ROTHSCHILD, Acting P. J.
This appeal is from an order denying a petition to compel arbitration. The trial court denied the petition on grounds of waiver under Code of Civil Procedure section 1281.2, subdivision (a), and the presence of third parties not subject to arbitration under subdivision (c) of the same provision.
On October 16, 2008, Carlson Mechanical, Inc. (Carlson) filed a complaint for breach of contract, foreclosure of a mechanic's lien and common counts against REP and Lakeland regarding improvements and modifications Carlson had made to a biodiesel facility located on property in Santa Fe Springs.
On February 26, 2009, Lakeland filed a cross-complaint against REP and REP-LA1, pleading causes of action for breach of contract (based on a written lease, a written management agreement and an oral agreement) and breach of the implied covenant of good faith and fair dealing. According to the cross-complaint, Lakeland owns the Santa Fe Springs property and leases it to REP-LA1, pursuant to an agreement executed in December 2007 and amended in July 2008, which requires REP-LA1 to keep the property free of all mechanic's liens and to reimburse Lakeland for any payments it makes as a result of a mechanic's lien. Also in December 2007, Lakeland, and its affiliate Energy Merchant, entered into a contract with REP, entitled Agreement for the Management of Biodiesel Production Facilities (REP Management Agreement), whereby Lakeland and Energy Merchant agreed to provide management services in connection with biodiesel facilities, including one on the Santa Fe Springs property, and REP agreed to reimburse Lakeland and Energy Merchant for costs regarding the biodiesel facilities. In April 2008, REP-LA1 retained Carlson to perform construction and provide services regarding the Santa Fe Springs biodiesel facility. Although Carlson properly billed Lakeland as the facility manager, REP and REP-LA1 are solely responsible for paying Carlson. Lakeland maintained that Carlson's recording of the mechanic's lien and REP's and REP-LA1's failure to pay Carlson constituted breaches of the lease, the REP Management Agreement and the oral agreement. Lakeland thus sought reimbursement from REP and REP-LA1 to the extent it is required to pay Carlson, in addition to damages from the mechanic's lien, attorney fees and costs.
On April 21, 2009, REP and REP-LA1 filed a cross-complaint against Lakeland and Energy Merchant for breach of contract (based on the lease, the REP Management Agreement, an agreement between REP-LA1 and Energy Merchant specifically relating to construction and operation of the biodiesel facility on the Santa Fe Springs property (REP-LA1 Management Agreement), and another lease between Lakeland and REP-LA1 regarding access to and utilization of storage tanks and piping), breach of the implied covenant of good faith and fair dealing, declaratory relief and contribution. According to this cross-complaint, the REP Management Agreement requires Lakeland and Energy Merchant to manage the construction, development and operation of the proposed biodiesel facilities, which includes obtaining necessary permits, ensuring code compliance and employing necessary personnel, and REP and REP-LA1 are only the investors and owners of the business. REP and REP-LA1 alleged that Lakeland and Energy Merchant were so negligent in supervising construction at the Santa Fe Springs biodiesel facility that REP and REP-LA1 hired Carlson to remedy the deficiencies. REP and REP-LA1 maintained that Lakeland and Energy Merchant are solely responsible for paying Carlson, whose services would not have been required had Lakeland and Energy Merchant adequately performed their contractual obligations. REP and REP-LA1 sought damages, a declaration that Carlson's mechanic's lien was the result of Lakeland and Energy Merchant's actions and that they could continue to possess the property, indemnification for any liability to Carlson, attorney fees and costs.
On July 17, 2009, before Lakeland and Energy Merchant answered the cross-complaint, REP and REP-LA1 filed an amended cross-complaint, this time adding Hodapp, an owner, director and officer of Lakeland and Energy Merchant, as a defendant and pleading causes of action for breach of contract (again based on the Management Agreements and the leases), declaratory relief and breach of fiduciary duty against Hodapp. In addition to the allegations in their original cross-complaint, REP and REP-LA1 claimed that Lakeland and Energy Merchant's mismanagement and failure to obtain the necessary permits had resulted, not only in the need to hire Carlson, but also in the cessation of all biodiesel operations on the Santa Fe Springs property. Including the responsibility for the debt to Carlson (alleged by Carlson to be about $600,000), REP and REP-LA1 maintained that Lakeland and Energy Merchant's contractual breaches and Hodapp's breach of his fiduciary duties, had caused them $10 million in damages. Aside from a declaration that Carlson obtained the mechanic's lien as a result of Lakeland and Energy Merchant's actions, REP and REP-LA1 also requested an order of specific performance requiring Lakeland and Energy Merchant to perform their contractual obligations and to cure all defects at the property.
