Judge: Michael E. Whitaker, Case: 23SMCV02630, Date: 2023-10-25 Tentative Ruling

Case Number: 23SMCV02630    Hearing Date: October 25, 2023    Dept: 207

TENTATIVE RULING

MOTION

Defendant Lucas, Horsfall, Murphy & Pindroh (“Defendant”) moves to compel Plaintiff Jack Ford (“Plaintiff”) to arbitrate Plaintiff’s claims for professional negligence (accounting malpractice) arising from tax advice Defendant allegedly gave to Plaintiff including the sale of  real property to Plaintiff’s financial detriment. 

Plaintiff opposes the motion and Defendant has replied.

LEGAL STANDARDS – MOTION TO COMPEL ARBITRATION

            “[T]he advantages of arbitration include a presumptively less costly, more expeditious manner of resolving disputes.  It follows a party to a valid arbitration agreement has a contractual right to have its dispute with another party to the contract resolved quickly and inexpensively.”  (Henry v. Alcove Investment, Inc. (1991) 233 Cal.App.3d 94, 99–100 [cleaned up].)  Thus, “on petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that 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.”  (Code Civ. Proc., § 1281.2; see also

EFund Capital Partners v. Pless (2007) 150 Cal.App.4th 1311, 1320 [the language in section 1281.2 compelling arbitration is mandatory].) The right to compel arbitration exists unless the court finds that the right has been waived by a party’s conduct, other grounds exist for revocation of the agreement, or where a pending court action arising out of the same transaction creates the possibility of conflicting rulings on a common issue of law or fact.  (Code Civ. Proc., § 1281.2, subds. (a)-(c).)   

            “On a petition to compel arbitration, the trial court must first determine whether an agreement to arbitrate the controversy exists.  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.  The party seeking arbitration can meet its initial burden by attaching to the petition a copy of the arbitration agreement purporting to bear the respondent's signature.”  (Bannister v. Marinidence Opco, LLC (2021) 64 Cal.App.5th 541, 543-544 [cleaned up].)  The party seeking to compel arbitration must also “plead and prove a prior demand for arbitration and a refusal to arbitrate under the agreement.”  (Mansouri v. Superior Court (2010) 181 Cal.App.4th 633, 640-641.) 

            And while the moving party on a motion to compel arbitration “bears the burden of proving the existence of a valid arbitration agreement by a preponderance of the evidence, [a] party opposing the petition bears the burden of proving by a preponderance of the evidence any fact necessary to its defense.  The trial court sits as the trier of fact, weighing all the affidavits, declarations, and other documentary evidence, and any oral testimony the court may receive at its discretion, to reach a final determination.”  (Ruiz v. Moss Bros. Auto Group, Inc. (2014) 232 Cal.App.4th 836, 842 [cleaned up]; see also Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236 [“The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability”].) 

ANALYSIS

On or about June 18, 2019, Plaintiff executed Defendant’s Engagement Letter in connection with Defendant’s provision of accounting service to Plaintiff.  (Declaration of Michael P. Amerio, ¶ 2, Exh. 1.)  The Engagement Letter contained the following provisions:

Management agrees that any dispute (other than our efforts to collect an outstanding invoice) shall be submitted first to mediation, and if mediation is not successful, then to binding arbitration.  The parties will engage in the mediation process in good faith once a written request to mediate has been given by any party to the engagement.  Any mediation initiated as a result of this engagement shall be administered within the county of Los Angeles, California in accordance with the Dispute Resolution Rules of Judicate West and any ensuing arbitration shall be conducted within said county, according to California law.  The results of any such mediation shall be binding only upon agreement of each party to be bound.  The costs of any mediation proceeding shall be shared equally by the participating parties.

If the parties are unable to resolve any dispute through mediation outlined above, the dispute shall be resolved by binding arbitration.  The arbitration will be conducted in accordance with the procedures in this document and the Dispute Resolution Rules of Judicate West as in effect on the date of the engagement letter, or such other rules and procedures as the parties may designate by mutual agreement.  The parties understand and agree that by using arbitration to resolve all disputes, they are giving up any right that they may have to a court trial by judge or jury trial with regard to those claims.

Any dispute arising out of the engagement, except actions by us to enforce payment of our professional invoices, must be filed within one year from the completion of the engagement, notwithstanding any statutory provision to the contrary.  In the event of arbitration, any monetary awards Management obtains shall be limited in amount, and shall not exceed the amount of the fee charged by us, and paid by the Entities, for the services set forth in this engagement letter.

