A. Harrison Barnes v. Crown Jewels, LLC et al, No. 2:2014cv04098 - Document 31 (C.D. Cal. 2014)
Court Description: ORDER GRANTING DEFENDANTS MOTION TO COMPEL ARBITRATION 13 by Judge Otis D. Wright, II: The Court GRANTS Defendants Motion to Compel Arbitration and STAYS this action pending arbitration. All dates are VACATED and taken off calendar. The parties shall notify the Court of the status of Barnes claims within 7 days of the conclusion of arbitration proceedings. (lc). Modified on 10/1/2014.(lc).
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A. Harrison Barnes v. Crown Jewels, LLC et al Doc. 31 O 1 2 3 4 5 6 7 United States District Court Central District of California 8 9 10 11 A. HARRISON BARNES, individually 12 and on behalf of the A. HARRISON 13 BARNES TRUST-2005, Case 2:14-cv-04098-ODW(MRWx) Plaintiff, 14 15 ORDER GRANTING DEFENDANTS’ MOTION TO v. COMPEL ARBITRATION [13] 16 CROWN JEWELS, LLC; KONA 17 CROWN HOLDINGS, LLC; MALIBU 18 INVESTMENT GROUP, LP; 32430 PCH, 19 LLC; REPUBLIC WESTERN 20 INVESTMENTS CO., LLC; MAYER 21 SEPARZADEH; DAVID YORK; 22 ANNETTE SEPARZADEH; DOES 1–50, 23 inclusive, 24 25 26 Defendants. I. INTRODUCTION This action arises from an apparent real estate transaction gone wrong. The 27 property is a multi-million dollar home on the California coast in Malibu. The 28 allegations include fraud and even forgery. According to Plaintiff A. Harrison Barnes, Dockets.Justia.com 1 the story begins with a high-profile Ponzi scheme, winds its way through broken 2 promises and the recession, and ends with this litigation—which includes a violation 3 of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. 4 §§ 1961–68. 5 But before the Court is Defendants’ Motion to Compel Arbitration (ECF 6 No. 13), which limits the Court’s inquiry to more mundane issues of contract 7 formation. The Court does not reach the merits of the dispute despite attempts by the 8 parties to color the issues. For the reasons discussed below, the Court GRANTS 9 Defendants’ Motion to Compel Arbitration and STAYS this action pending arbitration 10 in accordance with the parties’ agreement.1 (ECF No. 13.) II. 11 FACTUAL BACKGROUND 12 Barnes initiated this action on May 28, 2014. (ECF No. 1.) In the First 13 Amended Complaint (“FAC”), Barnes brings eight claims against Defendants, 14 including fraud and breach of contract. (ECF No. 12.) Barnes’ civil RICO claim is 15 the asserted basis for this Court’s subject-matter jurisdiction. (FAC ¶ 9.) Rather than 16 answering or otherwise challenging the allegations in the FAC, Defendants filed the 17 present Motion to Compel Arbitration on August 19, 2014. (ECF No. 13.) 18 Barnes’ claims are based on a real estate option agreement he entered into with 19 Defendants for a home and adjoining lot on Pacific Coast Highway in Malibu, 20 California (collectively “the Property”). (FAC ¶ 6.) According to Barnes, Defendants 21 committed fraud by concealing his interest in the property, thwarting his efforts to 22 record their option agreement, and holding onto Barnes’ option payments after he was 23 forced to abandon the property. (Id. ¶¶ 7–8.) 24 The parties first entered into a written option agreement (“the Original 25 Agreement”) for the Property on September 5, 2007. (Id. ¶ 64, Ex. O.) The Original 26 Agreement was executed between Barnes and the owners of the Property— 27 28 1 After carefully considering the papers filed in support of and in opposition to the Motion, the Court deems the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; L.R. 7-15. 2 1 Defendants Crown Jewels, LLC (“Crown Jewels”); Kona Crown Holdings, LLC 2 (“Kona”); Malibu Investment Group, LP (“Malibu Investment”); 32430 PCH, LLC 3 (“PCH”); Mayer Separzadeh; and Annette Separzadeh.2 4 Agreement incorporated by reference a Residential Lease Agreement, a Home 5 Purchase Agreement, and a Lot Purchase Agreement. (Id. ¶ 65, Ex. O.) According to 6 Barnes, the terms of the Original Agreement set a purchase price for the Property at 7 $14,750,000. (Id.) Barnes agreed to pay $4.2 million in four installments as “option 8 consideration,” which would then be credited to the purchase price if he exercised the 9 option. (Id. at Ex. O, pp. 309–10.) Barnes also agreed to pay Defendants $50,000 in 10 (Id.) The Original monthly lease payments. (Id. ¶ 66, Ex. O, p. 326.) 