Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Stanislaus County. No. 374551 Roger M. Beauchesne, Judge.
Mehlhaff & Mehlhaff, James R. Mehlhaff and Robert Mehlhaff for Plaintiffs and Appellants.
Freeman D’Aiuto Pierce Gurev Keeling & Wolf, Arnold J. Wolf and Coren D. Wong for Defendant and Respondent ConAgra Grocery Products.
Damrell, Nelson, Schrimp, Pallios, Pacher & Silva, Roger M. Schrimp and Kirin K. Virk for Defendants and Respondents John P. Brichetto and Jacqueline Brichetto.
OPINION
VARTABEDIAN, Acting P. J.
This is an appeal from a judgment confirming an arbitration award against plaintiffs and appellants, Kenneth L. Van Dyke and Roberta E. Van Dyke. We agree with the trial court’s conclusion that there is no basis to overturn the arbitration award, and we will affirm the judgment. At issue is whether the arbitrator’s award violated a public policy enshrined in statutory law, whether the arbitrator prejudicially refused to hear certain evidence, and whether the arbitrator arbitrarily “‘remade’ a contract which was not assignable into one which was,” as appellants phrase the matter in their opening brief. In addition, defendants and respondents John P. Brichetto and Jacqueline Brichetto (collectively, the Brichettos) have filed a motion for sanctions, contending the appeal is frivolous. We previously deferred that motion until consideration of the merits of the appeal, and we now deny the motion.
Facts and Procedural History
The dispute among the parties arose when the Brichettos attempted to exercise an option to purchase ranchl and owned by appellants. The option to purchase had been assigned to the Brichettos by respondent ConAgra Grocery Products Company, formerly known as Hunt-Wesson, Inc. (hereafter ConAgra).
Appellants had a longstanding business relationship with ConAgra. ConAgra ran a tomato processing plant near appellants’ 205-acre ranch in Oakdale (the property). This plant produced wastewater, of which ConAgra disposed by spraying it on farmland including, since the 1970’s, portions of appellants’ land.
In 1995, ConAgra contacted appellants. It offered to buy the property, already under lease to ConAgra, for $4,000 per acre. Appellants did not want to sell but were receptive to ConAgra’s request for a new and extended lease. ConAgra wanted to include an option to purchase the property in any new lease agreement and requested a price from appellants. Appellants set the option price at $8,000 per acre, which they thought would forestall any exercise of the option, since it was almost double the then-current price of irrigated farmland in the area.
ConAgra and appellants negotiated a new agreement, signed in 1996 (the agreement). This rather complex agreement, comprising 21 pages plus many attached exhibits, was divided into six “chapters.” Chapter I set forth the terms of a new lease of the property for a term of 10 years, beginning July 15, 1996. The lease terms permitted ConAgra to use the property for “any lawful purpose, including, but not limited to, the land application of … tomato wastewater .…” The lease terms allowed ConAgra to terminate the lease if “any circumstance, either foreseeable or unforeseeable, results in interference with [Conagra’s] desired use of the Leased Property or causes such use to become economically infeasible .…” The lease further stated, as relevant here: “The election by [ConAgra] to cancel the Lease shall not constitute an election by [ConAgra] to cancel the option to purchase set forth in Chapter II of this Agreement.”
Chapter II (“The Option”) granted ConAgra an exclusive option to purchase the property for $8,000 per acre. “In the event [ConAgra] elects to purchase” the property, it was required to notify appellants in a form specified. ConAgra paid $150,000 as consideration for the option, $138,000 of which would be credited to the purchase price if the option was exercised. The option terms required appellants to use $138,000 of the option consideration “to pay obligations which are secured by deeds of trust, liens, judgments, or mechanic’s liens with regard to the [property].” The option required the parties to execute a recordable “memorandum of option agreement,” attached as an exhibit to the agreement.
Chapters III and IV do not contain terms relevant to the issues on this appeal.
