Opinion
B296524
04-30-2020
AMERICAN/BCEGZ et al., Plaintiffs and Appellants, v. SHORES, LLC, Defendant and Respondent.
Nida & Romyn, David C. Romyn and Dennis M. Naish for Plaintiffs and Appellants. The Rodarti Group, Josef M. Rodarti and Ryan D. O'Dell for Defendant and Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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(a). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115(a). Los Angeles County Super. Ct. No. BC538363 APPEAL from an order of the Superior Court of Los Angeles County, Mark A. Young, Judge. Affirmed. Nida & Romyn, David C. Romyn and Dennis M. Naish for Plaintiffs and Appellants. The Rodarti Group, Josef M. Rodarti and Ryan D. O'Dell for Defendant and Respondent.
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INTRODUCTION
American/BCEGZ, a joint venture (Joint Venture), American Multifamily, Inc. (Multifamily), and BCEGZ-USA, Inc. (BCEGZ) (collectively, the American Parties) appeal from the trial court's order denying their motion to compel arbitration of three causes of action alleged in the third amended cross-complaint filed by Shores, LLC (Shores). The American Parties argue the court erred in finding they waived their right to arbitrate Shores's cross-claims after participating in litigation for nearly two and a half years before moving to compel arbitration. We affirm.
FACTS AND PROCEDURAL BACKGROUND
1. The Parties and the Underlying Contract
The Joint Venture, a partnership between Multifamily and BCEGZ, is a general contractor, and Shores is a real estate developer. In 2011, Shores held a ground lease on property in Marina del Rey where it planned to construct a 544-unit apartment complex (Project). In March 2011, the Joint Venture and Shores entered into a nine-figure contract for the Project's construction (Construction Contract).
Representatives from Multifamily and BCEGZ signed the Construction Contract on behalf of the Joint Venture.
The Construction Contract contained two dispute resolution provisions. The first provision addressed informal non-binding procedures, and the second provision addressed when the parties were required to submit their claims to binding arbitration (Arbitration Agreement). Specifically, under the Arbitration Agreement, the parties agreed that if the informal process failed to resolve all their claims, the remaining claims would be subject to binding arbitration. The Arbitration Agreement permitted the parties to take depositions and conduct discovery pursuant to Code of Civil Procedure section 1283.05, provided that all discovery related to the arbitration be completed within 90 days of the demand for arbitration. The Arbitration Agreement also included a provision allowing Shores to opt out of arbitration if Shores "is named as a party in litigation by another party that is not subject to a similar arbitration provision," or if "[Shores] intends to name as a party in litigation another party that is not subject to a similar arbitration provision, and the litigation relates to one or more of the remaining Claims [between Shores and the Joint Venture]."
2. The Parties Arbitrate Claims Related to the Project
In July 2013, while the Project was under construction, numerous disputes arose between the Joint Venture and Shores over delays in the completion of the Project, the amount charged for "extra and changed work," and defects in the Project's construction. That same month, the Joint Venture and Shores executed an "Addendum" to the Construction Contract (Addendum) which amended some of the terms governing the parties' resolution of disputes concerning the Project. Relevant here, the Addendum provided that the parties would submit all their present and future claims concerning the Project, excluding "unknown warranty and indemnity claims," to binding arbitration. The Addendum also established a priority-based schedule for resolving the parties' claims through arbitration. The Addendum required the parties to assert their claims "within 30 days of final completion of the Project[,]" and it provided that "a hearing on such claims shall be within the later of 75 days of final completion, or 75 days of the discovery of such claim[.]"
Around September or October 2013, the parties submitted their claims to binding arbitration. The Joint Venture alleged Shores breached the Construction Contract by failing to: (1) grant the Joint Venture extensions to complete the Project; (2) pay for "changed and extra work" that Shores required the Joint Venture to complete; and (3) pay for "contract retention as required upon successful completion of the Project." Shores alleged numerous construction defect claims against the Joint Venture, including defects in the Project's fire alarm and drainage systems and the construction of the units' balconies.
