December 20, 2011 – Financial Indemnity Company v. Leo Cordoba, No. 30,417

IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO
Opinion Number: ___________
Filing Date: December 20, 2011
NO. 30,417
FINANCIAL INDEMNITY COMPANY,
Plaintiff-Appellee,
v.
LEO CORDOBA,
Defendant-Appellant.
APPEAL FROM THE DISTRICT COURT OF DOÑA ANA COUNTY
James T. Martin, District Judge
Miller Stratvert P.A.
Charlotte Lamont
Matthew S. Rappapport
Albuquerque, NM
for Appellee
Kenneth G. Egan
Las Cruces, NM
L. Helen Bennett
Albuquerque, NM
for Appellant

OPINION
SUTIN, Judge.
{1} 	In this workers’ compensation case, Defendant Leo Cordoba appeals the district
court’s dismissal of his counterclaim against Plaintiff Financial Indemnity Company
(FIC) and denial of his motion for reconsideration or, in the alternative, for leave to
amend the counterclaim. We hold that the district court misconstrued and misapplied
Rules 11-408 and 1-012(B)(6) NMRA. Rule 11-408 is not designed or intended to
preclude admission of evidence of settlement negotiations in an insurance coverage
dispute when the settlement negotiations are offered not to prove coverage or amount,
but are offered to prove wrongful conduct such as bad faith or unfair practices during
the claim investigation and upon denial of the claim. Here, insofar as the averments
of settlement negotiations related to claims of wrongful conduct, dismissal was
inappropriate.
BACKGROUND
{2} 	Cordoba was injured in an accident that occurred when he was a passenger in
a 	company-owned 	truck 	driven 	by 	his 	co-worker. 	His 	medical 	costs 	were
approximately $35,000. Workers’ compensation, which was the exclusive remedy
available to Cordoba through his employer, paid his lost wages and medical bills.

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{3} 	Cordoba 	sought 	payment 	from 	his 	own 	insurer, 	FIC, 	under 	the
uninsured/underinsured motorist coverage of his policy and requested payment of
$25,000, the limit for bodily injury. 	Following a failed attempt at settlement
negotiations, FIC filed a declaratory judgment action as to whether the policy covered
Cordoba’s claim and, if so, in what amount. FIC’s position was that the policy did not
apply because Cordoba could not establish that his injuries were caused by an
uninsured or underinsured motorist and also that, in accordance with the policy, any
amount payable should be reduced by any payment made by workers’ compensation.
{4} 	Cordoba filed a counterclaim alleging that FIC had breached its contract,
violated New Mexico law, and acted in bad faith. 	As a factual basis for his
counterclaim, Cordoba averred, in part, that FIC had acknowledged coverage of
Cordoba’s claim by way of two settlement offers. Cordoba further averred that after
he demanded the policy limit, FIC made two counteroffers of $8,000 and $10,000
respectively and that FIC’s rationale for offering these amounts was that it was
entitled 	to 	offset 	the 	amount 	Cordoba 	had 	already 	received 	from 	workers’
compensation. 	Cordoba also averred that, 	in attempting to offset the workers’
compensation payments, FIC did not follow New Mexico law and that when FIC
“learned of its error” in this regard, it filed the declaratory judgment action as a
“tactic” to cause further delay. 	FIC moved under Rule 1-012(B)(6) to dismiss

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Cordoba’s counterclaim for failure to state a claim upon which relief could be granted.
FIC broadly asserted that the counterclaim cited the alleged settlement negotiations
between the parties in order to establish liability and was therefore attempting to do
what was expressly prohibited by Rule 11-408.
{5} 	In a hearing on FIC’s motion to dismiss, Cordoba contended that his reference
to the settlement negotiations, rather than being used to show FIC’s acknowledgment
of coverage, was intended only to show that because full coverage was otherwise
indisputable, FIC acted wrongfully in attempting to pay less than the policy limits.
Unpersuaded by Cordoba’s argument, the district court granted FIC’s Rule 1-
012(B)(6) 	motion. 	The 	district 	court 	reasoned 	that 	Cordoba’s 	counterclaim
contravened Rule 11-408 insofar as it was drafted to say that, in making settlement
offers, FIC admitted that Cordoba’s claim was covered. The court noted that “[t]he
first step is whether . . . [FIC] even ha[d] a responsibility of coverage . . . which [was]
the subject of the declaratory judgment action” and that by using FIC’s offer of
settlement to establish that FIC had a duty of coverage, Cordoba was using the
settlement offer to “make step one of [his] claim.” 	The dismissal was without
prejudice based on Cordoba’s request that he be permitted to proceed with discovery
already requested, “in case new information is learned that would support [his
counterclaim].”