11 After the Original Agreement was executed, Barnes alleges that Defendants 12 delayed recording the Original Agreement so that they could secure a mortgage on the 13 Property. (Id. ¶¶ 70–76.) A mortgage was recorded on the home in December 2007. 14 (Id. ¶ 76.) 15 mortgage, so that he could lower his payments and make them more manageable. (Id. 16 ¶ 77.) But, according to Barnes, York would not allow him to assume the mortgage 17 until he could “accumulate more equity,” and encouraged Barnes to increase his 18 payments to Defendants. (Id. ¶ 80.) Barnes alleges that he spoke with York frequently about assuming the 19 On April 11, 2009, Barnes signed a document titled “First Amendment of 20 Option Agreement” (“the Amended Agreement”). (Id. ¶ 83, Ex. U.) According to 21 Barnes, the Amended Agreement increased his monthly payments from $50,000 a 22 month to $100,000 a month. (Id. ¶ 81.) Barnes alleges that he signed the Amended 23 Agreement because he had already invested significant money in the Property—more 24 than $3 million—and was concerned about losing his investment if he did not agree to 25 increase the payments. (See id. ¶¶ 77–86.) However, Barnes alleges in a footnote in 26 /// 27 2 28 Defendant David York signed the Original Agreement as manager of Crown Jewels, Kona, and PCH. (York Decl. ¶ 4.) Barnes alleges that York presently owns the Property through Crown Jewels and Defendant Republic Western Investments Co., LLC. (FAC ¶ 14.) 3 1 the FAC that the Amended Agreement violates California law with respect to its 2 arbitration provisions and is “void ab initio because of fraud.” (Id. ¶ 83 n.2.) The Amended Agreement is attached to the FAC as Exhibit U. Relevant to this 3 4 Motion is paragraph 5 of the Amended Agreement, which reads as follows: 5 5. Alternative Dispute Resolution. The Reference Proceeding referred 6 to in Paragraph 18 of the [Original] Agreement, and Paragraph 15 in the 7 Purchase Agreements, is hereby replaced by the Arbitration Provisions 8 that are attached to this Amendment as Exhibit “C”. 9 (Id. at Ex. U, p. 488.) Exhibit C of the Amended Agreement is clearly titled 10 “Arbitration Provisions” and the entire document is in bold-type capital letters.3 (Id. 11 at Ex. U, pp. 500–01.) In addition to the signatures at the end of the Amended 12 Agreement, the parties’ initials—including Barnes’ initials—can be found on the last 13 page of the Arbitration Provisions. 14 generally alleges fraud with respect to the Amended Agreement, the FAC is silent as 15 to the authenticity of Barnes’ initials on the Arbitration Provisions. (Id. at Ex. U, pp. 501–03.) While Barnes 16 Barnes was represented by counsel—attorney Bruce Fraser of the law firm 17 Sidley Austin LLP—in negotiating the Original Agreement and Amended Agreement. 18 (FAC ¶ 119; Barnes Decl. ¶ 7.) 19 California as well as the owner of several businesses. (Barnes Decl. ¶ 7.) Barnes himself is also a licensed attorney in 20 After executing the Amended Agremeent, Barnes alleges that Defendants failed 21 to live up to their spoken promise that Barnes could assume the mortgage on the 22 Property. (See FAC ¶¶ 93–97.) The relationship between the parties subsequently 23 deteriorated and Barnes alleges that he was forced to abandon the Property after 24 making more than $8 million in payments over a four-year period. (See id. ¶ 138.) 25 /// 26 /// 27 28 3 The Court refers to Exhibit C of the Amended Agreement as the Arbitration Provisions for the remainder of this Order. 