Chapter V (“The Purchase”) consists of five full pages of terms and conditions for transfer of the property to ConAgra “[i]n the event of exercise of the Option.” The purchase terms in chapter V include a requirement that appellants resolve certain exceptions shown in a preliminary title report attached to the agreement as an exhibit. If appellants were unable to deliver title as required, ConAgra had the right to return of $138,000 of the consideration for the option or, at ConAgra’s election, to resolve the title issues and deduct from the purchase price its costs of doing so. The purchase terms and conditions also provided that, “to insure the performance of [appellants] under this agreement, [appellants agree] to give to [ConAgra] at the time of the execution of this agreement, a deed of trust with regard to the [property].” (Capitalization omitted.) Finally, as relevant to this appeal, the purchase terms and conditions provided for liquidated damages to appellants in the event of breach by ConAgra, prohibited appellants from seeking specific performance of the agreement, and expressly permitted ConAgra to seek specific performance in the event appellants breached the agreement.
Chapter VI contains “miscellaneous provisions applicable to all chapters.” (Capitalization omitted.) Several provisions of this chapter are relevant to the appeal: “It is expressly understood between the parties hereto that this Agreement contains various separate and distinct agreements between the parties.” “Any claim or controversy between the parties arising out of or relating to the Agreement, or the breach thereof, shall be settled by mandatory binding arbitration .…” “This Agreement shall be binding upon, enforceable by, and shall inure to the benefit of the successors and assigns of the parties hereto.” If appellants assigned their rights “under any … portion of this agreement,” ConAgra could require the assignee to agree to be bound by any relevant terms and conditions of the agreement as a condition of ConAgra’s approval of the assignment.
The memorandum of agreement and deed of trust were duly recorded.
In 2003, ConAgra sought from appellants a lease extension. The parties executed an extension of the lease for 10 years, through 2016. The extension provided that all of the terms of the 1996 agreement would remain in effect, with a modification of the termination provision, except that the option to purchase the property was not extended “and will expire at the end of the original Agreement on July 14, 2006.”
Beginning before the lease extension with appellants, ConAgra also was negotiating a wastewater-disposal lease for property owned by the Brichettos (apparently ConAgra began using the Brichetto land in 2002 while the negotiations went forward). The Brichettos told ConAgra during these negotiations that they wanted to be assigned ConAgra’s rights under the option to purchase as part of the consideration for any lease. ConAgra eventually agreed, and an assignment of the option to purchase was executed on or about October 28, 2004, about the same time as the lease between the Brichettos and ConAgra.
Four months later, on February 21, 2005, the Brichettos gave notice to appellants that they would exercise the option to purchase appellants’ land. Appellants refused to convey the property and filed an action against ConAgra and the Brichettos on May 13, 2005, seeking reformation of the lease extension (to provide that the option to purchase expired upon execution of the extension), declaratory and injunctive relief, damages, and an order to compel arbitration. ConAgra responded with a petition to compel arbitration. The Brichettos answered the complaint, filed objections to the petitions to compel arbitration, and filed a cross-complaint for, as relevant here, specific performance of the option to purchase. The court ordered the matter to arbitration and stayed proceedings in court.
After two days of testimony, as well as submission of numerous exhibits and extensive briefing, the arbitrator, the Honorable Cecily Bond, retired judge of the Sacramento County Superior Court, issued an extensive final award, which discussed in detail the factual and legal issues presented. As relevant to this appeal, the arbitrator found that the option to purchase was assignable, Code of Civil Procedure section 726 (the so-called one-action rule) did not prevent the remedy of specific performance in this case, and the Brichettos were entitled to specific performance under the option to purchase. The award established the purchase price, found certain adjustments were necessary as incidental damages, and awarded costs.
Further statutory references are to the Code of Civil Procedure.
