Duncan v. Public Storage

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

SALLY SCHNEIDER DUNCAN, et al., Plaintiffs/Appellees,

v.

PUBLIC STORAGE, INC., Defendant/Appellant.
________________________________________

KEVEN BROWN, Plaintiff/Appellee,

v.

PUBLIC STORAGE, INC., Defendant/Appellant.
________________________________________

TIFFANY ROBERTS, Plaintiff/Appellee,

v.

PUBLIC STORAGE, INC., Defendant/Appellant.

No. 1 CA-CV 21-0283
FILED 3-8-2022

Appeal from the Superior Court in Maricopa County
Nos. CV2020-010440, CV2020-010510, CV2020-010493
The Honorable Stephen F. McCarville, Judge

VACATED AND REMANDED
 COUNSEL

Lewis Brisbois Bisgaard & Smith LLP, Phoenix
By Sean P. Healy, Robert C. Ashley
Counsel for Defendant/Appellant Public Storage, Inc.

Hagens Berman Sobol Shapiro LLP, Phoenix
By Robert B. Carey, John M. DeStefano, E. Tory Beardsley
Counsel for Plaintiff/Appellee Tiffany Roberts

Osborn Maledon P.A., Phoenix
By Geoffrey M.T. Sturr
Counsel for Plaintiffs/Appellees Duncan

Guidant Law, PLC, Tempe
By Samuel Saks
Counsel for Plaintiff/Appellee Keven Brown

OPINION

Vice Chief Judge David B. Gass delivered the opinion of the court, in which
Presiding Judge Paul J. McMurdie and Judge Angela K. Paton joined.

G A S S, Vice Chief Judge:

¶1 Public Storage, Inc., a self-storage facility, appeals the
superior court’s denial of its motion to compel arbitration. Because the
superior court failed to apply the separability doctrine, we vacate the order
and remand for further proceedings consistent with this decision.

FACTUAL AND PROCEDURAL HISTORY

¶2 At different times between 2016 and 2018, Public Storage
contracted with three unrelated renters—Keven Brown (2016), Sally
Schneider Duncan (together with her husband, David Duncan) (2018), and
Tiffany Roberts (2018). The Duncan and Roberts rental contracts were
identical. The Brown rental contract was not identical but included some of
the same terms.

¶3 To begin, each rental contract contained an arbitration clause
stating the parties agreed to “arbitrate any and all disputes or claims . . .
relating to . . . the relationship between” the renter and Public Storage. The

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Opinion of the Court

arbitration clauses specifically included consumer fraud and negligence
claims. Each rental contract required the renter to acknowledge the
arbitration clause by initialing it. And each told the renter the arbitration
clause was optional and explained how to reject it.

¶4 Each rental contract also included an entirety clause, which
(1) told the renter the written contract was the entire agreement, (2)
disavowed any prior statements, and (3) explained subsequent changes
would need to be in writing. Each rental contract required the renter to
provide, at the renter’s expense, a lock the renter deemed sufficient to
secure the unit. And each said the renter would not give Public Storage or
any of its employees a key or combination to the lock.

¶5 In their complaints, the renters alleged Public Storage’s
website stated prospective renters would “keep the only key to [their] unit.”
The Duncans further alleged a Public Storage representative repeated the
only-key promise to them while standing outside their rental unit. The
Duncans’ complaint, however, does not make it clear whether that
conversation occurred before or after the Duncans signed their rental
contract.

¶6 The rental contracts differed in some respects. The Duncan
and Roberts rental contracts said Public Storage would “not have
possession, care, custody, or control over [their] stored property.” Brown’s
rental contract did not.

¶7 In September 2018, a thief accessed the three units. The
complaints alleged the thief used a “generic auctioneer code” to enter the
gate outside Public Storage’s facilities. The thief then unlocked the rear
doors to each rental unit and removed the renters’ possessions, including
furniture, family heirlooms, historic gifts, photo albums, and other
property. The thief entered the units using Public Storage’s master key or
keys obtained through the internet.