Shortly after REP and REP-LA1 filed their amended cross-complaint, on July 23, 2009, Carlson dismissed its action as to Lakeland.
On September 17, 2009, Lakeland, Energy Merchant and Hodapp answered the REP and REP-LA1 amended cross-complaint, asserting arbitration under the REP and REP-LA1 Management Agreements as an affirmative defense.
That same day, Lakeland amended its cross-complaint against REP and REP-LA1, this time naming Energy Merchant and Hodapp as cross-complainants as well and alleging causes of action for breach of contract (based on the property lease, the Management Agreements and the oral agreement regarding Carlson), breach of the implied covenant of good faith and fair dealing, a common count for money paid and indemnification. Lakeland, Energy Merchant and Hodapp asserted that, in addition to the Carlson liability, REP and REP-LA1 had failed to reimburse them for fees and expenses as required by the Management Agreements. They also stated that several of the alleged claims arise under the REP and REP-LA1 Management Agreements, requiring arbitration of disputes, and that Lakeland, Energy Merchant and Hodapp are not waiving the right to compel arbitration by filing their amended cross-complaint, but rather asserting the claims as compulsory counterclaims to REP and REP-LA1's amended cross-complaint.
About two months later, on November 25, 2009, Lakeland, Energy Merchant and Hodapp moved to compel arbitration in New York, based on the Management Agreements' provisions for New York governing law and arbitration in New York. The New York court, with the consent of REP and REP-LA1, decided on December 21, 2009 that the California court should determine arbitrability and issued its order on January 5, 2010.
Within days of that order, on January 12, 2010, Lakeland, Energy Merchant and Hodapp filed the petition to compel arbitration at issue on this appeal. (And they agreed to arbitrate the claims in their amended cross-complaint against REP and REP-LA1.) According to the petition, the claims are subject to arbitration pursuant to provisions in the REP and REP-LA1 Management Agreements, and the breach of lease, declaratory relief and breach of fiduciary duty causes of action are arbitrable as well because they are based on same acts as the breaches of the agreements.
In opposition to the petition, REP and REP-LA1 argued, as they had in the New York court, that Lakeland, Energy Merchant and Hodapp had waived any right to compel arbitration by participating in litigation, including attending status conferences and a deposition, for 11 months—since the filing of Lakeland's original cross-complaint—without mentioning arbitration. REP and REP-LA1 maintained that filing the petition after the court clerk had set a trial date constituted an attempt to delay the litigation. In addition, REP and REP-LA1 argued that the causes of action not directly alleging breaches of the Management Agreements are not arbitrable because they are based on independent obligations.
In reply, Lakeland, Energy Merchant and Hodapp asserted that they had not waived the right to compel arbitration. They explained that arbitration became an issue only after July 17, 2009, when REP and REP-LA1 filed their amended cross-complaint, which significantly broadened the scope of the litigation beyond the claims of Carlson, and that they had asserted the right to arbitration in their answer to the amended cross-complaint and in their own responsive amended cross-complaint and then petitioned to compel arbitration soon thereafter, first in New York and then in California. Lakeland, Energy Merchant and Hodapp also explained that the parties had been engaged in settlement negotiations, discovery had been limited to the deposition of Carlson's principal (and Carlson's claims were not arbitrable) and to document requests by REP and REP-LA1 and the court proceedings had involved only administrative matters before the court clerk.
