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Despite holding that arbitration agreements in mobile home lot leases do not offend public policy, a California state appellate court has affirmed a trial court's refusal to compel arbitration based on the presence of third-party non-signatories that might result in inconsistent decisions at court and arbitration.
In Adams v. MHC Colony Park Ltd. Partnership, No. F053046, 2008 WL 2502527 (Cal. Ct. App. June 24, 2008), Adams and other tenants of MHC's mobile home park filed suit alleging MHC's failure to keep common areas in good repair. Seventeen of the tenants signed leases with MHC containing arbitration agreements, and MHC moved to compel arbitration of those plaintiffs' claims. The trial court denied the motion, holding that the agreements were void as a matter of public policy. Alternatively, it held that allowing the arbitration of some claims could lead to inconsistent judgments.
On appeal, the Court held that the arbitration agreements were not void as a matter of public policy, noting that California's Mobile Home Residency Law (MRL) was silent on the authorization or prohibition of arbitration agreements. The Court interpreted the only section of the MRL that mentions arbitration as allowing arbitration without offending public policy as long as the homeowners voluntarily agree to arbitration. See Cal. Civ. Code § 798.25.5 (prohibiting binding arbitration when the agreement is "unilaterally adopted by the management . . . without the consent of the homeowners").
The tenants also argued that their claims were not arbitrable because they were statutory claims to prohibit conduct injurious to the general public. See, e.g., Broughton v. Cigna Healthplans, 21 Cal. 4th 1066, 1075 (Cal. 1999) (holding that statutory claims are not arbitrable when asserted for the primary benefit of the general public). The Court disagreed, finding that any benefit to the general public stemming from vindication of the tenants' claims was "merely incidental" to the benefits to the individual tenants.
The Court also rejected the tenants' allegation that their lease was a "residential lease agreement" for a dwelling that cannot be subject to an arbitration agreement under California law. See Cal. Civ. Code § 1953(a)(4). According to the Court, there was no intent on the part of the legislature to include a plot of land in a mobile home park in the definition of "dwelling" or "dwelling unit."
However, the Court agreed with the trial court's determination that the possibility of conflicting rulings warranted denying the motion to compel arbitration for the 17 signatory tenants. MHC conceded that both groups of plaintiffs brought claims that had a "common nucleus" of fact regarding maintenance of the park. The Court further observed that the two groups of plaintiffs presented common liability issues and common questions as to injunctive relief. According to the Court, the presentation of claims in different forums presented a possibility of inconsistent rulings that triggered the authority of the trial court to deny arbitration as to the signatories' claims. See Cal. Code Civ. P. 1281.2(c).
Finally, MHC argued that the U.S. Supreme Court's recent decision in Preston v. Ferrer, 128 S.Ct. 978 (2008), required the trial court to apply federal procedural arbitration law to the dispute. Because the Federal Arbitration Act (FAA) does not allow a court to deny arbitration based on the "possibility of inconsistent rulings" involving the presence of third-party non-signatories, MHC argued that the trial court had no authority to deny its motion to compel.
The Court rejected this argument, noting that, even if the FAA applied, it does not favor compelling arbitration under a particular set of procedural rules, but merely provides that "arbitration proceed in the manner provided for in the parties' agreement." See Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 474 (1989). Because the parties did not provide for the application of the FAA to their dispute either expressly or through invocation of particular rules and instead specifically invoked the California Code of Civil Procedure in their agreement, California's procedural rules governing arbitration applied to their dispute.
As this case illustrates, California trial courts have broad discretion to deny motions to compel arbitration once a third-party non-signatory is involved in the dispute and their presence creates the possibility of inconsistent rulings. To preserve the availability of the arbitral forum with some measure of predictability, parties anticipating disputes in a California forum should invoke an arbitration rule set that applies FAA procedural rules to any proceedings. See, e.g., Rule 48(B) of the National Arbitration Forum Code of Procedure.
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