Opinion
A148334
06-26-2018
HARRY TOM, et al., Plaintiffs and Respondents, v. LEI SUN et al., Defendants and Appellants.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (San Francisco County Super. Ct. No. CPF15514579)
The parties agreed to arbitrate their dispute arising out of a residential real estate transaction. After a two-day hearing the arbitrator issued a final award, which the trial court confirmed. Appellants argue that in making an award the arbitrator exceeded his power because he concluded the contract containing the arbitration provision was an entirely illegal contract. We reject this argument and affirm.
BACKGROUND
The material facts, as set forth in a 20-page arbitration award and accompanying documents, can be summarized as follows. On August 12, 2014, Harry and Young Tom (collectively, Tom parents) entered into a contract to purchase a home in Berkeley, which they intended to buy for their son Kenneth Tom and daughter-in-law Ana Tellez. Lei Sun and Wenqin Shen (collectively, Sun parties) were the sellers. The contracting parties memorialized their agreement using, in part, the California Association of Realtors' standard-form contract, which sets forth financial terms, schedules for the buyer to remove contingencies, escrow instructions, dispute resolution provisions, and so on. In this purchase agreement, the Tom parents offered to buy the home for $531,000, paying an initial deposit of $15,930, and the Sun parties accepted this offer. All signatories to the contract also agreed to binding arbitration of "any dispute . . . arising between them out of this Agreement or any resulting transaction." Sun, who is a licensed real estate agent, represented himself and Shen in the transaction, while the buyers proceeded without an agent.
Eight days later and before escrow closed, the Tom parents rescinded the agreement and demanded the return of their earnest money deposit. They developed cold feet because the purchase agreement they had entered into was part of a larger deal to sell the home for a higher price and to hide the higher price so as to facilitate underpayment of taxes. On the day they entered into the purchase agreement, Young Tom as buyer and Lei Sun as seller had also executed a note specifying that "[o]nce in contract for" the home she would pay Sun $50,000 on each of August 22 and September 3, 2014. With time to reflect, and as they went about the process of applying for a mortgage, the Tom parents understood the mistake they were making. When they notified Sun they were rescinding the transaction, he said he understood, but that he would not return their initial deposit.
After an attempt at mediation failed, the parties agreed to arbitrate their dispute over the initial deposit. Through counsel, both signed a "Stipulation for Arbitration" agreeing "to submit all disputes, claims or controversies to neutral, binding arbitration at JAMS," and "to give up any rights they might possess to have this matter litigated in a court or jury trial."
Arbitrator Kevin E. McKenney conducted a hearing on May 11-12, 2015, and then filed a partial final award. He awarded the Toms return of their $15,930 deposit, plus attorney fees, costs, and pre-judgment interest in amounts to be determined, and $1,000 pursuant to Civil Code section 1057.3, subdivision (b)(2). The Sun parties took nothing. Then, after receiving written submissions on attorney fees, costs, and pre-judgment interest, the arbitrator awarded the Toms attorney fees and costs (including AAA and JAMS fees) totaling $63,801 and pre-judgment interest. These amounts, plus the amounts awarded in the partial final award, were all recorded in a final award.
The trial court confirmed the award. "[T]he arbitrator did not conclude that the entire contract was illegal," just that the Tom parents "were entitled to rescission of the purchase agreement and a return of the $15,930 security deposit," the trial court reasoned. The trial court also awarded the Toms $16,516 in post-arbitration fees and costs. The Sun parties appeal the judgment confirming the arbitral award and this post-arbitration fee award.
DISCUSSION
We review de novo the trial court's confirmation of the arbitration award. (Ahdout v. Hekmatjah (2013) 213 Cal.App.4th 21, 33.) "[A]n arbitrator's decision is not generally reviewable for errors of fact or law," and we "will not review the validity of the arbitrator's reasoning" nor "the sufficiency of the evidence supporting" the award. (Moncharsh v. Heily & Blasé (1992) 3 Cal.4th 1, 6, 11 (Moncharsh).) Courts will, however, vacate an arbitral award where the arbitrator has exceeded his power and the award cannot be corrected without affecting the merits of the arbitrator's decision. (Code Civ. Proc., § 1286.2, subd. (a)(4).)
