Royal Alliance Associates, Inc. v. Liebhaber

Filed 8/30/16
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
ROYAL ALLIANCE ASSOCIATES, INC. B264619
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BS151127)
v.
SANDRA L. LIEBHABER et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los Angeles County, Susan
Bryant-Deason, Judge. Affirmed.
Jones Bell Abbott Fleming & Fitzgerald, G. Thomas Fleming, III, William M.
Turner and Kasumi Laura Takahashi for Plaintiff and Appellant.
Steiner & Libo, Leonard Steiner for Defendant and Respondent Sandra L.
Liebhaber.
Greenberg Glusker Fields Claman & Machtinger, Norman H. Levine and Lori L.
Werderitch; Terri L. Reicher for Defendant and Respondent Financial Industry
Regulatory Authority, Inc.
Appellant Royal Alliance Associates, Inc., a securities brokerage firm, petitioned
to confirm an arbitration award recommending expungement of an allegation of
misconduct from the record of one of its employees, Kathleen J. Tarr. The individual
who made the allegation of misconduct, Sandra Liebhaber, petitioned to vacate the same
arbitration award. Liebhaber argued that the arbitrators violated the rules applicable to
the arbitration and refused to hear evidence she sought to introduce and cross-
examination she sought to elicit. The Financial Industry Regulatory Authority, Inc.
(FINRA), under whose auspices and rules the arbitration at issue was performed, also
petitioned to vacate the award on similar grounds.
The trial court denied Royal Alliance’s petition to confirm the award and granted
Liebhaber’s and FINRA’s petitions to vacate, ruling that the arbitrators exceeded their
powers and that Liebhaber’s rights were substantially prejudiced by the arbitrators’
misconduct and refusal to hear material evidence. Royal Alliance appealed, and we
affirm. The arbitrators denied Liebhaber a full and fair opportunity to introduce and
challenge evidence material to the expungement proceedings to which she was a party.
The arbitrators’ refusal to hear Liebhaber’s evidence and cross-examination deprived
Liebhaber of a fair hearing and substantially prejudiced her rights within the meaning of
Code of Civil Procedure section 1286.2.
BACKGROUND
I. Underlying Action
Royal Alliance is a securities broker-dealer. It employed Tarr as a financial
advisor from July 2002 to July 2010. Liebhaber was a client of Royal Alliance who
obtained financial advice from Tarr in 2007.
Royal Alliance is a member of FINRA, a self-regulatory organization (15 U.S.C.
§§ 78c(a)(26), 78s(b)) that is “‘“responsible for regulatory oversight of all securities
firms that do business with the public; professional training, testing and licensing of
registered persons; [and] arbitration and mediation” [citation]’” of disputes that arise
between investors and securities firms. (Lickiss v. Financial Industry Regulatory
Authority (2012) 208 Cal. App. 4th 1125, 1128; see also 72 Fed. Reg. 42169, 42170
2
(Aug. 1, 2007).) In its capacity as a self-regulatory organization, FINRA has
promulgated a variety of rules governing the conduct of its members and persons
associated with them. (See FINRA Rule 0140(a).) Royal Alliance and Liebhaber both
agreed to be bound by FINRA’s rules, including those pertinent to dispute resolution.
We granted Royal Alliance’s request for judicial notice of several FINRA rules and
related materials.
In May 2013, Liebhaber filed a statement of claim against Royal Alliance with
FINRA. Liebhaber alleged that Tarr sold her “illiquid, high-risk investments” that were
“inappropriate and unsuitable” for her individual retirement account. Liebhaber further
claimed that Royal Alliance was negligent, breached its fiduciary duty to her, and
violated state securities laws. She sought $325,000 in compensatory damages.
Liebhaber and Royal Alliance agreed to submit to binding arbitration of
Liebhaber’s claims “in accordance with FINRA By-Laws, Rules, and Code of Arbitration
Procedure.” Liebhaber and Royal Alliance ultimately settled the case for $30,000 after
an arbitration panel was convened but before an arbitration hearing was held.
II. Expungement Proceedings
In accordance with FINRA rules and regulations, Liebhaber’s allegations against
Tarr were documented in FINRA’s Central Registration Depository (CRD), an electronic
database containing “‘information reported in connection with the registration or
licensing of brokers and dealers and their associated persons, including disciplinary
actions, regulatory, judicial, and arbitration proceedings. . . .’ (15 U.S.C. § 78o-
3(i)(1)(A) & (i)(5).)” (Lickiss v. Financial Industry Regulatory Authority, supra, 208
Cal.App.4th at p. 1128.) Information contained in the CRD is accessible to securities
firms and regulators. Certain customer complaints and allegations of misconduct
documented in the CRD also are available to the public via FINRA’s “BrokerCheck”
website. Liebhaber’s allegations against Tarr were publicly accessible and remained so
after the case was settled.
