MITCHELL v. AAMES HOME LOAN COMPANY

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Court of Appeal, Second District, Division 4, California.

Sandra MITCHELL, Plaintiff and Appellant, v. AAMES HOME LOAN COMPANY, et al., Defendants and Respondents.

B021272.

Decided: May 21, 1987

This is an appeal by plaintiff and appellant, Sandra Mitchell, from a judgment entered by superior court pursuant to Code of Civil Procedure section 1287.4 confirming an arbitration award in favor of defendant and respondent Aames Home Loan.

Wilshire Reconveyance, Inc., is a California corporation which acts as corporate trustee in connection with trust deed loans arranged by respondent Aames.   Aames is a licensed real estate broker which arranges trust deed loans secured by borrower's real property.   As a loan broker, respondent arranges loans not with its own funds, but with funds provided by private individuals.   Aames administers loans for the lenders as the loan servicing agent.

Appellant and her brother inherited certain real property and appellant shopped around for a loan, contacting at least three other lenders, in order to buy out her brother's interest.

In May 1981, appellant borrowed $35,000 from individual lenders in two loan transactions.   There was a $30,000 second trust deed loan and a $5,000 third trust deed loan.   The loans were secured by the property.

Appellant executed several documents entitled “Loan Escrow Instructions,” each of which contained an agreement to arbitrate loan disputes.   The lenders also signed the Loan Escrow Instructions, which contained the arbitration provision and appointed respondent Aames to take any action necessary in servicing or collecting on the note.

Appellant made payments for four months, and she defaulted after she and her husband separated, because she could no longer afford payments.

Respondents, acting as agent for Mr. Lucacher, the individual lender on the third trust deed loan, recorded notice of appellant's default on the loan.   Respondents noticed a trustee's sale of the property securing the loan.   Appellant filed a bankruptcy petition to delay sale, and on July 18, 1983, the property was sold at a trustee's sale to Mr. Lucacher.

Appellant filed an unverified complaint in May of 1983.   In her first amended complaint, appellant challenges the terms of the loan and respondents' conduct.

Respondents answered the first amended complaint on October 30, 1984, setting forth as an affirmative defense appellant's failure to submit the matter to contractual arbitration pursuant to Paragraph 8 of Loan Escrow Instructions.   On November 1, 1984, respondents filed a petition to compel arbitration.   On November 29, 1984, the superior court granted the petition and ordered the parties to arbitrate.

The arbitration board found in favor of respondents, and the superior court confirmed the arbitrator's award.

The loan documentation signed by appellant does not indicate the amount of monthly payments on the second trust deed.   The loan documentation signed by appellant and Mr. Bowers, an Aames employee, indicated monthly payments on the $30,000 second trust deed loan of interest only (“Int.   Only”).

According to appellant, Mr. Bowers told her that if appellant paid the $132 per month on the third trust deed loan and kept it current when the other loan was due, Aames would refinance it.   Appellant alleges the loan documentation pertaining to the third trust deed includes a handwritten notation of monthly payments on the second trust deed note in the sum of $500.   The $500 payment notation does not appear on duplicates of the Loan Escrow Instructions in respondents' files.   The documents signed by appellant do not indicate the amount of monthly payments on the second trust deed.

Mr. Bowers testified in a declaration and before the arbitrator that his oral disclosure included the items listed on the “Declaration of Oral Disclosure,” which included the interest rate, the choice to make higher monthly payments and reduce the balance thereby, the amount and the due date of the balloon payment, the annual percentage rate, the interest total, Aames' commission and other charges, and the due on sale clause.

Appellant believed her monthly payments were $132 a month, with a second trust deed loan to be refinanced if appellant kept current on the third trust deed loan.   However, Mr. Bowers testified he orally disclosed to appellant the amount of monthly payments on the second trust deed loan in the amount of $500 per month.   Aames' computer start up sheet has the sum of “0000.00” as regular payment amount on the second trust deed.

