California Mediation and Arbitration

Arbitration, Vacatur: California Supreme Court Rules 100-Day Deadline Is Not Jurisdictional And Equitable Tolling/Estoppel Could Apply

Missing The 100-Day Deadline For Seeking Vacatur Of An Arbitration Award Was Not The End Of The Story Here.

        It is not possible to improve on the California Supreme Court's summary of the case and its holding:

        "Law Finance Group, LLC, prevailed in an arbitration against Sarah Plott Key and filed a petition to confirm the award. Key filed a response seeking vacatur of the award, but she did so outside the 100-day deadline prescribed by Code of Civil Procedure section 1288.2. The primary questions now before us are whether, as the Court of Appeal held, this 100-day deadline is jurisdictional and, if not, whether the deadline is subject to the equitable doctrines of tolling and estoppel. We hold that the section 1288.2 deadline neither is jurisdictional nor otherwise precludes equitable tolling or estoppel. We remand for the Court of Appeal to determine in the first instance whether Key is entitled to equitable relief from the deadline." Law Finance Group, LLC v. Key, S270798 (S.Ct.  6/26/23).

        Justice Leondra R. Kruger authored the opinion of the court.

Public Policy, Vacatur: First District Div. 3 Holds Late Penalty On Loan Default Resulted In Forfeiture Violating Public Policy And Justifying Vacatur Of Arb Award

Violating Public Policy Can Be Ground For Vacating Award.

        Liquidated damages are presumed invalid in a consumer contract and presumed valid in a non-consumer contract. The Honchariws borrowed $5.6M secured by real property in a "non-consumer" contract -- so a liquidated damages provision was presumptively valid when they defaulted on the loan, and an arbitrator so found. They petitioned to vacate the award, the trial court denied their petition to vacate, and the Honchariws appealed. Honchariw v. FJM Private Mortgage Fund, LLC et al, A163756 (1/3  9/29/22) (Petrou, Fujisaki, Rodriguez). 

        One ground for vacating an arbitration award is: "The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted." Cal. Code Civ. Proc. § 1286.2(a)(4). "Arbitrators may exceed their powers by issuing an award that violates a party’s unwaivable statutory rights or that contravenes an explicit legislative expression of public policy." The Court of Appeal found a violation of legislative policy to be the case here.

        Here, the Late Fee imposed by the lender, which included "a 9.99% interest rate assessed against the entire unpaid principal balance of the Loan at any time a single payment is missed," violated the state policy against unreasonable liquidated damages provisions, which is the basis for Cal. Civ. Code,  § 1671. The Court of Appeal was unable to find a single case "in which a liquidated damages provision was upheld when a borrower missed a single installment, and then was penalized pursuant to that provision, even in part, by a late payment fee assessed upon the entire outstanding principal balance, much of it still to be owed."

        REVERSED.

 

 

Arbitration, Award, Finality, Correction, Vacatur: 4th Dist Div 4 Holds Arbitrator's Amendment Of Final Award Did Not Exceed Her Powers

Arbitrator Acted Within Nonstatutory Power To Amend Award and Also Exercised Equitable Powers.

        Starr v. Mayhew, G060277 (4/2  9/1/22, cert for pub. 9/28/22) (Moore, Goethals, Moteike) involved a dispute among members of an LLC as to their respective ownership interests and as to whether Mayhew, who managed the LLC, had a right to be fully indemnified for legal fees and damages in an arbitration he lost to Starr and another LLC member. The "final award" did not fully clear up the issues, and the arbitrator issued an amended award, at the behest of Mayhew, that did clarify the issues, but not to Mayhew's satisfaction. The trial judge confirmed the award and Mayhew appealed.

        Ordinarily an award can only be corrected for limited statutory reasons, such as a miscalculation of figures, misdescription of a person, thing, or property, or imperfect form that does not affect substance. See Cal. Code Civ. Proc., §§ 1284 (correction) and 1286.6 (vacatur). But did you know that, in addition to the limited statutory grounds for correcting an award or vacating it, a final award can be amended based on nonstatutory law? Well, it's a possibility.

