California Mediation and Arbitration

Arbitration/CCP 1281.2: Allegations Defendants Are Agents of One Another Are Not Necessarily Judicial Admissions that Defendants Can Use to Compel Arbitration

Only Factual Allegations Admitted By The Opposing Party Count As Judicial Admissions

     Section II of our next case is certified for publication.  It addresses the issue of when an allegation in a complaint that defendants are agents of one another is binding on plaintiff.  The issue is relevant to arbitration, because an argument often made in moving to compel arbitration is that there are no “third parties” whose involvement will create the possibility of inconsistent rulings resulting from litigation with those third parties.

     Plaintiff sued her former boyfriend, law firm, ex-boyfriend'’s brother-in-law and his LLC, as a result of a 1031 tax exchange that did not have a happy ending, alleging that her law firm secretly represented her former boyfriend’s brother-in law and his LLC in the exchange.  She also alleged that the defendants were agents of one another.  Based on an arbitration provision, the law firm moved to compel.  Plaintiff successfully defeated the motion, arguing that third parties created the possibility of inconsistent rulings, a basis for denying a request to arbitrate under Cal. Code Civ. Proc. section 1281.2.  The defendant law firm appealed, arguing that plaintiff was bound by her pleading that all defendants were agents of one another, and thus there were no “third parties”.  Barsegian v. Kessler & Kessler, Case No. B237044 (2nd Dist. Div. 1 April 15, 2013) (Rothschild, J., author 3:0) (partially certified for publication).

     The Court points out:  “Prominent treatises, while recognizing that the Supreme Court has described such allegations as ‘egregious examples of generic boilerplate’ . . . . still advise that ‘such allegations may be necessary,’ especially ‘at the outset of a lawsuit, before discovery.’”  A “judicial admission is ordinarily a factual allegation by one party that is admitted by the opposing party.”  (italics in the opinion).  However, here, at oral argument, the defendant seeking to compel arbitration based on plaintiff’s allegation of agency, also made it clear they were reserving their right to argue they were not bound by the allegation of agency.  Absent the agreement of the opposing party, plaintiff’s allegation of agency was not a judicial admission.

      Thus, the Court of Appeal affirmed the trial court’s order denying defendants’ motion to compel arbitration.

      Tip:  Whether you want to arbitrate or whether you want to oppose arbitration, consider the legal implications of alleging agency in a complaint, whenever an arbitration agreement may be an issue.

       

Arbitration/1281.2: Fourth District, Division 3 Affirms Denial Of Petition To Arbitrate Based On Risk of Inconsistent Rulings

 

The Inconsistent Rulings Could Have Resulted In Inconsistent Remedies – A Practical Consideration

     “The court, in a thorny litigation matter over technology licensing and investment fraud, denied a motion to compel arbitration of the issues arising under a cross-complaint. It held that there was an apparent risk of conflicting rulings between an arbitration decision on the cross-complaint and a judgment on the complaint. Moving party and cross-defendant CleanTech Biofuels, Inc. appeals. We affirm. The risk of conflicting rulings is clear.”  Clean Conversion Technologies, Inc. v. Cleantech Biofuels, Inc., Case No. G046589 (4th Dist. Div. 3 March 5, 2013) (Moore, J., author 3:0) (unpublished).

     Thorny.  J.J. Harrison, photographer.  Wikimedia Commons GNU License.

     The interesting twist to this case is that the inconsistent rulings would not necessarily have led to any difference in the amount of damages, but rather to different practical outcomes, one of which would have made a levy impossible.  One scenario could have led to a finding of fraudulent conveyance by a sublicensor, and the voiding of the sublicense, vesting the license rights in the sublicensor/judgment debtor and making them subject to levy.  Another scenario could have led to a finding that the transfer of license rights from sublicensor to sublicensee was not authorized by the licensor, allowing the licensor to terminate its license, and thus leaving the rights with the licensor who was not subject to attachment. 

