Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. MC020548, Brian C. Yep, Judge.
Northrup Schlueter, David S. Schlueter and Mathew R. Groseclose for Defendants and Appellants.
Law Offices of Ulric E. J. Usher, Ulric E. J. Usher and Richard Kavonian for Plaintiff and Respondent.
RUBIN, J.
A.V. Steel Building Services, Inc., Edward Houtz, Sr., Dorothy Ann Peters, and Patricia Gott appeal from the order denying their petition to compel arbitration of this action arising from their contract to build a church for United Christian Fellowship of the Antelope Valley. Because there was substantial evidence that appellants waived their right to arbitrate, we affirm the trial court’s order.
FACTS AND PROCEDURAL HISTORY
In June 2009, the United Christian Fellowship of the Antelope Valley (the church) sued A.V. Steel Building Services, Inc. (AVS), for breach of contract, negligence, and intentional and negligent misrepresentation arising from their contract for the construction of a new church facility. The church also sued three AVS shareholders – Edward Houtz, Sr., Dorothy Ann Peters, and Patricia Gott – alleging that AVS was an undercapitalized sham entity and was therefore the alter ego of those three.
On August 27, 2009, AVS and the individual shareholder defendants answered the complaint. The answer alleged numerous affirmative defenses, including the 40th, which demanded arbitration “[i]f an agreement exists to submit this matter to binding arbitration....” AVS alone cross-complained against the church on various theories, including breach of contract, intentional and negligent misrepresentation, implied equitable indemnity, and comparative contribution. Each set of parties attached and incorporated into their respective pleadings the same copy of their 2005 construction agreement, which did not include an arbitration provision.
Although only AVS cross-complained against the church, for ease of reference we include Houtz, Peters, and Gott when we refer to AVS, unless otherwise indicated.
After the answer and cross-complaint were filed, AVS began to litigate both its defense of the church’s complaint and its cross-complaint. In September 2009, AVS filed a case management statement in which it demanded a jury trial and estimated that all discovery, including expert witness depositions, would be concluded by June 30, 2010. AVS was the first party to send out discovery requests. Between October 5 and November 24, 2009, AVS sent out interrogatories, document production demands, and requests for admission, which collectively asked the church to respond to 197 separate inquiries.
The church responded to those discovery requests. On December 4, 2009, in response to a request by AVS to produce its files on the project, including any copies of the construction contract, the church failed to produce any copies of the agreement. Eleven days earlier, AVS sent a set of requests for admissions to the church, including one which asked the church to admit or deny that a copy of a 2006 amended version of the construction contract that included an arbitration provision was in fact the parties’ contract. On January 27, 2010, the church served a response admitting that the amended version of the contract with the arbitration provision was genuine.
The arbitration provision stated: “Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by binding arbitration and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Each party to this contract shall select an arbitrator who shall hold an active license as either a Contractor, architect, civil or mechanical engineer in the State of California. The arbitrators so selected shall in turn select a third arbitrator who shall also be so licensed and shall be the chairman of the arbitration hearing. If any party refuses or neglects to appoint his arbitrator or to participate in the arbitration with [sic] twenty (20) days after receiving notice thereof, the arbitrator or arbitrators are empowered to decide the controversy in accordance with whatever evidence is presented. The arbitrators are authorized to award reasonable costs, expenses, and attorneys fees. Any decision of this arbitration board shall be binding by a simple majority vote of the arbitrators.”
After receiving the church’s admission, AVS demanded that the church submit to arbitration of their dispute. When the church refused, AVS filed a petition to compel arbitration on March 3, 2010. (Code Civ. Proc., § 1281.2.) AVS’s petition noted that instead of attaching a copy of the operative amended contract with the arbitration provision to its complaint, the church used the superseded original contract that did not include that provision. AVS also pointed out that the church never produced any copies of the contract in response to a document production request. AVS argued that it moved to enforce its arbitration rights once the church admitted that the amended contract with the arbitration provision was the parties’ true contract.
All further section references are to the Code of Civil Procedure.
AVS’s lawyer, Mathew R. Groseclose, submitted a declaration stating that the version of the contract attached to the church’s complaint “appeared to be a copy of a document that had been faxed to the offices of counsel for the [church and that AVS] then answered the Complaint according to the [church’s] representation that the document attached to the Complaint was a copy of the contract between the parties.” In short, AVS contended that it believed the version of the contract attached to the church’s complaint was the operative agreement, and did not learn otherwise until the church admitted that the 2006 amended contract that contained an arbitration provision was in fact the true agreement. There were no declarations from anyone at AVS to support the petition.
