Filed 7/6/16 Syson v. Montecito Bank & Trust CA2/6
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
STEPHEN R. SYSON et al., 2d Civil No. B260747
(Super. Ct. No. 1402166)
Plaintiffs and Appellants, (Santa Barbara County)
v.
MONTECITO BANK & TRUST,
Defendant and Respondent.
Appellants Stephen R. Syson and Nanci E. Syson were longtime customers
of respondent Montecito Bank & Trust (Montecito),1 with whom they had a home equity
line of credit. After their house burned in a wildfire, they became embroiled in a dispute
with Montecito over the release of insurance proceeds. The instant lawsuit ensued.
Montecito moved to have the Sysons’ claims arbitrated pursuant to arbitration clauses in
the loan documents. The Sysons opposed the motion on several grounds, including that
the arbitration provisions were unconscionable.
The trial court ordered the Sysons’ legal claims to be arbitrated and stayed
their remaining equitable claims. After the arbitrator ruled in favor of Montecito on all
1
Over a 20-year period beginning in the early 1990s, Stephen Syson’s businesses
deposited approximately $1.5 million per year into accounts at Montecito.
the legal claims, the trial court confirmed the award and granted summary judgment to
Montecito on the equitable claims based on res judicata principles.
The Sysons contend that the arbitration clauses were unconscionable, res
judicata did not apply to their equitable claims, and the trial court erroneously denied
their request to stay arbitration under the mistaken belief that it lacked discretion to do so.
We affirm.
FACTS AND PROCEDURAL HISTORY
The Sysons purchased their family home in Santa Barbara with a loan from
Montecito secured by a deed of trust. Montecito sold the loan, which eventually ended
up being held by Bank of America.
The Sysons also obtained a home equity line of credit (Home Equity
Access Line or HEAL) from Montecito secured by a subordinate deed of trust. As part of
the HEAL transaction, the Sysons signed a four-page “Credit Agreement and Disclosure”
(Credit Agreement) containing a mandatory arbitration clause. A year later, they signed a
similar agreement, also containing a mandatory arbitration clause, that reduced their
credit limit. The nine-page deed of trust securing the HEAL also contained an agreement
to arbitrate any disputes.
Subsequently, a wildfire destroyed the Sysons’ home. The Sysons’ insurer
settled their loss claim for nearly $1.1 million. The funds were deposited with
Countrywide Financial, Bank of America’s predecessor in interest, and were made jointly
payable to Countrywide, Montecito, and the Sysons. Under the agreements between
Montecito and the Sysons, Montecito had an ownership interest in the insurance
proceeds, which served as additional security for the Sysons’ outstanding obligations
under the Credit Agreement. If property damage impaired Montecito’s security interest
in the property, Montecito could “retain the [insurance proceeds] and apply [them] to . . .
the restoration and repair of the Property,” reimbursing the Sysons after they made
satisfactory repairs.
At issue in this case is $228,581 of the insurance proceeds that Bank of
America released to the Sysons in October 2011 (the held proceeds). The Sysons
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deposited these funds with Montecito. A week and a half later, Montecito refused the
Sysons’ request to release the held proceeds.
At the time, the Sysons owed Montecito more than $300,000 under the
Credit Agreement. They had expended close to one million dollars on reconstruction.
The value of their property in its partially-constructed condition was at most one million
dollars, “substantially less than the liens against it”—approximately $1.6 million—and
“less than the amount of the first lien held by Bank of America.” The Sysons told
Montecito that they would need approximately $1.5 million to complete the
reconstruction and that they had “an independent source of funds” for the remaining
work. Montecito repeatedly requested information about their source of funds, but they
did not provide it.
Montecito offered (1) to release the held proceeds when the Sysons could
show that reconstruction had progressed to the point that the held proceeds would be
sufficient to complete the work or, alternatively, (2) to deposit the held proceeds in a
control account along with the remaining insurance proceeds held by Bank of America
when the Sysons deposited sufficient additional funds to complete the outstanding work.
After receiving these proposals, the Sysons paid $350,000 towards the purchase of a new
house rather than using those funds for reconstruction.
The Sysons sued Montecito to recover “the possession and use of” the held
proceeds. The Sysons claimed that Montecito’s refusal to return these funds to them
prevented them from rebuilding their home and subjected them to a threatened lawsuit by
Bank of America, which was seeking to recover the held proceeds from them. They
alleged causes of action for breach of contract, intentional interference with contract,
violation of the Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.), fraud,
negligent misrepresentation, and constructive trust (collectively, legal claims), as well as
declaratory and injunctive relief (collectively, equitable claims).
