Scottsdale Insurance Co. v. Parmerlee CA2/4 ( 2023 )

Filed 3/7/23 Scottsdale Insurance Co. v. Parmerlee CA2/4
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not
certified for publication or ordered published, except as specified by rule 8.1115(a). This opinion has not
been certified for publication or ordered published for purposes of rule 8.1115(a).
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
SCOTTSDALE INSURANCE B322733
COMPANY,
(Santa Clara County
Plaintiff and Respondent, Super. Ct. No.
v. 16CV292923)
LISA PARMERLEE, THOMAS C.
LALLY, AND NANCY G. LALLY,
AS TRUSTEES OF THE THOMAS
C. LALLY AND NANCY G. LALLY
REVOCABLE TRUST et al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of Santa
Clara County, Mary Arand, Judge. Affirmed.
Boliver Law and Gail E. Boliver; Law Offices of Keith J.
Hollis and Keith J. Hollis for Defendants and Appellants.
Gordon Rees Scully Mansukhani, Matthew S. Foy and
Jennifer N. Wahlgreen; Selman, Leichenger, Edson, Hsu,
Newsman & Moore and Linda Wendell Hsu for Plaintiff and
Respondent.
INTRODUCTION
Lisa Parmerlee, Thomas C. Lally, and Nancy G. Lally (as
trustees of the Thomas C. Lally and Nancy G. Lally Revocable
Trust), Thomas Lally, and Thomas Lally’s IRA (collectively,
appellants) appeal from a judgment entered after the trial court
denied their motion to vacate an arbitration award and granted
the petition of Scottsdale Insurance Company (Scottsdale) to
confirm the award. Appellants contend: (1) one of the arbitrators
on the panel failed to disclose, within the time required for
disclosure, a ground for disqualification of which the arbitrator
was then aware; and (2) the arbitration proceedings were
fundamentally unfair. For the reasons discussed below, we reject
these contentions and affirm.
FACTUAL AND PROCEDURAL BACKGROUND
A. The Scottsdale Policy
Scottsdale issued a “Broker/Dealer Financial Services
Professional Liability Insurance Policy” to DeWaay Financial
Network, LLC and its “representatives” (collectively, DeWaay).
The policy insured DeWaay against claims made and reported to
Scottsdale during the policy period—December 1, 2010 through
January 23, 2012. The policy contains an arbitration provision,
providing in relevant part: “In the event of any such dispute, the
matter shall be resolved by binding arbitration before three
privately selected arbitrators acting pursuant to the arbitration
provisions of the California Arbitration Act, Section 1280 through
1294.2 of the Code of Civil Procedure. . . . There shall be three
arbitrators, one named in writing by each of the parties within
ten days after demand for arbitration is given and a third chosen
by the two appointed arbitrators.” The policy also states: “At the
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hearing, either party may present any relevant evidence and the
formal rules of evidence applicable to judicial proceedings shall
not govern . . . . The submission of a dispute to the arbitrator(s)
may be rendered by any Superior Court having jurisdiction, or
such Court may vacate, modify, or correct the award in
accordance with the prevailing sections of the California
Arbitration Act.”
B. History of the Relevant Claims
On January 9, 2012, Gordon Mosher filed a class action
petition against DeWaay in Iowa District Court for negligence
and violations of the Iowa Uniform Securities Act (Mosher Class
Action). Appellants were not named as plaintiffs or identified in
the Mosher Class Action. The Mosher Class Action was reported
to Scottsdale during the policy period. Scottsdale retained Sam
Edgerton to defend DeWaay in the Mosher Class Action. The
parties in the Mosher Class Action reached a settlement, and the
trial court approved the proposed settlement. In 2015, however,
the Iowa Court of Appeals reversed the decision of the trial court
and remanded the matter for further proceedings. Over the next
several years, Scottsdale and DeWaay resolved the claims of the
individual putative class members.
