Employers Mutual Casualty Company v. Sanctuary Systems, LLC

Background

Employers Mutual Casualty Company (EMC) brought a declaratory-relief action concerning two insurance policies issued to Sanctuary Systems, LLC: a commercial general liability policy and a commercial umbrella policy. EMC sought declarations that the policies did not require it to defend or indemnify Sanctuary and other potential insureds in a California state-court lawsuit. EMC also sought to recover defense or indemnity payments it might make.

The underlying lawsuit arose from sales of allegedly defective filtration materials to California companies Advoque Safeguard, LLC and Ciasom LLC for use in making N95 masks. The underlying plaintiffs alleged that the materials did not meet required filtration standards and asserted nineteen state-law claims, including breach of contract, negligence, breach of warranty, fraud, and unfair business practices, against Sanctuary, 305 Consulting, LLC, Bryan Sigler, and others. Sanctuary tendered the defense to EMC, which agreed to defend Sanctuary, 305 Consulting, and Sigler while reserving its rights.

Motion to Dismiss for Lack of Personal Jurisdiction

The Sanctuary Defendants moved under Federal Rule of Civil Procedure 12(b)(2), which allows a defendant to challenge the court’s personal jurisdiction. EMC relied on specific personal jurisdiction, which can apply when a defendant’s forum-related contacts are connected to the claims and exercising jurisdiction is reasonable.

The court found that the Sanctuary Defendants purposefully engaged with California by entering supply contracts with California companies, supplying materials there, and allegedly directing misrepresentations and other tortious conduct toward California. Those contacts satisfied the first part of the Ninth Circuit’s specific-jurisdiction test.

The court also applied the Ninth Circuit’s “but for” test to determine whether EMC’s claims arose from or related to the defendants’ California contacts. It concluded that EMC’s coverage action would not have arisen but for the California-related conduct that led to the underlying lawsuit. The court found a sufficient connection between that conduct and the insurance-coverage dispute.

Finally, the court held that the defendants had not shown compelling reasons why exercising jurisdiction in California would be unreasonable. The court rejected the argument that merely defending the underlying action or requesting a defense and indemnity constituted purposeful activity, but it found the defendants’ supply-contract activities and alleged conduct directed toward California sufficient. The motion to dismiss for lack of personal jurisdiction was denied.

Motion to Dismiss for Improper Venue

The Sanctuary Defendants also moved under Rule 12(b)(3), which allows a defendant to challenge venue. EMC argued that venue was proper under 28 U.S.C. § 1391(b)(2) because a substantial part of the events giving rise to the declaratory-relief action occurred in the Northern District of California.

The court distinguished a prior decision in which the coverage dispute depended mainly on interpreting policy language. Here, the court determined that resolving whether the underlying claims qualified for coverage would depend in part on factual findings about the Sanctuary Defendants’ conduct. Because the allegedly defective materials were sold to Advoque and Ciasom in this district, the court concluded that a substantial part of the relevant conduct occurred here. The motion to dismiss for improper venue was denied.

Motion to Transfer

In the alternative, the Sanctuary Defendants sought transfer under 28 U.S.C. § 1404(a) to the Eastern District of North Carolina or, alternatively, the Middle District of Alabama. Section 1404(a) permits transfer for convenience and in the interest of justice when the case could have been brought in the proposed district.

The court held that the Sanctuary Defendants had not established that Advoque and Ciasom would be subject to personal jurisdiction in North Carolina or Alabama. Because those companies remained parties, this failure independently defeated the transfer request. The court also declined the defendants’ suggestion that the companies be severed from the case, finding no adequate basis for severance beyond the preference to litigate in Sanctuary’s home state.

The court further explained that, even if it had severed the companies, the transfer factors did not clearly favor transfer. The plaintiff’s choice of forum did not favor transfer; convenience of the parties was unclear; the defendants identified no witnesses or evidence in North Carolina or Alabama; familiarity with potentially applicable North Carolina or Alabama law favored transfer; consolidation was not relevant; California’s local interest did not favor transfer; and the court had no information about comparative court congestion. The motion to transfer was denied.

Disposition

Judge Beth Labson Freeman ordered that the Sanctuary Defendants’ motion to dismiss or, alternatively, to transfer was denied. The order terminated ECF 28. The opinion addressed personal jurisdiction, venue, and transfer, rather than deciding the parties’ underlying insurance-coverage rights.