Judge Ronald F. Frank, Case 22TRCV00541 2023-04-04 Tentative Ruling

Judge: Ronald F. Frank, Case: 22TRCV00541, Date: 2023-04-04 Tentative Ruling

Case Number: 22TRCV00541 Hearing Date: April 4, 2023 Dept: 8

Tentative Ruling

HEARING DATE: April 4, 2023¿

CASE NUMBER: 22TRCV00541

CASE NAME: Strategic Funding Source, Inc. d/b/a Kapitus v. Marshall Horizons LLC, et al.

¿ ¿

MOVING PARTY: Plaintiff, Strategic Funding Source, Inc. d/b/a Kapitus

RESPONDING PARTY: Defendant, Strateguc Funding Source, Inc. d/b/a Kapitus

MOTION:¿ (1) Specially Appearing Defendant, Le’mar Marshall’s Motion to Compel Arbitration

Tentative Rulings: (1) Specially Appearing Defendant, Le’mar Marshall’s Motion to Compel Arbitration is DENIED.

I. BACKGROUND¿

A. Factual¿

¿¿

On July 5, 2022, Plaintiff, Strategic Funding Source, Inc. d/b/a Kapitus (“Plaintiff”) filed a verified complaint against Defendants Lemar Marshall a/k/a Le’Mar Marshall and Marshall Horizons LLC (Collectively, “Defendants”) for an alleged breach of a business loan agreement (“Agreement”) entered into by Marshall Horizons as a borrower and by Mr. Marshall as guarantor. The Complaint is verified by an officer of Plaintiff, a Vice President of Underwriting. Defendants filed a verified Affidavit of Revocation of Signature, which appears to be in answer to the Plaintiff’s verified Complaint, on August 1, 2022. Among other things, the Affidavit of Revocation of Signature contains assertions by Mr. Marshall that he was defrauded into giving his January 20, 2022 signature in Plaintiff’s loan documents.

On October 25, 2022, Marshall untimely attempted to remove this case to federal court. After the federal district judge remanded this case back to this Court, Defendant filed on October 25, 2022 “Defendants First Amended Answer to Complaint and Counterclaim” without first obtaining leave of court. Unlike the original response to Plaintiff’s Complaint in August of 2022, Defendants’ October 2022 document is not a verified pleading. In response to the October filing, Plaintiff has filed both a demurrer and motion to strike Defendant’s First Amended Answer to Complaint and Counterclaim.

On January 10, 2023, Defendants filed a counterclaim. The counterclaim alleges causes of action for: (1) Fraud; (2) Mail Fraud; (3) Racketeering & Extortion; (4) Breach of Contract; (5) Falsifying Statement; and (6) Breach of Copyright.

B. Procedural

On March 9, 2023, Specially Appearing Defendant, Lemar Marshall, filed a Motion to Compel Arbitration although the body of the motion asserts that the motion is also field on behalf of the entity defendant Marshall Horizons LLC. On March 21, 2023, Plaintiff filed an opposition. To date, no reply brief has been filed.

II. REQUEST FOR JUDICIAL NOTICE

Plaintiff has requested this Court take judicial notice of the following documents:

1. The docket report in the matter of U.S. District Court, Central District of California, Case No. 2:22-cv-06056-SVW-MRWx, entitled Strategic Funding Source, Inc. d/b/a Kapitus v. Marshall Horizons LLC, et al.. This is the case that was removed from this Court upon Marshall's filing in this case of a Notice of Removal on August 29, 2022, and which was remanded to this Court by Order of the federal district court issued October 13, 2022.

The Court grants judicial notice of the above document.

III. ANALYSIS ¿

A. Legal Standard

The Federal Arbitration Act (“FAA”) states that “[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) California law incorporates many of the basic policy objectives contained in the Federal Arbitration Act, including a presumption in favor of arbitrability. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-72.)

California law states that “[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” (Code Civ. Proc, § 1281.2.) “The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.” (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236.)

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.)

B. Discussion

Specially appearing Defendant, Le’Mar Marshal, argues that Marshall Horizons entered into a loan agreement with Strategic Funding Source, Inc. on January 20, 2022. Marshall notes that the contract, as attached to the moving papers as Exhibit 1, has an arbitration clause, which states:

AGREEMENT TO ARBITRATE

PLEASE READ THIS AGREEMENT CAREFULLY. THIS AGREEMENT TO ARBITRATE (“AGREEMENT”) PROVIDES THAT DISPUTES BETWEEN STRATEGIC FUNDING SOURCE, INC. D/B/A KAPITUS AND ITS SUBSIDIARIES AND AFFILATES, INCLUDING BUT NOT LIMITED TO KAPIUS LLC AND KAPITUS SERVICING, INC. (COLLECTIVELY, “KAPITUS”), ON ONE HAND, AND MARSHALL HORIZONS LLC., D/B/A Marshall Horizons AND Lemar Marshall, (COLLECTIVELY, “YOU” OR “MERCHANT) (EACH A “PARTY” AND TOGETHERWITH KAPITUS, “THE PARTIES”) MAY BE RESOLVED BY BINDING ARBITRATION.