The Sun parties argue that the arbitrator exceeded his power here by making an award based on an illegal contract. Citing Loving & Evans v. Black (1949) 33 Cal.2d 603 (Loving & Evans), they argue that " 'an award springing out of an illegal contract, which no court can enforce, cannot stand on any higher ground than the contract itself.' " (Id. at p. 610.) They acknowledge that an arbitrator can decide a claim that a particular provision of the underlying contract is illegal, just not a challenge to the legality of the contract as a whole (see Moncharsh, supra, 3 Cal.4th at p. 30; Wolitarsky v. Blue Cross of California (1997) 53 Cal.App.4th 338, 344), and they argue that this arbitrator found their contract, in its entirety, to be illegal.
We reject the Sun parties' challenge for two reasons. First, Loving & Evans is easily distinguished as a case in which the party seeking to confirm an arbitral award sought to enforce a contract that was illegal in its entirety. (Loving & Evans, supra, 33 Cal.2d at p. 604.) Loving & Evans had done some remodeling work for which they claimed to have received only partial payment, and so secured an arbitrator's award in their favor. (Id. at pp. 604-605.) But they had failed to comply with state licensing requirements, which rendered their contract invalid and unenforceable. (Id. at p. 611.) For that reason, our Supreme Court reversed an order confirming the arbitrator's award, explaining that " '[a] claim that cannot be made the basis of a suit cannot be made the basis of an arbitration.' " (Ibid.) That is, a party "with a claim forbidden by the laws" cannot "be permitted to enforce it through the transforming process of arbitration." (Id. at p. 612.) That principle has no application here, since the Tom parents seek, not to enforce their real estate contract, but to rescind it. The distinction is important. As the arbitrator recognized, "granting relief 'to one who repudiates an illegal contract is entirely different from granting relief to one who seeks to enforce it.' (Severance v Knight-Counihan Co. (1947) 29 Cal.2d 561, 569.)"
Also, the purchase agreement containing the arbitration provision was not, by itself, an illegal contract. It is not illegal to sell a home in Berkeley for $531,000, or for $631,000, which was the object of this contract. The arbitral award makes clear that the purchase agreement was part of a larger scheme that, if carried to fruition, would have included illegal acts (e.g., perjury, tax fraud), but that does not make the purchase agreement itself an illegal contract. As the Sun parties acknowledge, where "the alleged illegality goes to only a portion of the contract (that does not include the arbitration agreement), the entire controversy, including the issue of illegality, remains arbitrable." (Moncharsh, supra, 3 Cal.4th at p. 30; see also Epic Medical Management LLC v. Paquette (2015) 244 Cal.App.4th 504, 513.) Here, the illegality goes to a portion of the scheme that does not implicate the arbitration provision, so the arbitrator did not exceed his power by rescinding the real estate transaction and requiring the Sun parties to return the initial deposit.
A second and independent ground for our decision lies in the fact that the parties specifically agreed to arbitrate this dispute when they authorized their counsel to execute a "Stipulation for Arbitration" at the outset of the arbitration in this case. The Sun parties admit they agreed to arbitrate whether they were entitled to retain, or had to return, the earnest money deposit but assert they never agreed to arbitrate whether their agreement was an illegal contract. This argument essentially concedes the point. The arbitrator discusses the legality of the contract in order to explain his decision to award return of the earnest money, which is the issue the Sun parties admit they agreed to arbitrate. They may not like the legal theory upon which the arbitrator relied, but it is not the role of the court to review for error the reasoning in support of an arbitrator's decision. (Moncharsh, supra, 3 Cal.4th at p. 28.) It is enough that the Sun parties concede they agreed to arbitrate the issue the arbitrator decided, namely whether they must return the earnest money deposit.
The Sun parties' argument on post-arbitration attorney fees parallels their argument on the arbitration award, but fails for a different reason. In the trial court, the Sun parties opposed on several grounds respondents' request for fees and costs. But the argument they make now—that a party cannot recover fees and costs pursuant to a contract that is determined to be illegal—was not an argument they made in the trial court. For that reason, we refuse to entertain it here. (See Dowling v. Farmers Ins. Exchange (2012) 208 Cal.App.4th 685, 696.)
DISPOSITION
The judgment of the trial court is affirmed. Appellants shall pay costs on appeal.
/s/_________
TUCHER, J. We concur: /s/_________
RICHMAN Acting P.J. /s/_________
MILLER, J.
Judge of the Alameda County Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution. --------