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{6} 	Cordoba filed a motion to reconsider or, in the alternative, for leave to amend
his counterclaim. His proposed amended counterclaim restated the averments of the
settlement negotiations but, in place of the averment that FIC had acknowledged
coverage for Cordoba by making the settlement offers, the amended counterclaim
averred that “FIC took the erroneous position at all relevant times . . . that they were
entitled 	to 	[offset] 	workers[’] 	compensation 	benefits 	paid 	to 	Cordoba.”
Simultaneously, he filed a motion to compel discovery of information that may have
been relevant to an amended counterclaim.
{7} 	With Cordoba’s motion to reconsider or to allow him to amend his counterclaim
still pending, the district court heard FIC’s motion for summary judgment and
Cordoba’s motion to compel discovery. The court denied FIC’s motion for summary
judgment, 	ruling 	that 	Cordoba 	was 	entitled 	to 	seek 	recovery 	under 	his
uninsured/underinsured motorist coverage, and the court granted Cordoba’s motion
to compel discovery. 	The district court declined to reconsider its prior Rule 1-
012(B)(6) dismissal of the original counterclaim, but it agreed that if Cordoba was
able to discover sufficient evidence to support his counterclaim, the court would
reconsider its ruling.
{8} 	Several weeks later, FIC filed a motion to dismiss, with prejudice, Cordoba’s
motion to amend his counterclaim. In its motion, FIC asserted that, after the court’s

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ruling on its motion for summary judgment, FIC paid Cordoba the policy limits and
that, therefore, the only outstanding issue in the case was Cordoba’s request to amend
his counterclaim. In that regard, FIC asserted that it had produced sufficient discovery
for Cordoba to determine whether he had an alternative basis for his counterclaim.
Thereafter, Cordoba filed a second motion to compel discovery in which he asserted
that his attempts “to schedule depositions with various individuals of [FIC]” had all
been refused.
{9} 	At a hearing on FIC’s motion to dismiss Cordoba’s motion to amend his
counterclaim and on Cordoba’s second motion to compel, the court ruled that because
the declaratory judgment action was resolved and the policy limits were paid, there
remained “no pending claims.” 	The court entered a final judgment by which it
granted FIC’s motion to dismiss with prejudice and denied as moot all pending
motions.
{10} 	On appeal, Cordoba contends that the district court erred in its application of
Rule 11-408 and in dismissing his counterclaim on Rule 1-012(B)(6) grounds and also
erred in not permitting him to proceed on that counterclaim or on his proposed
amended counterclaim.

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DISCUSSION
{11} 	“A motion to dismiss for failure to state a claim tests the legal sufficiency of the
complaint, not the factual allegations of the pleadings which, for purposes of ruling
on the motion, the court must accept as true.” 	Herrera v. Quality Pontiac, 2003-
NMSC-018, ¶ 2, 134 N.M. 43, 73 P.3d 181 (internal quotation marks and citation
omitted). 	“A district court’s decision to dismiss a case for failure to state a claim
under Rule 1-012(B)(6) is reviewed de novo.” Delfino v. Griffo, 2011-NMSC-015,
¶ 9, 150 N.M. 97, 257 P.3d 917 (internal quotation marks and citation omitted).
Dismissal under Rule 1-012(B)(6) is appropriate only if the non-moving party is “not
entitled to recover under any theory of the facts alleged in their complaint.” Delfino,
2011-NMSC-015, ¶ 12 (internal quotation marks and citation omitted). Moreover, on
review, “we accept all well-pleaded factual allegations in the complaint as true and
resolve all doubts in favor of sufficiency of the complaint.” Id. ¶ 9 (internal quotation
marks and citation omitted). 	Whether to admit evidence of settlement offers for a
purpose other than proving liability is within the discretion of the district court.
Fahrbach v. Diamond Shamrock, Inc., 1996-NMSC-063, 122 N.M. 543, 547-48, 928
P.2d 269, 273-74. “[W]e may characterize as an abuse of discretion a discretionary
decision that is premised on a misapprehension of the law.” 	Clark v. Sims, 2009-

