Lawler v. Casey
Filed 7/27/12 Lawler v. Casey CA1/1
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST
APPELLATE DISTRICT
DIVISION
ONE
MICHAEL
LAWLER,
Plaintiff and Respondent,
v.
JOHN KEVIN
CASEY, et al.,
Defendants and Appellants.
A132620
(San Mateo
County
Super. Ct.
No. CIV-499881)
A
partnership to run a bed and breakfast in Nicaragua soured. Amidst ongoing legal jockeying in Nicaragua, one partner, Michael
Lawler, has sued his partners, John and Patricia Casey, and their former
corporation, Montecito Designs, Inc. (collectively Casey) in California. Lawler alleges fraud surrounding an
allegedly entered into in San Mateo, California. Casey petitioned to compel arbitration of
Lawler’s claims based on an arbitration
clause in a written partnership agreement signed by the parties in Nicaragua. The trial court denied arbitration because
the arbitration clause appointed a biased arbitrator—namely, Casey’s
lawyer. While we agree the named
arbitrator cannot serve as such, we nevertheless reverse and remand because the
trial court should have severed the biased appointment from the remainder of
the arbitration clause, instead of voiding the clause in its entirety.
I. Factual and Procedural Background
According
to Lawler, on January 15, 2006, while in San Mateo, California, John Casey
“represented” to Lawler “he would enter into a joint venture and partnership
with [Lawler] to purchase and develop real property into income producing
properties in San Juan del Sur, Nicaragua, wherein [Lawler and Casey] would
contribute equal amounts of capital for acquisition and improvement of real
properties in Nicaragua and share equally in the income and profits.” Lawler further claims the parties, in fact,
entered an oral partnership agreement in San Mateo on January 21, 2006. He also
claims Casey told him they would need to form an entity in Nicaragua, a “Societe Anonima,” to
carry out the partnership’s business.
Whether
Casey disputes that these oral representations
and agreements were made is unclear from the record. It is undisputed, however, that on March 13, 2006, Casey and Lawler were in Rivas, Nicaragua and signed a written
contract, which, while cryptically titled “Legal Document Number thirty eight
(38) De Facto Corporation”, is essentially a partnership agreement. It states there will be a company called
“Casey & Lawle [sic] S.A.” that
will operate a bed and breakfast in Port of San Juan del Sur, Nicaragua and
other ventures. The company is to have the
authority to do all things necessary and convenient to carry out its
purpose. Further, “[t]he company shall
have a term of duration of THREE years,” which would be automatically extended
“unless the partners request its dissolution and subsequent liquidation no less
that [sic] six months before the date
the term is set to expire.” The contract
states what percentage of each business the partners will own and what
contributions to the company, financially and operationally, each is expected
to make.
The
contract contains a “CLAUSE FIVE ON ARBITRATION,” which states: “In the case of a disagreement of any kind
between the partners, they shall submit to Arbitration under a Fair and
Impartial Arbitrator that is herewith appointed to [sic] Mr. Carlos Luis Fuertes Gonzales, the undersigned Notary
Public. The Parties shall be bound by
law to abide by the Arbitrator’s determination.”
Less
than two years after signing their written contract, in 2008, the Casey and
Lawler collaboration began to unravel as each contested the other’s rights in
certain real property. Casey demanded
arbitration of the partners’ dispute.
Lawler refused, and instead, the parties have fought in and out of Nicaraguan
courts to create and remove liens on the contested real property. Gonzales, supposedly the parties’ neutral
arbitrator, assisted Casey in some of these disputes.
In
October 2010, Lawler turned the parties’ legal woes into a multi-national
affair, filing suit against Casey in superior court in San Mateo,
California. Lawler’s first amended
complaint, filed February 23, 2011, asserts:
(1) a common count for an unspecified debt owed Lawler; (2) fraud by
misrepresentation, concealment, and false promises related to the alleged oral
partnership; (3) a RICO violation based on use of the mail and bank wires to
perpetuate the alleged fraud and based on alleged misuse of the Nicaraguan
judicial system; (4) false imprisonment of Lawler, apparently in his Nicaraguan
home; (5) conversion of unspecified money; (6) accounting for money due Lawler
under the oral partnership agreement; and (7) breach of fiduciary duty for
failing to make an accounting as requested in July 2008.
