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Calif. App. Court (1st Dist) Rejects Bank’s Effort to Disqualify Arbitrator as Untimely

banking arbitrationThe California Court of Appeals, First Appellate District, recently reversed a lower court’s orders denying a bank account holder’s petition to confirm an arbitration award and an order granting a bank’s petition to vacate the award, and remanded with instructions to enter an order confirming the award.

The trial court had vacated the arbitration award based on the bank’s notice of disqualification as to the arbitrator.  However, on appeal, the First District held that California procedural rules required the bank to seek the arbitrator’s disqualification within 15 days of discovering the facts requiring disqualification, and because the bank did not do so, the bank forfeited the right to demand disqualification.

A copy of the opinion in Goodwin v. Comerica Bank, N.A. is available at:  Link to Opinion.

The appeal arose out of arbitration between bank (“Bank”) and a holder of an account with Bank (“Account Holder”) after Account Holder initiated legal proceedings against Bank. The matter was submitted to mediator and arbitrator (“Arbitrator”), employed by JAMS, who had previously arbitrated causes in which parties were represented by the lawyers representing both Plaintiff and Bank.

In January 2018, Arbitrator timely served a disclosure statement pursuant to section 1281.9 which requires an arbitrator to disclose “all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.”  Cal. Code Civ. Proc. § 1281.9(a).

The statute includes matters listed in six categories, and here the relevant categories were: “(1) The existence of any ground specified in Section 170.1 for disqualification of a judge…(2) Any matters required to be disclosed by the ethics standards….(3)…[and] (4) The names of the parties to all prior or pending noncollective bargaining cases in which the proposed neutral arbitrator served or is serving as a neutral arbitrator, and the results of each case arbitrated to conclusion, including [specified details].” Id.

Included in Arbitrator’s disclosure statement were the cases involving the parties and their lawyers, including two arbitrations involving Account Holder’s lawyers. The disclosure also stated that “[e]ach JAMS neutral, including me, has an economic interest in the overall financial success of JAMS,” and “because of the size and nature of JAMS, each side should assume that one or more of the other neutrals who practice with JAMS has participated in…[a] dispute resolution proceeding with the parties, counsel, or insurers in this case and may do so [again].”

Neither party objected to the disclosure statement. After spending months litigating the merits of the case before Arbitrator and after the matter was under submission, Arbitrator served an amended disclosure that included additional matters involving Bank’s lawyers, Hernandez and Dent-a-Med, disclosing that in May 2018, Arbitrator issued an award in Hernandez, in favor of the client of Account Holder’s lawyer in an unspecified amount. No further information was required and no notice of disqualification was served.

Less than a month later, Arbitrator issued an interim award in Account Holder’s favor, ruling he was entitled to $133,000 in damages, as well as attorney fees and costs. After Account Holder filed his fees motion and Bank filed its opposition, Bank’s attorneys learned that before the settlement in Hernandez, Arbitrator had entered an interim award of attorney’s fees and costs in favor of the claimant represented by Account Holder’s lawyers. They also learned that a party in Dent-A-Med had petitioned the federal court to vacate the award on the basis that the Arbitrator failed to disclose the interim award in Hernandez. Bank did not file a notice of disqualification or raise the nondisclosure matters in its opposition to Account Holder’s fees motion.

In February 2020, a final award reiterating the interim award was issued on the merits. Account Holder filed a petition to confirm the final award and bank opposed and filed a petition to vacate based on Arbitrator’s failure to disclose the interim award in Hernandez, the delay in reporting his issuance of an award to Account Holder’s attorney’s client in Dent-A-Med and delay in disclosing an ownership interest in JAMS.

The trial court ruled in favor of Bank holding that, even though section 1281.9 requires a party to serve notice of disqualification within 15 days after a proposed arbitrator serves an initial disclosure statement, an exception applies when the arbitrator makes “a material omission or material misrepresentation in his or her disclosure.” Account Holder appealed the decision.

The Court of Appeals reviewed the question of whether Bank forfeited any right to disqualification by failing to timely raise Arbitrator’s failure to make complete any accurate disclosures. See Honeycutt v. JPMorgan Chase Bank, N.A., (2018) 25 Cal. App. 5th 909, 921.  The Appellate Court assumed, without deciding, that the trial court had correctly ruled that Arbitrator was obligated to disclose in the initial disclosure the interim award in Hernandez and that the description of the arbitration as “settled prior to final award,” without mention of the interim award was a material omission and did not put Bank on inquiry notice.

