Judge: Salvatore Sirna, Case: 23PSCV02008, Date: 2024-12-09 Tentative Ruling
Case Number: 23PSCV02008 Hearing Date: December 9, 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
Defendant Best Solar Power Inc.’s Motion to Compel Arbitration and Request to Stay Proceedings
Respondent: Plaintiffs Rosalia Franco and Henry Franco
TENTATIVE RULING
Defendant Sunlight Financial LLC’s Motion to Compel Arbitration and Stay the Action is GRANTED.
Defendant Best Solar Power Inc.’s Motion to Compel Arbitration and Request to Stay Proceedings is GRANTED.
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’s 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 one of the present motions to compel arbitration. From December 8, 2023, to February 13, 2024, the present action was subject to a bankruptcy stay. On April 10, 2024, the court continued the hearing on Sunlight Financial’s motion for the parties to submit supplemental briefing.
On September 13, 2024, Best Solar also filed one of the present motions to compel arbitration. On October 8, 2024, the court continued the hearing on Best Solar’s motion for the parties to submit supplemental briefing.
A hearing on the present motions is set for December 9, 2024, along with a post-mediation status conference setting/case management conference.
ANALYSIS
Sunlight Financial and Best Solar both move to compel arbitration of the present action pursuant to separate arbitration provisions. For the following reasons, the court GRANTS their motions.
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.)
Sunlight Financial
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).)
In a supplemental opposition, the Francos argue Sunlight Financial lacks standing to enforce the arbitration provision in the loan agreement because Sunlight Financial does not qualify as a Lender. The arbitration provision defines “lender” as follows:
“‘Lender’ means Cross River Bank, any person servicing this Note for Cross River Bank, any subsequent holders of this Note or any interest in this Note, any person servicing this Note for such subsequent holder of this note, and each of their respective parents, subsidiaries, affiliates, predecessors, successors, and assigns, as well as the officers, directors, and employees of each of them . . . .” (Carpenter Suppl. Decl., Ex. A, ¶ 26(a)(ii).)
Sunlight Financial’s motion argues they qualify as a “lender” for the purposes of this arbitration provision because they were the “administrator” of the loan. In support of this argument, Sunlight Financial’s counsel provided a declaration stating Sunlight Financial “is an administrator for the relevant loans” and “provided administrative services on behalf of Cross River Bank between February 2, 2021 and June 24, 2021, and has provided administrative services on behalf of the subsequent holder of the loan since June 24, 2021.” (Carpenter Decl., ¶ 6.) In opposition, the Francos argue Sunlight Financial admitted they were not servicers of the loan in their mandatory settlement conference brief. (Brilliant Suppl. Decl., Ex. B.) But “[s]tatements of counsel in argument (or otherwise) are not evidence and, unless in the form of a stipulation or admission, are not binding on the client.” (Haynes v. Hunt (1962) 208 Cal.App.2d 331, 335.) The Francos fail to explain how arguments in a mandatory settlement conference brief have any evidentiary value. Thus, the court does not find this argument persuasive.
Because 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 the exception in Code of Civil Procedure section 1281.2, subdivision (c) is inapplicable here as 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, however, 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.
In an attempt to avoid the FAA’s preemptive application, the Francos’ supplemental briefing claims the arbitration provision is silent on whether the FAA or California procedural law applies to motions to compel arbitration. Such silence only exists, however, if one ignores the actual language of the arbitration provision. Specifically, the provision states the following in relevant part:
“Borrower and Lender acknowledge and agree that the Arbitration Provision is made pursuant to a transaction involving interstate commerce, and thus the Federal Arbitration Act shall govern the interpretation and enforcement of this Arbitration Provision. . . .” Carpenter Suppl. Decl., Ex. A, ¶ 26(j) (emphasis added).)