        And nonstatutory amendment of the award worked here. In an amended award, the arbitrator clarified that damages were to be paid by Mayhew, and that he was entitled to limited indemnity, but not full indemnity. The Court of Appeal explained that the arbitrator had acted upon equitable grounds. And she had not exceeded her powers, because the issues had been presented to the arbitrator for resolution. In any case, she had reached legal and factual conclusions, and if she was mistaken, that would not be a basis for overturning an arbitration award.

        COMMENT: The case is a reminder that an arbitration is an equitable proceeding. Thus, here an arbitrator was able to limit indemnity, though the indemnification clause seemed to provide for full indemnity, because she thought that given the conduct of Mayhew, limiting but not eliminating indemnity would be fair. The case is also a reminder that a seemingly final award can sometimes be amended on nonstatutory grounds. But beware: there is a split of authority as to whether the party seeking amendment has 30 days from the time the final award is served, or up to the time of confirmation of the award to obtain an amendment of the award. See note 3 of the Starr opinion.

Arbitration, Discovery, Appealability: In An Uninsured Motorist Arbitration, The Only Way To Challenge A Discovery Order Before Judgment Is With A Writ

A Case Of First Impression.

        Unless you practice in this area, you may not  know that in an uninsured motorist arbitration between the motorist with uninsured motorist coverage and her insurance company, discovery disputes are addressed to the court, not to the arbitrator. State Farm Mutual Automobile Insurance Company v. Cora Robinson, A158467 (1/1  3/14/22) (Humes, Margulies, Banke). "The question of first impression here is whether trial court discovery orders in these proceedings are reviewable on appeal from a judgment confirming the arbitration award. We hold that they are not." 

        The bases for vacating a judgment are found in California Code of  Civ. Proc. § 1286.2 (vacatur). And unhappiness with the trial judge's discovery order is not among the bases. Here, the insured argued that 1286.2(a)(4) provided a reason for  vacatur. That section allows vacatur when the arbitrator exceeded the arbitrator's power, and the award cannot be corrected without affecting the merits of the decision. However, the insured's complaint here was not addressed to the arbitrator, but rather  to the judge's discovery order. So there was no statutory route for vacating the arbitrator's decision. 

        The insured alternatively argued that her appeal should be considered as a writ. But that was not  possible, once a judgment had already been rendered.

        COMMENT: Suppose the arbitrator, rather than the judge, had issued a discovery order, as arbitrators routinely do in other types of proceedings. How easy would it be to attack the arbitrator's order in an appeal of a judgment confirming the award? Not easy. The arbitrator's discovery order would be scrutinized under the same standard as the award, and awards are not set aside just because the  arbitrator makes a mistake of law or fact.

Arbitration, Deadline, Vacatur: Second District, Div. 2 Holds Missed Deadline Means Arbitration Award Can't Be Vacated

Deadline To Move To Vacate Arbitration Award Is Jurisdictional.

Cover, First Edition of Charles Dickens' Bleak House. 1852-53. 

        Locked in sororicidal probate litigation over the disposition of mom and dad's estate, Sarah Plott Key prevailed at first, entitling her to one-third of her parents' estate which, at the time "was equivalent to about $20 million." To get to that result, Key borrowed $2.4M from Law Finance Group to pay for the probate action. Key paid back the principal, but refused to pay back the interest, claiming terms of the note violated the California Financing Law.

        The loan agreement with LFG required binding arbitration. A panel of three arbitrators awarded LFG $778,351 interest plus $838,864 attorney fees and costs to LFG. 

        In superior court, Key filed a petition to vacate the award, arguing the arbitrators exceeded their power because they found the loan to be a consumer loan and should have voided the loan in violation of the California Financing Law. For good measure, Key also filed a response to LFG's petition to confirm the award, raising the same arguments as in her petition to vacate. And the superior court agreed with Key, vacating the award. LFG appealed. Law Finance Group, LLC v. Sarah Plott Key, B305790 (2/2  7/30/21) (Lui, Ashmann-Gerst, Hoffstadt).

