LA Unified Sch. Dist. v. Safety Nat. Casualty Corp. ( 2017 )

Filed 7/12/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
LOS ANGELES UNIFIED B275597
SCHOOL DISTRICT,
(Los Angeles County
Plaintiff and Respondent, Super. Ct. No. BC593234)
v.
SAFETY NATIONAL
CASUALTY CORPORATION,
Defendant and Appellant.
APPEAL from an order of the Superior Court of Los
Angeles County. Kenneth R. Freeman, Judge. Affirmed.
Duane Morris, Philip R. Matthews, Paul J. Killion, and
Christine B. Cusick for Defendant and Appellant.
Jones Day, David W. Steuber, Tara C. Kowalski, Craig M.
Hirsch; Andrade Gonzalez, Sean A. Andrade, Stephen V.
Masterson, and April E. Navarro for Plaintiff and Respondent.
__________________________
SUMMARY
The question in this case is whether the procedural
provisions of the Federal Arbitration Act (FAA, 9 U.S.C. § 1 et
seq.) apply to a motion to compel arbitration in a California state
court, where the arbitration agreement is governed by the FAA
(because it involves interstate commerce), but the agreement has
no choice-of-law provision, and no provision stating the FAA’s
procedural provisions govern the arbitration.
We conclude California procedure applies in these
circumstances, and the trial court did not abuse its discretion
when it denied an insurer’s motion to compel arbitration with its
insured, based on the possibility of conflicting rulings in pending
litigation with third parties. (Code Civ. Proc., § 1281.2, subd. (c)
(section 1281.2(c)).)
FACTS
In September 2015, plaintiff Los Angeles Unified School
District sued 27 insurance companies that had issued policies of
primary or excess liability insurance to plaintiff. Plaintiff alleged
the insurers breached their insurance contracts and tortiously
breached the covenant of good faith and fair dealing by refusing
to provide coverage – under more than 100 insurance policies
spanning the years between 1975 and 2012 – for third party
claims and lawsuits referred to collectively as the Miramonte
litigation. These third party claims alleged that plaintiff’s
negligence “in hiring, retaining, and supervising caused hundreds
of students to be repeatedly exposed to abuse by two teachers
working at Miramonte Elementary School for decades . . . .”
Plaintiff sought declaratory relief and more than
$200 million in damages. The complaint alleged 203 causes of
action against the various insurers, the last one seeking a
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declaration against all the insurers that the Miramonte litigation
constituted a single occurrence under the policies, and “all
defense and indemnity sums incurred by or on behalf of the
[plaintiff] in connection with that Litigation result from that
single occurrence.” The lawsuit was designated a complex case.
(Cal. Rules of Court, rule 3.400.)
Defendant Safety National Casualty Corporation is one of
the 27 insurers. Plaintiff alleged defendant’s wrongful refusal to
defend and indemnify plaintiff under two policies, the “Safety
82/83 1ST XS Policy” and the “Safety 83/84 1ST XS Policy.”
(A declaration from defendant says it issued a policy “for at least
the policy period June 1, 1982 to July 1, 1983,” and that an
endorsement “appears to extend coverage for the following year,
but there is evidence . . . that makes it unclear if that extended
coverage was subsequently cancelled.” The policy “contains
limits of $5,000,000 per occurrence excess of $20,000,000 per
occurrence, and a self-insured retention of $1,500,000.”)
Defendant’s policy contained an arbitration clause, and
defendant filed a motion to compel arbitration, and to dismiss or
stay the action against it. The policy’s arbitration clause
provides, in pertinent part:
“As a condition precedent to any right of action under
this Agreement, . . . any dispute arising out of this
Agreement shall be submitted to the decision of a
board of arbitration. The board of arbitration will be
composed of two arbitrators and an umpire, meeting
in St. Louis, Missouri, unless otherwise agreed. [¶]
The members of the board of arbitration shall be
active or retired, disinterested officials of insurance
or reinsurance companies. Each party shall appoint
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its arbitrator, and the two arbitrators shall choose an
umpire before instituting the hearing. . . . [¶] . . . [¶]
The board shall make its decision with regard to the
custom and usage of the insurance and reinsurance
business. The board shall issue its decision in
writing based upon a hearing in which evidence may
be introduced without following strict rules of
evidence but in which cross examination and rebuttal
shall be allowed.”
