Judge: Margaret L. Oldendorf, Case: 22AHCV00484, Date: 2023-03-10 Tentative Ruling

Case Number: 22AHCV00484    Hearing Date: March 10, 2023    Dept: P

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF LOS ANGELES

NORTHEAST DISTRICT

            I.         INTRODUCTION AND SUMMARY OF PROCEDURAL HISTORY

            These consolidated cases concern a construction project. Pasadena Oaks Life Properties (Owner or Pasadena) retained Jokake Construction Services, Inc. (Contractor or Jokake) to perform certain construction work on real property. The Contract was for the construction of a two-story psychiatric hospital known as Las Encinas.

            The Contract was executed in April 2017 and had a Substantial Completion date of September 18, 2018. The “stipulated sum” for the construction work was $33,822,581.00. Jokake began performing, including by retaining various subcontractors. Problems and delays arose, which the parties attempted to work through. Following a June 2019 mediation the parties executed an amendment to the contract. The disputes continued. In March 2022, Pasadena terminated the Contract. These (and other) lawsuits followed.

            Jokake alleges in its lawsuit that Pasadena owns the hospital; and that its affiliate Signature Healthcare Services, Inc. developed it. Jokake sues Pasadena for breach of contract, breach of the covenant of good faith and fair dealing, abandonment of contract, quantum meruit, account stated, open book account, violation of prompt payment statute, and declaratory relief. It sues Pasadena and Signature for breach of the implied warranty of correctness of plans and specifications, fraudulent misrepresentation, fraudulent concealment, and negligent misrepresentation. And it sues Pasadena, Signature, Western Alliance Bank (WAB, Pasadena’s construction lender), and several subcontractors for foreclosure of mechanic’s liens based on the allegation that each defendant claims some right, title, lien, or legal interest in the real property. Numerous subcontractors sued Jokake for breach of contract and related common counts, and for foreclosure of mechanic’s liens. Some of the cross-complaints also name Pasadena and/or Signature, and/or WAB. The Subcontractors also have claims against Jokake’s surety, Travelers Casualty and Surety Company of America, with respect to its performance bond.

            The Contract between Pasadena and Jokake contains an arbitration provision. It also contains a term requiring Jokake to include the arbitration provision in all of its subcontracts.[1]

            Pasadena and Signature responded to Jokake’s lawsuit by filing a motion to compel arbitration pursuant to the Contract, and to stay the balance of this action. The hearing on that motion was taken off calendar, subject to re-setting it, once the cases were transferred to this department.

Jokake filed a motion to consolidate most of the cases, which was granted November 10, 2022.

On November 29, 2022, Jokake filed a demand for arbitration as against Pasadena. Pasadena and Signature, whose motion to compel arbitration had been re-set for hearing January 23, 2023, subsequently took their motion off calendar.

            Jokake now moves to stay this consolidated action in its entirety pending completion of the arbitration against Pasadena.  The motion was originally calendared for hearing February 7, 2023. At the hearing the Court requested additional briefing on certain questions and continued the hearing to today’s date. Specifically, the Court requested briefing on the practical consequences of staying (or not staying) this consolidated action. .

            The Court has read and considered all the written briefing, including the supplemental briefs. The case is in an unusual procedural posture because Jokake filed this action and then, apparently faced with Pasadena’s motion to compel arbitration, acceded to  arbitration. Jokake has not sought any order from this Court compelling the subcontractors to arbitrate. In the absence of such a motion the Court has no specific basis to stay the other aspects of this action, other than its own inherent power to regulate the proceedings. The Court declines to exercise that discretion under the current circumstances. Jokake’s motion for a stay of all proceedings is therefore denied.

            In their oppositions, the subcontractors have urged the Court to issue an order to the effect that they are not required to arbitrate. Subcontractors ENC Lath & Plaster, Inc. (ENC) and Integrit Development, Inc. (IDI) have filed a motion affirmatively seeking such relief. However, neither the ENC/IDI motion nor any of the supplemental briefs provides this Court with legal authority that supports such an order. The ENC/IDI motion and associated requests are therefore denied as well.

            II.        JOKAKE’S MOTION FOR A STAY

            Jokake asks the Court to stay the balance of this action until completion of the arbitration with Pasadena. The subcontractors and Western Alliance Bank strenuously oppose a stay. They have the stronger argument because all of the authority on which Jokake relies is distinguishable: all of the cases Jokake cites involve a court order compelling arbitration.

            Jokake relies on Code Civ. Proc. §1281.4 and cases interpreting its terms. That section provides as follows:

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

If an application has been made to a court of competent jurisdiction, whether in this State or not, for an order to arbitrate a controversy which is an issue involved in an action or proceeding pending before a court of this State and such application is undetermined, the court in which such action or proceeding is pending shall, upon motion of a party to such action or proceeding, stay the action or proceeding until the application for an order to arbitrate is determined and, if arbitration of such controversy is ordered, until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies.

