Arbitration/Enforceability/Unconscionability: Fourth District Division 1 Agrees With Trial Court That Automobile Dealership’s Arbitration Provision Is Unconscionable
However, California Supreme Court Will Likely Make Ultimate Determination of Issues in Pending Sanchez v. Valencia Holding Co. Case
Arbitration clauses in contracts for automobile purchases and leases offer fertile ground for litigation. See our April 12, 2012 post about Kolev v. Euromotors West/The Auto Gallery, 586 F.3d 1024 (9th Cir. 2011) (opinion withdrawn on April 11, 2012), and August 1 post about Caron v. Mercedes-Benz Financial Services USA LLC, Case No. G044550 (4th Dist., Div. 3 July 30, 2012). Our next case, Goodridge v. KDF Automotive Group, Inc., Case No. D060269 (4th Dist. Div. 1 August 24, 2012) (McDonald, Acting P.J., author) (unpublished), involves an automobile dealership’s appeal of an order denying its petition to compel arbitration of the action filed against it by plaintiff Goodridge arising out of his purchase of a used automobile. Both the trial judge and the Court of appeal concluded that the arbitration provision was procedurally and substantively unconscionable.
Marion Post Wolcott, photographer. 1939. Library of Congress.
Procedural unconscionability is rarely a difficult issue in such cases, since an adhesion contract is involved. Here, as described by the Court of Appeal, there was a “stack of preprinted form documents”, lack of an opportunity to read all the documents or to negotiate the terms, and lack of evidence that purchaser was clearly informed about the arbitration provision. The contract documents were long and printed on both the front and back sides of the pages. Though language in bold print on the front side of the preprinted contract did state that the contract contained an arbitration clause on the reverse side, “there is no provision for Goodridge’s signature or initials under or adjacent to that language.” The Court of Appeal readily concluded that there was both “oppression and surprise”, adding up to procedural unconscionability.
The contract was also found to be substantively unconscionable, because it was too one-sided (though printed on both sides). First, the arbitration clause provided either party could appeal an arbitrator’s award if it exceeded $100,000. Second, each party could appeal an arbitrator’s award of injunctive relief against it. Third, the arbitration clause provided an appealing party must pay the filing fees and other arbitration costs for appeal, subject to a final determination. Fourth, the arbitration clause did not apply to self-help remedies, including repossession. The court found that those provisions benefited the seller far more than the buyer. Because the contract had four problems permeating it with unconscionability, a court exercising its discretion could properly refuse a request to save the contract by severing unconscionable terms.
COMMENT: Footnote 1 of Goodridge notes, “the circumstances (e.g., preprinted contract and arbitration clause) and issues in this case are virtually identical to those in Sanchez v. Valencia Holding Co., LLC (2011) (A201 Cal.App.4th, review granted Mar. 21, 2012, S199119 (Sanchez). The California Supreme Court will likely make the ultimate determination of the issues discussed in this case.” The California Courts of Appeal website describes Sanchez for the public and the press: "Petition for review after the Court of Appeal affirmed an order denying a petition to compel arbitration. This case includes the following issue: Does the Federal Arbitration Act (9 U.S.C. ? 2), as interpreted in AT&T Mobility LLC v. Concepcion (2011) 563 U. S. __, 131 S.Ct. 1740, preempt state law rules invalidating mandatory arbitration provisions in a consumer contract as procedurally and substantively unconscionable?”
Arbitration/Vacatur: “Manifest Disregard Of The Law” Is Manifestly Not A Ground For Vacating Arbitration Award Under California Law
Second District Division 2 Concludes That Arbitrator Did Not Disregard Choice Of Law Provision
Roller Bearing Company of America (RBC) manufacturers roller bearing assembly parts and Honeywell International use them in engines it manufacturers. Roller Bearing Company of America, Inc. v. Honeywell International, Inc., Case No. BS127074 (2nd Dist. Div. 2 August 23, 2012) (Chavez, J.) (unpublished) is a contract dispute between the two companies. The arbitrator issued a ruling in favor of Honeywell in this breach of contract dispute, the judgment confirmed the award, and RBC appealed.
Inspector at the Fafnir Bearing Company inspecting large roller bearing which will probably end up in an Army tank. 1943. Gordon Parks, photographer. Library of Congress.