In early March 2014, while the parties' arbitration was pending, the American Parties initiated this action by filing a complaint against Shores and other defendants in the Los Angeles County Superior Court, alleging two causes of action to foreclose mechanics' liens on the Project. Shortly thereafter, the American Parties filed a motion to stay this action pending resolution of arbitration.
In May 2014, Shores filed a cross-complaint against the American Parties, the Project's architect, and an insurance company. As to the American Parties, Shores asserted claims for declaratory relief, breach of contract, breach of express warranty, and negligence, based on allegations that the Joint Venture unreasonably delayed the completion of the Project and that the finished Project suffered from design and construction defects, including several of the defects at issue in the parties' arbitration. Shortly after filing its cross-complaint, Shores filed two ex parte applications to stay the arbitration, both of which were denied.
In July 2014, the court granted the American Parties' motion to stay all proceedings on their complaint and Shores's cross-complaint. The court also granted a motion to compel arbitration of "the Complaint vs. Shores, LLC and the claims of the Cross Complaint filed by Shores LLC."
The American Parties have not included a copy of the motion to compel arbitration addressed in the July 2014 order in the appellants' appendix.
After hearings commenced in arbitration, Shores sought to "reserve" or "withdraw" from the arbitration its design and construction defect claims. Specifically, Shores asked to "reserve for resolution at a later date" its claims concerning defects in the design and construction of the Project's: (1) "fire life safety system"; (2) "balcony railings"; (3) the drainage systems for some of the apartment units' garages; and (4) the drainage systems for some of the apartment units' roofs. The Joint Venture objected to Shores withdrawing its claims from arbitration. The arbitrator allowed Shores to withdraw its claims and refused to offer an opinion "on what is the proper forum for the resolution of Shores['s] reserved claims—court, arbitration ... , or otherwise."
In July 2015, the arbitrator issued a final decision awarding the Joint Venture more than $24 million in damages and attorneys' fees and costs. In his written decision, the arbitrator noted that he did not decide the design and construction defect claims " 'reserved' " by Shores. In October 2015, the court confirmed the arbitration award and entered judgment in the Joint Venture's favor.
3. The Underlying Litigation
In March 2016, the Joint Venture filed an answer to Shores's original cross-complaint. The Joint Venture generally denied the allegations in the cross-complaint and asserted 29 separate affirmative defenses, none of which raised the Arbitration Agreement as a defense. In May 2016, after Shores appealed from the October 2015 judgment, the parties reached an agreement to settle, among other things, the Joint Venture's claims for payment under the October 2015 judgment and to dismiss Shores's appeal.
The record does not indicate whether Multifamily and BCEGZ filed separate answers to the cross-complaint.
In early September 2016, the Joint Venture filed a case management statement. The Joint Venture requested a jury trial and provided an estimated trial length of 10 to 15 days. In the section asking which alternative dispute resolution processes the Joint Venture would be willing to participate in, the Joint Venture did not select the box for "Binding private arbitration," instead selecting only the boxes for "Mediation" and "Settlement conference." In the section asking the Joint Venture to identify any motions the party expected to file before trial, the Joint Venture stated "[m]ultiple motions to disqualify counsel for various parties have been threatened, but none have been filed[.]" The Joint Venture did not state it intended to file a motion to compel arbitration. Nothing in the record indicates Multifamily or BCEGZ filed a separate case management statement.
In mid-September 2016, Shores filed a first amended cross-complaint. The Joint Venture, as one of the cross-defendants, apparently answered the first amended cross-complaint, but the American Parties have not included copies of that pleading or the Joint Venture's answer in the appellants' appendix.
In January 2017, Shores, the American Parties, and other cross-defendants filed a joint status conference statement. Although the joint statement acknowledges that the Joint Venture and Shores arbitrated numerous claims related to the Project's construction between 2013 and 2015, the American Parties did not indicate they intended to arbitrate any of the claims alleged in Shores's first amended cross-complaint. Rather, the American Parties stated they believed several of Shores's design and construction defect claims were barred by collateral estoppel or res judicata as a result of the prior arbitration and that the trial court should resolve those claims in a bifurcated proceeding.