Arbitration/Waiver/CCP 1281.2: Six-Year Delay In Seeking Arbitration Results In Waiver Of Right To Arbitrate

L.A. Law:  Top-Notch Law Firm Claimed Delayed Discovery Of Arbitration Agreement, But Court of Appeal Wasn’t Buying It

     Snippets of the trial court record selected by the Court of Appeal can be very telling.  Here, the trial court, troubled by defendants’ claim of delayed discovery of an arbitration agreement, observed:  “I guess one of my problems on this case is I have a problem figuring out how nobody knew there was an arbitration agreement for six years.  And I think too highly of the law firms involved, frankly, to think that nobody ever asked that question.  And of course, I have the business of plaintiff turning over a copy of it . . . They produced a copy of it.  For you to argue that that wasn’t enough, I think that’s a hard fact for you guys to get around and I see why you’re trying.”  Wolf v. Loring Ward Int’l, Ltd., Case No. B238428 (2nd Dist. Div. 3 Feb. 21, 2013) (Klein, P.J., author 3:0) (unpublished).

     The plaintiff, Christine Wolf, sued her financial advisors following her divorce from Dick Wolf, creator of the Law and Order television franchise, claiming defendants “failed to disclose the most significant asset in the marital estate –the vested contractual right to a percentage of income in future licensing of Law and Order and its spinoffs.”  Litigation commenced in 2005, and wended its way through federal and state courts.

     Basic principles governing waiver of the right to arbitrate are that it is generally a question of fact, the burden of proof is upon the person asserting waiver, and the trial court’s finding, if supported by substantial evidence, is binding on the appellate court.

     The bottom line here?  “By any standard, the six-year delay in seeking arbitration was egregious.”  The trial court’s finding of waiver was supported by substantial evidence, resulting in affirmance of the order denying the motion to compel arbitration.   

 

Doink Doink

Arbitration/Standard of Review/CCP 1281.2/Nonsignatories: Nonsignatories Created Possibility of Conflicting Rulings And Also There Was Evidence That Aged Plaintiff Never Agreed To Arbitrate

Standard of Review Was Crucial To Affirmance of Trial Court’s Order Denying Motion to Compel Arbitration

     What a difference the standard of review can make. 

     Plaintiff Thiel, an investor, sued MKA Real Estate Qualified Fund I, LLC for investment mismanagement.  Several investment advisors, as well as real estate developers, were named as co-defendants.  MKA moved to compel arbitration with it, and the trial court denied the motion on grounds that Thiel had not agreed to arbitrate, and that third party signatories, who could not be compelled to arbitrate, created the possibility of conflicting rulings.  MKA appealed. Thiel v. MKA Real Estate Qualified Fund I, LLC, Case No.A131683 (1st Dist. Div. 4 November 9, 2012) (Ruvolo, P.J.) (unpublished).

     Evidence cut both ways as to whether there was an agreement to arbitrate.  However, the Plaintiff stated he was not shown a copy of an arbitration agreement, and he never agreed to arbitrate, and his wife backed him up.  If the court’s order to deny a motion to compel arbitration is based on a decision of fact, then a substantial evidence standard governs.  And here, though the evidence was disputed, Thiel’s denials amounted to substantial evidence. 

     Cal. Code of Civ. Proc. section 1281.2(c) authorizes the court to deny a request to arbitrate when arbitration may result in conflicting rulings on a common issue of law or fact.  Applying a de novo standard of review, the Court of Appeal concluded that Plaintiffs’ allegations of agency and conspiracy “would necessarily require presenting evidence and determining the culpability of the codefendants as well as that of MKA,” as a result of which, “there exists a possibility of conflicting rulings on common issues of law and fact . . . warranting the denial of MKA’s motion to compel arbitration.”

     The Court of Appeal’s path to affirmance was made easier by its subsidiary rulings that MKA had forfeited various arguments along the way.

      Affirmed.

