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ZURICH AMERICAN v. SUPERIOR COURT FOR STATE OF CA

June 11, 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

Zurich American Insurance Co. ("Zurich"), of Illinois, extended insurance coverage against lawsuits to Watts Industries ("Watts"), a Delaware corporation whose principal place of business is in Massachusetts, and James Jones Co., a California corporation that was a wholly owned subsidiary of Watts. Watts and James Jones were sued in two lawsuits by third parties in the California state courts, but Zurich refused to pay the defense costs. The defendants here sued Zurich in those courts, and won a summary adjudication, while Zurich petitioned here in the Northern District of Illinois for arbitration. Zurich now asks for a preliminary injunction barring the California courts from proceeding in the matters concerning the two lawsuits by third parties. I grant the relief requested in part with respect to Watts but not to James, Jones.

I.

During 1991-96, Zurich extended insurance coverage against lawsuits to Watts and James Jones (a wholly owned subsidiary of Watts from 1987 through 1996). The policies provided for a duty to defend or indemnify against lawsuits. Zurich and Watts (but not James Jones) also signed deductible agreements containing broad arbitration provisions. Watts and James Jones were sued by third parties in California 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 Superior Court on February 14, 2001; James Jones filed a parallel lawsuit that was later consolidated with the Watts action.

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. Therein, Zurich stated that Watts repudiated its obligations under the deductible agreements in a letter of September 6, 2001, because Zurich refused to defend these actions. On October 9, 2001, Zurich asked the California state court for a stay of Watts' and James 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 on the duty to defend in Armenta. This was memorialized in two orders of November 27, 2001, one dealing with arbitrability and the other with the duty to defend in Armenta. Zurich appealed in the California state courts. In December 2001, Watts moved in this district to dismiss Zurich's petition to compel arbitration, which motion was denied by Judge Alesia, to whom this case was initially assigned. On March 7, 2002, The California Court of Appeal dismissed Zurich's appeal of the November 27, 2001 order on the grounds that the denial of a motion to stay is not appealable.

In May, 2002, Zurich asked me to enjoin the California Superior Court from pursuing further proceedings in Armenta, so that it might have me determine whether certain claims at issue in that case and Rothschild were arbitrable. I held that the Rooker-Feldman doctrine barred me from reviewing the state court decision on the matter where I found that it had reached a determination on the merits, the duty-to-defend issue in Armenta, but issued a temporary restraining order ("TRO") barring that court from further proceedings in Armenta that were unrelated to that discrete issue, and from further proceedings in Rothschild. See Zurich American Insurance Co. v. Superior Court for California, 200 F. Supp.2d 929 (N.D.Ill. 2002).

Zurich now asks for a preliminary injunction of wider scope than the TRO I issued, encompassing both Arementa and Rothschild and arguing that there are no Rooker-Feldman problems. The defendants oppose the motion, rearguing the Rooker-Feldman issue, and stating that the scope of my TRO was too narrow, and partly raising a new argument that the requirements for a preliminary injunction are not satisfied. As explained below, I find no reason to change my view on the jurisdictional question, and find that defendants' new argument about the likelihood of success, though close, is unsuccessful. I therefore grant the motion for a preliminary injunction in the modified form indicated below.

II.

I begin with the jurisdictional question. The Rooker-Feldman 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). Zurich argues that the defendants are judicially estopped from arguing that I lack subject matter jurisdiction with respect to the duty-to-defend issue in Armenta on Rooker-Feldman grounds, because they prevailed in the California appellate courts arguing that a state court order denying a stay in Armenta does not amount to a denial or dismissal of a petition to compel arbitration, the denial of which, Zurich says, would be a predicate of the applicability of Rooker-Feldman, and which Zurich claims the defendants deny before me. However, even if there were some form of judicial estoppel here, Rooker-Feldman poses the question of my subject matter jurisdiction, and I would be obliged to raise it sua sponte, even if the defendants could not. See Joyce v. Joyce, 975 F.2d 379, 386 (7th Cir. 1992).

Zurich argues further that Rooker-Feldman does not apply because the rulings it seeks are based on the Federal Arbitration Act, 9 U.S.C. § 1 et seq. ("FAA"), rather than the Cal.Civ.Proc.Code § 1281.4, the basis of the Superior Court's orders of October 30, and November 27, 2001. However, Zurich does not explain how I can possibly grant the relief it seeks based on the FAA without vacating, reversing, overruling, or invalidating the California court's orders, which is precisely what Rooker-Feldman prohibits me from doing.

Zurich argues that there is no final order in Armenta that Rooker-Feldman would bar me from reviewing. The California Superior Court's order of November 27, 2001, memorializing in part its decision of October 30, 2001, reads as follows:

[T]he claims alleged in the Complaints filed by Watts and James Jones, specifically including the duty to defend which is the subject of Watts' pending motion for Summary Adjudication, is not subject to the arbitration provisions of the Deductible Agreements. The determination of whether or not Zurich has a duty to defend and/or a duty to indemnify Watts and James Jones under the Policies is a condition precedent to the application of any deductible agreement.

Watts Indus. v. Zurich Am. Ins. Co., No. BC 245144 (Cal.Sup.Ct. Nov. 27, 2001), at 1. Watts Opposition, Ex. 1. At the October 30 hearing, the court also held that "the motion for summary adjudication of the first and sixth causes of action regarding Zurich's duty to defend [in Armenta] is granted." Watts Opposition, Ex. G at 45. That order was memorialized in an opinion of November 27, 2001. In an order of March 7, 2002, the California Court of Appeal dismissed Zurich's appeal because "[t]he denial of a motion to stay is not an appealable order." Ifft Decl., Ex. 2(E). Zurich asks that I treat this order as the only state court determination to which I must "defer" under Rooker-Feldman.

I am indeed bound by this decision. But I am also bound by the Superior Court's determination on October 30 and November 27, 2001, that a duty to defend exists in Armenta. This is an issue upon which the Court of Appeal made no such ruling, and in any event it would not matter if it had. A summary adjudication is not normally a final order in California law, Cal.Civ.Proc.Code ยง 437c(j) ("Except where a separate judgment may properly be awarded in the action, no final judgment shall be entered on a motion for summary judgment prior to the termination of the action."), but Rooker-Feldman "does not depend on a final judgment on the merits." Charchenko v. City of Stillwater, 47 F.3d ...


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