Filed 3/20/18 Scott v. Matsui CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS

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COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA



JASON M. SCOTT et al.,

Plaintiffs and Respondents,

v.

DARRYL SHOJI MATSUI, Individually and as Trustees, etc., et al.,

Defendants, Cross-complainants and
Appellants;

GEORGIA MURPHY et al.,

Cross-defendants and Respondents.
D072161



(Super. Ct. No. 37-2016-00024163- CU-OR-NC)


APPEAL from an order of the Superior Court of San Diego County, Timothy M. Casserly, Judge. Affirmed in part, reversed in part, and remanded with instructions.

Nicholas & Tomasevic, Craig M. Nicholas and David G. Greco for Defendants, Cross-complainants and Appellants.
Galuppo & Blake, Louis A. Galuppo, Steven W. Blake, Andrew E. Hall, and Daniel T. Watts for Plaintiffs and Respondents.
Keeney, Waite & Stevens, Todd F. Stevens and Mary M. Best for Georgia Murphy and Coldwell Banker Residential Brokerage Company, Cross-defendants and Respondents.
Plaintiffs Jason M. Scott and Patricia J. Scott (Buyers) bought a home (Property) from defendants Darryl Shoji Matsui and Pollie Alisa Gautsch (Sellers) in July 2014. After Buyers began the process of remodeling in April 2015, they allege that they first learned of an easement on the Property that created an encroachment onto the city's right-of-way. In a complaint filed in July 2016, Buyers asserted various causes of action against Sellers based on Sellers' alleged failure to disclose the easement.
Pursuant to an arbitration provision in the contract for the purchase and sale of the Property, Sellers demanded arbitration and filed a motion to compel arbitration in March 2017. The superior court denied Sellers' motion, ruling that, by their actions during the October 2015 through March 2017 time period—i.e., from the date the parties first attempted to resolve their dispute through the filing of Sellers' motion—Sellers had waived their right to arbitrate the dispute.
Sellers appeal from the May 2017 order denying their motion (Order). Because the record contains no evidence of the requisite prejudice to Buyers from Sellers' delay in demanding arbitration, we will reverse the Order and remand with directions to grant Sellers' motion.
I.
FACTUAL AND PROCEDURAL BACKGROUND
We recite the facts in a light most favorable to the trial court's order denying arbitration. (Jones v. Adams Financial Services (1999) 71 Cal.App.4th 831, 833.)
Buyers purchased the Property from Sellers in July 2014, pursuant to a written agreement (Contract), which consists of five forms from the California Association of Realtors, Inc.: California Residential Purchase Agreement and Joint Escrow Instructions and Counter Offer Nos. 1-4, copies of which are attached as exhibit Nos. 1-5 to the complaint. Buyers alleged that, as they began the remodeling process in April 2015, they learned for the first time that "an easement runs through structure(s) on the Property, thereby creating an encroachment onto the [city's] right-of-way." By June of 2015, Buyers allege that they received notice from the city that required them "to significantly and substantially alter or tear down portions of existing structures on the Property that encroach over the Property line."
In September 2015, Buyers wrote Sellers asking to discuss issues related to Sellers' failure to disclose an easement. Approximately a week later, Sellers responded, indicating that they wanted to mediate the dispute pursuant to the mediation provision found at paragraph 26.A. of the Contract. The parties exchanged further correspondence in January 2016 in which Buyers outlined their issues in more detail, and both sides indicated their willingness to mediate. The parties met, but did not resolve their dispute.
In July 2016, Buyers filed the underlying action against Sellers, both individually and as trustees of a living trust. In each of the six causes of action in the complaint, Buyers seek damages from Sellers based on Sellers' alleged failure to disclose an easement on the Property.
In September 2016, the parties participated in a second mediation. Although unsuccessful, they continued talking afterward.
In December 2016, Sellers responded to the complaint. They filed an answer, generally denying the allegations of the complaint and affirmatively asserting 36 defenses. Sellers also filed a cross-complaint for indemnity against Buyers' real estate agent and the agent's broker (Realtors).
The court presided over three case management conferences between December 2016 and March 2017, ultimately setting an October 2017 trial date. By late March 2017, Buyers had propounded written discovery on Sellers, Sellers had provided written responses, Buyers had noticed the depositions of Sellers, and Sellers had deposited the statutory advance jury fee.
