Cobb v. Ironwood Country Club , 183 Cal. Rptr. 3d 282 ( 2015 )

Filed 1/28/15
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
WILLIAM S. COBB, JR., et al.,
Plaintiffs and Respondents, G050446
v. (Super. Ct. No. INC1205888)
IRONWOOD COUNTRY CLUB, OPINION
Defendant and Appellant.
Appeal from an order of the Superior Court of Riverside County, Harold
W. Hopp, Judge. Affirmed. Request for Judicial Notice denied.
Slovak Baron Empey Murphy & Pinkney, Thomas S. Slovak and Charles
L. Gallagher for Plaintiffs and Respondents.
Arbogast and Bowen and David M. Arbogast for Consumer Attorneys of
California as Amici Curiae on behalf of Plaintiffs and Respondents.
Green, Bryant & French and Matthew T. Poelstra; Boudreau Williams and
Jon R. Williams for Defendant and Appellant.
Robert L. Bouchier for California State Club Association as Amici Curiae
on behalf of Defendant and Appellant.
Ironwood Country Club (Ironwood or the Club) appeals from an order
denying its motion to compel arbitration of the declaratory relief action brought by
plaintiffs William S. Cobb, Jr., and Elizabeth Richards, who are former members of
Ironwood, and Patrick J. Keeley and Helen Riedstra, who are current members. The
motion to compel was based on an arbitration provision Ironwood incorporated into its
bylaws four months after plaintiffs’ complaint was filed. Ironwood argues (1) that its
new arbitration provision was fully applicable to this previously filed lawsuit because the
lawsuit concerned a dispute which was “ongoing” between the parties, and (2) that its
right to amend its bylaws meant that any such amendment would be binding on both
current and former members.
The trial court disagreed, reasoning that Ironwood’s subsequent amendment
of its bylaws was insufficient to demonstrate that any of these plaintiffs agreed to
arbitrate this dispute, and that if Ironwood’s basic premise were accepted, it would render
the agreement illusory. We agree with both conclusions and affirm the order.
When one party to a contract retains the unilateral right to amend the
agreement governing the parties’ relationship, its exercise of that right is constrained by
the covenant of good faith and fair dealing which precludes amendments that operate
retroactively to impair accrued rights. Plaintiffs certainly did not agree to any such
illegal impairment in this case.
And Ironwood’s basic premise, which is that each member’s agreement to
the bylaw provision allowing for future amendments to its bylaws means those members
are automatically bound by whatever amendments the Club makes in accordance with
that provision – even after the members have resigned their membership – would doom
the agreement as illusory if it were correct. Fortunately, it is not.
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FACTS
Plaintiffs’ complaint, filed in August 2012, alleges that two of the plaintiffs
are current members of Ironwood, and two are former members. In 1999, the Club
entered into an agreement with each of its 588 members, whereby each member loaned
the club $25,500 to fund the Club’s purchase of additional land. The members were
given the option of paying the funds in a lump sum or by making payments over a period
of 20 years into a “Land Purchase Account.” In connection with the loans, the Club
represented that if any member sold his or her membership before the loan was repaid,
the Club would be “absolutely obligated to pay the Selling Member the entire amount
then standing in the Member’s Land Purchase Account.” Moreover, any new member
would be required to pay, in addition to the regular initiation fee, an amount equal to the
hypothetical balance in a Land Purchase Account, as well as the “remaining unamortized
portion of the Land Purchase Assessment.” (Original italics omitted.)
In reliance on the Club’s representations, the members voted to approve the
land purchase and enter into the loan agreements. Three of the plaintiffs paid the lump
sum, and one plaintiff elected to make monthly payments into a Land Purchase Account.
The Club consistently reported these payments in financial disclosures as a liability owed
to each member, payable upon “sale of a member’s certificate” to a new member.
(Original italics omitted.) In April 2012, Ironwood represented that it had repaid the
$25,500 Land Purchase Assessment to 10 resigned members whose memberships were
subsequently purchased by new members, since 2003.
However, plaintiffs alleged that despite the Club’s initial description of
how the funds would be generated to reimburse resigning members, it “inexplicably
failed” to require new members to pay the equivalent of the Land Purchase Assessment
when they joined.
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More significantly, in January 2012, Ironwood announced that “[a]fter
substantial due diligence, [it had] concluded that the practice of repaying the Land
Assessment to forfeiting members . . . must cease effective immediately.” (Orignal
italics omitted.) Thereafter, Ironwood made various conflicting and confusing statements
and unilaterally imposed new rules to justify writing off its previously acknowledged
liability to the members.
