Because arbitration is often seen as a faster, less costly, and more private alternative to litigation, arbitration clauses are now commonplace in everything from employment agreements and website “terms and conditions” to documents we must sign before a doctor will treat us.
But just how far do such clauses extend when several different businesses are involved in rendering the specified services?
That was the issue at the core of a recent case decided by the California Court of Appeal (Watson v. Professional Business Management Corporation).
In 2019, Gina Watson bought a home in Reseda, California. When the COVID pandemic hit the following year, its effects left her unable to pay her mortgage and facing foreclosure.
She then received multiple communications from an entity called Nonprofit Alliance of Consumer Advocates, also known as NACA Law. It described itself as a nonprofit law clinic that would, at no charge, forestall the foreclosure and help Watson refinance into another loan. Watson agreed to use NACA Law’s free services.
In a lawsuit she filed later in Los Angeles Superior Court, Watson described NACA Law as “actually a front for a highly sophisticated criminal joint enterprise and conspiracy” which offered her “predatory loans designed to steal her home equity.”
With the involvement of other defendants, Watson’s lawsuit alleges, NACA Law helped her obtain two bridge loans on her home, with large balloon payments due after one year. Unable to make the payments, late fees and processing charges, Watson was forced to sell her home.
The lawsuit identifies NACA Law as a shell organization used as an alter ego by other for-profit defendants, including Professional Business Management Corporation, or PBMC, a South Dakota company that allegedly paid the salaries of NACA Law’s employees.
Her complaint says PBMC and other defendants “are in fact one joint enterprise operating as a mortgage fraud scam, and NACA Law is their nonprofit alter ego,” meaning they operated as a single business despite their nominally separate corporate identities.
She asked the court to halt their allegedly predatory practices, rescind her loans, and award her general and punitive damages.
When Watson agreed to use NACA Law’s free services, she signed a “Services Agreement” that detailed the legal and financial services the firm would provide. It also included a clause stating that, “In the event there is any controversy arising between NonProfit Clinic and Client, that matter shall be settled via arbitration.”
After Watson filed her lawsuit, NACA Law asked the court to compel arbitration of the dispute, based on the Services Agreement she had signed. The court agreed, noting that the terms of the arbitration agreement Watson had signed covered the claims she alleged.
PBMC then joined in NACA Law’s motion, arguing that the arbitration clause in the Services Agreement should also apply to any dispute between Watson and PBMC. The firm argued that Watson’s own complaint described PBMC as “a success agent and/or alter ego” of NACA Law.
If it was added to the lawsuit as the alter ego and/or agent of a signatory to the arbitration agreement, PBMC argued, it should be able to enforce the arbitration clause of the agreement even though it was not a signatory to the document.
The trial court rejected PBMC’s reasoning. The company failed to present any evidence that it was an agent or alter ego of NACA Law, it noted, and Watson’s allegations that PBMC and were entwined were simply claims, not evidence that such a relationship actually existed.
When the court rejected PBMC’s motion to compel arbitration, the company appealed.
The appellate justices rejected its claims, noting that “PBMC presented no evidence to establish why it should be included within NACA Law’s arbitration agreement.”
It acknowledged that there are several specific and fairly narrow grounds that can allow a nonsignatory to invoke an agreement to arbitrate, but it said those did not apply here.
Watson’s allegations that NACA Law and PBMC were alter egos of each other did not amount to a “judicial admission” that PBMC could rely on, the justices said.
“Not every factual allegation in a complaint automatically constitutes a judicial admission,” the pointed out. “Otherwise, a plaintive would conclusively establish the facts of the case by merely alleging them, and there would never be any disputed facts to be tried.”
The justices also pointed out that the only factual evidence PBMC submitted was a sworn declaration that it never had any business dealing with Watson; it did not claim any agency, alter ego or successor status with NACA Law. It would be unfair to allow PBMC to deny that it was NACA Law’s alter ego when that position benefited it, the justices said, yet to claim it was an alter ego in order to take advantage of the arbitration clause.
The appellate court affirmed the decision of the trial court blocking PBMC’s request to have Watson’s claims arbitrated, and ordered PBMC to pay costs on appeal.
By Laurie Murphy