Judge: Margaret L. Oldendorf, Case: 21BBCV01044, Date: 2023-02-28 Tentative Ruling

Case Number: 21BBCV01044    Hearing Date: February 28, 2023    Dept: P

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF LOS ANGELES

NORTHEAST DISTRICT

I.         INTRODUCTION

            This litigation stems from a home remodeling project. David Myers and Sunny Park retained Davis Brothers Construction, Inc. (Davis Bros.) to do extensive remodeling of real property they own in Burbank. Also named as defendants are Davis. Bros.’ director/CEO Timothy Davis (Timothy), his wife and CFO Gracie Davis (Gracie), and his sister Karina Davis, who kept books.

The contract price for the work was $462,649, which was to be paid in installments as the work progressed. Plaintiffs allege that in contravention of Bus. & Prof. Code §7159, Defendants required a down payment that far exceeded the $1,000 limit and provided for progress payments that were not limited to completed work or materials delivered. Plaintiffs allege they made installment payments totaling $450,758.90 even though the work and materials for such installments were not provided, and that Defendants abandoned the project long before it was finished. Timothy and Gracie sold their home, closed the business, moved to Idaho, and started a new construction business there. The new business, Morning Star Development, Inc. (Morning Star), is also a named defendant in this action.

Prior to transfer to this Court, Defendants’ demurrer and motion to strike were ruled on by Judge Kralik. After transfer, Defendants again challenged the pleadings. On November 4, 2022, this Court overruled in part and sustained without leave in part Defendants’ demurrer to the operative Second Amended Complaint. Defendants now seek an order compelling Plaintiffs to arbitrate their claims. Plaintiffs oppose on the grounds of waiver and rescission, but these arguments fail. The motion is granted.

II.        LEGAL STANDARD

Code Civ. Proc. §1281 provides: “A written agreement to submit to arbitration an existing controversy or a controversy thereafter existing is valid, enforceable, and irrevocable, save upon such grounds as exist for the revocation of any contract.”

Paraphrased, Code Civ. Proc. §1281.2 provides that upon petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate and a party’s refusal to submit to arbitration, the court shall order the parties to arbitrate the controversy if it determines (1) that an agreement exists, (2) unless it determines that the right to arbitrate has been waived, that grounds exist for revocation, or that a party to the agreement is also party to a pending litigation arising out of the same facts and there exists a possibility of conflicting rulings on a common issue of fact or law. 

III.      ANALYSIS

            A. The Existence of a Written Agreement to Arbitrate is Established

When a petition to compel arbitration is “filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable.” Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413 (Rosenthal).

Defendants bear the burden of establishing the existence of a written agreement to arbitrate. They offer as evidence the declaration of their attorney, Kennedy P. Williams, who attaches as Exhibit 1 a copy of the “Prime/Direct Building Contract” entered into by the parties. Plaintiffs raise no objections to this evidence.

The contract consists of three pages. At the bottom of the first page, in language set off in a rectangular box about the signature line, are the words, “NOTICE TO OWNER: IF YOU AGREE TO ARBITRATE, REVIEW THE ‘ARBITRATION OF DISPUTES’ SECTION ON THE REVERSE SIDE OF THIS PAGE (PROVISION 13) AND PLACE YOUR INITIALS ON EACH COPY OF THIS CONTRACT.” There is square next to this language that could be a box. Plaintiffs argue that it is a box and that urge that since they did not check it, this indicates that they did not agree to arbitrate. But there is no instruction to check a box so it is not clear that was required.

On the second page, which is evidently the reverse side of the first page, the arbitration provision appears in paragraph 13. Following the provision are lines for the owners and the contractor to initial, and the lines do contain initials.

The third page is captioned, “Additional Description Form.” It is signed by the contractor but not the owners.

Plaintiffs have attached only pages one and three to the various iterations of their complaint. They explain this is so because that is all they were provided. Plaintiffs explain that they negotiated the contract with Timothy Davis who, on May 6, 2020, sent them the three-page contract, unsigned. Declaration of Sunny Park at ¶5 and Exhibit 2. They further explain that pursuant to verbal instructions from Timothy Davis, on May 19, 2020, they signed the contract and left the documents along with a check at their home. Id. at ¶11. A few days later Sunny Park texted Timothy Davis and requested signed copies of the contract. She states that he sent only the first and third pages. Id. at ¶12. The Declaration of David Myers contains this same testimony.

