Judge: David S. Cunningham, Case: 23STCV11871, Date: 2024-01-18 Tentative Ruling


Case Number: 23STCV11871    Hearing Date: February 22, 2024    Dept: 11

Stern (23STCV11871)

 

Tentative Ruling Re: Supplemental Briefs Re: Motion to Compel Arbitration

 

Date:                           2/22/24

Time:                          1:45 pm

Moving Party:           Hyundai Motor America (“HMA”) and Hyundai Capital America, Inc. (“HCA”) (collectively “Defendants” or “Petitioners”)

Opposing Party:        Andrew Stern (“Plaintiff”)

Department:              11       

Judge:                        David S. Cunningham III

________________________________________________________________________

 

TENTATIVE RULING

 

Defendants’ motion to compel arbitration is denied without prejudice.

 

BACKGROUND

 

The instant case is a putative class action.

 

On July 26, 2023, Plaintiff filed the operative complaint, which alleges the following:

 

9. On or about December 19, 2019, Plaintiff leased a 2020 Hyundai Tucson, VIN KM8J23A48LU145815 (“Vehicle”) from KEYES, one of HYUNDAI’s authorized dealerships, for a lease term of three (3) years (“Lease Term”).

 

10. Plaintiff, like others similarly situated, entered into a California Motor Vehicle Lease Agreement ("Lease Agreement") with FINANCE and KEYES for the Vehicle, with the option to purchase the Vehicle. A true and correct copy of said Lease Agreement is attached hereto, marked Exhibit “A” and incorporated herein by reference.

 

11. The Lease Agreement was set to expire on December 18, 2022, and Plaintiff was in discussions about purchasing the Vehicle with KEYES's sales manager in July 2022.

 

12. As of July 2022, the Vehicle, driven for almost three years under the Lease Agreement, had around 11,000 miles, and its buy-out price was approximately $17,000.00 ("Residual Value").

 

13. The Vehicle was stolen on August 4, 2022, and while later recovered, it was deemed a "total loss" by Plaintiff's insurance company, Farmers Insurance ("Farmers").

 

14. On or about September 15, 2022, Plaintiff was informed by Farmers that the Vehicle's pay-off figure obtained from HYUNDAI was $24,905.00, exceeding the Residual Value owed by Plaintiff.

 

15. Farmers' letter further indicated that, after deductions, Plaintiff was entitled to $2,613.65 as net insurance claim proceeds.

 

16. FINANCE's assertion of a $24,905.00 pay-off strayed from the agreed-upon Residual Value in the Lease Agreement. Instead, this claim was based on Section 25 of the Lease Agreement, which entitled HYUNDAI to the “reasonable market value” - rather than the contractual “Residual Value” - of the Vehicle once declared a total loss. This interpretation has fundamentally altered the calculations and expected payments within the Lease Agreement.

 

17. Meanwhile, Section 23 of the Lease Agreement grants to the Plaintiff the right to purchase the Vehicle at any time before the lease term ends, provided no default has occurred, but it makes absolutely no reference to Section 25. The default referenced in Section 23 pertains to the requirements sets forth in Section 9, which were not applicable to Plaintiff.

 

18. At the time of signing the Lease Agreement, Plaintiff asked to see the key deal terms including the purchase options and the finance manager at the time pointed Plaintiff to Section 9 and Section 23 of the Lease Agreement which identified Plaintiff's purchase options. Plaintiff read Section 9 and Section 23 and because there were absolutely no references to any language or sections within the Lease Agreement to suggest that this absolute right to purchase the Vehicle is taken away if the Vehicle is stolen or is damaged beyond repair, Plaintiff had no reason to believe that his rights could be affected in other parts of the Lease Agreement.

 

19. Plaintiff challenges the validity of Section 25 of the Lease Agreement, given its direct contradiction with Section 23. Amid the high-pressure nature of vehicle lease negotiations at a dealership, and the influx of additional offerings such as service contracts and maintenance packages, consumers such as the Plaintiff reasonably concentrate their attention on sections that explicitly delineate important deal terms, including but not limited to monthly payments, down payment amount, purchase options, and mileage limits. The expectation or feasibility of consumers scrutinizing every fine print of every page in every document during this process is unrealistic.

