Judge: Martha K. Gooding, Case: 22-01281667, Date: 2023-05-15 Tentative Ruling

1) Motion to Compel Arbitration

 

2) Case Management Conference

 

Before the Court is a Motion by Defendants Scott Browning and Browning Capital Management, LLC (collectively, “Defendants” or “Browning Defendants”) for an order compelling Plaintiff Rosalynn Crowell (“Plaintiff”) to arbitrate her claims against them in this action.  The Motion is GRANTED, and this action will be stayed pending completion of the arbitration.

 

The Court sets an ADR Review Hearing for December 4, 2023, at 9:00 a.m. in Department C31.

 

Defendant’s request that the court appoint an arbitrator is, at minimum, premature.  There has been no showing that the AAA arbitration rules – which the parties’ agreement provides will govern the arbitration – do not include a mechanism for the selection of an arbitrator or that, despite following the rules, the parties have been unable to select an arbitrator, so as to require the Court to do so.

 

Arbitration

 

Section 1281.2 of the Code of Civil Procedure (“CCP”) provides, inter alia:

 

“On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that:

 

(a)  The right to compel arbitration has been waived by the petitioner; or

 

(b)  Grounds exist for the rescission of the agreement.

(c)  A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. …”

 

(Emphasis added.) 

 

“‘[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable.  Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence.  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 (see § 1281.2, subds. (a), (b))--that party bears the burden of producing evidence of, and proving by a preponderance of the evidence, any fact necessary to the defense.’”  Hotels Nevada v. L.A. Pacific Center, Inc. (2006) 144 Cal.App.4th 754, 761, quoting Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.App.4th 394, 413. 

 

Although there is a policy in favor of arbitration and doubts are to be resolved in favor of arbitration, there is no public policy in favor of compelling persons to accept arbitration of controversies they have not agreed to arbitrate.  Id. at 739; Mitri v. Arnel Management Co. (2007) 157 Cal.App.4th at 1170; Greenspan v. LADT, LLC. (2010) 185 Cal.App.4th 1413, 1437.  As a general rule, a party cannot be compelled to arbitrate a dispute that he or she has not agreed to resolve by arbitration.  Buckner v. Tamarin (2002) 98 Cal.App.4th 140, 142; Benasra v. Marciano (2001) 92 Cal.App.4th 987, 990 (“The strong public policy in favor of arbitration does not extend to those who are not parties to an arbitration agreement, and a party cannot be compelled to arbitrate a dispute that he has not agreed to resolve by arbitration”). 

 

As a result, the first step in determining whether to grant a motion to compel contractual arbitration is to determine whether there was, in fact, an agreement to arbitrate the pending dispute. 

 

          Have Defendants Shown the Existence of an Agreement? Yes.

 

There is an agreement to arbitrate the claims Plaintiffs asserts here against Defendants.  It is undisputed that Plaintiff signed the Investment Advisory Services Agreement (the “Agreement”), which contains the arbitration provision.  The arbitration provision is broad, encompassing all controversies regarding services provided under the Agreement.  Plaintiff’s allegations are expressly about Defendants’ provision of services, or lack thereof, as manager of her assets under the agreement.

 

Plaintiff does dispute, however, whether Defendant Scott Browning individually is a party to the Agreement and can enforce the arbitration provision contained in it.

 

Plaintiff also asserts as defenses to enforcement that it is unconscionable and that enforcement would create the risk of inconsistent rulings. 

 

May Scott Browning, though a Nonsignatory, Enforce the Arbitration Agreement? Yes.

 

The general rule is that “one must be a party to an arbitration agreement to be bound by it or invoke it.”  DMS Servs., Inc. v. Superior Court (2012) 205 Cal.App.4th 1346, 1352 (internal quotes and citation omitted).  Courts have recognized limited exceptions to this general rule: “there are six theories by which a nonsignatory may be bound to arbitrate: (a) incorporation by reference; (b) assumption; (c) agency; (d) veil-piercing or alter ego; (e) estoppel; and (f) third-party beneficiary.”  Young Seok Suh v. Superior Court (2010) 181 Cal.App.4th 1504, 1513. 

