Judge Stephen P. Pfahler, Case 22CHCV00176 2022-09-29 Tentative Ruling

On July 10, 2021, Plaintiff Jerry Holly agreed to purchase 20610 Calloway Drive, Santa Clarita for $594,990 from Defendant Calatlantic Group, Inc. (Calatlantic). The parties also executed a second agreement, whereby Defendant Opendoor Property Acquisition, LLC (Opendoor) offered to purchase Plaintiff’s existing home for $608,000. Opendoor is allegedly partially owned by Defendants Calatlantic and Lennar Title, Inc. (Lennar).

While Plaintiff sought financing for the purchase of the Galloway Drive home, Plaintiff alleges Defendants “pushed” for his use of Defendants’ preferred lender. When Plaintiff elected to use his own lender, Plaintiff alleges Defendants became less cooperative with closing on the Gallowway Drive home, including refusal to extend the deadline for document submission. Defendants subsequently sold the home to a third party for a $70,000 higher price. Defendants also allegedly conditioned any purchase of a unit in the Galloway development on the acceptance of the $608,000 sale of the existing home, which Plaintiff contends constituted a “low ball” offer given comparable values on homes in the area.

Notwithstanding Plaintiff’s instruction to pause closing the sale of the home, including notification to the escrow company, Defendant Raincross Escrow, Inc., escrow apparently closed on an unspecified date.

On March 17, 2022 and August 2, 2022, Plaintiff filed a complaint and first amended complaint for Recission, Breach of Contract (Sale of Home), Financial Elder Abuse, Unfair Competition, Breach of Contract (Escrow), and Negligence. Meanwhile, defendant Raincross Escrow, Inc. answered the complaint on May 4, 2022. On August 16, 2022, the court sustained the unopposed demurrer of Calatlantic Group, Inc., et al., to the complaint, and deemed the first amended complaint filed.

Defendant Opendoor Property Acquisition, LLC (“Open Door”) moves to compel arbitration. Plaintiff Holly in opposition seeks to resist sending the Open Door portion of the case to arbitration, due to the third parties not bound by the arbitration agreement, and fraud in the execution of the agreement.[2] Open Door in reply reiterates the preemptive effect of the Federal Arbitration Act governing provision, and the lack of responsive authority undermining the case law. Open Door also challenges any showing of fraud in the execution, thereby rendering the agreement void. Open Door also denies any fiduciary relationship.

“A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (Code Civ. Proc., § 1281.) “On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such 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, unless it determines that: (a) The right to compel arbitration has been waived by the petitioner; or (b) Grounds exist for the revocation of the agreement.” (Code Civ. Proc., § 1281.2.)

In a motion to compel arbitration, the moving party must prove by a preponderance of evidence the existence of the arbitration agreement and that the dispute is covered by the agreement. The burden then shifts to the resisting party to prove by a preponderance of evidence a ground for denial (e.g., fraud, unconscionability, etc.). (Rosenthal v. Great Western Fin'l Securities Corp. (1996) 14 Cal.4th 394, 413-414; Hotels Nevada v. L.A. Pacific Ctr., Inc. (2006) 144 Cal.App.4th 754, 758.) Any challenges to the formation of the arbitration agreement should be considered before any order sending the parties to arbitration. The trier of fact weighs all evidence, including affidavits, declarations, documents, and, if applicable, oral testimony to determine whether the action goes to arbitration. (Hotels Nevada v. L.A. Pacific Ctr., Inc., supra, 144 Cal.App.4th at p. 758.)

“‘Under “both federal and state law, the threshold question presented by a petition to compel arbitration is whether there is an agreement to arbitrate.”’” (Long v. Provide Commerce, Inc. (2016) 245 Cal.App.4th 855, 861.) “Private arbitration is a matter of agreement between the parties and is governed by contract law. (Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307, 313.)

The arbitration agreement language provides that either party may submit any dispute arising from the scope of the purchase agreement to arbitration. The section also provides that any all disputes shall be governed under California law, though the arbitration itself is governed under Federal Arbitration Act (FAA) rules. [Declaration of Jessie Smith, Ex. A.] Open Door contends all causes of action arise from the agreement and completed transaction. Plaintiff now seeks to rescind the agreement, thereby placing the dispute within the purview of the arbitration clause. Open Door additionally seeks arbitration regardless of whether the co-defendants are bound by the arbitration agreement or not, and further argues that FAA requirements bar the court from denying the motion out of concern for piecemeal or inefficient proceedings.

