AMERICAN SOUTHERN INSURANCE COMPANY v. BUCKLEY

the party asserting jurisdiction. Ramming v. United States, 281 F.3d 158, 161 (5^th Cir. 2001) (citations omitted). Accordingly, the plaintiff constantly bears the burden of proof that jurisdiction does in fact exist. Id. Justiciability Issues

Standing and ripeness are jurisdictional questions which must be resolved as a preliminary matter. See Xerox Corp. v. Genmoora Corp., 888 F.2d 345, 350 (5^th Cir. Tex. 1989). Under the Federal Rules of Civil Procedure, standing challenges are dealt with by motion under Rule 12(b)(1) or on the court's own motion. Id. In making such a determination, both the trial and reviewing courts must accept as true all material allegations of the complaint, and must construe the complaint in favor of the complaining party. Id. Accordingly, in this situation, the Court must construe Colony's counterclaim in Colony's favor. At the same time, it is within the trial court's power to allow or to require the plaintiff to supply, by amendment to the complaint or by affidavits, further particularized allegations of fact deemed supportive of plaintiff's standing. Id. If, after this opportunity, the plaintiff's standing does not adequately appear from all materials of record, the complaint must be dismissed. Id. Article III of the United States Constitution limits federal courts' jurisdiction to cases and controversies. U.S. CONST. art. III § 2; Sample v. Morrison, 406 F.3d 310, 312 (5^th Cir. 2005). In order to give meaning to Article III's case-or-controversy requirement, the courts have developed justiciability doctrines, such as the standing and ripeness doctrines. Sample, 406 F.3d at 312. Specifically, "the standing and ripeness doctrines flow largely from Article III of the Constitution, which limits the federal judicial power to the resolution of cases and controversies." Texas v. United States, 497 F. 3d 491, 496 (5^th Cir. 2007), cert. denied 129 S.Ct. 32 (2008) (citing Valley Forge Christian Coll. v. Ams. United for Separation of Church and State, Inc., 454 U.S. 464, 471 (1982)). The case-or-controversy requirement is satisfied only where a plaintiff has standing. Sprint Commc'n Co., L.P., v. APCC Servs., 554 U.S. 269, 430 (2008). Standing is concerned with whether a proper party is bringing suit while ripeness is concerned with whether the suit is being brought at the proper time. Texas v. United States, 497 F.3d at 496. Although standing and ripeness are two distinct doctrines, the doctrines often overlap in practice. Id.

In Flast v. Cohen, the Supreme Court stated that the fundamental aspect of standing focuses on the party seeking to get his complaint before a federal court and not on the issues he wishes to have adjudicated. Flast, 392 U.S. at 100. The `gist of the question of standing' is whether the party seeking relief has alleged such a personal stake in the outcome of the controversy. Id. The Supreme Court has articulated the constitutional requirements for standing as follows:

(1) the plaintiff must have suffered an `injury in fact,' (i.e., a "concrete and particularized" invasion of a "legally protected interest");

(2) causation (i.e., a "fairly . . . trace[able]" connection between the alleged injury in fact and the alleged conduct of the defendant); and

(3) redressability (i.e., it is likely and not merely speculative that the injury will be redressed by a favorable decision or remedied by the relief plaintiff seeks in bringing suit.)

Relatedly, the ripeness doctrine is "drawn both from Article III limitations on judicial power and from prudential reasons for refusing to exercise jurisdiction." National Park Hospitality Assn. v. Department of Interior, 538 U.S. 803, 807-808 (2003) (quoting Reno v. Catholic Social Services, Inc., 509 U.S. 43, 57, n. 18 (1993)). Thus, "the basic rationale of the ripeness doctrine is to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies." Texas v. United States, 497 F.3d at 498. To determine if a case is ripe for adjudication a court must evaluate: (1) the fitness of the issues for judicial decision, and (2) the hardship to the parties of withholding court consideration. Id. at 498.

A court should dismiss a case for lack of ripeness when the case is abstract or hypothetical. New Orleans Public Service, Inc. v. Council of New Orleans, 833 F.2d 583, 586-87 (5^th Cir. 1987). The key considerations are the fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration. Id. Application: Standing

The Court agrees with Colony that it can meet the first two requirements for standing. Colony's counterclaim establishes an injury in fact in that they have expended funds in paying for Buckley's defense in the state court litigation. The causation element of standing is established by Colony's claims as pled in the counterclaim in that Colony contends that ASIC has not reimbursed Colony for monies expended in the defense of Buckley. Colony claims that ASIC is responsible for coverage of the defense costs yet has not reimbursed Colony for those costs. Accordingly, on its face, Colony's counterclaim meets the first two elements for standing in that Colony was injured by the expenditure of funds for which it has not been reimbursed.

