California Mediation and Arbitration

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.

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.

Arbitration, FAA, Standard of Review: 9th Circuit Agrees With District Court That Arbitrator's Award Was "Irrational"

"We have become an arbitration nation," says the Court.

    The 9th Circuit affirmed the district court's order vacating an arbitration award under the Federal Arbitration Act, concluding that the arbitrator acted beyond his powers, rendering an award that was "irrational", failing to "draw the essence of the award" from subcontracts. Aspic Engineering and Construction Company v. ECC Centcom Constructors LLC, et al., No. 17-16510 (9th Cir.  1/28/19) (Smith, Nguyen, Restani).

    Aspic, a local Afghan construction company, acted as a subcontractor for the prime contractor, ECC, in support of EEC's contracts with the U.S. Army Corps of Engineers. The subcontracts incorporated obligations that ECC owed to the U.S. government, and Federal Acquisition Regulations governing termination for convenience. (Termination for convenience refers to termination at any time without liability for damages that the other side might suffer). When the U.S. Army Corps of Engineers terminated for convenience its contracts with ECC, ECC did the same with Aspic.

    Aspic sued for damages, and received an award from the arbitrator, who believed "ECC could not expect that ASPIC would be capable of modifying their local business practices to completely and strictly conform to the US governmental contracting practices that were normal to ECC. There was not a true meeting of minds . . . " Apparently, the arbitrator believed it would be unfair to inflict the Federal Acquisition Regulations upon Aspic, and based the award on the damages Aspic had suffered.

    The arbitrator's award was confirmed and modified by a state court, ECC removed to the federal district court, the district court vacated the award, and the 9th Circuit affirmed the district court.

    "We have become an arbitration nation," wrote Judge Smith. "An increasing number of private disputes are resolved not by courts, but by arbitrators. Although courts play a limited role in reviewing arbitral awards, our duty remains an important one. When an arbitrator disregards the plain text of a contract without legal justification simply to reach a result that he believes is just, we must intervene." The court concluded that the arbitrator's award exceeded his authority, failed to draw the essence of the award from the subcontracts, "disregarded specific provision of the plain text" in an effort to prevent an unfair result, and was "irrational."

    COMMENT: Exceeding the powers of the arbitrator is a basis for vacatur in California and federal courts. However, "failing to draw the essence of the award" from the contract is language originating in federal cases in the context of collective bargaining. "[A]n arbitrator is confined to interpretation and application of the collective bargaining agreement; he does not sit to dispense his own brand of industrial justice. He may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement. When the arbitrator's words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award." United Steelworkers of Am. v. Enter. Wheel & Car Corp., 363 U.S. 593, 597 (1960). We would not expect to find this language in a California state case involving vacatur of an arbitration award.

 

    

Arbitration, Powers, Public Policy, Vacatur: Arbitrator Who Found HOA Failed To Follow Pre-Litigation Requirements In CC&Rs Did Not Exceed His Powers

Arbitrator Did Not Exceed Powers By Abridging An Unwaivable Statutory Right Or Policy.

    One of the grounds for a court to vacate an arbitrator's award is that the arbitrator exceeded his or her powers.  See Code of Civ. Proc. section 1286.2(a)(4). And 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. Richey v. AutoNation, Inc., 60 Cal.4th 909, 916 (2015). 

    In Branches Neighborhood Corporation v. CalAtlantic Group, Inc., G055201 (4/3  8/24/18) (Moore, O'Leary, Fybel), the defendant/respondent developer obtained summary judgment in arbitration, because the HOA filed its arbitration demand without first following a requirement in the HOA's CC&Rs requiring it to obtain the vote or written consent of 51% of its members prior to initiating a construction defect claim. The HOA tried to correct the problem by ratifying its decision to arbitrate after the fact, but the arbitrator wasn't having it.

    You could say this is a case that depends upon the plain language of the CC&Rs. That, by the way, is what the Court of Appeal said. The Court could not find an unwaivable statutory right to ratify after the fact what the CC&Rs required the HOA to do prior to filing its arbitration claim, nor could the Court find any express public policy that prevented enforcement of the CC&Rs. "[A]ccordingly, the plain language of the CC&Rs controls." Affirmed.

