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Case of the Month Archive

August 2023

In a reversal, the California Supreme Court held that CCP §1288.2 [imposing 100-day deadline for a response to a petition to confirm an arbitration award when the response requests the award be vacated] is a nonjurisdictional statute of limitations that is subject to equitable tolling and equitable estoppel.

 

Law Finance Group, LLC v. Key

(June 26, 2023)

Supreme Court of California, S270798, 14 Cal.5th 932, 309 Cal.Rptr.3d 796, 2023 FA 2089, per Kruger (Guerrero, C.J., Corrigan, J., Liu, J., Groban, J., Jenkins, J., and Evans, J.). Los Angeles County: Ongkeko, J. For Sarah Plott Key (Appellant): Christopher Lynn Frost, Cynthia E. Tobisman, and Alana H. Rotter. For Law Finance Group, LLC (Respondent): Margaret M. Grignon and Anne M. Grignon. CFLP §§ C.47.8.5, R.49.0.5.

 

The loan agreement. . .
When Sarah Plott Key's mother died, Sarah was expecting to receive one-third interest in her parents' estate, according to the Plott Family Trust. To her surprise, Sarah learned that several years before, her mother executed an amendment to the trust that disinherited Sarah of millions of dollars. Sarah then filed a probate action, alleging that her sister had exerted undue influence over their mother. In 2013, Sarah borrowed $2.4 million from Law Finance Group, LLC (Law Finance) in order to pay ongoing legal fees related to the probate action. According to the loan agreement, Sarah agreed to repay the loan principal and pay 1.53% interest (compounded monthly), an additional compound interest of 0.5% accruing monthly in the event of a default, a due diligence fee of up to $10,000, an origination fee of $60,000, and a monthly loan-servicing fee of 0.25% of the outstanding loan principal. The loan agreement also included an arbitration provision.

Ultimately, Sarah won the probate action and, as a result, her portion of the estate was worth $20 million. Sarah repaid $2.4 million (the loan principal) to Law Finance but refused to pay the interest or other fees, taking the position that the terms of the loan agreement were unlawful under the California Financing Law, Fin C §§ 22000 et seq. As a result of Sarah's refusal to pay the interest and fees, Law Finance submitted the dispute to arbitration and sought $3.5 million in unpaid compound interest.

The arbitration panel concluded that the loan in question was a consumer loan and, as such, its interest and fee provisions violated the California Financing Law. However, the panel rejected Sarah's argument that Law Finance should be barred from recovering any amount under the agreement. Instead, the panel calculated as damages what Sarah would have owed if the agreement had charged simple interest. The panel awarded Law Finance $800,000 as well as attorney's fees and costs. The panel served the parties with the final arbitration award on September 19, 2019.

On October 1, 2019, Law Finance filed a petition to confirm the arbitration award. On October 10, 2019, Sarah's counsel agreed to accept service of Law Finance's petition but informed Law Finance that Sarah would be filing a petition to vacate the arbitration award as well as a request to vacate the award in her response to Law Finance's petition. In exchange for Sarah's agreement to accept service and to use a preemptory challenge to disqualify the assigned trial judge, Law Finance agreed to extend the deadline for Sarah to file her response to Law Finance's petition to confirm. The parties "'agreed that the 10 day time period for filing a Petition to Vacate [per CCP §1290.6] will not apply'" and that the parties would "'work backwards'" from the hearing date "'to come up with a briefing schedule [that] will include oppositions and replies.'"

On January 27, 2020, Sarah filed her petition to vacate the arbitration award and on February 5, 2020, Sarah filed her response to Law Finance's petition to confirm. Sarah's petition to vacate was filed 130 days after she was served with the arbitration award and her response to Law Finance's petition to confirm was filed 139 days after service. Both Sarah's petition and response argued that the arbitration panel exceeded its authority by enforcing a modified version of the loan agreement.

The trial court (Los Angeles County's Ongkeko) held Sarah's petition to vacate was untimely filed per CCP §1288 [petition to vacate arbitration award must be filed within 100 days after service on petitioner] but that Sarah's request to vacate contained in her response to Law Finance's petition to confirm was timely because it complied with CCP §1290.6 [parties may agree in writing to extend 10-day deadline for response to petition]. The trial court further held that the arbitrators exceeded their powers. Law Finance appealed, and the Second District reversed, concluding that the response requesting vacatur was untimely under CCP §1288.2 [imposing 100-day deadline for a response to a petition to confirm an arbitration award when the response requests that the award be vacated]. More precisely, the Second District held that the 100-day deadline of CCP §1288.2 was jurisdictional and, as such, the parties lacked the power to extend it by stipulation. The California Supreme Court granted review and reversed the judgment of the Second District.

