California Appeals Court Rules Evidentiary Hearing on Questionable Agreements Must Precede ArbitrationA California appeals court has ruled that an evidentiary hearing in a dispute over the validity of questionable arbitration agreements must occur before a court can compel arbitration, reversing a lower court’s decision in Ashburn v. AIG Financial Advisors, Inc., to grant the defendant’s petition to compel arbitration.

Philip Ashburn and four other Pacific Bell employees took an early retirement package from the company and invested their funds with Sharon Kearney of SunAmerica Securities, Inc. Ashburn signed a client agreement with SunAmerica, which was later acquired by AIG Financial Advisors, Inc.

Ashburn became dissatisfied with Kearney’s investment decisions and sued her and AIG, which petitioned to compel arbitration. Ashburn contended that the client agreement he signed with Kearney did not include an arbitration clause; Kearney made a declaration that it did. The trial court found that AIG made a prima facie showing that Ashburn signed a client agreement that included an arbitration provision and granted AIG’s petition to compel arbitration.

On appeal, the First Appellate District reversed the trial court’s decision, saying that it erred in not holding an evidentiary hearing on the petition to compel arbitration. The court found that since there were significant facts in dispute — Ashburn’s contention that the client agreement he signed had no arbitration provision and AIG’s contention that it did — it would be difficult for a trial court to determine the existence of a valid arbitration agreement without an evidentiary hearing.

The appeals court found abundant evidence that there was no enforceable agreement to arbitrate, and said that when two conflicting versions of events occur, the best course for a trial court is to hear oral testimony and give each party an opportunity for cross-examination.

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