In the News: Stockton and Mediation – Near the End of the Rope?
Stockton Positions Itself to Be Able to End Mediation and File for Chapter 9 Protection From Its Creditors
We blogged on May 30, April 8, and March 11, 2012, about the efforts of California cities in financial distress to comply with AB 506 by mediating as a precondition to filing for bankruptcy.
Stockton is Exhibit 1. The city has been battered by an alignment of unfortunate events: the mortgage foreclosure crisis, the loss of tax revenues, and ambitious projects leaving it financially overextended. The city has the second-highest foreclosure rate in the nation. If Stockton does declare bankruptcy, it will become the most populous city in the country to have done so.
On June 6, 2012, the City Council authorized the City Manager to file for Ch. 9 protection from creditors. The vote immediately triggered a debt downgrade by Fitch Ratings.
A flurry of articles appeared on June 6, 2012, signaling the mediation process is approaching an end: (1) Diana Marcum’s article in the Los Angeles Times, “Stockton moves another step closer to bankruptcy”; (2) Reuters, “Fitch downgrades $252 mln of Stockton, Calif., Debt”, (3) Associated Press, “Stockton officials ready bankruptcy plan,” and (4) Scott Smith, Stockton Record, “Council gives Deis Chap. 9 authority.”
Mediation continues to June 25, 2012, with the city manager authorized to file for Ch. 9 protection the next day.
Blawg Bonus: photograph taken by Dorothea Lange in Stockton in December 1938 during the Depression:
Farm woman, Stockton, California. Tenant Purchase applicant.
Mediation/Fees: Rejecting Request to Mediate Results in Reversal of Fees Award
Plaintiff’s Filing Of Lawsuit Without Requesting Mediation Did Not Negate Duty of Defendant to Participate In Mediation After Plaintiff Did Request Mediation
The Cullens bought a vacation home in 2002, and sued the sellers, the Corwins, in 2009, for failing to disclose the defective condition of the roof. The Cullens lost their case based on the Corwins’ statute of limitations defense, and also got hit with a $16,500 attorney’s fees award in favor of the Corwins. The Cullens appealed. Cullen v. Corwin, Case No. C067861 (3rd Dist. June 7, 2012) (Butz, J., author) (certified for partial publication).
The result was bad news – and good news – for the Cullens. The bad news – not certified for publication — was that the Cullens’ complaint was indeed barred by the statute of limitations.
The good news for the Cullens – certified for publication – was that the fee award was reversed, based on the fee/mediation provision in the standard form purchase agreement:
“If . . . any party commences an action without first attempting to resolve the matter through mediation, OR refuses to mediate after [the making of] a request . . . , then that party shall not be entitled to recover attorney [ ] fees . . . . “ (Uppercase type & italics added in the opinion.”.
The Cullens apparently filed suit without first requesting mediation. That would have precluded them from recovering attorney’s fees—had they prevailed. But the facts here were that the Cullens lost, and that it was therefore the Corwins who requested attorney’s fees. Unfortunately, as it turned out for the Corwins, the Cullens did request mediation in 2010, after commencing suit, but the Corwins refused to mediate.
Because the plain language of the standard form purchase agreement also provides that if any party “refuses to mediate after [the making of] a request,” then that party doesn’t recover fees, the fee award in favor of the winning defendants was reversed by the Court of Appeal.
The Court of Appeal noted that the clause in the form purchase agreement was first considered in Frei v. Davey, 124 Cal.App.4th 1506 (2004) (Fybel, J., author). Though the facts of Frei are somewhat distinguishable from those in Cullen v. Corwin, the following point in Frei continues to be pertinent and should be heeded: “The new provision barring recovery of [legal] fees by a prevailing party who refuses a request for mediation means what it says and will be enforced.”
Arbitration: Third Party Cannot Rely On Res Judicata Effect Of Arbitration Unless That Is Intent Of Parties To The Arbitration
Court of Appeal Borrows Reasoning From Collateral Estoppel Effect Of Arbitration On Third Party
The Wus (Sellers) sold an apartment building to the Sobel Family Trust (Buyer). Buyer sued Seller for failure to disclose material defects in the 75 year old building, and obtained an award in arbitration that Sellers paid. Sellers followed up by suing the Sellers’ broker (Lee) and the Buyer’s broker (Sherman). The trial court sustained demurrers in favor of all defendants, and granted summary judgment on remaining causes of action for fraud and breach of contract. Sellers appealed. Wu v. Lee, Case No. B227087 (2nd Dist. Div. 8 June 4, 2012) (Grimes, J., author) (unpublished).