In late March, the parties again engaged in a formal mediation. Again they did not settle their dispute; and before the end of the day, Sellers delivered a letter to Buyers and Realtors demanding arbitration under the terms of the Contract. This was the first time Sellers ever mentioned arbitration to Buyers.
Within days, Sellers followed up their demand with a motion in the trial court for an order to compel arbitration and to stay the court proceedings. Buyers opposed the motion, in part arguing that Sellers, by their delay in demanding arbitration and their participation in the litigation, had waived any right they may have had to arbitrate the dispute. Realtors opposed the motion, in part arguing that, because they are not parties to the Contract, they cannot be required to arbitrate. Sellers filed a written reply to both oppositions.
Following oral argument, the trial court took the matter under submission, ultimately issuing a minute order denying Sellers' motion to compel arbitration and stay the court proceedings (previously identified as the Order). In relevant part, the court ruled that, because "[Sellers'] actions are inconsistent with the right to arbitrate and the litigation machinery has been substantially invoked," Sellers had waived their right under the Contract to arbitrate their disputes in the pending litigation. Sellers timely appealed from the Order.
II.
DISCUSSION
The sole issue on appeal is whether the trial court erred in finding that Sellers had waived their right to arbitrate their dispute with Buyers concerning disclosures related to an easement on the Property. The agreement to arbitrate is found at paragraph 26.B. of the Contract and provides in part:
"ARBITRATION OF DISPUTES: [¶] Buyer and Seller agree that any dispute or claim in Law or equity arising between them out of this Agreement . . . , which is not settled through mediation, shall be decided by neutral, binding arbitration. . . . The parties shall have the right to discovery in accordance with Code of Civil Procedure § 1283.05. In all other respects, the arbitration shall be conducted in accordance with Title 9 of Part 3 of the Code of Civil Procedure. . . . Enforcement of this agreement to arbitrate shall be governed by the Federal Arbitration Act[(FAA; 9 U.S.C. § 1 et seq.)] . . . ." (Italics added; bolding omitted.)
As we will explain, a party that opposes arbitration under the FAA on the basis that its adversary waived the right to arbitrate by its litigation conduct and delay in demanding arbitration must demonstrate a showing of prejudice by the adversary's actions. As we will further explain, because Buyers presented no evidence of prejudice, the trial court erred in finding that Sellers waived their right to arbitrate their dispute with Buyers.
A. Law
"[T]he courts of this state have held that the failure to make a timely demand for arbitration results in a 'waiver' of the right to compel arbitration." (Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307, 314 (Platt Pacific).) Although cases and statutes speak in terms of a "waiver" of the right to arbitrate, the term is used " 'as a shorthand statement for the conclusion that a contractual right to arbitration has been lost.' " (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195, fn. 4 (St. Agnes).) In contrast with traditional waiver, "[t]his does not require a voluntary relinquishment of a known right . . . . In this context, waiver is more like a forfeiture arising from the nonperformance of a required act." (Burton v. Cruise (2010) 190 Cal.App.4th 939, 944; see Platt Pacific, at p. 315 [" 'waiver' " is used "as a shorthand statement for the conclusion that a contractual right to arbitration has been lost"].)
Because of the strong policy favoring arbitration, "under both federal and California law, arbitration agreements are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 98, fn. omitted; see also 9 U.S.C. § 2; Code Civ. Proc., § 1281. )
Thus, the FAA, "requires close judicial scrutiny of waiver claims"; "waivers are not lightly to be inferred and the party seeking to establish a waiver bears a heavy burden of proof." (St. Agnes, supra, 31 Cal.4th at p. 1195; accord, Richards v. Ernst & Young, LLP (9th Cir. 2013) 744 F.3d 1072, 1074 (Richards) [" 'Waiver of a contractual right to arbitration is not favored,' and, therefore, 'any party arguing waiver of arbitration bears a heavy burden of proof.' "].) Indeed, " 'as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration' ''—especially where the issue involves " 'an allegation of waiver, delay, or a like defense to arbitrability.' " (Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 384, quoting Moses H. Cone Memorial Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24-25.)
