MKJA, INC., v. 123 FIT FRANCHISING, LLC










Filed 1/4/11





CERTIFIED FOR PUBLICATION

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

MKJA, INC., et al., Plaintiffs and Respondents, v. 123 FIT FRANCHISING, LLC et al., Defendants and Appellants.

D055967 (Super. Ct. No. GIN055734)

STORY CONTINUE FROM PART I….


2. Application
Although 123 Fit did not file a petition to compel arbitration in California, it did file a petition to compel arbitration in Colorado. By filing that petition, 123 Fit has evinced its intent to enforce the arbitration agreement. (See Henry, supra, 233 Cal.App.3d at p. 98 ["Alcove did not petition the trial court for an order to compel arbitration but it made clear to Mr. Henry it intended to pursue the arbitration"].) The trial court's order declaring the arbitration provisions unenforceable effectively prevents 123 Fit from enforcing the arbitration provisions in the franchise agreements, since it is undisputed that the plaintiffs intend to litigate their claims against 123 Fit in California. As in Henry, if the trial court's order were not appealable, 123 Fit would be forced to proceed with litigation to a final judgment, and its alleged right to arbitrate would thus be frustrated. For these reasons, we conclude that the trial court's order declaring the arbitration provisions unenforceable is appealable pursuant to section 1294, subdivision (a) as the functional equivalent of an order denying a petition to compel arbitration.
Although the plaintiffs acknowledge that the trial court's ruling that the arbitration provisions are unenforceable is "arguably appealable as [the] 'functional equivalent' of the denial of a Petition to compel arbitration," they argue that the defendants should be "equitably estopped," from raising this argument because the defendants sought arbitration in Colorado rather than in California. We are aware of no authority, and the plaintiffs cite none, that has applied the doctrine of equitable estoppel in determining whether a court has appellate jurisdiction over an appeal. In any event, we reject the plaintiffs' contention that the defendants' "inequitable conduct" supports dismissal of this appeal. 123 Fit sought arbitration in Colorado based on an arbitration agreement that provides that all arbitration proceedings are to be conducted in Colorado. There is nothing about this conduct that would warrant dismissal of the defendants' appeal.
In addition, we may review the trial court's order lifting a stay of the litigation pursuant to section 1294.2, in light of the defendants' appeal from the court's order declaring the arbitration provisions unenforceable, since we have concluded that the latter is an appealable order. The trial court's lifting the stay was a necessary prerequisite to the trial court issuing a ruling on the plaintiffs' motion to declare the arbitration provisions unenforceable. (See pt. III.C., post.) The trial court's ruling lifting the stay is therefore reviewable pursuant to section 1294.2. (E.g. Valentine Capital Asset Management, Inc. v. Agahi, supra, 174 Cal.App.4th at p. 612, fn. 5.) Accordingly, we reject the plaintiffs' argument that we may not review the trial court's order insofar as it granted the plaintiffs' motion to lift the stay because that "portion of the order is not appealable."
B. A trial court may not lift a stay of litigation imposed pursuant to section 1281.4, on the ground that plaintiffs cannot afford to pay the costs of arbitration^[1]

The defendants claim that the trial court erred in lifting the stay that the court previously imposed pursuant to section 1281.4 pending arbitration of the parties' disputes.^[2] Specifically, the defendants contend that section 1281.4 does not permit a trial court to lift a stay of litigation pending arbitration of a dispute on the ground that a party cannot afford to pay the costs associated with the arbitration. This claim raises an issue of statutory interpretation, which is subject to the de novo standard of review. (See Doe v. Brown (2009) 177 Cal.App.4th 408, 417 ["We apply the de novo standard of review to this claim, since the claim raises an issue of statutory interpretation"]; Cardiff Equities, Inc. v. Superior Court (2008) 166 Cal.App.4th 1541, 1548 [applying de novo standard of review to "legal question" of whether case was properly stayed pursuant to section 1281.4].)
1. General principles of statutory interpretation
In Doe v. Brown, supra, 177 Cal.App.4th at pages 417-418, this court outlined the following well established principles of statutory interpretation:
" 'In construing any statute, "[w]ell-established rules of statutory construction require us to ascertain the intent of the enacting legislative body so that we may adopt the construction that best effectuates the purpose of the law." [Citation.] "We first examine the words themselves because the statutory language is generally the most reliable indicator of legislative intent. [Citation.] The words of the statute should be given their ordinary and usual meaning and should be construed in their statutory context." [Citation.] If the statutory language is unambiguous, "we presume the Legislature meant what it said, and the plain meaning of the statute governs." [Citation.]' [Citation.]

