Filed 8/31/20 Peter L. Kaufman, Panish etc. v. Prospect Funding CA2/4
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
PETER L. KAUFMAN, B293259
PANISH, SHEA & BOYLE LLP,
Los Angeles County
Petitioners and Super. Ct. No. BS169525
Appellants,
v.
PROSPECT FUNDING LLC,
Defendants
and Respondents.
Appeal from a Judgment of the Superior Court of Los
Angeles County. Daniel Murphy, Judge. Reversed.
Peter L. Kaufman, Panish, Shea & Boyle for Petitioners
and Appellants.
Patrick R. Mahoney and Tyson W. Kovash for Respondent.
The law firm of Panish Shea & Boyle (PS&B) and one of its
attorneys, Peter L. Kaufman, Esq., appeal from a judgment
confirming an arbitration award against them in favor of
Prospect Funding (NY) LLC. We reverse, concluding the
arbitrator exceeded his authority in finding Kaufman and PS&B
agreed to arbitrate disputes arising out of a litigation funding
agreement between their client, La-Phosa Sangkaphim, and
Prospect, and by entering an arbitration award against them in
absentia.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
1. The Underlying Personal Injury Litigation and
Prospect’s Purchase of an Interest in the Litigation.
Kaufman and PS&B represented La-Phosa Sangkaphim on
a contingency basis in a personal injury suit in Riverside County
Superior Court.
While the lawsuit was pending, Prospect provided $10,000
to Sangkaphim under an undated “Sale and Repurchase
Agreement” (Agreement) drafted by Prospect. The Agreement
provided that Prospect, as the “Purchaser,” would buy from
Sangkaphim, as the “Seller,” an interest in Sangkaphim’s
eventual recovery, if any. The Agreement specified a “Purchase
Price” of $13,600, of which Sangkaphim received $10,000 ($3,600
was a fee paid to Prospect). In exchange, Prospect acquired a
right to receive proceeds from any eventual settlement or
recovery through Sangkaphim’s “repurchase” of the interest sold
to Prospect. The amount Prospect would receive varied depending
on when Sangkaphim “repurchased” the interest sold. If the
interest were “repurchased” within six months, Prospect would be
paid $17,680. The amount to be paid to Prospect out of any
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recovery (the “Repurchase Amount”) increased steeply to a
maximum of $46,240 (the “Prospect Ownership Amount”) if paid
after April 15, 2019.1 The Agreement contained a liquidated
damages clause providing in the event Sangkaphim did not
comply with the Agreement, “[Sangkaphim] SHALL
IMMEDIATELY PAY TO [Prospect] LIQUIDATED DAMAGES
IN THE AMOUNT OF TWICE THE PROSPECT OWNERSHIP
AMOUNT REGARDLESS OF THE OUTCOME OF THE LEGAL
CLAIM,” plus costs.
The Agreement provided for mandatory arbitration of
claims, including the determination of arbitrability: “[i]nstead of
suing in court, [Prospect] and [Sangkaphim] agree to arbitrate all
disputes . . . . ” and “THE PARTIES AGREE THAT THE ISSUE
OF ARBITRABILITY SHALL BE DECIDED BY THE
ARBITRATOR AND NOT BY ANY OTHER PERSON.” Prospect
and Sangkaphim were the only parties to the Agreement.
Underneath Sangkaphim’s signature on the last page of the
Agreement, Kaufman signed a separate “Certification of Seller’s
Attorney” (Certification), also drafted by Prospect. It states
Kaufman “certifies to [Sangkaphim] that [Kaufman] has
reviewed the terms and conditions of this . . . Agreement and
explained [them] to [Sangkaphim].” The Certification also states:
“I have a written fee agreement with Purchaser [sic]2 to pay my
1 This structure is known as a prepaid forward contract. (See
Wood, Capital Gains, Litigation Finance & Legal Fees, (Mar.
2015) Vol. 23, No. 8 The M&A Tax Report
(Woodllp.com/publications/articles/pdf/capital_gain_litigation.pdf)
.)
