Judge: Salvatore Sirna, Case: 23PSCV02008, Date: 2024-04-10 Tentative Ruling

Case Number: 23PSCV02008    Hearing Date: April 10, 2024    Dept: G

Defendant Sunlight Financial LLC’s Motion to Compel Arbitration and Dismiss, or Alternatively, Stay the Action

Respondent: Plaintiffs Rosalia Franco and Henry Franco

TENTATIVE RULING

Defendant Sunlight Financial LLC’s Motion to Compel Arbitration is GRANTED and the present action is STAYED pending the outcome of arbitration as to Defendant Sunlight Financial LLC.

BACKGROUND

This is an action for breach of contract and credit reporting violations. In February 2021, Plaintiffs Rosalia Franco and Henry Franco entered into a written construction agreement with Defendant Best Solar Power Inc. (Best Solar) in which Best Solar agreed to provide construction services for various home improvement projects on the Francos’ property in West Covina. In June 2021, the Francos financed the projects with a series of loans, including a $53,460 loan for solar panels and $49,968 loan for roofing work. The Francos obtained the solar panel and roofing work loans from Defendant Sunlight Financial LLC (Sunlight Financial), who was advertised as one of Best Solar’s “finance partners.” At the time, the Francos allege their loan transactions were handled by San Martin Escrow.

On December 27, 2021, the Francos allege San Martin Escrow paid off their loans from Sunlight Financial by transmitting checks to Sunlight Financial in the amount of $53,460 and $49,968. On January 3, 2022, the Francos allege Sunlight Financial received, cashed, or otherwise negotiated these checks. Subsequently, the Francos allege Sunlight Financial denied receiving the $49,968 check and reported the nonpayment to consumer credit reporting agencies which resulted in significant damage to Rosalia Franco’s credit score. The Francos also allege the error prevented them from applying for a permanent loan at the interest rate that Best Solar had represented they could obtain and resulted in Best Solar cancelling work for the West Covina property. On October 8, Sunlight Financial sent Rosalia Franco a written notice that admitted Sunlight Financial had made an error and promised to update their records to reflect the payment as well as inform credit reporting agencies of the update.

On July 5, 2023, the Francos filed a complaint against Best Solar, Sunlight Financial, and Does 1-40, alleging the following causes of action: (1) breach of contract, (2) willful violation of the California Consumer Credit Reporting Agencies Act (CCRAA), and (3) negligent violation of the CCRAA.

On October 6, 2023, Sunlight Financial filed the present motion. On December 8, the court stayed the present action pending Sunlight Financial’s filing of a bankruptcy petition.

On February 13, 2024, Sunlight Financial filed a notice stating that the bankruptcy stay was no longer in effect.

A hearing on the present motion is set for April 10, 2024, with a status conference re: bankruptcy on June 27.

ANALYSIS

Sunlight Financial moves to compel the Francos to the arbitration pursuant to an arbitration agreement. For the following reasons, the court GRANTS their motion.

Legal Standard

“A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (Code Civ. Proc., § 1281.) The court must grant a petition to compel arbitration unless it finds no written agreement to arbitrate exists, the right to compel arbitration has been waived, grounds exist for revocation of the agreement, or litigation is pending that may render the arbitration unnecessary or create conflicting rulings on common issues. (Code Civ. Proc., § 1281.2.) A petition to compel arbitration functions as a motion. (Code Civ. Proc., § 1290.2.)

In a motion or petition to compel arbitration, “the moving party bears the burden of producing ‘prima facie evidence of a written agreement to arbitrate the controversy.’” (Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165 (Gamboa).) Once the court finds an arbitration agreement exists, the party opposing arbitration bears the burden of establishing a defense to enforcement by preponderance of the evidence. (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413.) In interpreting an arbitration agreement, courts apply the same principles used to interpret contractual provisions with the fundamental goal of giving effect to the parties’ mutual intentions and applying contractual language if clear and explicit. (Valencia v. Smyth (2010) 185 Cal.App.4th 153, 177.) Because public policy strongly favors arbitration, “any doubts regarding the arbitrability of a dispute are resolved in favor of arbitration.” (Coast Plaza Doctors Hosp. v. Blue Cross of California (2000) 83 Cal.App.4th 677, 686.)

