Judge Upinder S. Kalra, Case Number: 23STCP01533, Date: 2023-11-20 Tentative Ruling

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CASE NAME: AK Management Group Inc., et al v. FG Care Group, LLC (lead case)

(1) PETITION TO COMPEL REFERENCE AND FOR APPOINTMENT OF A REFERENCE JUDGE [CCP § 638(a)];

MOVING PARTY: Petitioners/Defendants AK Management Group, Inc. and Security Capital Investments Inc.

2. An Order Compelling Plaintiff FG Care Group, LLC’s Complaint to Arbitration;

1. Petition to Compel Reference and for Appointment of a Reference Judge is DENIED;

On May 8, 2023, Petitioners AK Management Group, Inc. and Security Capital Investments Inc. (Petitioners) filed a Verified Petition to Compel Reference and for Appointment of a Reference Judge (Reference Petition). According to the Petition, this claim concerns a Security Agreement dated March 7, 2022 (Security Agreement) which provides that any claims or disputes arising out of or based on that agreement to be resolved by reference and appointment of a referee pursuant to Cal. Code Civ. Proc. § 638(a). The Security Agreement concerns the sale of property, for $1,500,000.00, consisting of congregate care health facilities business and business assets of such healthcare facilities. Petitioners were the lender and Respondent FG Care Group, LLC was the borrower.

On May 17, 2023, Plaintiff FG Care Group, LLC (Plaintiff FG Care) filed a Complaint against Defendants AK Management Group, Inc. (AMG), Security Capital Investments, Inc. (SCI), Alexandre Kouchavchili, Aleksandre Fishkin, United Care Facilities, LLC (UCF) and California Subacute Care, LLC (CSC) with six causes of action for: (1) Breach of Contract, (2) Breach of Good Faith and Fair Dealing, (3) Fraud in the Inducement, (4) Fraud, (5) Rescission; and (6) Declaratory Relief.

According to the Complaint, this claim concerns a series of agreements between Plaintiff FG Care and Defendants concerning the purchase, lease, financing, and operation of a number of Congregate Living Health Facilities located in Lancaster, California and Bakersfield, California. Plaintiff alleges that the Defendants concealed an active and ongoing investigation by the California Dept. of Public Health into a number of facilities involved in the transaction. On agreement, a Sale Agreement dated December 15, 2021, was between Plaintiff FG Care and Defendants UCF and CSC. On March 7, 2022, Plaintiff FG Care and Defendants UCF and CSC executed an Amended Sale Agreement (Sale Agreement). Plaintiff FG Care further alleges to have acquired an option to purchase the land from Defendants AMG and SCI in lieu of purchasing the land outright via an Independent Option Agreement (Option). Additionally, Plaintiff FG Care and Defendants AMG and SCI entered a series of four Commercial Lease Agreements, a Master Lease Addendum, two Promissory Notes, and the above-mentioned Security Agreement. Plaintiff FG Care further alleges that Defendants breached their various warranties by failing to disclose two surveys conducted by Cal. Dept. of Public Health concerning the Bakersfield facilities and a subsequent settlement stipulation regarding the same surveys. Plaintiff FG Care alleges that the Bakersfield Facilities’ value is negligible without these licenses.

On June 6, 2023, Plaintiff FG Care Group, LLC filed a Notice of Related Case which the court GRANTED on June 8, 2023.

On July 7, 2023, Defendants AMG, SCI, Kouchavilli, Fishkin, UCF, and CSC filed a motion for sanctions against counsel.[1] On November 6, 2023, Plaintiff FG Care filed an opposition.

On November 6, 2023, Respondent FG Care Group, LLC filed an opposition to the Reference Petition.

All replies were due by November 13, 2023. No reply filed as of November 14, 2023.

On November 13, 2023, Counsel for Plaintiff FG Care filed a Motion to be Relieved as Counsel set for hearing on December 28, 2023.

“A referee may be appointed upon the agreement of the parties filed with the clerk, or judge, or entered in the minutes, or upon the motion of a party to a written contract or lease that provides that any controversy arising therefrom shall be heard by a referee if the court finds a reference agreement exists between the parties:

(a) To hear and determine any or all of the issues in an action or proceeding, whether of fact or of law, and to report a statement of decision.”

A court has discretion to grant such a motion when there is risk of inconsistent rulings and considerations of judicial economy. (Tarrant Bell Property, LLC v. Superior Court 51 Cal.4th 538, 544 (Tarrant Bell).)