Where no deadline for demanding arbitration is specified in the agreement, a reasonable time is allowed, and the determination of what constitutes a reasonable time depends on " 'the situation of the parties, the nature of the transaction, and the facts of the particular case.' " (Spear v. California State Auto. Assn. (1992) 2 Cal.4th 1035, 1043 [under state law].) Participating in litigation of an arbitrable claim does not itself waive a party's right to seek arbitration later. (St. Agnes, supra, 31 Cal.4th at p. 1203.) Although "[b]oth state and federal law emphasize that no single test delineates the nature of the conduct that will constitute a waiver of arbitration," the California Supreme Court has instructed for almost 40 years that " '[t]he presence or absence of prejudice from the litigation of the dispute is the determinative issue under federal law.' " (Id. at pp. 1195, 1204, quoting Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 188 (Doers), italics added; accord, Thorup v. Dean Witter Reynolds, Inc. (1986) 180 Cal.App.3d 228, 237 (Thorup) [to establish an effective waiver under the FAA, "[t]he party opposing arbitration must demonstrate actual prejudice" (italics added)].)
A majority of federal appellate courts agrees that, under the FAA, a party seeking to prove waiver of a right to arbitration must demonstrate, in addition to acts inconsistent with the right to arbitrate, "prejudice to the party opposing arbitration resulting from such inconsistent acts." (Richards, supra, 744 F.3d at p. 1074, italics added; accord, Martin v. Yasuda (9th Cir. 2016) 829 F.3d 1118, 1124 [same test]; Krinsk v. SunTrust Banks, Inc. (11th Cir. 2011) 654 F.3d 1194, 1200 [same test]; Hooper v. Advance America, Cash Advance Centers of Missouri, Inc. (8th Cir. 2009) 589 F.3d 917, 920 [same test], 922, fn. 6 [focus is "on the prejudice to [the opposing party]," not on forum shopping]; Iraq Middle Market Development Foundation v. Harmoosh (4th Cir. 2017) 848 F.3d 235, 241 [to establish waiver based on pending litigation, party opposing arbitration must show that proceeding with the arbitration would " 'prejudice' the [opposing] party"]; In re Cox Enterprises, Inc. Set-top Cable Television Box Antitrust Litigation (10th Cir. 2015) 790 F.3d 1112, 1116 [six-factor test that includes "whether the delay affected, misled, or prejudiced the opposing party"]; In re Pharmacy Benefit Managers Antitrust Litigation (3d Cir. 2012) 700 F.3d 109, 117 [" '[p]rejudice is the touchstone for determining whether the right to arbitrate has been waived by litigation conduct"]; Petroleum Pipe Americas Corp. v. Jindal Saw, Ltd. (5th Cir. 2009) 575 F.3d 476, 480 [finding of waiver requires party opposing arbitration to have suffered " 'detriment or prejudice' "]; O.J. Distributing, Inc. v. Hornell Brewing Co., Inc. (6th Cir. 2003) 340 F.3d 345, 356 ["actual prejudice" required]; Doctor's Associates, Inc. v. Distajo (2d Cir. 1997) 107 F.3d 126, 131 [pending litigation must " 'result[] in prejudice to the opposing party' "].)
B. Analysis
1. Standard of Review
The parties disagree on the standard of review we are to apply.
For purposes of appellate review of an order granting or denying a motion to compel arbitration, where the party opposing arbitration contends the moving party waived the right to arbitrate, the determination of waiver is "[g]enerally" a question of fact, and accordingly "the trial court's finding, if supported by sufficient evidence, is binding on the appellate court." (St. Agnes, supra, 31 Cal.4th at p. 1196, citing Platt, supra, 6 Cal.4th at p. 319.) Referring to the record here, Buyers contend that the trial court considered evidence and made factual findings related to Sellers' delay in demanding arbitration—ultimately finding that Sellers waived their right to arbitrate the dispute because "[their] actions [we]re inconsistent with the right to arbitrate and the litigation machinery ha[d] been substantially invoked." Based on the above-quoted standard under St. Agnes and Platt Pacific, therefore, Buyers argue that we must review the Order for substantial evidence.
Relying on the same two authorities, Sellers assert that we must review the waiver issue de novo: " 'When, however, the facts are undisputed and only one inference may reasonably be drawn, the issue is one of law and the reviewing court is not bound by the trial court's ruling.' " (St. Agnes, supra, 31 Cal.4th at p. 1196, quoting Pacific Platt, supra, 6 Cal.4th at p. 319.) Sellers, too, refer to the same record, suggesting that none of the facts, or inferences from facts, is in dispute, because the evidence on which the trial court relied involved specific litigation-related events that occurred on uncontroverted dates.