The First District relied on prior rulings in determining that Cal. Code Civ. Proc. §§ 1281.9 and 1281.91 establish a timeline for arbitrators to disclose potential grounds for disqualification and for parties to promptly seek disqualification or forfeit their right to do so.

Specifically, the Appellate Court referred to prior decisions holding that “a party who knowingly participates in the arbitration process without disclosing a ground for declaring it invalid is properly cast into the outer darkness of forfeiture.” (Cummings v. Future Nissan (2005) 128 Cal. App. 4th 321, 329.), and further, that a party who “learns of a basis to disqualify an arbitrator cannot “wait and see how the arbitration turn[s]out before raising the[] issue[],”which would allow the party to “play games” with the arbitration and “not raise the issue” “until [they] los[e].” (Honeycutt v. JPMorgan Chase, supra, 25 Cal. App. 5th at pp.926, 927.)

The First District further relied on the language of section 1281.91 which provides ““[t]he right of a party to disqualify a proposed neutral arbitrator pursuant to this section shall be [forfeited] if the party fails to serve the notice pursuant to the times set for in this section, unless the [arbitrator] makes a material omission or material misrepresentation in his or her disclosure.”  Subdivision (c) adds, “[e]xcept as provided in subdivision(d), in no event may a notice of disqualification be given after a hearing of any contested issue of fact relating to the merits of the claim or after any ruling by the arbitrator regarding any contested matter.”

In addition, the Appellate Court looked to Ethics Standard 10 which states that an arbitrator is disqualified if “[a] party becomes aware that an arbitrator has made a material omission or material misrepresentation in his or her disclosure and, within 15 days after becoming aware of the omission or misrepresentation and within the time specified in… section 1281.91(c), the party serves a notice of disqualification that clearly describes the material omission or material misrepresentation and how and when the party became aware of [it].” (Ethics Standards, std.10(a)(4)).

Bank, relying on section 1281.91(c), argued that by the time they learned of the interim award, it was too late to file a notice of disqualification, as the hearing was underway and the merits of the dispute already decided. 

However, the Appellate Court took this reading of the statute to be incorrect, as this would mean that a party who learned of a basis for disqualification after the arbitration hearing had begun, would have no recourse or they would be required to await the outcome of the arbitration, and if unfavorable, raise the ground for disqualification for the first time in a petition to vacate.

The Appellate Court continued, that as this reading would be nonsensical and unfair, the statute includes subdivision (d) which provides “[i]f any ground specified in Section 170.1 exists, a neutral arbitrator shall disqualify himself or herself upon the demand of any party made before the conclusion of the arbitration proceeding.”

The First District assumed that Arbitrator’s failure to disclose the interim fee was a ground included in section 170.1. Section 170.1 which applies by reference to arbitrators, states that a judge is disqualified if, among other things, “[f]or any reason, … [a] person aware of the facts might reasonably entertain a doubt that the judge would be able to be impartial.” (§170.1, subd. (a)(6)(A)(iii)).

Thus, the Appellate Court held, that to obtain Arbitrator’s disqualification, Bank was required to “object ‘at the earliest practicable opportunity after discovery of the facts constituting the ground for disqualification.’” (Alper v. Rotella, supra, 63 Cal. App. 5th at p. 1152), and in compliance with the obligations under the ethics standard 10(a)(4) to serve a notice of disqualification “within 15 days after becoming aware of the omission or misrepresentation” in the arbitrator’s disclosure statement.  As Bank failed to do so, the First District held, it forfeited the right to demand disqualification once it subsequently learned of Arbitrator’s adverse fee award.

The First District thus held that because Bank failed to seek Arbitrator’s disqualification within 15 days of discovering the facts requiring disqualification and prior to Arbitrator deciding the pending fee motion, Bank forfeited the right to demand disqualification.

The Appellate Court therefore reversed the order vacating the award and denying Plaintiff’s petition to confirm the award, and remanded the matter with directions to issue orders denying the Bank’s petition and granting Plaintiff’s petition to confirm the award.

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Jenna Tersteegen is an Associate in Maurice Wutscher's New York City office, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Prior to joining the firm, Jenna was an associate attorney at a litigation law firm in New York City. Her practice covered New York state labor and employment laws, premises liability and property damage cases. She conducted all pre-trial aspects of litigation, including preparing case strategy and evaluation reports, taking and defending depositions, and drafting dispositive pre- and post-trial motions. She is admitted to practice law in Illinois and New York, and the U.S. District Court for the Eastern District of New York.

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