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Mave Enterprises, Inc. v. Travelers Indemnity Co. of Connecticut

California Court of Appeals, Second District, First Division

September 26, 2013

MAVE ENTERPRISES, INC., Plaintiff and Respondent,
v.
THE TRAVELERS INDEMNITY COMPANY OF CONNECTICUT, Defendant and Appellant.

APPEAL from an order and a judgment of the Superior Court of Los Angeles County, No. LC086852 William D. Stewart, Judge.

Horvitz & Levy, Jeremy B. Rosen, John F. Querio; Weston & McElvain, Richard C. Weston and Aaron C. Agness for Defendant and Appellant.

Shernoff Bidart Echeverria Bentley, William M. Shernoff, Travis M. Corby and Jill P. McDonell for Plaintiff and Respondent.

MALLANO, P. J.

In this case, an insured filed a bad faith action against its insurer in the Los Angeles Superior Court. After spending a substantial amount of time litigating the case in the superior court, the parties stipulated to have their disputes resolved through binding arbitration. The terms of the stipulation were placed on the record, and the superior court retained jurisdiction, requiring the parties to submit periodic status reports about the arbitration proceedings. The parties entered into a separate, written stipulation to arbitrate under the auspices of a sponsoring organization.

The arbitrator found in favor of the insured and awarded $3, 696, 414. The insurer filed a petition to vacate, modify, or correct the award in the United States District Court for the Central District of California based on diversity of citizenship. For its part, the insured filed a motion to confirm the award in the superior court. The insurer then filed a motion in the superior court, requesting that it stay its proceedings pending a decision by the federal district court. Oppositions were filed to each motion. Before the federal district court had issued a decision, the superior court denied the insurer’s request for a stay, confirmed the arbitration award in its entirety, and entered judgment in favor of the insured. The insured then filed a motion in the federal district court, requesting that it abstain from hearing the matter. The federal district court agreed based on the doctrine of abstention; it denied the insurer’s petition and closed the case.

On appeal, the insurer contends that the superior court abused its discretion by denying the motion to stay its proceedings pending a decision by the federal district court. The insurer also asserts that the arbitration award should be reviewed under the procedural provisions of the Federal Arbitration Act (FAA) (9 U.S.C. §§ 10, 11), and the award must be vacated, modified, or corrected because, in calculating damages, the arbitrator exhibited a manifest disregard of the law. In the alternative, the insurer argues that, under the California Arbitration Act (CAA) (Code Civ. Proc., §§ 1280–1294.2), the award should be vacated or corrected.

We conclude that the superior court did not abuse its discretion by denying the insurer’s motion for a stay, primarily because the superior court acquired jurisdiction over the parties’ disputes long before the insurer filed its petition in the federal district court; the superior court retained jurisdiction over the case while it was being arbitrated and was kept informed of the arbitration proceedings; and the superior court was more knowledgeable about the litigation. We also conclude that, even assuming the parties’ stipulations to arbitrate or the insurance policy involved interstate commerce, the procedural provisions of the CAA, not the FAA, govern judicial review of the award. Finally, under the CAA, we conclude that the superior court properly confirmed the arbitration award in its entirety.

I

BACKGROUND

The allegations and facts in this appeal are taken from the complaint and the papers submitted in connection with (1) the motions to confirm and vacate the arbitration award, and (2) the insurer’s motion for a stay of the proceedings below.

A. The Complaint

The complaint alleged as follows. Plaintiff Mave Enterprises, Inc. (Mave), makes high quality Kosher foods. It is a California corporation and has its manufacturing plant in North Hollywood.

On or about February 1, 2006, The Travelers Indemnity Company of Connecticut (Travelers) issued a property casualty insurance policy to Mave. The policy covered property damage to Mave’s manufacturing equipment and its inventory, business interruption losses, property damage, and lost business income.

On September 25, 2006, a severe fire occurred at Mave’s manufacturing facility, which was covered under the Travelers policy. Mave submitted claims to Travelers. Travelers did not make timely payments to cover the losses. Travelers would either deny the claim, delay payment by conducting unreasonable investigations, or take unreasonable positions such as requiring Mave to pay for its large losses and then seek reimbursement from Travelers. The reimbursement process required Mave to borrow money at high interest rates. The interest and finance charges were excessive because (1) Travelers was slow in reimbursing Mave, and (2) on some items, Travelers improperly refused to reimburse Mave altogether. At other times, Travelers would decide that Mave was entitled to payment on a particular item but would not make a lump sum payment; instead, Travelers would make several smaller payments over time. Travelers contested the value of damaged goods, inventory, equipment, and food. Travelers also refused to pay for business interruption losses.

On January 30, 2008, Travelers wrote to Mave, indicating that its investigation into the fire damage was complete and that all issued checks were without prejudice to Mave’s right to pursue additional benefits.