The Court must next determine if Colony's counterclaim meets the redressability prong to establish the requisite standing. In considering whether Colony successfully asserted grounds for reimbursement to satisfy the redressability component of standing, the court must decide whether the Texas Supreme Court's decision in Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co. applies. ASIC contends that Mid-Continent is applicable and therefore Colony has no right of contribution or subrogation. However, Colony claims that Mid-Continent does not apply and thus their claim satisfies the redressability requirement as required by the standing doctrine.

Mid-Continent involved an underlying suit related to an automobile accident. Mid-Continent Ins. Co. v. Liberty Mutual Ins. Co., 236 S.W. 3d 765, 768-769 (Tex. 2007). One of the defendants in the underlying suit, Kinsel Industries, was insured under two comprehensive general liability policies. Id. at 769. One policy was issued by Liberty Mutual and the other was issued by Mid-Continent. Id. Kinsel was accordingly covered under two CGLs at the same time. The insurers cooperatively assumed defense of the suit and neither company disputed the fact "that each owed some portion of Kinsel's defense and indemnification." Id. at 769.

However, the insurers disagreed on the settlement value of the case against Kinsel. Id. at 770. During mediation, Liberty Mutual agreed to settle on behalf of Kinsel for $1.5 million. Id. Mid-Continent instead calculated the settlement value of the case against Kinsel at $300,000 and refused to pay more than $150,000, half of that value. Id. Liberty Mutual, therefore, funded the remaining $1.35 million of the settlement on behalf of Kinsel, paying $350,000 more than its $1 million CGL policy limit. Id. Liberty Mutual reserved its right for recovery against Mid-Continent and filed suit against Mid-Continent seeking to recover Mid-Continent's pro rata share of the settlement. Id.

The Texas Supreme Court concluded that "there is no right of reimbursement in the context presented." Id. at 777. The Court found that Liberty Mutual was not entitled to reimbursement because there is no direct duty of reimbursement between co-primary insurers, and the insured had no rights against Mid-Continent to which Liberty Mutual may be subrogated. Id. at 772.

More specifically, the court first found that Liberty Mutual had no direct action for reimbursement under a right of contribution from Mid-Continent. In reaching this conclusion, the Mid-Continent court decided that the direct claim for contribution between co-insurers disappears when the insurance policies contain "other insurance" or "pro rata" clauses. Id. at 772. These other insurance and pro rata clauses create independent contractual obligations and preclude direct claims for contribution among insurers because the clauses makes the contracts several and independent of each other. Id. Accordingly, the co-insurers do not meet the common obligation requirement of a contribution claim. Id. Moreover, the co-insurers did not contractually agree to pay each other's pro rata share and Liberty Mutual paid more than contractually agreed upon voluntarily. Id. In other words, Liberty Mutual paid more than what they had contractually agreed upon without a legal obligation to do so. Thus, the court stated that "a co-insurer paying more than its proportionate share cannot recover the excess from the other co-insurers." Id.

In addition, the court found that Liberty Mutual had no right to subrogation, contractual or equitable. In either case, the insurer stands in the shoes of the insured, obtaining only those rights held by the insured against a third party, subject to any defenses held by the third party against the insured. Id. at 774. The court concluded that because Kinsel had no rights to which Liberty Mutual may be subrogated, Liberty Mutual had no right of reimbursement through subrogation. Id. at 777. In reaching this conclusion, the court first noted that Kinsel had already been fully indemnified, and therefore as the insured had no contractual rights that a co-insurer may assert against another co-insurer in subrogation. Id. at 776. Secondly, the court pointed out that this was not a case providing an equitable basis for subrogation because Mid-Continent and Liberty Mutual were co-insurers, not distinguishable as primary and excess insurers. See id. at 776. Accordingly, the situation was distinguishable from American Centennial Ins. Co. v. Canal Ins. Co. , in which the Texas Supreme Court recognized equitable subrogation as a basis for an excess insurer's recovery against a primary insurer to prevent a primary insurer from taking advantage of an excess insurer, acting solely as such, when a potential judgment approaches the primary insurer's policy limits. Id. at 776. Citing Canal, 843 S.W.2d at 482. Thus, Liberty Mutual had no right or reimbursement through subrogation.

