Saigon Plaza Association LLC

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 07-40169 LT
Chapter 11
SAIGON PLAZA ASSOCIATION, LLC,
Debtor.
______________________________/
SAIGON PLAZA ASSOCIATION, LLC, 	A.P. No. 07-4149
Plaintiff,
vs.
CALIFORNIA MORTGAGE & REALTY,
INC., et al.
Defendants.
_____________________________/
MEMORANDUM OF DECISION ON MOTION TO COMPEL
ARBITRATION AND FOR STAY
Creditor 	California 	Mortgage 	& 	Realty, 	Inc. 	(“CMR”) 	seeks 	to
compel arbitration of the claims based on state law asserted by the
above-captioned debtor plaintiff Saigon Plaza Association, LLC (the
“Debtor”) in its objection (the “Objection to Claim”) to the proof of
claim filed in the above-captioned case (the “Proof of Claim”) by CMR
on 	June 	21, 	2007 	and 	to 	stay 	litigation 	of 	all 	claims 	asserted
therein in the bankruptcy court. 	The Debtor opposes the motion. 	The
motion 	came 	on 	for 	hearing 	on 	October 	1, 	2007 	and 	was 	taken 	under
Signed: November 05, 2007
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 07, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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submission. 	During 	the 	course 	of 	the 	briefing 	and 	argument, 	the
scope 	of 	the 	motion 	was 	broadened 	to 	include 	additional 	claims
asserted 	by 	the 	Debtor 	against 	CMR 	in 	Adversary 	Proceeding 	No. 	07-
4149 AT (the “Adversary Proceeding”). 	For the reasons stated below,
having 	considered 	the 	issues 	and 	the 	applicable 	law, 	the 	Court
concludes 	that 	the 	motion 	to 	compel 	arbitration 	should 	be 	granted
with 	respect 	to 	the 	claims 	governed 	by 	state 	law 	and 	denied 	with
respect 	to 	the 	claims 	governed 	by 	bankruptcy 	law. 	The 	Court
concludes 	that 	the 	motion 	to 	stay 	litigation 	of 	the 	claims 	pending
the conclusion of arbitration should be granted except with respect
to the first claim for relief.
SUMMARY OF FACTS
The 	Debtor 	owns 	real 	property 	at 	380-338 	12 th 	Street, 	Oakland,
CA 	(“the 	12 th 	Street 	property”). 	On 	October 	17, 	2005, 	the 	Debtor
executed a secured promissory note for $5.75 million in favor of CMR
(the 	“Debt”). 	The 	loan 	was 	intended 	to 	fund 	the 	development 	of
restaurants 	and 	condominiums 	on 	the 	12 th 	Street 	property. 	The 	Debt
was secured by deeds of trust on the 12 th Street property, as well as
by other properties owned by the Debtor’s members. 	When the Debtor’s
principal, John Le Tung (“Tung”), signed the loan documents, he also
signed an arbitration agreement providing that all disputes regarding
the loan would be subject to mandatory arbitration (the “Arbitration
Agreement”).
On 	January 	18, 	2007, 	the 	Debtor 	filed 	a 	voluntary 	Chapter 	11
petition. 	Shortly 	thereafter, 	CMR 	filed 	the 	Proof 	of 	Claim 	in 	the
amount 	of 	$4,525,182.68. 	On 	June 	21, 	2007, 	the 	Debtor 	filed 	the
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Objection to Claim. 	In the Objection to Claim, the Debtor asserted
that 	it 	had 	received 	no 	payout 	on 	the 	loan 	at 	the 	time 	of 	closing,
although the closing documents said it would receive $3.9 million out
of 	the 	loan 	escrow. 	The 	Debtor 	also 	asserted 	that 	CMR 	had 	charged
interest 	on 	funds 	that 	the 	Debtor 	never 	received. 	Finally, 	the
Debtor 	asserted 	that, 	in 	a 	letter 	sent 	in 	early 	2007, 	CMR 	falsely
represented that a portion of the loan proceeds had been paid into a
trust account held for the Debtor’s benefit (“the Trust Account”).
