Cavallo v. Phoenix Health Plans, Inc. (D2 2.23.21)

Bad faith claims have recurring themes and evidence on both sides. This appeal is from a jury verdict in favor of a health insurer. The insured suffered from multiple sclerosis and purchased a health care plan in 2015. Before and after he purchased the plan, he received infusion treatments with a “controversial” drug. His medical provider submitted an authorization request and the insurer incorrectly stated that the provider was out-of-network and denied the request. After several weeks of back-and-forth exchanges between the insured, his provider, and the insurer, the infusion treatment was later approved. The insured argued the delay caused a significant relapse, and sued the insurer for bad faith. The defense argued the initial denial was a good-faith mistake; the medical provider cancelled the prior authorization and failed to provide information necessary to initiate and timely process the claim; and, the insured could have accepted a low-cost dose directly from his provider that would have cost approximately $150. Jury agreed and found for the insurer. The insured challenged several jury instructions and evidentiary rulings. The court of appeals held the jury may be instructed on contract defenses including waiver (the waiver defense was focused on the provider cancelling the authorization request). Although there is no “comparative bad faith,” whether the insured breached the contract or there are other contract defenses, such defenses may be considered by the jury when deciding whether the insurer’s conduct was reasonable. A closely related issue follows. The insured challenged a mitigation of damages instruction, but because the jury returned a defense verdict, the court did not consider it. It did, however, consider the insured’s negligent conduct in a footnote stating “UCATA may permit a defendant’s intentional conduct (bad faith) to be compared to a plaintiff’s negligence.” Thus, while there is no “comparative bad faith” because an insured cannot commit bad faith, the court’s footnote suggests comparative fault may still be in play. Less interesting are evidentiary challenges. One involving call logs without foundation, and the second, the inadmissibility of coverage guides from another plan for a different year. All of which were properly excluded.

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Sycamore Hills Estates Homeowners Ass’n v. Zablotny (D2 1.22.21)

Our curiosity is piqued whenever we see “affirmed in part; vacated in part and remanded,” and we expect something interesting is coming. So often we find ourselves disappointed – as we do here. It isn’t the court’s fault. The shallowness comes from the parties. The court tells us very little about the underlying dispute between the Zablotnys and their homeowners association the Sycamore Hills Estates Homeowners Ass’n. The Zablotnys sued the Association for breaching the CC&Rs for some reason the court does not explain. The case is settled and as part of the settlement, a consent judgment is entered. Two years later the Association changes its mind. The Association argues the judgment was beyond the scope of the pleadings because it can be characterized as a declaratory judgment and should not have been entered. Although the Association stipulated to it, it argues the court did not have jurisdiction to do what it asked. The Association then argues it really did not have authority to enter into such a settlement.

The court of appeals holds the trial court had authority to hear the underlying case; the parties had agreed to the stipulated judgment to resolve the dispute; and thus, the judgment was not void for lack of jurisdiction. As for the ultra vires challenge by the Association against itself, it’s a corporation and Arizona statutes limit challenges for lack of authority. A member can challenge the corporation’s action, but the corporation cannot challenge itself. Finally, the trial court had entered a supplemental award of fees against the Association before the time had expired for the Association to file a response. (Why wasn’t this fixed earlier when the court of appeals told the parties they had to go back to the trial court and get a final judgment because the first one wasn’t signed? ) The trial court is directed to give the Association the opportunity to be heard on this. We expect there will be more litigation because when the Association proclaims it acted without authority, it is sending its members a litigation invitation.


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The Spaulding LLC v Miller et al (D1 12.22.20)

When parties contractually agree to a broad arbitration clause to resolve “all disputes of every kind and nature” one party cannot later complain about the chosen forum when things go south. Basically, the parties formed an LLC called Dynamite and bought a vacant lot in Scottsdale. The loan was personally guaranteed by Miller who is the managing member. Things do not quite work out as envisioned and Dynamite defaults on the loan. Before the sale, Miller personally pays off the debt, and Dynamite keeps the lot. Miller then quitclaimed the property to another entity he owns and that entity quitclaimed the property to yet another entity he owns. Plaintiff was not told about either transfer. Three years later, Plaintiff learned another restaurant was closing and talked to Miller about developing the lot as a restaurant. Miller liked the idea and agreed to increase Plaintiff’s share in Dynamite to 8.6% if it was successful. Plaintiff was able to rezone the lot from residential to commercial. This increased the value of the lot from $300,000 to $5 million. Plaintiff then first learned Dynamite no longer owned the property and sued Miller. Plaintiff won at arbitration and was awarded 8.6% interest in the property.

In superior court, Miller contested the arbitration claiming Plaintiff’s claim was a “derivative action” and Plaintiff was required to follow the Arizona statute which he had not done. Because of this failure, he argued, the arbitrator lacked “subject matter jurisdiction.” He loses because subject matter jurisdiction involves a court’s jurisdiction and is not a defense to an arbitration clause. Miller further complained the arbitrator did not follow the rules. Without telling us what the rules are, the court cites and footnotes a dead-end link to AAA arbitration rules. Thus, the court ends with highlighting an unaddressed problem as to what rules and law apply. AAA makes its own rules and arbitrators are given considerable discretion in interpreting and applying substantive law. Many years ago we were told by the courts that arbitrators may do what no other judge has a right to do; an arbitrator may intentionally decide contrary to law and still have the arbitrator’s judgment stand. If there was a substantive defense here, it was lost in Miller’s quibbling over jurisdiction.

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