California Mediation and Arbitration

Arbitration/Vacatur: Arbitrator’s Award Bearing Some Rational Relationship To Contract And Breach Meant Arbitrator Did Not Exceed His Powers

The Party Allowed To Keep A $500,000 Deposit Was The Appellant

     SSIC, LLC, the seller of a mobile home park with serious financial problems, received an arbitral award allowing seller to keep a $500,000 deposit from buyer Kleege.  Not content with retaining the deposit, the seller appealed, arguing that a contractual provision was unambiguous, and that the arbitrator exceeded his powers by failing to provide additional monetary relief as required.  Kleege v. SSIC, LLC, D064077 (4/1 Sept. 30, 2014) (Huffman, McConnell, Aaron) (unpublished).

      However, the arbitrator did take into consideration that the real estate deal was “doomed from the start”; that in substance, buyer purchased for $500,000 “the opportunity to negotiate a purchase of the mobile home park”, while working through various problems; that both parties were in breach of obligations; and, that each party overlooked the other’s breaches, hoping against hope the problems with the deal could be straightened out.

     In essence, seller was arguing that the arbitrator made an error of fact or law – and that’s not a case where the arbitrator exceeds his powers.  Here, the arbitrator’s award passed muster, because it bore “some rational relationship to the contract and the breach.”  Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.4th 362, 381 (1994).

     Affirmed.

Arbitration/Correction by Arbitrator/Fees: Arbitrator Exceeded Power By Substantively Revising Final Award

Also, JAMS Rules Did Not Enlarge Arbitrator's Powers To Correct Final Award.

     Cooper v. Lavely & Singer, Case No. B251508 (2/4 Sept. 26, 2014) (Manella, Epstein, Willhite) (published) offers a very instructive discussion about correction of an arbitration award. Perhaps the best lesson here is for arbitrators – be careful about issuing dicey final awards that may require further tinkering.

     The key statutory provisions at issue in Cooper are: CCP section 1286.2, providing grounds for vacating an award by the court; section 1286.6, providing grounds for the court to correct an award; and, section 1284 providing grounds for an arbitrator to correct an award – which, however, precludes an arbitrator from making a substantive change that affects the merits of the final decision.  See CCP sections 1284 and 1286.6(b), which work in tandem.

     In an attorney fee dispute between client Cooper and law firm Lavely & Singer, the arbitrator issued a Final Award declaring the law firm the prevailing party, but denying fees to it, because it appeared that the law firm had represented itself in the litigation. However, after Lavely & Singer submitted a motion for "correction, modification and/or reconsideration of the Final Award," the arbitrator concluded that reconsideration was proper, and issued a Revised Final Award, incorporating the Final Award, and including attorney's fees.

     The problem here is that "Section 1284 prohibits substantive amendments to final awards to include new awards of attorney fees."  Section 1284 allows an arbitrator latitude to make other types of changes, where, for example, there is a miscalculation of figures, or the award is imperfect as to form.  And there is even a further nonstatutory amendment doctrine, allowing the arbitrator to amend an award to include rulings on mistakenly omitted issues.  Because the Revised Final Award here purported to eliminate substantive errors in the Final Award, it simply couldn’t be shoe-horned into any of the narrow exceptions that allow for amendment by the arbitrator.

      However, the parties had agreed to be governed by JAMS rules, leaving as a “key issue . . . whether the parties . . . expanded the scope of the arbitrator’s ability to modify a final award beyond that granted by section 1284.”  After all, some of the CCP rules governing arbitration can be governed by agreement of the parties, and whereas other rules will always, as a matter of policy, take priority over a private agreement.  The JAMS rules, however, contain the further provision that “If any of these Rules . . . is determined to be in conflict with a provision of applicable law, the provision of law will govern over the Rule in conflict . . . “  Therefore, the Court of Appeal is able to conclude here, on these facts, that by agreeing to arbitrate under JAMS rules, the parties “did not attempt to modify section 1284 to permit substantive revisions of an award that was final for purposes of that statute . . . “

      Here, the arbitrator, hamstrung by the earlier issuance of a Final Award, would have had more flexibility if an Interim Award had been issued. 

     So in the end, trial court erred by denying Cooper's petition to vacate the fee award contained in the Revised Final Award. Thus, Lively & Singer is the prevailing party – but it doesn't get attorney's fees incurred in the arbitration.

