Opinion
EDCV 16-59-VAP (KKx)
04-13-2016
FONTANA UNION WATER COMPANY et al., Plaintiffs, v. ARCH INSURANCE COMPANY, Defendant.
Attorneys and Law Firms Jennifer L. Meeker, Joan Marie Majarian Cotkin, Nossaman LLP, Los Angeles, CA, for Plaintiffs. Andrew D. Herold, Christopher L. Hendricks, Linda L. Sager, Herold and Sager, Encinitas, CA, for Defendant.
Attorneys and Law Firms
Jennifer L. Meeker, Joan Marie Majarian Cotkin, Nossaman LLP, Los Angeles, CA, for Plaintiffs.
Andrew D. Herold, Christopher L. Hendricks, Linda L. Sager, Herold and Sager, Encinitas, CA, for Defendant.
ORDER COMPELLING ARBITRATION OF ALL CLAIMS
VIRGINIA A. PHILLIPS, UNITED STATES DISTRICT JUDGE
*1 On January 11, 2016, Plaintiffs San Gabriel Valley Water Company and Fontana Union Water Company filed a Complaint alleging claims for: (1) Declaratory Relief; (2) Breach of Insurance Contract; and (3) Bad Faith. (Doc. No. 1.) On February 3, 2016, Defendant Arch Insurance Company filed a Motion to Dismiss and Strike the Complaint. (Doc. No. 12.) On February 4, 2016, Plaintiffs filed a Motion for Partial Summary Judgment. (Doc. No. 15.) On March 14, Arch filed a Motion to Compel Arbitration. (Doc. No. 96.) After considering the paper filed in support of, and in opposition to, these motions, and the arguments advanced at the motion hearing, the Court issues its rulings as follows.
I. BACKGROUND
On September 12, 2013, San Bernardino Valley Municipal Water District, City of Colton, City of Rialto, and West Valley Water District filed suit against Plaintiffs. Arch issued various insurance policies to Plaintiffs under which it assumed a duty to defend Plaintiffs against claims like the ones in the underlying action. (Comp. ¶ 8.)
San Bernardino Valley Municipal Water District et al. v. San Gabriel Valley Water Company d.b.a. Fontana Water Company et al., Case No. CIVDS 1311085. (Comp. ¶ 7.)
Plaintiffs tendered their defense of the underlying action to Arch in October 2013. (Declaration of Thomas Long ¶ 2, Ex. 1 (Doc. No. 19).) On October 31, 2013, Arch agreed to defend Plaintiffs in the underlying action with reservation rights. (Long Decl. ¶ 3, Ex. 2.)
On November 1, 2013, Arch appointed Paul Cotter as Plaintiffs' defense counsel in the underlying action. (Declaration of Valerie Vredevoogd ¶ 3, Ex. 1 (Doc. No. 49).) Plaintiffs told Arch that they wanted Nossaman, LLP as their Cumis counsel and that Mr. Cotter could be co-defense counsel. See San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal.App.3d 358; (Vredevoogd Decl. ¶ 4, Ex. 2.) Arch accepted and sent Cumis counsel its litigation guidelines, requesting periodic defense status reports and telling Cumis counsel that bills should be submitted on a quarterly basis. (Vredevoogd Decl. ¶¶ 5-6, Ex. 3.) After being appointed, Cumis counsel objected to Arch's reimbursement rate of $165 per hour, the same rate that Mr. Cotter was paid as co-defense counsel. (Vredevoogd Decl. ¶¶ 3, 7, Ex. 4.) In addition, Cumis counsel acknowledged that California Civil Code Section 2860 applied, asked Arch to demonstrate its reimbursement rate was similar to other rates in the community, and objected to Arch's litigation guidelines. (Id.)
Under liability insurance policies, an insurer has a duty to indemnify the insured for loss as well as a duty to defend the insured in litigation involving the claim under the policy. Section 2860 requires an insurer to provide independent counsel to the insured when an actual conflict of interest arises.
