definitely that unless his demand is complied with, he will not
cender his promised performance, an anticipatory breach
[conditional in character] has been committed.” Id.

I now consider whether Watts’ letter of September 6, 2001
involves a reasonable interpretation of the contract or shows an
intent not to perform in accord with any other interpretation. In
the letter, Watts argues that: (1) the deductible agreements
{containing the arbitration clauses) do not apply, first to James
Jones, which never signed them and Watts cites California precedent
that an insurer must provide a defense to James Jones as an
additional insured; (2) Zurich breached its duty to defend its
insureds by refusing to pay, thus repudiating the policy, and so,
under California law, could not rely on a clause of the policy to
deny its liability; (3) Zurich had waived its right to enforce the
deductible agreements against Watts by failing to mention them
during the pendency of the litigation between April 1998 and August
2001; (4) Zurich materially breached the deductible agreements by
failing to investigate the Armenta and Rothschild claims as
required by the policies; and (5) even if the deductible agreements
applied, Zurich must pay for the defense of the actions over the
$500,000 deductible.

Of these claims in the letter of September 6, 2001, (1), (2),
and (5) involve issues of contract interpretation and law rather

than (mainly) fact, as with (3) and (4). The factual questions

13


(N.D. Ill. May 13, 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 (1923); District of
Columbia Court of Appeals v. Feldman, 460 U.S. 462 (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


signed.
Iv.

I therefore Grant the motion for a preliminary injunction with
respect to Watts’ claims, apart from the duty to defend in Armenta.
I enjoin the California Superior Court from pursuing further
proceedings in Rothschild as far as Watts goes, pending resolution
of Zurich’s petition to compel arbitration in that case, and I
enjoin the California Superior Court from pursuing further
proceedings in Armenta, again with respect to Watts, apart from
enforcing its orders of October 30 and November 27, 2001, or other
matters concerning the duty to defend and non-arbitrability of that
duty in that case which was the subject of those orders. I DIsMiss
for want of subject matter jurisdiction Zurich’s motion for a
preliminary injunction enjoining the California Superior Court from
pursuing further proceedings in Armenta relating to its orders of
October 30 and November 27, 2001. I Dzny the motion for a
preliminary injunction with respect to James Jones on any matter
within my jurisdiction as to Armenta or Rothschild.

ENTER ORDER:

LF Lasch

Elaine E. Bucklo
United States District Judge

Dated: June {o, 2002

17


of the singular “is” in the concluding clause (“is not subject to
the arbitration provisions of the Deductible Agreements”) reflects
the Superior Court’s intention, picking out as the subject of the
sentence “the duty to defend which is the subject of Watts’ pending
motion for Summary Adjudication [in Armenta].”

Therefore, I reject the defendants’ arguments that the scope
of the Superior Court’s no-arbitrability order of November 27,
2001, is any broader than I originally concluded. As I read it,
that order cleared the way for the Superior Court to issue the
companion order finding that a duty to defend the Armenta action
existed, and nothing more. Because I have concluded that there are
no orders regarding the arbitrability or merits of any further
issues in Armenta other than the duty to defend, or of any issues
in Rothschild, as I held in granting the TRO, my jurisdiction over
such other questions is not barred by Rooker-Feldman.

IIr.

A preliminary injunction “is an extraordinary remedy that is
only granted where there is a clear showing of need.” Cooper v.
Salazar, 196 F.3d 809, 813 (7th Cir. 1999). Five factors figure
into the determination of whether a preliminary injunction should
be granted. Id. As a threshold matter, the plaintiffs must show (1
a likelihood of success on the merits, (2) irreparable harm if the
preliminary injunction is denied, and (3) the inadequacy of any

remedy at. law. I then balance (4) the harm to plaintiffs if the


{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 § 437c(4)
(“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


