Countrywide Homes Loans, Inc. et al v. Mortgage Guaranty Insurance Corporation

Filing 64

ORDER GRANTING DEFENDANT'S MOTION TO STAY ACTION PENDING RESOLUTION OF ARBITRATION. Signed by Judge JEFFREY S. WHITE on 10/18/11. (jjoS, COURT STAFF) (Filed on 10/18/2011)

1
2
3
4
5
6

IN THE UNITED STATES DISTRICT COURT

7
FOR THE NORTHERN DISTRICT OF CALIFORNIA
8
9

COUNTRYWIDE HOME LOANS,

11
For the Northern District of California

United States District Court

10

12

No. C 10-00233 JSW

Plaintiff,
v.

ORDER GRANTING
DEFENDANT’S MOTION TO
STAY ACTION PENDING
RESOLUTION OF ARBITRATION

MORTGAGE GUARANTY INSURANCE
CORPORATION,

13
14

Defendant.
/

15
16

Now before the Court for consideration is Mortgage Guaranty Insurance Corporation’s

17

(“MGIC”) motion to stay action pending resolution of arbitration. The Court has considered the

18

parties’ papers, relevant legal authority, and the record in this case, and concludes that the

19

matter is suitable for disposition without oral argument. See N.D. Civ. L.R. 7-1(b).

20

Accordingly, the hearing set for December 2, 2011 is HEREBY VACATED. For the reasons

21

set forth in the remainder of this Order, MGIC’s motion is GRANTED, and the matter is

22

STAYED pending completion of arbitration.

23
24

BACKGROUND
Countrywide Home Loans, Inc. (“Countrywide”) purchased mortgage default insurance

25

from MGIC to cover mortgage loans that Countrywide issued to third-party homeowners.

26

(Compl. at ¶ 7.) Countrywide individually submitted each of the loans that it issued for MGIC

27

to insure. Each of the approximately 1,400 loans in controversy is subject to an insurance

28

contract called the Flow Policy. (Compl. at ¶ 10.) Both parties agree that for the purposes of

1

this lawsuit, all 1,400 default claims are governed by identical master policies that are

2

collectively referred to as the Flow Policy.

3

The Flow Policy allows MGIC to deny insurance coverage for loans obtained or

4

approved through various types of first-party misrepresentations. (Flow Policy, Ex. A. §§ 2.2,

5

2.3, 2.4, 4.4, 4.11.) In the wake of the United States mortgage crisis, many Countrywide loans

6

defaulted, and MGIC invoked the Flow Policy to deny Countrywide coverage for approximately

7

1,400 of the defaults. (Compl. at ¶¶ 38-39.) The Flow Policy continues to govern and insure

8

thousands of Countrywide mortgage loans. (Compl. at ¶¶ 70-71.)

9

11
For the Northern District of California

United States District Court

10

12

The Flow Policy also contains an arbitration clause that provides:
[A]ll controversies, disputes or other assertions of liability or rights arising out of
or relating to this Policy, including the breach, interpretation or construction
thereof, shall be settled by arbitration. Notwithstanding the foregoing, the
Company [MGIC], or the Insured both retain the right to seek a declaratory
judgment from a court of competent jurisdiction on matters of interpretation of the
policy.

13
14
15

(Compl. Ex. A at § 7.6(a).)
Countrywide initiated litigation, arguing that MGIC improperly denied coverage of

16

nearly 1,400 claims pursuant to the Flow Policy. (Compl. at ¶ 43.) MGIC submitted a demand

17

for arbitration with the American Arbitration Association on February 24, 2010. Countrywide

18

seeks declaratory judgment pursuant to the “interpretation” exception to the arbitration clause,

19

to interpret sections 2.2, 2.3, 2.4 and 4.4 of the Flow Policy. (Compl. at ¶¶ 68-73.) MGIC

20

claims that Countrywide is asking the Court to “construct” the Flow Policy, and that

21

construction of the Flow policy is specifically reserved for arbitration. Thus, MGIC contends

22

that all of Countrywide’s contentions are expressly reserved for arbitration, and therefore asks

23

the Court to stay this litigation pending arbitration.

24

The Court shall address additional facts as necessary in the remainder of this Order.

25
26
27
28
2

1

ANALYSIS

2
3

A.

Legal Standard Applicable to Motion to Stay Litigation Pending Resolution of
Arbitration.

4

The Federal Arbitration Act (“FAA”) represents the “liberal policy favoring arbitration

favor of arbitration.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25

7

(1983). Pursuant to the FAA, arbitration agreements “shall be valid, irrevocable, and

8

enforceable, save upon such grounds that exist at law or in equity for the revocation of any

9

contract.” 9 U.S.C. § 2. Once the Court has determined that an arbitration agreement concerns

10

a transaction involving interstate commerce, thereby falling under the FAA, the Court then must

11
For the Northern District of California

agreements,” and “any doubts concerning the scope of arbitrable issues should be resolved in

6

United States District Court

5

determine if a valid arbitration agreement exists, and whether the scope of the parties’ dispute

12

falls within that agreement. 9 U.S.C. § 4; Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d

13

1126, 1130 (9th Cir. 2000).

14

If the Court determines that the issues in controversy are within the scope of a valid

15

arbitration agreement, it “shall on application of one of the parties stay the trial of the action

16

until such arbitration has been had ....” 9 U.S.C. § 3. The language of Section 3 is mandatory

17

and it compels a court to stay litigation of issues that are reserved for arbitration. Dean Witter

18

Reynolds, Inc. v. Byrd, 470 U.S. 213, 219-220 (1985) (internal citations omitted). Where some

19

issues are subject to arbitration and others are not, the trial court has the discretion to stay the

20

balance of proceedings pending arbitration. Mediterranean Enter., Inc. v. Ssangyong Corp.,

21

708 F.2d 1458, 1465 (9th Cir. 1983).

22

B.

