Pacific Funding Group v. Cal. Bank &
Trust
Filed 7/16/12 Pacific Funding Group v. Cal. Bank &
Trust CA2/8
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
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publication or ordered published for purposes of rule 8.1115
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
EIGHT
PACIFIC FUNDING GROUP, INC.,
Plaintiff and Respondent,
v.
CALIFORNIA BANK & TRUST,
Defendant and Appellant.
B235682
(Los Angeles
County
Super. Ct.
No. LC087843)
APPEAL from
an order of the Superior Court
of
County. Louis M.
Meisinger, Judge. Affirmed.
Frandzel Robins Bloom & Csato,
Michael G. Fletcher, Hal D. Goldflam and Brad R. Becker for Defendant and
Appellant.
Glazer & Blinder, Mark S.
Glazer and David M.S. Taam for Plaintiff and Respondent.
__________________________
Defendant and appellant California Bank & Trust (the
bank) appeals from an order denying its motion
to compel arbitration of a lawsuit brought against it by plaintiff and
respondent Pacific Funding Group, Inc. (Pacific). The bank contends the trial court erred in
finding it had waived the right to compel arbitration. We affirm.
Pacific is in the business of
making loans. In July 2006, Pacific
entered into a Business Loan Agreement with now defunct Alliance Bank pursuant
to which Alliance agreed to extend
to Pacific a $2 million line of credit to finance loans made to third
parties. The July 2006 agreement was
extended and eventually superseded by a February 2008 Business Loan
Agreement. In 2009, Alliance
was closed by federal and state authorities.
The bank is the successor in interest to Alliance.
Both the 2006 and 2008 agreements
contained similar arbitration clauses. In relevant part, the 2008 arbitration clause
reads: “Borrower and Lender agree that
all disputes, claims and controversies between them whether individual, joint,
or class in nature, arising from this Agreement or otherwise, including without
limitation contract and tort disputes, shall be arbitrated . . . upon
request of either party. . . .
The Federal Arbitration Act [(FAA; 9 U.S.C.A. § 1 et seq.)] shall
apply to the construction, interpretation, and enforcement of this arbitration
provision.â€
Pacific and the bank are currently
engaged in two separate lawsuits: this
action (Pacific v. California Bank)
and another action brought by the bank against Pacific, among others (
No. LC089629).
Pacific v. California Bank
In December 2009, Pacific brought
this action against the bank. The
factual allegations of the operative complaint for
implied covenant of good faith and fair dealing, fraudulent concealment and
negligence, are as follows. In October
2006, Centrium Associates, LLC owned certain real property in South Carolina
which was subject to a $2.5 million first deed of trust. Pacific agreed to loan Centrium $1.645
million, in exchange for which Centrium executed a promissory note secured by a
commercial mortgage on the property.
Pacific used its line of credit with the bank to make the loan to
Centrium and Centrium executed a second deed of trust on the property in favor
of the bank. Although Centrium had not
repaid Pacific, on April 17, 2007, Pacific repaid the bank the full $1.645
million plus interest. As was the usual
practice in the industry, the bank was to immediately assign and record the
second deed of trust to Pacific. The
bank did not do so until August 9, 2007.
Meanwhile, after Pacific satisfied the loan but before the bank assigned
the second deed of trust to Pacific, the first trust deed holder commenced
property. The bank never informed
Pacific of the foreclosure proceedings, never forwarded any of the pleadings
with which it was served to Pacific (including notice of default) and never
told the plaintiff in the foreclosure proceedings that the second deed of trust
had been assigned to Pacific. Pacific
first learned of the foreclosure proceedings on December 6, 2007. By that time, Centrium’s debt to the first
trust deed holder had increased significantly.
Pacific filed its original
complaint in December 2009, the gravamen of which was that, as a result of the
bank’s failure to immediately execute and record the assignment, and to tell
Pacific about the foreclosure proceedings, Pacific was unable to protect its
$1.645 million interest in the property.