Arbitration, Appealability, Jurisdiction: Order Denying Petition To Vacate Award Is Appealable As Order Dismissing Petition -- But The Trial Court Properly Dismissed Petition To Vacate "Partial Interim Award" For Lack Of Jurisdiction

"Partial Final Award" Did Not Constitute An Award Immediately Reviewable By Superior Court.

    Maplebear, Inc. v. Donna Busick, No. A151677 (1/2  8/21/18) affirms the trial court's order dismissing Maplebear's (Instacart's) petition to vacate an award, which award was dismissed for lack of jurisdiction. Instacart is a same-day grocery delivery service, and the dispute arose when an employee, Busick, filed a class action arbitration demand with JAMS, alleging Instacart violated California law by misclassifying employees as independent contractors.

    The arbitrator issued a "partial final award" determining that the parties' arbitration agreement permitted Busick to move for class certification. Instacart petitioned to vacate the award. The trial court denied the petition to vacate, and Instacart appealed the denial of the petition to vacate.

    The opinion, which is a great refresher of the procedural steps involved when appealing an arbitrator's order, is interesting for a number of reasons.

    First, it treats the order denying the petition to vacate as an order dismissing the petition to vacate. This is important, because the relevant statute allows an aggrieved party to appeal from an order "dismissing a petition to confirm, correct or vacate an award." A denial is not the same as a dismissal -- except that by case law, denials may sometimes be treated as dismissals, making them appealable.

    Second, the Court concludes that the ruling in Mid-Wilshire Associates v. O'Leary, 7 Cal. App. 4th 1450 (1992), where the Court of Appeal "declined to construe a trial court order 'denying' a petition to vacate as a dismissal" does not survive Law Offices of David S. Karton v. Segreto, 176 Cal.App.4th 1 (2009) and  and Cinel v. Christopher, 203 Cal.App.4th 759 (2012).

    Third, the Court holds that the trial court properly dismissed Instacart's petition to vacate the "partial final award" because the trial court lacked jurisdiction over a partial award that did not determine "all the questions submitted to the arbitrators the decision of which is necessary in order to determine the controversy." Cal. Code Civ. Proc., section 1283.4. 

    Fourth, the Court rejected Instacart's argument that because the parties agreed that the arbitrator had no "power or authority to commit errors of law or legal reasoning", the trial court could immediately review the partial final award allowing Busick to move for class certification.

Arbitration: Disclosures, Section 1286.2 (Vacatur): 2/7 DCA Orders Vacatur Of Adverse Award Against Plaintiff/Claimant Because Arbitrator Had Actual Awareness Of And Failed To Disclose Other Pending Arbitrations Involving Defendant/Respondent

Plaintiff Waived Vacatur Right As To Ethics Standard 12(b), But Did Not Waive Rights To Vacate Based On Arbitrator’s Failure To Make Required Disclosures Under Ethics Standard 7(d).

            Here is the ending quotation before the “Disposition” paragraph in Honeycutt v. JPMorgan Chase Bank, N.A., Case No. B281982 (2d Dist., Div. 7 Aug. 2, 2018) (certified for publication; Segal, J., author; Perluss, P.J., concurring; and Feuer, J., concurring): “’That all may drink with confidence from their waters, the rivers of justice,’ whether they flow through our public or private systems of dispute resolution, ‘must not only be clean and pure, they must appear so as to all reasonable men and women.’ (U.S. v. State of Ala. (11^th Cir. 1987) 828 F.2d 1532, 1552.)” (Slip Op., p. 29.)

            Honeycutt concerned an employment arbitration by plaintiff/claimant against her former employer which was a defendant/respondent after employer successfully moved to compel arbitration in the filed lawsuit. In a California arbitration, an arbitrator must make certain statutorily-mandated and ethically-mandated disclosures to the parties, including Ethics Standard 7 [whether the arbitrator is serving as a neutral arbitrator in another prior or pending case involving a party to the current or a lawyer for a party] and Ethics Standard 12 [whether the arbitrator will entertain offers of employment or new professional relationships in any capacity other than as a lawyer, expert witness, or consultant from a party or a lawyer for a party, including offers to serve as a dispute resolution neutral in another case; and, if so, disclose the offer and acceptance in each case within 5 days of same].

