Janopaul+Block v. Super. Ct. 11/17/11 CA4/1

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State: California

Court: California Eastern District Court

Docket No: D059282

Case Date: 11/17/2011

Plaintiff: Janopaul+Block

Defendant: Super. Ct. 11/17/11 CA4/1

Preview:Filed 11/17/11

CERTIFIED FOR PUBLICATION

COURT OF APPEAL, FOURTH APPELLATE DISTRICT DIVISION ONE STATE OF CALIFORNIA

JANOPAUL + BLOCK COMPANIES, LLC, et al., Petitioners, v. THE SUPERIOR COURT OF SAN DIEGO COUNTY, Respondent;

D059282 (San Diego County Super. Ct. No. 37-2010-00094324 CU-IC-CTL)

ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Real Party in Interest.

Petition for writ of mandate after superior court granted motion to compel arbitration. Steven R. Denton, Judge. Petition granted.

Oliva & Associates, Joseph L. Oliva and Matthew L. Cookson; Golub & Morales, Mitchell S. Golub and Thomas Morales for Petitioners.

No appearance for Respondent. McCloskey, Waring & Waisman, Andrew R. McCloskey and Jeffrey N. Labovitch for Real Party in Interest.

Janopaul+Block Companies, LLC, Janopaul Block S.D. No. 1, LLC (together, Janopaul), and Golub & Morales, LLP (Golub) (together with Janopaul, petitioners), seek a writ of mandate, supersedeas or other relief to overturn the trial court's order compelling them to arbitrate pursuant to Civil Code1 section 2860, subdivision (c) what the court characterized as a "fee dispute" between petitioners, on the one hand, and real party in interest St. Paul Fire and Marine Insurance Company (St. Paul), on the other hand, arising out of a construction defect action against Janopaul. Petitioners contend the trial court erred in granting St. Paul's motion to compel arbitration and in denying their motion to dismiss the petition to compel arbitration because St. Paul breached its duty to defend and engaged in bad faith conduct by waiting over two years from the date of Janopaul's initial tender of defense to accept the tender. Petitioners further contend if they are allowed to prove St. Paul's breach and bad faith in the trial court in advance of arbitration, St. Paul will forfeit and/or be estopped to assert any rights under section 2860, including the right to arbitrate under subdivision (c). As we explain, we grant the petition.

1

All statutory references are to the Civil Code. 2

FACTUAL AND PROCEDURAL BACKGROUND A. The Underlying Action Janopaul was the owner of the historic El Cortez Hotel in San Diego (El Cortez), which Janopaul planned to restore. Janopaul in 1998 contracted with St. Paul's named insured, Ninteman Construction Company, now known as The Sundt Companies, Inc. (together, Sundt), to serve as the general contractor for the El Cortez project (Janopaul contract). In the Janopaul contract, Sundt agreed under an express indemnity provision to defend Janopaul for claims arising from Sundt's work. In late January 2006, the El Cortez Owners Association filed suit against Janopaul for construction defects at the El Cortez project (San Diego County Superior Court case No. GIC854799 (El Cortez action)). Janopaul timely requested that Sundt defend and indemnify it in the El Cortez action. When Sundt failed to do so, Janopaul crosscomplained against Sundt for breach of express indemnity, among other causes of action. Ultimately, the El Cortez action was consolidated with two other cases (San Diego County Superior Court case Nos. GIC863887 and 37-2007-00083760-CU-FR-CTL), with the El Cortez action serving as the lead action (together, underlying action). B. Tender of Defense Janopaul retained Golub to represent it. In early May 2006, Golub tendered Janopaul's defense and indemnity in the underlying action to St. Paul. Janopaul's tender identified a series of insurance policies issued by St. Paul for work on the El Cortez

3

project and included a copy of the complaint in the El Cortez action. Golub requested a response to the tender offer within 20 days. St. Paul acknowledged receipt of the Janopaul tender in mid-May 2006. However, St. Paul stated it was investigating the matter and was then unable to "either decline or accept all or part of this tender." In connection with its investigation, St. Paul requested Janopaul provide it with the following information--most of which ostensibly was available from Sundt: copies of all contracts between Janopaul and Sundt (including Sundt's predecessor in interest); the phases its insured worked on and lot numbers; notices of completion and escrow dates on the home(s); the nature and extent of damages attributable to its insured's product/work; and any document depository created in connection with the El Cortez action. In response, the record shows Janopaul provided St. Paul with the information in mid-July 2006, and sent follow-up correspondence to St. Paul on December 26, 2006, October 1, 2007, and May 14, 2008, regarding Janopaul's defense and indemnity. On July 8, 2008, more than two years after Janopaul's original tender, Janopaul informed St. Paul that it intended to file a bad faith complaint against St. Paul because of the latter's "complete failure" to respond since mid-May 2006 to Janopaul's defense and indemnity tender. Janopaul included a draft complaint2 against St. Paul allegedly asserting tort and contract causes of action, which Janopaul threatened to file if St. Paul did not respond conclusively to the tender within 30 days.

