Case Number: 24NNCV06395    Hearing Date: May 13, 2025    Dept: E

Hearing Date: 05/08/2025 – 8:30am
Case No: 24NNCV06395
Trial Date: UNSET
Case Name: SOUTH SAN DIEGO STATE 2, LLC, a California limited liability company; and NORTH SAN DIEGO STATE 2, LLC, a California limited liability company v. BW MORRISON 11000 OWNER, LLC, a California limited liability company; ROBERT EDWARD HART, an individual; MARCUS & MILLICHAP REAL ESTATE INVESTMENT SERVICES, INC., a California corporation; and DOES 1-50

TENTATIVE RULING ON MOTION TO COMPEL ARBITRATION

Motion 1

PROCEDURAL

Moving Party: Defendant, Marcus & Millichap Real Estate Investment Services, Inc. (Defendant or Marcus & Millichap)

Responding Party: Plaintiffs, South San Diego State 2, LLC and North San Diego State 2, LLC (Plaintiffs)

Moving Papers: Notice/Petition; Proposed Order

Opposing Papers: Opposition; Declaration of Pejman Salimpour M.D.; Declaration of Michael W. Vivolil; Proof of Service

Reply Papers: Reply

RELIEF REQUESTED

Defendant, Marcus & Millichap Real Estate Investment Services, Inc. seek an order: (1) Compelling arbitration of all causes of action against Marcus & Millichap in the Complaint; and (2) Staying all proceedings regarding the causes of action against Marcus & Millichap, except for Marcus & Millichap’s anticipated motion for attorney’s fees.

Defendant moves pursuant to CCP § 1281.1, et seq.

Marcus & Millichap’s Petition is based upon this notice of petition, the attached memorandum of points and authorities, the accompanying declarations of Jeff Louks, Elliot Sabag, and Jeremy Borden, the complete files and records in this action, and such other argument and evidence as may be presented at or before the hearing of this matter.

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BACKGROUND

Plaintiffs, South San Diego State 2, LLC, and North San Diego State 2, LLC, filed the instant action on 12/9/2024.

Plaintiffs allege that Defendant, BW Morrison 11000 Owner, LLC is the “Seller” of the two separate apartment buildings (subject property) involved in this litigation. (See Compl. ¶¶ 3 & 8.)

Plaintiffs allege that Robert Edward Hart is and was the principal and equitable owner of the Seller, which Mr. Hart dominated and controlled for his own benefit. (See Compl. ¶ 4.) Plaintiffs allege that Hart is the alter ego of Seller. (Id.) Plaintiffs allege that each entity Defendant named, or later named herein is, in fact, the alter ego and agent of each other and each individual Defendant and, as such, is jointly liable to Plaintiffs. (See Compl. ¶ 6.)

Plaintiffs allege that Defendant, Marcus & Millichap Real Estate Investment Services, Inc. is the “Broker.” (See Compl. ¶ 5.) Plaintiffs allege that Broker served as a dual broker in the real estate transaction at issue herein, and as such, owed duties, including fiduciary duties, to both Plaintiffs and Seller, and each of them. (See Compl. ¶ 5.)

Plaintiffs allege that on or about October 6, 2022, Plaintiffs’ predecessor in interest and assignors signed the Purchase Agreement (PSA), attached as Exhibit A to the Complaint, for the purchase of the subject property. (See Compl. ¶ 8.)

Plaintiffs allege that pursuant to the PSA, Broker agreed to serve as the dual broker for both the Seller and Plaintiffs, and as such, assumed fiduciary duties to both the Seller and the Plaintiffs, pursuant to which Broker was precluded from relegating the interests of any one party over the other. (See Compl. ¶ 9.)

In general, Plaintiffs’ Complaint alleges that Defendants failed to disclose construction defects in the subject property and that the Broker (Marcus & Millichap ) failed to disclose a long history of representing Hart in the sale of similar properties.

Plaintiffs’ Complaint lists five causes of action: (1) Fraudulent Concealment and Nondisclosure; (2) Fraudulent Concealment and Nondisclosure; (3) Negligent Misrepresentation; (4) Breach of Contract; and (5) Unfair Business Practices.

The first and fourth causes of action are alleged against Seller (BW Morrison 11000 Owner, LLC); Robert Hart; and Does 1-5.

The second cause of action is alleged against Broker (Marcus & Millichap) and Does 6-10.

The third and fifth causes of action are alleged against all Defendants.

ANALYSIS
Code of Civil Procedure § 1281.2, governing orders to arbitrate controversies, provides in pertinent part:

On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that:

(a) The right to compel arbitration has been waived by the petitioner; or

(b) Grounds exist for rescission of the agreement.

(CCP § 1281.2(a)-(b).)

The party seeking arbitration bears the initial burden of demonstrating the existence of an arbitration agreement. (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236.) In ruling on a motion to compel arbitration, the Court must first determine whether the parties actually agreed to arbitrate the dispute, and general principles of California contract law help guide the court in making this determination. (Mendez v. Mid-Wilshire Health Care Center (2013) 220 Cal.App.4th 534, 541; Victoria v. Superior Court (1985) 40 Cal. 3d 734, 835.) Once the Court concludes an arbitration agreement exists, it must then consider whether the agreement covers the claims at issue. (Omar v. Ralphs Grocery (2004) 118 Cal.App.4^th 966, 960.) Even when the FAA applies, “interpretation of the arbitration agreement is governed by state law principles.” (Hotels Nevada, LLC v. Bridge Banc, LLC (2005) 130 Cal.App.4th 1431, 1435.)

Existence of Agreement – Parties

Moving Defendant (or Broker), Marcus & Millichap, attaches the Purchase Agreement as Exhibit 1 to the instant motion to compel arbitration. This Purchase Agreement contains the arbitration clause that is the subject of this motion.

Further, Marcus & Millichap attaches the declarations of Jeff Louks and Elliot Sabag to the moving papers.

Jeff Louks, Executive Managing Director of Investments for Marcus & Millichap, states in relevant part, “On September 29, 2022, and October 7, 2022, buyer, seller, and Marcus & Millichap executed the Purchase Agreement for the sale of the Property. On behalf of Marcus & Millichap, I signed the Purchase Agreement and initialed the arbitration agreement. A true and correct copy of the Purchase Agreement is attached as Exhibit 1.” (Decl. Louks, ¶ 3.)

Elliot Sabag, Licensed Assistant for Marcus & Millichap, states in relevant part, “On September 29, 2022, and October 7, 2022, buyer, seller, and Marcus & Millichap executed the Purchase Agreement for the sale of the Property. On behalf of Marcus & Millichap, I signed the Purchase Agreement and initialed the arbitration agreement. A true and correct copy of the Purchase Agreement is attached as Exhibit 1.” (Decl. Sabag ¶ 3.)

Plaintiffs’ Complaint alleges that pursuant to the Purchase Agreement, Broker (Marcus & Millichap) agreed to serve as the dual broker for both the Seller and Plaintiffs. (See Compl. ¶ 8.)

On page 1 of 15 to Exhibit 1 in the moving papers, a box is checked indicating that Marcus & Millichap is “agent” for Seller and Buyer.

Further, on page 1 of 15, “Pejman Salimpour and/or assignee” is referred to as “Buyer.”

Additionally, on page 1 of 15, “BW Morrison 11000 Owner LLC & BW Morrison 11005 Owner LLC” is referred to as “Seller.”

On page 10 of 15 to Exhibit 1 in the moving papers, the arbitration clause can be found.

Two sets of initials (presumably Jeff Louks and Elliot Sabag) are found near both Buyer’s Agent (Marcus & Millichap) and Seller’s Agent (Marcus & Millichap).

Therefore, Defendant, Marcus & Millichap, demonstrated it is a party to the arbitration agreement.

However, the Court notes that in order for Defendant to prove the existence of the arbitration agreement between Defendant and Plaintiffs, Defendant would have to show that Plaintiffs also signed the arbitration agreement.

An issue with this is that the Plaintiffs in this action are South San Diego State 2, LLC and North San Diego State 2, LLC.

This seems to present an issue because the “Buyer” in the purchase agreement/arbitration agreement is listed as “Pejman Salimpour and/or assignee.”

While the lack of signature by Plaintiffs appears as if it could potentially be a problem, the Court notes that the Complaint alleges that “On or about October 6, 2022, Plaintiffs’ predecessor in interest and assignors signed that certain Purchase Agreement, a true and correct copy of which is attached hereto as Exhibit “A” (the “PSA”) for the purchase and sale of two separate apartment buildings…” (Comp. ¶ 8.)

“When a plaintiff brings a claim which relies on contract terms against a defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement.” (JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222, 1239.)

In  Paragraph 26 of the Complaint, Plaintiffs allege:

Broker and DOES 6-10 served as dual brokers under the purchase and sale of the Property pursuant to Exhibit "A." As such, Broker and DOES 6-10 each expressly assumed an obligation to Plaintiffs to exercise reasonable skill and care in the performance of its duties; the duty of honest and fair dealing and good faith; and a duty to truthfully disclose to Plaintiffs all facts known to Broker to materially affect the value or desirability of the property that were not known to, or within the reasonable diligent attention and observation of Plaintiffs.

(Compl. ¶ 26.)

Therefore, based on Paragraph 26 of the Complaint, it appears as if Plaintiffs are bringing a claim which is relying on terms of the Purchase Agreement/arbitration agreement. Thus, it appears as if Plaintiffs are equitably estopped from repudiating the arbitration clause contained in the agreement.

However, even if Plaintiffs’ Complaint is not relying on terms of the Purchase Agreement/arbitration agreement to bring a claim against Marcus & Millichap, the Court notes that Plaintiffs’ Opposition did not argue that they were not parties to the Purchase Agreement/arbitration agreement.

In fact, Plaintiffs’ Opposition stated in relevant part, “Although Plaintiffs admittedly signed the purchase and sale agreement (“PSA”) pursuant to which Plaintiffs took title to the Property…” (Pl. Oppo. p. 3.)