The church’s opposition to the arbitration petition was two-pronged. First, the purported contract amendment was signed by only AVS president and codefendant Houtz, and had not been signed by the church. This contention was supported by the declaration of Veronica Fields, the church’s chief financial officer, who said the church did not sign the proposed amendment because it never agreed to do so. As a result, the church argued, the operative contract was the original one, which did not include an arbitration provision. In connection with this contention, the church purported to amend its earlier discovery admission to deny the authenticity of the 2006 contract amendment.
Second, the church contended that even if the arbitration provision was valid, AVS’s delay in raising the issue amounted to a waiver of the provision. Instead of demanding to arbitrate when the complaint was filed, the church pointed out that AVS answered, cross-complained, and initiated the extensive discovery mentioned above. In addition, AVS filed a motion for summary adjudication of issues in December 2009, which was continued before the church filed any written opposition. AVS did not fully respond to the church’s discovery requests, forcing the church to bring motions to compel.
The church contended that AVS’s delay while it invoked the trial court’s processes prejudiced it in several ways: (1) AVS was allowed to conduct discovery that was not available to it through arbitration, allowing AVS to learn about the church’s case; (2) a trial date was set for July 2010, little more than two months after the hearing date for the petition to compel arbitration; and (3) as of the date the petition to compel arbitration was served, the church had incurred attorney’s fees of more than $25,000.
AVS’s reply points and authorities contended that the 2006 contract amendment containing the arbitration provision was valid. According to the declaration of Rebecca Perez, who was AVS’s office manager and administrative assistant, the church was having financial problems and asked for the amendment, including the arbitration provision, to satisfy the demands of a new lender. Perez said that AVS, acting on the church’s request, researched form construction documents, drafted the amendment, and e-mailed a copy to the lender and Fields, who was the church’s financial officer. The church “expressed agreement” to the amendment and told AVS it would sign the revised contract. AVS also noted that the church never brought the motion required to amend its discovery admission concerning the revised contract (§ 2033.300), meaning the church was bound to its admission that the arbitration provision was part of the parties’ agreement.
As for the church’s contention that AVS waived the arbitration provision, AVS contended that the church committed misconduct – as evidenced by the version of the contract without the arbitration provision attached to its complaint and its failure to produce any copies of the contract during discovery – that “prevented [AVS] from ascertaining the validity of the arbitration clause at the onset of litigation.” In addition, AVS noted, its answer to the complaint raised the possibility of an arbitration provision as an affirmative defense. As with its moving papers, AVS’s reply points and authorities were not supported by declarations from anyone at AVS.
At the hearing on the petition to compel arbitration, the court said it could not disregard the church’s admission concerning the amended version of the construction contract because the church had not brought a motion to revise its response. As a result, the court found that there was a valid and binding agreement to arbitrate. However, because AVS drafted the contract amendment that contained the arbitration provision, the court assumed AVS knew the provision existed. Combined with AVS’s extensive discovery and other steps taken to litigate the matter, the trial court found that AVS had waived the provision and therefore denied the petition to compel arbitration. AVS contends the trial court erred by finding it waived the arbitration provision.
At the time of the hearing, the church had motions to compel discovery on calendar, the results of which would determine whether AVS’s summary adjudication motion would go forward or be continued again so the church could obtain the needed discovery. After AVS filed its notice of appeal, it then petitioned this court for a writ of supersedeas to stay the entire action until the appeal could be determined. We granted that petition, and our stay order will dissolve when the remittitur is issued.
AVS also argues in support of the trial court’s finding that the amended contract containing the arbitration provision was valid and enforceable. Although the church does not contest this point, it does argue that we should not enforce the provision because some of its claims are based on allegations that AVS was an unlicensed contractor, and that public policy should therefore prevent AVS from seeking arbitration. Because we affirm based on the waiver finding, we do not reach this issue.
DISCUSSION
1. Applicable Law and Standard of Review
California law favors arbitration as a faster and cheaper alternative to litigation, and a party to an agreement with an arbitration provision may petition the trial court to compel other parties to the contract to arbitrate disputes arising from the agreement. (§ 1281.2; Burton v. Cruise (2010) 190 Cal.App.4th 939, 944 (Burton).) However, a petition to compel arbitration will be denied where the moving party has waived the right to arbitrate. (§ 1281.2, subd. (a); Burton, supra, at p. 944.) Waiver in this context is really the label affixed to the conclusion that the contractual right to arbitrate has been lost. A finding of waiver does not require a knowing and intentional abandonment of the right to arbitrate, and is instead “more like a forfeiture arising from the nonperformance of a required act.” (Burton, supra, at p. 944.)
