Judge Teresa A. Beaudet, Case 21STCV15469 2023-05-02 Tentative Ruling

Plaintiff Leart, Inc. (“Plaintiff”) filed this action on April 23, 2021 against the Gemological Institute of America, Inc. (“GIA”) and Those Certain Underwriters at Lloyd’s, London (“Lloyd’s”) (jointly, “Defendants”). The operative First Amended Complaint (“FAC”) was filed on December 23, 2021, and asserts causes of action for (1) res ipsa loquitur, (2) negligence, (2) fraudulent inducement, (4) breach of insurance contract (failure to provide insurance), (5) breach of warranty of fitness of purpose, (6) trespass to chattel, (7) breach of insurance contract, and (8) breach of the implied covenant of good faith.[1]

On August 29, 2022, the Court issued an Order granting GIA’s motion to compel arbitration as to Plaintiff’s claims against GIA.

Lloyd’s now moves for an order compelling arbitration and staying this action. Plaintiff opposes.

The Court denies Lloyd’s request for judicial notice filed in support of the reply. The Court notes that “¿[t]he general rule of motion practice…is that new evidence is not permitted with reply papers.¿” (¿Jay v. Mahaffey¿(2013) 218 Cal.App.4th 1522, 1537¿.)

In a motion to compel arbitration, the moving party must prove by a preponderance of evidence the existence of the arbitration agreement and that the dispute is covered by the agreement. The burden then shifts to the resisting party to prove by a preponderance of evidence a ground for denial (e.g., fraud, unconscionability, etc.). (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413.)

Generally, on a petition to compel arbitration, the court must grant the petition unless it finds either (1) no written agreement to arbitrate exists; (2) the right to compel arbitration has been waived; (3) grounds exist for revocation of the agreement; or (4) litigation is pending that may render the arbitration unnecessary or create conflicting rulings on common issues. (Code Civ. Proc., § 1281.2; Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 218-219.)

“California has a strong public policy in favor of arbitration and any doubts regarding the arbitrability of a dispute are resolved in favor of arbitration.” (Coast Plaza Doctors Hospital v. Blue Cross of California (2000) 83 Cal.App.4th 677, 686.) “This strong policy has resulted in the general rule that arbitration should be upheld unless it can be said with assurance that an arbitration clause is not susceptible to an interpretation covering the asserted dispute.” (Ibid. [internal quotations omitted].) This is in accord with the liberal federal policy favoring arbitration agreements under the Federal Arbitration Act (“FAA”), which governs all agreements to arbitrate in contracts “involving interstate commerce.” (9 U.S.C. § 2, et seq.; Higgins v. Superior Court (2006) 140 Cal.App.4th 1238, 1247.)

Lloyd’s submits that Plaintiff entered into an agreement with GIA on November 25, 2019 (the “Client Agreement”), which provides, inter alia, that “except as expressly provided below in this Section 24 (Dispute Resolution and Arbitration/Class Action Waiver Provision), all disputes, suits, actions, and claims (‘Disputes’) related to or arising out of this Agreement shall be resolved by binding arbitration as provided in this Section 24 (Dispute Resolution and Arbitration/Class Action Waiver Provision). The parties acknowledge that, except with respect to GIA’s rights regarding Special Disputes (as defined below), they are waiving their right to bring claims and seek remedies in court, including the right to a jury trial, and that their disputes will be resolved by arbitrators, not a court.” (Wellman Decl., ¶ 2, Ex. 2, § 24.)

As set forth above, the seventh and eighth causes of action of the FAC are alleged against Lloyd’s. In the motion, Lloyd’s asserts that these causes of action “rel[y] upon the Client Agreement and its provision that GIA will maintain a policy of insurance.” (Mot. at p. 10:20-22.)