Appellant says she was never advised that the loan agreement contained an arbitration clause on the second side of the loan instructions. The Loan Escrow Instructions, in a place preceding the borrower's signature, states that there are General Instructions on the reverse side.1  The words “General Instructions” are written in capitals.   Immediately after that, also in dark capitals, a paragraph states that the borrower acknowledges that he agrees to and understands the provisions and general instructions.   The arbitration clause appears in item number 8 in the “General Instructions,” on the reverse side of the page with the lender, Robert Lucacher's signature.   A paragraph in the middle of item 8 states that any controversy arising out of the subject matter shall be settled by arbitration 2 in accordance with the rules of the American Arbitration Association.

Appellant raises the following issues in her brief.   Appellant alleges that she had a right to a jury trial.   She asserts that there was no valid, binding agreement to arbitrate, that the failure to orally disclose the arbitration clause is a breach of fiduciary duty, that appellant did not waive her right to a jury trial by her conduct, that the award of the arbitrator is invalid on its face, that respondents waived their right to arbitration by its conduct in answering the original complaint and by responding to the order to show cause.

Appellant argues that the arbitration award is improper in that the arbitrator ignored the evidence and did not understand the applicable law, and that the “trial court committed reversible error” in that the trial court refused to permit appellant to file written opposition, which included testimonial evidence of the lack of her knowledge of the arbitration agreement.

Appellant alleges that the court could not award the property to Lucacher, the lender, because he was not a party to the arbitration proceedings, and the mortgage loan broker, Aames, did not have any right, title, and interest in the property.

Appellant's allegation that the arbitrator ignored the facts and did not understand the law is not open to examination here.   A court's standard of review of the judgment confirming the arbitration award is strictly limited.   A court may decide whether parties agreed to arbitrate a matter. (O'Malley v. Wilshire Oil Co. (1963) 59 Cal.2d 482, 491.)   Under certain circumstances, the court may set aside an arbitrator's award, but the grounds for setting aside an arbitrator's award are limited to those set forth in Code of Civil Procedure section 1286.2.3  A court may not set aside an arbitration award even if the arbitrator made an error of law (Marcus v. Superior Court (1977) 75 Cal.App.3d 204) or fact.   The courts may not examine the sufficiency of the evidence supporting the arbitrator's award (Lauria v. Soriano (1960) 180 Cal.App.2d 163) or the arbitrator's reasoning in support of the decision, or the merits of the controversy. (Santa Clara-San Benito etc.   Elec.  Contractors' Assn. v. Local Union No. 332 (1974) 40 Cal.App.3d 431.)

Therefore, the court below, and this court, may not reexamine factual and legal questions that were before the arbitrator and appellant's claim that the arbitrator made factual and legal error is not well taken.   And for this reason, we may not reexamine appellant's claim that defendants did not inform plaintiff of a $500 monthly payment, nor may the court reexamine the question of whether or not defendants told plaintiff they would refinance to suit her needs.   The kinds of questions open to the court below were questions such as whether there was a valid agreement to arbitrate, a waiver of arbitration agreement, or grounds for vacation of the arbitration award under Code of Civil Procedure section 1286.2.

Appellant claims that there was no valid agreement to arbitrate because the arbitration clause was “buried” on the “reverse side” of the Escrow Loan Instructions.

There is a strong public policy enforcing agreements to arbitrate. (See Freeman v. State Farm Mut. Auto Ins. Co. (1975) 14 Cal.3d 473.)   But the policy favoring arbitration cannot displace the necessity for a voluntary agreement to arbitrate, and there is no policy compelling persons to accept arbitration absent such an agreement. (Victoria v. Superior Court (1985) 40 Cal.3d 734.)