Arch told Cumis counsel that it would pay Mr. Cotter $165 per hour for the defense of this case, and that in order to resolve the fee dispute and without waiving its rights under section 2860, it would agree to reimburse Cumis counsel $210 per hour for partners and $185 per hour for associates, but would not reimburse fees or costs incurred by Mr. McPeter, another lawyer retained by Plaintiffs. (Declaration of Alan Lyons ¶ 2, Ex. 1 (Doc. No. 60).)
*2 During the course of the underlying action litigation, Arch and Cumis counsel disagreed about the reasonableness of Cumis counsel's billings. For example, on May 13, 2014, after Arch paid Cumis counsel $75, 180 in response to a billing reimbursement request, Cumis counsel asked for an explanation of how reimbursement was calculated. (Vredevoogd Decl. ¶ 8, Ex. 5.) Arch responded on July 30, 2014, explaining that Arch did not have to pay for excessive, unreasonable, and unnecessary billings and had a right to audit Cumis counsel's invoices, which Arch believed had many improper entries, including billing for pre-tender fees, billing for administrative matters, duplicative entries, and other excessive charges. (Lyons Decl. ¶ 3, Ex. 2.)
Due to continued disagreement about fees and billings, and Cumis counsel's desire for copies of the detailed audit reports, Arch retained an outside and independent legal auditing firm to audit the invoices submitted by Cumis counsel and McPeters. (Vredevoogd Decl., ¶ 10.)
The parties continued to disagree about the reasonableness of Cumis counsel's fees and the timeliness of Arch's reimbursement, which led Plaintiffs to file this lawsuit.
II. LEGAL STANDARD
“Any dispute concerning attorney's fees not resolved by these methods shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute.” Cal. Civ. Code § 2860(c).
California has a “strong legislative policy favoring arbitration of Cumis counsel fee disputes expressed in the mandatory arbitration provision of section 2860(c)...” Behnke v. State Farm Gen. Ins. Co., 196 Cal.App.4th 1443, 1461-62 (2011); see also, Wallis v. Centennial Insurance Company, Inc., 982 F.Supp.2d 1114, 1121-23 (2013). “[A]rbitration has become an accepted and favored method of resolving disputes, praised by the courts as an expeditious and economical method of relieving overburdened civil calendars.” Madden v. Kaiser Foundation Hospitals, 17 Cal.3d 699 (1976); see also Berman v. Dean Witter & Co., Inc., 44 Cal.App.3d 999, 1003 (1975) (“In California, arbitration is highly favored as a method for the settlement of disputes.”).
Consistent with the strong public policy in favor of arbitration, all doubts concerning the scope of arbitration, must be resolved in favor of arbitration. Molecular Analytical Systems v. Ciphergen Biosystems, Inc., 186 Cal.App.4th 696, 705 (2010); Hayes Children Leasing Co. v. NCR Corp., 37 Cal.App.4th 775, 788 (1995). The burden falls on the party opposing arbitration to demonstrate that a statute or contract does not require arbitration of the dispute in question. Coast Plaza Doctors Hosp. v. Blue Cross of California, 83 Cal.App.4th 677, 687 (2000). If there is any reasonable doubt as to whether an arbitration provision applies, “the doubt must be resolved in favor of arbitration, not against it.” Id.; see also Buckhorn v. St. Jude Heritage Medical Group, 121 Cal.App.4th 1401, 1406 (2005).
III. DISCUSSION
A. California Civil Code Section 2860
Arch's Motion to Compel Arbitration relies on the language of section 2860(c), which states unambiguously that “any” disputes concerning attorney's fees should be resolved in final and binding arbitration. Section 2860(c) (emphasis added). Statutory interpretation rules are settled in California, “[i]f the statutory language is unambiguous, we presume the Legislature meant what it said, and the plain meaning of the statute governs.” People v. Toney, 32 Cal.4th 228, 232 (2004).