Therefore, since Plaintiffs’ Opposition doesn’t argue that they didn’t sign the arbitration agreement, Marcus & Millichap met its initial burden in demonstrating the existence of the agreement between itself and Plaintiffs.

Scope
Once the Court concludes an arbitration agreement exists, it must then consider whether the agreement covers the claims at issue. (Omar v. Ralphs Grocery (2004) 118 Cal.App.4^th 966, 960.)

With respect to the scope of the arbitration provision, the arbitration provision provides in relevant part:

ARBITRATION OF DISPUTES AND WAIVER OF JURY TRIAL: All disputes arising between the Parties, including Agent, with respect to the subject matter of this Purchase Agreement or the transaction contemplated herein (including but not limited to the parties' rights to the Deposit or the payment of commissions as provided herein) shall be settled exclusively by final, binding arbitration. The Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction.

(Def. Mot., Ex. 1, ¶ 32, p. 10 of 15.)

Plaintiffs allege causes of action for fraudulent concealment and nondisclosure (second cause of action), negligent misrepresentation (third cause of action), and unfair business practices (fifth cause of action) against Marcus & Millichap.

Based on the allegations of the Complaint, these allegations appear to arise with respect to the subject matter of the Purchase Agreement, or the transaction contemplated herein; therefore, the Purchase Agreement/arbitration agreement appears to cover the claims at issue.

Most importantly, Plaintiffs’ Opposition does not argue that the Purchase Agreement/arbitration agreement does not cover the claims at issue.

Therefore, Defendant, Marcus & Millichap, met its initial burden in demonstrating the existence of the agreement between itself and Plaintiffs, and Defendant met its burden in demonstrating the arbitration agreement covers the claim at issue in Plaintiffs’ Complaint.

Defense to Arbitration – Waiver 1

Plaintiffs argue that Defendant waived, through its conduct, any right to arbitrate.

Plaintiffs have a section on page 5 of the Opposition titled, “Marcus & Millichap Waived Through Its Conduct Any Right to Arbitrate.” (Pl. Oppo. p. 5.)

Plaintiffs’ section on waiver by conduct does not make sense to the Court, as the argument that Plaintiffs assert regarding waiver by conduct is the same argument that Plaintiffs make with respect to rescission of the contract on pages 6 – 7 of Plaintiffs’ Opposition.

“The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability. [Citation.]” (Marenco v. DirectTV LLC (2015) 233 Cal.App.4th 1409, 1416.) “Code of Civil Procedure section 1281.2 provides that one ground for denying a petition to compel arbitration is that “[t]he right to compel arbitration has been waived by the petitioner.”” (Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 374.)

As stated in  Quach v. California Commerce Club, Inc.:

To establish waiver under generally applicable contract law, the party opposing enforcement of a contractual agreement must prove by clear and convincing evidence that the waiving party knew of the contractual right and intentionally relinquished or abandoned it. (Lynch, supra, 3 Cal.5th at p. 475, 219 Cal.Rptr.3d 754, 396 P.3d 1085; see Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31, 44 Cal.Rptr.2d 370, 900 P.2d 619 (Waller) [burden is on party claiming waiver “ ‘to prove it by clear and convincing evidence’ ”]; 30 Cal.Jur. 3d, supra, Estoppel and Waiver, § 38.) Under the clear and convincing evidence standard, the proponent of a fact must show that it is “highly probable” the fact is true. (Conservatorship of O.B. (2020) 9 Cal.5th 989, 995, 266 Cal.Rptr.3d 329, 470 P.3d 41 (O.B.).) The waiving party's knowledge of the right may be “actual or constructive.” (Outboard Marine Corp. v. Superior Court (1975) 52 Cal.App.3d 30, 41, 124 Cal.Rptr. 852.) Its intentional relinquishment or abandonment of the right may be proved by evidence of words expressing an intent to relinquish the right or of conduct that is so inconsistent with an intent to enforce the **1138 contractual right as to lead a reasonable factfinder to conclude that the party had abandoned it. (Lynch, supra, 3 Cal.5th at p. 475, 219 Cal.Rptr.3d 754, 396 P.3d 1085.)

(Quach v. California Commerce Club, Inc. (2024) 16 Cal.5th 562, 584.)

Here, Plaintiffs do not establish that Defendant waived its ability to compel arbitration.

Plaintiffs’ arguments on pages 5 – 6 of the Opposition have nothing to do with waiver by conduct.

Further, nothing in the Vivoli Declaration shows that Defendant waived its ability to compel arbitration by its conduct.

Defense to Arbitration – Waiver 2

Plaintiffs also argue that the arbitration agreement should not be enforced because Defendant waived its right to compel arbitration based on CCP § 1281.2(c).

“[T]he court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: (c) 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. For purposes of this section, a pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition. This subdivision shall not be applicable to an agreement to arbitrate disputes as to the professional negligence of a health care provider made pursuant to Section 1295.” (CCP § 1281.2(c).)

Plaintiffs argue that Defendant Marcus & Millichap has waived its right to arbitrate because BW Morrison and Mr. Hart have waived their right to arbitrate by refusing to respond to Plaintiffs’ pre-litigation communications, thus forcing Plaintiffs to file suit.

Here, Plaintiffs’ argument doesn’t make much sense.

First off, the Court fails to see what Plaintiffs’ argument has to do with § 1281.2(c) because § 1281.2(c) mentions “a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party.”

Plaintiffs’ argument has nothing to do with a pending court action or special proceeding with a third party. BW Morrison and Mr. Hart are both Defendants in this action; they are not third parties.

Second, to the extent that Plaintiffs are arguing that Marcus & Millichap waived the right to compel arbitration because Mr. Hart and BW Morrison refused to respond to Plaintiffs’ pre-litigation communications, Plaintiffs have not established that BW Morrison and Mr. Hart waived their right to arbitrate.

The Vivoli Declaration states:

2. Before filing Plaintiffs' Complaint in this matter, and at Plaintiffs' request, I drafted a letter to BW Morrison's principal, Mr. Hart, and emailed it to him, expressing Plaintiffs' interest in informally resolving the matter, without having to resort to litigation or any other form of dispute resolution. Attached hereto as Exhibit "A" is a true and correct copy of the letter I repeatedly sent to the email address indicated on the face of the letter, with no indication the email had "bounced back" or been rejected, and the letter was also mailed to the address reflected in the letter. After multiple follow-up communications failed to prompt a response of any kind from Mr. Hart of any counsel responding on his behalf, I drafted and then filed Plaintiffs' Complaint herein, believing no other action would prompt a response from BW  Morrison or Mr. Hart.

3. After effecting service of the Complaint and allowing the "discovery hold" to pass, I promptly served written discovery on BW Morrison and Mr. Hart that was calculated to obtain evidence of the Defendants' fraud in failing to disclose the unpermitted work conducted at the Property, which converted a first-floor apartment to a "gym" by removing an interior load bearing wall, resulting in observable structural damage to the floors above. I have personally observed the modification of the "gym" and the damage to the units above, as I explained to counsel for BW Morrison and Mr. Hart. In response, BW Morrison and Hart's counsel refused to respond to the discovery until this motion and its own motion to compel arbitration have been held and indicated they would seek a "mandatory" stay of the action pending the hearing of the two motions to compel arbitration. Accordingly, Defendants have been able to effectively resist providing evidence of their fraudulent conduct - the very conduct that warrants rescinding the PSA and its arbitration clause - pending a hearing on these motions without evidence critical to deciding the motion in accord with Code of Civil Procedure section 128 l .2(b), which permits arbitration to be denied on grounds the contract containing the arbitration clause is subject to being rescinded.

(Decl. Vivoli ¶¶ 2-3.)

Even analyzing the alleged conduct of BW Morrison and Mr. Hart (located in Vivoli’s Declaration at §§ 2-3) with the standard set forth in, Quach v. California Commerce Club, Inc. (2024) 16 Cal.5th 562, 584, Plaintiffs do not demonstrate waiver by BW Morrison and Mr. Hart, nor do they demonstrate waiver by Marcus & Millichap.

Defense to Arbitration – Rescission

Plaintiffs also have a section in their Opposition titled “Marcus & Millichap’s Concealment of Material Facts From Plaintiffs Entitles Plaintiffs to Rescind the Agreement Altogether.” (Pl. Oppo. p. 6.)

Plaintiffs argue as follows:

Again, Marcus & Millichap outright acknowledges that a court may decline to enforce an agreement to arbitration where the agreement containing an agreement to arbitrate is subject to rescission. (Code of Civil Procedure section 1281.2(b).) This is just such a case, in which the Court should decline to enforce the agreement because it is so clearly subject to being rescinded.

The grounds for rescission under California law include mistake, undue influence, material failure of consideration and, of course, fraud. (See Civil Code sections 1689 and 1566.) This issue of whether an agreement to arbitrate is subject to being rescinded always decided by the Court, on motion to the Court, rather than by an arbitrator. (Duffens v. Valenti (2008) 161 Cal.App.4th 434, 447; Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547, 553; Moseley v. Electronic & Missile Facilities, Inc. (1963) 374 US 167, 170-171; Engalla v. Permanente Med. Group, Inc. (1997) 15 Cal.App.4th 951, 973.)

Here, Marcus & Millichap failed to disclose its longstanding financial relationship with Mr. Hart and his entities; a fact clearly material to Plaintiffs' agreement to permit Marcus & Millichap to serve as the broker for both principals while Marcus & Millichap was clearly beholden to its other fiduciary, from whom it has derived considerable income, and from whom it stood to receive even more income in the future. (See Salim pour Decl., at ¶ 3.) Yet, Marcus & Millichap did not disclose that fact, nor did Marcus & Millichap disclose the significant structural defects discovered by Plaintiffs only after the close of escrow, upon obtaining access to a unit that was not made available for inspection before the close of escrow. (Ibid.)

Because the agreement to arbitrate - and indeed, the entire PSA - is subject to rescission (one of the very remedies Plaintiffs have prayed for and to which the evidence submitted makes clear they are entitled), the Court should decline to compel arbitration based on that factor alone.