Colony argues that Mid-Continent is inapplicable to the situation in this case because Mid-Continent involved two comprehensive policies rather than two consecutive policies. In this case, as discussed above, ASIC issued CGL GL79555 to Buckley with effective dates April 28, 2004 through April 28, 2005, and CGL GL79555A with effective dates April 28, 2005 through April 28, 2006, but Buckley cancelled the latter policy on July 20, 2005. Id. Thereafter, Colony issued its CGL to Buckley covering property damage occurring after July 20, 2005. Thus, the policies are consecutive, not comprehensive, like the policies in Mid-Continent. Here, ASIC and Colony are not co-insurers, and they have not agreed on which insurer is responsible to defend and/or indemnify on behalf of Buckley because they dispute which consecutive policy, ASIC's or Colony, if any, provides coverage for Buckley. This is clearly distinguishable from the situation in Mid-Continent where the insured had already been indemnified and the insurers agreed that both of the co-insurers, Liberty Mutual and Mid-Continent, were responsible for at least some portion of the settlement on behalf of the insured.

Additionally, courts have noted that the holding in Mid-Continent is a narrow one. See Duininck Brothers, Inc. v. Howe Precast, Inc., No. 4:06-cv-441, 2008 U.S. Dist. LEXIS 70938 (E.D. Tex. Sept. 19, 2008) (Schell, J.). In Duininck Brothers, Judge Schell noted that " Mid-Continent deals with a scenario wherein two insurers have undertaken an obligation to assume the liability for losses incurred by an insured." Id. at *24. The court accordingly found that Mid-Continent was inapplicable because, in Duininck Brothers, Inc., the insurers were under no contractual obligation to pay for the underlying lawsuits in the case. Id. at *25. Likewise, in this case, Colony and ASIC have not undertaken an obligation to assume liability for losses incurred by the insured. Unlike the parties in Mid-Continent, ASIC and Colony disagree on whether each owed some portion of Buckley's defense and coverage is clearly a disputed issue. The Court agrees with Colony in finding that because the parties here do not concede coverage, Mid-Continent does not apply.

Furthermore, in Mid-Continent the insured had already been fully indemnified. Mid-Continent, 236 S.W.3d 775-776. Based on the pleadings in the present case, it is unclear whether Buckley has been indemnified. In fact, according to the pleadings, the underlying litigation has not been fully adjudicated against Buckley to date. In Mid-Continent, the court held that "a fully-indemnified insured has no rights against a non-paying co-insurer to which a paying co-insurer can be subrogated." Thus, for Mid-Continent to apply to the case at hand, the pleadings should indicate whether Buckley had been fully indemnified to bar contractual subrogation under Mid-Continent.

In addition, the Fifth Circuit's ruling in Trinity Universal Insurance Co. v. Employers Mutual Casualty Co. further narrowed the Mid-Continent holding. See Trinity Universal Ins. Co. v. Employers Mutual Casualty Co., 592 F.3d 687 (5^th Cir. 2010). Specifically, the court stated that " Mid-Continent only addressed the question of whether one co-insurer has a right of contribution or subrogation against a non-paying co-insurer to recover money paid to indemnify a common insured for a loss." Id. at 694. Because Mid-Continent only addressed the question in the indemnity context, the Fifth Circuit found that Mid-Continent left open the separate question of whether a co-insurer that pays more than its share of defense costs may recover such costs from a co-insurer who violates its duty to defend a common insured. Id. at 695. The Trinity Universal court's findings suggest that Mid-Continent's holding on the subrogation and contribution issues between co-insurers on the duty to indemnify should be considered separate and distinct from the subgroation and contribution issues on the duty to defend. See id. This recent ruling further supports Colony's contention that Mid-Continent is inapplicable to the extent that Colony's counterclaim seeks a declaration and damages with respect to the duty to defend rather than the duty to indemnify. Furthermore, it is well-settled that the duty to defend and the duty to indemnify are distinct and separate duties. D.R. Horton-Texas, Ltd. v. Markel Int'l Ins. Co., 300 S.W.3d 740, 743 (Tex. 2009). The duty to defend is not only separate from the duty to indemnify, but it is broader. See Zurich Am. Ins. Co v. Nokia, Inc., 268 S.W.3d 487, 490 (Tex. 2008). Whereas the duty to indemnify arises only once liability has been conclusively determined, the duty to defend occurs prior to the completion of litigation. See D.R. Horton, 300 S.W.3d at 744 (citations omitted). Here, Colony seeks a declaration and damages with respect to the duty to defend as well as the duty to indemnify. Thus, the case at hand can also be distinguished from the ruling in Mid-Continent in this regard.

