Alaia v. Tramontana Group-1

Filed 8/29/07 Alaia v. Tramontana Group-1 CA2/4

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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 FOUR

APPEAL from an order of the Superior Court of Los Angeles County,

Joseph E. Di Loreto, Judge. Affirmed.

E. Thomas Moroney for Defendants, Cross-complainants, and Appellants.

Huron Law Group, Jeffrey Huron, and Edward Kang for Plaintiff, Cross-defendant, and Respondent.

______________________________

The sole question on appeal is whether the trial court improperly denied defendants motion to compel arbitration based on its finding that defendants had waived their contractual right to arbitration. We affirm.

FACTUAL AND PROCEDURAL SUMMARY

On January 26, 2006 (all further dates are in 2006 unless otherwise indicated), plaintiff Carlo M. Alaia filed a complaint and demand for jury trial against his brother, Louis C. Alaia, M.D. (Louis), and Louiss wife, Susan C. Alaia (Susan), individually and doing business as Santa Clara Management (SCM); Louiss daughter, Diane M. Fetchick, M.D. (Diane), and her husband, Richard Fetchick, Sr., M.D. (Richard); Louiss son, Marc M. Alaia (Marc); Louiss friend, Davin Palitz (Palitz); and Tramontana Group-I, Inc. ([Tramontana]), a California corporation formed by Louis through which the parties real estate investments were to be owned (collectively, [d]efendants).

According to plaintiff, he filed the underlying action for declaratory relief, fraud, breach of fiduciary duty, rescission, accounting, constructive trust and conversion after he invested nearly $2 million with [defendants] to buy apartment buildings [in Long Beach] and [d]efendants then sold one of the buildings [and purchased a shopping center in Arkansas] without [his] knowledge or consent, failed to pay him his share of the sale proceeds or his share of the profits from the other buildings, and unilaterally rescinded his equity interest in the properties purchased with the money he invested, among other acts of mismanagement and misconduct. On January 27, plaintiff recorded a lis pendens against the two Long Beach properties at issue, and filed them with the court four days later.

A memorandum of agreement signed by the parties provides that [i]n the event of litigation of these terms for cause, binding arbitration is mutually agreed to and legal fees will be awarded to the prevailing party(ies).

After several requests for extension by defendants, and almost four months after the complaint was filed, Louis and Susan, individually and doing business as SCM (Group 1 defendants), filed an answer on May 24. Their 17th affirmative defense was that the parties have a written Memorandum of Agreement which requires arbitration of the disputes alleged in the complaint. The same day, Marc, Richard, Diane, Palitz and Tramontana (Group 2 defendants) filed a separate answer. Their 30th affirmative defense stated that [t]he parties have a written Memorandum of Agreement which requires arbitration of the disputes alleged in the complaint. All defendants, except SCM, also filed cross-complaints that day for breach of contract. The cross-complaints state that they are being brought as . . . compulsory cross-complaint[s] in this action and without waiving any right to compel arbitration.

On June 19, the Group 2 defendants filed a case management statement. In it, they requested a jury trial, and did not check any of the boxes indicating that they wished to pursue arbitration. They gave notice that they intended to engage in written discovery and depose plaintiff. The next day, the Group 1 defendants filed their case management statement. It gave notice that [t]here is an arbitration clause that may be invoked. The Group 1 defendants also indicated that they wished to engage in written discovery and depose plaintiff. In the space provided to indicate motions expected to be filed before trial, neither group stated that it would be filing a motion to compel arbitration, or a motion to stay the proceedings pending arbitration.

On June 22, the attorney for the Group 1 defendants took over representation of the Group 2 defendants. The same day, all defendants except SCM filed a joint amended cross-complaint. In the amended cross-complaint, they again asserted that they were not waiving their right to compel arbitration.

On June 26, the court held a case management conference, during which both sides agreed to mediation, and a trial date was set for February 5, 2007. Defendants did not mention arbitration to the court during the conference. According to defendants attorney: At the Case Management Conference . . . I advised [plaintiffs attorney] that there was a written agreement providing for arbitration and that I was evaluating whether my clients would prefer arbitration. At that time, [plaintiffs attorney] told me he did not believe his client had any interest in arbitrating the dispute.