(Ibid.) 

            Plaintiff argues (1) this dispute does not fall within the scope of the arbitration provision; (2) the arbitration provision is procedurally unconscionable because (i) it is a “take it or leave it” contract of adhesion; (ii) it contains an element of surprise because the Judicate West rules are neither included or linked within the Agreement, and the rules are subject to change after signing; (3) the provision is substantively unconscionable because (i) it lacks mutuality; and (ii) it abrogates Plaintiff’s rights by shortening the statute of limitations; and (4) mediation is a condition precedent of mandatory arbitration.

1.      SCOPE

Plaintiff first argues that the dispute, which stems from Defendant’s alleged provision of injurious tax advice, which induced Plaintiff to sell real property to his financial detriment, exceeds the scope of the engagement letter, which pertains only to Defendant’s preparation of Plaintiff’s annual tax returns, and not to any advice Defendant provided to Plaintiff.

In support, Plaintiff relies on Rice v. Downs (2016) 248 Cal.App.4th 175, 186.  In Rice, the arbitration provision at issue applied to “any controversy between the parties arising out of this Agreement[.]”  The Court of Appeal held that the legal malpractice claim arose out of the professional’s duty to exercise reasonable care, not out of the contractual terms of the Agreement.

By contrast, here, the arbitration agreement does not limit the scope of arbitrable claims to those arising from the Engagement Letter.  Rather, it applies to “any dispute (other than our efforts to collect an outstanding invoice)[.]”  (Declaration of Michael P. Amerio, ¶ 2, Exh. 1.)  The broader scope makes sense in light of the parties’ long history of working together, dating back to 1969.  (See Complaint, ¶ 6.)  Further, the language of the engagement letter makes clear that the parties’ contemplated working together in the future and intended the terms to apply to that future work: “[i]n the event the firm prepares any subsequent tax returns or undertakes any additional work on your behalf without a written agreement, the terms set forth in this engagement shall apply.”  (Declaration of Michael P. Amerio, ¶ 2, Exh. 1.)

In any event, the first sentence of the engagement letter contemplates Defendant’s provision of tax advice: “We appreciate the opportunity of working with you and advising you regarding your income tax matters.”  Therefore, Defendant’s provision of tax advice regarding the potential sale of Plaintiff’s real property is directly covered by the engagement letter.

As such, the dispute is within the scope of the arbitration provision.

2.      UNCONSCIONABILITY

            “Unconscionability is ultimately a question of law for the court.”  (Flores v. Transamerica Homefirst, Inc. (2001) 93 Cal.App.4th 846, 851.)  “However, numerous factual issues may bear on that question.” (Gutierrez v. Autowest, Inc. (2003) 114 Cal.App.4th 77, 89.)  As such, Plaintiff must show two elements to establish the unconscionability defense: (1) procedural unconscionability, which focuses on the manner in which the contract was negotiated, and (2) substantive unconscionability, which concerns whether the contract’s terms are unreasonably one-sided. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 113-115 (hereafter Armendariz).)

            “The prevailing view is that procedural and substantive unconscionability must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. But they need not be present in the same degree. Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.  In other words, 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, supra, 24 Cal.4th at p. 114 [cleaned up].) 

a.       PROCEDURAL UNCONSCIONABILITY

Procedural unconscionability examines the “oppression that arises from unequal bargaining power and the surprise to the weaker party that results from hidden terms or the lack of informed choice.”  (Ajamian v. CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 795.)  Preprinted forms buried within a volume of documents offered on a “take or leave it basis” evidence a high degree of procedural unconscionability.  (See Dougherty v. Roseville Heritage Partners (2020) 47 Cal.App.5th 93, 102-104 (hereafter Dougherty).)  Most consumer contracts are adhesive and therefore present some procedural unconscionability. (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899, 915, (hereafter Sanchez).)  “[A] finding of procedural unconscionability does not mean that a contract will not be enforced, but rather that courts will scrutinize the substantive terms of the contract to ensure they are not manifestly unfair or one-sided.”  (Ibid.) 

