Judge: Ronald F. Frank, Case: 23TRCV00590, Date: 2023-05-25 Tentative Ruling

Case Number: 23TRCV00590    Hearing Date: May 25, 2023    Dept: 8

Tentative Ruling

HEARING DATE:                 May 25, 2023 

CASE NUMBER:                  23TRCV00590

CASE NAME:                        Gosmart, Inc. d/b/a Design Support v. Tomaro Custom Homes, Inc., et al. 

MOVING PARTY:                Defendant, Tomaro Custom Homes, Inc.

RESPONDING PARTY:       (1) Co-Defendant, Joe Tedeschi and Knickerbocker & Associates

                                                (2) Plaintiff, GoSmart, Inc. dba Design Support

TRIAL DATE:                        Not Set.

MOTION:                               (1) Motion to Compel Arbitration

Tentative Ruling:                    (1) Motion to Compel Arbitration is DENIED.

I. BACKGROUND 

 ¿ 

A.    Factual

On February 28, 2023, Plaintiff GoSmart, Inc. dba Design Support (“Plaintiff”) filed the instant action against Defendants Tomaro Custom Homes Inc. (“Tomaro”), Joe Tedeschi (“Tedeschi”), Knickerbocker & Associates (“Knickerbocker”), and DOES 1 through 200. Plaintiff’s causes of action include: (1) Breach of Written Contract; (2) Breach of Oral Contract; (3) Quantum Meruit; (4) Unjust Enrichment; (5) Intentional Interference with Contract; and (6) Prompt Payment Act Penalties.

Defendant Tomaro now brings the instant Motion to Compel Arbitration

B.     Procedural

On April 17, 2023, Defendant Tomaro filed this Motion to Compel Arbitration. On May 12, 2023, Co-Defendants, Tedeschi and Knickerbocker filed an opposition. On May 12, 2023, Plaintiff also filed an opposition. On May 17, 2023, Defendant Tomaro 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.)  

Pursuant to CCP § 1281.2(c), “If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a third party ..., the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action or special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.”  Trial courts do not abuse their discretion in denying arbitration when there is a possibility of conflicting rulings if the claims against one set of parties were arbitrated and the claims against the remaining parties were adjudicated in court.  (Valencia v. Smyth (2010) 185 Cal.App.4th 153, 161.) 

If the court orders arbitration, then the court shall stay the court action until arbitration is completed.  (See Code Civ. Proc., § 1281.4.) 

B. Discussion

            Here, Defendant Tomaro notes that on May 26, 2019, Tomaro and Tedeschi entered into a Building Construction Agreement (the “Owner Contract”) relating to the construction of a home in Manhattan Beach. (Tomaro Decl., ¶ 3, Ex. A.) The Owner Contract requires Tedeschi to pay all valid bills to subcontractors. (Id., ¶ 4, Ex. A at § 7 [payments to subcontractors].) Defendant Tomaro also notes that the Owner Contract requires the parties to that contract to mediate and arbitrate all disputes arising thereunder (id., ¶¶ 5-6, Ex. A at § 20 [mediation and arbitration]), but as Plaintiff points out in its Opposition the subcontractor (Plaintiff) is not a party to that agreement.  The Owner Contract provision states, in pertinent part: “If the parties are unable to resolve their differences through mediation, then the disputes shall be arbitrated, using an arbitrator mutually selected from ARCS, JAMS or other similar organization.” (Ibid. [emphasis added].)  While Tomaro originally moved to compel arbitration as to Plaintiff as well as the owner Tedeschi, and attached both contracts with their arbitration provisions to the Tomaro declaration in support of the motion, Tomaro has since backed away from that position (Reply at p. 5, lines 14-15), perhaps spurred by the homeowner’s opposition to moving this payment dispute out of court system.  Tomaro’s motion asserted that “a dispute exists between Tedeschi and Tomaro as to which party would owe DS payment, assuming any payment is owed,” (Motion at p. 4, lines 19-20; see Motion at p. 6, lines 22-24), but Tedeschi’s Opposition to the motion disagrees that there is any dispute between Owner and Contractor, and notes that there has been no cross-complaint filed (at least not yet).  Thus, Tomaro now only seeks to arbitrate its defense of the causes of action alleged against it and not arbitrate the causes of action against Tedeschi.  That change of heart creates a circumstance where less than all of the parties before this Court are now being pressed towards an arbitrator, a change of heart that may implicate CCP § 1281.2(c).