(Pl. Oppo. p. 6-7.)

Here, the Court will hear argument.

In the Court’s view, Plaintiffs don’t explain in any clear manner what the standard is for fraud being a defense to enforcement of an arbitration provision, nor do they explain how they met that standard.

Plaintiffs properly cite to CCP § 1281.2(b) as fraud being a defense to arbitration based on the theory of rescission.

CCP § 1281.2(b) is construed to mean that the petition to compel arbitration is not to be granted when there are grounds for rescinding the agreement. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 973.) “Fraud is one of the grounds on which a contract can be rescinded. (Civ. Code, § 1689, subd. (b)(1).)” (Id.)

Plaintiffs argue that the agreement to arbitrate, and the entire Purchase Agreement, is subject to rescission because Marcus & Millichap failed to disclose its longstanding financial relationship with Mr. Hart and his entities. Further, Plaintiffs argue that failure to disclose the longstanding relationship was a material fact to Plaintiffs’ agreement to permit Marcus & Millichap serve as the broker for both principals while Marcus & Millichap was clearly beholden to its other fiduciary, from who it derived considerable income, and from whom it stood to receive even more income in the future. Plaintiffs also argue that Marcus & Millichap didn’t disclose the significant structural defects discovered by Plaintiffs only after close of escrow, upon obtaining access to a unit that was not made available for inspection before the close of escrow. (See Pl. Oppo. p. 7.)

Problematic with Plaintiffs’ argument is that based on how their Opposition is written, the Court is unclear as to how Plaintiffs are satisfying this fraud defense because they don’t explain what the legal standard is.

However, the Court has some hesitation in finding Plaintiffs’ argument unavailing because based on Plaintiffs’ citation to Brown v. Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938, 959-960 (Brown) on page 6 of Plaintiffs’ Opposition, as well as Plaintiffs’ citation to Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 973 (Engalla) on page 7 of Plaintiffs’ Opposition, Plaintiffs may potentially have a valid defense.

When reading Brown and Engalla, the Court was able to piece together somewhat of a standard.

As explained in Brown:

When a plaintiff alleges fraud in the inducement, the plaintiff is asserting that it understood the contract it was signing, but that its consent to the contract was induced by fraud. In contrast, when a plaintiff alleges fraud in the execution, the plaintiff is asserting that it was deceived as to the very nature of contract execution, and did not know what it was signing. A contract fraudulently induced is voidable; but a contract fraudulently executed is void, because there never was an agreement. (Rosenthal, supra, 14 Cal.4th at p. 415, 58 Cal.Rptr.2d 875, 926 P.2d 1061.)

When these theories are asserted with respect to an arbitration clause, different procedures apply. This is because arbitration clauses are considered separable from the agreements in which they appear. (Rosenthal, supra, 14 Cal.4th at p. 416, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) When a party to a contract containing an arbitration clause asserts fraud in the inducement of the contract generally, the assertion is no bar to the arbitration of the contract. The separable arbitration clause is considered valid, and the parties must arbitrate whether the contract was induced by fraud (even though a finding of fraud in the inducement may result in rescission of the contract as a whole).¹¹ (Id. at pp. 415–417, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) However, “claims of fraud in the execution of the entire agreement are not arbitrable under either state or federal law. If the entire contract is void ab initio because of fraud, the parties have not agreed to arbitrate any controversy.” (Id. at p. 416, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) Thus, claims of fraud in the execution are to be resolved by the trial court, not an arbitrator. (Ibid.)

(Brown v. Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938, 958-959, fn. 11 stating [“If, however, the party is asserting fraud in the inducement of the arbitration clause specifically, the assertion is to be resolved by the trial court, as it goes to the validity of the arbitration clause itself. (Engalla v. Permanente Medical Group, Inc., supra, 15 Cal.4th at pp. 960, 973, 64 Cal.Rptr.2d 843, 938 P.2d 903; Rosenthal, supra, 14 Cal.4th at p. 419, 58 Cal.Rptr.2d 875, 926 P.2d 1061.)]”)

Here, as a preliminary matter, Plaintiffs do not make clear whether they are arguing fraud in the inducement or fraud in the execution.

Fraud in the inducement of the contract generally, as explained in Brown above, is no bar to the arbitration of the contract. If Plaintiffs are arguing fraud in the inducement generally, then the parties must arbitrate whether the contract was induced by fraud.

Presumably, Plaintiffs are arguing fraud in the execution, because that appears as if that is what Plaintiffs would have to assert in order prevent enforcement of the arbitration agreement.

Confusingly, in Plaintiffs’ Opposition on page 5, in the section about waiver through conduct, Plaintiffs appear to begin asserting their fraud in the execution argument.

In relevant part, Plaintiffs argue:

In addition to the foregoing, it bears noting that Marcus & Millichap's failure to disclose its longstanding financial relationship with its other fiduciary in the same transaction undercuts one of Marcus & Millichap's most fundamental fiduciary duties to Plaintiffs; namely, their duty of truthful disclosure. As Plaintiffs have explained to the Court, they would not have signed the PSA with Marcus & Millichap serving as the dual broker for the parties had Marcus & Millichap disclosed their longstanding relationship with Mr. Hart and his entities; and thus would not have agreed to arbitration with the Defendants had Marcus & Millichap complied with its disclosure obligations to Plaintiffs; its other fiduciaries. (See Salimpour Deel., at ¶ 3.)

In short, Marcus & Millichap waived, through its conduct in failing to disclose material facts to Plaintiffs concerning Marcus & Millichap' s close and longstanding financial relationship with Mr. Hart, any right to enforce the arbitration provision, and the complete failure of any consideration provided by Marcus & Millichap to Plaintiffs, as its other fiduciaries, constitutes a separate contractual defense to enforcement of Marcus & Millichap's carefully drafted agreement, including its unconscionable arbitration provision. And, because it same conduct results in a material failure of consideration to Plaintiffs, that warrants rescission of the agreement in its entirety under Civil Code sections 1689 and 1566, as next explained below.

(Pl. Oppo. p. 6.)

Again, Plaintiffs’ argument doesn’t explain how their argument meets the standard for fraud in the execution, but the Court notes the following passage from Brown:

A necessary element of the defense of fraud in the execution is reasonable reliance. That is, when a plaintiff asserts that the defendant misrepresented the nature of the contract, the contract is not considered void due to the fraud if the plaintiff had a reasonable opportunity to discover the true terms of the contract. The contract is only considered void when the plaintiff's failure to discover the true nature of the document executed was without negligence on the plaintiff's part. (Rosenthal, supra, 14 Cal.4th at pp. 419–420, 423, 58 Cal.Rptr.2d 875, 926 P.2d 1061.)

This issue usually arises when the plaintiff failed to read the terms of the contract, relying instead on the defendant's representation as to the effect of the contract. Generally, it is not reasonable to fail to read a contract; this is true even if the plaintiff relied on the defendant's assertion that it was not necessary to read the contract. (Rosenthal, supra, 14 Cal.4th at pp. 423–424, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) Reasonable diligence requires a party to read a contract before signing it. (Brookwood v. Bank of America (1996) 45 Cal.App.4th 1667, 1674, 53 Cal.Rptr.2d 515.) This presumes, however, that the parties were dealing at arm's length. When the parties are in a fiduciary relationship, the same degree of diligence is not required of the non-fiduciary party. (Stafford v. Shultz (1954) 42 Cal.2d 767, 777, 270 P.2d 1.) If the defendant is in a fiduciary relationship with the plaintiff which requires the defendant to explain the terms of a contract between them,¹² the plaintiff's failure to read the contract would be reasonable. (Lynch v. Cruttenden & Co. (1993) 18 Cal.App.4th 802, 808–809, 22 Cal.Rptr.2d 636; see also Bruni v. Didion (2008) 160 Cal.App.4th 1272, 1291, 73 Cal.Rptr.3d 395; cf. Rosenthal, supra, 14 Cal.4th at p. 425, 58 Cal.Rptr.2d 875, 926 P.2d 1061 [finding no such fiduciary obligation].) In such a situation, the defendant fiduciary's failure to perform its duty would constitute constructive fraud (Van de Kamp v. Bank of America (1988) 204 Cal.App.3d 819, 854, 251 Cal.Rptr. 530), the plaintiff's failure to read the contract would be justifiable (Twomey v. Mitchum, Jones & Templeton, Inc. (1968) 262 Cal.App.2d 690, 715, 69 Cal.Rptr. 222), and constructive fraud in the execution would be established.

[Fn. 12, “The scope of a fiduciary's obligations vary according to the facts of the case. (Duffy v. Cavalier (1989) 215 Cal.App.3d 1517, 1535, 264 Cal.Rptr. 740.)”.]

In this case, the trial court found a fiduciary relationship existed between the parties, such that Wells Fargo was required to “do more” to make certain the Browns understood the Agreement. However, the court expressly did not make a finding on whether constructive fraud existed, stating that this was an issue for the jury. This was error; the court was required to resolve the factual issues raised by the petition to compel arbitration, not simply determine whether sufficient evidence existed to go to a jury. We will therefore remand for the trial court to determine whether there was constructive fraud in the execution of the Agreement.