The Federal Arbitration Act (FAA) applies to contracts that involve interstate commerce (9 U.S.C. §§ 1, 2), but since arbitration is a matter of contract, the FAA also applies if stated in the agreement.  (See Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 355.) Pursuant to the FAA, the court’s role “is limited to determining (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.” (Philadelphia Indemnity Ins. Co. v. SMG Holdings, Inc. (2019) 44 Cal.App.5th 834, 840, quoting U.S. ex rel. Welch v. My Left Foot Children’s Therapy, LLC (9th Cir. 2017) 871 F.3d 791, 796.)

Discussion

In this case, Sunlight Financial argues the present action is subject to an arbitration provision in a loan agreement between the Francos and Sunlight Financial. According to Sunlight Financial, the Francos entered into the loan agreement on February 8, 2021, for $50,000. (Carpenter Decl., ¶ 3, Ex. A, p. 4.) Paragraph twenty-six of the loan agreement includes an arbitration provision that states “[a]ny Claim shall be resolved, upon the election of either Lender or Borrower, by binding arbitration administered by the American Arbitration Association or JAMS, under the applicable arbitration rules of the administrator in effect at the time a Claim is filed (‘Rules’).” (Carpenter Decl., Ex. A, ¶ 26(b).) The provision defines “claim” to “mean any dispute, claim, or controversy . . .  arising from or relating to this Note or the relationship between Lender and Borrower . . . , and includes claims that are brought as counterclaims, cross claims, third party claims or otherwise, as well as disputes about the validity or enforceability of this Note or the validity or enforceability of this Section.” (Carpenter Decl., Ex. A, ¶ 26(a).)

The provision states it is governed by the FAA. (Carpenter Decl., Ex. A, ¶ 26(j).) It also allows the Francos to reject the arbitration provision by submitting a written notice within thirty days from the date the loan agreement was made. (Carpenter Decl., Ex. A, ¶ 26(i).) Thus, the court finds that Sunlight Financial adequately established the existence of an applicable arbitration provision that is governed by the FAA.  The burden now shifts to the Francos to establish any defenses to the enforcement of this provision. In opposition, the Francos argue arbitration should be denied based on the possibility of conflicting rulings pursuant to Code of Civil Procedure section 1281.2, subdivision (c) and because the arbitration provision is unconscionable.

Possibility of Conflicting Rulings

Pursuant to Code of Civil Procedure section 1281.2, subdivision (c), the court must deny a petition to compel arbitration if the following applies:

“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. For purposes of this section, a pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition. This subdivision shall not be applicable to an agreement to arbitrate disputes as to the professional negligence of a health care provider made pursuant to Section 1295.” (Code Civ. Proc., § 1281.2, subd. (c).)

But “[w]hen the FAA applies, it preempts any contrary state law and is binding on state as well as federal courts.” (Mastick v. TD Ameritrade, Inc. (2012) 209 Cal.App.4th 1258, 1263.) The FAA “does not authorize courts to stay arbitration pending resolution of litigation, or to refuse to enforce a valid arbitration provision to avoid duplicative proceedings or conflicting rulings.” (Ibid.) Here, the arbitration provision at issue explicitly states it is governed by the FAA. (Carpenter Decl., Ex. A, ¶ 26(j).) Thus, the court finds that the exception in Code of Civil Procedure section 1281.2, subdivision (c) does not apply since it is not appropriate grounds for refusing to enforce an arbitration provision pursuant to the FAA.

In opposition, the Francos argue the FAA does not preempt California law as held in Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376 (Cronus) and Los Angeles Unified School Dist. v. Safety National Casualty Corp. (2017) 13 Cal.App.5th 471 (LAUSD). Both cases are inapposite here.

In Cronus, the court held the FAA does not preempt California arbitration procedure “where the parties have agreed that their arbitration agreement would be governed by the law of California.” (Cronus, supra, 35 Cal.4th at p. 380.) And in LAUSD, the court held California procedures applied when the arbitration provision had “no provision stating the FAA’s procedural provisions govern the arbitration.” (LAUSD, supra, 13 Cal.App.5th at p. 476.) Unlike these two cases, the arbitration provision at issue here specifically states it is governed by the FAA.

The Francos also argue that Sunlight Financial expressly agreed to the applicability of California arbitration procedures by filing its motion in California court. The Francos fail to point to any authority, however, that supports this proposition.

Accordingly, Code of Civil Procedure section 1281.2, subdivision (c) is inapplicable.

