Arrowood Indemnity Company v. Bel Air Mart et al

Filing 59

ORDER signed by Judge John A. Mendez on 6/3/2013 ORDERING that the Court hereby GRANTS Bel Air Mart's 47 Motion to Compel Arbitration and orders that Arrowood submit all issues concerning the amount of fees it owes for the work of BAM's independent counsel to binding arbitration pursuant to California Civil Code § 2860(c). Arrowood's request for a stay is DENIED. (Zignago, K.)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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ARROWOOD INDEMNITY COMPANY, a
Delaware corporation formerly
known as ROYAL INDEMNITY
COMPANY, as successor to
GLOBE INDEMNITY COMPANY,

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Plaintiff,

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v.

No.

2:11-CV-00976-JAM-DAD

ORDER GRANTING BEL AIR MART’S
MOTION TO COMPEL FEE ARBITRATION
PURSUANT TO CALIFORNIA CIVIL
CODE § 2860(c)

BEL AIR MART, a California
corporation; R. GERN NAGLER,
as Trustee of the John W.
Burns Testamentary Trust;
ROBERT GERN NAGLER, an
individual,
Defendants.

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This matter is before the Court on Defendant Bel Air Mart’s

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(“BAM”) Motion to Compel Arbitration under California Civil Code

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§ 2860(c) (Doc. #47).

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(“Arrowood”) opposes the Motion (Doc. #50).

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Plaintiff Arrowood Indemnity Company

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I. BACKGROUND

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This case arises from an underlying action brought pursuant

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to the Comprehensive Environmental Response, Compensation and

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Liability Act of 1980 (“CERCLA”) by BAM against various owners

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and operators of a dry cleaning facility on BAM’s leased

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property.

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BAM tendered the defense of those claims to Arrowood, its

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insurer.

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the counterclaims and appointed counsel under a reservation of

The CERCLA defendants counterclaimed against BAM and

In January 2011, Arrowood agreed to defend BAM against

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rights.

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independent counsel of its choosing due to conflicts of interest.

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BAM objected to the appointment of counsel, requesting

In April 2011, Arrowood filed the present action seeking a

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declaration of whether it owed a duty to defend, whether BAM was

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entitled to independent counsel, and whether BAM had breached the

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policy’s cooperation clause.

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for breach of contract, alleging that Arrowood failed to pay

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independent counsel’s fees.

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BAM’s Motion for Partial Summary Judgment, holding that BAM was

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entitled to independent counsel under § 2860 of the California

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Civil Code due to conflicts of interest between BAM and Arrowood.

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The Court did not resolve the ultimate issue of whether Arrowood

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owed BAM a duty to defend.

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BAM counterclaimed against Arrowood

In September 2011, the Court granted

BAM now requests that Arrowood pay its independent counsel’s

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fees in the amount of $365,089.65.

BAM determined the requested

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amount through an allocation analysis by its independent counsel

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designating “covered” tasks as those deemed reasonable and

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necessary to the defense.

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paid only $208,835.79.

Arrowood disputes the fees and has

It challenges BAM’s allocation and
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reasonableness determinations.
While Arrowood agrees that § 2860 requires arbitration of

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independent counsel’s rates, it refuses to arbitrate the

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allocation and reasonableness issues, contending that those

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issues are solely within the purview of the Court.

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requests that any arbitration be stayed until the Court or a jury

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determines whether Arrowood owes a duty to defend.

Arrowood also

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II. OPINION

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A. Legal Standard
California Civil Code § 2860 specifies that where an insurer

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owes a duty to defend its insured and a conflict of interest

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arises, the insurer is required to provide independent counsel to

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represent the insured.

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Civil Code § 2860(c) provides that “[a]ny dispute concerning [an

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insured’s independent counsel’s] attorney’s fees” shall be

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submitted to arbitration.

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concerning the existence of a duty to defend must be determined

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at trial and not through arbitration.

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v. St. Paul Fire and Marine Ins. Co., 169 Cal. App. 4th 289, 300

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(2008).

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only responsible for representing its insured with respect to

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defensive claims.

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App. 4th 1093, 1104 (2001).

Cal. Civ. Code § 2860(a).

California

However, overarching coverage issues

Compulink Mgmt. Ctr., Inc.

Further, when a duty to defend exists, an insurer is

James 3 Corp. v. Truck Ins. Exch., 91 Cal.

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In addition to compelling arbitration, a court may stay

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proceedings in order to “control the disposition of the causes on

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its docket with economy of time and effort for itself, for

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counsel, and for litigants.”