Defendant contended the FAA applied as a matter of law to
the parties’ dispute, because the policy is a contract evidencing a
transaction involving interstate commerce. Because there was a
valid agreement to arbitrate encompassing the dispute at issue,
defendant argued, the court was required under the FAA to
“make an order directing the parties to proceed to arbitration in
accordance with the terms of the agreement.” (9 U.S.C. § 4.)
Plaintiff opposed the motion, proffering multiple
arguments, including that section 1281.2(c) applied and
compelled denial of the motion; and that the FAA’s procedural
provisions do not apply unless the contract contains a choice-of-
law clause expressly incorporating those provisions.
Defendant’s reply contended the lack of any choice-of-law
clause mandated application of the FAA, and even if California
rules applied, arbitration would be proper because plaintiff
“failed to make any showing to support a finding of possible
inconsistent rulings, as is necessary under . . . section 1281.2(c).”
The trial court denied the motion to compel arbitration.
The court found an agreement to binding arbitration existed, and
the policies themselves, together with pertinent legal authorities,
showed the insurance transaction involved interstate commerce.
4
Relying on Valencia v. Smyth (2010) 185 Cal.App.4th 153, the
court concluded the FAA’s substantive provisions applied, but its
procedural provisions did not, because the contract did not
contain a clause expressly incorporating those provisions.
Accordingly, the court found California rules of procedure
governed. The court further found there was a possibility of
conflicting rulings under section 1281.2(c). (We will describe the
court’s comments on the last point in connection with our legal
discussion, pt. 3, post.)
Defendant filed a timely notice of appeal.
DISCUSSION
Defendant contends the trial court’s application of
California’s procedural law on arbitration was error, and even if
California law applies, the trial court erred in denying arbitration
based on the possibility of inconsistent rulings. We disagree on
both points.
We review the first question de novo, and the second for
abuse of discretion. (Mastick v. TD Ameritrade, Inc. (2012) 209
Cal.App.4th 1258, 1262-1263.)
1. The Legal Background
We begin with a brief description of the relevant statutes
and principles.
It is undisputed that the substantive provisions of the FAA
govern the arbitration agreement, because the insurance contract
involves interstate commerce. As the high court has said, “the
FAA’s ‘substantive’ provisions—§§ 1 and 2—are applicable in
state as well as federal court . . . .” (Volt Info. Sciences v. Leland
Stanford Jr. U. (1989) 489 U.S. 468, 477, fn. 6 (Volt).) Section 1
defines the term “commerce,” and section 2 is “the primary
substantive provision of the FAA . . . .” (Cronus Investments, Inc.
5
v. Concierge Services (2005) 35 Cal.4th 376, 384 (Cronus).)
Section 2 provides in pertinent part that “[a] written provision in
. . . a contract evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter arising out of such
contract or transaction, or the refusal to perform the whole or any
part thereof, . . . shall be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for the revocation
of any contract.” (9 U.S.C. § 2.)
Sections 3 and 4 of the FAA are procedural provisions.
(Cronus, supra, 35 Cal.4th at p. 389.) Section 3 of the FAA
provides that if a suit is brought “in any of the courts of the
United States” on an issue referable to arbitration under a
written arbitration agreement, the court “shall on application of
one of the parties stay the trial of the action until such
arbitration has been had in accordance with the terms of the
agreement . . . .” (9 U.S.C. § 3.) Section 4 allows a party
aggrieved by an alleged refusal to arbitrate to “petition any
United States district court” that would have jurisdiction of the
subject matter in a civil action “for an order directing that such
arbitration proceed in the manner provided for in such
agreement.” (9 U.S.C. § 4.)
