Judge: Anne Richardson, Case: 23STCV06990, Date: 2023-11-02 Tentative Ruling

Case Number: 23STCV06990    Hearing Date: November 2, 2023    Dept: 40

Superior Court of California

County of Los Angeles

Department 40

Background

Plaintiff Wen Lung Cheng sues Defendants Jimmy Hsieh (Jimmy), Lily Lin-Lih Hsieh (Lily), Jane Hsieh (Jane), Golden Hyde, LLC, Debby Margrate Hsieh (Debby), A&K Plaza Limited (A&K), and Does 1-100 pursuant to a May 12, 2023 First Amended Complaint alleging claims of (1) Breach of Fiduciary Duty, (2) Breach of Contract, (3) Accounting, (4) Dissolution of Partner[ship], (5) Constructive Fraud, (6) Unjust Enrichment, and (7) Conversion.

The claims arise from allegations that Plaintiff Cheng and Defendant Jimmy Hsieh are respectively a 10% limited partner and the general partner of Defendant A&K, a limited partnership created for the purpose of acquiring the property commonly known as 1168 San Gabriel Boulevard, Rosemead, California 91770 (1168 San Gabriel). (A 1992 partnership agreement for A&K is attached as Exhibit A to the FAC. The body of the FAC alleges that Plaintiff Cheng did not have a copy of the 1992 partnership agreement until 2021 and that Plaintiff was not given a copy of the “actual” partnership agreement he signed, but the FAC relies on that agreement to advance his claims.) The FAC alleges that the Hsieh family (Jimmy, his wife Lily, and their daughters Jane and Margrate), have engaged in conduct harmful to A&K. Such conduct includes Jimmy executing, Lily receiving, and Jane notarizing a deed of trust and/or promissory note for $483,207 without consideration to A&K in exchange, as well as the Hsieh family operating a number of businesses (including Defendant Golden Hyde) out of 1168 San Gabriel without paying fair market value rent to A&K, e.g., no rent from Golden Hyde since assuming possession in 2010. The Complaint ties Defendants through allegations of (1) alter ego liability, with each Defendant as the other Defendants’ alter ego, (2) an agency relationship between A&K as principal and each member of the Hsieh family as agent, and (3) conspiracy between Defendants.

On June 6, 2023, Defendants filed a motion to compel arbitration and stay proceedings, and for monetary sanctions against Plaintiff Cheng and counsel.

On October 18, 2023, Plaintiff Cheng opposed Defendants’ motion.

On October 26, 2023, Defendants replied to the opposition.

The motion to compel arbitration is now before the Court.

Evidentiary Objections

Reply Objections

Objection No. 1-6 to Cheng Decl.: OVERRULED.

Objection Nos. 4-8 to Hwang Decl.: OVERRULED.

Objection Nos. 4-7 to Lee Decl.: OVERRULED.

Remaining Objections: Not ruled on as not material to disposition of this motion.

Motion to Compel Arbitration, Stay Proceedings, Award Sanctions

Procedural Requirements

“A petition to compel arbitration or to stay proceedings pursuant to Code of Civil Procedure sections 1281.2 and 1281.4 must state, in addition to other required allegations, the provisions of the written agreement and the paragraph that provides for arbitration. The provisions must be stated verbatim or a copy must be physically or electronically attached to the petition and incorporated by reference.” (Cal. Rules of Court, rule 3.1330.)

Here, Defendants attach a copy of the 1992 A&K partnership agreement (which is also attached as Exhibit A to the FAC), and quote the relevant arbitration provision verbatim: “‘Disputes arising under this Agreement, or under any instrument made to carry out the terms of this Agreement, shall be submitted to arbitration in accordance with the arbitration laws of the state of California.’” (Mot., p. 5, citing 1992 A&K Partnership Agreement, § 10.05; Mot., Lin Decl. Ex. 1.)

Legal Standard

A party to an arbitration agreement may seek a court order compelling the parties to arbitrate a dispute covered by the agreement. (Code Civ. Proc., § 1281.2.) Absent a viable defense to enforcement, the court must grant the motion if it determines there is an agreement to arbitrate that has not been rescinded. (See Code Civ. Proc., § 1281.2; see also Cinel v. Barna (2012) 206 Cal.App.4th 1383, 1389 [“Under section 1281.2, the court shall order a matter to arbitration if it determines that there is an agreement to arbitrate and (1) the agreement has not been waived or (2) the agreement has not been revoked”].) Even where the FAA governs the interpretation of arbitration clauses, California law governs whether an arbitration agreement has been formed in the first instance. (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 893.)

