Opinion
No. 1 CA-CV 18-0191
02-05-2019
DAN AUDEN, et al., Plaintiffs/Appellees, v. IHC HEALTH SOLUTIONS INDEPENDENCE HOLDING GROUP, et al., Defendants/Appellants.
COUNSEL Sanders & Parks PC, Phoenix By Robert J. Bruno, Jasmina Richter, Shanks Leonhardt Counsel for Plaintiffs/Appellees Quarles & Brady LLP, Phoenix By Coree E. Neumeyer, Daniel G. Roberts, Emily M. Feinstein Counsel for Defendants/Appellants
NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE. Appeal from the Superior Court in Maricopa County
No. CV2017-006029
The Honorable Daniel J. Kiley, Judge
REVERSED
COUNSEL Sanders & Parks PC, Phoenix
By Robert J. Bruno, Jasmina Richter, Shanks Leonhardt
Counsel for Plaintiffs/Appellees Quarles & Brady LLP, Phoenix
By Coree E. Neumeyer, Daniel G. Roberts, Emily M. Feinstein
Counsel for Defendants/Appellants
MEMORANDUM DECISION
Judge Jon W. Thompson delivered the decision of the Court, in which Presiding Judge James B. Morse Jr. and Judge Peter B. Swann joined. THOMPSON, Judge:
¶1 Defendants Standard Security Life Insurance Company of New York ("Standard Security"), Ebix Health Administration Exchange, Inc. f/k/a IHC Health solutions Independence Holding Group, and Lynn Oldenburg (collectively the "appellants") appeal the trial court's decision denying their "Motion to Compel Arbitration and Dismiss or Stay this Court Action" ("motion to compel"). For the following reasons, we reverse the trial court's ruling and remand for further proceedings consistent with this decision.
FACTUAL AND PROCEDURAL HISTORY
¶2 Dan and Paula Auden (collectively the "Audens") purchased a short-term medical insurance policy (the "policy") from Standard Security in December 2015. The policy was to be in effect from December 31, 2015 through December 31, 2016. Prior to the purchase of the policy, the Audens completed an application for the policy. Question six on the application asked:
[w]ithin the past 5 years have you or any person applying for coverage been aware of, received an abnormal test report for, been diagnosed with, been treated by or received follow-up care with a member of the medical profession, taken medication for or had a device surgically implanted or in place of . . . cancer or tumorTo which the Audens answered "no."
¶3 In April 2016, Mr. Auden was diagnosed with prostate cancer. Prior to treatment for his prostate cancer, the Audens sought and received approval for all necessary treatments from Standard Security. In August 2016, Mr. Auden also underwent neck and back surgery unrelated to the cancer diagnosis and treatment, which he had also sought and received approval for from Standard Security.
¶4 On December 12, 2016, two weeks before the policy expired, appellants rescinded the policy and refused to pay for any of Mr. Auden's medical treatment. Their reason for the rescission was that in reviewing Mr. Auden's medical records dated June 24, 2015, there was a note: "Elevated PSA." Standard Security asserted that based on that test result the Audens should have answered yes to question six on the application. After the rescission, the Audens became personally responsible for $450,301 in unpaid medical bills. In January 2017, Mr. Auden wrote to appellants asking them to reconsider the rescission of medical coverage and explained that he never believed he had cancer, and that no doctor had told him he had an abnormal cancer test when he completed the insurance application. He also explained that rescinding the policy would leave him with hundreds of thousands of dollars in unpaid medical bills, which would be an extreme financial burden and hardship for his family. The Audens never received a response from appellants.
¶5 The Audens filed a complaint against appellants in May 2017 and a first amended complaint later that same month. The complaint alleges claims of breach of contract and breach of the duty of good faith and fair dealing, as well as alleging claims for aiding and abetting. On June 6, 2017 appellants filed a motion to compel arbitration citing the arbitration clause in the policy. The arbitration clause provides:
Arbitration: If any Covered Person has a dispute, disagreement or claim against the Company, its authorized administrator, or any employee or agent of the Company or of its authorized administrator, which has not been resolved or settled after exhaustion of the Company's appeals procedures, then the dispute or disagreement shall be resolved by arbitration. This provision shall be applicable to all claims or controversies arising under the Policy. Arbitration shall be conducted in accordance with the Commercial Rules of Arbitration of the American Arbitration Association.
¶6 The Audens opposed the motion to compel and moved for an order staying arbitration. The Audens argued that the arbitration provision was unenforceable because the dispute was not within the arbitration agreement, the arbitration provision was procedurally and substantively unconscionable, and that the provision defies the reasonable expectation of the parties. The Audens also requested that the trial court hold an evidentiary hearing.
¶7 After oral argument on the motion to compel and the opposition, the trial court rejected most of the Audens' arguments regarding the arbitration clause. However, the trial court found that an evidentiary hearing was necessary to determine the Audens' claims regarding whether the arbitration clause was substantively unconscionable because it would be prohibitively expensive; was procedurally unconscionable because they were unable to negotiate the arbitration clause; and finally, whether the arbitration provision defied the reasonable expectation of the parties.
¶8 After the evidentiary hearing, the court found that the total cost to the Audens to arbitrate their claims would be "at least $61,120 and could be as high as $92,620." The court also found that the Audens' monthly income was $7,270 and their monthly expenses averaged $11,500. Additionally, the court found that the Audens have liquid assets in the form of bank accounts, CDs, stocks and bonds worth approximately $222,500, as well a retirement account worth $1.1 million. The court also found that the Audens own two cars, and two houses. The court then ruled that based on those findings arbitration would be substantively unconscionable because it would require the Audens who "are approaching the end of their income-earning years" to withdraw a large portion of their retirement savings "simply to obtain a forum in which to pursue their claims."
