The Loose Noose of Binding Arbitration

When there is a binding arbitration agreement and the arbitrator has clearly made an erroneous decision, will the courts set it aside? Moore v. First Bank of San Luis Obispo (1998) examines this question.

The appellants (the persons who apply to a higher court for a reversal of the decision of a lower court) were shareholders in a privately held real estate development corporation. The corporation purchased real property in San Luis Obispo County on which it intended to develop condominium complexes. To this end, the real estate development corporation made a series of construction loans totaling $1,645,435.76 to the corporation secured by seven deeds of trust on the properties. 

After construction commenced, the shareholders discovered that the property was environmentally contaminated which increased development costs. In order to obtain further financing, the shareholders executed home equity lines of credit secured by deeds of trust to their personal residences in favor of the corporation. The purpose of this transaction was to create "equity" in the development project by shifting some of the corporate debt on the parcels to the individual residences of the shareholders. The shareholders alleged that, in return, the corporation promised to reconvey as many deeds of trust on the property as the new equity lines were able to pay for so that financing from a construction lender could be obtained. 

In early 1993, after payments were not made on the debt, the corporation initiated non-judicial foreclosure proceedings pursuant to the seventh deed of trust securing a construction loan in the amount of $160,000. In March of 1993, the corporation took title to the real property after making a full credit bid at the foreclosure sale. The corporation also filed notices of default against the shareholders' personal residences under the "equity line" deeds of trust and commenced non-judicial foreclosure proceedings on their homes. 

In response, the shareholders filed the instant action for damages, declaratory relief, and injunctive relief. The shareholders sought to prevent the foreclosures as violative of the anti-deficiency statutes, and to cancel their debt instruments and deeds of trust to their residences on grounds of mistake, fraud, and failure of consideration. What is the anti-deficiency statute? The anti-deficiency statute is legislation enacted by the United States Congress to prevent the incurring of obligations or the making of expenditures (outlays) in excess of amounts available in appropriations or funds. Their complaint also sought monetary damages for fraud and unfair business practices. Finally, they sought attorney's fees pursuant to a provision in the deeds of trust.

The corporation filed a cross-complaint, seeking judicial foreclosure of the subject deeds of trust, a deficiency judgment for the amount owed after deducting the proceeds of the sales of the homes, and attorney's fees.

The trial court subsequently ordered the action to binding arbitration before the American Arbitration Association pursuant to a provision in the equity line agreements. In July of 1997, the panel of arbitrators issued their award in favor of the appellants (the shareholders). The arbitrators ordered the corporation to (1) cancel all obligations under the home equity lines, the deeds of trust, and the blanket liens that were the subject of the action; (2) reconvey all deeds of trust; and (3) release all obligations under any promissory notes or other documents. The arbitrators found, however, that the corporation owed no monetary sum to the appellants, and they ruled that each party shall pay its own attorney fees. 

The corporation subsequently filed a motion in the trial court to confirm the arbitration award. The shareholders opposed the motion and moved to correct the arbitration award to provide that they were entitled to recover their attorney's fees and costs from the corporation. The shareholders argued that the arbitration award gave no effect to the mandatory provision for attorney's fees in the deeds of trust, that they had prevailed on their contract claims, and that the arbitrators exceeded their powers by failing to award appellants attorney's fees and costs. 

The corporation opposed the appellants' motion, contending that the arbitrators clearly determined that neither side was a prevailing party. The corporation contended that the arbitrators had the power to decline to find a prevailing party and fashion a relief they considered just and fair under the circumstances. The corporation argued the award was a 'mixed result' for the parties because both sides won and lost -- the corporation was denied foreclosure rights and the shareholders were denied monetary damages against it. 

The trial court denied the appellants' motion to correct the award, reasoning that the arbitrators were expressly asked to declare the appellants (the shareholders) the prevailing party and to award them attorney's fees, but it instead ordered the parties to bear their own fees and costs. Accordingly the court granted the corporation's motion to confirm the award and entered judgment consistent with the award. 

What was the legal error? When an arbitration panel issues an award which makes one side the prevailing party and then refuses to award attorney's fees under mandatory provisions of the parties' agreement, the award contains a legal error which is not subject to judicial review. Civil Code section 1717 provides that fees shall be awarded to the prevailing party on a contract where the contract provides for attorney's fees. The appellants were, as a matter of law, the prevailing parties in this action and were entitled to an award of fees and costs. The arbitration award shows a clear error of law on this point.