Based on those described facts, plaintiffs alleged that an actual controversy
has arisen between themselves and Ironwood, with respect to the Club’s obligation to
repay the Land Purchase Assessment to each plaintiff.
When plaintiffs filed their complaint, Ironwood’s bylaws contained no
arbitration provision. However, four months later, in December 2012, the Club’s board
of directors notified the membership that it was contemplating amendments to the
bylaws, including the adoption of a bylaw mandating arbitration of “any claim,
grievance, demand, cause of action, or dispute of any kind whatsoever . . . of or by a
Member past or present . . . arising out of, in connection with, or in relation to Club
Membership, Club property, Club financial obligations of whatever nature, Club
equipment, and/or Club and/or Member’s activity, and involving the Club and/or the
Club’s officers, directors or agents. . . .” When it did not receive a sufficient number of
objections from members in response to these proposed amendments, Ironwood’s board
adopted the arbitration provision into its bylaws effective December 28, 2012.
In January 2013, Ironwood filed a motion to compel plaintiffs to arbitrate
their claim against it, based on Ironwood’s “recent bylaw amendment.” The Club
asserted, without analysis, that because the plaintiffs each agreed to abide by its bylaws
when they became members, including a provision which allowed those bylaws to be
amended, they were automatically deemed to have “accepted and agreed to” the
arbitration amendment subsequently adopted. Plaintiffs opposed the motion, arguing (1)
Ironwood’s amendment of its bylaws did not comply with either legal requirements for
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corporate voting or the bylaw’s own requirements, (2) Ironwood’s amendment of its
bylaws did not establish their agreement to arbitrate this dispute, (3) the provision was
unconscionable, and (4) Ironwood had waived any right to arbitrate by using the court
process to litigate plaintiff’s claim.
The trial court denied the motion to compel arbitration, concluding that
Ironwood’s motion represented an improper effort to apply its new arbitration bylaw
retroactively to a pending case. The court reasoned that Ironwood’s subsequent
amendment of its bylaws did not reflect any agreement by these plaintiffs to arbitrate this
already pending dispute. And because arbitration is a matter of agreement, and no party
can be compelled to a dispute he has not agreed to submit. The court also pointed out
that “[t]aken to its logical extreme, [Ironwood’s] argument would allow for an ever
shifting playing field. Indeed, [Ironwood] could arguably amend and require arbitration
years into a lawsuit, or amend to make conduct that was wrongful when an action was
filed allowable.”
DISCUSSION
On appeal, Ironwood makes three points. Its primary contention is that by
accepting membership in the Club, plaintiffs agreed to be bound by its bylaws –
including the provision for future amendments – and thus they “[n]ecessarily [a]greed” to
its subsequent bylaw amendment requiring arbitration of disputes. Ironwood also
disputes the idea that its application of the arbitration provision to this dispute qualifies as
“retroactive,” because in Ironwood’s view, the dispute is “ongoing.” And third, it claims
the trial court’s ruling contravenes the public policy which requires that any doubt as to
whether an arbitration agreement governs a particular dispute must be resolved in favor
of ordering arbitration. None of these points has merit.
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1. Ironwood’s Power to Amend
Ironwood asserts that its bylaws constitute a contract between the Club and
each of its members. (See King v. Larsen Realty, Inc. (1981) 121 Cal. App. 3d 349, 357.)
We agree. However, the Club further contends that because the bylaws include a
provision allowing it to amend them, the members – even former members – are deemed
to have agreed to whatever amendments are made in accordance with that provision. We
cannot agree with that further contention.
Indeed, the contract Ironwood describes would qualify as illusory, and be
unenforceable. “[W]hen a party to a contract retains the unfettered right to terminate or
modify the agreement, the contract is deemed to be illusory.” (Asmus v. Pacific Bell
(2000) 23 Cal. 4th 1, 15.) On the other hand, while “an unqualified right to modify or
terminate the contract is not enforceable[,] the fact that one party reserves the implied
power to terminate or modify a unilateral contract is not fatal to its enforcement, if the
exercise of the power is subject to limitations, such as fairness and reasonable notice.”
(Id. at p. 16.)
And under California law, one very significant restriction on what might
otherwise be a party’s unfettered power to amend or terminate the agreement governing
the parties’ relationship is the implied covenant of good faith and fair dealing. (Digerati
Holdings, LLC v. Young Money Entertainment, LLC (2011) 194 Cal. App. 4th 873, 885.)
