PARKING CONCEPTS INC v. Gulf Underwriters Insurance Co., a Missouri Corporation;  Gary Tenney and his wife, Dee Tenney;  Scott Jackson Brokerage, Inc., an Arizona corporation;  Core/Jackson, Inc., an Arizona corporation, Real Parties in Interest. (1998)

OPINION

¶ 1 Parking Concepts, Inc., John K. Tillison and Lawrence Tantillo (“Petitioners”) petition this court by special action, asking us to accept jurisdiction and grant relief by holding there is no right to a jury trial in a garnishment proceeding.   For the following reasons, we grant the requested relief and hold the trial court erred in granting Gulf Underwriters Insurance Company (“Respondent”) a jury trial as to the policy coverage issues in a garnishment proceeding.

¶ 2 Special Action No. SA 98-0044 arises out of a garnishment action instituted by a judgment creditor against the insurer of two judgment debtors.   There was a stipulated judgment pursuant to a “Morris Agreement” in an underlying action, Parking Concepts v. Gary Tenney, et. al., (“the underlying action”).   The underlying action, Maricopa Cty.Super. Ct. No. CV 95-01943, was consolidated with both Maricopa Cty.Super. Ct. No. CV 97-22156 and Maricopa Cty.Super. Ct. No. CV 97-07620.   That consolidated case is on appeal here as 1 CA-CV 97-0505 (primary), consolidated with 1 CA-CV 97-0593.   The appeal is from a declaratory judgment action.   Respondent in this special action is the appellant in that action.   Respondent's opening brief has been filed.   Respondent requested consolidation of this special action with that appeal, stating that the parties and issues are virtually identical.   We denied the Motion for Consolidation.

FACTS AND PROCEDURAL HISTORY

¶ 3 This case has been unduly complicated by the trial court's consolidation of a garnishment action with rescission and declaratory judgment actions.   The dismissal of the declaratory judgment action left the trial court with no framework to decide the insurer's liability except the garnishment action, yet the trial court decided that the garnishment statutes do not apply to coverage or liability issues.¹

¶ 4 On February 3, 1995, Petitioners sued the insureds under Respondent's errors and omissions policy.   The allegations included fraud, negligent misrepresentation, and breach of lease.   On March 14, 1995, Respondent insurer informed its insureds that it would defend them, but under a reservation of rights.   Petitioners entered into a Morris agreement with Respondent's insureds.   See United Servs. Auto. Ass'n v. Morris, 154 Ariz. 113, 741 P.2d 246 (1987).   They stipulated to a judgment, which was entered on March 11, 1997.   Petitioners agreed to dismiss the fraud claim with prejudice and receive a judgment of $430,000 for negligent misrepresentation, with the insureds paying an additional $35,000.   In return, the insureds assigned their rights, claims and causes of action against Respondent or any other insurers, to Petitioners.   Subsequently, Petitioners brought a garnishment proceeding against Respondent.   Respondent filed a Complaint for Declaratory Relief on April 21, 1997, after the garnishment writ had been filed.   The trial court granted Petitioners' Motion to Dismiss that action on July 18, 1997.   Respondent has since filed a direct appeal (1 CA-CV 97-0505) from the trial court's dismissal of its declaratory relief action.   Respondent also moved to dismiss the garnishment action, arguing that such an action was not the appropriate mechanism for determining the coverage, reasonableness of settlement, fraud and collusion issues.   However, the trial court set an initial evidentiary hearing date of October 14, 1997.   During that hearing, on January 20, 1998, the trial court determined that Respondent had a right to jury trial on the coverage issues.   At a subsequent hearing, the trial court consolidated Respondent's rescission action, filed December 2, 1997, with the garnishment proceedings.   On February 24, 1998, Petitioners filed this petition for special action.   Petitioners ask us to accept special action jurisdiction, hold that there is no right to a jury trial in a garnishment proceeding, and remand the case so that the trial court can complete the evidentiary hearing.

ISSUES

I. Is a garnishment action a proper forum in which to litigate insurance coverage issues?II. Is there a right to a jury trial in a garnishment action?DISCUSSION

¶ 5 This court may accept jurisdiction of special actions when the question raised is whether a determination by the trial court was arbitrary and capricious or an abuse of discretion.   Arizona Rules of Procedure for Special Actions, Rule 3(c).   Here, Petitioners argue that the trial court has committed such an abuse of discretion by granting Respondent's motion for a jury trial regarding the coverage issues of the insurance policy.   Special action jurisdiction is appropriate to review a trial court's grant of a jury trial because there is no adequate remedy by appeal.  State v. Miller, 172 Ariz. 294, 295, 836 P.2d 1004, 1005 (App.1992) (citation omitted).