The main issue in the case was whether the arbitrator disregarded a New York choice of law provision in order to consider inadmissible parol and extrinsic evidence to contradict the terms of the contract. Honeywell argued that the arbitrator’s disregard of the parties’ contractual choice of law provision constituted “manifest disregard of the law.
We posted on August 21, 2012 about Comerica Bank v. Howsam, et al. Case No. B232749 (2nd Dist. Div. 5 August 20, 2012) (Turner, P.J., author)(partially published) , explaining that “manifest disregard of law” is not a ground for vacating an arbitrator’s award in California. The grounds for vacatur are set forth in Cal. Code Civ. Proc. section 1286.2, and “manifest disregard of the law” is not one of those grounds. The court concluded the same here, but then treated the argument as one that the arbitrator “exceeded the scope of his authority” by refusing to apply New York law governing parol evidence and integrated contracts. The different label placed on the argument allowed the court to consider whether it provided a basis for vacating the award. However, the court then concluded that the argument the arbitrator had disregarded New York law was “flatly contradicted” by the record. The arbitrator had considered extrinsic evidence to interpret ambiguity, something permitted under New York law and the law of most states.
RBC’s argument that the arbitrator admitted inadmissible parol and extrinsic evidence was “simply another way of saying that the arbitrator committed legal error.” But legal error is not a ground for vacating an arbitration award.
Judgment affirmed.
International Arbitration/Disclosures: Second District Division 5 Affirms Orders In International Arbitration Denying Vacatur Motion and Confirming Award and Judgment
California’s Code of Civil Procedure Provisions Governing International Arbitration Differ From Ordinary Domestic Arbitration Provisions
With this post, we inaugurate a new sidebar category: “Arbitration: International.”
Comerica Bank v. Howsam, et al. Case No. B232749 (2nd Dist. Div. 5 August 20, 2012) (Turner, P.J., author)(partially published) involves appeals from orders confirming three international arbitration awards. The underlying disputes concerned Comerica Bank’s loans totaling $37 million to Mr. Howsam, a Canadian resident, and various Canadian corporations controlled by him. The loans were to fund the production of seven films. The loans, which the bank alleged had been obtained through fraud, were not repaid. The bank initiated legal action, and several defendants moved to compel arbitration. The arbitrator found in favor of the bank, the superior court denied a motion to vacate the awards (vacatur), and appeals followed.
The Court of Appeal affirmed across the board, after addressing four issues.
First, the Court of Appeal discussed whether the arbitrator’s failure to timely disclose an alleged disqualifying factor – he had once had signature authority for a client on a Comerica Bank account – is a proper vacatur ground (i.e., a ground upon which the trial court judge could have vacated the arbitration award). However, the failure to timely disclose potential disqualifying circumstances, as required by “Arbitration and Conciliation of International Commercial Disputes” provisions of the Code of Civil Procedure, specifically, section 1297.121, simply is not a ground for vacatur under section 1286.2(a)(6)(A) , the ground relied upon by Defendants, and governing vacatur by the trial judge of an arbitration award. Therefore, the trial judge did not err by failing to vacate an award on the basis of a disqualifying factor in international arbitrations that is not a basis for vacatur under 1286.2(a). The Court of Appeal notes, however, that failure of the arbitrator to disclose disqualifying factors in an international arbitration is not immune to review – but it requires following a different procedural path: “A litigant remains free to raise the failure to disclose issue in a writ petition.” Beware: trap for the unwary.
Second, the Court of Appeal concluded that the award was not secured by corruption, fraud, or other undue means. Billing errors of the arbitrator had no bearing on the outcome, and were explainable by procedural complexities “with fast moving substantive changes being pursued by both sides.”
Third, the award did not result from a manifest disregard of the law – an issue forfeited in any case by Defendants who withdrew from the arbitration and who therefore failed to raise the point before the arbitrator.
Fourth, the arbitrator did not exceed his power when he decided alter ego issues. The rules of the arbitral organization (Independent Film & Television Alliance) and Code of Civ. Proc. section 1297.161, providing that in international arbitration, the arbitrator may rule on his or her own jurisdiction, allowed him to do decide alter ego issues.