Tomaro asserts that on September 3, 2020, Tomaro and Plaintiff entered into a Short Form Standard Subcontract pursuant to which Plaintiff agreed to provide cabinetry services (the “DS Subcontract”). (Tomaro Decl., ¶ 7.) The DS Subcontract requires Tomaro to “approve for payment by [Tedeschi] to [Plaintiff] for the strict performance of his work the sum of $445,162.75.” (Id., ¶ 8, Ex. B at § 2 [price and payment].) Like the Owner Contract, the DS Subcontract requires Plaintiff to mediate and arbitrate disputes arising thereunder. (Id., ¶¶ 9-10, Ex. B at § 15 [dispute resolution].) The provision states, in pertinent part: “For disputes not involving the acts, omissions or otherwise the responsibility of the OWNER [Tedeschi] under the prime contract, the parties hereto shall submit any and all disputes arising under or relating to the terms and conditions of the Subcontract to arbitration in accordance with the Construction Industry Rules of the American Arbitration Association.” (Ibid. [emphasis added].)\

Defendant Tomaro asserts that it made efforts to secure a mediator, put forth mediation dates, and was ready to meaningfully participate in mediation. (Id., Exh. 2.) However, despite Tomaro’s efforts, it notes that the other named defendants in this matter refused to participate. (Id., Exh. 3.) In Tomaro’s view, participating in mediation without the other co-Defendants “would not have resolved all issues of this case, and therefore would have been a costly, and pointless expenditure for Tormaro.”  (Reply at p. 4, lines 2-3.)  Apparently Tomaro decided that having a mediation without Tedeschi at the table would have been fruitless. In the Court’s view, having an arbitration without Tedeschi at the table may also implicate CCP § 1281.2(c).

With regard to the co-defendants, Tedeschi and Knickerbocker assert that Tedeschi is not subject to the arbitration because he is not a signatory to any agreement to arbitrate Plaintiff’s claims, and there is no arbitrable claim pending against Tedeschi. Co-Defendants argue that Tedeschi is not a party to the subcontract between Plaintiff and Tomaro, or any other agreement with Plaintiff that includes an arbitration provision. They note that although Defendant Tomaro asserts that Tedeschi will seek indemnity from Tomaro pursuant to the Owner Contract, Tedeschi has neither noticed nor filed any claim for indemnity against Tomaro. (Cramer Decl., ¶ 3.)

In Tomaro’s reply brief, it argues that under the Owner Contract, any disputes between Tomaro and Tedeschi are to be submitted to arbitration, and that Tomaro and Tedeschi disagree over who is obligated to pay Plaintiff pursuant to an indemnification provision in the Owner Contract, if any money is owed. However, even though Tomaro conceded that this issue is not currently before the court, and even though it reserves the right to compel arbitration against Tedeschi regarding any disputes that are not currently before the Court, Tomaro’s motion now only seeks to compel Plaintiff to arbitrate the dispute over payment for Plaintiff’s work at Tedeschi’s home.

Plaintiff’s opposition asserts that the claims at issue in this case are expressly exempted from any arbitration proceeding. Plaintiff argues that the arbitration provision in the Subcontract expressly excludes obligations owed by the Owner.  Section 2 of the DS Subcontract states that the Contractor (Tomaro) agrees to approve for payment by Owner (Tedeschi) to Plaintiff the sum of $445,162.75.  The Opposition thus argues that the only claims subject to arbitration are “disputes not involving the acts, omissions, or otherwise the responsibility of the OWNER…” (Ex. B, ¶15.).  Neither arbitration provision at issue delegates the gateway issue of arbitrability to the arbitrator.  (See Najarro v. Superior Court (2021) 70 Cal.App.5th 871, 879-81 (no clear and unmistakable delegation of the issue to the arbitrator.) 

