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Gil Sanchez v. Valencia Holding Company

October 24, 2011

GIL SANCHEZ, PLAINTIFF AND RESPONDENT,
v.
VALENCIA HOLDING COMPANY, LLC, DEFENDANT AND APPELLANT.



(Los Angeles County Super. Ct. No. BC433634) APPEAL from an order of the Superior Court of Los Angeles County, Rex Heeseman, Judge. Affirmed.

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

CERTIFIED FOR PUBLICATION

Plaintiff, a car buyer, filed this class action against a car dealer, alleging violations of the Consumers Legal Remedies Act (CLRA) (Civ. Code, §§ 1750-1784), the Automobile Sales Finance Act (ASFA) (Civ. Code, §§ 2981-2984.6), the unfair competition law (UCL) (Bus. & Prof. Code, §§ 17200-17210), the Song-Beverly Consumer Warranty Act (Song-Beverly Act) (Civ. Code, §§ 1790-1795.8), and Public Resources Code section 42885.*fn1

The car dealer filed a motion to compel arbitration pursuant to a provision in the sales contract, which also contained a class action waiver. The trial court determined that the class action waiver was unenforceable on the ground that a consumer is statutorily entitled to maintain a CLRA suit as a class action. (See Civ. Code, § 1781.) The arbitration provision in the sales contract stated that if the class action waiver was declared unenforceable, the entire arbitration provision was not to be enforced. Pursuant to this "poison pill" clause, the trial court denied the petition to compel arbitration. The car dealer appealed.

We affirm but for a different reason. We conclude that the arbitration provision is unconscionable: The provision is adhesive -- involving oppression and surprise due to unequal bargaining power -- and contains harsh one-sided terms that favor the car dealer to the detriment of the buyer. Because the provision contains multiple invalid clauses, it is permeated with unconscionability and unenforceable. We cannot sever all of the offending language. Thus, regardless of the validity of the class action waiver, the trial court properly declined to compel arbitration.

I

BACKGROUND

The allegations and facts in this appeal are taken from the pleadings and the exhibits submitted in connection with the petition to compel arbitration.

A. Complaint

Plaintiff, Gil Sanchez, filed this class action in March 2010. Two months later, Sanchez filed a first amended complaint (complaint). It alleged as follows.

On August 8, 2008, Sanchez went to a car dealer, Mercedes-Benz of Valencia -- a fictitious business name for defendant Valencia Holding Company, LLC (Valencia) -- and expressed an interest in buying a certified pre-owned Mercedes. A salesman showed him a 2006 Mercedes-Benz S500V with an advertised price of around $48,000. Sanchez said he wanted to trade in his 2004 Cadillac Deville because he was "upside down" on it -- he owed more than the car was worth. The salesman told Sanchez they could probably "make the deal work," depending on how much Sanchez could afford as a down payment.

After a test drive, the salesman told Sanchez that Valencia would give him $6,000 for his Cadillac, on which Sanchez still owed approximately $20,800, creating a negative equity of $14,800. Sanchez made a down payment of $10,000. The salesman said Sanchez might be required to make a higher down payment, but it could be paid over time.

Valencia informed Sanchez that he had to pay $3,700 to have the Mercedes-Benz "certified" to qualify for an interest rate of 4.99 percent. That statement was false. The $3,700 payment was actually for an extended limited warranty, which was optional and unrelated to the interest rate. Sanchez agreed to the additional payment, believing it was a certification fee required to obtain the offered rate.

Sanchez met with Valencia's finance manager, who completed all of the financial information on the sales documents, including a preprinted "Retail Installment Sale Contract" (Sale Contract).*fn2 The total sales price was $53,498.60. The amount financed was $47,032.99, with a monthly payment of $888.31. The Sale Contract listed a charge of $347 for "license fees" and "N/A" for registration, transfer, and titling fees. It included a $28 "Optional DMV Electronic Filing Fee," but Valencia never discussed the fee with Sanchez or asked if he wanted to opt out of it. The Sale Contract also charged Sanchez new tire fees of $8.75 -- a new tire fee of $1.75 for each new tire, including the spare. But not all of the tires were new. Last, the contract showed a down payment of $15,000 instead of the $10,000 Sanchez had just paid.

Valencia represented that the vehicle was "certified," meaning it had been through a "rigorous inspection and certification process" in which any deficiencies were "repaired, replaced, or reconditioned." A certified vehicle comes with a 12-month limited warranty. As alleged, the "certified" classification and the certification program were "intentionally fraudulent." Nothing was done to improve the condition or operation of a certified vehicle.

