1

Filed 1/13/21 Paniagua v. Milestone Financial, LLC CA1/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for 

publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or 

ordered published for purposes of rule 8.1115. 

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION TWO

EDUARDO PANIAGUA et al.

Plaintiffs and Respondents,

v.

MILESTONE FINANCIAL, LLC et

al.,

Defendants and Appellants.

 A157183

 (San Francisco County

 Super. Ct. No. CGC18571279)

Eduardo Paniagua obtained a loan from Milestone Financial LLC

(Milestone), secured by a home owned by Paniagua and his wife. When the 

couple sued Milestone and related individuals and entities, defendants 

invoked mandatory arbitration provisions in several of the parties’ 

agreements. The trial court denied defendants’ motion to compel arbitration, 

finding the agreements void due to the defendants’ misrepresentations that 

they had the licenses required to lawfully engage in the transactions. On this 

appeal, defendants contend the trial court’s decision was unsupported by the 

evidence and contrary to law. We affirm. 

BACKGROUND

Paniagua and his wife, Elena Asturias, own a single family home on 

Funston Avenue in San Francisco which, according to the allegations of the 

complaint, has been in their family for over 50 years. Plaintiffs acquired the 
2

property in 2009, from Asturia’s 84-year-old mother and elderly aunt “for the 

purpose of rehabilitating the property and adding value and to subsequently 

liquidate the added value so that such funds could be used for the mother’s 

retirement fund, and, to help pay for the aunt’s ongoing expensive cancer 

treatments.” 

On March 11, 2014, Paniagua signed a promissory note for a $500,000 

loan from Milestone, with a maturity date of March 31, 2016, secured by the 

residential property on Funston Avenue. The promissory note states that the 

borrower “represents and warrants that the proceeds from the Note (i) are 

strictly for business, commercial, or investment purposes ONLY, (ii) will not 

be used primarily for farming, personal, family, household or other consumer 

purposes,” and “acknowledges that this Note was negotiated and arranged by 

a licensed real estate broker.” Paniagua also signed an “Affidavit Regarding 

Loan Purpose” stating that the “proceeds of the Loan is or shall be for either 

business, commercial or investment purpose” and the “proceeds of the Loan is 

or shall not be used primarily for agricultural, farming, personal, family, 

household or other consumer purposes.” A “Disbursement Request & 

Authorization” directed disbursement of an initial $100,000 to Old Republic 

Title Company to close escrow and subsequent disbursements upon 

completion of designated items on an “Estimate for Remodeling and Addition 

at 1228 Funston Avenue . . . .” The promissory note recites that it, and each 

of the loan documents, were negotiated, prepared and arranged through MJF 

Funding, Inc. (MJF).1

1 On the same day he signed the promissory note, Paniagua entered 

into an “Agreement to Arrange Credit” with MJF. Some of the documents 

related to the loan refer to the arranging broker as Blue Water Funding, a 

doing business as name used by MJF. 
3

On April 27, 2015, the California Bureau of Real Estate issued a “desist 

and refrain” order against Milestone, Bear Bruin Ventures, Inc. (Bear Bruin), 

doing business as Page Mill Funding, Carolyn Stuart, William Stuart, and 

Zoe Hamilton,

2 after an investigation concluded that over a time period 

beginning in March 2014, they had engaged in activities requiring a real 

estate license and/or mortgage loan originator license endorsement, without 

having such licenses and/or endorsements, in violation of Business and 

Professions Code3 sections 10130 (acting as real estate broker without a 

license), 10131, subdivision (d) (soliciting, negotiating, performing services in 

connection with loans secured by real property), and 10166.02, subdivision (b) 

(failing to obtain mortgage loan originator license endorsement.

4 The Stuarts 

and Bear Bruin were ordered to refrain from performing any acts for which a 

mortgage loan originator license endorsement is required unless and until 

such endorsement was obtained from the Bureau; Milestone and Hamilton 

were ordered to refrain from performing any acts requiring a real estate 

2 William Stuart’s declarations state he is the manager of Milestone. He

signed certain documents in the record on behalf of Milestone as President of 

Bear Bruin, indicated to be Milestone’s manager. Zoe Hamilton signed 

correspondence related to the Paniagua loan as processor for Page Mill 

Funding. 

3 Subsequent statutory references will be to the Business and 

Professions Code except as otherwise indicated.

4 A “mortgage loan originator” is “an individual who takes a residential 

mortgage loan application or offers or negotiates terms of a residential 

mortgage loan for compensation or gain.” (§ 10166.01, subd. (b)(1).)

