California Mediation and Arbitration

Arbitration/Agents/Third Party Beneficiaries/FINRA: Financial Advisor May Be Allowed to Compel Arbitration As Agent and Third-Party Beneficiary of Defunct Member of FINRA

The Twist Here:  A Defunct Member of FINRA Cannot Compel Arbitration – But Its Agent or Third Party Beneficiary Could Do So Here (Maybe)

     The Ronay Family Limited Partnership (Ronay) sued its financial advisor Robert R. Tweed, his investment firm TFI, and others, claiming Ronay had lost $4M as a result of bum investment advice.  Tweed, in his capacity as a registered representative of CapWest Securities, Inc., had signed an arbitration agreement between Ronay and CapWest covering the subject matter of Ronay’s claims.  However, CapWest, a member of the Financial Industry Regulatory Authority (FINRA), was defunct, and under the rules of FINRA, it could not compel arbitration.  The issue here is whether anyone can enforce the arbitration provision.

     Tweed moved to compel arbitration, and the trial court denied his request, reasoning that because CapWest could not compel arbitration, neither could its agent Tweed.  Tweed appealed.  Ronay Family Limited Partnership v. Tweed, D062195 (4th Dist. Div. 1 May 23, 2013) (Irion, J., author 3:0) (certified for partial publication except for part III.C).

     Held:  Tweed and TFI may enforce the arbitration clause of the account agreement between Ronay and CapWest as agents and third-party beneficiaries.  Though CapWest became defunct and under FINRA rules lost its right to enforce the arbitration clause, Tweed and TFI retained rights to do so.  It probably helped that, though Tweed himself was not a member of FINRA, he was registered as an associated person with FINRA at all relevant times.

      Note that we’ve said Tweed “may be allowed to compel arbitration.”  It is hardly a foregone conclusion, however, because the Court, in the unpublished part of the opinion, remanded for further consideration of an issue that wasn’t briefed:  whether the possibility of conflicting rulings among multiple parties should lead to denial of arbitration under Cal. Code Civ. Proc. section 1281.2(c).

     Que sera, sera.

 

Que Sera, Sera.

Arbitration/Burden of Proof: Second District Division 2 Affirms Trial Court’s Finding That Defendant Carried Prima Facie Burden of Proof to Make Finding of Existence of Arbitration Agreement

Second District, Division 4 and Division 7 Disagree About Need to Fully Authenticate Arbitration Agreement to Meet Initial Burden

      On May 22, 2013, we blogged about The Fine Living Trust v. Merrill Lynch, Pierce, Fenner & Smith, B240869 (2nd Dist. Div. 7 May 20, 2013) (Jackson, J. author 3:0) (unpublished), holding that the party seeking to compel arbitration must carry the initial burden of properly authenticating the arbitration agreement. In that case, Merrill Lynch relied on Condee v. Longwood Management Corp., 88 Cal.App.4th 215 (2001), holding that once the party seeking arbitration alleged the existence of an arbitration agreement, the burden shifts to the opposing party to prove the falsity of the agreement. However, in that case, District 7 disapproved of Condee, to the extent it conflicts with Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th 394 (1996), which places the burden of proving the existence of the arbitration agreement by a preponderance of the evidence upon the party seeking to compel arbitration. The panel concluded that Merrill Lynch, by failing to properly authenticate the arbitration agreement, "failed to meet its burden of proving by a preponderance of the evidence the existence of an arbitration agreement. . . . "

      Brown v. UBS Financial Services, Inc., B242971 (2^nd Dist. Div. 4 May 24, 2013) (Manella, J., author 3:0) (unpublished), views Condee differently, citing with apparent approval the statement in Condee that, in the context of a petition to compel arbitration, "it is not necessary to follow the normal procedures of document authentication.. . . as a preliminary matter the [trial] court is only required to make a finding of the agreement's existence, not an evidentiary determination of its validity." In the Brown case (like The Fine Living Trust case, another case involving a financial institution),UBS produced the arbitration agreement and a declaration purporting to authenticate it. Plaintiff ?Brown challenged the authentication of the arbitration agreement, but it appears that producing the agreement with a declaration was enough to get past the initial burden of making a prima facie showing of the "existence" of an arbitration agreement.

