Court Opinion

ID: 4570408
Source: CourtListenerOpinion
Date Created: 2020-09-28 19:03:28.247594+00
Date Added: 2024-06-11T13:30:17.026341
License: Public Domain

Filed 9/28/20 Kelly v. Charles Schwab & Co. CA2/6
     NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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has not been certified for publication or ordered published for purposes of rule 8.1115.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

                         SECOND APPELLATE DISTRICT

                                         DIVISION SIX

MICHAEL PATRICK KELLY,                                       2d Civil No. B265826
                                                           (Super. Ct. No. 56-2013-
     Plaintiff and Appellant,                              00435648-CU-BC-VTA)
                                                              (Ventura County)
v.

CHARLES SCHWAB & CO.,
INC.

     Defendant and Respondent.

            Michael Patrick Kelly appeals from the judgment
confirming a binding arbitration award against him. (Code Civ.
Proc., §§ 904.1, subd. (a)(1), 1294, subd. (d).) Kelly contends: (1)
Charles Schwab & Co., Inc. (Schwab) procured the arbitration
award by fraud, and (2) the arbitrator exceeded his powers by
ordering Kelly to pay monetary sanctions. We reverse the
sanctions award and otherwise affirm.
         FACTUAL AND PROCEDURAL BACKGROUND
            Kelly was an independent investment advisor. He
entered into an Investment Manager Service Agreement (IMSA)
with Schwab to conduct trades for Kelly’s clients.1
               The IMSA provided: “Schwab recognizes that you
and your Clients have selected Schwab as the custodian and
Schwab acknowledges the primacy of your relationship with your
Clients. . . . [¶] Schwab has no intent to communicate with your
Clients except as may be required by law, rule or regulation, as
for example brokerage confirmations and account statements,
and as Schwab reasonably determines necessary.” It further
provided, “Either party may terminate this Agreement at any
time by giving written notice to the other.”
               Schwab also required Kelly’s clients to enter separate
brokerage account agreements authorizing Schwab to execute
their transactions as the broker-dealer. The agreements stated
in part, “In the event Schwab elects to terminate the contract
with your named advisor, we will notify you as soon as possible.”
               Schwab became concerned about the signature of one
of Kelly’s clients authorizing the transfer of funds. Schwab
contacted Kelly and requested that the client contact Schwab to
verify their signature or submit a new form. Kelly telephoned
Schwab and impersonated the client. Kelly was combative,
angry, used foul language, and refused to acknowledge the policy
requiring clear and direct client authorization of money transfers.
               After conducting an investigation, Schwab notified
Kelly it was terminating the agreement effective 77 days later.
The same day, it mailed notices to Kelly’s clients advising them of
the termination.
               Kelly filed a civil complaint against Schwab alleging

      1 At some point, Kelly assigned his rights and obligations to
Airgead Clan, LLC (Airgead), of which Kelly was the sole or
principal owner.

                                 2
causes of action for breach of contract, breach of implied covenant
of good faith and fair dealing, defamation, intentional
interference with contractual relations, intentional interference
with prospective contractual relations, abuse of process, and
intentional infliction of emotional distress. He alleged the notices
to clients violated the IMSA and implied he committed a crime.
He also alleged that large and small account holders were treated
differently, and that notices were not sent to clients of large
account holders when fraud was suspected. He alleged that
Schwab intended to take over his clients’ accounts.
             The IMSA provided for arbitration. The court
granted Schwab’s motion to compel arbitration. Neither Kelly
nor Airgead appeared at the arbitration hearing. At the hearing,
Michelle Thetfort, Schwab’s Vice President of Advisory Services
Compliance, testified that its procedures for investigating and
terminating advisors were the same irrespective of the size or
profitability of the accounts involved. There was evidence that of
the 82 accounts Kelly managed at Schwab, all but one followed
Kelly to another custodian.
             The arbitrator issued an award for Schwab. He
found the notices to clients were “reasonably necessary in order
to protect the interests of the end clients, to provide transparency
to the clients and to avoid subsequent client claims and
regulatory risk.” The award ordered Kelly and Airgead to pay
$2,600 for administrative, filing, and case service fees of the
arbitrator, and $33,260 for arbitrator’s fees and expenses. The
arbitrator found that Kelly’s act of posting videos on YouTube
that disclosed discovery he received from Schwab pursuant to a
confidentiality agreement was “inexcusable and willful.” Kelly
was ordered to remove the videos and pay Schwab sanctions of