The motion comes as a result of the parties dispute over only moving defendants participating in arbitration, rather than all defendants, as sought by Plaintiff. According to Open Door, co-defendants have not stipulated to joining arbitration, thereby leading to the subject motion. [Declaration of Sarah Moses.]

The court however first addresses the issue of entry into the agreement. Plaintiff contends Open Door owed a fiduciary duty thereby requiring an explanation of the contractual terms and impacts. Because the contract was presented in an arms length transaction, Plaintiff seeks to declare the arbitration clause as invalid.

“Mutual assent is required for there to be an enforceable agreement to arbitrate disputes. ‘ “[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”’ (Citations.) ‘The right to arbitration depends upon contract; a petition to compel arbitration is simply a suit in equity seeking specific performance of that contract. [Citations.] There is no public policy favoring arbitration of disputes which the parties have not agreed to arbitrate. [Citation.]’ (Citation.) [¶] In other words, mutual assent exists when a reasonable person would conclude from the outward conduct of the parties that there was mutual agreement regarding their intent to be bound. (Citation.) If such mutual intent to be bound into arbitration cannot be shown, arbitration will not be compelled. (Citation.) [¶] Regardless of how broad the terms of a contract are, the contract will only extend to those issues for which it appears that the parties intended to contract. (Citation.) The parties must agree on all material terms; otherwise, there is no meeting of the minds between the parties and thus, no contract is formed. (Citation.)”

“No law requires that parties dealing at arm's length have a duty to explain to each other the terms of a written contract, particularly where, as here, the language of the contract expressly and plainly provides for the arbitration of disputes arising out of the contractual relationship. [Citation.] Reliance on an alleged misrepresentation [or, by extension of reasoning, a unilateral mistake not encouraged or fostered by the other party,] is not reasonable when plaintiff could have ascertained the truth through the exercise of reasonable diligence. [Citation.] Reasonable diligence requires the reading of a contract before signing it. A party cannot use his own lack of diligence to avoid an arbitration agreement. [Citation.]” (Brookwood v. Bank of America (1996) 45 Cal.App.4th 1667, 1674.) Plaintiff’s “failure to take measures to learn the contents of the document they signed is attributable to their own negligence, rather than to fraud on the part of GWFSC or its representatives.” (Rosenthal v. Great Western Fin. Securities Corp., supra, 14 Cal.4th at p. 431.)

“An exception to the general rule applies when a party was fraudulently induced to sign the contract. (Citations.)” (Id. at p. 519.) “Fraud in the inducement is a subset of the tort of fraud. It ‘occurs when “‘the promisor knows what he is signing but his consent is induced by fraud, mutual assent is present and a contract is formed, which, by reason of the fraud, is voidable.’”’ (Citations.)” (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294-295.) Nothing in the opposition presents an argument for fraud. The opposition only relies on a theory of duty to disclose based on a fiduciary duty. Plaintiff contends the contract was presented with tabs and pre-highlighted sections, with instructions and “pressure” to sign right away. [Declaration of Jerry Holly.]

A fiduciary duty is founded upon a special relationship imposed by law or under circumstances in which “confidence is reposed by persons in the integrity of others” who voluntarily accept the confidence. (Tri-Growth Centre City, Ltd. v. Silldorf, Burdman, Duignan & Eisenberg (1989) 216 Cal.App.3d 1139, 1150.) “A fiduciary or confidential relationship can arise when confidence is reposed by persons in the integrity of others, and if the latter voluntarily accepts or assumes to accept the confidence, he or she may not act so as to take advantage of the other's interest without that person's knowledge or consent.” (Pierce v. Lyman (1991) 1 Cal.App.4th 1093, 1101–02.)

The simple declaration of Plaintiff Holly insufficiently establishes a basis of any fiduciary duty, and therefore a duty to disclose the impact of the terms of the arbitration agreement. The court otherwise finds no evidence of any support for a fraud in the inducement in that nothing in the Holly declaration in any way suggests the terms were anything different than presented. The court therefore finds the contract was properly executed, and assent voluntarily occurring in the subject arms length transaction.

The court next considers the argument regarding arbitration without the agreement of Raincross Escrow, Inc., Calatlantic Group, Inc., and Lennar Title, Inc. to participate in arbitration. Plaintiff specifically relies on statutory authority, which provides in relevant part:

On 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, unless it determines that:

(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. For purposes of this section, a pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition. …

Open Door anticipating the argument emphasizes the FAA governing rule clause, as a basis of superseding authority over section 1281.2, subdivision (c). The Court of Appeal in the Second District recently considered the exact question: “we conclude the parties intended to incorporate the FAA with respect to compelling arbitration. … As set forth below, previous cases have held that when an arbitration agreement provides that its ‘enforcement’ shall be governed by California law, the California Arbitration Act (CAA) governs a party's motion to compel arbitration. It follows that when an agreement provides that its ‘enforcement’ shall be governed by the FAA, the FAA governs a party's motion to compel arbitration.” (Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 346 (Jaman Properties).) The holding comes following United States Supreme Court precedent addressing conflicts with section 1281.2, subdivision (c).