Wells Fargo suggests that remand is unnecessary as there is insufficient evidence to establish that it owed plaintiffs a fiduciary duty to explain the terms of the agreement. We disagree. First, there was sufficient evidence to support the trial court's finding of a fiduciary relationship. “Fiduciary” and “confidential” relationships are relationships existing between parties to a transaction wherein one party is duty bound to act with the utmost good faith for the benefit of the other. Such a relationship ordinarily arises when one party reposes a confidence in the integrity of the other, and the other voluntarily accepts that confidence. (Richelle L. v. Roman Catholic Archbishop (2003) 106 Cal.App.4th 257, 270, 130 Cal.Rptr.2d 601.) “ ‘[B]efore a person can be charged with a fiduciary obligation, he must either knowingly undertake to act on behalf and for the benefit of another, or must enter into a relationship which imposes that undertaking as a matter of law.’ ” (City of Hope National Medical Center v. Genentech, Inc. (2008) 43 Cal.4th 375, 386, 75 Cal.Rptr.3d 333, 181 P.3d 142.) An agent is a fiduciary as a matter of law. (Twomey v. Mitchum, Jones & Templeton, Inc., supra, 262 Cal.App.2d at p. 709, 69 Cal.Rptr. 222.) A stockbroker is a fiduciary, as well. (Duffy v. Cavalier, supra, 215 Cal.App.3d at p. 1531, 264 Cal.Rptr. 740.) “ ‘The essence of a fiduciary or confidential relationship is that the parties do not deal on equal terms because the person in whom trust and confidence is reposed and who accepts that trust and confidence is in a superior position to exert unique influence over the dependent party.’ ” (Richelle L. v. Roman Catholic Archbishop, supra, 106 Cal.App.4th at p. 271, 130 Cal.Rptr.2d 601.) Fiduciary obligations “generally come into play when one party's vulnerability is so substantial as to give rise to equitable concerns underlying the protection afforded by the law governing fiduciaries.” (City of Hope National Medical Center v. Genentech, Inc., supra, 43 Cal.4th at p. 389, 75 Cal.Rptr.3d 333, 181 P.3d 142.) While it is impossible to identify a single set of factors giving rise to a fiduciary relationship (id. at pp. 387–388, 75 Cal.Rptr.3d 333, 181 P.3d 142), some reasons generally used to demonstrate that a party to such a relationship is vulnerable include: advanced age, youth, lack of education, ill health, and mental weakness. (Richelle L. v. Roman Catholic Archbishop, supra, 106 Cal.App.4th at p. 280, 130 Cal.Rptr.2d 601.)

Wells Fargo relies on authority providing that a stock broker's fiduciary relationship does not arise until after the brokerage agreement has been executed, and therefore does not require additional disclosures at the time of the execution of that agreement. (Rosenthal, supra, 14 Cal.4th at p. 425, 58 Cal.Rptr.2d 875, 926 P.2d 1061.) Yet this argument overlooks the unique factual circumstances of this case. Specifically, plaintiffs introduced evidence that: (1) For six months prior to the Meeting, Tepper had been the Browns' relationship manager at Wells Fargo; (2) Tepper knew that Ira Brown had limited vision and that his declining health rendered him a “little slow”; (3) Tepper worked biweekly at the Browns' home office; (4) Tepper was provided with access to all of the Browns' financial information, and managed their significant financial paperwork; (5) Tepper introduced the Browns to an estate attorney and an accountant; (6) Tepper gave the Browns investment advice; and (7) Tepper insisted and repeatedly urged the Browns to retain Keleshian to handle their stock portfolio. These facts constitute sufficient evidence to support the trial *961 court's conclusion that Wells Fargo, through Tepper,¹³ knowingly induced the elderly and increasingly frail couple to rely on it to handle their financial affairs, thus creating a fiduciary relationship between Wells Fargo and the Browns.

[Fn. 13, “When an employee establishes a fiduciary relationship with a third party, the employee's employer is also a fiduciary. (See Black v. Shearson, Hammill & Co. (1968) 266 Cal.App.2d 362, 367, 72 Cal.Rptr. 157.)”]

We turn now to the issue of constructive fraud, or whether the scope of Wells Fargo's fiduciary duty encompassed oral disclosure of the arbitration clause. A fiduciary generally owes an obligation of the highest good faith. (Duffy v. Cavalier, supra, 215 Cal.App.3d at p. 1531, 264 Cal.Rptr. 740.) The scope of a fiduciary's obligations depends on the specific facts of the case. (Id. at p. 1535, 264 Cal.Rptr. 740.) Such factors may include, for example, the relative sophistication and experience of the vulnerable party.  (Apollo Capital Fund LLC v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 246–247, 70 Cal.Rptr.3d 199.) In this case, plaintiffs introduced evidence that: (1) Wells Fargo had, through Tepper, taken on the fiduciary responsibility of handling the Browns' financial needs; (2) for months, Wells Fargo assisted the Browns in paying their bills, and therefore can be inferred to have understood that the Browns required assistance with even rudimentary financial tasks; (3) Wells Fargo knew of Ira Brown's increasing frailty and that his limited vision rendered him unable to read the document Wells Fargo was asking him to sign; (4) Wells Fargo knew that the Browns did not read the Agreement before execution; and (5) Tepper, who had encouraged the Browns to trust her to act in their best interests, was present at the Meeting in order to make the Browns feel “more comfortable.” These facts, if accepted by the trial court, would support the conclusion that Wells Fargo's fiduciary duty to the Browns encompassed a duty not to treat the execution of the Agreement as an arm's-length transaction and to instead explain the material terms of the Agreement to them.¹⁴

[Fn. 14, “On remand, should the trial court determine, in resolving the motion to compel arbitration, that the Agreement is void for fraud in the execution, this determination would not foreclose a jury trial on the Browns' causes of action regarding Wells Fargo's allegedly improper sale of the Sav–On stock.”.]

(Brown v. Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938, 958-961.)

The reason the Court cites such an extensive portion of Brown is because Plaintiffs cited pages 959-960 of Brown and stated as follows in Opposition, “That is particularly true where, as here, the party seeking to enforce an arbitration clause owed a duty to the party against whom arbitration is sought to be compelled a fiduciary duty but engaged in fraud against the fiduciary. (Brown v. Wells Fargo Bank, NA (2008) 168 Cal.App.4th 938, 959-960.).” (Pl. Oppo. p. 5-6.)

While Plaintiffs cite to 959-960 of Brown, it is not clear as to what portion of Brown Plaintiffs are arguing they have satisfied for the standards of fraud/rescission. Plaintiffs seem to be saying that Marcus & Millichap had a duty to disclose that Marcus & Millichap had a longstanding relationship with Mr. Hart and his entities, as well as a duty to disclose of the defects in the property.

Here, Plaintiffs appear to be arguing that Defendant owed Plaintiffs a duty of utmost good faith for the benefit of the other based on the fact that the parties seem to agree that the Broker was an agent since Broker was acting as a dual agent.

Further, Plaintiffs’ Opposition includes the declaration of non-party Pedram Salimpour, M.D. :

1. I am over eighteen years of age and am the managing member of one of the Plaintiffs, SOUTH SAN DIEGO STATE 2, LLC (“South SDS2”) and NORTH SAN DIEGO STATE 2, LLC (“North SDS2”) (collectively, “Plaintiffs”), while the managing member of the other entity is my brother, Pedram Salimpour, M.D. Plaintiffs are entities that we formed to take title to real property and both currently are title record owners of the real property located at 11000 Morrison Street & 11005 Morrison Street, Los Angeles, CA 91601 (“the Property”). I personally signed the original purchase and sale agreement (“PSA”) in this matter, which was ultimately assigned to Plaintiffs.

2. At no time prior to the close of escrow did our broker, Jeff Louks of Marcus & Millichap, ever disclose to us that either he or Marcus & Millichap had served as the broker on multiple prior real estate transactions involving entities owned and/or controlled by Robert Edward Hart (“Mr. Hart”). In addition, at no time prior to the close of escrow did Mr. Louks or anyone else on behalf of Marcus & Millichap disclose to us that the Property had significant structural problems stemming from the removal of a load-bearing wall in a first-floor unit within the Property, which was removed without permits, that ultimately compromised the structural integrity of the of the entire building above it. We discovered this damage for the first time, as well as significant water intrusion into that unit which is likely why it was taken out of use as a residential unit, more than a year after the close of escrow.

3. After discovering the foregoing damage, which had not been disclosed to us, I spoke with Mr. Louks, who disclosed to me, for the very first time, that “Marcus & Millichap has handled many transactions for Mr. Hart and his entities over the years.” I was shocked to hear that as it was the first time I was ever told that. Had I known that fact before the close of escrow of Marcus & Millichap’s close relationship with Mr. Hart and his entities, I would not have allowed Marcus & Millichap to serve as the dual broker on the transaction, but would have secured our own broker to represent us in the transaction. In retrospect, I believe that would have assisted us in discovering the undisclosed work performed at the Property, for which there is no record of any permits. Upon learning that Marcus & Millichap had that relationship, we directed our counsel to reach out to Mr. Hart and BW Morrison to try and informally resolve this dispute without having to file a lawsuit, but I am informed and believe Mr. Hart ignored those pre-litigation communications, forcing us to file suit.

4. In order to get to the bottom of the fraud that we believe was perpetrated upon us, Plaintiffs instructed our counsel to proceed with seeking formal discovery from Mr. Hart and his entity, including all documents and other information concerning BW Morrison’s ownership and management of the Property, including their rent role records that would establish when the residential unit at issue was taken out of service as a rental unit. I am informed and believe Defendants have refused to respond to our discovery, while taking the position any “discovery” can only be conducted in arbitration, where the arbitration provision carefully drafted by Marcus & Millichap purports to limit our right to discovery and prevent many of the means that we would otherwise employ to find the truth in this matter.

(Decl. Salimpour, ¶¶ 1-4.)

Further, Plaintiffs’ counsel’s declaration states in relevant part:

5. In order to properly arbitrate or litigate these claims, Plaintiffs require discovery on the following non-exhaustive categories:

…

d. Because Marcus & Millichap acted as a dual agent and Plaintiffs' fiduciary in the transaction, Plaintiffs are entitled to discovery regarding its prior and ongoing relationship with Mr. Hart and his entities, including communications between Marcus & Millichap and Hart regarding the Property, the sale, and this dispute. Plaintiffs need discovery into all transactions in which Marcus & Millichap represented both buyer and seller involving Mr. Hart, to establish the extent of the preexisting relationship and the concealment of material conflicts of interest.

(Vivoli Decl. ¶5(d).)

It isn’t entirely clear how Plaintiffs are establishing fraud in the execution because they don’t explain how they meet the requirements explained in Brown.

Again, the Court will hear argument.