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NMCA-118, ¶ 20, 147 N.M. 252, 219 P.3d 20 (internal quotation marks and citation
omitted).
{12} 	FIC contends that Rule 11-408 strictly prohibited Cordoba’s “impermissible use
of settlement negotiations” to show that FIC acknowledged coverage or admitted
liability to Cordoba for benefits. 	See Rule 11-408 (stating that “[e]vidence of . . .
offering or promising to furnish . . . a valuable consideration in compromising or
attempting to compromise a claim . . . is not admissible to prove liability for . . . the
claim or its amount”). 	Rule 11-408 does not exclude evidence of settlement
negotiations, however, if the evidence is offered for “another purpose[.]” See Jesko
v. Stauffer Chem. Co., 89 N.M. 786, 789, 558 P.2d 55, 58 (Ct. App. 1976) (stating
that Rule 11-408 excludes evidence when its purpose is “proving the validity or
invalidity of the claim or its amount, [however] an offer for another purpose is not
within the rule” (internal quotation marks and citation omitted)). Cordoba’s argument
regarding evidence of the settlement negotiations is that they were not to show that
FIC acknowledged coverage or admitted liability for benefits. Before the court ruled
that Cordoba’s claim was covered under the policy, the settlement negotiations were
offered based on a theory that coverage was otherwise indisputable and that FIC
engaged in bad faith and other wrongful conduct in an attempt to delay payment or to
pay less than it was required by law to pay. After the court ruled that Cordoba’s claim

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was covered under the FIC policy, the settlement negotiations indisputably could no
longer have been offered to prove that FIC acknowledged coverage or admitted
liability for benefits. At all times during the pendency of this case below, evidence
of FIC’s actions during settlement negotiations, taken as true, was relevant to prove
Cordoba’s derivative bad faith claims.
{13} 	Cordoba relies on ABM Industries, Inc. v. Zurich American Insurance Co., 237
F.R.D. 225, 228 (N.D. Cal. 2006) (order), for the proposition that he was entitled to
reference FIC’s conduct and statements made during settlement negotiations to allege
that FIC’s conduct and actions in adjusting Cordoba’s claim for coverage were
undertaken in bad faith and in violation of New Mexico law governing insurance
practices. See Rule 11-408 comm. cmt. (“This rule was changed to conform to federal
rule.”); see also State v. Lopez, 1997-NMCA-075, ¶ 10, 123 N.M. 599, 943 P.2d 1052
(stating that, where the state and federal rules are similar, federal case law is
instructive in interpreting the state rule).
{14} 	ABM Industries involved a question of whether insureds could amend their
complaint to add facts concerning settlement offers, mediation efforts, and allegations
of bad faith against the insurers in an insurance coverage dispute. 237 F.R.D. at 226.
The insurers opposed the amendment request on the ground that evidence regarding
settlement and mediation was barred by Federal Rule of Evidence 408 and the

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amendments were therefore futile. 	ABM Indus., 237 F.R.D. at 228. 	The insureds
argued that Rule 408 was inapplicable because evidence of mediation and settlement
negotiations was not being offered to prove liability in the underlying action, but was
being used for “another purpose” which was to show that the insurers had
unreasonably denied coverage. ABM Indus., 237 F.R.D. at 228. The court agreed with
the insureds’ position and held that the insureds’ allegations that the amount of the
settlement in the underlying action triggered the insurance policy with one of the
insurers, if taken as true, raised a question of whether the insurer’s denial of coverage
was reasonable. Id. at 229. The court explained that the amendment would be held
futile “only if no set of facts could be proved under the amendment to the pleadings
that would constitute a valid and sufficient claim[.]” 	Id. at 227 (internal quotation
marks and citation omitted). Thus, in ABM Industries, the court made a distinction
that applies to this case, namely, that there is a difference between using evidence of
settlement to prove the existence or amount of coverage and using that evidence in a
separate claim or action to prove bad faith or other wrong doing.
{15} 	Here, as in ABM Industries, taking as true Cordoba’s allegations that “FIC did
not follow New Mexico law in its interpretation of the insurance policy” and that his
damages were “clearly covered under the Cordoba/FIC contract,” FIC’s conduct in
denying policy limits either prior to or during settlement negotiations raised a legal