We need not decide which standard of review to apply, because as we explain at part II.B.2., post, the record lacks evidence that Buyers were prejudiced by the timing of Sellers' arbitration demand. Thus, the result is the same on this record whether we review the Order de novo or for substantial evidence to support an implied finding of prejudice.
2. Prejudice to Buyers
In support of their opposition to Sellers' motion, the only evidence Buyers submitted was the declaration of Buyers' attorney, in which counsel testified only to undisputed chronological events. In their points and authorities, Buyers relied on this evidence to establish, as the trial court found, that Sellers first demanded arbitration in March 2017—nine months after Buyers filed the underlying lawsuit and 18 months after Buyers first complained to Sellers about the Property.
In response to Sellers' argument below that, under the FAA, the court was required to compel arbitration unless Buyers established the requisite prejudice, Buyers argued that they were prejudiced by Sellers' delay in demanding arbitration on the following grounds: (1) During the three attempts to mediate or informally resolve the matter, Buyers discussed the merits of their case; (2) the dispute concerned the sale of real property, escrow had closed almost three years earlier, and there was a chance that documents could have been lost; (3) the parties had a trial date in six months, and "it is unlikely that an arbitration would resolve this dispute before [then]"; (4) Buyers already had "expended a great deal of time and resources mediating and litigating this case"; (5) the delay had deprived Buyers of the benefits of arbitration; and (6) prior to Sellers' first notice that they intended to arbitrate, Buyers had undertaken considerable efforts to resolve the dispute during the nine months of formal litigation and the nine months of informal attempts to resolve the dispute prior to litigation. However, "unsworn averments in a memorandum of law prepared by counsel do not constitute evidence." (Davenport v. Blue Cross of California (1997) 52 Cal.App.4th 435, 454 [effect of pending FAA arbitration on court order awarding provisional relief]; accord, In re Zeth S. (2003) 31 Cal.4th 396, 413-414, fn. 11 (Zeth S.) ["the unsworn statements of counsel are not evidence"].)
Without evidence of anything other than the events and dates over the 18 months that preceded Sellers' motion, Buyers did not meet their burden of establishing prejudice. Stated differently, in response to the first five of the above-described suggestions of prejudice, the record contains no evidence of: (1) discussions of the merits of Buyers' case; (2) what documents, if any, were needed or unavailable; (3) when an arbitration hearing might commence; (4) the resources Buyers had expended; and (5) what benefits of arbitration Buyers had been denied. With regard to an argument of prejudice based on (6) Buyers' considerable efforts to resolve the dispute, as a matter of law such efforts are insufficient to establish the requisite prejudice: " ' "[W]aiver does not occur by mere participation in litigation" ' if there has been no judicial litigation of the merits of arbitrable issues . . . . [¶] Because merely participating in litigation, by itself, does not result in a waiver, courts will not find prejudice where the party opposing arbitration shows only that it incurred court costs and legal expenses." (St. Agnes, supra, 31 Cal.4th at p. 1203.)
At the hearing on Sellers' motion, Buyers repeated some of these examples of alleged prejudice—in particular, the considerable money Buyers had already spent, the fees and costs anticipated in arbitration, the length of time before an arbitrator could hear the dispute, the unusable discovery undertaken in the litigation, and disclosure of Buyers' litigation strategy. However, the oral argument of counsel is no more evidence than the written argument. (Villacorta v. Cemex Cement, Inc. (2013) 221 Cal.App.4th 1425, 1433; Zeth S., supra, 31 Cal.4th at p. 414.)
On appeal, Buyers have narrowed their presentation. Buyers argue first that they "suffered prejudice because they lost the primary benefit of arbitration: Speedy resolution of a lawsuit at low cost." (Bolding omitted.) We acknowledge that "[p]rejudice typically is found only where the petitioning party's conduct has . . . substantially impaired the other side's ability to take advantage of the benefits and efficiencies of arbitration." (St. Agnes, supra, 31 Cal.4th at p. 1204.) Again, however, the record contains no evidence of what Buyers contend were the primary benefits of their agreement to arbitrate—namely, the speed or low cost associated with arbitration that Buyers allegedly lost as a result of Sellers' delay in demanding arbitration.
