David Raymond v. ERLA Construction, Inc., et al.

MOTION TO COMPEL ARBITRATION

 

MOVING PARTY: Defendant ERLA Construction, Inc.

RESPONDING PARTY(S): Plaintiff David Raymond 

STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:

Plaintiff David Raymond allege he retained Defendants to construct an accessory dwelling unit on his property. Plaintiff alleges Defendants poorly constructed the ADU and failed to comply with the specifications advertised on their website. Plaintiff brings causes of action for (1) fraud, (2) negligent misrepresentation, (3) violation of Business & Professions Code section 17500 et seq., (4) violations of Business and Professions Code section 17200 et seq., (5) negligence, and (6) breach of contract.

Defendant ERLA Construction, Inc., now moves to compel Plaintiff to arbitrate the dispute pursuant to CCP § 1281 et seq. Plaintiff opposed. 

TENTATIVE RULING:

Defendant’s Motion to Compel Arbitration is GRANTED in part and STAYED in part. 

To the extent Plaintiff’s Third and Fourth causes of action seek public injunctive relief, that portion of the causes of action are severed and STAYED pending completion of the arbitration. 

The motion is GRANTED as to all other causes of action, including those portions of the Third and Fourth causes of action where Plaintiff seeks restitution.

The action is stayed pending the results of the arbitration. A Status Review/OSC re: Dismissal is set for June 21, 2024 at 8:30 a.m.

Defendant to give notice, unless waived.  

DISCUSSION:

Motion to Compel Arbitration

1. Legal Standard

“[T]he petitioner bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence . . . .”  (Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1284).  “In determining whether an arbitration agreement applies to a specific dispute, the court may examine only the agreement itself and the complaint filed by the party refusing arbitration [citation]. The court should attempt to give effect to the parties' intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made.”  (Weeks v. Crow (1980) 113 Cal.App.3d 350, 353).  “Doubts as to whether an arbitration clause applies to a particular dispute are to be resolved in favor of sending the parties to arbitration. The court should order them to arbitrate unless it is clear that the arbitration clause cannot be interpreted to cover the dispute.”  (California Correctional Peace Officers Ass'n v. State (2006) 142 Cal.App.4th 198, 205).  

“[A] party opposing the petition bears the burden of proving by a preponderance of the evidence any fact necessary to its defense. [Citation.] In these summary proceedings, the trial court sits as a trier of fact, weighing all the affidavits, declarations, and other documentary evidence, as well as oral testimony received at the court's discretion, to reach a final determination.”  (Giuliano v. Inland Empire Personnel, Inc. (2007) 149 Cal.App.4th 1276, 1284).

“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. . . .”  (CCP § 1281.4.)

2. Analysis

A. Existence of Arbitration Agreement

California has a strong public policy in favor of arbitration as an expeditious and cost-effective way of resolving disputes.  “Even so, parties can only be compelled to arbitrate when they have agreed to do so.” (Avila v. S. California Specialty Care, Inc. (2018) 20 Cal. App. 5th 835, 843.)  “The party seeking to compel arbitration bears the burden of proving the existence of a valid arbitration agreement.”  (Id.)

An arbitration agreement is a contractual agreement. “General contract law principles include that ‘[t]he basic goal of contract interpretation is to give effect to the parties’ mutual intent at the time of contracting. [Citations.] ... The words of a contract are to be understood in their ordinary and popular sense.” [Citations.]  (Garcia v. Expert Staffing W., 73 Cal. App. 5th 408, 412–13.)  

Pursuant to the construction of an ADU on Plaintiff’s property, Plaintiff and Defendant executed a “Design-Build Agreement” (the “Agreement”). The parties to the Agreement are Plaintiff David Raymond, on one hand, and Defendant ERLA Construction, on the other. (Laughton Decl., Exh. A.) The Agreement contains an arbitration provision.  It provides that “[a]ny controversy among parties to the construction of the Project arising from or relating to the performance or interpretation of this Agreement or any subcontract or subsubcontract is subject to arbitration.” (Laughton Decl., Exh. A, ¶ 15.01.)

