What You Need to Know About Dispute Resolution

First of all, it is mandatory. Second, it is effective.Third, it can be relatively inexpensive. Today, most contracts including most real estate purchase agreements‚ contain a provision that requires the parties to submit disputes to arbitration before going to court. If you’ve ever been involved in litigation, you know that at some point in the process, Court rules require the parties to participate in some form of Alternative Dispute Resolution, or  ADR. This can take the form of arbitration or mediation. However, most people, including some attorneys, are confused by these terms.  What are they?  How are they different? Which one is better?

According to the Superior Court of California, County of Santa Clara, ADR is a process in which a neutral person helps people who cannot agree, so that they can resolve their case. The types of ADR available for civil litigation include mediation, neutral evaluation, private arbitration, judicial arbitration, and early settlement conferences. In addition, if the case does not settle, a mandatory settlement conference is usually scheduled the week before the matter is scheduled to go to trial.

Mediation is described as an informal, confidential, flexible and non-binding process‚ in which the mediator helps the parties to resolve the dispute. In mediation, the parties are free to come up with whatever solution is mutually satisfactory. The mediator facilitates the discussion, but does not make rulings. A good mediator can help the parties consider options they and their attorneys might not otherwise have considered. The Courts are somewhat limited in what they can order the parties to do — the parties themselves have a lot more flexibility to fashion a remedy more suitable to their situation.

Arbitration‚ is similar to but less formal than a trial. The parties submit their respective arguments to a neutral  either an experienced attorney or a specially appointed Judge who will make a ruling based on the evidence and arguments submitted.  There is no jury in arbitration. The parties can agree (in advance) that this decision will be either binding or non-binding. If the decision is non-binding, either party may reject the ruling and the matter will proceed to trial. However, in many cases the arbitrator’s ruling gives the parties an idea how the Court might view the case. The primary advantage of binding arbitration is that is can be less costly and produce faster results than a trial. In complex cases involving large sums of money, the parties often will pay for special private arbitration, usually conducted by retired judges.

Dispute resolution is very effective, and can be relatively inexpensive.  Over 90% of all cases filed in Superior Court in Santa Clara County settle before going to trial, sometimes, quite literally, on the courthouse steps. Many of the forms of ADR are offered by the Court to parties in litigation for free or for nominal sums. However, for one reason or the other, parties ignore these opportunities and instead spend considerable time, money and effort to prepare for trial.  By the time they are directed to participate in mandatory settlement, they sometimes feel  erroneously  that they have nothing to lose. They fail to take advantage of the opportunity to take control of the outcome, and ignore the real costs of trial, post-trial procedures, and appeals‚  which can take years!

At any time, anyone may seek mediation to help them resolve a dispute and possibly avoid the cost, time and stress of litigation altogether. A key to saving money is to agree to mediation as soon as possible — before lawsuits are filed, if possible. The process is confidential, relatively inexpensive (especially when compared to the cost of lengthy litigation), and surprisingly effective. The ideal mediator should be knowledgeable about the subject area of the relevant law, experienced and trained, and skillful at getting the parties to explore all reasonable options.

ADR provides parties to a dispute the opportunity to control the outcome, reach an early resolution, and save thousands and thousands of dollars. Remember, the money you save may be yours!  If you need an experienced mediator who understands real estate, business, and common sense, please feel free to contact me.

Arbitration: Be Careful What You Ask For

In the past I’ve written about the importance of reading and understanding the Arbitration Clause in your contracts, and warned you not to sign until you fully understood the consequences. I also noted that the U.S. Supreme Court had granted certiorari to hear arguments in a case that raised the question whether the arbitrator had interpreted the parties” contract in determining that the parties had authorized a class action.  The case, Oxford Health Plans LLC v. Sutter, 675 F.3d 215, was affirmed on June 10 by the U.S. Supreme Court.

Dr. Sutton is a pediatrician who provided medical services under contract with Oxford Health Plan.  The contract included a binding arbitration clause for any contractual disputes. Alleging that Oxford had failed to fully and promptly pay him and other physicians with similar contracts, Dr. Sutton filed a proposed class action.  Oxford moved to compel arbitration, and the court granted the motion. The parties agreed that the arbitrator should decide whether or not the contract authorized class arbitration, and the arbitrator concluded that it did. Oxford then filed a motion to vacate the arbitrator”s decision, claiming he had exceeded his powers under Section 10(a)(4) of the Federal Arbitration Act.