      The 4^th and the 7^th District seem somewhat as if they are talking past one another. The 4^th Division says that the prima facie burden is to prove the "existence" of an agreement, not the "validity" of the agreement. The 7^th Division appears to be saying that one who hasn't properly authenticated the agreement has not met the prima facie burden of establishing its existence.

      In Brown, the Court affirmed the trial's judgment, finding no error in granting UBS's motion to compel arbitration.

 

Arbitration/Burden of Proof: Defendant Merrill Lynch Could Not Compel Arbitration Because It Failed To Authenticate Arbitration Agreement

Party Seeking To Arbitrate Has Burden of Proving Existence of Arbitration Agreement

     Trustee and beneficiaries sued Merrill Lynch, Pierce, Fenner & Smith for freezing an investment account and wrongfully precluding trustee from distributing funds to the beneficiaries.  Merrill Lynch moved to compel arbitration, based on a Client Relationship Agreement (CRA) signed by the original trustees of the trust, who were now deceased.  The trial court denied the motion, because Merrill Lynch failed to include a declaration authenticating the CRA – and Plaintiff filed a declaration stating he was “unable to determine in any definitive sense whether the signatures appearing on the CRA are the signatures of my parents.”  Merrill Lynch appealed.  The Fine Living Trust v. Merrill Lynch, Pierce, Fenner & Smith, B240869 (2nd Dist. Div. 7 May 20, 2013) (Jackson, J. author 3:0) (unpublished).

     Merrill Lynch relied on Condee v. Longwood Management Corp., 88 Cal.App.4th 215 (2001), holding that once the petitioner alleged the existence of an arbitration agreement, the burden shifts to the respondent to prove the falsity of the agreement.  However, another case, Toal v. Tardif, 178 Cal.App.4th 1208 (2009), holds that to the extent Condee conflicts with Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th 394 (1996), which places the burden of proving the existence of the arbitration agreement by a preponderance of the evidence upon petitioner, then Rosenthal, a Supreme Court case, controls.

     The Court of Appeal agreed that Condee had been called into doubt by Toal, and determined that Merrill Lynch, by failing to authenticate the CRA, “failed to meet its burden of proving by a preponderance of the evidence the existence of an arbitration agreement. . . . “

     Affirmed.

Arbitration/Enforcement: Arbitration Provision Fails Because Health Care Power of Attorney Is Invalid

Invalid Power of Attorney Did Not Constitute Sufficient Evidence of Ostensible Authority

    Grandma’s birthday. 1896. Library of Congress.

     Mother, in her 90s, suffering from dementia and osteoporosis, allegedly slipped and fell at a residential care facility for the elderly, after being left unattended in the dark on a wet pavement.  Found lying in a pool of blood, mother was transported to a hospital, where she died.  When daughter sued for elder abuse, fraud, wrongful death, and violation of a Health & Safety Code medical records provision, care facility unsurprisingly sought to compel arbitration.  What defendant wants to try such a case before a jury?  The trial court denied the motion to compel, and an appeal followed.  Root v. Emeritus Corporation and Emeritus At Westwind Gardens, A134748 (1st Dist. Div. 5 May 17, 2013) (Needham, J., author 3:0) (unpublished). 

     First, the daughter signed an Agreement to Resolve Disputes by Binding Arbitration.   But her authority to do so on behalf of her mother relied on an invalid health care power of attorney that was neither acknowledged by a notary nor signed by the requisite witnesses.

     Second, the invalid health care power of attorney was insufficient to confer ostensible authority on the daughter to act on behalf of her mother.   If it were otherwise, then it would permit health care and other decisions to be made based on the principal’s alleged signature alone, without the protective statutory formalities of acknowledgment before a notary or two witnesses.