A plain reading of section 2860(c) establishes that arbitration is required when: (1) the insured selects Cumis counsel; (2) the insurer agrees to the selected Cumis counsel; and (3) there is any dispute regarding Cumis counsel fees. See Cal. Civ. Code § 2860(c). Here, (1) Plaintiffs selected Cumis Counsel on December 12, 2013 (Vredevoogd Decl. ¶ 4); (2) Arch agreed to Plaintiffs' selection and made payments towards Plaintiffs' Cumis counsel (Id. ¶ 4, 5, 11, 12; Cunningham Decl. ¶¶ 3-5); and (3) Arch disputed some of Cumis counsel's billings under section 2860. (Lyons Decl. ¶ 5, Ex. 4.) Specifically, Arch contends that Cumis counsel's rate is unreasonably high, and some fees billed were for time spent on matters unrelated to, or unnecessary for the defense of, the underlying action.
*3 California courts have held that arbitration under section 2860 is mandatory. For example, in Compulink Management v. St. Paul Fire & Marine, 169 Cal.App.4th 289, 296-297 (2008), the insurer sought to compel arbitration based on the express language of section 2860, while the insured asserted that “arbitration is required only in cases where the sole issue is independent counsel's billing rate or hours.” Id. at 296. The court disagreed with the insured and held that the plain language of the statute is clear: “It requires arbitration of any and all Cumis fee disputes...On its face, section 2860 does not contain an exception for fee disputes where other claims or issues are alleged.” Id. (emphasis added).
See, e.g., Long v. Century Indemnity Co, 163 Cal.App.4th 1460 (2008) (holding that the appropriate remedy for a Cumis fee dispute was not litigation, but to move to compel arbitration, even when breach of contract and bad faith are alleged); see also Behnke, 196 Cal.App.4th at 1450 (granting insurer's motion to compel arbitration where plaintiff's complaint alleged causes of action for breach of contract, bad faith, equitable estoppel and fraud); see also Wallis v. Centennial Insurance Co., 982 F.Supp.2d 1114, 1122-1123 (E.D. Cal. 2013) (granting insurer's motion to compel arbitration under section 2860 where the insured brought claims for breach of the duty to defend and bad faith).
At the motion hearing, Plaintiffs' counsel argued again-without providing case citations-that “a string” of California Court of Appeal and California Supreme Court cases, as well as the “plain language” of section 2860 bar an arbitrator from resolving anything other than a dispute over fee rates. This argument lacks any merit. Here, as in Compulink, the insured alleged bad faith, which Plaintiffs argue prevents arbitration under section 2860 (Opp. at 12). In Compulink, however, the court held that presence of a bad faith allegation does not prevent a court from compelling a Cumis fee dispute to arbitration. Id. Hence, section 2860 requires courts to compel arbitration of any and all Cumis fee disputes, even where other claims such as bad faith or breach of contract are alleged.
Plaintiffs' counsel cited Intergulf Development v. Superior Court, 183 Cal.App.4th 16 at the motion hearing for the general proposition that only disputes about hourly rates are subject to section 2860 arbitration, and that before compelling arbitration, a trial court must determine first whether there was a duty to defend and if that duty had been breached. This argument fails for a number of reasons.
First, Intergulf is factually distinguishable from this case. For example, in Intergulf, whether the insurer had a duty to defend the insured had not been resolved. Here, there is no dispute that Arch had a duty to defend Plaintiffs. Moreover, Arch agreed to defend Plaintiffs whereas the insurer in Intergulf never responded to the insured's defense tender. Thus, Intergulf's holding that a trial court should determine whether an insurer has a duty to defend before compelling arbitration has no bearing on this case. Second, the plain language of the statute, i.e., the use of the word “any, ” requires the arbitration of Cumis fee disputes beyond hourly rates. Hence, as every claim alleged by Plaintiffs is derivative of the Cumis fee dispute, the entire matter should be ordered to arbitration.