     COMMENT:  By concluding here that the parties, by agreeing to JAMS rules, did not intend to modify section 1284, the Court leaves it for another day to decide whether section 1284 could be modified by agreement of the parties to devise a more flexible procedure for correcting an award.

Arbitration/Correction of Award/1286.6: Arbitrator Did Not Exceed Her Powers In Calculating Damages, Where Appellant Was Ordered To Produce Documentation Of Manufacturing Costs And Failed To Do So

 

Maxim of Equity:  “No one can take advantage of his own wrong.” (Civ. Code, section 3517).

     Defendant/Appellant Donn Zellet appealed from a judgment confirming an arbitration award for $376,418 in damages, contending the arbitrator exceeded her powers in grossly miscalculating damages, and the superior court erred in not correcting the award.  Clark v. Zellet, Case No. B251728 (2/6 Sept. 22, 2014) (Yegan, Gilbert, Perren) (unpublished).

     Zellet argued the superior court should have subtracted plaintiff’s manufacturing cost from plaintiff’s unit cost for items sold.  “The argument fails because Zellet was ordered to produce records of the manufacturing and production costs but refused to do so.”  True, contract damages must be clearly ascertainable.  But:  “The corollary to this rule is that ‘[o]ne whose conduct has rendered difficult the ascertainment of . . . damages cannot escape liability because the damages could not be measured with exactness. [Citations.]”  Zinn v. Ex-Cell-O Corp., 24 Cal.2d 290, 297-298 (1944).

     Affirmed.

Arbitration/Nonsignatories/Fees: Double Whammy–Judgment Confirming Arbitration Award With Party Who Didn’t Sign Arbitration Agreement Is Reversed And Denial Of Fee Award To Party Who Had Prevailed At Arbitration Is Affirmed

Guerra v. Aurora Loan Services, LLC, HO38331 (6th Dist. Sept. 19, 2014) (Mihara, Elia, Grover) (unpublished).

     Chairez and Guerra entered into a “LEASE AGREEMENT with OPTION TO PURCHASE & EXTEND” (agreement) relating to a property at which Chairez and Guerra lived.  Chairez borrowed $1.1 million against the property and defaulted on the loan, resulting in nonjudicial foreclosure proceedings by Aurora.  Aurora also brought an unlawful detainer action against Guerra, and Guerra successfully moved to compel arbitration under the agreement. 

     Guerra did well in the arbitration.  The arbitrator ordered Aurora to grant the property to him, to cancel the note, to reconvey the deed of trust, and to pay $14K in attorneys fees. 

     The appeal by Aurora yielded a reversal.  Aurora was a nonsignatory to the arbitration agreement between Chairez and Guerra.  Aurora was not a beneficiary of the agreement.  And the relationship between Chairez and Aurora, i.e., between borrower and lender, was different than the types of relationships such as principal and agent or employer and employee, where the identity of interest is sufficient to bind a nonsignatory to an arbitration agreement.  Hence, the trial court erred by ordering arbitration.

Guerra v. Aurora Loan Services, Inc., H038813 (6th Dist. Sept. 19, 2014) (Mihara, Elia, Grover) (unpublished). 

     Interestingly, on the basis the the Court of Appeal determined that it was improper to compel arbitration – namely, Aurora was a nonsignatory to the arbitration agreement – the trial judge denied attorney’s fees to Guerra, even though he had prevailed in the arbitration.  Because the Court of Appeal reversed the judgment confirming the arbitration award (see above), Guerra was not a prevailing party, and therefore the order denying him attorney’s fees was affirmed.

Arbitration/Record: Second District, Div 5 Affirms Order Staying Nonsignatory Plaintiffs’ Attorney Malpractice Claim Until After Arbitration, Based On Defendants’ Failure To Provide An Adequate Record For Appeal

Inadequate Record Is Basis For Affirmance

     The trial court orders the signatories to an arbitration agreement to arbitrate, while staying the matter as to the nonsignatory plaintiffs’ sole claim for attorney malpractice.  Defendants appeal from the order staying the nonsignatory plaintiffs’ attorney malpractice claim until after arbitration.  Defendants appeal.  Mouradian v. Jehdian, Case No. B251932 (2/5 Sept. 19, 2014) (Turner, Kriegler, Mink) (unpublished). 

     “Without a proper record,” explains the Court of Appeal, “we cannot determine what happened [below] . . . In numerous situations, courts have refused to reach the merits of an appellant’s claims where no reporter’s transcript of a pertinent proceeding or a suitable substitute has been provided.”

     Affirmed.

