Sandel v. R2D2

Filed 3/11/10 Sandel v. R2D2 CA2/5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

APPEAL from a judgment of the Superior Court of Los Angeles County, Holly E. Kendig, Judge. Affirmed.

Susan Tregub and Teri Zimon; Lascher & Lascher, Wendy C. Lascher and Eric R, Reed for Defendants and Appellants.

Robert S. Gerstein and Rex Julian Beaber for Plaintiff and Respondent.

I. INTRODUCTION

Defendants, R2D2, LLC, David Bergstein, Bordertown Productions, Inc., LLC, Mobius .45 Productions, LLC, Mobius International, Inc., and Wendell Distributions, Inc. (defendants), appeal from an order denying their petition to compel arbitration of a complaint filed by plaintiff, Alexander Sandel (plaintiff) for contract breach and fraud. The trial court denied the petition on the alternative grounds: there was no valid arbitration agreement; and defendants had waived any right to arbitration. We affirm.

II. BACKGROUND

Plaintiff filed his complaint on May 8, 2008. The complaint alleged that defendant Bergstein and his partner, Ron Tudor, work in the movie business making and distributing films through various entities. Beginning in 2004, defendant Bergstein came to plaintiff seeking loans to facilitate the businesses. Plaintiff agreed to make the loans in exchange for oral and written promises of repayment with interest. As of July 2005, plaintiff had loaned defendant the sum of $5,725,000. As of February 2006, with interest, the balance due to plaintiff exceeded $6,650,000. In a compromise agreement, plaintiff and defendant Bergstein agreed that the balance due would be $6,650,000. On March 1, 2006, defendants executed an Amended and Restated Consolidated Secured Promissory Note in the amount of $4.5 million. Defendants acknowledged receipt of consideration supporting the note. Defendants agreed but have failed to make periodic payments. In the fraud claims, defendants are alleged to have executed the note and represented a second note would be executed to reflect the balance of the loan owed. Defendant Bergstein made the representations without any intent of repaying the loans or fully documenting the full amount of the obligations. He also induced plaintiff to remove UCCs that had been filed and encumbered assets belonging to the various entities.

On September 3, 2008, defendants answered the complaint. The answer contained 16 affirmative defenses. Also on September 3, 2008, defendants, Bergstein and R2D2, filed a cross-complaint against plaintiff. Neither the answer nor cross-complaint requested arbitration or a stay of the action.

On May 15, 2009, defendants filed a petition to compel arbitration and stay the superior court proceedings. Defendants asserted that plaintiff was bound by an arbitration agreement contained in Paragraph 3(a) of a document entitled Mortgage of Copyright and Security Agreement which had been executed in 2004. The 2004 security agreement gave plaintiff security interests in the motion picture copyright of a number of films. Paragraph 3(a) provides in part: Mandatory Arbitration. Any controversy or claim between or among the parties including but not limited to those arising out of or relating to this Agreement or any related agreements or instruments (Subject Documents), including any claim based on or arising from any alleged tort, shall be determined by arbitration in accordance with Title 9 of the [United States] Code and the Commercial Arbitration Rules of American Arbitration Association (AAA) and each party shall have such discovery rights as the arbitrator deems appropriate under the circumstances. . . .

According to defendants, the March 2006 promissory note incorporated by reference the 2004 security agreements in the film copyrights. In support of defendants contention, they cited the following language from page 4 of the March 1, 2006 note: In connection with this Note, each of the Debtors is executing in favor of Lender a Security Agreement (collectively, the Security Agreements) and a Mortgage of Copyright and Security Agreement (collectively, the Copyright Mortgages, and together with the Security Agreements and all UCC financing statements which Lender may file, collectively, the Loan Documents). In the event of an Event of Default, Lender, acting in accordance with the Security Agreements, shall be entitled to enforce any or all of its rights under the Loan Documents. Upon repayment in full of the principal of this Note and all interest thereon, the security interests granted to Lender pursuant to the Loan Documents shall terminate and be of no further force or effect.

Plaintiff opposed the arbitration petition on the grounds: there was no arbitration agreement; defendants had waived the right to compel arbitration; and there are claims in the complaint and cross-complaint which would not be subject to arbitration. Plaintiff argued there was no valid agreement because: the 2004 security agreement was for a promissory note executed October 18, 2004; and plaintiff is not seeking any relief under the October 18, 2004 note. Plaintiff also argued that the 2004 security agreement had no force and effect in this action which was based on the March 2006 promissory note. The express terms of the March 2006 promissory notes state in part: This Note amends, restates, replaces and supersedes all promissory notes or any other form of promise to repay any amount by the Debtors or Debtor Affiliates in favor of Lender or his affiliates, (as evidenced by written or oral agreements). In addition, this Note amends, restates, replaces and supersedes any and all promises or obligations by Debtor or Debtor Affiliates to pay any amount to Lender or his affiliates for any reason or arising from any transaction.