Under California law, the trial court has authority to compel arbitration pursuant to CCP §1281.2 where a written agreement for such arbitration exists and one of the parties refuses to arbitrate. Specifically, the statute provides 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 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 arbitrate the controversy exists.” The statute further sets forth four grounds upon which the trial court may refuse to compel arbitration: (a) the right to compel arbitration was waived, (b) recission of the agreement, (c) there is a pending action or special proceeding with a third party, arising out of the same transaction; and (d) petitioner is a state or federally chartered depository institution.

“[T]he petitioner bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence . . . .”¿¿(Giuliano v. Inland Empire Personnel, Inc.¿(2007) 149 Cal.App.4th 1276, 1284¿(Guiliano).)¿“In determining whether an arbitration agreement applies to a specific dispute, the court may examine only the agreement itself and the complaint filed by the party refusing arbitration [citation]. The court should attempt to give effect to the parties' intentions, in light of the usual and ordinary meaning of the contractual language and the¿circumstances under which the agreement was made.”¿¿(Weeks v. Crow¿(1980) 113 Cal.App.3d 350, 353.)¿ “To determine whether a contractual arbitration clause requires arbitration of a particular controversy, the controversy is first identified and the issue is whether that controversy is within the scope of the contractual arbitration clause.”¿¿(Titolo¿v. Cano¿(2007) 157 Cal.App.4th 310, 316.)¿ “Doubts as to whether an arbitration clause applies to a particular dispute are to be resolved in favor of sending the parties to arbitration. The court should order them to arbitrate unless it is clear that the arbitration clause cannot be interpreted to cover the dispute.”¿¿(California Correctional Peace Officers¿Ass'n¿v. State¿(2006) 142 Cal.App.4th 198, 205.)¿¿¿

“[A] party opposing the petition bears the burden of proving by a preponderance of the evidence any fact necessary to its defense. [Citation.] In these summary proceedings, the trial court sits as a trier of fact, weighing all the affidavits, declarations, and other documentary evidence, as well as oral testimony received at the court's discretion, to reach a final determination.”¿¿(Giuliano, supra, at p. 1284.)¿

(b)¿By presenting to the court, whether by signing, filing, submitting, or later advocating, a pleading, petition, written notice of motion, or other similar paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, all of the following conditions are met:

(1)¿It is not being presented primarily for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

(2)¿The claims, defenses, and other legal contentions therein are warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.

(3)¿The allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.

(4)¿The denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.

Only “an attorney or unrepresented party may be sanctioned” under the statute. (In re Marriage of Reese & Guy (1999) 73 Cal.App.4th 1214, 1221.)

“Under section 128.7, a court may impose sanctions if it concludes a pleading was filed for an improper purpose or was indisputably without merit, either legally or factually. [Citation.]” (Bucur v. Ahmad (2016) 244 Cal.App.4th 175, 189.) “A claim is factually frivolous if it is ‘not well grounded in fact’ and is legally frivolous if it is ‘not warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.’ [Citation.] In either case, to obtain sanctions, the moving party must show the party's conduct in asserting the claim was objectively unreasonable. [Citation.] A claim is objectively unreasonable if ‘any reasonable attorney would agree that [it] is totally and completely without merit.’ [Citations.]” (Id.) No showing of bad faith is required. (In re Marriage of Reese & Guy, supra, 73 Cal.App.4th at p. 1221.)

“The California Legislature essentially sought to replicate rule 11 [of the Federal Rules of Civil Procedure] when it enacted section 128.7.” (Musaelian v. Adams (2009) 45 Cal.4th 512, 518, fn. 2.) As a result, federal case law construing rule 11 is persuasive authority on the meaning of Code of Civil Procedure section 128.7. (Guillemin v. Stein (2002) 104 Cal.App.4th 156, 167.) Under rule 11, even though an action may not be frivolous when it is filed, it may become so if later-acquired evidence refutes the findings of a prefiling investigation and the attorney continues to file papers supporting the client's claims. (See Childs v. State Farm Mutual Automobile Insurance Company (5^th Cir. 1994) 29 F.3d 1018, 1024-1026.) As a result, a plaintiff's attorney cannot “just cling tenaciously to the investigation he had done at the outset of the litigation and bury his head in the sand.” (Id. at 1025.)