Arbitration/Disclosures: Arbitrator’s Failure To Timely Disclose He Attended Memorial Service For Attorney Directly Implicated In Legal Malpractice Claim Results In Reversal Of Order Confirming Award

No Good Deed Goes Unpunished . . .  

     Here, the Court of Appeal reverses the order affirming the arbitrator’s award because the arbitrator, distinguished retired judge Eli Chernow, failed to timely disclose that he had attended the memorial service for attorney Steven Knowles, who “was directly implicated in the legal malpractice claim” brought by plaintiff.  The late Mr. Knowles had been deposed during the course of the arbitration.  Though not named as a party, Mr. Knowles had been the initial lead attorney for plaintiff Evans while Mr. Knowles was an attorney with defendant Trope & Trope.  Evans v. Trope & Trope, Case No. B252833 (2/5 Sept. 18, 2013) (Turner, with Mink and Mosk concurring) (unpublished).

     The Court of Appeal is at pains to point out that Retired Judge Chernow behaved without a display of bias.  For example, ”Judge Chernow issued a patient, dignified and courteous admonition concerning Mr. Trope’s conduct,” sometime after the admittedly thick-skinned plaintiff’s attorney complained, “Mr. Trope called me a ‘lying sack of sh-t.’”  The Court also is at pains to state, “We are not finding actual bias existed.”  Calling the case a “close one,” the Court nevertheless reverses the order confirming the award in favor of Trope & Trope, concluding “attendance at the celebration would cause a person aware of the facts to reasonably entertain a doubt that the Judge Chernow would be able to be impartial.”

     However, the Court also holds the arbitration provision is not unconscionable, despite its requirement that the arbitrator must be a retired LASC judge who sat in the family law department and “who is currently active as a reference judicial officer handling family law matters.”  Trope & Trope is the most prominent family law firm in Los Angeles, famous for the high profile cases it has handled over the years.

      Connect the dots.

     And that’s just what Justice Mosk, concurring, does.  He believes “the arbitration clause in this case could have been found unconscionable, depending on the facts.”  (my italics).  “There could be no reason for such a restrictive clause,” explains Justice Mosk, “other than to insure that the arbitrator might well have some likelihood of being retained by or selected by Trope & Trope in the future.”  This “repeat player” situation, in which “the arbitrator is likely to be utilized by one of the parties in the future”, seems calculated to give Trope & Trope an advantage.  However, Justice Mosk concedes that in this particular case, there is “no evidence as to the effect of such a clause.”  Just based on the record, unconscionability simply hasn’t been established. 

     COMMENT:  Justice Mosk’s concurrence leaves open the door for someone to argue, upon a different record, that a similar clause does lead to a substantively unconscionable unfair advantage.

Arbitration/Nonsignatories: Big Surprise–Parties That Failed To Initial Arbitration Provision As Required By The Express Language Of The Provision Could Not Be Compelled To Arbitrate

Appellants’ Argument That There Was An “Implied Oral Understanding” Didn’t Cut It With The Court Of Appeal

     The arbitration clause in our next case began:  “NOTICE:  BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION’ PROVISION DECIDED BY NEUTRAL ARBITRATION . . . “   No party initialed this provision.  Now that’s a problem.  Trial court denied defendants’ motion to compel arbitration, and scrappy defendants appealed.  Lake Balboa Investments, LLC v. J&J Mayfair, LLC, Case No. B254449 (2/7 Sept. 17, 2014) (Zelon, Woods, Segal) (unpublished). 

     Appellants appeared to argue “that the parties to the agreement waived the initialing condition of the arbitration provision ‘by implied oral understanding.’”  However, the trial court and the Court of Appeal didn’t buy this argument, because the declaration upon which it was based was conclusory, i.e., “devoid of any specific facts demonstrating how this conclusion was reached.”  A beefed-up declaration filed as part of defendants’ reply in the trial court “suffer[ed] from the same infirmities” as the original declaration, “with the additional deficiency that it was submitted in conjunction with the reply brief, precluding the responding party from addressing it.”

      Affirmed.

      Marc sends his greetings to appellants’ attorney, Michael B. Montgomery.  Michael, Marc, and Barbara Lichman were attorneys in a jury trial in Victorville some years ago, and it was a memorable experience.