Lloyd’s notes that in the FAC, Plaintiff alleges that “as part of the agreement between Plaintiff and Defendant GIA whereby the Stone was delivered to the GIA, GIA represented to Plaintiff that Defendant GIA maintained and would continue to maintain a standard form jewelers block insurance policy (or substantially similar insurance that is available in the jurisdiction where GIA operates) to insure the Stone against loss or damage while in GIA’s possession,” and that “Plaintiff is therefore effectively a named co-insured on that Lloyd’s Policy to reflect Plaintiff’s position as the actual owner of the Stone that was sent to the GIA and insured under the LLOYD’s Policy.” (FAC, ¶¶ 16, 18.) In the seventh cause of action for breach of insurance contract, Plaintiff alleges that Lloyd’s “breached the contract of insurance with Plaintiff, including, without limit, (a) failing to indemnify Plaintiff LEART for its loss and damage to the Stone; (b) failing and refusing to fully and properly investigate and pay for and investigation of the damages Stone, (c) failing and refusing to provide proper and adequate insurance coverages for the loss and damage to Plaintiff’s Stone.” (FAC, ¶ 49.) In support of the eighth cause of action for breach of the implied covenant of good faith, Plaintiff alleges, inter alia, that Lloyd’s “failed and refused to recognize Plaintiff’s rights under the insurance policy, thus completely failing and refusing to provide full indemnity under the Policy as agreed to and required.” (FAC, ¶ 57.)

In support of the assertion that Plaintiff’s seventh and eighth causes of action rely upon the Client Agreement, Lloyd’s cites to paragraph 13.1 of the agreement, which provides, “GIA shall maintain (or cause to be maintained on its behalf) a standard form jewelers block insurance policy (or substantially similar insurance that is available in the jurisdiction where GIA operates) to insure an Article against loss or damage while in GIA’s possession. You agree that the liability of GIA and its employees and agents for any loss of, mis-delivery of, or damage to an Article, even if caused by or resulting from the negligence or other fault of GIA or any of its employees or agents, shall be limited to the amount paid to GIA by its insurance carrier and subsequently paid by GIA to you, if any. In any event, GIA and its employees and agents shall not be personally liable for any such loss of, mis-delivery of, or damage to any Article, even if this limited remedy fails in its essential purpose. This Section 13.1 shall not operate in a way that limits GIA’s liability for GIA’s acts or omissions for which liability may not be limited under applicable law.” (Wellman Decl., ¶ 2, Ex. 2, § 13.1.)

Lloyd’s appears to acknowledge in the motion that it is not a party to the Client Agreement. The Court notes that the Client Agreement provides, inter alia, that “[t]his Agreement is entered into by the undersigned client (‘you’ or the ‘Client’) and, except as set forth below in the Cover Pages, Gemological Institute of America, Inc., a nonprofit organization, (‘GIA’)…” (Wellman Decl., ¶ 2, Ex. 2.) However, Lloyd’s asserts that Plaintiff is estopped from arguing that Lloyd’s may not enforce the arbitration clause in the Client Agreement.

Lloyd’s cites to Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 706, where the Court of Appeal noted that under the doctrine of equitable estoppel, “as applied in both federal and California decisional authority, a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are intimately founded in and intertwined with the underlying contract obligations. By relying on contract terms in a claim against a nonsignatory defendant, even if not exclusively, a plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement. The rule applies to prevent parties from trifling with their contractual obligations. Where the equitable estoppel doctrine applies, the nonsignatory has a right to enforce the arbitration agreement.” (Internal quotations and citations omitted.)

Lloyd’s asserts that “Plaintiff’s entire basis for suing [Lloyd’s] depends upon its allegation that GIA, in the Client Agreement, ‘represented’ to Plaintiff that GIA would maintain a policy of insurance,” and that “[u]nder the doctrine of equitable estoppel, Plaintiff is estopped from simultaneously arguing that the Client Agreement provides a basis for its claim against [Lloyd’s] and avoiding its obligation to arbitrate this dispute pursuant to the arbitration clause in the Client Agreement.” (Mot. at p. 12:10-11; 12:17-19.)