In conclusion, the Texas Supreme Court holding in Mid-Continent is inapplicable to the case at hand based on the pleadings. Ultimately, the court must agree with Colony and find, when construing the counterclaim in favor of Colony, that Colony may be able to subrogate or seek contribution from ASIC in the defense of Buckley by obtaining a declaration from the court findings as such. Thus Colony satisfies the redressability element of standing, and the Court finds the motion to dismiss for lack of jurisdiction without merit on the standing issue.

ASIC's arguments re Declaratory Judgment Act

ASIC claims that an inquiry of whether there is standing or if the claim is ripe differs when the action seeks a declaratory judgment. In support, ASIC cites Roark Hardee, LP v. City of Austin . In that case, the Fifth Circuit stated that, "a plaintiff can meet the standing requirements when suit is brought under the Declaratory Judgment Act, 28 U.S.C. §§ 2201-02, by establishing `actual present harm or a significant possibility of future harm." Roark Hardee, LP v. City of Austin, 522 F.3d 533, 542 (5^th Cir. 2008) (quoting Bauer v. Texas, 341 F.3d 352, 357-58 (5^th Cir. 2003)). Simply put, ASIC is alleging that to satisfy the standing requirement in the Declaratory Judgment Act, Colony must either establish actual present harm or a significant possibility of future harm. However, this argument is not on point. In its original complaint seeking a declaration from the court, ASIC cites the diversity of citizenship statute, 28 U.S.C. § 1332, as the basis for federal jurisdiction. The Declaratory Judgment Act is cited nowhere in the parties' pleadings.

Furthermore, in Bauer v. Texas, the Fifth Circuit stated that "the `actual controversy' required under 28 U.S.C. § 2201(a) is identical to the meaning of `case or controversy' for the purpose of Article III." Bauer v. Texas, 341 F.3d 352, 358 (5^th Cir. Tex. 2003) (quoting Lawson v. Callahan, 111 F.3d 403, 405 (5^th Cir. 1997)). Although the Fifth Circuit has noted a small difference in the standing requirement in a declaratory action, the underlying definition of the actual case or

controversy requirement remains the same. Consequently, for purposes of this case, the standard for establishing standing and ripeness review found in the Declaratory Judgment Act is insignificant. Additionally, although the parties are seeking declarations of law as their remedies, this does not necessarily trigger the statutory application of the federal Declaratory Judgment Act. Thus, the Court finds that its analysis of the standing and ripeness issues under the traditional case or controversy standards enunciated herein is appropriate.

Application: Ripeness

As discussed above, to determine whether a claim is ripe for review the court considers: (1) the fitness of the issues for judicial decision, and (2) the hardship to the parties of withholding the court consideration." Texas v. United States, 497 F.3d at 498. Both parties would face significant hardship if the court withholds consideration on the issue. Allegedly each party has participated in the defense of their common insured. Both parties request that the Court make a determination of the rights and obligations under each policy. Thus, each party would suffer greatly if the court determined that the cause of action was not ripe for review as expenditures continue to be made on behalf of Buckley in the underlying litigation. In addition, the issues currently in front of the court are fit for judicial decision. For the parties to move forward, the court must determine the obligations each party has, if any, to the common insured. Accordingly, the court must decide that the case is ripe for review and deny ASIC's contention to the contrary.

Based on the above discussion, the Court concludes that, on the face of the pleadings, Colony has established that it has standing to bring its causes of action against ASIC and that the issues it presents are ripe. The Court therefore concludes that the Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction should be denied.

B. Motion to Dismiss Under Federal Rule of Civil Procedure 12(b)(6)

Legal Standards: Rule 12(b)(6)

Federal Rule of Civil Procedure 12 provides that a pleader may present, by motion, a defense alleging "failure to state a claim upon which relief can be granted." FED. R. CIV. P 12(b)(6) (full citation of rule omitted). The Fifth Circuit has stated that a claim should not be dismissed under Rule 12(b)(6) unless the plaintiff would not be entitled to relief under any set of facts or any possible theory he may prove consistent with the allegations in the complaint. See, e.g., Martin K. Eby Constr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5^th Cir. 2004) (quoting Jones v. Greninger, 188 F.3d 322, 324 (5^th Cir. 1999)). This standard derived from Conley v. Gibson, which stated that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L. Ed. 2d 80 (1957). But recently in Twombly, the Supreme Court made clear that the Conley rule is not "the minimum standard of adequate pleading to govern a complaint's survival." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1968-69, 167 L. Ed. 2d 929 (2007).