In California, section 1281.2(c) allows a court to refuse to
enforce an agreement to arbitrate, if the court determines that
“[a] party to the arbitration agreement is also a party to a
pending court action or special proceeding with a third party,
arising out of the same transaction or series of related
transactions and there is a possibility of conflicting rulings on a
common issue of law or fact.”1 Unlike the procedure in
1 Under those circumstances, “the court (1) may refuse to
enforce the arbitration agreement and may order intervention or
6
California, the FAA by its terms “leaves no place for the exercise
of discretion by a district court, but instead mandates that
district courts shall direct the parties to proceed to arbitration on
issues as to which an arbitration agreement has been signed.”
(Dean Witter Reynolds Inc. v. Byrd (1985) 470 U.S. 213, 218; id.
at p. 217 [holding the FAA “requires district courts to compel
arbitration of pendent arbitrable claims when one of the parties
files a motion to compel, even where the result would be the
possibly inefficient maintenance of separate proceedings in
different forums”].)
2. California Procedure Applies.
Many cases have discussed whether and when the FAA’s
procedural provisions apply in state courts. Volt tells us the FAA
“simply requires courts to enforce privately negotiated
agreements to arbitrate, like other contracts, in accordance with
their terms.” (Volt, supra, 489 U.S. at p. 478.) The FAA does not
“prevent[] the enforcement of agreements to arbitrate under
different rules than those set forth in the Act itself.” (Volt, at
p. 479.) So, for example, “[w]here . . . the parties have agreed to
abide by state rules of arbitration, enforcing those rules according
to the terms of the agreement is fully consistent with the goals of
the FAA, even if the result is that arbitration is stayed where the
Act would otherwise permit it to go forward.” (Ibid.)
joinder of all parties in a single action or special proceeding;
(2) may order intervention or joinder as to all or only certain
issues; (3) may order arbitration among the parties who have
agreed to arbitration and stay the pending court action or special
proceeding pending the outcome of the arbitration proceeding; or
(4) may stay arbitration pending the outcome of the court action
or special proceeding.” (§ 1281.2.)
7
In this case, however, there is no agreement to abide by
state rules, and no agreement to abide by FAA procedural rules.
Instead the agreement is completely silent, with no terms
mentioning or alluding to the FAA, California law, or any other
state law or rules of procedure.
Under these circumstances, we hold the principles
discussed in Cronus compel the conclusion that California
procedure applies in California courts.
Cronus described or established several pertinent
principles.
First, the FAA “does not preempt the application of
section 1281.2, subdivision (c) where the parties have agreed that
their arbitration agreement would be governed by the law of
California.” (Cronus, supra, 35 Cal.4th at p. 380 [describing the
holding in Volt, supra, 489 U.S. 468].)
Second, the Cronus case presented circumstances where
the parties agreed that their arbitration agreement would be
governed by California law, “but they further agreed that the
designation of California law ‘shall not be deemed an election to
preclude application of the [FAA], if it would be applicable.’ ”
(Cronus, supra, 35 Cal.4th at p. 380.) The court concluded that
“in this situation, the FAA also does not preempt the application
of section 1281.2, subdivision (c).” (Ibid.)
Third, in reaching its conclusion, the Cronus court stated
the analytical principle to be applied: “Under United States
Supreme Court jurisprudence, we examine the language of the
contract to determine whether the parties intended to apply the
FAA to the exclusion of California procedural law and, if any
ambiguity exists, to determine whether section 1281.2(c) conflicts
8
with or frustrates the objectives of the FAA.” (Cronus, supra,
35 Cal.4th at p. 383.)
Fourth, Cronus concluded both that section 1281.2(c) does
not conflict with the procedural provisions of the FAA and that
section 1281.2(c) does not contravene the substantive goals and
policies of the FAA. The court first discussed procedure, and then
turned to substance.
In concluding that “the procedural provisions of the FAA
[(§§ 3 and 4)] and section 1281.2 do not conflict” (Cronus, supra,
35 Cal.4th at p. 390), the court observed: “[t]he language used in
sections 3 and 4 and the legislative history of the FAA suggest
that the sections were intended to apply only in federal court
proceedings.” (Id. at p. 388; see also Cable Connection, Inc. v.
DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1351 (Cable Connection)
[“Sections 3 and 4 of the FAA, governing stays of litigation and
petitions to enforce arbitration agreements, do not apply in state
court”].)2
2 Cronus also observed that the high court “does not read the
FAA’s procedural provisions to apply to state court proceedings.
