Arbitration/Fees/Construction of Agreement: Broadly Worded Fee Provision, Including More Than Arbitration, Results in Reversal of Trial Court Order That Had Denied Fees to Prevailing Party
“Dispute Resolution” Encompassed More Than Arbitration
Dispute resolution provisions in a contract often provide for attorney’s fees, and when they do, distinctions between such terms as "dispute resolution", "arbitration", "mediation", "lawsuit", and "legal proceeding" may become very significant. Such was the case in Toro Enterprises, Inc. v. Pavement Recycling Systems, Inc., Case No. B234627 (2nd Dist. Div. 6 filed April 9, modified May 1, 2012) (Gilbert, P.J., author) (unpublished).
Cross-Complainant and Respondent Toro Enterprises, Inc., a general contractor, sued Pavement Recycling Systems, Inc., for indemnity, in connection with a third-party tort claim brought by a person injured in an auto accident near a roadway construction project for the City of Oxnard. Toro Enterprises, Inc. lost its indemnity claim against its subcontractor, who then sought to recover attorney’s fees. The trial court denied attorney’s fees, based on its construction of the fee provision in the subcontract.
One section of the contract governed third-party claims, and another provision related to arbitrated payment claims. Toro argued that its indemnity claim related to a third party claim, and that it was not an arbitrated payment dispute – and therefore, that the trial court was correct to deny fees.
Wrong, said the Court of Appeal. Section 13 of the subcontract covered arbitrated payment disputes, but its fee provision was broader, authorizing fees to the prevailing party, "[i]n any dispute resolution between the parties." Based on its scrutiny of subcontract language, the Court of Appeal concluded that "dispute resolution" covered more than arbitration. Furthermore, the suit for contractual indemnity, though it was triggered by a third party claim, was a dispute "between the parties", i.e., between the contractor and the subcontractor.
The result was reversal of the trial court’s order denying fees.
Arbitration/Standard of Review: Trial Court Properly Vacated Arbitraiton Award, In Light of Unfair Procedure and Lack of Actual Notice
Fundamental Fairness Issue Involving Lack of Notice Resulted in De Novo Standard of Review
Plaintiff and Respondent Roland Hansalik signed a promissory note with Wells Fargo Advisors, LLC, with a provision calling for arbitration before the Financial Industry Regulatory Authority (FINRA). Then Mr. Hansalik moved to Switzerland. Wells Fargo initiated arbitration through FINRA, and obtained an award by default, because Mr. Hansalik never appeared. When enforcement procedures commenced in Switzerland against Mr. Hansalik, he immediately filed a petition in California to vacate the arbitration award, claiming he never received notice. Repeated notices had been sent to the wrong address. The trial court granted his petition, and a timely appeal followed. Hansalik v. Wells Fargo Advisors, LLC, Case No. B232151 (2nd Dist. Div. 2 April 25, 2012) (Ashmann-Gerst, J., author) (unpublished).
The interesting wrinkle here is that FINRA rules provide in part: "The panel has the authority to interpret and determine the applicability of all provisions under the [FINRA rules]. Such interpretations are final and binding upon the parties." Wells Fargo contended that the arbitrator had the power to interpret the notice rule to determine if service was proper, and that it did so. End of story. Not quite.
The Court of Appeal had a very different view of the matter, for it characterized Wells Fargo’s position thusly:
"What Wells Fargo is truly advocating is this: If the arbitrator has the contractual authority to determine the sufficiency of notice to a party, then the arbitrator’s finding of adequate notice cannot be overturned even if the arbitration was unfair and a party was denied notice and an opportunity to be heard." (italics in the original).
The Court of Appeal viewed this as a question of fairness and lack of notice, presenting a mixed question of fact and law. Such an issue is reviewed under a "de novo" standard. The Court of Appeal concluded: "Based on the unique facts of this case, FINRA’s procedure was unfair." The trial court’s order was affirmed.
Arbitration/Employment/Enforceability: Bad Facts For Employer Result in Unenforceable Arbitration Agreement
Employer Fired Employee Hours After He Signed Arbitration Agreement – How Much More Do You Need to Know?
Plaintiff Ruzanno instituted arbitration proceedings against defendants Spectrum, Larson, Blake, and National University. The salient fact in this case is that Ruzanno signed the arbitration agreement hours before the employer fired him, purportedly without his knowing the employer believed his performance was substandard.
Above: The coming of the cat. Udo J. Keppler. 1911. Library of Congress.
When Ruzzano learned during the course of arbitration that Spectrum had been secretly planning "adverse employment action against him" even before his signing the arbitration agreement, he withdrew from the arbitration, and filed a lawsuit. Defendants responded by filing a petition to compel arbitration. Ruzzano opposed, and the trial court denied the petition to compel arbitration, finding that "[t]he preponderance of the evidence demonstrates no valid arbitration agreement exists because it was procured by deceit on the same day [Ruzzano] was placed on administrative leave." Ruzzano v. Spectrum Pacific Learning Company, LLC, Case No. D059377 (4th Dist. Div. 1 April 24, 2012) (not for publication)(authored by Nares, J.).