The trial court also found that the Audens had failed to establish that the arbitration provision in the policy was procedurally unconscionable or contrary to the reasonable expectations of the parties.
¶9 The court also found the arbitration provision substantively unconscionable because although arbitration under the American Arbitration Association ("AAA") consumer arbitration rules would be more affordable for the Audens, it would not provide them "with an arbitral forum in which they may effectively vindicate their rights." The trial court based this finding on the expert witness's testimony that under the consumer rules discovery is not allowed for pre-hearing discovery and that it is unusual for an arbitration hearing under the consumer rules to last more than one day. Appellants timely appealed. We have jurisdiction pursuant to Arizona Revised Statutes (A.R.S.) section 12-2101(A)(1) (2019).
We cite to the current version of any statute unless the statute was amended after the pertinent events and such amendment would affect the result of this appeal.
DISCUSSION
¶10 "Whether a contract is unconscionable is a question of law that we review de novo." Clark v. Renaissance W., LLC, 232 Ariz. 510, 512 ¶ 7 (App. 2013). We will defer to any factual findings made by the trial court unless those findings are clearly erroneous. Id. (citing Harrington v. Pulte Home Corp., 211 Ariz. 241, 247, 252, ¶¶ 16, 40 (App. 2005)).
¶11 An arbitration agreement may be considered substantively unconscionable if the fees and costs to arbitrate would "deny a potential litigant the opportunity to vindicate his or her rights." Harrington, 211 Ariz. at 252, ¶ 43. However, "arbitration agreements are enforceable in the absence of individualized evidence to establish that the costs of arbitration are prohibitive." Id. at ¶ 44. "Whether arbitration is prohibitively expensive is a question of fact that depends on the unique circumstances of each case." Clark, 232 Ariz. at 513, ¶9.
¶12 On appeal appellants argue the trial court erred in finding that the cost of arbitration was prohibitively expensive for the Audens. We agree.
¶13 In determining whether arbitration costs are prohibitively expensive courts should consider three factors. Id. at ¶ 10. First, the party wishing to invalidate an arbitration agreement must present evidence concerning the cost to arbitrate. Id. Second, a party must show why "based on their specific income/assets, they are unable to pay the likely costs of arbitration." Id. at ¶ 11. This evidence must be based on more than just "conclusory allegations stating a person is unable to pay the costs of arbitration." Id. Finally, a court must consider whether applicable arbitration rules would permit a party to waive or reduce the costs of arbitration based on financial hardship. Id. at ¶ 12.
Though the effect of the arbitration clause is indeed harsh, there is no argument that the clause deprives the Audens of the opportunity to receive meaningful relief if their claims prove meritorious. Arbitration can be more expensive than litigation in court, but the cost of litigating a civil claim in a public forum is not inconsiderable. These regrettable realities do not alter our duty to apply the strong presumption in favor of arbitration. --------
¶14 The Audens presented sufficient evidence to establish the cost of arbitration and the court made accurate findings of the cost of arbitration based on that evidence. Additionally, the trial court found that the arbitration rules allow for a reduction or deferral of the filing fees and we do not disagree that AAA allows for such a reduction or deferral. We disagree, however, with the trial court's determination that based on the Audens' income and assets they are unable to pay the costs of arbitration and therefore the trial court's finding is clearly erroneous.
¶15 The superior court found that the Audens have liquid assets of $222,500, and separate retirement accounts of over $1 million. Although the superior court found that it would be unconscionable to require the Auden's to withdraw from their retirement accounts and suffer the corresponding tax penalties from such early withdrawals, their liquid non-retirement account assets are sufficient to cover even the highest estimate ($92,620) of the costs of arbitration. The case law does not state that arbitration agreements are only enforceable if a person can easily pay for arbitration or pay for arbitration without dipping into savings and retirement accounts. The case law requires an examination of a person's assets to determine if they can pay for arbitration and with $222,500 in liquid assets, the Audens clearly can. As such, we reverse the trial court's ruling."
¶16 Appellants next argue that the trial court erred in finding the arbitration clause substantively unconscionable under the AAA consumer rules because it would not provide the Audens with an arbitral forum in which they might vindicate their rights. We agree. Under the AAA commercial arbitration rules
The parties shall be deemed to have made these rules a part of their arbitration agreement whenever they have provided for arbitration by the [AAA] under its Commercial Arbitration Rules . . . . Any disputes regarding which AAA rules shall apply shall be decided by the AAA.AAA Commercial Arbitration Rules, R-1 (a) (emphasis added). We read the rules to mean that the commercial rules will apply when parties have agreed to have them apply and the AAA will only step in to decide if the commercial rules apply if there is a dispute.
¶17 The arbitration clause in the policy expressly states that the AAA commercial rules will apply to any dispute. Additionally, neither party argues that the AAA consumer rules should apply. Because the parties previously agreed that the AAA commercial rules would apply and neither party disputes which rules should be applied, the trial court's finding that the arbitration clause was substantively unconscionable because AAA could determine to hear the case under its consumer rules was clearly erroneous. As such, we reverse the trial court's ruling.
CONCLUSION
¶18 For the foregoing reasons we reverse the trial court's ruling denying the motion to compel arbitration and remand for further proceedings consistent with this decision.