In the case at bench, appellant argues that the arbitration provision on the reverse side of the escrow instructions is unenforceable, in that there was no true agreement to the arbitration provision, because there was no “distinguishing characteristic that would draw a reasonable persons's attention to the fact that there might be a waiver “of a right to a jury trial.” 4

Appellant relies on Code of Civil Procedure section 1295, subdivision (b) to support her contention that the instant document was insufficient to draw her attention to the arbitration clause on the back.

Code of Civil Procedure section 1295, subdivision (b) provides as follows:

“Immediately before the signature line provided for the individual contracting for the medical services must appear the following in at least 10-point bold red type:

“ ‘NOTICE:  BY SIGNING THIS CONTRACT YOU ARE AGREEING TO HAVE ANY ISSUE OF MEDICAL MALPRACTICE DECIDED BY NEUTRAL ARBITRATION AND YOU ARE GIVING UP YOUR RIGHT TO A JURY OR COURT TRIAL․’ ”

Code of Civil Procedure section 1295, subdivision (b) does not assist appellant because Code of Civil Procedure section 1295, subdivision (b) applies only to contracts for medical services.   We cannot expand the clear language of the statute, which applies to contracts for medical contracts, to include contracts between borrowers and real estate brokers.   To do so would violate the rules of statutory construction.   The court must assume the Legislature meant sections to be read as written (People v. Baker (1968) 69 Cal.2d 44) and a liberal construction does not mean enlargement of the plain provisions of the law. (MacLeod v. City of Los Altos (1960) 182 Cal.App.2d 364.)   If the Legislature had intended Code of Civil Procedure section 1295, subdivision (b) to apply to contracts between borrowers and real estate brokers, they could have written a statute to do so.

Appellant next argues that the arbitration clause is invalid because the real estate broker's contract was a contract of adhesion, and appellant lacked equal bargaining power.   A contract of adhesion is a standardized contract which is imposed and drafted by a party of superior bargaining strength and relegates to the subscribing party only the opportunity to accept or reject the contract. (Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 817.)   Even if the contract herein is an adhesion contract, the arbitration clause is not necessarily unenforceable.   An adhesion contract can provide for arbitration of disputes, and it will be enforceable provided that the arbitration provision does not conflict with the reasonable expectations of an ordinary person and provided that it is not unduly oppressive or unconscionable. (Izzy v. Mesquite Country Club (1986) 186 Cal.App.3d 1309.)   We do not regard the arbitration clause here either as oppressive or beyond the reasonable expectations of the parties.   In the absence of some special element of unfair advantage, arbitration is considered a mutually advantageous process, and therefore the fact that an arbitration provision is in a contract of adhesion will not render the provision unenforceable. (Keating v. Superior Court (1982) 31 Cal.3d 584, 595.)   A provision for arbitration in a commercial context is quite common and therefore reasonably anticipated. (Parr v. Superior Court (1983) 139 Cal.App.3d 440;  Keating v. Superior Court, supra, at p. 595.)   And since the challenged arbitration clause does not provide for an arbitration forum biased against either party, and since arbitration is generally advantageous and cost saving, we are reluctant to find an arbitration clause in this commercial setting to be unconscionable or unduly oppressive.

The next issue before this court is whether defendant Aames had a fiduciary duty to explain or orally disclose the existence of the arbitration clause on the back of the escrow instructions.   Respondents claim to have made other oral disclosures, but they do not claim they verbally informed appellant about the arbitration clause.   Respondents do claim that they drew appellant's attention to the provisions on the reverse side of the contract by a written admonition. (See Loan Escrow Instructions, fn. 1.)   The loan escrow agreement, not many lines above the place for the borrower's signature, states that there are “General Instructions” on the reverse side of the agreement, and the words “General Instructions” are in dark capitals.   Respondents claim that this statement, together with the provision just below it that is typed in all capitals, which states that the buyer has read and understood and agreed to the “General Instructions” fulfills respondents' duty to inform appellant.   Respondents assert that no further verbal instructions are necessary to fulfill their duty.

