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May 2016

Parent Company Lacks Standing to Bring Declaratory Relief Action Against Subsidiary’s Insurer

D. Cummins Corporation v. United States Fidelity and Guaranty Company

The California Court of Appeal, First Appellate District, held that the trial court properly sustained a demurrer, without leave to amend, as to a parent corporation’s declaratory relief complaint against the insurer of its subsidiary because the parent company failed to show that an actual controversy existed between it and its subsidiary’s insurer.

The insured, D. Cummins Corporation (the “Subsidiary”), was a California corporation that installed asbestos-containing products which allegedly gave rise to hundreds of bodily injury claims. The Subsidiary and its parent, Cummins Holding LLC (the “Parent”), a Delaware corporation, brought a declaratory relief action in California state court against the Subsidiary’s insurer, United States Fidelity and Guaranty Company (the “Insurer”), which was also a Delaware corporation. The Subsidiary and the Parent sought a declaration regarding the scope of coverage available under insurance policies issued by the Insurer to the Subsidiary. However, only the Subsidiary, not the Parent, qualified as an insured under the policies.

The Insurer removed the action to federal court on the ground the Parent – whose inclusion in the lawsuit defeated diversity jurisdiction – had been fraudulently joined. The federal court rejected this argument and remanded the case back to state court. The Insurer then demurred to the Parent’s declaratory relief cause of action, alleging that the Parent did not have standing to assert the claim against the Insurer. The trial court agreed and sustained the Insurer’s demurrer, without leave to amend. The Parent appealed.

The Court of Appeal first cited to California’s declaratory relief statute, California Code of Civil Procedure section 1060, which provides, in relevant part, that “[a]ny person interested under a written instrument … may, in cases of actual controversy … bring an original action … for a declaration … including a determination of any question of construction or validity arising under the instrument or contract.” Section 1061 further provides that the court may refuse to issue a declaratory judgment where the court’s “declaration or determination is not necessary and proper.”

The Parent argued that it had standing to pursue its declaratory relief claim because it had a “practical interest in the proper interpretation of [the Subsidiary’s] insurance policies given its relationship to, and its central role in the pursuit of those insurance assets.” The Court of Appeal rejected this argument because the Parent had not shown how the alleged indirect interest translates into “a legally cognizable theory of declaratory relief.”

Next, the Parent argued that its participation in the litigation was necessary since the Subsidiary has no assets of its own. The court rejected this argument as well, finding that the Subsidiary’s lawsuit was continuing in the trial court notwithstanding the fact Parent’s claims were dismissed. Finally, the Parent cited to a number of cases which stand for the proposition that, in certain instances, parties are allowed to bring declaratory relief actions even when they are not directly affected by the challenged contract, regulation or statute. Once again, the Court of Appeal rejected this argument, finding that the Parent had not alleged any theory showing that it had more than an indirect interest in the relevant policies.

Because the Parent was not in contractual privity with the Insurer and had no interest in the policies, the Court of Appeal held that the trial court acted within its discretion when it found that a declaration of the Parent’s rights was “not necessary or proper at the time under all the circumstances.” The court also held that the trial court did not abuse its discretion in denying leave to amend because the Parent had not shown that there is a reasonable possibility it could amend the complaint to state a cognizable claim.

Click here for the opinion.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.

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Christopher R. Wagner