Dismissal for failure to state a claim upon which relief may be granted does not require appearance, beyond a doubt, that plaintiff can prove no set of facts in support of claim that would entitle him to relief, although once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint. See Twombly, 550 U.S. at 563 (abrogating Conley). A cause of action can fail to state a "claim upon which relief can be granted" if, inter alia, it fails to comply with the requirements of Rule 8(a)(2). See, e.g., Buerger v. Southwestern Bell Tel. Co., 982 F. Supp. 1247, 1249-50 (E.D. Tex. 1997); Bank of Abbeville Trust Co. v. Commonwealth Land Title Ins. Co., 201 F. App'x. 988, * 2 (5^th Cir. Oct. 9, 2006) ("a Rule 12(b)(6) motion to dismiss for failure to state a claim may be a proper vehicle to challenge the sufficiency of a pleading under Rule 8").

Federal Rule of Civil Procedure 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief" FED. R. CIV. P. 8(a)(2). The United States Supreme Court has made clear, however, that a plaintiff is obligated to provide "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (citing Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L. Ed. 2d 209 (1986) (on a motion to dismiss, courts "are not bound to accept as true a legal conclusion couched as a factual allegation")). "Factual allegations must be enough to raise a right to relief above the speculative level." Id. "Rule 8(a)(2) still requires a showing, rather than a blanket assertion, of entitlement to relief without some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirement of providing not only fair notice of the nature of the claim, but also grounds on which the claim rests." Id. at 556 n. 3 (internal quotation marks omitted). Dismissal for failure to state a claim is appropriate when the plaintiff has failed to plead "enough facts to state a claim for relief that is plausible on its fact." Id. Plaintiffs must state enough facts to "nudge their claims across the line from conceivable to plausible." Id.

When the complaint contains inadequate factual allegations, "this basic deficiency should . . . be exposed at the point of minimum expenditure of time and money by the parties and the court." Id. at 558. "[A] district court must retain the power to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed." Id. (Quoting Associated Gen. Contractors of Cal., Inc. v. Carpenters, 459 U.S. 519, 528 n. 17, 103 S.Ct. 897, 74 L. Ed. 2d 723 (1983)).

A complaint must aver sufficient factual matter which, if accepted as true, states a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949, 173 L. Ed.2d 868 (2009). Pleaded factual content must be sufficient to allow the court to draw a reasonable inference that the defendant is liable for the misconduct alleged. Doucet v. State Farm Fire and Cas. Co., No. 1:09-CV-142, 2009 WL 3157478, 2009 U.S. Dist. LEXIS 89106 at *18-*19 (E.D. Tex. Sept. 25, 2009) (Hines, J.) (citing Iqbal, 129 S.Ct. at 1949) (emphasis in original). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 129 S.Ct. at 1949 (citing Bell Atlantic Corp. v. Twombly, 550 U.S. at 555). The "mere hypothetical possibility that such an action could exist" is insufficient to establish a state law cause of action. Id. See also Campbell, 509 F.3d at 669.

Application: Colony's Claims for Breach of Contract

Based upon its findings regarding Colony's counterclaim in the context of the Rule 12(b)(1) motion, the Court also finds that ASIC's motion to dismiss for failure to state a claim under Rule 12(b)(6) should also be denied as to Colony's breach of contract claims related to the subrogation and contribution issues. The Court has already concluded that Mid-Continent does not apply and thus, based on the pleadings herein, viewed in the most favorable light to Colony, the Court cannot conclude that Colony is precluded from asserting a contribution or subrogation claim against ASIC based on the facts alleged. Accordingly, the Court concludes that ASIC has not carried its burden in establishing that Colony has stated a claim for breach of contract which is not plausible on its face. The Rule 12(b)(6) motion should therefore be denied on the breach of contract claims

Insurance Code Claims

Although, Colony successfully argued that the Mid-Continent rationale is inapplicable, the court still must determine whether Colony can assert a statutory cause of action for violation of the "prompt payment of claims" provisions under the Texas Insurance Code, Chapter 542. Colony contends that they are entitled to sue ASIC under Ch. 542.051 as a `claimant.' However, ASIC argues that Colony cannot sue as a `claimant' because they are neither an insured nor a beneficiary of the policy. This argument is based on the definitions provided by the definitions of "claim" and "claimant" under the relevant provisions of the Code.