In addition, Code of Civil Procedure section 128.7 “contains a safe harbor provision. It requires the party seeking sanctions to serve on the opposing party, without filing or presenting it to the court, a notice of motion specifically describing the sanctionable conduct. Service of the motion initiates a 21-day ‘hold’ or ‘safe harbor’ period. [Citations.] During this time, the offending document may be corrected or withdrawn without penalty. If that occurs, the motion for sanctions ‘‘shall not’’ be filed. [Citations.] By mandating a 21-day safe harbor period to allow correction or withdrawal of an offending document, section 128.7 is designed to be remedial, not punitive. [Citation.]” (Li v. Majestic Industry Hills, LLC (2009) 177 Cal.App.4th 585, 590-591.)

Petitioners AMG and SCI contend that the parties agreed to reference via the Security Agreement. Respondent FG Care argues that not all parties involved in this series of transactions are included in the Petition and that if the Petition is allowed to move forward separately then there is danger of conflicting rulings.[2] Respondent FG Care additionally argues that there are two separate dispute resolution provisions here: the instant reference clause from the Security Agreement and a mandatory arbitration provision in the Sales Agreement.

Upon reviewing the Security Agreement, the court agrees with Respondent FG Care that sending the dispute under the Security Agreement to judicial reference risks inconsistent rulings and will impact judicial economy. First, the Petition purports to concern only the Security Agreement, but the Security Agreement defines “Loan Documents” that are subject to reference as including “this Agreement, the Note, the Leases and all other agreements, instruments, and documents heretofore, now or hereafter evidencing, securing, guaranteeing, or otherwise relating to the Obligations, the Collateral, the Lener’s Liens in the Collateral.” (Petition, Exhibit A, p. 4.) A plain reading of this definition leads the court to interpret the Security Agreement as encompassing the “Transaction Documents” FG Care enumerates in its Complaint. (Compl. ¶¶ 22 – 29.) On the one hand, this raises the issue that there are two conflicting dispute resolution mechanisms at play between the Sales Agreement and the Security Agreement. On the other hand, there is great risk of conflicting rulings should the court order only the Security Agreement dispute to reference because FG Care is seeking to rescind the underlying Sales Agreement, on which the Security Agreement appears to depend. The Sales Agreement and the Security Agreement concern the same sale of Congregate Living Health Facilities. For example, if the court (or arbitrator, discussed below) finds in favor of FG Care on the Sales Agreement and rescinds it, there is risk that the reference judge would find in favor of AMG and SCI on the Security Agreement. The reverse is also possible. Second, the Security Agreement section 13(e) provides a mechanism to arbitrate the same disputes should the Legislature repeal without replacing CCP § 638.

Accordingly, the court exercises its discretion to DENY Petitioners AMG and SCI’s Petition to Compel Reference.

In determining the enforceability of an arbitration agreement, the court considers “two ‘gateway issues’ of arbitrability: (1) whether there was an agreement to arbitrate between the parties, and (2) whether the agreement covered the dispute at issue.”¿ (Omar v. Ralphs Grocery Co. (2004) 118 Cal.App.4th 955, 961 (Omar).)¿¿¿

The moving party can meet its initial burden of proving the existence of an arbitration agreement by attaching a copy of the Agreement to this motion bearing the signature of the opposing party. (See Bannister v. Marinidence Opco, LLC (2021) 64 Cal.App.5th 541, 541-543 [“The party seeking arbitration can meet its initial burden by attaching to the petition a copy of the arbitration agreement purporting to bear the¿respondent's signature.”].) Alternatively, the moving party can meet its initial burden by setting forth the agreement’s provisions in the motion. (See Cal. Rules of Court, rule 3.1330; see also Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 219.) Here, Defendants[3] attached a copy of the Amended & Restated Purchase and Sale Agreement (the Sale Agreement) with supporting declaration of Alexander Fishkin, owner of Defendant SCI, part owner of Defendants UCF and CSC. (Fishkin Decl. ¶¶ 1-2, Exhibit 1.) Plaintiff FG Care signed through its managing member, Robert Guttman, on March 7, 2022. (Exhibit 1.) Plaintiff FG Care does not challenge the signature’s authenticity.