In other words, nonsignatories to a contract may enforce a contractual arbitration provision where there is a sufficient agency or identity between the signatories and nonsignatory.  See Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 715 (“the claims against the nonsignatory were dependent upon, or inextricably bound up with, the obligations imposed by the contract … Under the doctrine of equitable estoppel, if a plaintiff relies on the terms of an agreement to assert his or her claims against a nonsignatory defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement”); Segal v. Silberstein (2007) 156 Cal.App.4th 627, 636 (finding business partners to be sufficiently identified); Westra v. Marcus & Millichap Real Estate (2005) 129 Cal.App.4th 759, 766 (real estate broker); Norcal Mutual Ins. Co. v. Newton (2000) 84 Cal.App.4th 64, 76 (“the common thread … is the existence of an agency or similar relationship between the nonsignatory and one of the parties to the arbitration agreement”); County of Contra Costa v. Kaiser Foundation Health Plan, Inc. (1996) 47 Cal.App.4th 237, 242 (“A nonsignatory to an agreement to arbitrate may be required to arbitrate, and may invoke arbitration against a party, if a preexisting confidential relationship, such as an agency relationship between the nonsignatory and one of the parties to the arbitration agreement, makes it equitable to impose the duty to arbitrate upon the nonsignatory”).

 

Defendant Scott Browning signed the Agreement on behalf Browning Capital Management.  [Gleason Decl., Ex. A at p. 9 of 10.]  Further, Plaintiff alleges him to be a principal of Browning Capital Management, to have acted as Plaintiff’s and Harry’s investment advisor, and to be Browning Capital Management’s alter ego.  [Complaint, ¶¶ 2, 9.]  Plaintiff asserts the same claims against both Scott Browning and Browning Capital Management, based on the same alleged conduct and seeking the same relief.  Plaintiff is suing Scott Browning, as well as Browning Capital Management, for his services under the very agreement containing the arbitration provision.  In short, Plaintiff’s claims against Scott Browning are completely co-extensive and intertwined with her claims against Browning Capital Management.

Accordingly, under the doctrine of equitable estoppel, Scott Browning may enforce the arbitration provision in the Investment Advisory Services Agreement to the same degree as Browning Capital Management.

 

The remaining question, then, is whether the arbitration agreement is enforceable.

 

Is the Arbitration Agreement Unenforceable for Unconscionability? No.

 

Unconscionability is one ground on which a court may refuse to enforce a contract, including an arbitration agreement.  Civ. Code §1670.5.  Whether a provision is unconscionable is a question of law.  Civ. Code §1670.5(a); Flores v. Transamerica (2001) 93 Cal.App.4th 846, 851.

 

The core concern of unconscionability doctrine is the absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.  Sonic Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1145.

“If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”  Civ. Code §1670.5(a); Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83, 122.  The absence of severability clause is irrelevant to the determination whether the offensive provisions are “severable” for purposes of unconscionability analysis.  Severability is decided as a matter of state law.  Terminix Int’l Co., LP v. Palmer Ranch Ltd. Partnership (11th Cir. 2005) 532 F.3d 1327, 1331.

 

Unconscionability has both a procedural and a substantive element:  the procedural element focuses on the existence of oppression or surprise and the substantive element focuses on overly harsh or one-sided results.  Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83, 114. 

 

To be unenforceable, a contract must be both procedurally and substantively unconscionable, but the elements need not be present in the same degree.  The analysis employs a sliding scale:  “…the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.”  Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114; Mercuro v. Superior Court (2002) 96 Cal.App.4th 167, 174-75.   

 

žžProcedural Unconscionability

 

Procedural unconscionability concerns the manner in which the contract was negotiated and the parties’ circumstances at that time.  It focuses on the factors of oppression or surprise.  Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329.

 

Procedural unconscionability is often found in contracts of adhesion – i.e., standardized contracts which, imposed and drafted by the party of superior bargaining strength, relegate to the subscribing party only the opportunity to adhere to the contract or to reject it.  Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113.  “When the weaker party is presented the clause and told to take it or leave it without the opportunity for meaningful negotiation, oppress, and therefore procedural unconscionability, are present.”  Szetela v. Discover Bank (2002) 97 Cal.App.4th 107, 114.  See also Lhotka v. Geographic Expeditions, Inc. (2010) 181 Cal.App.4th 816, 821-24 (finding take it or leave it contract for recreational activity procedurally unconscionable even though activity not a “necessity”).  A “meaningful opportunity to negotiate or reject the terms of a contract requires, at a minimum, that a party have reasonable notice of the opportunity to negotiate or reject the terms of the contract and an actual, meaningful, and reasonable choice to exercise that discretion.  Circuit City Stores, Inc. v. Mantor (9th Cir. 2003) 335 F.3d 1101, 1106.