2 In the Agreement, Sangkaphim was referred to as the
“Seller” while Prospect was the “Purchaser.” Kaufman’s
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fees contingent upon the outcome of the case. I agree that all
disputes regarding this agreement will be resolved via arbitration
and I have explained this to [Sangkaphim]. All proceeds of the
legal claim will be disbursed via the attorney’s trust account and
the attorney is following the written instructions of
[Sangkaphim] with regard to this [Agreement] and the
Irrevocable Letter of Directions which attorney has
acknowledged.” Below Kaufman’s signature was a signature
block for Prospect.
The Irrevocable Letter of Direction (Letter), referenced in
the Agreement and Certification, is dated October 6, 2015.
Prospect prepared it for Sangkaphim’s signature, and addressed
it to Kaufman. The Letter directed Kaufman, among other
things, to “place an assignment, consensual lien and security
interest against any and all settlement proceeds . . . after
payment of legal fees and reimbursable costs, and to protect and
satisfy this assignment, consensual lien and security interest of
$46,240 which is the Prospect Ownership Amount.” It also
directed Kaufman to pay Prospect in full before disbursing any
settlement funds to Sangkaphim. The Letter states that in the
event of a dispute over Prospect’s ownership amount, Kaufman is
to hold the amount in dispute in PS&B’s trust fund “until the
dispute is resolved by arbitration as per [Sangkaphim’s]
agreement with [Prospect].” The concluding sentence of the letter
states, “By signing the acknowledgement below, you acknowledge
that this letter is from me and that you will comply with this
irrevocable Letter of Direction for the benefit of [Prospect].”
contingent fee agreement was with Sangkaphim, not Prospect, so
this is a scrivener’s error. The contingent fee agreement is not
part of the record.
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In an “Attorney Acknowledgment” (Acknowledgment)
placed below Sangkaphim’s signature line in the Letter,
Kaufman states, among other things: “[¶] I . . . acknowledge
receipt of this Letter from my client; [¶] I will honor my client’s
irrevocable letter of direction . . . as per instructions above. . . . [¶
. . . ¶] I acknowledge that all disputes arising out of this
transaction will be resolved via arbitration per the Sale and
Repurchase Agreement and the irrevocable letter of
direction . . .[;] [and] [¶] [Prospect] has relied upon this letter and
acknowledgement . . . .”
2. Settlement of Claim and Arbitration.
The litigation settled for $350,000 in February 2016, with
net settlement proceeds to Sangkaphim of $70,120.87, after
deduction of attorneys’ fees, medical liens, non-recourse loans,
and other costs and expenses. At the time of the settlement,
pursuant to the terms of the Agreement, $17,680 was due
Prospect, but PS&B did not pay it. Instead, PS&B later sent
Prospect a check for $5,000 with a letter stating, “[e]nclosed
please find a check in the amount of $5,000 as re-payment for the
loan provided to [Sangkaphim]. Unfortunately, the case settled
for much less than the actual value and we have no additional
funds.”3
Prospect submitted a “Certification of Damages” to
Sangkaphim and Kaufman, asserting $138,720 plus costs was
due, consisting of the Prospect Ownership Amount of $46,240
3 Apparently, PS&B mistakenly disbursed Sangkaphim’s
share of the settlement proceeds, except for $5,000, to
Sangkaphim, without first paying Prospect. When PS&B
discovered the error, it sent the remaining $5,000 to Prospect.
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plus liquidated damages of two times that amount ($92,480). As a
result of PS&B’s failure to pay, Prospect took the matter to
arbitration in July 2016, alleging breach of contract against
Kaufman and PS&B. Sangkaphim was not a party to the
arbitration. PS&B notified the arbitrator that neither it nor
Kaufman was a party to any agreement to arbitrate and that
they objected to the arbitration. Kaufman and PS&B further
objected to Prospect’s calculation of damages because it omitted
the $5,000 payment PS&B had made and its claim for liquidated
damages of $92,480 exceeded the maximum $46,240 awardable
under the Agreement. PS&B and Kaufman did not present
evidence at or participate in the arbitration hearing.
On November 10, 2016, the arbitrator found for Prospect,
concluding the Acknowledgment and Certification bound
Kaufman and PS&B to the arbitration clause in the Agreement,
and concluding (apparently incorrectly) that they failed to tender
any funds to Prospect. The arbitrator ordered PS&B to pay
$138,720 to Prospect. He noted that PS&B challenged the
jurisdiction of the arbitration, but concluded “[t]he documents
signed by Peter Kaufman, whom the Arbitrator finds to be an
agent of [PS&B]” established that PS&B agreed to arbitration.