¶ 6 Garnishment of money or property is governed by Arizona Revised Statutes Annotated (“A.R.S.”) sections 12-1570 through -1597.   At issue here is the language of A.R.S. section 12-1584.   Specifically, that statute provides:

If a timely objection is filed 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 what amount of nonexempt monies, if any, the garnishee was holding for or owed to the judgment debtor at the time the writ was served, and the court shall enter judgment on the writ against the garnishee for that amount or enter an order discharging the garnishee for that amount or enter an order discharging the garnishee if no nonexempt monies are determined owing.

A.R.S. § 12-1584(B).   The statute was amended in 1991 to provide further:  “[t]he court, sitting without a jury, shall decide all issues of fact and law.”  A.R.S. § 12-1584(E) (emphasis added).   Based on the language of the garnishment statute, Petitioners argue that we should accept jurisdiction and hold that all garnishment proceedings are to be tried to the court.

¶ 7 Petitioners argue that the language of the garnishment statute should govern, and Respondent should not be entitled to a jury trial on the issue of coverage.   In support of this position, Petitioners cite several cases beginning with Kepner v. Western Fire Insurance Company, 109 Ariz. 329, 509 P.2d 222 (1973).   In Kepner, our supreme court held that an insurer may refuse to defend against a suit that, on the facts pleaded in the complaint, would be covered under the policy, if facts outside the pleadings would exclude coverage.  Id. In reaching that decision the court stated:

Where there are facts which might exclude coverage, the insurer cannot always defend with complete fidelity.   There must be a proceeding at which the insurer and the insured are each represented by counsel of their own choice to fight out their differences.   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.

Id. at 332, 509 P.2d at 225 (emphasis added).

¶ 8 In Kepner, the insurer that provided a homeowner's policy (“Western”) refused to defend the suit.   The insureds had a business policy with another insurer (“Globe”) because they ran a business out of their home.   Globe entered the case and defended the suit, ultimately settling during the course of trial for less than the final judgment and taking a covenant not to execute from the plaintiffs.  Id. at 330, 509 P.2d at 223.   The plaintiffs then secured a writ of garnishment on Western.   Western received judgment in the garnishment proceeding and the plaintiffs appealed.  Id.

¶ 9 As mentioned above, our supreme court held that facts outside the pleadings, which excluded coverage, permitted Western to refuse to defend the suit.   It reached this holding without commenting on the fact that a declaratory judgment action can be tried to a jury and a garnishment proceeding must be tried to the court.

 ¶ 10 In Thomas v. Liberty Mutual Insurance Company, 173 Ariz. 322, 842 P.2d 1335 (App.1992), this court reviewed a decision in a garnishment proceeding that the appellees filed after executing a Damron agreement with the insured.   See Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969).   In Thomas, the facts were undisputed;  the only coverage issue concerned interpretation of the insurance contract.   Interpretation of an insurance contract is a question of law for the court to decide.  Thomas, 173 Ariz. at 324, 842 P.2d at 1337 (citing Sparks v. Republic Nat'l Life Ins. Co., 132 Ariz. 529, 534, 647 P.2d 1127, 1132, cert. denied, 459 U.S. 1070, 103 S.Ct. 490, 74 L.Ed.2d 632 (1982)).   The facts in Thomas were undisputed.   Here, the Respondent wants a jury trial on the coverage issue because it claims there are disputed facts.

 ¶ 11 Petitioners cite Holt v. Utica Mutual Insurance Company, 157 Ariz. 477, 759 P.2d 623 (1988), in support of their argument.   The operative facts in that case were undisputed as well.   While these cases appear to support the position that a garnishment proceeding is an appropriate forum in which to litigate insurance coverage issues, they differ from the instant case in that the only one that directly supports Petitioners' position is Kepner.   We now must determine whether the garnishment statute was intended to reach situations such as the one before us.   Our supreme court repeated its statement in Kepner that an insurer may litigate issues as to which it has a conflict of interest with the insured in a garnishment action in Farmers Insurance Company v. Vagnozzi, 138 Ariz. 443, 675 P.2d 703 (1983).   In Vagnozzi, the court set forth the proper course of action for an insurer that has reason to believe that its policy does not cover the insured.  Id. at 446, 675 P.2d at 706.   Respondent cites Vagnozzi as support for its statement that it is entitled to relitigate coverage issues to a jury.   The court in Vagnozzi did state that an insurer is not estopped in a subsequent proceeding from litigating those issues as to which there is a conflict of interest between it and the insured.  Id. The court also clearly stated that a garnishment proceeding could be just such a forum for relitigation of these issues.  Id. Yet the court did not suggest that a jury trial be engrafted onto a garnishment proceeding.   The Vagnozzi court, by quoting Kepner, reinforced the notion that a garnishment proceeding is an appropriate forum for litigation of disputed issues between the insurer and the insured despite the absence of the right to jury trial.