The party seeking arbitration has the “burden of proving the existence of a valid arbitration agreement by a preponderance of the evidence[.]” (Ruiz v. Moss Bros. Auto Group, Inc. (2014) 232 Cal.App.4th 836, 842.) “Once that burden is satisfied, the party opposing arbitration must prove by a preponderance of the evidence any defense to the petition.” (Lacayo v. Cataline Restaurant Group Inc. (2019) 38 Cal.App.5th 244, 257.) “The trial court sits as the trier of fact, weighing all the affidavits, declarations, and other documentary evidence, and any oral testimony the court may receive at its discretion, to reach a final determination.” (Ruiz v. Moss Bros. Auto Group, Inc., supra, at p. 842.) “A party required to prove something by a preponderance of the evidence ‘need prove only that it is more likely to be true than not true.’ [Citation.] Preponderance of the evidence means ‘“that the evidence on one side outweighs, preponderates over, is more than, the evidence on the other side, not necessarily in number of witnesses or quantity, but in its effect on those to whom it is addressed.”’ [Citations.] In other words, the term refers to ‘evidence that has more convincing force than that opposed to it.’ [Citations.]” (People ex rel. Brown v. Tri-Union Seafoods, LLC (2009) 171 Cal.App.4th 1549, 1567.)

“California has a strong public policy in favor of arbitration and any doubts regarding the arbitrability of a dispute are resolved in favor of arbitration.” (Coast Plaza Doctors Hospital v. Blue Cross of California (2000) 83 Cal.App.4th 677, 686.) “This strong policy has resulted in the general rule that arbitration should be upheld unless it can be said with assurance that an arbitration clause is not susceptible to an interpretation covering the asserted dispute.” (Id. [internal quotations omitted].) Generally, thus, on a petition to compel arbitration, the court must grant the petition unless it finds either (1) no written agreement to arbitrate exists; (2) the right to compel arbitration has been waived; (3) grounds exist for revocation of the agreement; or (4) litigation is pending that may render the arbitration unnecessary or create conflicting rulings on common issues. (Cal. Code Civ. Proc., § 1281.2; see Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 218-219.) Nonetheless, California’s policy in favor of arbitration does not override ordinary principles of contract interpretation holding that the contractual terms themselves must be carefully examined before the parties to the contract can be ordered to arbitration. (Rice v. Downs (2016) 248 Cal.App.4th 175, 185.)

Order Compelling Arbitration and Awarding Sanctions: GRANTED as to arbitration; DENIED as to sanctions.

I.

Whether Arbitration Agreement Exists

“Parties are not required to arbitrate their disagreements unless they have agreed to do so. [Citation.] A contract to arbitrate will not be inferred absent a ‘clear agreement.’ [Citation.] When determining whether a valid contract to arbitrate exists, we apply ordinary state law principles that govern contract formation. [Citation] In California, a ‘clear agreement’ to arbitrate may be either express or implied in fact. [Citation.]” (Davis v. Nordstrom, Inc. (9th Cir. 2014) 755 F.3d 1089, 1092-93 [applying California law].) The court is only required to make a finding of the agreement’s existence, not an evidentiary determination of its validity. (Condee v. Longwood Management Corp., supra, 88 Cal.App.4th at p. 219.)

In its motion, Defendants argue that California has a strong public policy in favor of arbitration, that an agreement to arbitrate exists between Plaintiff Cheng, Defendant Jimmy Hsieh, and Defendant A&K through the 1992 A&K partnership agreement, and that Lily, Jane, and Debby Hsieh can invoke the arbitration agreement through equitable estoppel. (Mot., pp. 6-11.) The Jimmy Hsieh declaration advances the position that Plaintiff Cheng signed the 1992 A&K partnership agreement. (Mot., Hsieh Decl., ¶¶ 1-3.) Defendant’s counsel’s declaration attaches a copy of the 1992 partnership agreement, which contains an arbitration provision. (See Mot., Lin Decl., Ex. 1, art. X, § 10.05, Arbitration.)

