Judge Ronald F. Frank, Case 20STCV28027 2023-02-08 Tentative Ruling

Judge: Ronald F. Frank, Case: 20STCV28027, Date: 2023-02-08 Tentative Ruling

Case Number: 20STCV28027 Hearing Date: February 8, 2023 Dept: 8

Tentative Ruling

HEARING DATE: February 8, 2023

CASE NUMBER: 20TRCV00508

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

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

RESPONDING PARTY: Cross-Defendant/Cross-Complainant, Len Hong Wu

TRIAL DATE: October 31, 2023

MOTION: (1) Motion to Compel Arbitration

Tentative Ruling: (1) DENIED, without prejudice

I. BACKGROUND

The Court has seen considerable law and motion activity in these related cases, including extensive briefing and evidence bearing on a motion to disqualify Mr. Menke and his firm as trial counsel, Mr. Wu’s motion for leave to file a Cross-Complaint arising out of his sale of shares in Bergamon, pending discovery motions, and the joint motion of Bergamon, Liew, Hsu and Jiang to compel arbitration of Wu’s cross-complaint based on the arbitration clause in the Stock Repurchase Agreement (“SRA”). The Court permitted additional briefing by the parties and additional evidence on the arbitration motion because the Court’s tentative ruling raised an issue neither side had briefed, i.e., the effect of the mediation pre-requisite to arbitration in the ADR provisions of the SRA.

Mr. Wu’s supplemental opposition argues that his fraud claim concerns alleged misconduct that preceded the execution of the SRA, that the checks Cross-Defendants paid for his shares of Bergamon stock were dated months before the SRA was signed (per exhibits showing only the fronts of the three purchase checks), and that his Cross-Complaint concerns matters outside the four corners of the arbitration agreement so he need not arbitrate those claims. But Mr. Wu’s Declaration only addresses the dates of the checks, not when they were tendered to him nor when he cashed them. Cross-Defendants’ declarations of Messrs. Liew, Jiang and Hsu attest to the dates of tender of the checks, the September 9, 2019 cashing of those checks over a week after the SRA was signed, and state that Mr. Wu himself asked Cross-Defendants to back-date the checks for accounting purposes. (Supplemental Declaration of Peter Liew (“Liew Supp. Decl.”), ¶¶ 3, 4, 5, Ex. 2; Declaration of Gordon Hsu (“Hsu Decl.”), ¶¶ 3, 4, 5, Ex. 1; Declaration of Kevin Jiang (“Jiang Decl.”), ¶¶ 3, 4, 5, Ex. 1.) Messrs. Liew, Hsu and Jiang also assert that at no time did Mr. Wu seek to mediate the claims he now asserts in his Cross-Complaint. Although he does not address the issue, the Court surmises from previous briefing and argument that Mr. Wu would assert that he did not seek to mediate his fraud claim because he did not believe it concerned a “dispute between the parties as to the rights and obligations or regarding enforcement of the provisions of” the SRA. (SRA ¶ 4.1, “Mediation”.)

II. ANALYSIS

Pursuant to Code of Civil Procedure §1281.2, on a petition to compel arbitration, the court generally 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. The state statute thus contains a specific provision regarding the obligation of the Court to determine whether the right to compel arbitration has been waived.

The right to compel arbitration arises from the parties' contract, which here is the SRA. As with other contractual rights, the right to compel compliance with an arbitration agreement is subject to waiver. Such waiver may be express or implied from the parties' conduct. (See CCP § 1281.2; Davis v. Blue Cross of Northern Calif. (1979) 25 C3d 418, 425.) In determining a waiver, the court can consider whether: (1) the party's actions are inconsistent with the right to arbitrate; (2) “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) a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) “important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place”; and (6) the delay “affected, misled, or prejudiced” the opposing party. (Saint Agnes Med. Ctr. v. PacifiCare of Calif. (2003) 31 C4th 1187, 1196 (internal quotes omitted).) The Court has considered each of these factors as bearing on the pending motion.