If the issue which is the controversy subject to arbitration is severable, the stay may be with respect to that issue only.

            This statute governs the options available to a trial court when there has been either an order (by any court) compelling arbitration; or where a motion (before any court) to compel arbitration is pending. Neither of those circumstances is present here. Thus, the statute does not directly apply.   

            Jokake relies heavily on Heritage Provider Network, Inc. v. Superior Court (2008) 158 Cal.App.4th 1146, which involves interpretation of the first paragraph of Section 1281.4.  The Court of Appeal in Heritage Provider held that if a court (of any state) orders parties to arbitrate a controversy, and that controversy has even one issue that overlaps with litigation before a court in this state, that court must stay the litigation. Heritage is distinguishable because there has been no arbitration order here. Jokake’s argument that a stay is “mandated” by the holding in Heritage (Reply at 2:17) fails to address this critical distinction.  

            Jokake also relies on Seidman & Seidman v. Wolfson (1975) 50 Cal.App.3d 826. In that case, some of the claims at issue were also the subject of an arbitration proceeding between plaintiff and one of two defendants (Weiner) in New York.  The arbitration was apparently commenced prior to the filing of the California action. The Court of Appeal for the Second District affirmed the trial court’s order granting Weiner’s motion for a stay of the entire case based on the on-going arbitration:  “[A]lthough no order or application for order have been made, it would be a useless act to require Weiner to submit such an application when the arbitration is already well under way.” Id. at 834.

            Here, by contrast, it is this Court’s view that it would not be a “useless act” to expect Jokake to submit an application or motion to compel the subcontractors to arbitrate before deciding whether the consolidated action should be stayed.

The facts here are closer to Slaught v. Bencomo Roofing Co. (1994) 25 Cal.App.4th 744, where an owner and contractor were involved in an arbitration proceeding and the contractor petitioned the superior court for an order compelling the subcontractors to join the arbitration. Here, however, Jokake has not sought such an order as to the subcontractors.

            Twentieth Century Fox Film Corp. v. Superior Court (2000) 79 Cal.App.4th 188 also does not support Jokake’s position. In that case, the Court of Appeal applied Section 1281.4 to a situation where the defendant in a civil lawsuit petitioned the federal court for an order requiring arbitration of the dispute. Here, again, Jokake has not petitioned this or any court for such relief.

            Finally, Jokake cites Federal Ins. Co. v. Superior Court (Mackey) (1998) 60 Cal.App.4th 1370. This case holds that a subcontractor cannot pursue claims against a contractor’s surety until arbitration between the subcontractor and contractor is complete, because the surety’s liability could not be fixed until the amount of work performed was determined in the arbitration. Mackey may be distinguishable because the subcontract in that case contained an arbitration clause -- a fact that may or may not be true here. Further, while Mackey is based in part on the rule that “the carriers’ liability under the bond will arise only if the contractor fails to pay for work performed under the contract,” legislation enacted in 1979 provides that an arbitration award against a principal shall not be deemed or used as an award against the surety. Civ. Code §2855. This indicates that a surety can either accept the validity of an award against a principal and pay it or decline to do so; in which case the claims against it will proceed in a subsequent  action.

            On its behalf, WAB argues that staying the consolidated action and allowing arbitration to proceed would be inefficient, because it is not required to arbitrate and it   cannot be affected by rulings made in the arbitration.  This means that the same parties will need to present the same evidence to this Court in order to determine any possible foreclosure on the $6.5 Million mechanic’s lien. WAB urges the Court to exercise its discretion under Section 1281.2(c) to refuse arbitration and order all parties to litigate. The  case WAB relies on, however, Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, is distinguishable.  Cronus involved a situation where a petition to compel arbitration had been filed.  Jokake argues in opposition that WAB will not be prejudiced by a stay, because the lien claims cannot be resolved until Pasadena’s claims (and possible offsets) against Jokake are resolved.    

            The bulk of the subcontractor opposition briefs are directed at opposing any order compelling them to arbitration -- something the motion for stay does not directly seek. On the issue of a stay, some of the opposition briefs cite the recent case of Leenay v. Superior Court (2022) 81 CalApp.5th 553. In Leenay, a stay order was reversed on appeal. The case involved a coordinated PAGA action against employer Lowe’s.  The action was stayed pending the resolution of some 50 individual employee arbitrations.  Leenay is also  distinguishable, because in that case there was no overlap and thus no possibility of conflicting rulings and/or res judicata effect between the coordinated action and the arbitration proceedings.

The Court of Appeal in Leenay stated as follows:

            “[S]ection 1281.4 applies only when a court has ordered parties to arbitration, the arbitrable issue arises in the pending court action, and the parties in the arbitration are also parties to the court action.” Id. at 559, bolding added. “[S]ection 1281.4 authorizes a stay only if a court has ordered arbitration of a question between the parties to an agreement, and the same question and the same parties are involved in the pending action.” Id. at 564-565.

