California Mediation and Arbitration

Settlement Agreements: How To Minimize Bankruptcy Risks In Settlement Agreements

Useful Advice In An Online Article.

    A problem sometimes arising in mediation is that while the parties may agree on a settlement amount, the defendant signals it may declare bankruptcy, putting the value of any settlement in doubt. How can bankruptcy risks be minimized in settlement agreements? I found an online article addressing this question on the Holland & Hart website to be useful. Rather than remake the wheel, here is a link to the article.

    I would, however, caution California practitioners to be careful with the discussion about preserving the full amount of the original claim in the event bankruptcy is declared, because there is a substantial amount of California law supporting the proposition that once a settlement amount is agreed upon, reverting to the full amount of the claim in the event that the settlement agreement is breached may constitute a penalty and forfeiture.

Arbitration, Unconscionability: 3rd Appellate Districts Reminds Us That Unconscionability Doctrine Applies To Commercial As Well As Consumer Contracts

College That Wanted To Participate In Intercollegiate Athletics Had No Choice Other Than To Contract With Athletic Association.

    Bakersfield College et al. v. California Community College Athletic Association et al., C085099 (3d Dist.  10/31/19) (Robie, Duarte, Renner), was described both by the trial court and the appellate court as a "close case". However, concluding that an arbitration agreement was "unconscionable", the Court of Appeal reversed the judgment of the trial court.

    The dispute between Bakersfield College, its football coach, and the California Community College Athletic Association arose when the Athletic Association sanctioned and penalized the college for providing football players with meal, work, and housing benefits not available to other students. Apparently if Bakersfield College wanted to participate in intercollegiate athletics, it had to contract with the Athletic Association, and of course the contract contained an arbitration provision. The College appealed the sanction/penalty decision, and proceeded through three steps of a multi-level appeal process that did not go well for the College. Rather than proceeding to levels four and five, the College filed a petition for writ of mandate and a complaint for breach of contract and a motion for judgment on the writ. The Athletic Association opposed on the grounds plaintiffs failed to exhaust administrative remedies by foregoing binding arbitration, and the College argued that arbitration was unconscionable.

    This was not consumer arbitration. The College was a sophisticated institution and represented by counsel. Furthermore, once entering into an agreement, it had the ability to propose and seek amendment to the Athletic Association's constitution and bylaws, and thus to seek amendment to arbitration provisions. The trial court found "at least a minimal degree of procedural unconscionability", but did not find enough substantive unconscionability to make the arbitration agreement unenforceable.

    The Court of Appeal rejected the Athletic Association's argument that there was no procedural unconscionability because the parties were sophisticated and because the College could, after entering into agreement with the Athletic Association, seek to change the rules. In fact, the Court of Appeal found the ability to seek to change the rules "after" entering into an agreement to be irrelevant for an unconscionability analysis, because unconscionability must be determined as of the time the parties enter into agreement, not as of a later date.

    Most interesting is the Court of Appeal's analysis of procedural unconscionability, which parallels the same analysis that goes into determining whether consumer arbitration is unconscionable. Do the parties have equal bargaining power? Is there an alternative to agreeing to arbitrate? Is there an opt-out? Who drafted the terms? Is it a "take it or leave it agreement"? The Court of Appeal agrees here that there was procedural unconscionability, without weighing in on the quantum of procedural unconscionability, but reading between the lines, one suspects that the Court of Appeal believed that the procedural unconscionability was more than "minimal" -- even though the parties were sophisticated and represented by counsel. As stated in the opinion, the College "had no meaningful choice but to accept the arbitration provision as drafted by the Athletic Association", and the Athletic Association had "superior bargaining strength."

    The Court of Appeal found several examples of a lack of mutuality in the agreement, leading to the conclusion that the agreement was substantively unconscionable, and that problem could not be cured by simply severing one unconscionable provision among several.

    HAT TIP: Hat tip to appellate attorney Ben Ginsburg, who brought this case to my attention. Ben, among other accomplishments, is Managing Editor of the California Lawyer Association's Litigation Update.

    

Arbitration, FAA, Vacatur: Sixth District Holds FAA Preempts Argument That Arbitration Is Incompatible With Following Commercial Code Sections Governing Wire Transfers

Plaintiff/Appellant Unsuccessfully Argued Following California Commercial Code Required Legal Proceeding, Not Arbitration.

    Plaintiff/Appellant Prima Donna Development Corporation appealed from a judgment confirming an arbitration award in favor of Wells Fargo Bank, N.A., and challenged an order compelling arbitration and denying its motion to vacate the award. Prima Donna Development Corporation v. Wells Fargo Bank, N.A., H045379 (6th Dist.  11/13/19) (Danner, Greenwood, Grover). The underlying facts provide a painful example of how transacting business over the internet can go horribly wrong. A third party hacked the email account of Prima Donna's President, and used the information obtained to fraudulently induce a "Company Administrator" -- an employee of Prima Donna -- to initiate a wire transfer of Prima Donna's funds to an overseas account. Prima Donna lost $638,400 wired from its Wells Fargo accounts. Of course, Prima Donna wanted Wells Fargo to bear the loss, and the dispute was subject to arbitration.

    The arbitrator found in favor of Wells Fargo, concluding that Wells Fargo had followed commercially reasonable security procedures, and that under the California Commercial Code, "security procedure" did "not include a procedure for establishing that the customer is not being defrauded by a third party into making the transfer." 

    The California Commercial Code governs the law of wire transfers, and the key California case, Zengen v. Comerica Bank, 41 Cal.4th 239 (2007), makes it clear that the UCC provisions displace common law provisions and provide the law under which claims are analyzed. Prima Donna argued that this meant that the matter could not be arbitrated, since arbitration is an equitable proceeding,  and the arbitrator might not follow the statute. The trial court, when considering the initial motion to compel arbitration, concluded that there was no reason that the arbitrator could not adjudicate a UCC claim, and evidently, the Court of Appeal agreed. In fact, the Court of Appeal pointed out that the arbitration agreement provided that the governing law of the state whose laws governed Prima Donna's accounts was to be applied, thus California law applied, and the arbitrator's award applied California's Commercial Code to the dispute.

    Prima Donna further argued that the arbitration agreement was substantively unconscionable because it denied Prima Donna's right to trial by jury, and because it limited judicial review, but those arguments were preempted by the Federal Arbitration Act, which governed the agreement.

    Finally, Prima Donna argued that the arbitrator had failed to address whether Wells Fargo had acted in "good faith", because there was evidence that a high "risk score" had been triggered by the transaction at Wells Fargo. But the Court of Appeal explained that Prima Donna was allowed to bring its claims against Wells Fargo and was not prevented "from receiving a review on the merits," so the failure to address "good faith" amounted only to a contention that the arbitrator made a legal error. And that is not a question subject to judicial review.

    COMMENT: Under Cal. Code of Civ. Proc., section 1286.2, vacatur may be based on arbitrators exceeding "their powers by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy." But legal error per se doesn't meet the "exceeding their powers" test. Rather, the error must be "so egregious as to constitute misconduct or so profound as to render the process unfair." This becomes a matter of degree subject to specific facts and circumstances.