4 III. 1 LEGAL STANDARD 2 The Federal Arbitration Act (“FAA”) is meant “to ensur[e] that private 3 arbitration agreements are enforced according to their terms.” AT&T Mobility LLC v. 4 Concepcion, 131 S. Ct. 1740, 1748 (2011) (citing Volt Info. Scis., Inc. v. Bd. of Trs. of 5 Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989)). Section 2 of the FAA 6 creates a policy favoring enforcement, stating that arbitration clauses in contracts 7 “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or 8 in equity for the revocation of any contract.” 9 U.S.C § 2; see also Cox v. Ocean View 9 Hotel Corp., 533 F.3d 1114, 1119 (9th Cir. 2008). Under the FAA, a party to such an 10 agreement may petition an appropriate federal district court to compel arbitration. 11 9 U.S.C. § 4. Courts are then required to stay litigation of arbitral claims pending 12 arbitration of those claims “in accordance with the terms of the agreement.” Id. 13 In determining whether parties must arbitrate their dispute, a court may not 14 review the merits of the dispute. Cox, 533 F.3d at 1119. Courts are instead limited 15 “to determining (1) whether a valid agreement to arbitrate exists and, if it does (2) 16 whether the agreement encompasses the dispute at issue.” 4 Id. (quoting Chiron Corp. 17 v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000)). 18 IV. DISCUSSION 19 Defendants point to the Amended Agreement and its attached Arbitration 20 Provisions to support their Motion to Compel Arbitration. Defendants argue that 21 Barnes agreed to arbitrate his claims in the Amended Agreement; thus, under the 22 FAA, he must take his dispute to arbitration. But Barnes opposes the Motion, arguing 23 that he never agreed to arbitrate and that Defendants actually forged his initials at the 24 bottom of the Arbitration Provisions. Furthermore, even if he did sign the Arbitration 25 26 27 28 4 Application of the FAA also requires a transaction involving interstate commerce. See 9 U.S.C. § 1. Barnes does not dispute that the parties’ transaction involved interstate commerce since he has brought a civil RICO claim. Defendants also point to the allegations in the FAC involving interstate commerce, including that Barnes made payments to Defendants “via checks and wire transfers from an office his company had in Ephraim, Utah” and the “wire transfers were processed through Citibank in New York.” (FAC § 84.) 5 1 Provisions, Barnes argues that they are unenforceable because they are 2 unconscionable and violate California Civil Procedure Code section 1298. 3 The Court addresses whether the parties agreed to arbitrate and each of Barnes’ 4 contract defenses below.5 See Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 5 (9th Cir. 2002) (holding that courts “should apply ordinary state-law principles that 6 govern the formation of contracts” in assessing whether an arbitration clause is 7 enforceable). 8 A. Fraud in the Execution/Fraud in the Inducement 9 Barnes first argues that he never agreed to arbitrate any disputes arising out of 10 his real estate deal with Defendants. Instead, Barnes contends that inclusion of the 11 Arbitration Provisions in the Amended Agreement was the result of fraud. While his 12 signature appears to be on the last page of the Arbitration Provisions, Barnes contends 13 that the signature is a forgery. (Opp’n 8:14–10:24.) Barnes also argues that the Court 14 cannot enforce the Arbitration Provisions because he was unaware that the Amended 15 Agreement contained the Arbitration Provisions and was “deceived as to the nature 16 and effect of his signature.” (Id. at 10:19–24.) He claims that he would never have 17 agreed to arbitration because he has never signed an arbitration clause outside of the 18 employment context. (Barnes Decl. ¶¶ 20–22.) 19 The statutory language of the FAA does not permit courts to consider defenses 20 of fraud with respect to the contract generally. Prima Paint Corp. v. Flood & Conklin 21 Mfg. Co., 388 U.S. 395, 403–04 (1967). “[U]nless the challenge is to the arbitration 22 clause itself, the issue of the contract’s validity is considered by the arbitrator in the 23 first instance.