Based
on the arbitration clause in the written contract, Casey, on March 24, 2011,
filed a verified petition to compel arbitration under Code of Civil Procedure
section 1281.2
title="">[1] and related
statutes. Lawler opposed the petition,
asserting the named arbitrator, Gonzales, was biased; the written contract had
expired; the written contract was invalid under Nicaraguan law because it,
among other things, concerned an impermissible form of business entity and did
not identify an interpreter; and Casey had waived arbitration based on a
claimed delay in filing a petition for arbitration in this case and for
allowing various proceedings in Nicaragua without seeking arbitration.
The
parties presented several written declarations in support of their respective
positions. As to Gonzales’ neutrality,
however, Casey conceded Gonzales was in fact no longer neutral, but asked the
trial court to sever Gonzales’ appointment from the arbitration clause rather
than invalidate the clause entirely.
The
trial court focused on Gonzales’ lack of neutrality. At a brief hearing on June 10, 2011, the
trial court stated it thought it had “discretion to toss the whole arbitration
agreement.” And the trial court did so
in a two-line order issued on June 28, 2010, stating: “Arbitration must meet certain minimum requirements
including the neutrality of the arbitrator.
[Citations.] The instant
arbitration agreement does not meet this minimum requirement.” The court did not address the parties’ other
contentions, did not expressly find any facts, and did not explain why it chose
to exercise its discretion to void the whole arbitration clause in its
entirety. Neither party requested a
statement of decision.
Casey
filed a timely notice of appeal from the order denying the arbitration petition
on July 13, 2011.
Standard of Review
“In
reviewing an order denying a motion to compel arbitration, we review the trial
court’s factual determinations under the substantial evidence standard, and we
review issues of law de novo.” (
(2011) 198 Cal.App.4th 1316, 1320.)
In some circumstances, the trial court has discretion to compel or deny
arbitration. In such cases, we review
the court’s discretionary decision for abuse of discretion. (See Whaley
v. Sony Computer Entertainment America, Inc. (2004) 121 Cal.App.4th 479,
484 [section 1281.2, subdivision (c), states court “may” choose one of several
options when party to arbitration agreement is also in a related court
proceeding with a third party]; Henry v.
Alcove Investment, Inc. (1991) 233 Cal.App.3d 94, 101 [same]; cf.
Services, Inc. (2000) 24 Cal.4th 83, 121-122 (Armendariz) [a court has limited discretion, depending on the
circumstances, to reform or void an arbitration clause with unconscionable
terms].)
Choice of Law
Although
the parties signed the written contract in Nicaragua for the purpose of
carrying out business in Nicaragua, we will apply California law to the
arbitration issue before us unless otherwise noted. Both Casey and Lawler have, with limited exceptions
discussed below, cited to only California law, both here and in the trial
court. Neither party contends the
questions of arbitrability or severance should be decided under Nicaraguan
law. The trial court applied California
law without objection. Under these
circumstances, we deem any choice of law issue waived. (See Segal
v. Silberstein (2007) 156 Cal.App.4th 627, 632-633 [deeming issue waived
and applying California law even when contract required application of Texas
law].)
Severability
On
appeal, Casey does not defend the contractual term appointing his lawyer,
Gonzales, arbitrator. Rather, Casey
asserts the trial court abused its discretion by striking the entire
arbitration clause rather than severing that single, offensive term.
Civil
Code section 1670.5, subdivision (a), pertaining to contracts generally,
“provides that ‘[i]f the court as a matter
of law finds the contract or any clause of the contract to have been
unconscionable at the time it was made the court may refuse to enforce the
contract, or it may enforce the remainder of the contract without the
unconscionable clause, or it may so limit the application of any unconscionable
clause as to avoid any unconscionable result.’