After Liebhaber’s claims were settled, Royal Alliance requested that the
arbitrators keep the case open because it intended to seek expungement of Liebhaber’s
3
allegations from Tarr’s CRD record. FINRA rules require requests for expungement to
be presented to either a court of competent jurisdiction or a FINRA arbitration panel.
(See FINRA Rules 2080(a), 12805.) Royal Alliance submitted a request for
expungement on behalf of Tarr to the previously convened FINRA arbitration panel on
June 9, 2014. Liebhaber remained a party to the case, but Tarr was not named as a party.
On June 30, 2014, Liebhaber’s counsel advised the arbitration panel that he did
not intend to file a pre-hearing brief but planned to call Liebhaber and Tarr as witnesses
at the arbitration hearing. The record does not indicate whether Royal Alliance or the
arbitration panel responded to this advisement. Also absent is the written evidence the
parties submitted prior to the hearing.
The three-member panel of arbitrators held a telephonic arbitration proceeding on
August 12, 2014. Liebhaber and her counsel, Robert S. Banks, Jr., were on the call, as
were Royal Alliance and its counsel, Kasumi L. Takahashi. Takahashi informed the
arbitrators that Tarr was on the line as well; “[s]he’s here to offer any additional
testimony and answer any questions that the panel may have of her . . . .”
Takahashi argued that expungement was warranted because Liebhaber’s
allegations against Tarr were false. She contended that the investments Tarr
recommended were suitable for Liebhaber, and Liebhaber’s alleged net losses could be
attributed to her large withdrawals from her retirement account and “the 2008 market
crash.” Takahashi also noted that a complaint similar to Liebhaber’s previously had been
expunged from Tarr’s record
At the conclusion of her argument, Takahashi informed the arbitrators that Tarr
had “a couple things [sic] that she would like to say to the panel before we kick it over to
the claimant’s counsel.” The presiding arbitrator said that Tarr could speak, and
Liebhaber’s counsel did not object. No oath was administered to Tarr, who presented a
lengthy narrative description of her interactions with and advice to Liebhaber. Tarr also
noted that she was “the daughter and granddaughter of ministers” and emphasized the
“vigorous” nature of her opposition to Liebhaber’s allegations. No one interrupted Tarr
4
with questions or objections. When Tarr concluded her remarks, Takahashi informed the
panel that Royal Alliance had nothing further to present.
In his response argument, Banks contended that Royal Alliance failed to show that
Liebhaber’s complaints against Tarr were false or factually impossible. He also
emphasized the importance of making complete (i.e., not expunged) CRD and
BrokerCheck records available to brokerage firms and the general public.
At the conclusion of his argument, Banks told the arbitrators, “I guess I would like
to ask some questions of Ms. Tarr and I would also like to ask some questions of Ms.
Liebhaber so that you can have a little bit more information before you make the decision
that they’re asking you to make.” Takahashi objected to “counsel’s proposed procedure
for this hearing.” She argued, “This is a hearing on a request for expungement, it’s not a
hearing on the merits of the case. The underlying case was settled. The only question
before the panel right now is whether or not the claim should be expunged based on the
falsity of allegations, so I would request that we not hear from the claimant at this time
and that we have a chance to rebut the opposition.”
The presiding arbitrator commented, “I believe Ms. Tarr didn’t say anything
substantive that is not already on the record on her behalf with respect to the declaration.
I listened carefully to Mr. Banks and I think he, based on the documents that I’ve seen,
has covered all the important points. [¶] I don’t see that any testimony as such is
necessary, setting aside whether it’s proper and has not been in effect perhaps prepared
for by everybody here, so I’m inclined to think that we should leave it at that, unless Mr.
Banks has further argument by himself and go from there.” He then asked for input from
his fellow panel members. One of them commented that she would like to hear from
Liebhaber and Tarr. She thought it was “important to hear the questioning,” and
commented that “the guidelines are pretty clear that we’re supposed to be looking at
everything because this was a settled case, and that the more information we have, the
easier it is for us to make what I would consider to be a fair and well reasoned decision
5
regarding expungement.”1 She then added, “[t]hat’s just my thought as long as we’re not
going to be here for another two hours.”
The presiding arbitrator responded, “Well, how can we make sure we’re not going
to be here for another two hours? That’s the problem. [¶] I appreciate your comments
and I think that’s in the best of all possible worlds how it should be.” The third arbitrator
then commented that she agreed with the presiding arbitrator. “[W]ith the greatest
respect, I think that allowing claimant’s counsel to question Ms. Tarr is out of order, and .
. . I do think that that’s not the purpose of this hearing, and if it is and the panel needs to
be corrected on that, because some of the -- this is kind of a new process that has not been
well defined, then we can be corrected on that, but I would be very comfortable with the
information, and I’m comfortable with us asking Ms. Tarr questions, but I am
uncomfortable with claimant’s counsel cross-examining her in any way.” The second
arbitrator stated that she was “good with that.” The presiding arbitrator then denied
Banks’s “request to take testimony from the claimant and to allow questioning by counsel
of the respondent.”