In the opposition, Plaintiff asserts that it “never agreed to arbitrate with any insurer, and the law in California State and under Federal law, is clear that a non-signatory has no rights to enforce arbitration by asserting an estoppel as a matter of law.” (Opp’n at p. 7:8-11.) In support of this assertion, Plaintiff cites to Glassman v. McNab (2003) 112 Cal.App.4th 1593. The Court does not find that Glassman stands for the proposition that “a non-signatory has no rights to enforce arbitration by asserting an estoppel.” (Opp’n at p. 7:9-10.) In Glassman, “[w]hen respondent Paul R. Glassman, an attorney, requested payment for his services from appellants Cecil McNab and Scirocco Partners, appellants sought arbitration of Glassman’s claim pursuant to Business and Professions Code section 6200 et seq. The arbitrators subsequently issued an award in Glassman’s favor, and the trial court confirmed the award. Appellants contend[ed] that the trial court erred, arguing that the arbitrators exceeded their jurisdiction under Business and Professions Code section 6200 et seq., in determining that an attorney-client relationship existed between appellants and Glassman.” (Glassman v. McNab, supra, 112 Cal.App.4th at p. 1595.) The Court of Appeal affirmed. (Ibid.)

The Glassman Court “conclude[d] that section 6200 et seq. permits the parties to agree that the arbitrators may decide the existence of an attorney-client relationship.” (Glassman v. McNab, supra, 112 Cal.App.4th at pp. 1600-1601.) The Court noted that “[a]ppellants nonetheless argue otherwise, pointing to the proposition cited in Stites that subject matter jurisdiction generally cannot be conferred by consent, waiver, or estoppel,” and found that “[i]n our view, appellants misapprehend the import of this proposition, which traces its origins to case law concerning the subject matter jurisdiction of courts of law.” (Id. at p. 1601 [internal quotations omitted].)

Plaintiff also cites to Rajagopalan v. NoteWorld, LLC (9th Cir. 2013) 718 F.3d 844, 847, a non-binding federal case, in which the Ninth Circuit Court of Appeals found that “[t]he district court also properly concluded that NoteWorld may not invoke the arbitration clause on the basis of equitable estoppel. We have never previously allowed a non-signatory defendant to invoke equitable estoppel against a signatory plaintiff, and we decline to expand the doctrine here. Equitable estoppel precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes. Where other circuits have granted motions to compel arbitration on behalf of non-signatory defendants against signatory plaintiffs, it was essential in all of these cases that the subject matter of the dispute was intertwined with the contract providing for arbitration.” (Internal quotations and citations omitted.) The Rajagopalan Court noted that “[h]ere, Rajagopalan does not contend that NoteWorld or any other party breached the terms of the contract. Instead, Rajagopalan has statutory claims that are separate from the [] contract itself.” (Id. at p. 847 [internal quotations omitted].) The Court found that “[b]ecause Rajagopalan’s statutory claims d[o] not arise out of or relate to the contract that contained the arbitration agreement, NoteWorld may not compel Rajagopalan to arbitrate his claims on the basis of equitable estoppel.” (Id. at p. 848 [internal quotations and citations omitted].) Here, by contrast, Plaintiff does not allege statutory claims against Lloyd’s. Rather, Plaintiff alleges causes of action against Lloyd’s for breach of insurance contract and breach of the implied covenant of good faith.

In addition, Lloyd’s notes that Ninth Circuit cases after Rajagopalan have applied the equitable estoppel doctrine. Lloyd’s cites to Franklin v. Cmty. Reg'l Med. Ctr. (9th Cir. 2021) 998 F.3d 867, 876, where the Ninth Circuit Court of Appeals found that “Franklin’s claims against the Hospital are ‘intimately founded in and intertwined with’ her employment contract with USSI. We thus hold that Franklin is equitably estopped from avoiding arbitration of her claims against the Hospital.” The Franklin Court noted that “[a]lthough Franklin points out that we have ‘never previously allowed a non-signatory defendant to invoke equitable estoppel against a signatory plaintiff,’ Rajagopalan v. NoteWorld, LLC, 718 F.3d 844, 847 (9th Cir. 2013) (per curiam), neither have we foreclosed that possibility. In Kramer, we recognized that equitable estoppel applies when the plaintiff’s claims rely on the written agreement, for instance when the claims are ‘intimately founded in and intertwined with the underlying contract obligations.’” (Id. at p. 873.)

Plaintiff also asserts that in “[t]he underlying agreement with Defendant the GIA requires insurance in the event of any insurable loss or damage to Plaintiff’s property, but that term between the parties does not give Defendant Lloyd’s any right to assert that insurance was somehow intertwined, necessary, or related to the transaction in a way allowing Defendant Lloyds’ to invoke arbitration against the parties.” (Opp’n at p. 8:28-9:4.)