 

“Oppression arises from an inequality of bargaining power which results in no real negotiation and an absence of meaningful choice.”  Crippen v. Central Valley RV Outlet (2004) 124 Cal.App.4th 1159, 1165 (citation omitted).  “When the weaker party is presented the clause and told to ‘take it or leave it’ without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present.”  Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 1100 (citation omitted). 

 

Here, Plaintiff does not present any evidence about the circumstances surrounding her signing of the Investment Advisory Services Agreement to support her argument that the arbitration provision in it is procedurally unconscionable.

 

She points to the appearance of the Agreement as a standardized contract to suggest that it was a contract of adhesion that she had no power or opportunity to negotiate.  But there are no facts to support a conclusion that Plaintiff and Harry Crowell lacked the power and opportunity to negotiate the terms of the agreement with Defendants.  In contrast, the wealth and success of Plaintiff and Harry Crowell as alleged in Complaint suggests that they were at least the equal of Defendants in the power to negotiate the terms of their agreement with Defendants.  In any event, it is Plaintiff’s burden to show the contract was adhesive and she has not met it.

 

Plaintiff also points to the fact that the arbitration provision was on page 7 of a 10-page agreement. But, again, she does not declare she was surprised that the arbitration provision was there.  Further, the arbitration provision is clearly and separately labeled.  Nor does Plaintiff suggest she did was somehow prevented from reading through the entire Agreement prior to signing.

 

Plaintiff further objects that the arbitration clause provides that the arbitration will be conducted under the American Arbitration Association (“AAA”) rules, but the rules are not attached.  Plaintiff cites Dougherty v. Roseville Heritage Partners (2020) 47 Cal.App.5th 93, 104 and Lane v. Francis Capital Management LLC (2014) 224 Cal.App.4th 676, 690 to suggest this makes the Agreement procedurally unconscionable.

 

Plaintiff’s circumstances were not like those of the plaintiff in Dougherty.  They were much closer to those in Lane:

 

Here, we conclude the failure to attach a copy of the AAA rules did not render the agreement procedurally unconscionable. There could be no surprise, as the arbitration rules referenced in the agreement were easily accessible to the parties—the AAA rules are available on the Internet. (See Boghos v. Certain Underwriters at Lloyd's of London (2005) 36 Cal.4th 495, 505, fn. 6, 30 Cal.Rptr.3d 787, 115 P.3d 68 [full, up-to-date text of AAA rules is available on AAA's Internet site] ). In addition, Lane—a formerly well-paid professional analyst—does not appear to lack the means or capacity to locate and retrieve a copy of the referenced rules. Finally, the arbitration agreement at issue clearly specified a particular set of AAA rules, and it did not modify those rules in any manner. In the absence of oppression or surprise, we decline to find the failure to attach a copy of the AAA rules rendered the agreement procedurally unconscionable.

Lane v. Francis Capital Management LLC (2014) 224 Cal.App.4th 676, 691–692.

 

In short, Plaintiff has not shown procedural unconscionability.

 

žžSubstantive Unconscionability

 

[S]ubstantive unconscionability focuses on the one-sidedness of the contract terms. In the context of an arbitration agreement, the agreement is unconscionable unless there is a “‘modicum of bilaterality’ ” in the arbitration remedy.  [Citation.]  “Although parties are free to contract for asymmetrical remedies and arbitration clauses of varying scope, ... the doctrine of unconscionability limits the extent to which a stronger party may, through a contract of adhesion, impose the arbitration forum on the weaker party without accepting that forum for itself.”  [Citation.]

 

Flores v. Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846, 854.

To be substantively unconscionable, contract terms must be “unduly harsh, oppressive, or one-sided.”  Sanchez v. Carmax Auto Superstores California, LLC (2014) 224 Cal.App.4th 398, 403.