Further, he concluded the liquidated damages award was not
inequitable because “[PS&B] blurs the distinction between a true
loan and a purchase of a contingent interest in a lawsuit. The
latter involves a substantial amount of risk to Prospect because
the personal injury case may either result in a defense verdict or
be otherwise dismissed.”
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3. Petitions to Vacate/Confirm Award.
On May 1, 2017, Kaufman and PS&B filed a motion to
vacate the award, asserting Prospect failed to establish any
arbitration agreement with them because they were not parties
to the Agreement or its arbitration clause, nor were they parties
to any agreement with Prospect. Thus, they asserted, because
they had no contractual obligation to arbitrate, the arbitrator
exceeded his authority by deciding the arbitrability issue and
making the award. PS&B and Kaufman denied that the Letter
bound them in any fashion to the terms of the Agreement.
Prospect responded by filing a motion to confirm the award,
asserting that the arbitrator did not exceed his authority in
ruling on the arbitrability of the contract because Kaufman twice
agreed (in the Certification and Acknowledgement) to arbitration.
Further, it contended PS&B was bound by the arbitration clause
based on agency and contract principles by acting as
Sangkaphim’s agent and fiduciary in connection with the
contract. Prospect sought the full amount of the arbitration
award plus interest and costs.
In reply, PS&B distinguished cases relying on agency
principles on the ground that the party who was a signatory
received a benefit, while, here, PS&B and Kaufman received no
benefit from the contract or underlying transaction. PS&B also
objected that Prospect’s calculation of liquidated damages was
excessive.
The trial court entered judgment on July 26, 2018,
awarding Prospect $138,720, plus interest, legal fees and costs. It
rejected Kaufman’s and PS&B’s argument that they were not
parties to the arbitration agreement, relying on the sentence
fragment in the Certification stating “I agree that all disputes
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regarding this agreement will be resolved via arbitration . . . . ”
Regarding damages, the court concluded Kaufman and PS&B
had not shown grounds for vacating the award under Code of
Civil Procedure4 section 1286.2 because the court could not
review the arbitrator’s reasoning nor the sufficiency of the
evidence supporting the award, and an arbitrator does not exceed
his powers merely by rendering an erroneous decision on a legal
or a factual issue.
DISCUSSION
I. STANDARD OF REVIEW
Generally, arbitration awards are not reviewable for errors
of fact or law, even when the errors appear on the face of the
award. (Richey v. AutoNation, Inc. (2015) 60 Cal.4th 909, 916.)
Courts are authorized to vacate an award only if the award was
(1) procured by corruption, fraud, or undue means; (2) issued by a
corrupt arbitrator; (3) affected by prejudicial misconduct by the
arbitrator; or (4) in excess of the arbitrator’s powers. (Ibid.)
“Under this [code] provision, the trial court is authorized to
vacate an arbitrator’s determination that he or she has the
jurisdiction to resolve an issue” if arbitrability “is outside the
scope of an arbitration agreement[.]” (Glassman v. McNab (2003)
112 Cal.App.4th 1593, 1598.) We conduct a de novo review except
to the extent there are disputed factual issues. (Haworth v.
Superior Court (2010) 50 Cal.4th 372, 383; Suh v. Superior Court
(2010) 181 Cal.App.4th 1504, 1511 [“trial court’s resolution of
disputed facts will be upheld if supported by substantial
4 All statutory references are to the Code of Civil Procedure
unless otherwise noted.
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evidence, but if there is no disputed extrinsic evidence, the trial
court’s decision on arbitrability is reviewed de novo [Citation.]”].)
II. THE ARBITRATOR EXCEEDED THE SCOPE OF HIS
POWERS BY DECIDING THE ISSUE OF ARBITRABILITY
Arbitration is a matter of contract and ordinarily a
nonparty to the arbitration agreement cannot be compelled to
arbitrate. (See, e.g., AT&T Techs. v. Communs. Workers of Am.
(1986) 475 U.S. 643, 648 (AT&T); Williams v. Atria Las Posas
(2018) 24 Cal.App.5th 1048, 1053.)