The Debtor contended that the alleged facts gave rise to claims
for breach of contract, fraud, breach of the covenant of good faith
and 	fair 	dealing, 	interference 	with 	contract, 	wrongful 	foreclosure
and 	unfair 	business 	practices, 	entitling 	the 	Debtor 	to 	a 	claim 	for
damages 	offsetting 	the 	Debt. 	The 	Objection 	to 	Claim 	also 	sought
disallowance 	of 	the 	Debt 	pursuant 	to 	11 	U.S.C. 	§ 	502(d) 	based 	on
CMR’s 	failure 	to 	return 	to 	the 	Debtor 	property 	recoverable 	under
Bankruptcy Code provisions, equitable subordination of the Debt, and
restitution. 	On 	August 	1, 	2007, 	the 	court 	overruled 	the 	Debtor’s
objections 	based 	on 	§ 	502(d) 	and 	equitable 	subordination 	without
prejudice to the Debtor’s asserting them in an adversary proceeding
against CMR.
On 	September 	17, 	2007, 	Debtor 	filed 	the 	Adversary 	Proceeding,
asserting nine claims for relief. 	The claims for relief asserted in
the 	Complaint 	are 	as 	follows: 	(1) 	Lien 	Avoidance 	and 	Recovery 	of
Avoided Transfer pursuant to §§ 544 and 550, (2) Turnover pursuant to
§ 	542, 	(3) 	Avoidance 	of 	Fraudulent 	Transfer 	pursuant 	to 	§ 	548, 	(4)
Avoidance 	of 	Fraudulent 	Transfer 	pursuant 	to 	§ 	548, 	(5) 	Breach 	of
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Contract, (6) Fraud, (7) Unfair Competition pursuant to Cal. Bus. &
Prof. Code § 17200 et seq., (8) Equitable Subordination pursuant to
§ 510(c), and (9) Objection to Claim. 	The prayer for relief seeks
rescission of the loan, lien avoidance based on fraudulent transfer
and 	other 	grounds, 	turnover 	of 	the 	loan 	proceeds, 	compensatory 	and
punitive 	damages, 	restitution, 	equitable 	subordination, 	and
disallowance of CMR’s claims. 	The Debtor also demands a jury trial
on all issues triable to a jury.
DISCUSSION
The 	principal 	argument 	made 	by 	the 	Debtor 	in 	opposing 	CMR’s
motion 	to 	compel 	arbitration 	is 	that 	the 	Arbitration 	Agreement 	is
unenforceable 	because 	it 	is 	unconscionable. 	However, 	before
addressing this argument, the Court will discuss the enforceability
of arbitration agreements in general with respect to claims asserted
in a bankruptcy case. 	See Part A below. 	The Court will then address
the Debtor’s unconscionability argument. 	See Part B below. 	Finally,
the Court will address CMR’s motion to stay litigation of the claims
pending arbitration. 	See Part C below.
A. 	GENERAL ENFORCEABILITY OF ARBITRATION AGREEMENTS IN BANKRUPTCY
The Federal Arbitration Act establishes a general congressional
policy 	favoring 	the 	resolution 	of 	disputes 	through 	arbitration.
Shearson/American 	Express, 	Inc. 	v. 	McMahon, 	482 	U.S. 	220, 	226-27
(1987). 	As a consequence of this policy, the party that opposes the
enforcement 	of 	an 	arbitration 	agreement, 	in 	this 	case, 	the 	Debtor,
bears 	the 	burden 	of 	demonstrating 	that 	the 	arbitration 	agreement
should not be enforced. 	Shearson/American Express, 482 U.S. at 227.
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1 Arguably, the bankruptcy law claims asserted by the Debtor
do not fall within the scope of the Arbitration Agreement.
