Thursday, January 27, 2022

California Court of Appeal, Falcon Brands, Inc. v. Mousavi & Lee, LLP, Docket No. G059477

 

Legal Ethics

 

Professional Malpractice

 

Attorneys

 

Litigation Privilege

 

Anti-SLAPP Law

 

Illegal Attempts to Force into Settling

 

Extortion

 

Flatley Rule.”

 

California Law

 

 

 

Lawyers argue for a living.  Some do more than argue.  They lace their settlement demands with threats.  When does such activity cross the line and become professional misconduct?  That is the fundamental question presented in this case.

 

 

Falcon Brands, Inc. and Coastal Harvest II, LLC (collectively Falcon) appeal here from an order granting respondent’s special motion to strike both causes of action in Falcon’s cross-complaint pursuant to Code of Civil Procedure section 425.16 (the anti-SLAPP law). The cross-complaint alleges extortion and intentional interference with a contract against attorney Amy Mousavi and her law firm, Mousavi & Lee, LLP (collectively Mousavi). Falcon argues Mousavi’s e-mail settlement demands, described in detail below, which are the focus of Falcon’s cross-complaint, were not entitled to protection under the anti-SLAPP law because they constituted illegal attempts to force Falcon into settling the underlying matter. The trial court rejected this argument and granted Mousavi’s anti-SLAPP motion.

 

We reverse as to the first cause of action for extortion because we conclude Mousavi’s e-mail settlement demands, when considered in context, were not protected speech in light of the Supreme Court’s ruling in Flatley v. Mauro (2006) 39 Cal.4th 299 (Flatley). Rather, Mousavi’s escalating series of threats ultimately transformed what had been legitimate demands into something else: extortion. We therefore conclude Falcon’s first cause of action is not protected by the anti-SLAPP law as a result of the well-established “Flatley rule.”

 

We affirm as to the second cause of action, intentional interference with a contract. That cause of action arises out of Mousavi’s actual revelation of damaging information about Falcon to Falcon’s merger partner. Falcon does not contend the revelations were illegal as a matter of law. The revelations were made in furtherance of Mousavi’s contemplated litigation. The trial court correctly concluded the revelations were protected by the litigation privilege. Consequently, they are also protected by the anti-SLAPP statute.

 

(…) The parties failed to reach a settlement; Mousavi thereafter sent Harvest copies of the various settlement demands she had made to Falcon. Harvest subsequently sued to rescind its merger agreement with Falcon, apparently based on the claims of illegal conduct it received from Mousavi.

 

(…) While Honard did allege in his complaint that Falcon engaged in specific illegal activities, he did not affirmatively link those acts to either his wrongful termination or the non-payment of his commissions, salary, or expenses.

 

(…) Mousavi moved to strike the cross-complaint pursuant to the anti-SLAPP law. In support of the motion, Mousavi declared that, after she learned Falcon was involved in a merger with Harvest, she had a good faith reason to inform Harvest about Honard’s claims against Falcon because the Corporations Code states the surviving corporation in a merger remains liable for any judgment entered against the disappearing corporation. (Corp. Code, § 1108.) She denied threatening to report Falcon to the Bureau of Cannabis Control, to other law enforcement agencies, or to the media.

 

The Anti-SLAPP Law


We begin our analysis with another quote from Flatley: “Our opinion should not be read to imply that rude, aggressive, or even belligerent prelitigation negotiations, whether verbal or written, that may include threats to file a lawsuit, report criminal behavior to authorities or publicize allegations of wrongdoing, necessarily constitute extortion.” (Flatley, supra, 39 Cal.4th at p. 332, fn. 16.) We concur in this observation. The presence or absence of extortion necessarily depends on the facts in a particular case. Having said that, we turn to the difficult issue presented here.

