FCM Invs., LLC v. Grove Pham, LLC

96 Cal.App.5th 545

314 Cal.Rptr.3d 445

FCM INVESTMENTS, LLC, Plaintiff and Respondent,

v.GROVE PHAM, LLC, et al., Defendants and Appellants.

D080801

Court of Appeal, Fourth District, Division 1, California.

Filed October 17, 2023

Enenstein Pham & Glass, Teri Thuy Pham, Philip M. Duclos and Thang Le, for Defendants and Appellants.

Law Offices of Richard M. Foster and Richard Martin Foster, North Hollywood, for Plaintiff and Respondent.

DATO, J.

When parties agree to private arbitration, they bargain for very limited judicial review. One of the few grounds for vacating an arbitration award is misconduct on the part of a neutral arbitrator substantially prejudicing the rights of a party. ( Code Civ. Proc.,¹ § 1286.2, subd. (a)(3).) Misconduct includes circumstances creating a reasonable impression of possible arbitrator bias.

In this high-stakes commercial arbitration over a canceled real estate deal, the arbitrator found the seller in breach based largely on an assessment of witness credibility. In the arbitrator's view, defendant Phuong Pham lacked credibility because she used an interpreter during the arbitration proceedings. Reasoning that she had been in the country for decades, engaged in sophisticated business transactions, and previously functioned in some undisclosed capacity as an interpreter, the arbitrator felt that her use of an interpreter at the arbitration was a tactical ploy to seem less sophisticated.

Given the exceedingly narrow scope of judicial review of arbitration awards, assuring both the actual and apparent impartiality of a neutral arbitrator is crucial to the legitimacy of arbitration as a dispute resolution mechanism. Courts are empowered to act where that impartiality can reasonably be questioned. Here, the arbitrator's credibility finding rested on unacceptable misconceptions about English proficiency and language acquisition. These misconceptions, in turn, give rise to a reasonable impression of possible bias on the part of the arbitrator requiring reversal of the judgment and vacating the arbitration award.

FACTUAL AND PROCEDURAL BACKGROUND

In January 2019, plaintiff FCM Investments, LLC (FCM) signed a Purchase Agreement to buy real property in Riverside, California from defendant Grove Pham, LLC (Grove), a company owned by Phuong Pham. Grove operated a nursing home on that property with resident patients. FCM agreed to pay Grove $7.45 million to buy the property, with an upfront deposit of $500,000. Escrow was to close in 30 days.

Disputes arose during the due diligence process, with the parties extending the escrow closing date several times. When it signed the Purchase Agreement, FCM believed that Grove and Phuong Pham owned the license to the facility. It later learned, however, that the license was held by Kevin Longha and the entities Arlington Management, LLC and Arlington II Senior Care, LLC. Concerns grew as FCM was unable to obtain necessary financial records for the business. FCM was also worried that dropping patient numbers might suggest Longha and the Arlington entities were intentionally sabotaging the business in an effort to scuttle the deal so they could buy the property for themselves at a lower price.

By April 2019, FCM filed a complaint in Riverside Superior Court against Grove, Phuong Pham, Trish Pham (Phuong's daughter),² Longha, and the Arlington entities, alleging that their dilatory tactics were preventing completion of the sale. The Purchase Agreement contained two alternative dispute resolution provisions. The parties were required to mediate "any dispute or claim arising between [FCM and Grove] out of this Agreement." Any dispute that couldn't be settled through mediation had to go to arbitration. Consistent with these provisions, the parties successfully mediated their dispute and signed a Joint Addendum in May 2019 amending the Purchase Agreement.

Pursuant to the Joint Addendum, FCM increased the purchase price to $7.7 million and the deposit to $650,000. Escrow was set to close in July 2019, and all but three seller contingencies were lifted: (1) Grove had to maintain "at least 66 live-in patients"; (2) Longha had to permit use of his license for the nursing home for 12 months until FCM obtained its own; and (3) the license had to be kept in good standing with state regulatory agencies.

Tensions developed soon after the Joint Addendum was signed, and FCM pulled out of the deal before escrow could close.³ Grove and Phuong moved to compel arbitration in October. That December, the Phams stipulated to arbitrate their disputes before Honorable Judith C. Chirlin (Ret.) of Judicate West. The lawsuit was stayed pending arbitration.

