Opinion
2d Civil No. B162566.
10-27-2003
PHYLLIS LINDEN, Plaintiff and Respondent, v. AMERICAN EXPRESS FINANCIAL, INC. et al., Defendants and Appellants.
Nash & Edgerton, Samuel Y. Edgerton, David Maurer, Teri Zimring and Brandon S. Reif for Defendants and Appellants. Lowthorp, Richards, McMillan, Miller, Conway & Templeman, Alan R. Templeman and Dean W. Hazard; Lasher & Lascher and Wendy Cole Lascher for Plaintiff and Respondent.
An investor sued her stockbroker for breach of fiduciary duty and negligence. The trial court granted the stockbrokers motion to compel arbitration before the National Association of Securities Dealers, Inc. (NASD). NASD refused to appoint an arbitrator unless the investor waived compliance with the California ethical standards for arbitrators. (Code Civ. Proc., § 1281.85; Cal. Rules of Court, appendix, div. VI.) The trial court vacated its order compelling arbitration on the ground of impossibility or impracticability of performance. The stockbroker appeals. We affirm.
All statutory references are to the Code of Civil Procedure.
FACTS
In August of 2001 Phyllis Linden filed an action in superior court against American Express Financial, Inc. and financial advisor Ty Stork (collectively American Express). The complaint alleged breach of fiduciary duty and negligence in advising her to invest her retirement savings in high risk mutual funds. Linden prayed for damages in excess of $100,000.
American Express petitioned the court to compel arbitration before NASD. The petition alleged that Linden signed an arbitration agreement as part of her new account application. The trial court granted the petition.
After Linden filed her claim, NASD appointed three arbitrators. Thereafter, one of the arbitrators decided to withdraw. Meanwhile, on July 1, 2002, California implemented new disclosure requirements for arbitrators. (§ 1281.85; Cal. Rules of Court, appendix, div. VI.) On July 10, 2002, NASD informed Linden that because NASD did not believe California ethical rules should apply to its arbitrations, it refused to appoint an arbitrator.
Linden wrote to American Express offering to have the superior court appoint an arbitrator. American Express refused the offer, insisting that the arbitrator be appointed by NASD.
Linden moved to vacate the order compelling arbitration on the ground of impossibility or impracticability of performance. American Express opposed the motion claiming that it was not impossible for Linden to arbitrate before NASD. Linden could choose to arbitrate in a neighboring state. Linden replied that she is 68 years old and a diabetic. She is reluctant to fly because after a flight in April of 2002 she developed severe hypertension. She owns a 1988 Buick which she does not believe is in sufficient shape to be driven to Nevada or Arizona. Other than savings, her income is limited to $1,000 per month.
The trial court granted Lindens motion to vacate the order compelling arbitration. In granting the motion, the court found it would be impractical to require Linden to arbitrate out of state. The court also stated it would be unfair and a violation of Lindens due process rights to require her to waive the protections of Californias arbitration disclosure act.
DISCUSSION
I
Section 1281.85, subdivision (a) requires a person serving as an arbitrator to comply with ethical standards adopted by the Judicial Council of the State of California. The Judicial Council has adopted such standards effective July 1, 2002. (Ethics Standards for Neutral Arbitrators in Contractual Arbitration, Cal. Rules of Court, appendix, div. VI.)
The standards adopted by the Judicial Council require an arbitrator to disclose to the parties any matter that could cause a reasonable person to doubt the arbitrators ability to be impartial. (Cal. Rules of Court, appendix, div. VI, Std. 7(d).) The standards also specify matters that an arbitrator must disclose. These include a family or significant personal relationship with a party or lawyer in the arbitration (id. at Std. 7(d) (1), (2) & (3)), prior service as an arbitrator or dispute resolution neutral involving a party or a lawyer for a party in the arbitration (id. at Std. 7(d) (4) & (5)), and information about the organization providing an arbitrator in a consumer arbitration (id. at Std. 7(d) (12)). Failure to make the required disclosures may be a ground for vacating the arbitrators award. (§ 1286.2, subd. (a)(6)(A).)
There is no dispute that American Express insists on arbitrating before NASD, and NASD refuses to appoint an arbitrator who will comply with the California ethical standards. Nevertheless, American Express argues Lindens agreement to arbitrate is not discharged under the doctrine of impossibility or impracticability. (See Witkin Summary of Cal. Law (9th ed (1987) Contracts, § 772 et seq., p. 697 et seq.)