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 seg. (“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:


arbitrable dispute claim is more restricted than Watts argues. The
Superior Court refers to the claims not subject to arbitration
“specifically including the duty to defend which is the subject of
Watts’ pending motion for Summary Adjudication.” That motion, filed
October 2, 2001, is limited to the duty to defend in Armenta
Moreover, although the key sentence begins with the plural
“claims,” which might be taken to refer to all claims in both
cases, the part of the sentence containing the central
determination in the order uses the singular “is” (“is not subject
to arbitration”). This clause is positioned after a qualifying
clause referring specifically to the duty to defend in Armenta.
Construing a judicial order is an exercise analogous in some
ways to construing a contract, and in some ways to statutory
interpretation. Under Illinois law of contract construction,
“specific provisions are entitled to more weight in ascertaining
the parties’ intent than general provisions.” Premier Title Co. v.
Donahue, 765 N.E.2d 513, 518 (Ill. App. Ct. 2000). Likewise with
statutory interpretation, where specific provisions take precedence
over general provisions. People v. Villarreal, 604 N.E.2d 923, 928
(Ill. 1992). I conclude that the general language about “the claims
alleged in the Complaints filed by Watts and James Jones” is
controlled by the specific language in the qualifying clause
(“specifically including the duty to defend which is the subject of

Watts’ pending motion for Summary Adjudication”), and that the use


Minote Order Form (06/97)

United States District Court, Northern District of Illinois

an ign woe Sitti irother
senor Magitrae Judge Elaine E, Bucklo “tam Assigned Dude
CASE NUMBER 01 C 7673 DATE 6/10/2002
CASE Zurich American Ins. Co. vs. Watts Industries, Inc., et al.
TITLE

{In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented.}

MOTION:
DOCKET ENTRY:

( o Filed motion of [ use listing in “Motion” box above.]

(2) oO Brief in support of motion due

@) oO Answer brief to motion due___. Reply to answer brief due

(4) Oo Ruling/Hearing on___set for at

(5) 0 Status hearing[held/continued to] [set for/re-set for]on__set for__at

(6) o Pretrial conference[held/continued to] [set for/re-set for]on___—ssetfor___—at__
(7) 0 Trialfset for/re-set for]on at

(8) oO [Bench/Jury trial] [Hearing] held/continued to______at

(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OFRCP4(m) (General Rule 21 OO FRCP4I1(a)(1) [1 FRCP41(a)(2).

ao) x [Other docket entry] _ Plaintiffs motion for preliminary injunction is granted in part with respect to Watts’
claim, but not to James Jones. The court enjoins the California Superior Court from pursuing further proceedings
in Rothschild as far as Watts goes, pending resolution of plaintiff's petition to compel arbitration. The court also
enjoins the California Superior Court from pursuing further proceedings in Armenta with respect to Watts. The
court denies plaintiffs motion for preliminary injunction with respect to James Jones. Enter Memorandum
Opinion and Order. Plaintiffs memorandum in support of its petition to compel arbitration is due by 6/24/02;
response by 7/15/02; and any reply by 7/29/02. Hearing set for 8/12/02 at 9:30 a.m.

dal) [For further detail see order attached to the original minute order.]

ument

No notices required, advised in open court.
Number.

No notices required.

umber of notices

JUN 1 1 2002

dlate docketed

Notices mailed by judge’s staff.

VY | Notified counsel by telephone.

Docketing to mail notices.

Mail AO 450 form.

LUNOD Foprictacg py
Copy to judge/magistrate judge. my Gs

date mailed notice
courtroom

MP} deputy’s
initials

DueAimefsepeiyedin | -f

central Clerk’s Office. mailing deputy initials



argument. This does not apply to any argument that the defendants
might make the argument about Rothschild at a hearing on
arbitrability at the appropriate time. I see no reason to change my
previous holding that Zurich has a non-negligible chance of success
on that issue, sufficient to make a showing of irreparable harm.

Finally, the defendants urge that Zurich cannot establish a
reasonable likelihood of success on the anticipatory repudiation
claim that it needs to win. This new argument, which works with
respect to James Jones but not with respect to Watts, is as
follows. Zurich admitted to me that there was no arbitrable
controversy until the defendants supposedly anticipatorily
repudiated their obligations under the deductible agreements.
Response to Motion to Dismiss at 2. But, Watts argues, the letter
of September 6, 2001, see Watts Opposition, Ex. D(A), does not
challenge the validity of those agreements or state that defendant
Watts (James Jones was a subsidiary of Watts during the relevant
period) would refuse to arbitrate if Zurich were to appropriately
seek reimbursement under the Agreements.