¶8 The renters separately sued Public Storage, alleging consumer
fraud and negligence. Public Storage moved to dismiss each case and
compel arbitration. The superior court consolidated the three cases for oral
argument. After argument, the superior court denied Public Storage’s
motion, finding the rental contracts void because Public Storage
fraudulently induced the renters to enter them. Public Storage timely
appealed. This court has jurisdiction under article VI, section 9, of the
Arizona Constitution, and A.R.S. §§ 12-120.21.A.1 and 12-2101.01.A.1.

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ANALYSIS

¶9 Public Storage argues the superior court erred by denying its
motion to compel arbitration because (1) it misconstrued the separability
doctrine, and (2) the renters did not show the arbitration clause was
fraudulently induced or unconscionable. The renters maintain (1) Public
Storage fraudulently induced them into agreeing to arbitrate disputes and
(2) the contracts are so unconscionable that no meeting of the minds
occurred.

¶10 On review, this court treats a motion to compel arbitration
like a motion for summary judgment. Gullett v. Kindred Nursing Ctrs. W.,
L.L.C., 241 Ariz. 532, 540, ¶ 27 (App. 2017) (citing Ruesga v. Kindred Nursing
Ctrs. W., L.L.C., 215 Ariz. 589, 596, ¶ 23 (App. 2007)). This court reviews de
novo a denial of a motion to compel arbitration. Allstate Prop. & Cas. Ins. Co.
v. Watts Water Tech., Inc., 244 Ariz. 253, 256, ¶ 9 (App. 2018). But this court
defers to any findings of fact the superior court made in ruling on the
motion unless they are “clearly erroneous or unsupported by any credible
evidence.” See Federoff v. Pioneer Title & Tr. Co. of Ariz., 166 Ariz. 383, 388
(1990).

¶11 Here, no party asked for an evidentiary hearing, and the
superior court did not hold one. This court, therefore, assumes the superior
court summarily determined any relevant disputed fact issues. See Ruesga,
215 Ariz. at 596, ¶ 24 (discussing A.R.S. § 12-1502.A). If the superior court
rules on an incorrect ground involving disputed fact issues and the correct
ground involves different disputed fact issues, this court remands the case
to the superior court to consider the relevant factual issues. Miller v. Bd. of
Supervisors of Pinal Cnty., 175 Ariz. 296, 301 (1993) (declining to adjudicate
the issue on appeal not addressed in the superior court findings because a
“final decision without findings was impossible without transforming this
court into a factfinder resolving disputed issues of fact”); Aida Rental Tr. v.
Ariz. Dep’t of Revenue, 197 Ariz. 222, 233, ¶ 29 (App. 2000) (as corrected).

I. The Separability Doctrine

¶12 All parties agree the “separability doctrine” governs
arbitration clauses but disagree about how to apply that doctrine. To begin,
we need not resolve whether state or federal law controls because “the same
analysis is mandated by both sets of statutes.” See WB, The Bldg. Co. v. El
Destino, LP, 227 Ariz. 302, 306, ¶ 10 (App. 2011); see also Hamblen v. Hatch, 242 Ariz. 483, 487–88, ¶¶ 16–17 (2017); 9 U.S.C. § 2; A.R.S. § 12-3006.

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¶13 Under the separability doctrine, an “arbitration clause is
considered to be an agreement independent and separate from the principal
contract.” U.S. Insulation, Inc. v. Hilro Constr. Co., 146 Ariz. 250, 253 (App.
1985). “[C]ourts must place arbitration agreements on equal footing with
other contracts . . . and enforce them according to their terms.” AT&T
Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (internal citation
omitted). Accordingly, a challenge to “the contract as a whole, either on a
ground that directly affects the entire agreement (e.g., the agreement was
fraudulently induced), or on the ground that the illegality of one of the
contract’s provisions renders the whole contract invalid” is insufficient to
render the arbitration clause unenforceable. Rent-A-Center, W., Inc. v.
Jackson, 561 U.S. 63, 70 (2010) (quoting Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 444 (2006) (emphasis in original)). “[A] court may
only stay arbitration if there is a challenge to the arbitration clause itself.”
WB, 227 Ariz. at 306, ¶ 11. Nevertheless, “the same grounds may be used to
challenge both an arbitration agreement and the underlying contract so
long as an arbitration agreement itself is separately and distinctly
challenged on those grounds.” Id. at 307, ¶ 13.