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issue separate from the question of liability for the uninsured/ underinsured motorist
benefits. See 237 F.R.D. at 229; see also Delfino, 2011-NMSC-015, ¶ 9 (stating that
on review for propriety of dismissal for failure to state a claim, the appellate courts
accept as true all well-pleaded facts in a complaint). 	Cordoba 	referenced the
settlement negotiations in his counterclaim, among other reasons, to demonstrate that
FIC had no legitimate or arguable basis on which to refuse to pay the policy limits and
that FIC wrongfully attempted to reduce that obligation. Accordingly, dismissal of
the counterclaim under Rule 1-012(B)(6) was improper. Even more so, the court erred
in holding fast to the dismissal and not permitting Cordoba to file his amended
counterclaim. 	It is indisputable that once the court ruled in Cordoba’s favor on
coverage, the settlement negotiation averments Cordoba sought to plead in his
proposed amended counterclaim unambiguously related only to FIC’s bad faith or
other wrongful conduct. As such, reaffirming the Rule 1-012(B)(6) dismissal based
on Rule 11-408 was improper. 	See Rule 1-015(A) NMRA (stating that after a
responsive pleading has been served, a “party may amend his pleading. . . by leave of
[the] court . . . and leave shall be freely given when justice so requires”); Amica Mut.
Ins. Co. v. McRostie, 2006-NMCA-046, ¶ 20, 139 N.M. 486, 134 P.3d 773
(recognizing that the clear policy behind Rule 1-015 is that amendments should be
freely granted); Lovato v. Crawford & Co., 2003-NMCA-088, ¶ 6, 134 N.M. 108, 73

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P.3d 246 (“Amendments to the pleadings are favored and should be liberally permitted
as justice requires.”).
{16} 	Moreover, Cordoba’s reference in his counterclaim to any facts that may have
eventually been ruled inadmissible in evidence did not provide a proper basis for
dismissal of his counterclaim under Rule 1-012(B)(6). See Ricciuti v. N.Y.C. Transit
Auth., 941 F.2d 119, 123 (2d Cir. 1991) (stating that “[t]he fact that a pleading
contains references to documents that may eventually be ruled inadmissible in
evidence is not a proper basis for dismissal pursuant to Rule 12(b)(6)”). Thus, while
the district court and FIC noted that in his counterclaim Cordoba alleged that “FIC,
by way of two separate financial settlement offers, [acknowledged] coverage to
Cordoba[,]” the presence of this in the averments was not a basis for dismissal of
Cordoba’s counterclaim because in significant part, if not fully, reference to FIC’s
acknowledgment of coverage was intended not as proof of coverage liability, but
rather as proof of liability for bad faith.
{17} 	Additionally, the fact that the objectionable reference was made while the
declaratory judgment was pending was not a proper basis for dismissal. 	Any
reference to FIC’s acknowledgment of liability by way of settlement offers would
undeniably have been improper had it been included in Cordoba’s response to FIC’s
declaratory judgment action; however, that is not what occurred here. 	Rather, the

