Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of San Diego County, No. 37-2008-00088969- CU-MC-CTL Jay M. Bloom, Judge.
HALLER, Acting P. J.
Highland Partnership, Inc. (Highland), a general contractor, hired San Diego Steel Holdings Group, Inc. (San Diego Steel) to perform steel work on a hotel construction project. After Highland stopped paying for the work, San Diego Steel sued Highland and several other defendants, seeking to foreclose on a mechanics' lien and to enforce bonded stop notices. Highland responded by moving to compel San Diego Steel to arbitrate the contract dispute underlying the foreclosure claim, and to stay the remainder of the action. The trial court denied the motion because it found the potential for conflicting rulings if it ordered arbitration only of the underlying claim between San Diego Steel and Highland. (Code Civ. Proc., § 1281.2, subd. (c).) Highland appeals. We determine the court acted within its discretion and affirm the order.
All further statutory references are to the Code of Civil Procedure unless otherwise noted.
FACTUAL AND PROCEDURAL BACKGROUND
In August 2004, 5th Avenue Partners, LLC (Owner) hired Highland to serve as the general contractor in building a downtown hotel known as the Diegan Hotel (Hotel). Two years later, Highland entered into a subcontract (Subcontract) with San Diego Steel in which San Diego Steel agreed to provide steel reinforcing work on the Hotel project, and Highland agreed to pay $2.9 million for the work.
The Subcontract contained an arbitration clause stating in relevant part: "Any controversy or claim between [Highland], OWNER and [San Diego Steel] arising out of or related to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association...." The Subcontract's arbitration agreement also contained provisions allowing Highland or Owner to join San Diego Steel in any arbitration proceedings between Highland and Owner.
On May 5, 2008, San Diego Steel recorded a mechanics' lien against the Hotel property for $204,389.15 to secure its claim for outstanding amounts owed on its steel work. San Diego Steel also served stop notices on various parties, including the Owner and the construction lender, West LB, AG (West LB).
Several months later, on August 4, 2008, San Diego Steel filed a superior court complaint to foreclose on the mechanics' lien and to enforce its stop notices. The complaint named the following parties as defendants: (1) Owner; (2) Highland; (3) the construction lender (West LB); and (4) the surety on a private works payment bond (Travelers Casualty and Surety Company of America (Travelers)). The first two causes of action pertained to the foreclosure of the mechanics' lien. The third, fourth, and fifth causes of action pertained to enforcement of the stop notices. The sixth cause of action related to the enforcement of the bond. Highland was a named defendant only on the first (foreclosure of mechanics' lien) cause of action. Owner and West LB were also named in the first cause of action, and on several other causes of action. Travelers was named only on the sixth cause of action.
Owner and West LB filed answers to the complaint. Each defendant alleged defenses countering San Diego Steel's underlying claim that it was owed funds on the project, and also asserted various additional defenses, including those relevant to procedural requirements applicable to mechanics' liens and stop notices.
Highland then moved to compel San Diego Steel to arbitrate its claims, and to stay the litigation pending the arbitration. San Diego Steel did not initially respond to the motion, but Owner filed a written opposition, arguing that an order requiring it to arbitrate the claims asserted by San Diego Steel would lead to the possibility of conflicting rulings because West LB could not be brought into the arbitration. Owner further stated there were numerous existing lawsuits involving the Hotel project, and there was a pending arbitration proceeding between Owner and Highland. Owner also argued that it appeared from Highland's motion that Highland was attempting to avoid a prior court order in a separate case in which the court refused Highland's request for arbitration of certain of Owner's contract causes of action.
In its reply brief, Highland clarified that it was not seeking an order that Owner be brought into the arbitration, and instead it sought only to compel San Diego Steel to arbitrate its underlying claim with Highland. Specifically, Highland stated it was seeking arbitration of the merits of San Diego Steel's claim that Highland failed to pay "[San Diego] Steel for labor and/or materials it allegedly supplied under its Subcontract with Highland." Highland stated that once an arbitrator rules on this claim, the issues pertaining to the foreclosure of the mechanics' lien could be litigated in superior court with all interested parties, including Owner and West LB.
In a tentative order, the court denied Highland's motion to compel arbitration. The court stated that because there was no arbitration agreement between San Diego Steel and Owner, or between San Diego Steel and West LB, the court could not order these parties to arbitration, and litigating the same issues in two forums could result in inconsistent rulings pertaining to identical factual and legal issues. The court also noted a possibility of conflicting rulings because of the pending arbitration between Owner and Highland.