The Court of Appeal agreed with the trial court. The legal principles here are straightforward. An arbitration clause may be rescinded for fraud. Fraud includes intentional concealment or nondisclosure of material facts which induce an innocent party to enter into a contract. Civ. Code §§ 1571-1574; Odorizzi v. Bloomfield School Dist., 246 Cal.App.2d 123, 128 (1966). The proponent of arbitration has the burden of showing that the arbitration a valid arbitration clause – a burden that was not met here.
A couple loose ends needed to be tied up. Ruzanno was suing upon the employment contract that he was seeking to rescind. But the court brushed that aside, explaining that he was not required to rescind the employment agreement as a whole – severance could apply to invalid or unenforceable clauses.
Hadn’t Ruzzano waived the right to file a lawsuit, by commencing arbitration? Nope. "Where a party first discovers the basis to oppose arbitration after proceedings commence, it may withdraw from the proceedings and commence litigation." (quoting Knight et al., Cal Practice Guide: Alternative Dispute Resolution (The Rutter Group 2010), 5:77, p. 5-59.)
Result: Affirmance.
Moral: It’s better for the employer to enter into an arbitration agreement at the time of hiring, rather than hours before firing.
Arbitration/Class Action Waiver: Party Cannot Be Compelled To Arbitrate Class Arbitration Where Arbitration Provision Neither Authorizes Nor Prohibits Class Action
But Rule in Gentry Allowing For Invalidation of Class Arbitration Waiver Where Nonwaivable Statutory Rights Are At Issue Manages to Maintain Toehold
Once again, the Court of Appeal ventures into the thicket of class action arbitration waivers, threading its way around ATT&T Mobility LLC v. Concepcion, __ U.S. __ , 131 S.Ct. 1740 (2011), Discover Bank v. Superior Court, 36 Cal.4th 148 (2005) (overruled by Concepcion), and Gentry v. Superior Court, 42 Cal.4th 443 (2007)(Gentry). Kinecta Alternative Financial Solutions, Inc. v. Superior Court of Los Angeles County, B235491 and B236084 (2nd Dist. Div. 3 April 25, 2012) (certified for partial publication) (authored by Kitching, J.)
Malone filed a class action for violation of California wage and hour laws against Kinecta. But Malone had signed an agreement containing an arbitration provision providing: "I further agree and acknowledge that [Kinecta] and I will utilize binding arbitration to resolve all disputes that may arise out of the employment context." Based on the arbitration provision that neither authorized nor prohibited class actions, the employer, Kinecta, moved to dismiss class allegations from Malone’s complaint. The trial court ordered arbitration, but refused to dismiss the class allegations. Kinecta then petitioned the Court of Appeal to issue a writ of mandate directing the trial court to vacate its order denying Kinecta’s motion to dismiss class allegations from the complaint.
First, the Court reviewed the status of Discover Bank. In that case, the California Supreme Court stated that when consumer contracts of adhesion contain a class action waiver, when the disputes involve small amounts of damages, when the party with unequal bargaining power schemes to cheat large numbers of consumers out of small sums of money, the class action waivers are unconscionable and should not be enforced. However, Discover Bank has been expressly overruled by Concepcion – the Federal Arbitration Act does not allow arbitration agreements to be enforced differently than other agreements.
Second, the Court reviewed the rule in Gentry. Gentry requires analysis of four factors to determine whether a class action arbitration waiver is unconscionable in circumstances where an employee seeks damages for the employer’s alleged violations of wage and hour statutes: (1) the modest size of potential individual recovery; (2) potential retaliation against class members; (3) absent class members may not be informed about their rights; and, (4) existence of other obstacles to vindication of class member’s rights through individual arbitration. Based upon an analysis of those factors, a trial court may invalidate the class arbitration waiver in California.
Third, the Court points out that Discover Bank and Gentry established different tests of whether to enforce a class arbitration waiver. Briefly, Discover Bank looked at a consumer situation, and a very carefully drafted arbitration provision, whereas Gentry concerned a situation in which nonwaivable employee statutory rights were involved – and the tests for invalidating a class action waiver were different in the two cases. Discover Bank has been overruled by Concepcion. However, at least for now, because Gentry, "has not been expressly abrogated or overruled, Gentry appears to remain the binding law in California." The Court added in dictum: "A question exists about whether Gentry survived the overruling of Discover Bank in Concepcion, but it is not one we need to decide."
Fourth, Malone failed to provide evidence as to any of the four Gentry factors, there was no "factual basis that would require a declaration that the arbitration agreement was unenforceable."
Fifth, because the arbitration agreement was not unenforceable under Gentry, and because the parties’ arbitration agreement did not authorize class actions, the employer could not be compelled to arbitrate. Stolt-Nielsen v. Animalfeeds International Corp., 559 U.S. __, 130 S.Ct. 1758 (2010). (holding that under FAA, party may not be compelled to submit to class arbitration unless there is a contractual basis for concluding that party agreed to do so.).
The Court granted a writ of mandate directing the Superior Court to vacate its order denying the employer’s motion to dismiss class action allegations, and also granted a writ directing the Superior Court to vacate its order granting the employee’s discovery motion relating to class action discovery.