Plaintiff further argued the March 2006 promissory note contains no arbitration clause. Rather, the March 2006 promissory note contains the right to a court trial as follows: EACH OF THE DEBTORS HEREBY WAIVES, AND COVENANTS THAT THE UNDERSIGNED WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS NOTE, THE SUBJECT MATTER HEREOF OR ANY DOCUMENT RELATING HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR IN TORT OR OTHERWISE.

In support of the opposition, plaintiffs counsel, Rex Beaber, declared that the trial court had continued the trial date on defendants motion. Mr. Beaber declared: Defendants then propounded a bounty of discovery, including, form interrogatories, special interrogatories, request for admissions, expert disclosure demands, request for production of documents, and including declarations supporting 100s of discovery requests beyond the ordinary statutory limit. Mr. Beaber and plaintiff had worked for more than a hundred hours drafting highly detailed responses. Plaintiff and his counsel spent endless hours propounding discovery. They also made extensive trial preparations.

Plaintiff declared that, when he signed the March 1, 2006 agreement, it was faxed to him by defendants attorney. The documents did not include the 2004 security agreement. The 2004 security agreement was executed to secure a 2004 promissory note. At the time plaintiff made the loans to defendants, plaintiff was in a much better financial position. The loans and the economic downturns had plaintiff in dire circumstances forcing him to live off of social security income. Had defendants demanded arbitration earlier, plaintiff would most likely have agreed simply to expeditiously resolve the matter.

On June 17, 2009, the trial court denied the petition to compel arbitration. At the hearing, the trial court concluded: at a minimum the documents supporting an incorporation of the 2004 Security Agreement into the terms of the March 2006 promissory note were ambiguous; the reference to the arbitration clause had to be clear and unequivocal; the terms must be known or easily available to the party; the language in the 2006 note contemplates future execution of security and mortgage of copyright agreements; and there is no clear reference to the 2004 Security Agreements in the 2006 notes. The trial court ruled that, assuming there was a valid agreement, plaintiff had established that defendants had waived the right to compel arbitration. The trial court found waiver and prejudice based on the following: defendants did not demand arbitration within a reasonable time after the action was commenced; defendants participated in litigation of disputed issues prior to the demand; defendants position was inconsistent with the right to arbitrate including answering the complaint, filing a cross-complaint, and defending against a writ of attachment; the litigation machinery had been substantially invoked; trial was set to begin within a month; discovery has been propounded and answered including more than 1,000 pages of documents; depositions had been set; and expert witnesses lists and jury instructions had been generated.

III. DISCUSSION

Code of Civil Procedure section 1281 provides: 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. The trial court has authority to compel arbitration pursuant to Code of Civil Procedure section 1281.2 which provides in 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 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. [] . . .  [] If the court determines that a written agreement to arbitrate a controversy exists, an order to arbitrate such controversy may not be refused on the ground that the petitioners contentions lack substantive merit. [] If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies . . . .

Any doubts as to whether an arbitration clause applies to a particular dispute should be resolved in favor of sending the parties to arbitration. (Vianna v. Doctors Management Co. (1994) 27 Cal.App.4th 1186, 1189; United Transportation Union, AFL/CIO v. Southern California Rapid Transit Dist. (1992) 7 Cal.App.4th 804, 808.) However, the right to compel arbitration depends upon the existence of a valid contract between the parties. (County of Contra Costa v. Kaiser Foundation Health Plan, Inc. (1996) 47 Cal.App.4th 237, 245; Marsch v. Williams (1994) 23 Cal.App.4th 250, 255; Boys Club of San Fernando Valley v. Fidelity & Deposit Co. (1992) 6 Cal.App.4th 1266, 1271; Blatt v. Farley (1990) 226 Cal.App.3d 621, 625.) The question of whether a valid agreement to arbitrate exists is determined by reference to state law applicable to contracts generally. (Doctors Associates, Inc. v. Casarotto (1996) 517 U.S. 681, 686-687; Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-973; Kinney v. United Healthcare Services, Inc. (1999) 70 Cal.App.4th1322, 1328.) Although California has a strong public policy in favor of arbitration (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9), there is no public policy favoring arbitration of disputes, which parties have not agreed to arbitrate. (Freeman v. State Farm Mut. Auto Ins. Co. (1975) 14 Cal.3d 473, 481; Cione v. Foresters Equity Services, Inc. (1997) 58 Cal.App.4th 625, 634; Engineers & Architects Assn. v. Community Development Dept. (1994) 30 Cal.App.4th 644, 653.) Before a party may be compelled to arbitrate a claim, the petitioning party has the burden of proving the existence of a valid arbitration agreement and the dispute is covered by the agreement. (Engalla v. Permanente Medical Group, Inc., supra, 15 Cal.4th at p. 972; Rosenthalv. Great Western Financial Securities Corp. (1996) 14 Cal.4th 394, 413-414.) If petitioner meets its burden, the respondent has to prove by a preponderance of the evidence any defense to the petition. (Engalla v. Permanente Medical Group, Inc., supra, 15 Cal.4th at p. 972; Rosenthal v. Great Western Financial Securities Corp., supra, 14 Cal.4th at p. 413.)