In opposition, Plaintiff argues that that the 1992 A&K partnership agreement was not signed by him, that he never saw that agreement until 2020, and that the only partnership agreement seen by Plaintiff Cheng is a 1987 A&K partnership agreement that was not signed by Plaintiff. The opposition also argues that Defendants Lily, Jane, and Debby Hsieh and Golden Hyde cannot invoke the 1992 partnership agreement. (Opp’n, pp. 8-10; see Opp’n, Cheng Decl., ¶¶ 1-8.)

In reply, Defendants argue that Plaintiff Cheng did in fact sign the arbitration agreement, that Plaintiff Cheng admits to his signature in the FAC’s allegations, and that Plaintiff’s claims rely so heavily on the 1992 partnership agreement that it must be enforced. (Reply, pp. 2-5.)

Defendants otherwise make arguments relating to waiver, unconscionability, and the risk of inconsistent rulings. (Reply, pp. 5-10.)

The Court finds in favor of Defendants on this issue.

First, the Court determines that Plaintiff is bound by the 1992 A&K partnership agreement and its arbitration clause through equitable estoppel. “‘[T]he linchpin for equitable estoppel is equity—fairness.’” (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 220.) “The doctrine thus prevents a party from playing fast and loose with its commitment to arbitrate, honoring it when advantageous and circumventing it to gain undue advantage.” (Metalclad Corp. v. Ventura Environmental Organizational Partnership (2003) 109 Cal.App.4th 1705, 1713.) Under the “direct benefits estoppel” doctrine applied in other courts, a nonsignatory who “embraced” a contract during the life of the contract may be required to arbitrate a dispute when, during litigation, the nonsignatory attempts to repudiate the arbitration clause in the contract. (See, e.g., Noble Drilling Services, Inc. v. Certex USA, Inc. (5th Cir. 2010) 620 F.3d 469, 473.) A nonsignatory “embraces” a contract with an arbitration clause by “knowingly seeking and obtaining ‘direct benefits’ from that contract” or “seeking to enforce the terms of that contract or asserting claims that must be determined by reference to that contract.” (Ibid.; see Everett v. Paul Davis Restoration, Inc. (7th Cir. 2014) 771 F.3d 380, 383-385 [nonsignatory, actively involved in franchise, required to arbitrate dispute with franchisor, having knowingly accepted same benefits of franchise agreement containing arbitration clause as her husband who signed agreement].) California courts have extended the reach of equitable estoppel to the reasoning behind the direct benefits estoppel doctrine. (See, e.g., Turtle Ridge Media Group, Inc. v. Pacific Bell Directory (2006) 140 Cal.App.4th 828, 831-835 [nonsignatory subcontractor estopped from non-enforcement of an arbitration agreement between signatory client and non-party contractor where the subcontractor’s claims against the defendant client were intertwined with the contract between the client and the contractor] (Turtle Ridge).)

Here, the May 12, 2023 FAC relies on the 1992 A&K partnership agreement to seek relief against Defendants. (See, e.g., FAC, ¶¶ 18, 22, 31, 39, 53-54, 58, 62, 76.) As a result, given that Plaintiff seeks to enforce the terms of the 1992 A&K partnership agreement against Defendants, Plaintiff is equitably estopped from arguing that he is not subject to the arbitration clause in the 1992 A&K partnership agreement. (Cf. Turtle Ridge, supra, 140 Cal.App.4th at pp. 831-835.)

Defendant Jimmy Hsieh is a party to the 1992 A&K partnership agreement, and A&K is the entity contemplated by the agreement. (See Mot., Lin Decl., Ex. 1, 1992 A&K Partnership Agreement.) They thus have standing to invoke the arbitration provision at issue here.

Moreover, even though Defendants Lily, Jane, and Debby were not signatories to the 1992 partnership agreement, they may invoke its arbitration clause because “when a plaintiff alleges a defendant acted as an agent of a party to an arbitration agreement, the defendant may enforce the agreement even though the defendant is not a party thereto. [Citations.]” (Thomas v. Westlake (2012) 204 Cal.App.4th 605, 614; see Complaint, ¶ 33 [Lily, Jane, and Debby alleged to be agents of A&K].)

Accordingly, the Court finds that an agreement to arbitrate exists between the parties.

II.

Delegation of Determination on Scope and Defenses

“Generally, a court will look to the arbitration agreement itself to determine its scope.” (United Teachers of Los Angeles (2012) 54 Cal.4th 504, 516; see Code Civ. Proc., § 1281.2.)