At the hearing on the motion to compel, Highland's attorney reiterated that Highland was not "seeking to compel arbitration of the mechanic's lien claim. It is the underlying dispute between San Diego Steel and Highland that we're trying to compel arbitration of.... [¶] [I]f this case were to proceed to trial, San Diego Steel will first have to establish that it has... done the work and it hasn't been paid before [it] can foreclose on the mechanic's lien. So we're only looking to compel arbitration of that first portion of that two-step process."
San Diego Steel's counsel stated at the hearing that San Diego Steel did not initially oppose Highland's motion to compel arbitration because he had understood Highland was seeking arbitration of the entire matter. However, based on Highland's clarification that it was seeking an arbitration only between Highland and San Diego Steel pertaining to the underlying dispute, counsel now believed that this limited arbitration was not proper. San Diego Steel's counsel stated that his client was seeking a single "venue to [resolve] what we believe to be a collection action, " and agreed with the court that Highland's proposal to litigate the issues in a two different forums could lead to inconsistent rulings.
After the hearing, the court adhered to its tentative ruling and denied Highland's motion to compel based on the possibility of conflicting rulings. (See § 1281.2, subd. (c).)
DISCUSSION
I. Legal Principles Governing Motions to Compel Arbitration
It is undisputed that San Diego Steel and Highland entered into a valid agreement to arbitrate disputes arising from the Hotel project. If an agreement to arbitrate exists, the court must order the parties to arbitrate the controversy, unless the party opposing arbitration establishes the applicability of a specific statutory exception. (See § 1281.2.) The exception at issue here is contained in section 1281.2, subdivision (c), which provides that a court need not compel arbitration if it determines that "[a] party to the arbitration agreement is also a party to a pending court action or special proceeding 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...." (§ 1281.2, subd. (c); see Whaley v. Sony Computer Entertainment America, Inc. (2004) 121 Cal.App.4th 479, 486 (Whaley); C.V. Starr & Co. v. Boston Reinsurance Corp. (1987) 190 Cal.App.3d 1637, 1642.)
An order denying arbitration under section 1281.2, subdivision (c) is reviewed for abuse of discretion. (Best Interiors, Inc. v. Millie & Severson, Inc. (2008) 161 Cal.App.4th 1320, 1329; Whaley, supra, 121 Cal.App.4th at p. 484.) Under this deferential standard, we must affirm the trial court's denial of arbitration based on the possibility of conflicting rulings unless the court's conclusion " 'exceeded the bounds of reason.' " (Mercury Ins. Group v. Superior Court (1998) 19 Cal.4th 332, 349.)
Highland urges us to conduct a de novo review, relying on People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415 and Whaley, supra, 121 Cal.App.4th 479 . Under those decisions, an independent review standard applies when an appellant raises an issue requiring statutory interpretation. (See Lockyer, supra, at p. 432; Whaley, supra, at p. 484.) That standard is inapplicable here because Highland's contentions do not require that we resolve competing interpretations of the arbitration statute, and instead involve only a review of the court's application of section 1281.2, subdivision (c) to the particular facts of the case.
II. Mechanics' Lien Law
A mechanics' lien is an involuntary encumbrance against the real property on which the claimant has furnished labor, services, equipment or material for the value of the items or services. (Civ. Code, § 3110.) The mechanics' lien is frequently a subcontractor's sole remedy against an owner because a subcontractor generally has no privity with the owner, and the lien may be imposed and enforced without a contractual relationship. (See Basic Modular Facilities, Inc. v. Ehsanipour (1999) 70 Cal.App.4th 1480, 1483-1484.) An unpaid subcontractor may also secure a claim by serving a stop notice on the owner or construction lender to freeze construction funds in the possession of these parties. (See Civ. Code, §§ 3103, 3083, 3158-3167.) Filing an action to enforce a stop notice seeks a money judgment against the party who held construction funds, and may provide for the immediate equitable garnishment of any remaining funds. (See Mechanical Wholesale Corp. v. Fuji Bank, Ltd. (1996) 42 Cal.App.4th 1647, 1654.)
A contractor enforces a mechanics' lien by filing a superior court complaint for foreclosure of the lien and establishing the contractor was not paid for the work performed and/or for the materials provided. (Civ. Code, § 3144, subd. (a); see Basic Modular Facilities v. Ehsanipour, supra, 70 Cal.App.4th at p. 1485.) When bringing an action to foreclose a mechanics' lien, the subcontractor must name all persons who claim an interest in the property, including the property owner and all beneficiaries under deeds of trust. (See Monterey S.P. Partnership v. W. L. Bangham (1989) 49 Cal.3d 454, 459.) Thereafter, each person who claims an interest in the property, including a junior encumbrancer, has an independent right to dispute the validity, amount, and priority of a mechanics' lien. (See Grinnell Fire Protection Systems Co. v. American Sav. & Loan Assn. (1986) 183 Cal.App.3d 352, 358.)