Generally, the court, not the arbitrator, decides the
arbitrability of a dispute, but the parties to an arbitration
agreement may, pursuant to their agreement, have the arbitrator
decide the issue. (AT&T, supra, 475 U.S. at p. 649.) (This would,
of course, require a valid arbitration agreement compelling the
parties to arbitrate.) Unless the parties “clearly and
unmistakably” so provide, however, whether they agreed to
arbitrate the particular dispute must be decided by the court, not
the arbitrator. (Ibid.; Jackpot Harvesting, Inc. v. Applied
Underwriters, Inc. (2019) 33 Cal.App.5th 719, 730.) The
willingness of parties to enter into arbitration agreements “would
be ‘drastically reduced’ . . . [if an] arbitrator had the ‘power to
determine his own jurisdiction. . . .’” (AT&T, supra, 475 U.S. at p.
651.)
This rule “necessarily requires the court to examine and, to
a limited extent, construe the underlying agreement.” (Freeman
v. State Farm Mut. Auto. Ins. Co. (1975) 14 Cal.3d 473, 481.) If
the “drafter of a form contract has prepared an arbitration
provision whose application to a particular dispute is uncertain,”
we construe the provision against the drafter under ordinary
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contract principles. (Sandquist v. Lebo Automotive, Inc. (2016) 1
Cal.5th 233, 248.) Here, Prospect drafted all the documents, and
they appear to be form contracts.
Recently, our Supreme Court addressed whether an
attorney’s acknowledgment to an agreement between the
attorney’s client and a third party would bind the attorney to the
provisions of the underlying agreement. Monster Energy Co. v.
Schechter (2019) 7 Cal.5th 781 (Monster) held that an attorney’s
signature on a notation approving a client’s settlement
agreement as to form and content did not preclude a finding that
the attorney also intended to be bound by terms of the
agreement. (Id at pp. 785-786.) Monster observed that if the
agreement itself contained no provision purporting to bind
counsel, then “the question is easily answered. . . . In that
circumstance, counsel’s signature that he approved the
agreement as to form and content could only mean he is
approving it for his client’s signature.” (Id. at p. 792.) On the
other hand, “[a]n attorney’s signature on an agreement
containing substantive provisions imposing duties on counsel
may reflect an intent to be bound even though counsel also
approves the document for his client’s signature.” (Ibid.) Thus,
Monster concluded in the case before it, a factfinder considering
all circumstances could conclude the attorney intended to be
bound by confidentiality provisions in the agreement, and the
question was one of fact. (Id. at pp. 792, 795.)
But nothing in Monster precludes interpreting an attorney
certification as a matter of law where no factual issues exist. The
parties here did not present any extrinsic evidence to aid the
interpretation of the contracts, and both the arbitrator and trial
court ruled as a matter of law on the meaning of the Certification
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and Acknowledgment. Thus, we construe the various documents
as a matter of law.
As Monster envisions, an attorney’s certification must be
considered with the contract to which it is appended. Here, by
solely relying on language in the Certification and
Acknowledgment, Prospect takes the provisions out of context
and fails to consider their language in concert with the
Agreement and Letter. Indeed, the only way the references to
arbitration in the Certification and Acknowledgment can be
interpreted to bind Kaufman and PS&B to arbitrate is to ignore
the terms of the agreements to which they are appended. That
runs contrary to a central principle of contract interpretation
requiring “[t]he whole of a contract to be taken together,” “to give
effect to every part, if reasonably practicable, with each clause
helping to interpret the other.” (Civ. Code, § 1641.) The language
of a provision should be construed in context, in view of the
intended function of the provision and of the contract as a whole.
(Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1265.)
Under Monster, we consider whether the attorney had any
duties under the agreements to which an arbitration clause could
apply. Kaufman and PS&B were not parties to the Agreement
and had no duties under it. The Agreement’s liquidated damages
clause explicitly states that such damages were payable by
Sangkaphim to Prospect. Given his lack of duties in the
Agreement, the only reasonable interpretation of the
Certification of the Agreement is — as it says — that Kaufman
“has reviewed the terms and conditions of this Sales and
Repurchase Agreement and explained such terms and conditions
to [Sangkaphim].” The sentence reading “I agree that all disputes
regarding this agreement will be resolved via arbitration and
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that I have explained this to the seller” can only reasonably be
understood as Kaufman certifying that he has reviewed the
Agreement, agrees the Agreement requires the parties to it (i.e.,
Sangkaphim and Prospect) to arbitrate their disputes, and he has
explained that to Sangkaphim. We know from the first sentence
of the Certification that “this agreement” refers to the
Agreement, to which neither Kaufman nor PS&B was a party,
rather than some new agreement contained in the Certification.