Both Sunny Park and David Myers state that they do not recall initialing the arbitration provision on page 2 of the contract. Park Declaration, ¶11; Myers Declaration, ¶11. Stating that they have no recollection is not an avowal that they did not place their initials on the arbitration provision. They do not state that the initials are not theirs or were forged. Based on this record, the Court concludes that Plaintiffs did agree to the arbitration provision in the contract.

The language of the arbitration provision is broad. It covers, “ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATED TO THIS CONTRACT, OR THE BREACH THEREOF.” It provides, “BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THIS ‘ARBITRATION OF DISPUTES’ PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL.”

This language is broad enough to cover the claims alleged in this lawsuit.  

B. Waiver Is Not Established

“[A] party who resists arbitration on the ground of waiver bears a heavy burden (Citation), and any doubts regarding a waiver allegation should be resolved in favor of arbitration (Citation).” St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195. “Both state and federal law emphasize that no single test delineates the nature of the conduct that will constitute a waiver of arbitration.” Ibid.

The relevant factors to consider in assessing waiver claims are:

“(1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether ‘the litigation machinery has been substantially invoked’ and the parties ‘were well into preparation of a lawsuit’ before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) ‘whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place’; and (6) whether the delay ‘affected, misled, or prejudiced’ the opposing party.” Id. at 1196, quoting Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 992.

Plaintiffs argue that Defendants have waived the right to arbitrate by participating in the litigation for nearly a year. Plaintiffs cite the various acts that Defendants have engaged in during the course of that year: initiating and participating in meet and confer conferences with Plaintiffs’ counsel; filing two demurrers and motions to strike; filing Case Management Conference briefs in which they informed the Court they want a jury trial, want to participate in ADR, and want to engage in specific discovery; posting jury fees; receiving discovery requests from Plaintiffs and requesting additional time to respond; filing an answer; filing an objection to a third-party witness subpoena and filing a motion to quash service of the subpoena.

The procedural posture of this case is very close to that of Adolph v. Coastal Auto Sales, Inc. (2010) 184 Cal.App.4th 1443, where denial of arbitration was affirmed on appeal. The trial court in Adolph summarized the evidence this way: “[I]t is apparent to the court that defendant’s conduct has been inconsistent with an intent to arbitrate. Related to this is the 6 months of delay from the filing of Plaintiff’s complaint to the instant petition to compel. In that time period defendant filed two demurrers, accepted and contested discovery request[s], engaged in efforts to schedule discovery, omitted to mark or assert arbitration in its case management statement. [¶] The effect of these inconsistent actions by defendant has resulted in more than merely participating in litigation or expending legal cost[s] but in prejudice to the plaintiff by substantially undermining plaintiff’s ability at this late date to take advantage of the benefits and cost savings provided by arbitration. It is clear to the court that defendants intended by their conduct to proceed with their court action. It was only until defendant’s second demurrer was overruled that it now request[s] this court that it litigate now in another forum to which all appearances it hopes that it will limit its litigation risk and expense. It will also increase plaintiff's expenses and burdens, having already required plaintiff to expend its efforts and resources in vigorously litigating this case in court.” Id. at 1451.

The Court of Appeal added, “We are loathe to condone conduct by which a defendant repeatedly uses the court proceedings for its own purposes (challenging the pleadings with demurrers) while steadfastly remaining uncooperative with a plaintiff who wishes to use the court proceedings for its purposes (taking depositions), all the while not breathing a word about the existence of an arbitration agreement, or a desire to pursue arbitration, and, in fact, withholding production of the arbitration agreement until after the demurrer hearing on the day the demurrer is overruled. To believe that defendant was not aware of its late-asserted right to arbitrate until plaintiff filed its SAC strains our imagination to the breaking point.” Id. at 1452.

Here, in attempting to explain their delay in seeking relief, Defendants attempt to blame Plaintiffs for not attaching all three pages of the contract to their pleadings. But based on the undisputed evidence, Defendants are the only ones who had all three pages of the signed contract. Defendants do not dispute Plaintiffs’ account of the facts, including that they only received signed copies of pages one and three. Moreover importantly, this is a “David Brothers Construction” form contract. Defendants ought to be aware of the terms of their own form contracts.