        With a nod to the recently departed Ron Popeil: "But wait, there's more!" The Court of Appeal never reached the substantive issue because it held Key did not timely request the arbitration award be vacated. Here's the timeline:

9/18/19 -- panel of 3 arbitrators issued modified award

10/1/19 -- LFG files petition to confirm award in superior court

1/27/20 -- Key files petition to vacate award in superior court

2/5/20 -- Key files response to LFG's petition to confirm, including her arguments from motion to vacate

        The Court of Appeal held Key is SOL because her petition to vacate was filed 130 days after the modified award was issued, missing the 100 day deadline for filing the petition to vacate. Key argued she had ten days to respond to LFG's motion to confirm the award, which was  true, and she included her objections to confirming the award in her  timely response to the petition, which was also true. But that  did not help her in the Court of Appeal, which concluded the dispositive statutory provision was the one governing time to file the petition to vacate the award (100 days), rather  than the statutory provision giving her 10 days to respond to the petition to confirm the award. By the time Key filed her petition to confirm, and by the time she filed her response to LFG's petition to confirm, she was beyond the 100-day deadline to petition to vacate.

        COMMENT: "Litigation among the sisters continues. . . . " (footnote 1 to the opinion). There is an anti-SLAPP motion filed in a probate proceeding to enforce a no contest clause in the parents' trust, and another currently pending appeal arising from a petition by Key alleging her sister breached fiduciary duties as trustee. It's a shame this roiling family dispute among sisters could not have been successfully mediated.

 

 

Arbitration, Vacatur: Arbitrator's Inappropriate Ex Parte Communications Result In Vacation Of Arbitration Award

Plaintiff/Appellant Did Not Need To Prove That Arbitrator's Ex Parte Communications Led To Adverse Award.

        A rather unusual case, this. Joanna G. Grabowski, an in pro per plaintiff/appellant successfully vacated an adverse arbitration award in a malpractice arbitration she brought against Kaiser. Joanna G. Grabowski v. Kaiser Foundation Health Plan, Inc., et al, No. D076968 (4/1  5/10/21) (Guerrero, Benke, Do).

        The Court of Appeal agreed that the arbitrator's ex parte communications with Kaiser's attorney were not ethical, and that the nature of the communications was such that a reasonable person could have concluded that the arbitrator was incapable of being impartial. Speaking with Kaiser's attorney ex parte, the arbitrator commiserated that this was a difficult case, and that Grabowski, who represented herself in pro per, couldn't effectively represent herself. "The arbitrator volunteered these comments to Kaiser’s counsel, ex parte, and they shared a hearty laugh about Grabowski’s perceived shortcomings as an advocate." Additionally the arbitrator failed to disclose two Kaiser matters in which the arbitrator was selected to arbitrate. 

        The disclosure standard is not whether disclosure would have changed the outcome, but whether a person could have reasonably concluded that the arbitrator could not be impartial, based on the ex parte communication and the failure to disclose prior involvement with Kaiser.

        COMMENT: One might well ask how Grabowski knew about the ex parte communications, since she wasn't present when Kaiser's attorney spoke to the arbitrator. "Grabowski’s mother was recording the proceedings on her cell phone and had inadvertently left it going while she and Grabowski left the room." If the arbitrator had imagined that everything he said might be recorded, he might have been more careful.

 

Arbitration, Vacatur, Illegality, Fees: Second District, Div. 8 Holds That Arbitrator Could Decide Contract Was Illegal

Who Decides Illegality Of A Contract, The Arbitrator Or The Court?

        Michael Bacall, an actor, was represented by Jeffrey Shumway, an attorney, who provided "legal/management services and [Chief Content Officer] services." Bacall alleged Shumway failed to disclose he was "inactive" with the State Bar, and Bacall terminated the contract with Shumway and his company Timaeus. Timaeus filed a demand for arbitration with the AAA, and Bacall filed a complaint asserting various claims, including breach of contract and rescission. The trial court granted the motion to arbitrate (be careful what  you ask for), and the arbitrator issued an award requiring Shumway and Timaeus to return $201,025.82 to plaintiffs/respondents Bacall and his company RBC Entertainment, and also to pay them $237.607.25 in fees and costs.

        Shumway and Timaeus appealed. Michael Bacall et  al. v Jeffrey Shumway et al., B302787 (2/8  3/16/21) (Ohta, Grimes, Wiley).

