Judge Lynette Gridiron Winston, Case Number: 22PSCV01143, Date: 2024-01-05 Tentative Ruling

Judge: Lynette Gridiron Winston, Case: 22PSCV01143, Date: 2024-01-05 Tentative Ruling

The Court GRANTS the motion to compel binding arbitration as to Defendant D. Longo, LLC, and DENIES as to Defendant Toyota Motor Sales, U.S.A., Inc. The Court STAYS this action pending arbitration.

D. Longo, LLC is ordered to give notice of the Court’s ruling within five calendar days of this order.

This is a lemon law case. On September 30, 2022, plaintiff Eva Lopez (Plaintiff) filed this action against defendants Toyota Motor Sales, U.S.A., Inc. (Toyota), D. Longo, LLC (Longo) (collectively, Defendants), and Does 1 through 100, alleging causes of action for violations of the Consumer Legal Remedies Act, breach of implied warranty of merchantability, and conversion.

On February 16, 2023, Defendants filed a motion to compel binding arbitration. On May 19, 2023, Plaintiff opposed the motion. On May 30, 2023, Defendants replied.

Parties may be compelled to arbitrate a dispute upon the court finding that: (1) there was a valid agreement to arbitrate between the parties; and (2) said agreement covers the controversy or controversies in the parties’ dispute.¿(Omar v. Ralphs Grocery Co. (2004)¿118 Cal.App.4th 955, 961.) A party moving to compel arbitration has the burden of establishing the existence of a valid agreement to arbitrate and the party opposing the petition has the burden of proving, by a preponderance of the evidence, any fact necessary to its defense. (Banner Entertainment, Inc. v. Superior Court¿(1998) 62 Cal.App.4th 348, 356-357.) A party seeking to compel arbitration meets their initial burden of establishing the existence of a valid arbitration agreement by attaching a copy to the motion or petition to compel arbitration. (Espejo v. Southern California Permanente Medical Group (2016) 246 Cal.App.4th 1047, 1060.)

“California has a strong public policy in favor of arbitration and any doubts regarding the arbitrability of a dispute are resolved in favor of arbitration.” (Coast Plaza Doctors Hospital v. Blue Cross of California (2000) 83 Cal.App.4th 677, 686.) “This strong policy has resulted in the general rule that arbitration should be upheld unless it can be said with assurance that an arbitration clause is not susceptible to an interpretation covering the asserted dispute.” (Ibid., internal quotations omitted.) This is in accord with the liberal federal policy favoring arbitration agreements under the Federal Arbitration Act (FAA), which governs all agreements to arbitrate in contracts involving interstate commerce. (9 U.S.C. § 2, et seq.; Higgins v. Superior Court (2006) 140 Cal.App.4th 1238, 1247.)

“[T]he FAA's procedural provisions (9 U.S.C. §§ 3, 4, 10, 11) do not apply unless the contract contains a choice-of-law clause expressly incorporating them. [Citation.] [T]he question is not whether the parties adopted the CAA’s procedural provisions: The state's procedural statutes (§§ 1281.2, 1290.2) apply by default because Congress intended the comparable FAA sections (9 U.S.C. §§ 3, 4, 10, 11) to apply in federal court. The question, therefore, is whether the parties expressly incorporated the FAA’s procedural provisions into their agreements.” (Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 345, internal quotation marks omitted.)

“[P]revious cases have held that when an arbitration agreement provides that its ‘enforcement’ shall be governed by California law, the California Arbitration Act (CAA) governs a party's motion to compel arbitration. It follows that when an agreement provides that its ‘enforcement’ shall be governed by the FAA, the FAA governs a party's motion to compel arbitration.” (Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 346.)

The Court finds that the applicable law governing this motion to compel arbitration is the CAA because nothing in the language of the Arbitration Agreement (defined below) states that the FAA governs its enforcement. (See Beatty Decl., Ex. A; Victrola 89, LLC, supra, 46 Cal.App.5th at p. 346.)

