Opinion
B332593
09-17-2024
BOBS, LLC, Plaintiff and Respondent, v. MICHAEL DRAZ, Defendant and Appellant.
Resch Polster & Berger, Andrew V. Jablon, Bradley H. Kreshek, for Defendant and Appellant. Bruce Dannemeyer, for Plaintiff and Respondent.
NOT TO BE PUBLISHED
APPEAL from order of the Superior Court of Los Angeles County No. 22STCV39004, Michael E. Whitaker, Judge. Reversed and remanded with directions.
Resch Polster & Berger, Andrew V. Jablon, Bradley H. Kreshek, for Defendant and Appellant.
Bruce Dannemeyer, for Plaintiff and Respondent.
MORI, J.
The facts in this case are undisputed. They involve two actions against Michael Draz for claims arising under written guaranties (the Continuing Guaranties) requiring Draz's unconditional payment of two loans issued by Bobs, LLC (Bobs) to BHABC, LLC (BHABC) and the Beverly Hills Mansion LLC (the Mansion LLC). In the first action, Bobs and other plaintiffs sued Draz and others for the dissolution of BHABC and the Mansion LLC and declaratory relief, and they sought issuance of a writ of mandate requiring Draz to deliver or execute the Continuing Guaranties. Before Draz filed a responsive pleading, the parties stipulated to arbitrate the issues and disputes identified in the complaint. During the arbitration proceeding, Bobs dismissed its writ claim against Draz and filed this second action against Draz alleging breach of one of the Continuing Guaranties. Draz filed a motion to compel arbitration of these claims. The trial court denied the motion, finding the parties' stipulation did not cover the claims raised in this second action.
On appeal from the order, Draz contends the claims in this action are properly encompassed by the prior stipulation. We agree, reverse the order denying his motion, and remand with directions to grant it.
BACKGROUND
A. Stipulation to Arbitrate Issues Alleged in the First Action
Shortly after Bobs and other named plaintiffs filed a complaint in the first action, Bobs and Draz (and all other named litigants) entered into a written stipulation to submit "[t]his dispute . . . to arbitration." The stipulation provided that "the issues" in the complaint filed in the first action were to be "properly resolved by arbitration."
The complaint named various plaintiffs-Bobs; Amit Tidhar as Trustee of the BR Shy Irrevocable Trust; Rommy Shy as Manager of BHABC; and Barry Shy as Member-Manager of the Mansion LLC-and various defendants-Draz; Vacation in Paradise, LLC (VIP) as Manager of BHABC and MemberManager of the Mansion LLC; and the Black and White Irrevocable Trust (B&W Trust) as Member of BHABC. The complaint included an introductory paragraph describing the parties' disputes as follows:
"This action arises out of the development of two residential properties in Beverly Hills, California. Both of the developments have failed as a result of one of the principal's, Michael Draz's, failure to dutifully perform his and his company's obligations in an efficient and economical manner .... As a result, impasses have arisen [as] to the management of the companies involved in the development . . . and disposition of the properties, as well as disputes concerning such fundamental matters of whether Draz signed and guaranteed the $2 [m]illion and $1.635 [m]illion loans that he expressly agreed to guarantee."
The complaint addressed the formation and management of BHABC and the Mansion LLC. Draz and Barry Shy formed the corporations in 2015 and 2018 to develop two parcels of property in Beverly Hills (the Schuyler and Tower Grove Properties). BHABC and the Mansion LLC were member-managed through Draz and his company, VIP.
The BR Shy Irrevocable Trust and the B&W Trust are equal members of BHABC. Managers of BHABC are Rommy Shy and VIP. Draz is the owner-beneficiary of the B&W Trust. VIP and Barry Shy are equal members of the Mansion LLC. VIP is the manager of the Mansion LLC.