Arbitration/Scope/Fees: Court of Appeal Affirms Arbitration Award Leaving Out Attorney Who Refused Arbitration

Standing On One’s Right May Not Always Be The Best Way To Protect One’s Rights

     The stake in the next case was a share of a $380,000 attorney’s fees award in a class action lawsuit.  The parties included the class, whose representative was McCall, and two law firms that had represented the class:  Morris Polich & Purdy (Morris) and The Quisenberry Law Firm (Mr. Quisenberry).   McCall, Plaintiff and Respondent, v. Morris Polich & Purdy et al., Defendants and Respondents; The Quisenberry Law Firm, Objector and Appellant, Case No. B239142 (2nd Dist. Div. 5 October 30, 2012) (Turner, J.) (not for publication). 

     Morris represented the clients first, substituting out in favor of Mr. Quisenberry, the attorney who actually negotiated the settlement on behalf of the class.  Morris, which had an arbitration provision in its fee agreement, arbitrated with the class, and based on quantum meruit, was awarded 65% of the award – $270,000.  The arbitrator also held that Mr. Quisenberry was entitled to 35% of the award, though Mr. Quisenberry was not a party to the arbitration provision, and had in fact successfully resisted efforts of Morris to compel Mr. Quisenberry to arbitrate.  The superior court confirmed the award in favor of Morris, but corrected the arbitrator’s award by deleting the 35% allocation in favor of Mr. Quisenberry, because the issue of Mr. Quisenberry’s rights to fees was not part of the “controversy submitted” to the arbitrator.  Mr. Quisenberry appealed from the judgment correcting and confirming the arbitration award.

     Affirmed. 

     Standing on his rights, Mr. Quisenberry asserted the arbitrator did not have the power to allocate the fee, as Mr. Quisenberry was not a party to the arbitration, and the Court of Appeal agreed:  the allocation to Mr. Quisenberrry was in excess of the arbitrator’s powers.  However, the Court of Appeal found no basis for overturning the quantum meruit award in favor of Morris.

     Mr. Quisenberry also argued that “the award as corrected interferes with and constitutes an involuntary forfeiture of his property rights.”  But the Court of Appeal was entirely unsympathetic to that claim.  The superior court judge had earlier ruled:  “If [Mr. Quisenberry] refuses to participate in the arbitration, [he] will have little practical opportunity to provide input to the arbitrator.”  The judge called that one correctly.  The Court of Appeal pointed out that Mr. Quisenberry could have protected his rights by participating in the arbitration, or filing suit to adjudicate his rights to the attorney’s fees fund, instituting litigation to bring in all interested parties (Cal. Code Civ. Proc. section 1281(c), and seeking to stay the arbitration to resolve the dispute in a judicial forum.

      But by standing on his right not to arbitrate, “Mr. Quisenberry’s [sic] declined to opt for any of these courses of action to protect his rights.” 

Arbitration/FAA Preemption: Justice Gilbert Answers Question of Federal Arbitration Act Preemption

It All Depends

     Justice Gilbert addresses the issue of when federal preemption applies in consolidated appeals of Mastick v. TD Ameritrade, Inc. and Mastick v. Oakwood Capital Management, Inc., LLC, Nos. B237475 and B238070 (2nd Dist. Div. 6 October 9, 2012) (published).  “We answer the question when it does with judges’ and lawyers’ habitual, exasperating response:  it all depends.”

      In the first appeal involving Mastick and Oakwood, the arbitration agreement provided for California choice of law.  California Code of Civ. Proc. section 1281.2(c) provides that a court may deny a petition to arbitrate because of the risk of inconsistent rulings.  Though the FAA governs arbitration provisions in contracts that involve interstate commerce (9 U.S.C. section 1), which happened to be the case here, nevertheless, the FAA is not inconsistent with section 1281.2 if the arbitration agreement is expressly governed by California law.  Why?  Because the FAA requires that the agreement be carried out according to the intent of the parties.  Following those principles, the trial correct correctly applied section 1281.2 to deny the petition to compel arbitration.

