Arbitration, Discovery, Constitutional Issues: Claimant’s Avoiding Discovery In Arbitration Allowed Arbitrator To Draw Adverse Inferences
"… we compliment the arbitrator on providing a thorough and well-reasoned award and orders."
As you have surmised from our lede, it did not go well for the plaintiff and appellant JP-Richardson, LLC, because the trial court's judgment granting the petition to confirm the arbitration award against JP-Richardson was affirmed. JP-Richardson, LLC v. Pacific Oak SOR Richardson Portfolio JV, et al., G059479 (4/2 6/29/21) (O'Leary, Moore, Fybel).
The facts are unusual. JP-Richardson entered into a joint venture agreement with Pacific Oak to develop real estate in Texas. The JV agreement included an arbitration provision, as well as a provision authorizing the removal of JP-Richardson as a managing member for a "Just Cause Event." JP-Richardson's manager and principal executive was one Mark Jordan.
The "Just Cause Event" arose because Jordan developed "a personal and financial relationship" with Laura Maczka, the town mayor of Richardson, Texas, where Jordan was seeking permits, entitlements, and zoning changes. A federal indictment basically alleged corrupt conduct by Maczka and Jordan. Jordan apparently was less than transparent with the JV partner Pacific Oak that he was the target of a federal criminal investigation. When Pacific Oak learned about the investigation in 2017, JP-Richardson was removed as managing member.
JP-Richardson and Jordan initiated arbitration proceedings, seeking declaratory relief and claiming breach of contract, inviting counterclaims, of course, from Pacific Oak. The arbitrator ruled against JP-Richardson, after drawing adverse evidentiary inferences because Jordan invoked his Fifth Amendment right against self-incrimination, and did not satisfy discovery demands. The arbitrator noted, "Here, we have a unique case wherein it is the [c]laimant who has asserted his Fifth Amendment privilege against testifying whereas in most of the case law it is the defendant making the claim."
Jordan's right to remain silent and avoid discovery did not help him, because the arbitration was civil, not criminal, and furthermore, the arbitrator offered an opportunity to provide a privilege log and redact documents — an opportunity that was not taken. Jordan argued that the arbitrator should never have relied upon his felony conviction, which was vacated after a jury member conversed with a court employee. But the arbitrator also relied on adverse inferences, and testimony presented at the trial, not simply on the conviction that was overturned.
The arbitrator awarded over $1 million in fees, and $88,000 in costs.
COMMENT: In an article about Laura Maczka, Wikipedia states that developer Mark Jordan is Maczka's current husband. One can only hope that all the tsuris was worth it for the sake of love.
Arbitration, Incorporation By Reference: Incorporation By Reference Fails To Successfully Incorporate Arbitration Agreement
The Arbitration Provision Was Buried Somewhere.
Grave digger at work. Woodbine, Iowa. 1940. Photographer: John Vachon. Library of Congress.
When AECOM, Inc. was sued by a subcontractor, Remedial Construction Services, LP (RECON), it unsuccessfully tried to compel arbitration, relying on a Prime Agreement between AECOM and Shell Oil, which Prime Agreement did contain an arbitration agreement and which Prime Agreement had been incorporated by reference into the agreement between AECOM and RECON. The incorporated Prime Agreement was 151 pages long. The trial court denied AECOM's motion to compel arbitration and to stay litigation, and the Court of Appeal affirmed. Remedial Construction Services, LP v. AECOM, et al., B303797 (2/6 6/15/21) (Perren, Gilbert, Tangeman).
COMMENT: AECOM missed drafting solutions that might have solved the problem for it. First, as the apparent master of the agreement with its subcontractor, AECOM could have included an effective arbitration provision in the contract between it and RECON. Second, if it was going to rely on incorporation by reference of the Prime Agreement, it could have included language in a conspicuous font pointing directly to the arbitration provision in the 151-page Prime Agreement, and asked for written acknowledgment that that language was incorporated, read, understood, and agreed to by the subcontractor.
Despite the legislative predilection to unburden the courts and send cases to arbitration, quite a few motions to compel arbitration continue to fail for lack of an effective agreement to arbitrate.
Arbitration, Appealability, Jurisdiction, Existence of Agreement: District Court Should Have Summarily Ruled On Existence Of Agreement Before Denying Motion To Arbitrate
There Is A Method To This . . .
Before I get to the case, I should mention that I'm playing "catch up." I've fallen somewhat behind on posting, between a busy mediation calendar and some travel to visit a newly born child in the family. But it's the weekend, so let's see how much we can get done.
Bill Hansen v. LMB Mortgage Services, Inc., et al., No. 20-15272 (9th Cir. 6/11/21) (Ikuta, Nguyen, Eaton) presented a jurisdictional question. Plaintiff Hansen opposed LMB Mortgage Services, Inc and CPL Assets, LLC's (collectively LMB) motion to compel arbitration. The district court issued a nonfinal order denying the motion and decided to schedule a trial to determine whether there was a binding agreement to arbitrate. LMB appealed.
LMB's appeal presented a threshold jurisdictional issue. Ordinarily interim orders are not appealable. However, as Judge Ikuta explains, under 9 USC §16, an order denying a petition to compel arbitration under §4 of the FAA is appealable, whether it is an interim or final order. So the Ninth Circuit could consider the appeal of the interim order.