The complaint discussed the funding of BHABC and the Mansion LLC through two loan agreements (the Loan Agreements) secured by Continuing Guaranties. The Loan Agreements were executed in May 2020 between the lender, Bobs, and the borrowers, BHABC and the Mansion LLC. Bobs agreed to loan BHABC $1.635 million and the Mansion LLC $2 million to be memorialized by promissory notes to be "further secured by a Continuing Guaranty" executed by Draz.
The complaint alleged Draz engaged in various acts and omissions constituting "willful misconduct, gross negligence, and reckless disregard of duty and material breaches of the obligations imposed" by BHABC and the Mansion LLC operating agreements. Such conduct resulted in "budget overruns," delays in developing and permitting the properties, and the ultimate need to sell the properties to mitigate anticipated losses.
The complaint attached copies of the Loan Agreements and Continuing Guaranties alleged to have been signed by Draz. In each guaranty, Draz agreed to "absolutely and unconditionally guarantee[ ] the punctual payment" of each loan. He also waived guarantor protections under various antideficiency statutes. The complaint further provided that "Draz has denied ever signing a Guaranty or even agreeing to guarantee the debts . . . in any way. Thus, a live and actual controversy exists" between Bobs, BHABC, the Mansion LLC, and Draz.
The complaint alleged eight causes of action against Draz and/or VIP. In the fifth cause of action, Bobs and Barry Shy sought a "[w]rit of [m]andate requiring Michael Draz to produce the signed copy of, or to sign, a Guaranty of the [Loan Agreements]." The writ claim alleged that because Draz personally signed the Continuing Guaranties, he was bound by their terms.
The remaining causes of action requested dissolution of BHABC and the Mansion LLC; declaratory relief on corporate mismanagement, access to company records, and reimbursement of capital contributions; and damages for breaches of fiduciary duties and corporate operating agreements.
B. Arbitration Proceedings
In March and April 2022, Bobs and other plaintiffclaimants submitted initial and amended arbitration demands. In each demand, Bobs alleged the existence of "disputes concerning such fundamental matters [as] whether Draz signed and guaranteed the $2 [m]illion and $1.635 [m]illion loans that he expressly agreed to guarantee." Based on its position in the "dispute," Bobs requested a writ of mandate requiring Draz to submit or execute the Continuing Guaranties.
Draz submitted his own counterclaims and amended counterclaims in arbitration, including a request for declaratory relief invalidating the purported guaranties as procured by fraud. In support, Draz alleged he was "duped" into signing the documents.
In June 2023, Bobs withdrew its writ claim in arbitration without prejudice. A week later, Draz amended his counterclaims in arbitration to alternatively seek indemnity and contribution for any payments owing under the Continuing Guaranties.
C. Commencement of the Second Action
On December 15, 2022-after it submitted its writ claim in arbitration and before it withdrew the same-Bobs commenced this action (the Second Action) against Draz and BHABC for $3,075,427 for (1) breach of the BHABC Loan Agreement; (2) breach of the Continuing Guaranty covering that agreement; and (3) common counts against both defendants. The first cause of action alleged Draz and BHABC failed to repay amounts due under the BHABC Loan Agreement, which was in second position to a senior deed of trust that foreclosed on the Schuyler Property.
On July 19, 2023, Bobs filed a request to dismiss the writ claim in the First Action without prejudice. The same day, Draz filed a notice to relate the First and Second Actions. On July 20, 2023, the trial court clerk entered dismissal of the writ claim in the First Action. Several days later, the court related both actions.
The request for dismissal listed "Bob, LLC only."
Rule 3.300(a) of the California Rules of Court defines "related cases" in part as those involving the same parties based on the same or similar claims, or those arising from the same or substantially identical transactions, incidents, or events.
D. Motion to Compel Arbitration
On August 11, 2023, Draz filed a motion to compel arbitration of claims raised in the Second Action. Draz argued each claim was "identical and dependent on the issues raised" in the First Action and submitted to arbitration.
