Judge Ronald F. Frank, Case 20STCV28027 2023-01-19 Tentative Ruling

Judge: Ronald F. Frank, Case: 20STCV28027, Date: 2023-01-19 Tentative Ruling

Case Number: 20STCV28027 Hearing Date: January 19, 2023 Dept: 8

Tentative Ruling

HEARING DATE: January 19, 2023

CASE NUMBER: 20TRCV00508, related to 20STCV29027

CASE NAME: Bergamon, Inc. v. Ridgerock Tools, Inc., et al;

Ridgerock Tools, Inc. vs Bergamon, Inc., et al.

MOVING PARTY: Bergamon, Inc., Peter Liew, Kevin Jiang, and Grey Acres, LLC

RESPONDING PARTY: Cross-Complainant, Len Hong Wu

TRIAL DATE: October 31, 2023

MOTION: (1) Motion to Compel Arbitration and

(2) Request to Stay of the Litigation Pending Completion of the Arbitration of Wu’s Cross-Complaint

Tentative Ruling: (1) Motion to Compel Arbitration is DENIED, without prejudice. The Court has no evidence that the mediation pre-condition to arbitration per the Stock Repurchase Agreement has been satisfied, and there are ambiguities and conflicting language in the Dispute Resolution provisions as to which the moving party has not met its burden of proof

(2) Request for Stay was Withdrawn by the Moving Party in the Reply brief

I. BACKGROUND

A. Factual

On July 23, 2020, Plaintiff Bergamon, Inc. (“Plaintiff”) filed the instant action against Defendants Ridgerock Tools, Inc., Niann-Tsyr Shuai, Len Hong Wu, and Does 1 through 10. Plaintiff’s causes of action include: (1) Invasion of Interest in Real Property; (2) Conversion; (3) Trespass to Chattel; (4) Promissory Fraud; (5) Breach of Written Contract; (6) Breach of Oral Contract; (7) Promissory Estoppel; (8) Interference with Contractual Relations; (9) Interference with Prospective Economic Relations; (10) Unfair Competition; and (11) Conspiracy to Commit Extortion.

On November 23, 2022, Wu filed a cross-complaint that is arguably based on a stock repurchase agreement, even though in his opposition to this motion he asserts that the stock was sold before and separate from the stock repurchase agreement. The gravamen of the Cross-Complaint is rescission and restitution based on fraud in the inducement of the repurchase of the stock. Wu alleged that though Liew’s representations, he was under the impression that Bergamon was a “sinking ship,” and thus if would be best if Wu recovered his initial investment by selling his Bergamon stock back. (Cross-Complaint (“CC”), ¶ 22.) Thus, on June 28, 2019, Wu sold his 30 shares to each of the other shareholders, Liew, Jiang, and Hsu for the total sum of $109,849.50, i.e., what he had paid for the shares years earlier. (CC, ¶ 23.) However, Wu claims that when Ridgerock and Bergamon filed lawsuits against one another, Wu received financial statements from Bergamon’s accounts for 2019 and 2020. (CC, ¶ 26.) In the course of reviewing those financials, Wu learned that Liew’s purported statements to him in June 2019 concerning the financials of Bergamon were false. (CC, ¶ 27.) Wu asserts that Bergamon was not actually “in the red” as Liew had represented, but in the black. (CC, ¶ 27.) Wu contends that once he learned that Bergamon was not losing money and actually was profitable, he realized that Liew had misrepresented the financial state of the company. (CC, ¶ 28.) Wu asserts that had those representations not been made, Wu would have sought to sell his shares at a much higher amount, commensurate with the sale and profitability of Bergamon in 2019 and forecast into the future. (CC, ¶ 28.) Mr. Liew and the other cross-defendants dispute and deny that there were any misrepresentations; they seem to be contending that Bergamon had stronger financial performance in the second half of the year than the first half in which Lu’s stock was tranferred.

Wu’s Cross Complaint alleges causes of action for: (1) Intentional Misrepresentation; (2) Negligent Misrepresentation; (3) Unjust Enrichment; (4) Breach of Fiduciary duty; and (5) Rescission.

B. Procedural

On December 12, 2022, shortly after the Court granted the motion for leave to file the Cross-Complaint, Cross-Defendants Bergamon, Inc., Peter Liew, Kevin Jiang, and Grey Acres, LLC filed this motion to compel arbitration. On January 5, 2023, Cross-Complainant Len Hong Wu filed an opposition, and Ridgerock Tools and Mr. Shuai filed a partial opposition addressing the request for a stay of the entire litigation. On January 11, 2023, Mr. Wu filed a reply brief.