 

Plaintiff contends the Agreement here is unconscionable because arbitration necessarily limits discovery, which is against public policy in cases involving statutory rights – such as an elder abuse case – and does not require that the arbitration award include factual findings or legal reasoning.  See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 104 (finding denial of adequate discovery in arbitration leads to de facto frustration of statutory rights); Dougherty v. Roseville Heritage Partners (2020) 47 Cal.App.5th 93, 106, 260 Cal.Rptr.3d 580 (finding discovery limitations permitting depositions only in exceptional cases and providing for no interrogatories or requests for admission “[ran] the risk of frustrating plaintiffs’ statutory rights”).

 

In Armendariz, the California Supreme Court found that arbitration cannot serve to deprive a plaintiff of her statutory right – in that case, rights under the FEHA.  Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 100–101.  In order to save the arbitration of an FEHA claim, the California Supreme Court further found an agreement to permit discovery was implied.  “We further infer that when parties agree to arbitrate statutory claims, they also implicitly agree, absent express language to the contrary, to such procedures as are necessary to vindicate that claim. (See Broughton, supra, 21 Cal.4th at pp. 1086–1087, 90 Cal.Rptr.2d 334, 988 P.2d 67.)”  24 Cal.4th at 106.

The result is the same here.  Moreover, as Defendants note in their reply brief, the AAA rules do allow for discovery.  Any order compelling arbitration will be premised on the parties being permitted to conduct discovery in their arbitration proceedings.

 

As for whether the arbitrator will be required to issue an award with factual findings and legal reasoning, there is no showing that the AAA rules do not so require.

 

Plaintiff also objects that the Agreement does not specify who pays the arbitration fees.  Relying on her financial elder abuse claim, Plaintiff equates her case with employment cases for which Armendariz requires the employer to pay the fees in order to maintain the employee’s access to a forum to pursue his claims.  But here there is no evidence, and certainly no presumption, that Plaintiff will be denied a forum if she is required to split the arbitration fees with Defendants.

 

Plaintiff further objects that her right to appeal an arbitration award is limited. But that is the nature of arbitration.  If that were a basis to find unconscionability, all arbitration agreements would be unconscionable.

 

She also asserts that arbitration does not allow for dispositive motions, but provides no evidence that this is true or demonstrate how it would limit her ability to pursue her claims.

 

Finally, Plaintiff assumes the NYSE arbitration rules apply to the Agreement and, based on that assumption, argues that the Agreement fails to comply with the notice requirements.  But Plaintiff does not provide any evidence that the NYSE rules apply to Defendants, but rather appears to assume it based on them being investment advisors.  There is no evidence that Defendants are members of the NYSE, and they deny that they are.  [Reply at 6-7.]  Moreover, the Agreement states that the AAA rules will apply to the arbitration.

 

In short, Plaintiff has shown neither procedural nor substantive unconscionability, much less both.  Accordingly, the Court finds the arbitration agreement is enforceable.

 

Plaintiff argues, nonetheless, arbitration “cannot” be compelled because of the risk of inconsistent rulings if the claims in this action are arbitrated but her claims in the Phan and Crowell actions are tried in court.  The Court turns to that issue.

 

          Possibility of Inconsistent Rulings

 

Under CCP section 1281.2(c), even when there is an enforceable arbitration agreement and arbitrable claims, the court need not compel arbitration where it finds the risk of inconsistent rulings due to a court action between a party to the arbitration agreement and a third party “arising out of the same transaction or series of related transactions.”  But, contrary to Plaintiff’s assertions in her brief, the Court is not required to deny enforcement of the arbitration agreement in that situation.  Denial is just one of the options available to the court.

 

Under California law, when a party to an arbitration agreement is also a party to a pending court action with a third party, and there is a possibility of conflicting rulings on a common issue of law or fact, the court has several options. It may refuse to compel arbitration, or it may stay either the arbitration or the court proceeding pending completion of the proceedings in the other forum. (Code of Civ. Proc., § 1281.2, subd. (c)) (section 1281.2(c).)

Rodriguez v. American Technologies, Inc. (2006) 136 Cal.App.4th 1110, 1114, 1117 (emphasis added).