Sanchez executed the Sale Contract and took possession of the vehicle on August 8, 2008. A few days later, Valencia called him and said he owed more toward the down payment. On August 15, 2008, Sanchez went to the dealership and wrote a check for $3,000. Sometime thereafter, Sanchez received another call, telling him he owed still more on the down payment. He went to the dealership and wrote a check for $2,000, bringing the total down payment to $15,000.

Shortly after the purchase, Sanchez experienced problems with the vehicle, including malfunctions with various electrical systems, water leaks inside the passenger cabin and the trunk, engine failures, and errors with the warning and indicator lights. Sanchez took the vehicle to authorized repair facilities on several occasions, including Valencia, but they were unable to repair the vehicle. Eventually, Valencia accused Sanchez of having tampered with the vehicle, told him it would cost $14,000 to make the repairs, and said the warranties would not apply. The accusation against Sanchez was false. Sanchez then had the vehicle inspected elsewhere and learned it had been in an accident or had been inadequately repaired before he bought it.

Sanchez alleges that Valencia violated several California laws by: (1) failing to separately itemize the amount of the down payment that is deferred to a date after the execution of the Sale Contract; (2) failing to distinguish registration, transfer, and titling fees, on the one hand, from license fees, on the other hand; (3) charging buyers the Optional DMV Electronic Filing Fee without discussing it or asking the buyer if he or she wanted to pay it; (4) charging new tire fees for used tires; and (5) telling Sanchez to pay $3,700 to have the vehicle certified so he could qualify for the 4.99 percent interest rate when that payment was actually for an optional extended warranty unrelated to the rate.

The complaint alleged that a class action was appropriate based on the numerosity of putative class members, the predominance of common questions of law and fact, the typicality of the claims, and the superiority and benefits of class litigation. Four distinct classes were proposed based on the particular violations committed by Valencia.

Fifteen causes of action were alleged. The first one, for violation of the CLRA, was premised on Valencia's false representations and sought injunctive relief and damages, including punitive damages. Of the remaining 14 causes of action -- alleging violations of the CLRA, ASFA, UCL, Song-Beverly Act, or section 42885 -- 12 sought injunctive relief, rescission of the Sale Contract, restitution, or some combination thereof, but no damages. The other two, alleging violations of section 42885 and the Song-Beverly Act, sought civil penalties or damages. Under section 42885, Sanchez sought a civil penalty not exceeding $25,000 for each used tire for which Valencia charged him a new tire fee. (See § 42885, subd. (e).) As provided in the Song-Beverly Act, he sought general and consequential damages plus a civil penalty up to two times actual damages. (See Civ. Code, § 1794.) The complaint also prayed for an award of attorney fees.

B. Motion to Compel Arbitration

On June 7, 2010, Valencia filed a motion to compel arbitration pursuant to an arbitration provision in the Sale Contract. The provision stated: "1. Either you or we may choose to have any dispute between us decided by arbitration and not in court or by jury trial.

"2. If a dispute is arbitrated, you will give up your right to participate as a class representative or class member on any class claim you may have against us including any right to class arbitration or any consolidation of individual arbitrations.

"3. Discovery and rights to appeal in arbitration are generally more limited than in a lawsuit, and other rights that you and we would have in court may not be available in arbitration.

"Any claim or dispute, whether in contract, tort, statute or otherwise (including the interpretation and scope of this Arbitration Clause, and the arbitrability of the claim or dispute), between you and us or our employees, agents, successors or assigns, which arises out of or relates to your credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship . . . shall, at your or our election, be resolved by neutral, binding arbitration and not by a court action. . . . Any claim or dispute is to be arbitrated by a single arbitrator on an individual basis and not as a class action. You expressly waive any right you may have to arbitrate a class action. You may choose one of the following arbitration organizations and its applicable rules: the National Arbitration Forum . . . (www.arbforum.com), the American Arbitration Association . . . (www.adr.org), or any other organization that you may choose subject to our approval. . .

