Judge Douglas W. Stern, Case 22STCV11454 2023-03-23 Tentative Ruling

Judge: Douglas W. Stern, Case: 22STCV11454, Date: 2023-03-23 Tentative Ruling

Case Number: 22STCV11454 Hearing Date: March 23, 2023 Dept: 68

Matthew S. Garza vs. Certain Underwriters at Lloyd’s of London Subscribing to the Subject Policy, et al., Case No. 22STCV11454

Motion to Compel Arbitration

Moving Parties – Defendants NKSFB, LLC and Nigro Karlin Segal & Feldstein, LLP (NKSFB Defendants)

Opposing Parties – Plaintiff Matthew Garza and Defendant Certain Underwriters at Lloyd’s of London

Moving Party’s Position

In this case, a disability insurance policy was issued to Plaintiff Matthew Garza (Plaintiff) by Defendant Certain Underwriters at Lloyd’s of London (Lloyd’s). When he tried to recover under that policy, Plaintiff’s claim was denied by Lloyd’s because of information that had been filled out in the original policy application. Plaintiff filed this suit against Lloyd’s and other defendants because he claims that someone else filled out the information on the policy application that led to the denial of his claim, and he never had a chance to review that information.

Plaintiff eventually filed a First Amended Complaint, alleging that it was Defendant NKSFB, LLC, that completed the application and provided the false answers on the application. Now, the NKSFB Defendants have filed this motion to compel arbitration based on a 2022 engagement letter and a 2008 engagement letter signed by Plaintiff and which contained arbitration provisions for any disputes between the parties. (Segal Decl., Exs. A and B.) The NKSFB Defendants argue that Plaintiff cannot show surprise or procedural unconscionability, and that the 2008 and 2022 engagement letters are not substantively unconscionable. They request that the case must be stayed until arbitration is complete.

Defendant Lloyd’s Opposition

Defendant Lloyd’s of London filed an opposition to the NKSFB Defendants’ motion to compel arbitration. Lloyd’s opposition is based on CCP § 1281.2(c), which bars the enforcement of arbitration provisions if a party to the arbitration has a pending court action with a third party which arises 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. Plaintiff alleges similar claims against co-Defendants ISI, Gilbert, and Paradigm as to the parties’ alleged failure to ensure that Plaintiff’s policy application was complete and accurate.

Lloyd’s argues that one of the determinative legal issues to resolve liability in this dispute will be which of these four defendants had the legal duty to obtain Plaintiff’s medical records and ensure that the responses contained in the application were accurate. If it is determined that multiple defendants were obligated to do so, then one of the determinative factual issues will be how much liability should be allocated among these defendants. Lloyd’s argues that arbitrating the NKSFB dispute separately from the claims against ISI, Gilbert, Paradigm, none of whom are parties to the arbitration agreement, could lead to conflicting rulings of law or fact.

Determining NKSFB’s responsibility for the inaccurate answers on Plaintiff’s policy application would have a direct impact on Lloyd’s cross-complaint against Defendants Gilbert and Paradigm. Lloyd’s argues that because all of the issues and the liability of the parties are intertwined, then everything should be heard as one case in the Superior Court.

Plaintiff’s Opposition

Plaintiff Garza also argues against the motion to compel arbitration based on CCP § 1281.2(c), arguing that because Plaintiff is seeking to hold NKSFB and the other Defendants liable for providing inaccurate information, then the extent of liability as to one cannot be decided with the presence of the others.

Plaintiff also opposes the motion by arguing that the 2022 engagement letter is not a novation of the 2008 letter. Further, Plaintiff argues that the 2008 letter’s arbitration provision is procedurally and substantively unconscionable

NKSFB’s Reply

The NKSFB Defendants argue that CCP § 1281.2(c) does not apply in this case because what happens in the arbitration is not admissible against the other defendants in the litigation. They argue that either the arbitration should be stayed and the case should proceed, or the case should be stayed and the arbitration should proceed.

They further argue that the 2008 arbitration agreement is not procedurally or substantively unconscionable, and that the 2022 engagement letter applies to Plaintiff’s claims.

Analysis

I. CCP § 1281.2(c) Exception

California Code of Civil Procedure Section 1281.2 states in relevant part:

On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: … (c) 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. … If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party as set forth under subdivision (c), the court (1) may refuse to enforce the arbitration agreement and may order intervention or 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.

Trial courts have “discretion to refuse to enforce an arbitration agreement if a party to the agreement was also a party to related litigation with a third party that creates the risk of conflicting rulings on a common issue of law or fact.” (Mastick v. TD Ameritrade, Inc. (2012) 209 Cal.App.4th 1258, 1265.) After determining that the elements within 1281.2(c) are satisfied, it is within the Court’s discretion to determine the proper method of adjudicating the disputes that are purportedly subject to an arbitration agreement. (Pioneer Take Out Corp. v. Bhavsar (1989) 209 Cal. App.3d 1353, 1357 (“The standard of review for an order staying or denying arbitration under section 1281.2, subdivision (c) is the well-known test for abuse of discretion.”).)

In this case, Plaintiff sued Defendant Lloyd’s in order to enforce an insurance policy to which Lloyd’s had denied a claim. Plaintiff claims that the inaccurate answers on his policy application were the fault of Defendants NKSFB, Paradigm, and Gilbert, meaning that there are claims against third parties that arise out of the same transaction. Accordingly, Lloyd’s filed a cross-complaint against Paradigm and Gilbert, prior to Plaintiff filing an amended complaint which added NKSFB. The liability of NKSFB and the extent to which NKSFB would be liable is tied up in Plaintiff’s similar claims and Lloyd’s cross-claims against Paradigm and Gilbert.

Having the claims against NKSFB heard separately by an arbitrator runs the risk of there being conflicting rulings on common issues of law and fact, particularly if liability will be distributed amongst the co-Defendants. Plaintiff’s claim against NKSFB flows directly from Lloyd’s denial of his insurance policy claim.

Therefore, regardless of the arbitration agreement that may exist between Plaintiff and NKSFB, the Court may use its discretion under CCP § 1281.2(c) to refuse to enforce the arbitration agreement and order the claims against the various Defendants be heard together.

II. Conscionability of the Arbitration Agreements

Though it is not necessary that the Court addresses this, Plaintiff argues that the arbitration agreements in the 2008 and 2022 engagement letters were procedurally and substantively unconscionable. The Court does not find that the agreements were procedurally unconscionable, as the arbitration agreement is clearly visible and Plaintiff was given a chance to review the letters before signing them. The Court also does not find that the agreements would be substantively unconscionable, as the arguments that Plaintiff makes against the agreements, that they should not include an attorney’s fees provision and that there is not a process to select an arbitrator, are without merit. Attorney’s fees provisions are common in arbitration agreements. Further, the 2022 engagement letter provides a clear method by which to select an arbitrator, and while the process in the 2008 letter is less clear, in the absence of a clear agreement for the selection of an arbitrator, the Court would choose the arbitrator.

Accordingly, the Court would not have denied enforcement of the agreements for procedural or substantive unconscionability.

ORDER

1. The NKSFB Defendants’ Motion to Compel Arbitration is DENIED because of the exception to the enforcement of arbitration agreements in CCP § 1281.2(c).