Case Name: Yehuda Fulda, et al. v. PayPal, Inc.
Case No.: 17CV311182

I. Background

This case arises out of a dispute over an arbitration award rendered against plaintiff Channa Grundman (“Grundman”) and her husband Yehuda Fulda (“Fulda”) (collectively “Plaintiffs”) in favor of defendant PayPal, Inc. (“Defendant”). Currently before the Court is Defendant’s demurrer to the First Amended Complaint (“FAC”).

As alleged in the FAC, around 2016, Grundman filed a dispute with Defendant in an attempt to prevent it from providing services to Tranik Enterprises dba AuthenticWatches.com, which she believed was engaged in a fraudulent business enterprise. (FAC, ¶ 6.) This dispute was arbitrated at the demand of Grundman pursuant to the terms of a user agreement between Grundman and Defendant (“User Agreement”), with Fulda acting as Grundman’s representative during the arbitration. (Id. at ¶¶ 7, 17-18.) During the arbitration, Defendant filed a counterclaim. (Id. at ¶ 34.) At the conclusion of the proceedings, the arbitrator entered an award in favor of Defendant and against Plaintiffs in the amount of $48,474.17. (Id. at ¶ 45.)

Plaintiffs complain of numerous defects in the conduct of the arbitration proceedings. Among other things, they allege the arbitration was held in Florida despite the fact no party was domiciled there; the arbitrator improperly applied Florida and not Delaware law in contravention of the User Agreement terms; and the arbitrator exceeded his jurisdictional boundaries by adding Fulda as a party to the arbitration at the final hearing and rendering the award against him and not just Grundman. (Id. at ¶¶ 7-10, 11-12, 20-28, 32-33.) In doing so, the arbitrator violated the User Agreement along with numerous rules established by the American Arbitration Association (“AAA”). (Id. at ¶¶ 23, 25-26, 32-33, 35-37.) Defendant also acted wrongfully by adding Fulda as a party to the arbitration, thereby interfering with his ability to present Grundman’s claim at the arbitration. (Id. at ¶ 50.)

The FAC is a hybrid pleading comprised of both a petition to vacate an arbitration award and two breach of contract claims. The petition to vacate is denominated as the first cause of action and the breach of contract claims are identified as the second and third causes of action. The first breach of contract claim is brought by Fulda while the second is brought by Grundman.

The demurrer is directed to each cause of action. Plaintiffs oppose the demurrer.

II. Request for Judicial Notice

Defendant filed two requests for judicial notice in support of its demurrer, one with its initial papers and one with its reply.

The first request seeks judicial notice of: (1) the User Agreement; (2) the arbitration award; (3) a letter accompanying the arbitration award; and (4) the proof of service of the original complaint.

Defendant cites Evidence Code section 452, subdivisions (d) and (h), in support of this request. Subdivision (d) permits judicial notice of court records and subdivision (h) permits judicial notice of facts not reasonably subject to dispute and capable of immediate determination by resort to sources of reasonably indisputable accuracy.

Defendant asserts judicial notice of the User Agreement, arbitration award and proof of service is proper because Plaintiffs attached a copy of the User Agreement and arbitration award to their original complaint and the proof of service was also filed with the Court. Since these documents are court records, they are generally proper subjects of judicial notice. (Evid. Code, § 452 subd. (d).) Furthermore, they are relevant to the issues raised in the demurrer. (See Silverado Modjeska Recreation and Park Dist. v. County of Orange (2011) 197 Cal.App.4th 282, 307 [a precondition to judicial notice is that the matter to be noticed be relevant to a material issue before the Court]. As such, the Court will take judicial notice of these documents.