The trial court denied the petition to compel arbitration. It found under section 1281.2, subdivision (a), a waiver of the right to compel arbitration based on "evidence of unreasonably delay or prejudice. The litigation machinery has been substantially invoked and the parties are well into the preparation of the lawsuit before the motion was brought. [Citation.] Moving parties have participated in several case management conferences, amended their cross-complaint in September 2009 specifically alleging the arbitration provision and yet waited until trial was set to seek to enforce it." Alternatively, and although not raised by REP and REP-LA1 in opposition, the court denied the petition under section 1281.2, subdivision (c), on grounds that "there is a pending action with third parties who are not required to arbitrate, there are common issues of law and fact, and there is a possibility of conflicting rulings." Lakeland, Energy Merchant and Hodapp timely appealed. (§ 1294, subd. (a) [order denying petition to compel arbitration is appealable].)
The Federal Arbitration Act (FAA) (9 U.S.C. § 2 et seq.) and the California Arbitration Act (CAA) (§ 1281 et seq.) both carry a strong presumption favoring enforcement of contractual arbitration provisions.
The FAA provides that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exists at law or in equity for the revocation of any contract." (9 U.S.C. § 2.) Under the FAA, state courts must "`rigorously enforce'" arbitration agreements (Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 626), and "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." (Moses H. Cone Mem'l Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24-25.)
Similarly, under the CAA, "[a] written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract." (§ 1281.) "On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that" the case falls into one of three limited exceptions. (§ 1281.2, italics added.) The CAA thus also "`evidence[s] a strong public policy in favor of arbitration[], which policy has frequently been approved and enforced by the courts.'" (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 706; see also Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97 ["California law, like federal law, favors enforcement of valid arbitration agreements"]; Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1282 ["A strong public policy favors the arbitration of disputes, and doubts should be resolved in favor of deferring to arbitration proceedings"].)
Both the FAA and the CAA provide for an exception to the enforcement of a contractual arbitration provision when the party seeking to compel arbitration has waived its right to do so. Under the FAA, a party has the right to a stay of judicial proceedings pending arbitration unless that party is "in default" of that right. (9 U.S.C. § 3.) "`"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 Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195 (St. Agnes ).) "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 (§ 1281.2, subd. (a)), waivers are not to be lightly inferred and the party seeking to establish a waiver bears a heavy burden of proof. [Citations.]" (Ibid.; Simms v. NPCK Enterprises, Inc. (2003) 109 Cal.App.4th 233, 239 [facts presented to support waiver claim "must be viewed in light of the strong policy favoring arbitration"].)
Under federal and state law (St. Agnes, supra, 31 Cal.4th at pp. 1194-1196; Zamora v. Lehman (2010) 186 Cal.App.4th 1, 11, 13-17), courts consider a number of factors when determining a question of waiver: "`"(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, at p. 1196.) In addition, bad faith or willful misconduct of a party may constitute a waiver. (Ibid.)
Although no single test establishes waiver, short of a final court judgment on an arbitrable issue, the opposing party, at a minimum, must suffer prejudice. (Groom v. Health Net (2000) 82 Cal.App.4th 1189, 1194-1195.) "Prejudice typically is found only where the petitioning party's conduct has substantially undermined th[e] important public policy [favoring arbitration as a speedy and relatively inexpensive means of dispute resolution] or 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; Groom, at p. 1197 ["Prejudice in the context of waiver of the right to compel arbitration normally means some impairment of the other party's ability to participate in arbitration"].)
"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.]" (St. Agnes, supra, 31 Cal.4th at p. 1196.)
REP and REP-LA1 contend, and the trial court agreed, that Lakeland, Energy Merchant and Hodapp waived their right to compel arbitration because they initiated and participated in litigation, waited to demand arbitration until after the setting of a trial date and prejudiced REP and REP-LA1 by denying them the expediency of arbitration and requiring them to incur fees to prepare for and attend the case management conferences. They point out that Lakeland, Energy Merchant and Hodapp filed their petition to compel arbitration more than one year after Carlson filed its complaint.
Initially, the passage of approximately one year (about 13 months) between the filing of Carlson's complaint and the petition to compel arbitration (in New York) is in itself not significant. The issue is not merely the amount of time that litigation was pending but whether during that time Lakeland, Energy Merchant and Hodapp acted inconsistently with the right to arbitration and REP and REP-LA1 suffered prejudice.