Montecito moved to compel arbitration and stay the action pending the
completion of arbitration. In opposing enforcement of the arbitration provisions, the
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Sysons asserted that they were procedurally unconscionable. The trial court ordered that
the legal claims be arbitrated and stayed the action pending the arbitrator’s decision.
The arbitrator ruled in favor of Montecito on all the legal claims and
awarded Montecito $150,468 in attorneys’ fees. The trial court confirmed the award.
Montecito then moved for summary judgment on the equitable claims, which the trial
court granted, ruling that the arbitrator’s award acted as res judicata.
DISCUSSION
Unconscionability
“‘[U]nconscionability has both a “procedural” and a “substantive”
element,’ the former focusing on “‘oppression”’ or “‘surprise”’ due to unequal bargaining
power, the latter on “‘overly harsh”’ or “‘one-sided”’ results. [Citation.] ‘The prevailing
view is that [procedural and substantive unconscionability] must both be present in order
for a court to exercise its discretion to refuse to enforce a contract or clause under the
doctrine of unconscionability.’ [Citation.] But they need not be present in the same
degree. ‘Essentially a sliding scale is invoked which disregards the regularity of the
procedural process of the contract formation, that creates the terms, in proportion to the
greater harshness or unreasonableness of the substantive terms themselves.’ [Citations.]
In other words, the more substantively oppressive the contract term, the less evidence of
procedural unconscionability is required to come to the conclusion that the term is
unenforceable, and vice versa.” (Armendariz v. Foundation Health Psychcare Services,
Inc. (2000) 24 Cal.4th 83, 114.) We review the trial court’s ruling on a motion to compel
arbitration for substantial evidence where the facts are in conflict and de novo where they
are not. (Fagelbaum & Heller LLP v. Smylie (2009) 174 Cal.App.4th 1351, 1360.)
Procedural Unconscionability
The Sysons contend that the arbitration clauses are procedurally
unconscionable because they were “buried” in small-print contracts of adhesion drafted
by the party (Montecito) with superior bargaining power and there is no evidence that
Montecito provided them with a copy of the relevant arbitration rules. Regarding their
first contention, the arbitration provision is not hidden. The original and modified loan
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agreements are short, four-page documents. The arbitration clauses appear on the last
page not far above the Sysons’ signatures in a separate paragraph captioned
“Arbitration.” They are printed in the same font size used throughout the agreements.
Their existence should not have come as a surprise. Montecito “was under no obligation
to highlight the arbitration clause of its contract, nor was it required to specifically call
that clause to [the Sysons’] attention.” (Sanchez v. Valencia Holding Co., LLC (2015) 61
Cal.4th 899, 914.) Requiring the Sysons to read all four pages of a contract involving
hundreds of thousands of dollars and lasting 14 years was not oppressive. (See id. at p.
915 [“‘[I]t is generally unreasonable . . . to neglect to read a written contract before
signing it’”].)
As for the Sysons’ second contention, the arbitration clauses require that
disputes “be arbitrated pursuant to the Rules of the American Arbitration Association
[AAA] in effect at the time the claim is filed.” The Sysons’ argument that there is no
evidence they received a copy of these rules “might have force if [their]
unconscionability challenge concerned some element of the AAA rules of which [they]
had been unaware when [they] signed the arbitration agreement. But [their] challenge to
the enforcement of the agreement has nothing to do with the AAA rules; [their] challenge
concerns only matters that were clearly delineated in the agreement [they] signed.”
(Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1246.) Moreover, the Sysons
themselves successfully negotiated for a modification to the arbitration agreement “that
the arbitration be administered by, and pursuant to the rules of, JAMS rather than the
[AAA].” Their knowledge of the AAA rules is immaterial.
Although “the adhesive nature of [a] contract is sufficient to establish some
degree of procedural unconscionability” (Sanchez v. Valencia Holding Co., LLC, supra,
61 Cal.4th at p. 915, italics added), there is nothing oppressive or surprising about the
arbitration clauses here other than the Sysons’ assumed inability to negotiate the terms.
“When . . . there is no other indication of oppression or surprise, ‘the degree of
procedural unconscionability of an adhesion agreement is low, and the agreement will be
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enforceable unless the degree of substantive unconscionability is high.’ [Citations.]”
(Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704.)
Substantive Unconscionability
The Sysons contend that the arbitration provisions are substantively
unconscionable because they allow court adjudication of claims Montecito is likely to
bring while requiring arbitration of claims they are likely to bring and because the deed
of trust contains a one-sided provision requiring the Sysons to reimburse Montecito for
“reasonable expenses” it incurs for enforcing its rights. By failing to present these or any
arguments regarding substantive unconscionability in the trial court, however, they have
forfeited them. (See Pearson Dental Supplies, Inc. v. Superior Court (2010) 48 Cal.4th
665, 681.) Regardless, their claims of substantive unconscionability lack merit.