The Texas Insurance Code mandates prompt payment of claims. In re Slavonic Mut. Fire Ins. Co., 308 S.W.3d 556, 559 (Tex. App-Houston [14^th Dist.]-2010, orig. proceeding) (citing TEX. INS. CODE. ANN. §§ 542.051-.061 (Vernon 2009)). The act is to be liberally construed to promote its purpose of obtaining prompt payment of insurance claims. Id. Citing TEX. INS. CODE. § 542.054. An insurer is required to acknowledge receipt of a claim, begin an investigation, and request documentation from its insured within fifteen days of notification of the claim. Id. Citing TEX. INS. CODE § 542.055(a). The insurer is to notify the claimant in writing of the acceptance or rejection of the claim within fifteen days after it receives the required documentation for proof of loss. Id. Citing Section 542.056(a). If the insurer notifies the claimant it requires more time, the acceptance or rejection must be made within forty-five days of the notice. Id. Citing § 542.056(d). Section 542.057 of the Texas Insurance Code provides that a claim must be paid within five business days after notice that the claim, or a part of the claim, will be paid. TEX. INS. CODE § 542.057(a). An insurer's failure to comply with the statutorily prescribed time frames will subject the insurer to damages, including interest on the amount of the claim and attorney's fees. See Tex. Ins. Code. §§ 542.058(a), 542.060.

With regard to Chapter 542, the Texas Insurance Code defines "claim" as "a first party claim that: (A) is made by an insured or policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract; and (B) must be paid by the insurer to the insured or beneficiary." TEX. INS. CODE. § 542.051(2). A "claimant" means a person making a claim. TEX. INS. CODE. § 542.051(3).

Here, Colony has asserted a counterclaim against ASIC for violations of these prompt payment of claims provisions of the Code based on its subrogated rights to sue on behalf of Buckley, the insured. Colony accordingly seeks interest on the claim and attorney's fees pursuant to Section 542.060 of the Texas Insurance Code. The Court must determine if Colony is entitled to sue for the statutory remedies provided by Chapter 542 as a subrogee to Buckley's rights against ASIC under the "prompt payment of claims" statutes.

As stated above, 542.051(2) states a "claim" within the meaning of Chapter 542 governing prompt payment of claims is defined as a "first party claim." The Legislature specifically added language limiting the statute's coverage to "first party claims" in response to objections that it could be interpreted to apply to third-party claims and the duty to defend. See Lamar Homes, Inc., v. Mid-Continent Cas. Co., 242 S.W.3d 1, 25 (Tex. 2007) (Brister, J., dissenting). Additionally, unlike the common law remedies discussed above, statutory remedies under the Texas Insurance Code are personal and punitive in nature and the Insurance Code makes no provision for assignability. See Great Am. Ins. Code v. Fed. Ins. Co., No. 3:04-CV-2267, 2006 U.S. Dist. LEXIS 55038 at *29 (N.D. Tex. Aug. 8, 2006).

Based on the pleadings, Colony's asserted claim under the Texas Insurance Code does not fall within the definition of "first party claim" envisioned by the Legislature. Colony is neither an insured nor the beneficiary under the CGL policies at issue. Its basis for claiming the prompt payment of claims violations against ASIC are based solely on its asserted subrogation of rights of Buckley, the insured. Looking to the scope of first party versus third party claims as discussed in Lamar Homes, the claim for coverage at issue here are not first party but rather are third party in nature. The Court accordingly finds that the relief sought by Colony under Chapter 542 of the Texas Insurance Code does not fall within the definition of "claims" necessary to bring forth a cause of action for prompt payment of claims violations. The court must construe the statute accordingly and find that Colony cannot state a claim for violation of Chapter 542 of the Texas Insurance Code upon which relief may be granted. The parties have not provided a case on point suggesting that an insurer such as Colony may step into the shoes of the insured and bring a claim for Insurance Code violations under Chapter 542 as contemplated here. The Rule 12(b)(6) motion for failure to state a claim should be granted on this cause of action asserted by Colony in its counterclaim.