However, because the Debtor has not raised this issue, the Court
will assume that they do.
5
In determining whether to grant a motion to compel arbitration, the
Court must first determine whether the arbitration agreement covers
the disputes at issue. 	It must then decide whether Congress intended
to 	preclude 	a 	waiver 	of 	the 	judicial 	remedies 	for 	the 	rights 	at
issue. 	Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473
U.S. 614, 625-28 (1985); In re Home Express, Inc., 226 B.R. 657, 658
(Bankr. N.D. Cal. 1998).
The Arbitration Agreement provides that “any Dispute involving
the 	Loan, 	including 	but 	not 	limited 	to 	claims 	arising 	from 	the
origination, documentation, disclosure, servicing, collection or any
other 	aspect 	of 	the 	Loan 	transaction 	or 	the 	coverage 	or
enforceability 	of 	this 	Agreement, 	shall 	be 	resolved 	exclusively 	by
binding arbitration under the terms of this Agreement.” 1
The Supreme Court has made it clear that arbitration agreements
should be enforced, even when to do so makes the dispute resolution
process more complex and even when the dispute is governed by federal
statutory law. 	See Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213,
218-21 (1985)(reversing Ninth Circuit’s decision refusing to enforce
arbitration agreement so as to avoid bifurcation of claims subject to
arbitration 	and 	claims 	subject 	to 	court’s 	exclusive 	jurisdiction);
Shearson/American 	Express, 	482 	U.S. 	at 	226-42 	(arbitration 	clause
enforced as to claims brought under RICO statute and 1934 Securities
Act); 	Gilmer 	v. 	Interstate/Johnson 	Lane 	Corp., 	500 	U.S. 	20, 	25-35
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(1991)(arbitration 	provision 	enforced 	as 	to 	Age 	Discrimination 	in
Employment Act of 1967). 	Based on these authorities the Court easily
concludes 	that 	it 	has 	no 	discretion 	to 	refuse 	to 	enforce 	the
Arbitration 	Agreement 	as 	to 	the 	claims 	governed 	exclusively 	by
nonbankruptcy 	law. 	Those 	claims 	include 	the 	Fifth, 	Sixth, 	and
Seventh Claims for Relief.
The 	only 	remaining 	question 	is 	whether 	Congress 	intended 	to
preclude 	waiver 	of 	judicial 	remedies 	with 	respect 	to 	the 	remaining
six claims for relief. 	As stated in Shearson,
The 	burden 	is 	on 	the 	party 	opposing
arbitration...to show that Congress intended to
preclude 	a 	waiver 	of 	judicial 	remedies 	for 	the
statutory 	rights 	at 	issue. 	If 	Congress 	did
intend to limit or prohibit waiver of a judicial
forum 	for 	a 	particular 	claim, 	such 	an 	intent
‘will be deducible from [the statute’s] text or
legislative 	history,’ 	or 	from 	an 	inherent
conflict 	between 	arbitration 	and 	the 	statute’s
underlying purposes.
482 U.S. at 226-27 (citations omitted). 	None of the statutes upon
which the bankruptcy law claims are based contains an indication of
any 	such 	intent 	nor 	has 	the 	Debtor 	cited 	any 	legislative 	history
indicating 	any 	such 	intent. 	Thus, 	the 	Court 	may 	refuse 	to 	enforce
the 	Arbitration 	Agreement 	with 	respect 	to 	these 	claims 	only 	if 	it
concludes that there is an inherent conflict between submitting them
to arbitration and “the statute’s underlying purposes.”
The 	leading 	case 	on 	this 	issue 	in 	the 	Ninth 	Circuit 	is 	In 	re
Gurga, 176 B.R. 196 (Bankr. 9 th Cir. 	1994). 	In 	Gurga, a chapter 11
debtor filed an adversary proceding against a creditor for breach of
contract, 	breach 	of 	fiduciary 	duty, 	conversion, 	accounting, 	and
turnover. 	The 	creditor 	moved 	to 	stay 	the 	proceeding 	pending
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arbitration 	and 	for 	relief 	from 	the 	automatic 	stay 	to 	proceed 	with
the 	arbitration. 	Id. 	at 	199. 	The 	bankruptcy 	court 	denied 	the
motion. 	The Bankruptcy Appellate Panel reversed. 	Id. at 198.