Plaintiffs argue that the “gravamen” of the case is Arch's alleged breach of contract and bad faith. (Opp. at 12.) Arch counters that the Cumis fee dispute under section 2860 is the “gravamen” of the case. (Reply at 7.) Here, the evidence submitted consists mostly of communications between the parties concerning bill rates, claims of excessive and inappropriate Cumis billing, and audits of Cumis bills. This evidence establishes that the Cumis fee issues are at the core of this dispute. (See Scott Decl. ¶¶ 6-24, Exs. 1-10; Lyons Decl. ¶¶ 2-8, 10, 12-14, Exs. 1-7, 9, 11-13.) The breach of contract and bad faith allegations derive from the fee dispute. In other words, if there were no fee dispute, there would be no basis for the breach of contract or bad faith allegations.
B. Waiver of Section 2860
*4 Plaintiffs argue that Arch waived its arbitration rights under section 2860 because it failed to reimburse defense expenditures in the underlying litigation in a timely manner. They cite two cases in support of this position: J.R. Marketing, L.L.C. v. Hartford Casualty. Insurance Company, 216 Cal.App.4th 1444 (2013), aff'd, 61 Cal.4th 988 (2015) and Travelers Indemnity Company of Connecticut v. Centex Homes, 2015 WL 5836947, at *4 (N.D. Cal. Oct. 7, 2015). Plaintiffs contend that J.R. Marketing and Centex hold that “an insurer that breaches its duty to defend in any way forfeits any rights it might have had under Civil Code § 2860” (emphasis in original). (Opp. at 6.)
J.R. Marketing and Centex are factually distinguishable from this case. Both cases involved insurers that denied a defense tender and did not agree to Cumis counsel. Here, in contrast, Arch accepted Plaintiffs' tender, appointed Cumis counsel, while disputing what Arch considers Cumis counsel's excessive rates and unnecessary bills. (Long Decl., Ex. 2; Vredevoogd Decl. ¶¶ 5, 6, 8, Exs. 3, 5.) Hence, neither case supports Plaintiffs' contention that Arch waived its rights under section 2860.
Plaintiffs also rely in vain on Travelers Indemnity Company of Connecticut v. Centex Homes, 2015 WL 5836947, at *4 (N.D. Cal. Oct. 7, 2015). In Centex, the insurer declined to defend the insured on two occasions and refused for months to defend the insured on two other occasions. Id. *2, 4. When the insurer agreed to defend, it did not let the insured choose Cumis counsel. Id. at *1. Again, not only do the factual differences between the present case and Centex make it distinguishable, but the Centex court considered only whether the insurer's pattern of long delays in agreeing to defend resulted in the insurer losing its right to control the defense. Id. at *1. In other words, Centex did not involve arbitration or section 2860; it involved a loss of right to control an insured's defense. Its analysis is not relevant here.
Similarly, Plaintiffs cite J.R. Marketing and Centex for the general proposition that if an insurer does not pay Cumis counsel within 30 days of being invoiced, the insurer breaches its duty to defend and waives its arbitration rights under section 2860. (Opp. at 6-7.) Neither J.R. Marking nor Centex stand for this proposition. The J.R. Marketing court entered a case-specific enforcement order after the insurer ignored the court's previous orders. This enforcement order directed the insurer to pay legal invoices within 30 days and “precluded [it] from invoking the rate provisions of Section 2860.” J.R. Marketing, 216 Cal.App.4th at 993.