In February and March 2016, appellants filed a “FINRA
[Financial Industry Regulatory Authority] Statement of Claim[s]”
against DeWaay for the first time. Scottsdale denied a duty to
defend or indemnify DeWaay against the claims made by
appellants on the ground they were made and reported more
than four years after the policy period expired.
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C. Arbitration Proceedings
On March 18, 2016, Scottsdale filed a petition to compel
DeWaay to binding arbitration based on the arbitration
provisions in the policy. It filed a first amended petition on
November 10, 2016. The trial court granted the petition on
February 9, 2017.
Appellants subsequently entered into a settlement
agreement with DeWaay. The settlement agreement included an
assignment of “all of [DeWaay]’s rights to bring causes of action,
including without limitation breach of contract and bad faith”
against Scottsdale. The arbitration, therefore, proceeded between
Scottsdale and appellants.
Scottsdale selected William Kronenberg as its party
arbitrator, and appellants selected Val Hornstein as their party
arbitrator. Kronenberg and Hornstein jointly selected Judge
Bonnie Sabraw (Ret.) as the neutral third arbitrator. Before the
arbitration hearing began, appellants voluntarily dismissed
Hornstein as their party arbitrator; thus, the arbitration
proceeded before a panel of two arbitrators.
On December 7, 2017, Judge Sabraw provided the parties
with a disclosure statement. The statement identified
arbitrations she had participated in within the previous five
years, and mediations she had participated in within the
previous two years, that involved the parties, their counsel, or
their counsel’s law firms. It also stated: “Please be advised that
Judge Sabraw will continue to entertain offers of employment (as
a neutral) from a party, lawyer, or law firm involved in the above
referenced matter while it is pending. . . . [T]he parties in this
matter will be notified if Judge Sabraw receives a new offer of
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employment while this arbitration is pending.” (Emphasis in
original.)
In January and April of 2018, Judge Sabraw provided the
parties with supplemental disclosures. Appellants did not object
to the supplemental disclosures.
Throughout the arbitration proceedings, each time Judge
Sabraw accepted an offer of employment from the law firms of
Scottsdale’s counsel, Judge Sabraw sent a “Notice of Offer and
Acceptance of Employment” to the parties. Specifically, between
July 11, 2018 and September 20, 2019, the parties received a
total of 16 emails from Judge Sabraw’s office notifying them that
she accepted an offer from the law firms of Scottsdale’s counsel to
serve as a mediator, neutral arbitrator or referee.
A two-day hearing was held on May 20 and 22, 2019.
On July 9, 2019, the panel issued an Interim Arbitration
Award, finding in favor of Scottsdale on all arbitrated claims.
It concluded appellants failed to meet their burden of
demonstrating their claims were made and reported within the
policy period, which was a requirement for coverage. It explained:
“[T]he differences between the [Mosher] Class Action Petition and
the Lally and Parmerlee FINRA actions, coupled with the notice
provisions in the Scottsdale policy, establish that the making and
reporting of the [Mosher] Class Action during the [p]olicy period
was not a making and reporting of the Parmerlee and Lally
claims to Scottsdale during the [p]olicy period.”
After the panel issued the Interim Arbitration Award, on
September 16, 2019, appellants requested Judge Sabraw’s
recusal from the arbitration proceedings “based upon financial
bias or undue means.” Appellants argued the “offers of
employment [from Scottsdale’s counsel’s law firms were] an overt
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effort to sway the decision.” Judge Sabraw denied the request,
declaring she has “been neither prejudiced nor biased in favor of
or against any party or counsel” throughout the arbitration. She
further declared: “A total of sixteen (16) [disclosure] notices were
issued from July 11, 2018 through September 20, 2019. . . . The
accepted matters were twelve (12) mediations, three (3)
arbitrations and a reference. For the same time period, I accepted
a total of approximately 200 cases.” She concluded: “At no time
prior to service of the Interim Award and filing of Scottsdale’s
motion for costs did any attorney question my fairness to handle
this case or raise any issue regarding undue means as a result of
my acceptance of additional employment. [¶] . . . I have not had
any disqualifying contact with any counsel or party to this matter
and I properly issued disclosures as required by California law.”