“‘[P]arties may agree to have an arbitrator decide not only the merits of a particular dispute but also ‘“‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.”’ [Citation.] But ‘[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is “clea[r] and unmistakabl[e]” evidence that they did so.’ [Citation.] This is a ‘heightened standard,’ and it ‘pertains to the parties’ manifestation of intent, not the agreement’s validity.’ [Citation.]” (Najarro v. Superior Court (2021) 70 Cal.App.5th 871, 879-880 (Najarro).)

In their motion, Defendants argue that gateway questions of arbitrability should be decided by the arbitrator. (Mot., p. 8.)

The Court disagrees.

The Court’s review of the arbitration clause in the 1992 A&K partnership agreement does not show a delegation of gateway questions of arbitrability. (See Mot., Lin Decl., Ex. 1, § 10.05.)

The Court therefore proceeds with a discussion of scope and defenses.

III.

Scope of the Arbitration Agreement

“[T]he decision as to whether a contractual arbitration clause covers a particular dispute rests substantially on whether the clause in question is ‘broad’ or ‘narrow.’” (Bono v. David (2007) 147 Cal.App.4th 1055, 1067.) “‘A “broad” clause includes those using language such as “any claim arising from or related to this agreement”’ [Citation] or ‘arising in connection with the [a]greement’ [Citation.]” (Rice v. Downs (2016) 248 Cal.App.4th 175, 186 [italics omitted].) “But clauses requiring arbitration of a claim, dispute, or controversy ‘arising from’ or ‘arising out of’ an agreement, i.e., excluding language such as ‘relating to this agreement’ or ‘in connection with this agreement,’ are ‘generally considered to be more limited in scope than would be, for example, a clause agreeing to arbitrate “‘any controversy … arising out of or relating to this agreement[.]’” [Citations.]” (Id. at pp. 186-87, italics omitted.) “Several Ninth Circuit cases have held that agreements requiring arbitration of ‘any dispute,’ ‘controversy,’ or ‘claim’ ‘arising under’ or ‘arising out of’ the agreement are intended to encompass only disputes relating to the interpretation and performance of the agreement.” (Id. at p. 187.)

In their motion, Defendants argue that the scope of arbitration is broad because it covers “[d]isputes arising under th[e] [1992 A&K partnership] [a]greement, or under any instrument made to carry out the terms of th[e] [1992 A&K partnership] [a]greement.” Defendants argue that the conduct complained of in the FAC arises from that scope and equally applies to all Defendants. (Mot., p. 8.)

In opposition, Plaintiff does not address the scope issue head on. Instead, Plaintiff argues that certain claims lie beyond the scope of an arbitrator because they are questions for the Court pursuant to Code of Civil Procedure section 1281.2, subdivision (c), which relates to denying arbitration where “[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions[,] and there is a possibility of conflicting rulings on a common issue of law or fact.” Plaintiff argues that the fraud, conversion, and unjust enrichment claims lie outside the scope of the arbitration agreement but does not cite a pending action or special proceeding involving a third party. (Opp’n, pp. 14-16.)

In reply, as to section 1281, subdivision (c), Defendants argue that this subdivision is not applicable because there is no third party at this moment with whom conflicting rulings are possible (Reply, pp. 9-10), e.g., no lawsuits by other limited partners pursuant to the same claims or claims similar to those supporting this action.

The Court finds in favor of Defendants on this point.

The FAC is somewhat vague as to the terms in the 1992 A&K partnership agreement that were breached by Defendants’ conduct. Indeed, though Plaintiff brings claims based on conduct harming the A&K partnership (see, e.g., FAC, ¶¶ 44-44(e)), he brings this suit in his individual capacity, not in his individual and derivative capacity on behalf of A&K.

In any case, the language of the scope of arbitration is broad because it covers disputes “arising under” the terms of the 1992 partnership agreement.

Moreover, the suit revolves on harm to A&K and its partners (like Plaintiff) based on Defendants’ self-dealing, failure to act in good faith, misappropriation of partnership assets, and refusal to disclose information to limited partners regarding partnership property. (FAC, ¶¶ 44-44(e).) Such conduct necessarily arises from duties of the 1992 A&K partnership agreement. Indeed, the 1992 A&K partnership agreement is alleged by the FAC as controlling the duties and benefits of the A&K partnership. (FAC, ¶ 18.)