 ¶ 12 Whether there is a right to jury trial in a garnishment proceeding has not been conclusively determined in Arizona.   Respondent claims that it has a right to jury trial on the coverage issues and cites Arizona Constitution, article 2, section 23, as support for that proposition.   That section states, “[t]he right of trial by jury shall remain inviolate.”   Respondent cites Shaffer v. Insurance Company of North America, 113 Ariz. 21, 545 P.2d 945 (1976), for the proposition that any litigant in Arizona is entitled to a jury trial as a matter of right.  Article 2, section 23, however, preserves the right to jury trial only for those causes of action that existed under the common law at the time that section was adopted.  Hayes v. Continental Ins. Co., 178 Ariz. 264, 872 P.2d 668 (1994);  see Life Investors Ins. Co. v. Horizon Resources, 182 Ariz. 529, 532, 898 P.2d 478, 481 (App.1995).   Respondent has not shown that a cause of action for garnishment existed under the common law at the time this constitutional section was adopted.

¶ 13 The supreme court has previously stated that “[t]he garnishment procedure is strictly a statutory one, unknown at common law.”  Andrew Brown Co. v. Painters Warehouse, Inc., 111 Ariz. 404, 406, 531 P.2d 527, 529 (1975) (citing State v. Allred, 102 Ariz. 102, 425 P.2d 572 (1967)).   Furthermore, Arizona adopted the garnishment statute of Texas.  Id. The Texas courts also stated, long ago, that garnishment is a statutory proceeding that did not exist at common law.   See Beggs v. Fite, 130 Tex. 46, 106 S.W.2d 1039, 1042 (1937).

¶ 14 Whether there is a right to jury trial in a garnishment proceeding has been litigated in Georgia.   In Mull v. Mull, 167 Ga.App. 687, 307 S.E.2d 675 (1983), the trial court denied Husband's demand for jury trial in garnishment proceedings, and conducted the evidentiary hearing required by statute.   The Court of Appeals of Georgia affirmed the judgment.   In doing so, the court stated, “[i]n construing the provision of the Georgia Constitution which states that the right of trial by jury shall remain inviolate, this court has consistently held that in civil actions the right of a jury trial exists only in those cases where the right existed prior to the first Georgia Constitution, and the Constitution guarantees the continuance of this right unchanged as it existed at common law.”  Id. (citations omitted).   The court then noted that garnishment in Georgia is a statutory proceeding created after the adoption of the first Georgia Constitution.   Id. 307 S.E.2d at 676.   Georgia, therefore, does not recognize the right to jury trial in garnishment proceedings.  Id.;  see also Worsham Bros. Co. v. Federal Deposit Ins. Corp., 167 Ga.App. 163, 305 S.E.2d 816 (1983).   We conclude that the right to jury trial, as protected by article 2, section 23, does not extend to garnishment proceedings.

 ¶ 15 The coverage issues to which Respondent asserts a right to trial by jury are:  (1) whether one of the insureds' misrepresentations to Petitioners during the lease negotiations was “fraudulent” or “negligent”;  (2) whether the insureds are in fact insured by the policy, which is issued in a different name;  and (3) whether the notice of claim was given to Respondent in accordance with policy terms.   The fact that Respondent received a notice of claim is undisputed.   The question is whether the undisputed notice met the standard that the policy required.   This is a question of law.   Thus, issues 2 and 3 involve interpretation of the insurance contract, which are questions of law for the court, not a jury, to decide.  Thomas, 173 Ariz. at 324, 842 P.2d at 1337.   Issue 1 is best analogized to the issue in Vagnozzi.   That case involved an appeal from summary judgment in a declaratory judgment action.  138 Ariz. at 444, 675 P.2d at 704.   The plaintiff suffered injury as the result of an elbow thrown by the insured in a basketball game.  Id. at 448, 675 P.2d at 708.   The insurer won summary judgment in the trial court on the basis that the act was intentional and, therefore, fell outside coverage of the policy.  Id. at 445, 675 P.2d at 705.   The court held that the insured could relitigate this issue in a subsequent proceeding such as a garnishment proceeding:

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.

Id. at 446, 675 P.2d at 706 (quoting Kepner, 109 Ariz. at 332, 509 P.2d at 225).

¶ 16 Here, whether one of the insureds' statements to Petitioners was fraudulent or negligent is analogous to the issue in Vagnozzi.   Respondent, the insurer, and the insureds disagree and have a conflict of interest regarding this issue.   Therefore, based on the supreme court's reasoning in Vagnozzi, Respondent has the right to relitigate this issue regardless of the decision in the third-party action.   Our supreme court's identification of a garnishment proceeding as one of two possible appropriate forums in which to relitigate coverage questions, and the language of the garnishment statute requires the court to decide all issues of fact and law.  A.R.S. § 12-1584(E).   Therefore, we accept jurisdiction and grant Petitioners relief by reversing the trial court's order granting Respondent a jury trial as to the coverage issues and remanding for trial to the court.

FOOTNOTES

1.   The propriety of the dismissal is not before us in this special action.

GRANT, Judge.

NOEL FIDEL, Presiding Judge, and JEFFERSON L. LANKFORD, Judge, concur.