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445–46 24 (2006) (holding that an arbitration provision is severable from the remainder of the 25 26 27 28 5 Both parties have filed objections to declarations and exhibits submitted in support of and in opposition to the Motion. (See ECF Nos. 19, 22, 26.) To the extent the Court relies on portions of the declarations or exhibits that have been objected to, the Court OVERRULES those objections. The Court finds the evidence upon which it relies is relevant, within the declarants’ personal knowledge, and not inadmissible hearsay. 6 1 contract for the purposes of the FAA). But courts, and not the arbitrator, must decide 2 “the threshold issue of the existence of an agreement to arbitrate.” Three Valleys Mun. 3 Water Dist. v. E.F. Hutton & Co., Inc., 925 F.2d 1136, 1140–41 (9th Cir. 1991). 4 Accordingly, fraud in the execution of the contract as a whole and fraud in the 5 inducement of the arbitration clause itself are issues to be resolved by the courts. See 6 id. at 1139–42. 7 Here, Barnes contends that the Arbitration Provisions were fraudulently 8 executed because his signature was forged on the last page of the Arbitration 9 Provisions. (Barnes Decl. ¶ 21.) But the Court finds that Barnes misses the mark by 10 focusing on the wrong document. Barnes does not dispute that he signed the 11 Amended Agreement. (Id. ¶ 18.) Paragraph 5 of the Amended Agreement clearly 12 states that “the Reference Proceeding referred to [in the Original Agreement] is hereby 13 replaced by the Arbitration Provisions that are attached to this Amendment as Exhibit 14 ‘C’.” (FAC Ex. U.) The Court finds no language in the Amended Agreement or in 15 the attached Arbitration Provisions indicating that the Arbitration Provisions are 16 unenforceable unless separately initialed by Barnes. (See id.) Instead, the Arbitration 17 Provisions are incorporated by reference into the Amended Agreement. (Id.) Thus, 18 the Court need not reach the issue of whether Barnes’ initials on the last page of the 19 Arbitration Provisions are forged because Barnes consented to arbitration by signing 20 the Amended Agreement itself. 21 Moreover, while Barnes contends that he was unaware that the Amended 22 Agreement included the Arbitration Provisions, the Court finds that his failure to read 23 paragraph 5 of the Amended Agreement and the attached Arbitration Provisions is a 24 result of his own negligence and does not amount to fraud. See Rosenthal v. Great 25 Western Fin. Securities Corp., 14 Cal. 4th 394, 423 (1996) (“[O]ne party’s 26 unreasonable reliance on the other’s misrepresentations, resulting in a failure to read a 27 written agreement before signing it, is an insufficient basis . . . for permitting that 28 party to avoid an arbitration agreement contained in the contract.”). Barnes argues 7 1 that the Arbitration Provisions were concealed from him until after he signed the 2 Amended Agreement. (See Opp’n 10:19–24.) But Paragraph 5 of the Amended 3 Agreement clearly and unambiguously references the Arbitration Provisions attached 4 as Exhibit “C”. (FAC Ex. U.) Barnes should have asked to see Exhibit “C” before 5 signing the Amended Agreement if those provisions were not attached or provided to 6 him. 7 Barnes alleges several colorable facts in support of his fraud argument, none of 8 which excuse Barnes’ apparent failure to read the arbitration clause in the Amended 9 Agreement. For example, Barnes claims that Defendants delayed fully executing the 10 Amended Agreement until August 30, 2010. (FAC ¶¶ 89, 147; Barnes Decl. ¶ 25.) 