What should the district court have done? It should have summarily tried the issue of whether an agreement to arbitrate existed, before deciding the motion to arbitrate. So the Ninth Circuit vacated the district court's denial of the motion to compel and remanded for the district court to "proceed summarily to the trial" on the question of whether plaintiff is required to arbitrate.
Arbitration, Automobiles: Insurance Code Makes Underinsured Motorist Claim Arbitrable
Insurance Code Section 11580.2 Was Dispositive.
California Insurance Code section 11580.2, subdivision (f) provides that disputes between insureds and insurers over entitlement to recover damages caused by an uninsured or under insured motorist [UIM], or the amount of damages, must be resolved by agreement or arbitration. When Brett McIsaac sued Foremost Insurance over an UIM, he argued that the matter was exempt from arbitration, because he was suing for breach of contract and for bad faith, and a bad faith action is not a dispute over coverage or the amount of the UIM claim. The trial court sided with McIsaac; the Court of Appeal did not. Brett McIsaac v. Foremost Insurance Company Grand Rapids, Michigan, A160389 (1/1 filed 4/30, cert. for pub. 5/19/21) (Margulies, Humes, Banke). Justice Margulies explained that, while McIsaac had sued for bad faith, the insurance company also made a showing that the parties disputed the amount of damages due to plaintiff on his UIM. Thus, the insurance company was entitled to arbitrate.
COMMENT: The Court of Appeal agreed that the bad faith claim did not need to be arbitrated. But the action for bad faith could be stayed while other claims were arbitrated.
Arbitration, Authentication, Standard Of Review, Employment: First District Div. 5 Agrees That Employer Failed To Authenticate Electronic Signature On Arbitration Agreement
Authentication Of Electronic Signatures Continues To Trip Up Employers.
The trial court denied the employer's motion to compel arbitration, because the employee Bannister "presented evidence that she never saw the [arbitration] agreement during the onboarding process and did not affix her electronic signature to it," and the Court of Appeal affirmed. Maureen Bannister v. Marinidence Opco, LLC, et al., A159815 (1/5 5/21/21) (Burns, Simons, Rodriguez).
When an appeal from a denial of a motion to arbitrate turns on undisputed facts, the Court of Appeal reviews the trial court's ruling for substantial evidence. If the facts are undisputed, then the review of the trial court's finding can be a question of law. Here, the court agreed that the outcome is the same regardless of the standard applied. The trial court concluded that, given conflicting evidence, the employer failed to prove by "a preponderance of the evidence" the existence of an arbitration agreement. And the Court of Appeal defers to the trial court's determination of the credibility of witnesses and weight of the evidence.
COMMENT: Civil Code section 1633.9, subdivision (a), governs the authentication of electronic signatures. It provides: "(a) An electronic record or electronic signature is attributable to a person if it was the act of the person. The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable."
Arbitration, Nonsignatories: First Dist. Div. 5 Holds Plaintiff Using Third Party To Exchange Cryptocurrency Is Not Bound By Arbitration Agreement Between Third Party And Cryptocurrency Exchange Platform
Just One More Thing To Worry About With Cryptocurrency.
There are a number of ways in which a nonsignatory to an arbitration agreement can nevertheless find itself bound to arbitrate. Affirming the trial court, the Court of Appeal shoots down each of those ways in Pillar Project AG v. Payward Ventures, Inc., A160731 (1/5 5/24/21) (Simons, Needham, Burns). In this case, the facts are interesting, because the facts take us into the brave new world of cryptocurrency.
Plaintiff Pillar Project AG hired a third party Epiphyte to exchange Plaintiff's cryptocurrency for Euros. Epiphyte relied on an exchange platform of Payward Ventures, Inc., the Defendant, to convert Plaintiff's cryptocurrency to Euros. By the end of the transaction, 4 million Euros belonging to Plaintiff were stolen from Epiphyte's account.
Defendant Payward allegedly represented that it was the most secure platform for converting cryptocurrency. Plaintiff sued Payward for negligence and misrepresentation, which the Court notes, are claims that are likely independent of the contract between Payward and Epiphyte. Payward unsuccessfully tried to compel Plaintiff to arbitrate, relying on the arbitration agreement between Payward and Epiphyte. But Plaintiff was a nonsignatory to the arbitration agreement.
The Court sets up and shoots down the various theories used to compel a nonsignatory to arbitrate: agency, third party beneficiary, and equitable estoppel. The most interesting analysis applies to the equitable estoppel claim that, because Plaintiff benefited from the agreement with the arbitration clause between Payward and Epiphyte, Plaintiff should therefore be bound to arbitrate. As the maxim of provides, one who accepts the benefits of a transaction must accept the burdens that go with it. However, here, the Court explains, the benefits that Plaintiff obtains from its contract with Epiphyte, with whom it is not litigating, are direct, whereas the benefits it derives from the contract between Epiphyte and Payward are indirect. The Court is not willing to extend the theory of equitable estoppel to indirect benefits, for that seems a slippery slope — how far down the chain of commerce do indirect benefits extend?