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Valencia v. Smyth

June 1, 2010

JOSE A. VALENCIA ET AL., PLAINTIFFS AND RESPONDENTS,
v.
PETER MICHAEL SMYTH ET AL., DEFENDANTS AND APPELLANTS.



APPEAL from an order of the Superior Court of Los Angeles County, Joseph S. Biderman, Judge. Affirmed. (Los Angeles County Super. Ct. No. SC097558).

The opinion of the court was delivered by: Mallano, P. J.

CERTIFIED FOR PUBLICATION

The California Association of Realtors publishes and periodically revises a standard form residential purchase agreement commonly used in California. The agreement contains an arbitration provision. We previously interpreted the October 2000 version of the agreement, concluding that, under the California Arbitration Act (CAA) (Code Civ. Proc., §§ 1280-1294.2), the trial court had the authority to stay or deny arbitration where (1) some of the parties to the action were not parties to the agreement, and (2) proceedings in different forums -- arbitral and judicial -- could result in conflicting rulings on a common issue of fact or law. (Gravillis v. Coldwell Banker Residential Brokerage Co. (2006) 143 Cal.App.4th 761, 782-783 (Gravillis), construing Code Civ. Proc., § 1281.2, subd. (c).)

The Federal Arbitration Act (FAA) (9 U.S.C. §§ 9-16) does not permit a trial court to stay or deny arbitration in those circumstances. Rather, the FAA requires the arbitration of all claims within the scope of an arbitration provision even if the action includes nonarbitrable claims by or against third parties. (See 9 U.S.C. §§ 3, 4.)

In accordance with choice-of-law principles, the parties may limit the trial court's authority to stay or deny arbitration under the CAA by adopting the more restrictive procedural provisions of the FAA. Here, the question is whether the October 2002 version of the residential purchase agreement (Agreement), unlike the earlier version we interpreted, incorporates the FAA's procedural provisions. The Agreement states, as did its predecessor, that disputes arising out of the Agreement shall be "decided by neutral arbitration as provided by California law," and the arbitrator's decision "shall be rendered in accordance with substantive California Law." The only material difference is the addition of a single sentence: "Interpretation of this agreement shall be governed by the [FAA]." (Italics added.)

We conclude that, by adopting the FAA for purposes of contract interpretation, the parties did not displace the procedural provisions of the CAA. Both the FAA and the CAA employ the same principles of contract interpretation. Thus, regardless of which act governs the interpretation of the Agreement, the result is the same: Under the "plain meaning" rule, the Agreement's choice-of-law provision requires the application of the CAA's procedural provisions. The trial court had the authority under the CAA, which it properly exercised, to deny arbitration and to join all parties in a single action to be adjudicated in court. We therefore affirm.

I. BACKGROUND

The facts and allegations in this case are taken from the pleadings and the parties' submissions on the motion to compel arbitration.

A. Complaint

On March 31, 2008, Jose Valencia and Maricela Mendoza (plaintiffs) filed this action. An amended complaint (complaint) was filed on June 11, 2008. It alleged as follows.

In June 2006, plaintiffs decided to buy real property in Palmdale, California. They were represented by Blanco Rivera-Letrado (Letrado), a licensed real estate agent. Letrado was employed by Keller Williams Realty. Richard Velasco owned the property. Peter Smyth, a licensed real estate broker, doing business as California Investments, was Velasco's broker and the listing agent on the property.

Letrado and Smyth convinced plaintiffs to offer $949,000 for the property. Velasco accepted the offer. Plaintiffs were unaware that Velasco was in default on his "mortgage" in the amount of $660,000 and that the property was in foreclosure. Plaintiffs made a down payment of $175,000, which was wired to either Fidelity National Title Company or United Title Company (formerly known as New Century Title Company). Without informing plaintiffs, Velasco transferred ownership of the property to Smyth before the close of escrow. Smyth's wife, Pam, executed inter-spousal transfer deeds to assist in the transaction. Reliable Trust Deed Services, Inc., became "a Trustee of the Deed of Trust in favor of Smyth." At the time of closing, plaintiffs believed that Velasco was the property owner and that they were buying the property from him.

After escrow closed, plaintiffs regularly deposited funds into a designated bank account to cover the "mortgage", insurance, taxes, and utilities. At some point, plaintiffs learned they had purchased the property from Smyth, not Velasco; they had been depositing funds into the Smyths' personal checking account; and the Smyths, together with others, had misappropriated plaintiffs' funds and used the money to finance other real estate transactions of their own.

In late 2007, Peter Smyth demanded that plaintiffs make additional "mortgage" payments, more than doubling the size of their monthly payment. Plaintiffs refused to make the additional payments, and Smyth initiated foreclosure proceedings.