In its reply brief, Tomaro notes that DS's Complaint asserts four causes of action against Tomaro: (1) Breach of Written Contract; (2) Breach of Oral Contract; (3) Quantum Meruit; and (4) Prompt Payment Act Penalties. Tomaro contends that these claims arise out of the Subcontract and Tomaro’s alleged conduct thereunder, and Tomaro’s supposed failure to pay Plaintiff for its work. The Subcontract requires Tomaro to “approve for payment by [Tedeschi] to [Plaintiff] for the strict performance of his work the sum of $445,162.75.” (Id., ¶ 8, Ex. B at § 2 [price and payment].) Thus, Tomaro asserts that the issue raised by the Complaint is whether Tomaro failed to approve these payments, and Tedeschi’s duties under the Owner Contract are not at issue. In sum, Tomaro argues the dispute between Tomaro and Plaintiff can be resolved without arbitrating Tedeschi’s acts or omissions. Tomaro argues that the Subcontract does not contemplate that disputes involving Tedeschi may never be arbitrated, but rather suggests that arbitration involving Tedeschi must be invoked through the Owner Contract, and for Plaintiff to argue otherwise would consequently render the purpose of these arbitration agreements illusory.

The Court is troubled by the moving party’s shifting positions as to whether there is or is not a dispute here as to whether Mr. and Ms. Tedeschi owe a duty of payment to Plaintiff.  The statement that “a dispute exists between Tedeschi and Tomaro as to which party would owe DS payment” was argued in the motion itself, yet the Reply dances around acknowledging “this issue is not currently before the Court.”  Just as the Reply argues that mediation between only Tomaro and DS would not have resolved all of the issues of this case,” so too would an arbitration between only Tomaro and DS.  It is exactly because there is a dispute between Tomaro and the Tedeschis as to which of them owes Plaintiff a duty to pay for the subcontractor’s work (or if any amount is due), that bifurcating that dispute between forums is contrary to what the Court sees as the expressed contractual intentions of the parties.  The Building Construction Agreement references subcontractors and discusses the Owner’s duty to pay both the Contractor and subcontractors in Paragraphs 4, 7, and 8.  Mr. Tomaro’s declaration explicitly states “Section 7 of the Owner Contract requires Tedeschi to pay all valid bills to subcontractors.”  (Tomaro Decl. ¶ 4.)  The Mechanics’ Lien Warning at the end of the Owner Contract discusses claims by subcontractors for payment for their work.  The DS Subcontract cross-references the “prime contract” between Tomaro and the Tedeschis in multiple places, including in the arbitration provision ¶ 15.  Plaintiff is not party to the Owner Contract and is not bound directly by its provision. 

            The DS Subcontract’s Dispute Resolution provision contains a broad and express bar of arbitrability for “disputes not involving the acts, omissions, or otherwise the responsibility of the owner under the prime contract.”  The same exemption appears in the language of ¶15 that incorporates the “prime contract” dispute resolution provision.  The Complaint alleges a series of disputes that do “involve” the owner’s responsibility, per Mr. Tomaro’s Declaration ¶ 4 that the Tedeschis are required by the Owner Contract to pay all valid bills to subcontractors.  Whether a moving party in a brief argues to the Court that such an issue is not currently before the Court or not, the principal of the moving party has stated otherwise under penalty of perjury.  The Court finds that the contractual exemption from arbitration applies here.    

            As a final observation, the parties should all reconsider whatever decisions were made to eschew mediation by all rather than some of the interested parties.  This set of briefing should demonstrate that there are very fine lawyers on all sides, each of whom likely command fine rates of compensation for their services.  It is not inconceivable that the combined attorney’s fees to be incurred on all sides may exceed the amount in controversy should every step of the litigation process be zealously pursued by conflicting parties advocating their positions.