From March to early July, plaintiff served numerous discovery requests on defendants and third parties. Defendants responded to some of plaintiffs requests for documents, interrogatories and admissions. Susans deposition was set for July 21, and Louiss deposition was set for July 24.

On July 7, plaintiff filed a motion for appointment of receiver and for a preliminary injunction. Three days later, defendants attorney faxed a letter to plaintiffs attorney advising that his clients have decided to enforce the arbitration provision in the [memorandum of agreement]. On July 11, almost six months after the complaint was filed, defendants filed a motion to compel arbitration and stay the proceedings pending arbitration. On July 19, defendants applied ex parte for an interim stay of proceedings pending resolution of the motion to compel arbitration.

The same day, plaintiff opposed the application for interim stay, arguing that defendants have been very adept in delaying the proceedings in this action. They have changed counsel, provided select, limited and misleading document production, avoided depositions and submitted unintelligible interrogatory responses. Now, more than six months after the Complaint was filed, the Defendants ask for arbitration despite having served an answer, cross-complaint, first amended cross-complaint, responses to requests for admission, interrogatories and documents demands. The Defendants seek a stay of the discovery in these proceedings on virtually the eve: (1) of the dates they agreed to for rescheduling their depositions (i.e., Susan for [July 21] and Louis for [July 24]); and (2) the hearing on [plaintiffs] motion for appointment of a receiver and request for preliminary injunction (hearing scheduled for [August 3]). (Fns. omitted.)

The court denied defendants ex parte application for an interim stay: Defendant[s] should have petitioned for arbitration and stay before responding to discovery and seeking affirmative relief by way of a cross-complaint. Arbitration rights have been waived by affirmative actions of the parties. The same day, defendants noticed plaintiffs deposition to avoid [defendants] being placed at a discovery disadvantage (where plaintiff has Susan and Louis depositions but defendants did not have and, if the matter were ordered to arbitration, could not take Carlos deposition).

Plaintiff filed an answer to the amended cross-complaint on July 26. In the meantime, plaintiff deposed Susan. Plaintiff requested that certain documents be provided at Susans deposition. Defendants did not produce them at her deposition, but provided them to plaintiff on a later date. The parties then agreed to postpone the depositions of plaintiff and Louis, and in the event the matter was ordered to arbitration, both depositions would still be taken as part of discovery in the arbitration proceeding.

On August 17, the court held a joint hearing on defendants motion to compel arbitration and plaintiffs motion for a receiver and preliminary injunction. The court denied the motion to compel arbitration, finding that defendants had waived their contractual right to compel arbitration: I think youve gone enough ways to constitute a waiver. Youve used the power of this court, youve set a trial date, you made an appearance here, you filed a cross-complaint, [an] amended cross-complaint. It seems to me under those circumstances that you cant wait eight or nine months and all [of a] sudden come in say, gee, judge, I want to go to arbitration now. All right. The motion is denied. Im not going to order this to arbitration. I think counsel has been remiss in moving this forward. And at this point in time, . . . Im not going to unring the bell and send it all back and start it all over. The court also denied the motion for a receiver and preliminary injunction.

Defendants filed a timely notice of appeal of the courts order denying their motion to compel arbitration.

DISCUSSION

I

In his reply brief, plaintiff argues that defendants have waived their appeal by failing to provide an adequate record or set forth all material evidence on point in their statement of the facts. We disagree. The documents plaintiff complains were not designated in the record largely deal with the lis pendens, a motion to quash a subpoena, and plaintiffs motion for a receiver and preliminary injunction. We granted plaintiffs unopposed motion to augment the record and unopposed motion for judicial notice. Thus, the documents are part of the record on appeal. As for plaintiffs assertions that defendants excluded material evidence in their statement of facts, defendants are not required to list every absence of an event. For example, plaintiff faults defendants for not mentioning that they did not seek a stay of the proceedings when filing their cross-complaints, and not mentioning that they did not object to the setting of a trial date on arbitration grounds. Plaintiff could have, and did, highlight these facts. The defendants designation of the record and statement of facts are sufficient.

