Honchariw v. FJM Private Mortg. Fund, LLC

83 Cal.App.5th 893

299 Cal.Rptr.3d 819

Nicholas and Sharon HONCHARIW, Petitioners and Appellants,

v.FJM PRIVATE MORTGAGE FUND, LLC, et al., Defendants and Respondents.

A163756

Court of Appeal, First District, Division 3, California.

Filed September 29, 2022

Nicholas Honchariw, in pro. per., for Petitioners and Appellants.

Law Offices of Mark J. Romeo and Mark J. Romeo, San Francisco, for Defendants and Respondents.

Petrou, J.

In the case before us, petitioners and appellants Nicholas and Sharon Honchariw took out a loan secured by real property. When they defaulted, the lender imposed a late-payment fee provided for in their loan agreement. The Honchariws commenced arbitration, in which they contended the late-payment fee was unlawful (1) pursuant to regulations applicable to a mortgage-loan originator with a license regulated by the Department of Real Estate, and (2) because it was a liquidated damage constituting an unlawful penalty in violation of section 1671.¹ The arbitrator denied both claims. A petition to vacate the arbitration award in the trial court failed, and the order on that petition was appealed.

We shall reverse as the trial court erroneously failed to vacate an award that constitutes an unlawful penalty in contravention of the public policy set forth in section 1671.

FACTUAL AND PROCEDURAL BACKGROUND

Nicholas and Sharon Honchariw took out a $5.6 million dollar bridge loan, with 8.5% interest assessed per annum, secured by a first lien deed of trust on real property. Included in the record on appeal is a "NOTE SECURED BY A DEED OF TRUST," dated "12/13/2018" and executed between "FJM Private Mortgage Fund, LLC a California Limited Liability Company, as to an undivided 100.00% interest (CFL License # 6054701) (who will be called ‘Lender’)" and Nicholas and Sharon Honchariw (the "Loan"). (FJM Private Mortgage Fund, LLC is hereinafter referred to as "FJM Fund.")

The Honchariws defaulted on their September 1, 2019, monthly payment. By missing that payment of $39,667, the Honchariws triggered certain late-payment fee provisions set forth in the Loan: (1) a one-time 10% fee assessed against the overdue payment ($3,967); and (2) a default interest charge of 9.99% per annum assessed against the total unpaid principal balance of the Loan ("any unpaid principal balance of the loan at the time of default shall bear interest at the rate of nine and ninety-nine percent (9.99%) ... above the herein stated note rate, automatically and without notice, from the time of default, until this Note has been paid in full, or until the specific default has been cured"). We shall refer to the sum of these amounts as the "Late Fee."

The Honchariws filed a demand for arbitration on October 7, 2019. The arbitration demand alleged (1) the Loan was in violation of the "Real Estate Loan [L]aw," ( Business & Professions Code § 10240, et seq. ), and (2) the Late Fee was an unlawful penalty in violation of section 1671. "First Bridge Lending" and "FJM Capital, Inc." (hereinafter jointly referred to as "FJM Capital") averred the loan was not subject to the Real Estate Loan Law, and that the late-payment fee did not violate section 1671. The arbitrator agreed with FJM Capital on both points and denied the demand for arbitration. We shall refer to the arbitration award as "the Award."

The Honchariws petitioned to vacate the Award in November 2020. They sought to vacate the Award on the basis that the arbitrator exceeded their authority by denying claims in violation of "nonwaivable statutory rights and/or contravention of explicit legislative expressions of public policy," specifically identifying both the rights protected by the Real Estate Loan Law's prohibition against lenders charging more than 10% of the installment amount due ( Bus. & Prof. C., §§ 10248.1, 10242.5 ) and section 1671.

The trial court denied the petition, holding the Honchariws " ‘did not meet their burden of proof’ to show that the ‘default interest provision in the subject loan was invalid as a penalty....’ " "[E]ven when the Court considers the evidence presented in this motion, the Court cannot conclude that the arbitrator exceeded her powers by denying [the Honchariws’] claims."

A timely appeal ensued.

DISCUSSION

I. Standard of Review and Governing Law

An 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 v. Heily & Blase (1992) 3 Cal.4th 1, 6, 10 Cal.Rptr.2d 183, 832 P.2d 899 ( Moncharsh ).)² Code of Civil Procedure section 1286.2 provides an exception to this general rule where "[t]he arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted."

( Code Civ. Proc., § 1286.2, subd. (a)(4) ; see also, City of Palo Alto v. Service Employees Internat. Union (1999) 77 Cal.App.4th 327, 333, 91 Cal.Rptr.2d 500.)

