California Mediation and Arbitration

Arbitration/CCP 1281.2: CCA 4/3 Affirms Order Denying Arbitration In Lawsuit Between Law Firm And Ex-Client Because Ex-Client’s Lawsuit Against Another Law Firm Created Possibility Of Conflicting Rulings

Key Issue:  Who Is A Third Party Within The Meaning of 1281.2(c)?

    Reger v. Glaser Weil Fink Howard Avchen & Shapiro, LLP, G052352 (4/3 11/22/16) (Aronson, Bedsworth, Ikola) (unpublished) shows how a party with an otherwise valid arbitration clause can be thwarted from arbitrating through the application of Cal. Code Civ. Proc., section 1281.2(c) “when pending litigation with a third party creates the possibility of conflicting rulings on common factual or legal issues.”

     Glaser Weil had represented Mr. Coxeter in an earlier lawsuit in which Mr. Coxeter’s business partner Mr. Bisno, alleged to have embezzled funds, paid for his and Mr. Coxeter’s joint defense.  Mr. Coxeter separately hired Jackson, DeMarco, Tidus & Peckenpaugh to monitor the litigation because of potential conflicts.  (Disclosure:  I was a shareholder at Jackson DeMarco till February 2008.  The full extent of my knowledge about this case comes entirely from the Slip Opinion).  In December 2008, Glaser Weil withdrew as counsel, and Jackson DeMarco became Mr. Coxeter’s counsel of record.  In 2015, Mr. Reger, as trustee in Mr. Coxeter’s bankruptcy, sued Jackson DeMarco and Glaser Weil on behalf of Mr. Coxeter’s bankruptcy estate, alleging claims for legal malpractice and breach of fiduciary duty, based on conflicts of interest, and failure to properly advise and defend Mr. Coxeter.

     Mr. Coxeter had an arbitration agreement with Glaser Weil, but not with Jackson DeMarco.  So Glaser Weil petitioned to compel arbitration.  Jackson DeMarco, which did not have an arbitration agreement, joined in the petition.  The trial judged denied the petition and joinder, finding that the malpractice claims against Jackson DeMarco constituted third-party litigation under section 1281.2(c) that might result in inconsistent rulings, allowing the judge to exercise his discretion and deny the request for arbitration.

     Section 1281(c) may be used to deny a petition to compel arbitration where the following applies:  “A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.”  Here, Glaser Weil did not dispute (1) that the claims against it and Jackson DeMarco arose out of the same related transactions; (2) that there was a possibility of conflicting rulings if one set of claims was litigated and the other was arbitrated.  The nub of the dispute was Glaser Weil’s challenged to the trial court’s determination that Jackson DeMarco was “a third party within the meaning of section 1281.2(c)”.

     In fact, there was some connection between Glaser Weil and Jackson DeMarco.  A former Glaser Weil partner, Mr. Heyman, who later went to work for Jackson DeMarco, had done tax work for Glaser Weil’s first name founding partner, Patricia Glaser.  Plaintiff alleged the “undisclosed and preexisting relationship with Patricia Glaser” made it impossible for Jackson DeMarco to exercise independent judgment when monitoring Glaser Weil’s representation of Mr. Coxter.  But that was nowhere near enough to establish a commonality of interest between Glaser Weil and Jackson DeMarco such that Jackson DeMarco would not be a “third party”.  Jackson DeMarco was not an agent nor an alter ego of Glaser Weil.  Also, Jackson DeMarco and Glaser Weil represented Mr. Coxter for different purposes, and owed separate duties to him.    Bottom line:  “Heyman’s previous representation of Patricia Glaser, even when combined with Reger’s allegation regarding the purported conflict of interest that relationship created, is completely unrelated to the representations at issue in this case and has no connection to Glaser Weil’s retainer agreement and its arbitration provision.”

     Affirmed.

    COMMENT:  The case relies on section 1281.2(c) of the California Arbitration Act, and makes no reference to the Federal Arbitration Act.  If interstate commerce had been involved, and Glaser Weil has been able to invoke the Federal Arbitration Act, the result would have been somewhat different.  The Court would have been unable to deny Glaser Weil’s petition to arbitrate, because presumably it had a valid arbitration clause, and it would not matter that there was another lawsuit pending.  However, the Court would likely still have denied Jackson DeMarco’s joinder in the petition, because Jackson DeMarco did not have an arbitration agreement.  Good luck to my former colleagues at Jackson DeMarco on the ultimate outcome of the dispute.