            The facts were that the arbitrator filled out the AAA disclosures, but there was a missing page where the arbitrator checked he would entertain other offers even though one of the other pages actually sent to the parties did have a handwritten explanation to the missing question that he would entertain offers to serve as a dispute resolution neutral in other cases and would evaluate any potential conflict at that time prior to accepting each offer. However, the arbitrator failed to timely disclose that during the pendency of the Honeycutt arbitration, he had been appointed to serve as an arbitrator in eight other employment cases involving counsel for Chase and two others (one being an employment case) involving Chase—with the parties only receiving four of the eight letters concerning employment cases involving counsel for Chase before the arbitration was completed. Importantly, an arbitrator has a continuing obligation to make required disclosures all along the way. After Honeycutt lost the arbitration, the AAA administrator sent the missing page and all 10 letters about the other cases involving the Honeycutt arbitrator. Honeycutt’s counsel sent AAA a disqualification demand based on the belated disclosures. AAA advised Honeycutt that the arbitrator was not disqualified, with a zero award to Honeycutt and each side ordered to bear administrative fees and arbitrator compensation/expenses “as incurred.” Honeycutt moved to vacate the award (given that arbitrator nondisclosure is a mandatory basis for vacatur under CCP § 1286.2(a)(6)(A)), but the trial judge confirmed it instead, finding sufficient disclosures and no prejudice.

            The 2/7 DCA panel reversed and ordered that the award be vacated based on the arbitrator’s failure to make disclosures under Standard 7(d) [other cases involving Chase’s counsel or Chase].

With respect to the failure to make the Standard 12 disclosure, the appellate court found Honeycutt waived her right to vacate on this basis; after all, she failed to object although knowing about the missing page and knowing about the handwritten disclosure such that it was unfair for her to delay raising the issue until after she lost the arbitration.

            Different matter, altogether, with respect to the Standard 7(b) nondisclosures. Even though a vacatur requires that the arbitrator has actual awareness of a ground for disqualification, the panel found he had to in light of the fact that he was a participant in the other cases. The appellate court questioned whether an arbitrator, unlike an attorney, can blame a case manager, assistant, or secretary for an arbitrator’s failure to comply with the Ethical Standards, given that the arbitrator has actual awareness of his own intent to entertain offers of employment and then to accept them—which triggered disclosure obligations. Honeycutt did not waive this right to vacate, because it was a right she did not know she had, with her counsel moving to disqualify the arbitrator well within the 15 days required to object after receiving the AAA case manager’s letter finally disclosing everything. So, the rivers of justice in this one swept the arbitration award down the river and out to sea so that an arbitration can take place before an arbitrator making all required disclosures. Honeycutt also was awarded her costs on appeal.

Fees, Section 1286.2 Vacatur: Recent 2/1 DCA Unpublished Opinion Is A Stark Reminder To Raise Fees And Costs Issue To An Arbitrator Before A Final Award Is Issued

Otherwise, Fees/Costs Recovery Could Be Forfeited; Best Is To Ask For An Interim Award On Merits And Reserve Other Issues For Later Interim Award.

            The next case really is a stark reminder to litigators to make sure an arbitrator reserves fees and costs issues for decision in a subsequent interim award after an interim award on the merits. If you do not do so, you may face the unhappy conclusion in the next case.

           The unhappy conclusion in Buckley v. El Dorado Enterprises, Inc., Case No. B282204 (2d Dist., Div. 1 May 16, 2018) (unpublished) was that a claimant recovering on a pregnancy discrimination and failure to accommodate claims (but not awarded damages based on a subsequent reinstatement) did not gain a substantial award of attorney’s fees and costs as the prevailing party. We describe how this came about.