“ ‘Residential mortgage loan’ means any loan primarily for personal, 

family, or household use that is secured by a mortgage, deed of trust, or other 

equivalent consensual security interest on a dwelling, or residential real 

estate upon which is constructed or intended to be constructed a dwelling.” 

(§ 10166.01, subd. (d).)
4

broker’s license or mortgage loan originator endorsement are required until 

such license and endorsement were obtained from the Bureau.5

On January 26, 2016, with Paniagua unable to pay off or refinance the 

loan by the maturity date of March 31, 2016, he and Milestone entered a 

“Settlement Agreement, Indemnity and First Amendment to Promissory Note 

Secured by Deed of Trust” extending the maturity date to March 31, 2017.

The stated balance at that time was $425,631.44. The agreement, which

recited it had been reviewed by Paniagua with counsel and there was no 

basis for arguing it was invalid, unenforceable or unconscionable, included a 

consent to mandatory arbitration and acknowledgment by Paniagua that 

Milestone would not have entered into the agreement “without the express 

terms set forth in the arbitration clause . . . .” 

On January 20, 2017, Paniagua and Milestone entered another 

agreement extending the maturity date to March 31, 2019. The stated 

balance at this time was $444,478.48. The agreement contained the same 

acknowledgement of review by counsel and again contained a consent to 

mandatory arbitration and acknowledgement that the mandatory arbitration 

provision “is extremely material to the Agreement” and Milestone would not 

have entered into the agreement without its express terms. 

5 According to the findings of fact in the Bureau’s 2015 order, at all 

times mentioned, William and Carolyn Stuart were each licensed as real 

estate brokers and neither had obtained a mortgage loan originator license 

endorsement; Hamilton had been licensed as a real estate salesperson but 

her license had expired on December 22, 2004, and not been renewed, and 

she had not obtained a mortgage loan originator endorsement; Bear Bruin, 

doing business as Page Mill Funding, was licensed as a corporate real estate 

broker and had not obtained a mortgage loan originator endorsement; and 

Milestone was not licensed by the Bureau in any capacity and had not 

obtained a mortgage loan originator endorsement. 
5

On April 14, 2018, Paniagua signed a “Payoff Approval & 

Acknowledgement” that also included an arbitration provision. He was 

represented in negotiating this agreement by 

attorney Victor Marquez. 

On November 13, 2018, plaintiffs filed a complaint against Milestone, 

Bear Bruin, William Stuart, Carolyn Stuart and Zoe Hamilton, alleging 

causes of action for fraud, negligence, violation of the Unfair Competition 

Law (§ 17200), False Advertising Act (§ 17500) and Consumer Remedies Act

(Civ. Code, § 1750), and violation of article XV, section 1 et seq., of the 

California Constitution. 

Plaintiffs alleged that in entering into the loan agreement with 

Milestone, they relied upon advertisements for Milestone’s “fast quotes,” “fast 

closings” and “competitive rates” as a “wholesale direct lender,” and 

representations on Milestone’s website that the Stuarts were officers of 

Milestone and licensed real estate brokers. They alleged that at the time of 

their loan, Milestone was not licensed to enter into a residential mortgage 

loan but misrepresented that it was, and that they would not have contracted 

with the defendants if they had known the defendants were unlicensed and 

prohibited from making loans. They further alleged that while the 

defendants were promoting themselves and making loans, the Bureau

initiated an investigation of Milestone, during which Hamilton, on behalf of 

Milestone, solicited and/or offered to negotiate the terms of a residential 

mortgage loan for the investigator, and that the Bureau issued desist and 

refrain orders against defendants on or about March 13, 2015, and April 27, 

2015, but defendants did not inform plaintiffs of these orders. 

Plaintiffs further alleged that they entered the January 2017 loan 

modification agreement after defendants threatened to initiate foreclosure 
6

proceedings; this agreement contained an interest rate exceeding the 

constitutional maximum;

6 Milestone unlawfully refused to divulge pay-off 

amounts due when plaintiffs requested this information; defendants 

unlawfully pressured plaintiffs into entering the new loan agreement despite 

being subject to the Bureau’s desist and refrain orders; plaintiffs were forced 

to accept the terms of the modification due to defendants’ continued threats 

of foreclosure; and despite coming to an agreement and promising to refrain 

from filing a notice of default, defendants filed such notice in March 2018, 

resulting in harm to plaintiffs’ credit.