 

The anti-SLAPP law provides a summary mechanism to test the merit of any claim arising out of a defendant’s protected speech or petitioning activities. The law authorizes courts to strike any cause of action which falls within the statute’s purview, if the plaintiff cannot demonstrate a probability of prevailing on it. (Code Civ. Proc.,
§ 425.16.) “Attempting to protect against ‘lawsuits brought primarily to chill’ the exercise of speech and petition rights, the Legislature embedded context into the statutory preamble, ‘declaring that it is in the public interest to encourage continued participation in matters of public significance.’” (FilmOn.com Inc. v. DoubleVerify Inc. (2019)
7 Cal.5th 133, 143 (FilmOn.com).)

 

“Because our ‘primary goal is to determine and give effect to the underlying purpose of’ the anti-SLAPP statute,” we will “liberally extend the protection of the anti-SLAPP statute where doing so would ‘encourage continued participation in matters of public significance,’ but withhold that protection otherwise.” (FilmOn.com, supra, 7 Cal.5th at p. 154.)

 

When a party moves to strike a complaint on the basis of the anti-SLAPP law, the trial court must engage in a two-step process. “First, the court decides whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity. The moving defendant’s burden is to demonstrate that the act or acts of which the plaintiff complains were taken ‘in furtherance of the defendant’s right of petition or free speech under the United States or California Constitution in connection with a public issue,’ as defined in the statute.” (Equilon Enterprises v. Consumer Cause, Inc. (2002) 29 Cal.4th 53, 67 (Equilon).)

 

If the court finds the defendant has made that required showing, the burden shifts to the plaintiff to demonstrate “there is a probability that the plaintiff will prevail on the claim.” (Code Civ. Proc., § 425.16, subd. (b)(1); DuPont Merck Pharmaceutical Co. v. Superior Court (2000) 78 Cal.App.4th 562, 567-568.)

 

“An order granting or denying a special motion to strike shall be
appealable . . . .” (Code Civ. Proc., § 425.16, subd. (i).) We review either ruling on a de novo basis. (ComputerXpress, Inc. v. Jackson (2001) 93 Cal.App.4th 993, 999 [“Whether section 425.16 applies and whether the plaintiff has shown a probability of prevailing are both reviewed independently on appeal”].) “While we are required to construe the statute broadly, we must also adhere to its express words and remain mindful of its purpose.” (Paul v. Friedman (2002) 95 Cal.App.4th 853, 864, fn. omitted.)

 

The Protected Activity Prong
A cross-defendant who files an anti-SLAPP motion to strike bears the initial burden of demonstrating that the challenged cause of action arises from protected activity. (Equilon, supra, 29 Cal.4th at p. 67.) “In deciding whether the ‘arising from’ requirement is met, a court considers ‘the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based.’” (City of Cotati v. Cashman (2002) 29 Cal.4th 69, 79.)

 

In Flatley, the Supreme Court created an addendum to the standard anti-SLAPP analysis. We believe application of the so-called “Flatley rule” is dispositive here. Because the facts in Flatley bear such a remarkable similarity to those now before us, we quote liberally from the Supreme Court’s opinion:

“Plaintiff Michael Flatley, a well-known entertainer, sued defendant
D. Dean Mauro, an attorney, for civil extortion, intentional infliction of emotional distress and wrongful interference with economic advantage. Flatley’s action was based on a demand letter Mauro sent to Flatley on behalf of Tyna Marie Robertson, a woman who claimed that Flatley had raped her, and on subsequent telephone calls Mauro made to Flatley’s attorneys, demanding a seven-figure payment to settle Robertson’s claims. Mauro filed a motion to strike Flatley’s complaint under the anti-SLAPP statute.
[Fn. omitted.] . . . The Court of Appeal held that, because Mauro’s letter and subsequent telephone calls constituted criminal extortion as a matter of law, and extortionate speech is not constitutionally protected, the anti-SLAPP statute did not apply.” (Flatley, supra, 39 Cal.4th at p. 305.)