American Express and NASD attempt to resolve the impasse by offering Linden a choice. She can expressly waive the California ethical standards and have the arbitration in California, or she can waive the California ethical standards by agreeing to arbitrate in another state. It is a Hobsons choice. Either way, she must waive the California ethical standards.
American Express points out that an unforeseen reasonable increase in difficulty or costs does not make performance of a contract impossible or impractical. (Citing Kennedy v. Reece (1964) 225 Cal.App.2d 717, 724-725.) But the problem here is not increased difficulty or costs. The problem is NASDs refusal to appoint an arbitrator unless Linden agrees to waive her statutory rights. American Express cites no authority that requires Linden to waive her statutory right to an arbitrator who complies with California ethical standards.
American Express argues that Linden agreed to arbitrate under NASD rules. But the state can regulate agreements. There is nothing in section 1281.85 or in the rules adopted by the Judicial Council that exempts NASD. In fact, NASD admits it tried and failed to obtain an exemption from the Legislature and the Judicial Council. There is no question that the Legislature intended California ethical standards to apply where the parties agree to arbitration before NASD.
In Alan v. Superior Court (2003) 111 Cal.App.4th 217, an investor sought a writ of mandate to vacate the trial courts order compelling arbitration of claims against a stockbroker. As here, NASD refused to appoint an arbitrator unless the investor waived the California ethical standards or agreed to arbitrate in another state. The broker argued that NASD rules allows it to conduct the arbitration in any location it chooses. (Id. at p. 230, citing NASD Code of Arbitration, rule 10315.) The Court of Appeal stated, however, that the forum selection clause should be set aside if the agreement is affected by fraud, undue influence, or overweening bargaining power; or if enforcement of the agreement would be unreasonable or unjust; or if proceeding in the selected forum will be so gravely difficult or inconvenient that the resisting party will for all practical purposes be deprived of his day in court. (Ibid., citing Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 632-633.) The court directed the trial court to determine whether the forum selected by NASD is proper; that is, for example, whether the forum is unreasonable or unjust. If it is, the dispute should be resolved in superior court in California.
Here the trial court has decided that a location outside of California is not proper because it is impractical for Linden. That is simply another way of saying that proceedings in another state would be so difficult or inconvenient as to deprive her of her opportunity to be heard in California.
Although the trial court here made the finding required by Alan, we disagree with Alan that such a finding is necessary. Requiring arbitration in a neighboring jurisdiction is simply another way of forcing Linden to waive her right to compliance with California ethical standards. Unless she waives the right, American Express and NASD would deny her any forum in which to seek a remedy for her complaint.
An opportunity for a hearing is fundamental to due process. (Groppi v. Leslie (1972) 404 U.S. 496.) American Express has established no legal basis for forcing Linden to abandon her statutory right to compliance with California ethical standards for arbitrators. For the trial court to deny Linden a hearing, unless she waives those rights, would be a violation of due process.
II
American Express contends the California ethical standards have been preempted by federal law.
American Express does not brief the issue of federal preemption. Instead, it refers us to a memorandum of law and declaration of the NASD Director of Arbitration, George Friedman, filed in Mayo v. Dean Witter Reynolds, Inc. (N.D. Cal. 2003) 258 F.Supp.2d 1097. At the time American Express filed its opening brief, the district court had not decided Mayo. Ultimately, the court decided that California ethical standards are preempted by federal law. (Id. at pp. 1107-1116.)
That, of course, does not end the matter. We are not bound by the district courts opinion. (Elliott v. Albright (1989) 209 Cal.App.3d 1028, 1034.)
The briefing here is inadequate on the question of federal preemption. It is simply not adequate for an appellant to rely on a memorandum of law and affidavit filed in another case; particularly, where the affidavit makes untested assertions of fact, such as that complying with California standards will make arbitration prohibitively expensive. The documents filed in Mayo are properly intended for a trial court. They are not a substitute for an appellate brief.
American Express asks that we take judicial notice of more materials including briefs filed in other cases. The request was filed with its reply brief in this case. The request for judicial notice is denied. It would be unfair to Linden to consider such matters at this stage of the proceedings. (See 9 Witkin, Cal. Procedure (4th ed 1997) Appeal, § 616, pp. 647-648 [points raised for first time in reply brief will not be considered].)
American Express has failed to provide sufficient briefing for us to decide the issue of federal preemption. It has waived the issue. (See Duarte v. Chino Community Hospital (1999) 72 Cal.App.4th 849, 856 [argument deemed waived where party fails to support it by adequate brief].)
The order vacating the order compelling judgment is affirmed. Costs are awarded to respondent.
We concur: YEGAN, J., and COFFEE, J.