The bank’s March 2010 demurrer was placed off calendar after Pacific filed
a first amended complaint in July 2010.
sustained with leave to amend the bank’s demurrer to the first amended
complaint. On January 4, 2011, the bank
filed a case management statement in which it checked the box for nonjury
trial; it did not mark the box indicating willingness to participate in binding
arbitration. After additional trial
court proceedings, the parties stipulated that, in lieu of Pacific filing a
fourth amended complaint, the bank would answer the third amended complaint.
On June 23, 2011, the bank filed a
general denial to the third amended complaint which included as an affirmative
defense that Pacific’s claims were subject to binding arbitration; the bank had
requested Pacific to submit to arbitration but Pacific had refused to do so;
and Pacific also refused to extend the time for the bank to file a responsive
pleading to give the bank an opportunity to bring a motion to compel
arbitration.
California Bank v. Pacific
Meanwhile, on May 4, 2010 (when its demurrer to the
original complaint in Pacific v.
California Bank was still pending), the bank initiated California Bank v. Pacific with the filing of a verified complaint
naming as defendants Pacific and its principals. The gravamen of California Bank v. Pacific was that the bank had loaned Pacific $2
million, and Pacific had defaulted on the loan which had an outstanding
principal balance of $1.110 million, plus interest.
The loans that are the basis of the bank’s claims in
the California Bond v. Pacific are
unrelated to the loan in this appeal.
All of the loans, however, were made pursuant to the same business loan
agreements between Pacific and the bank.
Pacific’s verified answer to the operative second amended complaint in
affirmative defense of set-off, which incorporated by reference the allegations
of the complaint in Pacific v. California
Bank.
At the June 28, 2011 hearing on the bank’s motion for
summary judgment in the second lawsuit, the trial court stated its intention to
deny summary judgment because it believed that, as a result of Pacific’s
set-off affirmative defense, the cases were related. After hearing oral argument, the trial court
instead granted summary judgment in favor of the bank. The trial court subsequently granted
Pacific’s motion to stay judgment without a bond. The appeal of Pacific and the individual
defendants from the judgment entered in California
Bank v. Pacific is currently pending in this Division, with briefing not yet
completed (case No. B237336).
v. California Bank
On July 1, 2011, after it obtained
summary judgment in California Bank v.
Pacific, the bank moved to compel arbitration in this case. When the bank filed its motion to compel, the
present lawsuit had been pending in the trial court for approximately 19
months. In opposition to the motion to
compel arbitration, Pacific’s attorney, Mark
Glazer, averred that at a hearing in California
Bank v. Pacific, the bank’s attorney, Hal Goldflam, told him that if the
trial court denied the bank’s summary judgment motion, the bank would file a
motion to arbitrate that case as well.
At the hearing on the motion, the
trial court took judicial notice of the 2006 and 2008 Business Loan Agreements,
and a 2006 Commercial Security Agreement.
The trial court denied the bank’s motion to compel arbitration. It reasoned that the parties knew about the
agreement that contained the arbitration clause. Moreover, “the level of participation in the
litigation here was extensive, four demurrers, at least six court appearances,
[and] we are close to trial . . . . [¶]
The other thing is that there really is little justification, in my
mind, for waiting so long to – for participating in trial setting conferences
without indicating anything about arbitration . . . .†The trial court also noted that, by engaging
in extensive discovery in California Bank
v. Pacific, the bank “in essence, achieved the benefits of litigation which
would not otherwise have been available to them had they pursued this matter in
arbitration.â€
The bank timely appealed.
DISCUSSION
Choice
of Law and Standard of Review
The FAA
applies to contracts involving interstate commerce. (Aviation
Data, Inc. v. American Express Travel Related Services Co., Inc. (2007)
152 Cal.App.4th 1522, 1534 (Aviation).)
“Under
the FAA, waiver of the right to compel arbitration is not viewed as a question
of substantive contract law. . . .
‘Waiver, in the arbitration context, involves the circumstances under
which a party is foreclosed from electing an arbitration forum. Therefore, the question of whether a party
has waived its right to compel arbitration directly concerns the allocation of
power between courts and arbitrators.
[Citation.]’ [Citation.] Therefore, ‘it is federal law, not state,
that governs the inquiry into whether a party has waived its right to
arbitration.’ [Citations.]†(Id.
at pp. 1535-1536.)