Bobs opposed the motion, arguing under Cardiff Equities, Inc. v. Superior Court (2008) 166 Cal.App.4th 1541 (Cardiff Equities), its dismissal of the writ claim divested the trial court of jurisdiction to compel arbitration.
In reply, Draz noted his counterclaims in arbitration against Bobs remained pending, rendering Bobs a crossrespondent in arbitration. In addition, Draz argued Cardiff Equities was distinguishable and inapplicable to the court's ruling.
The trial court denied the motion to compel arbitration, finding the "dispute" in the First Action "involved a writ for Draz to produce a copy of the guaranty on the loans." The court distinguished this dispute both from Draz's counterclaim in arbitration requesting cancellation of the Continuing Guaranties and the claims alleged in the Second Action for breaching one of them. The court also found Cardiff Equities controlling. Draz timely appealed.
DISCUSSION
A. Governing Law
In analyzing whether an arbitration agreement "requires arbitration of a particular controversy, the controversy is first identified and the issue is whether that controversy" falls within the scope of the agreement. (In re Tobacco Cases I (2004) 124 Cal.App.4th 1095, 1106.)
Once the existence of a valid arbitration agreement is established, "the burden is on the party opposing arbitration to show it "'"cannot be interpreted to require arbitration of the dispute."' [Citation.] In other words, 'an order to arbitrate a particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.' [Citation.]" (Titolo v. Cano (2007) 157 Cal.App.4th 310, 316-317 (Titolo).) These standards reflect the "'strong public policy in favor of arbitration'" (Moncharsh v. Heily &Blase (1992) 3 Cal.4th 1, 9) while also limiting arbitration of disputes to only those agreed upon. (FCM Investments, LLC V. Grove Pham, LLC (2023) 96 Cal.App.5th 545, 560 (FCM Investments).) "'Hence, any reasonable doubt as to whether a claim falls within the arbitration clause is to be resolved in favor of arbitration. [Citation.]'" (Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 356 (Victrola 89).)
The parties do not dispute our review is de novo. (See Titolo, supra, 157 Cal.App.4th at p. 316; Avery v. Integrated Healthcare Holdings, Inc. (2013) 218 Cal.App.4th 50, 60 [interpreting arbitration agreement without conflicting evidence "is a question of law subject to de novo review"].)
B. The Second Action Falls Under the Stipulation to Arbitrate
In support of his motion, Draz submitted a copy of the stipulation to arbitrate the issues raised in the First Action. Bobs did not challenge the validity of the stipulation below and does not do so here. Draz has met his burden to demonstrate a valid arbitration agreement. It is Bobs's burden to "'"demonstrate that [the] arbitration clause cannot be interpreted to require arbitration of the dispute"'" in the Second Action. (Titolo, supra, 157 Cal.App.4th at pp. 316-317.) Bobs has not met that burden.
"'In determining the scope of an arbitration provision, the court should give effect to the parties' intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made.'" (FCM Investments, supra, 96 Cal.App.5th at p. 561.) "'"A court must view the language in light of the instrument as a whole and not use a 'disjointed, single-paragraph, strict construction approach' [citation]."' [Citation.]" (Rice v. Downs (2016) 248 Cal.App.4th 175, 185-86.) "An interpretation that leaves part of a contract as surplusage is to be avoided." (Ibid.)
Bobs and Draz agreed to arbitrate the "issues [raised] in the Complaint" filed in the First Action. Among those issues was a "fundamental" disagreement over Draz's execution of the Continuing Guaranties or his agreement to guarantee debts owing under the Loan Agreements. The writ claim alleged in the First Action and initially pursued in arbitration was based on Draz personally signing the guaranties. Draz's disagreement with this premise-that he executed the Continuing Guaranties and was thus bound by their terms-is the basis on which Draz is pursuing his counterclaim in arbitration.