In Realty Projects, Inc. v. Smith (1973) 32 Cal.App.3d 204, 210, the court said that the Real Estate Licensees (brokers and salesmen) when acting as mortgage loan brokers have a duty of fair and honest dealing that extends to borrowers.   The court also said that mortgage loan brokers hold themselves out to prospective borrowers as loan experts, and they have a duty to disclose what the various loans cost.   However, the Realty case specifically stated that the court was not deciding whether the statutory duty of disclosure extends beyond the particular points indicated. (32  Cal.App.3d at p. 211, fn. 11.)

The case of Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, also imposed on mortgage loan brokers an obligation to make a full and accurate disclosure of the terms of the loan to borrowers and to act in good faith.   The court reasoned in part that a mortgage loan broker is a fiduciary, and therefore they may have a duty of oral disclosure and counseling that extends beyond the bare written disclosures of the terms of the transaction.   The Wyatt court said that where plaintiffs were persons of modest means and limited financial experience, the mortgage loan broker's fiduciary duty included the duty to disclose orally the true rate of interest, the size of the balloon and the penalty for late payments.5  The Wyatt, court relied on the fact that the interest payment, late charges, and balloon payment were “highly unfavorable to the borrower.” (24  Cal.3d at p. 784.)   Relying here on the reasoning of Wyatt, if an arbitration clause is unfavorable (in the manner of late payments, interest payments or balloon payments) it is arguable that the fiduciary duty of oral disclosure and counseling of a mortgage loan broker to a borrower, ought to extend to verbally pointing out the existence of an arbitration clause on the reverse of the contract.

Some cases involving stock fraud and undue influence by a stock brokerage are helpful here.   A court in a stock fraud case has found that the fiduciary duty of the stock broker to the client extended to advising the client orally of the fine print arbitration clause on the reverse side of the agreement. (Main v. Merrill-Lynch, Pierce, Fenner & Smith, Inc. (1977) 67 Cal.App.3d 19.)   The court said in the case of Main v. Merrill-Lynch, Pierce, Fenner & Smith, Inc., supra, that a fiduciary in a transaction with a beneficiary may not gain an advantage, and that both plaintiff and defendant treat the subject arbitration clause as an advantage to be held and a disadvantage to be invalidated. (67  Cal.App.3d at p. 31.)   The court held that where plaintiff was aged and unschooled in business matters, and plaintiff had developed a relationship of trust and confidence with the stock broker, plaintiff had successfully alleged fraud as the inducement of the arbitration clause.   Plaintiff in the Main case believed she was signing a document to open a new account, and she did not know she was signing a lending agreement, and that was found to be a significant factor.

Similarly, in Ford v. Shearson Lehman American Express, Inc. (1986) 180 Cal.App.3d 1011, 1012, in an action against a stock broker and several others for fraud and undue influence, the court held that plaintiff had sufficiently alleged in his complaint that the fraud had permeated the entire agreement, including the arbitration clause vitiating the arbitration clause.   In Ford, defendant and others controlled and influenced and dominated appellant's financial affairs and appellant did whatever defendants told him to do and signed whatever he was told to sign.

The issue before us, then, is whether the mortgage loan broker's fiduciary duty of oral disclosure and counseling as set out in Wyatt v. Union Mortgage Co., supra, 24 Cal.3d 773, includes the duty to orally disclose and counsel this particular plaintiff about the existence of an arbitration clause provision on the reverse side of an agreement.   Or, stated another way, does the fiduciary duty of a stock broker to orally disclose the existence of an arbitration clause, under the facts as set forth in Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 67 Cal.App.3d 19, a case involving stock fraud scheme and undue influence, extend to the fiduciary duty of a mortgage loan broker where there is an ordinary borrower and there is no scheme of fraud and undue influence to get plaintiff to sign the contract.