To Plaintiff’s argument that the scope of the arbitration agreement does not encompass the fraud, conversion, and unjust enrichment claims, the Court disagrees. Plaintiff does not explain why the arbitrator cannot decide the fraud or conversion claims, which arguably arise from duties in the 1992 A&K partnership agreement. As for unjust enrichment, that is not a valid cause of action in California. (City of Oakland v. Oakland Raiders (2022) 83 Cal.App.5th 458, 477-478 [“There is no cause of action in California labeled ‘unjust enrichment,’” where the typical cause of action for restitution of a benefit unjustly enriching the recipient is instead a ‘quasi-contractual’ claim].)

To the extent that Plaintiff relies on Code of Civil Procedure section 1281.2, subdivision (c), the Court notes that subdivision (c) relies on the existence of third parties alleging claims arising from the same or similar transactions as this action. At most, Plaintiff explains that two other limited partners—Ken Hwang and Samantha Lee—are interested in joining this action as plaintiffs. (Opp’n, p. 6; Opp’n, Hwang Decl., ¶¶ 6-10; Opp’n, Lee Decl., ¶¶ 6-9.) However, Plaintiff fails to reference any already-initiated superior court actions or special proceedings involving claims arising from the same or similar transactions as this action. Code of Civil Procedure section 1281.2, subdivision (c) is thus inapplicable. Moreover, if Hwang or Lee had instituted claims similar or the same to Plaintiff Cheng’s claims, they would similarly rely on the terms of the 1992 A&K partnership agreement, perhaps equitably estopping Hwang and Lee from disclaiming the 1992 A&K partnership agreement’s arbitration clause, just like Plaintiff Cheng in Section I above.

Accordingly, the Court finds that this action is encompassed within the scope of the arbitration agreement. The burden thus shifts to Plaintiff Cheng to point to defenses to enforcement of the arbitration agreement.

IV.

Defenses to the Arbitration Agreement

A “party opposing arbitration must prove by a preponderance of the evidence any defense to the petition” to compel arbitration in the matter. (Lacayo v. Cataline Restaurant Group Inc., supra, 38 Cal.App.5th at p. 257.)

In opposition, Plaintiff Cheng raises various defenses against enforcement of the arbitration clause in the 1992 A&K partnership agreement: (1) waiver of arbitration by Defendants; (2) unconscionability; (3) application of Civil Code section 1281.2, subdivision (c); and (4) the need to stay arbitration until the un-arbitrable claims are adjudicated by this Court. (Opp’n, pp. 10-16.)

A. Waiver of Arbitration by Defendants

A judge may deny a petition for arbitration when the petitioner has waived the right to compel arbitration. (Code Civ. Proc., § 1281.2, subd. (a); Spracher v. Paul M. Zagaris, Inc. (2019) 39 Cal.App.5th 1135, 1137.) It is immaterial whether the Federal Arbitration Act (9 U.S. Code 1 et seq.) or the California Arbitration Act (Code Civ. Proc., §§ 1280 et seq.) applies to the arbitration agreement at issue, because the same standards apply in determining waiver under both acts. (Fleming Distribution Co. v. Younan (2020) 49 Cal.App.5th 73, 79, fn. 5.)

Although no single test delineates the nature of the conduct that will constitute a waiver of arbitration, the California Supreme Court has identified six factors relevant for consideration: (1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a crossclaim without asking for a stay of the proceedings; (5) whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place; and (6) whether the delay affected, misled, or prejudiced the opposing party. (Spracher v. Paul M. Zagaris, Inc., supra, 39 Cal.App.5th at p. 1138 [citing to St. Agnes Med. Ctr. v. PacifiCare of Cal. (2003) 31 Cal.4th 1187, 1195-96, quotations omitted].)

A waiver of the right to arbitrate may not be lightly inferred; rather, the party seeking to establish a waiver has a heavy burden of proof. (St. Agnes Med. Ctr. v. PacifiCare of Cal., supra, 31 Cal.4th 1187, 1195; Fleming Distribution Co. v. Younan, supra, 49 Cal.App.5th at p. 80.) Close judicial scrutiny of any claim of waiver is required. (St. Agnes Med. Ctr. v. PacifiCare of Cal., supra, at p. 1195.) A judge, not an arbitrator, generally resolves the issue of whether a party petitioning to compel arbitration has waived the right to arbitrate by the party’s litigation conduct. (Hong v. CJ CGV Am. Holdings, Inc. (2013) 222 Cal.App.4th 240, 243 [rejecting defendant’s contention that arbitrator should have decided waiver by litigation conduct issue because case was subject to Federal Arbitration Act].)

