J.H. Boyd Enterprises, Inc. v. Boyd (Cal.App.)

The following is a case update written by Dean T. Kirby, Jr., a member of the ad hoc group of the California Lawyers Association’s (CLA) Business Law Section, analyzing a recent decision of interest:

SUMMARY:

A California appellate court has held that a trial court order denying judicial reference under Code of Civil Procedure section 638 et seq. is not appealable until the conclusion of the case, in contrast with the appealability of an order denying arbitration. [J.H. Boyd Enterprises, Inc. v. Boyd, 39 Cal.App.5th 802 (Aug. 23, 2019).  Click here for the full decision.

Facts: Kenneth Boyd’s father Joseph Boyd incorporated J.H. Boyd Enterprises, Inc. (“JBHE”) and ran the business until shortly before he passed away in 2015. Upon Joseph’s death his daughter Martha, together with her husband and sister became majority shareholders of JBHE. Joseph’s son Kenneth Boyd became a “frozen out minority owner.”

Kenneth and Susan Boyd were the settlors and trustees of the Boyd Trust. Prior to Joseph’s death, the Boyd Trust borrowed $2 Million from JBHE. The loan was evidenced by a promissory note, secured by a deed of trust. Shortly before the note matured, a series of letters were exchanged between the Boyd Trust and JBHE, which amounted to tenders of JBHE stock, rather than cash, as payment of the note. When various tenders were refused, the Boyd Trust demanded arbitration, which was provided for in the note. JBHE refused to arbitrate and commenced a judicial foreclosure action.

Based on the various provisions quoted in the opinion, it appears that the note was adapted from a form document intended for use by an institutional lender. It included a lengthy section entitled “Arbitration Agreement” which commenced with a broad requirement to submit all “Disputes” to binding arbitration. The term “Dispute” was defined in part as follows:

A ‘Dispute’ shall include any dispute, claim or controversy of any kind, whether in contract or in tort, Legal or equitable, now existing or hereafter arising, relating in any way to this Agreement . . . or any past, present, or future loans, transactions, contracts, agreements, relationships, incidents or injuries of any kind whatsoever relating to or involving Business Banking, Regional Banking, or any successor group or department of Lender.

The Arbitration agreement provided that “any arbitration proceeding will be governed by the Federal Arbitration Act,” and contained five “State Specific Provisions” which applied when that state’s law “governs the Dispute.” The California provision stated in part:

No Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless the holder of the mortgage . . . specifically elects in writing to proceed with arbitration. If any such Dispute is not submitted to arbitration, the Dispute shall, at the election of any party, be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq.

The note also included a provision entitled “Governing Law” which stated in part: “[t]his Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of California . . . .”

In the judicial foreclosure action, the trial court denied the motion of the Boyd Trust to compel arbitration or in the alternative for judicial reference of the case. The trial court found that because California law governed the Dispute, and because JBHE had not elected in writing to proceed with arbitration it could not be compelled to arbitrate. The trial court refused to grant the motion for judicial reference because of the potential that the referee’s ruling could be inconsistent with future rulings in two pending probate cases. 

In an opinion certified for partial publication, the Court of Appeal affirmed the order denying arbitration and dismissed that portion of the appeal relating to the denial of judicial reference for lack of appellate jurisdiction.

Reasoning: In the published portion of the opinion, the Court of Appeal dealt with the question of whether there was a right to appeal from an order granting or denying judicial reference of a dispute. Because the right to appeal is statutory, the question was whether such an order was within the ambit of Code of Civil Procedure section 1294(a), which permits appeals from “an order dismissing or denying a petition to compel arbitration.” Code of Civil Procedure section 1294.2 provides generally that “[u]pon an appeal from any order or judgment under this title, the court may review the decision and any intermediate ruling, proceeding, order or decision which involves the merits or necessarily affects the order or judgment appealed from, or which substantially affects the rights of a party.” The Boyd Trust argued that the order denying judicial reference fell within the ambit of section 1294.2. The Court of Appeal disagreed.

The Court acknowledged that there was apparently no published decision on the appealability of orders granting or denying judicial reference. It concluded that “the ancillary jurisdiction conferred by section 1294.2 simply ensures that the appellate court can effectuate its arbitration order” and that review of the judicial reference ruling was not necessary to effectuate the denial of arbitration. The Court held that “the denial of the motion to compel judicial reference is not the ‘flip side’ of the denial of the motion to compel arbitration—the two are completely separate and significantly different.” Accordingly, the appeal on judicial reference was dismissed for lack of jurisdiction.

Author’s Comment: The unpublished section of the Court of Appeal’s opinion devoted to the trial court’s denial of arbitration is twice as lengthy as the section discussing the judicial reference appeal. The full opinion is currently unavailable on Westlaw.® It may be obtained on the Court of Appeal website.

The decision not to publish this portion is understandable, because the Court was required to unravel the convoluted and ambiguous “Arbitration Agreement” section of the note, the like of which we are thankfully unlikely to encounter again. The Arbitration Agreement specified that the agreement would be governed by “Federal law applicable to the Lender” (a phrase that might have some meaning, in some contexts, as to federally regulated lenders), and that the “arbitration proceeding” would be governed by the Federal Arbitration Act. All of this may have been designed to take advantage of the FAA’s more stringent requirements in favor of arbitration. In Boyd, however, there was nothing about the lender, or the loan transaction, that was governed by federal law. The Boyd Trust made a strained argument that the loan involved “commerce” as defined by the FAA (i.e., interstate commerce). It was unclear why arbitration would have been compelled under the FAA in this particular case where it could not have been compelled under California law. 

While simple jury waiver provisions contained in pre-dispute agreements are unenforceable under the Supreme Court’s decision in Grafton Partners L.P. v. Superior Court, 36 Cal.4th 944, 32 Cal.Rptr.3d 5 (2005), both judicial reference and arbitration provisions are enforceable ways to avoid the possibility of a jury trial. The Boyd opinion cites Sy First Family Ltd. Partnership v. Cheung, 70 Cal.App.4th 1334, 1341-1342, 83 Cal.Rptr.2d 340 (1999) as explaining the differences between judicial reference and contractual arbitration. One feature considered by many to be an advantage is the availability of appeal directly to the courts of appeal as to all aspects of a ruling by a judicial referee. More and more ADR provisions provide for judicial reference first, specifying arbitration only in cases where judicial reference is unavailable (e.g., the federal courts) or is denied in the discretion of the trial court.

The Boyd decision seems correct in interpreting the question of appellate jurisdiction under section 1294.2. However, from the point of view of policy, including judicial economy, it is unclear why a decision to deny arbitration (and allow a perhaps unnecessary jury trial to proceed) should be reviewable, while a decision to deny judicial reference (and allow a perhaps unnecessary jury trial to proceed) is not reviewable.

These materials were written by members of the California Lawyers Association Business Law Section for the Commercial Finance Newsletter, published weekly on Westlaw. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them.  This material may not be further distributed without the consent of Thomson Reuters.