C. Motions to Strike Pursuant to Rule 12(f)

Rule 12 of the Federal Rules of Civil Procedure provides "the court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." FED. R. CIV. P. 12(f). The court has the authority to act on its own or pursuant to a "motion made by a party either before responding to the pleading or, if a response is not allowed, within 21 days after being served with the pleading." FED. R. CIV. P. 12(f)(1)-(2). The Fifth Circuit has stated that motions to strike are generally disfavored. See Kaiser Aluminum Chem. Sales, Inc. v. Avondale Shipyards, 677 F.2d 1045, 1058 (5^th Cir. 1982). They are viewed with disfavor and infrequently granted, both because striking portions of pleadings is a drastic remedy and because it is often sought by a movant simply as a dilatory tactic. See Bailey Lumber Supply Co. v. Georgia-Pacific Corp., No. 1:08CV1394, 2010 U.S. Dist. LEXIS 26018 at *13 (S.D. Miss. March 19, 2010) (citing FDIC v. Niblo, 821 F. Supp. 441 (N.D. Tex. 1993)). Although motions to strike are disfavored and infrequently granted, striking certain allegations can be appropriate when they have no possible relation to the controversy and may cause prejudice to one of the parties. Jefferson Parish Consol. Garbage Dist. No. 1 v. Waste Mgmt. of La., No. 09-6270, 2010 U.S. Dist. LEXIS 49869 at *15 (E.D. La. Apr. 28, 2010) (citing Boceri v. Fiat S.p.A., 763 F.2d 17, 23 (1^st Cir. 1985); Berry v. Lee, 428 F. Supp. 2d 546, 563 (N.D. Tex. 2006); McInerney v. Moyer Lumber Hardware, Inc., 244 F. Supp. 2d 393, 401 (E.D. Pa. 2002)). The Court possesses considerable discretion in ruling on a motion to strike. Bailey, 2010 U.S Dist. LEXIS 26018 at *13 (citing Niblo, 821 F. Supp. at 449).

Timeliness Under Rule 12(a)

Federal Rules of Civil Procedure 12(a) provides that a defendant must serve an answer within 21 days after being served with the summons and complaint. FED. R. CIV. P. 12(a)(1)(A)(i). A party served with a counterclaim or crossclaim must also serve an answer within 21 days after being served with the pleading that states the counterclaim or crossclaim. FED. R. CIV. P. 12(a)(1)(B). Pursuant to the Federal Rules of Civil Procedure, failure to file a timely answer in this matter may result in the defendant's default under Rule 55(a). No act by one party can relieve the other party of its responsibility to comply with the Federal Rules. See, e.g., Merrill Lynch Mortgage Corp. v. Narayan, 908 F.2d 246, 251 (7^th Cir. 1990).

Although courts favor timely filings, they are not quick to enter default judgments. Routinely, courts will consider the defendant's conduct to see if the late filing was willful or if it was only a mere oversight. The Fifth Circuit will look at other factors before imposing harsh sanctions where less severe sanctions would suffice. For example, "before a trial judge dismisses a complaint with prejudice, there should be a clear record of delay or contumacious conduct, and a finding that lesser sanctions would not serve the system of justice." Watson v. United States, No. 07-41178, 285 F. App'x 140, 143 (5^th Cir. July 14, 2008) (quoting Luna v. Int'l Ass'n of Machinists Aerospace Workders Local #36, 614 F.2d 529, 531 (5^th Cir. 1980)). In Watson, The Fifth Circuit noted that an automatic grant of dismissal for failure to comply with procedural rules was too severe a penalty. Id. The Fifth Circuit has routinely emphasized that they are hesitant to impose harsh punishment for untimely filing if there are less severe sanctions that would be adequate. Boazman v. Economics Laboratory, Inc. 537 F.2d 210, 212 (5^th Cir. 1976).

Additionally, the Supreme Court has noted that "the basic purpose of the Federal Rules is to administer justice through fair trials, and not through summary dismissals as necessary as they may be on occasion . . . [if] rules of procedure work as they should in an honest and fair judicial system, they not only permit, but should nearly as possible guarantee that bona fide complaints be carried to an adjudication on the merits." Surowitz v. Hilton Hotels, Corp., 383 U.S. 3636, 373-74 (1966). Relatedly, in Hines v. Delta Air Lines, Inc. , the parties failed to file responsive pleadings within the time allowed by the Federal Rules of Civil Procedure, including an answer filed late under Rule 12(a). Hines, 461 F.2d at 579. Id. Although the Fifth Circuit noted that the parties were at fault in complying with the filing deadlines of the Rule, the Court stated that procedural dismissal was improper because it "aborts the case on an unjustly stringent procedural argument." Id. at 580. The Court concluded that the parties "are not to be cut off at the pass" or "deprived from utilizing the tools of the Federal Rules to try to establish a claim warranting recovery." Id. at 581.

