Leith v. Berthel, Fisher & Co. Fin. Servs.

• Decision Date: 17 March 2020
• Docket Number: C088365
• Citation: Leith v. Berthel, Fisher & Co. Fin. Servs., C088365 (Cal. App. Mar 17, 2020)
• Court: California Court of Appeals
• Parties: THOMAS S. LEITH et al., Plaintiffs and Appellants, v. BERTHEL, FISHER & COMPANY FINANCIAL SERVICES, INC., et al., Defendants and Respondents.

THOMAS S. LEITH et al., Plaintiffs and Appellants, v. BERTHEL, FISHER & COMPANY FINANCIAL SERVICES, INC., et al., Defendants and Respondents.

C088365

COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT (Placer)

March 17, 2020

NOT TO BE PUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Super. Ct. No. SCV-0040085)

After initiating arbitration against defendants Berthel, Fisher & Company Financial Services, Inc. (Berthel Fisher), and their former investment advisor Shawn B. Davis (Davis)¹ (collectively, defendants), and facing a motion to dismiss, plaintiffs Thomas S. Leith and Lynda Reiner Leith (the Leiths) stipulated to dismiss theirarbitration case so they could pursue their claims in court. Then, 19 months later, after an unsuccessful mediation, and with discovery pending and a trial date approaching, the Leiths reversed course and filed a petition to compel a return to arbitration. The court denied the petition, finding the Leiths had waived their right to arbitration.

On appeal, the Leiths argue the trial court erred in finding waiver because (1) even though they admittedly engaged in acts inconsistent with an intent to arbitrate, their actions did not prejudice defendants, and (2) in assessing waiver, the trial court improperly considered how an arbitrator likely would rule on an anticipated motion to dismiss the underlying claim.

We conclude that the Leiths expressly and impliedly waived their arbitration rights. We also conclude that any error by the trial court in considering how an arbitrator likely would rule on a motion to dismiss the arbitration was harmless. Accordingly, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

In September 2016, the Leiths initiated an arbitration proceeding before the Financial Industry Regulatory Authority (FINRA)² against Davis and the investment firm for which he worked, Berthel Fisher. In their statement of claim, the Leiths alleged that between 2005 and 2010, based on recommendations and advice from Davis, they purchased investments that were illiquid, risky, and unsuitable for them based on their financial situation, investment objectives, and risk criteria. The Leiths alleged that Davis failed to disclose the risky and illiquid nature of the investments and falsely assured them that purchasing the investments would allow them to earn higher returns while at thesame time reducing their overall portfolio risk. The Leiths further alleged that after persuading them to purchase the investments, Davis concealed the poor performance of the investments by misrepresenting their actual value in annual "score card" reports. The Leiths allegedly discovered the "truth" about their investments in April 2016, and filed their arbitration claim five months later.

In January 2017, after filing an answer, defendants informed the Leiths of their intent to file a motion to dismiss the arbitration claims under rule 12206 of FINRA's Code of Arbitration Procedure for Customer Disputes (the FINRA rules).³ Under that rule, a claim is ineligible for arbitration if "six years have elapsed from the occurrence or event giving rise to the claim." (FINRA rule 12206, subd. (a).) Treating the date of the initial investment as the relevant occurrence or event, defendants argued that the Leith's claims were ineligible for arbitration because they were filed more than six years after the dates of the initial investments.

Counsel for the Leiths was convinced that defendants' motion to dismiss had merit. Therefore, to avoid the cost and expense associated with a motion that counsel for the parties agreed "would probably be granted," the Leiths stipulated to voluntarily dismiss their arbitration case. "[C]onsistent with FINRA Rule 12206(b)," the parties stipulated that the dismissal would be "without prejudice," and therefore "not prohibit the Leiths from pursuing [their] claim[s] in a court of competent jurisdiction."⁴ For their part, defendants stipulated that they would not raise the existence of an arbitration agreement or obligation to arbitrate as a defense to claims in court. The parties enteredinto the stipulation "solely for the mutually beneficial[] purpose of avoiding [the] cost and expense associated with [defendants] filing a motion to dismiss the arbitration pursuant to FINRA Rule 12206."

The Leiths signed the stipulated dismissal on January 31, 2017. Approximately eight months later, on September 27, 2017, the Leiths filed this lawsuit, making essentially the same claims against defendants as they did in the arbitration proceeding. Defendants filed an answer denying the allegations and asserting various affirmative defenses. The court set trial for December 10, 2018.