Landis v. N. Am. Co., 299 U.S. 248,
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254 (1936).

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parties are not subject to arbitration and that their resolution

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may make arbitration unnecessary, a court may stay arbitration

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until those issues are resolved.

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1281.2(c).

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If a court determines that other issues between the

Cal. Civ. Proc. Code §

B. Discussion
BAM argues in support of its motion that the language of

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§ 2860(c) clearly covers allocation and reasonableness in

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specifying that “[a]ny dispute concerning attorney’s fees” is

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subject to mandatory arbitration.

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rates dispute is subject to arbitration, but maintains that

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allocation and reasonableness fall outside § 2860(c)’s mandate

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and thus should be decided by the Court or a jury.

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contends that any arbitration should be stayed until the Court or

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a jury has decided whether Arrowood owes a duty to defend and the

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scope of that duty.

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Arrowood also

1. Defendant’s Motion to Compel Arbitration

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Arrowood concedes that the

a.

Arbitrability of Rates

The parties agree that a determination of the appropriate

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hourly rate to be paid by Arrowood to independent defense counsel

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for BAM is subject to arbitration, so this issue is not in

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dispute.

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appropriateness of a stay on arbitration, they do not dispute

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that the rates issue is ripe for determination.

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While the parties disagree regarding the

b.

Arbitrability of the Reasonableness of Fees

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Arrowood contends that the reasonableness issue, or a

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determination of which independent counsel hours were reasonably

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incurred in BAM’s defense, is not arbitrable.
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Arrowood argues

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that § 2860(c)’s arbitration provision applies only to

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determinations of hourly rates.

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portion of § 2860(c), which discusses rates, confines the

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arbitration requirement to apply to rates only.

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that the plain language of § 2860 covers the present dispute over

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attorney’s fees.

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It contends that the preceding

BAM maintains

Rulings on the appropriateness of arbitration have

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ultimately rested on what courts have deemed the “gravamen of the

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complaint.”

See Compulink, 169 Cal. App. 4th at 293 (citing

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Fireman’s Fund Insurance Co. v. Younesi, 48 Cal. App. 4th 451,

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455 (1996)) (comparing the gravamen of the complaint in Younesi

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that “counsel had engaged in a scheme of fraudulent billing

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practices” to “the gravamen of Compulink’s complaint . . . that

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it was entitled to additional attorney’s fees”).

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Development LLC v. Superior Court, 183 Cal. App. 4th 16, 20

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(2010), for example, reversed an order to arbitrate where the

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insurer did not respond to the insured’s request for independent

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counsel and thus “the gravamen of the complaint [was] bad faith

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and breach of contract, not a dispute over the amount Interstate

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should pay independent counsel . . . .”

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court in Long v. Century Indemnity Co., 163 Cal. App. 4th 1460,

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1466 (2008), compelled arbitration where the parties had agreed

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on independent counsel and “the gravamen of the breach-of-the-

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implied-covenant claim [was that counsel] was not paid the hourly

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rate he sought.”

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Id.

Intergulf

By contrast, the

Id.

An assertion of additional claims such as bad faith or

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breach of contract will not preclude arbitration if fees

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constitute the ultimate focus of the dispute.
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See Compulink, 169

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Cal. App. 4th at 300 (“[T]he presence of other non-arbitrable

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issues in an action does not preclude arbitration of [independent

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counsel] fee issues, as long as any disputed matters regarding

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the duty to defend . . . are resolved by the trial court.”).

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However, where the parties’ dispute centers on issues outside the

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scope of fees, or where fee amounts are not disputed, arbitration

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is inappropriate.

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instance, in BKM Total Office of California v. Pacific Insurance

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Co., No. B173073, 2005 WL 36148, at *4 (Cal. App. Feb. 16, 2005),

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the court affirmed denial of a motion to compel arbitration where

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the insurer failed to tender a defense but the amount of fees and

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billing rate were not contested.

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lower court’s denial of a motion to compel arbitration was

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affirmed where the insurer alleged a scheme of fraudulent billing

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practices on the part of independent counsel.

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Cal. App. 4th at 458.

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See Intergulf, 183 Cal. App. 4th at 20.

Id.

For

Similarly, in Younesi, the

See Younesi, 48

Arrowood relies on Younesi and BKM, but the facts of both

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cases are distinguishable.

Arbitration was denied in Younesi

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because the dispute centered on alleged fraudulent billing

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practices, not the amount of fees alone.

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argument that the present case is similar because it centers on

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the scope of coverage rather than fees is unconvincing.

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fraudulent billing claims, which constitute allegations outside

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the context of a fee disagreement, the supposed separate claim

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here falls within the fee dispute itself.