Defendants filed a petition to compel arbitration, relying upon the 

mandatory arbitration provisions in the settlement agreements and the 

payoff agreement, which they argued plaintiffs could not avoid because the 

arbitration agreements were not substantively and procedurally 

unconscionable. Defendants maintained the loan was a “business purpose 

loan for construction” and Paniagua was represented by his own licensed loan 

broker; Milestone did not violate the Bureau’s order because the loan was for 

a business purpose, the lender is not required to itself be a licensed real 

estate broker where the loan is for a business purpose and arranged through 

a licensed real estate broker, and a mortgage originator endorsement is 

6 Plaintiffs alleged that the modification agreement contained a 19.75 

percent annual interest rate (increased from the 10.75 rate specified in the 

original loan agreement), plus a 10 percent penalty clause for late payments 

which was applied to both principal and interest payments on the January 

20, 2017 loan amount, in violation of the 10 percent maximum permitted 

under the California Constitution (Cal. Const., art. XV, § 1). The exception 

for licensed real estate brokers engaged in lending activities (see Civ. Code, 

§ 1916.1), plaintiffs alleged, did not apply because Milestone did not have the 

requisite license. 
7

required only for loans primarily for personal family or household use secured 

by real property; and the interest rate was not usurious.

7

Opposing the petition, plaintiffs maintained that defendants 

unilaterally selected MJF to “ ‘represent’ ” Paniagua as broker in the 

transaction, and worked with MJF to prepare the documents without 

plaintiffs’ consent or input; defendants were unlicensed and legally barred 

from issuing or entering into the loan agreement in March 2014, and later 

restrained from issuing any residential mortgage and consumer loans by the 

Bureau’s desist and refrain order; plaintiffs entered the agreement to modify 

the terms of the loan, which contains the arbitration provision, under threat 

of default and foreclosure; and the modification agreement was an adhesion 

contract in that plaintiffs had either “lose their home or agree to the 

exorbitant fees and interest rates” defendants demanded, as well as the 

arbitration provisions. Plaintiffs asserted the agreement was for a 

residential mortgage loan and defendants’ characterization of it as a business 

purpose loan, and reliance on the presence of a broker in the transaction, was 

the “business model” for which they had been under investigation. Arguing 

that the affidavit of purpose and statements of purpose were unenforceable 

and unconscionable, plaintiffs stated Paniagua has limited English 

proficiency and was asked to sign the documents—prepared by defendants 

and MJF—with no opportunity to bargain for the terms. 

7 According to defendants, there was no violation of the constitutional 

usury provisions (Cal. Const. art. XV, § 1) because Civil Code section 1916.1, 

makes the constitutional restrictions on interest rates inapplicable to loans 

made or arranged by a licensed real estate broker and secured by lien on real 

property, and plaintiffs were represented by a licensed real estate broker in 

entering the agreements. 
8

Plaintiffs argued the arbitration provisions were void because the 

agreements containing them were illegal and Paniagua was induced to enter

them by the defendants’ fraud; the issue of illegality of the contract had to be

established before any final ruling on the enforceability of the arbitration 

clause; and the illegality could be deduced from the facts pleaded, or “upon 

additional limited discovery and supplemental briefing.” 

Defendants, in their reply, asserted that in arguing the loan was not for 

a business purpose, Paniagua was improperly using “his own unclean hands 

and apparent fraud and deception as a sword,” as he admitted signing 

documents representing to the lender that the loan was for a business 

purpose. Defendants argued plaintiffs’ factual arguments were unsupported 

by admissible evidence; the Bureau’s orders did not impose a bar on all loans; 

plaintiffs were not forced to sign the contracts and were free to seek a loan or 

refinancing from a different lender; the agreements were easily modifiable

Microsoft Word documents, but plaintiffs never requested any changes; the 

terms were not unconscionable; and, pursuant to the arbitration provisions, 

the arbitrator should decide any questions about arbitrability.

The trial court denied defendants’ petition to compel arbitration. 

Recognizing that plaintiffs alleged they were fraudulently induced to enter 

the loan agreements by defendants’ fraudulent misrepresentations and 

omissions, and sought rescission of the agreements, the court held that the 

Bureau’s cease and desist order and findings provided substantial evidence 

that at the time plaintiffs entered into the original loan agreement, 

“Milestone and Hamilton were misrepresenting to the public that they were 

licensed to act as real estate broker, real estate salesperson, and/or mortgage 

loan broker, when in fact they lacked the real estate broker licenses, real 

estate licenses, and mortgage loan originator endorsements required by 
9

statute. This evidence is sufficient to support ‘a preliminary factual 

determination that misleading circumstances existed and led to the entry 

into the agreements, supporting a conclusion the agreements are void. These 

conclusions apply to avoid the arbitration clauses contained within the 

agreements.’ (Duffens [v. Valenti (2008)] 161 Cal.App.4th [434,] 448.)”8

DISCUSSION

Defendants contend the trial court erred in denying the petition 

because the loan complied with applicable laws and did not violate the 

Bureau’s desist and refrain order, plaintiffs’ fraud claims are of a type that 

must be decided by the arbitrator rather than the court, and the court’s 

decision was not supported by evidence.