On September 9, 2009, Mave filed this action against Travelers in Los Angeles Superior Court, alleging two causes of action: (1) breach of contract based on Travelers’s failure to investigate Mave’s claims in a timely manner and its refusal and delay in paying various policy benefits; and (2) breach of the covenant of good faith and fair dealing.

The breach of covenant claim alleged that Travelers had acted in bad faith by denying to pay full benefits and by unreasonably delaying the payments it made. Travelers’s bad faith conduct forced Mave to retain legal counsel, construction consultants, and other experts to obtain benefits under the policy. Travelers had engaged in acts or omissions that were malicious, oppressive, or fraudulent.

As relief, Mave sought consequential damages for breach of contract. On the breach of covenant claim, Mave sought damages for failure to pay the appropriate amount of benefits and an award of punitive damages.

Mave filed a first amended complaint on January 25, 2010, but did not add any causes of action against Travelers.

B. Arbitration

The trial began in the superior court in August 2011. On August 11, 2011, during jury selection, Mave and Travelers (parties) agreed to arbitrate their disputes. The oral agreement was placed on the record and consisted of these terms: (1) arbitration would be “a resolution of the trial of this matter”; (2) the arbitration award would be limited to a low of $500, 000 and a high of $7.5 million, but the arbitrator would not be told about the “high low” provision; (3) the arbitration award would be binding; (4) the superior court’s order on in limine motions would apply in the arbitration; (5) retired California Supreme Court Justice Edward Panelli had been selected as the arbitrator; and (6) the superior court retained jurisdiction to issue subpoenas. In addition, the superior court stated it would retain jurisdiction to “make sure you’re under way” and would also schedule periodic status conferences. The superior court set the first status conference for November 17, 2011.

By minute order, also dated August 11, 2011, the superior court stated: “The Court is informed that parties have reached a settlement agreement regarding binding arbitration. Terms of the Settlement are recited in open court.... Stipulation of parties re motions in limine to stand. The Court retains jurisdictions to enforce subpoenas. [¶] A Status Conference re Status of Arbitration is set on November 17, 2011.”

On August 25, 2011, the parties signed a “Stipulation for Arbitration and Selection of Arbitrator, ” which read: “It is stipulated and agreed by the Parties to submit all disputes, claims or controversies to neutral, binding arbitration at JAMS, pursuant to the JAMS Arbitration Administrative Policies and, unless otherwise agreed in writing by the parties, to the applicable JAMS Arbitration Rules and Procedures....”

JAMS rule 25 states: “Proceedings to enforce, confirm, modify or vacate an Award will be controlled by and conducted in conformity with the Federal Arbitration Act, 9 U.S.C. Sec 1 et seq. or applicable state law. The Parties to an Arbitration under these Rules shall be deemed to have consented that judgment upon the Award may be entered in any court having jurisdiction thereof.” (Italics & boldface added.)

Neither the stipulation to arbitrate reached in the superior court nor the August 25, 2011 JAMS stipulation designated the law of a particular jurisdiction to govern the arbitration proceedings. Both stipulations were silent on that issue. In that regard, JAMS rule 24(c) states: “In determining the merits of the dispute, the Arbitrator shall be guided by the rules of law agreed upon by the Parties. In the absence of such agreement, the Arbitrator shall be guided by the rules of law and equity that the Arbitrator deems to be most appropriate. The Arbitrator may grant any remedy or relief that is just and equitable and within the scope of the Parties’ agreement, including, but not limited to, specific performance of a contract or any other equitable or legal remedy.” (Italics added.)

On November 17, 2011, the parties filed a stipulation to continue the status conference in the superior court and to inform the court that Travelers had asked retired Justice Panelli to recuse himself as the arbitrator, which he did. The parties had agreed to arbitrate the case before Alexander Polsky of JAMS. The superior court continued the November 17, 2011 status conference to February 8, 2012. On January 9, 2012, the parties filed a request that the status conference be continued to a date after February 29, 2012, because the arbitration hearing was scheduled for February 27 through February 29, 2012. The superior court continued the status conference to March 21, 2012.

The arbitration hearing began on February 27, 2012, and lasted approximately three days. On March 21, 2012, the arbitrator provided the parties with his “Issue Findings of Arbitrator, ” which indicated how he had resolved the major factual and legal disputes on each of Mave’s claims. The arbitrator also requested supplemental briefing on: (1) the amount of compensatory damages that should be awarded on each claim; (2) the amount, if any, of exemplary damages that should be awarded; and (3) the amount, if any, of “attorney fees” that Mave should recover.[1]

At the March 21, 2012 status conference, the parties informed the superior court that the arbitration hearing had been conducted, and they were awaiting the arbitration award. Mave’s counsel stated, “I just want the ruling. Make sure they pay and at that point, we can dismiss obviously.”

