Metropolitan News-Enterprise


Wednesday, June 2, 2010


Page 1


State, Not Federal, Law Held Controlling in Real Estate Dispute

Form Arbitration Agreement Did Not Incorporate U.S. Law, Panel Says




A standard form agreement to arbitrate a real estate dispute in California did not incorporate procedural provisions of the Federal Arbitration Act, the Court of Appeal for this district ruled yesterday.

Div. One affirmed an order by Los Angeles Superior Court Judge Joseph Biderman, denying a motion to compel arbitration. The court said the residential purchase agreement published by the California Association of Realtors, as revised in 2002, does not preclude a trial judge from denying or staying arbitration when related claims have been raised by or against a party not subject to the agreement.

Peter Smyth, a licensed real estate broker, and his wife Pam sought arbitration after Jose Valencia and Maricela Mendoza sued them, along with Blanco Rivera-Letrado, a licensed real estate agent, and others. The plaintiffs alleged that Peter Smyth, acting as broker on behalf of the seller, and Letrado, acting as the plaintiffs’ agent, defrauded the plaintiffs in a complex property transaction.

Deception Claimed

The plaintiffs claimed they were deceived into thinking that they were purchasing a Palmdale property from its owner, only to later learn that the Smyths had acquired the property in foreclosure and that money the plaintiffs thought was going to pay the mortgage and expenses for the property was actually going into the Smyths’ private bank account.

They sought damages of at least $1 million.

Under the arbitration agreement, a copy of which was attached to the motion to compel arbitration, the plaintiffs and the seller agreed that any “dispute or claim in Law or Equity arising between them out of this Agreement or any resulting transaction” would be subject to binding arbitration.

The agreement further provided that the arbitrator would “render an award in accordance with substantive California Law,” that the proceedings “shall be conducted in accordance with Title 9 of Part III of the California Code of Civil Procedure”—commonly referred to as the California Arbitration Act, and that “[i]nterpretation of this agreement to arbitrate shall be governed by the Federal Arbitration Act.”

Opposition to Motion

The plaintiffs opposed the motion to compel arbitration on various grounds, including that the Smyths were not parties to the agreement. The Smyths argued that they were the seller’s assignees and thus had standing to enforce the agreement.

In denying the motion, the judge ruled that Peter Smyth could enforce the arbitration provision as an assignee, but that Pam Smyth had no standing to seek arbitration, that Peter Smyth had waived any right to arbitration by delay in bringing the motion and by participating in discovery, and that since not all of the parties to the suit were parties to the arbitration agreement, arbitration should be denied so that the entire controversy could be litigated in court.

The judge cited Code of Civil Procedure Sec. 1281.2(c), which permits the court to stay or deny arbitration if “[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.”

Presiding Justice Robert Mallano, writing for the Court of Appeal yesterday, said that the CAA, including Sec. 1281.2(c), applied, based on the plain meaning of the agreement, and that Biderman did not abuse his discretion under that provision.

Earlier Version

The presiding justice cited Gravillis v. Coldwell Banker Residential Brokerage Co. (2006) 143 Cal.App.4th 761, which upheld the application of the statute to an earlier version of the CAR form agreement.

The only differences between the earlier form and the one that the plaintiffs signed, Mallano explained, were that the latter provided for discovery and that it contained the language concerning “interpretation.”

Those differences do not compel a different result than in Gravillis, Mallano explained.

“The rules of contract interpretation employed under the FAA are the same as those used under the CAA,” the jurist wrote. “For example, under the FAA, courts interpret arbitration agreements using the plain meaning rule....We have employed that rule here.”

The California Supreme Court, Mallano noted, has held on several occasions that the procedural provisions of the federal law do not apply to a California dispute unless the parties have specifically agreed to apply them. Since there was no such agreement here, the CAA, rather than federal law precluding a court from denying arbitration based on the potential for inconsistent adjudications, governs, the presiding justice wrote.

Mallano went on to say that Biderman’s analysis of the potential for conflicting adjudications with respect to the conduct of Peter Smyth and Letrado was persuasive, so there was no abuse of discretion.

The case is Valencia v. Smyth, 10 S.O.S. 2990.


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