Mediation: Homeowners Get To Recover Fees Spent On Pre-Litigation Mediation from Homeowner Association
Interpretation of Civil Code section 1354(c) Leads to Result
In Grossman v. Park Fort Washington Association, Case No. F063125 (5th Dist. Dec. 19, 2012) (Franson, J.) (unpublished), the Court of Appeal held that the trial court correctly awarded fees for pre-litigation mediation to homeowners involved in a tussle with their homeowners association over construction of a backyard cabana and fireplace. How did the court get to that result?
Outdoor fireplace built by U.S. Forest Service. Russell Lee, photographer. 1942. Library of Congress.
Civil Code sections 1354(c) reads: “In an action to enforce the governing documents, the prevailing party shall be awarded the reasonable attorney’s fees and costs.” The homeowner’s association, which resisted paying attorney’s fees, argued that fees incurred in pre-litigation mediation are not incurred “in the action”, and hence, should not have to be paid.
Nope, said the Court of Appeal. “This text does not explicitly limit the recovery of attorney fees and costs to those items incurred in the lawsuit itself.” (italics in the original). Three things are important: (1) the existence of an action to enforce the governing documents; (2) a prevailing party; and (3) reasonable fees and costs. The Grossmans, who were plaintiffs and respondents, easily satisfied the first two conditions. As to the question of reasonableness, because the Legislature has required ADR, “a party acts reasonably when it spends money on attorney fees and costs during pre-litigation ADR.” Thus, the third condition was also satisfied by the Grossmans.
The pre-litigation attorneys fees related to 38.1 hours of work at $350/hour (i.e., $13,335) and pre-litigation costs were an additional $875 – a fraction of the total requested ($116,165), and a fraction of the total awarded ($112,665).
FAA’s National Policy Favoring Arbitration Requires Arbitrator In First Instance To Determine If Noncompetition Agreements Are Null And Void
SCOTUS Smackdown of Supreme Court of Oklahoma
On November 26, 2012, in Nitro-Lift Technologies, L.L.C. v. Howard, 568 U.S. _______ (2012) (per curiam), the Supreme Court of the United States found it necessary to remind the Supreme Court of Oklahoma that “[i]t is a matter of great importance . . . that state supreme courts adhere to a correct interpretation” of the Federal Arbitration Act (FAA). “Here, the Oklahoma Supreme Court failed to do so. By declaring the noncompetition agreements in two employment contracts null and void, rather than leaving that determination to the arbitrator in the first instance, the state court ignored a basic tenet of the Act’s substantive arbitration law.” The Oklahoma decision was therefore vacated.
Consider for a moment how this would play out in California, a state with a strong public policy that protects employees from unlawful restraints of trade and promotes competition. Cal. Bus. & Prof. Code section 16600. As in Nitro-Lift Technologies, the issue would have to be decided by the arbitrator, assuming the arbitration provision is enforceable. If the arbitrator incorrectly applied the law, that would ordinarily be no ground for judicially reversing the arbitrator’s award, notwithstanding the failure to carry out California’s strong public policy that protects employees and promotes competition.
On March 27, 2012, we posted about Marmet Health Care Center, Inc. v. Brown, 565 U.S. ___ (2012) (per curiam). The Supreme Court of West Virginia had refused enforcement of an arbitration clause because it violated the state’s public policy against arbitrating personal injury or wrongful death claims against nursing homes. The per curiam Nitro-Lift Technologies opinion quotes the per curiam Marmet opinion: “[W]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” Hence, state law cannot prohibit outright the arbitration of a noncompete claim – the arbitrator decides the issue “in the first instance.”
We would simply add that in the case of binding arbitration, “in the first instance” usually means “in the last instance” too!
Pending Case: Ninth Circuit Holds En Banc Hearing In Kilgore v. KeyBank
Federal Preemption Of California’s Broughton-Cruz Rule Exempting Claims For Public Injunctive Relief Is At Issue
On March 7, 2012, we posted about Kilgore v. KeyBank, 673 F.3d 947 (9th Cir. March 7, 2012) (authored by Judge Trott). Kilgore held that California’s Broughton-Cruz rule, which provides claims for public injunctive relief cannot be arbitrated, is preempted by the Federal Arbitration Act (FAA). The case was heard en banc on December 11, 2012, and the video of the hearing is available online.
Kilgore involved students of a private helicopter vocational school alleging the school had a preferred lender who knew the school was “a slowly unfolding disaster”, yet continued to make loans to the hapless students. The students sought to have the loans declared unenforceable and to prevent the lender from reporting defaults to credit reporting agencies. Because the students had to first get over the hurdle of an arbitration provision, the case presented the issue of whether the Broughton-Cruz rule provides a carve-out exception to arbitration on the facts here, and whether the rule is now preempted by the FAA. In the opinion authored by Judge Trott earlier this year, the court found preemption.
The estimable Kimberly A. Kralowec has posted two reports of last week’s hearing on The UCL Practitioner, the first by Eric Kingsley of Kingsley & Kingsley in Encino, the second by Edie Mermelstein of the Offices of F. Edie Mermelstein in Huntington Beach.