Comment 2 of the Legislative Committee comment on section 1670.5,
incorporating the comments from the Uniform Commercial Code, states: ‘Under this section the court, in its
discretion, may refuse to enforce the contract as a whole if it is permeated by
the unconscionability, or it may strike any single clause or group of clauses
which are so tainted or which are contrary to the essential purpose of the
agreement, or it may simply limit unconscionable clauses so as to avoid
unconscionable results.’ (Legis. Com.
com., 9 West’s Ann. Civ. Code (1985 ed.) foll. § 1670.5, p. 494
(Legislative Committee comment).)” (
“Thus,
the statute appears to give a trial court some discretion as to whether to
sever or restrict the unconscionable provision or whether to refuse to enforce
the entire agreement. But it also
appears to contemplate the latter course only when an agreement is ‘permeated’
by unconscionability.” (
122.) Put another way: “If the central purpose of the contract is tainted
with illegality, then the contract as a whole cannot be enforced. If the illegality is collateral to the main
purpose of the contract, and the illegal provision can be extirpated from the
contract by means of severance or restriction, then such severance and
restriction are appropriate.” (
“interests of justice” by “conserving” lawful contractual relations and by
avoiding undeserved benefits or detriments that would flow from voiding an
entire agreement, particularly if the agreement has been partially
performed. (Id. at pp. 123-124.)
Although
Armendariz notes a trial court has
some discretion in selecting a remedy for the presence of unconscionable terms,
it also notes this discretion is not unfettered. “Whether a contract is severable in this
regard”—that is, whether it is permeated by unconscionability—“is primarily a
question of contract interpretation . . . subject to de novo review unless the
interpretation turns on the credibility of extrinsic evidence.” (Sanchez
v. Western Pizza Enterprises, Inc. (2009) 172 Cal.App.4th 154, 178,
citing Armendariz,
(2007) 156 Cal.App.4th 138, 149 [“The court has discretion under this statute
to refuse to enforce an entire agreement if the agreement is ‘permeated’ by
unconscionability.”].)
In
the trial court’s decision to strike an entire “adhesive” arbitration agreement
between an employer and employee because the agreement contained more than one
unconscionable term, indicating a “systematic effort to impose arbitration on
an employee not simply as an alternative to litigation, but as an inferior
forum that works to the employer’s advantage.”
(Armendariz,
124.) Further, the arbitration agreement
was so one-sided—that is, it required the employee to arbitrate, but not the
employer—there was “no single provision” to strike and reformation would
impermissibly require augmentation of the contract with additional terms. (Id.
at pp. 124-125.)
Significantly, Armendariz
distinguished Graham v. Scissor-Tail,
Inc. (1981) 28 Cal.3d 807, 831 (Scissor-Tail). In Scissor-Tail,
the Supreme Court held “a contractual provision designating the union of one of
the parties to the contract as the arbitrator of all disputes arising
thereunder . . . does not achieve the ‘minimum levels of integrity’ which we
must demand of a contractually structured substitute for judicial proceedings.” (Id.
at p. 828.) Nonetheless, the court did
“not believe that the parties herein should for this reason be precluded from
availing themselves of nonjudicial means of settling their differences.” (Id.
at p. 831.) It continued: “The parties have indeed agreed to arbitrate,
but in so doing they have named as sole and exclusive arbitrator an entity
which we cannot permit to serve in that broad capacity. In these circumstances we do not believe that
the parties should now be precluded from attempting to agree on an arbitrator
who is not subject to the disabilities we have discussed. We therefore conclude that upon remand the
trial court should afford the parties a reasonable opportunity to agree on a
suitable arbitrator and, failing such agreement, the court should on petition
of either party appoint the arbitrator.
(See and cf. § 1281.6.)” (
Scissor-Tail’s outcome, according to Armendariz, depended in part on section 1281.6. (Armendariz,
“If
the arbitration agreement does not provide a method for appointing an
arbitrator, the parties to the agreement who seek arbitration and against whom
arbitration is sought may agree on a method of appointing an arbitrator and
that method shall be followed. In the absence of an agreed method, or if the
agreed method fails or for any reason cannot be followed, or when an arbitrator
appointed fails to act and his or her successor has not been appointed, the
court, on petition of a party to the arbitration agreement, shall appoint the
arbitrator.” (§ 1281.6.)