11 But the Court fails to see how the alleged delay affects the fact that Barnes agreed to 12 arbitration and that the Amended Agreement was ultimately executed by all the 13 parties. Barnes also alleges that he was mentally and physically exhausted at the time 14 the Amended Agreement was signed due to Defendants’ conduct and his own 15 financial hardships. (Barnes Decl. ¶¶ 23–24.) Barnes claims that his “previous 16 interactions” with counsel for Defendants and counsel’s “tactics of ‘threatening to 17 walk away’ from the deal” also made him hesitant to make or suggest changes to the 18 Amended Agreement. (Id. ¶ 17.) However, these allegations do not reasonably 19 excuse Barnes from reading and understanding the arbitration clause in the Amended 20 Agreement. Barnes is a sophisticated party, who admits that he was represented by 21 counsel at the time he signed the Amended Agreement.6 (See id. ¶ 7.) Defendants 22 have also submitted email exchanges with Barnes’ counsel regarding drafts and edits 23 to the Amended Agreement. (See Weiss Reply Decl. ¶ 3, Ex. 1.) Barnes himself is 24 25 26 27 28 6 Barnes’ counsel at the time—Bruce Fraser from Sidley Austin LLP—is no longer representing him because of an undisclosed conflict. (Barnes Sur-Reply Decl. ¶ 4.) Barnes claims that the specifics of the conflict were never explained to him, but he insinuates that his former counsel was somehow involved in the alleged fraud. (Sur-Reply 4:22–27.) Notwithstanding the Court’s hearsay concerns with respect to Fraser dropping the representation because of a “conflict,” the Court finds Barnes’ insinuation entirely unsubstantiated. Moreover, while the Court permitted Barnes to file a SurReply, it made clear that new arguments and new grounds for relief would not be considered. 8 1 also an attorney. (See Barnes Decl. ¶¶ 7, 22.) While Barnes denies expertise in real 2 estate transactions and denies ever signing an arbitration clause outside of the 3 employment context, his background suggests an understanding of the general effect 4 of an arbitration clause in a contract. (See id.) 5 Overall, the Court gives little weight to Barnes’ general contention that 6 Defendants deceived him into agreeing to arbitrate. Barnes has submitted no specific 7 evidence of Defendants affirmatively misrepresenting the existence of an arbitration 8 clause in the Amended Agreement. 9 Arbitration Provisions from Barnes, Barnes cannot explain his failure to read Even if Defendants concealed the attached 10 Paragraph 5 in the Amended Agreement itself. 11 adequately supported by the evidence or not, do not equate to fraud in the execution of 12 the Amended Agreement or fraud in the inducement of the arbitration clause. See 13 Rosenthal, 14 Cal. 4th at 415 (defining fraud in the execution and fraud in the 14 inducement of a contract under California law). 15 B. 16 17 Barnes’ allegations, whether Unconscionability Barnes also argues that, even if he agreed to arbitrate, the Arbitration Provisions are unconscionable and thus unenforceable. (Opp’n 10:27–17:23.) 18 Under California law, a contractual clause is unenforceable if it is both 19 procedurally and substantively unconscionable. Courts apply a sliding 20 scale: ‘the more substantively oppressive the contract term, the less 21 evidence of procedural unconscionability is required to come to the 22 conclusion that the term is unenforceable, and vice versa.’ Still, ‘both 23 [must] be present in order for a court to exercise its discretion to refuse to 24 enforce a contract or clause under the doctrine of unconscionability. 25 Davis v. O’Melveny & Myers, 485 F.3d 1066, 1072 (9th Cir. 2007) (quoting 26 Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83, 99 (2000)) 27 overruled on other grounds by Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928, 28 933–34 (9th Cir. 2013). 9 1 2 Here, the Court finds that neither procedural nor substantive unconscionability is present with respect to the Arbitration Provisions. 3 1. Procedural Unconscionability 4 Courts consider two factors when looking at whether a contract term is 5 procedurally unconscionable: oppression and unfair surprise. Armendariz, 24 Cal. 4th 6 at 114 (citing A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 486 (1982)). 7 “The oppression component arises from an inequality of bargaining power of the 8 parties to the contract and an absence of real negotiation or a meaningful choice on the 9 part of the weaker party.” Kinney v. United HealthCare Servs., Inc., 70 Cal. App. 4th 10 1322, 1329 (1999). Unfair surprise is “a function of the disappointed reasonable 11 expectations of the weaker party.” Harper v. Ultimo, 113 Cal. App. 4th 1402, 1406 12 (2003). 