Arch contends that section 2860 's plain language and case law supports its position that it may refuse to pay excessive and unreasonable Cumis fee amounts without waiving its rights under section 2860. See Behnke v. State Farm Gen. Ins. Co., 196 Cal.App.4th 1443 (2011); Wallis v. Centennial Insurance Co., 982 F.Supp.2d 1114 (E.D. Cal. 2013). In Behnke, the insurer timely accepted the defense of the insured and agreed to Cumis counsel; however, it did not agree to excessive rates charged by Cumis counsel. Behnke, 196 Cal.App.4th at 1459-60. The insured alleged its insurer breached its duty to defend and acted in bad faith when it “ceased making any payment for defense fees and costs beginning in September 2003 and when it failed to make any payment for defense fees incurred on his behalf for over a year thereafter.” Id. at 1468. Despite such delays in payment, which were longer than those alleged in Plaintiffs' Complaint and Partial Motion for Summary Judgment, the fee dispute in Behnke was compelled to a mandatory arbitration pursuant to section 2860. Id. at 1451.
*5 In Wallis, the insurer accepted the insured's defense tender and agreed to the insured's request for Cumis counsel. Wallis, 982 F.Supp.2d at 1117. Later, billing issues arose over Cumis counsel's rates and the slow payment of its bills. Id. at 1118. The insurer began auditing bills, making deductions for excessively high rates, and ultimately paid Cumis counsel amounts less than the full amounts billed. Id. The court held that “plaintiff's claims seeking reimbursement of unpaid fees and costs ... are subject to section 2860 arbitration.” Id. at 1123.
Accordingly, Plaintiffs provide no authority, binding or otherwise, to support its argument that Arch waived its arbitration rights under section 2860 by disputing Cumis counsel's fees and billings. On the contrary, the Court finds persuasive authority holding that Arch is entitled to refuse to pay any amounts in excess of what is required under section 2860 or which are not reasonable and necessary for Plaintiffs' defense in the underlying action.
C. Section 2860 In Federal Courts
Plaintiffs argue that a “dispute over Fontana's counsel's fees cannot be compelled to arbitration because fee disputes in federal actions are not subject to § 2860 arbitration.” (Opp. at 11.) This argument fails. First, federal courts have often ordered arbitration pursuant to section 2860. Second, the Erie doctrine requires a federal court, sitting in diversity, to apply the substantive law of the forum state. Erie R. Co. v. Tompkins, 304, U.S. 64, 77-78 (1938). Here, the substantive law at issue is California Civil Code Section 2860.
See Karsant Family Ltd. P'ship v. Allstate Ins. Co., 2009 WL 188036, at *5-6 (N.D. Cal. Jan. 27, 2009); Arrowwood Indem. Co. v. Bel Air Mart, 2013 WL 2434830 (E.D. Cal. June 4, 2013); 88 King St., LLC v. The Travelers Companies, Inc., 2009 WL 330236 (N.D. Tex. Feb. 10, 2009); Wallis, 982 F.Supp.2d 1114 (2013).
Moreover, the cases Plaintiffs cite for the proposition that section 2860 cannot be applied by federal courts do not so hold. In Caiafa, an insurer brought a federal action against its insured's Cumis counsel for fraud based on the allegation that Cumis counsel violated federal RICO laws. Id. at 802. Cumis counsel petitioned the state court for arbitration of the fee dispute under section 2860. Id. The state court denied Cumis counsel's petition to compel and stayed the state court action pending resolution of the federal RICO case. Id. Caiafa did not hold, as Plaintiffs suggest, that a federal court, sitting in diversity, was free to disregard Erie, and not apply the state substantive law of section 2860. Rather, the Caiafa court ruled that, in light of the complexities of the earlier filed federal RICO action, and in the interest in comity between state and federal courts, the state court did not abuse its discretion in refusing to grant the petition to compel arbitration.
Throughout the moving papers Plaintiffs' counsel inaccurately cite cases for propositions for which they do not stand.
IV. CONCLUSION
For the reasons stated above, the Court COMPELS arbitration of the entire matter, i.e., all claims in Plaintiffs' Complaint, and renders MOOT Plaintiffs' Motion for Partial Summary Judgment and Defendant's Motion to Dismiss.
IT IS SO ORDERED.