The question is whether, in the letter of September 6, 2001,
the defendants made an offer to perform in accordance with a
reasonable interpretation of the contract, or rather made a clear
manifestation that it was not going to perform in accord with any
interpretation. The defendants cite Seventh Circuit law that an

offer to perform in accordance with a reasonable interpretation of

11


preliminary injunction were wrongfully denied against the harm to
the defendant if the injunction were wrongfully granted, and (5)
the impact on persons not directly concerned in the dispute. Id.;
see also Platinum Home Mortgage Corp. v. Platinum Fin. Group, Inc.,
149 F.3d 722, 726 (7th Cir. 1998). The defendants argue that Zurich
has not satisfied the requirements for a preliminary injunction,
notably irreparable harm and likelihood of success on the merits.

I held in issuing the TRO that Zurich’s threatened loss of the
possibility of arbitration satisfied the irreparable harm
requirement. 2002 WL 1009147, at *3. The defendants argue, first,
that Zurich has had an opportunity to argue this issue, and so
would not lose anything if I were not to bar the California courts
from deciding the matter. I disagree. The Superior Court
specifically held that that an arbitrable issue might arise in
certain circumstances. See Order of Nov. 27, 2001. Zurich would
lose the opportunity to have that issue, left open by the Superior
Court, adjudicated in the forum that the deductible agreements and
the FAA specify.

The defendants contend, second, that Zurich has waived the
issue of arbitrability of the duty to defend or indemnify in
Armenta and Rothschild, and so has nothing to lose there either.
The duty to defend or indemnify in Armenta, and the arbitrability
(at present) of that issue, have been decided by the California

courts, and so is beyond my reach or the reach of any waiver

10


Rooker-Feldman “does not depend on a final judgment on the merits.”
Charchenko v. City of Stillwater, 47 F.3d 981, 983 n.1 (8th Cir.
1995). I cannot, therefore, review the Superior Court’s orders in
Armenta of October 30 and November 27, 2001, holding that Zurich
had a duty to defend.

The defendants argue that the language from the November 27,
2001, order denying arbitrability, quoted above, is broader in
scope than I had concluded previously, encompassing the non-
arbitrability of any issue in either Armenta or Rothschild. The key
sentence reads: “the 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.” This might be read as a judicial holding
that the scope of the arbitration agreements, at least
provisionally, did not include any and all “claims alleged in the
Complaints filed by Watts and James Jones,” i.e., that no claim in
Rothschild and Armenta yet presented an arbitrable dispute. If so,
Rooker-Feldman would bar any federal review of that determination,
at least at present. The Superior Court stated that an arbitrable
controversy might arise later if Zurich paid defense costs and made
a demand for indemnification that was resisted.

I am therefore presented with an issue in the construction of

a judicial order. As I read the Superior Court’s order, the no-


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 2002 WL 1009147


involved in (3) (waiver by conduct) and (4) (failure to
investigate) are not suitable for resolution without an evidentiary
hearing.

Argument (1) (that James Jones is not a party to the
deductible agreements and so is not bound by them), may or may not
be right, but is at least a reasonable interpretation of the
contract. The defendants’ letter of September 6, 2001, involves no
anticipatory repudiation with respect to James Jones. This means
that Zurich cannot use such anticipatory repudiation in James
Jones’ case to evade the requirements, if they apply, of the
deductible agreements. This argument does not apply to Watts, which
was a signatory to those agreements. The argument for Watts must
proceed on a different basis.

Arguments (2) and (5) are the central ones with regard to
Watts. Under argument (2) (wrongful refusal to defend), Watts cites
several California cases indicating generally that the insurer’s
obligation to defend is of “vital importance to the insured,” and
that if an insurer “unreasonably refuses to defend,” it has
breached the contract. This is boilerplate, however. Watts does not
actually offer an interpretation of any particular contested
provision’ of any contract that Zurich supposedly breached, thereby
repudiating the contract, and thus freeing Watts of any duties
under the deductible agreements, much less a satisfactory

