Public Policy, Vacatur: First District Div. 3 Holds Late Penalty On Loan Default Resulted In Forfeiture Violating Public Policy And Justifying Vacatur Of Arb Award
Violating Public Policy Can Be Ground For Vacating Award.
Liquidated damages are presumed invalid in a consumer contract and presumed valid in a non-consumer contract. The Honchariws borrowed $5.6M secured by real property in a "non-consumer" contract — so a liquidated damages provision was presumptively valid when they defaulted on the loan, and an arbitrator so found. They petitioned to vacate the award, the trial court denied their petition to vacate, and the Honchariws appealed. Honchariw v. FJM Private Mortgage Fund, LLC et al, A163756 (1/3 9/29/22) (Petrou, Fujisaki, Rodriguez).
One ground for vacating an arbitration award is: "The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted." Cal. Code Civ. Proc. § 1286.2(a)(4). "Arbitrators may exceed their powers by issuing an award that violates a party’s unwaivable statutory rights or that contravenes an explicit legislative expression of public policy." The Court of Appeal found a violation of legislative policy to be the case here.
Here, the Late Fee imposed by the lender, which included "a 9.99% interest rate assessed against the entire unpaid principal balance of the Loan at any time a single payment is missed," violated the state policy against unreasonable liquidated damages provisions, which is the basis for Cal. Civ. Code, § 1671. The Court of Appeal was unable to find a single case "in which a liquidated damages provision was upheld when a borrower missed a single installment, and then was penalized pursuant to that provision, even in part, by a late payment fee assessed upon the entire outstanding principal balance, much of it still to be owed."
REVERSED.
Miscellaneous: Attorney Fees: A Potential Malpractice Minefield
We've Authored An Article About Attorney Fees And The Risk Of Malpractice Exposure In The October 2022 Issue Of Orange County Lawyer.
"Attorney Fees: A Potential Malpractice Minefield," authored by Marc Alexander and appearing in the October 2022 issue of Orange County Lawyer, discusses the "unhappy case" of Shahrokh Mireskandari v. Edwards Wildman Palmer, 77 Cal.App.5th 247 (2022), and its implications for legal malpractice when the risks of attorney fee shifting are (allegedly) not carefully analyzed and disclosed to the client.
Proving legal malpractice typically follows "the familiar case-within-a case method for establishing causation in litigation malpractice cases." The plaintiff-client needs to establish not only the negligence of the attorney, but also that the client would have won the underlying case but for attorney negligence. Mireskandari, however, is not a typical case, for Mireskandari's malpractice claim did not depend on prevailing in the underlying action. Instead, his malpractice claim depended on being able to prove that the "outcome" would have been better had he received different legal advice, never filed a lawsuit, and never been exposed to the risk of anti-SLAPP attorney fees.
The "case-within-a case" method of establishing a malpractice claim is simply an example of a more general principal, namely, that but for attorney negligence, the outcome of a case would have been better for the client. This is not exactly a bright line.
Perhaps the most important lesson is that a careful attorney will analyze attorney fee issues early in the litigation process, and inform the client of those risks. While this may be easy in a simple case where a contract contains a "prevailing party attorney fees clause," there are numerous situations in which the risk of fee shifting is less obvious. The article describes some attorney fee situations that create a potential malpractice minefield.
Arbitration, Award, Finality, Correction, Vacatur: 4th Dist Div 4 Holds Arbitrator’s Amendment Of Final Award Did Not Exceed Her Powers
Arbitrator Acted Within Nonstatutory Power To Amend Award and Also Exercised Equitable Powers.
Starr v. Mayhew, G060277 (4/2 9/1/22, cert for pub. 9/28/22) (Moore, Goethals, Moteike) involved a dispute among members of an LLC as to their respective ownership interests and as to whether Mayhew, who managed the LLC, had a right to be fully indemnified for legal fees and damages in an arbitration he lost to Starr and another LLC member. The "final award" did not fully clear up the issues, and the arbitrator issued an amended award, at the behest of Mayhew, that did clarify the issues, but not to Mayhew's satisfaction. The trial judge confirmed the award and Mayhew appealed.
Ordinarily an award can only be corrected for limited statutory reasons, such as a miscalculation of figures, misdescription of a person, thing, or property, or imperfect form that does not affect substance. See Cal. Code Civ. Proc., §§ 1284 (correction) and 1286.6 (vacatur). But did you know that, in addition to the limited statutory grounds for correcting an award or vacating it, a final award can be amended based on nonstatutory law? Well, it's a possibility.
And nonstatutory amendment of the award worked here. In an amended award, the arbitrator clarified that damages were to be paid by Mayhew, and that he was entitled to limited indemnity, but not full indemnity. The Court of Appeal explained that the arbitrator had acted upon equitable grounds. And she had not exceeded her powers, because the issues had been presented to the arbitrator for resolution. In any case, she had reached legal and factual conclusions, and if she was mistaken, that would not be a basis for overturning an arbitration award.
COMMENT: The case is a reminder that an arbitration is an equitable proceeding. Thus, here an arbitrator was able to limit indemnity, though the indemnification clause seemed to provide for full indemnity, because she thought that given the conduct of Mayhew, limiting but not eliminating indemnity would be fair. The case is also a reminder that a seemingly final award can sometimes be amended on nonstatutory grounds. But beware: there is a split of authority as to whether the party seeking amendment has 30 days from the time the final award is served, or up to the time of confirmation of the award to obtain an amendment of the award. See note 3 of the Starr opinion.