Plaintiff argues that the agreement is procedurally unconscionable because (1) it is a contract of adhesion; and (2) it did not include the Judicate West arbitration rules, which can change over time. 

i.        Contract of Adhesion

Plaintiff argues the agreement is a contract of adhesion because it was a “take it or leave it” agreement and Plaintiff did not participate in the negotiation of the terms, which were “first inserted into the engagement letter almost forty years into Mr. Ford’s business relationship with the Defendant.”  (Plaintiff’s Opposition, p. 7.) 

Plaintiff has not produced any evidence that the agreement was adhesive.  This is not a standard form contract; rather, it is a personalized letter to a decades-long client.  And while Plaintiff chose not to try to negotiate the terms of the engagement, there is no evidence that he would have been unable to do so, especially in light of the long ongoing working relationship between the parties.

                        ii.         Arbitration Rules

Plaintiff next argues that the arbitration agreement is procedurally unconscionable because although the agreement indicates the Judicate West arbitration rules apply to the arbitration proceedings, it does not attach those rules to the letter.  In support, Plaintiff primarily cites Harper v. Ultimo (2003) 113 Cal.App.4th 1402 (hereafter Harper). 

In Harper, the Court of Appeal affirmed the trial court’s determination that the arbitration agreement was unconscionable.  With respect to procedural unconscionability, the appellate court found that the Better Business Bureau arbitration rules, which were not attached to the agreement, limited the damages and remedies available to a refund and up to $2500 of property damage, excluding all other damages and remedies, including personal injuries, even in the event of an intentional tort.  These “surprise” terms were “oppressive,” because they were “artfully hidden” by mere reference to the BBB’s arbitration rules, without attaching them.  (Harper, 113 Cal.App.4th at p. 1406.) 

By contrast, here, Plaintiff has not pointed to any “surprise” provisions in the Judicate West arbitration rules, such as limitations on the remedies or damages available to Plaintiff.  Thus, the engagement letter’s reference to the rules does not create the “surprise” or “oppression” necessary for a finding of procedural unconscionability.

Also unavailing is Plaintiff’s argument that the rules can change over time.  The provision makes clear, “The arbitration will be conducted in accordance with the procedures in this document and the Dispute Resolution Rules of Judicate West as in effect on the date of the engagement letter, or such other rules and procedures as the parties may designated by mutual agreement.”  Thus, the terms of the arbitration will change only in the event the parties mutually agree.

Therefore, the Court finds that the arbitration provision in the engagement letter is not procedurally unconscionable.[1]

3.      MEDIATION AS A CONDITION PRECEDENT

Plaintiff’s final argument is that the arbitration provision has not been triggered, because mediation is a condition precedent to arbitration, and Defendant ignored Plaintiff’s written request to mediate.  In support of this argument, Plaintiff cites to an unpublished federal district court case, which cites to out-of-circuit cases in support of its ruling.  Thus, Plaintiff has not provided any binding legal support for the contention that Defendant cannot yet compel arbitration proceedings because it ignored Plaintiff’s written request to mediate.

Moreover, Plaintiff has not provided evidence that he ever submitted a formal mediation demand.  The Ford declaration merely indicates, “On April 6, 2023, Haderlein and Kouyoumdjian LLP, my attorneys in this matter, sent a demand letter on my behalf to Lucas Horsfall, informing them that we believed Lucas Horsfall was liable for accounting malpractice, and requested informal settlement talks so that litigation could be avoided.  They never responded.”  (Ford Decl. ¶ 4.)  A written request for “informal settlement talks” is not necessarily the same as a written demand for mediation, pursuant to the dispute resolution terms of the parties’ agreement.  Plaintiff may not circumvent the arbitration provision by filing a lawsuit instead of presenting a written mediation demand.

CONCLUSION

            Therefore, the Court grants Defendant’s motion compelling Plaintiff’s claim to arbitration.  The Court further orders this action stayed, pending the resolution of the parties’ arbitration proceeding.  

            Further, the Court vacates the Case Management Conference scheduled on December 6, 2023 and sets a Status Conference re: Completion of Arbitration on April 23, 2024 at 8:30 A.M. in Department 207.  The parties shall file a joint report regarding the status of the arbitration no later than 5 court days before the scheduled status conference.           

            Defendant shall provide notice of the Court’s ruling and file a proof of service regarding the same.

DATED:  October 25, 2023                                                  ___________________________

                                                                                          Michael E. Whitaker

                                                                                          Judge of the Superior Court