With respect to the letter accompanying the arbitration award, though it was not a court record at the time the demurrer was filed, it became a court record around the time of the filing because it was attached to Defendant’s concurrently filed petition to confirm the arbitration award. Furthermore, it otherwise qualifies as a fact not reasonably subject to dispute because its existence is capable of immediate determination by resort to sources of reasonably indisputable accuracy. (See Evid. Code, § 452, subd. (h).) As with the other documents, it is also relevant to the Court’s evaluation of issues raised in the demurrer. (See Silverado, supra, 197 Cal.App.4th at 307.) Accordingly, judicial notice of the letter accompanying the arbitration award is proper.

The second request seeks judicial notice of: (1) the original demand for arbitration filed by Plaintiffs; and (2) the arbitrator’s order on Plaintiffs’ motion for rehearing on a request for a change of arbitration locale. Judicial notice of these documents is unnecessary because they are not helpful or necessary to the determination of any of the issues on demurrer. (See Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739, 748, fn. 6 [a court need not take judicial notice of a matter unless it “is necessary, helpful, or relevant”].)

For the reasons stated, the first request for judicial notice is GRANTED and the second request is DENIED.

III. Demurrer

A. First Cause of Action – Petition to Vacate Arbitration Award

Defendant demurs to the petition to vacate the arbitration award on the ground of lack of subject matter jurisdiction. (See Code Civ. Proc., § 430.10, subd. (a).)

The first cause of action consists of Plaintiffs’ request that the Court vacate the arbitration award on the grounds it was procured by corruption or undue means, the arbitrator was partial to Defendant, and the arbitrator exceeded his powers by adding Fulda to the arbitration and applying inapplicable law. Defendant argues the Court lacks subject matter jurisdiction to hear this claim both because it is time-barred and courts are not permitted to review an arbitrator’s legal conclusions. These arguments fail because they are predicated on a fundamental misunderstanding of the concept of subject matter jurisdiction.

Defendant’s first argument that the cause of action is time-barred is based on its assertion the petition to vacate the arbitration award was not timely served. Under Code of Civil Procedure section 1288, Plaintiffs were required to both file and serve their petition to vacate the arbitration award no later than 100 days after the date a signed copy of the award was served on them. Defendant maintains the award was served on March 2, 2017 based on the date of the arbitration award and the letter accompanying the award. It concludes Plaintiffs had until June 10, 2017 to file and serve a copy of their petition to vacate the arbitration award. Defendant was not served with a copy of the complaint until August 16, 2017. Defendant concludes this Court lacks subject matter jurisdiction to consider Plaintiffs’ petition, stating the “filing and service deadline for a petition to vacate is jurisdictional.” (Dem. at p. 6:11-13, citing Santa Monica Coll. Faculty Ass’n v. Santa Monica Cmty. Coll. Dist. (2015) 243 Cal.App.4th 538, 544.)

Though it is true that some cases have referred to filing and service deadlines for post-arbitration petitions as being “jurisdictional” in nature, the concept of jurisdiction in that context is separate and distinct from the concept of subject matter jurisdiction. Subject matter jurisdiction is conferred by constitutional or statutory law and has been defined by the California Supreme Court as “the power of the court over a cause of action or to act in a particular way.” (Greener v. Workers’ Comp. Appeals Bd. (1993) 6 Cal. 4th 1028, 1035.) “By contrast, the lack of subject matter jurisdiction means the entire absence of power to hear or determine a case; i.e., an absence of authority over the subject matter.” (Cummings v. Stanley (2009) 177 Cal.App.4th 493, 503; see also Miller-Leigh LLC v. Henson (2007) 152 Cal.App.4th 1143, 1148-1149.) Thus, the principle of subject matter jurisdiction relates to the competence or “inherent authority of the court involved to deal with the case or matter before it.” (Harnedy v. Whitty (2003) 110 Cal.App.4th 1333, 1343-1344.) A classic example of a matter over which California courts lack subject matter jurisdiction is an action based on claims where federal courts have exclusive jurisdiction. (See e.g., Landmark Screens, LLC v. Morgan, Lewis & Bockius, LLP (2010) 183 Cal.App.4th 238 [lack of subject matter jurisdiction over claims arising under federal patent laws].)