The Gurga Panel found that, except for the turnover claim, the
claims asserted were noncore proceedings. 	Id. at 199. 	It cited two
of 	its 	prior 	decisions 	and 	a 	Third 	Circuit 	decision 	enforcing
arbitration clauses with respect to noncore proceedings. 	See Mor-Ben
Ins. Markets Corp., 73 B.R. 644 (Bankr. 9 th Cir. 1987); In re Morgan,
28 B.R. 3 (Bankr. 9 th Cir. 1983); Hays and Co. V. Merrill Lynch, 885
F.2d 1149 (3 rd Cir. 1989). 	Id. at 200. 	The Panel found no explicit
evidence in either the relevant statutes or the legislative history
that 	Congress 	intended 	bankruptcy 	courts 	to 	refuse 	to 	enforce
arbitration 	agreements 	with 	respect 	to 	noncore 	claims. 	It 	further
found 	no 	inherent 	conflict 	with 	the 	Bankruptcy 	Code 	in 	enforcing
arbitration agreements with respect to noncore claims. 	Id.
The instant case is distinguishable to some extent in that all
of the claims asserted here are core proceedings. 	The claims based
on bankruptcy law are clearly core. 	However, even the claims based
on nonbankruptcy law are core because they constitute counterclaims
to 	the 	Proof 	of 	Claim. 	See 	11 	U.S.C. 	157(b)(2)(C)(designating 	as
core 	proceedings 	counterclaims 	to 	proofs 	of 	claim). 	Courts 	have
declined 	to 	draw 	a 	bright-line 	rule 	regarding 	the 	treatment 	of
arbitration agreements in core bankruptcy proceedings. 	Instead, in
core 	proceedings, 	the 	bankruptcy 	court 	must 	consider 	“whether 	the
proceeding derives exclusively from the provisions of the Bankruptcy
Code and, if so, whether arbitration of the proceeding would conflict
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2 Several factors influenced the Gandy court’s decision,
including the fact that funds had been transferred to foreign
trusts and that substantive consolidation could not be granted by
an arbitrator.
3 At the hearing on the motion to compel arbitration, the
Court, sua sponte, raised the issue of whether enforcing an
arbitration agreement was in conflict with a fundamental policy of
federal law where the claims were triable to a jury and a timely
jury demand had been made. 	Having considered this issue further,
the Court concludes that, where the state law claims are governed
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with 	the 	purposes 	of 	the 	Code.” 	In 	re 	Nat'l 	Gypsum 	Co., 	118 	F.3d
1056, 1067 (5th Cir. 1997).
In In re Gandy, 299 F.3d 489 (5 th Cir. 2002), the Fifth Circuit
addressed 	the 	issue 	of 	whether 	to 	enforce 	an 	arbitration 	agreement
with 	respect 	to 	a 	proceeding 	involving 	a 	mixture 	of 	bankruptcy 	and
state law claims. 	The proceeding combined avoidance claims under 11
U.S.C. 	§§ 	544 	and 	548 	with 	state 	law 	claims 	for 	RICO 	conspiracy,
insider fraud, alter ego, and substantive consolidation. 	The Court
concluded that none of the claims should be sent to arbitration. 	It
found 	that 	the 	principal 	purpose 	of 	the 	debtor’s 	suit 	was 	lien
avoidance and that therefore all of the claims should be determined
by the bankruptcy court rather than by an arbitrator. 2
In 	this 	case, 	unlike 	in 	Gandy, 	the 	principal 	purpose 	of 	the
Adversary 	Proceeding 	is 	to 	invalidate 	the 	loan 	agreement 	and 	to
cancel the Debt and the liens securing it based on state law claims
of 	breach 	of 	contract 	and 	fraud. 	With 	one 	exception, 	the 	claims
based ostensibly on bankruptcy law are merely derivative of the state
law 	claims. 	While 	the 	claims 	based 	exclusively 	on 	state 	law 	are
core, submitting them to arbitration would clearly not conflict with
the purposes of the Bankruptcy Code. 3
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by California law, this is no basis upon which to refuse to enforce
an arbitration clause. 	See Grafton Partners L.P. v. Superior
Court, 36 Cal. 4 th 944, 955 (2005)(holding that pre-dispute
contractual waivers of jury trials are unenforceable does not
extend to arbitration agreements).