13 Barnes argues that unfair surprise exists because he never signed the Arbitration 14 Provisions and he lacks expertise in “complex real estate transactions or real estate 15 law.” (Opp’n 11:23–12:8; Barnes Decl. ¶ 7.) According to Barnes, he only expected 16 his option payments to increase when he signed the Amended Agreement and it was 17 unreasonable for him to expect mandatory arbitration provisions since they were not 18 in the Original Agreement. (Opp’n 11:23–12:8; Barnes Decl. ¶¶ 16–19.) Barnes also 19 argues that oppression abounds because of the economic conditions at the time he 20 signed the Amended Agreement. (Barnes Decl. ¶ 15.) In addition, he had already 21 sunk millions of dollars into the property, was worried about losing his investment, 22 felt pressured to sign the Amended Agreement on a “take or leave it” basis, and relied 23 on Defendants’ statements that he would not qualify for a traditional mortgage. 24 (Id. ¶¶ 10, 13, 15–19.) 25 But the Court finds that Barnes’ arguments once again focus on the wrong 26 document. Barnes admits to signing the Amended Agreement, which is only two 27 pages long and includes clear language about arbitration in Paragraph 5. (Barnes 28 Decl. ¶ 18; FAC Ex. U.) Moreover, Barnes is a lawyer and businessman who had 10 1 counsel representing him at the time he signed the Amended Agreement. (See Barnes 2 Decl. ¶ 7.) Barnes’ contention that he was surprised that the mandatory arbitration 3 provisions were included in the Amended Agreement is simply unreasonable. Barnes’ 4 background and the fact that he had counsel to negotiate the Amended Agreement also 5 contradict his oppression arguments. While Barnes is correct that “generalizations are 6 always subject to exceptions and categorization is rarely an adequate substitute for 7 analysis,” this case is not an exception to the general rule that surprise and oppression 8 are not present between sophisticated contracting parties. A & M Produce, 135 Cal. 9 App. 3d at 489 (“[A] businessman usually has a more difficult time establishing 10 procedural unconscionability in the sense of either ‘unfair surprise’ or ‘unequal 11 bargaining power.’”). 12 In addition, Defendants have submitted evidence in the form of email 13 exchanges between counsel for Barnes and Defendants, in which counsel discuss 14 drafts of the Amended Agreement. (Weiss Reply Decl. ¶ 3, Ex. 1.) The evidence 15 contradicts Barnes’ Declaration that he did not actively participate in the drafting of 16 the Amended Agreement. Defendants also point out that Barnes agreed to alternative 17 dispute resolution in the Original Agreement, which bound the parties first to a 18 judicial reference proceeding and called for binding arbitration as an alternative if 19 judicial reference was unavailable. (FAC Ex. O, pp. 356 ¶ 15.4, 392 ¶ 15.4.) Since 20 Barnes does not dispute the validity of the Original Agreement, the Court finds 21 Barnes’ assertion that he has never agreed to arbitration outside of the employment 22 context simply untrue. 23 Lastly, Barnes argues that procedural unconscionability exists because he was 24 not provided the “arbitration rules” when he signed the Amended Agreement. 25 (Opp’n 14:7–16.); see Trivedi v. Curexco Tech. Corp., 189 Cal. App. 4th 387, 393 26 (2010) (holding that the failure of an employer to provide a copy of the arbitration 27 rules to an employee bound by the rules supports a finding of procedural 28 unconscionability). To the extent that Barnes is claiming that he was not provided the 11 1 Arbitration Provisions when he signed the Amended Agreement, the Court has already 2 discussed at length that his failure to read and inquire about the Arbitration Provisions 3 cannot be excused. 