In a case with certainly an interesting set of facts, the California Court of Appeal, Second Appellate District, ruled in the case Washington Umberto Cinel v. George Barna (2012) DJDAR 7995 that a defendant respondent to a matter subject to contractual arbitration may be deemed to have waived the right to arbitrate where other parties to the matter failed to pay the arbitrator's fees and no agreement was reached as to the payment of the non-paying parties' share.
In Cinel, Plaintiff Washington Umberto Cinel ("Plaintiff" or "Cinel"), a Brazilian citizen, alleged he agreed to purchase 600,000 shares of preferred stock from Good News Holdings, LLC ("GNH") for a total consideration of $3,000,000. GNH was formed to create and distribute Christian, faith-based and family friendly content. Cinel made the first three installments of $750,000 but later became concerned in regard to GNH's financial condition. On June 30, 2008, Cinel commenced an action for securities fraud and related claims against various defendants, and filed his first operative amended Complaint on November 13, 2008. On March 9, 2009, one of the defendants, George Barna ("Barna") filed a petition to compel arbitration pursuant to an arbitration clause in the Private Placement Memorandum for the securities transaction.
On April 3, 2009, the Trial Court granted Barna's Petition to Compel Arbitration. The parties then commenced two separate arbitration proceedings before the American Arbitration Association ("AAA") which were later stipulated to be consolidated. As of January 11, 2010, the parties had selected a panel of arbitrators and the AAA requested payment of fees from the parties for an initial deposit. The AAA advised the parties that the failure to submit payment by a certain date would result in the AAA arbitrators suspending the preliminary hearing. Of the six defendants, only Barna and one other defendant paid their share of the arbitrator fees.
On April 22, 2010, Cinel suggested that the parties who compelled arbitration pay the fees of the nonpaying parties, and that if they did not, the AAA panel issue an order terminating the arbitration.
On June 7, 2010, the AAA panel rejected Cinel's proposal and suggested that the paying parties agree to pay a pro rata share of the deposits of the delinquent parties. When no payment was made, on July 7, 2010, the AAA panel terminated the arbitration due to the nonpayment of fees. On July 16, 2010, the other "paying" defendant submitted a proposed form of written order to be signed by the AAA panel stating the arbitration was terminated for nonpayment. The AAA panel declined to do that on the basis of jurisdiction. On July 19, 2010, the AAA panel then advised the parties the matter had been terminated for nonpayment of fees.
On November 15, 2010, the Trial Court reasserted jurisdiction over the case and held a Case Management Conference. Thereafter, the Trial Court declined to confirm the AAA panel's termination ruling and/or to dismiss Cinel's Complaint (a matter which was also affirmed on appeal). Cinel then proposed to the defendants that the paying parties advance, on a pro rata basis, the fees of the nonpaying parties (akin to what had been previously suggested by the AAA). The two paying defendants, for whatever reason, declined Cinel's proposal.
On March 4, 2011, Barna filed a Petition to Compel Arbitration and stay the proceedings in the Trial Court contending that, notwithstanding the termination of the arbitration for lack of payment, there remained a valid agreement to arbitrate and a prior court order that the parties proceed to arbitration. Cinel then opposed contending that Barna and the other "paying" defendant had waived their rights to arbitrate by failing to pay the fees for the arbitration they had compelled in the first place.
On April 11, 2011, after Barna advised the Trial Court that he did not have funds to pay for the nonpaying parties' share of the arbitrator's fees, the Trial Court denied the Motion to Compel. An appeal then followed.
On appeal, the Court of Appeal affirmed the order of the Trial Court. The Court of Appeal noted that arbitration is a "creature of contract," which is subject to waiver. The Court of Appeal specifically found that, by refusing to agree among themselves to pay the fees of the nonpaying parties, both the Plaintiff and the "paying" defendants had waived the arbitration agreement by their collective and simultaneous repudiation of it through their refusal to reach an agreement over the payment of fees.
The Cinel opinion is certainly logical, and also deals with a common occurrence where there is a multiparty case subject to arbitration with some parties being unable to pay the substantial fees charged by the arbitration outfit. In that regard, the Cinel opinion provides guidance as to what will occur when some parties to an arbitration are able to pay the fees of the arbitration outfit, and others are not. In summary, if a party wishes to go through to arbitration, it is incumbent on that party to either advance the shares of the nonpaying parties' fees, or reach an arrangement whereby those fees are paid at least on a pro rata share basis by the parties who have sufficient funds to pay the arbitrator fee.
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