The deed of trust, in a paragraph captioned “Attorneys’ Fees; Expenses,”
provides that “[w]hether or not any court action is involved, and to the extent not
prohibited by law, all reasonable expenses [Montecito] incurs that in [its] opinion are
necessary at any time for the protection of its interest or the enforcement of its rights shall
become a part of the [Sysons’] indebtedness.” We have previously held that “Civil Code
section 1717 makes such clauses mutual so that when a contract provides for only a
particular party to be awarded fees and costs, the prevailing party obtains the right.
[Citation.]”2 (Severtson v. Williams Construction Co. (1985) 173 Cal.App.3d 86, 95
(Severtson).) Section 1717’s mutuality requirement is incorporated into the arbitration
agreements here. (See Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 954
[“‘“‘[A]ll applicable laws in existence when an agreement is made, which laws the
parties are presumed to know and to have had in mind, necessarily enter into the contract
and form a part of it, without any stipulation to that effect, as if they were expressly
referred to and incorporated’”’”].) Because the attorney’s fee provision in the deed of
trust applies mutually by law, it is not substantively unconscionable.
2
All further statutory references are to the Civil Code unless otherwise specified.
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The Sysons rely on Carmona v. Lincoln Millennium Car Wash, Inc. (2014)
226 Cal.App.4th 74, 88-89, and Samaniego v. Empire Today LLC (2012) 205
Cal.App.4th 1138, 1147 (Samaniego), which held otherwise. The reasoning in these
cases is inconsistent with Severtson, and we decline to follow them.
In Samaniego, “one of several one-sided provisions” in an arbitration
agreement required the plaintiffs to pay any attorneys’ fees incurred by the defendant but
imposed no reciprocal obligation on the defendant. (Samaniego, supra, 205 Cal.App.4th
at p. 1147.) Addressing the defendant’s argument that “one-way fee shifting provisions
that benefit only employers violate both the Labor Code and commercial arbitration
rules,” the court stated, “according to [defendant, the provision] isn’t unconscionable
because it’s illegal and, hence, unenforceable. To state the premise is to refute
[defendant’s] logic. The argument is unpersuasive.” (Id. at p. 1147; accord Carmona v.
Lincoln Millennium Car Wash, Inc., supra, 226 Cal.App.4th at p. 88 [concluding, based
on Samaniego, that one-sided “attorney fee provision is not conscionable merely because
section 1717 might provide employees relief from the provision’s one-sidedness”].)
Samaniego assumed that a one-sided fee provision was unenforceable.
Severance of an unconscionable contractual provision is normally an available remedy
where it would further the interests of justice. (Armendariz v. Foundation Health
Psychcare Services, Inc., supra, 24 Cal.4th at p. 124; see § 1670.5, subd. (a).) As we
held in Severtson, however, section 1717 saves a one-sided fee provision in an arbitration
agreement by imposing a mutuality requirement. “Section 1717 was enacted to establish
mutuality of remedy where contractual provision makes recovery of attorney’s fees
available for only one party [citations], and to prevent oppressive use of one-sided
attorney’s fees provisions. [Citation.]” (Reynolds Metals Co. v. Alperson (1979) 25
Cal.3d 124, 128.)
Carmona acknowledged the effect of section 1717 but supplanted the
Legislature’s chosen remedy with its own. We are not free to do so. (See Bishop v.
Hyundai Motor America (1996) 44 Cal.App.4th 750, 757 [courts may not “ignore the
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Legislature’s unambiguous indication of intent and supplement . . . statutory remedies
with additional ones”].)
Nor is it clear why such a result furthers the interests of justice. Severing a
one-sided fee provision—as opposed to applying it mutually—discourages consumers
from pursuing meritorious contractual claims because it prevents them from recovering
their legal expenses when they prevail. Consumers like the Sysons with comparatively
weak claims are left with a greater incentive to pursue them: even if they lose, they do
not risk having to pay the company’s legal fees. There is no justice in a rule promoting
meritless over meritorious claims.
The Sysons also claim that the arbitration requirement is substantively
unconscionable because it “appl[ies] almost exclusively to those claims that would
ordinarily be brought [by them], and excepts all claims that would ordinarily be brought
by [Montecito]”—judicial foreclosure and self-help remedies. To the contrary, the
arbitration agreement provides “that in the event of an action for judicial
foreclosure . . . [,] the court shall refer to arbitration as much of such action, including
counterclaims, as lawfully may be referred to arbitration.” Although the agreement does
preserve Montecito’s ability to pursue nonjudicial foreclosure, there is nothing
unconscionable about excluding self-help remedies from arbitration. (Sanchez v.