This same disagreement governs the claims alleged in this Second Action. The Second Action alleges breach of contract claims that rely upon the existence of valid contracts. (See Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821]; see also Civ. Code, §§ 1549, 1550, 1572.) We therefore conclude the claims at issue in this case fall within the scope of the stipulation and must be arbitrated. (Accord, Victrola 89, supra, 46 Cal.App.5th at pp. 343-344, 356-357; Laymon v. J. Rockcliff, Inc. (2017) 12 Cal.App.5th 812, 816-817, 821-822.)
C. Cardiff Equities Does Not Support Denying Arbitration
As they argued below, the parties debate the applicability of Cardiff Equities, supra, 166 Cal.App.4th 1541, to the circumstances here. The dispute in Cardiff Equities arose out of a failed real estate investment between the plaintiff (Cardiff) and the defendant (O'Neel). (Id. at p. 1544.) Unlike this case, however, the dispute in Cardiff Equities was governed by "two separate contracts" and an arbitration agreement within only one of them. (Ibid.) The arbitration provision appeared in the first contract, a "Partnership Agreement" in which Cardiff invested money as a limited partner. The second contract, a "Guaranty" in which O'Neel agreed to fully repay Cardiffs investment, contained no arbitration provision. (Ibid.) It provided O'Neel's obligation under the Guaranty was independent, and a separate action could be brought against him to enforce it. (Ibid.)
Cardiff sued O'Neel in the first action (Case No. 1) for breaching both agreements by failing to repay its investment. (Cardiff Equities, supra, 166 Cal.App.4th at p. 1545.) O'Neel moved to compel arbitration under the Partnership Agreement. (Ibid.) In granting O'Neel's motion, the trial court found "the gravamen of [Case No. 1] concerned the Partnership Agreement, which contained an arbitration provision." (Ibid.) Despite noting the absence of any similar arbitration provision in the Guaranty, the trial court found each cause of action arising under the Guaranty "'intimately founded in and intertwined'" with the Partnership Agreement. (Ibid.) Cardiff did not seek review of the order by writ petition, and instead dismissed Case No. 1 without prejudice. (Id. at p. 1546.)
Cardiff commenced a second action (Case No. 2) against O'Neel on "some, but not all, of the claims asserted in Case No. 1." (Cardiff Equities, supra, 166 Cal.App.4th at p. 1546.) Relying on the order compelling arbitration of the prior, dismissed case (Case No. 1), O'Neel filed a motion to stay Case No. 2. (Id. at pp. 1546-1547.) Cardiff opposed the motion, "claiming it had the absolute right to dismiss its prior action and thereafter to pursue only claims against O'Neel under the Guaranty." (Id. at p. 1547.) The trial court granted O'Neel's motion to stay and Cardiff sought review by petition for a writ of mandate. (Ibid.)
On review, Cardiff argued it was no longer bound by the prior order compelling arbitration because "its voluntary dismissal of Case No. 1, coupled with the filing of Case No. 2, acted to sever the Partnership claims from the Guaranty claims so that it is now free to immediately litigate the Guaranty claims in the trial court and to file another action and arbitrate its Partnership claims at a later date." (Cardiff Equities, supra, 166 Cal.App.4th at p. 1550.)
Based on the scope of each agreement and the distinction in claims arising under them, the court agreed with Cardiff. (Cardiff Equities, supra, 116 Cal.App.4th at p. 1550.) The court then noted, "Since Cardiff intends to pursue the Guaranty claims independently, as permitted by the Guaranty, there is no longer any basis for arbitration of the Guaranty claims." (Cardiff, supra, 166 Cal.App.4th at pp. 1550-1551, citing Freeman v. State Farm Mutual Automobile Insurance Company (1975) 14 Cal.3d 473, 481 [no policy compelling persons to accept arbitration of controversies which they have not agreed to arbitrate]; United Public Employees v. City &County of San Francisco (1997) 53 Cal.App.4th 1021.)