"Arbitrators may exceed their powers by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy. [Citations.]" ( Richey v. AutoNation, Inc. (2015) 60 Cal.4th 909, 916, 182 Cal.Rptr.3d 644, 341 P.3d 438 ( Richey ).) The public policy so contravened must be a "well-defined and dominant" public policy as "ascertained ‘by reference to the laws and legal precedents and not from general considerations of supposed public interests.’ " ( W.R. Grace and Co. v. Local Union 759, Intern. Union of United Rubber, Cork, Linoleum and Plastic Workers of America (1983) 461 U.S. 757, 766, 103 S.Ct. 2177, 76 L.Ed.2d 298 ( W.R. Grace ); see also Department of Human Resources v. International Union of Operating Engineers (2020) 58 Cal.App.5th 861, 873–880, 273 Cal.Rptr.3d 127.) " ‘[W]hether the arbitrator exceeded his or her powers ..., and thus whether the award should have been vacated on that basis, is reviewed on appeal de novo.’ [Citation.]" (See Ahdout v. Hekmatjah (2013) 213 Cal.App.4th 21, 33, 152 Cal.Rptr.3d 199.)

A brief review of section 1671 is sufficient to conclude that it expresses "well-defined and dominant" public policy such that a challenge predicated thereon escapes the general prohibition against review of arbitral decisions. (See W.R. Grace, supra , 461 U.S. at p. 766, 103 S.Ct. 2177 ; Moncharsh, supra , 3 Cal.4th at pp. 31–33, 10 Cal.Rptr.2d 183, 832 P.2d 899 ; Richey, supra , 60 Cal.4th at p. 916, 182 Cal.Rptr.3d 644, 341 P.3d 438.)

Section 1671 provides that a liquidated damages provision is either presumptively valid or invalid depending upon the subject matter of the contract. If the contract involves "the retail purchase, or rental ... of personal property or services, primarily for ... personal, family, or household purposes," ( § 1671, subd. (c)(1) ), or involves "a lease of real property for use as a dwelling," ( § 1671, subd. (c)(2) ), then a liquidated damages provision in that contract is presumptively void. ( § 1671, subd. (d).) We shall refer to those contracts described by subdivisions (c)(1)–(c)(2) as "consumer contracts." For all other contracts, which we shall refer to as "non-consumer contracts," "a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." ( § 1671, subd. (b).)

Simply put, a liquidated damages provision is presumed valid if it is in a non-consumer contract but presumed invalid if it is in a consumer contract. (See Ridgley v. Topa Thrift & Loan Assn . (1998) 17 Cal.4th 970, 977, 73 Cal.Rptr.2d 378, 953 P.2d 484 ( Ridgley ).) The case before us involves a non-consumer contract as it is neither for the purchase of property for personal use nor does it involve a primary dwelling. ( § 1671, subds. (c)(1)–(c)(2).) Whether or not an agreement is a non-consumer contract or consumer contract, it may not violate public policy.

Section 1671 expresses clear public policy as "ascertained ‘by reference to the laws and legal precedents and not from general considerations of supposed public interests.’ " ( W.R. Grace, supra , 461 U.S. at p. 766, 103 S.Ct. 2177.) It is the public policy of California that liquidated damages bear a "reasonable relationship" to the actual damages that the parties anticipate would flow from breach; conversely, if the liquidated damages clause fails to so conform, it will be construed as an unenforceable "penalty." ( Garrett v. Coast & Southern Fed. Sav. & Loan Assn . (1973) 9 Cal.3d 731, 739, 108 Cal.Rptr. 845, 511 P.2d 1197 ( Garrett ).) The amount set as liquidated damages "must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained." ( Ibid. ) In the absence of such relationship, a contractual clause purporting to predetermine damages "must be construed as a penalty." ( Ibid. ) " Civil Code section 1671 and the case law interpreting it aim to combat unfair and unreasonable coercion arising from an imbalance of bargaining power." ( Constellation-F, LLC v. World Trading 23, Inc. (2020) 45 Cal.App.5th 22, 27, 258 Cal.Rptr.3d 341.)

Because an arbitrator may exceed their powers by enforcing a contract that is in violation of public policy, we conclude de novo review is appropriate. ( Moncharsh, supra , 3 Cal.4th at p. 31, 10 Cal.Rptr.2d 183, 832 P.2d 899.) "Based on section 1671(b) ’s presumption that liquidated damage provisions in nonconsumer contracts are valid, the party challenging the provision bears the burden to show the provision was unreasonable under the circumstances existing when the parties entered into the contract. [Citations.]" ( Vitatech Internat., Inc. v. Sporn (2017) 16 Cal.App.5th 796, 806, 224 Cal.Rptr.3d 691.)

II. The Late Fee Violates Civil Code Section 1671³

The Late Fee provided for the following...