Judge Ronald F. Frank, Case 20STCV28027 2023-05-08 Tentative Ruling

Judge: Ronald F. Frank, Case: 20STCV28027, Date: 2023-05-08 Tentative Ruling

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

Tentative Ruling

HEARING DATE: May 8, 2023

CASE NUMBER: 20STCV28027

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

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) Motion to Compel Arbitration is DENIED, without prejudice. Nothing in the supplemental briefing has changed the Court’s views expressed in the February 8, 2023 Tentative Ruling.

Discussion

Defendants’ Supplemental Brief

Defendants asserts that the repurchase and sale of Wu’s 30 shares in Bergamon in exchange for payment of $109,849.50 was memorialized by the Stock Repurchase Agreement. (Motion, p. 8:18-20.) Defendants note that The Stock Repurchase Agreement was dated August 28, 2019. (Id.) Defendant contends that in exchange for the return of Wu’s 30 shares, Bergamon’s other shareholders (Gordon Hsu, Peter Liew and Kevin Jiang) each issued a check to Wu in the amount of $36,616.50. Defendant claims that the checks were each dated June 28, 2019. However, Defendants contend that each of the purchasing shareholders physically signed their checks and handed them to Wu on or shortly after September 2, 2019. Defendants claim that Wu thereafter cashed each of those checks on September 9, 2019. (Supplemental Declaration of Peter Liew (“Liew Supp. Decl.”), ¶¶ 3, 5, Ex. 2; Declaration of Gordon Hsu (“Hsu Decl.”), ¶¶ 3, 5, Ex. 1; Declaration of Kevin Jiang (“Jiang Decl.”), ¶¶ 3, 5, Ex. 1.)

Defendants assert that to the best of the re-purchasing shareholders’ recollections, Wu instructed them to date the checks as issued on June 28, 2019. They further claim that Wu instructed them to use that date so that the accounting of the transaction would be easier to manage with a mid-year transaction date. (Liew Supp. Decl., ¶ 4; Hsu Decl., ¶ 4; Jiang Decl., ¶ 4.) Defendants claim that Wu has never demanded that Defendants mediate his cross-claims against them. (Liew Supp. Decl., ¶ 6; Hsu Decl., ¶ 6; Jiang Decl., ¶ 6.)

Defendants assert that none of the parties to the Stock Purchase Agreement argued in any of their pleadings that either party failed to mediate Wu’s cross-claims. However, Defendants note that if a waiver of mediation or a failure to satisfy mediation as a condition precedent to arbitration were raised by Wu as a defense to arbitration and the Motion, those issues would be procedural questions for the arbitrator, not the Court, to decide. (citing Omar, 118 Cal.App.4th at 960, 964-65; Howsam, 537 U.S. at 84.) Defendants argue that the same is true of Defendants’ assertion that Wu may not avoid arbitration by delaying or failing to make a request for arbitration or mediation. (Thorup, 180 Cal.App.3d at 234-35 (laches is an arbitrable issue for the arbitrator, not the court, to decide).) Moreover, Defendants contend that from a practical standpoint, allowing a party to an arbitration agreement such as Wu to avoid arbitration by failing to demand mediation before filing his cross-complaint, would destroy California’s strong public policy in favor of enforcing arbitration agreements and resolving disputes of arbitrability in favor of arbitration. (Thorup, 180 Cal.App.3d at 234.) Defendants argue that the policy is aligned with the Supreme Court’s consistent guidance that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” (Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24-25.)

Plaintiff’s Supplemental Brief

In opposition, Plaintiff claims that Defendants cannot carry their burden of proving an applicable arbitration agreement. Plaintiff argues that Code of Civil Procedure section 1281.2 requires an affirmative showing, by the party moving to compel arbitration, that there exists a written agreement to arbitrate disputes, and there is no dispute between the parties to arbitrate the claims of fraud. Here, Plaintiff claims that the Agreement was only executed after the sale of the shares were consummated. Plaintiff also argues that the claimed fraud took place before the sale, and thus, at the time of the perpetration of the conduct complained of in the Cross-Complaint, there was no written agreement to arbitrate anything.

Plaintiff argues that Section 4.3 builds on Sections 4.1 and 4.2, providing for attorneys’ fees to the prevailing party in connection with a civil matter or arbitration “in connection with a dispute or matter arising under this Agreement.” However, Plaintiff contends that the Cross-Complaint arises out of fraudulent conduct and actions which took place prior to the Agreement, and it necessarily does not and cannot then arise under the Agreement. Additionally, Plaintiff argues that arbitration is premature because it is conceded by all parties that no mediation has yet taken place. Plaintiff also argues that given the language of the Agreement, regardless of the Court’s interpretation as to whether the Cross-Complaint is subject to arbitration generally, any arbitration would be premature unless and until the parties mediate the dispute.

A question presented to the Court is whether or not allegations of fraudulent inducement to repurchase the shares of stock is bound by the mediation and arbitration clause found in the Stock Repurchase Agreement. As the Court reads it, provision 4.1, the mediation provision, states that any disputes regarding enforcement of the provision in this Agreement shall be submitted to mediation as a first step of ADR. Provision 4.2 requires all claims, disputes, or controversies which the parties are unable to resolve through mediation shall proceed to arbitration as a second step of ADR. Assuming that these ADR provisions do apply to a fraudulent inducement claim, the Court cannot compel the second step of the ADR provisions because the condition precedent first step, mediation, has yet to take place. Based on the language of the agreement, the Court finds that a Motion to Compel Arbitration is premature unless the parties have first gone to mediation and failed in mediation to resolve their issues. The intention of the parties as determined by the Court from the Agreement is that ADR is a two-step process where the parties are required first to mediate and then be unable to resolve their dispute in mediation before any duty or right to arbitrate ever arises. Such two-step processes for ADR are fairly common and reflect contracting parties’ intention to avoid both litigation and arbitration if the dispute can be mediated. The Court tentatively so ruled 3 months ago and still the Court has no evidence that mediation has been attempted or taken place. Thus, the Motion to Compel Arbitration is DENIED.

IV. CONCLUSION

1. The Motion to Compel arbitration is denied, without prejudice to it being renewed after the parties to the Stock Repurchase Agreement 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; and

2. The Court, not an arbitrator, will determine whether the right to compel arbitration was waived, but not until after mediation is conducted and proven to be unsuccessful.