Opinion
No. 1 CA-CV 14-0049
01-22-2015
In the Matter of the Estate of: DAVID HARMON, An Adult, Deceased. THE ESTATE OF DAVID HARMON, by and through JEANNIE PATRICK, Personal Representative; JEANNIE PATRICK, on behalf of herself and other survivors of DAVID HARMON, Plaintiffs/Appellees, v. AVALON CARE CENTER - SCOTTSDALE, L.L.C. dba AVALON CARE CENTER - SHADOW MOUNTAIN; AVALON HEALTH CARE, INC.; AVALON HOLDING, INC.; AVALON HEALTH CARE CENTERS, L.L.C., and AVALON HEALTH CARE MANAGEMENT OF ARIZONA, L.L.C., Defendants/Appellants.
COUNSEL Udall Shumway, PLC, Mesa By H. Michael Wright and Lincoln M. Wright Counsel for Plaintiffs/Appellees Bowman and Brooke LLP, Phoenix Barry C. Toone Counsel for Defendants/Appellants
NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE. Appeal from the Superior Court in Maricopa County
No. PB2012-091096
The Honorable Geoffrey H. Fish, Judge
AFFIRMED
COUNSEL Udall Shumway, PLC, Mesa
By H. Michael Wright and Lincoln M. Wright
Counsel for Plaintiffs/Appellees
Bowman and Brooke LLP, Phoenix
Barry C. Toone
Counsel for Defendants/Appellants
MEMORANDUM DECISION
Judge Donn Kessler delivered the decision of the Court, in which Presiding Judge John C. Gemmill and Judge Kenton D. Jones joined. KESSLER, Judge:
¶1 Avalon Care Center - Shadow Mountain ("Shadow Mountain Care Center"), a nursing facility owned by Avalon Health Care Inc. and its affiliates (collectively "Avalon"), appeals from the trial court's judgment denying arbitration. For the following reasons, we affirm.
FACTUAL AND PROCEDURAL HISTORY
¶2 David Harmon was admitted to Shadow Mountain Care Center in late May 2009. Approximately one month later, in early July, Jeannie Patrick, Harmon's daughter and power of attorney, completed and signed Shadow Mountain Care Center's admissions paperwork. Several days later, Patrick returned to the facility to sign a voluntary arbitration agreement. Under the agreement, the parties "waive[d] all rights to pursue any legal action . . . in a court of law before a judge and a jury," and agreed to submit to binding arbitration all disputes and claims for damages. Patrick signed the agreement solely as her father's "Guardian, Power of Attorney or Authorized Agent," because her father was suffering from dementia.
¶3 Harmon passed away in June 2011. As part of this informal probate proceeding, in July 2012, Patrick filed a complaint against Avalon in the Maricopa County Superior Court alleging violations of the Adult Protective Services Act ("APSA"), see Ariz. Rev. Stat. ("A.R.S.") §§ 46-451 to -503 (2005 & Supp. 2013), and wrongful death, see A.R.S. § 12-611 (2003). The complaint was filed for her father's estate as well as for her father's statutory beneficiaries under the wrongful death statute, which the parties agree are Patrick and her mother. The complaint also alleged that the arbitration agreement was unenforceable on various grounds, including lack of informed consent, procedural and substantive unconscionability, public policy, and "other reasons under common law." Avalon moved to compel arbitration arguing the signed written agreement was enforceable pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 1-16, and the Arizona Revised Uniform Arbitration Act, A.R.S. §§ 12-3001 to -3029 (Supp. 2013).
We will cite to the current version of any Arizona statutes unless they were amended after the underlying proceedings or events.
Arizona adopted the Revised Uniform Arbitration Act in 2010. As of January 1, 2011, it governs an arbitration agreement, regardless of when that agreement was made. A.R.S. § 12-3003(A)(3).
¶4 The trial court held a two-day evidentiary hearing to determine the enforceability of the arbitration agreement. For reasons stated below, the court found the agreement to be substantively unconscionable.
¶5 Avalon timely appealed. We have jurisdiction pursuant to A.R.S. § 12-2101.01(A)(1) (Supp. 2013).