Nothing Lakeland, Energy Merchant and Hodapp did during the litigation was inconsistent with the right to arbitration. Their only answer to REP and REP-LA1 (responding to the amended cross-complaint) raised arbitration. Their own amended cross-complaint raised arbitration. When the court clerk, at a case management conference on November 12, 2009, set a trial date, they informed the clerk and REP and REP-LA1 that they intended to seek arbitration. The clerk nonetheless set a trial date. They then moved to compel arbitration in New York, which the court on January 5, 2010 denied because it believed that the California court should decide arbitrability. After the New York court's decision, they expeditiously, on January 12, 2010, filed a petition in California.
REP and REP-LA1 nonetheless contend that the failure of Lakeland to request arbitration in its initial cross-complaint was inconsistent with the right to arbitration. We do not agree. When Lakeland filed its initial cross-complaint, REP and REP-LA1 had yet to file their expansive amended cross-complaint. The case thus was limited to what was owed to Carlson, and Carlson could not be forced to arbitrate. The REP and REP-LA1 amended cross-complaint raised a myriad of issues—beyond the liability to Carlson—between the parties to the Management Agreements, which contained the arbitration provisions, as well as breach of fiduciary duty claims against Hodapp.
Lakeland's participation in discovery also was not inconsistent with arbitration. Lakeland essentially participated in discovery only as to Carlson's claims against it and indeed reached a settlement with Carlson.
Further, REP and REP-LA1 have not established they were denied the expediency of arbitration by the timing of the petition to compel arbitration. Lakeland, Energy Merchant and Hodapp petitioned to compel arbitration (in New York) only four months after REP and REP-LA1 expanded the litigation through their amended cross-complaint. Further, REP and REP-LA1 do not claim that they produced any discovery that would have been unavailable in arbitration, nor that they revealed trial strategies before arbitration was sought. (St. Agnes, supra, 31 Cal.4th at p. 1204 [no prejudice when parties did not litigate or conduct discovery on arbitrable claims and petitioner did not use action to gain information that would not be available in arbitration or impair opposing party's ability to resolve arbitrable disputes fairly through arbitration].) Their only claim is that the delay caused them to incur attorney fees and costs in attending case management conferences. They, however, produced no records showing their expenses. In any case, incurring costs and legal expenses in litigation alone is insufficient to establish prejudice. (Id. at p. 1203.)
Contrary to REP and REP-LA1's claim, Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, is not similar to this case. In Sobremonte, the party requesting arbitration waived its right to the procedure because they caused the opposing party to spend 10 months—more than 200 hours—preparing for trial and incurring costs and attorney fees, took advantage of judicial discovery procedures that were more expansive than those available in arbitration, participated in hearings and status conferences, filed numerous motions and ex parte applications and waited until one month before the scheduled trial date to move to compel arbitration. (Id. at pp. 992-997.) In contrast, "[t]his is not a case where the litigation machinery was substantially invoked before the request for arbitration, where there was a long delay before arbitration was sought, where plaintiffs took advantage of judicial discovery procedures not available in arbitration, or where the delay affected, misled or prejudiced the opposing party." (Simms v. NPCK Enterprises, Inc., supra, 109 Cal.App.4th at p. 240.) Lakeland, Energy Merchant and Hodapp did not act inconsistently with their right to compel arbitration, nor did REP and REP-LA1 establish prejudice. As such, the trial court erred by denying the petition to compel arbitration on waiver grounds. (St. Agnes, supra, 31 Cal.4th at pp. 1202-1205 [no waiver as a matter of law because petitioner's filing of lawsuit to challenge the validity of the contract insufficient to relinquish right to arbitration and opposing party's incurring of costs and litigation expenses does not constitute prejudice]; Simms, at pp. 236, 239-240 [reversing order denying arbitration because filing suit for damages on arbitrable claim seeking temporary restraining order without a stay request does not waive right to arbitration, particularly in light of no showing of prejudice].)
As an alternative ground for denying the petition to compel arbitration, the trial court relied on section 1281.2, subdivision (c), which affords a trial court discretion to decline enforcement of a contractual arbitration agreement when "[a] party to the arbitration agreement is also a party to a pending court action . . . with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact." According to the court, "[t]here are parties who are not covered by either [Management] [A]greement. The court cannot compel them to arbitrate their claims." REP and REP-LA1 do not defend the court's ruling under section 1281.2, subdivision (c), simply noting that the provision was a "separate and independent ground[]" for denial of the petition to compel arbitration. The ruling was error.