Mediation/Condition Precedent: Plaintiffs Made Good Faith Effort To Mediate And Were Not Barred From Seeking Award of Attorney’s Fees
Good Faith Effort To Mediate Was Supported By Substantial Authority And Argument That Offer To Mediate Was Made To The Wrong Intermediary Had Been Forfeited On Appeal
The DeSantises bought a commercial building occupied by a hospital tenant, only to discover too late that a hospital tenant was on the way out. The DeSantises prevailed on their claims for breach of contract, misrepresentation, and concealment and were awarded compensatory and punitive damages. The trial court denied their claims under California’s unfair competition law. The DeSantises were also awarded attorney fees. Both sides appealed, and in a 49 page unpublished opinion, the Court of Appeal affirmed, rejected all the parties’ claims. DeSantis v. Oakmont LLC, Case No. A128220 (1st Dist. Div. 5 Dec. 7, 2012) (Simons, Acting P.J.) (unpublished).
We have a side bar category: “Mediation: Condition Precedent,” We have posted about “those pesky provisions requiring that one request mediation before filing suit, or else risk losing attorney’s fees even if one prevails.” The issue of failure to comply with mediation, a condition precedent to receiving attorney’s fees, was raised on appeal in DeSantis by the losing defendant. Defendant ingeniously argued plaintiff’s attorney McMillan “improperly attempted to communicate with [defendant] about mediation through an insurance adjuster employed by [defendant’s] general liability carrier, and because the adjuster was not the actual or ostensible agent for [defendant], ‘McMillan could not give legally sufficient notice to Gloria Ruppert about mediation issues through’ the adjuster.”
Well, the argument, however clever, failed because it had not been made earlier and preserved for appeal. Besides, the Court said, no one was arguing that there was a lack of substantial evidence showing that plaintiff attempted to mediate in good faith.
Tip: Check out the notice provisions in the contract when offering to mediate. If you make an offer to mediate through an intermediary, pin down the authority of the intermediary. That’s usually not going to present a problem if the “intermediary” is the adverse party’s attorney.
Arbitration/Enforceability/Unconscionability: Second District, Division 3 Reverses Order Denying Physician’s Motion To Compel Arbitration
Statutory Provisions Specifically Relating To Medical Care Weigh Into The Result
Statutory provisions are the key to the next decision, Raynond v. Kram, Case No. B236552 (2nd Dist. Div. 3 Dec. 7, 2012) (Kitching, J.) (unpublished). The case involved a malpractice lawsuit brought by the patient, Raymond, against his treating physician, Kram. Dr. Kram appealed an order denying the his motion to compel arbitration. The Court of Appeal held that “the arbitration agreement was not substantively unconscionable because of its provision requiring Raymond to pay the fees of his arbitrator and half the fees of the neutral arbitrator. The lack of substantive unconscionability requires reversal of the order denying defendant’s petition to compel arbitration.”
Why didn’t the arbitration provision requiring the patient to pay the fees of the arbitrator and half the fees of the neutral arbitrator result in substantive unconscionability? Essentially, we can identify four reasons. First, the arbitration provisions complied with the notice language required by Cal. Code of Civ. Proc. section 1295, pertaining to any contract for medical services which contains a provision for arbitration of any dispute as to professional negligence. This notice language explains the consequences of arbitration, includes certain capitalized words, and provides the patient with 30 days to rescind the agreement to arbitrate. Second, Dr. Kram did something tactically smart, and not required by statute – he offered to advance certain of the costs. Third, the Court of Appeal pointed out that Cal. Code of Civ. Proc. section 1284.2 requires each party to the arbitration to pay his pro rata share of the expenses and fees of the neutral arbitrator, unless there is a different agreement. Fourth, the Court of Appeal pointed out that this case, unlike consumer cases that have weighed in against requiring the plaintiff to pay costs, did not involve unwaivable consumer rights.
Additionally, the plaintiff argued that arbitration could lead to inconsistent results with a lawsuit involving a third party, a reason for which a court may decide to deny a request to arbitrate. Here, however, Cal. Code of Civ. Proc. section 1281.2, the provision allowing a court to deny arbitration to as to avoid inconsistent results, contains an exception that applies to an agreement to arbitrate disputes as to the professional negligence of a health care provider.
Evidently, the fact that the patient earned $24.72/per hour did not factor into the unconscionability analysis of fee shifting. As Anatole France acidly put it, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”
Arbitration/Enforceability/Homeowners: California Supreme Court’s Decision In Pinnacle Requires Reversal In Another Case Of Order Denying Developer’s Motion To Compel Arbitration
On August 16, 2012, we blogged about the California Supreme Court’s decision (actually, a majority, concurrences, and a dissent) in Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223 (2012). That case held that covenants, conditions and restrictions of a recorded declaration created by a developer, which contain an arbitration clause, will be honored and enforced to compel arbitration as long as they are not proven to be unreasonable.
That Supreme Court holding compelled the Second District, Division 1, in Promenade at Playa Vista Homeowners Association v. Western Pacific Housing, Inc., Case No. BC225086 (2nd Dist. Div. 1 Dec. 6, 2012) (Mallano, J) (unpublished) to vacate its prior decision in the Promenade case affirming an order denying the developer’s motion to compel arbitration. On remand, the trial court is to enter a new order granting the developer’s motion to compel arbitration.