¶14 In their responses to Public Storage’s motions to compel
arbitration, the renters did not raise a defense consistent with the
separability doctrine. Except for a few different factual allegations, the
renters’ responses were nearly identical. The Duncans alone hinted at, but
never developed, an arbitration-specific defense, saying: “The very [rental
contract] itself and all of its terms including the arbitration [clause] are void
because they were procured by due process violations and induced by the
lie [Public Storage] told [the renters].” Beyond that, the renters’ responses
did not suggest the arbitration clauses were distinctly induced by fraud or
unconscionable. Instead, they argued the entire rental contracts were
substantively unconscionable because of terms outside the arbitration
clauses.

¶15 Then, at oral argument, the Duncans briefly developed an
arbitration-specific theory premised on fraudulent inducement, and the
other renters adopted those arguments by reference. Though the renters did
not adequately raise the appropriate theory in their responses, we exercise
our discretion to address the merits because the renters advanced a theory
consistent with the separability doctrine both during oral argument in the
superior court and on appeal. See State v. Aleman, 210 Ariz. 232, 240, ¶ 24
(App. 2005) (waiver is a procedural concept this court does not “rigidly
employ in mechanical fashion”).

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II. The Enforceability of the Arbitration Clauses

¶16 An arbitration clause “is valid, enforceable and irrevocable
except on a ground that exists at law or in equity for the revocation of a
contract.” A.R.S. § 12-3006.A; see also WB, 227 Ariz. at 308, ¶ 14; 9 U.S.C. § 2.
Those grounds include “generally applicable contract defenses, such as
fraud, duress, or unconscionability.” Rent-A-Center, 561 U.S. at 68 (quoting
Dr.’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)); see also WB, 227 Ariz.
at 308, ¶ 14 (defenses to arbitration include “lack of mutual consent,
consideration or capacity[,] fraud, duress, lack of capacity, mistake, or
violation of a public purpose” (quoting Hilro, 146 Ariz. at 253)). We address
the renters’ fraudulent inducement defense before turning to their
unconscionability argument.

A. Fraudulent Inducement

¶17 The renters argue “Public Storage induced the making of the
arbitration [clause] itself by fraudulently representing the very essence of
the security it was supposed to provide.” Public Storage counters by
arguing the renters failed to show it fraudulently induced them to agree to
the arbitration clauses.

¶18 In the superior court, a party seeking to compel arbitration
must demonstrate the existence of an arbitration agreement. A.R.S.
§ 12-3007.A. The superior court next “determines whether material issues
of fact are disputed, and, if such factual disputes exist, then conducts an
expedited discovery hearing to resolve the dispute.” Ruesga, 215 Ariz. at
596, ¶ 24 (quoting Haynes v. Kuder, 591 A.2d 1286, 1290 (D.C. 1991)). On a
motion to compel arbitration, the “burden of proving a generally applicable
contract defense lies with the party challenging” the arbitration clause.
Gullett, 241 Ariz. at 541, ¶ 31 (citing Guidotti v. Legal Helpers Debt Resol.,
L.L.C., 716 F.3d 764, 774 n.5 (3d Cir. 2013) (quoting Lloyd v. HOVENSA, LLC,
369 F.3d 263, 274 (3d Cir. 2004))).

¶19 Public Storage met its initial burden by providing the parties’
signed arbitration clauses. The renters then bore the burden to bring forth
evidence establishing a genuine dispute of material fact as to the arbitration
clauses’ enforceability. See Ruesga, 215 Ariz. at 596, ¶ 24.

¶20 Here, the renters claimed Public Storage fraudulently
induced them to enter the rental contracts. Fraud requires proof of the
following elements:

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(1) a representation; (2) its falsity; (3) its materiality; (4) the
speaker’s knowledge of its falsity or ignorance of its truth; (5)
the speaker’s intent that it be acted upon by the recipient in
the manner reasonably contemplated; (6) the hearer’s
ignorance of its falsity; (7) the hearer’s reliance on its truth; (8)
the hearer’s right to rely on it; [and] (9) the hearer’s
consequent and proximate injury.