The trial court did not specify who it considered to be the party not subject to arbitration under the Management Agreements and thus not required to arbitrate claims. Lakeland and Energy Merchant, on the one hand, and REP and REP-LA1, on the other, all are subject to arbitration by virtue of the Management Agreements. While Hodapp, as an individual, is not a party to the Management Agreements, he signed the agreements on behalf of Lakeland and Energy Merchant, and REP and REP-LA1's breach of fiduciary cause of action against him is based on his purported conduct as an owner, officer and director of Lakeland and Energy Merchant and execution of Lakeland and Energy Merchant's role pursuant to the Management Agreements. According to the allegations in the breach of fiduciary duty cause of action, Hodapp induced REP and REP-LA1 to continue performance under the Management Agreements and failed to notify them that Lakeland and Energy Merchant were not satisfying their contractual duties, particularly as to their supervision of the biodiesel facility project and their oversight of issues with local governmental entities.
Under these facts, Hodapp, even as a nonsignatory, may compel arbitration for two reasons.
Because Hodapp has the right to enforce the arbitration provisions, he is not a third party as required to invoke section 1281.2, subdivision (c), and permit the trial court to deny arbitration. Section 1281.2, subdivision (c), thus does not apply. (Laswell v. AG Seal Beach, LLC (2010) 189 Cal.App.4th 1399, 1405 [§ 1281.2, subd. (c) "does not apply when all defendants, including a nonsignatory to the arbitration agreement, have the right to enforce the arbitration provision against a signatory plaintiff"].)
Hodapp's right as a nonsignatory to enforce the arbitration provisions renders the breach of fiduciary duty cause of action arbitrable. Similar to the principles allowing a nonsignatory to enforce an arbitration provision, and consistent with the liberal interpretation of arbitration agreements, contractual arbitration provisions have been held to cover, not only the claims under the contract with the arbitration provision, but also those claims rooted in the relationship between the parties created by the contract. (Simula, Inc. v. Autoliv, Inc. (9th Cir. 1999) 175 F.3d 716, 719, 721 [under FAA, "standard for demonstrating arbitrability is not high" and "language `arising in connection with' reaches every dispute between the parties having a significant relationship to the contract and all disputes having their origin or genesis in the contract"]; Izzi v. Mesquite Country Club (1986) 186 Cal.App.3d 1309, 1315-1316 [under California's liberal interpretation of arbitration provisions, causes of action with their roots in the relationship between the parties created by the contract are arbitrable].)
Here, the arbitration provision in both the REP and REP-LA1 Management Agreements covers "any dispute . . . arising under this Management Agreement." This language encompasses both the breach of lease and declaratory relief causes of action. The breach of lease cause of action is predicated on Lakeland's alleged failure to maintain storage facilities and to pay Carlson, resulting from Lakeland's mismanagement and noncompliance with its duties under the REP Management Agreement—executed in conjunction with the lease. The declaratory relief cause of action seeks a judicial determination that Lakeland caused Carlson's mechanic's lien on the Santa Fe Springs property and that REP-LA1 may continue its occupation, which directly relates to the parties' obligations under the Management Agreements. Thus, both the breach of lease and declaratory relief causes of action are rooted in the contractual relationships created by the Management Agreements and, as a result, subject to arbitration. (Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 711-714 [bad faith, fraud and accounting causes of action arbitrable because they arise out of the parties' contractual relationship]; EFund Capital Partners v. Pless (2007) 150 Cal.App.4th 1311, 1325-1326 [fraud and related tort, as well as declaratory relief, causes of action subject to arbitration when the genesis of the claims was inducement to enter the contract with the arbitration provision, and the claims would not have existed but for the existence of the contract].)
The order denying the petition to compel arbitration is reversed, and the matter is remanded with directions for the trial court to grant the petition and order arbitration of the claims in REP and REP-LA1's amended cross-complaint, and of the claims in Lakeland, Energy Merchant and Hodapp's amended cross-complaint. Lakeland, Energy Merchant and Hodapp are entitled to their costs on appeal.
We concur:
CHANEY, J.
JOHNSON, J.