Arbitration/Disclosure/Vacatur: Judgment Confirming Arbitration Award Is Affirmed, Notwithstanding Objections About Arbitrator’s Alleged Lack of Disclosure And Failure To Grant Postponement

Want A Postponement?  Gotta Ask For It

     An arbitrator’s failure to timely disclose a basis for disqualification and an arbitrator’s failure to grant a reasonable continuance in the proceedings may be grounds for vacating an arbitration award.  Both issues were at play in Lawyers’ Mutual Insurance Company v. Law Offices of Diana Courteau, Case No. B250158 (2/5 Sept. 12, 2014) (Turner, Kriegler, Mink) (unpublished), a case involving a policy limits dispute between a law firm and its malpractice carrier.  

     As is sometimes the case with a three arbitrator panel, each side here picked a party arbitrator, but the two party arbitrators could not agree on the selection of the neutral arbitrator.  The trial court designated Retired Justice Daniel A. Curry as the “neutral arbitrator.” 

     The law firm and its party arbitrator, Cynthia Bozzone, did not attend the arbitration.  Ms. Bozzone’s aged mother was in an ICU at the time, and Ms. Bozzone notified the arbitral organization, Alternative Resolution Centers (ARC), of this fact. 

     ARC’s rules permitted the arbitration to go forward with two arbitrators, and go forward it did.  Unsurprisingly, considering that the law firm and its party arbitrator did not attend the arbitration, the arbitration did not go well for the law firm, and the award favoring the carrier’s policy interpretation was confirmed as a judgment by the trial court.  (But note:  The Court of Appeal briefly comments that defendants failed to demonstrate prejudice – i.e., that “they had any chance of prevailing in the arbitration had there been a continuance.”).

     Two additional facts, before we turn to the Court of Appeal decision:  (1) Retired Justice Curry belonged to 13 specialty panels of ARC, along with attorney Jerold S. Sherman, the former senior vice-president and general counsel for 12 years, before retiring in 2005, of plaintiff Lawyers’ Mutual Insurance Company; (2) Mr. Sherman received an on-line endorsement from the insurance carrier’s coverage counsel, Mr. Littlefield.

     The law firm argued that the award should be vacated pursuant to CCP sections 1281.9(a) and 1286.2(a) (6) for the arbitrator’s failure to disclose the relationship between ARC and Mr. Sherman.  The Court of Appeal, however, rejected this argument, based on the facts of record.  Mr. Sherman was not a party or an attorney in the arbitration.  Furthermore, Retired Justice Curry did not know Mr. Sherman.  Also, Retired Justice Curry’s compensation was not dependent on any matter handled by Mr. Sherman, and vice versa.  Justice Curry also declared that he did not know Mr. Sherman was connected with ARC, or that Mr. Sherman had served as general counsel of plaintiff until Ms. Courteau mentioned his name.   On the facts of this case, the Court of Appeal concluded that Retired Justice Curry did not need to disclose that Mr. Sherman is an arbitrator affiliated with ARC.

      The Court distinguished Gray v. Chui, 212 Cal.App.4th 1355 (2013), holding that the neutral arbitrator violated Ethics Standard 8(b)(1)(a) by failing to disclose that one of the party’s attorneys worked for ADR, Services, Inc., the dispute resolution provider administering the arbitration.  In the instant case, however, Mr. Sherman was neither a party nor an attorney in the arbitration.

     That leaves the “failure” of the arbitrator here to postpone the arbitration hearing (CCP section 1286.2(a)(5)), upon receipt by ARC of the information that Ms. Bozzone’s mother was in an ICU.  “No doubt, Ms. Bozzone had good cause for postponement of the hearing,” explained the Court of Appeal, adding:  “But neither defendants nor Ms., Bozzone requested a continuance of the hearing from Retired Justice Curry.

     PRACTICE TIP:  Do your independent investigation of arbitrators’ backgrounds, exercise strikes, and state objections as early as possible.  See my May 29, 2014 post on Post-Arbitral Award Investigation of Bias.  Also, if you have a basis for seeking a postponement of an arbitral hearing, ask for it expressly, and in writing, so as to make a record.

Consumer Arbitration/Employees/Enforceability/ Fees: CCP 1284.3 Prohibits Fee Shifting In Employee Arbitrations But Not On The Facts Of This Case

Court of Appeal Was Unable To Find Precedent On Whether CCP 1284.3, Pertaining To Consumer Arbitrations, Applies To Employer-Employee Arbitrations, And Reaches Its Own Conclusion

     On March 12, 2014, I posted about an earlier Court of Appeal decision involving the same parties and the same arbitration agreement as here, in which the Court held that, with the exception of a claim for unpaid wages, other claims in the case could be arbitrated. Unfortunately, the decision in that case apparently came down too late to offer guidance to the trial judge in this case, who denied plaintiff’s motion to compel the former employee to arbitrate, only to be reversed on appeal. Francis Capital Management LLC v. Martin Keith Lane, Jr., B253559 (2/1 Sept. 9, 2014) (Manella, Epstein, Willhite) (unpublished).