ISSUES AND STANDARD OF REVIEW
¶6 On appeal, Avalon argues that the court erred in holding the arbitration agreement was not binding on non-signatory heirs and finding the agreement was substantively unconscionable based on the estimated arbitrator fees and because it limits APSA remedies.
¶7 "This [C]ourt will sustain factual findings unless they are clearly erroneous." Kocher v. Dep't of Revenue of Ariz., 206 Ariz. 480, 482, ¶ 9, 80 P.3d 287, 289 (App. 2003). "A finding of fact is not clearly erroneous if substantial evidence supports it, even if substantial conflicting evidence exists." Id. We therefore "defer to the judge with respect to any factual findings explicitly or implicitly made, affirming them so long as they are supported by reasonable evidence." Twin City Fire Ins. Co. v. Burke, 204 Ariz. 251, 254, ¶ 10, 63 P.3d 282, 285 (2003). "The validity and enforceability of a contract and arbitration clause are mixed questions of fact and law, subject to de novo review." Estate of Decamacho ex rel. Guthrie v. La Solana Care and Rehab, Inc., 234 Ariz. 18, 20, ¶ 9, 316 P.3d 607, 609 (App. 2014). We will affirm the superior court if its decision was correct for an erroneous reason. Zuck v. State, 159 Ariz. 37, 42, 764 P.2d 772, 777 (App. 1988) ("We may affirm a trial court's decision if it is correct, even though rendered for the wrong reason.").
DISCUSSION
I. Non-Signatory Heirs
¶8 Avalon argues that the trial court erred as a matter of law in holding that the arbitration agreement was not binding on non-signatory heirs. We disagree.
¶9 The arbitration agreement provides that the parties "expressly intend that this Agreement shall bind all persons whose alleged claims for injuries or losses arise out of care rendered by the Facility or which should have been rendered by Facility after the date of this Agreement, including claims by any individual or entity claiming by or through the Resident or on his or her behalf, or heirs of the Resident or Executor of the Resident's estate." The trial court concluded that the agreement could not bind any heirs or other beneficiaries for their own causes of action:
The parties do not dispute that the terms of the arbitration agreement attempt to make the agreement applicable to the statutory beneficiaries under the wrongful death statute and we agree with the trial court that the above language would appear to try and bind those heirs.
The Arbitration Agreement contains language that would seem to bind not only the Resident, but also his heirs. These heirs would be bound to proceed through arbitration, despite the fact they did not sign the Arbitration Agreement. Some of the Plaintiffs in this action are clearly non-signatory beneficiaries. They are pursuing their own claims, including wrongful death, not on behalf of Mr. Harmon, but on their own behalf. The Court does not believe that this Arbitration Agreement would be binding on those non-signatory heirs.
¶10 With certain exceptions, the general rule is that an arbitration agreement is only binding on parties who sign the agreement. Dueñas v. Life Care Ctrs. Of Am., Inc., 236 Ariz. 130, 139, ¶ 26, 336 P.3d 763, 772 (App. 2014); see also A.R.S. § 12-3006(A) (providing that with certain exceptions, an arbitration agreement is valid and enforceable "between the parties to the agreement . . . ."). Consistent with this rule and following briefing in this appeal, we decided in Dueñas that an arbitration agreement with a nursing home signed by the patient or his agent could not be enforced to require non-signatory wrongful death statutory beneficiaries to arbitrate their wrongful death claims. Dueñas, 236 Ariz. at 138-39, ¶¶ 23-29, 336 P.3d at 771-72. In Dueñas, we held that "[a]bsent an actual agreement by the beneficiaries to arbitrate, or a legislative enactment expanding the binding effect of arbitration agreements to third parties, . . . beneficiaries are entitled to maintain their wrongful-death action in court." 236 Ariz. at 139, ¶ 29, 336 P.3d at 772. We find no reason to disagree with Dueñas and hold the trial court did not err in ruling that the arbitration agreement was not binding on the non-signatory heirs.