 

The Supreme Court affirmed the judgment of the Court of Appeal: “We conclude that, consistent with the legislative intent underlying the anti-SLAPP statute as revealed by the statutory language, and consistent with our existing anti-SLAPP jurisprudence, a defendant whose assertedly protected speech or petitioning activity was illegal as a matter of law, and therefore unprotected by constitutional guarantees of free speech and petition, cannot use the anti-SLAPP statute to strike the plaintiff’s complaint.” (Flatley, supra, 39 Cal.4th at p. 305.)

 

Mousavi argued in the trial court that Flatley is distinguishable despite the fact that, much like in Flatley, Falcon sued Mousavi for extortion and intentional interference with a contract based on the content of a series of increasingly strident demand letters it received from her. Mousavi echoes the argument made by counsel in Flatley that her demands “amounted to no more than the kind of permissible settlement negotiations that are attendant upon any legal dispute . . . .” (Flatley, supra, 39 Cal.4th at p. 328.) During oral argument before us, Mousavi’s appellate counsel vigorously agreed.

We are not persuaded.

 

Extortion
“Extortion is the obtaining of property . . . from another, with his or her consent . . . induced by a wrongful use of force or fear.” (Pen. Code, § 518, subd. (a).) Fear, for purposes of extortion “may be induced by a threat of any of the following:
1. To do an unlawful injury to the person or property of the individual threatened or of a third person. 2. To accuse the individual threatened . . . of a crime. 3. To expose, or to impute to him . . . a deformity, disgrace or crime. 4. To expose a secret affecting him, her, or them. 5. To report his, her, or their immigration status or suspected immigration status.” (Pen. Code, § 519, italics added; Flatley, supra, 39 Cal.4th at p. 326.)
Attempted extortion is also a crime. (Pen. Code, § 524; see People v. Umana (2006) 138 Cal.App.4th 625 (Umana) [affirming conviction for attempted extortion under Penal Code section 524].)

 

As the Supreme Court explained in Flatley, “extortion has been characterized as a paradoxical crime in that it criminalizes the making of threats that, in and of themselves, may not be illegal. ‘In many blackmail cases the threat is to do something in itself perfectly legal, but that threat nevertheless becomes illegal when coupled with a demand for money.’ [Citation.] The extortion statutes ‘all adopted at the same time and relating to the same subject matter, clearly indicate that the legislature in denouncing the wrongful use of fear as a means of obtaining property from another had in mind threats to do the acts specified in Penal Code section 519, the making of which for the purpose stated is declared to be a wrongful use of fear induced thereby.’” (Flatley, supra, 39 Cal.4th at p. 326, fn. omitted.). “Attorneys are not exempt from these principles in their professional conduct.” (Id. at p. 327.)

 

The Supreme Court addressed a pivotal argument tendered by Mousavi both in the trial court and before us—that her conduct did not constitute extortion since she threatened no direct disclosure of Falcon’s alleged criminal misconduct to either law enforcement or the media. We recognize at this point that this argument will strike a familiar chord with many lawyers who might ask, isn’t this type of posturing standard operating procedure for aggressive litigators? Don’t lawyers regularly link settlement demands to threatened consequences?

 

In response, we concur with the answers provided by the Supreme Court in Flatley: “threats to do the acts that constitute extortion under Penal Code section 519 are extortionate whether or not the victim committed the crime or indiscretion upon which the threat is based and whether or not the person making the threat could have reported the victim to the authorities or arrested the victim. [Citations.] Furthermore, the crime with which the extortionist threatens his or her victim need not be a specific crime.” (Flatley, supra, 39 Cal.4th at p. 327.)

 

In other words, it is the threat to reveal damaging information, not any subsequent revelation, that makes the conduct illegal when the threat is linked to a monetary demand. Many, perhaps most, extortionate threats may never actually be conveyed to either law enforcement or the media. The reason for this is obvious enough: the threat had its desired effect. “The accusations need only be such as to put the intended victim of the extortion in fear of being accused of some crime. The more vague and general the terms of the accusation the better it would subserve the purpose of the accuser in magnifying the fears of his victim, and the better also it would serve to protect him in the event of the failure to accomplish his extortion and of a prosecution for his attempted crime.” (People v. Sanders (1922) 188 Cal. 744, at pp. 749-750; cited with approval in Flatley, supra, 39 Cal.4th at p. 327.)