" 'If, however, the statutory language is ambiguous or reasonably susceptible to more than one interpretation, we will 'examine the context in which the language appears, adopting the construction that best harmonizes the statute internally and with related statutes,' and we can ' " 'look to a variety of extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a
part.' " ' [Citation.]' [Citation.]

" ' "We must select the construction that comports most closely with the apparent intent of the Legislature, with a view to promoting rather than defeating the general purpose of the statute, and avoid an interpretation that would lead to absurd consequences." [Citation.]' [Citation.]"

2. Section 1281.4
Section 1281.4 provides:

"If a court of competent jurisdiction, whether in this State or not, has ordered arbitration of a controversy which is an issue involved in an action or proceeding pending before a court of this State, the court in which such action or proceeding is pending shall, upon motion of a party to such action or proceeding, stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies.

"If an application has been made to a court of competent jurisdiction, whether in this State or not, for an order to arbitrate a controversy which is an issue involved in an action or proceeding pending before a court of this State and such application is undetermined, the court in which such action or proceeding is pending shall, upon motion of a party to such action or proceeding, stay the action or proceeding until the application for an order to arbitrate is determined and, if arbitration of such controversy is ordered, until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies.

"If the issue which is the controversy subject to arbitration is severable, the stay may be with respect to that issue only."

"The purpose of the statutory stay [required pursuant to section 1281.4] is to protect the jurisdiction of the arbitrator by preserving the status quo until arbitration is resolved. [Citations.] [¶] In the absence of a stay, the continuation of the proceedings in the trial court disrupts the arbitration proceedings and can render them ineffective. [Citation.]" (Federal Ins. Co. v. Superior Court (1998) 60 Cal.App.4th 1370, 1374-1375 (Federal Ins. Co.).)
In SWAB Financial, LLC v. E*Trade Securities, LLC (2007) 150 Cal.App.4th 1181, 1199-1200 (SWAB Financial), the Court of Appeal emphasized that, after granting a petition to compel arbitration and staying a lawsuit, the scope of jurisdiction that a trial court retains is extremely narrow:
"The trial court was . . . authorized under Code of Civil Procedure section 1281.4 to stay pending judicial actions. But beyond that, the trial court's power to interfere in the pending arbitration was strictly limited. [Citations.] . . . . [¶] . . . Once a petition is granted and the lawsuit is stayed, "the action at law sits in the twilight zone of abatement with the trial court retaining merely vestigial jurisdiction over matters submitted to arbitration." [Citation.] During that time, under its "vestigial" jurisdiction, a court may: appoint arbitrators if the method selected by the parties fails ([Code Civ. Proc.,] § 1281.6); grant a provisional remedy "but only upon the ground that the award to which an applicant may be entitled may be rendered ineffectual without provisional relief" ([Code Civ. Proc.,] § 1281.8, subd. (b)); and confirm, correct or vacate the arbitration award ([Code Civ. Proc.,] § 1285). Absent an agreement to withdraw the controversy from arbitration, however, no judicial act is authorized.' [Citation.]"