The FAA Compels a Stay Pending Resolution of Arbitration.

23
1.
24

The Exception to the Arbitration Clause Allows Either Party to Request
Declaratory Judgment for Interpretation of the Flow Policy.

25

Countrywide claims that “the arbitration clause gives Plaintiffs’ [sic] the right to a court-

26

determined declaratory judgment as to any dispute arising out of the Flow Policy.” (Opp. Br. at

27

11) (emphasis added). “The whole of a contract is to be taken together, so as to give effect to

28

every part, if reasonably practicable, each clause helping to interpret the other.” Cal. Civ. Code
3

1

§ 1642. Here, the arbitration clause is broad and it dictates that “all controversies ... relating to

2

this policy ... shall be settled by arbitration.” (Compl., Ex. A at § 7.6(a).) The arbitration clause

3

contains a narrow exception that allows both MGIC and Countrywide to “seek declaratory

4

judgment ... on matters of interpretation of the Policy.” (Id.) (emphasis added). If Countrywide

5

were entitled to declaratory judgment “as to any dispute arising out of the Flow Policy,” the

6

limiting language that creates an exception to the agreement to arbitrate for “matters of

7

interpretation of the Policy” would not make sense. Countrywide effectively reads out this

8

limitation. Further, Countrywide’s argument that it is entitled broadly to declaratory judgment

9

as to any dispute arising out of the Flow Policy violates the express terms of the arbitration
clause, which provides that all disputes arising from the Flow Policy are subject to arbitration.

11
For the Northern District of California

United States District Court

10

Thus, the Court rejects Countrywide’s argument that it is entitled to broad declaratory relief.

12

2.

13

“Countrywide seeks declaratory relief as to ... how Section 2.4 [of the Flow Policy]

Countrywide’s Declaratory Judgment Requests Are Arbitrable.

14

should be interpreted concerning the burden of proving first party knowledge or involvement.”

15

(Compl. at ¶ 69.) Countrywide also seeks declaratory relief to determine if MGIC can deny

16

coverage “based on alleged misrepresentation of borrower information and opinions regarding

17

property values.” (Id.) “Further Countrywide seeks declaratory relief as to how the Flow

18

Policy should be interpreted and applied” for denials based on alleged violations of

19

underwriting guidelines. (Id.) (emphasis added). According to Countrywide, “it is necessary

20

and proper for the Court to declare the rights and obligations of the parties under the policy ....”

21

(Id. at ¶ 72.)

22

The dispositive issue is whether Countrywide’s requests for declaratory relief are

23

“matters of interpretation of the [Flow] Policy,” as opposed to matters of application or

24

construction of the Flow Policy. (See Compl., Ex. A at § 7.6(a).) Pursuant to the Flow Policy,

25

all disputes over breach, interpretation, and construction of the Policy “shall be settled by

26

arbitration.” (Id.) (emphasis added). However there is a limited exception for “matters of

27

interpretation of the Policy.” (Id.) Interpretation involves ascertaining the meaning of

28

contractual words, while construction involves deciding their legal effect. See Gjerlov v.
4

law ... any doubts concerning the scope of arbitrable issues should be resolved in favor of

3

arbitration.” Moses H. Cone, 460 U.S. at 24. Here, Countrywide does not ask the Court to

4

ascertain the meaning of any language contained in the Flow Policy, but instead requests the

5

Court issue declaratory relief on the issues of burden of proof, credibility of evidence, and

6

sufficiency of evidence. (See Compl. at ¶ 69.) In essence, Countrywide asks the Court to look

7

at the kind and quantity of evidence MGIC uses to support its denials, to apply relevant legal

8

standards like burden of proof to that evidence, and to declare the parties’ rights and

9

responsibilities pursuant to the Flow Policy. Countrywide’s request is consistent with

10

Countrywide’s unpersuasive argument that it is entitled to broad declaratory judgment.

11
For the Northern District of California

Schuyler Laboratories, Inc., 131 F.3d 1016, 1020 (Fed. Cir 1997). “[A]s a matter of Federal

2

United States District Court

1

However, this request for declaratory judgment goes beyond the limited exception to the

12

arbitration clause because it involves deciding the legal effect of the Flow Policy as opposed to

13

the interpretation or meaning of the terms of the Flow Policy. The Court cannot tailor

14

declaratory relief to the acceptable bounds of the arbitration clause because all of the issues that

15

Countrywide submits for declaratory judgment are arbitrable. Thus, a stay is mandatory

16

pursuant to Section 3 of the FAA because this matter has already been submitted to arbitration

17

and the issues are arbitrable. See 9 U.S.C. § 3.

18
19

CONCLUSION
For the foregoing reasons the Court GRANTS MGIC’s motion to stay pending

20

arbitration. This action is STAYED pending completion of arbitration. The Clerk is directed to

21

close the file administratively in this case, but it may be reopened for such additional

22

proceedings as may be appropriate and as necessary upon conclusion of arbitration. If the

23

matter is resolved, the parties shall promptly file a dismissal of this action.

24

IT IS SO ORDERED.

25
26

Dated: October 18, 2011
JEFFREY S. WHITE
UNITED STATES DISTRICT JUDGE

27
28
5