Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-03924/USCOURTS-cand-3_06-cv-03924-1/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:2201 Declaratory Judgement (Insurance)

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

THE INSURANCE COMPANY OF THE

STATE OF PENNSYLVANIA,

Plaintiff,

v

CENTRAL GARDEN AND PET COMPANY,

et al,

Defendants. /

No C 06-3924 - VRW

ORDER

On June 23, 2006, plaintiff and counterdefendant The

Insurance Company of the State of Pennsylvania (“ICSOP”) filed this

diversity action against defendants and counterclaimants Central

Garden and Pet Company (“Central Garden”) and Federal Insurance

Company (“Federal”), seeking reimbursement for funds paid to

Central Garden following the alleged exhaustion of ICSOP’s

insurance policy. Doc #1. The parties have filed cross-motions

for summary judgment. Doc ##33, 41, 43. For reasons discussed

below, the court GRANTS ICSOP’s motion for summary judgment, DENIES

Central Garden’s motion for summary judgment and DENIES Federal’s

motion for partial summary judgment.

Case 3:06-cv-03924-VRW Document 91 Filed 12/18/06 Page 1 of 16
United States District Court

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I

A

The parties agree that facts relevant to the present

motions are undisputed. On August 2, 2000, a fire destroyed a

warehouse in Phoenix, Arizona. Doc #32 (Friedrich decl), ¶¶ 2, 8. 

At the time of the fire, B&L Properties owned the warehouse and

leased the space, in part, to Central Garden, and in remaining part

to Cardinal Health, Inc (“Cardinal”). Id, ¶ 8. The fire allegedly

resulted from the combustion of pool treatment chemicals stored in

the Central Garden portion of the warehouse. Id, ¶ 9. 

At the time of the Phoenix warehouse fire, Central Garden

retained liability insurance from four insurers that afforded

primary, umbrella and excess liability coverage as set forth below:

Insurer Type of

Coverage

Policy

Number

Policy Limits

Fireman’s Fund

Insurance

Company (“FFIC”)

Primary

Liability

S 95 DXX

80758493

$1,000,000 per occurrence;

$2 million in the

aggregate

ICSOP Umbrella

Liability

4700-

6498

$20,000,000 per occurrence

and in the aggregate

Federal Excess

Liability

7931-92-

47

$20,000,000 per occurrence

and in the aggregate

RLI Insurance

Company (“RLI”)

Excess

Liability 

RXU02028

65

$10,000,000 per occurrence

and in the aggregate

Following the fire, a number of parties initiated

lawsuits against Central Garden. Nearby residents filed a

purported class action lawsuit against Central Garden, claiming

bodily injury and property damage from smoke, fumes and chemical

runoff from the fire. Cardinal sued for, among other things,

destruction of its property stored at the warehouse. Vittorino

Case 3:06-cv-03924-VRW Document 91 Filed 12/18/06 Page 2 of 16
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decl, Ex B. B&L filed a complaint arising out of the destruction

of the warehouse. Vittorino decl, Ex C. Also, some surrounding

businesses brought suit for losses relating to the fire. These

lawsuits were initially defended by FFIC under its primary

liability insurance contract. Friedrich decl, ¶ 12.

In January 2004, FFIC and ICSOP agreed on behalf of

Central Garden to fund a settlement of the bodily injury and

property damage claims in the actions brought by the residents for

a total of $7,825,000. Vittorino decl, ¶ 5. That settlement

exhausted FFIC’s primary policy limits. Id. ICSOP contributed

$5,897,823 to the settlement. Id. Following exhaustion of FFIC’s

primary limits, ICSOP assumed Central Garden’s defense in the

pending lawsuits by B&L, Cardinal and those actions brought by

surrounding businesses that had not been settled by FFIC prior to

exhaustion of its limits. Id, ¶ 6. With Central Garden’s

approval, ICSOP funded settlements of the remaining suits brought

by the surrounding business, thereby eroding ICSOP’s remaining

policy limits by an additional $711,839. Id. 