Although differing in specific phrasing, the arbitration provisions in the 

two settlement agreements provided for disputes, claims or controversies

“arising out of or relating to this Agreement, the Note, the Deed of Trust and 

8 Plaintiffs ask us to take judicial notice pursuant to Evidence Code 

section 452, subdivisions (c) and (h), of records of additional disciplinary 

action taken by the Bureau after the trial court’s ruling. The first is an 

accusation filed on April 24, 2019, against Bear Bruin and Carolyn Stuart for 

conduct including engaging in the business of a mortgage loan originator 

(§ 10166.01, subd. (b)(1)), on behalf of Milestone, without having obtained a 

mortgage loan originator endorsement, with respect to (but not limited to) a 

transaction with a closing date of April 26, 2016. The second is an order of 

the Department of Real Estate accepting Bear Bruin’s and Stuart’s voluntary 

surrender of their real estate corporation broker and designated broker 

officer licenses effective November 26, 2019.

Defendants oppose the request for judicial notice, arguing the 

documents are irrelevant because the loan in the present case was arranged 

by an independent broker, the voluntary surrender of licenses does not admit 

the allegations of the accusation, and the request for judicial notice is 

untimely. Although we do not find the opposition persuasive, the documents 

at issue are not necessary to our decision and we decline the request for 

judicial notice on that basis.
10

any related documents, . . . including the determination of the scope or 

applicability” of the arbitration agreement,

9 to be determined by arbitration 

as detailed in the agreement. The arbitration clause in the payoff agreement 

similarly provided for arbitration of disputes, claims or controversies arising 

out of or relating to “this Agreement . . . , including the determination of the 

scope or applicability of this agreement to arbitrate.” 

Pursuant to Code of Civil Procedure section 1281.2, “On petition of a 

party to an arbitration agreement alleging the existence of a written 

agreement to arbitrate a controversy and that a party to the agreement

refuses to arbitrate that controversy, the court shall order the petitioner and 

the respondent to arbitrate the controversy if it determines that an 

agreement to arbitrate the controversy exists, unless it determines that: 

[¶] . . .[¶] “(b) Grounds exist for rescission of the agreement. . . .”

The statute has been interpreted as referring to grounds for rescission 

of the arbitration agreement, rather than grounds for rescission of the entire 

contract: “[S]ection 1281.2 requires enforcement of the arbitration agreement 

unless there exist grounds for revocation of that agreement.”10 (Moncharsh v. 

9 The first settlement agreement referred to the scope or applicability of 

“this Agreement to arbitrate”; the second settlement agreement referred to 

the scope or applicability of “this mandatory arbitration proceeding.”

10 Prior to an amendment effective January 1, 2019, section 1281.2, 

subdivision (b), referred to grounds for “revocation” of the agreement. (Stats. 

2018, ch. 106, § 1.) Before this amendment, the California Supreme Court 

had referred to use of the term “revocation” as “something of a misnomer” 

because only offers to create a contract can be revoked, while an existing 

contract can be undone only by rescission. (Engalla v. Permanente Medical 

Group, Inc. (1997) 15 Cal.4th 951, 973.) The 2018 statutory amendment was 

intended to correct the “misnomer.” (Sen. Rules Com., Off. of Sen Floor 

Analyses, Analysis of Assem. Bill No. 3247 (2017–2018 Reg. Sess.) June 22, 

2018.) 
11

Heily & Blase (1992) 3 Cal.4th 1, 29 (Moncharsh).) Nevertheless, “[i]f a 

contract includes an arbitration agreement, and grounds exist to revoke the 

entire contract, such grounds would also vitiate the arbitration agreement. 

Thus, if an otherwise enforceable arbitration agreement is contained in an 

illegal contract, a party may avoid arbitration altogether.” (Ibid.) On the 

other hand, where “the alleged illegality goes to only a portion of the contract

(that does not include the arbitration agreement), the entire controversy, 

including the issue of illegality, remains arbitrable.” (Ibid.)

