Arizona Supreme Court holds that, in a garnishment action by a judgment creditor against the judgment debtor’s insurer for loss coverage, the insurer may not invoke the doctrine of direct benefits estoppel to bind the judgment creditor to the arbitration terms in the insurance contract.

In December 2012, a nursing home resident and his family sued the nursing facility for abuse and neglect.  The facility submitted the claim to its insurer, but while litigation was still pending, stopped defending the claim and denied it owed coverage.  The plaintiffs ultimately obtained an uncontested judgment for $1.5 million against the nursing home and filed a writ of garnishment against the insurer to collect. 

A clause in the nursing home’s insurance policy provided that all claims against the insurer related to the policy must be settled through arbitration.  The insurer removed the garnishment action to federal court and moved to compel arbitration.  The District Court for the District of Arizona granted the motion and dismissed the action.  The plaintiffs appealed, and the Ninth Circuit certified two questions to the Arizona Supreme Court: (1) whether the doctrine of direct benefits estoppel can be applied in an Arizona garnishment proceeding and, (2) if so, whether the doctrine also binds the judgment creditor to the arbitration clause in the contract.  

The Court first noted that the Federal Arbitration Act, 9 U.S.C. § 1, et seq., states that written arbitration agreements are valid and enforceable except where law or equity dictates otherwise.  However, a party is not generally bound to an arbitration agreement within a contract they did not sign.  The doctrine of direct benefits estoppel is an exception to this rule and provides that a nonsignatory may only be forced to arbitrate 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 v. Austin, 237 Ariz. 201, 210 ¶ 29 (App. 2015).

To determine whether this exception should apply in this case, the court looked to Arizona’s garnishment statute, which provides that a “court, sitting without a jury, shall decide all issues of fact and law.”  A.R.S. § 12-1584(A).  The court found that allowing application of the exception would contravene the clear statutory intent that a judge, not an arbitrator, decide all factual and legal issues in garnishment actions.  The court therefore held that an insurer cannot employ the doctrine of direct benefits estoppel to bind a judgment creditor to the terms of an underlying contract to which the creditor was not a party.  Accordingly, to proceed with their garnishment action, plaintiffs must prove in a court that the insurer was obligated under the policy to insure the loss.

Justice Beene authored the unanimous opinion for the court.