On January 17, 2006, Central Garden and two other

defendants, Arch Chemicals, Inc and Olin Corporation (collectively

“Arch”), affiliated manufacturers of the pool treatment chemicals

stored at the Central Garden warehouse, entered into an “Agreement

to Settle and Arbitrate” in which Central Garden and Arch agreed to

fund a settlement of Cardinal’s claims. Id, Ex D. The Central

Garden and Arch agreement contemplated a subsequent mediation with

the Cardinal plaintiffs. Id, Ex D, ¶ 1. If a settlement with the

Cardinal plaintiffs were achieved in the mediation, the Central

Garden and Arch agreement called for equal shares in initial

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funding responsibility subject to a subsequent allocation

arbitration to determine the ultimate allocation of the settlement

amount paid to the Cardinal plaintiffs as between Central Garden

and Arch. Vittorino decl, Ex D, ¶ 4. The agreement provided for a

floor and ceiling on the respective comparative fault of Central

Garden and Arch as determined by the arbitration. Id.

At a January 25, 2006, mediation, the Cardinal plaintiffs

reached an agreement with Central Garden and Arch on the amount to

be paid to the Cardinal plaintiffs. CG counterclaim ¶ 29; Federal

counterclaim ¶ 12. On March 10, 2006, at Central Garden’s

direction, ICSOP contributed the remaining portion ($13,390,338) of

its $20,000,000 stated policy limits toward the funding of the

payment to the Cardinal plaintiffs. Vittorino decl, ¶ 9. Federal

paid the balance of Central Garden’s required funding. On March

13, 2006, Cardinal provided the final signature on a “Confidential

Settlement and Release Agreement,” whereby the parties, including

Cardinal, Central Garden and Arch, released all claims against each

other and agreed to dismiss the Cardinal action and cross-actions

with prejudice. Vittorino decl, Ex D. The contemplated dismissals

were filed on March 27, 2006, and the action was dismissed with

prejudice on April 6, 2006. Id, Ex E & F. 

The agreed floor and ceiling imposed on any recovery by

Central Garden or Arch pursuant to the allocation arbitration

precluded ICSOP from receiving any reimbursement for the

$13,390,338 it paid toward the Cardinal settlement. As a result,

on March 21, 2006, ICSOP advised Central Garden and Federal that

ICSOP would not pay fees or costs incurred after March 10, 2006, to

administer the terms of the Central Garden-Arch reallocation

Case 3:06-cv-03924-VRW Document 91 Filed 12/18/06 Page 4 of 16
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arrangement with respect to the Cardinal settlement. Vittorino

decl, ¶ 12. On March 28, 2006, ICSOP also advised Central Garden

and Federal that ICSOP would not pay fees or costs incurred after

March 10, 2006 to further defend the B&L action. Vittorino decl, ¶

12. 

In response, Federal demanded that ICSOP fund all

post-settlement costs in connection with the Cardinal action. 

Vittorino decl, ¶ 13. Central Garden also insisted that ICSOP

continue paying fees and costs to administer the Cardinal

settlement and to defend the B&L action. Vittorino decl, ¶ 14. In

light of this dispute, ICSOP paid Central Garden’s expenses to

conduct the allocation arbitration and is continuing to defend the

B&L action pending the present motions. Id. Since March 10, 2006,

the date ICSOP’s policy allegedly was exhausted, ICSOP has paid in

excess of $600,000 on Central Garden’s behalf in connection with

the allocation arbitration and administering the Cardinal

settlement and more than $70,000 defending Central Garden in the

B&L action. Id, ¶ 15. The allocation arbitration began on July

10, 2006. A decision in the arbitration was rendered on August 11,

2006.

B

Basing federal jurisdiction on diversity, ICSOP filed the

instant lawsuit against Central Garden and Federal on June 23,

2006, seeking reimbursement of post-exhaustion payments to Central

Garden and declaratory relief. Doc #1. On July 24, 2006, Central

Garden filed counterclaims for breach of contract and declaratory

relief. Doc #10. On September 1, 2006, Federal filed

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counterclaims for equitable subrogation and unjust enrichment. Doc

#19. The parties have presently filed cross-motions for summary

judgment. Doc ##33, 41, 43. 