The superior courts in California are vested with jurisdiction to confirm, correct or vacate arbitration awards. (See Code Civ. Proc., §§ 1285 et seq.) As such, this Court has subject matter jurisdiction over Plaintiffs’ petition to vacate the arbitration award. (See e.g., Harnedy, supra, 110 Cal.App.4th at 1343-44.) Even if Plaintiffs served the petition after expiration of the statutory time limits for challenging an award, this would not divest the Court of subject matter jurisdiction to consider it, including the ability to deny the petition because it was untimely. At most, a court’s substantive review of a time-barred petition would amount to an act in excess of the court’s jurisdiction. (See Conservatorship of O’Connor (1996) 48 Cal.App.4th 1076, 1088 [distinguishing actions taken in excess of a court’s jurisdiction from actions in which a court lacks subject matter jurisdiction]; Law Offices of Stanley J. Bell v. Shine, Browne & Diamond (1995) 36 Cal.App.4th 1011, 1021-22 [court may have subject matter jurisdiction and yet act in excess of its jurisdiction by giving relief it has no power to give].)

The timeliness argument is flawed for the additional reason that neither the face of the FAC nor the matters subject to judicial notice establish when the 100-day period commenced. To establish that date was March 2, 2017, Defendant relies on documents subject to judicial notice, i.e. the arbitration award and accompanying letter. It apparently assumes that because these documents are dated March 2, 2017, the award was necessarily served that same day. In its demurrer, Defendant does not cite any AAA rule or other authority that supports this assumption or the proposition that the dates listed on an arbitration award or accompanying letter establish the date of service. In its demurrer, Defendant does not cite any AAA rule or other authority that supports this assumption or the proposition that the dates listed on an arbitration award or accompanying letter can establish the date of service. Though it asserts in its reply that the award was served by e-mail, which it states constituted valid service under Consumer Arbitration Rules, rule 52(a), nothing in the FAC indicates the award was served by this means. This argument otherwise improvidently presumes the date listed on the arbitration award or accompanying letter was necessarily the date it was served.

For these reasons, Defendant’s argument the Court lacks subject matter jurisdiction because the petition was time-barred fails.

Defendant fares no better with its second argument the Court lacks subject matter jurisdiction because “arbitration awards are generally immune from judicial review.” (Dem. at p. 7: 12, citing Moncharsh v. Heily & Blasé (1992) 3 Cal.4th 1, 11.) Defendant asserts the first cause of action only alleges “non-reviewable mistakes of law” and, as such, the arbitration award is not subject to judicial review. (Dem. at p. 7:19.) As with the timeliness argument, this argument is similarly misguided because it is predicated on the flawed argument regarding the concept of subject matter jurisdiction.

Once again, Code of Civil Procedure section 1285 et seq. authorizes California superior courts to review petitions to confirm, correct or vacate arbitration awards. As such, this Court has subject matter jurisdiction over the review of arbitration awards. While Defendant may be correct that mistakes of law are not grounds to vacate an award, its contention this Court lacks subject matter jurisdiction to review the award simply because the petition fails to allege facts that would justify and order to vacate the award is erroneous. The grounds for vacating an arbitration award are enumerated by statute. (Code Civ. Proc., § 1286.2.) If no grounds to vacate an award exist, that is a basis to deny the petition but is not a fundamental jurisdictional defect.

Accordingly, the demurrer to the first cause of action on the ground of lack of subject matter jurisdiction is OVERRULED.

B. Second and Third Causes of Action – Breach of Contract

Defendant demurs to the second and third causes of action for breach of contract on the grounds the Court lacks subject matter jurisdiction and Plaintiffs failed to state facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subds. (a), (e).)