Application

Construing the Rule 12 standards for a motion to strike and the timeliness of filing responsive pleadings, the Court concludes that the motion to strike Colony's and Buckley's answers and counterclaims should not be stricken based solely on ASIC's argument that they are untimely. To strike the pleadings on this basis alone would be a drastic and harsh remedy. The prejudice to Colony and Buckley in having their defenses and claims stricken in their entirety is greater than the prejudice suffered by ASIC due to the untimeliness of Colony and Buckley's pleadings.

Although the Court did not grant Buckley or Colony leave to file late pleadings, it would have freely granted that leave under the Federal Rules of Civil Procedure and the Local Rules, especially at that early stage of the litigation. Additionally, although no formal extension was granted, the record shows that ASIC `s counsel did grant an informal extension to Colony. To now argue that ASIC would be harmed or surprised by the late answer and counterclaim is without merit, based on the fact that counsel was made aware of the untimeliness. Furthermore, the Court agrees with Colony's contention that ASIC had the remedy available to it to seek default pursuant to Rule 55(a) rather than filing a motion to strike. The Court finds that the motion to strike Colony's answer and claims should be denied.

The Court notes that Buckley was not granted any extension for the filing of its late answer, and it has not responded to ASIC's motion to strike. However, again noting that the striking of pleadings is a drastic and disfavored remedy, the Court concludes that the motion to strike Buckley's pleading should also be denied. The Fifth Circuit has made clear that it has not approved the automatic grant of dispositive motions solely based upon a party's failure to comply with rules requiring the filing of opposition to a motion. See Johnson v. Pettiford, 442 F.3d 917, 918 (5^th Cir. 2008). Rather, before a court dismisses a party's claims, there should be a clear record of delay or contumacious conduct, and a finding that lesser sanctions would not serve the system of justice. Luna, 614 F.2d at 531. In its motion to strike and briefs, ASIC has cited no persuasive case law favoring the granting of the motion and it has not established that Buckley or Colony engaged in a clear record of delay or contumacious conduct, or that lesser sanctions for the untimely pleadings would not better serve justice in this situation.

In addition, the relief requested by ASIC in its motion to strike does not comport with the purpose of Rule 12(f), which only provides that motions under the Rule may be utilized to strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter. FED. R. CIV. P. 12(f) ASIC's motion to strike is solely based on the untimeliness of the Buckley and Colony answers and pleadings. The motion does not discuss, much less establish, how the answers and counterclaims are "redundant, immaterial, impertinent or scandalous." A review of the pleadings shows that the defenses and claims asserted by Buckley and Colony are directly related to the controversy at hand. This only further convinces the Court that the motion to strike is without merit and has been utilized as a tactical and dilatory measure in this situation. To grant such a motion would go against other court's warnings that motions to strike are disfavored and rarely granted because they are often used for tactical and dilatory reasons, rather than addressing the merits. Accordingly, based on these findings and the discretion afforded to the Court in determining a motion to strike under Rule 12(f), the Court concludes that ASIC's motions to strike should be denied.

The undersigned United States Magistrate Judge recommends that the District Court deny in part and grant in part ASIC's Rule 12 motion to dismiss and motion to strike Defendant Colony's answer, counterclaim and cross-claim (doc. #12).

The Court recommends that the motion to dismiss Colony's answer and counterclaim be denied with regard to the Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction; denied with regard to the Rule 12(b)(6) motion to dismiss Colony's breach of contract claim against ASIC; granted with regard to the Rule 12(b)(6) motion to dismiss Colony's statutory claim under the Texas Insurance Code, and denied with regard to the Rule 12(f) motion to strike.

The Court further recommends that ASIC's motion pursuant to Rule 12 to strike defendant Michael Buckley d/b/a Buckley Sons Plumbing's ("Buckley") Answer and Counterclaim filed against ASIC (doc. #22) be denied.

Objections must be: (1) specific, (2) in writing, and (3) served and filed within fourteen (14) days after being served with a copy of this report. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 1(a), 6(b), and 72(b).

A party's failure to object bars that party from: (1) entitlement to de novo review by a district judge of proposed findings and recommendations, see Rodriguez v. Bowen, 857 F.2d 275, 276-77 (5^th Cir. 1988), and (2) appellate review, except on grounds of plain error of unobjected-to factual findings and legal conclusions accepted by the district court, see Douglass v. United Servs. Auto. Ass'n., 79 F.3d 1415, 1417 (5^th Cir. 1996) (en banc).

SIGNED this the 1st day of September, 2010.