In his opposition, Plaintiff Cheng argues that waiver applies to Defendants for various reasons. The first reason is that in the “three years prior to Cheng bringing suit, Defendant [Jimmy] Hsieh never mentioned the arbitration sentence” in the 1992 A&K partnership agreement. The second reason is that Defendant Jimmy Hsieh “used a potential buyout as an excuse to delay Cheng’s access to any information related to the Partnership.” Third, Plaintiff Cheng argues that ever since he “brought suit …, Defendants [have] provided frivolous objections to Cheng’s discovery requests,” “filed this motion to compel arbitration, [filed a] demurrer against Cheng’s complaint, requested sanctions and served four sets of discovery requests on Cheng,” and “continue to have sole and exclusive control over the Partnership, the Property and all of its information.” (Opp’n, p. 11; see Opp’n, 10-12 generally.)

In reply, Defendants argue that they “have never argued residency or jurisdictional issues after being served nor contested service of the subject Complaint filed,” and instead, “through their legal counsel have timely answered in filing of a proper Motion to Compel Arbitration as well as proper Demurrer to the First Amended Complaint as well as demanded that the case be properly transferred to Arbitration immediately.” Defendants also make other arguments for why their discovery and other conduct has been proper. (Reply, pp. 6-7.)

The Court finds in favor of Defendants on this point.

The failure to mention the arbitration clause in the 1992 A&K partnership agreement does not appear relevant or even prejudicial, at least not until a true dispute arose between the parties in 2023. Moreover, Plaintiff’s own evidence shows that the 1992 A&K arbitration agreement was disclosed to Plaintiff’s counsel as of December 14, 2020, well before this action was filed in March 2023. Therefore, there is no prejudice or misleading of Plaintiff Cheng by Jimmy Hsieh based on failure to specifically note the existence of the arbitration clause in the 1992 A&K partnership agreement. A simple reading of the agreement would have shown the clause’s existence.

To the extent that Defendant Jimmy Hsieh has relied on statutory provisions permitting a buyout of Plaintiff’s share in A&K, the Court does not see those efforts as inconsistent with the right to arbitration. Defendants clearly did not file for arbitration until there was an actual dispute between the parties. (Compare Complaint, p. 1 [filed on Mar. 30, 2023], with Mot., p. 1 [motion filed Jun. 6, 2023].)

As for Defendants’ conduct relating to discovery, challenges to the pleadings, and other litigation efforts, the Court finds that this conduct is not inconsistent with the right to arbitrate. Plaintiff has not pointed to Defendants taking advantage of discovery procedures not available in arbitration, nor has Plaintiff shown that the litigation machinery has been sufficiently invoked as to connote a waiver of arbitration. Indeed, trial has not even been set, discovery is only commencing, and the challenge to the pleadings, the demurrer, was filed a day after the motion to compel arbitration and is set for hearing in approximately one month should this action not be compelled to arbitration.

The Court thus determines that Plaintiff Cheng has provided an insufficient showing of waiver of the right to arbitrate by Defendants.

B. Unconscionability

“Both procedural unconscionability and substantive unconscionability must be shown [for a finding of unconscionability to exist], but ‘they need not be present in the same degree’ and are evaluated on a ‘sliding scale.’ [Citation.] ‘[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Pinnacle Museum Tower Assn. v. Pinnacle Market Dev. (US), LLC (2017) 55 Cal.4th 223, 247.)

Whether an arbitration provision is unconscionable is a question of law. (Suh v. Superior Court (2010) 181 Cal.App.4th 1504, 1511-1512.)

1. Procedural Unconscionability

Procedural unconscionability “addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power.” (Pinnacle Museum Tower Assn., supra, 55 Cal.4th at p. 246.) Established case law explains that “‘[o]ppression’ arises from an inequality of bargaining power which results in no real negotiation and ‘an absence of meaningful choice’ [and] ‘[s]urprise’ involves the extent to which the supposedly agreed-upon terms of the bargain are hidden [in the agreement] by the party seeking to enforce the disputed terms.” (Zullo v. Superior Court (2011) 197 Cal.App.4th 477, 484.)