The panel denied Scottsdale’s motion to recover costs, and
issued a Final Arbitration Award on October 1, 2019.
D. Trial Court Proceedings
Scottsdale petitioned the superior court to confirm the
award (Code Civ. Proc., § 1286)1; appellants petitioned for the
award to be vacated (§ 1286.2).2 Appellants principally argued
the “‘neutral’ arbitrator failed to disclose substantial financial
1 All further undesignated statutory references are to the
Code of Civil Procedure.
2 Appellants also filed a motion to vacate arbitration in the
United States District Court for the Northern District of
California (Case No. 19-mc-80298-JSC). That action is stayed
pending the resolution of the state court proceedings. (Scottsdale
Ins. Co. v. Parmerlee (N.D. Cal., March 23, 2020, No. 19-mc-
80298-JSC) 2020 U.S. Dist. LEXIS 49941, at *18.)
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information demonstrating a significant financial entanglement
with [Scottsdale] . . . .” The trial court disagreed, holding “[Judge]
Sabraw made disclosures as required by applicable law of new
retentions by counsel for the parties, and [appellants] failed to
object within the applicable time period and waived their right to
object.” It further found “no material omission or
misrepresentation in the disclosures by [Judge] Sabraw.
Moreover, [appellants] did not seek to disqualify the arbitrator
until after hearings were held and after the Interim Arbitration
Award was issued.”
The trial court confirmed the award, and entered judgment
in favor of Scottsdale. Appellants appeal from the judgment.3
DISCUSSION
A. Governing Law and Standard of Review
We first address the threshold issue of whether federal or
state law applies. In their opening brief, appellants contend the
arbitration award should be vacated, citing provisions of the
California Arbitration Act (CAA). Later in their opening brief,
however, appellants also argue the arbitration award should be
vacated under the Federal Arbitration Act (FAA), without any
explanation regarding whether the FAA is applicable. As
discussed above, the express language of the policy’s arbitration
provision provides the CAA applies: “The submission of a dispute
to the arbitrator(s) may be rendered by any Superior Court
having jurisdiction, or such Court may vacate, modify, or correct
the award in accordance with the prevailing sections of the
3 On August 9, 2022, the Supreme Court ordered the case
transferred from the Sixth Appellate District to the Second
Appellate District.
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California Arbitration Act.” Appellants do not dispute they are
bound by the language of the policy as the assignees of the
insureds (i.e., DeWaay). We therefore consider this matter under
the CAA, including the provisions governing judicial review. (See,
e.g., Royal Alliance Associates, Inc. v. Liebhaber (2016) 2
Cal.App.5th 1092, 1104-1105, fn. 4 [acknowledging security
brokerage agreements involve interstate commerce, but applying
the provisions of the CAA because “‘a state court applies its own
procedural law—here, the procedural provisions of the CAA—
absent a choice-of-law provision expressly mandating the
application of the procedural law of another jurisdiction’”]; see
also SWAB Financial, LLC v. E*Trade Securities, LLC (2007) 150
Cal.App.4th 1181, 1195 [noting the FAA “does not preempt
California’s statutory grounds for vacating an arbitration
award”].)
“We review de novo the trial court’s order confirming the
arbitration award.” (Greenspan v. LADT, LLC (2010) 185
Cal.App.4th 1413, 1435.) “The scope of judicial review
of arbitration awards is extremely narrow because of the strong
public policy in favor of arbitration and according finality
to arbitration awards.” (Ahdout v. Hekmatjah (2013) 213
Cal.App.4th 21, 33 (Ahdout).) Thus, “an arbitrator’s decision is
not generally reviewable for errors of fact or law, whether or not
such error appears on the face of the award and causes
substantial injustice to the parties.” (Moncharsh v. Heily &
Blase (1992) 3 Cal.4th 1, 6.) “However, Code of Civil Procedure
section 1286.2 provides limited exceptions to this general rule.”