The second and third causes of action are for breach of contract. Plaintiffs allege they entered into an agreement with Defendant whereby all parties promised to resolve disputes through the AAA and in accordance with its rules but Defendant breached this agreement by failing to do so. They seek damages from Defendant as a result. In its notice of demurrer, Defendant states it is demurring to these claims on the grounds stated above. However, in its memorandum, it is unclear what arguments Defendant is tethering to which ground.

There are two separate sections relating to these causes of action in Defendant’s memorandum. The heading of the first states the breach of contract claims are mere restatements of the time-barred petition to vacate arbitration award; the other says the breach of contract allegations improperly complain of an arbitrator’s conclusions of law.

The arguments in the first section reference the issue of jurisdiction. Specifically, Defendant argues the Court lacks jurisdiction to hear these claims because they merely reframe the petition to vacate the arbitration award and also encompass issues Plaintiffs failed to raise during the arbitration proceeding.

In the second section, at points in time, Defendant references a failure to plead facts or state a valid claim. Specifically, Defendant argues Plaintiffs fail to plead any facts the contract was breached. It also contends no actionable contract claims exist because evaluating the merits of these causes of action would necessitate a review of the arbitrator’s legal conclusions. Though this argument was previously raised in connection to its demurrer to the first cause of action on the ground of lack of subject matter jurisdiction, relative to the contract claims, Defendant appears to advance it in support of the ground of failure to state facts sufficient to constitute a cause of action. [See Dem at p. 10:6-7 [“Since the breach of contract causes of action all require, as predicates, that this Court review the arbitrator’s decisions of law, they fail to state valid claims.”]

Given the arguments in the first section are framed in reference to the issue of jurisdiction, they will be construed as bases for the demurrer on the ground of lack of subject matter jurisdiction. As the arguments in the second section use terms related to failures to plead or state a claim, they will be construed as bases for the demurrer on the ground of failure to state sufficient facts to constitute a cause of action.

1. Lack of Subject Matter Jurisdiction

Defendant’s lack of jurisdiction arguments are predicated on the proposition that the breach of contract claims are mere restatements of the first cause of action requesting the arbitration award be vacated. As a preliminary matter, the characterization of these claims as such is questionable. Though there may be some overlap between the allegations that form the basis of these claims, those recited in the first cause of action are framed as grounds for vacating the award while the second and third causes of action affirmatively allege a purported breach by Defendant and seek an award of damages.

In any event, even assuming the breach of contract claims could be treated as a petition to vacate the arbitration award, Defendant’s timeliness argument is not a basis for sustaining the demurrer on the ground of lack of subject matter jurisdiction for the reasons previously stated.

As to the argument the Court lacks subject matter jurisdiction because the breach of contract claims raise issues that were purportedly not raised during the arbitration proceeding, Defendant cites no authority supporting this proposition. Instead, it references Code of Civil Procedure section 1281.2, which merely states that, subject to some exceptions, a court must generally grant a petition to compel arbitration where an arbitration agreement between the parties exist. This statute is inapplicable. Here, the Court is not dealing with a petition to compel arbitration. Moreover, this statute does not stand for the proposition that an arbitration proceeding divests a court of subject matter jurisdiction to hear a certain matter.

For the reasons stated, the demurrer to the breach of contract claims on the ground of lack of subject matter jurisdiction is OVERRULED.

2. Failure to State Facts Sufficient to Constitute a Cause of Action

Defendant argues no valid breach of contract claims have been stated because evaluating the merits of these claims necessitate a review of the arbitrator’s decisions of law, which are unreviewable. It does not further explain its reasoning for this contention except to say that “at its core, Plaintiffs’ breach of contract claims are predicated on an unlawful review of the arbitrator’s decisions of law.” (Dem. at p. 9:21-22.) This argument is not persuasive.

The second and third causes of action allege Plaintiffs and Defendant entered into an agreement whereby they agreed to resolve disputes through and in accordance with AAA rules, and Defendant breached the contract by failing to do so. (FAC, ¶¶ 65, 67, 70, 72.) As framed, these claims would not require evaluation of the arbitrator’s decision. As such, Defendant’s argument is misplaced and the demurrer to these claims is not sustainable on this basis.