     Affirmed.

Arbitration/3rd Party Beneficiaries/Equitable Estoppel: 9th Circuit Holds District Court Correctly Concluded Defendant Could Not Invoke Arbitration Clause As 3rd Party Beneficiary or Through Equitable Estoppel

Defendant Admitted It Did Not Enter Into Contract With Student To Provide Him With Debt Relief Services

     Student loan debt is an area of our economy ripe to generate cases on arbitration and class action.  See for example my April 12, 2013 post about Kilgore v. Keybank, No. 09-16703 (9th Cir. April 11, 2013), a case in which students of a failed helicopter flight-training school, in which the 9th Circuit, sitting en banc, found that the class action waiver was not unconscionable. 

     Rajagopalan v. NoteWorld, LLC, No. 12-35205 (9th Cir. May 20, 2013) (per curiam) (for publication), is yet another student loan debt case. 

     After losing his job, Plaintiff Rajagopalan, an electrical engineer who accumulated $15,000 in student debt, sought a professional loan work out solution by contacting a company on the Internet.  He signed a contract that contained an arbitration clause.  After some months passed, Plaintiff cancelled his subscription, only to find out that the company responsible for the payment processing had had withdrawn $8,290.15 from his account, and he had received no debt relief.

      NoteWorld, which was responsible for payment processing, was not a signatory to the contract.  Its in-house counsel explained that NoteWorld was an “independent third-party and does not act as an agent for the [debt relief service provider], nor does it take on any of the contractual obligations of the DRSP.”

     Plaintiff filed a lawsuit against NoteWorld, and NoteWorld sought to take advantage of the arbitration provision in the contract between Plaintiff and the debt relief company.  The district court denied NoteWorld’s motion to compel arbitration.

     Under Washington state law, “both contracting parties must intend that a third party beneficiary contract be created.”  Here, evidence was lacking that Plaintiff intended to designate NoteWorld as a third-party beneficiary, or that NoteWorld assumed any duties or obligations under the contract.

      In order to successfully invoke equitable estoppel, it was essential “that the subject matter of the dispute was intertwined with the contract providing for arbitration.”  Such was not the case here, because Plaintiff’s claims against NoteWorld were statutory claims separate from the contract itself.

      Affirmed.

  

Arbitration/Costs/CCP 1286.6: Sixth District Reverses Costs Award for Arbitration, But Remands to Allow Trial Court to Determine Costs Incurred To Judicially Confirm Arbitration Award

Both Sides Wanted To Correct Cost Award That Couldn't Be Corrected

     As with our immediately preceding post of May 19, 2013 on De Sena v. Richert, the issue here is whether cost issues should be presented to the trial judge or to the arbitrator.

     At arbitration, Plaintiffs were awarded $1,092,797, plus "costs in accordance with the California Code of Civil Procedure." Plaintiffs, however, never briefed the cost issue to the arbitrator, and did not submit evidence of costs or of a CCP 998 settlement offer. The trial court confirmed the arbitrator's award, but "corrected" the costs award by removing it. Plaintiffs appealed in order to recover their costs. Watson v. Knorr, H036430 (6^th Dist. May 13, 2013) (Rushing, P.J., author 3:0) (unpublished).

     The unpublished opinion is 40 pages long – evidence that costs issues in arbitration can be very confusing. Both Plaintiffs and Defendant had wanted to correct the ruling on costs – Plaintiffs, by filling in a dollar amount, Defendant, by deleting the reference to entitlement to costs. The bottom line, however, was that it was within the power of the arbitrator to rule on costs, and that even if the ruling was erroneous in arbitration, that was no basis for "correcting". it. If the Plaintiffs wanted the arbitrator to award costs, they would have done well to brief the issue, and submit evidence to the arbitrator.

     Costs incurred by Plaintiffs in the trial court were a different matter. "The case is remanded to the trial court for the sole purpose of determining Plaintiffs' entitlement to costs related to the proceedings in the trial court and the amount of such costs."