II

In reviewing a summary judgment motion, the court must

determine whether genuine issues of material fact exist, resolving

any doubt in favor of the party opposing the motion. “[S]ummary

judgment will not lie if the dispute about a material fact is

‘genuine,’ that is, if the evidence is such that a reasonable jury

could return a verdict for the nonmoving party.” Anderson v

Liberty Lobby, 477 US 242, 248 (1986). “Only disputes over facts

that might affect the outcome of the suit under the governing law

will properly preclude the entry of summary judgment.” Id. And

the burden of establishing the absence of a genuine issue of

material fact lies with the moving party. Celotex Corp v Catrett,

477 US 317, 322-23 (1986). When the moving party has the burden of

proof on an issue, the party’s showing must be sufficient for the

court to hold that no reasonable trier of fact could find other

than for the moving party. Calderone v United States, 799 F2d 254,

258-59 (6th Cir 1986). Summary judgment is granted only if the

moving party is entitled to judgment as a matter of law. FRCP

56(c).

The nonmoving party may not simply rely on the pleadings,

however, but must produce significant probative evidence supporting

its claim that a genuine issue of material fact exists. TW Elec

Serv v Pacific Elec Contractors Ass’n, 809 F2d 626, 630 (9th Cir

1987). The evidence presented by the nonmoving party “is to be

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believed, and all justifiable inferences are to be drawn in his

favor.” Anderson, 477 US at 255. “[T]he judge’s function is not

himself to weigh the evidence and determine the truth of the matter

but to determine whether there is a genuine issue for trial.” Id

at 249.

III

The cross-motions for summary judgment concern two

related issues: (1) whether ICSOP’s policy requires it to pay prejudgment interest in excess of policy limits and (2) whether

ICSOP’s duty to defend Central Garden continued after ICSOP

contributed the remaining portion of its policy limits pursuant to

the parties’ agreement to settle and arbitrate. 

As a preliminary matter, the court notes the parties’

dispute concerning choice-of-law. In a diversity action, the court

“must apply the same choice of law analysis that would be applied

by state courts in the jurisdiction in which the district court is

situated.” Liew v Official Receiver & Liquidator, 685 F2d 1192,

1195 (9th Cir 1982) (citing Klaxon Co v Stentor Electric

Manufacturing Co, 313 US 487, 496 (1941)). The court declines the

parties’ invitation to plod through the “government interest test”

because it finds (and the parties at argument agreed) that Arizona

and California law do not materially differ with respect to the

present motions. Estate of Darulis v Garate, 401 F3d 1060, 1062

(9th Cir 2005). 

//

//

//

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8

A

Under California and Arizona law, the overarching goal in

interpreting an insurance contract is to give effect to the “mutual

intention of the parties.” Waller, 11 Cal 4th at 18 (internal

citations omitted). To do so, courts first look to the language of

the contract in order to ascertain its plain meaning or the meaning

a layperson would ordinarily attach to it. Id (citing Cal Civ Code

§ 1638); Canadian Indem Co v Heflin, 151 Ariz, 257, 258 (App Div

1986) (“When interpreting the language of an insurance policy, the

courts will construe the policy’s terms in accordance with their

plain and ordinary meaning.”). If the policy language is clear and

explicit, it governs. Waller, 11 Cal 4th at 18; Cal Civ Code §

1639 (internal citation omitted). If, however, the contractual

language permits two or more reasonable constructions, courts

resolve the ambiguity by looking to the “objectively reasonable

expectations of the policy holder.” Montrose Chem Corp v Admiral

Ins Co, 10 Cal 4th645, 666-67 (1995); Bay Cities Paving Grading,

Inc v Lawyers’ Mutual Ins Co, 5 Cal 4th 854, 867 (1993). Finally,

if the ambiguity is not resolved by the “reasonable expectations”

approach, courts interpret the ambiguity against the drafter (the

insurer). AIU Ins Co v Superior Court, 51 Cal 3d 807, 822 (1990)

(citing Cal Civ Code § 1654). Under California and Arizona law,

interpretation of an insurance policy is a question of law. Waller

v Truck Ins Exchange, Inc, 11 Cal 4th 1, 18 (1995); Canadian Indem

Co v Heflin, 151 Ariz 257, 258 (App Div 1986). 