‘[W]e do not hold that §§ 3 and 4 of the Arbitration Act apply to
proceedings in state courts. Section 4, for example, provides that
the Federal Rules of Civil Procedure apply in proceedings to
compel arbitration. The Federal Rules do not apply in such state
court proceedings.’ [Citation.] In Volt, the high court later
confirmed that, ‘While we have held the FAA’s “substantive”
provisions—§§ 1 and 2—are applicable in state as well as federal
court [citation], we have never held that §§ 3 and 4, which by
their terms appear to apply only to proceedings in federal court
[citations], are nonetheless applicable in state court.’ (Volt,
supra, 489 U.S. at p. 477, fn. 6.) Reaffirming Volt’s distinction
between the procedural and substantive aspects of the FAA, the
court further described section 1281.2(c) as ‘determin[ing] only
9
Cronus also relied on the court’s prior decision in Rosenthal
v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394(Rosenthal), quoting Rosenthal’s statement (id. at p. 409) that,
“ ‘Like other federal procedural rules, therefore, “the procedural
provisions of the [FAA] are not binding on state courts . . .
provided applicable state procedures do not defeat the rights
granted by Congress.” ’ ” (Cronus, supra, 35 Cal.4th at p. 390,
italics added in Cronus.) Further: “ ‘Our statutes do establish
procedures for determining enforceability not applicable to
contracts generally, but they do not thereby run afoul of the
[FAA’s] section 2, which states the principle of equal
enforceability, but does not dictate the procedures for
determining enforceability.’ ”3 (Cronus, at p. 390.)
Finally, Cronus rejected claims that application of
section 1281.2(c) would contravene the substantive goals and
policies of the FAA (Cronus, supra, 35 Cal.4th at p. 387), and that
section 1281.2(c) “conflicts with the spirit of the FAA because its
application would undermine and frustrate . . . section 2’s policy
of enforceability of arbitration agreements.” (Cronus, at pp. 391,
391-393.) The court observed:
the efficient order of proceedings [and] not affect[ing] the
enforceability of the arbitration agreement itself.’ [Citation.]”
(Cronus, supra, 35 Cal.4th at pp. 389-390.)
3 In Rosenthal, the court held that, while an agreement was
subject to the FAA, “the federal provision for a jury trial of
questions regarding the existence of an arbitration agreement
(9 U.S.C. § 4) does not operate in California state courts.”
(Rosenthal, supra, 14 Cal.4th at p. 402.)
10
“[S]ection 1281.2(c) is not a special rule limiting the
authority of arbitrators. It is an evenhanded law that allows the
trial court to stay arbitration proceedings while the concurrent
lawsuit proceeds or stay the lawsuit while arbitration proceeds to
avoid conflicting rulings on common issues of fact and law
amongst interrelated parties. Moreover, ‘[s]ection 1281.2(c) is not
a provision designed to limit the rights of parties who choose to
arbitrate or otherwise to discourage the use of arbitration.
Rather, it is part of California’s statutory scheme designed to
enforce the parties’ arbitration agreements, as the FAA requires.
Section 1281.2(c) addresses the peculiar situation that arises
when a controversy also affects claims by or against other parties
not bound by the arbitration agreement. The California provision
giving the court discretion not to enforce the arbitration
agreement under such circumstances—in order to avoid potential
inconsistency in outcome as well as duplication of effort—does
not contravene the letter or the spirit of the FAA.’ ” (Cronus,
supra, 35 Cal.4th at p. 393.)
The court concluded: “Our opinion does not preclude
parties to an arbitration agreement to expressly designate that
any arbitration proceeding should move forward under the FAA’s
procedural provisions rather than under state procedural law.
We simply hold that the language of the arbitration clause in this
case, calling for the application of the FAA ‘if it would be
applicable,’ should not be read to preclude the application of
1281.2(c), because it does not conflict with the applicable
provisions of the FAA and does not undermine or frustrate the
FAA’s substantive policy favoring arbitration.” (Cronus, supra,
35 Cal.4th at p. 394.)
11
In sum, Cronus leaves us with several incontrovertible
principles. Section 1281.2(c) does not contravene the letter or
spirit of the FAA. (Cronus, supra, 35 Cal.4th at p. 393.)