While Avalon cited for the first time in its reply brief to various other jurisdictions which bind non-signatory wrongful death beneficiaries to arbitration agreements signed by or for the decedent, those cases are based on either a theory that the wrongful death claim is derivative of the decedent's claims or a statute that expressly bound such non-signatories. We expressly rejected such arguments in Dueñas. 236 Ariz. at 138-39, ¶¶ 25-29, 336 P.3d at 771-72.
¶11 Avalon further argues that the beneficiaries fall within the third-party beneficiary exception to the rule. Under the third-party beneficiary exception, a non-signatory heir may be barred from avoiding arbitration if he has received a direct benefit from the arbitration agreement. Schoneberger v. Oelze, 208 Ariz. 591, 594, ¶ 14, 96 P.3d 1078, 1081 (App. 2004), superseded by statute, 2008 Ariz. Sess. Laws, ch. 247, § 16 (2d Reg. Sess.) (current version at A.R.S. § 14-10205 (2012)). "Arbitration rests on an exchange of promises," and "[p]arties to a contract may decide to exchange promises to substitute an arbitral for a judicial forum." Id. at 596, ¶ 20, 96 P.3d at 1083.
¶12 We find no evidence of any benefit or exchange of promises between Avalon and Harmon's non-signatory beneficiaries. Unlike Schoneberger, where the plaintiffs sought to benefit from a trust document while avoiding an arbitration clause it contained, the beneficiaries here do not seek any benefits under the arbitration agreement. In addition, as we pointed out in Schoneberger, a non-party to an arbitration agreement must receive a direct benefit from the agreement if they are going to be required to abide by the arbitration. No such direct benefit is present here. II. Substantive Unconscionability
¶13 Avalon also argues that the trial court erred in finding the arbitration agreement to be substantively unconscionable based on the estimated arbitrator fees. We disagree.
It is unclear whether the arbitration agreement is governed by the Federal Arbitration Act, 9 U.S.C. §§ 1-16, or the Arizona Revised Uniform Arbitation Act, A.R.S. §§ 12-3001 to -3029. The agreement merely states that it "shall be governed by applicable state and federal law." We need not decide which law is governing because Avalon correctly notes that substantive unconscionability is governed by state law. Harrington v. Pulte Homes Corp., 211 Ariz. 241, 245-46, ¶¶ 9-11, 119 P.3d 1044, 1048-49 (App. 2005); see also A.R.S. § 12-3006(A) (providing that an arbitration agreement "between the parties to the agreement is valid, enforceable and irrevocable except on a ground that exists at law or in equity for the revocation of a contract.").
¶14 "Our supreme court has explained that reasonable expectations and unconscionability are two distinct grounds for invalidating or limiting the enforcement of a contract." Harrington v. Pulte Homes Corp., 211 Ariz. 241, 252, ¶ 39, 119 P.3d 1044, 1055 (App. 2005) (citation and internal quotation marks omitted). "Procedural unconscionability addresses the fairness of the bargaining process, which is concerned with unfair surprise, fine print clauses, mistakes or ignorance of important facts or other things that mean bargaining did not proceed as it should." Dueñas, 236 Ariz. at 135, ¶ 8, 336 P.3d at 768 (internal quotation marks omitted). In contrast, "[s]ubstantive unconscionability concerns the actual terms of the contract and examines the relative fairness of the obligations assumed." Harrington, 211 Ariz. at 252, ¶ 39, 119 P.3d at 1055.
¶15 "An arbitration agreement may be substantively unconscionable if the fees and costs to arbitrate are so excessive as to 'deny a potential litigant the opportunity to vindicate his or her rights.'" Clark v. Renaissance West, LLC, 232 Ariz. 510, 512, ¶ 9, 307 P.3d 77, 79 (App. 2013) (citation omitted). "To show this type of unconscionability, the party challenging the arbitration agreement must present specific, non-speculative evidence regarding several factors." Dueñas, 236 Ariz. at 136, ¶ 14, 336 P.3d at 769 (citing to Clark). "First, the party seeking to invalidate the arbitration agreement must present evidence concerning the cost to arbitrate." Clark, 232 Ariz. at 513, ¶ 10, 307 P.3d at 80. "Second, a party must make a specific, individualized showing as to why he or she would be financially unable to bear the costs of arbitration." Id. at ¶ 11. "Third, a court must consider whether the arbitration agreement or the applicable arbitration rules referenced in the arbitration agreement permit a party to waive or reduce the costs of arbitration based on financial hardship." Id. at ¶ 12.
