parties a number of additional potentially relevant legal authorities, including published cases and a law review article, and gave the parties time to submit additional briefs addressing those authorities. The Parties submitted supplemental briefs on December 21, 2018. I have reviewed the proposed amendments, the original and supplemental briefing, and considered the arguments presented at oral argument.

         2. STANDARD FOR GRANTING MOTION TO AMEND

         A party may amend a pleading by consent of the other parties or by leave of court. Fed.R.Civ.P. 15(a). Leave to amend is to be freely given when justice so requires. Id. Refusing leave to amend is generally only justified upon a showing of undue delay, undue prejudice to the opposing parties, bad faith or dilatory motive, failure to cure deficiencies by amendments previously allow, or futility of amendment. Frank v. U.S.W., Inc., 3 F.3d 1357, 1365 (10th Cir. 1993). See also Foman v. Davis, 371 U.S. 178, 182(1962).

         Here, I find that there was no undue delay, bad faith or dilatory motive. The only reason for denying amendment would be futility. If a pleading, as amended, could not withstand a motion to dismiss, then the amendment should be denied as futile. TV Communications Network, Inc., v. Turner Network Television, Inc., 964 F.2d 1022, 1028 (10th Cir. 1992). See also Glick v. Koenig, 766 F.2d 265 (7th Cir. 1985) (holding that district court is justified in denying a motion to amend the pleadings pursuant to rule 15(a) if the proposed amendment could not withstand a motion to dismiss). Thus, to determine whether Movants should be entitled to amend their respective pleadings to add claims of malicious prosecution and abuse of process against Great Lakes, I need to analyze whether these two discrete claims, as pled, could survive a motion to dismiss under the Rule 12(b)(6) standard.

         Federal Rule of Civil Procedure 12(b)(6) provides that a defendant may move to dismiss a claim for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). "The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiffs complaint alone is legally sufficient to state a claim for which relief may be granted." Dubbs v. Head Start, Inc., 336 F.3d 1194, 1201 (10th Cir. 2003) (citations and quotation marks omitted).

         "A court reviewing the sufficiency of a complaint presumes all of plaintiffs factual allegations are true and construes them in the light most favorable to the plaintiff." Hall v. Bellmon, 935 F.2d 1106, 1198 (10th Cir. 1991). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Plausibility, in the context of a motion to dismiss, means that the plaintiff pleaded facts which allow "the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. The Iqbal evaluation requires two prongs of analysis. First, the court identifies "the allegations in the complaint that are not entitled to the assumption of truth," that is, those allegations which are legal conclusions, bare assertions, or merely conclusory. Id. at 679-81. Second, the court considers the factual allegations "to determine if they plausibly suggest an entitlement to relief." Id. at 681. If the allegations state a plausible claim for relief, such claim survives the motion to dismiss. Id. at 679.

         However, the court need not accept conclusory allegations without supporting factual averments. Southern Disposal, Inc., v. Texas Waste, 161 F.3d 1259, 1262 (10th Cir. 1998). "[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678. Moreover, "[a] pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.' Nor does the complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Id. (citation omitted).

         3. MOVANTS' CLAIM FOR MALICIOUS PROSECUTION IS NOT YET RIPE, WOULD NOT SURVIVE A MOTION TO DISMISS, AND AMENDMENT TO ADD THE CLAIM SHOULD BE DENIED AS FUTILE

         In Colorado, to prevail on a claim for malicious prosecution, the following elements must be satisfied: (1) the defendant contributed to bringing a prior action against the plaintiff; (2) the prior action ended in favor of the plaintiff; (3) there was no probable cause to bring the prior action; (4) malice; and (5) damages. Hewitt v. Rice, 154P.3d408, 411 (Colo. 2007). See also CJI-Civ. 17:1 (2017). Element two-that the prior action ended in favor of the plaintiff-is referred to as the "favorable termination" element. "The requirement of favorable termination is important because the statute of limitations begins running at the point of favorable termination, and favorable termination is a substantive element" of the claim. Hewitt, 154 P.3d at 412 (citing Dan B. Dobbs, The Law of Torts, §436 (2000)). The favorable termination requirement for malicious prosecution helps separate a claim for malicious prosecution from the related, but distinct, tort of abuse of process. Hewitt, 154 P.3d at 414 (citing Timothy P. Getzoff, Dazed and Confused in Colorado: The Relationship Among Malicious Prosecution, Abuse of Process, and the Noerr-Pennington Doctrine, 67 U. Colo. L. Rev. 675, 685-686 (1996) ("Dazed and Confused')).

         Importantly, the favorable termination element refers not just to a single discrete claim among many in a case, but to the "action" as a whole. Accordingly, the Colorado Supreme Court has observed that a "malicious prosecution claim that arises out of the main action may not usually be brought as a counterclaim since the main action has not yet terminated in favor of the counterclaimant." Westfield Dev. Co. v. Rifle Inv. Assoc, 786 P.2d 1112, 1119 n.4 (Colo. 1990), quoted in Hewitt, 154 P.3d at 412, and cited in Thompson v. Maryland Casualty Co., 84 P.3d 496, 505 (Colo. 2004). In this instance, Movants are seeking to bring a malicious prosecution action as a counterclaim while the main action is still pending.

         Movants argue that they can satisfy the favorable termination element of a claim for malicious prosecution because Great Lakes' COCCA and RICO claims were dismissed. The problem for Movants is that not all of Great Lakes' claims were dismissed. As noted above, Great Lakes' non-racketeering counter-claims and third-party claims for fraud, civil conspiracy, civil theft, and declaratory judgment remain in this lawsuit. Assuming, without deciding, that a dismissal without prejudice could constitute a "favorable termination" for the purpose of a claim for malicious prosecution, the fact remains that Great Lakes still has pending a number of claims against the movants which were ...