“In ruling upon a petition to compel arbitration, the superior court is 

allowed to determine arbitrability issues, such the existence and validity of 

the arbitration agreement, by utilizing summary motion procedures.

(Rosenthal [v. Great Western Financial Securities Corp. (1996)] 14 Cal.4th

394, 409.) These procedures are consistent with the use of private arbitration 

as a means of resolving disputes quickly and inexpensively. (Ibid.) ‘[T]he 

superior court does not decide whether the plaintiff's causes of action have 

merit, although some factual questions considered in deciding the application 

may overlap those raised by the plaintiff's claims for relief. The only question 

implicated by the petition to compel arbitration is whether the arbitration 

agreements should be specifically enforced. . . . [T]he superior court decides 

only the facts necessary to determine specific enforceability of an arbitration 

agreement, an equitable question as to which no jury trial right exists.’ (Id.

at p. 412.)” (Duffens v. Valenti, supra, 161 Cal.App.4th at p. 444 (Duffens).) 

Defendants dispute the fundamental premise of plaintiffs’ position and 

the trial court’s ruling, maintaining that the loan was explicitly for business 

purposes, as stated in the agreements and affidavit of purpose Paniagua 

signed, and therefore did not violate any licensing requirements or the 

Bureau’s desist and refrain order. They maintain that a mortgage loan 
12

originator endorsement is only required for loans “primarily for personal,

family, or household use” (§ 10166.01, subd. (d)), and that the lender for a 

business purpose loan arranged through a licensed real estate broker is not 

required to itself be a licensed real estate broker. For the latter point, 

defendants argue the license generally required for finance lenders or brokers 

(Fin. Code, §§ 22100) is not required for loans made or arranged by a licensed 

real estate broker and secured by a lien on real property (Fin. Code, § 22057); 

here they maintain, the loan was arranged by Paniagua’s licensed real estate 

broker.

Plaintiffs argue the agreements were for a residential mortgage loan 

and were illegal in that defendants did not have the licenses required to enter 

into a residential mortgage loan (§§ 10130 [real estate broker license 

requirement], 10131, subd. (d) [soliciting, negotiating, servicing loans secured 

by real property], 10166.02, subd. (b) [mortgage loan originator license 

endorsement requirement for broker making, arranging, servicing loans 

secured by residential real property]), and defendants fraudulently induced 

Paniagua to enter the agreements by conduct including misrepresenting their 

licensing status, failing to disclose the Bureau’s disciplinary action, 

conspiring with a broker they selected to ostensibly represent Paniagua and 

presenting Paniagua with documents created to immunize defendants from 

the licensing requirements. 

Although the trial court’s decision did not discuss the parties’ dispute 

as to the purpose of the loan, the decision refers to “the original residential 

mortgage loan agreement.” The court thus implicitly rejected defendant’s 

argument that the loan was for business purposes. The evidence supports 

this preliminary factual conclusion that it was a residential mortgage loan. 
13

As earlier indicated, a residential mortgage loan is “any loan primarily 

for personal, family, or household use that is secured by a mortgage, deed of 

trust, or other equivalent consensual security interest on a dwelling, or 

residential real estate upon which is constructed or intended to be 

constructed a dwelling.” (§ 10166.01, subd. (d).) The loan was secured by 

plaintiffs’ family residence, and its documented purpose was renovation of 

that home. According to plaintiffs’ verified complaint, the residence had been 

in plaintiffs’ family for more than 50 years and plaintiffs acquired it from 

Asurias’s 84-year-old mother and elderly aunt “for the purpose of 

rehabilitating the property and adding value and to subsequently liquidate 

the added value so that such funds could be used for the mother’s retirement 

fund, and, to help pay for the aunt’s ongoing expensive cancer treatments.” 

Defendants take this expression of plaintiffs’ intent to sell the property as 

demonstrating the loan was for a business purpose – “renovation of the 

property for sale.” But the fact plaintiffs intended to sell the house after 

improving it does not necessarily demonstrate a business purpose; use of a 

loan to improve and sell the family home as a means of financing relatives’ 

retirement and medical care is clearly a personal or family use. Defendants 

rely upon the assertions in the loan documents that the loan was for a 

business purpose, but plaintiffs maintain these assertions were part of the 

fraud perpetrated by the defendants, who plaintiffs claim mischaracterized 

the loan as one for business purposes in order to avoid the licensing 

requirements for residential mortgage loans. The trial court’s conclusion the 

loan was a residential mortgage loan, despite its characterization in the loan 

documents, is supported by the allegations of plaintiffs’ verified complaint 
14

and the undisputed evidence that the loan was obtained in order to renovate 

the family residence that served as security for the loan.11

Defendants argue that the trial court erred in refusing to compel 

arbitration because their claim of fraud in the inducement of the contract can 

and should be decided by the arbitrator rather than the court. 