Defense to Arbitration – Unconscionability (Procedural and Substantive)

Unconscionability generally includes the absence of meaningful choice on the part of one of the parties together with contract terms that unreasonably favor the other party. (Carboni v. Arrospide (1991) 2 Cal.App.4th 76, 82-83.) Unconscionability has both a “procedural” and a “substantive” element. (A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486.)  An agreement to arbitrate is unenforceable only if both procedural and substantive unconscionability is shown. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533.) Plaintiff has the burden of proving both procedural and substantive unconscionability. (Crippen v. Central Valley RV Outlet. Inc. (2004) 124 Cal.App.4th 1159, 1165.)

Procedural Unconscionability

“The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability. [Citation.]” (Marenco v. DirectTV LLC (2015) 233 Cal.App.4th 1409, 1416.)

Here, Plaintiffs’ motion argues that the arbitration agreement is unconscionable only on substantive grounds. “In addition, the arbitration provision drafted by Marcus & Millichap is substantively unconscionable because it purports to restrict Plaintiffs' ability to conduct the type of meaningful discovery that would reveal all three Defendants' fraud upon Plaintiffs.” (Pl. Oppo. p. 3.)

Based on the Plaintiffs’ motion only attacking the arbitration agreement on substantive unconscionability grounds, and not also attacking it on procedural unconscionability grounds, the Court has the ability to find that Plaintiffs did not meet their burden in demonstrating unconscionability.

An agreement to arbitrate is unenforceable only if both procedural and substantive unconscionability is shown. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533.) Plaintiff has the burden of proving both procedural and substantive unconscionability. (Crippen v. Central Valley RV Outlet. Inc. (2004) 124 Cal.App.4th 1159, 1165.)

While Plaintiffs’ Opposition makes no arguments on procedural unconscionability, it is possible that Plaintiffs’ counsel’s declaration could be construed as making arguments on procedural unconscionability.

“The clause is not only procedurally unconscionable in how it was imposed, via a pre-printed agreement prepared by an experienced industry player and fiduciary, but also substantively unconscionable because it deprives Plaintiffs of the basic tools required to establish their fraud and rescission claims.” (Decl. Vivoli ¶ 7.)

The Court does not find Plaintiffs’ counsel’s very brief argument on procedural unconscionability to be availing.

First, Plaintiffs’ motion, nor the Vivoli Declaration, explains what the procedural unconscionability standard is. Further, neither the motion nor the Vivoli Declaration explains how “a pre-printed agreement prepared by an experienced industry player and fiduciary” meets the procedural unconscionability standard.

“ ‘The procedural element focuses on two factors: oppression and surprise. Oppression arises from an inequality of bargaining power which results in no real negotiation and an absence of meaningful choice.... Surprise involves the extent to which the terms of the bargain are hidden in a “prolix printed form” drafted by a party in a superior bargaining position.’ ” (Crippen v. Central Valley RV Outlet (2004) 124 Cal.App.4th 1159, 1165 quoting Olsen v. Breeze, Inc. (1996) 48 Cal.App.4th 608, 621.)

Here, the Court does not find surprise because the arbitration provision is not hidden. Not only did the buyer have to initial the page that contained the arbitration provision, but buyer also had to specifically initial next to the arbitration provision itself.

While oppression arises from an inequality of bargaining power which results in no real negotiation and an absence of meaningful choice, all Plaintiffs’ counsel states, in a conclusory fashion, is that the arbitration provision was procedurally unconscionable because it is “a pre-printed agreement prepared by an experienced industry player and fiduciary.” (Vivoli Decl. ¶ 7.)

Here, the Court does not find oppression because Plaintiffs do not introduce or rely on any evidence of the circumstances surrounding the execution of the agreement to show inequality of bargaining power, lack of negotiation, or lack of meaningful choice based on the circumstances.

“[T]here is no general rule that a form contract used by a party for many transactions is procedurally unconscionable.” (Crippen v. Central Valley RV Outlet (2004) 124 Cal.App.4th 1159, 1165.)

Therefore, Plaintiffs’ argument on unconscionability is unavailing because Plaintiffs did not demonstrate any procedural unconscionability.

Substantive Unconscionability

An agreement to arbitrate is unenforceable only if both procedural and substantive unconscionability is shown. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533.)

As a preliminary matter, Plaintiffs’ unconscionability argument fails because Plaintiffs did not demonstrate procedural unconscionability.

Therefore, even if Plaintiffs demonstrate substantive unconscionability, Plaintiffs cannot demonstrate unconscionability of the arbitration agreement because they did not demonstrate procedural unconscionability.

Plaintiffs argue that the arbitration agreement is substantively unconscionable because it does not provide for sufficient discovery.

Plaintiffs cite to Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702 to argue that when discovery is so limited that a claimant is unlikely to gather evidence needed to prove their claims, or even justify additional discovery, courts have not hesitated to strike down such provisions as substantively unconscionable. Plaintiffs also cite to Fitz to argue there is no “safety valve” since “the scope of discovery may be expanded only upon the mutual consent of the parties.”

In the instant arbitration agreement, it provides as follows:

In any arbitration proceeding discovery will be permitted only in accordance with the terms of this paragraph. Discovery by each party shall be limited to: (i) a maximum number of five {5) depositions limited to four hours each; (ii) requests for production of documents; (iii) two interrogatories: one inquiring into the amount of damages sought by the other party and another into the calculation of those damages: and (iv) subpoenas upon third parties for production of documents, depositions, and to appear at a hearing. The scope of discovery may be expanded only upon the mutual consent of the parties. Discovery not set forth in this paragraph shall not be permitted.

(Def. Mot., Ex. 1, ¶ 32.)

In relevant part of the Vivoli Declaration, Vivoli explains that the discovery limitation in the arbitration provision does not provide for sufficient discovery because:

4. The discovery limitations set forth in the arbitration agreement, restricting each side to only two interrogatories and five depositions of no more than four hours each, are grossly inadequate given the complexity of this case, the number of parties and potential witnesses involved, and the nature of Plaintiffs' claims. This action arises out of Defendants' failure to disclose material defects and unpermitted structural modifications made to a multi-unit real estate property prior to its sale to Plaintiffs. Plaintiffs assert claims for fraud, concealment, breach of fiduciary duty, and rescission based on these failures and omissions.

5. In order to properly arbitrate or litigate these claims, Plaintiffs require discovery on the following non-exhaustive categories:

a. Construction Defects and Unpermitted Work: Plaintiffs must obtain records, communications, permits ( or lack thereof), photographs, inspection reports, engineering analyses, and contractor communications regarding the conversion of a permitted apartment into a "gym" and the removal of an interior load-bearing wall. Plaintiffs also require discovery concerning what Marcus & Millichap, BW Morrison, and Mr. Hart knew or failed to disclose about this conversion. Conducting discovery of the work involved may well require deposition and/or other discovery from the prior owner(s) of the property involved.

b. Structural Impact and Property Condition: Plaintiffs need to depose  individuals with knowledge of the structural impact of the removed load-bearing wall, including each of the prior owners, building inspectors, engineers, and tenants. Photographic and expert evidence will need to be gathered and authenticated. Plaintiffs also require time to retain and prepare experts to assess and opine on the nature and scope of the resulting damage and the cost of repairing same, and undoubtedly Defendants will have their own experts who will need to be deposed.

c. Transactional Communications and Disclosures: Plaintiffs must examine communications between Marcus & Millichap, BW Morrison, and Mr. Hart and any agents, brokers, escrow officers, or third parties regarding representations made ( or withheld) about the Property's condition and disclosures during escrow. This includes emails, internal memos, and agent notes, which will identify other currently unknown witnesses that will need to be deposed.

d. Fiduciary Relationships and Prior Dealings: Because Marcus & Millichap acted as a dual agent and Plaintiffs' fiduciary in the transaction, Plaintiffs are entitled to discovery regarding its prior and ongoing relationship with Mr. Hart and his entities, including communications between Marcus & Millichap and Hart regarding the Property, the sale, and this dispute. Plaintiffs need discovery into all transactions in which Marcus & Millichap represented both buyer and seller involving Mr. Hart, to establish the extent of the preexisting relationship and the concealment of material conflicts of interest.

e. Damages: Plaintiffs also require discovery into rents collected before and after the sale, the extent and cost of required repairs to correct the unsafe condition, and all inspections, assessments, or appraisals conducted on the Property before or after sale.

6. Based on the foregoing, Plaintiffs anticipate needing to serve multiple sets for interrogatories with at least 25 to 30 interrogatories per set, multiple requests for production of documents, and to take easily 10 to 15 depositions, including but not limited to: (1) Robert Edward Hart; (2) principal representatives of BW Morrison; (3) Marcus & Millichap agents involved in the transaction; (4) contractors and engineers involved in the work; (5) tenants familiar with the "gym" condition; (6) prior brokers; and (7) experts needed to evaluate structural and financial damages. Plaintiffs must also reserve the right to depose any person identified in Defendants' discovery responses or expert designations. The five-deposition limit imposed by the arbitration clause, combined with its two-interrogatory restriction and absence of any discovery "safety valve," other than Marcus & Millichap's "agreement" to increase the discovery limits, renders it functionally impossible for Plaintiffs to pursue their claims and uncover essential facts.

(Vivoli Decl. ¶¶ 4-6.)

In Reply, Defendant cites to Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1287 which explains that in assessing substantive unconscionability, the paramount consideration is mutuality.

Defendant argues that the instant arbitration agreement imposes mutual obligations on all parties and does not favor any party. Defendant argues that the discovery limits apply equally to all parties.