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averment appeared only in Cordoba’s counterclaim, which, in addition to being
pertinent to legal issues other than liability for coverage, was compulsory and,
therefore, could not have been raised except within a counterclaim. 	See Rule 1-
013(A) NMRA (stating that “[a] pleading shall state as a counterclaim any claim
which at the time of serving the pleading the pleader has against any opposing party,
if it arises out of the transaction or occurrence that is the subject matter of the
opposing party’s claim”); Bentz v. Peterson, 107 N.M. 597, 601, 762 P.2d 259, 263
(Ct. App. 1988) (stating that “[f]ailure to plead a compulsory counterclaim bars a later
action on that claim”). Therefore, to the extent that FIC’s acknowledgment of liability
provided 	proof 	of 	Cordoba’s 	counterclaim 	allegations, 	its 	inclusion 	in 	the
counterclaim was proper notwithstanding the pendency of the declaratory judgment
action.
{18} 	We conclude that the district court abused its discretion by misinterpreting and
misapplying Rule 11-408 and erroneously dismissed Cordoba’s counterclaim under
Rule 1-012(B)(6). 	See Clark, 2009-NMCA-118, ¶ 20 (stating that a district court
abuses its discretion by making a decision based on misapprehension of the law).
{19} 	On a final note, we distinguish Reeder v. American Economy Insurance Co., 88
F.3d 892 (10th Cir. 1996), upon which the district court relied in making its
determination and upon which FIC relies on appeal. 	In Reeder, the insurer filed a

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declaratory judgment action to determine whether the insured was entitled to recover
under 	the 	uninsured 	motorist 	coverage, 	and 	the 	insured 	counterclaimed 	for
compensatory damages and for damages in bad faith. 	Id. at 893. On the coverage
issue, the insured sought $1.5 million, which represented three insured vehicles each
with uninsured motorist coverage of $500,000. Id. at 893, 895.
{20} 	Both parties moved for summary judgment. Id. at 893. The court ruled that the
insured’s claim was covered. Id. The court also ruled that the insurer had not acted
in bad faith. Id. The court set trial on the issue of compensatory damages only. Id.
Just before trial, the insurer offered $1 million in settlement. Id. The jury awarded
$612,000 for the insured’s bodily injuries. Id. The court (1) entered judgment on that
verdict, (2) granted partial summary judgment in favor of the insured on liability, and
(3) granted summary judgment in favor of the insurer on the bad faith claim. Id.
{21} 	On appeal, the insured claimed that the court erred in failing to proceed to jury
trial on the issue of whether the $1 million offer fully compensated her or whether she
was entitled to $1.5 million. 	Id. at 894. The apparent underlying rationale for this
request was the insurer’s duty under state law that if the insurer does not conduct an
investigation or after investigation determines that the likely worth of the claim
exceeds the liability limits, “prompt payment [of the limits] must be offered.” 	Id.
(internal quotation marks and citation omitted).

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{22} 	Apparently, based on Buzzard v. Farmers Insurance Co., 824 P.2d 1105, 1112
(Okla. 1991), which imposed a duty on the insurer to investigate and evaluate claims
and offer payment if the claim so warrants, the insured wanted to show that the $1
million offered was the insurer’s “evaluation” apparently for the purpose of having
a jury determine whether it was adequate compensation for her claim, and this,
presumably in the insured’s mind, was linked to proving the insurer’s bad faith in
failing in its state law duty to timely and promptly investigate and pay her claim.
Reeder, 88 F.3d at 894. 	The court in Reeder held that the “evaluation” was a
settlement offer and that it was “inexorably linked with proving the amount of the
[coverage] claim.” Id. Here, unlike Reeder, the references to settlement negotiations
were not linked with proving the amount of the claim. Rather, as we have already
indicated, they were for “another purpose” allowable under Rule 11-408. Reeder is
also distinguishable insofar as it was not a case in which the court dismissed for
failure to state a claim based on Rule 12(b)(6). And finally, Reeder is distinguishable
because the Reeder court, unlike the district court in the present case, ruled on the
merits of the insured’s bad faith claim. Owing to its inapplicability to issues in this
case, Reeder does not support FIC’s position.

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CONCLUSION
{23} 	We reverse the district court’s dismissal under Rule 1-012(B)(6) and remand
for further proceedings consistent with this Opinion.
{24} 	IT IS SO ORDERED.
__________________________________
JONATHAN B. SUTIN, Judge
WE CONCUR:
__________________________________
JAMES J. WECHSLER, Judge
__________________________________
RODERICK T. KENNEDY, Judge