Class, Collective Bargaining, CCP 1281.2: Court Of Appeal Reverses Order Staying Individual Arbitrations Pending Trial Of “Non-Arbitrable Claims”–Because All Claims Are Arbitrable

“Judicial Economy Was Not . . A Proper Basis For Delaying Arbitration.”

     What’s a judge to do when confronted with the possibility of compelling thousands of individual grievances to arbitration, versus staying the arbitration of arbitral issues, while one case is tried?  Here, the trial judge expediently stayed the individual arbitrations, and got reversed by the Court of Appeal because the part of CCP section 1281.2 upon which the trial judge relied was inapplicable.  Association for Los Angeles Deputy Sheriffs v. County of Los Angeles, B254982 (2/5 Feb. 17, 2015) (Mosk, Kriegler, Goodman) (published).

     The scenario was that the County of Los Angeles Sheriff’s Department sought to compel individual arbitrations of numerous grievances for wage issues by union employees.  The trial court refused to compel the arbitrations, ruling that section 1281.2(c) gave it discretion to stay the arbitration of arbitral issues while it resolved issues between the parties that were not subject to arbitration.

     Section 1281.2(c) gives the trial court the discretion to delay its order to arbitrate arbitrable claims if it first determines that adjudication of the nonarbitrable claims in court might make arbitration unnecessary.  That’s the section the trial court relied upon to stay arbitration of thousands of individual claims.

      The problem here is that all the Unions’ grievances, which the County sought to arbitrate, were the same as the claims raised in a cross-complaint brought by the Unions.  Collective bargaining agreements or memoranda of understanding required arbitration of individual claims, without provision for class-wide arbitration.  Because no non-arbitrable claims had been raised that could be tried first, i.e., all the claims were the same and arbitrable – there was no basis for staying the individual arbitrations.  As for judicial economy, “California courts have no inherent authority to deny arbitration simply because it would be more efficient to litigate the claims in court.”  Acquire II, Ltd. v. Colton Real Estate Group, 213 Cal.App.4th 959, 980 (2013).

Arbitration, CCP 1281.2, Construction Of Agreement, Scope: Plaintiff’s Equitable Claims Were Outside Scope Of Arbitration Agreement

Second District, Division 2, Rejects Appellants’ “Tortured” Reading Of Arbitration Provision And Affirms Order Denying Motion To Compel Arbitration.

     Plaintiffs, investors in an independent bookstore, refused the request of defendants, the bookstore and its prior owner, to arbitrate a business dispute.  The key language in the arbitration provision read:  “Notwithstanding the foregoing, no arbitrator shall have the power to render equitable relief of any kind, and requests for such relief shall be referred to a court of competent jurisdiction.”  The trial court denied defendants’ motion to compel arbitration, finding that plaintiffs’ equitable claims – the sole remaining claims at issue – were excluded from arbitration by the language in the arbitration provision.  Appellants advanced a rather creative reading of the arbitration provision, distinguishing between the arbitrator’s ability to try any action and the court’s ability to grant equitable relief.  Bachrach v. Compagno, Case No. B252454 (2/1 Jan. 6, 2015) (Johnson, Chaney, Bendix) (unpublished).

     Appellants argued that under the clear language of the arbitration provision, any action to enforce or interpret the agreement had to be arbitrated, and that once the substantive issues were resolved, a party could turn to the court to obtain equitable relief.  The Court of Appeal, however, rejected “a tortured conclusion that the trial court has the power only to perform the ministerial act of rubber-stamping an arbitrator’s conclusive ruling.” 

     Affirmed.

Arbitration/CCP 1281.2/Enforceability: Opponent’s Filing Of Lawsuit Constitutes Refusal To Arbitrate

Fourth District, Division 3 Publishes To Distinguish Mansouri v. Superior Court.

     California Code of Civil Procedure, section 1281.2 requires that a party seeking to compel arbitration allege, “the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy.”  The question in Hyundai Amco America, Inc. v. S3H, Inc., Case No. G049204 (4/3 Dec. 17, 2014) (Fybel, O’Leary, Ikola) (published) was whether contractor S3H was required to formally demand arbitration from Hyundai Amco once Hyundai Amco filed a complaint.  The answer:  No.  Filing the complaint “invoked the protections and procedures of the court system, and thus was an effective denial of arbitration.”

     The Court published to distinguish Mansouri v. Superior Court, 181 Cal.App.4th 633 (2010).  In Mansouri, the arbitration demand did not match the terms of the parties’ arbitration agreement, whereas Hyundai Amco’s lawsuit “clearly related to the parties’ performance under the agreement, thus suffic[ing] to show Hyundai Amco’s refusal to arbitrate the controversy.”