Defendants contend that Plaintiff’s claims are subject to arbitration because the Sales Agreement provides for arbitrating any and all disputes arising under it and that Plaintiff FG Care must be equitably estopped from denying arbitrating its claims.[4] Plaintiff FG Care argues that the court cannot compel arbitration because, pursuant to CCP § 1281.2(c), they are a party to a pending court action or special proceeding – namely, the Reference Petition.[5] Additionally, Plaintiff FG Care argues that the court cannot compel arbitration because nonsignatories to the Sales Agreement are named defendants in the case.

A party can be compelled to arbitrate only those issues it has agreed to arbitrate and so, courts must read the contractual terms carefully before ordering the parties to arbitration. (Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 705.) Doubts as to scope, however, favor arbitration. (Ibid.) Those who are not parties to an arbitration agreement cannot be compelled to arbitrate a dispute that he has not agreed to resolve by arbitration. (Id. at p. 704.) One exception to this general rule is the doctrine of equitable estoppel. (Id. at 706.) This applies when a nonsignatory defendant invokes an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are “intimately founded in an intertwined” with the underlying contract obligations. (Ibid. (internal citations omitted); see also Rowe v. Exline (2007) 153 Cal.App.4th 1276.) “Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable.” (Ciphergen, supra, at p. 715.) When equitable estoppel doctrine applies, the nonsignatory has a right to enforce the arbitration agreement and CCP § 1281.2(c) would not apply. (Ibid.)

Here, the court agrees with Defendants that Plaintiff FG Care’s Complaint is covered by the arbitration agreement. First, the Sales Agreement provides for binding arbitration of “[a]ny controversy or claim between the Parties arising out of or relating to this Agreement, or a breach of this Agreement, which cannot be resolved by mutual agreement . . . .” (Fishkin Dec., Exhibit 1.) Plaintiff FG Care’s Complaint concerns the Transaction Documents, including the Sales Agreement, and alleges that “the defendants concealed an active and ongoing investigation by the California Department of Public Health (CDPH) into a number of facilities involved in the transaction” which “gives rise to this action and the causes of action alleged herein.” (Compl. ¶ 2.) Indeed, Plaintiff FG Care references the “Transaction Documents” throughout the Complaint. As to whether “Defendants” may move to compel arbitration, Plaintiff FG Care cites no authority supporting its position that AMG and SCI cannot move to compel arbitration.[6]

As Plaintiff FG Care did not address defenses to enforcement, the court will not address any.

Accordingly, the court GRANTS the motion to compel arbitration and orders a STAY pending arbitration as to the underlying action.

Defendants contend that the court should award sanctions against Davidovich Stein Law Group LLP for filing the Complaint on Plaintiff FG Care’s behalf because it was frivolous and meant to harass since all of the claims are subject to arbitration. Plaintiff FG Care argues that the motion for sanctions is improper, the Complaint was not frivolous or brought for an improper purpose, and existing law supports filing the Complaint.[7]

The court rejects Defendants’ request for sanctions. First, based on Defendants’ logic, all motions to compel arbitration a court grants would necessarily require sanctions awards. Second, the cases upon which Defendants rely do not support their position as they do not concern similar circumstances.[8] Third, Defendants’ request is exorbitant. Finally, the court is not persuaded that Plaintiff FG Care’s Complaint is frivolous or otherwise warrants imposing sanctions.

1. Petition to Compel Reference and for Appointment of a Reference Judge is DENIED;

[1] It is actually unclear whether all of the Defendants filed the motion. The moving papers refer to “Defendants” but does not definitively articulate that each Defendant moves for sanctions.

[2] FG Care cites to CCP § 389(a) (joinder) and CCP § 1281.2(c) (arbitration) as tangential support for its argument.

[3] The court in this instance uses the phrasing as indicated on the moving papers.

[4] The court in this instance uses the phrasing as indicated on the moving papers.

[5] As discussed above, the court denied that Petition. It follows that this underlying argument subsequently fails.

[6] However, the court does note that the Defendants have not been clear in their moving papers and supporting declarations as to which parties belong to which agreement. For example, Mr. Fishkin declares that the Sales Agreement was entered into between AKG and SCI but it was in fact entered into between UCF and CSC. (Exhibit 1.) The letters defense counsel submit in both the Petition to Compel Reference and the Motion to Compel Arbitration appear almost identical, too.

[7] The court declines to expand on Plaintiff FG Care’s arguments.

[8] Plaintiff FG Care did make a compelling argument that the various arbitration authorities do not allow such an award either.