An action to foreclose a mechanics' lien sounds in both equity and law. The validity of the underlying claim is a factual issue that the parties are entitled to have resolved by a jury. (See Basic Modular Facilities v. Ehsanipour, supra, 70 Cal.App.4th at p. 1485; Selby Constructors v. McCarthy (1979) 91 Cal.App.3d 517, 526.) The issues pertaining to the manner in which the lien was perfected and the right to foreclose on the property are equitable issues to be decided by a court. (Selby Constructors, supra, at p. 526; A. A. Baxter Corp. v. Home Owners & Lenders (1970) 7 Cal.App.3d 725, 732.) Each of these issues may be decided in arbitration if the parties have agreed to do so in their arbitration agreement.
III. Court Did Not Abuse Discretion in Finding Potential for Inconsistent Rulings
San Diego Steel asserted mechanics' lien foreclosure and stop notice enforcement causes of action in its complaint, and named Highland and several other defendants. Highland moved for an order that San Diego Steel arbitrate solely the merits of its underlying claim against Highland that it was owed $204,389.15 for work it completed on the Hotel project. In bringing the motion, Highland acknowledged that San Diego Steel will thereafter be required to litigate the remaining claims against Highland and against the remaining defendants in superior court. The court found that bifurcating the litigation in this matter would lead to the possibility of inconsistent rulings, and refused to order arbitration.
Without citing any authority, Highland argues that the two proceedings will not create the possibility of conflicting rulings because once the amount of the outstanding claim is determined by the arbitrator, all defendants would be bound by this amount, and the parties would need only to litigate the issues pertaining to whether San Diego Steel met the procedural requirements for a foreclosure of the mechanics' lien and enforcement of the stop notice.
The flaw with this argument is that Owner and West LB would not necessarily be bound by the arbitrator's finding with respect to the underlying claim, and would be entitled to relitigate the outstanding payment issues in the superior court proceedings. San Diego Steel alleged in its complaint that Owner, Highland, and West LB have an interest in the Hotel property, and that these interests are junior, and/or subject to, San Diego Steel's mechanics' lien. Thus, even if the underlying dispute as to the amount of money owed to San Diego Steel is fully litigated in the arbitration proceeding between Highland and San Diego Steel, the remaining parties (including the Owner and construction lender) would be potentially entitled to relitigate the same issue in the superior court, which could result in inconsistent legal and/or factual conclusions. (See Grinnell Fire Protection Systems Co. v. American Sav. & Loan Assn., supra, 183 Cal.App.3d at p. 358.) In their answers, Owner and West LB both asserted defenses that raise issues challenging the amount owed to San Diego Steel for its work on the Hotel project.
Highland argues that "in reality, there is no real risk of inconsistent rulings" because "any ruling by the arbitrators will be binding against the parties who participated in the arbitration." However, collateral estoppel generally cannot be used by third parties to foreclose later litigation on issues decided by private arbitrators, absent an express agreement to the contrary. (See Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 827.) Moreover, a party cannot invoke a prior arbitration determination against an entity who was not a party to the prior proceedings. (See Lucido v. Superior Court (1990) 51 Cal.3d 335, 341.) Thus, if San Diego Steel prevails in the arbitration, it could not assert the court's factual findings against the Owner or the construction lender in a later superior court action, and instead would be required to relitigate the underlying issues, including the nature of its steel work and the amounts owed on the Subcontract.
Highland also asserts that "should [San Diego] Steel recover against [Highland], it would be precluded from double recovery against other defendants that were not parties to the arbitration." However, in the arbitration proceeding sought by Highland, San Diego Steel would not "recover" anything in the arbitration. Instead, Highland seeks an arbitration only on the claim underlying the mechanics' lien cause of action pertaining to the amount that Highland owes to San Diego Steel for its steel work. After this determination, San Diego Steel would need to continue its litigation against Highland and the other parties in superior court to seek a foreclosure of the lien. At that time, there would be a possibility of inconsistent rulings because Owner and West LB would be potentially entitled to relitigate the amounts owed to San Diego Steel.
Highland contends the "risk of inconsistent judgments was minimal, if it existed at all, because four of the five parties to the underlying case could have been joined into one arbitration proceeding." The trial court had a reasonable basis to reject this argument. San Diego Steel sued four defendants: Highland, Owner, West LB, and Travelers. Highland agreed to arbitrate one portion of one claim, and Travelers agreed to arbitrate the bond enforcement claim asserted against it. However, neither Owner nor West LB agreed to arbitrate claims with San Diego Steel. There is no showing on the record before us that Owner signed the Subcontract containing the arbitration agreement with San Diego Steel. Although there was a clause in the Subcontract allowing Highland and/or Owner to bring San Diego Steel into an arbitration resolving disputes between these parties (Highland and Owner), there was no reciprocal provision allowing San Diego Steel to require the Owner (a nonsignatory party) to arbitrate claims asserted by San Diego Steel. Thus, on this record, only two of the four defendants were bound, or had agreed, to arbitration with San Diego Steel.