     LITIGATION TIP:  In run-of-the-mill cases, formally request an opponent to arbitrate before moving to compel arbitration.

Arbitration/Record/1281.2: Second District, Division 2 Affirms Trial Court’s Order Denying Petition To Compel Arbitration, Based On Slim Record

A Statement of Decision Couldn’t Have Hurt Appellants Here

     The facts are somewhat odd here.  Defendants/Appellants were involved in a fee dispute with Plaintiff/Respondent, a law firm.  Defendants moved to compel arbitration, while arguing that the parties’ agreement, governed by the Los Angeles County Bar Association rules, did not allow the arbitrators to decide an alter ego claim. Plaintiff pointed out some of the interested parties were not subject to arbitration, but expressed a willingness to arbitrate, “noting that the only issue in dispute was whether the arbitration would include the alter ego claim.”  The trial court said that if the parties “’really want to arbitrate, I’ll let you stipulate to arbitrate’ but emphasized that any arbitration must be ‘all or nothing.’”  You guessed it – no stipulation, so no arbitration.  Defendants appealed.  Tesser Ruttenberg & Grossman LLP v. Forever Entertainment LLC, B249042 (2/1 Aug. 27, 2014) (Chavez, Boren Ashmann-Gerst) (unpublished). 

     The appellants failed to establish reversible error, perhaps because they failed to request a statement of decision.   An order denying a petition to compel arbitration “is presumed to be correct, and all intendments and presumptions are indulged to support the order on matters at to which the record is silent.”  Here, the record appeared to be silent on matters as to which Appellants argued the trial court had gone sideways.  “The presumption of correctness is particularly applicable when, as was the case here, defendants failed to request a statement of decision explaining the factual and legal basis for the trial court’s ruling denying their motion to compel arbitration.”

     That meant that the Court of Appeal only had to find one ground that would support the trial judge’s order, and it did in Cal. Code of Civ. Proc., section 1281.2(c), giving the trial court discretion to deny arbitration so all issues between the parties are resolved in a judicial proceeding. 

     Defendants argued that the record contained no ruling under section 1281.2(c).  No matter.  “Their failure to request a statement of decision resulted in the forfeiture on appeal of any objection based on the absence of such findings or ruling.”  Surely there is a moral here.

    Comment:

    If the Federal Arbitration Act alone had governed the arbitration, Cal. Code Civ. Proc. section 1281.2(c) would have been preempted, and would not have been a basis for denying arbitration.

Arbitration/Appealability/Waiver/1281.2/Agents: Court Of Appeal Reverses Denial Of Petition To Compel Arbitration, Because Delay In Bringing Petition Did Not Result In Prejudice

 

Also, California Code of Civil Procedure, Section 1281.2, Did Not Prevent Arbitration, Because Federal Arbitration Act Applied And Preempted State Provision

     Defendants/appellants in the next case lost a petition to compel arbitration in the trial court. At first blush, they had waived their right to arbitrate, because they delayed bringing their motion to compel, and they chose a litigation route, filing an (unsuccessful) motion for summary judgment. However, defendants, who appear to have given particular attention to the risk of waiver, fared better when they appealed, managing to convince the Court of Appeal that they had not lost their right to arbitrate. Gloster v. Sonic Automotive, Inc., A137081 (1^st Dist. Div. 1 filed 4/23/14, certified for partial publication 5/21/14) (Margulies, Dondero, Banke).

     First, defendants appealed the denial of their summary judgment motion – a motion they brought arguing that plaintiff, an employee who was a party to numerous agreements requiring arbitration, had forfeited his right to bring any claims, by not following the arbitration route.  This appeal issue was easily shot down, because absent extraordinary circumstances, an order denying summary judgment is not appealable. 

     Second, defendants had obviously given thought to the risk of waiving their right to arbitrate, because they were careful to assert the right to arbitrate as an affirmative defense, and because along with filing their motion for summary judgment, they petitioned to arbitrate in case they lost.  While they delayed petitioning to compel arbitration, they were careful to consistently assert their right to arbitrate, and to only respond to discovery rather than to propound discovery. Furthermore, the motion for summary judgment was not viewed by the Court of Appeal as deciding the merits of the employee’s substantive claims.  In sum, there was no convincing showing that the defendants’ delay resulted in an advantage in litigation to the defendant – hence, no showing of waiver of the right to arbitrate.