On March 29, 2012, the arbitrator issued “Factual Findings, ” consisting of 12 pages. The arbitrator found that although Travelers had paid a total of $3, 437, 631.08 in policy benefits, Travelers had acted in bad faith with respect to “equipment reimbursement” and the “inventory valuation process.” He rejected Mave’s claims that (1) another company retained by Travelers as an appraiser and a salvager (Stoner & Co.) had impermissibly salvaged products that had been damaged in the fire, and (2) Travelers should have paid for more than six months of lost business income. At the end of the Factual Findings, the arbitrator established a briefing schedule on the subject of whether Mave was entitled to attorney fees and, if so, in what amount.

On April 11, 2012, the arbitrator issued the award, which recited that Travelers was liable for: (1) $161, 939 in compensatory damages on Mave’s inventory claim ($106, 939, plus interest of $55, 000); (2) $2, 429, 085 in punitive damages (15 times the amount of compensatory damages); and (3) Brandt fees (see Brandt, supra, 37 Cal.3d at pp. 817–820), which the arbitrator calculated by multiplying the compensatory damages award and the punitive damages award—a total of $2, 591, 024—by the 40 percent contingency rate set forth in the retainer agreement between Mave and its counsel. The arbitrator awarded $1, 036, 450 in Brandt fees. Costs totaled $68, 940. The arbitrator awarded a total of $3, 696, 414.[2]

On or about April 18, 2012, Travelers submitted a motion to the arbitrator, requesting that he “correct computational, typographical, and/or other similar errors in the award.” With regard to Brandt fees, Travelers argued that Mave was entitled to only those attorney fees incurred in recovering the policy benefits (compensatory damages); the arbitrator should not have taken the award of punitive damages into account. According to Travelers, the arbitrator should have calculated Brandt fees in the same way Mave did in its arbitration brief—by multiplying $161, 939—the compensatory damages award—by the 40 percent contingency rate in Mave’s retainer agreement. The award of punitive damages should not have been considered. (See Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 809–813.) Travelers also argued that the arbitrator had erred in determining the amount of punitive damages: The arbitrator had multiplied the compensatory damages award ($161, 939) by 15. Instead, as Travelers explained, the arbitrator should have applied a multiplier to the tort recovery—the Brandt fees as properly calculated. Travelers also took issue with the arbitrator’s use of a 15-to-1 ratio of punitive damages to compensatory damages, arguing it exceeded the constitutional maximum: Under the federal due process clause of the Fourteenth Amendment, the ratio of punitive damages to compensatory damages should not exceed a single-digit ratio, for example, four to one. Thus, the 15-to-1 ratio was unconstitutionally excessive. On April 19, 2012, the arbitrator denied Travelers’s motion.

By letter dated April 23, 2012, the arbitrator thanked counsel for their “confidence” and “professionalism during this rather unusual arbitration.” He also stated, “I cannot recall receipt of less developed testimony as to loss of revenues. Nor can I recall more aggravated conduct by a claim professional.” The arbitrator commented that “[t]he result was apparent. A high multiplier which, due to the uniqueness of the conduct was considered in the fee claim; and a denial of what appeared to be a genuine loss of revenue, reputation and clients—but whose proofs fell below the required burden. [¶] I imagine both sides found themselves surprised, and have criticism for these two extremes. As an arbitrator, I can say that this ended up as one of the more extreme and unusual cases I have heard, and awards I have issued.”

C. Challenges to the Award

At a status conference on April 25, 2012, Mave’s counsel informed the superior court that she intended to file a motion to confirm the arbitration award. The superior court suggested that the parties reserve a date for the hearing. Before a date was chosen, counsel for Travelers announced that “we are filing a petition to vacate or modify the award in federal court today, ” referring to the United States District Court for the Central District of California (The Travelers Indemnity Company of Connecticut v. Mave Enterprises, Inc. (C.D.Cal., 2012, No. CV 12-3574)).[3]

The next day, April 26, 2012, Mave filed a motion in the superior court to confirm the award. On May 3, 2012, Travelers filed two motions in the superior court: (1) a motion seeking a stay of the action pending a decision by the federal district court, and (2) a motion to vacate or correct the arbitration award. On May 14, 2012, Travelers filed in the superior court an opposition to Mave’s motion to confirm the award. Also on May 14, 2012, Mave filed in the superior court an opposition to each of Travelers’s motions. All three motions—Mave’s motion to confirm the award, Travelers’s motion to stay the action, and Travelers’s motion to vacate or correct the award—were heard on May 25, 2012. At the beginning of the hearing, the superior court issued a tentative ruling, granting Mave’s motion to confirm the award and denying both of ...


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