The Court of Appeal explained that the trial court had erroneously relied on the res judicata effect of the arbitration between Sellers and Buyer when it sustained demurrers in favor of the brokers. Relying on Vandenberg v. Superior Court, 21 Cal.4th 815, 833-834 (1999), which holds that a private arbitration award, even if judicially confirmed, can have no collateral estoppel effect in favor of third persons unless the arbitral parties agreed that such a consequence should apply, the Court of Appeal applied the same principle to res judicata (without distinguishing between res judicata and collateral estoppel).
The trial court error was harmless in the case of the Sherman defendants, because in their case, the Court of Appeal affirmed the summary judgment in their favor. But the trial court’s error in sustaining the demurrer was corrected in the case of the Lee defendants. There, the error made a difference to the outcome, because material disputes as to the Lee defendants precluded summary judgment.
Arbitration/Federal Preemption/Class Actions/Employment: Second District, Division 2 Broadly Applies Federal Preemption in Labor Code Violation Case to Uphold Arbitration
Vindication of Statutory Rights Loophole to Arbitration Is Closed
In an April 25, 2012 post, we suggested, based on Kinecta Alternative Financial Solutions, Inc. v. Superior Court of Los Angeles County, (2012) (partially published) (District 2, Div. 3), that “the rule in Gentry [42 Cal.4th 443 (2007)] allowing for invalidation of class arbitration waiver where nonwaivable statutory rights are at issue manages to maintain [a] toehold.” No longer, according to Division Two of the Second District. In Iskanian v. CLS Transportation Los Angeles, LLC, Case No. B235138 (2nd Dist. Div. 2 June 4, 2012) (Boren, P.J., author) (certified for publication) a labor code violations case, the Court of Appeal interprets AT&T Mobility v. Concepcion broadly to hold that the Federal Arbitration Act “conclusively invalidates the Gentry test” for finding that a statutory right is unwaivable and cannot be arbitrated.
The Court of Appeal agrees that “Concepcion thoroughly rejected the concept that class arbitration procedures should be imposed on a party who never agreed to them.” It rejects the “public policy rationale” and the vindication of statutory rights rationale of Gentry as “irrelevant in the wake of Concepcion.”
The Court also declines to follow D.R. Horton, 357 NLRB No. 184 (2012), a case that held that a mandatory, employer-imposed agreement requiring all employment-related disputes to be resolved by arbitration, violated the National Labor Relations Act. Because the FAA is not a statute the NLRB is charged with interpreting, the Court of Appeal concluded that it was under no obligation to defer to the NLRB’s analysis.
The Court of Appeal also disagreed with the majority opinion in Brown v. Ralphs Grocery Co., 197 Cal.App.4th 489 (2011). Brown held that the Concepcion holding does not apply to representative claims under the Private Attorney General Act of 2004 (“PAGA”), allowing a private citizen to pursue civil penalties on behalf of the State of California Labor and Workforce Development Agency.
“We recognize that the PAGA serves to benefit the public and that private attorney general laws may be severely undercut by application of the FAA,” said the Court of Appeal, adding: “But we believe that the United States Supreme Court has spoken on the issue, and we are required to follow its binding authority. . . . Following Concepcion, the public policy reasons underpinning the PAGA do not allow a court to disregard a binding arbitration agreement.”
This is an active area of the law. Kinecta, Brown, and Iskanian create a sharp split in authority. As fellow-blogger Kimberly Kralowec says about Iskanian in her post today in the UCL Practitioner, “We should all watch this case to see if the California Supreme Court takes it up.”
Arbitration: Department of Corrections
“Anonymous Attorney” is Not Anonymous
In a March 18, 2012 post, we spoke of “the sheer ingenuity of the anonymous attorney who drafted the arbitration clause at issue” in AT&T Mobility v. Concepcion. After poking around the web a bit, we learned that the “anonymous attorney” is actually Archis Parasharami, a partner at Mayer Brown.
Arbitration: Midwife of AT&T Mobility v. Concepcion Very Fond of Case He Delivered
In a May 28, 2012 opinion piece in the National Law Journal, Andrew J. Pincus saw the precedent he had made, and, behold, it was very good. (Cf. Gen. 1:31 King James Version). Mr. Pincus is the attorney at Mayer Brown heralded for arguing and winning Concepcion before the Supreme Court in 2011. He laments that opponents of arbitration, motivated by “reflexive hostility”, are not capitulating. Instead, they are mounting attacks against arbitration in Congress and federal agencies.
Mr. Pincus expresses the argument in favor of arbitration in the strongest declarative terms: “Our courts are expensive, overburdened and virtually impossible for nonlawyers to navigate. For these claims, it is arbitration or nothing.”