Defendant also cites to several cases that discussed discovery limitations:

Plaintiffs contend the arbitration agreement is “substantively unconscionable because it purports to restrict Plaintiffs’ ability to conduct . . . meaningful discovery.” Opposition, 3:13-16. But “arbitration is meant to be a streamlined procedure. Limitations on discovery, including the number of depositions, is one of the ways streamlining is achieved . . . . [D]iscovery limitations are an integral and permissible part of the arbitration process . . . . ‘Adequate’ discovery does not mean ‘unfettered’ discovery . . . . [P]arties may agree to something less than the full panoply of discovery permitted under the California Arbitration Act.” Dotson v. Amgen, Inc., 181 Cal. App. 4th 975, 982-83 (2010) (held discovery provision—giving each party the right to take the deposition of one individual and any expert witness designated by the other party, each party the right to make requests for production of documents to any party, each party the right to subpoena witnesses and documents for the arbitration, and the arbitrator the ability to order additional discovery upon a showing of need—is not unconscionable); see also Roman v. Superior Court, 172 Cal. App. 4th 1462, 1475-76 (2009) (discovery limitation authorizing the arbitrator to order “such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in the dispute, consistent with the expedited nature of arbitration” not unconscionable); Armendariz, 24 Cal.4th at 106, fn. 11 (“[A] limitation on discovery is one important component of the ‘simplicity, informality, and expedition of arbitration.’”); Coast Plaza Doctors Hosp. v. Blue Cross of California, 83 Cal. App. 4th 677, 690 (2000) (“The fact that an arbitration may limit a party’s discovery rights is not ‘substantive unconscionability.’”).

Courts routinely uphold arbitration agreements limiting a party to five or fewer depositions. Torrecillas v. Fitness International, LLC, 52 Cal. App. 5th 485, 498 (2020) (discovery limitation not unconscionable; “A limit of five depositions is not shocking.”); Sanchez v. Carmax Auto Superstores California, LLC, 224 Cal. App. 4th 398, 405-06 (2014) (three deposition limit for each party not unconscionable); Dotson, 181 Cal. App. 4th at 982-83 (one individual deposition and one expert deposition not unconscionable).

(Def. Reply, p. 8-9.)

With respect to substantive unconscionability, the Court will hear argument for the reasons explained below.

First, the Court has concerns about Plaintiffs relying on Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702 (Fitz) as their basis to argue that the arbitration provision does not provide for sufficient discovery.

It is unclear if Fitz is on point for Plaintiffs’ discovery arguments.

Fitz relies on Armendariz, and both involved public rights [FEHA] in the employment context:

Fitz's claims invoke public and private rights, both of which may be the subject of arbitration. However, the law affords greater deference to public rights. “ ‘Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.’ [Citations.]” (Armendariz, supra, 24 Cal.4th 83 at p. 100, 99 Cal.Rptr.2d 745, 6 P.3d 669.) Public rights are designed to protect the public interest, not just the individual, and therefore cannot be contravened by private agreement. (Little, supra, 29 Cal.4th at p. 1077, 130 Cal.Rptr.2d 892, 63 P.3d 979.)

The California Supreme Court has stated that an arbitration agreement between employer and employee cannot be made to serve as a vehicle for the waiver of statutory rights. (Armendariz, supra, 24 Cal.4th at p. 101, 99 Cal.Rptr.2d 745, 6 P.3d 669.) Furthermore, there is no need to “distinguish” between public rights derived from statute or common law when “arbitration agreements ... harbor terms, conditions and practices that undermine the vindication of unwaivable rights.” (Little, supra, 29 Cal.4th at p. 1079, 130 Cal.Rptr.2d 892, 63 P.3d 979.)

In order to ensure that mandatory arbitration agreements are not used to curtail an employee's public rights, the California Supreme Court in Armendariz set forth five minimum requirements (the Armendariz requirements). Arbitration agreements in the employer-employee context must provide for: (1) neutral arbitrators, (2) more than minimal discovery, (3) a written award, (4) all types of relief that would otherwise be available in court, and (5) no additional costs for the employee beyond what the employee *713 would incur if he or she were bringing the claim in court. (Armendariz, supra, 24 Cal.4th at pp. 102, 110–111, 99 Cal.Rptr.2d 745, 6 P.3d 669, citing Cole v. Burns Intern. Security Services (D.C.Cir.1997) 105 F.3d 1465, 1482; see also Little, supra, 29 Cal.4th at p. 1081, 130 Cal.Rptr.2d 892, 63 P.3d 979.)

The Armendariz requirements are an application of general state law contract principles regarding the unwaivability of public rights in the arbitration context. (Little, supra, 29 Cal.4th at p. 1079, 130 Cal.Rptr.2d 892, 63 P.3d 979.) Therefore, to be enforceable, an agreement to arbitrate public rights must satisfy the Armendariz requirements. Additionally, such an agreement must be conscionable. “If agreements to arbitrate claims arising from ordinary private rights must meet conscionability standards, then certainly those that affect revered public values warrant the same consideration.” (Abramson, supra, 115 Cal.App.4th at p. 655, 9 Cal.Rptr.3d 422.)

(Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 712-13.)

Here, it does not appear that causes of action 1 – 4 pertain to public rights. While it could possibly be argued that the fifth claim for unfair business practices pertains to public rights, it is clear that none of Plaintiffs’ claims are employment related.

Second, the Court will hear argument because in Reply, instead of Defendant arguing that the standard in Fitz is not relevant here, Defendant cites to several cases which explain what is considered adequate discovery.

However, of the cases that Defendant cites [from page 8, line 17 to page 9, line 15], all are employment cases except Coast Plaza Doctors Hosp. v. Blue Cross of California (200) 83 Cal. App. 4th 677, which is a case pertaining to unfair competition and unfair trade practices.

Further, the Court has concerns about the Reply’s argument because all of the cases cited by Defendant [from page 8, line 17 to page 9, line 15] , with the exception of Coast Plaza Doctors Hosp. v. Blue Cross of California (200) 83 Cal. App. 4th 677, the arbitrator had some discretion with respect to having the ability to allow for more discovery than that initially provided in the arbitration agreements.

While Coast Plaza Doctors Hosp. did not explain whether or not the arbitrator had some discretion in allowing for more discovery than the discovery initially provided for in the arbitration agreement, that case did cite to Christensen v. Dewor Developments, supra, 33 Cal.3d at p. 783, fn. 1 [only arbitrators can order discovery in arbitration proceedings].

Here, the arbitration provision does not allow for the arbitrator to have any discretion on whether or not to allow for more discovery than that initially provided in the arbitration agreement. The arbitration agreement here only allows for more discovery if both parties mutually consent to more discovery.

Third, the Court will hear argument because it is unclear what the standard is for unconscionability with respect to discovery.

Plaintiffs seem to argue that there needs to be a “safety valve” for the arbitrator to decide whether or not more discovery can occur. However, it is unclear if that is actually the standard.

“As discussed above, it is undisputed that some discovery is often necessary for vindicating a FEHA claim. Accordingly, whether or not the employees in this case are entitled to the full range of discovery provided in Code of Civil Procedure section 1283.05, they are at least entitled to discovery sufficient to adequately arbitrate their statutory claim, including access to essential documents and witnesses, as determined by the arbitrator(s) and subject to limited judicial review pursuant to Code of Civil Procedure section 1286.2.¹¹” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 106; fn 11, “We recognize, of course, that a limitation on discovery is one important component of the “simplicity, informality, and expedition of arbitration.” (Gilmer, supra, 500 U.S. at p. 31, 111 S.Ct. 1647.) The arbitrator and reviewing court must balance this desirable simplicity with the requirements of the FEHA in determining the appropriate discovery, absent more specific statutory or contractual provisions.”)

Likewise, Defendant does not make clear as to what the standard is.

As stated in Coast Plaza Doctors Hosp.:

We are not aware of any case that has ever held that an arbitration provision is substantially unconscionable merely because a party's discovery rights are limited in arbitration. Limited discovery rights are the hallmark of arbitration. (Sy First Family Ltd. Partnership v. Cheung (1999) 70 Cal.App.4th 1334, 1342 *690 [83 Cal.Rptr.2d 340] [“Unless the parties otherwise agree, the rules of evidence and judicial procedure do not apply” in arbitration].) Discovery is not a right in arbitration as it is in judicial proceedings. (Christensen v. Dewor Developments, supra, 33 Cal.3d at p. 783, fn. 1 [only arbitrators can order discovery in arbitration proceedings]; see also Brock v. Kaiser Foundation Hospitals (1992) 10 Cal.App.4th 1790, 1802 [13 Cal.Rptr.2d 678] [same].) The fact that an arbitration may limit a party's discovery rights is not “substantive unconscionability.” If it were, every arbitration clause would be subject to an unconscionability challenge on that ground.⁹

(Coast Plaza Doctors Hosp. v. Blue Cross of California (2000) 83 Cal.App.4th 677, 689-90; fn. 9, “Unquestionably, discovery is limited in arbitrations (except in injury or death cases or where the parties have expressly agreed otherwise). (See Code Civ. Proc., §§ 1283, 1283.05 and 1283.1.) However, given the clarity and prominence of the statutory provisions dealing with this issue, we again see no basis for a claim of surprise or disappointment of reasonable expectations.”)

The Court to hear argument on substantive unconscionability; however, even if Plaintiffs demonstrate substantive unconscionability, Plaintiffs did not demonstrate procedural unconscionability. Thus Plaintiffs’ unconscionability argument is unavailing.

TENTATIVE RULING Motion 1
The Court to hear argument. Defendant (Marcus & Millichap) met its burden in demonstrating that Plaintiffs’ claims against Defendant should be compelled to arbitration.

In Opposition, Plaintiffs’ arguments as to waiver and unconscionability being grounds to deny arbitration is unavailing.

The Court to hear argument on Plaintiffs’ rescission argument as a basis to deny arbitration.

Defendant’s motion also seeks an order that Defendant may file a motion for an award of attorneys’ fees. Here, the Court notes that that issue is not before the Court. Whether or not Defendant can file a motion for an award of attorneys’ fees would more appropriately be determined if Defendant files such a motion and puts those issues before the Court.

Defendant’s Reply argues that the Opposition is untimely and that the Opposition should not be considered. The Court to hear argument. The Court is likely to consider the Opposition. Further, to the extent that Defendant cites cases wherein a petition’s allegations are deemed admitted if no response is served and filed, those cases deal with arbitration awards, not motions/petitions to compel arbitration.