II. ANALYSIS

A. Legal Standard

Pursuant to Code of Civil Procedure §1281.2, generally, on a petition to compel arbitration, the court must grant the petition unless it finds either (1) no written agreement to arbitrate exists; (2)¿the right to compel arbitration has been waived; (3) grounds exist for revocation of the agreement; or (4) litigation is pending that may render the arbitration unnecessary or create conflicting¿rulings on common issues.

When seeking to compel arbitration, the initial burden lies with the moving party to demonstrate the existence of a valid arbitration agreement by preponderance of evidence. (Ruiz v. Moss Bros. Auto Group (2014) 232 Cal.App.4th 836, 841-42; Gamboa v. Northeast Community Clinic (2021), 72 Cal.App.5th 158, 164-65.) It is sufficient for the moving party to produce a copy of the arbitration agreement or set forth the agreement’s provisions. (Gamboa, 72 Cal.App.5th at 165.) The burden then shifts to the opposing party to prove by a preponderance of evidence any defense to enforcement of the contract or the arbitration clause. (Ruiz, 232 Cal.App.4th at 842; Gamboa, 72 Cal.App.5th at 165.) Subsequently, the moving party must establish with the preponderance of admissible evidence a valid arbitration agreement between the parties. (Ibid.) The trial court then weighs all the evidence submitted and uses its discretion to make a final determination. (Ibid.) “California law, ‘like [federal law], reflects a strong policy favoring arbitration agreements and requires close judicial scrutiny of waiver claims.’” (Wagner Const. Co. v. Pacific Mechanical Corp. (2007) 41 Cal.4th 19, 31.)

If the court orders arbitration, then the court shall stay the action until arbitration is completed. (See Code Civ. Proc., § 1281.4.) But the stay provisions are subject to exceptions and limitations especially where, as here, there is a lack of complete correlation between the parties to non-arbitrable claims and the parties to the allegedly arbitrable claims. Even if the Court were inclined to order arbitration of Wu’s cross-complaint, it would not be inclined to stay the entire action or the other causes of action in the related cases. Ridgerock seems to concur that the entire action should not be stayed even if the Wu Cross-Complaint were ordered into arbitration. In its Reply brief, Bergamon, Liew, and Jiang withdrew their request in the motion to stay the entire action while Mr. Wu’s Cross-Complaint is arbitrated.

B. Discussion

Existence of Valid Arbitration Agreement

The parties concede that Wu sold his shares but apparently now dispute whether that sale or “transfer” was or was not pursuant to a written agreement. Defendants assert that Wu’s sale of 30 shares of Bergamon was effectuated by way of a Stock Repurchase and Shareholder Withdrawal Agreement (“Stock Repurchase Agreement”). (Declaration of Peter Liew (“Liew Decl.”), ¶ 2, Exhibit 1.) Mr. Wu’s lawyers assert their brief that the shares were transferred before the Stock Repurchase Agreement, but there is not declaration or other evidence to support that assertion. The Stock Repurchase Agreement includes the following mediation and arbitration provisions in Article 4 entitled “Dispute Resolution”:

4.1. Mediation. Any dispute between the parties as to the rights and obligations or regarding enforcement of the provisions of this Agreement shall be submitted first to mediation. The cost of mediation shall be borne equally by all parties to the mediation. Each party shall bear its own attorney’s fees incurred in connection with the preparation for or attendance at the mediation.

4.2. Arbitration. All claims, disputes or controversies which the parties are unable to resolve through mediation shall proceed to arbitration upon written request by any party. The arbitration shall be conducted in accordance with the American Arbitration Association and its commercial rules, as then in effect, except that the parties shall have the right to conduct all discovery available to parties in a civil action as provided in the California Code of Civil Procedure. . . . The arbitrator’s decision shall be final and binding, subject to confirmation of a court of competent jurisdiction, pursuant to California Code of Civil Procedure §§ 1285 et seq., or any successor statute as then in effect.

(Liew Decl., Exhibit 1, p. 5.)

The issue presented here is whether any or all of Wu’s causes of action in his Cross-Complaint are subject to the arbitration provision contained in the Stock Repurchase Agreement. Defendants assert all of Wu’s cross-claims are based on his allegation that he was misled into selling his shares (via the Stock Repurchase Agreement) for less than those shares supposedly were worth. Defendants also assert that none of the exceptions in Code of Civil Procedure section 1281.2 apply.