The dispute over payment of pre-judgment interest

concerns the following term in ICSOP’s policy:

//

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9

We will pay the following:

* * *

Pre-judgment interest awarded against the insured on

that part of the judgment we pay. If we make an offer

to pay the applicable limit of the insurance, we will

not pay any pre-judgment interest based on that period

of time after the offer.

Vittrioni decl, Ex A at 3 (ICSOP’s policy form). 

According to ICSOP, this term requires ICSOP to pay prejudgment interest in addition to policy limits if pre-judgment

interest is awarded by a court upon entry of judgment. Doc #43 at

10. Both Federal and Cental Garden disagree with ICSOP and find the

term ambiguous. 

Federal insists that ambiguity results from reading the

two sentences separately. Under this interpretation, the first

sentence relates to ICSOP’s obligation to pay pre-judgment interest

in connection with a judgment against the insured and the second

sentence relates to all other instances in which the insured becomes

obligated to pay after it has offered policy limits. Doc #41 at 6. 

Focusing on the second sentence, Federal reasons that by carving out

the duty to pay pre-judgment interest after ICSOP offers policy

limits, ICSOP obligated itself to pay pre-judgment interest prior to

offering policy limits. Id at 7 (citing “the principle of inclusio

unius est exclusio alterius”). 

Despite being cloaked in a Latin maxim, Federal’s argument

amounts to a logical fallacy. In essence, Federal reasons that if

an offer to pay forecloses pre-judgment interest, then the absence

of an offer should provide for pre-judgment interest. Rather than a

rule of interpretation, Federal’s theory simply confuses necessary

and sufficient conditions: namely, that an offer to pay policy

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limits is sufficient to preclude pre-judgment interest does not

render it necessary to preclude such interest. Hence, ICSOP’s term

does not imply the broad availability of pre-judgment interest in

excess of policy limits. 

The court finds compelling ICSOP’s alternative

interpretation (almost walked away from at argument) of the disputed

second sentence: the term refers to circumstances in which ICSOP

offers to pay its limits toward a settlement that is not

consummated, and instead the case goes to verdict with an award of

pre-judgment interest. Doc #60 at 17. The second sentence then

obviates ICSOP’s duty to pay pre-judgment interest accruing after

ICSOP made its offer. Id. 

Central Garden takes a different tack in its contention

that the pre-judgment term is ambiguous. First, Central Garden

faults ICSOP for not “clearly exclud[ing] the payment of prejudgment interest on settlements.” Doc #33 at 22. But this

critique reads the term in the abstract, disregarding the insurance

policy as a whole. See Bank of the West, 2 Cal 4th at 1265

(“Language in a contract must be interpreted as a whole, and in the

circumstances of the case, and cannot be found to be ambiguous in

the abstract.”). The insurance policy makes clear at the outset

that ICSOP’s policy limit per occurrence and in the aggregate is

$20,000,000. Given this context, the term providing pre-judgment

interest in excess of policy limits constitutes an exception to the

insurance policy’s default rule. If the exception does not apply,

the default governs. Central Garden’s position would thus impose a

duty on ICSOP to specify every non-exception to the policy’s

default. The court declines to impose such an unreasonable burden. 

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Next, Central Garden asserts that the term “judgment”

lacks clear definition. Doc #33 at 23. “A layperson,” according to

Central Garden, “would reasonably interpret the provision to require

the payment of pre-judgment interest on both jury verdicts and

settlements.” Id. The court disagrees. Under its plain meaning,

the term judgment denotes a formal decision or determination by a

court of law or other tribunal. A layperson would not consider a

private settlement to be a judgment. See also Great West Casualty

Company v Barnick, 529 N W 2d 504, 505 (Minn App 1995) (concluding

that “the term ‘prejudgment interest’ presupposes there was a

judgment” from a court). Accordingly, with respect to the present

motions, the court finds no ambiguity in the term judgment. See

Reserve Ins Co, 30 Cal 3d at 807 (“Courts will not strain to create

an ambiguity where none exists.”). 