The covenant operates “‘as a supplement to the express contractual covenants, to prevent
a contracting party from engaging in conduct which (while not technically transgressing
the express covenants) frustrates the other party’s rights to the benefits of the contract.’”
(Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal. App. 4th
1026, 1031-1032.) “The covenant of good faith finds particular application in situations
where one party is invested with a discretionary power affecting the rights of another.
Such power must be exercised in good faith.” (Carma Developers (Cal.), Inc. v.
Marathon Development California, Inc. (1992) 2 Cal. 4th 342, 372.)
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With respect to arbitration provisions specifically, this court has already
held that the implied covenant of good faith and fair dealing prohibits a party from
“mak[ing] unilateral changes to an arbitration agreement that apply retroactively to
‘accrued or known’ claims because doing so would unreasonably interfere with the
[opposing party’s] expectations regarding how the agreement applied to those claims.”
(Avery v. Integrated Healthcare Holdings, Inc. (2013) 218 Cal. App. 4th 50, 61.) In
reaching this conclusion, we join other courts. (See Peng v. First Republic Bank (2013)
219 Cal. App. 4th 1462, 1474 [“The implied covenant also prevents an employer from
modifying an arbitration agreement once a claim has accrued or become known to it”];
Peleg v. Neiman Marcus Group, Inc. (2012) 204 Cal. App. 4th 1425, 1465 [“A unilateral
modification provision that is silent as to whether contract changes apply to claims,
accrued or known, is impliedly restricted by the covenant so that changes do not apply to
such claims”].)
Thus, to the extent Ironwood intended to enact an arbitration bylaw which
would govern this dispute – a dispute which had not only accrued, but was already being
litigated in court by the time the arbitration bylaw became effective – it violated the
covenant of good faith and fair dealing implied into the bylaws, and thus exceeded the
proper scope of its amendment power. Consequently, there is no basis to infer that
plaintiffs agreed in advance to be bound by such an attempt.
2. Retroactivity
Even if it were otherwise theoretically proper for a party to unilaterally
impose an arbitration provision which applied to claims which had already accrued, there
is an additional problem with Ironwood’s claim that its bylaw amendment reflected an
agreement to arbitrate this dispute: i.e., there is nothing in the language of either the
bylaws generally, or this specific amendment, which states it is intended to have such a
retroactive effect. (Compare Peleg v. Neiman Marcus Group, Inc. supra, 204
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Cal.App.4th at pp. 1432-1433 [in which the disputed provision actually stated it would
apply to all unfiled claims, even those which had already accrued].)
The Club addresses this additional problem by denying that application of
this arbitration provision to the instant case would qualify as retroactive. In the Club’s
view, because plaintiffs have alleged their claim for declaratory relief reflects an
“ongoing” dispute concerning the parties’ rights duties and obligations under the loan
agreements, it is distinguishable from the type of dispute that is “based upon some
incident which occurred at some finite period of time in the past.” This distinction is
specious.
All pending lawsuits – even those which are based on a specific past
incident – reflect ongoing disputes. That is the very nature of a lawsuit. Until a lawsuit
is resolved by settlement or judgment, or becomes moot, it necessarily reflects an
ongoing dispute. Application of the arbitration bylaw to this case would qualify as
retroactive because it would affect plaintiffs’ already accrued legal claims, as well as
their already accrued rights to seek redress for those claims in court. (See Buttram v.
Owens-Corning Fiberglas Corp. (1997) 16 Cal. 4th 520, 528-529 [proposition applies
retroactively if it affects causes of action that accrued prior to its effective date].)
The Club also points out that even if this court were to construe this
declaratory relief action as what it chooses to call a “‘pre-agreement dispute,’” “the law
does not otherwise forbid the arbitration of such a dispute.” We might agree with that
point, as far as it goes, but the problem for Ironwood is that it doesn’t go very far. Coon
v. Nicola (1993) 17 Cal. App. 4th 1225 (Coon), the case the Club relies on, provides no
support for retroactive application of an arbitration provision in the context of this case.