4 If Barnes is arguing that he was not provided the rules of the arbitral forum, the 5 Court finds that the case law cited by Barnes is distinguishable. In Trivedi, the court 6 was dealing with an arbitration clause in an employment agreement where the 7 employee clearly held unequal bargaining power. 189 Cal. App. 4th at 393. The 8 employer drafted the agreement and selected the arbitral forum, and the employee was 9 forced to go to an outside source to learn the ramifications of the arbitration 10 agreement. See id. Here, Barnes is not only a more sophisticated party, but the 11 arbitration rules are clearly laid out in the Arbitration Provisions and only specify that 12 arbitration is to be conducted in accordance with the California Arbitration Act 13 (“CAA”), specifically California Civil Procedure Code sections 1280 through 1294.2, 14 “as amended from time to time.” (FAC Ex. U, p. 500 ¶ 1.) Barnes, a lawyer, need 15 only look up the statute to know the rules that he is bound by.7 Also, under the terms 16 of the Arbitration Provisions, the arbitrator is to be selected by mutual agreement, so 17 Barnes is not entirely powerless in the proceeding. (Id. at p. 500 ¶ 2.) 18 For the reasons discussed above, the Court finds that Barnes has failed to 19 demonstrate that the arbitration clause in the Amended Agreement is procedurally 20 unconscionable. 21 /// 22 23 24 25 26 27 28 7 Barnes also takes issue with the language “as amended from time to time” in the Arbitration Provisions. According to Barnes, the language supports a finding of procedural unconscionability because it is not clear whether the CAA as written at the time of contracting or the CAA as it stands now applies. See Harper, 113 Cal. App. 4th at 1407 (finding procedural unconscionability where it was not clear whether the arbitration rules in existence at the time of contracting or at the time of arbitration would apply). But the Court finds the language “as amended from time to time” in the Arbitration Provisions to be perfectly clear—the specified sections that are in effect the date of arbitration apply. There is no ambiguity. The parties even addressed the issue of a future conflict between the CAA and the Arbitration Provisions, explicitly stating that the Arbitration Provisions control. (FAC Ex. U, p. 500 ¶ 1.) 12 1 2. Substantive Unconscionability 2 While both procedural and substantive unconscionability must be present and 3 the Court has already found procedural unconscionability lacking, the Court briefly 4 addresses Barnes’ arguments with respect to substantive unconscionability. 5 Substantive unconscionability “focuses on the actual terms of the agreement 6 and evaluates whether they create ‘overly harsh’ or ‘one-sided’ results as to ‘shock the 7 conscience.’” 8 (quoting A & M Produce, 135 Cal. App. 3d at 486). Here, Barnes argues that the 9 Amended Agreement is an unenforceable “adhesion contract” because it was imposed 10 on him by Defendants who drafted the agreement and he had no opportunity to 11 negotiate its terms. (Opp’n 15:4–28.) But the Court has already addressed this issue 12 above with respect to procedural unconscionability. 13 evidence showing that Barnes’ counsel actively participated in negotiating the terms 14 of the Amended Agreement. (Weiss Reply Decl. ¶ 3, Ex. 1.) Barnes’ argument also 15 focuses too much on the overall terms of the Amended Agreement instead of the 16 inquiry relevant to this Motion, which are the terms of the Arbitration Provisions only. 17 See Buckeye Check Cashing, 546 U.S. at 445–46 (holding that an arbitration provision 18 is severable from the remainder of the contract for the purposes of the FAA). Aron v. U-Haul Co. of Cal., 143 Cal. App. 4th 796, 808 (2006) Defendants have proffered 19 Barnes also contends that the cost of arbitration makes the provisions 20 unconscionable. (Opp’n 16:1–17:23.) Barnes even estimates the arbitration fees 21 based on his alleged damages of more than $25 million. (Id. at 16:11–17:14.) Yet 22 Barnes fails to explain how his estimated arbitration fees deviate from acceptable 23 standards or what makes the arbitration fees in this case unusual or particularly 24 onerous. Since unconscionability is assessed at the time of contracting, Barnes also 25 argues that he “may have been unable to pay the costs” at the time the Amended 26 Agreement was executed because he was financially strapped. (Id. at 17:15–23.) This 27 argument is speculative at best and is hardly sufficient to render the Arbitration 28 Provisions unenforceable. 