“The FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration. (Citation.) But even when Congress has not completely displaced state regulation in an area, state law may nonetheless be pre-empted to the extent that it actually conflicts with federal law—that is, to the extent that it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’ (Citation.) The question before us, therefore, is whether application of Cal.Civ.Proc.Code Ann. § 1281.2(c) to stay arbitration under this contract in interstate commerce, in accordance with the terms of the arbitration agreement itself, would undermine the goals and policies of the FAA. We conclude that it would not.

“The FAA was designed ‘to overrule the judiciary's long-standing refusal to enforce agreements to arbitrate,’ (Citation), and to place such agreements ‘“upon the same footing as other contracts,”’ (Citation.) … Accordingly, we have recognized that the FAA does not require parties to arbitrate when they have not agreed to do so, (citation) … It simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms.

“In recognition of Congress' principal purpose of ensuring that private arbitration agreements are enforced according to their terms, we have held that the FAA pre-empts state laws which ‘require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.’ … But it does not follow that the FAA prevents the enforcement of agreements to arbitrate under different rules than those set forth in the Act itself. Indeed, such a result would be quite inimical to the FAA's primary purpose of ensuring that private agreements to arbitrate are enforced according to their terms. Arbitration under the Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate … Where, as here, the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that arbitration is stayed where the Act would otherwise permit it to go forward. By permitting the courts to “rigorously enforce” such agreements according to their terms (citation), we give effect to the contractual rights and expectations of the parties, without doing violence to the policies behind by the FAA.”

(Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University (1989) 489 U.S. 468, 477–479 [109 S.Ct. 1248, 1254–1256, 103 L.Ed.2d 488].)

While the court prefers to avoid piecemeal arbitration, the FAA governing rules compels preemption of section 1281.2 subdivision (c) stay. The court is therefore compelled to grant the motion as to Open Door.

Neither party raises arguments, but the court notes the allegations in the complaint regarding partial ownership of Open Door by Calatlantic Group, Inc. and Lennar Title, Inc. While arbitration agreements may only be generally compelled by parties to the agreement, the doctrine of equitable estoppel allows for a non-signatory party to compel arbitration “‘when the causes of action against the nonsignatory are “intimately founded in and intertwined” with the underlying contract obligations.’” (JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222, 1237; Felisilda v. FCA US LLC (2020) 53 Cal.App.5th 486, 495-496; Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 217-218; Crowley Maritime Corp. v. Boston Old Colony Ins. Co. (2008) 158 Cal.App.4th 1061, 1070 [Under equitable estoppel, a party cannot avoid participation in arbitration, where the party received “a direct benefit under the contract containing an arbitration clause…”]; Boucher v. Alliance Title Co, Inc. (2005) 127 Cal.App.4th 262, 271).)

The court invites the parties to consider the potential joinder of the Calatlantic Group, Inc. and Lennar Title, Inc. to the arbitration, but otherwise offers no opinion on the potential applicability of equitable estoppel as to this case. The court only notes this in order to potentially mitigate potential future prejudice as a result of the piecemeal process imposed by the FAA rules for arbitration.

The action is therefore ordered to arbitration in compliance with the terms of the agreement. If applicable, and if the parties cannot agree on an organization, the court orders the parties to submit a list of one to two organizations/arbitrators from each party, where the court will select the organization/arbitrator. The parties have 30 days from the date of this order to begin the selection process.

“If a court of competent jurisdiction, whether in this State or not, has ordered arbitration of a controversy which is an issue involved in an action or proceeding pending before a court of this State, the court in which such action or proceeding is pending shall, upon motion of a party to such action or proceeding, stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies.” (Code Civ. Proc., § 1281.4.) The court orders the action stayed as to ALL parties pending arbitration with Open Door.

The court will set an OSC re: Status of Arbitration and Stay at the time of the hearing.

A second motion to compel arbitration is currently reserved, but not filed, for November 3, 2022.

[1]Moving Defendants filed a notice of non-opposition, and addresses the improper filing of the first amended complaint.

[2]The court accepts the one-day late opposition and accepts the explanation of counsel. [Declaration of Steffanie Stelnick.]