We cannot read the use of the phrase “I agree” to mean that
Kaufman also independently agreed to arbitration because that
would be contrary to the stated purpose of the Certification
(explaining the Agreement’s terms to Sangkaphim), and expand
the scope of the Agreement’s arbitration provision to include
Kaufman, a non-party. To the extent there is any uncertainty, we
construe the provision against the drafter, Prospect. (Sandquist
v. Lebo Automotive, Inc., supra, 1 Cal.5th at p. 248.) It is far from
a “clear and unmistakable” agreement by Kaufman to arbitrate
disputes with Prospect.
The Letter directed Kaufman to pay Prospect out of any
settlement proceeds before paying Sangkaphim and stated that
Kaufman was to hold any disputed funds until the dispute was
resolved. Although Kaufman did have independent duties to his
client under the Letter (holding settlement funds in PS&B’s trust
account and forwarding the Ownership Amount to Prospect), the
language of both the Letter and the Acknowledgement clearly
contemplates any arbitration would solely involve Sangkaphim
and Prospect, not Kaufman. The Letter directs Kaufman to
“retain only the amount in dispute in your trust fund until the
dispute is resolved as per my agreement with Prospect . . . .”
Again, Kaufman was not a party to that agreement. In the
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Acknowledgment, Kaufman similarly merely observes that all
disputes arising out of this transaction will be resolved via
arbitration “per the [Agreement] and the irrevocable letter of
direction.” (Emphasis added.) Neither the Agreement nor the
Letter requires Kaufman to arbitrate, so we have no reason to
conclude Kaufman would have intended his statement that
disputes would be resolved “per” those documents to require him
to arbitrate disputes involving him or his firm.
Moreover, Kaufman and PS&B cannot be bound by any
purported agreement to arbitrate with Prospect because they did
not receive any consideration. (Civ. Code, § 1550; Orcilla v. Big
Sur, Inc. (2016) 244 Cal.App.4th 982, 1006 [“consideration is an
essential element of a contract”].)
Finally, we cannot overlook the fact that Kaufman and
PS&B were serving as Sangkaphim’s attorneys, with all the
fiduciary and ethical duties that relationship entails. Their duties
under the Letter were to their client, Sangkaphim, not Prospect.
Indeed, we assume the transaction was structured as it was —
i.e., not including Kaufman and PS&B as parties to the
Agreement but instead having Sangkaphim impose duties on his
lawyers through a letter of instruction — to avoid creating a
conflict of interest necessitating a conflict waiver from
Sangkaphim due to the parties’ adverse interests. No such waiver
was sought or obtained. (Sheppard, Mullin, Richter & Hampton,
LLP v. J-M Manufacturing Co., Inc. (2018) 6 Cal.5th 59, 84
[necessity of client waiver of adverse interests].)
Given this context, the only reasonable interpretation of
the Acknowledgment is that Kaufman assented to do the things
Sangkaphim requested of him in the Letter, and acknowledged
that the terms of the Agreement and Letter include
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Sangkaphim’s consent to arbitrate disputes with Prospect. As a
result, Prospect cannot claim it reasonably relied on the isolated
statements in the Certification and Acknowledgment such that
PS&B and Kaufman are bound to arbitrate by principles of
promissory estoppel. (Aceves v. U.S. Bank N.A. (2011) 192
Cal.App.4th 218, 225 [reliance must be reasonable for promissory
estoppel to apply].)
We therefore conclude Appellants’ purported consent to
arbitrate any dispute arising out of the Agreement and Letter is
not “clear and unmistakable.” We reverse the trial court and
direct it to enter an order vacating the arbitration award and
enter judgment thereon in Appellants’ favor. Consequently, we
need not address the arbitrator’s award of liquidated damages or
his failure to acknowledge the $5,000 payment by PS&B.
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DISPOSITION
The judgment of the superior court is reversed. The case is
remanded for further proceedings consistent with this opinion.
Appellants are to recover costs on appeal.
CURREY, J.
We concur:
WILLHITE, Acting P.J.
COLLINS, J.
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