Opinion
No. 2:07-cv-02542-MCE-DAD.
June 11, 2008
MEMORANDUM AND ORDER
The Nevada Irrigation District ("NID") filed a demand for arbitration against HCC Life Insurance Company ("Plaintiff" or "HCC Life"), Managed Benefit Administrators, LLC ("MBA"), and Anthem Blue Cross Life and Health Insurance Company ("BC") arising out of a $3,000,000 claim under NID's insurance policy. In the arbitration proceeding, Plaintiff filed a cross-demand against MBA and BC, asserting that, to the extent Plaintiff is liable to NID, MBA and BC are liable to Plaintiff.
After the arbitration panel dismissed the cross-demand, Plaintiff brought this action against MBA and BC. Presently before the Court is Plaintiff's Motion to Compel Arbitration. Because no contract exists between HCC Life and MBA or between HCC Life and BC, and because this case does not satisfy the criteria under which a nonparty to an arbitration agreement is bound by another party's consent, Plaintiff's Motion to Compel Arbitration is denied.
Because oral argument will not be of material assistance, the Court orders this matter submitted on the briefs. E.D. Cal. Local Rule 78-230(h).
BACKGROUND
HCC Life provided a stop loss insurance policy to NID. Under the policy, NID established a self-funded health plan for its employees, while Plaintiff insured NID for medical expenses in excess of the policy's deductibles. To be subject to reimbursement under the policy, NID's expenses had to be both covered by the policy and by NID's self-funded health plan. The agreement between Plaintiff and NID required that any controversy or dispute arising out of or relating to the policy would be settled by arbitration.Defendant MBA, formerly known as Acclaim Administrators, and Defendant BC, formerly known as BC Life Health Insurance Company, contracted with NID to review, process, adjudicate, and pay or deny claims under NID's self-funded health plan. Both MBA and BC have individual contracts with NID and each of those contracts contain arbitration clauses.
Stephen Paulus, a former NID employee covered by NID's insurance policy, underwent surgery at Sutter Memorial Hospital on September 22, 2005 to repair his mitral heart valve. As a result of alleged complications from the surgery, Mr. Paulus died on November 5, 2005. Sutter Memorial Hospital submitted approximately $3,000,000 in charges to NID. NID paid at least part of this claim and, on October 24, 2006, Plaintiff paid $423,282.98.
NID filed a demand for arbitration with the American Arbitration Association against Plaintiff, MBA, and BC seeking reimbursement of $1,500,000 from Plaintiff under the stop loss policy. NID also sought exemplary and punitive damages against Plaintiff. NID alleged that "MBA breached its Administrator Services Agreement and negligently performed its third party administrator duties, or BC Life Health negligently performed its utilization review function, and as a consequence NID paid, and has been denied reimbursement for, medical expenses for . . . Stephen H Paulus. . . ." Compl. 2:16-20. The arbitration proceeding is currently pending.
Plaintiff filed a cross-demand in the arbitration proceeding, seeking reimbursement from MBA and BC for amounts already paid to NID and for any future amounts owed to NID. On October 9, 2007, the arbitration panel granted MBA and BC's motion to dismiss the cross-demand, but did not provide an explanation for the decision.
Plaintiff subsequently brought this action against BC and MBA. Plaintiff seeks the same relief it sought in its cross-demand that the arbitration panel dismissed: equitable subrogation, equitable contribution, equitable indemnity, and declaratory relief. Plaintiff alleges that BC and MBA failed to perform their duties under their respective contracts with NID and that their actions resulted in excessive and unnecessary medical procedures and services, experimental and investigative medical procedures and services, and charges above reasonable and customary amounts. Plaintiff now moves to compel arbitration on those claims.