In Aviation, supra,
federal and state law, the appellate court defers to the trial court’s factual
findings but independently reviews questions of law. (Aviation,
supra, 152 Cal.App.4th at p. 1536.) In St.
Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th
1187, 1196 (St. Agnes), our Supreme
Court explained: “Generally, the
determination of waiver is a question of fact, and the trial court’s 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 court’s ruling.’
[Citation.]†Here, the relevant
facts are undisputed. Accordingly, we
whether the bank waived its right to compel arbitration.
The
Bank Waived Its Right to Compel Arbitration
The bank
contends the trial court erred in finding that the bank waived its right to
compel arbitration of Pacific’s claims.
The bank argues (1) the issue of waiver was for the arbitrator, not the
trial court, to decide in the first instance; and (2) Pacific did not establish
that the bank knew of its right to arbitrate, acted inconsistently with that
right, or that Pacific was prejudiced.
We find no error.
1.
The trial court properly decided the issue of
waiver in the first instance
In Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 84, the
United States Supreme Court characterized “allegations of waiver, delay, or a
like defense to arbitrability†as “procedural questions†presumptively to be
decided by the arbitrator.
118 Cal.App.4th 955, 962-964 (Omar),
a decision on which the bank relies. But
subsequent Circuit Courts have interpreted Howsam
as allocating the issue of waiver to the court where waiver is based on
litigation-related conduct of the party seeking to compel arbitration. (See, e.g., Grigsby & Assoc., Inc. v. M. Securities Inv. (11th Cir. 2011)
664 F.3d 1350, 1353 & cases cited therein; Cox v. Ocean View Hotel Corp. (9th Cir. 2008) 533 F.3d 1114,
1120 [the waiver defense to enforcement of an arbitration clause is properly
decided by the district court]; see also Code Civ. Proc., § 1281.2 [under
the California Arbitration Act, the court determines whether the party seeking
arbitration has waived the right to compel arbitration].)
Here,
because the bank seeks to compel arbitration and the waiver claim is based on
the bank’s litigation-related conduct, the trial court properly decided the
issue.
2.
The bank knew or reasonably should have known
of its right to compel arbitration
The bank
argues that it did not waive its right to compel arbitration because it was not
clear until Pacific’s third amended complaint that Pacific’s claims arose out
of the Business Loan Agreements that contained the arbitration clause. The facts are to the contrary.
Pacific’s original complaint for,
among other things, breach of contract, was filed on December 7, 2009. It alleged that Pacific “used its line of
credit at [the bank] to obtain the funds to loan to Centrium.†In its demurrer to the original complaint
filed in March 2010, the bank stated that Pacific, “drew down on its letter of
credit with [the bank] to fund the Centrium loan.†Nothing in the record suggests that Pacific
had any “Line of Credit†with the bank other than the Business Loan
Agreements. Under these circumstances,
the bank’s suggestion that it did not know Pacific’s claims arose out of the
Business Loan Agreements until the third amended complaint was filed is not
credible. At the very least, the trial
court was entitled to so find.
3.
The bank acted inconsistently with its right
to compel arbitration
The bank next argues that, under
82 Cal.App.4th 1189 (Groom),
filing a series of demurrers in this action and bringing the
not acts inconsistent with arbitration.
We disagree.
There is no single test to
establish waiver of the right to arbitration.
(Adolph v. Coastal Auto Sales,
Inc. (2010) 184 Cal.App.4th 1443, 1450 (Adolph).) Our Supreme Court
has identified the following factors to be considered: (1) whether the actions of the party seeking
arbitration 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.]â€
(St. Agnes, supra,
31 Cal.4th at p. 1196.)
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.
[¶] For example, courts have
found prejudice where the petitioning party used the judicial discovery
processes to gain information about the other side’ 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.]â€
(Adolph, supra, at
p. 1451.)
In Groom, the insured sued her health insurer alleging that she
suffered a debilitating stroke as a result of the insurer’s refusal to provide
necessary medication and diagnostic tests.