      The TD Ameritrade agreements, however, did not contain a California choice-of-law provision.  Instead, the agreements provided that they would “be governed by the laws of the State of Nebraska,” and that disputes would be resolved by arbitration “in accordance with the rules of FINRA.”  But Nebraska law, like the FAA, and unlike California law, does not expressly authorize a court to stay arbitration or refuse to enforce an arbitration provision to avoid duplicative proceedings or conflicting rulings. So here, the trial court erred by relying on California law and section 1281.2(c) to deny a petition to compel arbitration.

      Thus, the denial of Oakwood’s petition to compel arbitration was affirmed, and the denial of TD Ameritrade’s petition to compel arbitration was reversed.

      It just depends.

Arbitration/Fees: Plaintiff’s Request for Fees for Defeating a Petition to Compel Arbitration in Pending Lawsuit Is Unsuccessful, Because Defendant Prevailed In the Whole Lawsuit

 

Under Civil Code Section 1717, There May Be Only One Prevailing Party Entitled to Recover Attorney’s Fees on Given Contract In Given Lawsuit

     The key to our next case, involving arbitration and attorney’s fees, turns on a nice point that may at first seem a technicality but is actually material and dispositive here. That point: a party may petition to enforce an arbitration agreement as an independent lawsuit if there is no pending lawsuit; otherwise, the party must file the petition in the pending lawsuit. Frog Creek Partners, LLC v. Vance Brown, Inc., Case No. A129651, p. 2, n. 4 (1^st Dist. Div. 5 May 24, 2012) (Simons, Acting P.J., author) (certified for publication); Cal. Code Civ. Proc., section 1281.2.

     In the first example, the petitioner who is defeated may be exposed to attorney’s fees under Civ. Code section 1717 (assuming of course the existence of an attorney’s fees provision), because the petitioner who loses a petition to compel arbitration has lost an action on a contract. One who wants to litigate must now file a lawsuit, and the prevailing party in that lawsuit will have a separate right to recover attorney’s fees. But in the second example, if someone files a petition to arbitrate in an existing lawsuit and loses, no determination of liability for attorney’s fees can be made until the lawsuit is over, because only one prevailing party is entitled to recover fees on a given contract in a given lawsuit. In the second example, the plaintiff successfully defeating the petition to arbitrate brought in the existing lawsuit, but ultimately losing the substantive contract dispute at trial is a loser, and will not be able to collect attorney’s fees. That is the rationale for the outcome in Frog Creek Partners.

     The frog who tried to be as big as a bull.  Library of Congress.

Arbitration/Fees/Appealability: Order Denying Petition to Compel Arbitration Is Not (Necessarily) An Appealable Order

 

Some Orders Denying Petitions to Compel Arbitration Are More Equal than Others

     Defendant and Appellant Zani Mansouri spent over $200,000 in a patio improvements dispute with her HOA, Plaintiff and Respondent Fleur Du Lac Estates Association.  Naturally, she hoped to recover her fees and costs after the trial court earlier granted the HOA’s motion to compel arbitration, and the Court of Appeal, in a prior writ proceeding, reversed, agreeing with Mansouri that the HOA had failed to establish that it had requested arbitration and that she had refused.

      Mansouri sought fees and costs on the theory that she was the prevailing party in a proceeding to compel arbitration.  But the trial court concluded her fee motion and costs memoranda were untimely.  She moved for reconsideration, or relief due to excusable neglect.  The trial court denied that motion too in a May 2011 order.  All that law and commotion led to a writ petition, denied on the ground that Mansouri had a remedy by appeal, followed by her present appeal from the May 2011 order.  Fleur du Lac Estates Association v. Mansouri, C0968693 (3d Dist. April 23, 2012) (certified for publication) (authored by Justice Robie).

        In the opinion now certified for publication, the Court of Appeal holds that the May 11 order appealed from was non-appealable.  Why?