Fraud in the inducement of a contract, unlike fraud in the execution, 

does not always vitiate an arbitration provision. Fraud in the “execution” of a 

contract “ ‘ “goes to the inception or execution of the agreement, so that the 

promisor is deceived as to the nature of his act, and actually does not know 

what he is signing, or does not intend to enter into a contract at all, mutual 

assent is lacking, and [the contract] is void. In such a case, it may be 

disregarded without the necessity of rescission.” ’ ” (Rosenthal, supra,

14 Cal.4th at p. 415, quoting Ford v. Shearson Lehman American Express, 

Inc. (1986) 180 Cal.App.3d 1011, 1028.) “Fraud in the inducement, by 

contrast, occurs when ‘ “the promisor knows what he is signing but his 

consent is induced by fraud, mutual assent is present and a contract is 

formed, which, by reason of the fraud, is voidable. In order to escape from its 

obligations the aggrieved party must rescind. . . .” ’ ” (Rosenthal, at p. 415.)

Defendants rely upon the statement in Ericksen, Arbuthnot, McCarthy, 

Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 323 (Ericksen)

that “in the absence of indication of contrary intent, and where the 

arbitration clause is reasonably susceptible of such an interpretation, claims 

11 As Paniagua verified the complaint, its allegations, to the extent 

made from his personal knowledge, constitute evidence upon which the trial

court could base its ruling. (Coppinger v. Superior Court (1982) 134 

Cal.App.3d 883, 889 [allegations of verified complaint sufficient to establish 

prima facie case of fraudulent inducement in opposing motion to expunge lis 

pendens].)
15

of fraud in the inducement of the contract (as distinguished from claims of 

fraud directed to the arbitration clause itself) will be deemed subject to 

arbitration.” Erickson involved a question of fraud “intertwined with 

performance of the agreement,” in which the tenant law firm claimed it was 

fraudulently induced to enter the lease by the lessor’s knowingly false 

representation that the premises were tenantable when in fact defective air

conditioning made the premises untenantable. (Id. at pp. 315, 317, fn. 2.) 

The court distinguished this type of case from cases involving illegal 

agreements: “Questions of public policy which are implicated by an illegal 

agreement, and which might be ill-suited for arbitral determination, are not 

presented when garden-variety ‘fraud in the inducement,’ related to 

performance failure, is claimed. The latter is ideally suited for the 

arbitrator's expert determination.” (Id. at p. 317, fn. 2.)

Duffens, supra, 161 Cal.App.4th 434, the case relied upon by the trial 

court here, upheld the denial of a motion to compel arbitration where the 

plaintiffs claimed fraud in the inducement of contracts that were found to be 

illegal because they did not comply with statutory requirements. The case 

involved “ ‘consulting agreements’ ” for matchmaking services that did not 

contain essential language required by statutes regulating “dating service 

contracts.” (Id. at p. 440.) 

Duffens discussed the Moncharsh court’s distinction between illegal 

contracts, as to which an arbitration agreement will not be enforced, and 

contracts alleged only to contain an illegal provision (not related to the 

arbitration agreement), which remain arbitrable, with the alleged illegality a 

matter for the arbitrator to determine. (Duffens, supra, 161 Cal.App.4th at 

pp. 449–450.) In particular, Duffens noted Moncharsh’s observation that 

Ericksen, in holding the entire controversy arbitrable despite the fact that 
16

fraud in the inducement of the contract could result in revocation as 

contemplated by section 1281.2, “ ‘distinguished that case from those in which 

a party claimed illegality of the underlying agreement.’ ” (Duffens, at pp. 449–

450; Moncharsh, supra, 3 Cal.4th at p. 30, fn. 13.) The Duffens court stated 

that, according to Moncharsh, cases of fraud in the inducement resulting in “ 

‘disappointed expectation[s]’ that may justify a ‘revocation of the agreement’ 

(Code Civ. Proc., § 1281.2), because of a failure of performance” “should be 

distinguished from those in which a party claimed illegality of the underlying 

agreement. (Ericksen, supra, 35 Cal.3d at pp. 316–317, fn. 2.) Apparently, 

this means that where the underlying agreement is illegal under other 

accepted standards, its arbitration clause can be avoided. (See Moncharsh, at 

p. 30, fn. 13.)” (Duffens, at p. 450.) In other words, although the plaintiffs in 

Duffens alleged fraud in the inducement that “normally might be arbitrable,”

the claimed illegality of the contracts would “ ‘void[] the entire contract.’ ” 

(Id. at p. 451.)