Any defect in an arbitrator's award resulting from an error of fact or law, no matter how flagrant, is neither reviewable nor correctable, unless:

• the arbitrator exceeded their authorized powers;
• the arbitrator acted with fraud or corruption;
• the arbitrator failed to disclose grounds for their disqualification of a dispute;
• the award was procured by corruption, fraud or other misconduct; or
• the refusal of the arbitrators to postpone the hearing substantially prejudiced the rights of the party

An arbitrator, unlike a judge in a court of law, is not bound by the rules of law controlling conduct when arbitrating a dispute. Even when the arbitrator agrees to follow applicable California law, their erroneous award, unlike an award of court, cannot be corrected by any judicial review. 

When I purchased my first house in 2018, I noticed in the pre-printed purchase agreement published by the California Association of Realtors (CAR), there was a boilerplate arbitration provision. Prior to taking Real Estate Practice, I didn't pay much attention to the arbitration provision. My real estate agent reassured me that initialing the arbitration provision is "standard practice." She did not mention any of the risks and did not educate me on the adverse ramifications of initialing the arbitration provision. Back then, I knew little about arbitration beyond the pretext that it is less costly and more efficient than litigation. In 2018, I didn't know enough to inquire about it. 

Arbitration was born out of a genuine desire to save on court costs, expedite the dispute resolution process and improve the efficiency of the real estate marketplace. In practice, however, arbitration often results in absurd legal consequences, in direct conflict with the reasons and practical purposes for its inception. 

Arbitration provisions can lead to:

• Frequent misapplication and misinterpretation of the law;
• Erroneous awards;
• A bar to discovery in preparation for hearings;
• Waiver of the right to judicial review; and 
• A lack of legal precedent for future application to conduct of buyers, sellers, brokers and agents

I argue that arbitration provisions do not belong in real estate purchase agreements. These provisions are not included in trust deeds, nor in most rental or lease agreements as all remedies in landlord-tenant law are judicial. They are omitted for good reason: it is rules of law, not an "arbitrary" arbitrator, which control for fair results. Do you think arbitration provisions should appear in real estate purchase agreements, trust deeds, rental and lease agreements? 

Paradise Hell or Paradise Hill?

A few weeks ago, I successfully completed an online class called Legal Aspects of Real Estate at Diablo Valley College. I also completed Real Estate Principles and Real Estate Practice, but I thought the real estate law class was the most interesting one. Fascinated by some of the some of the legal battles that have taken place since 1990, I did some research and found a few interesting cases such as the one described below.  

In March 1989, a homebuyer (Brenda Procel) who was not satisfied with the workmanship and materials in her new home distributed leaflets in front of the developer's model home and on two weekends, she spoke to prospective customers trying to discourage them from buying homes at Paradise Hills. She also posted signs on her house: "I bought a $200,000 fixer-upper," "My house leaks and no one gives a damn," and "We moved to Paradise Hills, but we live in hell." At various times, up to 20 other homeowners posted similar signs on their houses. Procel spoke with newspaper reporters about her house, and a local newspaper published an article about the situation. Based on these activities, the developer filed a complaint against Procel for declaratory relief, damages for interference with prospective economic advantage, and injunctive relief for interference and conspiracy. The developer did not allege that any of Procel's statements were false; however, the developer alleged that her statements were made with the intention to injure the developer in its business of selling houses. What is declaratory and injunctive relief? Declaratory relief is asking the court to state the rights of the parties without ordering any specific action or listing awards for damages. Injunctive relief would prohibit someone from doing something. Was the homeowner acting within her rights? What do you think happened and why? 

The developer, Paradise Hills Associates (PHA), sought and was granted a preliminary injunction. What is an injunction? An injunction is a court order to desist from some activity. The injunction was issued by the trial court as preliminary relief in a lawsuit for interference with business interests. 

However, after reviewing the traditional balancing factors, the Court of Appeal reversed the injunction on the ground the preliminary injunction unduly interfered with the defendant's First Amendment speech rights, which were not overridden by any other factors. (Paradise Hills Associates v. Procel, at pp. 1542-1547). What were the balancing factors? What was in question is the balance of hardships. A preliminary injunction is justified when the trial court determines that a greater injury will result to the moving party (the party who is making a motion -- in this case, the plaintiff, Paradise Hills Associates) if the injunction is denied than will result to the opposing party (Procel) if the injunction is granted. PHA's prospective hardship is economic: sales of the houses it constructs are allegedly deterred by Procel's activities. In contrast, the hardship to Procel from an injunction is the potential for interference with her first amendment right to freedom of speech. Procel expressed her views through picketing, leafleting and posting signs. Each of these forms of communications is entitled to First Amendment protection. 