 

Again, it is the fact that the threat is directly linked to the monetary demand that is the critical factor. “‘It is the means employed to obtain the money which the law denounces, and though the purpose may be to collect a just indebtedness arising from and created by the criminal act for which the threat is to prosecute the wrongdoer, it is nevertheless within the statutory inhibition.’” (Flatley, supra, 39 Cal.4th at p. 326, italics added.)

 

Applying these rules to the current facts, we believe Mousavi’s initial communication with Falcon on September 6, 2019, as described above, was innocent. Her next e-mail sent on October 8, 2019, is a closer call when considered by itself. That e-mail contained at least an implicit threat, as Mousavi specified the crimes Falcon had allegedly committed, though she never directly linked her settlement demands to them. Instead, she explained how she had calculated her client’s damages without making any direct reference to the alleged criminal misconduct. A skeptical observer might reasonably wonder why Mousavi referenced the “BBC Violations” at all within that demand. Indeed, we share that curiosity. We nonetheless conclude the October 8 correspondence standing alone may not have crossed the line into misconduct.

 

But the October 8 e-mail must be considered in context along with the October 11, 2019 e-mail. In that e-mail Mousavi informed Falcon’s counsel she had already “put the attorneys for Harvest Health & Recreation Inc. (‘Harvest’) on notice about Mr. Honard’s claim for wages, without disclosing other issues mentioned in my letter of October 8, 2019.” There can be no doubt that bribing a deputy district attorney (as alleged in the October 8 e-email) involves criminal misconduct. Mousavi then added, “Harvest has requested that I forward the demand letters I have sent you. I am planning to e-mail those letters on Tuesday.” The implication is clear: settle the case now or Harvest will become aware of Falcon’s alleged criminal misconduct next week.

 

“It is not necessary that a threat should be apparent from the face of the letter, nor even necessary that it should be implied therefrom. The statute says if the language used is adapted to imply a threat, then the writing is sufficient. Parties guilty of the offense here alleged seldom possess the hardihood to speak out boldly and plainly, but deal in mysterious and ambiguous phrases . . . .” (People v. Choynski (1892) 95 Cal. 640, 641–642; Umana, supra, 138 Cal.App.4th at p. 640.)

 

Mousavi’s $490,000 settlement demand, as explained in her October 8 e-mail correspondence, was for unpaid wages, commissions, and related expenses. The demand was unrelated to any alleged criminal conduct. Thus, to paraphrase Flatley, Mousavi’s threat to disclose criminal activity entirely unrelated to her client’s damage claim “‘exceeded the limits of respondent’s representation of his client’ . . . . (State v. Harrington, supra, 260 A.2d at p. 699 [attorney’s veiled threat to have his client in a divorce action inform on her husband to the Internal Revenue Service and Bureau of Immigration and Naturalization supports attorney’s conviction of extortion].)” (Flatley, supra, 39 Cal.4th at pp. 330-331.)

 

Although statements made in connection with litigation are generally protected under the terms of the anti-SLAPP law, the Supreme Court made it clear in Flatley that settlement demands which contain threats may not be afforded protection: “not all speech or petition activity is protected by [Code of Civil Procedure] section 425.16.” (Flatley, supra, 39 Cal.4th at p. 313.) “The law does not contemplate the use of criminal process as a means of collecting a debt.” (People v. Beggs (1918) 178 Cal. 79, 84.)

 

 

(California Court of Appeal, Jan. 27, 2022, Falcon Brands, Inc. v. Mousavi & Lee, LLP, Docket No. G059477, Certified for Publication)

Wednesday, January 19, 2022

Arizona Supreme Court, Benson v. Casa De Capri Enterprises, LLC, Docket No. CV-20-0331-CQ

 

Garnishment Action (a Statutory Scheme) (“after recovering a judgment against an insured under a liability policy, the injured third person may collect such judgment by instituting garnishment proceedings against the liability insurer »)

Insurance Law

Assignment of Rights

Direct Benefits Estoppel (a Common Law Equitable Doctrine)

Garnishment Action before a Court or before the Insurance Contract Arbitrator?