Finally, Central Garden argues the proceedings leading up

to the settlement with the Cardinal plaintiffs amount to a judgment

under ICSOP’s policy. In early 2005, the Cardinal plaintiffs moved

for partial summary judgment that Central Garden was negligent per

se in connection with the August 2, 2000, fire. Soon thereafter,

Central Garden stipulated to judgment on this issue. Doc #34, Ex A

at 2. According to Central Garden, this “judgment” made it

“virtually certain that [it] would be held liable for compensatory

damages, and that it would also be required to pay pre-judgment

interest on those damages.” Doc #67 at 13. But Central Garden’s

prediction that it would pay pre-judgment interest is of no

consequence. Although the expected imposition of pre-judgment

interest likely affected the settlement amount, that does not mean a

portion of the settlement actually constitutes pre-judgment

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interest. See Liimatta v Likkari, 185 Mich App 144, 145 (1990) (“By

accepting a settlement before judgment, a party trades off the loss

of interest during the waiting period in exchange for the certainty

of settlement.”)

Central Garden and Federal both cite Tucker v United

States Services Automobile Ass’n, 827 P 2d 440 (Alaska 1992), for

the proposition that courts have interpreted language similar to

that in the ICSOP contract as requiring an insurer to pay prejudgment interest on settlements. But Tucker does not support such

a proposition. In Tucker, an insurer offered its “policy limits” to

settle a negligence suit arising out of an automobile accident. Id. 

In resolving the parties’ dispute over the meaning of the term

“policy limits,” the Alaska court held that the insurer obliged

itself “to pay its maximum potential liability available under the

policy,” which included pre-judgment interest. 827 P 2d at 440. 

Within the context of the parties’ settlement, the court construed

the term “policy limits” to be the amount available “if the case had

proceeded to trial.” Id at 441 n4. The inclusion of pre-judgment

interest thus followed from this construction. In the present

action, however, there is no settlement promise that compels the

court to find the maximum potential liability under the insurance

policy. 

Accordingly, the court concludes that ICSOP’s policy does

not oblige ICSOP to pay pre-judgment interest in excess of policy

limits due to the parties’ settlement. 

//

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B

The crux of the second dispute contained in the parties’

cross-motions for summary judgment is whether ICSOP had a duty to

defend Central Garden in the allocation arbitration and the B&L

action. 

ICSOP’s policy provides that it “will not defend any claim

or suit after [ICSOP’s] applicable Limits of Insurance have been

exhausted by payment of judgments or settlements.” Vittorino decl,

Ex A at 3. Despite this policy language, Central Garden and Federal

insist that ICSOP had a duty to defend Central Garden in the

allocation arbitration and the B&L action even though ICSOP paid its

$20,000,000 policy limit toward settlements on Central Garden’s

behalf. This duty allegedly continued after exhaustion because

Central Garden’s liability for the Cardinal plaintiffs’ claims was

not finally determined until the arbitrators rendered their decision

on August 11, 2006. 

Pursuant to the agreement to settle and arbitrate, Central

Garden and Arch funded the Cardinal settlement on a 50/50 basis and

then submitted to the allocation arbitration for the sole purpose of

reallocating fault between Central Garden and Arch. Vittorino decl,

Ex D, ¶ 1. This arbitration had no bearing on Central Garden’s

obligations to the Cardinal plaintiffs; indeed, pursuant to the

agreement to settle and arbitrate, the Cardinal action was dismissed

with prejudice in its entirety. Id. Central Garden portrays the

arbitration as “a continuation of the Cardinal action,” Doc #33 at

13, but this belies the arbitration’s limited purpose: to adjust

settlement contributions between Central Garden and Arch. See id,

Ex D, ¶ 4. More significantly, the agreed ceiling imposed on any

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recovery by Central Garden or Arch precluded ICSOP from receiving

any reimbursement for the $13,390,338 it paid toward the Cardinal

settlement. The only insurer whose interests could be affected by

the allocation arbitration was Federal. 