STANDARD
"An order to arbitrate . . . should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." United Steelworkers of Am. v. Warrior Gulf Navigation Co., 363 U.S. 574, 582-83 (1960). Any doubts should be resolved in favor of arbitration. Id. at 583. In making this determination, a court looks only at whether the parties agreed to arbitrate the claim, not to the merits of the of the claim itself. AT T Techs. Inc., 475 U.S. at 649-50. In determining the existence of an agreement to arbitrate, the district court looks to "general state-law principles of contract interpretation, while giving due regard to the federal policy in favor of arbitration." Wagner v. Stratton Oakmont, Inc., 83 F.3d 1046, 1049 (9th Cir. 1996).
"On petition of a party to an arbitration agreement . . . the court shall order the [parties] to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists." Cal. Civ. Proc. Code § 1281.2. The right to arbitration depends on the existence of an agreement to arbitrate, and a party cannot be forced to arbitrate in the absence of such an agreement. Frederick v. First Union Secs., Inc., 100 Cal. App. 4th 694, 697 (Ct.App. 2002). "The strong public policy in favor of arbitration does not extend to those who are not parties to an arbitration agreement, and a party cannot be compelled to arbitrate a dispute that he has not agreed to resolve by arbitration." Lee v. S. Cal. Univ. for Prof'l Studies, 148 Cal. App. 4th 782, 786 (Ct.App. 2007). "Very limited circumstances exist under which a nonparty to an arbitration agreement can be bound by someone else's consent. . . ." Id.
Because the existence of an arbitration agreement is a statutory prerequisite to granting a petition to compel arbitration, the petitioner bears the burden of proving the agreement exists by a preponderance of the evidence. Rosenthal v. Great W. Fin. Secs. Corp., 14 Cal. 4th 394, 413 (Cal. 1996).
ANALYSIS
Under the Federal Arbitration Act (FAA), arbitration agreements "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.
While the FAA and the California Arbitration Act (CAA) express a strong public policy in favor of enforcing arbitration agreements, this policy does not arise until an enforceable agreement is established. Baker v. Osborne Dev. Corp., 159 Cal. App. 4th 884, 892 (Ct.App. 2008). "[A]lthough the FAA governs the interpretation of arbitration clauses, California law governs whether an arbitration agreement has been formed in the first instance, and whether an arbitration agreement exists is an issue for judicial determination." Id. at 893.
The right to arbitration depends upon contract. Romo v. Y-3 Holdings, Inc., 87 Cal. App. 4th 1153, 1158 (Ct.App. 2001). When presented with a petition to compel arbitration, a trial court's first task is to determine whether the parties have in fact agreed to arbitrate the dispute. Id. Generally, one must be a party to an arbitration agreement to be bound by it. Buckner v. Tamarin, 98 Cal. App. 4th 140, 142 (Ct.App. 2002). One of the narrow exceptions in which a court may enforce an arbitration agreement is where a nonsignatory and one of the parties to the agreement have a preexisting agency relationship that makes it equitable to impose the duty to arbitrate on either of them.Nguyen v. Tran, 157 Cal. App. 4th 1032, 1036-37 (Ct.App. 2007).
Separate contracts exist between Plaintiff and NID, MBA and NID, and BC and NID; and all three include arbitration clauses. No contract exists, however, between Plaintiff and MBA or between Plaintiff and BC. To grant Plaintiff's Motion, this Court would have to find an agency relationship between BC and NID, and between MBA and NID.
Such a relationship would render Plaintiff's claims against BC and MBA subject to arbitration under Plaintiff's contract with NID.
As their respective contracts with NID reveal, BC and MBA were independent contractors and not agents of NID. The Administrative Services Agreement between NID, MBA, and BC states that "[BC] is an independent contractor. Nothing in this Agreement shall create, or be construed to create, the relationship of employer and employee between [NID] and [BC] or as principal and agent. . . ." (Newman Decl. Ex. G at 73.) The Administrative Services Agreement between NID and MBA similarly states that "MBA is an independent contractor. Nothing in this Agreement shall create, or be construed to create, the relationship of employer and employee between [NID] and MBA, or as principal and agent other than as provided in this agreement. . . ." (Newman Decl. Ex. H at 102.) While "[a]gency and independent contractorship are not necessarily mutually exclusive legal categories," Mottola v. R. L. Kautz Co., 199 Cal. App. 3d 98, 108 (Ct.App. 1988), this Court finds particularly compelling BC and MBA's own explicit characterization of their relationship with NID as independent contractors and not agents.