"Arbitrators shall be attorneys or retired judges and shall be selected pursuant to the applicable rules. The arbitrator shall apply governing substantive law in making an award. The arbitration hearing shall be conducted in the federal district in which you reside . . . . We will advance your filing, administration, service or case management fee and your arbitrator or hearing fee all up to a maximum of $2500, which may be reimbursed by decision of the arbitrator at the arbitrator's discretion. Each party shall be responsible for its own attorney, expert and other fees, unless awarded by the arbitrator under applicable law. If the chosen arbitration organization's rules conflict with this Arbitration Clause, then the provisions of this Arbitration Clause shall control. The arbitrator's award shall be final and binding on all parties, except that in the event the arbitrator's award for a party is $0 or against a party is in excess of $100,000, or includes an award of injunctive relief against a party, that party may request a new arbitration under the rules of the arbitration organization by a three-arbitrator panel. The appealing party requesting new arbitration shall be responsible for the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs. Any arbitration under this Arbitration Clause shall be governed by the Federal Arbitration Act (9 U.S.C. § 1 et seq.) and not by any state law concerning arbitration.

"You and we retain any rights to self-help remedies, such as repossession. You and we retain the right to seek remedies in small claims court for disputes or claims within that court's jurisdiction, unless such action is transferred, removed or appealed to a different court. Neither you nor we waive the right to arbitrate by using self-help remedies or filing suit. Any court having jurisdiction may enter judgment on the arbitrator's award. This Arbitration Clause shall survive any termination, payoff or transfer of this contract. If any part of this Arbitration Clause, other than waivers of class action rights, is deemed or found to be unenforceable for any reason, the remainder shall remain enforceable. If a waiver of class action rights is deemed or found to be unenforceable for any reason in a case in which class action allegations have been made, the remainder of this Arbitration Clause shall be unenforceable." (Italics added, some capitalization omitted.)*fn3 [3]

In anticipation of Sanchez's contentions, Valencia asserted in its moving papers that: (1) the arbitration provision was not procedurally or substantively unconscionable under the principles set forth in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 at page 114 (Armendariz); and (2) the class action waiver was not invalid under Discover Bank v. Superior Court (2005) 36 Cal.4th 148, overruled AT&T Mobility LLC v. Concepcion (2011) ___ U.S. ___ [131 S.Ct. 1740] (Concepcion). This second point was of special importance because the arbitration provision contained a "poison pill" clause -- if the class action waiver was found to be unenforceable, the entire arbitration provision was unenforceable, and the case would be adjudicated in a court of law.

Attached to the moving papers was a completed copy of the Sale Contract, a preprinted three-page document with provisions on both sides of each page. The three front pages required the buyer's signature or initials as to several provisions, indicating his consent. No signatures or initials were required on any of the back pages. The arbitration provision was the last provision in the Sale Contract, appearing at the bottom on the back of the last page. The buyer's final signature appeared on the front of the last page. No signature or initials appeared after or near the arbitration provision. The typeface and font size were the same throughout the Sale Contract, but the font size was small. Also, in comparison to the rest of the contract, the line spacing in the arbitration provision was reduced, giving it a "squashed" appearance and making it relatively more difficult to read.

In his opposition papers, Sanchez disagreed with Valencia's legal points. He also submitted a declaration, stating: ". . . When I signed the documents related to my purchase of the Subject Vehicle, I was presented with a stack of documents, and was simply told by the Dealership's employee where to sign and/or initial each one. All of the documents (including the purchase contracts) were pre-printed form documents. When I signed the documents, I was not given an opportunity to read any of the documents, nor was I given an opportunity to negotiate any of the pre-printed terms. The documents were presented to me on a take-it-or-leave-it basis, to either sign them or not buy the car. . . . There was no question of choice on my part or of my being able to 'negotiate' anything. And I had no reason to suspect that hidden on the back of the contracts . . . was a section that prohibited me from being able to sue the Dealership in court if I had a problem.

". . . When I signed the purchase contract and related documents, the Dealership did not ask me if I was willing to arbitrate any disputes with it, did not tell me that there was an 'arbitration clause' on the back side of the purchase contract, and I did not see any such clause before I signed the documents. The Dealership did not explain to me what an arbitration clause was. I was not given any opportunity at any time during my transaction with [the] Dealership to negotiate whether or not I would agree to arbitrate any potential disputes. I was not given an option whether to sign a contract with an arbitration clause or one without.

". . . Prior to the filing of [Valencia's motion to compel arbitration], I had never heard of the National Arbitration Forum or American Arbitration Association. Nor was I aware that there was a clause in my contract with the Dealership supposedly requiring me to go to arbitration if I had a dispute with the Dealership and that I had to read the rules of those organizations before signing my purchase contracts. No one at the Dealership turned my purchase contract over and showed me the writing on ...


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