Next, Defendant argues the breach of contract claims fail because Plaintiffs did not plead facts demonstrating it was obligated to object to arbitrator rulings that were rendered in its favor and, hence, no actionable breach is pled. This argument is well-taken.

A plaintiff asserting a breach of contract claim must allege the defendant failed to do something the contract required it to do. (Otworth v. Southern Pac. Transportation Co. (1985) 166 Cal.App.3d 452, 459 [no breach alleged where complaint failed to allege the contract contained a provision requiring the defendant to perform the act that constituted the purported breach]; see also Gabriel v. Wells Fargo Bank, N.A. (2010) 188 Cal.App.4th 547, 553, fn. 3.) A court may look to the “language of the contract on its face to determine whether, as a matter of law, the contract is reasonably subject to a construction sufficient to sustain a cause of action for breach.” (Davies v. Sallie Mae, Inc. (2008) 168 Cal.App.4th 1086, 1091 (2008); Hillsman v. Sutter Community Hospitals (1984) 153 Cal.App.3d 743, 749-50.)

Here, though Plaintiffs allege Defendant was contractually required to comply with AAA rules in the conduct of any arbitration, an examination of the User Agreement itself does not support the proposition that any breach occurred. Under the agreement, Defendant was only required to resolve all disputes through arbitration. [See Request for Judicial Notice, Exh. 1, Sec. 14.3 [“Agreement to Arbitrate. You and PayPal each agree that any and all disputes or claims…shall be resolved exclusively through final and binding arbitration… .”] While the agreement goes on to detail the procedures by which any arbitration would proceed, including the general statement it would be conducted through the AAA in accordance with its rules, this language cannot reasonably be construed as a material requirement that, if violated, would amount to an actionable breach of the User Agreement. A contrary interpretation would lead to an absurd result. (See Segal v. Silberstein (2007) 156 Cal.App.4th 627, 633.) A more reasonable construction of the User Agreement is that it requires Defendant to submit to arbitration in the event of a dispute on demand of the Plaintiffs (which it did) and any irregularities or rule violations flowing out of the conduct of the arbitration would be addressed in the arbitration proceeding itself or raised by a petition to vacate the arbitration award. The law is clear that Plaintiffs’ only remedy is by way of a petition to vacate or correct the award on grounds specified by statute, not by seeking monetary damages for an alleged breach. (Code of Civ. Proc. §§ 1286.2, 1286.6.)

Except on the stated statutory grounds, arbitration awards are immune from judicial review in proceedings to challenge or enforce the award. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 12-13; Zazueta v. County of San Benito (1995) 38 Cal.App.4th 106, 110.) In order to challenge an award in court, the litigant must have raised the point before the arbitrator. (Comerica Bank v. Howsam (2012) 208 Cal.App.4th 790, 829-830; see Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 30-31; Mossman v. City of Oakdale (2009) 170 Cal.App.4th 83, 93.)

Accordingly, the argument Plaintiffs failed to allege an actionable breach is well-taken and the demurrer to the breach of contract claims on this basis is sustainable.

It does not appear from the allegations of the FAC that these claims can be amended to state valid breach of contract claims. Each allegation of a purported breach by Defendant arises from Plaintiffs’ complaints regarding irregularities or wrongful actions taken in the conduct of the arbitration proceedings between the parties. As such, they cannot form the basis of a cause of action for breach of the User Agreement seeking damages. As it is apparent from the face of the FAC that the facts alleged do not and cannot state a cause of action for breach of contract, leave to amend will not be granted. (See Burki v. Pleasanton Sch. Dist. of Alameda Cty. (1912) 18 Cal.App.493, 498.)

Therefore, the demurrer to the second and third causes of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITHOUT LEAVE TO AMEND.

The Court will prepare the Order.