Friday, November 1, 2013

Towards a Unifed Theory of Equitable Estoppel

Young v. Horizon Services Inc., No. H038736 (D6 Oct. 28, 2013)

This is a pretty routine opinion about whether a non-signatory can be compelled to an arbitration clause contained in a document allegedly signed on her behalf. But in the course of discussing one theory under which a non-signatory can be compelled to arbitrate—equitable estoppel—the court provides a textbook illustration about the development of California decisional law creates traps for the unwary. And, indeed, for the wary too.


Equitable estoppel is a construct that gets applied in a wide variety of contexts. See generally 13 Witkin Summary of California Law, Equity § 194 (2012 online ed.) (providing illustrations). “[T]he very essence of equitable estoppel is to prevent a party from blowing hot and cold and from taking advantage of his inconsistent conduct to the detriment of another.” In re Marriage of Valle, 53 Cal. App. 3d 837, 842 (1975). Equitable estoppel is used to enforce a reliance interest that makes it unjust to hold (or not hold) a party to an obligation. When it comes to equitable estoppel, California law is a mess.

There is an enormous volume of equitable estoppel precedent. (Westlaw counts 1,075 published California cases containing the phrase.) Within that corpus, there are broad, venerable statements of law that purport to be generally applicable. These get picked up and repeated, over and over again—often aided and abetted by the Witkin treatise, which has a regrettable tendency to oversimplify. But then there are exceptions or special applications, which because of the way they develop, sometimes don’t even acknowledge the general rule. These lines of cases can coexist like ships passing in the night. Inconsistencies build up over time, and institutional features of our appellate system—a supreme court whose docket is clogged with capital litigation and an intermediate appellate court without horizontal stare decisis or an en banc procedure—make it difficult to reconcile them or clear them away. And because no one is going to read 1,075 cases to figure out how equitable estoppel works, even thorough legal research can lead to an answer that appears authoritative, but is ultimately incomplete.


In this case, the plaintiff, an eighty-eight-year-old woman, was admitted to a nursing home after she suffered a stroke. After she was discharged, she discovered that she had contracted herpes. Tests of her husband of seventy years came back negative. Plaintiff sued the facility and related entities for elder abuse. Relying on an arbitration clause contained in an agreement that plaintiff’s daughter, Bobbi, had signed at the time of plaintiff’s admission, defendants moved to compel arbitration. Since the plaintiff herself had not signed the agreement, the defendants’ theory was that Bobbi was acting as the plaintiff’s agent. The trial court denied the motion.


The court of appeal affirmed, holding that Bobbi lacked either actual or ostensible authority to bind the plaintiff. The fact that Bobbi had power of attorney for the plaintiff’s health care decisions did not make her an agent because it would only become effective if plaintiff were judged incompetent, which had never occurred. Further, a power of attorney that lets someone make only “health care decisions” does not authorize her to sign agreements to arbitrate.


The court also rejected the premise that there could be ostensible authority based on Bobbi’s purported assertion that she was authorized to sign the admission paperwork. Ostensible authority must be based on the conduct of the principal that gives the impression that an agency exists—the agent’s acts alone cannot give rise to ostensible authority. Since Bobbi lacked authority to bind the plaintiff to an arbitration agreement, plaintiff could not be compelled to arbitrate.


Turning to the defendant’s argument that equitable estoppel bound the plaintiff to arbitrate, the court finds the doctrine inapplicable because the plaintiff had not concealed any fact, which the court says is a “threshold element” for equitable estoppel. The opinion quotes a five-element test requiring “(a) a representation or concealment of material facts; (b) made with knowledge, actual or virtual, of the facts; (c) to a party ignorant, actually and permissibly, of the truth; (d) with the intention, actual or virtual, that the ignorant party act on it; and (e) that party was induced to act on it.” Slip Op. 10. A similar four-element formulation that includes essentially the same requirements has long been recognized as “well-settled.” See Ware Supply Co. v. Sacramento Sav. & Loan Ass’n, 246 Cal. App. 2d 398, 407 (1966). Cases applying it go back almost to the founding of the state. See Boggs v. Merced Mining Co., 14 Cal. 279, 367–68 (1859). And the California Supreme Court, as recently as 2008, has suggested that the five-element test cited by the court is a generally applicable statement of the elements of equitable estoppel. See Simmons v. Ghaderi,
44 Cal. 4th 570, 584–85 (2008). Indeed, cases have specifically said that the absence of any of these elements dooms an assertion of equitable estoppel. See e.g., Dollinger DeAnza Assocs. v. Chicago Title Ins. Co., 199 Cal. App. 4th 1132, 1155 (2011).