In Titan/Value Equities Group, Inc. v. Superior Court (1994) (Titan/Value) 29 Cal.App.4th 482, 487, this court held that a trial court exceeded the vestigial jurisdiction that it retained after staying a lawsuit pending arbitration pursuant to section 1281.4. In Titan/Value, the trial court stayed an action pending arbitration between the plaintiffs and certain securities dealers. (Titan/Value, supra, at p. 485.)^[3] As a result of a series of problems, including the bankruptcy of certain defendants, various discovery disputes, and scheduling conflicts, the "arbitration never got off the ground." (Ibid.) The plaintiffs requested that the trial court " 'take control of the case.' " (Ibid.) In response, the trial court "reasserted jurisdiction" over the case. (Ibid.) The court proceeded to enter an order that directed certain defendants to respond to various discovery requests, directed that an arbitration occur by a specified date, and left a trial date on the court's calendar so that the case could be tried if the arbitration were not completed by the specified date. (Id. at p. 486.) The defendants filed a petition for writ of mandate or prohibition in this court. (Ibid.)
The Titan/Value court issued a writ of prohibition directing the trial court to vacate its order, stating, "[T]he trial court exceeded its jurisdiction in ordering the arbitration to proceed under the stated conditions subject to reinstatement on the trial calendar." (Titan/Value, supra, 29 Cal.App.4th at p. 488.) The Titan/Value court explained, "[A] trial court may not step into a case submitted to arbitration and . . . set the case for trial because of a party's alleged dilatory conduct." (Id. at p. 489.) This court reasoned that whether a party is frustrating the other party's right to arbitration is a question for the arbitrator, not the trial court, to resolve. (Ibid.)
3. A trial court's authority to lift a stay imposed under section 1281.4
This case involves the circumstances under which a trial court may properly lift a stay pursuant to that portion of section 1281.4 that provides that a trial court may stay an action until arbitration is completed, "or until such earlier time as the court specifies." We have found no published case that has addressed the circumstances under which a trial court may lift a stay entered pursuant to section 1281.4, prior to the completion of an arbitration. The defendants contend that to interpret section 1281.4 as granting a trial court "unfettered discretion" to lift a stay imposed pursuant to that statute would lead to an absurd result. Specifically, the defendants note that section 1281.4 mandates that the trial court impose a stay of litigation once arbitration is ordered, and maintain that it would make no sense to interpret the same provision as allowing a trial court "full discretion" to lift the stay while the arbitration is still pending. The plaintiffs counter that the "plain meaning" of section 1281.4 provides a trial court with discretion to lift a stay imposed pursuant to that section.
We assume, for purposes of this decision, that a trial court possesses some amount of discretion to lift a stay imposed pursuant to section 1281.4, prior to the completion of an ordered arbitration. However, the statute does not address the scope of that discretion. Based on the purpose of section 1281.4 as stated by the Federal Ins. Co. court and the context in which the operative statutory language appears, we conclude that a trial court may not lift a stay of litigation merely because a party cannot afford the costs associated with arbitration.
As discussed above, the purpose of section 1281.4 is to protect the jurisdiction of the arbitrator by preserving the status quo until the arbitration is resolved. (Federal Ins. Co., supra, 60 Cal.App.4th at pp. 1374-1375.) Preserving the arbitrator's jurisdiction through a stay of related litigation is essential to the enforceability of an arbitration agreement since, in the absence of such a stay, a party could simply litigate claims that it had agreed to arbitrate. Given the purpose of the statute, the most reasonable interpretation of the stay provision is that it grants a trial court discretion to lift a stay prior to the completion of arbitration only under circumstances in which lifting the stay would not frustrate the arbitrator's jurisdiction.
The context in which the critical statutory language appears suggests at least one narrow circumstance under which the Legislature may have intended that a trial court be authorized to lift a stay entered pursuant to section 1281.4 prior to the completion of arbitration, without contravening the purpose of the statute. The final paragraph of section 1281.4 provides: "If the issue which is the controversy subject to arbitration is severable, the stay may be with respect to that issue only." If an issue in litigation subject to a stay is removed from the litigation (e.g., where a party amends its complaint to remove the arbitrable claim from the litigation) or the arbitrable controversy is removed from the arbitration (e.g., through agreement of the parties) such that the arbitrator's jurisdiction would not be frustrated by the litigation, there would be no reason for a stay of the litigation to remain in effect. (Accord SWAB Financial, supra, 150 Cal.App.4th at pp. 1199-1200 ["Absent an agreement to withdraw the controversy from arbitration, however, no judicial act is authorized"].)
In contrast, lifting a stay of litigation merely based upon a determination that a party cannot afford the costs associated with arbitration would directly and materially impede the arbitrator's jurisdiction, and would thus contravene the purpose of section 1281.4. Further, ensuring that litigation will be stayed is essential to the enforceability of arbitration agreements generally. Interpreting section 1281.4 to broadly permit a trial court to allow litigation to proceed whenever the court determines that a party cannot afford the costs of arbitration, as plaintiffs urge, would be fundamentally inconsistent with California's "strong public policy favoring contractual arbitration." (Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 704.)^[4]
Finally, permitting a trial court to lift a stay merely upon a determination that a party cannot afford arbitration would be inconsistent with well established case law holding that a trial court retains only a very narrow scope of jurisdiction with respect to an action that has been stayed pending arbitration. (E.g., SWAB Financial, supra, 150 Cal.App.4th at pp. 1199-1200; Titan/Value, supra, 29 Cal.App.4th at p. 487.) Further, because it was a court in a sister state that ordered the case to arbitration, the scope of jurisdiction that the trial court in this case possessed was even narrower than that possessed by the courts in SWAB Financial and Titan/Value. The courts in SWAB Financial and Titan/Value discussed the vestigial jurisdiction that a court retains when that court has granted a petition to compel arbitration. In this case, unlike in SWAB Financial and Titan/Value, a Colorado court granted the petition to compel arbitration. The California trial court's connection to the parties' arbitration was therefore even more attenuated than in the cases cited. If a trial court "exceed[s] its jurisdiction" under section 1281.4 by setting a case for trial on the ground that the party resisting litigation has engaged in dilatory conduct inhibiting an arbitration (Titan/Value, supra, 29 Cal.App.4th at p. 488), then the California court in this case clearly "exceed[ed] its jurisdiction" (ibid.) under section 1281.4 by lifting a stay of litigation imposed pursuant to that section merely because the parties seeking to litigate maintain that they cannot afford the costs associated with the arbitration ordered by a Colorado court.
C. The trial court lacked jurisdiction to declare the arbitration provisions unenforceable and/or unconscionable