If, as here, an insurance policy expressly provides that

the duty to defend terminates upon exhaustion of policy limits, and

the insurer pays out its policy limits in the payment of settlements

or judgments (as opposed to “tendering its limits” to a court in a

ploy to exhaust a policy before a settlement or judgment is

entered), the insurer’s defense obligations extinguish, and an

insurer is entitled to withdraw from the defense of claims. See, e

g, Hartford Accident & Indemnity Co v Superior Court, 23 Cal App 4th

1774, 1780-81 (1994); Johnson v Continental Ins Cos, 202 Cal App 3d

477 (2d Dist 1988); Continental Cas Co v Farmers Ins Co of Ariz, 180

Ariz 236, 239 (App Div 1994); California Cas Ins Co v State Farm Mut

Auto Ins Co, 185 Ariz 165, 169 (App Div 1996). See also Haskel, Inc

v Superior Court, 33 Cal App 4th 963, 977 (1995) (“The defense duty

arises upon tender of a potentially covered claim and lasts until

the underlying lawsuit is concluded, or until it has been shown that

there is no potential for coverage.”). 

Central Garden cites one case, California Casualty Ins Co

v State Farm Mutual Auto Ins Co, 185 Ariz 165 (Ariz Ct App 1996),

for the proposition that “an insurer must continue defending its

insured until the insured obtains a complete release, even if the

insurer has paid out its policy limits.” Doc #33 at 18. But

California Casualty addressed a different issue: whether the

insurer’s payment of its policy was “by itself sufficient to

discharge its contractual duty to defend.” 185 Ariz at 169. The

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court declined to discharge the insurer’s duty to defend until the

insured was released from liability. Id. Here, Central Garden

received more than mere payment of ICSOP’s policy; Central Garden

obtained settlement and release from the Cardinal plaintiffs. This

release absolves ICSOP from its duty to continue defending Central

Garden. 

Interpreting the policy in this manner also provides for a

more efficient allocation of defense responsibilities. Obliging

ICSOP to pay for defense until the potential for indemnity ends

ensures ICSOP will defend Central Garden with an incentive to

minimize liability. Severing the duty to defend from the duty to

indemnify, by contrast, creates a serious conflict of interest: an

insurer with no indemnity obligation will seek to minimize

litigation costs without regard for the amount of liability. The

court cannot find that the parties contemplated such a result.

Accordingly, the court declines to force ICSOP to assume a

contractual obligation that ICSOP did not agree to provide. ICSOP

did not have a duty to defend Central Garden during the arbitration

or through the resolution of the B&L action. 

//

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IV

In sum, the court concludes that ICSOP’s policy limits

were exhausted on March 10, 2006, absolving ICSOP of defense or

indemnity obligations to Central Garden. Accordingly, the court

GRANTS ICSOP’s motion for summary judgment, DENIES Central Garden’s

motion for summary judgment and DENIES Federal’s motion for partial

summary judgment. Central Garden must reimburse ICSOP for payments

it made on Central Garden’s behalf for defense costs incurred after

March 10, 2006. 

Pursuant to 28 USC § 636(b)(1)(A) and FRCP 72(a), IT IS

HEREBY ORDERED that this case be referred to the chief magistrate

judge or his designee to conduct such proceedings, including

evidentiary hearings, as necessary and appropriate to determine the

amount ICSOP has paid on Central Garden’s behalf in connection with

the allocation arbitration and the B&L action. The magistrate judge

shall conclude these proceedings or report to the court on the

status of matters no later than February 28, 2007. Counsel will be

advised of the date, time and place of appearance by notice from the

assigned magistrate judge. 

IT IS SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge

Case 3:06-cv-03924-VRW Document 91 Filed 12/18/06 Page 16 of 16