Courts have recognized the importance of the public's access to consumer information. The growth of 'consumerism' in the United States is a matter of common knowledge. The Court of Appeal concluded that the content of Procel's speech, to the extent it provides truthful information and opinions about PHA's business, is entitled to First Amendment protection. The preliminary injunction was reversed. What are the key takeaways from this case?  

• If you're a real estate developer, focus on relationships. You need to have great relationships with your tenants, architects, bankers, attorneys, contractors, geologists, engineers, and more. Treat everyone around you as though they're the most important person in the room, as these relationships are going to go a long way. PHA denied Procel's claims, but agreed to perform substantial reconstruction, repairs and upgrading on her house. Customers do not appreciate being told they are wrong. Even if the customer is mistaken, as a developer, it's important to find a way to repair and restore the relationship and not accuse the customer of being wrong.  
• Solve problems. When something goes wrong, rather than ignoring the problem or denying that there is a problem, the developer needs to work with his or her team to make sure things get back on track and the problem is solved. PHA performed substantial reconstruction, repairs and upgrading on Procel's house, but it was too late. The damage had already been done when PHA denied her claims.
• Mitigate risk. Once it became clear that there were problems with the homes that were being built at Paradise Hills, the developer should have found ways to mitigate that risk. When Procel's claims were denied, she found 20 other homeowners who also posted signs on their houses complaining about the workmanship and materials in their homes. If PHA had not denied Procel's claims and agreed to repair and upgrade the homes of the dissatisfied homeowners, chances are Procel would not have distributed leaflets in front of the developer's model home and discouraged prospective customers from buying homes at Paradise Hills. Most likely, Procel's actions encouraged 20 other homeowners to post similar signs outside their homes and as a result, this situation attracted negative media attention. All of this could have been avoided if PHA had accepted full responsibility from the very beginning for the quality of their workmanship and made the necessary repairs and upgrades to the affected homes. 

Source: Paradise Hills Associates v. Procel (1991), 235 Cal. App. 3d 1528, 

COVID Shaming

In mid-August 2020, I volunteered as an enumerator for the US Census Bureau. What is an enumerator? Working as an enumerator involves visiting and interviewing people who have not completed the 2020 US Census Bureau questionnaire. Each of my assignments required visiting people in houses that were within a few miles of where I live in Martinez, California. With temperatures spiking up to 100 degrees, I felt sweat oozing down behind my face mask. Much to my surprise, many of the people who answered the door were not wearing face masks. In my house, I installed three sets of hooks right by my front door where I hang my face masks. I tried to stand at least six feet away from each person I interviewed, but some of my neighbors were hard of hearing and in those situations, I had to stand closer than six feet away from people who were not wearing face masks.

Ever since the shutdown began in March 2020, I have been extremely careful about observing all the recommended COVID-19 safety protocols. I wear a KN95 face mask whenever I leave my house, I use gloves while grocery shopping, and I carry hand sanitizer everywhere. I worked from home four days a week so my exposure to the general public was minimal. However, once a week, I rode the BART train for an hour from Martinez to Oakland, where I worked as a commercial property administrator. I was worried that the US Census work I did on the side had some risks, but given the detrimental impact of an inaccurate count in 2020, the risks seemed worth taking. Why is the U.S. Census so important? The U.S. Census helps our communities determine where to build everything from schools to supermarkets, and from homes to hospitals. It helps the government decide how to distribute funds and assistance to states and localities.

During that August weekend, I started to have trouble breathing right after my last census visit. My chest tightened with severe pressure and my headache turned into a full-blown migraine. I rarely experience headaches so I attributed my unusual symptoms to heat exhaustion. But on the following Monday, my company announced that one of our employees had contracted COVID-19. I was no longer experiencing breathing problems, chest pressure and a headache, but I thought it would be prudent to get tested for COVID-19 just in case I had come into contact with the infected employee. Two days later, I received the devastating news that I was infected with COVID-19. At first, I thought I contracted COVID-19 from my enumerator work, but my physician told me that the symptoms would not have appeared until a few days later and most likely, I caught the disease in early August and not in mid-August. 