explanation of how this complicated chain of results was supposed

14


of arguments and positions, with respect to Watts’ coverage (though
not James Jones’), is sufficient to establish a reasonable
likelihood of success on Zurich’s claim that Watts made a
conditional anticipatory repudiation, as explained by Corbin and
adopted by the Illinois Supreme Court. In the letter of September
6, 2001, Watts demands of Zurich “a performance to which {it} had
no right under the contract,” or at least to which it does not
demonstrate that it has any right, and offers enough by way of
“accompanying expressions {that would] justify [Zurich] in
understanding that no performance other than that demanded will be
accepted.” See Olsen, 528 N.E.2d at 686-87 (citing Corbin,
Contracts, § 973)). I here bear in mind that with regard to the
required showing, “the threshold is low. It is enough that the
plaintiff's chances are better than negligible.” Roland Mach. Co.
v. Dresser Indus., Inc., 749 F.2d 380, 387 (7th Cir. 1984). Here,
the plaintiff’s chances to show that “an anticipatory breach
[conditional in character] has been committed,” Corbin, Contracts,
§ 973, are better than negligible.

If it seems odd to thus separate the situation of Watts and
James Jones, it must be borne in mind that as signatory and non-
signatory, respectively, to the deductible agreements, their
situations are different. This should not be surprising. Signing
a contract often has legal effects that do not apply to

nonsignatorities, even if they are beneficiaries of the contract

16


requested in part with respect to Watts but not to James Jones.
rT.

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.


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

ZURICH AMERICAN INSURANCE CO.,
Plaintiff,
No. 01 C 7673

v.

SUPERIOR COURT FOR THE STATE OF
CALIFORNIA, COUNTY OF LOS
ANGELES ,

Respondent,

WATTS INDUSTRIES, INC. and
JAMES JONES COMPANY,

Real Parties.

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

(_2


a contract is not an anticipatory breach. LAK, Inc. v. Deer Creek
Enters., 976 F.2d 328, 331-32 (7th Cir. 1992). Anticipatory
repudiation requires “a clear manifestation of an intent not to
perform in accordance with any other interpretation.” Id. The
Seventh Circuit there was applying Florida law, but Illinois law is
parallel:
The doctrine of anticipatory repudiation requires a clear
manifestation of an intent not to perform the contract on the
date of performance. That intention must be a definite and
unequivocal manifestation that he will not render the promised
performance when the time fixed for it in the contract
arrives. . .. “[A]n offer to perform in accordance with his
own interpretation made by one of the parties is not in itself
an anticipatory breach. .. . So, also, the making of a demand
upon the other party to a contract that he shall perform in
accordance with an interpretation that is not justified by the
law is not in itself a repudiation.”
In re Marriage of Olsen, 528 N.E.2d 684, 686 (Ill. 1988) (quoting
4 Arthur Corbin, Contracts § 973, at 911-12 (1951)).
The Illinois Supreme Court added, quoting Corbin, that “such
a demand, however, does not require much by way of accompanying
expressions in order to justify the other party in understanding
that no performance other than that demanded will be accepted.” Id.
at 686-87. I understand this to mean that there is anticipatory
repudiation if the other party is thus justified in so
understanding. Corbin calls this a “conditional” anticipatory
repudiation. See Corbin, Contracts, § 973. “If one party to a

contract, either wilfully or by mistake, demands of the other a

performance to which he had no right under the contract, and states

12


to follow. With respect to argument (5) (addressing what happens if
the deductible agreements apply), Watts states that Zurich may not
“apportion or parse its defense costs” because “at least one of the
policies issued by Zurich caps the insured’s defense costs
expenses.” Watts waves a hand at “California law,” but does not
actually cite any cases or statutes. I do not find this to be a
reasonable interpretation either. Why should a cap in one contract
apply to all? On what legal basis? Watts does not say. With respect
to arguments (2) and (5), Watts fails to offer a reasonable (or
with (2), any) interpretation of the contract.

Watts does not say outright that it has no intention of
performing or that Zurich must perform on its (unjustified) terms
and no others. But it does list a set of terms on which the dispute
should be resolved, the second of which is that Zurich should pay
for any defense costs incurred by it and James Jones. Nothing in
the letter gives any indication that there is any give in its
position or that it would perform under any other terms. As to
arbitration, Watts says nothing, stating instead that if Zurich
does not agree to its terms (“We hope that our views are close
enough that an agreement can be reached within the next two
weeks.”), Watts would go back to court. And, as explained, Watts
offers no reasonable purely legal interpretation of the contract
that would justify its insistence on compliance with its demands.

The question is a close one, but I find that this combination

15