Avalon's reliance on Harrington to create a more rigorous standard for unconscionability for prohibitive costs is unpersuasive. Harrington merely summarized the basis for prohibitive costs, indicating that it would require a case-by-case approach with individualized evidence of the costs and inability to pay those costs. 211 Ariz. at 252-53, ¶¶ 42-44, 119 P.3d at 1055-56.
¶16 After reviewing the record, we conclude the trial court did not err in finding the agreement substantively unconscionable based on arbitration costs.
A. Cost to Arbitrate
¶17 As discussed above, see supra ¶ 15, the party challenging the arbitration agreement must first present evidence regarding the probable costs of arbitration. Clark, 232 Ariz. at 513, ¶ 10, 307 P.3d at 80.
¶18 At the hearing, Patrick's expert Jeffrey Victor testified regarding the fees the estate would likely incur under binding arbitration. Specifically, Victor testified that Phoenix-area arbitrators charge between $300 and $475 per hour, and arbitrators with expertise in long-term care charge at least $400. As to the minimum length of time that would be needed to present the case, Victor testified it would likely take seven to eight days. In addition, Victor also testified that based on the complexity of the case Patrick would need to call seven or eight expert witnesses, including a pulmonologist, nursing standard of care expert, certified wound care nurse, geriatrician, wound care doctor or plastic surgeon, administration expert, director of nursing expert, and pathologist. He further testified that because those experts would all be testifying on different issues there would be no violation of the one expert per issue rule.
¶19 Under the arbitration agreement, Patrick and Avalon would be responsible for selecting and paying the fees and expenses of their own selected arbitrator, and both parties would select and split the cost of a third neutral arbitrator selected from "a list of individually approved arbitrators utilized by the State." Even assuming a shorter arbitration hearing of five days and one day for pre-matters, deliberations, and reading pleadings, Victor testified that the total arbitrators' fees alone would be approximately $57,000, of which $28,500 would be Harmon's estate's responsibility. Avalon offered no evidence below as to the costs of the arbitration and argues on appeal that Victor's testimony overstated the arbitrator's costs.
¶20 We defer to the superior court's factual determinations if they are supported by any reasonable evidence. Twin City, 204 Ariz. at 254, ¶ 10, 63 P.3d at 285. Based on this testimony, Patrick and Harmon's estate provided reasonable evidence of the probable costs of arbitration based on the arbitrator's costs sufficient to fulfill the first factor. See Dueñas, 236 Ariz. at 137, ¶ 15, 336 P.3d at 770 (noting that "[t]he plaintiff in Clark presented expert testimony regarding the likely hourly rate of arbitrators, the number of types of witnesses his case would require, and the estimated duration of arbitration proceedings.").
B. Ability to Pay
¶21 Next, the party seeking to invalidate the arbitration agreement "must make a specific, individualized showing as to why he or she would be financially unable to bear the costs of arbitration." Clark, 232 Ariz. at 513, ¶ 11, 307 P.3d at 80. "This evidence must consist of more than conclusory allegations stating a person is unable to pay the costs of arbitration. Rather, the parties must show that based on their specific income/assets, they are unable to pay the likely costs of arbitration." Id. (citation omitted).
¶22 Since the arbitration agreement is not enforceable against the statutory heirs, the only question is whether David Harmon's estate can pay the costs of arbitration. There is reasonable evidence supporting the superior court's finding that the estate could not afford the costs of arbitration. Patrick testified that there were no funds left in Harmon's estate that would be available to fund the arbitration. In addition, as further evidence that her father was indigent, Patrick testified that Harmon was on Arizona Long Term Care System ("ALTCS") when he passed away. The only asset appeared to be a house in Florida owned at one time by both of Patrick's parents. However, taking judicial notice of Harmon's will filed in the superior court, the house passed by inheritance to his wife, since she survived him, thus making that asset no longer part of the estate. See In re Sabino R., 198 Ariz. 424, 425, ¶ 4, 10 P.3d 1211, 1212 (App. 2000) (holding that a court may take judicial notice of filings in its own proceedings or in proceedings in a separate matter).