Comerica Bank v. Mahmoodi, 224 Ariz. 289, 291–92, ¶ 14 (App. 2010). Because
a defense to a motion to compel arbitration seeks rescission, not damages,
“a defrauded party does not have to show pecuniary damages in order to
defeat a [motion] to compel arbitration.” Engalla v. Permanente Med. Grp., 15
Cal. 4th 951, 980 (Cal. 1997); see also Lehnhardt v. City of Phoenix, 105 Ariz.
142, 144 (1969) (damages are not an essential element of a rescission claim
based on misrepresentation).

¶21 On appeal, the renters contend Public Storage induced them
to agree to arbitrate any dispute by falsely promising they would each have
the only key to their respective storage facilities. To be clear, the rental
contracts say the renter shall provide a lock for the unit and shall not
provide a key or combination to Public Storage. The Duncan and Roberts
rental contracts also say Public Storage will not have “possession, care,
custody, or control over [the renters’] stored property.” No rental contract
states Public Storage will not keep a master key. Nevertheless, the renters
argue they were fraudulently induced by statements made outside the
express contractual terms. The renters’ evidence, however, was limited to
the rental contracts, a hyperlink to Public Storage’s website containing its
only-key promise, and a reference to the criminal case number in the thief’s
criminal matter. The Duncans also alleged a Public Storage employee
repeated the only-key promise while standing outside their unit. But
neither the Duncans nor the other renters filed an affidavit or testified about
why they agreed to arbitration.

¶22 The superior court denied Public Storage’s motion because it
found the entire rental contract was fraudulently induced. The superior
court’s ruling is inconsistent with the separability doctrine. See supra at ¶ 13.
Under that doctrine, the only issue before the superior court was whether
the arbitration clauses—not the rental contracts as a whole—were
fraudulently induced. See Rent-A-Center, 561 U.S. at 70 (“a party’s challenge
to another provision of the contract, or to the contract as a whole, does not
prevent a court from enforcing a specific agreement to arbitrate”). In short,
on a motion to compel arbitration, the doctrine of separability squarely

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requires the superior court to consider whether the arbitration clause—not
the overall contract—is enforceable. See id.

¶23 Though this court defers to the superior court’s factual
findings absent clear error, the superior court here made no findings as to
what induced the renters to agree to arbitration. The superior court did find
“a Master Key that opened the back of each unit was in fact stored in the
Manager’s Office of Public Storage, as well as an auctioneer code which
allowed access to the property and individual storage units.” Though the
renters did not present direct evidence of a master key, they did reference
a criminal case they said included those facts. Nothing in the record
suggests the superior court looked at or took judicial notice of that criminal
case. See In re Sabino R., 198 Ariz. 424, 425, ¶ 4 (App. 2000) (A court may
“take judicial notice of its own records or those of another action tried in
the same court.”).

¶24 The parties dispute why the renters agreed to arbitration, and
the superior court must resolve that dispute. Cf. WB, 227 Ariz. at 308, ¶ 15
(holding arbitration clause void because undisputed relevant facts
supported the defense to arbitration). The renters preserved this argument,
but only by the thinnest of margins. The better practice is to submit
evidence or to request an evidentiary hearing. See Ruesga, 215 Ariz. at 596,
¶ 24 (“[T]he party claiming that there is a dispute of fact regarding
arbitrability has the burden of requesting an evidentiary hearing.”). We
remand this matter to the superior court to determine whether, in making
an “only-key promise,” Public Storage necessarily represented it would not
have a master key, and such representation fraudulently induced each of
the renters to agree to arbitration. See Engalla, 15 Cal. 4th at 973–81
(remanding, in part, because plaintiffs presented sufficient evidence to
establish material factual disputes regarding their fraudulent inducement
challenge to an arbitration clause); see also State v. Cid, 181 Ariz. 496, 500
(App. 1995) (the “finder-of-fact, not the appellate court, weighs the
evidence” and determines credibility).