(Ahdout, supra, 213 Cal.App.4th at p. 33.)
Appellants primarily rely on section 1286.2, subdivision
(a)(6)(A) as the statutory basis for challenging the award. That
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section states a court shall vacate an award when the arbitrator
“failed to disclose within the time required for disclosure a
ground for disqualification of which the arbitrator was then
aware.” (§ 1286.2, subd. (a)(6)(A).) Appellants also rely on section
1286.2, subdivision (a)(3), which provides, in relevant part, that a
court shall vacate an arbitration award if it determines “[t]he
rights of the party were substantially prejudiced by misconduct of
a neutral arbitrator.”
B. The Trial Court Properly Denied Appellants’ Motion
to Vacate the Arbitration Award
1. The Neutral Arbitrator Timely Disclosed All
Information Required Under the CAA
The CAA requires a neutral arbitrator to disclose “all
matters that could cause a person aware of the facts to
reasonably entertain a doubt that the proposed neutral arbitrator
would be able to be impartial . . . .” (§ 1281.9, subd. (a).)
Regarding other employment opportunities, “the proposed
neutral arbitrator shall disclose whether or not he or she has a
current arrangement concerning prospective employment or
other compensated service as a dispute resolution neutral or is
participating in, or, within the last two years, has participated in,
discussions regarding such prospective employment or service
with a party to the proceeding.” (§ 1281.9, subd. (a)(1).) An
arbitrator’s duty to disclose continues throughout the proceeding:
“If an arbitrator subsequently becomes aware of a matter that
must be disclosed . . . , the arbitrator must disclose that matter to
the parties in writing within 10 calendar days after the arbitrator
becomes aware of the matter.” (Cal. Rules of Court, Ethics
9
Standards for Neutral Arbitrators in Contractual Arbitration,
std. 7(c)(2).)
If a party seeks to disqualify an arbitrator based on a
disclosure made under section 1281.9, subdivision (a), that party
must do so within 15 days after service of the disclosure.
(§ 1281.91, subd. (b)(1).) A party who fails to disqualify a neutral
arbitrator within the 15-day time limit waives the right to
disqualify the arbitrator. (§ 1281.91, subd. (c).) Section 1281.91,
subdivision (c) also prohibits service of a notice of disqualification
“after a hearing of any contested issue of fact relating to the
merits of the claims or after any ruling by the arbitrator
regarding any contested matter.” (Ibid.) “If a party is ‘aware that
a disclosure is incomplete or otherwise fails to meet the statutory
disclosure requirements,’ the party ‘cannot passively reserve the
issue for consideration after the arbitration has concluded.’” (Cox
v. Bonni (2018) 30 Cal.App.5th 287, 306 (Cox).) “‘[T]o permit a
party to vacate an arbitration award at the conclusion of the
arbitration’ based on a deficiency in the arbitrator’s disclosures of
which the party was aware and yet took no action to address
‘would undermine the purpose of the time limitations imposed’ in
section 1281.91, subdivision (c).” (Cox, supra, 30 Cal.App.5th at p.
308, quoting Dornbirer v. Kaiser Foundation Health Plan, Inc.
(2008) 166 Cal.App.4th 831, 846 (Dornbirer).)