The parties agree that the provision, if valid, is broad and covers the dispute here. Each cause of action in the Complaint is based on the allegation(s) that Defendants failed to build the ADU to the specifications that Plaintiff reasonably expected or that the parties’ agreed upon. Thus, an agreement to arbitrate exists, and it pertains to the dispute here.  

B. The FAA Applies to the Transaction

The Federal Arbitration Act provides for enforcement of arbitration provisions in any contract “evidencing a transaction involving commerce.” (9 USC § 2.) The term “involving commerce” is functionally equivalent to “affecting commerce” and “signals an intent to exercise Congress’ commerce power to the full.” (Allied-Bruce Terminix Cos., Inc. v. Dobson (1995) 513 US 265, 277.) “The party asserting the FAA bears the burden to show it applies by presenting evidence establishing [that] the contract with the arbitration provision has a substantial relationship to interstate commerce . . . .” (Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 238.)

Plaintiff contends that Defendant has failed to meet its burden to demonstrate that the transaction here involved interstate commerce. 

Shepard v. Edward Mackay Enterprises, Inc. is instructive. There, the defendants met their burden to demonstrate that a transaction involved commerce by “produc[ing] evidence the construction of plaintiff's house involved the receipt and use of building materials that were manufactured and/or produced outside California.” (Shepard v. Edward Mackay Enterprises, Inc. (2007) 148 Cal. App. 4th 1092, 1101.) That evidence included declarations from suppliers stating that the carpet and vinyl flooring, “some of the hardware and doors,” the house’s trusses, doors and windows, and kitchen appliances were manufactured and/or produced out of state. (Id. at 1100.) The Court continued that the “number of building materials shown by defendants to have come from interstate commerce” indicated that the impact on commerce was more than “trivial.” (Id.) Thus, the FAA applied.

The Court of Appeal came to the opposite conclusion in Woolls v. Superior Court, another case involving the renovation of a single-family residence.  (Woolls v. Superior Ct. (2005) 127 Cal. App. 4th 197, 213.) Notably, the party with the burden of showing the FAA applied “did not submit any declarations to show the [transaction] involve[d] interstate commerce.” (Id.) Thus, the court held the party had failed to meet its burden that the FAA applied. (Id.) 

Here, Defendant presents a declaration from Toby Laughton, Defendant ERLA Construction, Inc.’s Construction Project Manager. Laughton attests he has “personal knowledge of the work performed, and materials used, by ERLA” on the project. (Laughton Decl. ¶ 4.) He contends that a “substantial portion” of the construction materials used in the Project were manufactured by and/or obtained from sources outside of California, including: 

(a) Insulfoam from Insulfoam in Puyallup, Washington; 

(b) metal framing and “other metal products” from ClarkDietrich in West Chester, Ohio; 

(c) Bluskin weather proofing materials from Henry Company in Kimberton, Pennsylvania; 

(d) doors and windows from Milgard Manufacturing, LLC, in Tacoma, Washington; 

(e) 500 Hardie Backer cement boards from Texas, Florida, Washington, Illinois, Virginia, and Nevada; 

(f) heating, ventilation, and air conditioning units from the South Korean manufacturer LG and manufactured in China; 

(g) a Rinnai tankless water heater from Rinnai Corporation in Japan; 

(h) Cabinets, vanity, sinks, faucets, including products from Ikea, manufactured in China, Poland, Italy, Germany and Sweden; 

(i) a toilet from TOTO Ltd., a Japanese company, whose United States subsidiary, TOTO USA, Inc., is headquartered in Morrow, Georgia; 

(j) a shower system and shower head from Grohe, a German company whose United States subsidiary, Grohe America, Inc., is headquartered in Piscataway, New Jersey; 

(k) a countertop from Georgia; 

(l) structural plywood from Oregon; 

(m) a refrigerator from New Jersey; and

(n) an electric cooktop model manufactured by a German company. 

