Court Opinion

ID: 4651299
Source: CourtListenerOpinion
Date Created: 2021-01-13 23:02:13.625052+00
Date Added: 2024-06-11T08:01:37.750262
License: Public Domain

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                  NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or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,
                                                                         A157183
 v.
 MILESTONE FINANCIAL, LLC et                                             (San Francisco County
 al.,                                                                    Super. Ct. No. CGC18571279)
           Defendants and Appellants.

         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

                                                               1
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.

                                       2
      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

      2William 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.
      3Subsequent statutory references will be to the Business and
Professions Code except as otherwise indicated.
      A “mortgage loan originator” is “an individual who takes a residential
      4

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).)

                                        3
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.

                                          4
      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

                                         5
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.

                                           6
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.

      7According 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.

                                       7
      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

                                       8
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.

                                       9
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.

      9The 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.”
      10Prior 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.)

                                         10
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

                                       11
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.

                                        12
      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

                                       13
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

      11As 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].)

                                        14
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

                                        15
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

                                        16
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.)

                                          17
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.)

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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.)

                                        19
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,”

      15Although 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.

                                       20
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.

      16Our resolution of the issues makes it unnecessary for us to address
the parties’ arguments as to whether the arbitration agreement was
unconscionable.

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                                          _________________________
                                          Kline, P.J.

We concur:

_________________________
Richman, J.

_________________________
Stewart, J.

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

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