     First, an order denying reconsideration is typically non-appealable – to hold otherwise would permit, in effect, two appeals from every appealable decision.

     Second, the appealability of an order under the California Arbitration Act is governed by Cal. Code of Civ. Proc. section 1294 – and Mansouri was unable to successfully  shoehorn her appeal into an appealable situation under section 1294.   Mansouri argued that under Otay River Constructors v. San Diego Expressway, 158 Cal.App.4th 796 (2008), an order denying a petition to compel arbitration is a “judgment” in a petition to compel proceeding, and that a subsequent order denying fees is an appealable post-judgment order, expressly appealable under section 1294 (e).

     The Court of Appeal drew a distinction between an order in an arbitration proceeding resolving the only issue before the court in that proceeding – essentially a judgment and therefore appealable – and an order in an arbitration proceeding that did not foreclose the HOA here from “making a proper demand for arbitration under the CC&R’s on remand . . . .”  And that is what the HOA did here:  after its motion to compel arbitration was nixed by the Court of Appeal earlier because the HOA failed to demand arbitration and failed to establish a refusal to arbitrate, the HOA simply retraced its steps, and made the demand required by section 1281.2 as a predicate for bringing a petition to compel. The second time around, Mansouri didn’t oppose arbitration – the HOA had dotted its i’s and crossed its t’s. 

     There are several lessons to be drawn from this case.  First, before seeking to compel arbitration under section 1281.2, establish that you asked for arbitration, and that the opposing party refused.  Second, appealing from denial of a motion to reconsider may be futile – you may be appealing from a non-appealable order.  Third, not all orders denying a petition to compel arbitration are created equal:  some resolve all issues in a case, some do not.  Fourth, an order denying a motion to compel arbitration that resolves all issues in a case may be a final and appealable order.  Fifth, a special order after final judgment is appealable in a proceeding under the California Arbitration Act – but only if you first have a final judgment.

     Is the door shut to Mansouri’s recovery of fees?  No:  “because it appears that Mansouri still has an adequate remedy by appeal from the final judgment in this matter by which to seek review of the trial court’s denial of her motion for attorney fees and the granting of the Association’s motion to strike her costs memoranda. . . “  In fact, that was the basis for denying her alternative request to treat her premature appeal as a writ petition.  It ain’t over. . . .

    

Above:  Kirsten Flagstad

Arbitration: Third District Rules That FAA Does Not Preempt California Arbitration Statute Allowing for Denial of Arbitration Where There Is Possibility of Conflicting Rulings

 

Elder Abuse of Parent and Emotional Distress of Daughter Set Up Possibility of Conflicting Rulings

     The trial court denied motions of operators of skilled care nursing facilities to compel arbitration of parent’s Elder Abuse claim that was subject to arbitration. Why? Because the daughter’s claim of emotional distress caused by her mother’s alleged abuse created the possibility of conflicting rulings. Cal. Code Civ. Proc. section 1281.2. Defendants appealed. Bush v. Horizon West, C067277 (3^rd Dist. April 9, 2012) (not to be published).

     Above:  Nurse caring for elderly patient. c1906.  Library of Congress.

     Defendants’ chief argument was that the California statutory provision allowing for denial of the motions to compel arbitration was preempted by the Federal Arbitration Act. However, in an earlier case involving Stanford University, the Supreme Court held that “where the parties have agreed that their arbitration agreement will be governed by the law of California,” (which was also the case in Bush v. Horizon West), “application of [section 1281.2(c)] is not preempted by the [FAA].” Volt Info. Sciences v. Stanford Univ., 489 U.S. 468, 470 (1989).