            In sum, because there is no order compelling arbitration, or even an application for such relief, Section 1281.4 does not apply in this case. None of the cases Jokake cites supports a stay under the particular facts of this case.   

            III.      SUPPLEMENTAL BRIEFS

            The Court requested supplemental briefing on the practical consequences of staying (or not staying) this consolidated action; and in particular whether the outcome of the arbitration would somehow bind the subcontractors even if they were not parties to the arbitration because of the overlapping nature of the various claims.  According to Jokake, it raises the same the allegations against the subcontractors in arbitration that it alleged in this action, plus some additional claims; it raises no claims against WAB in arbitration. Memorandum of Points and Authorities at 6:28-7:7. Pasadena has filed a counterclaim in arbitration. While it is somewhat difficult to discern, it appears that the claims in arbitration are very similar to the issues in the consolidated action (except for the mechanic’s lien and claims against the sureties, which are not included as part of the arbitration proceeding).

            The supplemental briefs of the subcontractors all take the position that the arbitration will have no binding effect on them. The subcontractors chiefly rely on the case of Vandenberg v. Superior Court (1999) 21 Cal.4th 815. In Vandenberg, the California  Supreme Court held that “a private arbitration award, even if judicially confirmed, may not have nonmutual collateral estoppel effect under California law unless there was an agreement to that effect in the particular case. [fn. 2]” Id. at 824.

In footnote 2 of Vandenberg the Supreme Court qualifies its holding:  “Our holding is narrowly circumscribed. Nothing in our decision imposes or implies any limitations on the strict res judicata, or ‘claim preclusive,’ effect of a California law private arbitration award. (See, e.g., Thibodeau v. Crum (1992) 4 Cal.App.4th 749, 756–761, 6 Cal.Rptr.2d 27 [unconfirmed award in private arbitration between homeowner and general contractor is res judicata barring homeowner’s identical claim against subcontractor]; Sartor v. Superior Court (1982) 136 Cal.App.3d 322, 327–328, 187 Cal.Rptr. 247 [confirmed private arbitration award in favor of architectural firm is res judicata barring homeowner’s identical causes of action against firm’s employees].)”

            ENC notes that Vandenberg may be distinguishable because it concerned third parties who were not joined in the arbitration. ENC notes that here, Jokake has attempted to add the subcontractors as parties to arbitration against their will, and without seeking a court order compelling their participation.

            There is an additional way in which Vandenberg may not support the  subcontractors’ position: the Supreme Court’s holding in that case is qualified by the phrase “unless there was an agreement to that effect in the particular case.” Id. at 824.  Here, each of the subcontracts (except the Graycon subcontract) provides at ¶14.1 that “in the event there is a dispute between [Pasadena] and [Jokake] that directly or indirectly involves a claim against [Pasadena] for additional compensation  . . . , Subcontractors agree to be bound to [Jokake] to the same extent that [Jokake] is bound to [Pasadena] by the terms of the Contract Documents and to abide by all decisions, findings or determinations made thereunder by the person so authorized in the Contract Documents, by an administrative agency or court of competent jurisdiction or arbitration proceeding boards, whether or not the Subcontractor is a party of the proceedings before said persons, board, agency or court.”

Jokake urges that, pursuant to this provision, each subcontractor has agreed to be bound by the outcome of the arbitration between Pasadena and Jokake whether or not they are parties to that litigation. None of the subcontractor opposition or supplemental briefs (other than Graycon’s) addresses ¶14.1. If Jokake is correct the subcontractors may in fact be contractually obligated to abide by the outcome of arbitration whether or not they participate.

            WAB is differently situated from the subcontractors. Jokake has not named WAB (or Travelers) in its arbitration proceeding. Jokake makes no argument that WAB would be bound in the same way that the subcontractors are. In fact, pursuant to Civ. Code §2855 sureties are not automatically bound by arbitration awards against their principals.

IV.      ENC’S AND IDI’S MOTION FOR AN ORDER THAT THEY ARE NOT REQUIRED TO PARTICIPATE IN ARBITRATION IS DENIED

            ENC and IDI have filed a motion seeking an order that they are not required to participate in the arbitration. That motion cites no legal authority for the relief requested. In the absence of any authority, the Court denies the motion.

            However, the Court does wish to emphasize that it has not necessarily ceded jurisdiction to the arbitrator on this question. This Court has not issued an order compelling any subcontractor to arbitrate. If it had done so, a partial or complete stay of this action might indeed be proper to protect the jurisdiction of the arbitrator.   

V.        CONCLUSION AND ORDER

            Jokake’s motion for a stay is denied.

            ENC and IDI’s motion for order that they are not required to arbitrate is also denied.   

            Counsel for Jokake is ordered to give notice of this ruling.

Dated:                                                                        _______________________________

                                                                                          MARGARET L. OLDENDORF

                                                                                 JUDGE OF THE SUPERIOR COURT