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On 	the 	other 	hand, 	it 	would 	conflict 	with 	purposes 	of 	the
Bankruptcy Code to enforce the Arbitration Agreement with respect to
the 	claims 	based 	on 	bankruptcy 	law, 	even 	if 	those 	claims 	are
derivative. 	Congress 	created 	the 	bankruptcy 	court 	as 	a 	court 	of
special 	expertise. 	Enforcing 	pre-dispute 	agreements 	to 	waive 	the
right 	to 	have 	bankruptcy 	law 	issues 	determined 	by 	the 	bankruptcy
court 	would 	be 	contrary 	to 	the 	purposes 	for 	which 	the 	bankruptcy
court 	was 	created. 	That 	the 	bankruptcy 	law 	fraudulent 	transfer
claims are based on the same nucleus of facts as the state law claims
does not alter this conclusion. 	See In re Friedman’s Inc., 372 B.R.
530, 546 (Bankr. S.D. Ga. 2007)(fraudulent transfer claims should not
be 	recharacterized 	as 	disguised 	state 	law 	claims 	absent 	a 	showing
that 	plaintiff 	has 	failed 	to 	state 	a 	claim 	under 	the 	applicable
fraudulent transfer statute). 	Thus, the claims based on bankruptcy
law–-that is, all of the claims except the Fifth, Sixth, and Seventh
Claims for Relief--will be adjudicated by the Court.
B. 	UNCONSCIONABILITY
As 	noted 	above, 	the 	principal 	argument 	made 	by 	the 	Debtor 	for
refusing 	to 	enforce 	the 	Arbitration 	Agreement 	is 	that 	it 	is
unenforceable because it is unconscionable. 	Under California law, an
arbitration agreement is enforceable “save upon such grounds as exist
for 	the 	revocation 	of 	any 	contract,” 	including 	unconscionability.
Cal. 	Civ. 	Proc. 	Code 	§ 	1281 	(West 	2007); 	Flores 	v. 	Transmerica
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HomeFirst, 	Inc., 	93 	Cal. 	App. 	4 th 	846, 	850 	(2001). 	A 	contract
provision must be both procedurally and substantively unconscionable
to 	be 	unenforceable. 	A 	sliding 	scale 	analysis 	is 	employed 	so 	that
“the 	more 	substantively 	oppressive 	the 	contract 	term, 	the 	less
evidence 	of 	procedural 	unconscionability 	is 	required...and 	vice
versa.” 	Nagrampa v. Mailcoups, 469 F.3d 1257, 1280 (9 th Cir. 2006).
In 	Nagrampa, 	the 	court 	found 	that 	minimal 	procedural
unconscionability 	coupled 	with 	more 	egregious 	substantive
unconscionability warranted a finding of overall unconscionability.
Id. at 1294. 	The Debtor contends that the Arbitration Agreement is
both 	procedurally 	and 	substantively 	unconscionable. 	The 	Court
concludes that it is neither.
1. 	Procedural Unconscionability
Oppression 	and 	surprise 	are 	the 	cornerstones 	of 	procedural
unconscionability. 	Flores, 	93 	Cal. 	App. 	4 th 	at 	853 	(2001).