II

Defendants argue the trial court erred in denying their motion to compel arbitration because they did not waive arbitration. (See Code Civ. Proc., 1281.2, subd. (a).)

First, defendants argue that the Federal Arbitration Act (FAA) may be applicable to this case because the disputed transactions involve or affect interstate commerce, an assertion plaintiff does not dispute. Although the FAA generally preempts any contrary state law regarding the enforceability of arbitration agreements [citation], the federal and state rules applicable in this case are very similar. (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1194 (St. Agnes).)
[T]he FAA permits a party to obtain a stay of judicial proceedings pending arbitration unless such party is in default of that right. [Citation.] Although this principle of default is akin to waiver, the circumstances giving rise to a statutory default are limited and, in light of the federal policy favoring arbitration, are not to be lightly inferred. [Citation.] Accordingly, a party who resists arbitration on the ground of waiver bears a heavy burden [citations], and any doubts regarding a waiver allegation should be resolved in favor of arbitration [citation]. (St. Agnes, supra, 31 Cal.4th at p. 1195.) Our state waiver rules are in accord. State law, like the FAA, reflects a strong policy favoring arbitration agreements and requires close judicial scrutiny of waiver claims. [Citation.] Although a court may deny a petition to compel arbitration on the ground of waiver [citation], waivers are not to be lightly inferred and the party seeking to establish a waiver bears a heavy burden of proof. [Citations.] (Ibid.)

There is no single test to determine whether a party has waived its right to arbitration. The court may 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 abritration] had taken place; and (6) whether the delay affected, misled, or prejudiced the opposing party. (St. Agnes, supra, 31 Cal.4th at p. 1196, citing Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 992 (Sobremonte), which in turn, relies on a federal decision, Peterson v. Shearson/American Exp., Inc. (10th Cir. 1988) 849 F.2d 464, 467-468.) A partys bad faith or willful misconduct also may justify a courts refusal to compel arbitration. (St. Agnes, supra, 31 Cal.4th at p. 1196.)

Prejudice is the determinative issue under federal law.[1] (St. Agnes, supra, 31 Cal.4th at p. 1203.) In California, whether or not litigation results in prejudice also is critical in waiver determinations. (Ibid.) If there has been no litigation on the merits of the arbitrable issues, a showing of prejudice is required. (Groom v. Health Net (2000) 82 Cal.App.4th 1189, 1195 (Groom).) Prejudice in the context of waiver of the right to compel arbitration normally means some impairment of the other partys ability to participate in arbitration. (Id. at p. 1197.)

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.) Rather, courts assess prejudice with the recognition that Californias arbitration statutes reflect a strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution and are intended to encourage persons who wish to avoid delays incident to a civil action to obtain an adjustment of their differences by a tribunal of their own choosing. [Citation.] Prejudice typically is found only where the petitioning partys conduct has substantially undermined this important public policy or substantially impaired the other sides ability to take advantage of the benefits and efficiencies of arbitration. [] For example, courts have found prejudice where the petitioning party used the judicial discovery processes to gain information about the other sides case that could not have been gained in arbitration [citations]; where a party unduly delayed and waited until the eve of trial to seek arbitration [citation]; or where the lengthy nature of the delays associated with the petitioning partys attempts to litigate resulted in lost evidence [citation]. (Id. at p. 1204.)

Generally, the determination of waiver is a question of fact, and the trial courts finding, if supported by sufficient evidence, is binding on the appellate court. [Citations.] 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 courts ruling. (St. Agnes, supra, 31 Cal.4th at p. 1196.)