COMMENT: We gleaned interesting tidbits from this case.
First, title 9.3 of the Code of Civil Procedure, entitled “Arbitration and Conciliation of Commercial Disputes”, sections 1297.11 et seq., while similar to domestic arbitration provisions, also differs substantially in some respects, for reasons that are not intuitively obvious. For example, “the disclosure duties and the consequences of a failure to disclose differ in domestic and international arbitrations.” Therefore, if you have a case involving international arbitration, we urge you to read Cal. Code of Civ. Proc. sections 1297.11 et seq. Comerica Bank v. Howsam will also be a useful case to read.
Second,”federal Courts of Appeals are divided as to whether the arbitrator’s manifest disregard of the law remains a basis for vacatur in federal court . . . . But one thing is clear, an arbitrator’s manifest disregard of the law is not a ground for vacatur under California law.”
Mediation/Condition Precedent/Res Judicata: Fourth District Division 3 Allows Homeowner To Litigate After She Finally Gets Around To Mediating
Mediation Was A Condition Precedent To Litigating And Failure To Mediate Had Earlier Prevented The Homeowner From Suing To Enforce A Settlement Agreement
The homeowner (an in pro per attorney) and homeowner’s association (HOA) have been involved in a battle royal resulting in four appeals. Appeal No. 1: trial court dismisses homeowner’s lawsuit as settled; affirmed on appeal. Appeal No. 2: Homeowner challenges settlement, three of 15 defendants are dismissed after winning anti-SLAPP motion; affirmed on appeal. Appeal No. 3: Defendants who prevailed in first appeal are awarded attorney’s fees; affirmed on appeal. Trial court enters judgment on dismissal after an order sustaining demurrer without leave to amend, filed in case with the 15 defendants. And this leads to the fourth appeal. Adams v. Newport Crest Homeowners Association, G045590 (4th Dist. Div. 3 August 16, 2012) (Moore, J., author) (unpublished.)
The HOA asserted the homeowner’s claims concerning breach of the settlement agreement had been fully adjudicated and resolved by the first appeal, barring further claims under the doctrine of res judicata. In Appeal No. 1, the Court of Appeal held that the settlement agreement was binding and that disputes thereunder had first to be submitted to a mediator, rather than a court.
However, by the time of Appeal No.4, homeowner and HOA had mediated. Furthermore, homeowner purported to state new wrongs related to the implementation of the settlement agreement going forward from the time of settlement. Therefore, homeowner had complied with the requirement that she mediate first before litigating, and homeowner was not trapped by res judicata, because the wrongs she sought to allege were fresh ones.
“It would appear that Adams [the homeowner] has not always understood this court’s directions to her,” said the court. “However, this time,” the court added, “her understanding was ‘spot on’.”
The judgment of dismissal was reversed. The homeowner will be allowed to amend her complaint. Also, the HOA’s request for additional attorney’s fees was rejected, as the judgment was reversed. The homeowner is batting .250 on appeals with her HOA.
NOTE: On July 1, 2012, we posted on the earlier appeal, in which the Court of Appeal affirmed the fee award in favor of the HOA, resulting from the homeowner’s failure to mediate, which failure resulted in a violation of the settlement agreement.
News/Celebrities: Oscar Winner Loses Legal Battle; Rep. Dennis Kucinich Criticizes Arbitration of Credit Card Disputes
Actor Nicolas Cage Ordered to Pay Attorney’s Fees in Real Estate Lawsuit After Losing Attempt to Compel Arbitration
On March 20, 2012, we posted about Lindemann v. Hume, et al., Case Nos. Nos. B226106, B233273 (2nd Dist. Div. 7 filed February 21, 2012) (Perluss, P.J.), a case in which the Court of Appeal affirmed the trial court’s order denying a motion to compel arbitration. This was a real estate sale/water intrusion/nondisclosure case. A motion to compel the Buyer to arbitrate raised “a possibility of conflicting rulings on common issues of law and fact if the nondisclosure causes of action against [the Seller] were ordered to arbitration and the litigation against [the Developer] proceeded in superior court” – the basis for denying the motion to compel arbitration. Actor Nicolas Cage is the beneficiary of the trust acting for the Seller, so we placed the case in our ‘celebrities” sidebar category.