ARBITRATION REPLACES THE RIGHT TO GO TO COURT, HAVE A JURY TRIAL OR INITIATE OR PARTICIPATE IN A CLASS ACTION. NOTWITHSTANDING ANY TERMS TO THE CONTRARY CONTAINED HEREIN, THE BORROWER AND GUARANTOR WAIVED, EXCEPT WHERE SUCH WAIVER IS PROHIBITED BY LAW, PURSUANT TO LOAN AGREEMENT AND NOTHING HEREIN SHALL BE DEEMED AN ADMISSION THAT A CLASS ACTION MAY BE COMMENCED AND/OR TO CREATE A RIGHT TO COMMENCE A CLASS ACTION. IN ARBITRATION, DISPUTES ARE RESOLVED BY AN ARBITRATOR, NOT A JUDGE OR JURY. ARBITRATION PROCEDURES ARE SIMPLER AND MORE LIMITED THAN IN COURT. THIS AGREEMENT IS GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE FEDERAL ARBITRATION ACT (“FAA”), AND SHALL BE INTERPRETED IN THE BROADEST WAY THAT LAW WILL ALLOW.

Based on the above, Defendant, Marshall argues that because the loan agreement contains a valid and enforceable arbitration clause, and because Marshall Horizons and Le’Mar Marshall have not waived its right to demand arbitration, the Court should grant his motion and order Strategic Funding Source to proceed to arbitration.

In opposition, Plaintiff asserts that the Arbitration Provision is permissive, not mandatory, pointing to the word “may” in the arbitration clause. Plaintiff also asserts that the Court has discretion to deny arbitration based on the waiver exception. Plaintiff argues that by offensively and defensively litigating this case over eight months, Defendants waived their purported right to arbitrate. Plaintiff argues that Defendants had knowledge of their right to arbitrate, based on the arbitration provision in the Agreement, and the Agreement to Arbitrate incorporated in the Agreement as of the day the entered into the agreement. Plaintiff further contends that Defendants had knowledge of an existing right to arbitrate at least as of the date they were served with process in this action, as the complaint attached as Exhibit 1, a copy of the Agreement, which contains the arbitration provision and Agreement to Arbitrate. As such, Plaintiff argues that Defendants delayed seeking arbitration, and sought affirmative relief by filing cross-complaints against Plaintiff, as well as improperly removing the case to federal court. Additionally, Plaintiff notes that Defendants did not seek to exercise their right to arbitration until after their three answers and two counter-claims were stricken or defeated on demurrer, and two motions to dismiss the compliant were denied, and the case was remanded following their unsuccessful attempt to remove the case to federal court. Lastly, Plaintiff argues that the Motion is improperly filed on behalf of Marshall Horizons, a legally unrepresented Limited Liability Company against whom default has been entered.

The Court agrees with the opposition here. A party waives the right to compel arbitration where, as here, it delays in seeking to alter the forum for the dispute, and especially where that delay includes affirmative actions inconsistent with arbitrating rather than litigating, and includes the filing of pleadings that could have been raised before an arbitrator had the case been ordered into arbitration previously. Section 2 of the FAA provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract....” (9 U.S.C. § 2.) However, like any contract right, the right to arbitrate may be waived—either expressly or by implication. (St. Mary's Medical Center, Inc. v. Disco Aluminum Products Co. (7th Cir. 1992) 969 F.2d 585, 587; Davis v. Shiekh Shoes, LLC (2022) 84 Cal.App.5th 956, 964.)

In Davis, the First District utilized the multi-factor arbitration waiver standards adapted by the California Supreme Court in St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1196 from the Tenth Circuit opinion in Peterson v. Shearson/American Express, Inc. (10th Cir. 1988) 849 F.2d 464. The Peterson waiver test evaluates the following factors in assessing arbitration waiver claims: “(1) whether the party's actions are inconsistent with the right to arbitrate; (2) whether ‘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) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) ‘whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place’; and (6) whether the delay ‘affected, misled, or prejudiced’ the opposing party.” (Peterson, supra, at pp. 467-48.) All of the first 5 factors weigh in favor of finding waiver here. The 6^th factor and specifically consideration of prejudice to the party opposing arbitration appears to have been rejected by the United States Supreme Court, in its decision less than a year ago in Morgan v. Sundance, Inc. (2022) 212 L.Ed.2d 753, 142 S.Ct. 1708, 1713.

Plaintiff’s factual showing presented by review of the court file and as presented in the Declaration by plaintiff’s counsel in opposition to this motion lead the Court to conclude that Defendants waived their right to arbitrate this dispute. While the Court acknowledges the strong federal policy in favor of enforcing arbitration agreements, the Court must also acknowledge that even favored contractual rights can be waived. Here, Mr. Marshall took actions inconsistent with the right to arbitrate, including his filing an affidavit revoking his signature on the alleged contract documents, filing a motion to dismiss that did not raise the arbitration agreement, and filing a Notice of Removal to change the forum from state court to federal court rather than an arbitration forum. Then, after remand from the federal court, Mr. Marshall filed an amended answer and counterclaim seeking affirmative relief in the court system and seeking a jury trial, but failing to raise the affirmative defense of diversion to an arbitration forum. The “litigation machinery” has been well under way with a series of Plaintiff’s demurrers to the cross-complaint, a second motion to dismiss filed by Mr. Marshall, and a case management conference (as to which Defendant failed to submit a Case Management Statement indicating intent to pursue arbitration), all before the March 9, 2023 motion to compel arbitration was ultimately filed some 9 months after Defendants were served with the Summons and Complaint. On this record, the Court finds as a factual determination that Mr. Marshall waived the right to arbitrate. As to the entity defendant Marshall Horizons, a default has been entered against it that has not been cured, so it has not validly made a motion to compel arbitration nor otherwise filed a responsive pleading in this case.

Accordingly, Defendants’ Motion to Compel Arbitration and for a stay is DENIED. Notice to be given by Plaintiff.

Mr. Marshall, the Court reiterates its encouragement to you to get a lawyer to represent your LLC, as that entity is currently in default and, like a corporation, an LLC cannot defend itself in a court case under California law without having a lawyer to represent it.