Although the American Parties have not included any formal written request or written order in the record on appeal, they acknowledge the court denied their request to resolve the defect claims in a bifurcated proceeding.
In March 2017, Shores filed a second amended cross-complaint, a copy of which the American Parties have not included in the appellate record. In April 2017, the Joint Venture answered the second amended cross-complaint without raising arbitration as a defense to any of Shores's cross-claims.
Shores claims it had discovered additional defects in the Project's construction, which led the company to file its first and second amended cross-complaints.
In May 2017, the court issued a case management order. The court stayed all discovery not permitted by the order, which identified the type of discovery the parties were permitted to conduct, the procedures through which that discovery would be conducted, and the schedule by which the discovery would be disclosed to opposing parties. The order does not reference any arbitration agreement.
In July 2017, the court held a pre-trial hearing, at which counsel for the Joint Venture and Shores appeared. At that hearing, the Joint Venture did not indicate it intended to raise arbitration as a defense to any of Shores's defect claims.
In January 2018, the Joint Venture filed a second case management statement requesting a jury trial, this time estimating the trial would take 30 days. In the section addressing desirable forms of alternative dispute resolution, the Joint Venture again did not select the box for "Binding private arbitration," instead selecting only the box for "Mediation." The Joint Venture also did not state it intended to file a motion to compel arbitration. Nothing in the record indicates Multifamily or BCEGZ filed a separate case management statement.
In July 2018, the court held a pretrial hearing at which counsel for the Joint Venture and Shores appeared. The Joint Venture did not indicate it intended to raise arbitration as a defense to any of Shores's cross-claims. In August 2018, the court issued a case management order, noting that the parties agreed to try the case no later than early March 2020.
In September 2018, Shores filed the operative third amended cross-complaint. The pleading named as cross-defendants the same parties identified in the original cross-complaint, and it named eight cross-defendants who were not named in the original cross-complaint. Against the American Parties, Shores alleged five causes of action: breach of written contract (first cause of action), breach of express warranty (second cause of action), negligence (third cause of action), recovery on performance bond (fifth cause of action), and declaratory relief (fifteenth cause of action). The first, second, and third causes of action against the American Parties were based on the same design and construction defects claims at issue in the original cross-complaint, as well as new alleged defects, including claims that the Joint Venture failed to properly design and install "firewalls," concrete walls and waterproofing, planters, and interior cabinets.
In October 2018, the Joint Venture demurred to Shores's third amended cross-complaint. The Joint Venture demurred only to the fifteenth cause of action, arguing Shores failed to state a claim for declaratory relief because it failed to allege an actual controversy "involving justiciable questions relating to the rights or obligations of the parties." The Joint Venture did not rely on, let alone mention, the Arbitration Agreement in its demurrer.
In late October 2018, Shores filed its "Verified Final Defect List," which identified "known or suspected defective conditions in the original design and construction of the [Project]." In November 2018, Shores filed an amended defect list. In December 2018, Shores notified the American Parties that it had discovered an additional defect in the Project.
As of early 2019, the parties had engaged in extensive discovery. The parties responded to special interrogatories and production requests, exchanging nearly 750,000 documents. The court also ordered Shores to conduct destructive testing of "known or suspected conditions" of the Project.
4. The Motion to Compel Arbitration
On January 15, 2019, the American Parties filed a motion to compel arbitration of the first, second, and third causes of action in Shores's third amended cross-complaint. The American Parties argued those causes of action were subject to binding arbitration under the Arbitration Agreement. Shores opposed arbitration, contending that, among other things, the American Parties waived their right to arbitrate by participating in the underlying litigation for more than two years before making any arbitration demand. The American Parties filed a reply, arguing they did not act inconsistent with the right to arbitrate, unreasonably delay in seeking arbitration, or substantially participate in litigation before filing the motion to compel. In any event, the American Parties argued, Shores could not show it was prejudiced by any delay.