The insurer demurred to the original and three amended complaints before
it moved to compel arbitration. The
trial court denied the motion because the insurer had participated in
litigation for over a year before moving to compel arbitration. The appellate court reversed, reasoning that
“participation in litigation by way of demurrers did not, in the absence of
prejudice to [the plaintiff], waive [the defendant’s] right to enforce the
arbitration agreement between the parties.â€
(Groom, supra, 82 Cal.App.4th
at p. 1191.) The court explained
that the demurrer activity in that case was not the equivalent of litigation on
the merits. (Id. at p. 1195; but see Burton
v. Cruise (2010) 190 Cal.App.4th 939, 948 (Burton) [“Groom
. . . erred in failing to recognize that a petitioning party’s
conduct in stretching out the litigation process itself may cause prejudice by
depriving the other party of†the expediency of arbitration].)
The issue in St. Agnes was whether the defendant insurance company waived its
contractual right to arbitrate a dispute with the plaintiff medical center by
filing a separate lawsuit that contained nonarbitrable claims. The court concluded that it did not. (St.
Agnes, supra, 31 Cal.4th at pp. 1201-1202.) The court found the medical center did not
establish prejudice: “The record in this
case does not reflect that the parties have litigated the merits or the
substance of St. Agnes’s arbitrable claims, or that any discovery of those
claims has occurred. Nor is there any
indication that PacifiCare used the [two lawsuits] to gain information about
St. Agnes’s case that would be unavailable in arbitration.†(Id.
at p. 1204.)
By contrast, in
33 Cal.3d 778, 782 (Christensen),
the plaintiff admitted that it was aware of the arbitration provision and its
applicability, but filed an action in superior court to obtain a set of
verified pleadings which would reveal the defendants’ legal strategies and
theories. The court concluded that
“[s]uch procedural gamesmanship provides amble support for the trial judge’s
conclusion that plaintiffs filed their action in bad faith, and by doing so
waived their right to arbitrate.†(
the court found waiver where the defendant waited six months after the
complaint was filed before moving to compel arbitration, had filed two demurrers,
accepted and contested discovery requests, engaged in efforts to schedule
discovery, and omitted to assert arbitration in its case management
statement. (Adolph, supra, 184 Cal.App.4th at p. 1451.)
The facts of our case are closer to
Christensen and Adolph than to Groom or
verified pleadings and discovery the bank obtained in California Bank v. Pacific, which arose from the same contract as
the claims in this case, revealed Pacific’s legal strategies and theories
applicable not just to that case, but to the present case as well. As in Adolph,
the bank omitted to assert arbitration in its case management statements.
acts established sufficient grounds to support a finding of waiver of the right
to arbitrate.
4.
Prejudice
The bank maintains that Pacific
suffered no prejudice as a result of the bank’s conduct. We disagree.
“[P]rejudice can be established
when the party seeking arbitration used judicial discovery procedures not
available in arbitration to obtain discovery of the opposing party’s
strategies, evidence, theories, or defenses.â€
(Groom, supra, 82 Cal.App.4th
at p. 1196, italics omitted.)
Prejudice can also be established by the use of verified pleadings to
obtain the same result. (See
p. 784.) Moreover, an egregious
delay in seeking arbitration may also result in prejudice by depriving the
other party of the advantages of expediency and cost-effectiveness associated
with arbitration. (Burton, supra, 190 Cal.App.4th at p. 948.)
Here, the bank waited 19 months to
request arbitration. Although there was
no discovery in the present case, Pacific’s answers to the discovery and
verified pleadings in California Bank v.
Pacific, gave the bank access to information about Pacific’s legal
strategies and theories that it would not have otherwise obtained. This was sufficient to establish prejudice.
The
judgment is affirmed. Pacific shall
recover its costs on appeal.
RUBIN,
ACTING P. J.
WE CONCUR:
FLIER,
J.
SORTINO,
J.
its demurrer to the original complaint was pending, the bank filed a separate
action against Pacific (California Bank
v. Pacific), which we discuss in more detail, infra. Pacific filed a
motion in this case to deem the cases related, which was denied without
prejudice by Judge Bert Glennon. Judge
Glennon later presided over California
Bank v. Pacific. Meanwhile, the
present case was reassigned to Judge Louis M. Meisinger for all purposes
and it was Judge Meisinger who denied the bank’s motion to compel arbitration.
Court, assigned by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.
