Judge: Michelle C. Kim, Case: 22STCV16129, Date: 2024-09-18 Tentative Ruling

Case Number: 22STCV16129    Hearing Date: September 18, 2024    Dept: 78

The motion is granted.

BACKGROUND

This is a lemon law case. Plaintiff Robert Hernandez filed his complaint on May 13, 2022. On September 26, 2022, defendant Maryland Marketsource Inc. moved to compel arbitration and stay the proceedings. The Court granted the motion on October 28, 2022.

On July 3, 2024, Plaintiff filed the instant motion to vacate the Court’s October 28, 2022 order. Plaintiff argues Defendant failed to pay fees required to continue with arbitration, so Plaintiff is permitted to withdraw from arbitration and return to court pursuant to Code of Civil Procedure section 1281.98.

On September 4, 2024, Defendant filed its opposition. On September 11, 2024, Plaintiff replied.

LEGAL STANDARD

          Code of Civil Procedure, section 1281.98 provides in relevant part:

“(a)(1) In an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration provider, that the drafting party pay certain fees and costs during the pendency of an arbitration proceeding, if the fees or costs required to continue the arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel the employee or consumer to proceed with that arbitration as a result of the material breach.

[(a)](2) The arbitration provider shall provide an invoice for any fees and costs required for the arbitration proceeding to continue to all of the parties to the arbitration. The invoice shall be provided in its entirety, shall state the full amount owed and the date that payment is due, and shall be sent to all parties by the same means on the same day. To avoid delay, absent an express provision in the arbitration agreement stating the number of days in which the parties to the arbitration must pay any required fees or costs, the arbitration provider shall issue all invoices to the parties as due upon receipt. Any extension of time for the due date shall be agreed upon by all parties. Once the invoice has been paid, the arbitration provider shall provide to all parties a document that reflects the date on which the invoice was paid.

(b) If the drafting party materially breaches the arbitration agreement and is in default under subdivision (a), the employee or consumer may unilaterally elect to do any of the following:

(1) Withdraw the claim from arbitration and proceed in a court of appropriate jurisdiction. ...”

(Code Civ. Proc., § 1281.98(a),(b).)

DISCUSSION

A. Section 1281.98 applies notwithstanding the parties’ selection of federal substantive law to govern their dispute.

          As a threshold matter, Defendant contends the California Arbitration Act, including section 1281.98, does not apply because the parties selected the Federal Arbitration Act as the governing law in their contract.

A host of precedents discuss the application of Code of Civil Procedure sections 1281.97 and 1281.98. “[S]ections 1281.97 and 1281.98 ‘ “largely parallel” each other’ and – where appropriate – an analysis as to one ‘applies with equal force’ to the other.” (Reynosa v. Superior Court of Tulare County (2024) 101 Cal.App.5th 967, 981 fn. 4, internal citations omitted.) In other words: the two sections are substantially identical, and the relevant case law is equally applicable to both.

          The law aw distinguishes between substantive and procedural provisions of federal and state arbitration laws. (See ibid.; accord Nixon v. AmeriHome Mortgage Co., LLC(2021) 67 Cal.App.5th 934, 945.) It is well-established that state procedural law governs proceedings in state courts, absent some exception. (See Mave Enterprises, supra, 219 Cal.App.4th at p. 1428.) And case law regards sections 1281.97 and 1281.98 as procedural provisions, not substantive ones. “[T]he FAA's procedural provisions ... do not apply unless the contract contains a choice-of-law clause expressly incorporating them.” (Valencia v. Smyth (2010) 185 Cal.App.4th 153, 173-174, italics in original.) “Absent a choice-of-law provision expressly mandating the application of the procedural law of another jurisdiction”, California’s procedural law applies. (See Mave Enterprises, Inc. v. Travelers Indemnity Co. (2013) 219 Cal.App.4th 1408, 1429 (Mave Enterprises); see also Judge v. Nijjar Realty (2014) 232 Cal.App.4th 619, 631-632.)

          Section 1281.98 is a procedural provision in the CAA. The CAA’s procedural provisions apply to arbitrations in California by default unless the parties agree otherwise, notwithstanding the parties’ choice of substantive law. Here, the parties did not choose a particular procedural law. In fact, the parties’ agreement reads: “This Agreement is governed by the FAA and, to the extent not inconsistent with or preempted by the FAA, with the laws of the state of California.” (Opp., 7:23-24, italics added.) Sections 1281.98 applies.

          Defendant’s point is well-taken that the law on this point is unsettled. As the parties’ arbitrator noted, our Supreme Court has granted review of Hernandez v. Sohnen Enterprises, Inc. (2024) 102 Cal.App.5th 222, review granted Aug. 21, 2024, S285696, which took a position at odds with the decision in Espinoza v. Superior Court (2022) 83 Cal.App.5th 761. As noted in the Supreme Court’s certiorari order, the trial courts may choose whether or not to follow Hernandez while review is pending. (See Hernandez v. Sohnen Enterprises (2024) 324 Cal.Rptr.3d 318 (Mem.), 319, citing Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 456.)

          Recognizing the split in authority, this court opts to follow Espinoza. State procedural law, including section 1281.98, applies notwithstanding the parties’ choice of federal substantive law. The parties did not choose any governing procedural law, so California law applies by default.

