The Rule of Watson v. Professional Business Management Corporation is that a nonsignatory defendant cannot compel arbitration based solely on unverified boilerplate allegations in a complaint that it is a "successor, agent and/or alter ego" of a signatory party, under circumstances where the nonsignatory defendant denies the agency relationship and provides no factual evidence to establish its connection to the signatory.
Appeal from order denying motion to compel arbitration in Superior Court, Los Angeles County.
Defendant Appellant was Professional Business Management Corporation — a South Dakota corporation allegedly paying salaries of employees at the signatory entity NACA Law in a predatory lending scheme.
Plaintiff Respondent was Gina Watson — a homeowner who received foreclosure prevention services under an agreement containing an arbitration clause.
The suit sounded in mortgage fraud and predatory lending. The plaintiff alleged defendants operated a sophisticated scheme using a nonprofit front to provide predatory bridge loans to distressed homeowners, ultimately forcing property sales through illegal fees and foreclosure threats.
The key substantive facts leading to the suit were Watson faced foreclosure during COVID, was contacted by NACA Law claiming to be a free nonprofit law clinic, signed a Services Agreement with an arbitration provision, but was allegedly trapped in predatory balloon loans that forced her to sell her home while defendants collected illegal fees.
The procedural result leading to the Appeal: The trial court denied PBMC's motion to compel arbitration, ruling that the SAC was unverified and not admissible evidence, and PBMC failed to present any facts showing it was a successor, agent, or alter ego of signatory NACA Law, thus failing to meet its initial burden.
The key question(s) on Appeal: Whether a nonsignatory defendant's motion to compel arbitration must be granted where the unverified complaint alleges only that the nonsignatory defendant is a "successor, agent and/or alter ego" of the signatory party.
The Appellate Court held that boilerplate agency allegations in an unverified complaint do not constitute judicial admissions sufficient to establish a nonsignatory defendant's right to compel arbitration, particularly where the defendant denies the agency relationship and provides no evidence of its connection to the signatory party.
The case is inapplicable when the nonsignatory defendant admits or concedes the agency/alter ego relationship, when the complaint is verified, when the defendant provides factual evidence establishing its connection to the signatory, or when the nonsignatory does not intend to deny the agency allegations at trial.
The case leaves open whether other theories for nonsignatory arbitration enforcement (incorporation by reference, assumption, veil-piercing, estoppel, third party beneficiary) might succeed with proper factual support, and whether verified complaints containing agency allegations would constitute judicial admissions.
Counsel
For Appellant: Thaler Law, Jesse J. Thaler
For Respondent: Law Offices of Douglas Joseph Rosner, Douglas J. Rosner