We think that although stock brokers and mortgage loan brokers each have fiduciary duties to the clients and borrowers, their duties of oral disclosure are not necessarily the same.   A mortgage loan broker's fiduciary duty, under the circumstances here presented, does not extend to oral counseling about the existence of the arbitration clause on the reverse of the contract.   Here the borrower's attention had been clearly drawn to the reverse side of the contract by the language on the front page of the contract.   In the two stock broker fraud cases, where the court found a duty to orally point out the existence of the arbitration clause, there were alleged complex fraudulent schemes directed toward tricking plaintiffs into signing papers they did not understand.   In one case, plaintiff was aged and she thought she was opening a new account;  that plaintiff did not even know she was signing a lending agreement. (Main v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 67 Cal.App.3d at p. 30.)   In the Ford case (Ford v. Shearson Lehman American Express, Inc., supra, 180 Cal.App.3d 1011), the plaintiff alleged a fraudulent scheme in which the security broker and investment adviser, the psychotherapist, the bookkeeper and business manager, and others all gained plaintiff's confidence and gained control over his wealth and business affairs.   In that case, plaintiff exercised no independent judgment when signing the papers put before him.

In the case at bench, although defendant mortgage loan broker certainly has a fiduciary duty of oral disclosure as to certain matters, such as those set out in Wyatt, that duty does not extend to orally disclosing the arbitration clause.   There is no suggestion here of domination of appellant by Aames.   Though appellant may not be a highly sophisticated entrepreneur, she appears to have been capable of reading the contract before her.   This case is not a case where plaintiff alleges that she read the arbitration clause, and did not understand it, or that defendants misled her about the meaning of arbitration.   Appellant simply says that respondents did not tell her orally about the existence of the provisions on the reverse side of the form, and respondents had a duty to do so.6 The fiduciary duty herein does not include verbally drawing plaintiff's attention to the existence of the arbitration clause on the rear page of the escrow loan instructions.

Appellant next argues that her counsel attempted to file opposition papers to respondents' petition to compel arbitration, and the clerk erroneously refused the papers, incorrectly concluding that appellant was too late to file them within the five-day time limit.   There is no citation to the record to support this contention.   Furthermore, appellant's brief contained her arguments on the unenforceability of the arbitration agreement, so appellant has no complaint.

Appellant argues that by seeking to foreclose, respondents waived their rights under the arbitration agreement.   Appellant filed a motion to enjoin the foreclosure sale.   Respondent argues that they did not waive their rights to arbitration by opposing the motion because they were entitled to oppose appellant's motion and to assert their rights to arbitrate.   Although it is true that respondent is entitled to oppose the motion, appellant is arguing that Aames waived their right to compel arbitration by seeking to foreclose, and not merely by filing opposition papers to appellant's motion.   In Christensen v. Dewor Developments (1983) 33 Cal.3d 778, the plaintiff waived his right to contractual arbitration by filing suit in court, in knowing disregard of the existence of the contract arbitration provision, in order to discover the contractors' legal defense theories, with the intention of eventually pursuing arbitration.   In the case at bench, Aames conduct in seeking foreclosure is also conduct inconsistent with arbitration.

In Keating v. Superior Court, supra, 31 Cal.3d at page 605, the court said while there is no single test for establishing “waiver, the relevant factors include whether the party seeking arbitration (1) has ‘previously taken steps inconsistent with an intent to invoke arbitration,’ (2) ‘has unreasonably delayed’ in seeking arbitration, (3) or has acted in ‘bad faith’ or with ‘wilful misconduct.’  [Citations.]”

We do not agree with appellant that respondents' conduct in waiting to raise the arbitration issue until respondent submitted its counter at-issue memorandum and until the filing of respondents' answer to the first amended complaint is an unreasonable delay, or that it showed bad faith, or that this conduct is inconsistent with bringing arbitration.   However, respondents' conduct in seeking to foreclose is a previously taken step inconsistent with an intent to invoke arbitration.   Respondents should have sought arbitration instead of foreclosure.