The justices began their analysis by giving an overview of the California Arbitration Act, CCP §§1280 et seq., noting that a party seeking to vacate an arbitration award may make such a request in either a petition to vacate (CCP §1285) or in a response to the petition to confirm (CCP §1285.2). But both the petition to vacate an arbitration award and a response requesting an award be vacated must be served and filed not later than 100 days after the date of service of a signed copy of the award. The justices noted that, here, it is undisputed that Sarah's petition to vacate was untimely since it was filed outside the 100-day window. Sarah, however, argued her second vacatur request contained in her response to Law Finance's petition to confirm should be deemed timely, despite also being filed outside of the 100-day deadline, since the filing complied with CCP §1290.6 by reaching an agreement with Law Finance to extend the default 10-day period for her responsive filing. Put another way, Sarah argued that the deadline of CCP §1290.6 supersedes the 100-day deadline in CCP §1288.2. The justices rejected Sarah's argument, finding instead that when a filing both responds to a petition to confirm and requests that the arbitration award be vacated, both deadlines apply.

Sarah next argued that her untimely filings should be accepted based on the doctrines of equitable tolling and equitable estoppel. Law Finance, meanwhile, argued that those doctrines do not apply since that CCP §1288.2's deadline is jurisdictional. The justices explained that a court's lack of fundamental jurisdiction is an entire absence of power to hear or determine a case and courts must enforce jurisdictional limitations even if considerations of waiver, estoppel, consent, or forfeiture might otherwise excuse a party's failure to comply with them. Because of these harsh consequences, statutes are presumed not to limit the courts' fundamental jurisdiction unless there is a clear indication of legislative intent to do so. The justices further noted that they will not assume the Legislature intended a statute of limitations to be jurisdictional merely because the statute speaks in mandatory terms. Instead, the Legislature must express something more to indicate a statute of limitations is jurisdictional in a fundamental sense.

 

CCP §1288.2 is not jurisdictional. . .
With these principles in mind, the panel concluded that the Legislature did not intend to limit the fundamental jurisdiction of the court by enacting the 100-day deadline under CCP §1288.2 and, therefore, the statute is not jurisdictional. First, nothing in the language of the statute directly references the power of the courts, whereas other statutes of limitations that have been deemed to be jurisdictional contain direct limitations on the court's power. For example, CCP §659, which has been found jurisdictional, provides that a party's time to file notice "'shall not be extended by order or stipulation.'" Second, the justices rejected Law Finance's argument that a neighboring section of the California Arbitration Act (CCP §1286.4), which provides that "'[t]he court may not vacate' an award if the petition or response requesting a vacatur is not 'duly served and filed'" supports its reading that CCP §1288.2 is jurisdictional. As noted by the justices the word "duly" means in a proper manner, which gives rise to the question a vacatur request has been served and filed in a proper manner when a court grants equitable relief from a missed deadline. By concluding that the deadline under CCP §1288.2 is not jurisdictional, the justices disapproved Darby v. Sisyphian LLC (2023) 87 Cal.App.5th 1100, 304 Cal.Rptr.3d 227, to the extent it characterizes CCP §1288.2's 100-day limitations period as jurisdictional in the fundamental sense.

 

CCP §1288.2 is subject to equitable tolling and other claims of equitable relief. . .
Next, the panel noted that even if a statute of limitations is not jurisdictional, the Legislature still may bar the use of equitable doctrines. At the outset of this analysis, the justices observed that the presumption is that a deadline permits tolling and other forms of equitable relief. Here, the justices concluded that CCP §1288.2 is subject to equitable relief for a couple of reasons. First, the Legislature does not expressly prohibit use of equitable principles to CCP §1288.2. In other words, if the Legislature had intended to preclude equitable relief, it could have stated so in the statute. For example, in the case of CCP §366.2, the Legislature expressly precluded equitable relief by stating that the statute of limitations for a surviving action against a deceased person "'shall not be tolled or extended for any reason.'" Instead, the justices noted, CCP §1288.2 "reads like other run-of-the-mill statutes of limitations that we have held are subject to equitable tolling." Second, the justices found that equitable exceptions are not inconsistent with the statutory text or legislative policy. Thus, the justices found that CCP §1288.2 is subject to equitable tolling and other claims of equitable relief.

Finally, the panel rejected Sarah's argument that a claim of contract illegality can never be forfeited by failure to raise it in a timely manner. As the justices noted, established law already "makes clear that claims of contract illegality are not categorically immune from the traditional rules of forfeiture." In so concluding, the panel disapproved South Bay Radiology Medical Associates v. Asher (1990) 220 Cal.App.3d, 269 Cal.Rptr. 15, insofar as it suggests that an "'attack on the arbitrator's decision [that] is based on alleged illegality' is a defense that 'may be raised at any time.'"

For these reasons, the California Supreme Court reversed the judgment of the Second District and remanded for the Second District to determine in the first instance whether equitable considerations should excuse Sarah's failure to comply with the statutory deadline.

 

 

COMMENT:

  

In a footnote, the justices clarified that their opinion expresses no views on a court using its discretion to reach the merits of an otherwise forfeited claim of contract illegality where enforcement of the contract raises matters of significant public interest and threatens substantial justice.

 

Library References
3 Witkin, Cal. Procedure (6th ed. 2023) Actions, §743

 

 

 
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