On February 27, 2019, the court denied the motion to compel arbitration, finding the American Parties waived their right to arbitrate the construction and design defect claims raised in Shores's third amended cross-complaint. The court explained that the American Parties' "use of the litigation machinery has been extensive over the last two years. Without moving to compel arbitration or signaling [their] intent to do the same, [the] American [Parties have] filed responsive pleadings, filed extensive cross-complaints, argued motions, and engaged in extensive written discovery. In addition, Shores acted in reliance on [the] American[ Parties'] failure to invoke [their] right to arbitration and also engaged in over two years of extensive litigation. ... The court concludes that this constitutes prejudice ... ." The court also found that, "since there are many parties involved in this action not subject to arbitration, ... compelling Shores and [the] American [Parties] to arbitrate their claims while staying the other claims would create a substantial risk of contradictory rulings and inconsistent judgments."
The American Parties appeal.
DISCUSSION
1. Applicable Law and Standard of Review
California and federal law have strong public policies in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution. (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195 (St. Agnes).) Nevertheless, a court may deny a party's motion to compel arbitration if it finds the moving party has waived its right to arbitrate. (Code Civ. Proc., § 1281.2, subd. (a); St. Agnes, at pp. 1194-1196.)
Although "no single test delineates the nature of the conduct that will constitute a waiver of arbitration," the California Supreme Court has identified the following factors courts should consider when evaluating the issue: " ' "(1) whether the party's 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." ' [Citation.]" (St. Agnes, supra, 31 Cal.4th at pp. 1195-1197.)
Prejudice is " 'critical in waiver determinations.' [Citation.]" (Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 376-377 (Iskanian).) " 'Prejudice typically is found only where the petitioning party's conduct has substantially undermined this important public policy or substantially impaired the other side's ability to take advantage of the benefits and efficiencies of arbitration. ...' [Citation.]" (Id. at p. 377.)
" '[B]ecause merely participating in litigation, by itself, does not result in ... waiver, courts will not find prejudice where the party opposing arbitration shows only that it incurred court costs and legal expenses.' [Citation.]" (Iskanian, supra, 59 Cal.4th at p. 377.) But, where the moving party's delay in seeking arbitration is unreasonable and unjustified, the nonmoving party's "expenditure of time and money are relevant to the prejudice analysis." (Oregel v. PacPizza, LLC (2015) 237 Cal.App.4th 342, 361; see also Iskanian, at p. 377.) Such a delay deprives the other party of the advantages of arbitration as a speedy, efficient, and cost-effective means of dispute resolution. (Burton v. Cruise (2010) 190 Cal.App.4th 939, 948 (Burton).)
"The question of waiver is generally a question of fact, and the trial court's finding of waiver is binding on us if it is supported by substantial evidence." (Bower v. Inter-Con Security Systems, Inc. (2014) 232 Cal.App.4th 1035, 1043.) "Because this is not a case where 'only one inference may reasonably be drawn' from the underlying facts, we review the court's decision under a substantial evidence standard." (Spracher v. Paul M. Zagaris, Inc. (2019) 39 Cal.App.5th 1135, 1138.)
2. Substantial evidence supports the court's finding that the American Parties waived their right to arbitrate.
The American Parties contend the court erred when it found they waived their right to compel arbitration of the first, second, and third causes of action alleged in the operative third amended cross-complaint. Primarily, the American Parties argue insufficient evidence supports the court's finding that they substantially participated in litigation and that their delay in moving to compel arbitration prejudiced Shores. As we explain, substantial evidence supports the court's waiver finding.
As a preliminary matter, ample evidence supports a finding that the American Parties acted inconsistent with the right to arbitrate during the nearly two-and-a-half-year period between the time the Joint Venture answered Shores's first amended cross-complaint in September 2016 and the American Parties moved to compel arbitration in January 2019. The American Parties do not (and cannot) dispute they were aware of the Arbitration Agreement at the time the Joint Venture filed its answer to Shores's first amended cross-complaint. As outlined above, the Joint Venture, which is a partnership between appellants Multifamily and BCEGZ, and Shores arbitrated numerous claims related to the Project's construction under the Arbitration Agreement between 2013 and 2015.
