California Mediation and Arbitration

Arbitration, Construction Of Agreement, Reference: Trial Court Properly Denied Motion To Compel Arbitration Or For A Reference

An Order Denying A Judicial Reference Is Not Appealable, Even When Coupled With An Order Denying Arbitration, Which Is Appealable.

    A frequent source of confusion with motions to arbitrate is an arbitration provision that refers to both the Federal Arbitration Act (FAA) and California law. Indeed, that was the source of confusion (somewhat amplified, as the Court of Appeal ultimately determined there was no ambiguity) in J.H. Boyd Enterprises, Inc. v. Kenneth Robert Boyd, F078292 (5th Dist.  9/10/19) (DeSantos, Smith, Meehan). 

    Defendants/Appellants, the Boyd Trust, moved to compel arbitration after their tender of payment of a promissory note to J.H. Boyd Enterprises, Inc., was rejected.  It was clear that an agreement between the Boyd Trust and J.H. Boyd Enterprises, Inc. included a broad arbitration clause that governed the dispute over the refusal to accept the tender. However, there was an exception: If California law governed a dispute that involved a promissory note secured by property, as happened to be the case here, then arbitration could not be compelled, unless J.H. Boyd Enterprises, Inc. elected to arbitrate, which it assuredly did not do. And as many arbitration agreements do, this one provided that any arbitration proceeding shall be governed by the FAA. 

    So was the dispute governed by California law or the FAA? Basically, the Court of Appeal concludes that even if the FAA applies to an arbitration proceeding, the parties agreed to arbitrate this particular dispute, alleged in the complaint to involve a defaulted promissory note, by applying ordinary state law principles. The term "Dispute" was defined to encompass "any dispute, claim or controversy", which encompassed a promissory note default, and forum was not included in the definition of Dispute.

    Defendants/Appellants alternatively sought a reference, and that too had been denied by the trial judge. We see plenty of cases involving orders denying motions to compel arbitration, but orders denying a motion to deny a reference? Not so much. The short answer here is that orders denying a motion to compel a reference are not appealable.

    However, Appellants made a rather ingenious argument. Orders denying a motion to arbitrate are appealable, and Code of Civ. Proc. section 1294.2 creates ancillary appellate jurisdiction over orders affecting appealable arbitration orders. For example, if the Court denies an order to compel arbitration and to deny a stay, ancillary jurisdiction exists to consider the denial of the stay. No go here. The ancillary jurisdiction that allows an appeal of the order denying a stay is necessary to effectuate an appellate ruling on an arbitration order. An appellate ruling allowing arbitration becomes pointless if the litigation is not stayed. But that's not the case here, where review of the order denying the reference is not necessary to effectuate the order denying arbitration. It's apples and oranges.

References: Any Error In Ordering a Section 638 General Reference Is Harmless When The Referee Gets Matters Right

Whether Referee Or Trial Court Decided The Case Would Have Made No Difference, Because The Case Was Decided Correctly.

     It was the last 1 ½ pages of this published 27 page slip opinion that caught our attention, because it referred to appointment of a referee, and reference is one of this blog's sidebar categories. Stella v. Asset Management Consultants, Inc., et al., B269207 (2/7 filed 1/17, pub. 2/6/17) (Perluss, Zelon, Segal).

     Plaintiff/Appellant Stella appealed from a judgment of dismissal entered after a judicial referee sustained without leave to amend all demurrers to Stella's amended complaint based on the statute of limitations. The Court of Appeal agreed that the statute of limitations barred all causes of action.

     Stella's last argument was that it was erroneous to order a general reference. As the Court of Appeal explained, any error was harmless, because whether a referee or a trial court sustained the demurrers "could not possibly have affected the outcome of the case."

Arbitration/Homeowners/References/FAA: Fifth District Affirms Order Denying Motion To Compel Arbitration In Construction Defect Lawsuit

The Key:  Close Reading Of Provision Providing For Arbitration If Reference Became “Legally Unavailable.” 

      The short but interesting opinion in Freeman v. Froehlich Signature Homes, Inc., F073374 (5th Dist. 12/15/16) (Levy, Gomes, Kane) (unpublished), merits close reading, because it reads like a finely-worded exam question.

     In a construction defect lawsuit, the trial court considered plaintiffs/homeowners’ motion to compel a judicial reference with a developer against the backdrop of a CC&R requirement that disputes be resolved by judicial reference but, “if ‘for any reason the judicial reference procedures . . . are legally unavailable at the time a dispute would otherwise be referred to judicial reference, then such dispute shall be submitted to binding arbitration.’” 