Banks stated for the record that he “must vigorously object to the panel’s denying
me an opportunity to question Ms. Tarr about the very events that she is asking you to
expunge her record on.” He further stated that he “had a number of questions for Ms.
Tarr that went into how she came to meet Ms. Liebhaber, what advice she gave her,
1
The “guidelines” the arbitrator mentioned are not regulations or rule
interpretations promulgated through formal administrative procedures. They consist of a
numbered list that appears on a FINRA webpage entitled “Notice to Arbitrators and
Parties on Expanded Expungement Guidance” and within FINRA’s “Expungement
Training” materials. In both places, the list reads as follows: “It is important to allow
customers and their counsel to participate in the expungement hearing in settled cases if
they wish to. Specifically, arbitrators should: 1) allow the customer and their counsel to
appear at the expungement hearing; 2) allow the customer to testify at the expungement
hearing; 3) allow counsel for the customer or a pro se customer to introduce documents
and evidence at the expungement hearing; 4) allow counsel for the customer or a pro se
customer to cross-examine the broker and other witnesses called by the party seeking
expungment; and 5) allow counsel for the customer or a pro se customer to present
opening and closing arguments if the panel allows any party to present such arguments.”
6
questions about the suitability of the investments, whether she considered certain factors
about these investments she was recommending, how much time she spent giving her the
advice she gave her and what she told her about whether she should take this early
retirement at age 47.” The presiding arbitrator thanked Banks for his comments and
asked Takahashi to proceed with her rebuttal, which consisted primarily of argument that
Banks’s comments were not relevant to the issue of expungement.
After the arbitrators asked a few questions, Banks asked the presiding arbitrator if
he could “have a few words, please?” Takahashi objected, and the presiding arbitrator
sustained her objection after confirming that the other panel members did not want any
more information.
The presiding arbitrator thanked counsel for “the very high degree of advocacy on
both sides” and indicated that the panel intended to commence deliberations. Banks
asked if he could make his record, and despite the presiding arbitrator’s response that “I
don’t think there’s any necessity on my behalf to have it on the record here,” Banks
commented, “I feel like I have not been given a full and fair opportunity to respond to
this, the claims that have been made in the hearing.” Banks continued, “my client is here
prepared to testify, there have been statements about expungements previously granted,
information has been admitted about expungements that have been denied, and I think
that those are all important matters, but if you don’t -- if you won’t let me talk about
them, I won’t.” The presiding arbitrator asked the others for their thoughts, and one of
them said to Banks, “I think that you may add more information in your mind’s eye, but
again, I don’t think it’s going to dramatically impact my part, my participation in the
deliberations, and really with a lot of respect I say that to you.” The third arbitrator
echoed these comments, adding, “we’ve followed the process and the procedure and the
rule as it’s stated and I’m very confident that -- and I do appreciate, Mr. Banks, how
strongly you feel opposing respondent’s request for expungement, but I’m confident that
we’ve allowed all the information that we need to make a good decision.”
The arbitration panel issued an award recommending expungement on September
10, 2014. The panel, tracking the language of FINRA Rule 2080, found that Liebhaber’s
7
“claim, allegation, or information” against Tarr was “factually impossible or clearly
erroneous; and [¶] The claim, allegation, or information is false.”2 The panel cited
several reasons for its findings, including the sizable difference between the damages
Liebhaber alleged ($325,000) and the amount she accepted from Royal Alliance to settle
her claims ($30,000). The panel concluded the amount of the payment reflected a
business decision by Royal Alliance rather than Liebhaber’s actual net out-of-pocket
losses. The panel also made the following findings (emphases added):
“In late 2007, Claimant [Liebhaber] opened an Individual Retirement Account
with Respondent [Royal Alliance] with an initial deposit of $315,000.00. Claimant was
approximately 47 years of age. Non-party Kathleen Tarr was her broker of record.
Stating that her investment objectives were long-term growth and income, with a
moderate investment risk, Claimant purchased four separate variable annuities and a real
estate investment trust (‘REIT’) paying over 6% per annum. Almost 15% of her
investable monies remained in cash. [¶] Claimant stated in her Statement of Claim that
these investments were not suitable for her. The statement of non-party Kathleen Tarr
was that the annuities were invested in a broad-based portfolio which matched Claimant’s
investment objectives and risk tolerance. This information was not disputed by Claimant.
[¶] Claimant did not add any additional monies to her IRA. Claimant regularly received
or took distributions from her IRA. Claimant sold one variable annuity in December
2011. [¶] At the time of the expungement hearing, non-party Kathleen Tarr stated that it
was her understanding and belief that Claimant still owns the same three variable
2
FINRA Rule 12805(c) requires arbitrators presiding over expungement
proceedings to “Indicate in the arbitration award which of the Rule 2080 grounds for
expungement serve(s) as the basis for its expungement order and provide a brief written
explanation of the reason(s) for its finding that one or more Rule 2080 grounds for
expungement applies to the facts of the case.” The pertinent Rule 2080 grounds are “(A)
the claim, allegation, or information is factually impossible or clearly erroneous; (B) the
registered person was not involved in the alleged investment-related sales practice
violation, forgery, theft, misappropriation, or conversion of funds; or (C) the claim,
allegation, or information is false.” (FINRA Rule 2080(b)(1).)