In any event, generic claims of speed or low cost are not the type of benefit or efficiency the St. Agnes court had in mind when analyzing potential prejudice. Instead, the examples given by the court include: "where the petitioning party used the judicial discovery processes to gain information about the other side's case that could not have been gained in arbitration"; "where a party unduly delayed and waited until the eve of trial to seek arbitration"; "or where the lengthy nature of the delays associated with the petitioning party's attempts to litigate resulted in lost evidence." (St. Agnes, supra, 31 Cal.4th at p. 1204 [citing cases].) Even if we were to consider that the record contains evidence to support Buyers' appellate arguments, Buyers still fail to establish the requisite prejudice under the above-quoted examples: Sellers, the petitioning parties, did not initiate any discovery or otherwise gain information about Buyers' case that could not have been gained in arbitration; Sellers did not first demand arbitration on the eve of trial; and Buyers do not suggest what, if any, evidence may have been lost.
Buyers' alternative argument on appeal is that the party opposing a delayed demand for arbitration necessarily suffers prejudice without the need for an additional showing "when he is 'misled' or encounters 'significant delay' in the resolution of the case"—relying on Thorup, supra, 180 Cal.App.3d at p. 237. We do not read Thorup as excusing an evidentiary showing of prejudice; nor could we, given the court's express statement of the law under the FAA and its application in that appeal:
"[For] an effective waiver, [t]he party opposing arbitration must demonstrate actual prejudice. [Citations. ]. Here, no such prejudice has been shown." (Thorup, at p. 237, italics added.)
Indeed, Thorup's ruling that the party opposing arbitration failed to establish the requisite showing of prejudice immediately precedes the court's statement—on which Buyers rely—that the party opposing arbitration was not "misled" and the delay was not "significant." (Ibid.) There is no suggestion in Thorup, or in the 30 years of jurisprudence since Thorup, that evidence of whether a party was misled or whether the delay was significant is a substitute for evidence of prejudice.
Finally, in the last few pages of their appellate brief, Buyers argue that Sellers "are estopped from demanding arbitration because they repudiated the arbitration contract, demanded a jury, filed a cross-claim, consented to trial, consented to depositions, and told the court that they did not want to arbitrate." However, Buyers forfeited appellate consideration of this argument, because they failed to mention estoppel in the trial court. " 'A party is not permitted to change his position and adopt a new and different theory on appeal. To permit him to do so would not only be unfair to the trial court, but manifestly unjust to the opposing litigant.' " (Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1350, fn. 12, quoting Ernst v. Searle (1933) 218 Cal. 233, 240-241.) In any event, in both the trial court and on appeal Buyers referenced each of those events, arguing that together they supported the trial court's finding of waiver. As we have concluded ante, without evidence of prejudice those events will not support a finding of waiver, and Buyers do not suggest how or why those events support an estoppel under the FAA when they will not support a waiver.
In conclusion, where an arbitration agreement is subject to the FAA, for the party opposing arbitration to establish that the party seeking arbitration waived the right to arbitrate as a result of a delay in demanding arbitration, the superior court must first find, based on substantial evidence, that the opposing party was prejudiced by the delay. Here, however, the party opposing arbitration, Buyers, did not present any evidence of prejudice. Accordingly, regardless whether we review the Order de novo or for substantial evidence, because the record contains no evidence that Buyers were prejudiced by Sellers' delay in demanding arbitration, the trial court erred in denying Sellers' motion to compel Buyers to arbitrate their dispute.
DISPOSITION
The Order is reversed as to Buyers, and the superior court is directed to enter an order granting Sellers' motion to compel arbitration and to stay the proceedings. The Order is affirmed as to Realtors. Sellers are entitled to their costs on appeal from Buyers, and Realtors are entitled to their costs on appeal from Sellers. (Cal. Rules of Court, rule 8.278(a)(3), (5).)


IRION, J.

WE CONCUR:



McCONNELL, P. J.



GUERRERO, J.