The Brichettos filed a petition to confirm the award and for judgment according to the terms of the award. Appellants filed a petition to vacate the award. Appellants contended the arbitrator exceeded her powers (see § 1286.2, subd. (a)(4)) and the arbitrator prejudicially refused to hear material evidence (see Id. at subd. (a)(5)). After hearing, the court entered judgment confirming the arbitrator’s award and, as relevant here, ordering appellants to convey the property to the Brichettos within 45 days.
Appellants filed a timely notice of appeal.
Discussion
Courts in California, both the Supreme Court and the Court of Appeal, have rigorously adhered to the rule of arbitral finality set forth in Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 (Moncharsh). (See Gueyffier v. Ann Summers, Ltd. (2008) 43 Cal.4th 1179, 1182; Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401, 407-409.) The few exceptions that permit some level of judicial review of arbitration awards have been narrowly construed. (Id. at p. 408.) Appellants seek to invoke three of those exceptions in this appeal. We conclude none of the three is applicable; the arbitrator’s award in this case is final and not subject to judicial review.
A. Section 726.
The 1996 agreement, including the option to purchase, was secured by a deed of trust on the real estate that was the subject of the agreement. Section 726, subdivision (a) (section 726(a)), states, in part: “There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein, which action shall be in accordance with the provisions of this chapter.” “This chapter” is chapter 1 of title 10 of the Code of Civil Procedure, entitled “Actions for the Foreclosure of Mortgages”; section 726(a) has been held applicable to deeds of trust as well as mortgages. (See Roseleaf Corp. v. Chierighino (1963) 59 Cal.2d 35, 38.) Section 726 generally requires a secured creditor to foreclose on the security before suing directly on the debt. (See O'Neil v. General Security Corp. (1992) 4 Cal.App.4th 587, 597.) And, as particularly relevant to appellant’s argument here, “[i]f the decree of foreclosure of a mortgage or deed of trust on real property pursuant to Section 726 determines that a deficiency judgment may be ordered against the defendant, the real property … shall be sold subject to the right of redemption.” (§ 729.010, subd. (a).) The notice of sale must state there is a right of redemption “and shall state the amount of the secured indebtedness with interest and costs.” (Id. at subd. (b)(1).)
In this case, the arbitrator determined that section 726(a) was inapplicable, did not order the property sold at a foreclosure sale, and did not determine that appellants had a right of redemption. Appellants contend these determinations were wrong and that we may and should correct the asserted errors.
Section 1286.2 requires a reviewing court to vacate an arbitration award if the court determines “the arbitrators exceeded their powers.” Although arbitrators can exceed their powers in many different ways (see O’Flaherty v. Belgum (2004) 115 Cal.App.4th 1044, 1055-1056), there are three such ways appellants assert with respect to judicial review of the section 726 determinations: the award violates a well-defined public policy; the award violates a party’s statutory rights; and the award confers a remedy not authorized by law. (See O’Flaherty, supra, at pp. 1055-1056.)
Both the public-policy and the statutory-rights exceptions address not the rights of the parties adjudicated within the arbitration but, instead, focus on the policies and rights that make arbitral finality itself inappropriate. (See Moncharsh, supra, 3 Cal.4th at pp. 31-32.) Nothing in the public policies reflected in the security-first or one-form-of-action statutes precludes parties from electing binding arbitration. Determination of such contract disputes does not impinge on rights statutorily entrusted to the judiciary (City of Palo Alto v. Service Employees Internat. Union (1999) 77 Cal.App.4th 327, 338-340 [arbitrator award required action directly conflicting with previous judicial order]) or the Legislature (Jordan v. Department of Motor Vehicles (2002) 100 Cal.App.4th 431, 443-444 [award exceeded monetary limit imposed by statute authorizing arbitration of the particular dispute]). The public policies reflected in section 726(a) and related statutes are no more a bar to arbitral finality that were the State Bar’s Rules of Professional Conduct at issue in Moncharsh. (See Moncharsh, supra, 3 Cal.4th at p. 33.) Virtually every statute is reflective of some public policy; but unless that policy directly conflicts with the policy favoring arbitral finality in private arbitrations, this exception permitting judicial review is not established. (Id. at p. 32.)