Highland contends San Diego Steel could have been made a party "to the Arbitration between Highland and [Owner] that had been pending since October of 2008, leaving West LB alone as the only party that could not have been joined to the Arbitration." This argument is unhelpful to Highland's position. Although it is true that Highland or Owner could have made San Diego Steel a party to the Highland-Owner arbitration proceeding, neither party in fact sought to join San Diego Steelin that arbitration. Further, in moving to compel the arbitration of San Diego Steel's claims, Highland specifically stated that it was not seeking to join Owner in this arbitration proceeding.Thus, the fact that Highland potentially had a right to have all three parties (Highland, Owner, and San Diego Steel) in the same arbitration is of no consequence here because Highland never sought to invoke this right. In any event, even if the Owner could have been joined in the arbitration, it is undisputed that no party had the right to bring the construction lender (West LB) into this arbitration proceeding.
It appears that this arbitration proceeding between Highland and Owner may have already taken place.
Highland next contends the trial court's ruling is contrary to legislative intent to promote arbitration in mechanics' lien proceedings. In support, Highland cites to section 1281.5, which sets forth procedural rules governing a party's preservation of its arbitration right upon filing a mechanics' lien foreclosure complaint. Viewed according to its plain meaning, section 1281.5 does not require trial courts to grant motions to compel arbitration merely because the underlying complaint contains a mechanics' lien claim. By enacting section 1281.5, the Legislature sought to ensure that a mechanics' lien claimant would not waive his or her arbitration rights merely by complying with the strict deadlines for filing a mechanics' lien foreclosure complaint. But these rules do not reflect legislative intent "to affect the substantive law governing arbitrability, which still must be determined by a court in accordance with Code of Civil Procedure Section 1281.2." (Sen. Com. on Judiciary, Analysis of Sen. Bill No. 113 (2003-2004 Reg. Sess.) as amended April 30, 2003.)
Section 1281.5, subdivision (a) provides that a party filing a complaint seeking to enforce a mechanics' lien does not waive the right to arbitration if the claimant: (1) includes an allegation in the complaint that the claimant does not intend to waive the arbitration right; or (2) files an application that the action be stayed pending an arbitration. The party must then file a request for arbitration within 30 days after service of the summons and complaint. (§ 1281.5, subd. (b).)
Highland next argues that affirming the trial court's order "would make it impossible to arbitrate any action to foreclose on a mechanic's lien, " because the parties named in a mechanics' lien foreclosure action are not generally "parties to a single arbitration agreement." However, the fact that the court here exercised its discretion to deny the motion does not mean a court will always deny such a motion and/or that a refusal to order arbitration will always be warranted. Under the applicable statutes, the court must make a case-by-case assessment of the applicability of the section 1281.2, subdivision (c) exception. Moreover, even if there is more than one arbitration agreement, the court may order consolidated arbitration proceedings. (See Garden Grove Community Church v. Pittsburgh-Des Moines Steel Co. (1983) 140 Cal.App.3d 251, 263; Cal. Mechanics' Liens & Related Construction Remedies (Cont.Ed.Bar 3d. ed. 2009) § 7.59, pp. 514-515.)
Finally, Highland contends the trial court's denial of Highland's motion to compel arbitration was improper because it was based on the court's "own bias and prejudice against arbitration." In support, Highland cites to the court's statement at the hearing that: "My experience has been, when I send a case to arbitration, it goes into a deep hole for years, number one. And if we have other moving parts here, it's going to take even longer. So I just don't think it's judicially efficient, nor does it make any sense under the facts of this case."
Viewing the court's remarks in context of the entire hearing, the statements do not show the court was "bias[ed]" or "prejudice[d] against arbitration." The court's reference to the length of the arbitration process was related to its concern that Highland was seeking to arbitrate only a small portion of the case, and that the arbitrator's rulings would not necessarily bind the remaining parties after the matter is returned to superior court. These were proper factors to take into consideration in determining whether the section 1281.2, subdivision (c) exception applied in the case. The court's oral and written statements reflect that the court understood the applicable law and properly applied the facts of the case to reach a reasoned conclusion.
DISPOSITION
Order affirmed. Appellant to bear respondent's costs on appeal.
WE CONCUR: McDONALD, J., AARON, J.