“[T]he petitioner bears the burden of proving its existence by a preponderance of the evidence.” (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413.) “If the party opposing the petition raises a defense to enforcement—either fraud in the execution voiding the agreement, or a statutory defense of waiver or revocation [citation]—that party bears the burden of producing evidence of, and proving by a preponderance of the evidence, any fact necessary to the defense.” (Ibid.) The moving party meets their initial burden of proving the existence of a valid arbitration agreement by attaching a copy to the motion. (Espejo, supra, 246 Cal.App.4th at p. 1060.)

Defendants have attached a copy of a Retail Installment Sale Contract (Sale Contract) for the subject vehicle to their moving papers. (Beatty Decl., Ex. A.) That agreement also contains an arbitration clause (Arbitration Agreement). (Beatty Decl., Ex. A.) Thus, it is undisputed that Plaintiff signed an agreement for the sale of the vehicle, which explicitly included an arbitration clause and an agreement to arbitrate. Accordingly, Defendants have met their initial burden. The burden now shifts to Plaintiff to challenge the validity of the Arbitration Agreement.

Plaintiff does not dispute the existence of the Sales Contract or the Arbitration Agreement. Instead, Plaintiff contends that Defendants are not entitled to move to compel arbitration of this dispute per Ford Motor Warranty Cases (Ochoa) (2023) 89 Cal.App.5th 1324. The Court agrees that Toyota may not move to compel arbitration, but disagrees that Longo may not move to compel arbitration.

The Court notes that this action is proceeding against both Toyota the manufacturer and Longo the dealer, whereas Ochoa involved only the manufacturer. Here, Longo is a party to the Sales Contract and Arbitration Agreement with Plaintiff. The Arbitration Agreement broadly encompasses disputes between Plaintiff and Longo. (See Beatty Decl., Ex. A, italics added [“Any claim or dispute, whether in contract, tort, statute or otherwise… between you and us or our employees, agents, successors or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle…”])[1] Plaintiff does not dispute that Longo is a party to the Sales Contract and Arbitration Agreement or otherwise provide much argument regarding Longo being a party to them. Rather, Plaintiff’s opposition focuses on the issue of equitable estoppel and third parties, which are inapposite to Longo.

Toyota concedes that it is not a party to the Arbitration Agreement, but argues instead that it is entitled to enforce the Arbitration Agreement under the doctrine of equitable estoppel. Toyota relies on Felisilda v. FCA US LLC (2020) 53 Cal.App.5th 486, arguing that Plaintiff’s claims arise out of and are intertwined with the underlying contract obligations of the Sales Contract. (Id. at p. 495; Boucher v. Alliance Title Co., Inc. (2005) 127 Cal. App. 4th 262, 271, [“[U]nder both federal and California decisional authority, a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are ‘intimately founded in and intertwined’ with the underlying contract obligations.”]; Goldman v. KPMG LLP (2009) 173 Cal.App.4th 209, 217-218.)

In Felisilda, the First District of the Court of Appeal found that purchasers of a vehicle were estopped from refusing to arbitrate Song-Beverly Act claims against the vehicle manufacturer, based on an agreement between the purchaser and the vehicle dealer. (See Felisilda, supra, 53 Cal.App.5th at pp. 496-499.) The relevant portions of the subject arbitration agreement in Felisilda are identical to those in the Lease Agreement:

1. EITHER YOU OR WE MAY CHOOSE TO HAVE ANY DISPUTE BETWEEN US DECIDED BY ARBITRATION AND NOT IN COURT OR BY JURY TRIAL. . . .

Any claim or dispute, whether in contract, tort, statute or otherwise (including the interpretation and scope of this Arbitration Provision, and the arbitrability of the claim or dispute), between you and us or our employees, agents, successors or assigns, which arises out of or relates to ... condition of this vehicle, this contract or any resulting transaction or relationship (including any such relationship with third parties who do not sign this contract) shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action. . .

