L. A. Unified Sch. Dist. v. Safety Nat'l Cas. Corp., B275597

• Decision Date: 12 July 2017
• Docket Number: B275597
• Court: California Court of Appeals Court of Appeals
• Parties: LOS ANGELES UNIFIED SCHOOL DISTRICT, Plaintiff and Respondent, v. SAFETY NATIONAL CASUALTY CORPORATION, Defendant and Appellant.

13 Cal.App.5th 471

220 Cal.Rptr.3d 546

LOS ANGELES UNIFIED SCHOOL DISTRICT, Plaintiff and Respondent,

v.SAFETY NATIONAL CASUALTY CORPORATION, Defendant and Appellant.

B275597

Court of Appeal, Second District, Division 8, California.

Filed July 12, 2017

Duane Morris, Philip R. Matthews, Paul J. Killion, and Christine B. Cusick, San Francisco, for Defendant and Appellant.

Jones Day, David W. Steuber, Tara C. Kowalski, Craig M. Hirsch, Los Angeles; Andrade Gonzalez, Sean A. Andrade, Los Angeles, Stephen V. Masterson, and April E. Navarro for Plaintiff and Respondent.

GRIMES, J.

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 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 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. Relying on Valencia v. Smyth (2010) 185 Cal.App.4th 153, 110 Cal.Rptr.3d 180, 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, 147 Cal.Rptr.3d 717.)

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, 109 S.Ct. 1248, 103 L.Ed.2d 488 ( Volt ).) Section 1 defines the term "commerce," and section 2 is "the primary substantive provision of the FAA ...." ( Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 384, 25 Cal.Rptr.3d 540, 107 P.3d 217 ( 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, 25 Cal.Rptr.3d 540, 107 P.3d 217.) 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 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, 105 S.Ct. 1238, 84 L.Ed.2d 158 ; id. at p. 217, 105 S.Ct. 1238 [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...