Similarly, the statutory-rights exception is only relevant where the statutory right in question is inconsistent with the concept of arbitral finality. Thus, in Board of Education v. Round Valley Teachers Assn. (1996) 13 Cal.4th 269, 275-277, the statute invested the school board with the right and duty to exercise final discretion with respect to reappointment of probationary teachers. Even where the arbitration occurred pursuant to a collective bargaining agreement, the school board’s statutory right was inconsistent with arbitral finality, because a binding arbitrator’s award would take the decision out of the school board’s hands. As a result, judicial review of the arbitrator’s award was necessary to protect the statutory right conferred on the school board. (Id. at p. 276.)
Here, there is no similar necessity for the protection of the statutory right. First, section 726(a) establishes an affirmative defense, which the defendant can waive. (Salter v. Ulrich (1943) 22 Cal.2d 263, 267-268.) Second, the result of a successful invocation of section 726(a) is not discharge of the underlying debt but, rather, either a forfeiture of the creditor’s security interest or a requirement that the creditor exhaust the security before seeking a deficiency judgment, depending on circumstances not relevant here. (See Walker v. Community Bank (1974) 10 Cal.3d 729, 741; O'Neil v. General Security Corp., supra, 4 Cal.App.4th at pp. 597-598.) An arbitrator is fully capable of affording that kind of relief where appropriate; where it is not appropriate, other relief (such as specific performance) is authorized by law. Third, even appellants’ expert witness, quoted in appellants’ opposition to a motion for sanctions on appeal, acknowledged that the dispute is subject to arbitration; he just said the arbitrator is required to establish a value for, and order a foreclosure sale of, the option to purchase. If the matter is properly a subject of arbitration, any possible incorrectness of the resolution of the matter is not subject to judicial review. (Moncharsh, supra, 3 Cal.4th at p. 11.)
In addition to the foregoing reasons that the rights established in section 726(a) do not permit judicial review of an arbitration award, appellants’ brief acknowledges that, in order to invoke the section 726(a) rights as they (erroneously) construe them, we would have to first examine whether the arbitrator erred in her interpretation of the contract. Claims of factual and legal error are at the very core of the Moncharsh prohibition of judicial review of private arbitration. (See Moncharsh, supra, 3 Cal.4th at p. 11.) If an appellant must succeed on such a claim of error in order to reach an exception to the rule of arbitral finality, the appeal must fail. (See Hall v. Superior Court (1993) 18 Cal.App.4th 427, 439.)
Finally, of course, it is not at all clear that appellants are correct, and the arbitrator incorrect, about the applicability of section 726(a). An action for specific performance is not an action to collect a debt and the relief requested is, at best, incidental to the security given in the deed of trust. (See Ashcroft Estate Co. v. Nelson (1915) 26 Cal.App. 400, 401-402.) We need not decide that issue, however, because the arbitrator’s award is not subject to judicial review for errors of law.
B. Excluded evidence.
Section 1286.2, subdivision (a)(5), in relevant part, requires a court to vacate an arbitrator’s award if a party is substantially prejudiced by an arbitrator’s refusal “to hear evidence material to the controversy.” Appellants contend the arbitrator excluded evidence of the “value” of their claimed right of redemption if the deed of trust were foreclosed. Appellants do not even attempt to show prejudice and their argument on materiality can be described as, at best, brief.
Because the arbitrator determined section 726(a) was inapplicable and because the deed of trust was not ordered foreclosed, it is clear the evidence in question could not be material, since there was no right of redemption to be valued. “To find substantial prejudice the [reviewing] court must accept, for purposes of analysis, the arbitrator’s legal theory and conclude that the arbitrator might well have made a different award had the evidence been allowed.” (Hall v. Superior Court, supra, 18 Cal.App.4th at p. 439.) In this case, the excluded evidence did not address any issue determined by the arbitrator; accordingly, that evidence could not have resulted in a different award on the issues that were determined by the arbitrator.