And if the Debt is Contested: “a testing of the insurer’s liability may take the form of a declaratory judgment brought in advance of the third party’s action or proceedings on garnishment following the trial of the third party’s action

Arizona Law

 

 

 

Certified Questions from the United States Court of Appeals for the Ninth Circuit

Benson, et al. v. Casa de Capri Enters., LLC, Continuing Care Risk Retention Grp., Inc., 980 F.3d 1328 (9th Cir. 2020)

QUESTIONS ANSWERED

 

The United States Court of Appeals for the Ninth Circuit certified the following questions to this Court: (1) In a garnishment action by a judgment creditor against the judgment debtor’s insurer claiming that coverage is owed under an insurance policy, where the judgment creditor is not proceeding on an assignment of rights, can the insurer invoke the doctrine of direct benefits estoppel to bind the judgment creditor to the terms of the insurance contract?; and (2) If yes, does direct benefits estoppel also bind the judgment creditor to the arbitration clause contained in the insurance policy?

 

We answer the first question “no” and therefore do not reach the second question. The common law doctrine of direct benefits estoppel cannot be invoked in a garnishment action to bind the judgment creditor to the terms of the contract because applying the doctrine in this context would contravene Arizona’s statutory garnishment scheme.

 

From January 2012 to August 2013, Continuing Care Risk Retention Group (“CCRRG”) insured Casa de Capri Enterprises (“Capri”), a skilled nursing facility. The insurance policy provided up to $1 million in liability coverage and contained an arbitration clause, which stated:

Any dispute or controversy arising under, out of, in connection with or in relation to this Policy shall be submitted to, and determined and settled by, arbitration in Sonoma County, California . . . . Any demand for arbitration by a CCRRG Member under this Policy must be made within twelve (12) months of any dispute arising out of this “Policy”, including, but not limited to any denial by CCRRG of defense or reimbursement, whether in whole or in part, of any “Claim” dispute or controversy that arises. . . . The parties agree that any such award shall also be final and binding in a direct action against CCRRG by any judgment creditor of a CCRRG Member.

 

Jacob Benson was a resident at Capri and is a “vulnerable adult.” See A.R.S. § 46-451(A)(11). In December 2012, Jacob and his family (“the Bensons”) sued Capri in Maricopa County Superior Court alleging negligence and abuse of Jacob. Capri sent the claim to CCRRG, which provided a defense. In August 2013, Capri filed a Chapter 11 bankruptcy petition, triggering an automatic stay of all litigation. Capri retroactively cancelled its insurance policy with CCRRG, effective August 1, 2013. CCRRG then discontinued defending Capri and disclaimed any further coverage.

 

Three years later, the Bensons obtained an order partially lifting the bankruptcy stay so they could pursue their action against Capri. As part of the order, the Bensons obtained an assignment of Capri’s bad faith insurance claim against CCRRG. In December 2017, the trial court entered a $1.5 million uncontested judgment in favor of the Bensons and against Capri.

 

After the court entered judgment, the Bensons filed a writ of garnishment against CCRRG to collect the judgment. CCRRG removed the garnishment action to federal court and moved to compel arbitration under the policy’s arbitration clause. CCRRG also disputed that it would owe any coverage to Capri because Capri cancelled the policy.

 

The United States District Court for the District of Arizona granted CCRRG’s motion to compel arbitration and dismissed the action. The Bensons appealed to the Ninth Circuit, which certified the questions to this Court.

 

We have jurisdiction pursuant to article 6, section 5(6) of the Arizona Constitution and A.R.S. § 12-1861.