The complaint named as defendants Peter Smyth, Pam Smyth, Blanca Letrado, Keller Williams Realty, United Title Company, Fidelity National Title Company, and Reliable Trust Deed Services, Inc. (collectively defendants). Plaintiffs alleged seven causes of action: fraud, conversion, breach of fiduciary duty, negligence, declaratory and injunctive relief, unfair business practices (Bus. & Prof. Code, §§ 17200-17210), and negligent infliction of emotional distress. They sought damages of at least $1 million.

B. Default and Discovery

Plaintiffs had difficulty serving process on the Smyths. Eventually, service was made by publication. The deadline for a responsive pleading passed. Defaults were entered. Shortly thereafter, the Smyths discovered they were in default. By stipulation dated December 2, 2008, the parties set aside the defaults, and the Smyths' answer was filed.

Defendants took plaintiffs' depositions over a four-day period. Plaintiffs produced more than 700 pages of documents in response to discovery requests.

C. Motion to Compel Arbitration

On March 17, 2009, the Smyths filed a motion to compel arbitration, relying on the arbitration provision in the Agreement, a standard form residential purchase agreement published by the California Association of Realtors. The Agreement, revised in October 2002, indicated that plaintiffs were the buyers, and Velasco was the seller. It identified the real estate agents and brokers by name. The arbitration provision stated:

"17. DISPUTE RESOLUTION:

"A. MEDIATION: Buyer and Seller agree to mediate any dispute or claim arising between them out of this Agreement, or any resulting transaction, before resorting to arbitration or court action. . . .

"B. ARBITRATION OF DISPUTES: (1) Buyer and Seller agree that any dispute or claim in Law or Equity arising between them out of this Agreement or any resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration . . . . The arbitrator shall be a retired judge or justice, or an attorney with at least 5 years of residential real estate Law experience, unless the parties mutually agree to a different arbitrator, who shall render an award in accordance with substantive California Law. The parties shall have the right to discovery in accordance with California Code of Civil Procedure §1283.05. In all other respects, the arbitration shall be conducted in accordance with Title 9 of Part III of the California Code of Civil Procedure. Judgment upon the award of the arbitrator(s) may be entered [in] any court having jurisdiction. Interpretation of this agreement to arbitrate shall be governed by the Federal Arbitration Act. [¶] . . . [¶]

"'NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.'

"'WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION.'" (Italics & boldface added.)

Plaintiffs initialed the spaces for the buyers. Velasco initialed as the seller.

In support of the motion to compel arbitration, Peter Smyth asserted that, as the owner and seller of the property, he was Velasco's assignee and could enforce the arbitration provision. Pam Smyth argued that, because she had been a joint owner of the property with her husband, she could enforce the arbitration provision as a third party beneficiary. Together, the Smyths argued they had not waived their right to arbitration by delaying the motion to compel or by engaging in discovery. They also contended the trial court had no authority to stay or deny arbitration under the CAA because the Agreement adopted the FAA's procedural provisions.

Plaintiffs opposed the motion to compel, arguing the Smyths had waived any right to arbitration by delay in seeking arbitration and by participating in discovery. Plaintiffs also argued the Smyths were not parties to the Agreement and thus could not invoke the arbitration provision, and, in any event, the trial court should stay or deny arbitration under the CAA and consolidate all of the claims, arbitrable and nonarbitrable, for determination in court. Plaintiffs requested a stay or denial of arbitration pursuant to Code of Civil Procedure section 1281.2, subdivision (c) (hereafter § 1281.2(c)), which provides:

"On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy . . . , the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: [¶] . . . [¶] (c) 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. . . . [¶] . . . [¶] If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party . . . , the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding." (§ 1281.2(c); all undesignated section references are to the Code of Civil Procedure.)

D. Trial Court's Ruling

The motion was heard on April 14, 2009. After argument, the trial court continued the hearing to allow the parties an opportunity to discuss settlement. The case did not settle. On May 18, 2009, the trial court denied the motion and issued a final order. The order recited that Peter Smyth could enforce the arbitration provision as Velasco's assignee; Pam Smyth had no standing to seek arbitration; and Peter Smyth had waived any right to arbitration by delay in bringing the motion and by participating in discovery. The trial court also invoked its authority under section 1281.2(c), denying arbitration and joining all parties in a single action to be adjudicated in court.

The Smyths appealed.

II. DISCUSSION

The Smyths contend (1) the trial court erred by finding they had waived their right to arbitration, and (2) the trial court lacked the authority to deny arbitration under section 1281.2(c) because the parties had adopted the procedural provisions of the FAA. In addition, Pam Smyth argues she had standing to invoke the Agreement's arbitration provision.

Based on the plain meaning of the arbitration provision, we conclude the parties agreed that the CAA, not the FAA, would govern the arbitration. Further, the trial court did not abuse its discretion in denying arbitration given the possibility of conflicting rulings if the claims against the Smyths had been arbitrated and the claims against the remaining defendants had been adjudicated in court. Because we conclude the trial court properly ...


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