Armendariz then noted “[o]ther cases,
both before and after Scissor-Tail,
have also held that the part of an arbitration clause providing for a
less-than-neutral arbitration forum is severable from the rest of the
clause. (See Lewis v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1986) 183
Cal.App.3d 1097, 1107 . . . ; Richards v.
Merrill Lynch, Pierce, Fenner & Smith, Inc. (1976) 64 Cal.App.3d
899, 906 . . . .) [¶] Thus, in
above, the arbitration statute itself gave the court the power to reform an
arbitration agreement with respect to the method of selecting
arbitrators.” (Armendariz, supra, 24
Cal.4th at p. 126.)
The
trial court appears to have understood it had some discretion to sever the
provision naming Gonzales arbitrator or to void the entire arbitration
clause. However, there is nothing in the
record indicating the court actually exercised its discretion within the bounds
of Armendariz and
statement of reasons on the question of severance versus invalidation. This, alone, would require reversal. (See Fletcher
v. Superior Court (2002) 100 Cal.App.4th 386, 391-392 [failure to exercise
discretion at all is an abuse of discretion]; Kim v. Euromotors West/The Auto Gallery (2007) 149 Cal.App.4th
170, 176-177 [failure to exercise discretion in accordance with governing legal
principles is error].)
Moreover,
applying our independent judgment on this question of law—is the arbitration
clause “permeated” by unconscionability—we conclude, based on the record before
us, the clause is not so laden and therefore the appointment provision should
have been severed, and the clause not voided in its entirety. Like Scissor-Tail,
and unlike Armendariz, the clause’s
only relevant defect is naming a now-biased individual as arbitrator. Otherwise, it simply calls for neutral
arbitration.
Lawler
nonetheless contends the clause is also defective, and thus permeated with
unconscionability, because it omits provisions for adequate discovery and
limited judicial review, and, more generally, fails to specify the rules that
will apply to arbitration. These might
well be shortcomings in an arbitration provision clause in an adhesive contract
to arbitrate a remedial statutory claim, as “parties agreeing to arbitrate
statutory claims must be deemed to ‘consent to abide by the substantive and
remedial provisions of the statute’ ” at issue. (Armendariz,
supra, 24 Cal.4th at p. 101
[requiring judicial review and discovery in arbitrations of California Fair
Employment and Housing Act (FEHA) (Gov. Code, § 12900 et seq.) claims to
give full effect to that statute].) But
the absence of such terms, even in that type of arbitration clause, does not
render it permeated with unconscionability.
Rather, such terms are, as required, “implied as a matter of law” and
their absence, even in Armendariz,
“provide[s] no basis to deny the enforcement of the arbitration agreement.” (Sanchez
v. Western Pizza Enterprises, Inc. (2009) 172 Cal.App.4th 154, 176-177
[noting it was only the clause’s unilateral nature and the unlawful damages
provision that contributed to the “permeation” analysis in Armendariz].)
Further,
the arbitration clause here is not part of a contract of adhesion, and Lawler
has not invoked any remedial statute entitling him to special procedural
mechanisms.
title="">[3] In fact, Lawler has cited no authority, and
we have found none, allowing a court to void a freely-negotiated, arm’s length
arbitration agreement simply because it lacks a level of specificity about
procedures. (Cf. Coast Plaza Doctors Hospital v. Blue Cross of California (2000) 83
Cal.App.4th 677, 689 [“We are not aware of any case that has ever held that an
arbitration provision is substantially unconscionable merely because a party’s
discovery rights are limited in arbitration.
Limited discovery rights are the hallmark of arbitration.”];
(1991) 234 Cal.App.3d 192, 199, 201 [confronted with a “skeletal” arbitration
agreement parroting a statutory requirement for arbitration before a “single
neutral arbitrator,” the court enforced the agreement by reference to the
arbitrator selection provision in section 1281.6].)