 

The first question here is whether Plaintiff’s claims against the Defendants arise out of the “same transaction or series of related transactions” as the Phan action and the Crowell action. It is not clear that they do.  See Acquire II, Ltd. v. Colton Real Estate Group (4/3 2013) 213 Cal.App.4th 959 (reversing order denying arbitration under CCP 1281.2(c) because plaintiff’s claims against defendant, while similar in many respects, were not shown by substantial evidence to be based on the same transactions).

 

In the larger sense, all the litigation identified (including the trust action) arises out of the same family dispute.  On one side, Harry Crowell describes Plaintiff and his son trying to push Harry out of the business he created and has managed alone for decades, so that his son can take over.  On the other, Plaintiff describes Harry Crowell as falling under the spell of Ellie Phan and letting Phan exercise control over certain transactions that involve or implicate not just the business but Plaintiff’s own community property assets.

 

Plaintiff is thus suing Phan and Harry for the actions they took, or that Phan took under authority granted by Harry, that involved or impacted Plaintiff’s own money and finances.  Plaintiff also, in both actions, accuses Harry of withholding documents and information about the business to which Plaintiff she is entitled.

 

But, in the more specific sense, Plaintiff is suing the Browning Defendants for something different than what she is suing Phan and Harry Crowell for.  Plaintiff alleges that when she went to Defendants as a result of her concerns about Phan, they did not respond to her inquiries properly.  [Complaint, ¶¶ 22-24.]  She also alleges their fees were inflated.  [Id., ¶ 23.]  Finally, Plaintiff complains that when informed of her filing of an elder abuse claim against Phan -- and confronted with Plaintiff’s demands that Phan not be involved in handling Plaintiff’s assets and Plaintiff receive a copy of all communications from Phan regarding those assets – the Browning Defendants again did not respond properly.  [Complaint, ¶¶ 26-29.]

 

While Phan’s alleged actions are the beginning point for the events that have led to Plaintiff’s claims against the Browning Defendants, they are not alleged to be central to those claims.  The Browning Defendants will be held liable, or not, depending on whether they are found to have breached their duties to Plaintiff or mishandled her assets.  It is not at all clear what, if any findings about Phan or Harry Crowell would be necessary in this case, in order to adjudicate Plaintiff’s claims against the Browning Defendants.  Certainly to the extent Plaintiff’s claims are based on the Browning Defendants’ refusal to provide her with information, or abide by her instructions, the reasons for Defendants’ failures is secondary.  Their liability will rest on whether those failures and refusals were wrongful. 

 

The second question is whether arbitration of the claims in the Browning action would increase the risk of inconsistent rulings.  That is, even if the Court were to conclude that this action against the Browning Defendant arises out of the same series of related transactions as the Phan action and the Crowell action, would arbitration make a difference?

 

There are four separate proceedings pending in court.  None of the cases are consolidated; nor has any motion to consolidate been filed.  Nor does consolidation of all four proceedings, including the trust action, seem feasible. Even in the absence of arbitration, then, there is a potential risk of inconsistent rulings.  But compelling this action to arbitration does not affect that.

 

The Court grants the Motion to Compel Arbitration of this action and stays this action pending conclusion of the arbitration proceedings.

 

Appointment of an Arbitrator

 

Under Code Civ. Proc. § 1281.6, “If the arbitration agreement does not provide a method for appointing an arbitrator, the parties to the agreement who seek arbitration and against whom arbitration is sought may agree on a method of appointing an arbitrator and that method shall be followed. In the absence of an agreed method, or if the agreed method fails or for any reason cannot be followed, or when an arbitrator appointed fails to act and his or her successor has not been appointed, the court, on petition of a party to the arbitration agreement, shall appoint the arbitrator.”  Code Civ. Proc. § 1281.6.

 

Here, however, the arbitration clause in the parties’ Agreement provides that the arbitration will be governed by the rules of the AAA.  There is no showing that those rules do not include a mechanism for the appointment of an arbitrator.  It is premature for Defendants to ask this Court to step in an appoint an arbitrator without having availed themselves of the procedure set forth in the agreed-upon governing rules.

 

Defendant is ordered to give notice.