California Mediation and Arbitration

Prof. Carrie Menkel-Meadow Speaks To The OC Bar ADR Section About Negotiating The US Constitution

In The Room Where It Happens . . . 

Howard Chandler Christy's Scene at the Signing of the Constitution (1940). Wikipedia article. Public domain.

        Prof. Carrie Menkel-Meadow, Distinguished and Chancellor's Professor of Law at UCI, spoke to the ADR Section of the Orange County Bar on February 24, 2020, about "Negotiating the American Constitution." Part of the genius of the 55 delegates to the Constitutional Convention was demonstrated by their devotion to crafting ground rules and decision rules before they turned to substantive debate and negotiation. 

        The process rules included: (1) dividing leadership among Washington, acting as a neutral chair ("President"), Franklin, acting as a process trouble shooter, and Madison, acting as agenda manager, scribe, reporter, and secretary; (2) confidentiality; (3) limiting speakers to speak only twice on a subject (and waiting till all others had their say before speaking a second time);  (4) attendance rules; (5) assignments for committee and task groups; (6) lack of attribution of votes to particular delegates by name; (7) majority rule on most matters (with 9 of 13 states required to ratify).

        While not every procedural rule was equally important, it is impossible to imagine how the Constitution as we know it could ever have been drafted if the procedural rules required unanimous rather than majority vote. Confidentiality and anonymity of votes were also extremely important, as both rules helped to build trust, avoided public interference and disparagement, and enabled delegates to change positions.

        Prof. Menkel-Meadow concluded on an optimistic note: the Constitution, with amendments, and the government structures created, have proven to be highly durable, lasting more than 200 years.¹ At the same time, we can trace some of the current challenges, such as problems with the voting system, back to the very negotiations, linkages, and compromises that resulted in our Constitution. 

        A copy of Prof. Menkel-Meadow's article entitled "Negotiating the American Constitution (1787-1789) Coalitions, Process Rules, and Compromises," a chapter in Landmark Negotiations from Around the World: Lessons for Modern Diplomacy (Emmanuel Vivet, editor, Intersentia 2019.), can be downloaded free of charge from SSRN by clicking here. You will need to open an account with SSRN, which, however, is free.

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1_{For a recent critical discussion of the Constitution, see the October issue of Harper's Magazine, "Do We Need The Constitution? "- a forum with Donna Edwards, Mary Anne Franks, David Law, Lawrence Lessig, and Louis Michael Seidman.}

 

Reviews: Our Blogger Reviews McMillion$ In The Daily Journal

Review Of McMillion$ Appears In February 21, 2020 Issue Of Daily Journal.

        After watching the first two episodes of the HBO documentary mini-series, McMillion$, I reviewed it for the Daily Journal under the heading, "‘McMillion$’ evokes nostalgia for burgers, fries and mere millionaires." The documentary is about McDonald's "Who Wants To Be A Millionaire" Monopoly game scandal that erupted in 2001 after it was discovered by the FBI, with the help of an inside tip, that the game was rigged. Thus far, I have thoroughly enjoyed this fast moving and entertaining documentary. Regrettably, the Daily Journal places articles behind a paywall, and thus I cannot link the article to social media, but perhaps some of you who subscribe to the Daily Journal can take a look at the review.

Arbitration, Nonsignatories: 2nd District Div. 8 Holds Nonsignatory Is Able To Compel Another Nonsignatory To Arbitrate Based On "Stipulation"

A Critical Letter Provided The Evidentiary Linchpin.

        The Court of Appeal in Gamma Eta Chapter of PI Kappa Alpha, B25667 (2/8   2/6/20) (Wiley, Bigelow, Grimes), reversed the trial court's order denying a motion to compel arbitration and remanded so that the trial court could grant the motion and stay the case pending arbitration. The somewhat unusual circumstance here is that the defendants who moved to compel arbitration against the fraternity chapter were not signatories to the arbitration agreement -- and neither was the chapter.

        The arbitration agreement in question was between the national fraternity (Fraternity) and the local chapter (Chapter). It required that the Chapter mediate disputes, and if mediation did not resolve disputes, then arbitrate disputes with entities or persons "affiliated" with the Fraternity.

        A dispute erupted between the Chapter and a housing corporation (Housing Corporation) created "to serve as a non-profit facilitator to ensure that the [Fraternity] at USC would consistently have a fraternity house to house and host its members." The Chapter sued the Housing Corporation and its director for constructive fraud, breach of fiduciary duty, unjust enrichment, negligent misrepresentation, and other claims.