California procedure ordinarily applies in California courts, and
sections 3 and 4 of the FAA ordinarily do not. (Cronus, at p. 388;
see also Cable Connection, supra, 44 Cal.4th at p. 1351.)
Consequently, where, as here, the parties do not “expressly
designate that any arbitration proceeding should move forward
under the FAA’s procedural provisions rather than under state
procedural law” (Cronus, at p. 394), California procedures
necessarily apply. (See also Judge v. Nijjar Realty, Inc. (2014)
232 Cal.App.4th 619, 632 [“Absent an agreement by the parties to
apply the procedural provisions of the FAA to their arbitration,
federal procedural rules apply only where state procedural rules
conflict with or defeat the rights Congress granted in the FAA.”];
Valencia v. Smyth, supra, 185 Cal.App.4th at p. 174 [“the
procedural provisions of the [California Arbitration Act] apply in
California courts by default”].)
3. Denial of the Motion to Compel Was Proper.
Defendant argues the trial court abused its discretion when
it denied arbitration under the authority of section 1281.2(c).
Again, we disagree.
As stated earlier, section 1281.2(c) allows a court to refuse
to enforce an arbitration agreement if a party to the agreement is
also a party to a pending court action with a third party, “arising
out of the same transaction or series of related transactions and
there is a possibility of conflicting rulings on a common issue of
law or fact.” A trial court “may deny a party’s contractual right
to arbitration only when all of section 1281.2(c)’s conditions are
12
satisfied.” (Acquire II, Ltd. v. Colton Real Estate Group (2013)
213 Cal.App.4th 959, 980 (Acquire II).)
Defendant contends two conditions are not satisfied.
Defendant first asserts plaintiff’s court action against the
other insurers does not arise out of “the same transaction or
series of related transactions” as plaintiff’s action against
defendant. Defendant tells us the “transactions at issue” are the
insurance contracts issued by each insurer, and “[t]here are no
related ‘transactions’ because the policies were purchased at
different times, from different insurers, and involve different
contract terms and cover different time periods.”
Defendant – who did not make this argument to the trial
court – admits that section 1281.2(c) does not define the term
“transaction,” and cites no authority that supports its constricted
notion of the term.4 The trial court’s view was this: “This
4 Defendant cites Acquire II, supra, 213 Cal.App.4th 959,
where “the record fail[ed] to show that . . . the claims of any
group of Plaintiffs who agreed to arbitration and the claims of
any group of Plaintiffs who did not agree to arbitration arose out
of the same transaction or series of related transactions . . . .”
(Id. at p. 973.) The case involved a wide variety of fraud-related
claims by 250 investors against the defendants, who had created
six different investment funds over a 10-year period to purchase
and manage six portfolios of commercial real estate. (Id. at
pp. 963, 965-966.) The defendants filed six motions to compel
six of the 12 groups of plaintiffs to arbitrate their claims. (The
other six groups invested in funds that had no arbitration
agreements in their governing documents.) (Id. at p. 963.) Each
group of plaintiffs invested in different funds or properties, at
different times, under separate private placement memoranda,
and “executed separate agreements to define their rights and
obligations depending on the fund or property in which they
13
litigation arises out of a series of related transactions – namely,
[plaintiff’s] alleged entitlement to insurance coverage arising out
of the underlying Miramonte litigation.” Defendant says this
ruling was “incorrect,” but offers no cogent reason for that
assertion. Indeed, defendant admits that plaintiff’s claims
“against all its insurers arise out of a common set of underlying
claims,” but at the same time insists that plaintiff’s dispute “with
each insurer arises out of each separate insurance transaction.”
We think not; the dispute arises out of each insurer’s refusal to
defend or indemnify against the very same underlying claims,
and further arises in the context of plaintiff’s claim, against all
the insurers, that the Miramonte litigation constituted a single
occurrence under the policies. We find no fault in the trial court’s
assessment.
