Reed v. Mutual Service Corp.

• Decision Date: 21 February 2003
• Docket Number: No. B157086.,B157086.
• Court: California Court of Appeals Court of Appeals
• Parties: Peter REED, et al., Plaintiffs and Appellants, v. MUTUAL SERVICE CORPORATION, et al., Defendants and Respondents.

131 Cal.Rptr.2d 524

106 Cal.App.4th 1359

Peter REED, et al., Plaintiffs and Appellants, v. MUTUAL SERVICE CORPORATION, et al., Defendants and Respondents.

No. B157086.

Court of Appeal, Second District, Division 8.

February 21, 2003.

Timothy A. Canning, Artcata, for Plaintiffs and Appellants.

Jones, Bell, Abbott, Fleming & Fitzgerald, L.L.P., G. Thomas Fleming III and Catherine L. Dellecker, for Defendants and Respondents.

BOLAND, J.

Private investors petitioned the trial court to vacate an arbitration award after a panel of arbitrators concluded the investors' claims against their securities brokers were not eligible for arbitration. The trial court denied that petition and granted the brokers' counter-petition to confirm the award. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

This is an appeal from a judgment granting a motion to confirm an arbitration award. The essential facts are undisputed. Beginning in 1990, appellants Peter and Lonnie Reed made several investments through securities accounts they maintained with respondent Mutual Service Corporation ("MSC," formerly known as Titan/Value Equities Group).¹ The Reeds' final investment was made in January 1991. At the time they opened their accounts, the Reeds each signed standard, preprinted agreements stating he "agree[d] that any controversy between [him] and [MSC] arising out of or relating to [his] account, transactions with or for [him] or the agreement or the breach thereof shall be settled by arbitration in accordance with the rules, then obtaining, of the National Association of Securities Dealers, Inc."

The Reeds initiated the underlying contractual arbitration proceeding with the National Association of Securities Dealers, Inc. (NASD). They claimed MSC lured them into investing in high risk, high commission securities by misrepresenting the nature and safety of those investments both before and after they were made. At the time they submitted their claims, the Reeds signed Uniform Submission Agreements stating they had read "the procedures and rules of the [NASD] relating to arbitration," and acknowledging that the proceeding would be governed by the "Constitution, By-Laws, Rules, regulations and/or Code of Arbitration Procedure of the [NASD]."

In May 2001, MSC filed a motion in the NASD arbitration proceeding to dismiss the Reeds' case arguing that, among other things, the claim was barred by the six-year rule of the NASD Code of Arbitration Procedure, which bars the arbitration of any matter in which more than six years have elapsed since the event that gave rise to the dispute.² The Reeds filed a written opposition to that motion.³

On June 4, 2001, a panel of three arbitrators conducted a telephonic "pre-hearing" conference in which the parties' attorneys, but not the parties themselves, participated. In late June 2001, "after considering the pleadings, testimony, and evidence presented at the pre-hearing conference," the arbitrators issued an award in which they granted MSC's motion to dismiss the claim with prejudice.

The Reeds filed a petition to vacate the arbitration award arguing: (1) the arbitrators exceeded their powers by dismissing their claim with prejudice and without a hearing; (2) two of the arbitrators, Charles Graham and Robert Sether, created a "reasonable impression of bias" by failing to disclose information regarding their participation in other arbitrations; and (3) the contractual six-year time-bar provision on which the award was based was void and contrary to public policy. MSG filed a counter-petition to confirm the award. The trial court denied the Reed's petition, and granted MSC's counter-petition. This appeal followed.

DISCUSSION

The Reeds contend the court erred when it granted MSC's counter-petition to confirm the arbitration award because: (1) the arbitrators exceeded their powers by dismissing their claim without a hearing; (2) two arbitrators failed to disclose potentially material information; and (3) the award was based on an unconscionable arbitration provision which is contrary to public policy.

1. The standard of review.

As a preliminary matter, the parties dispute the appropriate standard of review for this case. According to the Reeds, because the issues on appeal involve undisputed facts and/or questions of law, our review is de novo as to each. (See Maggio v. Windward Capital Management Co. (2000) 80 Cal.App.4th 1210, 1214, 96 Cal.Rptr.2d 168 [review of arbitration clause is de novo if no extrinsic evidence is presented]; Flores v. Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846, 851, 113 Cal.Rptr.2d 376 [as to the question of unconscionability, de novo standard applies if extrinsic evidence is undisputed].)