     At first blush, a motion for judicial reference would seem appropriate.  Not so fast, said the trial court:  another case involving the same development project was pending, and a reference might negatively impact judicial economy.  So the trial court, in the exercise of judicial discretion, denied the motion for judicial reference – but without prejudice.

     Therefore, plaintiffs’ attorneys took the next logical step, and moved to compel arbitration.  After all, the court had denied their request for a judicial reference. However, the motion to compel arbitration was also denied.  Plaintiffs appealed.

     The Court of Appeal upheld the order denying the motion to compel arbitration, because the denial of a reference without prejudice did not make a reference legally unavailable.

     COMMENT:  Sometimes timing is everything.  This outcome does not foreclose plaintiffs from getting a reference or an arbitration.  The trial court ordered the cases consolidated, noting that, “motions for judicial reference, and when appropriate, motions [to] compel arbitration may be renoticed.”  So another round of law and motion can be anticipated.  Nothing prevents plaintiffs from moving again for a reference, and in the alternative, arbitration,

      This is a case in which the application of the Federal Arbitration Act makes a real difference, because if California law applies, the trial court could stay a reference or stay arbitration to avoid results inconsistent with a pending court case.  Here, the Court of Appeal concluded that the FAA applies – not because interstate commerce was involved, but because the dispute resolution provision expressly provided for application of the FAA.    In this case, the preemptive effect of the FAA sweeps away inconsistent California law that would otherwise give the trial judge more discretion to deny a reference or to deny arbitration.  Let’s see what happens after the inevitable “next round.”

References, Confidentiality: Law Firm May Be Disqualified If It Substitutes Into Case In Which One Of Its Attorneys Participated As A Court Appointed Settlement Officer

The Disqualification Outcome Hinges On Whether The Attorney-Settlement Officer Received Confidential Information

     Bird’s-eye view of the Great Wall of China.  Jean E. Norwood, photographer.  1979.  Library of Congress.

     Attorney Banuelos participated as a settlement officer on a “CRASH” panel mediating an employee-employer dispute in Los Angeles Superior Court.  “CRASH” stands for “Civil Referee Assisted Settlement Hearing,” and the CRASH panel consisted of two attorneys and one judge.  A little less than six months after the mandatory settlement conference, Banuelos’ law firm substituted in to represent the employer in the dispute, and the employee moved to disqualify Banuelos’ law firm.

     The trial court denied the disqualification motion, holding that even if Banuelos received confidential information – an issue the court did not decide – adequate screening measures could be established to ensure Banuelos did not discuss the case with anyone at the firm.  The employee filed a writ.  Castaneda v. Superior Court (Perrin Bernard Supowitz, Inc., Real Party in Interest), No. B259950 (2/8 June 24, 2015) (Rubin, Flier Grimes) (published).

      The employee’s petition was granted, with directions.  The trial court must now consider whether Banuelos participated in ex parte communications with the employee’s representatives.  If ex parte communications occurred, then it will be presumed that confidential information was exchanged, and the law firm will be vicariously disqualified.  No ethical wall will prevent vicarious disqualification if the attorney received confidential information.

     COMMENT:  I have participated as a “mediator” in a settlement conference program in LASC.  The status of attorneys who participated in the program was not clearly defined.  Participants were informed that the formal mediation privilege did not apply, because these were settlement conferences ordered under rule 3.1380.  However, as the Court of Appeal points out in Castaneda, its concern is not with the laws of mediation confidentiality, but rather with “the law of attorney disqualification based on confidential communications, wherever they may occur.” 

Arbitration/Waiver/References: First District, Div. 4 Agrees Defendants Waived Right To Arbitrate, And Appointment Of Referee Is Moot

By Considerably Expanding Scope Of Complaint, Party Might Have Reopened Opponent’s Right To Arbitrate That Has Been Waived – But It Didn’t Happen Here

     Defendants appealed the trial court’s denial of their petition to arbitrate, and their appeal from an order appointing a referee.  Boschetti v.  Pacific Bay Investments, Inc., et al., No. A134195 (1st Dist. Div. 4 Jan. 30, 2014) (Rivera, Ruvolo, Reardon) (unpublished).  The Court of Appeal affirmed, because defendants had delayed, and in the meantime, “substantially invoked” the machinery of litigation.

     The interesting point is that by amending his complaint and substantially expanding the scope of his claims, plaintiff risked reviving defendant’s right to arbitrate:  “See Keating v. Superior Court (1982) 31 Cal.3d 584, 607, reversed on another ground in Southland Corp. v. Keating (1984) 465 U.S. 1 [where amended complaints “considerably expanded” scope of pleadings, trial court could properly find lack of waiver of right to arbitrate interrelated claims in original complaints].).” (Slip Op. at 8).  However, the expansion of claims here did not revive a right to arbitrate, because there were arbitrable claims in the earlier complaint that were waived, and the same properties were involved in the earlier complaint and the amended complaint.