 Defendant’s motion also request a statement of decision if the Court denies the petition.

“An aggrieved party may appeal from: (a) An order dismissing or denying a petition to compel arbitration. Notwithstanding Section 916, the perfecting of such an appeal shall not automatically stay any proceedings in the trial court during the pendency of the appeal.” (CCP § 1294(a).)

“A statement of decision shall be made by the court, if requested pursuant to Section 632, whenever an order or judgment, except a special order after final judgment, is made that is appealable under this title.” (CCP § 1291.)

Here, the Court will hear argument because it is not clear if this issue is before the Court. Under CCP § 1291, a statement of decision shall be made by the court, “if requested pursuant to Section 632[.]” (See CCP § 1291.)

It is unclear if this request has been made pursuant to Section 632.

Under CCP § 632:

In superior courts, upon the trial of a question of fact by the court, written findings of fact and conclusions of law shall not be required. The court shall issue a statement of decision explaining the factual and legal basis for its decision as to each of the principal controverted issues at trial upon the request of any party appearing at the trial. The request must be made within 10 days after the court announces a tentative decision unless the trial is concluded within one calendar day or in less than eight hours over more than one day in which event the request must be made prior to the submission of the matter for decision. The request for a statement of decision shall specify those controverted issues as to which the party is requesting a statement of decision. After a party has requested the statement, any party may make proposals as to the content of the statement of decision.

The statement of decision shall be in writing, unless the parties appearing at trial agree otherwise; however, when the trial is concluded within one calendar day or in less than 8 hours over more than one day, the statement of decision may be made orally on the record in the presence of the parties.

(CCP § 632.)

In relevant part of 632, “The request must be made within 10 days after the court announces a tentative decision unless the trial is concluded within one calendar day or in less than eight hours over more than one day in which event the request must be made prior to the submission of the matter for decision.” (Ibid.)

The Court to hear argument.

MOTION 2

PROCEDURAL

Moving Party: Defendants, BW Morrison 11000 Owner, LLC (Morrison) and Robert Edward Hart

Responding Party: Plaintiffs, South San Diego State 2, LLC and North San Diego State 2, LLC (Plaintiffs)

Moving Papers: Notice/Petition

Opposing Papers: Opposition

Reply Papers: Reply

RELIEF REQUESTED

Defendants, BW Morrison 11000 Owner, LLC (“Morrison”) and Robert Edward Hart (“Hart”), petition the Court to issue an Order compelling arbitration of all causes of action against Morrison and Hart in the Complaint, and staying all proceedings regarding the causes of action against Morrison and Hart, except for Morrison and Hart’s anticipated motion for  attorneys’ fees.

ANALYSIS
Code of Civil Procedure § 1281.2, governing orders to arbitrate controversies, provides in pertinent part:

On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that:

(a) The right to compel arbitration has been waived by the petitioner; or

(b) Grounds exist for rescission of the agreement.

(CCP § 1281.2(a)-(b).)

The party seeking arbitration bears the initial burden of demonstrating the existence of an arbitration agreement. (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236.) In ruling on a motion to compel arbitration, the Court must first determine whether the parties actually agreed to arbitrate the dispute, and general principles of California contract law help guide the court in making this determination. (Mendez v. Mid-Wilshire Health Care Center (2013) 220 Cal.App.4th 534, 541; Victoria v. Superior Court (1985) 40 Cal. 3d 734, 835.) Once the Court concludes an arbitration agreement exists, it must then consider whether the agreement covers the claims at issue. (Omar v. Ralphs Grocery (2004) 118 Cal.App.4^th 966, 960.) Even when the FAA applies, “interpretation of the arbitration agreement is governed by state law principles.” (Hotels Nevada, LLC v. Bridge Banc, LLC (2005) 130 Cal.App.4th 1431, 1435.)

Here, moving Defendants are BW Morrison 11000 Owner, LLC and Robert Hart.

Plaintiffs allege that Defendant, BW Morrison 11000 Owner, LLC is the “Seller” of the two separate apartment buildings (subject property) involved in this litigation. (See Compl. ¶¶ 3 & 8.)

Plaintiffs allege that Robert Edward Hart is and was the principal and equitable owner of the Seller, which Mr. Hart dominated and controlled for his own benefit. (See Compl. ¶ 4.) Plaintiffs allege that Hart is the alter ego of Seller. (Id.) Plaintiffs allege that each entity Defendant named, or later named herein is, in fact, the alter ego and agent of each other and each individual Defendant and, as such, is jointly liable to Plaintiffs. (See Compl. ¶ 6.)

Moving Defendants argue that they entered into the arbitration agreement, via the Purchase Agreement, with Plaintiffs and that all claims alleged against them are subject to arbitration.  

In Opposition, Plaintiffs do not argue that Defendants did not enter into an agreement to arbitrate with Plaintiffs, nor do they argue that the arbitration provision does not cover the scope of the claims that Plaintiffs bring against Defendants. “Although Plaintiffs admittedly signed the purchase and sale agreement ("PSA") pursuant to which Plaintiffs took title to the Property [.]” (Pl. Oppo. p. 2.)

Instead, Plaintiffs’ Opposition focuses on waiver, rescission, and unconscionability of the arbitration agreement.

Therefore, Defendants, BW Morrison 11000 Owner, LLC and Robert Hart, met their initial burden in establishing the existence and scope of the arbitration agreement between Defendants and Plaintiffs.

Defense to Arbitration – Waiver 1

Plaintiffs argue that Defendants waived, through their conduct, any right to arbitrate.

Plaintiffs argue that Defendants waived their right to arbitrate because Sellers ignored Plaintiffs’ efforts to resolve this case before literally forcing Plaintiffs to file suit.

“The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability. [Citation.]” (Marenco v. DirectTV LLC (2015) 233 Cal.App.4th 1409, 1416.) “Code of Civil Procedure section 1281.2 provides that one ground for denying a petition to compel arbitration is that “[t]he right to compel arbitration has been waived by the petitioner.”” (Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 374.)

As stated in  Quach v. California Commerce Club, Inc.:

To establish waiver under generally applicable contract law, the party opposing enforcement of a contractual agreement must prove by clear and convincing evidence that the waiving party knew of the contractual right and intentionally relinquished or abandoned it. (Lynch, supra, 3 Cal.5th at p. 475, 219 Cal.Rptr.3d 754, 396 P.3d 1085; see Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31, 44 Cal.Rptr.2d 370, 900 P.2d 619 (Waller) [burden is on party claiming waiver “ ‘to prove it by clear and convincing evidence’ ”]; 30 Cal.Jur. 3d, supra, Estoppel and Waiver, § 38.) Under the clear and convincing evidence standard, the proponent of a fact must show that it is “highly probable” the fact is true. (Conservatorship of O.B. (2020) 9 Cal.5th 989, 995, 266 Cal.Rptr.3d 329, 470 P.3d 41 (O.B.).) The waiving party's knowledge of the right may be “actual or constructive.” (Outboard Marine Corp. v. Superior Court (1975) 52 Cal.App.3d 30, 41, 124 Cal.Rptr. 852.) Its intentional relinquishment or abandonment of the right may be proved by evidence of words expressing an intent to relinquish the right or of conduct that is so inconsistent with an intent to enforce the **1138 contractual right as to lead a reasonable factfinder to conclude that the party had abandoned it. (Lynch, supra, 3 Cal.5th at p. 475, 219 Cal.Rptr.3d 754, 396 P.3d 1085.)

(Quach v. California Commerce Club, Inc. (2024) 16 Cal.5th 562, 584.)

Here, unlike Motion 1, Plaintiffs do not submit any declarations with their Opposition for Motion 2.

Even if Plaintiffs had submitted the same declarations that they submitted in opposition for Motion 1, the Court would not find Plaintiffs’ argument on waiver by conduct to be availing.

Plaintiffs do not establish that Defendants waived their ability to compel arbitration.

Defense to Arbitration – Waiver 2

Plaintiffs also argue that the arbitration agreement should not be enforced because Defendants waived their right to compel arbitration based on CCP § 1281.2(c).

“[T]he court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: (c) 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. For purposes of this section, a pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition. This subdivision shall not be applicable to an agreement to arbitrate disputes as to the professional negligence of a health care provider made pursuant to Section 1295.” (CCP § 1281.2(c).)

Plaintiffs argue that Defendants waived their right to arbitrate because Marcus & Millichap waived its right to arbitrate.

Here, Plaintiffs’ argument is confusing to the Court.

First off, the Court fails to see what Plaintiffs’ argument has to do with § 1281.2(c) because § 1281.2(c) mentions “a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party.”

Plaintiffs’ argument has nothing to do with a pending court action or special proceeding with a third party. Marcus & Millichap is a Defendant in this action; it is not a third party.

Second, to the extent that Plaintiffs are arguing that Defendants waived the right to compel arbitration because Mr. Hart and BW Morrison refused to respond to Plaintiffs’ pre-litigation communications, Plaintiffs have not established that BW Morrison and Mr. Hart waived their right to arbitrate.

Not only did Plaintiffs not attach any declarations with Motion 2, even if the Court considered the declarations to Motion 1, when analyzing the alleged conduct of BW Morrison and Mr. Hart with the standard set forth in, Quach v. California Commerce Club, Inc. (2024) 16 Cal.5th 562, 584, Plaintiffs do not demonstrate waiver by BW Morrison and Mr. Hart.

Defense to Arbitration – Rescission

Plaintiffs argue that Sellers’ concealment of material facts from Plaintiffs entitle Plaintiffs to rescind the agreement altogether.

Plaintiffs argue as follows:

Again, Sellers, like Marcus & Millichap, outright acknowledge that a court may decline to enforce an agreement to arbitration where the agreement containing an agreement to arbitrate is subject to rescission. (Code of Civil Procedure section 1281.2(b).) This is just such a case, in which the Court should decline to enforce the agreement because it is so clearly subject to being rescinded.