 

20. The Plaintiff had no grounds to expect that significant constrains to his purchase rights might be obscurely nestled in non-cross-referenced sections of the Lease Agreement. The conspicuous absence of any cross-reference to Section 25, despite the presence of such references among Sections 4, 9, 22, 23, and 24 within Section 23, accentuates the apparent inconsistency and purported unfairness of Section 25.

 

21. This lack of explicit cross-reference potentially leaves consumers unaware of restrictions on their purchase rights. This omission is purportedly and strategically designed to provide an “illusion of absolute purchase rights” subject to the Residual Value, despite the reality that conditions in Section 25 could drastically alter these rights.

 

22. It is well understood that even a vehicle deemed a total loss by an insurance carrier - typically based on the cost of repairs exceeding a set percentage of the vehicle's value - still retains a salvage value. Significantly, there is no language in Sections 9 or 23 of the Lease Agreement indicating that a consumer's right to purchase is limited to non-salvage vehicles. This is crucial as the Plaintiff, had the right to purchase his salvage vehicle been upheld, could have received over $7,000 from the insurance proceeds. Despite the Residual Value being around $17,000 to purchase the Vehicle during the lease term, FINANCE received $24,905 from Farmers. The Plaintiff alleges that this considerable sum was secured at his expense, asserting that his purchase rights under the lease were abruptly and unfairly nullified under Section 25, with the additional $7,000 being appropriated by FINANCE.

 

23. Moreover, after FINANCE received $24,905.00 for the Vehicle's "pay-off," HYUNDAI billed the Plaintiff an additional $510.30 ("Additional Pay-off Amount").

 

24. Upon inquiry, the Plaintiff was informed that the $510.30 was the discrepancy between the $1,000 deductible and credits owed to Plaintiff by HYUNDAI.

 

25. Nonetheless, on August 31, 2022, HYUNDAI, indicating the Vehicle's pay-off as $24,905.00, promised to "release and transfer all of its right, title and interest in and to the Vehicle" to Farmers Insurance in consideration of said amount.

 

26. Despite receiving the requested $24,905.00, HYUNDAI continues to demand the Additional Payoff Amount from the Plaintiff, threatening legal action and negative credit reporting, which could adversely impact the Plaintiff's credit rating.

 

27. As a result of HYUNDAI's actions and omissions, the Plaintiff has suffered various damages, including financial loss, decreased credit rating, and significant emotional distress, such as stress, aggravation, frustration, loss of trust, loss of serenity, and reduced confidence in engaging with car manufacturers and dealerships.

 

(Second Amended Complaint, ¶¶ 9-27, capitalizing in original.)

 

On January 18, 2024, Defendants’ motion to compel arbitration came on for hearing.  The Court ended up continuing the matter for supplemental briefing.

 

Now, the Court considers the supplemental briefs.

 

DISCUSSION

 

At the last hearing, Plaintiff “assert[ed] that the arbitration provision is a ‘distinct standalone document executed only with the dealership’ and that it does not apply to Defendants since the lease agreement fails to incorporate it.”  (Ruling Re: Motion to Compel Arbitration, p. 6.)

 

In response, “[t]he Court continue[d] the hearing[,]” stating:

 

Although the arbitration provision covers disputes with “employees, agents, successors or assigns,” it does not mention Defendants.  [Citation.]  Although HCA’s manager declares that HCA and Hyundai Lease Titling Trust [(“HLTT”)] constitute assigns, he fails to discuss HMA.  [Citation.]  And although the lease agreement states that “EXHIBIT A IS INCORPORATED BY REFERENCE AS IF SET FORTH HEREIN[,]” it does not define what Exhibit A is, and there is no Exhibit A attached to it.  [Citation.]  Moreover, the arbitration provision fails to identify itself as Exhibit A.  [Citation.]  Are Defendants assigns within the meaning of the provision?  Is the provision Exhibit A?  Does the lease agreement incorporate it?  These questions need to be answered before the Court can find that an agreement to arbitrate exists, so the parties should submit supplemental briefs.

