Judge Lynette Gridiron Winston, Case Number: 23PSCV02742, Date: 2024-07-15 Tentative Ruling

Judge: Lynette Gridiron Winston, Case: 23PSCV02742, Date: 2024-07-15 Tentative Ruling

Defendant Toyota Motor Sales, U.S.A., Inc.’s Motion to Compel Binding Arbitration

The Court DENIES Defendant Toyota Motor Sales, U.S.A., Inc.’s motion to compel binding arbitration.

Plaintiff 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 7, 2023, plaintiffs Angelica Moreno, Rolando Martinez, and Ramon Moreno (collectively, Plaintiffs) filed this action against defendant Toyota Motor Sales U.S.A., Inc. (Defendant) and Does 1 through 10, alleging one cause of action for Violation of the Song-Beverly Act – Breach of Express Warranty.

On April 11, 2024, Defendant moved to compel arbitration. On July 1, 2024, Plaintiff opposed the motion. On July 8, 2024, Defendant 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 quotation marks omitted.)

The Court GRANTS Defendant’s request for judicial notice. (Evid. Code § 452, subd. (d).) However, the Court takes judicial notice of the foregoing documents only as to “the existence, content and authenticity of public records and other specified documents”; it does not take judicial notice of the truth of the factual matters asserted in those documents. (Dominguez v. Bonta (2022) 87 Cal. App. 5th 389, 400.)

“’[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, quoting Valencia v. Smyth (2010) 185 Cal.App.4th 153, 177, italics in original.)

The arbitration provision in the Agreement (defined below) only provides that the arbitration itself is governed by the FAA; it contains no language indicating the FAA governs the enforcement of the Agreement. (Ameripour Decl., Ex. 2, p. 5, ¶ 7, italics added.) Accordingly, the CAA applies by default and governs this motion to compel arbitration. (Victrola 89, LLC v. Jaman Properties 8 LLC, supra, 46 Cal.App.5th at p. 345.)

Defendant seeks to compel arbitration per the Retail Installment Sale Contract (Agreement) between Plaintiffs Rolando Martinez and Angelica Moreno on the one hand and Longo Toyota on the other. The arbitration clause provides, in part:

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 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.

The moving party on a motion to compel arbitration may meet its initial burden by setting forth the agreement’s provisions in the motion or attaching the agreement to the motion. (Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165.) Defendant has therefore met its initial burden. The burden now shifts to Plaintiffs to challenge the validity of the Agreement. (See Id.)

Plaintiffs did not challenge the validity of the Agreement in their opposition. (See generally, Opp.) Defendant has therefore established the existence of a valid arbitration agreement. However, Defendant concedes it is not a party to the Agreement, but instead argues it has standing to sue either as a third-party beneficiary or under the doctrine of equitable estoppel.

Defendant argues it is entitled to enforce the arbitration provision of the Agreement under the doctrine of equitable estoppel. Defendant relies on Felisilda v. FCA US LLC (2020) 53 Cal.App.5th 486 (Felisilda), and non-binding federal authority, arguing that Plaintiff’s claims arise out of and are intertwined with the underlying contract obligations of the Agreement. (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 arbitration agreement in Felisilda are identical to those in the 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, the Second District of the Court of Appeal in Ochoa rejected application of Felisilda in a similar motion to compel arbitration by a car manufacturer in a lemon law case. (Ochoa, supra, 89 Cal.App.5th at pp. 1335-1336.) 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 (Montemayor), 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 (Kielar) and Jaclyn Yeh v. Superior Court of Contra Costa County (2023) 95 Cal.App.5th 264 (Yeh).

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 p. 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 p. 1334.) Thus, the Court found equitable estoppel to be inapplicable because the plaintiffs' claims "in no way rel[ied] on the sale contracts." (Id., at p. 1336.) 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 notes that Ochoa is currently pending review before the California Supreme Court, but the Court is permitted to rely on Ochoa while it is pending review. (Cal. Rules of Court, rules 8.1115, subd. (e)(3); Ford Motor Warranty Cases (2023) 532 P.3d 270.)[1]

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 manufacturer 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 Agreement relate to the sale and financing of the subject vehicle, do not set forth the terms of the warranties between Defendant and Plaintiffs, and directly disclaims any warranties by the dealer. (See Ameripour Decl., Ex. 2, ¶ 4.) Defendant’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 Agreement for purposes of equitable estoppel.

Based on the foregoing, the Court rejects Defendant’s equitable estoppel theory and declines to compel arbitration on that basis.

Civil Code section 1559 provides: “A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.” The California Supreme Court in Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 830 stated that the following elements must be present for a third-party to move forward with a claim: “(1) whether the third party would in fact benefit from the contract, but also (2) whether a motivating purpose of the contracting parties was to provide a benefit to the third party, and (3) whether 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.”

However, “ ‘the “mere fact that a contract results in benefits to a third party does not render that party a ‘third party beneficiary.’ ” ’ [Citation.] Nor does knowledge that the third party may benefit from the contract suffice.” (Ochoa, supra, 89 Cal.App.5th at p. 1336.)

Defendant argues that it is a third-party beneficiary because the arbitration provision of the Agreement contemplates types of disputes such as the one that gives rise to the current case. Even if true, Defendant’s argument fails to address the other requirements to enforce the arbitration provision as a third-party beneficiary.

Moreover, the Court of Appeal in Ochoa rejected the auto manufacturer’s third-party beneficiary argument, which is similar to Defendant’s here. 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 per Goonewardene – 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 Defendant. 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 arbitration provision of the Agreement indicating an express intent to benefit Defendant, nor does the Court find that allowing Defendant to compel arbitration would be consistent with the reasonable expectations of the contracting parties.

Here, the arbitration provision expressly states that only two parties—Plaintiffs Rolando Martinez and Angelica Moreno on the one hand and the seller Longo Toyota —may compel arbitration. The Agreement defines "you" as Plaintiff and "we" as the seller Longo Toyota. (Ameripour Decl., Ex. 2, pp. 1, 7.) 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." (Id., Ex. 2, p. 7, italics 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." (Id., p. 7, italics added.) Though the language allows for arbitration of certain claims concerning third parties, it still gives only Plaintiffs Rolando Martinez and Angelica Moreno on the one hand and Longo Toyota on the other the power to compel arbitration. Nothing in the clause or, for that matter, in the Agreement reflects any intention to benefit Defendant by allowing it to take advantage of the arbitration provision.

Based on the foregoing, the Court rejects Defendant’s third-party beneficiary argument, and declines to compel arbitration on that basis.

The Court DENIES Defendant Toyota Motor Sales, U.S.A., Inc.’s motion to compel binding arbitration.

Plaintiff is ordered to give notice of the Court’s ruling within five calendar days of this order.

[1] Kielar, Montemayor, and Yeh are also pending review before the California Supreme Court. (536 P.3d 1214 (Kielar); 535 P.3d 1 (Montemayor); 537 P.3d 1151 (Yeh).)