An agent is one who represents the principal in dealings with third persons. Cal. Civ. Code § 2295. Some of BC and MBA's responsibilities, as described in their respective contracts with NID (Newman Decl. Exs. G H), are akin to those of an agent acting on behalf of a principal.
For purposes of an arbitration agreement, however, California law does not permit such tenuous relationships as those existing between BC and NID and between MBA and NID to bind nonsignatories to the arbitration agreements of another. Indeed, all cases Plaintiff cites demonstrate a much closer relationship between principal and agent. See, e.g., Letizia v. Prudential Bache Secs., Inc., 802 F.2d 1185 (9th Cir. 1986) (nonsignatory account executives bound by arbitration provision in employer Prudential's brokerage agreement with plaintiff); Thomas v. Perry, 200 Cal. App. 3d 510 (2nd Dist. 1988) (former employee bound by arbitration provision in employment contract in suit for breach of oral contract against former employer and two of its employees); Dryer v. Los Angeles Rams, 40 Cal. 3d 406, 418 (1985) (nonsignatory owners, operators, and managing agents bound by arbitration provision in employment contract between plaintiff and employer). Because MBA and BC were independent contractors and not agents of NIC, they do not fall within the agency exception to the general rule that only parties to an arbitration agreement are bound by it.
Plaintiff also contends that, as an equitable subrogee of NID, its claims against BC and MBA are subject to arbitration under their contracts with NID. The purpose of equitable subrogation is "to place the burden for a loss on the party ultimately liable or responsible for it and by whom it should have been discharged, and to relieve entirely the insurer or surety who indemnified the loss and who in equity was not primarily liable therefor. . . ."Morgan Creek Residential v. Kemp, 153 Cal. App. 4th 675, 695 (3d Dist. 2007).
"The subrogated insurer is said to `stand in the shoes' of its insured, because it has no greater rights than the insured and is subject to the same defenses assertable against the insured."Fireman's Fund Ins. Co. v. Md. Cas. Co., 65 Cal. App. 4th 1279, 1292 (1st Dist. 1998). Under the general rule, however, an insurer is not entitled to subrogation for a debt until that debt has been fully discharged. Sapiano v. Williamsburg Nat. Ins. Co., 28 Cal. App. 4th 533, 536 (2nd Dist. 1994). "In other words, the entire debt must be paid. Until the creditor has been made whole for its loss, the subrogee may not enforce its claim based on its rights of subrogation." Id.
Plaintiff is not entitled to equitable subrogation of any potential NID claims because Plaintiff has not yet paid the entire amount due on Mr. Paulus's claim. In its Complaint, Plaintiff concedes as much: "HCC Life asserts that it is entitled, through subrogation, to reimbursement from MBA and BC for any amounts that it pays for the Stephen Paulus claim. . . ." Compl. 10:14-16 (emphasis added). The contrast with a later statement in the same paragraph, that "HCC Life further asserts that MBA and/or BC . . . are obligated to pay and hold HCC Life harmless for amounts that HCC Life has already paid to NID. . . ." Compl. 10:18-20, clarifies that Plaintiff has not yet paid the entire Paulus claim. Plaintiff is therefore not entitled to equitable subrogation, and cannot compel arbitration under the arbitration provisions of BC and MBA's contracts with NID.
CONCLUSION
No contract exists between Plaintiff and Defendant BC or between Plaintiff and Defendant MBA, and neither Defendant ever agreed to arbitrate disputes with Plaintiff. Because Defendants are independent contractors and not NIC's agents, they do not fall under the narrow exception to the general rule that only parties to an arbitration agreement are bound by it. Plaintiff similarly cannot compel arbitration under the theory it is an equitable subrogee because Plaintiff has not yet fully paid the debt resulting from the Paulus claim. For these reasons, Plaintiff's Motion to Compel Arbitration is DENIED.IT IS SO ORDERED.