     Third, Cal. Code of Civ. Proc., section 1281.2(c) allows the court to deny a petition to compel arbitration under circumstances where, for example, pending litigation and an arbitration would present the possibility of conflicting rulings on a common issue of law or fact.  However, here, the arbitration provisions were contractually governed by the Federal Arbitration Act, which preempts 1281.2(c).  The FAA is not concerned with the possibility of conflicting rulings; if the parties agree to arbitrate, then section 1281.2(c) offers no escape hatch.

     Fourth, several defendants argued that another defendant, Toyota, should be deemed a third party beneficiary of the arbitration agreement, because Toyota was labeled an “agent” of the other defendants in boilerplate complaint allegations.  However, the defendants making the argument did not concede the truth of the boilerplate allegations.  The issue is resolved conclusively by a case we have posted about on April 18, 2013, Barsegian v. Kessler & Kessler, 215 Cal.app.4th 556 (2013):  a third party cannot be deemed an agent under an arbitration agreement based on boilerplate allegations, particularly when the party advocating agency status denies the allegations, as was the case here.

     DRAFTING TIP.  Many arbitration provisions contain confusing language to the effect that the arbitration agreement is governed by some combination of the FAA, California law, the rules of the AAA, or some other rules.  Because of confusion about what law governs, there may be confusion about whether section 1281.2 applies, allowing the court to deny a request for arbitration because of the possibility of conflicting rulings.  One can resolve that issue upfront by spelling out the result one desires in the arbitration clause.  Here, for example, one of the contracts provided:  “the court may not refuse to enforce this arbitration agreement and may not stay the arbitration proceeding despite the provisions of California Code of Civil Procedure section 1281.2 [subdivision] (c).”  The Court of Appeal concluded that the parties could not have stated their intent “any more clearly.” 

    

Arbitration/Agents/CCP 1281.2/Stay: Second District, Division 3 Reverses Trial Court’s Denial Of Motion To Compel Arbitration

Non-Parties To The Arbitration Agreement Were Not “Third Parties” Within The Meaning Of Section 1281.2(c).

     The trial court denied defendants’ motion to compel arbitration, under the third party litigation exception found in Cal. Code Civ. Proc. 1281.2(c) to the general rule requiring enforcement of an arbitration agreement.   Here, only one of several defendants was a party to arbitration agreements with plaintiffs.  Therefore, the trial court was concerned that litigation filed against “third parties” who were not entitled to enforce the arbitration agreements would result in inconsistent results, if one defendant was allowed to arbitrate.  Defendants were smart to appeal the denial of their motion to compel arbitration.  Alpert v. HDA Mortgage Fund, LLC, No. B247142 (2nd Dist. Div. 3 April 23, 2014) (Croskey, Klein, Kitching) (unpublished).

     Plaintiffs were investors who had invested in an investment fund holding loans secured by deeds of trust.  Plaintiff Alpert was investors’ business manager.  Defendants included the company providing investment counseling and portfolio management services, the company investing in the secured loans and offering shares in the investment fund, the fund manager, and two officers.  Only defendant HDA Properties Inc. was actually a party to the arbitration agreement with plaintiffs.

     The Court of Appeal, however, concluded that the so-called “third parties” were in fact entitled to enforce the arbitration agreement, and therefore, they were not “third parties” for purposes of section 1281.2(c).  The parties fell within the rule that a nonparty acting as an agent of a party to the agreement to arbitrate may enforce that agreement.  Indeed, plaintiffs had alleged that the the defendants were all related entities and individuals and that they acted as agents for one another. 

     Reversed, with directions to grant the motion to arbitrate, and stay the action in whole or in part.

     This left one housekeeping matter for the Court of Appeal.  The trial court had to stay the pending litigation in whole or in part, because a trial court granting a motion to compel arbitration must do so.  Cal. Code Civ. Proc. section 1281.4.  But who decides the scope of the required stay, i.e., to what extent are the claims subject to arbitration severable from the claims to be litigated?  Here, the parties’ Operating Agreement stated that the arbitrator must decide any questions concerning arbitrability of the dispute – “so any questions concerning which claims are subject to arbitration must be decided by an arbitrator, rather than the trial court.”