(Id. 5(a)-(m).)

Considering this evidence—which Plaintiff does not dispute—Defendant has established the transaction at issue involved interstate commerce. A portion of the building materials came from out of the state, and based on the number involved, the impact on commerce was more than “trivial.” (See Shepard, supra, 148 Cal. App. 4th at 1101.) Accordingly, the FAA governs this dispute.

C. Business and Professions Code § 7191 is Preempted by the FAA

Plaintiff next argues the arbitration agreement is unenforceable because it fails to comply with California Bus. & Prof. Code section 7191. That Code section provides that arbitration provisions in residential construction contracts (1-4 units) must satisfy certain disclosure and format requirements, including advice that the consumer is giving up the right to a jury trial. Provisions that fail to comply with § 7191 are unenforceable against anyone but the licensee.

Defendant concedes that its arbitration provision is not compliant with section 7191. (Reply 6: 12-14.) But Defendant argues this is irrelevant, because the FAA preempts section 7191. 

The Supreme Court of the United States has held that courts may not “invalidate arbitration agreements under state laws applicable only to arbitration provisions.” (Doctor's Assocs., Inc. v. Casarotto (1996) 517 U.S. 681, 687.) This court is unaware of any published California authority expressly holding that the FAA preempts section 7191. In Woolls, discussed supra, the Court of Appeal stopped short of that conclusion because the moving party failed to present evidence that the FAA applied. (Woolls, 127 Cal. App. 4th at 213.) In other words, Woolls did not hold that the FAA does or does not preempt section 7191—only that the FAA did not apply in that case to begin with because the moving party had not made a sufficient evidentiary showing.

However, the Court of Appeal has held a substantially similar code section was preempted. The former CCP section 1298, like Bus. & Prof. Code section 7191, required an arbitration agreement have certain size and bolded font specifications, a specific reference to “ARBITRATION OF DISPUTES,” and a warning that certain rights attendant to judicial proceeding are being lost by initialing the agreement to arbitrate. (Hedges v. Carrigan (2004) 117 Cal. App. 4th 578, 583.) The Hedges court held that section “directly conflict[ed]” with the FAA because it was “a state law applicable only to arbitration agreements” that purported to allow an action to remain in court despite a party having signed an agreement to arbitrate. (Id.)

Similarly, in Doctor's Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 683, the United States Supreme Court held the FAA preempted a Montana statute declaring an arbitration clause unenforceable unless notice that the contract is subject to arbitration was typed on the first page of the contract in underlined capital letters. 

Here, section 7191 is a state law applicable only to arbitration agreements. It requires that an arbitration provision in a contract for “work on residential property with four or fewer units” be titled “ARBITRATION OF DISPUTES,” be in a particular font, and include an all-caps form warning that the signing party is giving up the right to proceed in court. (CCP 7191(a),(b).) It further states that an arbitration provision that fails to comply “may not be enforceable against any person other than the licensee.” (§ 7191(c).) 

Applying these authorities, there is little doubt that section 7191 “directly conflicts with § 2 of the FAA” because it conditions the enforceability of construction arbitration agreements on compliance with formatting and notice requirements that are “not applicable to contracts generally.” (Doctor's Associates, Inc., supra, 517 U.S. at 683.) It is therefore preempted by the FAA. 

Is it noted that Plaintiff’s only argument in opposition to preemption is that Defendant cannot meet its burden to establish that the FAA applies. As already discussed, the court rejects this argument. By failing to address the second issue of whether the FAA preempts section 7191, Plaintiff effectively concedes that it does. (Trinity Risk Management, LLC v. Simplified Labor Staffing Solutions, Inc. (2021) 59 Cal.App.5th 995, 1009 [“failure to offer reasoned analysis of [an] issue constitutes a waiver”].) 