8
annuities as well as the REIT. This information was not disputed by Claimant. No other
evidence or information regarding suitability was offered by Claimant.
“Respondent argued that any losses incurred by Claimant were ‘paper’ losses due
to the economic downturn of 2008-2009. By continuing to hold her assets, Respondent
argued that Claimant no longer has incurred losses, and, to the contrary, has benefited
from the upturn in the economy. This argument was not disputed by Claimant.
“The Panel finds that the statements offered by non-party Kathleen Tarr during
the telephonic hearing were credible. The Panel finds that the investments were suitable
for Claimant, and that the claim or allegation of unsuitability is clearly erroneous.
“The Panel finds that based upon the documents described above, the statements
and other information presented at the telephonic hearing, and the Settlement Agreement,
Claimant’s argument that the $30,000.00 [settlement] payment reflected [net out-of-
pocket] losses is not true. In addition, there is no documentation or other evidence to
support a claim that Claimant suffered losses as a result of non-party Kathleen Tarr’s
actions, or Respondent’s actions or inactions.”
The panel charged Royal Alliance with all applicable fees. (See FINRA Rule
12805(d).)
III. Petitions to Confirm and Vacate
FINRA Rule 2080(a) requires parties seeking expungement of customer
complaints from a CRD record to “obtain an order from a court of competent jurisdiction
directing such expungement or confirming an arbitration award containing expungement
relief.” (FINRA Rule 2080(a).) In accordance with this rule, Royal Alliance filed a
petition under Code of Civil Procedure section 12853 to confirm the arbitration award.
Royal Alliance included with its petition the parties’ signed consent forms agreeing to
arbitration and a copy of the expungement award. Pursuant to FINRA Rule 2080(b),
parties “seeking judicial confirmation of an arbitration award containing expungement
relief must name FINRA as an additional party and serve FINRA with all appropriate
3
All further statutory references are to the Code of Civil Procedure unless
otherwise indicated.
9
documents unless this requirement is waived . . . .” Royal Alliance named both
Liebhaber and FINRA as respondents in its petition.
In her answer opposing the petition, Liebhaber requested that the award be vacated
pursuant to sections 1286.2 and 1286.4. She asserted three grounds for vacation: “(a)
Liebhaber’s rights were substantially prejudiced by misconduct of the arbitrators; (b) the
arbitrators exceeded their powers in denying Liebhaber’s request to present evidence at
the hearing; and (c) Liebhaber’s rights were substantially prejudiced by the refusal of the
arbitrators to hear evidence material to her claims.” Liebhaber attached several exhibits
to her filing, including her statement of claim, a transcript of the arbitration hearing,
Tarr’s BrokerCheck report, and FINRA publications titled “Neutral Corner,” “Dispute
Resolution Expungement Arbitrator Training Manual,” and “Notice to Arbitrators and
Parties on Expanded Expungement Guidance.”
In her accompanying memorandum, Liebhaber argued that the arbitration panel
“failed to hold an adequate hearing on expungement in violation of FINRA Rule 12805
by refusing Liebhaber’s request to testify, and to cross-examine the broker Tarr.” She
further contended that the arbitrators “allowed Royal Alliance to present its case for
expungement in its entirety” but did not allow her to question either of the witnesses she
wanted to call, herself and Tarr. Liebhaber emphasized that the arbitrators’ award
repeatedly stated that she failed to offer evidence or dispute Royal Alliance’s evidence,
and contended that “no evidence was presented or information not disputed [sic] because
the arbitrators did not allow Ms. Liebhaber to present any evidence at the hearing
despite her appearance and multiple requests to do so.”
FINRA also opposed Royal Alliance’s petition and sought to vacate the arbitration
award. FINRA took “no position on the merits of the underlying case,” but “oppose[d]
expungement of the arbitration from FINRA’s regulatory database because the arbitrators
failed to follow FINRA rules governing such expungements,” specifically Rules 2080
and 12805. FINRA argued that the expungement hearing “was fatally defective because
Tarr, the broker seeking expungement, was permitted to testify unsworn without cross
examination, while her customer Liebhaber, who opposed expungement, was denied the
10
right even to speak, with or without cross examination. As a result, the award’s findings
were not properly made under FINRA Rule 2080 (which governs arbitrator-ordered
expungements).” FINRA further contended that the arbitrators exceeded their powers by
violating applicable FINRA rules, and substantially prejudiced Liebhaber by disallowing
her testimony.