Moving parties have cited to several authorities including a number of SCOTUS cases indicating that the arbitrator, rather than the judge, should determine the issue of waiver of the right to compel arbitration and that the arbitrator should decide on pre-conditions of the right to arbitrate such as whether mediation was sought or completed first. But the SRA states that the governing law for its terms shall be California law, not federal law. The Howsam v. Dean Witter Reynolds, Inc. decision (which concerned a National Association of Securities Dealers arbitration agreement and the 6-year statute of limitations in the NASD rules that NASD arbitrators are better able to interpret) and other federal cases cited by the moving parties are applying the Federal Arbitration Act, not the California Arbitration Act. In Howsam, the SCOTUS resolved a split between federal circuits “about whether a court or an arbitrator primarily should interpret and apply this particular NASD rule.” (Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 82.) In so doing, the Howsam court reaffirmed some general principles applicable to both federal and state arbitration statutes generally, i.e., that a court rather than an arbitrator should decide whether the arbitration contract bound parties who did not sign the agreement, and whether an arbitration clause in a concededly binding contract applies to a particular type of controversy, and other questions of arbitrability. It is true that Howsam also cited to the comments to the Uniform Laws Annotated that in the absence of an agreement tot eh contrary, prerequisites such as conditions precedent tot eh right to arbitrate are for arbitrators to decide. But that was not the issue Howsam was asked to or did decide.

Shortly after Howsam was decided, a federal court was directly confronted with the issue presented here, i.e., does the arbitrator or the court decide if a mediation precondition to the right to arbitrate has been satisfied. The First Circuit held that if the parties have agreed to mediate before commencing arbitration, the district judge may require that the mediation step be complied with as a condition precedent to compelling arbitration. (HIM Portland, LLC v. DeVito Builders, Inc. (1st Cir. 2003) 317 F3d 41, 43.) District courts in California have followed HIM. See, e.g., Mostowfi v. I2 Telecom International, Inc. (N.D. Cal., May 27, 2004, No. C 03-5784 VRW) 2004 WL 7338797, at *6; see also Bellingham Marine Industries, Inc. v. Del Rey Fuel, LLC (C.D. Cal., Oct. 19, 2012, No. CV1205164MMMMANX) 2012 WL 12941958, at *10 (dismissed complaint without prejudice to the filing of a new action once the parties have mediated their dispute).

Under California law, questions of waiver and estoppel are determined by the court, not the arbitrator. (See CCP § 1281.2(a)—“the court shall [compel arbitration] … unless it determines … [t]he right to compel arbitration has been waived …” (emphasis added); see Engalla v. Permanente Med. Group, Inc. (1997) 15 C4th 951, 982; Hong v. CJ CGV America Holdings, Inc. (2013) 222 CA4th 240, 243.) Waiver of the right to compel arbitration, or estoppel to seek arbitration, are thus for this Court, not the arbitrator, to decide.

In support of their argument that the arbitrator, not the court, should determine issues such as contractual waiver of the right to arbitrate, Moving Parties cited in oral argument and in their supplemental brief the California state court case of Omar v. Ralphs Grocery Co. (2004) 118 Cal.App.4th 955, 964. Omar concluded that the issue of waiver of the right to arbitrate must be decided by the arbitrator in that case because the waiver allegations involved for aspects of non-litigation conduct, one of which was the failure to engage in mediation before seeking arbitration. But in Omar, (a) the mediation provision was permissive, not mandatory, (b) the Second District recognized that the Federal Arbitration Act rather than the California Arbitration Act applied, and (c) the Omar court would have required the trial judge rather than the arbitrator to have decided the waiver issues if the federal statute did not apply. Moving parties also cited to Hong, supra, a case in which the Second District affirmed the trial court’s denial of a shareholder’s motion to compel arbitration because the judge, rather than the arbitrator, was required to decide whether the right to compel arbitration was waived by litigation conduct.

The SRA here in Paragraph 1.1(a) references the purchase price paid by Messrs. Liew, Jiang and Hsu to Mr. Wu. Mr. Wu disputes whether he was misled into selling for the correct purchase price. Is a dispute over the correct purchase price one that concerns a “dispute between the parties as to the rights and obligations or regarding enforcement of the provisions of” the SRA? If so, should not Messrs. Hsu, Jiang, and Liew demand that Mr. Wu mediate the issues raised by his Cross-Complaint before this Court can compel Mr. Wu to arbitrate those issues? Should not Mr. Wu be required to mediate those issues before he can litigate (or arbitrate) them? The Court believes the answer is “Yes” to all of those questions. The Court thus rules as follows:

1. The Motion to Compel arbitration is denied, without prejudice to it being renewed after the parties have first exhausted their contractual responsibility to mediate before they arbitrate disputes over their rights and obligations regarding the purchase price of the shares of stock Messrs. Hsu, Jiang, and Liew bought and Mr. Wu sold under the SRA;

2. The Court, not an arbitrator, will determine whether the right to compel arbitration was waived, but not until after mediation is at least attempted by the moving parties; and

3. The Wu Cross-Complaint is stayed pending the completion of mediation and, potentially, arbitration.