In this case, defendants actions were inconsistent with the right to arbitrate, and the litigation machinery was substantially invoked. They filed answers, cross-complaints and an amended cross-complaint before moving to compel arbitration. Defendants did not request a stay of the proceedings pending arbitration in any of these filings. That defendants indicated there was an arbitration provision, or that they may invoke arbitration, did not demonstrate that they intended to compel arbitration. Mere announcement of the right to compel arbitration is not enough. (Sobremonte, supra, 61 Cal.App.4th at p. 997.) The Group 2 defendants specifically requested jury trial. Defendants also gave notice that they intended to engage in written discovery and depose plaintiff, and then responded to plaintiffs discovery requests. Defendants appeared at the case conference hearing and made no mention of arbitration to the court. The parties even agreed to court-ordered mediation, and defendants participated in setting the trial date. Litigation in this case was well on its way.

There also is an element of bad faith here. Defendants were aware of their right to arbitration, yet they chose to fully participate in litigation for almost six months. Only when plaintiff filed his motion for receiver and preliminary injunction did defendants inform the court and plaintiff that they intended to compel arbitration.

Substantial evidence also supports a finding of prejudice. Factors to be considered in assessing prejudice are the length of delay in demanding arbitration, the expense and time invested by the opposing party in the litigation process and the disclosure of the partys defenses and strategies. (Sobremonte, supra, 61 Cal.App.4th at p. 995; Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558 (Guess?).) Given the nature of this fast track case, the length of delay was considerable. California Rules of Court, Rule 3.714(b)(1) provides that [t]he goal of each trial court should be to manage unlimited civil cases from filing so that: [] (A) 75 percent are disposed of within 12 months; [] (B) 85 percent are disposed of within 18 months; and [] (C) 100 percent are disposed of within 24 months. Both parties indicated in their case management statements that the case would be ready for trial within 12 months of the filing of the complaint. The case was set for trial approximately a year from the date the complaint was filed. In this context, a six month delay was unreasonable.

Further, by misleading plaintiff for almost six months, defendants allowed plaintiff to diligently prepare for trial and propound significant discovery on defendants and third parties, incurring considerable time and expenses. And by filing a cross-complaint, they compelled plaintiff to file an answer. In doing these things, plaintiff inevitably disclosed some of his defenses, strategies and case plan. (See Kaneko Ford Design v. Citipark, Inc. (1988) 202 Cal.App.3d 1220, 1228-1229 (Kaneko); Guess?, supra, 79 Cal.App.4th at p. 558.) The cumulative effect of defendants conduct was prejudicial. (See Kaneko, supra, 202 Cal.App.3d at p. 1229.)

Prejudice typically is found only where the petitioning partys conduct has substantially undermined th[e] important public policy [of a speedy and relatively inexpensive means of dispute resolution] or substantially impaired the other sides ability to take advantage of the benefits and efficiencies of arbitration. (St. Agnes, supra, 31 Cal.4th at p. 1204.) [T]he benefits it can provide, to both the parties and an already overburdened judicial system, become illusory when there is a failure to timely and affirmatively implement the procedure. (Sobremonte, supra, 61 Cal.App.4th at p. 997.) Here, defendants considerable delay in moving to compel arbitration substantially undermined the public policy of a time-efficient and relatively inexpensive means to dispute resolution. Because there is substantial evidence to support the trial courts ruling, we affirm.

DISPOSITION

The order denying defendants motion to compel arbitration is affirmed. Plaintiff is to have his costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

EPSTEIN, P. J.

We concur:

WILLHITE, J. SUZUKAWA, J.

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[1] Compare with Cabinetree of Wis. v. Kraftmaid Cabinetry, Inc. (7th Cir. 1995) 50 F.3d 388, 390 (taking the minority position that a showing of prejudice is not a requirement of waiver, and holding that an election to proceed before a nonarbitral tribunal for the resolution of a contractual dispute is a presumptive waiver of the right to arbitrate); Nat. Foun. for Cancer v. A.G. Edwards & Sons (D.C. Cir. 1987) 821 F.2d 772, 777 (holding that prejudice is not a separate and independent element of the showing necessary to demonstrate waiver of the right to arbitration).