            The arbitrator entered a final award on the merits in favor of claimant, but claimant never requested any attorney’s fees. After that award, claimant moved for fees and costs, with the arbitrator in a second award deciding she was the prevailing party and awarding about $120,000 in fees, costs, AAA administrative fees, and arbitrator compensation/expenses. However, the trial judge vacated the award of fees and costs, prompting an appeal by claimant.

            The 2/1 DCA decided that claimant had no basis to supplement the first award with the second award recovery given that there was no mathematical error or failure of the arbitrator to rule on a submitted issue. This was so under the California Arbitration Act and the AAA Rules. So, the moral of the story (so to speak), is to make sure that a merits award is interim and that the arbitrator is asked to reserve a ruling on fees/costs through a later interim award. If not, and a final award is issued instead, a claimant may be deprived of a recoupment of substantial fees and costs even though the arbitrator would have awarded them but for labeling the award a “final” one.

Vacatur: Effort To Set Aside Arbitration Award For Arbitrator's Failure To Consider An Issue Fails

The Case Includes Good Discussion Of What Constitutes A Judicial Admission.

        With narrow exceptions, an arbitrator's decision cannot be reviewed for errors of fact or law.  One such exception, which was invoked by the Appellant in Shenoi Koes LLP v. Bank of America, et al., B281756 (2/4  1/31/18) (Willhite, Epstein Manella) (unpublished) is when the rights of the party "were substantially prejudiced by . . . the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title."  Cal. Code Civ. Proc., section 1286(a)(5).  

        Appellants had made a motion in limine in arbitration to preclude Appellee from giving testimony "that contradicts judicial admissions in her pleadings."  Appellants argued on appeal that when their motion was denied, the arbitrators somehow failed to consider an issue necessary to determine the controversy, because they failed to interpret a contract in light of binding judicial admissions.  The Court of Appeal, however, didn't buy the argument, believing there never had been binding judicial admissions, and so the motion lacked merit. The judgment was affirmed. 

        See the case for a discussion of what constitutes a genuine judicial admission.  It must be in the pleadings, not in testimony, and it cannot be taken from a prior proceeding.

Deadlines: Appellant Forfeited Ability To Challenge Judgment Confirming Arbitration Award Based On Lack Of Jurisdiction By Permitting The Arbitration To Proceed Without Objection

How Long You Can Wait To Challenge A Judgment Confirming Arbitration Award Depends On Whether Court Compelled Participation In The Arbitration, Or Whether You Simply Allowed The Arbitration To Proceed Without Objection.

         Appellant waited more than seven years to attack a superior court judgment confirming an arbitration award in FIA Card Services, N.A. v. Cross, D071954 (4/1  1/19/18) (Aaron, McConnell, Huffman) (unpublished).   While that may seem like an awfully long time (and so it proved to be here), there was a narrow opportunity to attack the judgment that the appellant tried to exploit.

        A party seeking to vacate an arbitration award has a 100-day deadline to do so, and the 100-day deadline is jurisdictional.  However, in the case of attacking a judgment to confirm the award, there is a loophole:  if the court erroneously compelled the parties to arbitrate, then there is a jurisdictional flaw, and of course, a lack of jurisdiction can be attacked at any time.  See United Firefighters of Los Angeles v. City of Los Angeles, 231 Cal.App.3d 1576, 1581 (1991).  As the Court of Appeal explained:

     "In the circumstance where a court orders the parties to arbitrate, if the arbitration process is later found to be invalid, the responsibility for the wasting of resources lies with the trial court, not the litigant, and there has not been any gaming of the system."

        Here, however, the Court of Appeal believed that the evidence showed Appellant had received notice of the arbitration, had not participated, and had not objected.  Under those circumstances, the Appellant had "forfeited her contention that the arbitration . . . against her was invalid.  She may not come to court for the first time a decade after the fact and attempt to undermine a judgment entered based on the arbitration award."

        Note that, rather than address a specific time deadline for attacking the judgment confirming the arbitration award, the Court phrased the outcome in terms of "forfeiture" through delay, probably because it recognized that a fundamental lack of jurisdiction that would make a judgment void ab initio can be attacked at any time.