While the case was pending, the U.S. Supreme Court issued a ruling in the case of Stolt-Nielson S.A. v. AnimalFeeds Int”l Corp., 559 U.S. 662 (2010), which held that an arbitrator may employ class procedures only if the parties have authorized them.  In Stolt-Nielson, the parties stipulated they had never reached an agreement on class arbitration, so the arbitrator”s decision approving the class action in the Stolt-Nielson case was held casino online to be in excess of his powers.  Based on the ruling in Stolt-Nielson, Oxford asked the arbitrator to reconsider his decision. The arbitrator issued a new opinion saying that Stolt-Nielson did not apply; in the Oxford case the parties disputed whether the contractual language authorized class actions, whereas in Stolt-Nielson, the parties agreed they had not established intent.  The arbitrator in the Oxford case reaffirmed his conclusion that class arbitration was permitted based on the intent of the parties.

The key lesson of Oxford is the extremely limited scope of judicial review available to vacate arbitration rulings. Under the Federal Arbitration Act (FAA), courts may vacate the arbitrator”s decision “only in very unusual circumstances.” The Court goes on to note that FAA Section 10(a)(4) authorizes a federal court to set aside an arbitration award where the arbitrator exceeded his powers, but declares that a party seeking relief bears “a heavy burden.” “It is not enough … to show that the arbitrator committed an error–or even a serious error.”  The Oxford Court went on to declare that “the sole question … is whether the arbitrator (even arguably) interpreted the parties” contract, not whether he got its meaning right or wrong.” (Oxford; emphasis added.)  In other words, The arbitrator”s decision, even if he committed a serious error or got it wrong, will withstand a legal challenge to vacate unless the aggrieved party can show that arbitrator”s actions were outside the scope of his contractually delegated authority.

Driving home the point, the Court ruled that Oxford chose arbitration, and “it must now live with that choice.” Even if the arbitrator made a “grave error,” it would not be sufficient to vacate the award. “The potential for those mistakes is the price of agreeing to arbitration.” Agreeing to submit a dispute to arbitration is a bargained-for risk.

In other words – be careful what you ask for!

PRIDE GOETH BEFORE A FALL

A recent legal decision involving a real estate dispute received some attention because the Court denied the prevailing party attorneys’ fees. The Third District Court of Appeal was attempting to send a message when it overturned the Trial Court’s decision awarding the fees. But there was more than one message in the ruling worth noting.

The case, Cullen v. Corwin, was certified for only partial publication, which severely limits the extent to which it may be cited. The key facts were that Corwin, who had purchased a residential property from Cullen, later discovered a serious defect in the garage structure that caused the roof to leak and resulted in several thousand dollars of damage. In the published portion of the decision, the Court notes that although the Sellers (Cullen) successfully argued that the Buyers (Corwin) failed to bring their case before the applicable statutes of limitation had expired, and were therefore the prevailing party, the Sellers failed to comply with the requirement that a party must mediate before they litigate.

While this requirement is most often used by Defendants against Plaintiffs who rush into litigation before going through the procedures required under most standard Purchase and Sale Agreements (including standard CAR forms), the Court noted that the actual language of the provision allowing recovery of legal fees contains a condition precedent that requires any party to first attempt to resolve the dispute through mediation, and not refuse to mediate in light of a request to do so, in order to recover legal fees. The Court noted that the Plaintiff’s attorney had twice requested the Defendant to mediate, and Defendants refused. The Court took note of the fact that the Defendant’s attorney had declared that they wanted the results of discovery first, so that any mediation would be more “meaningful.” The Court saw that tactic for what it was, ruled that the response constituted a refusal to mediate in response to a request, and therefore overturned the award of attorneys’ fees.

The Court went on to note that the mediation requirement is designed to encourage mediation as a preferable alternative to litigation, which can be costly and time-consuming. But in the unpublished section of the case, the Court found plenty of fault with the Plaintiff, who had clearly failed to take reasonable steps to protect their rights in a timely manner when they first discovered the defects in the roof. Moreover, the Court found several errors in Plaintiff’s pleadings, but in the end, the Court found the Defendants’ excuses unconvincing.

The primary message in this case was that in order to recover legal costs and attorneys’ fees as a prevailing party, one must comply with the plain language of the requirement to make a good faith effort to participate in mediation. The secondary message appears to be “don’t overplay your hand.” The Defendants knew they had a very good chance of prevailing on the basis of the failure of the plaintiffs to meet the statute of limitations. Forcing the Plaintiffs to comply with discovery requests before agreeing to mediation would only drive up the Plaintiff’s costs, and not substantially change the outcome. But refusing to mediate was unacceptable, and on the basis of the Court’s interpretation of the contract provisions, sufficient grounds on which to deny recovery of their fees.