     As for the order appointing the referee, that is an interlocutory rather than an appealable order.  Defendants failed to ask that their appeal be treated as a writ of mandate, and the Court of Appeal declined to treat the appeal as a writ.  End of story, for now.

References and Privilege: Second District Division 7 Rules Special Reference Can’t Examine Documents Claimed To Be Privileged To Determine If They Are Privileged

Allegedly Confidential Documents Can Only Be “Generally Described” To Determine If They Are Truly Privileged

     Plaintiff Parness sued attorney Weiss and his law firm (acting as film production counsel) for alleged fraud arising out of the financing of the film Gospel Hill.  Plaintiff claimed production counsel made fraudulent representations the production company had good chain of title to the film screenplay, and that this proved to be false, along with the representation that Samuel L. Jackson would star in the movie.  Over plaintiff’s objection, the trial judge appointed a referee to evaluate production counsel’s contention it could not defend without disclosing protected lawyer-client communications relevant to counsel’s scienter.  Accepting the referee’s report that production counsel could not defend without violating the attorney-client privilege, and that attorney-client communications were relevant to the lawyer’s scienter, the trial judge dismissed claims against production counsel.  Plaintiff appealed the dismissal of production counsel.  Parness v. Abrams Garfinkel Margolis Bergson, LLP, Case No. B234762 (2nd Dist. Div. 7 August 14, 2012) (Perluss, J., author) (unpublished).

     Finding that the reference was improper, the Court of Appeal reversed.  There were two flaws in the reference procedure.

     First, in camera review of documents allegedly protected by the lawyer-client privilege to determine if they are privileged is prohibited.  Evid. Code section 915(b).   “So long as Weiss established a prima facie claim of privilege, his motion to dismiss must be decided without examination of the contents of the assertedly privileged documents notwithstanding the ‘assumptions’ and ‘uncertainty’ about the nature of the privileged communication that troubled the trial court.”  The trial court’s error here was in ordering a reference to inspect the documents.

     Second, the referee made recommendations on the ultimate legal question presented by the motion that the trial judge did not independently review – and the findings of a special referee under Cal. Code of Civ. Proc. section 639 are not to be rubber-stamped, but rather require independent review by the trial judge.  If the trial judge had treated the referee’s report as “advisory”, and independently reviewed it, the second problem could have been avoided. 

     On remand, the trial court “must decide the motion [to dismiss production counsel] by weighing the materiality of information, which can only be generally described, on the elements of scienter and intent – elements by their very nature that can be difficult to prove – and drawing conclusions about its significance from other evidence the court is permitted to review.” 

References: Ninth Circuit Addresses Issue of First Impression Concerning Appealability of Order Granting Reference

 

Order Compelling A Reference And Staying Proceedings Does Not Put Plaintiffs "Out Of Court", And Therefore Is Not Final And Appealable

     The Ninth Circuit tells us the issue considered in this case is one "of first impression." That issue is "whether an order compelling enforcement of a contractual agreement to submit a dispute to a referee, and staying proceedings in the interim, is immediately appealable." Bagdasarian Productions, LLC v. Twentieth Century Fox Film Corporation, No. 10-56430 (9th Cir. March 26, 2012) (for publication) (Hawkins, Senior Circuit Judge).

     The underlying dispute involved plaintiffs, who created or controlled properties connected with Alvin and the Chipmunks, and defendant Fox, owner of rights in the properties entitling it to develop, produce, distribute, exhibit, exploit, advertise, promote and publicize "throughout the universe." The agreement between the parties provided that "any dispute arising out of the Agreement would be submitted to a general non-jury reference pursuant to California Code of Civil Procedure section 638."

     Plaintiffs sued Fox. Fox moved to refer the disputes to a referee, and to stay the action. The trial court granted Fox's motion. Was the order granting the reference a final and appealable order?

     It helps to know two things: first, that an order granting a motion to compel arbitration is not appealable; second, that both arbitration and a reference are a form of ADR – and therefore, the court is likely to view them similarly:

     “Although there are some differences between arbitration and Section 638 reference, both are forms of alternative dispute resolution designed to move disputes out of court and lower the cost of trial proceedings. Plaintiffs offer no convincing reason why stays pending Section 638 reference proceedings should be treated differently from stays pending arbitration, since errors with either may be corrected later on appeal.”

     In other words,

“the district court’s order is not final, the Plaintiffs have not been put ‘out of court’ by the order . . . the decision to refer can be reviewed and, if incorrect, later remedied by this court. As such, the appeal is premature and we lack jurisdiction over it under Section 1291.”