        In a critical letter the Fraternity sent to its Chapter and the Housing Corporation, it asserted the Housing Corporation was affiliated with the Chapter, the Chapter lacked standing to sue, the Chapter must mediate, and if mediation did not resolve the dispute, then it must arbitrate. The Housing Corporation and its director then moved to compel arbitration, which the trial court, without explanation, denied.

          The Court of Appeal reasoned, based on the record it had, that the Fraternity "is an overarching and governing international organization, and the local chapter . . . is merely a subordinate fraternal component of the international fraternity. ¶ The international fraternity wanted arbitration, and so did the defendant housing corporation. This was in effect a stipulation for arbitration."

COMMENTS:

        Several things helped the Court of Appeal reach this result. First, the record on appeal was scant. There was no transcript. The trial judge had not explained his reasoning in a minute order, nor was there a statement of decision. And there were no disputes of fact. Therefore, the standard of review was de novo.

        Second, the critical letter in which the Fraternity aggressively asserted its control over the Chapter, was not objected to, and was "in evidence for the truth of the matter it asserts."

        Third, the effectiveness of the arbitration agreement depended on the interpretation of the word "affiliated." At first blush, it is not clear that the Housing Corporation is "affiliated" to the Chapter in the way the word is sometimes used, to mean one entity owning a majority of another entity's stock. However, once the Court of Appeal concluded that the Chapter was a subordinate unit of the Fraternity, then because the Fraternity staked the position that the Housing Agency and the Chapter were "affiliated", "the letter established that affiliate relationship from the perspective that counts: the perspective of the governing international fraternity."

        Presumably there is some "perspective that counts" from which the Court of Appeal could have rejected a completely off-the-wall interpretation of the meaning of "affiliated". However, since the Housing Corporation was set up for the purpose of securing housing for the Chapter, and because it acted as an agent for the Chapter, the Fraternity's interpretation of "affiliated" was  colorable.

Arbitration, Vacatur, Public Policy: Second Dist., Div. 6 Holds Arbitrator Award Violated Public Policy in HOA/Developer Dispute

And Now There Is A Split Between The 4th District, Div. 3, And The 2nd District, Div. 2.

          In Branches Neighborhood Corp. v. CalAtlantic Group, Inc., 26 Cal.App.5th 743 (2018), a homeowner's association began a construction defects arbitration with a developer without first getting a vote of 51% of its membership, despite association documents requiring such approval. When the developer sought to dismiss the arbitration, the association obtained a ratifying vote. The arbitrator dismissed the arbitration based on the failure to get the required vote before initiating the arbitration, the trial court entered judgment against the association, and the Court of Appeal, 4th District, Div. 3, affirmed.

          Now Aldea Dos Vientos v. CalAtlantic Group, Inc., No. B291731 (2nd Dist., Div. 6  2/6/20) (Gilbert, Yegan, Tangeman) holds otherwise. Note: (1) the facts of the two cases are essentially the same; (2) the developer defendant is the same; (3) the 51% voting requirement is in the governing documents of the HOA in both cases; (4) the arbitrator in both cases dismissed the arbitration; (5) the trial court in both cases affirmed judgment in favor of the developer; (6) the law firm representing the developer is the same in both cases. The differences are the outcome (affirmance in the earlier case, reversal in the later case), the legal arguments, and the courts.

          In the later case, Justice Gilbert explains that the arbitrator exceeded his power, a basis for vacating an award under Cal. Code Civ. Proc., section 1286.2. "Arbitrators exceed their power by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy."

           First, provisions that require a 51% vote before initiating arbitration or litigation "contravene statutory policy by giving the Developer the unilateral power to bar actions for construction defects", contrary to housing policy. The developer here argued that the majority voting requirement of an early vote was for the good of the homeowner. However, Justice Gilbert sees the voting requirement as an issue between the HOA and its members, one that was taken care of by ratification, and not one that the Developer could take advantage of after ratification had occurred. 

          Second, Civ. Code section 5975(a) provides that "unreasonable" equitable servitudes shall not be enforced. Justice Gilbert views as unreasonable a covenant that "gives the Developer veto power over the Association's claims in spite of the members' vote to proceed with the arbitration." The provision, if not interpreted to allow for ratification, "amounts to a trap for the unwary set by the Developer to bar claims against it. The Developer is burdened with no similar hurdle prior to seeking a determination of its rights."

