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Calif. App. Court (2nd Dist) Holds Court Should Decide Whether Parties Agreed to Arbitrate

arbitrationThe California Court of Appeal, Second District, recently granted a lender’s petition for a writ of mandate compelling the trial court to vacate its order granting the borrower’s petition to compel arbitration.

In so ruling, the Second District agreed with the lender that the trial court erred in relying on the Supreme Court of the United States’ recent ruling in Henry Schein, Inc. v. Archer and White Sales, Inc., (2019) ___ U.S. ___ [139 S.Ct. 524, 529].

The Second District explained that the Supreme Court in Schein considered who should decide whether the parties’ dispute arising from a specific contract with an arbitration clause was arbitrable. In this case, however, the question on the borrower’s petition to compel arbitration was whether the parties agreed to arbitrate their dispute over the loan documents, which did not have arbitration clauses, a question the court must decide in the first instance.

A copy of the opinion in Banc of Cal., NA v. Superior Court is available at:  Link to Opinion.

After the borrower defaulted on a loan to purchase a commercial aircraft, the lender filed suit alleging that the borrower breached the terms of the loan documents in various respects. The lender also alleged it had a right to sell the aircraft in the possession of a charter company as collateral for the loan and to recover money owed by the charter company to the borrower based on a subordination agreement. Furthermore, the lender asserted claims for breach of the aircraft usage agreement and conversion, but later dismissed these aircraft usage agreement claims, leaving only claims based on breach of the loan documents.

The trial court granted the borrower and the charter company’s petition to compel arbitration, finding that the American Arbitration Association (AAA) rules provided for delegation of the determination of whether the parties’ dispute arose out of an arbitration clause and thus the arbitrator should decide whether the lender’s claims were arbitrable.

The lender then sought a writ of mandate compelling the trial court to vacate its order granting the petition to compel arbitration. The lender asserted that the trial court erred in relying on the Supreme Court’s decision in Schein.

Section 1281.2 of the California Code of Civil Procedure requires the trial court to order arbitration of a controversy “[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate such controversy . . . if it determines that an agreement to arbitrate the controversy exists.” Whether there is a written agreement to arbitrate “is a matter of contract, and courts must enforce arbitration contracts according to their terms.” (Schein, supra, 139 S. Ct. at p. 529; accord, Rent-A- Center, West, Inc. v. Jackson, (2010) 561 U.S. 63, 67.

Furthermore, the Supreme Court held in Schein that the arbitrator should resolve the threshold question of whether an arbitration agreement applies to a particular dispute where the arbitration agreement delegates to the arbitrator the question of arbitrability, regardless of whether the argument for arbitration is “‘wholly groundless.’” 139 S. Ct. at p. 528.

However, the Second District distinguished the facts here from those in Schein. It reasoned that, unlike in Schein, where the Supreme Court considered who should decide whether the parties’ dispute fell within the scope of a specific contract, here the trial court was tasked with deciding in the first instance whether there was an agreement to arbitrate at all.

The Second District agreed with the holdings found in Moritz v. Universal City Studios LLC, (2020), 54 Cal.App.5th 238, and Bautista v. Fantasy Activewear, Inc., (2020) 52 Cal.App.5th 650, that where a party seeks to arbitrate a dispute that arises from a contract without an arbitration clause, the court is not required under Schein to defer to the arbitrator on the threshold determination of arbitrability. See Bautista, supra, 52 Cal.App.5th at p. 656; Moritz, supra, 54 Cal.App.5th at p. 248.

Here, the Second District determined that the only agreement that contained an arbitration clause was the aircraft usage agreement entered into almost two months after the execution of the loan documents. However, after the lender voluntarily dismissed two of its causes of action, the only remaining causes of action at the time of the petition to compel arbitration related to the seven loan documents, none of which contained an arbitration clause.

Furthermore, the Second District found that the promissory note, loan agreement, security agreement, and assignment agreement also provided for a jury waiver, and the loan agreement provided that any disputes would be heard by a referee. Given the parties’ clear expression of which courts (or referee) would hear any lawsuit arising from the loan documents, the Court concluded that the parties’ failure to specify in the loan documents that the disputes would be decided by an arbitrator showed the parties’ contrary intent.

The borrower argued that because the seven loan documents and the aircraft usage agreement were “interrelated,” this supported arbitration. However, the Second District rejected this argument because, even if the loan documents had some relationship to the aircraft usage agreement, the question for the trial court was whether the parties’ dispute related to the aircraft usage agreement.

The Court held that the dispute at issue did not relate to the aircraft usage agreement because nothing in the record showed that the breach of the loan documents was in any way related to the aircraft usage agreement, which simply provided the terms for the lender to obtain a discounted price for flight time on the borrower’s aircraft.

Thus, the Second District concluded that the borrower did not meet its burden to show the parties had “clearly and unmistakably” agreed to arbitrate their dispute over the loan documents based on the arbitration clause in the aircraft usage agreement. See AT&T Technologies, Inc. v. Communications Workers of America, supra, 475 U.S. at p. 649.  Absent an agreement to arbitrate, the Court held that the trial court erred in granting the borrower’s petition to compel arbitration on the issue of arbitrability.

Accordingly, the Appellate Court granted the lender’s petition for writ of mandate and ordered that a peremptory writ of mandate shall issue directing the trial court to vacate its order granting the borrower’s petition to compel arbitration and motion to stay the action and to enter a new order denying the petition and motion.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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