No matter how strong or righteous a case someone may think they have, public policy considerations and standard purchase agreement contracts require the parties to at least make a good faith effort to mediate. Arrogantly refusing to do so not only does not do your clients any good, but may end up costing you dearly!

Forecast: 100% Chance of Uncertainty

In a recent article published on September 18 in Forbes Magazine, “Where Home Prices are Hitting Bottom,” author Francesca Levy attempts to make sense out of recently compiled housing price data produced by a Mountain View research firm, Altosresearch.com, in effect trying to explain where and how different Metropolitan Statistical Areas (MSA) would be hitting “bottom.”  The data focused on whether the number of homes selling at a discount had declined or held steady.  Presumably, if the number of homes selling at a discount was declining, the argument could be made that the housing market in that specific MSA was close to the “bottom” — and a signal to investors to buy.

Four days previously, Ms. Levy had authored another article in Forbes, entitled “Where Home Prices are Likely to Rise.”   In that article, Ms. Levy reported on a housing price forecast produced by Moody’s Economy.com.  As reported, Moody’s calculations were based on long-term demographic and economic fundamentals, changes in income and population, and supply and demand.  Overall, the prediction was for a nationwide 16.08% decrease in prices by the end of the year, but by 2014, prices “will have nearly reverted to their pre-2009 state.”

For San Jose, the article says that the five-year forecast calls for a 23.04% jump in prices; however, that will follow another 25.14% decrease within the next year!  Housing markets in Texas will not see much of a climb, but then they also won’t experience much of a decrease.

As I’ve fondly quoted Yogi Berra:  “Making predictions is difficult, especially about the future.”  The Forbes articles make for interesting reading, and the online graphics are impressive.  But the “small print” caveats continue to provide the harsh reality check.  No one knows the full extent of the number of homes that will go into foreclosure, whether Congress will extend (or increase) the first-time homebuyer’s tax credit, scheduled to expire on November 30 of this year, and certainly no one knows if the banks will relax credit and start making loans again.  FHA, which has been providing a substantial number of loans, recently announced it has to tighten credit due to low reserves.

All of this makes for interesting reading, but one has to question where it takes us.  There are a number of unprecedented anomalies that makes me wonder if the forecast models are valid.  At least one real estate expert noted recently that there were over 2 million excess housing units in California — a shocking number given the number of programs designed to address housing shortages in this State.  California recently hit 12.2% unemployment.  Add to this a “shadow” inventory of properties that have not yet been foreclosed, due either to voluntary moratoriums or deliberate efforts to control inventory.   The Wall St. Journal reports there are approximately 1.2 million homes where the foreclosure process has not begun, even though the mortgages are more than 90 days past due.    The repercussions on local governments across the country have yet to be fully felt, let alone measured, yet are causing unprecedented cutbacks in services.   Ultimately, the entire process will come down to buyers’ ability to purchase homes, whether as first-time buyers taking advantage of tax credits and other incentives, or property owners selling their existing property and moving up.  Without jobs, this simply will not happen.

Therefore, I question what it means to say that housing prices in any specific MSA will rise or fall over any projected time period, given the current turmoil in the market, particularly the inability of the typical person to borrow money.  At the special Norris Group event held on September 11, 2009, “I Survived Real Estate 2009,” the various speakers were remarkably eloquent if not cautious.  David Kittle, 2009 Chairman of the Mortgage Banker’s Association, and John Young, Vice President of the California Builders Industry Association, along with other panelists, were quick to point out that for every new home purchase would result in anadditional expenditure of $7,500 for furnishings and supplies, and noted that Congress is considering a $15,000 tax credit.  They claim that if enacted, this would result in over 400,000 home purchases, significantly reducing the backlog of troubled inventory.  Interesting concepts, and worthy of consideration as a means to jump start the economy.  But such a move by Congress, if enacted, would definitely throw another wrench in to the forecasting models.

It’s easy to be a skeptic, and I won’t claim to know of a better methodology or model.  But I would caution investors to adopt a healthy dose of skepticism when reviewing the ubiquitous “Top Ten Cities” lists as a basis for making an investment decision.  Concentrate on cash flow, a strong and diverse job market, and local conditions.  A good cash flow investment in a bad market will be a better investment than a negative cash flow investment in a good market.  An outdoor enthusiast once told me, “there’s no such thing as bad weather – only bad clothing.”  A corollary maxim would probably be that “there’s no such thing as a bad market — only a bad deal.”  Good gear can get you through the worst of storms.  A good deal will beat a bad market.

Investors need to look deeper into the background information provided by these articles, and REALLY understand the dynamics and demongraphics.  Communities with diverse economies and industries will fare better than those without.