Arbitration/1281.2: Order Denying Motion To Compel Arbitration Is Affirmed Because Of Risk Arbitration Would Lead To Inconsistent Results

Compelling Arbitration Of the Claims Against Appellants Could Result In Conflicting Rulings On Issues Common To All Defendants

     Plaintiff Vox sued six defendants, including four former employees, alleging they conspired to “encumber” Vox’s business to the benefit of their planned competing business.  The four former employees were parties to arbitration agreements with Vox, and petitioned to compel arbitration.  However, two other defendants were not bound by arbitration agreements.  The trial court denied the employees’ request to arbitrate, and employees appealed.  Vox Entertainment, Inc. v. Carter Reese, et al., Case No. B244812 (2nd Dist. Div. 2 Feb. 5, 2014) (Chavez, Ashmann-Gerst, Ferns) (unpublished).

     Under Cal. Code of Civ. Proc. section 1281.2(c), a court may deny a motion to compel arbitration “when (1) ‘[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party,’ (2) the action or proceeding ‘aris[es] out of the same transaction or series of related transactions,’ and (3) ‘there is a possibility of conflicting rulings on a common issue of law or fact.’”

     Appellants/employees, who were seeking arbitration with Vox, challenged only the existence of the third prong – possibility of conflicting rulings.  Appellants focused on the trial court’s findings that Vox’s claims against two of the six defendants arose independent of the employment agreements containing the arbitration provisions, and were “not intertwined with the contract claims.”  However, the Court of Appeal explained that the trial court’s findings were simply made to establish the first of the three 1281.2(c) requirements – that third parties were involved.  Because there was evidence “that compelling arbitration of the claims against [four] appellants could result in conflicting rulings on factual and legal issues common to all [six] of the defendants,” the trial court’s order denying the petition to arbitrate was affirmed.

    COMMENT AND PRACTICE TIP:  I note that there is no discussion in the opinion of whether California law or the Federal Arbitration Act was referenced in the contracts as governing their interpretation and enforcement.  The result could be different here, depending on which law governs.  Unlike California arbitration statutes, the FAA does not contain an “inconsistency” provision providing express discretion to deny a motion to compel arbitration.  If the contract is governed  by the FAA, then the arbitration provision is more likely to be enforced among those parties that have signed the arbitration agreement, notwithstanding the risk of inconsistent results in litigation with third parties who are not bound by arbitration.  See my October 10, 2012 post on Mastick v. TD Ameritrade, Inc. and Mastick v. Oakwood Capital Management, Inc., LLC, 209 Cal.App.4th 1258 (2012) in which Justice Gilbert answers the question – when does federal preemption apply? – with a resounding “it all depends.”

     If you are concerned when drafting an arbitration clause that future disputes with third parties could lead to inconsistent results, and economic inefficiency, unless everything can be resolved in a judicial forum, then consider making California law govern the clause.  However, if you really, really want to arbitrate, notwithstanding the risk of inconsistent results if there is litigation with a party not bound by the arbitration provision, then consider making the FAA govern the arbitration clause.

Arbitration/Agency/Enforceability/CCP 1281.2: Nursing Home’s Petition To Arbitrate Fails For Lack Of Evidence That Husband Delegated Authority To His Wife To Agree To Arbitration

 

Spouses Are Not Automatically The Agents Of One Another When It Comes To Making Health Care Decisions

     Mrs. Goldman signed an arbitration provision on behalf of her husband who entered a nursing home.  After Mr. Goldman died, Mrs. Goldman sued on behalf of her husband for elder abuse and related wrongs, and in her individual capacity, for negligent infliction of emotional distress and wrongful death.  After defendants lost their motion to compel arbitration, they appealed.  Goldman v. Sunbridge Healthcare, LLC, Case No. C069970 (3rd Dist. filed Sept. 27, publication ordered Oct 28, 2013).

     The defendants lost their appeal, because they failed to demonstrate that Mr. Goldman lacked the capacity to make health decisions, and that he had delegated authority to Mrs. Goldman to sign an arbitration agreement.  When Mrs. Goldman signed, she wrote “stroke”, by way of explaining why Mr. Goldman had not signed.  But she was not a doctor, and there was no evidence that Mr. Goldman lacked the ability to sign or make his own health decisions.  Agency had to be created by the purported principal, Mr. Goldman, not the purported agent.  And the mere fact that Mr. and Mrs. Goldman were husband and wife was not enough to automatically confer agency for making health care decisions. 

     Lurking in the appeal is an interesting issue that the Court did not have to address, once it found that there was no effective agreement to arbitrate.  That issue is whether Cal. Code of Civ. Proc., section 1281.2(c), which allows a trial court judge to adjudicate arbitrable and non-arbitrable claims to avoid inconsistent decisions, is preempted by the Federal Arbitration Act. 

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.