But there is a problem with this reasoning. The test is too reductionist. Although it encompasses the requirements of an estoppel grounded in a misrepresentation, there are at least two other bases for equitable estoppel that don’t comfortably fit into the test’s elements.


First, there is an equitable estoppel based on a promise. Although estoppel by a promise usually arises in an affirmative claim for promissory estoppel, a promise can also equitably estop a party from making a defense. For instance, a promise that justifiably induces someone to forebear litigation can give rise to an estoppel to assert the statute of limitations. See, e.g., Battuello v. Battuello, 64 Cal. App. 4th 842, 849 (1998). These cases generally require only a promise and a justifiable reliance on it. See Indus. Indem. Co. v. Indus. Acc. Comm., 115 Cal. App. 2d 684, 690 (1953). Although it could be said that the promise is false in the sense that it is ultimately breached if the party nonetheless raises the defense, the cases do not suggest that the party invoking this kind of estoppel needs to show that the promise was false when made, as is necessary in the case in a claim or defense of fraudulent inducement. Indeed, an equitable estoppel to raise the statute of limitations should apply if the defendant induced the plaintiff into forbearing suit by making a good faith promise to negotiate but then subsequently changed its mind. See generally Miles v. Bank of Am. Nat’l Trust & Sav. Ass’n, 17 Cal. App. 2d 389, 398 (1936). “Actual fraud in the technical sense, bad faith, or an intent to mislead, are not essential to create such an estoppel.” Indus. Indem. Co., 115 Cal. App. 2d at 690. In these cases, an estoppel can apply when the party to be estopped makes a statement (in the form of a promise) that it does not necessarily know is false. Neither the four- nor five- element tests properly encompass that scenario. Indeed, the only way that the elements can be squared with the resulting doctrine is by simply declaring, ipse dixit, as the court of appeal once did long ago, that “[t]he violation of such a promise amounts to fraud,” Calistoga Nat. Bank v. Calistoga Vineyard Co., 7 Cal. App. 2d 65 (1935), even though the equation of a mere breach of a promise with fraud had already been rejected in California. See Bragg v. Bragg, 219 Cal. 715, 720 (1934).


Second, there are cases, where the estopped party’s reliance forms the basis of an estoppel. This often arises to hold that a party cannot bring a claim that relies on enforcing some provisions of a contract, while, at the same time, arguing that the contract is invalid or not binding. The rule appeals to the equitable principle that it is unjust to let a party “play fast and loose” or to “blow hot and cold” with its contractual obligations. See Metalclad Corp. v. Ventana Envtl. Org’l P’ship, 109 Cal. App. 4th 1705, 1714 (2003). This is the rule that is applied in the equitable estoppel cases cited in this opinion. See Slip Op. 9–10 (citing Boucher v. Alliance Title Co. Inc., 127 Cal. App. 4th 262, 268 (2005); Metalclad, 109 Cal. App. 4th at 1714). But the rule in these cases does not depend on any false statement, it does not require the party to be estopped to know any facts at all, and it requires no reliance by the party seeking the estoppel. Notwithstanding some of the sweeping statements in the case law, the common formulation of the elements of equitable estoppel does not apply in this context. Indeed, arguably none of the elements of either the four- or five- element tests is present.


Interestingly, both of these exceptions look much like other varieties of estoppel. The first looks a lot like promissory estoppel, but applied to a defense instead of a claim. That is, when someone promises to do something and the promisee, reasonably relying on that promise, delays filing suit, equity makes the promise binding even in the absence of consideration. The second is closely akin to judicial estoppel—which similarly precludes parties from playing fast and loose with the courts by taking contradictory litigation positions. The similarity has been noted in at least one case. See Turtle Ridge Media Grp., Inc. v. Pac. Bell Directory, 140 Cal. App. 4th 828, 833 n.5 (2006). So perhaps the problem here is just one of nomenclature—happenstance has given three different kinds of estoppel the same name.


In the end, the court here was ultimately correct in holding that equitable estoppel did not apply. It just had the wrong reason. Equitable estoppel was not inapplicable because the plaintiff didn’t make any false statements. That is not a “threshold element” in cases applying the doctrine to compel the arbitration of non-signatories. Instead, equitable estoppel would not apply in this case because the non-signatory plaintiff’s elder abuse claims—all common law and statutory torts—were not premised on enforcing other terms of the admissions document containing the arbitration clause that was signed by Bobbi. See Goldman v. KPMG LLP, 173 Cal. App. 4th 209, 229–30 (2009) (equitable estoppel did not compel a non-signatory to arbitrate because his claims were not “dependent upon, or inextricably bound up with, the obligations imposed by the contract” that contained an arbitration clause).


Affirmed.

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