In Coon, the plaintiff was treated by the defendant physician for injuries
suffered in a mining accident. Several days later, the plaintiff visited the doctor in his
office and signed an arbitration agreement. The agreement provided for arbitration of all
claims arising out of “prospective care,” but also included an optional provision
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governing “‘[r]etroactive [e]ffect.’” (Coon, supra, 17 Cal.App.4th at p. 1230.) That
provision stated: “‘If patient intends this agreement to cover services rendered before the
date it is signed (for example, emergency treatment) patient should initial below:
Effective as of date of first medical services.’” (Ibid.) The Coon court noted “[i]t is not
disputed that respondent signed the agreement and separately initialed the clause
expressly agreeing to arbitrate disputes stemming from the care appellant rendered prior
to the office visit.” (Ibid., italics added.)
Thus, Coon provides no authority for enforcing a unilaterally imposed
retroactive arbitration agreement on a party who has not expressly consented to that
retroactive application – which is what Ironwood is attempting to do here. Consequently,
it offers no support for Ironwood’s position. Moreover, in the course of rejecting
plaintiff’s contention that the retroactive agreement would be unenforceable even though
he had expressly agreed to it, the Coon court makes a point that affirmatively harms
Ironwood’s effort to enforce its new bylaw here: the court states that “[m]ost
significantly, the present case does not limit appellant’s liability in any way but merely
provides for a different forum in which to settle disputes.” (Coon, supra, 17 Cal.App.4th
at p. 1237, italics added.) On this point as well, the Coon case is distinguishable from
ours. The bylaw at issue before us, which Ironwood is attempting to apply retroactively,
also purports to limit Ironwood’s liability, in that it additionally mandates a “waive[r of ]
all claims, rights and demands for punitive and consequential damages.” Coon provides
no support for retroactive application of such a provision.
3. Public Policy
Ironwood also relies on the strong public policy favoring arbitration
provisions as the basis for asserting that any “‘[d]oubts as to whether an arbitration clause
applies to a particular dispute are to be resolved in favor of sending the parties to
arbitration.’” (Vianna v. Doctors’ Management Co. (1994) 27 Cal. App. 4th 1186, 1189.)
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However, that presumption is of no assistance to Ironwood here, because it is also true
that “[a]rbitration is consensual in nature” (County of Contra Costa v. Kaiser Foundation
Health Plan, Inc. (1996) 47 Cal. App. 4th 237, 244) and “‘[t]he right to arbitration depends
on a contract’” between the parties. (Id. at p. 245.) Thus, “‘the policy favoring
arbitration cannot displace the necessity for a voluntary agreement to arbitrate.’”
(Victoria v. Superior Court (1985) 40 Cal. 3d 734, 739.)
And as we have already pointed out, Ironwood’s unilateral amendment of
its bylaws, to add an arbitration requirement which purports to retroactively compel
plaintiffs to arbitrate a dispute which is already pending in court, does not create a legally
enforceable agreement to arbitrate that dispute. Stated simply, this case does not present
any “doubt” as to whether Ironwood’s new arbitration bylaw might apply to this case.
Finally, we note that Ironwood’s fervent commitment to the arbitration of
any claims its members might choose to file against it, stands in marked contrast to its
apparent unwillingness to commit its own claims to the same system. The arbitration
bylaw the Club seeks to enforce here applies only to “any claim, grievance, demand,
[etc.,] of or by a Member past or present, [etc.]” (Italics added.) These disputes brought
by members are to be arbitrated before a “mutually agreed to retired Superior Court
Judge.” By its terms, then, the provision does not extend to any claims brought by the
Club itself. And if that omission were not clear enough, the bylaw goes on to specify that
“[t]his arbitration provision shall not apply to any dispute arising out of the Club’s
decision to impose any disciplinary action upon Members as set forth in these Bylaws.”
And while the bylaw also provides for arbitration of “claims by the Club against a
Member for the payment of dues, assessments, fees and/or use charges,” those
arbitrations are required “to be administered by a judicial arbitration company or service
in Riverside County that is selected by the Club.”
Such a one-sided provision, especially when coupled with the purported
waiver of any award of “punitive or consequential damages,” could be deemed
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unconscionable. (Armendariz v. v. Foundation Health Psychcare Services, Inc. (2000)
24 Cal. 4th 83, 118 [“the doctrine of unconscionability limits the extent to which a
stronger party may, through a contract of adhesion, impose the arbitration forum on the
weaker party without accepting that forum for itself”].)
DISPOSITION
The order is affirmed. Respondents’ request for judicial notice of
documents which were lodged, but not filed, in the trial court is denied. Respondents are
to recover their costs on appeal.
CERTIFIED FOR PUBLICATION
RYLAARSDAM, J.
WE CONCUR:
O’LEARY, P. J.
BEDSWORTH, J.
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