Applying these principles, we conclude appellants forfeited
their right to disqualify Judge Sabraw for two reasons. First,
appellants requested recusal of Judge Sabraw on September 16,
2019—two months after the most recent disclosure notice sent to
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the parties on July 15, 2019.4 Appellants, therefore, forfeited
their right to disqualify Judge Sabraw by failing to seek
disqualification within the 15-day time limit. (See § 1281.91,
subd. (c).) Moreover, if appellants took issue with the
completeness of the disclosures (i.e., the disclosures did not
disclose the monetary value of each employment offer), they
failed to timely seek additional information. (See, e.g., United
Health Centers of San Joaquin Valley, Inc. v. Superior Court
(2014) 229 Cal.App.4th 63, 85 [If a party is “aware that a
disclosure is incomplete or otherwise fails to meet the statutory
disclosure requirements,” the party “cannot passively reserve the
issue for consideration after the arbitration has concluded”].)
Second, appellants waited until after the panel issued the
Interim Arbitration Award to seek Judge Sabraw’s
disqualification. For this additional reason, appellants forfeited
their challenge by not objecting to Judge Sabraw’s disclosures
until after the panel issued a ruling on a “contested matter.”
(§ 1281.91, subd. (c).)
In any event, even if appellants timely objected to Judge
Sabraw’s disclosures, for the reasons discussed below, we
conclude the objections are meritless.
It is undisputed that Judge Sabraw timely disclosed each
time she accepted an offer of employment from the law firms of
Scottsdale’s counsel. Appellants nevertheless contend the
disclosures were insufficient because they “do not, individually or
in the aggregate, explain and provide notice of the extent of the
neutral’s financial entanglement with Scottsdale or its
4 Judge Sabraw sent three additional disclosure notices after
appellants sought to disqualify Judge Sabraw based on her
previous disclosures.
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partisans.” They fail to cite any case law or statute, however, to
support their assertion that a disclosure is insufficient if it does
not include the financial terms of the employment offer.5 And,
even if financial information was required, failure to include the
information is not a basis for vacating an arbitration award. (See
Dornbirer, supra, 166 Cal.App.4th at p. 842 [“[N]ot every item of
information that is required to be disclosed under section
1281.9 constitutes a ‘ground for disqualification’ as the term is
used in section 1286.2. Rather, the most reasonable
interpretation of the statutory scheme is that the words ‘failed to
disclose within the time required for disclosure a ground for
disqualification of which the arbitrator was then aware’ in section
1286.2 refer to a failure to disclose the existence and nature of
any relationship between the arbitrator and the parties or the
parties’ attorneys, not the specifics of each such relationship”].)
The disclosure notices provided sufficient information for the
parties to inquire about additional information they felt was
needed within the 15-day time limit in section 1281.91,
subdivision (c). (See Dornbirer, supra, 166 Cal.App.4th at p. 842
5 Appellants’ reliance on Benjamin, Weill & Mazer v. Kors
(2011) 195 Cal.App.4th 40 (Benjamin) is misplaced. Benjamin
involved a fee dispute between a law firm and its client. At the
time of the arbitration, the neutral arbitrator was engaged
generally in the defense of attorneys and law firms in cases
involving professional responsibility and was actively
representing a law firm in a case before the California Supreme
Court involving a dispute over legal fees. (Id. at p. 72.) Based on
the arbitrator’s complete lack of disclosure, the court reversed the
trial court’s order denying vacation of the arbitration award. (Id.
at pp. 73, 80.) Here, by contrast, appellants concede timely
disclosure notices were received.
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[“When a party has been informed of the existence of a prior
relationship between the arbitrator and another party or an
attorney, that party is aware of facts that would put the party on
notice of the potential for bias. If the arbitrator does not include
additional information regarding such a relationship in the
disclosure, a party has sufficient information to inquire of the
arbitrator concerning that information”].) As discussed above,
appellants failed to do so.
Accordingly, we conclude appellants forfeited their
objections to Judge Sabraw’s disclosures by failing to timely
object or seek additional information. And, in any event, Judge
Sabraw made timely and complete disclosures as required by
section 1281.9. The trial court, therefore, properly denied
appellants’ motion to vacate based on Judge Sabraw’s alleged
failure to “disclose within the time required for disclosure a
ground for disqualification of which the arbitrator was then
aware.” (§ 1286.2, subd. (a)(6)(A).)