                                 3
$300 for each day that passed before the videos were removed
after the order.
               The trial court denied Kelly’s request to vacate the
arbitration award and entered judgment “in conformity with” the
arbitration award. It added prejudgment interest of $4,202.96.
Because the parties had presented conflicting information
regarding whether confidential information had been removed
from YouTube, the trial court declined to order sanctions without
an evidentiary hearing. The judgment stated, “Issue of sanctions
is reserved.”
                              DISCUSSION
               The exclusive grounds for vacating an arbitration
award are provided in Code of Civil Procedure section 1286.2.
(Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 28, 33.) “[A]n
arbitrator’s decision [is not generally reviewable] for errors of fact
or law” (id. at p. 11), “whether or not such error appears on the
face of the award and causes substantial injustice to the parties”
(id. at p. 6).
               On appeal, findings of fact by the trial court in
confirming an arbitration award are reviewed for substantial
evidence. (Cooper v. Lavely & Singer Professional Corp. (2014)
230 Cal.App.4th 1, 11-12.) But our review of the trial court’s
determination whether the arbitrator’s powers were exceeded is
de novo. (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9
Cal.4th 362, 376, fn. 9.)
                                  Fraud
               Kelly first claims that the arbitration award was
procured through fraud and should be vacated. This claim lacks
merit.
               The court shall vacate an arbitration award if “[t]he

                                  4
award was procured by corruption, fraud or other undue means.”
(Code Civ. Proc., § 1286.2, subd. (a)(1).) An arbitration award
must be vacated for fraud if (1) the movant “‘establish[es] the
fraud by clear and convincing evidence,’” (2) the fraud was not
“‘discoverable upon the exercise of due diligence prior to or during
the arbitration,’” and (3) “‘the fraud materially related to an issue
in the arbitration. [Citations.]’ [Citations.]” (Pour Le Bebe, Inc.
v. Guess? Inc. (2003) 112 Cal.App.4th 810, 830.) Kelly has not
established that fraud occurred here.
             Kelly’s petition to vacate the award and his objection
to the petition for entry of judgment included charts, excerpts
from depositions, and statements that he did not present as
competent evidence at the arbitration hearing and that he claims
show that Schwab committed “perjury” and “a fraud on the
court.” That Kelly offered contradictory evidence after the
arbitration hearing does not, however, establish perjury or fraud.
In addition to the evidentiary defects in Kelly’s presentation, the
court “may not review the sufficiency of the evidence supporting
an arbitrator’s award.” (Moncharsh v. Heily & Blase, supra, 3
Cal.4th at p. 11.)2
            Kelly contends the arbitrator incorrectly concluded
that the law required Schwab to notify clients of his termination.
But the award did not so state, and the IMSA did not limit

      2  We deny Kelly’s request for judicial notice of records in
Securities and Exchange Commission v. Charles Schwab & Co.,
Inc. (N.D.Cal., 2018, 18-cv-03942), and our file in People v. Kelly
(Dec. 3, 2009, B296697) [nonpub. opn.]. There are no exceptional
circumstances here to warrant judicial notice of records or
evidence that were not before the trial court. (Vons Companies,
Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 444, fn. 3.)

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Schwab to notifications “required by law.” Instead, the IMSA
stated, “Schwab has no intent to communicate with your Clients
except as may be required by law, rule or regulation, as for
example brokerage confirmations and account statements, and as
Schwab reasonably determines necessary.” (Italics added.) The
arbitrator reasonably interpreted this provision to allow
notification to Kelly’s clients of the impending termination
because Schwab deemed it reasonably necessary. Notification
was also required by Schwab’s separate agreements with each of
Kelly’s clients.
             Kelly also asserts the award was fraudulent because
Schwab failed to provide discovery. But the evidence does not
establish that Schwab failed to provide any required discovery, or
that the award was procured by a failure to provide discovery.
             Kelly’s reliance on Baker Marquart LLP v. Kantor
(2018) 22 Cal.App.5th 729, is misplaced. There, an ex parte
communication with the arbitrators procured an award by
“‘undue means’” by “‘“preventing a fair adversary hearing, the
aggrieved party being deliberately kept in ignorance of the action
or proceeding, or in some other way fraudulently prevented from
presenting his claim or defense.”’ [Citation.]” (Id. at p. 739.)
Here, Kelly had the opportunity to hear and see all the evidence
presented at the arbitration hearing, but he chose not to attend.
                               Sanctions
             Kelly next argues that the order for daily sanctions
following entry of the award until he complied with the award
exceeded the arbitrator’s powers. We agree.
             The court shall vacate an arbitration award if “[t]he
arbitrators exceeded their powers and the award cannot be
corrected without affecting the merits of the decision upon the