In reply, Royal Alliance argued that Liebhaber could not establish substantial
prejudice because hearings need not include an opportunity to present live testimony and
Liebhaber failed to take advantage of the opportunity to submit written statements. It
further contended that Liebhaber failed to demonstrate that cross-examination of Tarr
would have changed the outcome of the hearing, and that neither FINRA’s nor
Liebhaber’s interests were affected by the award. Royal Alliance also refuted
Liebhaber’s and FINRA’s contentions that the arbitrators violated FINRA rules and
exceeded their powers.
The trial court held a hearing on the petitions on May 18, 2015. The court
indicated at the outset that its tentative decision was to vacate the award. It explained,
“Not only did they [the arbitrators] not permit live testimony, but they also permitted Ms.
Tar[r] to testify unsworn. She got to go into the fact that her father was a minister. She
got to talk about what a good person she was and all that. Ms. Liebhaber’s attorney
didn’t get a chance to ask her questions. Ms. Liebhaber didn’t even get a chance to
testify. Somehow that just doesn’t sound right, does it?”
Royal Alliance denied that Tarr was “offered as a witness to give testimony un-
rebutted,” claiming that “[s]he was there to answer questions posed if any by the
arbitrators.” It also argued that Liebhaber had “no substantial rights in the outcome” of
the expungment hearing, since her claims already had been resolved. Royal Alliance
additionally asserted that the arbitration award satisfied the requirements of FINRA Rule
12805, and contended that “[i]f FINRA’s position is there needs to be live testimony in
hearings like that, they need to amend their rule because the rule doesn’t require that.”
Liebhaber argued that she had an “absolute interest” in the expungement
proceedings, because the award deemed her complaints against Tarr false and therefore
11
found her “essentially to have been a liar without anyone hearing from her or giving her a
right to cross-examine the principle [sic] witness against her, which is a basic
fundamental due process right.” She further argued that she was “actually representing
the interests of FINRA and the general public” by attempting to ensure that Tarr’s CRD
and BrokerCheck reports were accurate. In her view, “if she’s not permitted to cross-
examine the broker, then the CRD system -- this whole system becomes a farce.” FINRA
likewise contended that it had an interest in the proceedings, namely “protecting the
integrity of the CRD system and the information contained in it.” It further argued that
the arbitrators violated FINRA Rule 12805 by not allowing Liebhaber to testify or cross-
examine Tarr, despite having advance notice that she wished to do both.
The trial court ultimately adopted its tentative ruling and vacated the arbitration
award “on the ground that Liebhaber’s rights were substantially prejudiced by
misconduct of the arbitrators, the arbitrators exceeded their powers, and Liebhaber’s
rights were substantially prejudiced by refusal of the arbitrators to hear evidence material
to the controversy.” The court found that the arbitrators violated FINRA Rule 2080 “by
allowing Ms. Tarr to provide an unsworn statement in support of expungement while also
preventing Liebhaber’s attorney from cross-examining Ms. Tarr in order to determine if
the requirements of Rule 2080 were met.”
Royal Alliance timely appealed. (See § 1294, subds. (b) & (c); Cinel v.
Christopher (2012) 203 Cal. App. 4th 759, 765-766.)
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DISCUSSION
I. General Arbitration Principles4
“Title 9 of the Code of Civil Procedure, as enacted and periodically amended by
the Legislature, represents a comprehensive statutory scheme regulating private
arbitration in this state. (§ 1280 et seq.) Through this detailed statutory scheme, the
Legislature has expressed a ‘strong public policy in favor of arbitration as a speedy and
relatively inexpensive means of dispute resolution.’ [Citations.]” (Moncharsh v. Heily &
Blase (1992) 3 Cal. 4th 1, 9 (Moncharsh).) Accordingly, “it is the general rule that parties
to a private arbitration impliedly agree that the arbitrator’s decision will be both binding
and final.” (Ibid.) Likewise, “it is the general rule that, ‘The merits of the controversy
between the parties are not subject to judicial review.’ [Citations.] More specifically,
courts will not review the validity of the arbitrator’s reasoning. [Citations.] Further, a
court may not review the sufficiency of the evidence supporting an arbitrator’s award.
[Citations.] [¶] Thus, it is the general rule that, with narrow exceptions, an arbitrator’s
decision cannot be reviewed for errors of fact or law.” (Id. at p. 11.)