     The most interesting issue presented by the case is the application of Cal. Code of Civ. Proc., section 1284.3. (I posted about 1284.3 earlier on May 1, 2014). Subpart (a) of this provision states:

“No neutral arbitrator or private arbitration company shall administer a consumer arbitration under any agreement or rule requiring that a consumer who is a party to the arbitration pay the fees and costs incurred by an opposing party, if the consumer does not prevail in the arbitration, including, but not limited to, the fees and costs of the arbitrator, provider, organization, attorney, or witnesses.”

     The parties had designated the AAA as the arbitration organization. The issue presented by section 1284.3 was whether a prevailing party fee shifting provision in the arbitration agreement prohibited the AAA from arbitrating the dispute. The trial court concluded that the answer was “yes”, but the Court of Appeal concluded here, on the facts, that the answer was “no.”

     A threshold question is whether employee-employer arbitrations even qualify as “consumer arbitrations.” Finding an absence of case law, and looking to guidance in California Rules of Court, Ethics Standard for Neutral Arbitrators, promulgated pursuant to section 1281.85, the Court of Appeal answered the threshold question in the affirmative.

     Several factors here saved the fee shifting provision from the clutches of section 1284.3.

     First, the fee shifting was not “mandatory,” but rather “discretionary.” The clause provided that the arbitrator “may” award reasonable fees.

     Second, the arbitrator was given authority to award costs and fees “authorized by law.” That meant that if 1284.3 didn’t allow for fee shifting, then the arbitrator lacked the authority to shift fees. DRAFTING TIP: the phrase “authorized by law” can be useful to save a questionable provision.

     Third, there was a severability provision.

     Fourth, plaintiff had agreed to waive fees.

     In short, the Court of Appeal concluded “no legal bar prohibits the AAA from accepting the arbitration.” The Court remanded the matter to the trial court “to enter an order granting FCM’s motion to compel Lane to submit to arbitration of FCM’s claims.”

     If published, this case would provide useful guidance about section 1284.3 to parties drafting fee clauses in consumer arbitration agreements, and to arbitrators having to confront the impact of such clauses on their ability to accept the arbitration.

Arbitration/Employment/Waiver/Class Action: Following Iskanian, 2nd District Div 2 Holds Employee Cannot Waive PAGA Representative Claims

Also,There Was No Basis Here For Sending The PAGA Representative Claims To Arbitration Rather Than Court

         In Jones v. J.C. Penney Corporation, Inc., Case No. B246674 (2/4 Sept. 5, 2014) (Edmon, Willhite, Manella) (unpublished), plaintiff brought a representative claim under the Labor Code Private Attorneys General Act of 2004 (PAGA), alleging employer J.C. Penney did not permit her and others to sit at work, even when it would not interfere with performance of their duties, and did not provide employees with suitable seats.  The Court of Appeal has affirmed the trial court’s order denying a petition to compel arbitration, on the grounds that Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014) holds that employee waivers of the right to bring representative PAGA claims are unenforceable.

       The unenforceability of a waiver of the representative PAGA claims left as a remaining issue whether plaintiff’s claims were to proceed in litigation or arbitration.

       In connection with that issue, J.C. Penney conceded that the employee could not arbitrate PAGA claims unless the Labor & Workforce Development Agency (LWDA) also signed the arbitration agreement.  This concession makes sense, because the California courts view PAGA claims as public disputes between an employer and the state, though initiated by the employee as a type of “qui tam” dispute in which a 75% of the civil penalties will go to the state, and 25% will go to the aggrieved employee.   As the LWDA was not about to sign an arbitration agreement, there was no basis for arbitrating the PAGA claims, leaving them to be litigated.

      J.C. Penney also urged that the Court of Appeal “stay this appeal until the high court can receive and rule on an anticipated petition for writ of certiorari in Iskanian.”  The Court of Appeal did not follow that suggestion.  However, if a writ is to be anticipated in Iskanian, then we have hardly heard the last word about the arbitrability of PAGA claims in the face of a waiver of the right to bring a representative action.