 

The district court ruled that even though the Bensons were nonsignatories to the policy, they were bound to its arbitration clause under Arizona’s doctrine of direct benefits estoppel. The Bensons argue that because their garnishment action is not premised on an assignment of Capri’s coverage claims under the CCRRG policy but is instead based on an assignment of Capri’s bad-faith claim, they should not be bound by the arbitration clause in the contract that they did not sign. They also argue that garnishment is a statutory remedy and is therefore not subject to private arbitration. CCRRG contends that because the Bensons sought to avail themselves of the benefits of the CCRRG policy, they should be bound by the arbitration clause. We review issues of law arising out of a contract and the interpretation of statutes de novo. JTF Aviation Holdings Inc. v. CliftonLarsonAllen LLP, 249 Ariz. 510, 513 ¶ 14 (2020); Premier Physicians Grp., PLLC v. Navarro, 240 Ariz. 193, 194 ¶ 6 (2016).

 

Before addressing the questions certified to us by the Ninth Circuit, we examine the relationship between contractual arbitration clauses and the doctrine of direct benefits estoppel.

 

The Federal Arbitration Act, 9 U.S.C. § 1, et seq., governs the arbitration clause here, and makes “written arbitration agreements ‘valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of a contract.’” Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 629–30 (2009) (quoting 9 U.S.C. § 2). Nonparties to a contract are generally not bound by an arbitration agreement. See Dueñas v. Life Care Ctrs. of Am., Inc., 236 Ariz. 130, 139 ¶ 26 (App. 2014). There are common law exceptions to this general rule, however, including direct benefits estoppel, which is at issue here. Id. (citing Bridas S.A.P.I.C. v. Gov’t of Turkmenistan, 345 F.3d 347, 356 (5th Cir. 2003)); Austin v. Austin, 237 Ariz. 201, 208–09 ¶ 23 (App. 2015).

 

Direct benefits estoppel specifies that “a nonsignatory may be compelled to arbitrate only when the nonsignatory (1) knowingly exploits the benefits of an agreement containing an arbitration clause, or (2) seeks to enforce terms of that agreement or asserts claims that must be determined by reference to the agreement.” Austin, 237 Ariz. at 210 ¶ 29 (citing Reid v. Doe Run Res. Corp., 701 F.3d 840, 846 (8th Cir. 2012)); see also Schoneberger v. Oelze, 208 Ariz. 591, 594 ¶ 14 (App. 2004) (“In the arbitration context, a nonsignatory to an agreement requiring arbitration may be estopped, that is, barred, from avoiding arbitration if that party is claiming or has received direct benefits from the contract.”).

 

Next, we consider Arizona’s garnishment statutes. Garnishment did not exist at the common law; it is not itself a cause of action or claim but is entirely a statutory remedy. Kellin v. Lynch, 247 Ariz. 393, 398 ¶ 18 (App. 2019); see also A.R.S. §§ 12-1570 to -1597. “Since garnishment is a creature of statute, garnishment proceedings are necessarily governed by the terms of those statutes . . . and courts may not allow garnishment proceedings to follow any course other than that charted by the legislature.” Bennett Blum, M.D., Inc. v. Cowan, 235 Ariz. 204, 208 ¶ 16 (App. 2014) (quoting Patrick v. Associated Drygoods Corp. (Goldwater’s Div.), 20 Ariz. App. 6, 9 (1973)) (holding that because garnishment is a statutory cause of action, “a trial court must follow the manner in which the legislature has chosen for making a determination”); see also Carey v. Soucy, 245 Ariz. 547, 551 ¶ 15 (App. 2018) (explaining that courts narrowly construe the garnishment statutes and apply them exactly as the legislature prescribed).

 

A garnishment proceeding is limited and moves on a statutorily expedited timeline and pursuant to prescribed detailed procedures. See Davis v. Chilson, 48 Ariz. 366, 369–70 (1936); A.R.S. §§ 12-1578.01, -1580. Importantly, the legislature provided that the “court, sitting without a jury, shall decide all issues of fact and law.” § 12-1584(E); see also § 12-1584(A) (“On application by the judgment creditor the court shall enter judgment on the writ . . . .”), § 12-1584(B) (“The court, after hearing evidence and argument, shall determine whether the writ is valid against the judgment debtor, what amount is presently due and owing on the underlying judgment . . . and the court shall enter judgment . . . .”).