¶25 As discussed above, the superior court must determine on
remand whether Public Storage fraudulently induced the renters to agree
to arbitration. See supra at ¶¶ 13, 24. What induced the renters into entering
the entire rental contract is irrelevant to that determination. See supra at
¶ 13.

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B. Unconscionability

¶26 We address whether the arbitration clauses are
unconscionable because the issue may otherwise recur on remand. Under
the separability doctrine, we decline to address whether the entire rental
contracts are unconscionable. See supra at ¶ 13.

¶27 Public Storage maintains the renters “never claimed the
Arbitration [Clause] itself was unconscionable.” In response, the renters
assert that “the contract is so contrary to the provision of storage services
. . . it did not reflect any meeting of the minds as to arbitration,” meaning
the scope of arbitration was left “undefined.” We agree with Public Storage.

¶28 To begin, the rental contracts did not leave the scope of
arbitration undefined. The arbitration clause in each rental contract
mandated arbitration would be the forum to resolve “any and all disputes”
between the parties. And each arbitration clause specifically covered both
negligence and consumer protection claims—the exact claims each renter
brought.

¶29 The renters identify nine contractual terms outside the
arbitration clause they contend rendered the entire rental contract
unconscionable. As support, the renters compare those terms to similar
contractual terms in Gonzalez v. A-1 Self Storage, Inc., 795 A.2d 885 (N.J.
2000). The renters’ reliance on Gonzalez is unavailing because that case—
though it addressed unconscionability at storage facilities—did not involve
an arbitration clause. See generally id. As stated above, regardless of whether
a challenge to arbitrability is based on fraud or on unconscionability, under
the doctrine of separability, the only issue is whether the arbitration clause
is enforceable, not whether the remainder of the contract might be
enforceable. See Rent-A-Center, 561 U.S. at 70 (“a party’s challenge to
another provision of the contract, or to the contract as a whole, does not
prevent a court from enforcing a specific agreement to arbitrate”).

¶30 “Substantive unconscionability concerns the actual terms of
the contract,” and because separability governs arbitration, the terms of the
arbitration clause—standing alone—govern its substantive
unconscionability. See Maxwell v. Fid. Fin. Servs., Inc., 184 Ariz. 82, 89 (1995);
see also Hilro, 146 Ariz. at 253. Indeed, this court has recognized substantive
unconscionability challenges to arbitration only when grounded on the
terms of the arbitration clause itself. See, e.g., Harrington v. Pulte Home Corp., 211 Ariz. 241, 252–53, ¶¶ 42–49 (App. 2005); Clark v. Renaissance W., LLC,
232 Ariz. 510, 512–13, ¶¶ 8–13 (App. 2013); Gullett, 241 Ariz. at 535–40,

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¶¶ 7–25; Falcone Bros. & Assocs., Inc. v. City of Tucson, 240 Ariz. 482, 490, ¶ 21
(App. 2016).

¶31 In the arbitration context, substantive unconscionability
focuses on whether parties can “effectively vindicate [their] rights in the
arbitral forum.” Rizzio v. Surpass Senior Living LLC, 251 Ariz. 413, 417, ¶ 10
(2021); see also Clark, 232 Ariz. at 512, ¶ 9 (arbitration agreements may be
substantively unconscionable if, for example, “the fees and costs to arbitrate
are so excessive as to ‘deny a potential litigant the opportunity to vindicate
his or her rights’” (quoting Harrington, 211 Ariz. at 252, ¶ 43)). The renters
have not argued the terms of the arbitration clauses are unconscionable or
the arbitral forum will prejudice their claims. The renters, therefore, have
not shown the arbitration clauses are substantively unconscionable.

CONCLUSION

¶32 We vacate the superior court’s denial of Public Storage’s
motion to compel arbitration and remand to the superior court to
determine, consistent with this decision, whether Public Storage
fraudulently induced the renters to agree to the arbitration clauses.

AMY M. WOOD • Clerk of the Court
FILED: AA

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