However, the Court agrees with Lloyd’s that Plaintiff’s causes of action against Lloyd’s here rely upon the Client Agreement. As set forth above, Plaintiff alleges that “[t]o induce Plaintiff to cause the stone to be delivered to Defendant GIA and, as part of the agreement between Plaintiff and Defendant GIA whereby the Stone was delivered to the GIA, Defendant GIA represented to Plaintiff that Defendant GIA maintained and would continue to maintain a standard form jewelers block insurance policy (or substantially similar insurance that is available in the jurisdiction where GIA operates) to insure the Stone against loss or damage while in GIA’s possession.” (FAC, ¶ 16, emphasis added.) Plaintiff alleges that “[i]n that regard, Plaintiff is informed and believes that Defendant GIA was and is insured by Defendant LLOYD’s,” and that “Plaintiff is therefore effectively a named co-insured on that Lloyd’s Policy.” (FAC, ¶¶ 17-18.) Plaintiff alleges that Lloyd’s “breached the contract of insurance with Plaintiff,” and that “[t]he conduct of defendant LLOYD’s…as alleged herein, are violations of the covenant of good faith and fair dealing implied by law in the Policy…” (FAC, ¶¶ 49, 58.) As noted in Molecular Analytical Systems v. Ciphergen Biosystems, Inc., supra, 186 Cal.App.4th at page 715, “[c]laims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable.” (Internal quotations omitted.)

Based on the foregoing, the Court finds that Lloyd’s has established that an arbitration agreement exists and that it covers the claims asserted against Lloyd’s by Plaintiff in this lawsuit.

In the opposition, Plaintiff contends that “it would be improper and prejudicial to adjudicate the underlying loss claim in the same arbitration as insurance coverage dispute and bad faith claims.” (Opp’n at p. 11:23-24.) But as noted by Lloyd’s, Plaintiff alleges causes of action against both Lloyd’s and GIA in the instant action (See FAC), and thus appears to be arguing that its own action is improper.

In addition, Plaintiff does not provide legal authority demonstrating it would be “improper” to “adjudicate the underlying loss claim in the same arbitration as insurance coverage dispute and bad faith claims.” (See Opp’n at p. 11:23-24.) Plaintiff references Evidence Code section 1155, but that Code section provides that “[e]vidence that a person was, at the time a harm was suffered by another, insured wholly or partially against loss arising from liability for that harm is inadmissible to prove negligence or other wrongdoing.” (Evid Code., § 1155.) The Court does not see how this provision is relevant to whether Lloyd’s may compel arbitration of Plaintiff’s claims here.

Code of Civil Procedure section 1281.4 states that the court shall stay the action or proceeding if the court has ordered arbitration. (Code Civ. Proc., § 1281.4.) Accordingly, the case is stayed pending completion of arbitration between Plaintiff and Lloyd’s.

For the foregoing reasons, Lloyd’s motion to compel arbitration is granted as to Plaintiff’s claims against Lloyd’s.

The Court orders that the entire action is stayed pending completion of arbitration of Plaintiff’s arbitrable claims against Lloyd’s.

The Court sets an arbitration completion status conference on May 2, 2024 at 10:00 a.m. in Dept. 50. The arbitrating parties are ordered to file a joint report regarding the status of the arbitration by _______________, with a courtesy copy delivered directly to Dept. 50.

[1]The first, second, third, fourth, fifth, and sixth causes of action are alleged against GIA only. The seventh and eighth causes of action are alleged against Lloyd’s only.

LEART, INC., Plaintiff, vs. THE GEMOLOGICAL INSTITUTE OF AMERICA, et al., Defendants.	Case No.:	21STCV15469
	Hearing Date:	May 2, 2023
	Hearing Time:	10:00 a.m.
	[TENTATIVE] ORDER RE: DEFENDANT CERTAIN UNDERWRITERS AT LLOYD’S AMENDED MOTION TO STAY ACTION AND COMPEL ARBITRATION

Superior Court of California

County of Los Angeles

Department 50