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Arbitration in Real Property Transactions: Efficient, Cost Effective, Fair or None of the Above?”
Real Estate Newsletter
This is the second of a two-part article on arbitration in the context of real estate disputes. In the first part, published in the last edition of the Real Estate Newsletter, we analyzed the pros and cons of arbitration generally. Here, we discuss a few specific examples of how an agreement to arbitrate might affect a number of facets of real estate disputes.
Arbitration and Real Estate Disputes
Arbitration in connection with real estate disputes presents special concerns.
Problems in Securing Provisional Remedies in Arbitration
The problems inherent in disputes over real property frequently require quick solutions. A property owner that is party to a sales contract might refuse to go through with it because of a better offer from another purchaser. A lender might find it is undersecured after a mortgagor defaults. A lessee might have abused its leasehold property, or used it in a way that is not permitted under the lease or under applicable zoning ordinances.
Ironically, the solutions available to an aggrieved party are likely to be far quicker to obtain in court than in an arbitration. A purchaser can file a lis pendens, a written notice that a lawsuit concerning the property has been filed. A lender might seek to obtain security by way of a prejudgment attachment. A property owner can apply for an injunction against unlawful behavior. Indeed, these provisional remedies and others so important to parties in real estate disputes are for the most part available only through judicial process.
The procedure for securing a lis pendens, for example, is mandated by statute and a close reading of the relevant provisions indicates that a lis pendens is not available through arbitration. Serving papers in arbitration or even seeking a court-ordered arbitration does not amount to the filing of suit that is necessary to record a notice of pendency of action.
Receivership is also a provisional remedy that only a judge can order. (Marsch v. Williams, 28 Cal. App. 4th 238, 245 (1994).) Receivership is available in disputes where there is a danger of loss, waste or injury to the property, where a secured lender seeks performance of assignment of rents and payments, and in cases of unlawful detainer. (Cal. Code of Civ. Proc. §§ 564(b)(1),(6),(10).) Since the appointment of a receiver takes control of property from someone who might turn out to be the rightful owner, the courts have ruled that the statutory limits must be strictly applied. (See Baron v. Fire Insurance Exchange, 154 Cal. App. 4th 1184, 1192-93 (2007), which upheld an arbitrator's appointment of a receiver only because the appointment was not challenged before the trial court.) As such, a receiver can only be appointed in the classes of cases expressly set forth in the statutes authorizing them. (Turner v. Superior Court, 72 Cal. App. 3d 804, 811 (1977).) After reviewing the statutes, the Court of Appeal concluded in Marsch that an arbitration panel had exceeded its power by appointing a receiver, and ruled that only a court is authorized to do so.
The law is less clear about issuing injunctions and other remedies such as pre-judgment attachment, although an injunction or attachment arguably could be awarded either by a court or an arbitrator. In DHL Information Services, Inc. v. Infinite Software Corp., 502 F.Supp.2d 1082 (C.D. Cal. 2007), the federal district court declined "to rush in where the arbitrator [was] free to tread," thus deferring to the arbitrator on the issue of whether to issue an injunction. With very little discussion, the court stated that since "almost all their disputes are going to arbitration where interim relief is authorized, it is best not to carve out interim relief from the issues the arbitrator will decide, even though Rule 34(c) of the AAA Rules would allow this Court to do so."
Even if an arbitrator is authorized to award an "interim" remedy, it is unclear exactly how such a remedy would be enforced without resort to judicial process. An injunction, for example, is a court order, and its violation can lead to sanctions by way of contempt. (Cal. Code of Civ. Proc. §§ 175.5, 121209(a)(5).) An arbitrator's award is not an order or the equivalent of it – it is a decision resolving a dispute by one contractually authorized to do so. Although the award can be turned into an order by a petition to compel its enforcement, an arbitrator does not have the power to enforce an award by holding a party in contempt. By the same token, an arbitrator might issue an interim award providing for prejudgment attachment (See China National Metal Products Import/Export Co. v. Apex Digital, Inc., 155 F.Supp.2d 1174, 1182 (C.D. Cal. 2001)), but a sheriff would likely be loathe to take action on an arbitrator's award without a right to attach order issued by a court. (Under Cal. Code of Civ. Proc. §481 et seq., the sheriff is authorized to attach property upon receipt of a right to attach order.) Although an arbitrator may be authorized to decide the appropriateness of interim remedies, he or she lacks the authority to see that the decision is enforced. (David v. Abergel, 46 Cal. App. 4th 1281, 1284 (1996).)