C. Assignability of the option to purchase.
Appellants’ final argument is that the arbitrator rendered “such a completely irrational construction of the provision in dispute as to remake the parties’ contract [citations omitted].” This argument is wholly frivolous and we will not belabor our rejection of it. The arbitrator’s determination was not “completely irrational” and did not “remake” the parties’ contract. Indeed, the arbitrator’s decision clearly was supported by the express language of the 1996 agreement, which prohibited appellants from separately assigning one particular right under the agreement, but specifically permitted assignment of any others if the assignee agreed “to be bound by all of the terms and provisions of this Agreement which are applicable to such assignee.”
In order to confer on this argument even a limited degree of plausibility, appellants rephrase the quote in the text as follows: “[ConAgra] could clearly subject any assignee of the Van Dykes to all of the obligations under the entire contract applicable to such assignee. This hardly comports with the notion of a partial assignment of a separable part of the 1996 Agreement .…” (Original italics.) In fact, the language quoted in the text not only “comports with the notion of a partial assignment,” it is completely inconsistent with a prohibition on partial assignment.
Appellants contend: “Here, there is no reasonable dispute that the overriding object of the 1996 Agreement was to enable [ConAgra] the ability to discharge its wastewater on the Van Dyke ranch. No one expected that any party other than the party that was running the plant … would have the right to exercise the option.” (Italics in original.) Appellants then expend three pages describing the deplorable conditions created by wastewater spraying, presumably to establish that it was sensible for ConAgra to maintain the option to take over the property if appellants allowed the property to become a nuisance: “[T]he remedies available to [ConAgra] simply as a lessee would have been woefully inadequate.”
That all may be true. Nevertheless, the argument does not speak to any mutually expressed or understood intent that only ConAgra could exercise the option to purchase. After all, once the property has been transferred upon exercise of the option (which required full payment in cash), appellants had nothing more to do with the property. Whether ConAgra exercised the option and then sold the land to a third party or, instead, sold the option to purchase, which was then exercised by the third party, the result is the same for appellants: they receive for the property the exact price for which they agreed to sell the property. Nothing about that circumstance conflicts with the language, intent, or purpose of the 1996 agreement. Appellants have not begun to show that the arbitrator’s determination concerning assignability of the option to purchase was irrational or remade the parties’ contract.
D. Motion for sanctions.
The Brichettos filed a motion for sanctions against appellants, in the form of an award of attorney fees as costs on appeal, contending the appeal was frivolous and taken for the purpose of delay. (See Cal. Rules of Court, rule 8.276(e).) By order, this court deferred ruling on the motion pending consideration of the appeal on its merits.
Although it is an extremely close matter, we decline to impose sanctions. While appellants’ second and third arguments on appeal are indeed frivolous (and, if standing alone, would indicate the appeal was solely intended to cause delay), we think appellants’ first argument was at least marginally plausible. The exception for an arbitrator’s violation of public policy is still a developing area of appellate law and the cases have not exhausted the list of policies that might weigh against arbitral finality. Appellants did not, in fact, make a very good argument that the existence of a right of redemption might be such a policy, but we cannot say the issue is frivolous.
The Brichettos state in their motion for sanctions that “[p]ending the instant appeal, Appellants remain in possession of the property, preventing Respondents from exercising the decree of specific performance .… As such, Appellants have brought this appeal solely for the purpose of delay.” A judgment ordering conveyance of property by the appellant is not stayed by the filing of an appeal, where the appellant remains in possession of the property, unless the appellant gives an undertaking in an amount fixed by the trial court. (§ 917.4.) At oral argument, the parties advised that such an undertaking was posted here. Accordingly, our denial of the motion for sanctions is without prejudice to the Brichettos’ claims on remand in accordance with section 917.4.
Disposition
The judgment is affirmed. Respondents are awarded costs on appeal.
WE CONCUR: WISEMAN, J., HILL, J.