 

(Ibid.)

 

Exhibit A and Incorporation

 

The incorporation issue is undisputed.  The parties agree that Exhibit A is not the arbitration provision and that the lease does not incorporate the arbitration provision by reference.  (See Defendants’ Supp. Brief, pp. 1, 3; see also Plaintiff’s Supp. Brief, pp. 1-4.)

 

Defendants and Assignment

 

Defendants claim the motion to compel does not depend on incorporation.  They assert that the motion is “made on entirely distinct and separate grounds.”  (Defendants’ Supp. Brief, p. 3.)  As the Court intimated last time, the arbitration provision’s express terms permit enforcement by the dealership’s assigns.  Defendants contend they have a right to enforce the arbitration provision as nonsignatories because:

 

* the dealership assigned the lease to HLTT;

 

* HCA is HLTT’s attorney-in-fact regarding the lease; and

 

* the claims against HMA are inextricably intertwined with the claims against HCA.  (See id. at pp. 2, 4-6.)

 

Plaintiff disagrees.  She contends the motion should be denied because the arbitration provision is a separate agreement, and Defendants fail to show that the dealership assigned the arbitration provision in addition to the lease.  (See Plaintiff’s Supp. Brief, pp. 2-4.)

 

Nonsignatories are entitled to compel arbitration in some circumstances.  For example, “[a]n assignee of a contract containing an arbitration clause has standing to compel other parties to the contract to arbitrate claims against the assignee.”  (Knight, et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group December 2023 Update) ¶ 5:266.7, emphasis added.)  Also, for example, “[u]nder the equitable estoppel doctrine, a party to an arbitration agreement may be required to arbitrate with a nonparty.”  (Id. at ¶ 5:266.15.)  “A nonsignatory may enforce an arbitration clause on grounds of equitable estoppel only when the claims against the nonsignatory are ‘dependent upon, or founded in and inextricably intertwined with,’ the obligations imposed by the agreement containing the arbitration clause.”  (Ibid., emphasis in original.)  But “[w]hen the nonsignatory’s claims are not founded on and so intertwined with the contracting parties’ agreement containing an arbitration provision, a nonparty cannot invoke the arbitration provision to compel a party to the contract to arbitrate with the nonparty.”  (Id. at ¶ 5:266.19, emphasis added.)

 

Given these rules, the Court agrees with Plaintiff.  Defendants cite the declaration of Nayeli Saldivar, HCA’s manager.  Paragraph 14 discusses the assignment:

 

Subsequent to the execution of the Lease and Arbitration Provision, Keyes Hyundai assigned the Lease to HLTT, which holds title as the legal owner of the lessor’s rights under the Lease of the Vehicle. 

 

(Saldivar Decl., ¶ 14, emphasis added.)  Significantly, the plain language only affirms assignment of the lease.  Again, the parties agree that the arbitration provision is not an exhibit to the lease and is not incorporated by reference.  In effect, they agree that the lease does not contain an arbitration clause and that the arbitration provision is an independent agreement.  Thus, Defendants cannot enforce the arbitration provision – and their motion must be denied – because:

 

* assigning the lease, alone, was inadequate to assign the arbitration provision;

 

* Defendants do not qualify as assigns under the arbitration provision; and

 

* Plaintiff’s claims against Defendants, which concern the lease, are not founded on or intertwined with the arbitration provision.

 

Defendants’ reliance on Metalclad Corp. v. Ventana Environmental Organizational Partnership (2003) 109 Cal.App.4th 1705 does not change the result.  Unlike here, where the arbitration provision is separate from the lease and was not assigned, the claims in Metalclad involved breach of and interference with a contract that contained an arbitration clause.  (See Metalclad, supra, 109 Cal.App.4th at 1710, 1717-1718.)

 

The Court is denying the motion without prejudice.  Defendants are free to file a renewed motion to compel if they find evidence showing that the dealership assigned the arbitration provision to HLTT or HCA.