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overreads the Younesi court’s statement that § 2860 “limit[s] the

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scope of arbitrable disputes to those in which only the amount of

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legal fees or the hourly billing rates are at issue.”
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Id.

Arrowood’s

Unlike

Arrowood also

Id. at

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459.

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rate determinations, but other courts have criticized this

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interpretation.

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Compulink court refused to follow such a narrow reading of §

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2860’s scope on the grounds that it was not supported by the

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plain language of the statute.

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Younesi, the court’s statement quoted above was likely made only

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in reference to the fraud dispute at issue in that case.

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present dispute between BAM and Arrowood contains no allegation

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of fraud, and absent authority to the contrary, the Court is not

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inclined to read into Younesi any attempt to narrow the plain

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language of § 2860(c) as it applies to the arbitrability of

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disputes over the scope of fees.

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Arrowood sees Younesi as restricting § 2860 arbitration to

See Compulink, 169 Cal. App. 4th at 300.

Id.

The

Examined in the context of

The

The facts of BKM are also distinguishable from the present

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case.

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the complaint [did] respondents allege that the amount of legal

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fees or counsel’s billing rate was in dispute. Rather, all of the

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allegations concerning legal fees pertain[ed] to appellants’

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failure to pay them at all.”

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(emphasis in original).

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been appointed here pending resolution of the underlying scope of

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coverage and duty to defend issues in a situation similar to a

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reservation of rights.

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focus of the parties’ immediate dispute.

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not apply.

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BKM involved a complete refusal to defend and “nowhere in

BKM, 2005 WL 361418, at *4

By contrast, independent counsel has

The amount of legal fees constitute the
As a result, BKM does

Additional case law also supports submitting a dispute over

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reasonableness of fees to arbitration.

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in Larkin v. ITT Hartford, 1999 U.S. Dist. LEXIS 9960, at *21 fn.
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For instance, the court

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1 (N.D. Cal. June 29, 1999), recognized that “any dispute between

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the parties as to the amount of reasonable attorneys’ fees and

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costs incurred by plaintiffs in defense of [the insured] is

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subject to arbitration.”

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that the plaintiffs maintained the ability to recover fees and

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costs through arbitration “on the ground that such fees and costs

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were reasonable and necessary to the defense.”

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Truck Insurance Exchange v. Superior Court, 51 Cal. App. 4th 985,

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998 (1996), the court determined that disputes “over the rate and

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scope of fees to be paid to independent counsel” are arbitrable.

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Id. (emphasis added).

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Id.

In its decision, the court stated

Id.

Finally, in

While the coverage action here involves a counterclaim for

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breach of contract, the focus of the immediate dispute is clearly

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the amount of fees to be paid to independent counsel.

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is accordingly distinguishable from the precedent Arrowood cites,

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in which fees constituted at most an aspect of the claims rather

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than their focus.

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Cal. App. 4th at 458.

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independent counsel’s fees and simply contests payment of the

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full amount billed.

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brought as a result of this fee dispute, and no overarching fraud

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allegations are present.

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properly submitted to arbitration, with issues of a duty to

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defend and any other legal determinations reserved for the Court.

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This case

See BKM, 2005 WL 361418, at *4; Younesi, 169
Here, Arrowood has paid a majority of

BAM’s breach of contract counterclaim was

This is precisely the type of dispute

Further, in light of the case law, the Court is unconvinced

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by Arrowood’s narrow reading of the statute.

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difficult to arbitrate rates absent determinations of

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reasonableness, the Court sees the issues as closely related.
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Because it would be

To

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hold that § 2860(c) nevertheless submits only the determination

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of rates to arbitration would be illogical and would negate the

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provision’s purpose of relegating fee disputes to arbitration.

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c.

Arbitrability of Allocation

Arrowood also contends that the Court, not an arbitrator,

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must allocate costs between offensive and defensive tasks, thus

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determining which costs are Arrowood’s responsibility.

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responds by emphasizing the broad language of § 2860’s

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arbitration mandate, arguing that the requirement to submit

BAM

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“[a]ny dispute concerning attorney’s fees” to arbitration covers

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the allocation dispute.

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No California court has come close to articulating an

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allocation carveout to the § 2860(c) arbitration requirement.

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While it also appears that no court has explicitly resolved a

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dispute over allocation issues and included them in arbitration,

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this is not determinative.

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to determinations of rates and reasonableness, the absence of

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case law excluding allocation should tip in favor of submitting

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the issue to arbitration.