13 The Court therefore finds substantive unconscionability lacking with respect to 1 2 Paragraph 5 of the Amended Agreement and the Arbitration Provisions. 3 C. California Civil Procedure Code § 1298 4 Barnes’ last argument against enforcement of the Arbitration Provisions in the 5 Amended Agreement is that they do not comply with California Civil Procedure Code 6 section 1298. (Opp’n 17:26–20:1.) In California, special requirements for binding 7 arbitration agreements apply in the context of real estate transactions. See Cal. Civ. 8 Proc. Code § 1298. For example, the arbitration provisions must be clearly titled 9 “ARBITRATION OF DISPUTES” and the parties must initial or sign the arbitration 10 provisions. Id. 11 But the Court finds that Barnes’ section 1298 argument fails because the statute 12 is preempted by the FAA. The FAA’s savings clause “permits agreements to arbitrate 13 to be invalidated by generally applicable contract defenses, such as fraud, duress, or 14 unconscionability, but not by defenses that apply only to arbitration or that derive their 15 meaning from the fact that an agreement to arbitrate is at issue.” AT&T Mobility, 131 16 S. Ct. at 1746 (internal quotations and citations omitted); see also Hedges v. Carrigan, 17 117 Cal. App. 4th 578, 583–84 (2004) (“A court may not invalidate an agreement to 18 arbitrate under state laws that are only applicable to arbitration clauses.”). Since 19 California Civil Procedure Code section 1298 applies specifically to arbitration 20 provisions in real estate contracts, it is preempted by the FAA. 21 Barnes contends that section 1298 is not preempted by the FAA in this case 22 because the Arbitration Provisions reference only California law and contracting 23 parties are free to decide the governing law. See Volt, 489 U.S. at 479. However, the 24 Arbitration Provisions are more specific with respect to governing law than Barnes 25 characterizes. The Arbitration Provisions state only that California Civil Procedure 26 Code sections 1280 through 1294.2 apply. (FAC Ex. U, p. 500 ¶ 1.) The parties 27 never contracted for section 1298 to apply. Furthermore, Barnes misinterprets the 28 Supreme Court’s holding in Volt. In Volt, the court held that parties are free to agree 14 1 that arbitration will be conducted in accordance with state procedural law, not that 2 state statutes like section 1298 that purport to govern the right to arbitrate will 3 withstand FAA preemption. See id. at 478–79. 4 5 Accordingly, the Court finds that California Civil Procedure Code section 1298 does not preclude enforcement of the Arbitration Provisions. V. 6 CONCLUSION 7 For the reasons discussed above, the Court finds that a valid agreement to 8 arbitrate exists. There is also no real dispute that Barnes’ claims in this action fall 9 within the scope of the Amended Agreement, which includes the Arbitration 10 Provisions. See Cox, 533 F.3d at 1119 (limiting a court’s determination to “(1) 11 whether a valid arbitration agreement exists and, if does (2) whether the agreement 12 encompasses the dispute at issue”). The Court, therefore, GRANTS Defendants’ 13 Motion to Compel Arbitration and STAYS this action pending arbitration. (ECF 14 No. 13.) All dates are VACATED and taken off calendar. The parties shall notify the 15 Court of the status of Barnes’ claims within 7 days of the conclusion of arbitration 16 proceedings. 17 IT IS SO ORDERED. 18 19 October 1, 2014 20 21 22 ____________________________________ OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE 23 24 25 26 27 28 15
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