Judge Margaret L. Oldendorf, Case Number: 21BBCV01044, Date: 2024-03-13 Tentative Ruling

Judge: Margaret L. Oldendorf, Case: 21BBCV01044, Date: 2024-03-13 Tentative Ruling

In this breach of contract action, Plaintiffs David Myers and Sunny Park (collectively Plaintiffs) allege that the contractor who agreed to remodel their home breached the remodeling agreement in a variety of ways. Defendants are the owners and principals of the contractor, Davis Brothers Construction (collectively Defendants). Plaintiffs seek an order vacating the Court’s February 28, 2023 order compelling Plaintiffs to arbitrate their disputes pursuant to an arbitration provision in the remodeling contract.

This motion was filed February 6, 2024. Defendant Morning Star Development filed an opposition on February 26, 2024. The other Defendants also filed an opposition on February 26, 2024. Plaintiffs filed a reply on March 4, 2024. This motion was moved from March 8, 2024 to its current date of March 13, 2024.

For the reasons that follow, the motion is GRANTED. Monetary sanctions are also assessed against Morning Star Development, Inc.

Plaintiffs request that the Court take judicial notice of various pleadings and documents, identified as Exhibits 1 through 9, that have been filed in this case.

Defendants Davis Brothers Construction, Timothy Davis, Gracie Davis and Karina Davis also request the Court take judicial notice of the following documents: (1) the Complaint, (2) the First Amended Complaint, (3) the Second Amended Complaint and (4) the declaration of Kennedy Williams submitted in support of the Motion to Compel Arbitration.

Though it is not necessary to take judicial notice of papers already in the court file, the requests are granted. (See Evid. Code, § 452, subd. (d).) (Evid. Code § 453; Scott v. JP Morgan Chase Bank, N.A. (2013) 214 Cal.App.4th 743, 754-755.)

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 that an agreement exists; unless it finds that the right to arbitrate has been waived, that grounds exist for revocation, or that a party to the agreement is also party to pending litigation arising out of the same facts and there exists a possibility of conflicting rulings on a common issue of fact or law. In one of those situations, the court may: (1) refuse to enforce the arbitration agreement and order intervention or joinder of all parties in a single action, (2) order intervention or joinder as to all or only certain issues, (3) order arbitration among the parties who have agreed to arbitration and stay the action pending outcome of arbitration, or (4) stay arbitration pending outcome of the litigation.

“[I]n an employment or consumer arbitration that requires, either expressly or through application of state or federal law or the rules of the arbitration administrator, the drafting party to pay certain fees and costs before the arbitration can proceed, if the fees or costs to initiate an arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration...” (CCP § 1281.97(a).)

Code of Civil Procedure Section 1281.98 provides that “if the fees or costs required to continue the arbitration proceeding are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel the employee or consumer to proceed with that arbitration as a result of the material breach.” (CCP § 1281.98(a).)

Code of Civil Procedure Section 1280(e) defines a “drafting party” as including “any third party relying upon, or otherwise subject to the arbitration provision, other than the employee or consumer.”

Plaintiffs urge that sections 1281.97 and 1281.98 both apply here. The Court agrees that the arbitration between the parties is a consumer arbitration, as Plaintiffs were the consumers/recipients of promised home improvements by Defendants. (Motion, p.12: 20-26.) Additionally, the American Arbitration Association acknowledged this as a consumer arbitration. (Szabo Decl. ¶¶ 9,20, referencing Exh. 2.) The claims brought by Plaintiffs are consumer-related. Lastly, Defendant Davis Brothers Construction Inc. was the business that wrote the arbitration provision into its contract with Plaintiffs. Morning Star was formed by the Davis defendants after the remodeling contract was entered into (and not finished). (Morning Star Opposition p. 6: 5-9.)