“On the other hand, arbitration procedures that interfere with a party’s right to a
fair hearing are reviewable on appeal.” (Hoso Foods, Inc. v. Columbus Club (2010) 190
4
Security brokerage agreements involve interstate commerce and therefore are
governed by the Federal Arbitration Act (9 U.S.C. § 1 et seq.). (Mastick v. TD
Ameritrade, Inc. (2012) 209 Cal. App. 4th 1258, 1263.) However, the parties sought
confirmation and vacation of the arbitration award in California state court pursuant to
the California Arbitration Act (CAA). (See § 1280 et seq.) “[T]he presence of interstate
commerce [is] not sufficient, by itself, to make the FAA’s procedural provisions,
including its provisions regarding judicial review (9 U.S.C. §§ 10, 11), applicable in
California state courts. This is so because a state court applies its own procedural law—
here, the procedural provisions of the CAA—absent a choice-of-law provision expressly
mandating the application of the procedural law of another jurisdiction.” (Mave
Enterprises, Inc. v. Travelers Indemnity Company of Connecticut (2013) 219 Cal. App. 4th
1408, 1429; see also SWAB Financial v. E*Trade Securities (2007) 150 Cal. App. 4th
1181, 1195 [noting the FAA “does not preempt California’s statutory grounds for
vacating an arbitration award”].) We accordingly consider the matter under the CAA,
including the provisions governing judicial review, namely section 1286.2. (Mave
Enterprises, Inc. v. Travelers Indemnity Company of Connecticut, supra, 219
Cal.App.4th at p. 1430.)
13
Cal. App. 4th 881, 888.) “Precisely because arbitrators wield such mighty and largely
unchecked power, the Legislature has taken an increasingly more active role in protecting
the fairness of the process. (Moncharsh, supra, 3 Cal.4th at pp. 12-13.)” (Azteca
Construction, Inc. v. ADR Consulting, Inc. (2004) 121 Cal. App. 4th 1156, 1165.) Indeed,
one of the reasons “why we tolerate the risk of an erroneous decision” by arbitrators is
the existence of statutes permitting judicial review of the fairness of the arbitration
process. (Moncharsh, supra, 3 Cal.4th at p. 12.)
One such statute is section 1286.2, which enumerates “grounds which will justify
vacating an arbitration award.” (California Faculty Association v. Superior Court (1998)
63 Cal. App. 4th 935, 944.) Section 1286.2 provides in pertinent part that a trial court
“shall vacate” an arbitration award if it finds that “[t]he rights of the party were
substantially prejudiced by misconduct of a neutral arbitrator”; “[t]he arbitrators
exceeded their powers and the award cannot be corrected without affecting the merits of
the decision upon the controversy submitted”; or “[t]he rights of the party were
substantially prejudiced by the refusal of the arbitrators . . . to hear evidence material to
the controversy or by other conduct of the arbitrators contrary to the provisions of this
title.” (§ 1286.2, subds. (a)(3), (a)(4), (a)(5).) The party seeking to vacate an arbitration
award bears the burden of establishing that one of the six grounds listed in section 1286.2
applies and that the party was prejudiced by the arbitrator’s error. (See Comerica Bank v.
Howsam (2012) 208 Cal. App. 4th 790, 826.)
We review the trial court’s order vacating the arbitration award de novo. (SWAB
Financial v. E*Trade Securities, supra, 150 Cal.App.4th at p. 1196.) We review for
substantial evidence any determinations of disputed factual issues. (Ibid.)
II. Analysis
A. Violation of the forum rules is not necessary for prejudice.
The parties devote a substantial portion of their briefing to the questions of which
portions of the FINRA Code of Arbitration Procedure for Customer Disputes apply, what
the applicable provisions require, and whether the arbitrators complied with these
14
requirements.5 Prior to oral argument, we asked the parties to be prepared to discuss
whether “a finding of substantial prejudice within the meaning of Code of Civil
Procedure section 1286.2, subdivision (a)(5) [can] be made absent a finding that the rules
of the arbitral forum were violated.” All three parties addressed this issue at oral
argument.6
Royal Alliance maintained that a party’s rights can never be prejudiced—and
therefore an arbitral award can never be vacated under section 1286.2, subdivision
(a)(5)—if the rules of the arbitral forum are followed. We disagree.
The CAA, under which Royal Alliance sought confirmation of the expungement
award, “seeks to enhance both the appearance and reality of fairness in arbitration
proceedings.” (Ovitz v. Schulman (2005) 133 Cal. App. 4th 830, 853.) To that end, it
provides the basic parameters of arbitration proceedings unless the parties specifically
agree otherwise; “such parameters include limited judicial review of the arbitration
award.” (Corona v. Amherst Partners (2003) 107 Cal. App. 4th 701, 705.) Sections 1285
and 1286.2, respectively govern the confirmation and vacation of arbitration awards.
Unlike §§ 1281.6, 1282, 1282.2, and 1283.8, these sections are not by their terms
modifiable or avoidable by consent of the parties. Indeed, courts have characterized
section 1286.2, subdivision (a)(5) as a “safety valve in private arbitration that permits a
court to intercede when an arbitrator has prevented a party from fairly presenting its
case.” (Hall v. Superior Court (1993) 18 Cal. App. 4th 427, 439 [discussing section
1286.2, subdivision (e), the predecessor statute to section 1286.2, subdivision (a)(5)]
(Hall); see also Burlage v. Superior Court (2009) 178 Cal. App. 4th 524, 529.) Section
1286.2, subdivision (a)(5) does not mention forum rules, or require courts to make a
5
The parties are in agreement only that Rules 2080 (“Obtaining an Order of
Expungement of Customer Dispute Information from the Central Registration Depository
(CRD) System”) and 12805 (“Expungement of Customer Dispute Information under Rule
2080”) apply. They dispute the meaning and breadth of those rules, as well as the
applicability of other rules contained in the FINRA Code of Arbitration Procedure for
Customer Disputes.