The Court of Appeal in Felisilda found that because the plaintiffs “expressly agreed to arbitrate claims arising out of the condition of the vehicle – even against third party nonsignatories to the sales contract – they are estopped from refusing to arbitrate their claim against [the manufacturer].” (Felisilda, supra, 53 Cal.App.5th at p. 497.) As such, the Court of Appeal found the plaintiffs’ claims in that action arose out of the condition of the vehicle and were covered by the arbitration provision in that contract. The Court of Appeal found that the plaintiffs’ claims were “founded on or intimately connected” with the contract in that action because they arose out of the condition of the vehicle. (Id. at p. 496.)

However, earlier this year, the Second District of the Court of Appeal rejected application of Felisilda in a similar motion to compel arbitration by a car manufacturer in a lemon law case. (Ford Motor Warranty Cases (Ochoa) (2023) 89 Cal. App. 4th 1324, 306 Cal.Rptr.3d 611 (“Ochoa”). Additionally, on June 26, 2023, the Second District of the Court of Appeal decided the case Montemayor v. Ford Motor Co. (2023) 92 Cal.App.5th 958, in which the Court of Appeal also rejected the holding in Felisilda that equitable estoppel applies to enable a non-signatory manufacturer to enforce an arbitration provision in a sales contract like the contract at issue in this case. The Court of Appeal further rejected Felisilda and followed Ochoa in other recently issued opinions, such as Kielar v. Superior Court (2023) 94 Cal.App.5th 614 and Jaclyn Yeh v. Superior Court of Contra Costa County (2023) 94 Cal.App.5th 264.

The Second District in Ochoa found that the arbitration language was insufficient to support the manufacturer’s equitable estoppel argument. In relevant part, Ochoa expressly diverged from Felisilda's analysis that "the sales contract was the source" of the warranties at issue. (Felisilda, supra, 53 Cal.App.5th at 496.) Instead, Ochoa concluded that “manufacturer vehicle warranties that accompany the sale of motor vehicles without regard to the terms of the sale contract between the purchaser and the dealer are independent of the sale contract.” (Ochoa, supra, at 619.) Thus, the Court found equitable estoppel to be inapplicable because the plaintiffs' claims "in no way rel[ied] on the sale contracts." (Id. at 621.) The Court of Appeal held that this language in the arbitration clause referring to arbitration of claims “against third party nonsignatories” cannot mandate arbitration of the warranty claims. Rather, such language agreed to arbitrate claims against third parties whose service, etc., are financed under the sales contract. (Id.)

The Second District also found that the warranty claims were not founded in the sales contracts. The warranty claims arose out of statutory obligations to reimburse consumers or replace their vehicles when unable to repair in accordance with the warranty or related claims. They did not arise out of any express contractual language in the sales contracts, which themselves do not include any warranties, or assurance regarding the vehicle’s performance, or any promise of repairs or remedies if contracts arise. “To the contrary, the sale contracts disclaim any warranty on the part of the dealers, while acknowledging no effect on ‘any warranties covering the vehicle that the vehicle manufacturer may provide.” (Ochoa, supra, 89 Cal.App.5th at p. 1335.) In short, “the substantive terms of the sale contracts relate to sale and financing and nothing more.” (Ibid.)

Thus, there is a split of authority on this point of law. "[W]here there is more than one appellate court decision, and such appellate decisions are in conflict . . . the court exercising inferior jurisdiction can and must make a choice between the conflicting decisions." (Auto Equity Sales, Inc. v. Superior Ct. of Santa Clara Cnty. (1962) 57 Cal. 2d 450, 456.) The Court finds Ochoa and the cases following it to be the better reasoned cases which more precisely examine the contract terms and long-standing warranty law distinguishing between manufacture warranties and retailer sale contracts. (See Ochoa, supra, at 621-622.) Indeed, the Court finds the same rationale and reasoning in Ochoa applies here. The substantive terms of the Sales Contract relate to the sale and financing of the subject vehicle, do not set forth the terms of the warranties between Toyota and Plaintiff, and directly disclaims any warranties by the seller, i.e., Longo. (See Beatty Decl., Ex. A, ¶ 12.) Toyota’s obligations in this context arise under operation of law, not contract. (See Ochoa, supra, 89 Cal.App.5th at p. 1334). Thus, the warranties were not inextricably intertwined with or founded in the Sales Contract for purposes of equitable estoppel.