Although waiver is a question of fact which, if supported by substantial evidence is binding on the appellate court (Keating v. Superior Court, supra, 31 Cal.3d at p. 605), there is insufficient evidence to support the court's finding of no waiver of the right to arbitration where Aames sought to foreclose prior to bringing arbitration proceedings.

Appellant argues that the arbitrator exceeded its jurisdiction, and therefore the award should be vacated under Code of Civil Procedure section 1286.2.   Code of Civil Procedure section 1286.2 provides in pertinent part that:

“Subject to section 1286.4, the court shall vacate the award if the court determines that:  (d) The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted․”

Appellant first argues that there was no stipulation by the parties that the court had authority to decide all pending issues.   The arbitrator's award recites that there was such a stipulation.   Although the stipulation appears to be missing from the record, all parties conducted themselves as though the stipulation was in existence.   In claiming error, it is appellant's burden to support her contention (U.S.   Plywood Corp. v. Hudson Lumber Co. (1954) 124 Cal.App.2d 527), and appellant herein has not done so.

Appellant argues that there is not “one scintella of evidence in the record that respondents have any right, title or interest in the single family residence which was the subject of foreclosure,” and that, therefore, the arbitrator had no right to award the property to respondents.7  Appellant argues that it was Robert Lucacher “who testified before the arbitrator that he was the investor under the third deed of trust under which foreclosure was had,” and it was Mr. Lucacher who “owned the title and was given the trustee's deed on sale after foreclosure.”   Appellant argues that since Mr. Lucacher was not a party to the arbitration proceedings or to the present proceedings, he has no standing to recover the property, and respondents also have no standing to recover the property because they did not have title to it.

In view of the fact that respondents waived their rights to arbitrate by seeking to foreclose, we need not reach these questions.

Reversed.  Respondents shall pay appellant's costs under rule 26(a) of the California Rules of Court.

FOOTNOTES

1.   The page in which the agreement notes that the general instructions are on the reverse side and are incorporated by reference, appears as follows: The size of the letters below are smaller than the letters in the actual agreement.

3.   Those grounds are:  “Subject to Section 1286.4, the court shall vacate the award if the court determines that:  [¶ ] (a) The award was procured by corruption, fraud or other undue means, [¶ J (b) There was corruption in any of the arbitrators, [¶ ] (c) The rights of such party were substantially prejudiced by misconduct of a neutral arbitrator;  [¶ ] (d) The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted, or [¶ ] (e) The rights of such party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title.”

4.   In Conservatorship of Link (1984) 158 Cal.App.3d 138, it was held that a release from liability is not enforceable if it is not easily readable, and as a matter of public policy, the type face size of the crucial language in a release should be no smaller than 8 to 10 point type.   In footnote one on page 141, Link court listed certain sections of the code which require the use of certain size type in certain kinds of cases.   We have not been cited to any code section or to any case that suggests that the size type in the instant Escrow Instructions is too small.   Secondly, although appellant claims that Aames did not advise her of the existence of fine print boiler plate provisions on the reverse side, appellant does not claim those provisions are too small to read.   Finally, the reproduction in this opinion of the Escrow Instructions does not reflect the actual size of the type and is smaller than the type actually used in the loan instructions that appellant signed.

5.   No arbitration clause was before the court in the Wyatt case, so of course the court did not decide whether the mortgage loan broker s fiduciary duty included oral disclosure of such a clause.

6.   In Parr v. Superior Court, supra, 139 Cal.App.3d 440, 445, 446, a case not dealing with fiduciary duty of a mortgage loan broker or any other fiduciary, the court said that an arbitration clause is within the “reasonable expections” of the parties.

7.   Code of Civil Procedure section 1287.2 reads as follows:  “The court shall dismiss the proceeding under this chapter as to any person named as a respondent if the court determines that such person was not bound by the arbitration award and was not a party to the arbitration.”

KINGSLEY, Judge.

WOODS, P.J., and McCLOSKY, J., concur.