6
None argued that the federally applicable FINRA rules should be given
supremacy or precedence over state statutes or decisional law.
15
finding that such rules were violated before assessing prejudice and vacating an award.
The effectiveness of this “safety valve” and other CAA provisions designed to ensure
fairness would be substantially reduced if a party’s rights could be prejudiced only in
proceedings in which an explicit rule of the forum was violated.
Accordingly, we find it unnecessary in this case to resolve the parties’ substantial
disagreements regarding the scope of (and degree of arbitrator compliance with) the
FINRA rules. The pertinent question for us is not what the FINRA rules provided or
whether the arbitrators adhered to them; it is whether the trial court correctly concluded
that the arbitrators prevented a party from fairly presenting its case and prejudiced her
rights as a result. (Hall, supra, 18 Cal.App.4th at p. 439.) We therefore focus our
analysis on whether the trial court properly vacated the award under section 1286.2,
subdivision (a)(5).
B. The arbitrators refused to hear evidence material to the controversy.
Section 1286.2, subdivision (a)(5) provides that the trial court “shall vacate” an
arbitration award if “The rights of the party were substantially prejudiced by . . . the
refusal of the arbitrators to hear evidence material to the controversy or by other conduct
of the arbitrators contrary to the provisions of this title.” The statute thus presents a two-
part inquiry: (1) Did the arbitrators refuse to hear evidence material to the controversy or
engage in other conduct contrary to the provisions of the CAA? (2) If so, were the rights
of the party seeking to vacate the award substantially prejudiced? We consider the
threshold inquiry regarding the arbitrators’ conduct first.
Section 1286.2, subdivision (a)(5) includes “refusal of the arbitrators to hear
evidence material to the controversy” among the grounds for vacating an arbitration
award. Another provision of the CAA, section 1282.2, subdivision (d), provides that,
unless they agree otherwise, “[t]he parties to the arbitration are entitled to be heard, to
present evidence, and to cross-examine witnesses appearing at the hearing, but rules of
evidence and rules of judicial procedure need not be observed. On request of any party to
the arbitration, the testimony of witnesses shall be given under oath.” Section 1282.2,
subdivision (d) is incorporated into section 1286.2, subdivision (a)(5) by the phrase
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“other conduct of the arbitrators contrary to the provisions of this title.” Both statutes
codify within the CAA the fundamental principle that “[a]rbitration should give both
parties an opportunity to be heard.” (Cheng-Canindin v. Renaissance Hotel Associates
(1996) 50 Cal. App. 4th 676, 689.) The parties may be heard on the papers rather than at a
live hearing (Schlessinger v. Rosenfeld, Meyer & Susman (1995) 40 Cal. App. 4th 1096,
1105), but the opportunity to be heard must be extended to all parties equitably. That
requirement was violated here. Both parties to the expungement were permitted to submit
written evidence, but only Royal Alliance was given the opportunity to offer oral
evidence at the expungement proceeding. The arbitrators barred Liebhaber from doing
so.
The arbitrators also foreclosed Liehaber’s efforts to question Tarr. Regardless of
whether the FINRA rules applicable to expungement hearings expressly contain or
somehow incorporate the right to cross-examination, section 1282.2, subdivision (d)
“entitles a party to cross-examine witnesses if they appear at a hearing.” (Schlessinger v.
Rosenfeld, Meyer & Susman, supra, 40 Cal.App.4th at p. 1106; see § 1282.2, subd. (d).)
Liebhaber was a party to the proceeding, and Tarr appeared at opposing party Royal
Alliance’s behest to “offer any additional testimony” for the arbitrators. Although she
did not technically “testify” for purposes of California law, as she was not under oath (see
§ 17, subd. (b)(5)(B)), Tarr appeared and acted as a witness by submitting oral evidence
for the arbitrators’ consideration. (Cf. § 1282.2, subd. (d) [suggesting that a person may
be a witness during an arbitration without being sworn: “On request of any party to the
arbitration, the testimony of witnesses shall be given under oath.”].) Yet the arbitrators
denied Liebhaber any opportunity to question Tarr.