 

With these principles in mind, we now turn to the question before us. It is undisputed that insurance loss obligations can be garnished. See Sandoval v. Chenoweth, 102 Ariz. 241, 245 (1967) (“It seems to be settled that after recovering a judgment against an insured under a liability policy, the injured third person may collect such judgment by instituting garnishment proceedings against the liability insurer.”); see also Kepner v. W. Fire Ins. Co., 109 Ariz. 329, 332 (1973) (“Such a testing of the insurer’s liability may take the form of . . . proceedings on garnishment following the trial of the third party’s action as in the instant case.”); Webster v. USLife Title Co., 123 Ariz. 130, 132 (App. 1979) (“These derivative rights, in essence, place the garnishor-creditor in the shoes of the debtor and if the debtor has no right to the funds sought to be garnished, then neither does the garnishor-creditor.”).

 

The Ninth Circuit asks whether the doctrine of direct benefits estoppel can be applied in an Arizona garnishment proceeding as an exception to the general rule that nonparties are not bound by the terms of a contract. We hold it cannot.

 

Permitting the application of direct benefits estoppel in garnishment proceedings would contravene the legislature’s directive that garnishment proceedings adhere to prescribed statutory procedures. This includes the statutory requirement that the trial court—not an arbitrator— resolve all factual and legal issues. The common law doctrine of direct benefits estoppel cannot be applied to supplant the legislative scheme for garnishment. Allowing the arbitration clause to control in a garnishment proceeding would undermine the legislature’s intent that the trial court decide the issues of law and fact. Courts narrowly construe the garnishment statutes and apply them as prescribed by the legislature. See Carey, 245 Ariz. at 551 ¶ 15. A common law equitable doctrine cannot supersede the legislature’s clear mandate regarding garnishment proceedings.

 

Additionally, courts in other jurisdictions have found that similarly worded garnishment provisions preclude arbitration entirely. See, e.g., Penford Prods. Co. v. C.J. Schneider Eng’g Co., 808 N.W.2d 443, 448 (Iowa Ct. App. 2011) (“While the garnishor ‘stands in the shoes’ of the judgment debtors, this is in the context of the issue presented in the garnishment proceedings. It does not extend to the arbitration clause in the agreement between the two companies. Further, the garnishment statute provides that this issue shall be decided by trial.”); see also United States v. Harkins Builders, Inc., 45 F.3d 830, 833 (4th Cir. 1995) (“Under Virginia law, a garnishment proceeding is a separate proceeding in which the judgment creditor enforces the ‘lien of his execution’ against property or contractual rights of the judgment debtor which are in the hands of a third person . . . . The judgment creditor does not ‘step into the shoes’ of the judgment debtor and become a party to the contract, but merely has the right to hold the garnishee liable for the value of that contract right.”).

 

However, if the debt is contested, as is the case here, the judgment creditor must prove that the insurer was obligated to insure the loss under the insurance agreement. This does not mean that the Bensons are bound by or effectively parties to the insurance contract, but rather they have standing to access the funds to the extent the original insured could have. The parties must necessarily refer to the insurance policy to determine the existence of a debt, but these issues must be resolved by a court. See Kepner, 109 Ariz. at 332 (“Such a testing of the insurer’s liability may take the form of a declaratory judgment brought in advance of the third party’s action or proceedings on garnishment following the trial of the third party’s action as in the instant case.”).

 

For the foregoing reasons, we answer the Ninth Circuit’s first certified question as follows: In a garnishment proceeding, an insurer cannot invoke the doctrine of direct benefits estoppel to bind a judgment creditor to the terms of the insurance contract. Because the answer to the first question is no, we do not reach the second question.

 

 

 

 

(Arizona Supreme Court, Jan. 20, 2022, Benson v. Casa De Capri Enterprises, LLC, Docket No. CV-20-0331-CQ)