Hagan v. Park Miller LLC

Background

Kevin and Laura Hagan entered an Investment Advisory Agreement with Park Miller LLC on April 7, 2018. The agreement contained an arbitration clause covering disputes about Park Miller’s services and stated that American Arbitration Association (AAA) rules would apply. It also included a California governing-law provision and a forum-selection clause designating Contra Costa County for disputes between the adviser and client.

Park Miller managed approximately $10 million in assets for the Hagans and advised them to loan $4 million to Durham Capital, which later collapsed. The Hagans alleged that they lost their entire investment and asserted federal securities-law and breach-of-contract claims against Park Miller, John Miller, and Stuart Park.

The Hagans initially filed an arbitration claim against all three defendants. Miller and Park objected to arbitrating claims against them individually, and the Hagans voluntarily dismissed them from the arbitration. The Hagans later filed a lawsuit in Hawaii against the defendants, then voluntarily dismissed Park Miller after two weeks and later voluntarily dismissed Miller and Park. The Hagans subsequently filed this case and moved to compel arbitration before the AAA’s consumer division.

Waiver of Arbitration

The court applied the Ninth Circuit’s three-part test for waiver of a contractual right to arbitrate: the party seeking arbitration must have known of the right, acted inconsistently with it, and caused prejudice to the opposing party through those acts.

The court held that the Hagans waived their right to compel arbitration against Miller and Park. The Hagans knew about the arbitration right and acted inconsistently with it by voluntarily removing Miller and Park from the arbitration after those individuals objected to arbitration. Miller and Park were then prejudiced because the Hagans sued them in Hawaii and left them there for four months, causing them to incur legal costs connected with their motion to dismiss.

The court held that the Hagans did not waive their right to compel arbitration against Park Miller. Although filing the Hawaii lawsuit was potentially inconsistent with that right, Park Miller was voluntarily dismissed after only two weeks and did not file a motion to dismiss. The court found that Park Miller had not shown meaningful financial or other prejudice connected to the Hawaii action.

AAA Arbitration Rules

Park Miller argued that the court should require the AAA to use its commercial rules rather than its consumer rules. The court rejected that argument. The agreement required the use of AAA rules but did not specify whether the consumer or commercial rules applied. Under the AAA’s rules, the AAA had initial authority to decide which rules applied, and an arbitrator had authority to make the final decision if a party objected.

The court concluded that the AAA, rather than the court, was responsible for deciding which rules applied. Because the AAA had determined that its consumer rules applied, Park Miller had to submit to arbitration under those rules. The court also rejected Park Miller’s argument that the AAA’s refusal to administer the case meant that the arbitration agreement could not be enforced.

Arbitration Fees

California Code of Civil Procedure section 1281.97 allows a consumer to compel arbitration, with the drafting party paying reasonable attorneys’ fees and costs related to the arbitration, when the drafting party does not timely pay required arbitration fees. The court held that the statute applied because Park Miller drafted the arbitration agreement and failed to pay the required fees after the AAA determined that its consumer rules applied.

The court rejected Park Miller’s argument that section 1281.97 did not apply because the Hagans began arbitration before the statute took effect on January 1, 2020. The court explained that the statute applied to Park Miller’s later failure to pay the required fees, which occurred after the effective date. The court also held that the Hagans did not waive their right to fees by briefly pursuing the Hawaii lawsuit and then seeking arbitration.

Disposition

The court granted the Hagans’ motion to compel arbitration as to Park Miller and denied the motion as to John Miller and Stuart Park. Park Miller must arbitrate under the AAA’s consumer rules, and the Hagans are entitled to reasonable attorneys’ fees and costs related to the arbitration. The court stayed the case.