Valencia Holding Co., LLC, supra, 61 Cal.4th at p. 922.) To the extent Flores v.
Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846 reached the opposite
conclusion (id. at pp. 854-855), it is no longer good law.
With minimal procedural unconscionability and no showing of substantive
unconscionability, the trial court properly found the arbitration agreements enforceable
and compelled arbitration of the Sysons’ legal claims.
Application of Res Judicata to Equitable Claims
The Sysons assert that the trial court erred in granting summary judgment
on the basis that the arbitrator’s decision acted as res judicata on their equitable claims.
Private arbitration awards are given strict res judicata or claim preclusive effect to
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subsequent suits involving identical causes of action. (See Richard B. LeVine, Inc. v.
Higashi (2005) 131 Cal.App.4th 566, 577.)
The Sysons argue that res judicata does not apply to their equitable claims
because the doctrine “only applies to [claims] which were or could have been litigated in
the arbitration” (Truck Ins. Exchange v. Superior Court (1996) 51 Cal.App.4th 985, 998)
and the arbitration agreement “expressly preclude[s] the arbitrator from hearing equitable
claims.” The agreement prohibits the arbitrator from awarding injunctive relief. It does
not prohibit the arbitrator from awarding declaratory relief, although neither does it
prohibit a party from seeking such equitable relief in a judicial forum.
Regardless, California utilizes a “primary right” theory to determine
whether causes of action are identical. (Richard B. LeVine, Inc. v. Higashi, supra, 131
Cal.App.4th at p. 575.) “Under the ‘primary rights’ theory, a cause of action arises from
the invasion of a primary right. Although different grounds for legal relief may be
asserted under different theories, conduct that violates a single primary right gives rise to
only one cause of action. [Citation.]” (DKN Holdings LLC v. Faerber (2015) 61 Cal.4th
813, 818, fn. 1.) In other words, “[t]he cause of action is the right to obtain redress for a
harm suffered, regardless of the specific remedy sought or the legal theory (common law
or statutory) advanced. [Citation.]” (Boeken v. Philip Morris USA, Inc. (2010) 48
Cal.4th 788, 798.)
As the trial court accurately found, “[t]he primary right [the] Sysons seek to
litigate is the right to have the insurance proceeds paid to them. This is the primary right
the arbitrator determined. The arbitrator determined that, under the terms of the deed of
trust, [Montecito] did not wrongfully withhold the insurance proceeds and acted
reasonably in retaining the proceeds. The arbitrator determined that [Montecito] had not
breached the contract between the parties because it had committed the proceeds to
restoration and repair of the property.”
The Sysons do not dispute this. They merely misunderstand the doctrine of
claim preclusion. Truck Insurance Exchange, on which they rely, is inapposite. It
involved an insurer’s failure to tender a defense. The arbitrator in that case did not
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determine insurance coverage issues, the primary right at issue in the litigation, because
the arbitration agreement prohibited that issue from being arbitrated. (Truck Ins.
Exchange v. Superior Court, supra, 51 Cal.App.4th at p. 998.) Here, the arbitration
agreements did not prohibit the arbitrator from determining the primary right at issue in
the Sysons’ equitable claims, it merely prohibited the arbitrator from awarding certain
forms of relief.
Trial Court’s Discretion to Stay Arbitration
The Sysons argue that the trial court erroneously concluded “that because
the arbitration provisions are governed by the Federal Arbitration Act (FAA), the court
had no discretion to deny or stay arbitration under Code of Civil Procedure section
1281.2, subdivision (c).” We disagree. “The FAA requires courts to enforce arbitration
provisions. (9 U.S.C., § 2.) It does not authorize courts to stay arbitration pending
resolution of litigation, or to refuse to enforce a valid arbitration provision to avoid
duplicative proceedings or conflicting rulings. [Citation.]” (Mastick v. TD Ameritrade,
Inc. (2012) 209 Cal.App.4th 1258, 1263.) The trial court correctly understood the limits
of its discretion and acted within them.
DISPOSITION
The judgment is affirmed. Costs to respondent.
NOT TO BE PUBLISHED.
PERREN, J.
We concur:
GILBERT, P. J.
YEGAN, J.
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Donna D. Geck, Judge
Superior Court County of Santa Barbara
______________________________
Esner, Chang & Boyer, Holly N. Boyer, Shea S. Murphy and Joseph S.
Persoff for Plaintiffs and Appellants.
Seed Mackall LLP, Peter A. Umoff and Alan D. Condren for Defendant
and Respondent.