ALTCS is an Arizona Medicaid program designed to provide long term health care to qualifying individuals who are unable to pay for the care they need on their own. See Filing an Application for [ALTCS], AHCCCS, http://www.azahcccs.gov/community/Downloads/Publications/DE-828_english.pdf (last visited on January 15, 2015). To qualify for ALTCS, an individual must show that all assets and sources of income, excluding a home, amount to $2,000 or less. See id. We take judicial notice of this administrative regulation and manual. See Climate Control, Inc. v. Hill, 86 Ariz. 180, 188, 342 P.2d 854, 859 (1959), modified on rehearing on other grounds, 87 Ariz. 201, 349 P.2d 771 (1960) (holding that a court may take judicial notice of administrative regulations); State v. Rojers, 216 Ariz. 555, 560, ¶ 26, 169 P.3d 651, 656 (App. 2007) (holding that a court can take judicial notice of an agency's published manuals); Ariz. R. Evid. 201(b)(2) (court may judicially notice a fact that is not subject to reasonable dispute because it "can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.").
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¶23 This evidence distinguishes this case from Harrington in which the named plaintiffs merely stated that they were on fixed, modest incomes and they could not afford even an expense of $1000 to arbitrate their claims. 211 Ariz. at 253, ¶ 47, 119 P.3d at 1056. Here, there is direct evidence there simply are no assets in the estate to pay the arbitrators' fees.
¶24 Based on this testimony, and taking judicial notice of the requirements to qualify for ALTCS and the will, we conclude the trial court did not err in finding that the estate would be unable to pay the likely costs of arbitration. See Gutierrez v. Gutierrez, 193 Ariz. 343, 347, ¶ 13, 972 P.2d 676, 680 (App. 1998) ("We will defer to the trial court's determination of witnesses' credibility and the weight to give conflicting evidence.").
C. Waiver or Reduction in Fees
¶25 Finally, in determining whether an arbitration agreement is substantively unconscionable based on arbitration costs, "a court must consider whether the arbitration agreement or the applicable arbitration rules referenced in the arbitration agreement permit a party to waive or reduce the costs of arbitration based on financial hardship." Clark, 232 Ariz. at 513, ¶ 12, 307 P.3d at 80.
¶26 Here, the arbitration agreement itself does not provide for a waiver or reduction of fees based on financial hardship. The arbitration agreement simply provides that both parties would be responsible for selecting and paying the fees and expenses of their own selected arbitrator, and both parties would select and split the cost of a third neutral arbitrator. In addition, as in Clark, the "[a]greement is not subject to any arbitration rules, such as [the American Arbitration Association], that provide for waiver/reduction of fees based on financial hardship." 232 Ariz. at 514, ¶ 20, 307 P.3d at 81. In contrast, "[w]e note that parties not subject to arbitration may request a waiver or deferral of court fees and costs based on financial hardship if they litigate in court." Id. at n.5.
¶27 Avalon argues that, without any explanation for how the estate can afford litigation but not arbitration, "this Court can only presume that Plaintiff's counsel is advancing costs and making fees contingent." No such evidence, however, was provided below, and we refuse to speculate on appeal. See State v. Schackart, 190 Ariz. 238, 247, 947 P.2d 315, 324 (1997) ("Because our court does not act as a fact-finder, we generally do not consider materials that are outside the record on appeal.").
¶28 Because we affirm the trial court's finding of substantive unconscionability based on the arbitration costs and that the agreement is not binding on the non-signatory statutory beneficiaries, we do not address the remaining issues of unconscionability based on the limitation of APSA remedies.
CONCLUSION
¶29 For the foregoing reasons, we affirm. We will award Patrick her taxable costs on appeal upon compliance with Arizona Rule of Civil Appellate Procedure 21.