Arbitration/Fees/Appealability: Order Denying Petition to Compel Arbitration Is Not (Necessarily) An Appealable Order
Some Orders Denying Petitions to Compel Arbitration Are More Equal than Others
Defendant and Appellant Zani Mansouri spent over $200,000 in a patio improvements dispute with her HOA, Plaintiff and Respondent Fleur Du Lac Estates Association. Naturally, she hoped to recover her fees and costs after the trial court earlier granted the HOA’s motion to compel arbitration, and the Court of Appeal, in a prior writ proceeding, reversed, agreeing with Mansouri that the HOA had failed to establish that it had requested arbitration and that she had refused.
Mansouri sought fees and costs on the theory that she was the prevailing party in a proceeding to compel arbitration. But the trial court concluded her fee motion and costs memoranda were untimely. She moved for reconsideration, or relief due to excusable neglect. The trial court denied that motion too in a May 2011 order. All that law and commotion led to a writ petition, denied on the ground that Mansouri had a remedy by appeal, followed by her present appeal from the May 2011 order. Fleur du Lac Estates Association v. Mansouri, C0968693 (3d Dist. April 23, 2012) (certified for publication) (authored by Justice Robie).
In the opinion now certified for publication, the Court of Appeal holds that the May 11 order appealed from was non-appealable. Why?
First, an order denying reconsideration is typically non-appealable – to hold otherwise would permit, in effect, two appeals from every appealable decision.
Second, the appealability of an order under the California Arbitration Act is governed by Cal. Code of Civ. Proc. section 1294 – and Mansouri was unable to successfully shoehorn her appeal into an appealable situation under section 1294. Mansouri argued that under Otay River Constructors v. San Diego Expressway, 158 Cal.App.4th 796 (2008), an order denying a petition to compel arbitration is a “judgment” in a petition to compel proceeding, and that a subsequent order denying fees is an appealable post-judgment order, expressly appealable under section 1294 (e).
The Court of Appeal drew a distinction between an order in an arbitration proceeding resolving the only issue before the court in that proceeding – essentially a judgment and therefore appealable – and an order in an arbitration proceeding that did not foreclose the HOA here from “making a proper demand for arbitration under the CC&R’s on remand . . . .” And that is what the HOA did here: after its motion to compel arbitration was nixed by the Court of Appeal earlier because the HOA failed to demand arbitration and failed to establish a refusal to arbitrate, the HOA simply retraced its steps, and made the demand required by section 1281.2 as a predicate for bringing a petition to compel. The second time around, Mansouri didn’t oppose arbitration – the HOA had dotted its i’s and crossed its t’s.
There are several lessons to be drawn from this case. First, before seeking to compel arbitration under section 1281.2, establish that you asked for arbitration, and that the opposing party refused. Second, appealing from denial of a motion to reconsider may be futile – you may be appealing from a non-appealable order. Third, not all orders denying a petition to compel arbitration are created equal: some resolve all issues in a case, some do not. Fourth, an order denying a motion to compel arbitration that resolves all issues in a case may be a final and appealable order. Fifth, a special order after final judgment is appealable in a proceeding under the California Arbitration Act – but only if you first have a final judgment.
Is the door shut to Mansouri’s recovery of fees? No: “because it appears that Mansouri still has an adequate remedy by appeal from the final judgment in this matter by which to seek review of the trial court’s denial of her motion for attorney fees and the granting of the Association’s motion to strike her costs memoranda. . . “ In fact, that was the basis for denying her alternative request to treat her premature appeal as a writ petition. It ain’t over. . . .
Above: Kirsten Flagstad
Arbitration: Parties Are Entitled To Prejudgment Interest During Time The Trial Court Vacated Arbitration Award In Their Favor And Reinstatement Of The Award
Issue of First Impression in California
Tenzera, Inc. v. Osterman, B228189 (2nd Dist. Div. 3 April 19, 2012) presents “what appears to be an issue of first impression in California.” That issue is whether prevailing parties in an arbitration “are entitled to prejudgment interest between the time the trial court vacated the arbitration award in their favor and our reinstatement of the award in the previous appeal in this case.”
Before an earlier appeal (Tenzera I), the trial court had vacated the arbitration award in favor of the Ostermans as to all parties, even though the company, Tenzera, Inc., did not seek to vacate the award. In Tenzera I, the Court of Appeal held the trial court should have modified the award to reflect that only the company was liable. On remand, the trial court did not award interest that would have accrued during the pendency of the appeal in Tenzera I, reasoning that during this appeal, the company was “prevented by law” from paying the arbitration award.
Not so said the Court of Appeal this time around. A prevailing party in arbitration is entitled to prejudgment interest as of the date of the final award to entry of judgment. Thoughout the appeal in Tenzera I, “damages were certain and there was no dispute between the parties concerning the basis of computing those damages.” Nor was the company “prevented by law” from paying – that exception is very narrowly construed, and did not apply under the facts here.
The opinion was authored by Justice Aldrich. It is certified for partial publication – the unpublished part pertains to attorney’s fees, and the published party pertains to the prejudgment interest “issue of first impression”.