Relying primarily on Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 36 Cal.Rptr.2d 581, 885 P.2d 994, and Pierotti v. Torian (2000) 81 Cal.App.4th 17, 96 Cal.Rptr.2d 553, MSC insists our review is much more limited, and we must accept the trial court's findings of fact if they are supported by substantial evidence, and are bound to draw every reasonable inference to support the arbitration award. (Advanced Micro Devices, Inc., supra, 9 Cal.4th at pp. 376-380, 36 Cal.Rptr.2d 581, 885 P.2d 994; Pierotti supra, 81 Cal.App.4th at p. 24, 96 Cal. Rptr.2d 553.)

In large measure, the Reeds are correct. The primary questions in this case — whether the award was made in excess of the arbitrators' contractual powers, and whether the six-year time-bar provision is unconscionable — are questions of law. (See Maggio, supra, 80 Cal.App.4th at p. 1214, 96 Cal.Rptr.2d 168; Flores, supra, 93 Cal.App.4th at p. 851, 113 Cal.Rptr.2d 376 [if the extrinsic evidence is undisputed, the question of unconscionability is one of law].) However, the issue whether the arbitrators had a duty to disclose information about decisions made by other arbitration panels on which they served which might indicate bias, is a question of fact. Our review as to that issue is deferential. (Betz v. Pankow (1993) 16 Cal.App.4th 919, 20 Cal.Rptr.2d 834.)

2. The arbitrators did not exceed their powers.

In Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 Cal.Rptr.2d 183, 832 P.2d 899, the California Supreme Court made it clear that the grounds for judicial review of a contractual arbitration award are extremely limited. Under Moncharsh, we are not free to review the merits of the controversy, the arbitrators' reasoning, or the sufficiency of the evidence on which the award is based. (Id. at p. 11, 10 Cal.Rptr.2d 183, 832 P.2d 899.) Indeed, even "an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review." (Id. at p. 33, 10 Cal.Rptr.2d 183, 832 P.2d 899.) The exclusive grounds on which an award may be challenged are contained in Code of Civil Procedure sections 1286.2 and 1286.6.

Of those grounds, the one pertaining here requires the court to vacate an arbitration award if "[t]he arbitrators exceeded their powers." (Code Civ Proc., § 1286.2, subd. (a)(4).)⁴ The Reeds contend the arbitrators exceeded their powers by dismissing their case based solely on the parties' pleadings and documentary evidence, and without a formal arbitration hearing. In dismissing the Reeds' claim, the arbitrators relied on Rule 10304 of the NASD's Code of Arbitration Procedure (Rule 10304). That Rule provides:

"No dispute, claim, or controversy shall be eligible for submission to arbitration under this Code where six (6) years have elapsed from the occurrence or event giving rise to the act or dispute, claim or controversy. This Rule shall not extend applicable statutes of limitation, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction."⁵

Preliminarily, we note the Reeds have not raised the oft-presented issues regarding who decides the question of arbitrability — the court or arbitrators themselves — or whether the dispute at issue is arbitrable. Rather, the parties agree that their dispute, if viable, must be arbitrated. Accordingly, as we understand it, the question we must address is not whether the arbitrators had the power to decide the issue of the timeliness of the presentation of the Reeds' claims, but only whether they were empowered to decide that issue in the manner in which they did. The answer is yes.

Rule 10321 of the NASD Code of Arbitration Procedure, which governs NASD arbitrations, specifically provides that, upon the request of a party or an arbitrator, a telephonic pre-hearing conference, such as the one at issue, must be convened. Such conferences give the parties an opportunity to exchange documents, information, witness lists, etc., and to address "any other matters which will expedite the arbitration proceedings." (Id., rule 10321, subds. (a), (d)(1).) Rulings on issues raised in the course of the prehearing conference may be issued by one or more members of the arbitration panel, and "shall be made upon the papers submitted by the parties, unless the arbitrator calls a hearing."⁶ (Id., rule 10321, subd. (e).) The NASD's arbitration process clearly anticipates that dispositive issues may arise in advance of the arbitration hearing itself which will require the arbitrators' attention. To that end, NASD training materials specifically address the presumably common circumstance that occurred here — the panel's need to address a dispositive pre-hearing motion arguing that the claims presented are stale and therefore ineligible for submission to arbitration under Rule 10304. In response to the Reeds' petition to vacate the award, MSC presented the trial court with an excerpt from the NASD's Arbitrator Training Manual.⁷ The Manual provides that "[although arbitration is an informal process, any party may file a dispositive motion — that is, a motion to dismiss all or part of a claim — prior to hearing." (NASD Rule on Dispositive Motions (1996), italics omitted.) The Manual also...