Syson v. Montecito Bank & Trust CA2/6
B260747
| Cal. Ct. App. | Jul 6, 2016Background
- Stephen and Nanci Syson obtained a home equity line (HEAL) and signed loan documents (Credit Agreement and deed of trust) containing mandatory arbitration clauses.
- Their house burned in a wildfire; insurer settled for ~ $1.1M. Bank of America released $228,581 (the "held proceeds") to the Sysons, who deposited those funds with Montecito Bank. Montecito refused to release them.
- Montecito claimed an ownership/security interest in insurance proceeds under the loan documents and conditioned release on proof of reconstruction progress or control-account arrangements. The Sysons declined to provide requested proof and used other funds to buy a new house.
- The Sysons sued for breach of contract, interference, UCL, fraud, negligent misrepresentation, and constructive trust (legal claims) plus declaratory and injunctive relief (equitable claims). Montecito moved to compel arbitration under the loan arbitration clauses.
- Trial court compelled arbitration of the legal claims and stayed equitable claims. The arbitrator ruled for Montecito and awarded attorney fees; the trial court confirmed the award and granted summary judgment on equitable claims based on res judicata.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were the arbitration clauses unconscionable? | Sysons: clauses procedurally unconscionable (adhesion, buried, no AAA rules provided) and substantively unconscionable (one-sided fee and carve-outs favoring bank). | Montecito: clauses were conspicuous, negotiable in part (JAMS modification), fee clause rendered mutual by Cal. Civ. Code §1717, carve-outs not unconscionable. | Court: Low procedural unconscionability; no substantive unconscionability; arbitration enforceable. |
| Did res judicata bar the Sysons’ equitable claims after arbitration? | Sysons: equitable claims not barred because arbitration agreement precluded certain equitable remedies and res judicata applies only to matters that could have been arbitrated. | Montecito: arbitrator decided the primary right (possession of proceeds); claim preclusion applies to identical causes of action. | Court: Arbitration judgment resolved the primary right; res judicata bars equitable claims. |
| Could trial court stay arbitration under CCP §1281.2(c) despite FAA? | Sysons: trial court mistakenly believed it lacked discretion because FAA governs the clauses. | Montecito: FAA limits courts from staying or refusing arbitration to avoid duplicative proceedings. | Court: Trial court correctly recognized FAA constraints and acted within its discretion; no error. |
| Is the one-sided attorneys’ fees clause unconscionable? | Sysons: clause allows Montecito to recover enforcement expenses but not Sysons; unfair and one-sided. | Montecito: Civil Code §1717 makes such fee provisions mutual by operation of law, curing one-sidedness. | Court: §1717 mutuality applies; clause not substantively unconscionable. |
Key Cases Cited
- Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000) (framework for procedural and substantive unconscionability and sliding scale analysis)
- Sanchez v. Valencia Holding Co., LLC, 61 Cal.4th 899 (2015) (requirements for disclosure/highlighting of arbitration clauses in adhesion contracts)
- Baltazar v. Forever 21, Inc., 62 Cal.4th 1237 (2016) (scope of challenge to arbitration tied to the agreement’s terms rather than AAA rules)
- Severtson v. Williams Construction Co., 173 Cal.App.3d 86 (1985) (section 1717 makes one-sided fee clauses mutual)
- Samaniego v. Empire Today LLC, 205 Cal.App.4th 1138 (2012) (addressing one-sided fee provisions in arbitration agreements)
- Carmona v. Lincoln Millennium Car Wash, Inc., 226 Cal.App.4th 74 (2014) (treatment of one-sided fee-shifting provisions)
- Truck Ins. Exchange v. Superior Court, 51 Cal.App.4th 985 (1996) (res judicata applies only to matters that could have been arbitrated under the agreement)
- Richard B. LeVine, Inc. v. Higashi, 131 Cal.App.4th 566 (2005) (private arbitration awards given claim-preclusive effect)
- DKN Holdings LLC v. Faerber, 61 Cal.4th 813 (2015) (primary-right theory for claim identity)
- Boeken v. Philip Morris USA, Inc., 48 Cal.4th 788 (2010) (cause of action defined by the primary right regardless of remedy sought)
- Mastick v. TD Ameritrade, Inc., 209 Cal.App.4th 1258 (2012) (FAA requires enforcement of arbitration provisions and limits courts’ ability to stay arbitration)