In opposition, Wu claims that his Cross-Complaint is not arbitrable based on the Mediation provision language in ¶4.1. That arbitration clause applies to “Any disputes between the parties as to the rights and obligations or regarding the enforcement of the provisions of [The Stock Repurchase Agreement]…”. Wu claims that his Cross-Complaint does not put forth any dispute between the parties as to whether or not the terms of the Stock Repurchase Agreement were breached. Mr. Wu argues that the crux of his causes of action is in regard to the negotiations that preceded the Stock Repurchase Agreement, that is, the alleged misrepresentations by certain Defendants that caused Wu to decide to sell his shares. Yet he seeks rescission of the “transaction” (CC, ¶ 90), without mentioning that the transaction was memorialized in the Stock Repurchase Agreement that contains the arbitration clause. Wu asserts that as the “master of his pleading,” he intentionally and deliberately pleaded only tort theories rather than contract theories, implicitly to avoid the potential application of the arbitration provision in the document that memorialized the “transaction.” But there is no evidence, only argument, that sale or transfer of Bergamon shares occurred independently of the Stock Repurchase Agreement, and the Declaration of Mr. Liew states that it did not. Mr. Wu did not submit a declaration stating how the transfer of shares occurred before or separate from the contract that the transferees and he all signed.

Wu also argues that even if his cross-complaint was subject to arbitration, it falls under the exception of Code of Civil Procedure section 1281.2(c). Under Code of Civil Procedure section 1281.2(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…” Wu asserts that he is already a party to a related action which arises out of the same transactions and occurrences, the same individuals, and the same companies. As such, he claims that compelling an arbitration of his cross-complaint, which essentially arises from the same issues, with the same parties, and then staying the instant litigation, would, without question, create a possibility of conflicting rulings on a common issue of law and/or fact. But Wu does not explain what issues might be decided on his Cross-Complaint that would raise the possibility of conflicting rulings. The main action and the related action do not allege fraud in the inducement of the stock repurchase “transaction.” Many of the parties to the main action and the related action are not parties to Wu’s Cross-Complaint, and they would thus not be bound by any finding for or against Mr. Wu on this Cros-Complaint. Defendants’ Reply makes these points as well.

The Mediation Pre-Condition.

None of the parties mention the express pre-condition to the application of the arbitration clause, which is that a pre-arbitration mediation must precede any arbitration. The Court has no evidence before it of any mediation of the issues raised by the Cross-Complaint. The Declaration of Mr. Liew supporting the motion makes no mention of the mediation pre-condition having been satisfied. If there has been no mediation, that shortcoming would be grounds alone for denying the motion.

Conflicting Language in the Mediation and Arbitration Provisions

None of the parties mention that there is conflicting language in the Mediation provision versus the arbitration provision versus the Attorneys Fees provision in Article 4’s Dispute Resolution paragraphs of the Stock Repurchase Agreement. Paragraph 4.1 discusses “any dispute” between the parties while Paragraph 4.2 requires arbitration of “All claims, disputes or controversies.” Paragraph 4.3’s attorney’s fees provision discusses “a dispute or matter.” Are all of these intended to mean the same thing? Are they intended to apply to a controversy over fraud in the inducement of the stock repurchase? The Scope of Paragraph 4.1’s mediation provision is “rights and obligations or regarding enforcement of the provisions of this Agreement; Paragraph 4.2 has no scope language other than whatever “the parties are unable to resolve through mediation.” Paragraph 4.3’s attorney’s fees provision scope is “arising under this Agreement, or to specifically enforce any of its provisions.” These three paragraphs have conflicting provisions; conceivably there could be a claim or controversy that is not arbitrable because it was not a “dispute” subject to mediation. Conceivably there could be an arbitration as to which a prevailing party might not recover attorney’s fees because it was an arbitrable “dispute” that was not arising under the Agreement nor was it to specifically enforce the Stock Repurchase Agreement. Assuming the mediation pre-condition has been (or in the future will be) satisfied, a party seeking to enforce the arbitration provision will need to address this conflicting language.

Further, there appears to be some ambiguity in the scope of the mediation provision, i.e., “the rights and obligations or regarding enforcement of the provisions of this Agreement.” Does the Court interpret the initial clause “rights and obligations” to mean “of the parties” or something else? Do those rights and obligations necessarily tie into one arising under the Agreement, or only as to “enforcement of the provisions of this Agreement,” or was it the intent of the parties to arbitrate any of their rights and obligations even independent of the Agreement? There has been substantial litigation of arbitration provisions in state and federal courts in the last decade, but none of the wisdom from that body of published decisions has been brought to bear on this ambiguous language. Because the moving party bears the burden of proving an applicable arbitration agreement, and in the absence of evidence or argument as to how to resolve the ambiguous language or conflicts in the Dispute Resolution paragraphs, the Court finds the moving party has failed to meet its burden of proof on this motion.

IV. CONCLUSION

The Motion to Compel arbitration is denied, without prejudice to a future motion once the moving party can provide proof that the mediation pre-condition has been satisfied.