The following is a case update written by Leonard Gumport analyzing a recent case of interest.
In Williams v. 3620 102nd Street, Inc, 53 Cal. App. 5th 1087 (2020)(“Williams”), the California Court of Appeal ruled that an arbitration clause in a residential lease was unenforceable under Cal. Civ. Code § 1953(a)(4) and that the Federal Arbitration Act did not apply. A copy of Williams is here.
In March 2014, Keisa Williams and Rubin Womack leased an apartment in Los Angeles. Williams and Womack resided there with their two children and another person (collectively, “Residents”). Williams and Womack renewed the lease in 2015. The lease and the renewed lease contained an arbitration clause. Both Williams and Womack initialed the arbitration clause. The leased premises were owned by corporate entities (“Owners”).
The arbitration clause in the leases provided that “The specific terms of [the] Arbitration are stated in Addendum ‘B,’ receipt of which is hereby acknowledged by [Tenant].” Addendum B set forth the arbitration procedures and contained a jury trial waiver. Although Addendum B provided spaces for initials and signatures by the tenant and landlord, those spaces were blank.
On October 2, 2016, the Residents sued the Owners for breach of the warranty of habitability and for negligence and related claims. Years later, on March 14, 2019, the Owners filed a petition to compel arbitration. The Owners’ petition did not include Addendum B. With a reply brief, the Owners submitted Addendum B, containing blank spaces for initials and signatures.
On May 1, 2019, the trial court denied the Owners’ petition to compel arbitration. The trial court ruled that: (1) the Owners failed to show that the parties had a valid arbitration agreement, and (2) the Owners had waived arbitration. The Owners appealed. The Court of Appeal affirmed.
The Court of Appeal first decided that the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., did not apply. A party seeking to enforce an arbitration agreement under the FAA “has the burden of showing the case affects interstate commerce, which is the prerequisite for the federal act’s application.” Williams, 53 Cal. App. 5th at 1091. The Owners did not carry this burden. There was no evidence that anything connected with the case affected interstate commerce and the arbitration provisions did not refer to federal law. At oral argument on appeal, the Owners conceded that federal law did not apply. Ibid.
Next, the Court of Appeals decided that the arbitration provisions of the lease agreements were unenforceable as contrary to public policy. Under Cal. Code Civ. Proc. § 1953(a)(4), any residential lease provision in which a lessee agrees to modify or waive procedural rights in litigation in any action involving his rights and obligations as a tenant is void as contrary to California public policy. Enforcement of the arbitration provisions in the lease agreements would waive the tenants’ right to jury trial, which is a procedural right that may not be waived or modified pursuant to Section 1953(a)(4). Williams, 53 Cal. App. 5th at 1091.
Williams distinguished Jaramillo v. JH Real Estate Partners, Inc., 111 Cal.App.4th 394 (2003), which stated that tenants and landlords could waive or modify procedural rights in an agreement entirely independent of the residential rental agreement. The Owners’ briefs on appeal did not set forth any argument that Williams and Womack entered into an agreement to arbitrate that was separate and independent from the lease agreements. Williams, at 1093.
Takeaways from Williams are that the FAA does not apply to all arbitration agreements, and arbitration agreements in residential leases are unenforceable under Section 1953(a)(4). Williams explained that the FAA does not apply unless the proponent of arbitration carries the burden of proving that the case affects interstate commerce. The facts recited in Williams suggest that the court may have doubted whether the tenants agreed to the unsigned arbitration provisions of Addendum B to the leases.
Although Williams is not a bankruptcy case, arbitration issues do arise in bankruptcy cases. See Cont’l Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011, 1021 (9th Cir.) (“We join our sister circuits in holding that, even in a core proceeding, the McMahon standard must be met – that is, a bankruptcy court has discretion to decline to enforce an otherwise applicable arbitration provision only if arbitration would conflict with the underlying purposes of the Bankruptcy Code.”) (citing Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220 (1987)); In re EPD Inv. Co., LLC, 821 F.3d 1146, 1150-1152 (9th Cir. 2016) (under Thorpe Insulation, FAAdid not require bankruptcy court to compel arbitration of trustee’s avoidance actions); Ackerman v. Eber (In re Eber), 687 F.3d 1123, 1130-1131 (9th Cir. 2012) (FAA did not require bankruptcy court to compel arbitration of dischargeability issues).
These materials were written by Leonard L. Gumport of Gumport Law Firm, PC in Pasadena (firstname.lastname@example.org). Editorial contributions were provided by Ed Hays of Marshack Hays LLP (EHays@MarshackHays.com).