Arbitration, Employment, FAA Preemption: Employers Must Strictly Comply With Requirement To Pay Arbitration Fees By Statutory Deadline
Substantial Compliance With CCP § 1281.97 Just Won't Cut It.
In July 2022, the California Court of Appeal ruled in Sunny Gallo v. Wood Ranch that Cal. Code of Civ. Proc. § 1281.97 is not preempted by the Federal Arbitration Act. The court reasoned that 1281.97, which requires the drafting party — usually the employer — to pay arbitration fees and costs within 30 days after the due date, does not thwart arbitration, but rather encourages promptly proceeding with arbitration. See our post dated 8/1/22 on Gallo. In Rosa Espinoza v. Superior Court, B314914 (2/1 9/27/22) (Bendix, Rothschild, Chaney), the court, agreeing with Gallo, held there was no federal preemption of California's statutory rule.
However, the court went one step further in Espinoza. The court held that substantial compliance, unintentional nonpayment, and absence of prejudice did not excuse the employer from making timely payment. Thus, it is not enough to pay fees and costs. Rather, fees and costs must be paid within the statutory deadline, or else the employer will waive the right to enforce the arbitration agreement.
COMMENT. Here's one consequence that the employer may not have thought about. If failure to pay within the statutory deadline constitutes a material breach of the agreement, the employer might also get stuck paying the employee's attorney fees.
Arbitration, PAGA: 4th Dist. Div. 2 Holds That Losing Non-PAGA Claims In Arbitration Does Not Preclude Litigation Of PAGA Claims
Modified Opinion Addresses Viking River Cruises v. Moriana.
In a partially published and modified opinion, the Court of Appeal holds that an employee's loss of Labor Code violation claims in arbitration does not preclude her from bringing a PAGA claim that the trial court had stayed. The basis for this ruling is that the plaintiff was acting in different capacities, bringing Labor Code claims on her own behalf in arbitration, and acting in a different and representative capacity in the PAGA action. The PAGA action, which seeks civil penalties as a remedy, "is fundamentally a law enforcement action designed to protect the public and not to benefit private parties." Eleni Gavriiloglou v. Prime Healthcare Management, Inc., No. E076832 (4/2 9/20/22) (Ramirez, Slough, Fields).
COMMENT: The original opinion did not address Viking River Cruises v. Moriana, the subject of our 6/19/22 post. The modified opinion seems to suggest that in Viking River, SCOTUS didn't really understand California law: "It . . . held that the Federal Arbitration Act preempts a state-law rule that precludes the arbitration of an individual PAGA claim separately from a representative PAGA claim. …. In Prime’s view, Viking River 'explicitly recognizes an individual claim under PAGA . . . .' This is mere wordplay. What the Supreme Court called, as shorthand, an 'individual PAGA claim' is not actually a PAGA claim at all. It would exist even if PAGA had never been enacted. It is what we are calling, more accurately, an individual Labor Code claim."
We note one difference between Gavriiloglou case and Viking River. In Gavriiloglou, the issue in the published part of the opinion is whether the arbitrator's award denying non-PAGA claims precluded the PAGA claims, and the court held that it did not. In Viking River, the issue was different. SCOTUS held that the employee could be compelled to arbitrate PAGA individual claims (which Justice Ramirez now says are really better described as Labor Code claims).
Look forward to ongoing confusion about standing to bring representative PAGA claims in California in cases where there are mandatory arbitration provisions.
Arbitration, PAGA, Collective Bargaining: A PAGA Lawsuit Is Barred By A Collective Bargaining Agreement In The Construction Industry
A Statutory Route In California Avoids A Private Attorney General Act Of 2004 (PAGA) Lawsuit In The Construction Industry: Labor Code § 2699.6.
The issue presented in Jerome Oswald v. Murray Plumbing and Heating Corporation, B312736 (2/2 9/2/22) (Lui, Chavez, Hoffstadt), is whether an arbitration clause in a construction industry collective bargaining agreement bars a PAGA lawsuit. While the recent SCOTUS opinion in Viking River Cruises, Inc. v. Moriana (see our 6.19/22 post) limits the ability of employees to avoid arbitrating PAGA claims wherever federal preemption under the Federal Arbitration Act is involved, California has created its own statutory exception to bringing a PAGA lawsuit: Labor Code § 2699.6.
Section 2699.6 generally provides that the right to bring a civil action under PAGA shall not apply to an employee in the construction industry with respect to work performed under a valid collective bargaining agreement providing for wage and hour issues and conditions of work. The states legislative intention behind this legislation is to commit PAGA claims in the building and construction trades to the grievance and arbitration machinery in the building trades to CBAs that provide expressly for key coverage of issues. This was intended to allay "significant legal abuse" by limiting "class action type lawsuits over minor employment issues."
In Oswald, the Court of Appeal concluded that the CBA met the requirements of § 2699.6. There, it reversed the trial court's order that had denied a motion to compel arbitration under the CBA.
COMMENT: Perhaps application of the Supreme Court's Viking Cruises decision would have led to the same result. But the Court of Appeal did not discuss Viking Cruises, because California law provided an answer that would not have been incompatible with Viking Cruises.