Recognizing its severance of claims depended on the arbitrability of each claim arising under the agreements before it, the Cardiff Equities court stated: "As we discussed elsewhere in the opinion, if Cardiff later decides to file another action to pursue any claim under the Partnership Agreement it will necessarily have to do so in arbitration consistent with the trial court's order." (Cardiff Equities, supra, 166 Cal.App.4th at p. 1552, fn. 7, italics added.)
Cardiff Equities does not support Bobs's position in this case, and in fact compels the opposite result. As we have discussed, the parties in this case submitted their dispute over the validity and execution of the Continuing Guaranties to arbitration. As the breach of contract and common count claims alleged in the Second Action depend on this very dispute, they are analogous to the Partnership claims in Cardiff Equities, and not the Guaranty claims. Thus, under Cardiff Equities, because Bobs "later decide[d] to file another action to pursue" claims that the parties agreed would be arbitrated, it necessarily had to pursue them in arbitration. (Cardiff Equities, supra, 166 Cal.App.4th at p. 1552, fn. 7.)
D. Bobs's Remaining Contentions Are Unavailing
Bobs contends the breach of contract and common count claims raised in the Second Action could not have been submitted to arbitration because they did not accrue until after arbitration commenced. In support, Bobs relies on the antideficiency statutes, which "prohibit a lender from obtaining a deficiency judgment from a borrower following a nonjudicial foreclosure of real property." (LSREF2 Clover Property 4, LLC v. Festival Retail Fund 1, LP (2016) 3 Cal.App.5th 1067, 1074 (LSREF2); see Code Civ. Proc., § 580d, subd. (a).) Based on these statutes, Bobs avers it did not have a claim against Draz until foreclosure proceedings were held on the Schuyler Property.
Bobs is mistaken. "The antideficiency statutes' protections generally do not extend to guarantors." (LSREF2, supra, 3 Cal.App.5th at p. 1075.) Where, as here, a guarantor waives his antideficiency protections, the lender may recover a deficiency judgment "'even though the antideficiency statutes would bar the lender from recovering that same deficiency from the primary borrower.' [Citation.]" (Ibid.; see Code Civ. Proc., § 580d, subd. (b).)
Second, Bobs argues that although Draz's counterclaims in arbitration concern the validity of the Continuing Guaranties, which is also at issue in the Second Action, the counterclaims should be "disregarded." Bobs classifies Draz's counterclaims in arbitration as "nothing more than an evidentiary challenge to the authenticity of the personal guaranty attached to [Bobs's] complaint." According to Bobs, Draz will not be prejudiced by having "to raise that evidentiary objection or similar affirmative defense at trial" rather than in arbitration.
To the extent Bobs proposes prejudicial error should apply to our limited review in this case, Bobs furnishes no authority for the proposition. (See B.B. v. County of Los Angeles (2020) 10 Cal.5th 1, 11 ["As we have repeatedly observed, '"cases are not authority for propositions not considered"'"].) The "prejudice" we discern is not the ability of Draz to raise a claim in defense in this lawsuit, but his inability to do so in the forum to which he and Bobs agreed. (See Moncharsh v. Heily &Blase (1992) 3 Cal.4th 1, 9 ["'those who enter into arbitration agreements expect that their dispute will be resolved without necessity for any contact with the courts'"].)
The cases on which Bobs purports to rely do not address the standards governing the judicial compulsion of arbitration. They simply reflect the point that a trial court may prevent the filing of a declaratory relief cross-complaint based on "the same facts alleged in the separate defenses pleaded in [the] defendant's answer to the complaint." (Welfare Inv. Co v. Stowell (1933) 132 Cal.App. 275, 276278; C.J.L. Construction, Inc. v. Universal Plumbing (1993) 18 Cal.App.4th 376, 391.)
DISPOSITION
The order denying the motion to compel arbitration is reversed with directions to the trial court to grant the motion on remand. Draz is entitled to costs on appeal.
We concur: CURREY, P. J., COLLINS, J.