B. Defendant’s failure to pay fees satisfies the conditions of section 1281.98.

The undisputed facts demonstrate that Defendant satisfied the conditions for Plaintiff’s withdrawal from arbitration, as they are stated in section 1281.98.

On March 13, 2024, the parties’ JAMS Case Coordinator sent a “Revised Notice of Hearing” to all parties, which states in pertinent part: “All fees are due upon receipt. If you have an outstanding balance for retainer of services, please refer to the enclosed invoice.” (Hahn Decl., Exh. A, p. 1.) The enclosed invoice states in part that “[a]ll fees are due and payable in advance of services rendered ... .” (Id., p. 2.)

On May 24, 2024, the parties’ Case Manager sent a “courtesy reminder” to all parties informing them that “[h]earing fees [were] currently outstanding” and “[i]f payment is not received by June 7, 2024, the hearing will be administratively removed from calendar.” (Id., Exh. B.)

On May 31, 2024, Plaintiff’s counsel informed the Case Manager and Defendant’s counsel that Plaintiff intended to exercise his rights under section 1281.98. (Id., Exh. C.) The arbitrator suspended the arbitration, but left the parties’ case file open because “Claimant has not yet taken action to vacate the superior court order ... .” (Id., Exhs. D-E.) Plaintiff filed the instant motion approximately one month later.

Defendant contends several facts should mitigate the result here. In particular, Defendant points out that the March 13, 2024 notice was a revised notice, and the enclosed invoice was the third the parties had received from JAMS. Defendant paid the first two. (Kun Decl., ¶¶ 6-8 and Exhs. 5-6.) Also, Defendant contends that “[a]t the time Plaintiff’s counsel announced that Plaintiff was withdrawing from [] arbitration, Defendant held a credit balance of $5,906.07 in the arbitration.” (Opp., 9:19-21.) Finally, Defendant points out that Plaintiff continued to file papers in the arbitration proceeding even after he announced his intent to withdraw. (See id., 9:14-10:4.)

Beginning with the last point: Defendant does not cite authority for its implicit proposition that Plaintiff waived his rights under section 1281.98 by continuing to participate in the arbitration after announcing his intent to withdraw. The Court is not persuaded by Defendant’s unsupported suggestion. Section 1281.98 does not refer to any such waiver.

As to the three sequenced JAMS invoices: the fact that two prior invoices were issued is irrelevant. Section 1281.98 applies to fees required to continue with an arbitration; this self-evidently includes fees, as here, that must be paid prior to a hearing.

The middle point deserves more discussion: that “[a]t the time Plaintiff’s counsel announced that Plaintiff was withdrawing from arbitration, Defendant held a credit balance of $5,906.07 in this case.” (Kun Decl., ¶ 18 and Exh. 11.) But Defendant does not state when this payment was made. The invoice was issued on March 12, 2024; even if Defendant was current by the end of May, they have not contradicted Plaintiff’s (and JAMS’) contention that they defaulted first.

The Court is not persuaded that section 1281.98 permits Defendant to cure its default in this manner. “The clear and unequivocal language of section 1281.98, subdivision (a)(1) “ ‘establishes a bright-line rule that a drafting party’s failure to pay outstanding arbitration fees within 30 days after the due date results in its material breach of the arbitration agreement.’ [Citations.]” (Reynard v. Superior Court of Tulare County, supra, 101 Cal.App.5th, at p. 987; see also Espinoza v. Superior Court, supra, 83 Cal.App.5th, at pp. 777-778 [legislative history shows substantial compliance provision proposed and rejected during drafting, and in any case plain statutory language overrides case law and legislative history].) “ Section 1281.98 declares the party not just (1) “in material breach of the arbitration agreement,” but also (2) “in default of the arbitration”, and states (3) the party has waives its right to proceed with arbitration. Even if the breach of contract could be cured by late payment – and the Court is not convinced it could – Defendant does not set out sufficient grounds to vacate default or set aside waiver.

It is undisputed that Defendant failed to pay timely pay fees required to continue with their arbitration. Section 1281.98 does not permit substantial compliance. The thirty-day deadline is firm, and Defendant missed it. The motion is granted.

          C. Attorneys’ Fees

          Plaintiff requests that the Court award all fees associated with the arbitration prior to Defendant’s default, amounting to more than $80,000.00. (Mot., 10:11-17.) Plaintiff cites Code of Civil Procedure section 1281.99 as authority for this sanction. But section 1281.99 permits a monetary sanction to refund costs incurred as a result of the breach – not for the entire arbitration. Here, the Court agrees with Defendant that Plaintiff has not adequately established entitlement to the fees requested. The information that has been provided does not allow the Court to intelligently discern what costs were incurred as a result of the breach. The Plaintiff refers to a set of written discovery served and an IDC, but that should only amount to a few hours of time. There is no explanation as to why this cost was incurred as a result of the breach. All the other descriptions of work performed are so general and lacking any timeline or explanation to assist the Court in understanding whether any costs were incurred as a result of the breach. Therefore, the Court only awards the $400 JAMS filing fee.

          .

ORDER

The motion is granted. The Court’s October 28, 2022 order is vacated, and the Court lifts the stay on the instant proceedings. The Court sets a Status Conference for ____________________________, 2024. The parties are ordered to submit a Joint Status Report no fewer than 5 court days before the hearing.

Plaintiff to give notice.

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DATED:  September 18, 2024    

           ________________________________

Hon. Michelle C. Kim

Judge of the Superior Court