Unconscionability

Pursuant to both federal and state law, arbitration agreements are valid and enforceable, unless they are revocable for reasons under state law that would render any contract revocable” including “fraud, duress, and unconscionability.” (Tiri v. Lucky Chances, Inc. (2014) 226 Cal.App.4th 231, 239.) “‘[U]nconscionability has both a procedural and a substantive element,’ the former focusing on ‘oppression’ or ‘surprise’ due to unequal bargaining power, the latter on ‘overly harsh’ or ‘one-sided’ results.” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114, quoting A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486-487.) While both elements must be present to prevent enforcement, courts evaluate them as a sliding scale in that “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.” (Ibid.)

Procedural Unconscionability

The Francos contend the arbitration provision in this case was an adhesion contract as they had no reasonable opportunity to negotiate with Sunlight Financial and no reasonable market alternatives because Best Solar was partnered with Sunlight Financial. But the plain text of the arbitration provision contradicts this contention. In paragraph 26(i) of the arbitration provision, the Francos had the option to reject the arbitration provision within thirty days of the making of the loan agreement. (Carpenter Decl., Ex. A, ¶ 26(i).) As such, the court finds the arbitration provision was not an adhesion contract since the Francos had the ability to reject it without rejecting the entire loan agreement.

The Francos also argue the arbitration provision was “hidden” in a 23-page document and inconspicuous. In Fisher v. MoneyGram Intern., Inc. (2021) 66 Cal.App.5th 1084, the court held an arbitration provision was procedurally unconscionable where it did not “stand out distinctively from the surrounding text” and a small six-point font. (Id., at p. 1104.) Here, the arbitration provision appears to be in standard font size. Additionally, this provision’s heading is stated in all caps, in addition to being bolded, while the other paragraph headings are only bolded. Last, while the entire provision is not bolded and in all caps, the specific provision noting that the Francos have waived their rights to a jury trial is bolded and in all caps. (Carpenter Decl., Ex. A, ¶ 26(h).) Based on the formatting of the arbitration provision, the court finds the subject arbitration provision to be conspicuous, and any procedural unconscionability is minimal at best.

Next, the Francos assert that Sunlight Financial failed to provide a Spanish translation of the loan agreement and arbitration provision. But “a party may not avoid enforcement of an arbitration provision because the party has limited proficiency in the English language. If a party does not speak or understand English sufficiently to comprehend a contract in English, it is incumbent upon the party to have it read or explained to him or her.” (Caballero v. Premier Care Simi Valley LLC (2021) 69 Cal.App.5th 512, 518.) Here, Rosalia Franco’s declaration does not state Rosalia Franco asked for a Spanish translation of the loan agreement. Thus, the Francos cannot establish procedural unconscionability on this ground.

Last, to the extent the Francos suggest Rosalia Franco did not sign the loan agreement containing the arbitration provision, the Francos failed to establish this contention by a preponderance of the evidence. At the end of the loan agreement, there is a page signifying that Rosalia Franco electronically signed the agreement. (Carpenter Decl., Ex. A, p. 36.) In Rosalia Franco’s declaration, Rosalia Franco does not admit to or deny signing the document. (Franco Decl., ¶ 5.) Thus, the court finds that Rosalia Franco’s lack of clarity on this issue fails to rebut the electronic evidence that Rosalia Franco signed the loan documents.

Substantive Unconscionability

In asserting the arbitration provision is substantively unconscionable, the Francos maintain the provision requires arbitration that is more expensive than consumer arbitration pursuant to JAMS or AAA rules. This argument ignores, however, the actual language of the arbitration provision, which states Sunlight Financial “will temporarily advance to Borrower any filing, administrative, and hearing fees for the arbitration of Borrower’s claim against Lender” that are in excess of the fees that would be required for filing a claim in federal or state court. (Carpenter Decl., Ex. A, ¶ 26(d).)

The Francos also argue this provision is substantively unconscionable because it limits their right to conduct full discovery. The Francos fail to develop this one-sentence argument with any citations to statutes or caselaw. As a result, the court finds the Francos failed to establish any grounds for substantive unconscionability, and have failed to establish that the arbitration provision is unconscionable.

Accordingly, in light of the Francos’ failure to establish a defense to the enforcement of the arbitration provision at issue, the court GRANTS Sunlight Financial’s motion.

CONCLUSION

Based on the foregoing, Sunlight Financial’s motion to compel arbitration is GRANTED.  The present action is stayed pending the outcome of such arbitration.