Although section 1282.2, subdivision (d) also provides that “rules of evidence and
rules of judicial procedure need not be observed,” the procedural flexibility of the arbitral
forum does not override participants’ fundamental, common law right to a fair
proceeding. (See Graham v. Scissor-Tail, Inc. (1981) 28 Cal. 3d 807, 826, fn. 23.) It is
one thing to establish reasonable time limits for the parties’ presentation and rebuttal of
evidence, which is well within an arbitrator’s discretion. It is another to curtail one
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party’s oral presentation and exploration of evidence because the arbitration panel does
not want “to be here for another two hours.” (Cf. In re Marriage of Carlsson (2008) 163
Cal. App. 4th 281, 290-291 [finding reversible error where trial judge “display[ed] ill-
disguised impatience” with a litigant, “repeatedly threaten[ed] a mistrial if the
proceedings were not concluded quickly enough,” and “abruptly ended the trial before
[the litigant] had finished his presentation”].) Liebhaber initiated the proceedings that
culminated in Tarr’s expungement request and was named as a party to the expungement
proceedings; she had an interest in the outcome of the proceedings and the right to be
treated fairly and in accordance with statutory law during their pendency.
C. Liebhaber’s rights were substantially prejudiced.
The second question presented by section 1286.2, subdivision (a)(5) is whether the
rights of a party to the arbitration “were substantially prejudiced.” This prejudice
criterion was satisfied here.
“Where, as here, a party complains of excluded material evidence, the reviewing
court should generally focus first on prejudice, not materiality.” (Hall, supra, 18
Cal.App.4th at p. 439.) A party’s mere disappointment with an arbitration decision is not
sufficient to prove substantial prejudice. (Taheri Law Group, A.P.C. v. Sorokurs (2009)
176 Cal. App. 4th 956, 964.) “To find substantial prejudice, the 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, supra, 18
Cal.App.4th at p. 439.) The prejudice query under section 1286.2, subdivision (a)(5) is
not, as Royal Alliance suggests, “ultimately a question of the sufficiency of evidence,”
an inquiry generally outside the permissible scope of review of arbitration awards.
Rather, it is an examination of the proffered but rejected evidence to determine the
impact of its omission under the theory adopted by the arbitrators.
The arbitrators’ legal theory in this case was that Liebhaber’s contentions were
false and clearly erroneous because Royal Alliance and Tarr said they were, and
Liebhaber failed to refute these claims or offer any evidence to the contrary. However,
the arbitrators did not afford Liebhaber the opportunity to present evidence orally, despite
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extending such an opportunity to Royal Alliance. Although the arbitrators told Liebhaber
that her oral evidence and proposed cross-examination were unlikely to “dramatically
impact” their deliberations, they nonetheless relied on the absence of such evidence to
support their ruling, mentioning the inadequacy of Liebhaber’s presentation at least four
times in the written award. The arbitrators also relied on the credibility of the statements
Tarr made at the hearing, even though they acknowledged that “Ms. Tarr didn’t say
anything substantive that is not already on the record on her behalf with respect to the
declaration.” Accordingly, we conclude that “the arbitrator[s] might well have made a
different award” (Hall, supra, 18 Cal.App.4th at p. 439) if they had allowed Liebhaber to
tell her side of the story or question Tarr’s.
Royal Alliance correctly notes that the arbitration panel received documentary
evidence from both sides. It fails to acknowledge, however, that only Liebhaber was
deprived of the opportunity to supplement that cold record with contemporaneous oral
comments. The arbitrators permitted Royal Alliance to present Tarr’s oral statements,
deemed them credible, and relied on them to conclude that she recommended appropriate
investments for Liebhaber. But the arbitration panel could not fully weigh the credibility
of Tarr’s statements due to the absence of cross-examination; “‘[o]ne cannot “consider”
what one has refused to “hear.”’” (Burlage v. Superior Court, supra, 178 Cal.App.4th at
p. 531.) During the expungement proceedings, Liebhaber’s counsel placed on the record
several lines of questioning he intended to explore with Tarr: “how she came to meet
Ms. Liebhaber, what advice she gave her, questions about the suitability of the
investments, whether she considered certain factors about these investments that she was
recommending, how much time she spent giving her the advice she gave her and what
she told her about whether she should take this early retirement at age 47.” All of these
areas of inquiry were aimed at the ultimate question of whether expungement was
warranted because Liebhaber’s complaints against Tarr were false or erroneous, and
could well have affected the arbitrators’ perfunctory conclusion that “the statements
offered by non-party Kathleen Tarr during the telephonic hearing were credible.” As
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Liebhaber argued to the trial court, she was not given the opportunity “to show to the
panel that . . . what [Tarr] is saying is not exactly accurate.”
Simply put, the hearing was not fair. The arbitrators gave Royal Alliance an
unfettered opportunity to bolster the written record but denied Liebhaber even a limited
chance to do the same. Liebhaber’s rights as a party to the arbitration proceedings were
substantially prejudiced within the meaning of section 1286.2, subdivision (a)(5), and the
arbitration order properly was vacated as a result.
DISPOSITION
The judgment of the trial court is affirmed. Liebhaber and FINRA shall recover
their costs on appeal.
CERTIFIED FOR PUBLICATION
COLLINS, J.
We concur:
EPSTEIN, P. J.
MANELLA, J.
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