The City News Service reported on August 17, 2012, that Superior Court Judge Rolf M. Treu found in favor of the trust set up for the Buyer, and awarded $165,510 in attorney’s fees – a loss for the Oscar winner.
Rep. Dennis Kucinich Writes of His Accomplishment in Getting Banks to Abandon Mandatory Arbitration of Credit Card Disputes
On August 17, 2012, Rep. Dennis Kucinich authored a short article in the Huffington Post, entitled “Consumers fight Big Banks for a Day in Court.” He objects to banks’ imposition of mandatory arbitration upon consumers. Rep. Kucinich bemoans that banks “erect massive structures of red tape that most American families don’t have the timore or money to fight.”
“My staff followed up with all the major banks,” writes Kucinich, “and, over the course of several months, nine of those banks abandoned the practice of using arbitration to collect their credit card debts.”
Rep. Kucinich’s comments do not mention CompuCredit Corp. v. Greenwood (2011), the recent U.S. Supreme Court case holding consumers who sign credit card agreements with arbitration clauses are bound to arbitrate. Consumer advocates have criticized the case.
Arbitration/Enforceability/Homeowners: Privity, Shmivity, Says The California Supreme Court – A Provision To Arbitrate Construction Disputes In Recorded CC&Rs Will Be Honored If Not Unreasonable
Majority Opinion Draws Two Concurrences and One Dissent
Arbitration is a matter of consent, right? Because there can be no meaningful consent between a developer that drafts covenants, conditions, and restrictions containing a provision requiring arbitration of construction disputes, and a homeowner’s association (HOA) that doesn’t yet exist, how can the HOA in such circumstances be bound by the arbitration clause? That was the view of the Court of Appeal in San Diego, 4th District Division 1, which found, by a split vote, that the arbitration clause did not constitute an agreement sufficient to waive the HOA’s constitutional right to a jury. But the California Supreme Court, with a five person majority, two concurrences, and one dissent, does not agree. Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, Case No. S186149 (Sup. Ct. August 16, 2012) (Baxter, J., author for the majority).
Justice Baxter explains, "it is no surprise the courts have described recorded declarations as contracts." (emphasis added). The use of that little word "as" discloses a legal fiction, because while CC&Rs may act "as" contracts, they are not identical to contracts. In particular, they may be binding even where contractual privity is lacking, under the common law of equitable servitudes, and under the Davis-Stirling Act.
And so the majority opinion concludes:
"Even when strict privity of contract is lacking, the Davis-Stirling Act ensures that the covenants, conditions, and restrictions of a recorded declaration – which manifest the intent and expectations of the developer and those who take title to property in a community interest development – will be honored and enforced unless proven unreasonable. Here, the expectation of all concerned is that construction disputes involving the developer must be resolved by the expeditious and judicially favored method of binding arbitration."
Justice Werdegar, concurring, points out that "the majority never clearly states whether the grounds for enforcement lie in contract or real property law." She agrees that contract law does not result in enforceability, because there is no meaningful consent between the developer and an HOA that is automatically subject to "whatever the developer has seen fit to insert in the declaration, without any opportunity to reject those terms." But she believes that the arbitration provision may be enforced as an equitable servitude — even if not an equitable servitude at common law, then under the Davis-Sterling Act.
Justice Lui joins the opinion of the Court with the proviso "whether or not the arbitration provision is contractual in the strict sense, it is appropriate in this case to use the substantive unconscionability inquiry from contract law to determine whether the arbitration clause is reasonable and hence lawful."
Finally, Justice Kennard dissents, "because of the association’s lack of consent to the arbitration provision." She would affirm the judgment of the Court of Appeal.
COMMENT: We posted on May 10, 2012 about Verano Condominium Homeowners Association v. La Cima Development, LLC, another 4th District Division 1 case, in which the Court of Appeal held, based on an analysis of contractual privity, that an arbitration provision in CC&Rs was not enforceable between the HOA and the developer, or between the developer and a class of owners on whose behalf the HOA sued. The Supreme Court granted a petition for review on July 25, 2012. Will today’s Supreme Court opinion in Pinnacle Museum Tower Association dispose of issues in Verano Condominium Homeowners Association?