     Practice Tip: The Court of Appeal helpfully suggests a two-step approach in arbitration where a 998 settlement offer is made, and costs cannot be assessed before a prevailing party is determined. The parties should advise the arbitrator that a 998 offer has been made, and ask the arbitrator to conduct a bifurcated hearing, reserving jurisdiction to address costs after the liability and damages phase is completed.

 

Arbitration/Fees/Construction of Agreement/Mediation/Settlement Agreement: Limiting Language in Settlement Agreement Required Arbitrator, Not Court, To Determine Fees

"Customary Provision Allowing for the Award of Legal Fees in Any Action on a Contract" Was Missing Here 

     This case presents a common issue: whether a prevailing party must seek fees from the arbitrator or from the trial court. Here, the issue was resolved by express, non-standard language in a settlement agreement. DeSena v. Richert, C070461 (3d Dist. May 13, 2013) (Butz, J., author 3:0).

     Plaintiff settled a neighbor dispute during mediation. The settlement agreement provided that the mediator could resolve future disputes acting as an arbitrator. Sure enough, disputes arose, the mediator cum arbitrator resolved the disputes in favor of Plaintiff, and Plaintiff was thus the prevailing party. As the prevailing party, Plaintiff expected to recover fees based on a contractual fee provision in the settlement agreement. Consequently, Plaintiff appealed after the superior court judge denied her motion for legal fees incurred to confirm the ruling of the mediator acting as an arbitrator.

     Plaintiff ended up cornered by the language of the settlement agreement. "The intent reflected in the terms of the . . . settlement . . . was for the parties to bear their own costs and legal fees except in matters relating to the enforceability and interpretation of the settlement agreement (undoubtedly as a way to avert any subsequent truculence about settling the dispute). This exception, however, is limited to issues of enforceability and interpretation submitted to the mediator for binding arbitration, as to which the mediator possesses sole discretion to award costs or legal fees." Here, because the Plaintiff did not submit the fee issue to the arbitrator, Plaintiff was unable to recover fees. Focusing on the language of the settlement agreement, the Court of Appeal pointed out," this is not the equivalent of the customary provision allowing for the award of legal fees in any action on a contract . . . . "

     Judgment affirmed.

Arbitration/Unconscionability: Fourth District, Division 3, Finds That Contract of Adhesion Is Not Procedurally Unconscionable

Justice Aronson Dissents, Believing Majority Misapplied Legal "Sliding Scale" Test To Contract of Adhesion

      Plaintiff Nibler sued Monex, a precious metals trading company in which he invested, and lost, his inheritance. The trial court denied Monex's motion to compel arbitration, finding the arbitration provisions unconscionable. In fact Monex had been involved in another case, Paradise v. Superior Court, 176 Cal.App.4^th 1554 (2009) in which the arbitration clause was found unconscionable. Monex appealed the denial of its motion.

      The Court of Appeal reversed, finding a lack of procedural unconscionability. Nibler v. Monex Deposit Company, G046511 (4^th Dist. Div. 3 May 13, 2013) (Moore, Acting P.J., author 2:1, with Justice Fybel concurring) (unpublished). The key to the reversal was that changes had been made to the arbitration provisions, including the ability to opt out completely, precluding a finding of procedural unconscionability. Because both procedural and substantive unconscionability must be present to make an arbitration provision unconscionable, the Court of Appeal didn't even need to address substantive unconscionability. So it didn't.

      Nevertheless, the Court of Appeal did agree that the contract was adhesive – basically a take it or leave it contract that the customer could not change.

      Justice Aronson, dissenting, believed that once the Majority agreed that the contract was adhesive, it had acknowledged that there was at least some procedural unconscionability, requiring it to apply the sliding scale test, and to consider whether the procedural and substantive unconscionability, considered together, were sufficient to make the arbitration provision unconscionable.

      Interesting issue; too bad the case is unpublished.