Lawler
also asserts severance would not be in the interests of justice because it
would presumably result in a Nicaragua-based arbitration. Even assuming this issue relates to whether
the agreement is permeated with unconscionability, the parties
Gonzales, in the first place, and we fail to see how appointing a second
Nicaraguan arbitrator would, in these circumstances, stifle the interests of
justice.
Lawler
further asserts Casey “had the burden of producing evidence to establish” the
“rationale for severance,” namely evidence of an undeserved benefit or
detriment if the entire arbitration clause were voided, and evidence of Casey’s
own performance under the agreement. Although
Armendariz states avoidance of undeserved
benefit or detriment is one rationale
for severance (Armendariz,
[severance may “prevent parties from gaining undeserved benefit or suffering
undeserved detriment as a result of voiding the entire agreement—particularly
when there has been full or partial performance”]), the case does not make it a
necessary prerequisite for severance
and places no evidentiary burden on the party favoring severance. Armendariz
instead goes on to re-emphasize the key question we have already answered—the
extent an agreement is tainted or permeated with unconscionability. (Id.
at p. 124.) In any case, if the
arbitration clause here were voided, the parties’ expectation of arbitration
would frustrated, which from at least Casey’s perspective would be a
detriment. (See Scissor-Tail, supra, 28
Cal.3d at p. 831 [“The parties have indeed agreed to arbitrate. . . . In these circumstances we do not believe that
the parties should now be precluded from” arbitration entirely.].) Severance best fits the parties’ contractual
intentions.
On
remand, if the trial court does not deny arbitration on other grounds, which we
address in the next section, it must sever the portion of the parties’
arbitration clause appointing Gonzales as arbitrator and follow the
the parties a reasonable opportunity to agree on a suitable arbitrator and,
failing such agreement, the court should on petition of either party appoint
the arbitrator. (See and cf. Code Civ.
Proc., § 1281.6.)” (Scissor-Tail, supra, 28 Cal.3d at p. 831
If the court appoints a substitute arbitrator, the court should select
one similar to the originally-appointed arbitrator to best give effect to the
parties’ original intent in agreeing to arbitrate. (Civ. Code, §§ 3399 [revision must “express
the intention of the parties”]; 3401 [“In revising a written instrument,
the court may inquire what the instrument was intended to mean, and what were
intended to be its legal consequences . . . .”].)
Written Contract
Lawler
contends the trial court’s denial of arbitration can be affirmed on two other
grounds. He asserts the parties’ written
contract is wholly illegal under Nicaraguan law because (a) it did not meet
formalities for contracts between parties that do not speak Nicaragua’s
official language and (b) it concerns a type of business entity Nicaragua does
not permit.
title="">[4] (See Duffens
v. Valenti (2008) 161 Cal.App.4th 434, 454, italics omitted
[“ ‘Contracts contrary to express statutes or to the policy of express
statutes are illegal’ ” and “ ‘[s]uch illegality voids the entire
contract, including the arbitration clause.’ ”].) Lawler also asserts Casey waived arbitration
based on a claimed five-month delay in filing a petition for arbitration in
this case and for allowing legal proceedings in Nicaragua between the parties
without seeking arbitration.
The
trial court did not reach either issue, and we decline to in the first instance
since Lawler’s illegality and waiver arguments raise questions of fact.
“Ordinarily,
when the trial court gives an incorrect legal reason for its ruling, we look
for any correct legal basis on which to sustain the judgment.” (Affan
v. Portofino Cove Homeowners Assn. (2010) 189 Cal.App.4th 930, 944.) “ ‘[W]here . . . a respondent argues [an
alternate ground] for affirmance based on substantial evidence, the record must
show the court actually performed the
factfinding function. Where the record
demonstrates the trial judge did not weigh the evidence, the presumption of
correctness is overcome.