I suspected the virus would take a toll on my health, but I was completely unprepared for some of the other less-publicized effects -- like how it would affect my personal relationships. Most people know someone who has contracted COVID-19. As a result, many of us have become armchair experts in the highly contagious aspects of this disease, its devastating impact on communities of color, and the struggles experienced by long haulers who are still experiencing the side effects of COVID. But there are other effects that have nothing to do with the physical effects of this disease. . . 

It is so easy to assume that the unlucky ones were not careful enough. Perhaps they wore face masks below their noses and mouths when they left their homes. Maybe they were attending super spreader events with large groups of people. Perhaps they did not wash their hands for at least 20 seconds in warm, soapy water. But I was not careless when it came to COVID. Nevertheless, I still experienced shame and ostracism from people whom I thought knew me well. 

For example, one of my housemates -- a woman in her 50s whom I'll call Frances -- freaked out when I shared my diagnosis with her. She immediately moved out of my house for two weeks and while I was self-isolating and quarantining in my bedroom, not once did she reach out to me to see how I was doing. My other housemate, a 23-year-old woman whom I'll call Abigail, took everything in stride and generously volunteered to prepare my food and clean all my dirty dishes during my two week quarantine period. 

Even after I recovered from COVID and my 10 days of self-isolation had ended, Frances told me that she did not feel safe being in the same room with me. Frances forced me to create a complicated kitchen schedule with prescribed times when each housemate was allowed to use the kitchen. Frances told me, "Obviously you weren't careful enough and that is why you caught COVID." If we happened to pass by each other in the hallway, Frances would turn and run away from me. Despite all the medical information about how long people are contagious after catching COVID-19, Frances seemed convinced that I was still shedding the virus. 

I felt extremely hurt because prior to catching COVID, Frances and I were close in the past. We used to watch movies in my living room together, visit the Farmer's Market in Martinez, and go on shopping and hiking excursions together. We had even planned to go on a trip together to Carmel, California in October 2020, but Frances cancelled the trip after I contracted COVID-19 in August.

But Frances wasn't the only one who reacted very negatively after I received my diagnosis. When a contact tracer reached out to one of my friends, a woman in her 50s whom I'll call Anna, she became angry that I had given the contact tracer her contact information. Anna felt that I had betrayed her and told me, "The last thing I want to do is isolate for 14 days." She decided not to tell her employer and continued going into work and meeting with her patients. She also temporarily cut off ties with me for three weeks and said she needed a break from our friendship. 

I found all these reactions mystifying because I knew I did the right thing. When you get COVID, you're supposed to inform the contact tracer about every person you have been in close contact with for 15 minutes or more. What is contact tracing and why is it so important? Contact tracing is the process of finding out who has recently been in close contact with a person infected with COVID-19, and reaching out to those people to let them know they may have been exposed and advising them to quarantine for 14 days in order to reduce the possible spread of the disease. The success of contact tracing depends on the honesty of every person who has been exposed to COVID-19. Contact tracers can only be effective if people who test positive for COVID-19 tell them where they went and who they saw during the window when they were contagious.

After COVID-19 reared its ugly head in my home -- not just once, but twice (in October 2020, my 23-year-old housemate, Abigail, also caught COVID two months after I recovered from the disease) -- my relationship with Frances completely broke down. Our communications were limited to long, anxiety-ridden text messages and emails about kitchen shifts and broken appliances (Frances accidentally broke my garbage disposal). COVID exacerbated the tensions in our relationship and on December 31, 2020, Frances moved out. The reason she gave was, "I do not want to live with anyone who has had COVID." Ironically, her new roommate caught COVID two weeks before Frances was scheduled to move in with her. 

Most of my friends have been kind and supportive, but a few have remained wary. Even though I am fully vaccinated (I received the two-dose Pfizer vaccine), some of my friends do not feel comfortable going on a hike with me even if I wear a KN95 face mask. It still feels like I'm being treated like a leper. 

Nevertheless, I do not regret being open about my experiences with COVID because I am not ashamed that I caught this disease. Initially, I had post-COVID symptoms, but after receiving the second dose of the Pfizer vaccine, my physical stamina has returned and I successfully completed three real estate classes (Real Estate Principles, Legal Aspects of Real Estate and Real Estate Principles) with an "A." 

While we continue to adjust to our new normal, it's time for all of us to exercise some compassion instead of shaming those who are still struggling with this dreadful disease.