In any event, it is important to note that under the statute, an application to a court for a provisional remedy does not destroy a party's right to arbitration, so long as the party also moves to stay all further proceedings in court pending completion of the arbitration.
Problem of Arbitration and Unlawful Detainer
Arbitration is also of questionable value in connection with a landlord's efforts to recoup possession of its property after unlawful detainer. It is likely to take longer than an unlawful detainer proceeding and to be more expensive.
The Legislature has provided landlords with an expedited and summary procedure to evict wayward tenants and recover their properties. The California Code of Civil Procedure states that upon the landlord's filing of a complaint, the tenant must answer or otherwise respond within five days. Trial must be set within 20 days after any request to set. Although not all courts are able in all cases to meet the statutorily prescribed deadlines, courts are at least sensitive to these requirements consistent with the demands of other high-priority matters.
There is little question that arbitration would take longer than an unlawful detainer proceeding and would undoubtedly delay resolution of the dispute. As already noted, there can be delay, as well, in forcing the other party to arbitration, in choosing an arbitrator, in disputes over the right to discovery, in disputes over the right to summary judgment, and in the scheduling of an arbitration hearing, particularly one with more than one arbitrator. As a result of the tenant's actions, the dispute would unquestionably be more costly than litigation.
Problems Inherent in Arbitration and Judicial Foreclosure
Under California statute, a creditor secured by real property ordinarily has the option of a judicial action to determine that the loan is in default, order that the security be sold, declare the debtor liable for any deficiency and enter a deficiency judgment if appropriate. However, it is debatable whether a "judicial" foreclosure can be carried out in whole or in part through an arbitration.
Section 726 of the Code of Civ. Proc. authorizing judicial foreclosure states:
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. In the action the court may, by its judgment, direct the sale of the encumbered real property or estate for years therein (or so much of the real property or estate for years as may be necessary), and the application of the proceeds of the sale to the payment of the costs of court, the expenses of levy and sale, and the amount due plaintiff ...
The statute also says that a foreclosure decree must declare the amount of the indebtedness and determine the personal liability of any defendant for the payment of the debt.
Typically, secured lending institutions do not include an arbitration provision in their loan documents or, if they do, they exclude judicial foreclosure from its application. Indeed, there is virtually no decisional law considering the intersection of judicial foreclosure and arbitration. If the real property is located in California, the Code of Civil Procedure will apply to the foreclosure; nonetheless, the parties may agree to apply the law of another state to recovery under the note. (Consolidated Capital Income Trust v. Khaloghli, 183 Cal.App.3d 107, 111 (1986).) Theoretically, there is no reason why the parties may not also choose an arbitrator to decide whether there is any personal liability after foreclosure. An interesting question arises, though: if the arbitrator is not obligated to follow California law, is an arbitration award in violation of the one action rule or other anti-deficiency laws enforceable? No case appears to have considered this issue.
One thing, however, is clear in the foreclosure context: initiation of a foreclosure proceeding constitutes a waiver of right to arbitrate. (See Mitchell v. Aames, 196 Cal.App.3d 183, 195 (1987), citing Keating v. Superior Court, 21 Cal.3d 584, 605 (1982).)
Conclusion
In sum, it is questionable whether arbitration provides a more efficient and cost effective forum than litigation for resolving disputes generally, and even more questionable whether arbitration does so for complex real estate disputes. Although the Supreme Court has embraced arbitration as a quick and inexpensive means of dispute resolution, the reported decisions involving arbitration demonstrate this is not necessarily correct. Moreover, certain procedures for resolving real estate disputes such as unlawful detainer or judicial foreclosure proceedings are uniquely available through the courts. Additionally, the particular need for provisional remedies in real estate disputes arguably counterbalances whatever benefits there might be in arbitration. By careful drafting and knowledge of the law applicable to arbitration and real estate, a party can avoid many of the pitfalls of arbitration and seek to reap the best of both worlds.
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