On December 19, 2017, the Leiths retained new counsel to represent them in the pending court action. The new firm attempted mediation with defendants on May 11, 2018, but the parties' informal efforts to resolve the dispute were unsuccessful.

In July 2018, with trial approaching, defendants served their first sets of written discovery and noticed the Leith's depositions. On July 31, 2018, the Leiths notified defendants of their desire to return to arbitration. Defendants rejected the proposal, asserting that the Leiths had waived their right to arbitration by abandoning the prior arbitration proceeding and pursuing their claims in court.

On August 29, 2018, the Leiths filed a petition to compel arbitration, along with a supporting memorandum, declaration, and a number of exhibits. The same day, they served their responses to defendants' discovery requests, objecting to every request based on the pendency of the petition to compel arbitration. In opposition to the petition, defendants filed a memorandum and evidence, as well as a motion to compel discovery. The Leiths filed a reply memorandum on October 9, 2018, along with additional evidence in support of their petition.

Before the hearing on the petition to compel arbitration, the trial court issued a tentative ruling, granting the petition. Although the court agreed that the Leiths acted inconsistently with an intent to invoke their right to arbitrate, the court tentatively foundthat defendants had failed to establish prejudice, which the court termed a dispositive issue.

After hearing oral argument, the trial court reversed its tentative ruling and issued an order denying the petition. In its final order, the trial court "determine[d] that the position articulated in the tentative ruling on the issue of prejudice was not correct" and that "prejudice has been adequately demonstrated by the defendants."⁵ In finding prejudice, the trial court relied on three factors, namely that (1) returning to arbitration would not vindicate the purpose of arbitration to serve as an expeditious, efficient, and cost-effective method of resolving the underlying dispute, (2) a renewed FINRA rule 12206 motion likely "would in the end result in return of the matter to the Superior Court," and (3) the claims at issue likely could not be consolidated with a related arbitration claim pending against defendant Davis and his new employer, WFG Investments, Inc. No statement of decision was requested or issued.

The Leiths timely appealed. (Code Civ. Proc., § 1294.)⁶

DISCUSSION

The Leiths challenge the trial court's order denying the motion to compel arbitration on two grounds. First, they argue the trial court erred in finding that the Leiths waived the right to arbitrate their claims. In particular, the Leiths argue that a party seeking to establish waiver must demonstrate prejudice, and that defendants failed to do so. Second, the Leiths argue that the trial court, in assessing prejudice, improperly considered the likelihood that a renewed FINRA rule 12206 motion would result in return of the matter to the court.⁷ Finding no reversible error, we affirm the trial court's order.

A. The Leiths waived their right to compel arbitration

The California Arbitration Act governs private arbitration.⁸ (§ 1280 et seq.) Through this detailed statutory scheme, the Legislature has expressed a " 'strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.' " (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9.) To effectuate that policy, the California Arbitration Act authorizes a party to an arbitration agreement to seek a court order compelling the parties to arbitrate a dispute covered by the agreement. (§ 1281.2.) A proceeding to compel arbitration is in essence a suit to compel specificperformance of the arbitration agreement. (Freeman v. State Farm Mut. Auto. Ins. Co. (1975) 14 Cal.3d 473, 479.)

In this case, there is no dispute that a valid agreement to arbitrate exists and that the Leith's claims fall within the scope of that agreement.⁹ The only issue is whether the Leiths expressly or impliedly waived their right to compel arbitration.

As with other contractual rights, a right to compel arbitration is subject to "waiver." (§ 1281.2, subd. (a).) Although courts frequently define "waiver" as the voluntary relinquishment of a known right, waiver also may stem from conduct " 'which, according to its natural import, is so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.' "¹⁰ (Savaglio v. Wal-Mart Stores, Inc. (2007) 149 Cal.App.4th 588, 598.)

No single test delineates the conduct that will constitute a waiver of arbitration. (St. Agnes, supra, 31 Cal.4th at p. 1195.) Nevertheless, our Supreme Court has identified several factors that are properly considered in assessing waiver claims. (Id. at p. 1196.) Such factors include (1) whether the party has taken actions inconsistent with the right to arbitrate; (2) whether the...