Judge Thomas D. Long, Case Number: 23STCP00305, Date: 2023-08-15 Tentative Ruling

On February 3, 2023, Petitioner Farnaz Khavari filed a petition to compel arbitration against Respondents Asset Commercial Lending LLC and Carol Baker Real Estate Inc.

When seeking to compel arbitration, the movant must allege the existence of an agreement to arbitrate. (Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 219.) The burden then shifts to the opponent to prove the falsity of the agreement. (Ibid.) After the Court determines that an agreement to arbitrate exists, it then considers objections to its enforceability. (Ibid.)

The Court must grant a petition to compel arbitration unless the movant has waived the right to compel arbitration or if there are grounds to revoke the arbitration agreement. (Ibid.; Code Civ. Proc., § 1281.2.) Under California law and the Federal Arbitration Act, an arbitration agreement may be invalid based upon grounds applicable to any contract, including unconscionability, fraud, duress, and public policy. (Sanchez v. Western Pizza Enterprises, Inc. (2009) 172 Cal.App.4th 154, 165-166.)

The parties agree that Petitioner and Asset Commercial Lending LLC entered into a California Residential Purchase Agreement (“RPA”), and Asset later assigned the rights of the agreement to Carol Baker Real Estate Inc. (Petition at p. 2; Opposition at p. 2.) Petitioner provides a copy of the RPA. (Petition, Ex. 1.) Through the RPA, the parties “agree that any dispute or claim in Law or equity arising between them out of this Agreement or any resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration. The Parties also agree to arbitrate any disputes or claims with Broker(s), who, in writing, agree to such arbitration prior to, or within a reasonable time after, the dispute or claim is presented to the Broker.” (Petition, Ex. 1 at p. 8, ¶ 22(B).)

Respondents argue that the RPA was fraudulently induced and is illegal, void, and unenforceable. (Opposition at pp. 4-5.) Specifically, Respondents contend that the RPA was procured by an unlicensed real estate professional who falsely represented the appraisal value of the property, constituting fraud in the execution or inception and a violation of Business and Professions Code section 10130 et seq.

“It has long been settled that when parties have agreed to arbitration, challenges to the validity of the underlying contract, including contract defenses such as fraud in the inducement or illegality, are for the arbitrator to decide. [Citations.] This is because the arbitration clause is viewed as separate from the underlying contract. [Citation.] Thus, allegations that the main contract is unlawful or unconscionable does not affect the enforceability of the arbitration clause. [Citation.]” (Nielsen Contracting, Inc. v. Applied Underwriters, Inc. (2018) 22 Cal.App.5th 1096, 1107-1108 (Nielsen Contracting).)

Respondents’ cited cases (Opposition at p. 4) are distinguishable and do not support their argument. A contract is void for fraud in the execution when “‘the fraud goes to the inception or execution of the agreement, so that the promisor is deceived as to the nature of his act, and actually does not know what he is signing, or does not intend to enter into a contract at all.’” (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 415 (Rosenthal); see also Duffens v. Valenti (2008) 161 Cal.App.4th 434, 448 (Duffens) [reiterating “the correct analysis” from Rosenthal].) “[C]laims of fraud in the execution of the entire agreement are not arbitrable under either state or federal law. If the entire contract is void ab initio because of fraud, the parties have not agreed to arbitrate any controversy.” (Rosenthal, supra, 14 Cal.4th at p. 416.) That is not what Respondents allege here. There is no evidence that Respondents did not intend to enter into the RPA and that the contract lacked mutual assent.

“Fraud in the inducement, by contrast, occurs when ‘“the promisor knows what he is signing but his consent is induced by fraud, mutual assent is present and a contract is formed, which, by reason of the fraud, is voidable. In order to escape from its obligations the aggrieved party must rescind . . . .”’” (Rosenthal, supra, 14 Cal.4th at p. 415.) “[C]laims that the contract as a whole was obtained through fraud in the inducement are, in the absence of evidence of the parties’ contrary intent, arbitrable.” (Id. at p. 419; see also Nielsen Contracting, supra, 22 Cal.App.5th at p. 1107; Duffens, supra, 161 Cal.App.4th at p. 449.)

The illegality of the underlying contract is also an issue for the arbitrator. (Nielsen Contracting, supra, 22 Cal.App.5th at p. 1107.) There is an exception for agreements that must comply with statutory requirements in order to be enforceable (see Duffens, supra, 161 Cal.App.4th at p. 456), but that exception does not apply here, and there is no argument that the RPA itself is deficient.

Respondent has not shown grounds to revoke the arbitration agreement. (Code Civ. Proc., § 1281.2.) Accordingly, the petition to compel arbitration is GRANTED.

A Status Conference re: Arbitration is scheduled for 08/15/2024 at 8:30 AM in Department 48 at Stanley Mosk Courthouse (August 15, 2024). Five court days before, the parties are to file a joint report stating the name of their retained arbitrator and the status of arbitration.

Parties who intend to submit on this tentative must send an email to the Court at SMCDEPT48@lacourt.org indicating intention to submit. If all parties in the case submit on the tentative ruling, no appearances before the Court are required unless a companion hearing (for example, a Case Management Conference) is also on calendar.

Hon. Thomas D. Long

Judge of the Superior Court