In addition to lifting the stay of litigation, in its September 10, 2009 order, the trial court also declared the arbitration provisions to be unenforceable and/or unconscionable. Because the stay was improperly lifted, the trial court lacked jurisdiction to declare the arbitration provisions unenforceable and/or unconscionable.^[5]
As noted above, once a lawsuit has been stayed pursuant to section 1281.4, a trial court possesses only a limited " 'vestigial jurisdiction over matters submitted to arbitration.' [Citation.]" (SWAB Financial, supra, 150 Cal.App.4th at p. 1200.) After a petition to compel arbitration has been granted and a lawsuit stayed, "the arbitrator takes over. It is the job of the arbitrator, not the court, to resolve all questions needed to determine the controversy." (Ibid.) A trial court's "vestigial jurisdiction" (ibid.) over an action stayed pending arbitration clearly does not extend so far as to permit the court to declare an arbitration provision unconscionable and/or unenforceable, and certainly not in a case in which the enforceability of the arbitration agreement has already been decided by a court in another state. Because the trial court lacked authority to lift the stay, it clearly lacked jurisdiction to declare the arbitration provisions unenforceable and/or unconscionable.^[6]
IV.
DISPOSITION
The trial court's September 10, 2009 order is reversed. The defendants are entitled to costs on appeal.

AARON, J.

WE CONCUR:



McCONNELL, P. J.



HUFFMAN, J.





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