The first issue is whether there was a valid arbitration agreement. Defendants argue plaintiff is bound by arbitration provisions in the 2004 security agreement. This is because the 2004 security agreement was specifically referenced on page 4 of the 2006 promissory note. There is no requirement that an agreement expressly provide for arbitration because the arbitration may be required by a secondary document which is incorporated by reference. (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 895; Slaught v. Bencomo Roofing Co. (1994) 25 Cal.App.4th 744, 748-749; Baker v. Aubry (1989) 216 Cal.App.3d 1259, 1264.) But, [f]or the terms of another document to be incorporated into the document executed by the parties the reference must be clear and unequivocal, the reference must be called to the attention of the other party and he must consent thereto, and the terms of the incorporated document must be known or easily available to the contracting parties. (Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 641, emphasis omitted; see also Slaught v. Bencomo Roofing Co., supra, 25 Cal.App.4th at pp. 748-749.) Here, there is no clear incorporation by reference of the 2004 security agreement into the March 2006 promissory note. Indeed, on the first page of the March 2006 promissory note, there is an agreement by the parties that prior agreements have been superseded or replaced. Moreover, the March 2006 note contemplates that in the future the parties will execute security and mortgage of copyright agreements. Because there is no clear and unequivocal incorporation of the 2004 security agreements into the March 2006 promissory note, there was no valid arbitration agreement. (Baker v. Osborne Development Corp., supra, 159 Cal.App.4th at p. 895; Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582, 1608.)

However, even if there was a valid contract, the trial court also found that defendants had waived the right to compel arbitration. In St. Agnes Med. Ctr. v. PacifiCare of California (2003) 31 Cal.4th 1187, the Supreme Court explained: [T]he term waiver has a number of meanings in statute and case law. [Citation.] While waiver generally denotes the voluntary relinquishment of a known right, it can also refer to the loss of a right as a result of the partys failure to perform an act it is required to perform, regardless of the partys intent to relinquish the right. [Citations.] In the arbitration context, [t]he term waiver has also been used as a shorthand statement for the conclusion that a contractual right to arbitration has been lost. [Citation.] (Id. at p. 1195, fn. 4.) In deciding whether there is a waiver of the right to arbitration, St. Agnes applied the following factors: In determining waiver, a court can consider (1) whether the partys 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. (St. Agnes Med. Ctr. v. PacifiCare of California, supra, 31 Cal.4th at p. 1196 quoting Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 992; accord, Wagner Construction Co. v. Pacific Mechanical Corp. (2007) 41 Cal.4th 19, 31.) The trial courts waiver determination is reviewed for substantial evidence. (St. Agnes Med. Ctr. v. PacifiCare of California, supra, 31 Cal.4th at p. 1196; Engalla v. Permanente Medical Group, Inc., supra, 15 Cal.4th at p. 983; Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307, 319.)

The trial courts waiver determination is supported by substantial evidence. Plaintiff filed the complaint on May 8, 2008. Defendants answered the complaint on September 3, 2008. The answer contained 16 affirmative defenses but no claim that the matter was subject to arbitration. Defendants also filed a cross-complaint against plaintiff in September 2008. But, defendants did not request a stay so that arbitration could be utilized as a means to resolve the parties dispute. Eight months later, on May 15, 2009, defendants filed a petition to compel arbitration. At the time the petition was filed, a trial date had previously been set for May 26, 2009, but had been continued at defendants request. The parties had also engaged in extensive discovery. The right to discovery under the 2004 security agreement was at the arbitrators discretion. Defendants had also sought and obtained a continuance of the trial date. Plaintiff, who claims financial desperation, has spent hundreds of hours in discovery and trial preparation with his attorney. A timely arbitration demand would no doubt have been less costly and time consuming. In sum, there was substantial evidence: defendants actions were inconsistent with the right to arbitrate; the parties were well into the court litigation before the arbitration demand was made; the demand was made on the eve of the continued trial date (a year after the action was filed and eight months after defendants answered and filed a cross-complaint); defendants filed a cross-complaint without seeking a stay; defendants took advantage of discovery procedures that would not have been available in arbitration; and plaintiff was prejudiced by the delay. Under the circumstances, the trial courts waiver determination must be upheld.

IV. DISPOSITION

The order denying the petition to compel arbitration is affirmed. Plaintiff is awarded his costs on appeal from defendants, R2D2, LLC, David Bergstein, Bordertown Productions, Inc., LLC, Mobius .45 Productions, LLC, Mobius International, Inc., and Wendell Distributions, Inc.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

WEISMAN, J.^*

We concur:

ARMSTRONG, ACTING P. J.

MOSK, J.

Publication courtesy of California pro bono legal advice.

Analysis and review provided by La Mesa Property line attorney.

San Diego Case Information provided by www.fearnotlaw.com

^* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.