2

The draft complaint was not part of the record on appeal. 4

Three days later, St. Paul agreed to defend Janopaul under a reservation of rights. Although Janopaul had never requested appointment of independent counsel, St. Paul nonetheless agreed as follows to provide Janopaul "Cumis counsel":3 "Civil Code [section] 2860 provides the right to independent counsel where the outcome of a coverage issue may be controlled by counsel first retained by the insurer. In light of the allegations of intentional conduct, St. Paul concludes that Janopaul is entitled to independent counsel and understands that your [Golub's] office has been selected by the insured to represent its interests in this matter. However, St. Paul's obligation to pay defense fees and costs incurred by independent counsel is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. Thus, St. Paul agrees to contribute to the defense of Janopaul at the rate of $150 an hour for [p]artners, $135 an hour for associates and $75 an hour for paralegals." St. Paul further stated in its reservation of rights letter that it was not obligated to reimburse Janopaul for any fees and costs Janopaul incurred pursuing any "affirmative claims" against Sundt or any other party in the underlying action; that it only agreed to

3 The phrase "Cumis counsel" is derived from San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 375 (Cumis), where this court held that when "there are divergent interests of the insured and the insurer brought about by the insurer's reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured." The terms "Cumis counsel" and "independent counsel" are synonymous. (Assurance Co. of America v. Haven (1995) 32 Cal.App.4th 78, 86, fn. 7.) 5

pay costs and fees that were "reasonable and necessary" to Janopaul's defense in the underlying action; and demanded "to the extent reasonably possible, [Golub] segregate its billing entries so that tasks performed in defense of potentially covered claims are delineated from those associated with the uncovered and affirmative claims outlined herein." In late August 2009, St. Paul notified Golub that it was in the process of reviewing invoices Golub had submitted for defending Janopaul in the underlying action. St. Paul indicated that St. Paul and Golub had met in January 2009 regarding St. Paul's concerns over Golub's alleged "objectionable billing practices," including "excessive hourly rates, block billing entries and tasks which did not appear reasonable and/or necessary to the defense of Janopaul." St. Paul further noted that despite their previous meeting, Golub had not modified its billing practices, making it difficult for St. Paul to confirm whether the time Golub spent on any particular task was reasonable and necessary to the defense of Janopaul. St. Paul also disputed the billing rates Golub charged to defend Janopaul in the underlying action. St. Paul thus invoked its alleged right to arbitrate under subdivision (c) of section 2860, claiming there was a "dispute[] concerning attorney[] fees" between the parties. Specifically, because St. Paul had previously acknowledged Golub as independent counsel to Janopaul, St. Paul claimed the attorney fee dispute "must be submitted to a single auditor for resolution. St. Paul also claimed the scope of such arbitration included "(1) the applicable rate; (2) the extent the fees submitted to St. Paul are reasonable and 6

necessary to the defense of Janopaul; and (3) any reimbursement right St. Paul may have against Janopaul for overpayment of defense fees after the audit process is complete." St. Paul initially requested Janopaul and Golub voluntarily agree to arbitrate. St. Paul suggested any such arbitration be stayed pending resolution of the underlying action in order for Golub to focus solely on Janopaul's defense. When Janopaul and Golub refused to arbitrate, St. Paul filed a petition to compel arbitration. In response, Golub filed a motion to dismiss the petition to arbitrate, which Janopaul later joined. Among other things, petitioners argued that because St. Paul waited more than two years to respond to the tender of defense and indemnity and reserve its rights, St. Paul had breached the insurance contract(s) and engaged in bad faith, and forfeited and/or was estopped to assert its alleged right to compel arbitration and select and set rates for independent counsel. St. Paul in turn moved to enforce its petition to compel arbitration. C. Trial Court Proceedings 1. The Trial Court's Initial Order The trial court denied petitioners' motion to dismiss the arbitration petition and granted St. Paul's competing motion to compel arbitration, ruling in part as follows: "[Petitioners'] motion to dismiss the [arbitration petition], or in the alternative to stay the arbitration is DENIED. Arbitration is authorized pursuant to Civil Code section 2860. This section 'requires arbitration of any and all Cumis fee disputes unless the parties' insurance policy provides for an alternative dispute resolution procedure.' [Citation.] 7

"[St. Paul's] July 11, 2008 letter contains an acknowledgement of its duty to defend the entire underlying action. This letter also asserts a reservation of rights, and contends that there is no potential duty to defend or indemnify with respect to some of the causes of action. The letter finds that the right to independent counsel under section 2860 is triggered and continues: 'St. Paul . . . understands that your [Golub's] office has been selected by the insured to represent its interests in this matter. However, St. Paul's obligation to pay defense fees and costs incurred by independent counsel is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. . . .' "Janopaul argues that no right to independent counsel arose because St. Paul denied a defense obligation with respect to some of the claims asserted in the underlying action. However, the right to independent counsel only arises when the insurer takes a position that some claims within the underlying action are not covered. As is clear from the reservation of rights, St. Paul nonetheless agreed to defend the entire 'mixed' action, which it is obligated to do.[4] "Janopaul also argues that St. Paul cannot compel arbitration because its delay in accepting the tender constitutes a breach of the insuring agreement. However, the citation to Intergulf Development v. Superior Court (2010) 183 Cal.App.4th 16 does not

4

We note that petitioners have not challenged this finding on appeal. 8

support this contention. Th[e instant] action addresses only the amount of fees incurred, not whether the insurer breached an obligation to appoint independent counsel. "Finally, Janopaul argues that the arbitration is unnecessary, or at least should be stayed, until resolution of its cross-complaint for indemnity in the underlying action. However, the relief sought by petitioner in this action is unrelated to Janopaul's crosscomplaint.[5] "Petitioner [St. Paul's] petition to compel arbitration is GRANTED. [Civil Code]

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