In opposition, Plaintiff Cheng argues that procedural unconscionability surrounds the 1992 A&K partnership agreement. Plaintiff Cheng argues that procedural unconscionability arises from him not having seen the 1992 A&K partnership agreement until December 2020, which means that the arbitration clause was not negotiated. Plaintiff also argues that the arbitration clause lacks essential terms that amount to a dispute resolution mechanism because the agreement “does not provide for (a) a third party decisionmaker chosen by the parties, (b) a mechanism for ensuring neutrality in the rendering of the decision, (c) an opportunity for both parties to be heard; and (d) a binding decision.” (Opp’n, pp. 12-13.)

In reply, Defendants argue that Plaintiff insufficiently elaborates the grounds for procedural unconscionability beyond conclusory arguments. Defendants also argue that Plaintiff Cheng admitted to signing the 1992 A&K partnership agreement, for which reason he had an opportunity to negotiate the terms in the agreement. (Reply, pp. 7-8.)

The Court finds in favor of Defendants on this issue.

Plaintiff Cheng cannot rely on the terms of the 1992 A&K partnership agreement that he claims he did not sign to support his causes of action while simultaneously disclaiming the arbitration term in that agreement.  (See Section I discussion supra.)

The Court recognizes that a “a true arbitration agreement [contains]: (1) a third party decisionmaker; (2) a mechanism for ensuring neutrality with respect to the rendering of the decision; (3) a decision maker who is chosen by the parties; (4) an opportunity for both parties to be heard, and (5) a binding decision.” (Cheng-Canindin v. Renaissance Hotel Assocs. (1996) 50 Cal.App.4th 676, 684-685 (Cheng-Canindin).) Here, the entire arbitration provision reads: “Disputes arising under this Agreement, or under any instrument made to carry out the terms of this Agreement, shall be submitted to arbitration in accordance with the arbitration laws of the state of California.” (Mot., Lin Decl., Ex. 1, art. X, § 10.05, Arbitration.) This clause is vague as to the terms of the arbitration itself. However, again, because Plaintiff has relied on the 1992 A&K partnership agreement to enforce its action against Defendants, the Court finds that any failure to flesh out the arbitration clause more fully is attributed to both parties. Plaintiff has not cited any cases stating that arbitration clauses are unenforceable where they fail to provide the terms for deciding on an arbitrator, costs, etc. The arbitration agreement at issue in Harper v. Ultimo (2003) 113 Cal.Ap.4th 1402, 1406-07, cited by Plaintiff, did in fact refer to a set of arbitration rules under the Better Business Bureau, which did not provide for the possibility of full relief to the plaintiff and hence was found unconscionable.

Nevertheless, depending on the Defendants’ position as to which arbitration provider and rules will apply, the Court could find some substantive unconscionability. In order to avoid any prejudice or unconscionability, the Court will inquire at the hearing as to the arbitration provider and arbitration rules that the parties propose to be used.

2. Substantive Unconscionability

Substantive unconscionability focuses on the terms of the agreement and whether those terms are so one-sided as to shock the conscience.” (Kinney v. United HealthCare Servs., Inc. (1999) 70 Cal.App.4th 1322, 1330.)

In opposition, Plaintiff Cheng argues that two clauses in the 1992 A&K partnership agreement show substantive unconscionability. First, Plaintiff points to the clause giving the general partners “full, exclusive and complete discretion and control of the management [of A&K], [and] to conduct the operation of the Partnership and the [Property] in all respects.” Second, Plaintiff points to a term giving the general partner and a majority in interest the power to unilaterally amend the terms of the Partnership Agreement. Plaintiff relies exclusively on a comparison to federal case law to support these points. (Opp’n, pp. 13-14, citing [Mot., Lin Decl., Ex. 1,] 1992 A&K Partnership Agreement, §§ 3.04, 6.01.)

In reply, Defendants argue that sections 3.04 and 6.01 “only set the authority of the general partners in managing the partnership’s affairs and potential amendments to the partnership agreement, which reflect the general nature of a limited partnership.” (Reply, p. 8.)

The Court finds in favor of Defendants on this issue.

As to section 6.01—granting the “General Partners … full, exclusive and complete discretion and control of the management, to conduct the operation of the Partnership and the Investment in all respects”—the Court finds that this type of clause is typical in limited partnerships. (Mot., Lin Decl., Ex. 1, Article VI, § 6.02.)