Defendant’s second contention is that plaintiff “failed to
provide substantial evidence that there would be a possibility of
conflicting rulings on a common issue of law or fact.” Specifically,
defendant says the “only possibility of inconsistent rulings noted
in the trial court’s order” is whether or not the underlying
litigation represents a single “occurrence” for purposes of
insurance coverage. And, defendant tells us, “there is no real
possibility of either the court or the arbitration panel ruling that
there was only one occurrence, and even if one tribunal did, such
inconsistent rulings would not impact the triggering of the excess
invested.” (Id. at p. 974.) And the plaintiffs’ claims “regarding
Defendants’ management of the funds and properties also arose
out of separate transactions because Defendants managed
different funds and different properties for each group of
Plaintiffs.” (Ibid.) We see nothing in Acquire II that assists
defendant in this case.
14
coverage obligations under [defendant’s policy] because they are
so high level.”
Defendant’s view is mistaken on multiple levels.
First, “the allegations of the parties’ pleadings may
constitute substantial evidence sufficient to support a trial court’s
finding that section 1281.2(c) applies. [Citation.] A party relying
on section 1281.2(c) to oppose a motion to compel arbitration does
not bear an evidentiary burden to establish a likelihood of success
or make any other showing regarding the viability of the claims
and issues that create the possibility of conflicting rulings.
[Citation.] An evidentiary burden is unworkable under
section 1281.2(c) because the question presented is whether a
“ ‘possibility’ ” of conflicting rulings exists [citation] and a motion
to compel arbitration is typically brought before the parties have
conducted discovery.” (Acquire II, supra, 213 Cal.App.4th at
p. 972.)
Second, defendant’s mere assertion “there is no real
possibility” that any tribunal would rule there was only one
occurrence is of no moment. Defendant tells us “[t]he majority of
jurisdictions” follow the rule “that multiple acts of sexual abuse
against different victims do not constitute one occurrence” and, in
a footnote, cites 10 cases from California and other jurisdictions
(one of which held otherwise). Defendant presents no analysis or
argument as to why and how these cases are analogous to the
facts alleged here, and cites no controlling authority from our
Supreme Court. It is obvious that an appellate court cannot
decide that issue in the absence of a record developed in the trial
court.
Third, we see no error in the trial court’s analysis. The
court explained: “There certainly is a possibility of conflicting
15
rulings on common issues of law or fact if the [defendant-
plaintiff] arbitration were to proceed concurrently with the
litigation of the [plaintiff’s] case against the insurers. As
[plaintiff] notes, its position is that the Miramonte litigation
represents a ‘single occurrence,’ entitling it to coverage. While
the Court is in no position to make that assessment at this time,
the gravamen of this case will require the Court to ultimately
resolve this important coverage question. This question will
certainly also be part of any arbitration proceeding between
[defendant] and [plaintiff]; depending on the outcome of the
occurrence question, it may, or may not, trigger potential excess
coverage obligations on the part[] of [defendant]. To allow the
arbitration to proceed would risk potentially inconsistent results
with the Court’s ultimate findings in the instant litigation.”
Further, the trial court properly rejected the claim
defendant repeats on appeal, that even if there were conflicting
rulings, “there would be no practical impact on the litigation,”
because defendant “is a high-level excess carrier and the policy
attaches excess of $20 million.” Defendant asserts that “even if
the $200 million loss alleged by [plaintiff] is divided over the
40 years of coverage, the $5 million assigned to [defendant’s]
policy year would not impact [defendant’s] Policy, which attaches
excess of $20 million.” Like the trial court, we are not prepared
to so conclude as a matter of law. As the court stated: “The
Court is not persuaded by [defendant’s] argument that
[defendant’s] potential for coverage, at most, would be for two
years, and that any overlap is ‘minimal.’ The standard under
§ 1281.2(c) requires only a ‘possibility’ of conflicting rulings on a
common issue of law or fact. Certainly, and at the very least,
there is such a possibility here.” (Fn. omitted.)
16
DISPOSITION
The order denying defendant’s motion to compel arbitration
is affirmed. Plaintiff shall recover its costs on appeal.
GRIMES, J.
WE CONCUR:
BIGELOW, P. J.
SORTINO, J.*
* Judge of the Los Angeles Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.
17