The Court of Appeal holds that when you cannot afford arbitration, a judge can require the other party to pay arbitration costs or else proceed in the courts. So, best practice is to pay all arbitration costs, as we have advised since 2013 when the Callahan & Blaine case (to the same effect) was published.
In Weiler v. Marcus & Millichap Real Estate Investment Services, Inc., et al., the Court of Appeal in Santa Ana stated that the Weilers ("Weiler") were fairly well-off once. They traded their two Las Vegas properties for one in Texas, operated as a Red Robin restaurant, supposedly worth $4.1 million. Marcus & Millichap represented Weiler. All of the relevant contracts contained arbitration clauses. When Weiler acquired the new property, Weiler believed they would receive rent payments from Red Robin who would also pay property taxes.
Shortly after COE, Red Robin defaulted; the defaults persisted for seven years. Weiler lost an alleged $600,000 in income alone. Weiler eventually sold the property for $2.1 million less than their purchase price.
ENTER THE LAWYERS
Weiler sued, claiming breach of fiduciary duty, negligence, negligent misrepresentation and elder abuse, and seeking compensatory and punitive damages. Weiler lacked knowledge of commercial real estate investing and desired a "safe and secure investment with a decent return." Weiler says Marcus & Millichap recommended the Texas property because it was a "wonderful investment" and the restaurant on the property "was busy and doing well financially." Weiler argued that the Texas deal was $2 million more than fair market value, based on "misrepresentations and other wrongdoing" by Marcus & Millichap.
The Court opinion says that from "go," disagreements ensued about Weiler's suit and how arbitration should proceed. For example, due to the amount of Weiler's claim-$2.8 million-Marcus & Millichap's lawyers insisted that the American Arbitration Association ("AAA") rules dictated ". . . a Panel of three arbitrators." Weiler argued for a single arbitrator. A three-person panel was ordered at an hourly rate of $1,450.
COURT RELIEF TO STOP EXPENSIVE UNAFFORDABLE ARBITRATION COSTS
The trial judge ruled against Weiler on an "unconscionability" analysis. Clearly, the clause was not unconscionable when the contracts were entered into. The trial court held that changes in circumstances later was not relevant. True enough, but not the test.
The Court of Appeal said the trial judge misapplied the "unconscionability" test to the arbitration agreement. Overreaching at inception is not the relevant consideration. Weiler's wealth dissipated over time. Weiler said they could not proceed unless Marcus & Millichap paid the arbitration fees, or all parties proceeded to court. Changed circumstances could be reviewed too.
The Court of Appeal ruled in favor of Weiler, citing Tillman v. Tillman, 825 F.3d 1069 (9th Cir. 2016). There, a party's financial situation eroded. Accordingly, the Ninth Circuit held that a court resolution would be available. Tillman was a federal precedent, but persuasive nonetheless here. Weiler may proceed in court, or else Marcus & Millichap must pick up the entire cost. The case remains subject to possible Supreme Court request for hearing which is discretionary.
PRACTICE TIP: We continue to recommend:
(1) that the park owner pay all costs for arbitration (to eliminate challenges such as made by Weiler);
(2) that the terms should call for decisions by one arbitrator; and, among other things,
(3) that the arbitration agreement or clause not limit who may serve as arbitrator (sometimes, AAA, for example, will not even take park cases).
CONCLUSION: To escape the valid arbitration clause, a strong showing of the inability to pay is required. Some arbitration costs are very high, and demands to proceed forward can range into tens of thousands of dollars. Too, the judge will need to find out if financial status "is not a result of the party's intentional attempt to avoid arbitration." Many mobilehome tenants will likely make the grade. Since 2013 when the Callahan and Blaine case was published, it is pretty obvious that the park owner's clause should provide for payment of arbitration costs.
This case also illustrates how important it is to consider a nuanced approach to legal issues. And to modulate strategy on the attorney's part. A "one size fits all" "psychotic" aggressiveness (as touted in recent attorney advertising) is expensive and may fail. Look at the end result there: would it be better to allow for just one, not three, arbitrators?
Absent a malevolent effort to falsely paint ones finances, the judge may order the arbitration to continue only if the park owner agrees to pay, or so orders such payment, or else to allow the case to be decided by the court.