Reported / Citable
Background
Gina Watson purchased a home in Reseda, California in 2019. When the Covid pandemic left her unable to make mortgage payments, a purported nonprofit law clinic called NACA Law contacted her, promising free help to prevent foreclosure. Watson alleges NACA Law was actually a front for a criminal enterprise that funneled her into predatory bridge loans, ultimately forcing her to sell her home at a loss while defendants collected inflated fees.
Watson sued NACA Law and several other corporate defendants, including Professional Business Management Corporation (PBMC), a South Dakota corporation she alleged paid NACA Law’s employees and received referral commissions. Her complaint used standard boilerplate language alleging all defendants were the “alter ego, agent, managing agent, principal, owner, partner, joint venture, representative, manager and/or co-conspirator of each of the other defendants.”
Watson had signed a Services Agreement with NACA Law that included an arbitration clause requiring any controversy between them to be settled through the American Arbitration Association. NACA Law successfully moved to compel arbitration of Watson’s claims against it. PBMC then tried to piggyback on that result, arguing it too could force Watson into arbitration even though it never signed the Services Agreement.
The Court’s Holding
The Second District Court of Appeal affirmed the trial court’s denial of PBMC’s motion to compel arbitration. The court held that a nonsignatory defendant cannot compel arbitration based solely on generic boilerplate allegations in an unverified complaint that it is a “successor, agent and/or alter ego” of the signatory party.
PBMC’s theory was that Watson’s own complaint contained a “judicial admission” that PBMC was NACA Law’s agent or alter ego, which should entitle PBMC to enforce NACA Law’s arbitration clause. The court rejected this argument. A judicial admission is a waiver of proof that removes a fact from dispute because both sides agree it is true. But not every factual allegation in a complaint automatically becomes a judicial admission. If it did, plaintiffs would conclusively prove their cases simply by filing allegations, and there would never be any disputed facts.
Following its earlier decision in Barsegian v. Kessler and Kessler (2013), the court explained that boilerplate agency allegations are recognized as generic placeholders, especially useful at the outset of litigation before discovery reveals the true relationships among defendants. Treating them as binding judicial admissions would mean that in any multi-defendant case, a single arbitration agreement between the plaintiff and one defendant would allow every other defendant to compel arbitration, no matter how tenuous the actual connections.
The court also highlighted the fundamental unfairness of PBMC’s position. PBMC submitted a sworn declaration stating it had never done business with Watson, and its counsel confirmed at oral argument that PBMC’s answer denied all agency and alter ego allegations. PBMC wanted to hold Watson to the agency allegation solely to get into arbitration, then turn around and deny that same allegation before the arbitrator. The court found this contradictory approach impermissible, citing the equitable principle that one who takes the benefit must bear the burden.
Key Takeaways
- A nonsignatory to an arbitration agreement bears the burden of proving it has the right to enforce that agreement. Generic boilerplate allegations in an unverified complaint are not enough.
- Boilerplate language alleging mutual agency among defendants is not a judicial admission. A judicial admission requires agreement by both sides, such as a stipulation, a discovery admission, or an answer that concedes a factual allegation.
- A defendant cannot selectively invoke agency or alter ego status to compel arbitration while simultaneously denying that same status in its answer to the complaint. Courts will not allow parties to cherry-pick legal theories for tactical advantage.
- Nonsignatories seeking to enforce arbitration clauses must present actual evidence of their relationship to the signatory, such as proof of agency, alter ego status, or another recognized exception to the general rule that only parties to an agreement can enforce it.
Why It Matters
This decision has practical consequences for businesses and individuals involved in multi-defendant litigation where arbitration agreements exist with only some parties. It prevents defendants from weaponizing a plaintiff’s own boilerplate pleading language to force arbitration without offering any real evidence of a relationship to the contracting party. For plaintiffs, it means that standard agency and alter ego allegations included in early-stage complaints will not be turned against them at the arbitration stage. For defendants who genuinely are agents or alter egos of a signatory, the path to arbitration remains open, but they must come forward with actual evidence rather than relying on the plaintiff’s unverified allegations. The ruling also reinforces the broader principle that parties cannot take contradictory positions for strategic gain, claiming a relationship exists when it helps them and denying it when it does not.