By not only applying the FAA to the interpretation of this provision but also to the enforcement of this provision, the parties explicitly incorporated FAA procedural law. After all, the present motion is a direct attempt to enforce this arbitration provision. The Francos also argue that Sunlight Financial expressly agreed to the applicability of California arbitration procedures by filing its motion in a California court. The Francos fail to point to any authority, however, in their initial or supplemental briefing that supports this proposition. Accordingly, the court finds 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 their contention.
In paragraph 26(i) of the arbitration provision, the Francos had the option to reject the arbitration provision within thirty (30) days of the making of the loan agreement. (Carpenter Decl., Ex. A, ¶ 26(i).) Thus, the arbitration provision was not an adhesion contract as they had the ability to reject it without rejecting the entire loan agreement.
The Francos also contend 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 is standard font size. And while the other paragraph headings are bolded, this provision’s heading is stated in all caps in addition to being 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 at issue, the court finds it is not inconspicuous and any procedural unconscionability is minimal at best.
Next, the Francos contend 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, they 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, Rosalia Franco’s uncertainty 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. But this argument also ignores 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 briefly maintain this provision is substantively unconscionable because it limits their right to conduct full discovery. But they fail to develop this one-sentence argument with any citations to statutes or case law. Because any procedural unconscionability is slight and the Francos failed to establish any grounds for substantive unconscionability, the court finds the Francos failed to establish the arbitration provision is unconscionable.
Accordingly, because the Francos fail to establish a defense to the enforcement of the arbitration provision at issue, the court GRANTS Sunlight Financial’s motion.
Best Solar
In this case, Best Solar argues the present action is subject to an arbitration provision in a home improvement contract between the Francos and Best Solar. According to Best Solar, the Francos entered into the contract on February 1, 2021. (Yehoshua Decl., ¶ 2.) On what appears to be the third page of the contract, there is an arbitration provision that states, in relevant part:
“. . . any controversy or claim arising out of or related to this contract, or breach thereof, shall be settled by binding arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association.” (Yehoshua Decl., Ex. A, p. 3.)
Because the Francos’ first cause of action for breach of contract against Best Solar is based on Best Solar’s alleged breach of the home improvement contract (Complaint, ¶ 7, 31), the court finds Best Solar adequately established the applicability of this arbitration provision since the Francos’ cause of action arises out of the home improvement contract. In opposition, the Francos argue Best Solar waived the right to compel arbitration.
In determining whether waiver has occurred, courts consider “(1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit’ before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place; and (6) whether the delay affected, misled, or prejudiced the opposing party.” (Davis v. Shiekh Shoes, LLC (2022) 84 Cal.App.5th 956, 964 (Davis), quoting Peterson v. Shearson/American Express, Inc. (10th Cir. 1988) 849 F.2d 464, 467-468.) But in light of the U.S. Supreme Court’s decision in Morgan v. Sundance, Inc. (2022) 142 S.Ct. 1708 (Morgan), courts no longer consider the sixth factor looking at prejudice. (Davis, supra, 84 Cal.App.5th at p. 966.)
In this case, the Francos argue Best Solar’s actions were inconsistent with the right to arbitrate for the following reasons. First, the Francos attack Best Solar’s motion as “weak” because it failed to provide a procedural history of the present action. It is unclear to the court, however, how the formatting of Best Solar’s motion has any bearing on the substantive issue of whether Best Solar acted in a manner inconsistent with the right to arbitrate. Second, the Francos note their Complaint references the arbitration provision in the home improvement contract. As with their first argument, the court finds this argument also has no relevance since the Complaint was not a pleading filed by Best Solar. Third, the Francos claim Best Solar waived the right to arbitrate by failing to include it as an affirmative defense in their answer. Unlike the first two arguments, the court finds this claim has merit as “the failure to plead arbitration as an affirmative defense is an act inconsistent with the later assertion of a right to arbitrate.” (Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558.)
Fourth, the Francos point out that when Best Solar filed a joint case management statement on November 28, 2023, with the Francos, the parties agreed to participate in mediation and a settlement conference while noting dates for depositions. (Brilliant Decl., Ex. C.) The court also notes that binding private mediation was not selected by the parties. (Brilliant Decl., Ex. C.) But the court does not find the absence of arbitration significant as this was a joint document and selecting arbitration would have required the Francos consent or agreement.