Oppression exists when the parties have unequal bargaining power and
no 	opportunity 	for 	negotiations, 	leaving 	the 	weaker 	party 	with 	no
meaningful 	choice. 	Id. 	An 	adhesion 	contract, 	or 	“a 	standardized
contract, imposed upon the subscribing party without an opportunity
to negotiate the terms,” is likely to be found oppressive, especially
if 	the 	parties 	have 	unequal 	bargaining 	power. 	Id. 	Surprise, 	the
second element of procedural unconscionability, is present when the
relevant 	term 	is 	“hidden 	in 	a 	prolix 	printed 	form 	drafted 	by 	the
party seeking to enforce [it].” 	Id.
In 	Nagrampa, 	the 	plaintiff, 	a 	neophyte 	businesswoman, 	entered
into 	a 	franchise 	agreement 	with 	the 	defendant, 	Mailcoups, 	after
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receiving their circular in the mail. 	Nagrampa, 469 F. 3d at 1265.
Nagrampa 	signed 	a 	35 	page 	franchise 	agreement 	that 	contained 	an
arbitration provision on page 25. 	Id. at 1283. 	Defendant Mailcoups
conceded 	that 	the 	contract 	was 	non-negotiable 	and 	was 	presented 	to
Nagrampa 	on 	a 	take-it-or-leave-it 	basis. 	Id. 	at 	1281. 	In 	fact,
Nagrampa attempted to negotiate one of the contractual terms, but was
“rebuffed by Mailcoups.” 	Id. at 1265. 	Under these facts, the Ninth
Circuit 	found 	“the 	evidence 	of 	procedural 	unconscionability
...minimal” yet sufficient to support a finding of unconscionability
when combined with strong evidence of substantive unconscionability.
Id. at 1284.
The 	Flores 	case 	presents 	a 	stronger 	showing 	of 	procedural
unconscionability 	than 	Nagrampa. 	In 	Flores, 	the 	plaintiffs 	were 	a
couple, ages 80 and 76, who obtained a reverse mortgage on their home
from 	the 	defendant, 	Transamerica 	HomeFirst, 	Inc. 	Flores, 	93 	Cal.
App. 	4 th 	at 	849. 	The 	Floreses 	signed 	a 	14 	page 	agreement 	that
contained 	an 	arbitration 	clause 	on 	page 	11. 	Id. 	The 	“Important
Information for Borrowers” provided by HomeFirst indicated that the
borrowers 	were 	required 	to 	sign 	the 	standardized 	loan 	documents 	in
order to obtain a reverse mortgage. 	Id. at 853. 	The Floreses were
also 	told 	that 	HomeFirst 	was 	the 	only 	lender 	in 	California 	that
provided reverse mortgages. 	Id. 	The court found this agreement to
be procedurally unconscionable because it was drafted and presented
by 	a 	party 	with 	superior 	bargaining 	power 	on 	a 	take-it-or-leave-it
basis. 	Id. at 854.
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In the case before us, there is no evidence of oppression. 	The
Debtor is a limited liability corporation engaged in the development
of a tract of commercial property. 	Although Debtor’s principal is a
Vietnamese 	immigrant, 	his 	business 	experience 	exceeds 	that 	of 	the
first-time 	business 	owner 	in 	Nagrampa. 	No 	evidence 	was 	presented
that the Debtor had limited or no bargaining power as in Flores. 	No
negotiations took place between the Debtor and CMR. 	However, there
is no evidence that the Debtor attempted to negotiate any terms and
that CMR refused to do so or presented the loan documents to Debtor
on a take-it-or-leave-it basis. 	The Debtor admitted that he signed
the 	loan 	documents 	without 	reading 	them 	and 	without 	initiating
negotiations over their terms because he was in a hurry.