                                6
controversy submitted.” (Code Civ. Proc., § 1286.2, subd. (a)(4).)
             Schwab incorrectly contends that Kelly raised this
issue for the first time on appeal. In his objection to motion for
entry of judgment, Kelly asserted the arbitrator had no power to
sanction him for his conduct after termination of the arbitration.
             Schwab next contends this issue is not ripe for appeal
because there was no final judgment. We disagree. “If an award
is confirmed, judgment shall be entered in conformity therewith.”
(Code Civ. Proc., § 1287.4.) The record establishes a final
judgment was entered. “‘A judgment is final “when it terminates
the litigation between the parties on the merits of the case and
leaves nothing to be done but to enforce by execution what has
been determined.”’ [Citations.]” (Sullivan v. Delta Air Lines, Inc.
(1997) 15 Cal.4th 288, 304.) We interpret the court’s order here
as a final appealable judgment incorporating the sanctions award
of $300 for every day certain videos are not removed. (See Carole
Ring & Associates v. Nicastro (2001) 87 Cal.App.4th 253, 259
[judgment confirming award incorporated arbitrator’s decision
denying attorney fees].) The judgment is appealable even though
it does not determine whether such violations occurred or
calculate a dollar amount. (Luster v. Collins (1993) 15
Cal.App.4th 1338, 1344, fn. 5 (Luster) [judgment confirming
arbitration award and remanding back to arbitrator to calculate
damages was appealable judgment].)
             The arbitrator exceeded his authority by awarding
sanctions of $300 for every day Kelly failed to remove the videos
from YouTube. This case is like Luster, where the arbitrator
exceeded his authority in an easement dispute by imposing
sanctions of $50 for each day certain trees or signs were not
removed. (Luster, supra, 15 Cal.App.4th at pp. 1349-1350.) The

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court held that in light of the complexity of the law regarding
enforcement of judgments, the Legislature did not give
arbitrators the authority to provide for enforcement of judgments.
(Id. at p. 1349.)
             Luster remains good law. It was not abrogated by
Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at
page 367, or Emerald Aero, LLC v. Kaplan (2017) 9 Cal.App.5th
1125, 1138-1139. Those cases authorize arbitrators to fashion
remedies rationally related to the subject matter of the contract
and the breach. In Advanced Micro Devices, the court upheld an
award of a license to use intellectual property. In Emerald Aero,
the court reversed an award of punitive damages because the
arbitrator exceeded his authority by making the award without
giving adequate notice to the adverse party. Neither case
authorized monetary sanctions for future failures to comply with
the award. Cases decided after Advanced Micro Devices cite it
along with Luster as examples of limitations on arbitrators’
authority. (O’Flaherty v. Belgum (2004) 115 Cal.App.4th 1044,
1056; Jordan v. Department of Motor Vehicles (2002) 100
Cal.App.4th 431, 443.)
             Schwab states it is “willing to waive its right to
recover sanctions and will not seek to enforce that portion of this
award.” But the obligation to pay sanctions would remain a part
of the public record that might have consequences to Kelly. In
addition, an unaccepted settlement offer does not render a case
moot. (Campbell-Ewald Co. v. Gomez (2016) 577 U.S. ___ [136
S.Ct. 663, 670].) Accordingly, we direct the trial court to set aside
that part of its order adopting the sanctions order.
                           DISPOSITION
             The judgment is reversed in part. The trial court

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shall set aside that portion of its judgment confirming the award
of sanctions of $300 per day. In all other respects, the judgment
is affirmed. The parties shall each bear their own costs on
appeal.
             NOT TO BE PUBLISHED.

                                    TANGEMAN, J.
We concur:

             GILBERT, P. J.

             YEGAN, J.

                                9
                        Rocky J. Baio, Judge

                 Superior Court County of Ventura

                 ______________________________

             Michael Patrick Kelly, in pro. per., for Plaintiff and
Appellant.

          Steptoe & Johnson, Robin Crowther and Kelly
Champ for Defendant and Respondent.