Fifth, the Francos note that Best Solar’s opposition to Sunlight Financial’s motion to compel arbitration expressly opposes arbitration of their claims. (Brilliant Decl., Ex. D.) Specifically, Best Solar argued they opposed arbitration because they did not agree to arbitration and “reserve their right to have the matter litigated.” (Brilliant Decl., Ex. D, p. 2:18-20.) They also argued “the Court is the most appropriate forum for a thorough and just examination of the issues. Arbitration, which was neither agreed to nor compelled, would unduly limit the scrutiny of these questionable claims and compromise the pursuit of justice.” (Brilliant Decl., Ex. D, p. 3:13-16.) The court does note that Sunlight’s motion to compel arbitration was not brought pursuant to the present arbitration provision and was instead brought pursuant to a provision in a separate lending agreement. Nonetheless, the court notes Best Solar’s broad objections to the fairness and appropriateness of arbitration do appear inconsistent with a party who later attempts to compel arbitration.
Sixth and last, the Francos point out that in Best Solar’s most recent case management statement filed on September 23, 2024, Best Solar requested a jury trial, noted deadlines for completion of discovery, and stated agreeability to mediation and settlement conference. (Brilliant Decl., Ex. E.) The court notes, however, this is not entirely inconsistent since the case management statement also mentioned private binding medication. Furthermore, the court interprets Best Solar’s request for a jury trial as a means to avoid the waiver of a jury trial should the court deny Best Solar’s instant motion. To the extent the Francos’ supplemental briefing suggests this was an attempt to substantially invoke litigation machinery by stating an intention to conduct discovery and engage in nonbinding judicial arbitration, the court finds these statements do not constitute a substantial invocation of litigation machinery, especially when there is no evidence the parties actually engaged in trial or discovery.
When the court takes into account Best Solar’s failure to raise arbitration as an affirmative defense in their answer and their opposition to Sunlight Financial’s motion to compel arbitration, the court finds Best Solar’s actions are inconsistent with the right to arbitrate. But this is not the only factor the court considers. As established in Davis, supra, 84 Cal.App.5th at p. 964, the second factor which looks at “whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate” (Ibid), the Francos do not specifically address this factor beyond noting Best Solar is utilizing the present motion as a litigation tactic following an unsuccessful mandatory settlement conference. The court categorically rejects that participation in a mandatory settlement conference constitutes a substantial invocation of litigation machinery. It does not, especially when Best Solar has not filed any other motions.
Third, the court considers “whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay.” (Ibid.) The first issue is inapplicable here since the court has not yet set the matter for trial. As to the issue of delay, the Francos do not explicitly address this issue beyond noting Best Solar waited to compel arbitration for fourteen months. But, from the time Best Solar filed an answer on August 17, 2023, to the filing of the present motion on September 13, 2024, this action was stayed for nearly three and one-half months due to Sunshine Financial’s initiation of bankruptcy proceedings. Thus, Best Solar only delayed for ten and one-half months.
Fourth and last, the court considers “whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place.” (Ibid.) The Francos do not address this ground and do not provide any evidence of Best Solar taking such important intervening steps. Thus, the only factors suggesting waiver has occurred are Best Solar’s inconsistent actions and a ten-and one-half-month delay in bringing the present motion. Because the Francos fail to establish how Best Solar has also substantially invoked the machinery of litigation and taken important intervening steps prior to the filing of the present motion, the court does not find Best Solar waived its right to compel arbitration.
Finally, to the extent the Francos also argue there is a possibility of conflicting rules pursuant to Code of Civil Procedure section 1281.2, this argument fails since the court has also granted Sunlight Financial’s motion to compel arbitration.
Accordingly, the court GRANTS Best Solar’s motion to compel arbitration.
CONCLUSION
Based on the foregoing, Sunlight Financial and Best Solar’s motions to compel arbitration are GRANTED.