2. Appellants Fail to Show the Arbitration
Proceedings Were Fundamentally Unfair
Alternatively, appellants contend vacation of the
arbitration award is required under section 1286.2, subdivision
(a)(3) because their rights were substantially prejudiced by
misconduct of Judge Sabraw. We are unpersuaded.
Appellants point to two instances of purported misconduct.
First, appellants contend Judge Sabraw improperly interjected
during appellants’ counsel’s cross-examination of Sam Edgerton
(counsel for DeWaay in the Mosher Class Action). During
appellants’ counsel’s cross-examination of Edgerton, he showed
Edgerton the Mosher Class Action Petition and Dr. Lally’s
FINRA Statement of Claims against DeWaay, and asked whether
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certain allegations in the petition and the statement of claims
were similar. Scottsdale’s counsel objected on grounds the
questions called for a legal conclusion. Judge Sabraw attempted
to clarify whether counsel for appellants was asking if Edgerton
believed the claims were similar when he represented DeWaay
several years ago, or whether he currently believed the claims
were similar while looking at the two documents. Judge Sabraw
did not receive a clear response. Edgerton testified he did not
think he could answer whether the claims were similar because
he never compared the claims in the two documents. He
explained: “I never compared [appellants’ claims] to the class
action” because appellants’ claims were made at a later time.
Next, appellants claim Judge Sabraw “injected herself into”
the direct examination of appellants “by sua sponte stopping their
answers as ‘going beyond the question’ when they were clearly
answering the subject that was asked of them and providing
context to the question propounded.” (Original emphasis.) The
sole example appellants provide is the following exchange
between Dr. Lally and appellants’ counsel:
Q[.] And did he make a recommendation of a portfolio of
products to you?
A[.] He would present a list of alternative investments that
he had available, which basically every time we met with him, it
turned into somewhat of a harangue, for want of a better term, to
purchase in some of the investments.
At that time, I was sitting on a lot of cash because I had
been wary of market downturns. The dotcom implosion had come
to have an impact. I wasn’t in the stock market much. And also
the subsequent downturn in the early 2000s –
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JUDGE SABRAW: I’m going to stop you, Doctor. Could you
stop him?
Excuse me, Doctor. This is Judge Sabraw. I want you to
listen very carefully to the question that you’re asked and try to
just answer that question for us because we have limited time for
this. Okay?
THE WITNESS: Okay.
JUDGE SABRAW: Thank you.
[¶] . . .[¶]
Q[.] Did you think these things were – were you told by Mr.
DeWaay that these things were safe or risky?
A[.] Well, he would hand out a prospectus which stated that
there were some risks, but he would present them as being safe
investments for an IRA situation.
In fact, at one point he called me on the phone and listed
some of these –
JUDGE SABRAW: I’m going to stop you again, Doctor.
Doctor, listen to me, please. You’re going beyond the question. So
just listen and just answer the question.
We conclude appellants fail to establish any misconduct by
Judge Sabraw based on these two instances over the course of a
two-day hearing, much less substantial prejudice due to the
purported misconduct. (See Cal. Rules of Court, Ethics Standards
for Neutral Arbitrators in Contractual Arbitration, comment to
std. 13 [“During an arbitration, an arbitrator may discuss the
issues, arguments, and evidence with the parties or their counsel,
make interim rulings, and otherwise to control or direct the
arbitration. [Standard 13, stating an arbitrator must ‘conduct the
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arbitration fairly, promptly, and diligently’] is not intended to
restrict these activities”].)
DISPOSITION
The judgment is affirmed. Scottsdale is awarded its costs
on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
CURREY, Acting P.J.
We concur:
COLLINS, J.
STONE, J.*
* Judge of the Los Angeles Superior Court, assigned by the
Chief Justice pursuant to Article VI, section 6, of the California
Constitution.
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