Thus, this court determines section 7191 is preempted by the FAA.  For that reason, Defendant’s failure to comply with that section’s format and notice requirements is immaterial. 

D. Application of Broughton-Cruz Rule

Plaintiff next argues that the Third Cause of Action for violation of Business and Professions Code section 17500 et seq. and Fourth Cause of Action for violation of Business and Professions Code section 17200 et seq. are not arbitrable.

As relied on by Plaintiff, California has recognized the so-called Broughton-Cruz rule. The rule states that “‘[a]greements to arbitrate claims for public injunctive relief under the CLRA, the UCL, or the false advertising law are not enforceable in California.’ [Citation.] In other words, a plaintiff's claim for ‘public’ injunctive relief under the CLRA or the UCL must be determined in a judicial forum, not in arbitration.” (Clifford v. Quest Software Inc. (2019) 38 Cal.App.5th 745, 751.) “Importantly, the Broughton-Cruz rule distinguishes between public injunctive relief and private injunctive relief, and it only bars arbitration of claims for public injunctive relief. [Citations.] ‘[P]ublic injunctive relief under the UCL, the CLRA, and the false advertising law is relief that has ‘the primary purpose and effect of’ prohibiting unlawful acts that threaten future injury to the general public. [Citation.] Relief that has the primary purpose or effect of redressing or preventing injury to an individual plaintiff—or to a group of individuals similarly situated to the plaintiff—does not constitute public injunctive relief.’ [Citation.]” (Id.)

As argued by Defendant, however, several courts have concluded the FAA preempts the Broughton-Cruz restriction on arbitrability. (See, e.g., Ferguson v. Corinthian Colleges, Inc. (9th Cir. 2013) 733 F.3d 928, 930 [“we conclude that the Broughton-Cruz rule is preempted by the [FAA]”]; Nelsen v. Legacy Partners Residential, Inc. (2012) 207 Cal.App.4th 1115, 1136 [Broughton-Cruz rule “is in conflict with the FAA”]; see also AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 341 [FAA preempts any “state law [that] prohibits outright the arbitration of a particular type of claim”].) 

The California Supreme Court has not addressed the issue, and in fact, declined the opportunity to do so. (See McGill, supra, 2 Cal.5th at 953, 954, 956 [after granting review of appellate court's finding that FAA preempted Broughton-Cruz, court determined Broughton-Cruz was “not at issue in this case” and expressly declined to address the preemption issue].)

Absent further guidance from a higher court, this court cannot and does not determine that the FAA preempts the Broughton-Cruz rule. 

Plaintiff’s complaint seeks public injunctive relief based on alleged misrepresentations made by Defendant on its website. (Compl. ¶¶ 67, 68, 73, 74.) Plaintiff seeks “to permanently enjoin Defendants, together with their successors and assigns and all persons who act in concert with them or on their behalf, from engaging in any unlawful, unfair, and fraudulent business acts and practices.” (Id., Prayer 5.)

Where, as here, a “cause of action includes both arbitrable and inarbitrable claims, such as a request for restitution and a request for public injunctive relief, the trial court must sever the cause of action, order the arbitrable portion to arbitration, and stay the inarbitrable portion pending the completion of arbitration.” (Clifford v. Quest Software Inc. (2019) 38 Cal. App. 5th 745, 750.)

Accordingly, to the extent Plaintiff’s Third and Fourth causes of action seek public injunctive relief, that portion of the causes of action are severed and stayed pending completion of the arbitration. All other causes of action, including those portions of the Third and Fourth causes of action where Plaintiff seeks restitution, are ordered to arbitration. (Cruz v. PacifiCare Health Sys., Inc. (2003) 30 Cal. 4th 303, 31 [actions for restitution “are fully arbitrable under the FAA”].) 