On March 24, 2023, AAA acknowledged the Plaintiffs’ arbitration claim and communicated the need for timely fee payment by the parties. (Szabo Decl. ¶ 9, Exh. 2.) The arbitration process went forward. On October 30, 2023, AAA notified counsel of record for all parties that the amounts due must be paid within 30 days after notification. (Szabo Decl. ¶¶ 15-16, Exh. 8, see CCP § 1281.98.) AAA followed up on November 17, 2023 that Respondents (i.e., Defendants) still had not paid. (Szabo Decl. ¶ 17, Exh. 9.) On December 27, 2023, AAA sent a letter stating that Respondent Morning Star still had not paid. (Szabo Decl. ¶ 18, Exh. 10.) On December 30, 2023, AAA sent a letter to all parties indicating that because of the non-payment by Morning Star, Claimants/Plaintiffs had the option to withdraw from the arbitration and proceed in court. (Szabo Decl. ¶¶ 20-21, Exh. 12.)

In their opposition, Defendants Davis Construction and the individual Davis defendants argue that they did not materially breach the arbitration agreement because they paid their fees, and thus that the motion to vacate arbitration does not apply to them. (See Davis Opposition p. 4: 21-23.)

In its opposition, Morning Star does not debate that it did not pay any arbitration fees; however, it urges that it is not a “drafting party.” (Morning Star Opposition p. 6: 4-27.) Morning Star was incorporated in Idaho in March of 2021. The Contract between Davis Brothers Construction and Plaintiffs which contained the arbitration provision was signed and executed more than six months earlier, on May 19, 2020. (Second Amended Complaint ¶ 19.) Additionally, although Morning Star admittedly was formed by Tim Davis, one of the individual Davis defendants, it claims that it is a separate entity, formed for the purpose of “flipping” houses. (Tim Davis Decl. ¶¶ 13, 22, Morning Star Opposition p. 3: 16-18.) Morning Star asserts that it “did not just simply continue Davis Brothers as a business in Idaho.” (Davis Decl. ¶ 22.)

However, in their reply, the Plaintiffs point out that the definition of drafting party, as set forth in CCP Section 1280(e), is “the company or business that included a predispute arbitration provision in a contract with a consumer or employee. The term includes any third party relying upon, or otherwise subject to the arbitration provision, other than the employee or consumer.” (CCP § 1280(e)(emphasis added).) Here, the motion to compel arbitration was clearly brought by all Defendants, including Defendant Morning Star. (1/6/23 Motion to Compel.) By doing so, Morning Star relied on the arbitration agreement.[1]

As such, there was a material breach by a drafting party. Therefore, the Court GRANTS the motion to vacate the order compelling arbitration.

“If the employee or consumer proceeds with an action in a court of appropriate jurisdiction, the court shall impose sanctions on the drafting party in accordance with Section 1281.99.” (CCP § 1281.97(d).)

“The court shall impose a monetary sanction against a drafting party that materially breaches an arbitration agreement pursuant to subdivision (a) of Section 1281.97 or subdivision (a) of Section 1281.98, by ordering the drafting party to pay the reasonable expenses, including attorney’s fees and costs, incurred by the employee or consumer as a result of the material breach.” (CCP § 1281.99(a).) The court may also order non-monetary sanctions, such as terminating sanctions or evidence sanctions. (CCP § 1281.99(b).)

Plaintiffs’ attorney Lawrence Szabo attested to performing 16 hours preparing this motion. (Szabo Decl. ¶ 27.) He anticipates spending an additional 1 hour for review of the oppositions to the motion, 2.5 hours to draft a reply, and 1 hour for the hearing, for a sum total of 20.5 hours. Mr. Szabo’s hourly rate is $375.

The Court finds the hourly rate reasonable. Although the time requested is on the high side, the Court awards all hours requested.

Because the order compelling arbitration is vacated, the stay imposed pursuant to the granting of the motion is now lifted.

Plaintiffs’ motion to vacate the order compelling arbitration is granted. The stay in the case is lifted. Defendant Morning Star is ordered to pay $7,687.50 in monetary sanctions to Plaintiffs within forty-five (45) days of today’s date.

Defendants are ordered to file a verified answer to Plaintiffs’ First Amended Complaint within ten (10) days of today’s date.

Additionally, Defendants are ordered to provide responses to all outstanding discovery within thirty (30) days of today’s date.

A Trial Setting Conference is scheduled for ________________, 2024 at 8:30 a.m. in this Department.

[1] To the extent that Morning Star urges that it did not know of the effect of bringing a motion to compel arbitration and its previous counsel misled it, that is a matter between Morning Star and its prior counsel. The fact remains, under these circumstances, that Morning Star is a third party that relied on the arbitration agreement.