        The chief argument by Shumway was that it was the duty of the court, not the  arbitrator, to review the legality of the contract. This was somewhat curious, given that it was Bacall who filed a lawsuit and Shumway who successfully moved to compel arbitration. Shumway relied on a  case, Loving & Evans v. Blick, 33 Cal.2d 603 (1949), in which a party sought to vacate an arbitration award on the basis the arbitrator enforced an illegal contract, and the California Supreme Court held the arbitrator who enforced an illegal contract exceeded his  powers. Why? An arbitrator who enforces an illegal contract presumably has no rights and powers conferred under the contract. But the Loving case did not convince the court here, because the situation was the opposite: instead of enforcing an illegal contract, "the arbitrator severed the unlawful legal services rendered on a contract that Respondents had terminated . . . and allocated damages accordingly."

Russian-made antipersonnel mine in Cambodia. Creative Commons License.

        Another aspect of the case concerning legal fees is troubling as an example of the landmines litigators can step on in arbitration. Shumway alleged the arbitrator engaged in misconduct by denying an opportunity to address issues related to attorney fees and costs. After the arbitration hearing, Bacall requested attorneys fees and costs and submitted billing records. Shumway's counsel wrote to the arbitrator that arbitrators typically entertain such requests after an award has been rendered. The arbitrator wrote back: "Consideration of attorney fees will not take place until the case is decided and a prevailing party is determined. Anything submitted in that regard will not be read until then." Shumway did not submit a response, and the arbitrator's final award also included the fee award. 

        Evidently Shumway felt sandbagged by the arbitrator's response. But the Court of Appeal disagreed, though it  did acknowledge, "the arbitrator's response was vague," and that one might not know best how to argue the attorneys fees issue before one knew who would be the prevailing party However, the court pointed out that the  arbitrator had not never explicitly ordered that Shumway could not file an opposition before the arbitrator addressed fees and costs. 

        COMMENT: Regarding the briefing of the fees and cost issue, the Court explained, "the onus was on Appellants to seek clarification, which they failed to do." Good advice -- and a painful lesson.

 

Arbitration, Disclosures, Vacatur: Second District, Div. 7 Holds That Party Cannot Waive Right To Timely Object To Appointment Of An Arbitrator

Years Earlier, The Parties Had Agreed To The Appointment Of A Particular Arbitrator.

        Brothers Harry and Ted Soussos fought over control of  family business interests. Harry moved to compel arbitration, and Ted timely objected. The arbitrator refused to recuse himself, and Harry obtained an award in  his favor. The rub here is that several years earlier, Ted and Harry had agreed that in case future disputes arose, they would not object to the appointment of Judge John P. Shook (ret.) as the  arbitrator. After the arbitrator issued the award, Ted unsuccessfully sought to vacate it in the trial court. Did the earlier agreement not to contest the appointment of Judge Shook mean that Ted had waived the  right to object? 

        The right to timely object to the appointment of an arbitrator cannot be waived, holds the court in  Soussos v Soussos, No. B293358 (2/7   2/15/21) (Feuer, Perluss, Segal).

Arbitration, Vacatur: CCA 2nd Dist Div 1 Affirms Trial Court, Refusing To Vacate Judgment

The Majority Opinion Is Chiefly A Reminder Of The Court's Limited Ability To Vacate An Arbitration Award.

        VVA-Two LLC v. Impact Development, Case No. B291330 (2/1  5/12/20) (Rothschild, Bendix; Chaney, dsst.), serves chiefly as a reminder of how limited the power of the court is to vacate an arbitration award. The Court of Appeal rejected three arguments by Plaintiff/Appellant VVA-Two LLC: 1) that the arbitrator exceeded his authority by awarding remedies inconsistent with the contract; 2) that the award was incomplete; 3) that the arbitrator's refusal to consider certain evidence and reopen proceedings did not render the arbitration process fundamentally unfair.

        Justice Chaney dissented, believing that the arbitrator exceeded his power: "The effect of the arbitration award is that IDG andVVA [the parties] are suspended in an impregnable dilemma created by an arbitration award that VVA cannot comply with because it cannot force RBC—a nonparty to the arbitration—to consent to the transfer, and that IDG cannot enforce for the same reason." The majority, however, felt that the award was not rendered incomplete by a failure to address the issue of third-party consent, because that was not an issue specifically submitted to the arbitrator, and because, as a workaround, the arbitrator retained jurisdiction in case there was a failure by a third party to consent to a transfer of interest that was required by the  award.

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.