76 Cal.App.5th 1074
Cal. Ct. App.2022Background
- In 2006 Japanese investors (Respondents) and some U.S. investors (Appellants) bought an office property using structures (TIC 1 and MLA 1) that allocated economic interests differently than record title to capture tax benefits.
- The parties refinanced about two years later; Respondents assert new TIC/MLA (TIC 2 / MLA 2) controlled the economic shares, while Appellants claim their signatures on those documents were fraudulent, creating a dispute over which agreement governed sale proceeds.
- After the JP Morgan loan matured, the parties defaulted; Kokubu (Respondent) sued for partition in Nov. 2018 and recorded a lis pendens; trustee’s sale occurred July 2019 and Appellant BFP purchased the property.
- Appellants demanded arbitration in July 2019 when they filed a cross-complaint, then withdrew the demand shortly after the trustee’s sale and proceeded with extensive court litigation (case management, discovery, motions, depositions notices) through 2020.
- Appellants moved to compel arbitration in December 2020 (more than two years after the complaint); the trial court denied the motion, finding Appellants waived arbitration and that the third-party litigation exception applied; the Court of Appeal affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did Appellants waive the contractual right to arbitrate? | Kokubu: Appellants waived by unreasonably delaying, litigating in court, using discovery and obtaining relief, and thereby prejudicing Respondents. | Appellants: No waiver; arbitration right preserved; waiver requires demonstrable prejudice and they did not prejudice Respondents. | Held: Waiver. Trial court’s finding supported—Appellants acted inconsistently with arbitration, substantially invoked litigation, delayed >2 years, filed cross-complaint, used court discovery, and prejudiced Respondents. |
| Is a showing of prejudice required and what kind qualifies? | Kokubu: Prejudice is a critical factor and includes litigation costs, loss of arbitration’s speed/cost benefits, and control of property. | Appellants: Prejudice should be limited to cases where the non-moving party produced civil-discovery information not available in arbitration or irreversibly changed litigation posture. | Held: Prejudice is critical but not limited to those narrow categories; substantial litigation-costs, delay, and strategic advantages sufficed as prejudice here. |
| Was Appellants’ delay reasonable (e.g., due to lis pendens or COVID)? | Kokubu: Delay was unjustified; Appellants could have sought stay or notified intent to arbitrate earlier. | Appellants: Delay was to resolve lis pendens and later explained by COVID-related uncertainties. | Held: Delay unreasonable. Appellants litigated broadly while asserting (then withdrawing) arbitration; five-month post-expungement delay lacked evidentiary support and COVID excuse failed. |
| Did the third-party litigation exception justify denying arbitration? | Kokubu: The exception applies because non-signatory issues and court relief were necessary to resolve parties’ rights to the property. | Appellants: Not argued to prevail on appeal; primary defense focused on waiver. | Held: Trial court also found the third-party litigation exception applied; appellate court affirmed on waiver and declined to reach exception further. |
Key Cases Cited
- St. Agnes Medical Center v. PacifiCare of California, 31 Cal.4th 1187 (2003) (articulates multi-factor St. Agnes waiver test for arbitration)
- Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014) (discusses waiver standards and appellate review of factual findings)
- Burton v. Cruise, 190 Cal.App.4th 939 (2010) (approves considering delay and litigation costs as prejudice supporting waiver)
- Christensen v. Dewor Developments, 33 Cal.3d 778 (1983) (courts should not allow use of litigation as a ‘‘vestibule’’ to arbitration)
- Denham v. Superior Court, 2 Cal.3d 557 (1970) (trial court orders enjoy presumption of correctness on appeal)
- Adolph v. Coastal Auto Sales, Inc., 184 Cal.App.4th 1443 (2010) (filing demurrers, engaging in discovery, and omitting arbitration in case management statement can show inconsistency with arbitration)
- Berman v. Health Net, 80 Cal.App.4th 1359 (2000) (unsuccessful discovery efforts can still reveal case strengths/weaknesses and factor into waiver analysis)
- Younan v. Fleming Distribution Co., 49 Cal.App.5th 73 (2020) (recognizes delayed arbitration demand can prejudice by delaying efficient resolution and advantaging the movant)