Duffens easily concluded the contracts at issue were illegal because the 

governing statutes expressly provide that contracts omitting the statutorily 

required language are “void and unenforceable.” (Duffens, supra, 161 

Cal.App.4th at pp. 453–454.) Recognizing that “even voidable contracts may 

contain enforceable arbitration clauses” and “illegal provisions may be 

severable if not central to the purpose of the agreement,”12 the court 

12 Duffens stated, “ ‘Under California law, illegal provisions may be 

severable if not central to the purpose of the agreement. [Citations.]’ 

([Knight et al., California Practice Guide:] Alternative Dispute Resolution 

[(The Rutter Group 2007) Contracts], ¶ 5:144.5, p. 5–99.) There, the authors 

cite as authority for this proposition Abramson v. Juniper Networks, Inc.

[(2004)] 115 Cal.App.4th 638, 658, 667. The ‘taint of illegality and 

unconscionability cannot be removed from this arbitration agreement by 
17

concluded the arbitration provisions in Duffens were not severable because 

the dating service statutes, reflecting the legislature’s intent to regulate 

contracts for dating services “in a particular manner,” “operate to exclude 

such contracts for dating services from the scope of the general rule that a 

court will refrain from determining the legality of voidable contracts that 

contain an arbitration clause, and will instead allow an arbitrator to do so. 

The defects in these agreements are central to the policy of the statutes, and 

the express language of the statues regarding unenforceability applies to the 

arbitration clauses as well.” (Id. at p. 456.)

In the present case, as the trial court explained in its order, “It is 

unlawful for any person to engage in the business of, act in the capacity of, 

advertise as, or assume to act as a real estate broker or a real estate

salesperson within this state without first obtaining a real estate license from 

the department, or to engage in the business of, act in the capacity of, 

advertise as, or assume to act as a mortgage loan originator within this state 

without having obtained a license endorsement.” (§ 10130.) “No individual 

may engage in business as a mortgage loan originator under this article 

without first . . . [¶] . . . [o]btaining and maintaining a real estate license . . . 

[¶] . . . [¶] [and] a real estate license endorsement pursuant to this article 

identifying that individual as a licensed mortgage loan originator.” 

(§ 10166.02, subd. (b).) 

“The purpose of the licensing requirement is to protect the public from 

the perils incident to dealing with incompetent or untrustworthy real estate 

practitioners.” (Schantz v. Ellsworth (1971) 19 Cal.App.3d 289, 292–293.) 

The statutes provide for both civil and penal consequences of violating the 

severing or restricting the objectionable terms. . . .’ (Id. at p. 667.)” (Duffens,

supra, 161 Cal.App.4th at p. 456.)
18

requirements. A person “engaged in the business or acting in the capacity of 

a real estate broker or a real estate salesperson” is prohibited from bringing 

or maintaining an action “for the collection of compensation for the 

performance of any of the acts mentioned in this article without alleging and 

proving that he or she was a duly licensed real estate broker or real estate

salesperson at the time the alleged cause of action arose.” (§ 10136.) Acting 

as a real estate agent without the proper license is punishable by a fine 

and/or a jail term of up to six months. (§§ 10139, 10185.)13

One of the “guiding principles” followed by the Duffens court was stated 

in Loving & Evans v. Blick (1949) 33 Cal.2d 603, 610–611, which refused to 

enforce an arbitration award based on a construction contract found to be

illegal due to the contractor’s lack of a valid license: “ ‘It seems clear that the 

power of the arbitrator to determine the rights of the parties is dependent 

upon the existence of a valid contract under which such rights might arise. 

[Citations.] In the absence of a valid contract no such rights can arise and no 

power can be conferred upon the arbitrator to determine such nonexistent 

rights.’ ” (Duffens, supra, 161 Cal.App.4th at p. 455.) So, here, a residential 

mortgage loan agreement negotiated and extended by individuals or entities 

not licensed to engage in such activities is unlawful under the real estate 

statutes described above. While we are aware of no statute expressly 

declaring such a contract void (unlike the situation in Duffens, where the 

13 Acting as a real estate broker, real estate salesperson or mortgage 

loan originator without the required license or license endorsement is a 

public offense punishable by a fine of up to $20,000 and/or a jail term of up to 

six months, or, for a corporation, a fine of up to $60,000. (§ 10139.) Willful 

violation, or knowing participation in the violation, of the requirements of the 

real estate division of the Business and Professions Code is a misdemeanor 

punishable by a fine of up to $10,000 and/or a jail term of up to six months. 