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disregard the plain language of § 2860(c) in the absence of

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contrary authority.

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Because allocation of fees is related

In other words, there is no reason to

As with reasonableness, allocation bears directly on the

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amount of legal fees owed.

An allocation inquiry would logically

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proceed with a reasonableness inquiry, in that an arbitrator

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would be unlikely to find an offensive task reasonably related to

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BAM’s defense.

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reasonableness is arbitrable, it would again be impractical and

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unnecessary to reserve the allocation determination for the

In light of the Court’s finding that

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Court.

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the scope of arbitration would unnecessarily separate related and

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dependent determinations and create judicial inefficiency.

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To take allocation of defensive and offensive fees out of

In summary, the parties do not dispute that independent

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counsel rates are arbitrable.

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reasonableness and allocation of defensive tasks should also be

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submitted to arbitration.

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Further, the Court finds that

d) Plaintiff’s Request to Stay Arbitration
Arrowood asks the Court to stay arbitration on the basis

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that proceeding with arbitration before resolution of the

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coverage action would “not be meaningful” and would waste court

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resources.

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Superior Court, 200 Cal. App. 4th 1239, 1251 (2011), in arguing

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that the Court should stay any fee arbitration until it decides

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the issues in the coverage action.

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basis to stay arbitration in this case and that Truck Insurance

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Exchange v. Superior Court, 51 Cal. App. 4th 985, 998 (1996),

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applies and supports its contention.

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Arrowood primarily relies on Janopaul + Block Cos. v.

BAM asserts that there is no

California Courts of Appeals have been somewhat inconsistent

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in their treatment of the timing of arbitration within larger

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coverage actions over the duty to defend.

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Bottling Co. v. Ins. Co. of N. Am., No. CV-10-2696 SVW (MANx),

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2010 U.S. Dist. LEXIS 144401, at *45 fn. 18 (C.D. Cal. Dec. 28,

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2010) (“[T]he Intergulf court may have broken with the Compulink

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court in requiring that issues regarding the duty to defend and

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bad faith be addressed prior to arbitration under § 2860(c)

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. . . .” (emphasis in original)).

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disputes may be arbitrable prior to any legal determination of
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See Pepsi-Cola Metro.

However, under Truck, fee

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coverage issues in cases where an insurer (1) is providing a

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defense under a reservation of rights and (2) has agreed to

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independent counsel.

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Truck did not address every precise issue presented in this case,

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it does establish that arbitration may appropriately occur before

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coverage issues over the duty to defend are resolved.

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an insurer has not agreed to the insured’s representation by

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independent counsel, the situation may be different.

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(citing Truck Ins. Exch. v. Dynamic Concepts, Inc., 9 Cal. App.

See Truck, 51 Cal. App. 4th at 998.

While

Id.

Where

Id. at 997

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4th 1147, 1150 (1992)) (“[W]here the [insurer] refuses to provide

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a defense through independent counsel, the legal issue must be

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decided by the court before section 2860 arbitration is

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available.”).

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grant of arbitration where the insurer had breached its duty to

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defend and engaged in bad faith conduct.

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App. 4th at 1251.

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independent counsel had not been agreed upon in that case.

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By contrast, where independent counsel is appointed, “it would

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undermine the concept of reservation of rights to preclude

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resolution of the issue until after the declaratory relief action

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has been decided.”

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once the reasonable amount of fees is determined in arbitration

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and paid by Arrowood, the reservation of rights, or in this case

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a pending declaratory relief action, would still permit Arrowood

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to recover any overpayments pursuant to the Court’s findings on

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the duty to defend.

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substantial portion of BAM’s independent counsel’s fees, meaning

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that even if arbitration were stayed, Arrowood would still have

For instance, in Janopaul, the court reversed a

See Janopaul, 200 Cal.

However, Janopaul is distinguishable because

Truck, 51 Cal. App. 4th at 998.

Id.

Under Truck,

Additionally, Arrowood has already paid a

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to recover fees if it succeeds in the coverage action.
The Court finds Truck controlling in the present case and
accordingly denies Arrowood’s request for a stay.

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II.

ORDER

For the foregoing reasons, the Court hereby grants Bel Air

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Mart’s Motion to Compel Arbitration and orders that Arrowood

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submit all issues concerning the amount of fees it owes for the

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work of BAM's independent counsel to binding arbitration pursuant

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to California Civil Code § 2860(c).

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stay is denied.

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Arrowood’s request for a

IT IS SO ORDERED.
Dated: June 3, 2013

____________________________
JOHN A. MENDEZ,
UNITED STATES DISTRICT JUDGE

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