E. Third-Party Litigation Exception Under CCP § 1281.2(c)

Finally, Plaintiff argues the court should deny arbitration under the “third-party litigation exception.” Under Code of Civil Procedure section 1281.2, subdivision (c), a trial court “may” refuse to compel arbitration on the ground that “[a] party to the arbitration agreement is also a party to a pending court action ... 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.” (Code Civ. Proc., § 1281.2, subd. (c).)

The only moving party is Defendant ERLA Construction, Inc. The other five named Defendants—Minarc, Inc., MNM Mod. Corp., Plus Hus, Inc., Erla Dogg Ingjaldsdottir, and Tryggvi Thorsteinsson—have been served but have not yet appeared in this action. Be that as it may, the entities are under the common ownership of the individual Defendants. (See Ingjaldsdottir Reply Decl. and Thorsteinsson Reply Decl.) [FN 1]  Moreover, the individual Defendants each attest that they are “authorized to act on behalf of, and to bind” the entity Defendants, and in that capacity, represent that “each consent to arbitrate the plaintiff’s claims in this matter.” (Id. 6, 10.)

“Someone who is not a party to a contractual arbitration provision generally lacks standing to enforce it.” (Cohen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal. App. 5th 840, 856.) However, there is a recognized exception “for third parties who are agents of a party to a contract.” (Id.; See Dryer v. Los Angeles Rams (1985) 40 Cal.3d 406, 418 [“If, as the complaint alleges, the individual defendants, though not signatories, were acting as agents for the [Defendant], then they are entitled to the benefit of the arbitration provisions.”]).  

Here, Plaintiff alleges the Defendants “collectively perpetrated a fraud on Plaintiff.” (Compl. ¶ 1.) Plaintiff alleges each Defendant was the “principal, agent, employee, co-conspirator, representative, or alter ego” of the other Defendants, and that each Defendant “committed such acts or omissions within the course and scope of such agency, servitude, employment, conspiracy, or alter ego relationship with the full knowledge, consent, authority and/or ratification of some or all of the other Defendants.” (Id. ¶¶ 11, 53.) 

Plaintiff alleges the entity Defendants are “controlled by” Defendant Tryggvi Thorsteinsson and Defendant Erla Dogg Ingjaldsdottir. (Id. ¶ 20.) By and large, the Plaintiff’s Complaint makes no distinction between the Defendants, and commonly refers to them together as “Defendants” (plural). Every cause of action is asserted against all Defendants jointly, and the claims are intertwined against each Defendant. Thus, Plaintiff’s agency theory permits all Defendants the benefit of the arbitration agreement.

The doctrine of equitable estoppel warrants the same result.  The doctrine holds “that a signatory plaintiff who sues on a written contract containing an arbitration clause may be estopped from denying arbitration if he sues nonsignatories as related or affiliated persons with the signatory entity.” (Rowe v. Exline (2007) 153 Cal. App. 4th 1276, 1287 citing Turtle Ridge, 140 Cal.App.4th at p. 833).  “Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable.”  (Id.)  

Accordingly, this “identity of interest” allows the nonsignatory Defendants to invoke the arbitration provision under either an equitable estoppel or agency theory. (DMS Servs., LLC v. Superior Ct. (2012) 205 Cal. App. 4th 1346, 1353.) 

Therefore, all Defendants named in this action are entitled to arbitrate the dispute, and there stands no risk of conflicting rulings. Section 1281.2 is therefore inapplicable. 

3. Conclusion

Consistent with the above discussion, this Court finds the existence of a valid arbitration agreement applicable to all parties in this action.

To the extent Plaintiff’s Third and Fourth causes of action seek public injunctive relief, that portion of the causes of action are severed and STAYED pending completion of the arbitration. 

The motion is GRANTED as to all other causes of action, including those portions of the Third and Fourth causes of action where Plaintiff seeks restitution.

Accordingly, Defendant’s Motion to Compel Arbitration is GRANTED in part and STAYED in part. The action is stayed pending the results of the arbitration.

Defendant to give notice, unless waived.  

IT IS SO ORDERED.

Dated:   June 22, 2023 ___________________________________