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ZURICH AMERICAN v. SUPERIOR COURT FOR THE STATE OF CA.

United States District Court, Northern District of Illinois, Eastern Division


May 13, 2002

ZURICH AMERICAN INSURANCE CO., PLAINTIFF,
V.
SUPERIOR COURT FOR THE STATE OF CALIFORNIA, COUNTY OF LOS ANGELES, RESPONDENT, WATTS INDUSTRIES, INC. AND JAMES JONES COMPANY REAL PARTIES.

The opinion of the court was delivered by: Bucklo, District Judge.

  MEMORANDUM OPINION AND ORDER

During 1991-96, Zurich American Insurance Co. ("Zurich"), of Schaumburg, Illinois, entered into certain insurance arrangements with Watts Industries ("Watts"), a Delaware Corporation whose principal place of business is North Andover, Massachusetts, and James Jones Co., a California corporation that was a wholly owned subsidiary of Watts from 1987 through 1996, and was insured under the agreements in question. The arrangements included policies providing for a duty to defend against lawsuits, accompanied by deductibility agreements on the side containing broad arbitration provisions. Watts and Jones were sued by third parties in California state court for fraud in connection with sales of water distribution products containing excessive levels of lead to municipal water systems. See Rothschild v. Tyco Int'l, No. 726930 (Cal. Super Ct. San Diego), filed May 7, 1999 ("Rothschild "), and Armenta v. James Jones Co., No BC 173487 (Cal.Super. Ct., Los Angeles), filed June 25, 1997 ("Armenta"). Watts sued Zurich for coverage under the agreements in California state Superior Court on February 14, 2001 (the "California action"); Jones filed a parallel lawsuit that was later consolidated with the California Action. Zurich states that Watts repudiated its obligations under the deductibility agreements on September 6, 2001, because Zurich refused to defend these actions. On October 2, 2001, Watts filed a motion for summary adjudication in Superior Court against Zurich. Zurich demanded arbitration, but Watts denied there was anything to arbitrate. On October 4, 2001, Zurich filed a motion to compel arbitration in this court. On October 9, 2001, Zurich asked the California state court for a stay of Watts' and Jones' action pending a decision on arbitrability, but on October 30, 2001, that court refused to stay the action, denying that there was any arbitrable dispute, and granting Watts' motion for summary adjudication, a nonfinal order. This was memorialized in two orders of November 27, 2001. Zurich appealed in the California state courts (and later lost). In December 2001, Watts moved in this district to dismiss Zurich's petition to compel arbitration, which motion was denied.

Zurich now asks me to enter a temporary restraining order ("TRO") enjoining the California state court from enforcing the orders of November 27, 2001. The first issue concerns my jurisdiction. The defendants argue that I lack subject matter jurisdiction to grant the requested relief because of the Rooker-Feldman doctrine. This doctrine essentially precludes lower federal court jurisdiction over claims seeking review of state court judgments or over claims "inextricably intertwined" with state court determinations. See Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923); District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983). The doctrine "bars federal jurisdiction when the federal plaintiff alleges that [its] injury was caused by a state court judgment." Remer v. Burlington Area Sch. Dist., 205 F.3d 990, 996 (7th Cir. 2000). The reason is that the only court with the authority to review such judgments is the United States Supreme Court, and therefore litigants must appeal state court rulings "through their state courts and then to the Supreme Court." Id. Without the doctrine, lower federal courts essentially would be engaging in appellate review of state court rulings. In deciding whether to apply the Rooker-Feldman doctrine, I ask:

is the federal plaintiff seeking to set aside a state judgment, or does he present some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party? If the former, then the district court lacks jurisdiction; if the latter, then there is jurisdiction and state law determines whether the defendant prevails under principles of preclusion.

GASH Assocs. v. Village of Rosemont, Ill., 995 F.2d 726, 728 (7th Cir. 1993). This formulation is usually referred to as the "source of injury" test (i.e., is the source of injury the judgment itself or something distinct from it?). Garry v. Geils, 82 F.3d 1362, 1367 (7th Cir. 1996).

With regard to the order of the California Superior Court granting summary adjudication for the defendants and against Zurich on the duty to defend in the Armenta action, application of Rooker-Feldman is in order. Zurich argues that Rooker-Feldman does not apply because Zurich initiated its federal action before the state court rendered any determination on the issues Zurich seeks to arbitrate. It cites a Second Circuit Case finding that Rooker-Feldman is inapplicable when the federal plaintiff "filed its petitions to compel arbitration of the [federal defendants'] state actions before the state courts had made any rulings on the merits in those actions." Doctor's Assocs., Inc. v. Distajo, 107 F.3d 126, 138 (2d Cir. 1997). Even if the Seventh Circuit would apply this rule, that would not give me jurisdiction over the duty to defend issue in the Armenta action, where there was a ruling on the merits reached in a matter filed in February 2001, well before Zurich filed its petition to compel arbitration in October 2001. Doctor's Associates would be distinguishable anyway because there the plaintiffs obtained default judgment in state court that they sought to have set aside in federal court, but here, with respect to the Armenta action, the state court reached a reasoned judgment on the merits of a claim that Zurich seeks to have arbitrated, the existence under the contract of that duty.