For Toyota’s contention of enforcing the arbitration agreement as a third-party beneficiary to be true, “the parties to the contract must have intended the third party to benefit.” (Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 524.) To do so, Toyota must show that “(1)…the third party would in fact benefit from the contract, but also (2)…a motivating purpose of the contracting parties was to provide a benefit to the third party, and (3)…permitting a third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties. All three elements must be satisfied to permit the third party action to go forward.” (Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 830.)

The Court of Appeal in Ochoa also rejected the auto manufacturer’s third-party beneficiary argument. Analyzing the Ninth Circuit Court of Appeal's recent decision in Ngo v. BMW of North America, LLC (2022) 23 F.4th 942, the Second District agreed that the sales contracts reflect no intention to benefit a vehicle manufacturer under the Goonewardene factor – nothing in the sales contracts or their arbitration provision offers any direct “benefit” to the manufacturer, there was no indication that a benefit to the manufacturer was a motivating purpose of the contract, and allowing the manufacturer to enforce the arbitration would be inconsistent with the reasonable expectations of the contracting parties. (Ochoa, supra, 89 Cal.App.5th at pp. 1337-1338.)

Applying the same reasoning here, there is insufficient evidence to show a motivating purpose of the contracting parties was to provide a benefit to Toyota. Civil Code section 1559 requires that a contract benefiting a third party must be made expressly for the benefit of a third person before that third party can enforce it. (Civ. Code § 1559.) The Court finds no language in the Sales Contract or Arbitration Agreement indicating an express intent to benefit Toyota, nor does the Court find that allowing Toyota to compel arbitration would be consistent with the reasonable expectations of the contracting parties.

Here, the arbitration provision expressly states that only two parties—Plaintiff Lopez and the Seller-Creditor Longo—may compel arbitration. The contract defines "you" as Plaintiff Lopez and "we" as the Seller-Creditor Longo. The provision specifies that "[e]ither you or we may choose to have any dispute between us decided by arbitration and not in court or by jury trial." (emphasis added). The clause also states that "[a]ny claim or dispute . . . between you and us or our employees, agents, successors or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship (including any such relationship with third parties who do not sign this contract) shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action." (emphasis added). (Beatty Decl., Ex. A.) Though the language allows for arbitration of certain claims concerning third parties, it still gives only Plaintiff and Longo the power to compel arbitration. Nothing in the clause or, for that matter, in the purchase agreement reflects any intention to benefit Toyota by allowing it to take advantage of the arbitration provision.

Based on the foregoing, the Court rejects Toyota’s third-party beneficiary argument as well, and DENIES the motion to compel arbitration as to Toyota.

Given the Court’s decision herein to grant the motion to compel arbitration as to Longo and deny as to Toyota, the Court exercises its discretion to stay this action as to Toyota pending Plaintiff’s and Longo’s completion of arbitration. (Code Civ. Proc., § 1281.2; Id. § 1281.4.)

The Court GRANTS the motion to compel binding arbitration as to Defendant D. Longo, LLC, and DENIES as to Defendant Toyota Motor Sales, U.S.A., Inc. The Court STAYS this action pending arbitration.

D. Longo, LLC is ordered to give notice of the Court’s ruling within five calendar days of this order.

[1] The scope and interpretation of the Arbitration Agreement appear to have been delegated to the arbitrator. (Beatty Decl., Ex. A [“Any claim or dispute… (including the interpretation and scope of this Arbitration Provision, and the arbitrability of the claim or dispute)…”]); B.D. v. Blizzard Entertainment, Inc. (2022) 76 Cal.App.5th 931, 957 [delegation of arbitrability to arbitrator must be stated “clearly and unmistakably”.]) Thus, whether the Arbitration Agreement governs Plaintiff’s claims against Longo will be left to the arbitrator to determine.