The American Parties also were aware that Shores's defect claims fell within the scope of the Arbitration Agreement, as the Joint Venture opposed Shores's withdrawal of its defect claims from the prior arbitration. Despite being aware of the Arbitration Agreement's applicability to the first, second, and third causes of action in Shores's third amended cross-complaint, the American Parties failed to raise arbitration as a defense to any of those claims prior to filing the motion to compel arbitration. While the record does not contain any responsive pleadings filed by Multifamily or BCEGZ, the Joint Venture failed to raise the Arbitration Agreement as a defense in its answers to Shores's first and second amended cross-complaints, or in its demurrer to the third amended cross-complaint, all of which were filed after the prior arbitration was completed. (See Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558 (Guess?) ["At a minimum, the failure to plead arbitration as an affirmative defense is an act inconsistent with the later assertion of a right to arbitrate."].)
Any failure by Multifamily and BCEGZ to file separate responsive pleadings weighs against the American Parties' arguments opposing waiver. A party's inaction and delay in seeking to compel arbitration supports a finding that the party waived its right to arbitrate. (See Weisman v. Johnson (1982) 133 Cal.App.3d 289, 293 ["California courts have found a waiver of the right to demand arbitration in a variety of contexts ranging from situations in which the party seeking to compel arbitration has previously taken steps inconsistent with an intent to invoke arbitration to instances in which the petitioning party has unreasonably delayed an undertaking of the procedure."].)
In an attempt to justify its delay, the American Parties assert Shores did not re-allege its construction defect claims that were withdrawn from arbitration until it filed the third amended cross-complaint in September 2018. However, Shores had alleged defect claims in the original cross-complaint, which the Joint Venture answered in March 2016, and Shores claims the discovery of new defects in the Project's construction caused it to file the first and second amended cross-complaints. Because the American Parties have not included in the record on appeal copies of the first and second amended cross-complaints, we must presume those pleadings alleged at least some of the defect claims that the American Parties sought to compel to arbitration. (See Osgood v. Landon (2005) 127 Cal.App.4th 425, 435 ["It is the appellant's affirmative duty to show error by an adequate record[;] [citation] '[a] necessary corollary to this rule [is] that a record is inadequate, and appellant defaults, if the appellant predicates error only on the part of the record he provides the trial court, but ignores or does not present to the appellate court portions of the proceedings below which may provide grounds upon which the decision of the trial court could be affirmed.' "].)
The American Parties also never mentioned the Arbitration Agreement or raised arbitration as a defense in any of their other numerous filings, including in requests, and responses to requests, for discovery, the two case management statements filed by the Joint Venture, and the joint case management statement filed by Shores and the American Parties. Indeed, in its case management statements, the Joint Venture twice requested a jury trial on the claims raised in Shores's cross-complaints. The American Parties also sought to bifurcate Shores's defect claims to allow the court to resolve them on res judicata or collateral estoppel grounds before addressing the parties' other claims and cross-claims. On the whole, the American Parties' conduct throughout the underlying litigation was inconsistent with a right to arbitration. (See Lewis v. Fletcher Jones Motor Cars, Inc. (2012) 205 Cal.App.4th 436, 448-449 [" 'The trial court must ... view the litigation as a whole and determine if the parties' conduct is inconsistent with a desire to arbitrate.' "].)
The American Parties contend that even if the court correctly found they took steps inconsistent with the right to arbitrate by participating in litigation for nearly two and a half years without raising arbitration as a defense, the court nevertheless erred in finding Shores was prejudiced by that delay. Specifically, the American Parties argue that because Shores did not suffer an "adverse ruling ... on a substantive matter or the loss of evidence," and because the American Parties did not take advantage of "discovery procedures unavailable in arbitration," Shores failed to prove it suffered any prejudice. According to the American Parties, the court's analysis conflates "mere participation in litigation and some delay in bringing the motion to compel with prejudice suffered by Shores." We disagree.