     Okay, so section 1281.2(c) is not preempted where the parties have agreed that the contract will incorporate California law. But section 1281.2(c) also provides that “[t]his subdivision shall not be applicable to an agreement to arbitrate disputes as to the professional negligence of a health care provider made pursuant to Section 1295.” Section 1295 requires particular language be included in an agreement to arbitrate as to the professional negligence of a health care provider, and that language was employed in the agreement here. That gave Defendants a fall-back argument: the exemption for arbitration of medical malpractice claims meant that section 1281.2(c), by its terms, did not apply. The Court of Appeals brushed off that argument of Defendants, pointing out that here, neither the mother nor her daughter had sued for medical malpractice. Instead, the mother had sued for Elder Abuse, and the daughter sued for infliction of emotional distress.

     That was not the end of it, however. Defendants argued that the daughter was not a third party to the arbitration agreement, because of the closeness of the parties, and that therefore, the daughter could also be bound by the arbitration provision. In fact, the California Supreme Court recently held that, “when a person seeking medical care contracts with a health care provider to resolve all medical malpractice claims through arbitration,” the agreement applies “to the resolution of wrongful death claims, when the claimants are not themselves signatory to the arbitration agreement.” Ruiz v. Podolsky, 50 Cal.4^th 838, 841 (2010). At first blush, Ruiz seems close to the situation here, but courts are in the business of drawing distinctions. Here, neither the mother’s nor the daughter’s claims were for wrongful death, and the daughter’s claim for emotional distress – to her – was distinct from the mother’s claim for Elder Abuse. Therefore, Ruiz was not controlling.

     Separately, Defendants argued “equitable estoppel.” A nonsignatory who sues on a contract can sometimes be equitably estopped from disclaiming the binding effect of an arbitration provision in the contract sued upon. You take the benefits, you accept the burdens. The problem for Defendants here is that the daughter’s claim for negligent infliction emotional distress is not a contract claim.

     Finally, Defendants made a policy argument, reminding one of a variant of that old adage: if the facts are against you, argue the law, if the law is against you, argue the facts, and if both are against you, argue policy [or: bang the table]. Concluding that section 1281.2(c) is not preempted, and that the trial court did not abuse its discretion in exercising its power under the statute, the Court of Appeal said, “we can do no more.”

     Result: The orders denying the motions to compel arbitration were affirmed in a 3-0 decision authored by Justice Robie.

Arbitration/Section 1281.2/Equitable Estoppel: 4th District, Division 2 Applies Section 1281.2 and Equitable Estoppel To Reverse Trial Court’s Orders That Had Stayed Arbitration And Had Denied Petition To Arbitrate

 

Inland Empire Dustup Presented Unique Procedural Issue – But The Court Didn’t Resolve It

     The Court of Appeals noted at the outside that “we have not found a case that involves the same procedural facts as those presented here, namely, a case in which a party to an ongoing contractual arbitration files a lawsuit that names as defendants the other party to the arbitration as well as purported third parties, and alleges claims in its complaint that could have been but were not asserted in the arbitration, and then moves to stay the arbitration based on the new lawsuit.” PrimeCare of Corona, Inc. v. Hemet Community Medical Group, Inc., E051306 & E052577 (4^th Dist. Div. 2 March 26, 2012) (McKinster, J.) (not for publication).

     The Court questioned “whether a party to an ongoing arbitration can invoke section 1281.2(c) [allowing for denial of petition to arbitrate to avoid conflicting rulings] in such circumstances.” We got the drift that the Court may have thought this was sharp practice. The Court,however, did not resolve its own question, deciding the case on somewhat different grounds – thereby allowing this case to remain “not to be published in official reports.”

     The underlying dispute involved medical professionals allegedly contractually bound by restrictions on their practice, and competing independent physician associations. The trial court had stayed the arbitration of PrimeCare’s breach of contract claim against defendants and respondents Muller and Corona Family Care, Inc. [collectively “Muller”] and denied PrimeCare’s petition to arbitrate claims in Muller’s lawsuit filed against PrimeCare after arbitration began.

     PrimeCare appealed the denial of its petition to arbitrate Muller’s further claims, and the stay of an existing arbitration. Result?