Arbitration proceeded over two days in June 2021. The central question was whether Grove breached its obligations under the Joint Addendum, justifying FCM's cancellation of escrow. Ultimately, the arbitrator concluded that the Phams breached the Joint Addendum by failing to provide proof of 66 live-in patients or a notarized agreement regarding the use of Longha's license. FCM was accordingly justified in terminating escrow and did not breach. FCM was awarded a return of its $650,000 deposit with interest, loss-of-bargain damages of $9.1 million plus interest, $127,040 in attorney's fees, and $20,048 in costs.⁴

In the arbitrator's view, although the transaction "was rather complicated," her decision in the case was "made easier by an evaluation of the credibility of the witnesses." She felt the case was unique "both in 12 years of doing arbitration and 24½ years on the Los Angeles County Superior Court, in that the lack of credibility issues are so rampant and obvious." The arbitrator did not find Phuong or Trish credible. In explaining why, she highlighted as the key example Phuong's use of an interpreter:

"Among the items that stand out, is Mrs. Pham's use of an interpreter. While the Arbitrator understands that people for whom English is a second language frequently prefer to testify in their native language in important legal matters, Mrs. Pham's use of an interpreter appeared to the Arbitrator to be a ploy to appear less sophisticated than she really is. She has been in the country for decades, has engaged in sophisticated business transactions and has herself functioned as an interpreter."⁵

"That being said," the arbitrator went on, "the one part of Mrs. Pham's testimony that appeared truthful is that she did not want to sell the business and property to FCM because she believed she could sell it for more money than her agreement with FCM contemplated."

FCM filed a petition to confirm the arbitration award, while the Phams moved to vacate it pursuant to the California Arbitration Act ( Code of Civ. Proc., § 1280 et seq. ).⁶ In moving to vacate, the Phams claimed the arbitrator exceeded her powers because the transaction amounted to an illegal contract to transfer the license of a nursing home in violation of the California Residential Care Facilities for the Elderly Act ( Health & Saf. Code, § 1569 et seq. ). Emphasizing the narrow scope of judicial review, FCM opposed the petition to vacate.

Following hearings in December 2021 and January 2022, the court denied the Phams's motion and entered judgment for FCM confirming the arbitration award.

DISCUSSION

Although the Phams seek to vacate the arbitration award on multiple grounds, we largely focus on one. In making an adverse credibility finding against Phuong based on her use of an interpreter, the arbitrator's decision creates a reasonable impression of possible bias requiring that the arbitration award be vacated. Because it may bear on further proceedings, we also conclude that Trish and Pham agreed to arbitrate their dispute with FCM.⁷

A. Although judicial review of arbitration awards is limited, arbitrator bias furnishes a proper basis to vacate an award, which is a claim the Phams did not forfeit by failing to raise it in the superior court.

"[P]rivate arbitration is a process in which parties voluntarily trade the safeguards and formalities of court litigation for an expeditious, sometimes roughshod means of resolving their dispute." ( Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 831, 88 Cal.Rptr.2d 366, 982 P.2d 229.) Respecting this bargain limits the grounds for judicial review. ( Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10, 10 Cal.Rptr.2d 183, 832 P.2d 899 ; Richey v. AutoNation, Inc. (2015) 60 Cal.4th 909, 916, 182 Cal.Rptr.3d 644, 341 P.3d 438.) "[A]n arbitrator's decision is not generally reviewable for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties." ( Moncharsh , at p. 6, 10 Cal.Rptr.2d 183, 832 P.2d 899.) The narrow grounds stated in section 1286.2 for vacating an award "protect against error that is so egregious as to constitute misconduct or so profound as to render the process unfair." ( Heimlich v. Shivji (2019) 7 Cal.5th 350, 368, 247 Cal.Rptr.3d 603, 441 P.3d 857 ( Heimlich ).) A party challenging an arbitration award and trial court judgment confirming that award bears the burden of establishing entitlement to relief. ( Id. at p. 370, 247 Cal.Rptr.3d 603, 441 P.3d 857.)

As is relevant to our decision, the Phams contend that the arbitrator exhibited linguistic and/or national origin bias in making an adverse credibility finding against Phuong based on her use of a translator. Pursuant to section 1286.2, subdivision (a)(3), an award must be vacated where "[t]he rights of the party were substantially prejudiced by misconduct of a neutral arbitrator." "Misconduct" in this context includes actions that create a reasonable impression of possible bias. ( Betz v. Pankow (1995) 31 Cal.App.4th 1503, 1507–1508, 38 Cal.Rptr.2d 107 ( Betz II ).)

The Phams did not raise their claim of bias before the trial court in moving to vacate the award. FCM contends that as a result, the Phams have forfeited the argument. The Phams respond that forfeiture is not automatic, and courts have...