The American Parties are correct that " 'merely participating in litigation, by itself, does not result in ... waiver, [and] courts will not find prejudice where the party opposing arbitration shows only that it incurred court costs and legal expenses.' [Citation.]" (Iskanian, supra, 59 Cal.4th at p. 377.) Typically, prejudice occurs 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 [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 party's attempts to litigate resulted in lost evidence [citation].' [Citation.]" (Ibid.)
But, as the California Supreme Court recognized in Iskanian, courts consider "the expenditure of time and money in determining prejudice where the delay is unreasonable." (Iskanian, supra, 59 Cal.4th at p. 377.) For example, in Burton, the court explained that "a petitioning party's conduct in stretching out the litigation process itself may cause prejudice by depriving the other party of the advantages of arbitration as an 'expedient, efficient and cost-effective method to resolve disputes.' [Citation.] Arbitration loses much, if not all, of its value if undue time and money is lost in the litigation process preceding a last-minute petition to compel." (Burton, supra, 190 Cal.App.4th at p. 948.)
Here, substantial evidence supports a finding that the American Parties' delay in pursuing arbitration was unreasonable, and that such delay prejudiced Shores. As we just explained, the American Parties knew about the Arbitration Agreement, and they were aware that Shores's defect claims fell within that agreement, well before the Joint Venture answered Shores's first amended cross-complaint in September 2016. Despite this knowledge, the American Parties waited almost two and a half years after the Joint Venture answered Shores's first amended cross-complaint to move to compel arbitration. During that period, the American Parties and Shores substantially participated in the litigation by filing pleadings and responses to pleadings, engaging in extensive discovery (e.g., exchanging more than 750,000 documents), and litigating the request to resolve the defect claims through a bifurcated proceeding in the trial court without the American Parties ever referencing the Arbitration Agreement as a defense or demanding Shores submit its defect claims to arbitration.
Courts have found prejudice caused by far shorter delays and similar litigation conduct. (See, e.g., Adolph v. Coastal Auto Sales, Inc. (2010) 184 Cal.App.4th 1443, 1451-1452 [opposing party prejudiced by six-month delay in requesting arbitration during which the moving party " 'filed two demurrers, accepted and contested discovery request[s], engaged in efforts to schedule discovery, [and] omitted to mark or assert arbitration in its case management statement' "]; Guess?, supra, 79 Cal.App.4th at pp. 556, 558 [sufficient prejudice where moving party waited less than four months to demand arbitration, during which that party filed a responsive pleading, responded to discovery, participated in depositions noticed by the opposing party, and unsuccessfully moved to stay the action].) By stretching out the litigation process, the American Parties deprived Shores of the expediency, efficiency, and cost-saving benefits of arbitration. (Burton, supra, 190 Cal.App.4th at p. 948; see also Guess?, at p. 558 [a party may not use the courtroom " ' "as a convenient vestibule to the arbitration hall so as to allow a party to create [their] own unique structure combining litigation and arbitration" ' "].) Accordingly, the court properly found the American Parties' delay was prejudicial.
In short, we conclude substantial evidence supports the court's finding that the American Parties waived their right to arbitrate the first, second, and third causes of action in Shores's third amended cross-complaint. "Were [Shores] compelled to arbitrate now, arbitration would be neither speedy nor inexpensive." (Burton, supra, 190 Cal.App.4th at p. 951.)
Because the court properly found the American Parties waived their right to arbitrate the first, second, and third causes of action alleged in Shores's third amended cross-complaint, we need not address the American Parties' arguments that the Arbitration Agreement's opt-out provision does not apply in this case and that the court erred in alternatively finding arbitration would not be proper because it could result in inconsistent orders and judgments concerning parties not subject to the Arbitration Agreement. --------
DISPOSITION
The order denying the motion to compel arbitration is affirmed. Shores shall recover its costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
LAVIN, Acting P. J. WE CONCUR:
EGERTON, J.
DHANIDINA, J.