The Debtor, a business entity, cannot remain blissfully ignorant
of 	the 	terms 	of 	an 	agreement 	and 	subsequently 	avoid 	terms 	that 	it
finds unfavorable. 	Because the Debtor is more sophisticated than the
Nagrampa and Flores plaintiffs and because the Debtor made no attempt
to negotiate the contractual terms, the evidence does not support a
finding of oppression.
Likewise, there is no reasonable basis upon which the Debtor may
assert surprise. 	Unlike the arbitration agreements in both Nagrampa
and Flores, which were buried in lengthy contracts, the Arbitration
Agreement 	was 	a 	stand-alone 	agreement 	that 	required 	a 	separate
signature. 	Although 	it 	was 	presented 	with 	many 	other 	documents
requiring signatures, there is no evidence that CMR did anything to
prevent the Debtor from scrutinizing the Arbitration Agreement before
signing it.
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Because 	the 	procedure 	by 	which 	the 	Arbitration 	Agreement 	was
procured 	by 	CMR 	was 	neither 	oppressive 	nor 	calculated 	to 	catch 	the
Debtor by surprise, the Court concludes that the Debtor has failed to
establish the necessary element of procedural unconscionability.
2. 	Substantive Unconscionability
An arbitration agreement is substantively unconscionable if it
is overly harsh, lacks mutuality, or contains one-sided provisions.
Nagrampa, 	469 	F. 	3d 	at 	1280. 	In 	Nagrampa, 	the 	court 	held 	that 	the
arbitration 	agreement 	was 	substantively 	unconscionable 	because 	it
allowed 	the 	defendant, 	but 	not 	the 	plaintiff, 	access 	to 	judicial
remedies. 	In addition, the arbitration agreement contained a forum
selection 	clause 	providing 	that 	arbitration 	would 	take 	place 	in
Boston, 	Massachusetts--a 	convenient 	location 	for 	the 	defendant
corporation 	and 	an 	inconvenient 	location 	for 	the 	plaintiff, 	a
California resident.
The 	Flores 	court 	also 	found 	the 	arbitration 	agreement 	to 	be
substantively unconscionable. 	Flores, 93 Cal. App. 4 th at 855. 	The
agreement in Flores allowed the lender “to proceed with foreclosure
despite the pendency of disputes brought to arbitration” and provided
that 	arbitration 	must 	not 	delay 	or 	adversely 	affect 	the 	lender’s
ability 	to 	exercise 	its 	own 	remedies. 	Id. 	at 	854. 	The 	Flores
agreement 	explicitly 	differentiated 	between 	the 	borrower’s 	and 	the
lender’s 	rights 	and 	did 	so 	in 	a 	particularly 	misleading 	way. 	The
agreement 	stated 	that 	“arbitration 	may 	not, 	however, 	without 	your
consent, 	delay 	or 	adversely 	affect 	your 	ability 	to 	exercise 	any 	of
the remedies available to you under this Loan Agreement or under the
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Security Instrument.” 	Id. at 850. 	The document later defined “you”,
and “your” to refer only to the lender. 	Id.
The 	Debtor 	argues 	that 	the 	Arbitration 	Agreement 	is 	similarly
one-sided. 	The Arbitration Agreement exempts certain actions by CMR
from arbitration, including “actions by the lender to judicially or
non-judicially foreclose on the note and deed of trust (or mortgage)
for the Loan, to enjoin waste, to collect rents, interpleader actions
or actions for a receiver, to recover possession, ejectment or relief
from 	the 	automatic 	stay 	in 	bankruptcy, 	or 	to 	obtain 	relief 	through
governmental agencies.” 	The Arbitration Agreement does not specify
the location of the arbitration, but it does state that arbitration
will 	be 	filed 	with 	the 	American 	Arbitration 	Association 	office
nearest to CMR’s place of business in San Francisco, California.