As to section 3.04—providing that the 1992 A&K partnership “[a]greement may not be altered or modified except by a writing signed by the General partners and a Majority in Interest”—the Court notes that this term is not inherently one-sided. (Mot., Lin Decl., Ex. 1, Article III, § 3.04.) The term only gives Defendant Jimmy Hsieh full control of the “majority in interest” insofar as Jimmy has acquired such a majority interest, such that he can unilaterally vote both as the general partner and as a majority in interest of the partnership. However, the term itself is not unconscionable. Any unfairness arises from Jimmy’s acquisition of a majority interest in A&K.

The Court thus finds that no substantive unconscionability arises from the 1992 A&K partnerships’ terms, for which reason substantive unconscionability does not provide a defense to enforcement of the agreement’s arbitration clause.

C. Code Civ. Proc., § 1281.2, subd. (c)

The Court adopts its discussion at Section III to determine that Code of Civil Procedure section 1281.2, subdivision (c) does not provide a defense to enforcement of the arbitration agreement against Plaintiff Cheng. (Opp’n, pp. 14-16.)

D. Need to Stay Arbitration Pending Judicial Determination of Non-Arbitrable Claims

The Court adopts its discussion in Section III to determine that there are no claims outside the scope of the 1992 A&K partnership agreement, such that, there are no “non-arbitrable claims” that the Court must first adjudicate before arbitration may proceed. (Opp’n, p. 16.)

V. Arbitration Conclusion

Because Defendants have shown the existence of an agreement to arbitrate between the parties that encompasses the FAC’s claims, and because Plaintiff has failed to advance valid defenses to the arbitration agreement, Defendants’ motion is GRANTED.

VI.

Dismissal or Stay of Action

“If a court of competent jurisdiction, whether in this State or not, has ordered arbitration of a controversy which is an issue involved in an action or proceeding pending before a court of this State, the court in which such action or proceeding is pending shall, upon motion of a party to such action or proceeding, stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies.” (Code Civ. Proc., § 1281.4.)

Here, the Court finds it proper to stay this action until arbitration is had in accordance with this order or until such earlier time as the Court specifies.

VII.

Sanctions

“In addition to any other sanctions permitted by law, the court may order a person, after written notice and an opportunity to be heard, to pay reasonable monetary sanctions to the court or an aggrieved person, or both, for failure without good cause to comply with the applicable rules. For the purposes of this rule, ‘person’ means a party, a party’s attorney, a witness, and an insurer or any other individual or entity whose consent is necessary for the disposition of the case. If a failure to comply with an applicable rule is the responsibility of counsel and not of the party, any penalty must be imposed on counsel and must not adversely affect the party’s cause of action or defense thereto.” (Cal. Rules of Court, rule 2.30, subd. (b).)

In their motion, Defendants argue that this rule—erroneously referred to as “CRC Rule 2.3”—has been triggered here based on “Plaintiff and his counsels’ frivolous objection and refusal to concede to the demand for Arbitration of all claims in this Action.” (Mot., p. 12.)

In opposition, Plaintiff Cheng notes the incorrect reference to rule 2.3 but makes no reference to rule 2.30. (Opp’n, p. 17.)

In reply, Defendants do not directly argue in favor of sanctions. (See Reply, Lin Decl., ¶¶ 4-5 [only mention of sanctions within statements arguing that Defendants are entitled to sanctions].)

The Court finds in favor of Plaintiff Cheng on this issue.

Beyond the fact that Defendants reference the incorrect rule of court in relation to sanctions—erroneously reference Cal. Rules of Court, rule 2.3, not rule 2.30—the Court finds that Defendants also fail to reference the “applicable rule[]” with which Plaintiff Cheng has failed to comply by opposing arbitration. Alternatively, the Court finds that Plaintiff’s opposition raised arguments in good faith, even if the Court ultimately did not agree with those arguments.

Sanctions are thus DENIED. 

Conclusion

Defendants Jimmy Hsieh, Lily Lin-Lih Hsieh, Jane Hsieh, Golden Hyde, LLC, Debby Margrate Hsieh, and A&K Plaza Limited’s Motion to Compel Arbitration is GRANTED.

The parties are ORDERED to arbitration. The Court will take argument at the hearing as to the arbitration provider and rules proposed to be used by the parties.

The corresponding Request for Monetary Sanctions is DENIED.