[Citation.] . . . “The [substantial evidence] rule thus
operates only where it can be presumed that the court has performed its
function of weighing the evidence. If
analysis of the record suggests the contrary, the rule should not be invoked.”
’ ” (Id.
at pp. 944-945; see also International
Aerial Tramway Corp. v. Konrad Doppelmayr & Sohn (1969) 70 Cal.2d
400, 406, fn. 6 [“ ‘Where the record reflects that the trier of fact has
not considered a theory under which the evidence is conflicting, the reviewing
court cannot rely on that theory to sustain the action of the lower
court.’ ”].)
To
address Lawler’s illegality argument we would need to apply Nicaraguan law.
of a foreign nation . . . is a question of law to be determined in the manner
provided in Division 4 (commencing with Section 450)” concerning judicial
notice. (Evid. Code, § 310, subd.
(b).) Here, however, the parties have submitted
conflicting declarations about the interpretation of Nicaraguan law. Lawler provided a declaration from a
Nicaraguan attorney purportedly attaching portions of Nicaraguan statutory law,
from which Lawler argues the parties’ contract should be voided. Casey responded with an affidavit from
another Nicaraguan attorney stating the first lawyer’s interpretation of the
law was wrong. In this case, where the
interpretation and application of the law, not merely its existence, is at
issue, the court faces a question of fact we would review for substantial
evidence. (See Estate of Arbulich (1953) 41 Cal.2d 86, 99 [“the question of
how such statutes . . . have been interpreted and applied by a foreign country
is a question of fact”]; Logan v. Forster
(1952) 114 Cal.App.2d 587, 595-596 [“Where the meaning of the statutory
law of a foreign country is in controversy and its elucidation requires expert
testimony, the resolution of such conflict as to the meaning and effect of the
foreign law remains a question to be determined by the trier of the facts
[citation] and such determination, if supported by substantial evidence, will
not be disturbed on appeal.”]; cf. Societe
Civile Succession Richard Guino v. Redstar Corp. (2007)
153 Cal.App.4th 697, 701 [“There is no conflicting extrinsic evidence
concerning the meaning of the French judgment.
It follows that the interpretation of the French judgment is a question
of law.”].)
Waiver
of an arbitration agreement is also a question “of fact, and an appellate
court’s function is to review a trial court’s findings regarding waiver to
determine whether these are supported by substantial evidence.” (Engalla
v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 983-984.)
Accordingly,
we do not reach Lawler’s illegality and waiver defenses to enforcement of the
arbitration provision, and leave them for the trial court to address on remand.
III. Disposition
The
order denying Casey’s petition to compel arbitration is reversed. On remand, the trial court must consider and
rule on Lawler’s other defenses to the enforcement of the arbitration
provision. If the court rejects these
defenses, it must then sever that part of the arbitration provision appointing
Gonzales arbitrator and follow the procedure in Scissor-Tail for appointing a substitute arbitrator.
_________________________
Banke,
J.
We
concur:
_________________________
Marchiano,
P. J.
_________________________
Dondero,
J.
Code of Civil Procedure unless otherwise specified.
case, we take note of Alan v. Superior
Court (2003) 111 Cal.App.4th 217, 227-228.
While acknowledging “if the obstacle to arbitration can be resolved by
the appointment of an arbitrator, a court may . . . make such an
appointment and compel the parties to arbitrate,” it held “ ‘[i]f an
arbitration agreement designates an exclusive arbitral forum (e.g., the NYSE),
and arbitration in that forum is not possible, courts may not compel
arbitration in an alternate forum by appointing substitute arbitrators . . . .’
” (Id.
at pp. 227-229.) Alan does not mention Scissor-Tail. It does, however, limit its holding to cases in which choice of an arbitral
forum, and particularly its rules, are an “integral part” of the arbitration
agreement. (See Alan, at pp. 228-229.) Here,
in contrast, the arbitration clause is silent as to the procedural rules that
will apply and any expectation that a certain set of rules would apply would be
unreasonable. Accordingly, this case is
akin to Scissor-Tail, which deals
squarely with arbitral bias.