          Third, Senate Bill No. 326, signed by the Governor on August 30, 2019, "bars the use of provisions such as section 7.01B [the 51% member voting requirement to initiate legal action] as a defense for developers against claims of condominum associations."

          The judgment is reversed.

Settlements: 9th Circuit Takes Negotiation Strategy Into Account In Case Where Trial Judge Slashed Fees Because Plaintiff Settled for 10% Of Claim

The Majority Opinion Acknowledges That Parties Can Start High When Staking A Claim.

          In today's Daily Journal, I have an article about Vargas v. Howell et al., 2020 DJDAR 905 (9th Cir. Feb. 5, 2020), entitled: 'Mechanical' analysis of attorney fees award in civil rights case results in partial reversal'.  In Vargas, the trial judge slashed a senior litigation attorney's fees 90% in a civil rights case. The Court of Appeals panel majority required further explanation for the severe discount, and District Judge Roger Benitez dissented, believing that the trial judge had provided enough explanation already. While my article focuses on the fee issue, one issue addressed in the case will be of interest for mediators, as well as for attorneys and clients negotiating a settlement.

          The majority opinion argues that punishing a fee applicant in a civil rights case because the settlement amount is a fraction of the claim can create "perverse incentives." Because it is unusual and interesting for a court to speculate or opine about the effect of a fee award on settlement negotiation strategy, I provide the court's comments. Here is the panel's discussion of the potential impact on negotiation strategy of a trial court's discounting fees 90% because the settlement was 10% of the claim:

     The effect of that approach is to punish Vargas’s attorneys for pursuing what might well have been a sensible negotiation strategy. A reasonable attorney representing Vargas could have made the strategic choice to present an initial damages estimate as high as possible. Of course, an unrealistically high estimate could make settlement talks unproductive, and an attorney must also ensure that any estimate presented to the court is “likely [to] have evidentiary support after a reasonable opportunity for further investigation.” Fed. R. Civ. P. 11(b)(3). But within those limits, Vargas’s attorneys could reasonably have decided that by offering a high damages estimate, they would retain “room to later grant concessions, while still reaching a favorable settlement.” Stephen J. Ware, Principles of Alternative Dispute Resolution § 3.15, at 313 (3d ed. 2016). Had they started from a lower number, the settlement might have been lower. Whether or not that is the strategy Vargas’s attorneys had in mind, they should not be faulted for negotiating a settlement.
     The district court’s approach threatens to create perverse incentives for lawyers representing civil rights plaintiffs. If fees are reduced whenever a case settles for less than the initial demand, lawyers will be encouraged to make only modest initial demands, limiting the potential recovery for their clients. And as the litigation proceeds, they will be encouraged to refuse to lower their demands, making settlement more difficult and prolonging the litigation. No one will be well served by that approach.

 

Arbitration: Equitable Estoppel And Third Party Beneficiary Theories Required Additional Insured To Arbitrate Coverage Claims

Additional Insured Had Tried To Avoid Arbitration By Arguing It Was Not A Party To Arbitration Agreement.

        Philadelphia Indemnity Insurance Company v. SMG Holdings, Inc., No. C082841 (3rd Dist.  12/31/19) (per curiam), "concerns whether a binding arbitration clause in an insurance policy issued by plaintiff Philadelphia Indemnity Ins. Co., applies to a third party, defendant SMG Holdings, Inc." The trial court ruled it did not apply, and the Court of Appeal ruled it did apply.

        Future Farmers of America had licensed the use of the Fresno Convention Center for an event from the Convention Center's manager, SMG. As a condition for doing so, SMG required that Future Farmers of America obtain an insurance policy that also provided coverage for SMG. When someone stepped into a parking lot pothole and suffered serious injury during the event, the injured person sued Fresno and SMG, and SMG tendered the claim to Philadelphia Indemnity Ins. Co. The insurance company claimed there was no coverage, and after a standoff, moved to compel arbitration.

        The trial court determined that SMG was not a  party to the arbitration clause, and denied the insurance company's motion to compel arbitration. The Court of Appeal, however, concluded that SMG was bound by the arbitration clause. SMG was an intended third party beneficiary; after all, it had insisted that Future Farmers of America provide it with insurance for the event. And SMG was equitably estopped from avoiding avoiding arbitration, because one cannot claim the benefits of a contract -- in this case, insurance coverage -- while denying the burdens -- in this case, binding arbitration of a coverage dispute.