(§ 10185.) 
19

governing statutes did so declare), contracts that are contrary “to the policy of 

express statutes . . . are illegal contracts” as well. (Green v. Mt. Diablo 

Hospital Dist. (1989) 207 Cal.App.3d 63, 73.)14 

Contracts entered by an individual lacking the required license are not 

necessarily void ab initio where the proper license is in place during 

performance of the contract. (MW Erectors, Inc. v. Niederhauser Ornamental 

& Metal Works Co., Inc. (2005) 36 Cal.4th 412 (MW Erectors) [statute 

precluding unlicensed contractor from maintaining action to recover 

compensation under contract does not preclude recovery where contractor 

unlicensed at execution of contractor but fully licensed at all times during 

performance of contract]; Fewel & Dawes, Inc. v. Pratt (1941) 17 Cal.2d 85, 90

[acknowledging “unlicensed person is not precluded from recovering a 

commission if he secures such license by the time the contract is performed, 

although it was executed prior to the time he was licensed,” but finding no 

enforceable obligation because license never acquired].) Here, however, there 

is no suggestion defendants were licensed to engage in residential loan 

transactions at any time relevant to the parties’ agreements. In the context 

of construction contracts, MW Erectors noted that nonlicensure at the time of 

contracting does not negate the protection of the public served by the 

regulatory statutes “where all performance was licensed.” (MW Erectors, at 

pp. 442–443.) Here, enforcing a contract entered and performed in violation 

of licensing requirements would be contrary to the public interest. Indeed, 

14 As noted in Duffens, “ ‘[t]he Civil Code places illegal contracts in 

three groups: (1) those contrary to express statutes; (2) those contrary to the 

policy of express statutes, though not expressly prohibited; (3) those 

otherwise contrary to good morals. [Citation.] [Citations.]’ ” (Duffens, supra, 

161 Cal.App.4th at p. 450, fn. 5, quoting 1 Witkin, Summary of Cal. Law 

(10th ed. 2005) Contracts § 451, p. 492.)
20

the circumstances of this case—defendants’ misrepresentation of themselves 

to the public as licensed to engage in residential mortgage loan transactions

and employment of documents reciting the loan was for a business purpose

despite the nature of the borrower and the security demonstrating the 

contrary—supports an inference that defendants deliberately 

mischaracterized the nature of the loan in the documents it presented for 

Paniagua’s signature for the purpose of avoiding the applicable regulations.15

This case does not involve the sort of claim of “garden-variety ‘fraud in 

the inducement,’ related to performance failure” Ericksen described as 

“ideally suited for the arbitrator's expert determination.” (Ericksen, supra, 

35 Cal.3d at p. 317, fn. 2.) Instead, the fraud at issue here went to the very 

legality of the transactions. The trial court based its decision on the evidence 

supplied by the Bureau’s desist and refrain order that around the time 

Paniagua entered the original loan agreement, Milestone and Hamilton were 

misrepresenting to the public that they were licensed to act as a real estate 

broker, real estate salesperson and/or mortgage loan originator, when in fact 

they did not hold any of these licenses. Absent the required licenses, it was 

unlawful for Milestone to enter the residential mortgage agreement with 

Paniagua. Accordingly, the trial court “properly made a preliminary factual 

determination that misleading circumstances existed and led to the entry 

into the agreements, supporting a conclusion the agreements are void,” 

15 Although the trial court made no factual findings on this point, it 

bears noting that the loan documents recited the loan was arranged by a 

licensed real estate agent—necessary to avoid the licensing requirements of 

the Financial Code (Fin. Code, §§ 22100, 22057)—but plaintiffs alleged the 

broker was selected by defendants unilaterally and worked with defendants 

without input from plaintiffs.
21

including the arbitration provisions within them. (Duffens, supra, 161 

Cal.App.4th at p. 456.)16

DISPOSITION

The order denying the motion to compel arbitration is affirmed. Costs 

to plaintiffs.

16 Our resolution of the issues makes it unnecessary for us to address 

the parties’ arguments as to whether the arbitration agreement was 

unconscionable. 
22

_________________________

Kline, P.J.

We concur:

_________________________

Richman, J.

_________________________

Stewart, J.

Paniagua et al. v. Milestone Financial, LLC et al. (A157183)