Adolph is not controlling, however. The defendants there withheld the arbitration agreement from its first document production (id. at 1449) and there were meet and confer letters exchanged with regard to the defendants’ discovery responses and as to the dates for the deposition of defendant’s personnel. Here, Defendants did not withhold the agreement from document production and discovery is not as far along. Plaintiffs propounded discovery in October 2022 and have thus far granted Defendants extensions of time to respond. Declaration of Lawrence Szabo, ¶¶23-25, 29, 33, 35,40-43.

Plaintiffs also rely on Augusta v. Keehn & Associates (2011) 193 Cal.App.4th 331, but as that case makes clear, “the party who seeks to establish waiver must show that some prejudice has resulted from the other party's delay in seeking arbitration.” Id. at 337, citing Berman v. Health Net (2000) 80 Cal.App.4th 1359, 1363-1364.

“Despite the delay in seeking arbitration and lack of intent to arbitrate, the conduct of the party demanding arbitration must have prejudiced the opposing party. [fn. 5] ‘In California, whether or not litigation results in prejudice also is critical in waiver determinations.’ (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1203, 8 Cal.Rptr.3d 517, 82 P.3d 727.) ‘The moving party’s mere participation in litigation is not enough; the party who seeks to establish waiver must show that some prejudice has resulted from the other party’s delay in seeking arbitration.’ (Davis v. Continental Airlines, Inc. (1997) 59 Cal.App.4th 205, 212, 69 Cal.Rptr.2d 79 (Davis).) ‘[C]ourts have found prejudice where the petitioning party used the judicial discovery processes to gain information about the other side’s case that could not have been gained in arbitration [citations]; where a party unduly delayed and waited until the eve of trial to seek arbitration [citation]; or where the lengthy nature of the delays associated with the petitioning party's attempts to litigate resulted in lost evidence.’ (St. Agnes Medical Center v. PacifiCare of California, at p. 1204, 8 Cal.Rptr.3d 517, 82 P.3d 727; Kaneko Ford Design v. Citipark, Inc., supra, 202 Cal.App.3d at p. 1228, 249 Cal.Rptr. 544 [prejudice found when petitioning party learned other side’s legal strategies].)” Augusta, supra, 193 Cal.App.4th at 340.

Plaintiffs raise no argument on this aspect of their waiver defense. Plaintiffs’ counsel states that Plaintiffs will be prejudiced if they are forced to arbitrate without the right to conduct necessary discovery. Szabo Declaration, ¶53. The disadvantage to Plaintiffs, if any, of having to conduct discovery in accordance with AAA’s Construction Industry rules, as opposed to the Discovery Act, is not the kind of prejudice that establishes waiver.

While it regrettable that Defendants did not seek arbitration prior to engaging in their pleading challenges, it cannot be said on the record here that Defendants have “substantially invoked” the court’s “litigation machinery.” St. Agnes, supra, 31 Cal.4th at 1196. Further, there is no showing of prejudice.

C. Grounds For Rescission Are Not Shown

Plaintiffs argue for rescission pursuant to Civ. Code §1689(b). The grounds for rescission set forth in that provision are the following:

(1) If the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party.

(2) If the consideration for the obligation of the rescinding party fails, in whole or in part, through the fault of the party as to whom he rescinds.

(3) If the consideration for the obligation of the rescinding party becomes entirely void from any cause.

(4) If the consideration for the obligation of the rescinding party, before it is rendered to him, fails in a material respect from any cause.

(5) If the contract is unlawful for causes which do not appear in its terms or conditions, and the parties are not equally at fault.

(6) If the public interest will be prejudiced by permitting the contract to stand.

Plaintiffs point to certain of their allegations (breach of the implied covenant and violation of Bus. & Prof. Code §§7150-7170), and list Defendants’ allegedly wrongful conduct (inducing them to make an excessive down payment and subsequent progress payments) but they do not connect that conduct with any of the grounds for rescission itemized in the statute. Based on the evidence presented, there does not appear to be a lack of consent or lack of consideration, and Plaintiffs have not alleged an unlawful contract.

IV.      CONCLUSION AND ORDER

Defendants have presented evidence establishing the existence of a signed agreement to arbitrate. That agreement encompasses the claims alleged by Plaintiffs. Plaintiffs have not established that Defendants have waived the right to arbitrate and they have not established grounds for rescinding the agreement. Consequently, the motion is granted. The parties are ordered to arbitrate this dispute pursuant to the terms of the agreement between them.

Moving party is ordered to give notice.

Dated:                                                            __________________________________

                                                                                          MARGARET L. OLDENDORF

                                                                                 JUDGE OF THE SUPERIOR COURT