However, that is the limit of Rooker-Feldman here, because the order of October 30, 2001, memorialized in written opinions of November 27, 2001, reached only the duty to defend in Armenta and not any other issue, including whether there is a duty to defend in Rothschild or whether any dispute about Rothschild, including the existence of a duty to defend, is arbitrable. In that case there is no state court order or judgment for which the plaintiffs might improperly seek "review" in federal court. It is not claimed that the state court has decided any issue in Rothschild or indeed any other issue in Armenta, and so Rooker-Feldman cannot apply to those issues where there are no state court rulings.

Watts also invokes the Anti-Injunction Act, 28 U.S.C. § 2283 This states that a federal court may not "grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments." However, this case involves the "necessary in aid of [my] jurisdiction" clause, because I have diversity jurisdiction in this matter, but I would lose it in view of the operation of the Rooker-Feldman doctrine if the state court were to rule in Rothschild or on any other issue in Armenta. Watts argues that there are no cases where any federal court has granted an injunction prior to deciding whether arbitration is proper. That is not true. The Fourth Circuit has directed that this be done, holding that "absent exceptional circumstances, a federal district court has `no right to stay the federal proceedings" brought under the FAA even though a similar action between the parties was pending in the state court.'" Whiteside v. Teltech Corp., 940 F.2d 99, 102 (4th Cir. 1991) (citations omitted) (abstention context), and ordering the district court to "decide the question under federal law whether the dispute is arbitrable." Id.

I now turn to whether it is appropriate to issue the TRO with respect to proceedings in the California Superior Court relating to the issues raised by Zurich's petition in this court to compel arbitration, setting aside the duty to defend issue in Armenta. Injunctive relief is an extraordinary and drastic remedy that should not be granted unless the movant, by a clear showing, carries the burden of persuasion. Mazurek v. Armstrong, 520 U.S. 968, 972, 117 S.Ct. 1865, 138 L.Ed.2d 162 (1997). Five factors figure into the determination of whether a preliminary injunction should be granted. Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 385-88 (7th Cir. 1984). As a threshold matter, the plaintiff must show (1) a likelihood of success on the merits, (2) irreparable harm if the preliminary injunction is denied, and (3) the inadequacy of any remedy at law. Cooper v. Salazar, 196 F.3d 809, 813 (7th Cir. 1999). Once this threshold showing is made, I balance (4) the harm to the plaintiff if the preliminary injunction were wrongfully denied against the harm to the defendants if the injunction were wrongfully granted, and (5) the impact on persons not directly concerned in the dispute (the "public interest"). Id. The standards I must apply when determining whether a TRO is appropriate are analogous to the standards applicable when determining whether preliminary injunctive relief is appropriate. Consumer Sales & Marketing, Inc. v. Digital Equip. Corp., No. 95 C 5049, 1995 WL 548765, at *3 (N.D.Ill. Sept. 13, 1995).

Watts opposes the TRO, arguing that there is no showing of irreparable harm nor any likelihood of success. The risk of irreparable harm is that Zurich may lose any possibility of submitting the claims it may still submit to arbitration if the state court enters a judgment on the merits with respect to Rothschild and issues regarding the deductible agreements in Armenta. In enacting the Federal Arbitration Act, 9 U.S.C. § 2, under the authority of which Zurich would prefer to proceed, "Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration." Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984). If denied the right to have its petition to compel arbitration heard, Zurich may be compelled to undergo costlier litigation that it might avoid if that petition is granted, and if the California courts decide in the remaining cases and issues as they have in Armenta, then Rooker-Feldman may bar any possibility that I could even hear the question. That is enough for irreparable harm.

As for likelihood of success, Zurich must only show that "its chances for success are better than negligible." Roland Mach., 749 F.2d at 387. Watts' letter of Sept 6, 2002, might well be construed as anticipatory repudiation and breach of the deductible side agreements containing the broad arbitration clause. Watts argues that it was no such thing as an anticipatory repudiation, but only a proposition offered as part of settlement negotiations. That may be, but the case is not so clear cut that Zurich's chances of prevailing are less than negligible. As to whether the duty to defend in Rothschild, the subject of the main policy, is within the scope of the arbitration clause in the deductible agreement, that is a matter of contract interpretation, Collins & Aikman Prods. Co. v. Building Sys., Inc., 58 F.3d 16, 19 (2d Cir. 1995), but the Supreme Court has said that "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. . . ." Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). "Federal policy requires us to construe arbitration clauses as broadly as possible." David L. Threlkeld & Co. v. Metallgesellschaft Ltd., 923 F.2d 245, 250 (2d Cir. 1991). Here, the arbitration clauses are broad, at least one of which requires "all matters in difference between the parties" to be arbitrated.*fn1 The breadth of that language suggests that Zurich has some likelihood of prevailing on the issue of the arbitrability of the duty to defend in Rothschild. The Southern District of New York has rejected the sort of argument urged by Watts in Petition of Home Ins. Co., 908 F. Supp. 180, 183 (S.D.N.Y. 1995) (Koetl, J.).

The other elements for extraordinary relief are not in dispute. I therefore GRANT Zurich's motion for a TRO enjoining the California Superior Court from pursuing further proceedings in Rothschild pending resolution of Zurich's petition to compel arbitration in that case, and enjoining the California Superior Court from pursuing further proceedings in Armenta, apart from enforcing its orders of October 30 and November 27, 2001, or other matters concerning the duty to defend issue in that case which was the subject of those orders. I DISMISS for want of subject matter jurisdiction Zurich's motion for a TRO enjoining the California Superior Court from pursuing further proceedings in Armenta relating to its orders of October 30 and November 27, 2001, finding that Zurich had a duty to defend in the Armenta action.


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