The grounds for rescission under California law include mistake, undue influence, material failure of consideration and, of course, fraud. (See Civil Code sections 1689 and 1566.) This issue of whether an agreement to arbitrate is subject to being rescinded always decided by the Court, on motion to the Court, rather than by an arbitrator. (Duffens v. Valenti (2008) 161 Cal.App.4th 434, 447; Dream Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547, 553; Moseley v. Electronic & Missile Facilities, Inc. (1963) 374 US 167, 170-171; Engalla v. Permanente Med. Group, Inc. (1997) 15 Cal.App.4th 951, 973.)

Here, Sellers failed to disclose material facts concerning the Property, and Marcus & Millichap failed to disclose its longstanding financial relationship with Mr. Hart and his entities; a fact clearly material to Plaintiffs' agreement to permit Marcus & Millichap to serve as the broker for both principals while Marcus & Millichap was clearly beholden to its other fiduciary, from whom it has derived considerable income, and from whom it stood to receive even more income in the future. (See Salim pour Decl., at ¶ 3.) Yet, neither Sellers nor Marcus & Millichap disclosed that fact, nor did either disclose the significant structural defects discovered by Plaintiffs only after the close of escrow, upon obtaining access to a unit that was not made available for inspection before the close of escrow. (Ibid.)

Because the agreement to arbitrate - and indeed, the entire PSA - is subject to rescission (one of the very remedies Plaintiffs have prayed for and to which the evidence submitted makes clear they are entitled), the Court should decline to compel arbitration based on that factor alone.

(Pl. Oppo. p. 5-6.)

In Reply, Defendants argue:

Plaintiffs then assert, without any legal or factual support, that Morrison, Hart, and Marcus & Millichap all waived arbitration because they allegedly failed to disclose prior relationships between Morrison and Hart and Marcus & Millichap – effectively attacking the validity of the entire PSA, itself. However, an attack on the validity of the entire contract, as opposed to a focused attack on the arbitration agreement within the contract, is subject to arbitration:

When a party to a contract containing an arbitration clause asserts fraud in the inducement of the contract generally, the assertion is no bar to the arbitration of the contract. The separable arbitration clause is considered valid, and the parties must arbitrate whether the contract was induced by fraud (even though a finding of fraud in the inducement may result in rescission of the contract as a whole). [Footnote omitted.] Brown v. Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938, 958; Rent-ACenter, West, Inc. v. Jackson (2010) 561 U.S. 63, 70.

In arguing that Morrison and Hart have waived arbitration, the Opposition alleges fraud in the inducement of the entire PSA, rather than fraud that is more focused on the Arbitration Clause, specifically. Therefore, the matter is arbitrable, and the Petition should be granted.

(Def. Reply, p. 4.)

Here, the Court will hear argument.

Defense to Arbitration – Unconscionability (Procedural and Substantive)

Unconscionability generally includes the absence of meaningful choice on the part of one of the parties together with contract terms that unreasonably favor the other party. (Carboni v. Arrospide (1991) 2 Cal.App.4th 76, 82-83.) Unconscionability has both a “procedural” and a “substantive” element. (A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486.)  An agreement to arbitrate is unenforceable only if both procedural and substantive unconscionability is shown. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533.) Plaintiff has the burden of proving both procedural and substantive unconscionability. (Crippen v. Central Valley RV Outlet. Inc. (2004) 124 Cal.App.4th 1159, 1165.)

//

Procedural Unconscionability

“The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability. [Citation.]” (Marenco v. DirectTV LLC (2015) 233 Cal.App.4th 1409, 1416.)

Here, Plaintiffs’ motion argues that the arbitration agreement is unconscionable only on substantive grounds. “It should also be denied because the arbitration provision, drafted as it was by Marcus & Millichap apparently for the benefit of its long-client, Mr. Hart, is substantively unconscionable since it purports to restrict Plaintiffs' right to the discovery needed to prove Defendants' underlying fraud against Plaintiffs in failing to disclose material defects that Hart and/or BW Morrison caused to the Property through illegal alterations to the Property that have compromised its structural integrity.” (Pl. Oppo. p.3.)

Based on Plaintiffs’ motion only attacking the arbitration agreement on substantive unconscionability grounds, and not also attacking it on procedural unconscionability grounds, the Court has the ability to find that Plaintiffs did not meet their burden in demonstrating unconscionability.

An agreement to arbitrate is unenforceable only if both procedural and substantive unconscionability is shown. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533.) Plaintiff has the burden of proving both procedural and substantive unconscionability. (Crippen v. Central Valley RV Outlet. Inc. (2004) 124 Cal.App.4th 1159, 1165.)

While Plaintiffs’ Opposition makes no arguments on procedural unconscionability, it is possible that Plaintiffs intended to submit the declarations they submitted in opposition to Motion 1 for the instant opposition here in Motion 2. To the extent that this Court can even consider the opposition declarations for Motion 1 in the instant opposition, and to the extent that counsel’s declaration could be construed as making arguments on procedural unconscionability, Plaintiffs’ arguments on procedural unconscionability are not availing.

“The clause is not only procedurally unconscionable in how it was imposed, via a pre-printed agreement prepared by an experienced industry player and fiduciary, but also substantively unconscionable because it deprives Plaintiffs of the basic tools required to establish their fraud and rescission claims.” (Motion1, Decl. Vivoli ¶ 7.)

Therefore, for the reasons explained in this Court’s tentative with respect to procedural unconscionability in Motion 1, Plaintiffs’ argument on unconscionability is unavailing because Plaintiffs did not demonstrate any procedural unconscionability.

Substantive Unconscionability

An agreement to arbitrate is unenforceable only if both procedural and substantive unconscionability is shown. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533.)

As a preliminary matter, Plaintiffs’ unconscionability argument fails because Plaintiffs did not demonstrate procedural unconscionability.

Therefore, even if Plaintiffs demonstrate substantive unconscionability, Plaintiffs cannot demonstrate unconscionability of the arbitration agreement because they did not demonstrate procedural unconscionability.

Plaintiffs argue that the arbitration agreement is substantively unconscionable because it does not provide for sufficient discovery.

Plaintiffs asserted the same arguments in the instant Opposition that they asserted in the Opposition for Motion 1. [The only difference is that Plaintiffs did not submit declarations in Opposition to the instant motion.]

In Reply, among other arguments, Defendants point out how the cases cited by Opposition are all employment cases where an employee was seeking to resist arbitration against an employer. Defendants also pointed out how the discovery limitations are not unilateral and are completely mutual between the parties.

The Court to hear argument on substantive unconscionability; however, even if Plaintiffs demonstrate substantive unconscionability, Plaintiffs did not demonstrate procedural unconscionability. Thus, Plaintiffs’ unconscionability argument is unavailing.

TENTATIVE RULING MOTION 2

The Court to hear argument. Defendants met their burden in demonstrating that Plaintiffs’ claims against Defendants should be compelled to arbitration.

In Opposition, Plaintiffs’ arguments as to waiver and unconscionability being grounds to deny arbitration is unavailing.

The Court to hear argument on Plaintiffs’ rescission argument as a basis to deny arbitration.

Defendants’ motion also seeks the Court allow them to bring a motion for an award of attorney’s fees if this petition is granted. The Court notes that whether or not Defendants can bring a motion for attorney’s fees is not before this Court; if Defendants want to seek attorney’s fees, they need to bring the appropriate motion, and the Court can determine the merits of Defendants’ arguments then. To the extent that Defendants are requesting that this matter not be stayed with respect to a motion for attorney’s fees, the Court notes that this case will not be stayed with respect to a motion for attorney’s fees; however, the Court is not ruling on the merits of any party’s potential motion for attorney’s fees.

Defendants’ Reply points out that the Opposition is untimely. The Court notes that it will likely still consider the Opposition.

Defendants’ motion also states:

Pursuant to Code of Civil Procedure sections 632 and 1291, Morrison and Hart respectfully request a written statement of decision should the Court deny this Petition. Orders denying a petition to compel arbitration are immediately appealable. (Code Civ. Proc., § 1294(a).) “A statement of decision shall be made by the court, if requested pursuant to Section 632, whenever an order or judgment, except a special order after final judgment, is made that is appealable under this title.” (Code Civ. Proc., § 1291.)

(Def. Mot. p. 22.)

“An aggrieved party may appeal from: (a) An order dismissing or denying a petition to compel arbitration. Notwithstanding Section 916, the perfecting of such an appeal shall not automatically stay any proceedings in the trial court during the pendency of the appeal.” (CCP § 1294(a).)

“A statement of decision shall be made by the court, if requested pursuant to Section 632, whenever an order or judgment, except a special order after final judgment, is made that is appealable under this title.” (CCP § 1291.)

Here, the Court will hear argument because it is not clear if this issue is before the Court. Under CCP § 1291, a statement of decision shall be made by the court, “if requested pursuant to Section 632[.]” (See CCP § 1291.)

Under CCP § 632:

In superior courts, upon the trial of a question of fact by the court, written findings of fact and conclusions of law shall not be required. The court shall issue a statement of decision explaining the factual and legal basis for its decision as to each of the principal controverted issues at trial upon the request of any party appearing at the trial. The request must be made within 10 days after the court announces a tentative decision unless the trial is concluded within one calendar day or in less than eight hours over more than one day in which event the request must be made prior to the submission of the matter for decision. The request for a statement of decision shall specify those controverted issues as to which the party is requesting a statement of decision. After a party has requested the statement, any party may make proposals as to the content of the statement of decision.

The statement of decision shall be in writing, unless the parties appearing at trial agree otherwise; however, when the trial is concluded within one calendar day or in less than 8 hours over more than one day, the statement of decision may be made orally on the record in the presence of the parties.

(CCP § 632.)

In relevant part of 632, “The request must be made within 10 days after the court announces a tentative decision unless the trial is concluded within one calendar day or in less than eight hours over more than one day in which event the request must be made prior to the submission of the matter for decision.” (Ibid.)

The Court to hear argument.

AC