Chess v. CF Arcis IX LLC

Background

John Chess and David Orenberg were members of The Ruby Hill Golf Club. Their refundable memberships required deposits and provided rules for receiving those deposits back after resignation. In 2014, CF Arcis IX LLC purchased the club and amended the existing rules to create a Membership Plan. The amendments changed the refund requirements, added lower-priced nonrefundable memberships, and added an arbitration agreement.

Chess and Orenberg filed a proposed class action in California state court. Their eight claims alleged violations of the Consumer Legal Remedies Act, unfair competition, two types of fraud, conversion, unjust enrichment, breach of written contract, and declaratory relief. CF Arcis removed the case to federal court. The plaintiffs sought remand to state court and attorneys’ fees. CF Arcis moved to compel arbitration under the Membership Plan.

Remand and Attorneys’ Fees

The court held that it had federal subject-matter jurisdiction under both traditional diversity jurisdiction and the Class Action Fairness Act. For traditional diversity jurisdiction, the court found that the unnamed Doe defendants did not defeat diversity because the complaint’s descriptions were too vague to establish their citizenship. The court also found that the amount in controversy exceeded $75,000. It could reach that amount through the plaintiffs’ claims for treble damages based on their membership deposits and through claims involving deposits and membership dues.

The court alternatively found jurisdiction under the Class Action Fairness Act. The parties did not dispute that the proposed class had at least 100 members or that minimal diversity existed. The court found that CF Arcis showed it was more likely than not that the class’s aggregate claims exceeded $5 million, based on the alleged deposits, dues, potential treble damages, and evidence concerning the class size.

Because removal was warranted, the court DENIED the Motion for Remand. It also DENIED the plaintiffs’ request for attorneys’ fees related to removal.

Motion to Compel Arbitration

The court GRANTED CF Arcis’s Motion to Compel Arbitration and stayed the action pending arbitration. Applying the Federal Arbitration Act and California contract law, the court concluded that the Membership Plan was an enforceable contract.

The court rejected the plaintiffs’ argument that the agreement was unconscionable. Although the 2014 amendments appeared to have been presented on a take-it-or-leave-it basis, the court found that the plaintiffs had actual notice of the amendments, that the arbitration provision was prominently identified, and that the membership changes did not make the contract’s purpose worthless. The court also rejected the argument that the unilateral-modification provision made the agreement illusory. It reasoned that California’s implied duty of good faith restricted retroactive changes and that the plan required at least 30 days’ notice before changes took effect.

The court also rejected the plaintiffs’ argument under the McGill rule. Although the arbitration agreement barred class actions, the court concluded that it did not necessarily prevent an award of public injunctive relief. The court therefore did not invalidate the arbitration agreement on that basis.

The court found that equitable estoppel applied because the plaintiffs were signatories to the contract as modified and their claims relied on or were closely connected to the Membership Plan. The court further found that the plan required written notice, negotiation, and mediation before arbitration or litigation. The plaintiffs had not completed those steps and had ignored CF Arcis’s attempts to begin the required process. The court held that the plaintiffs could not avoid arbitration by refusing to perform the preliminary contractual obligations and treated mediation as unsuccessful.

Disposition

The court DENIED the Motion for Remand and the Motion for Attorneys’ Fees, GRANTED the Motion to Compel Arbitration, and stayed the action pending the outcome of arbitration. The opinion did not decide the underlying claims alleging that CF Arcis wrongfully changed the membership agreement.