The 	Court 	concludes 	that 	these 	provisions 	do 	not 	render 	the
Arbitration 	Agreement 	substantively 	unconscionable. 	Although 	the
Arbitration 	Agreement 	allows 	CMR 	to 	resolve 	certain 	claims 	outside
arbitration, it does not do so in an unreasonable manner. 	Unlike the
agreement in Flores, it does not allow CMR to step outside a pending
arbitration 	any 	time 	it 	chooses. 	It 	simply 	allows 	CMR 	to 	take
necessary 	steps 	to 	protect 	its 	collateral 	in 	ways 	that 	would 	be
impossible in the context of arbitration. 	Moreover, the Arbitration
Agreement 	also 	allows 	the 	Debtor 	to 	pursue 	provisional 	equitable
remedies, such as to obtain a preliminary injunction of an improper
nonjudicial foreclosure sale.
In addition, the Arbitration Agreement lacks the onerous cross-
country 	forum 	selection 	clause 	that 	was 	present 	in 	Nagrampa. 	Both
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parties, 	as 	California 	corporations, 	would 	benefit 	from 	an
arbitration being conducted in California. 	Because the Arbitration
Agreement is not unfairly one-sided, either by its terms or due to an
inconvenient forum selection clause, the Court concludes that it is
not substantively unconscionable.
Since 	the 	agreement 	is 	neither 	procedurally 	nor 	substantively
unconscionable, 	the 	Court 	concludes 	that 	it 	is 	enforceable 	under
California law.
C. 	MOTION FOR STAY
CMR has also moved the Court for a stay of litigation of all the
claims asserted in the Adversary Proceeding pending conclusion of the
arbitration. 	As to those claims submitted to arbitration, granting
such 	a 	stay 	is 	mandatory. 	See 	Friedman 	at 	549. 	As 	to 	the 	claims
retained 	by 	the 	Court, 	granting 	such 	a 	stay 	is 	discretionary. 	The
decision is primarily one of judicial economy. 	Where the completion
of 	the 	arbitration 	may 	resolve 	or 	shed 	light 	on 	the 	nonarbitrable
issues and claims, a stay may be appropriate. 	Id. at 550.
As discussed above, except for the First Claim for Relief, the
Court 	finds 	all 	of 	the 	claims 	based 	on 	bankruptcy 	law 	to 	be
derivative of the state law claims. 	Therefore, it seems appropriate
to 	stay 	litigation 	of 	those 	claims. 	However, 	the 	First 	Claim 	for
Relief 	is 	distinct 	from 	the 	other 	claims 	asserted 	in 	the 	Adversary
Proceeding. 	It 	seeks 	to 	avoid 	CMR’s 	security 	interest 	on 	the 	Trust
Account 	pursuant 	to 	11 	U.S.C. 	§ 	544 	on 	the 	ground 	that 	it 	was
unperfected 	at 	the 	time 	the 	Debtor 	filed 	its 	bankruptcy 	petition.
This claim is legally and factually severable from the other claims
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asserted 	in 	the 	Complaint. 	It 	may 	well 	be 	determinable 	by 	summary
judgment. 	There 	is 	no 	reason 	to 	delay 	adjudicating 	this 	claim
pending 	arbitration 	of 	the 	Fifth, 	Sixth, 	and 	Seventh 	Claims 	for
relief.
CONCLUSION
CMR’s motion to compel arbitration will be granted with respect
to 	the 	Debtor’s 	Fifth, 	Sixth, 	and 	Seventh 	Claims 	for 	Relief 	and
denied with respect to the remaining claims for relief. 	CMR’s motion
to stay litigation of the claims pending arbitration will be granted
with respect to all of the claims except the First Claim for Relief.
Counsel 	for 	CMR 	is 	directed 	to 	submit 	a 	proposed 	form 	of 	order 	in
accordance with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
Robert B. Kaplan
Jeffer, Mangels, Butler & Marmaro LLP
Two Embarcadero Center, Fifth Floor
San Francisco, CA 94111
Steven B. Sacks
Sheppard, Mullin, Richter & Hampton LLP
Four Embarcadero Center, 17 th Floor
San Francisco, CA 94111
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