The court in St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187 (St. Agnes) set forth the factors to consider when determining whether a waiver occurred: (1) whether the party seeking to compel arbitration acted inconsistently with the right to arbitrate; (2) whether the litigation machinery has been substantially invoked and the parties were well into preparation of the action before receiving notice one party intended to arbitrate; (3) whether the arbitration request was delayed for a long time before seeking a stay, or was requested close to the trial date; (4) whether a defendant seeking arbitration filed a cross-complaint without asking for a stay of the action; (5) whether important intervening steps had taken place, such as taking advantage of judicial discovery procedures not available in arbitration; and (6) whether the delay misled, affected, or prejudiced the other party. (Id. at p. 1196.) The existence of prejudice is critical, because without it, mere participation in litigation is not enough, even if the party opposing arbitration incurred court costs and legal expenses. (Id. at p. 1203.)
Waiver is not a mechanical process and no one of these factors is predominant. (Burton, supra, 190 Cal.App.4th at pp. 944-945.) An evaluation of the waiver issue is context-driven, and no one test covers all possible situations. (St. Agnes, supra, 31 Cal.4th at p. 1195; Burton, supra, at p. 945.) Waiver is not lightly inferred and the party contending that an arbitration provision was waived bears a heavy burden of proof by clear and convincing evidence. Even so, the issue presents a question of fact for the trial court, and we will affirm a finding of waiver so long as it is supported by substantial evidence. (Burton, supra, at pp. 945-946.)
In other words, even when a moving party bears a “heavy burden” of proof such as the clear and convincing evidence standard, that burden effectively disappears on appeal and we apply the traditional substantial evidence standard of review. (Burton, supra, 190 Cal.App.4th at pp. 945-946; 9 Witkin, Cal. Procedure (5th ed. 2008) Appeal, § 371, p. 428.)
2. Substantial Evidence Supports the Trial Court’s Waiver Finding
A. Evidence That AVS Knew About the Arbitration Provision
AVS contends the trial court erred by finding it waived the right to arbitrate because the church misled AVS to believe that the original 2005 contract without the arbitration provision was the parties’ operative agreement. Thus, according to AVS, even though it answered and cross-complained in August 2009 and did not move to compel arbitration until March 2010, it did not delay enforcement of its right to arbitration because it acted swiftly once the church confirmed the validity of the amended contract containing the arbitration clause. This contention overlooks the trial court’s finding that AVS, as the author of the 2006 contract amendment that included the arbitration provision, knew the provision existed. AVS’s argument is also based on a failure to acknowledge the evidence to support that finding, evidence that came from AVS itself.
AVS’s contention is also based on a failure to acknowledge, discuss, or analyze the evidence that supports this finding. We therefore alternatively hold that AVS waived this issue. (Doe v. Roman Catholic Archbishop of Cashel & Emly (2009) 177 Cal.App.4th 209, 218 & fn. 3.)
According to the declaration of AVS office manager Perez, AVS researched and drafted the 2006 contract amendment because the church said it needed the amendment, including the arbitration provision, to satisfy its new lender. Perez said that copies of the amended contract were sent to the church and its lender, and that the church agreed to the amended provisions and also said that it would sign the amendment. Codefendant and AVS president Houtz signed the amended contract. AVS’s admission that it drafted the arbitration provision at the church’s request raises a powerful and compelling inference that, as the trial court found, AVS was aware of its existence when the church filed its complaint, and could not and should not have been misled by the church’s use of the original 2005 contract.
In its opening appellate brief, AVS claims that it found the amended contract after it began a review of its files in the fall of 2009. Its reply brief claims that the business “had been effectively shut down, ” and that the records were being kept in “various storage facilities across Los Angeles County.” However, there is no evidence in the record to support these factual assertions, which were never raised in the trial court. Neither is there evidence to explain why AVS forgot the existence of a contract provision, which, by its own admission, it researched and drafted at the church’s request, and which was signed by its president, who is a party to this action. Because there is no evidence to counter the inference that AVS knew about the arbitration provision, the trial court correctly found that AVS knew of that provision when it responded to the complaint with an answer and cross-complaint, undertook extensive discovery, moved for summary adjudication, and otherwise actively litigated this matter.
AVS contends the trial court erred because the court merely assumed AVS’s knowledge of the arbitration provision, when the evidence left open the alternative explanation that AVS had forgotten about the arbitration provision and was misled by the church into believing that no such provision existed. We disagree.
First, as just noted, there was no evidence to explain how or why Houtz or anyone else at AVS forgot about the arbitration provision. Second, although the trial court said it assumed AVS knew about the provision, we view its use of that term as a shorthand expression of a finding to that effect. (Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624, 631 [trial court’s ruling is presumed correct and all ambiguities are resolved in favor of affirmance].) Third, AVS cites New Linen Supply v. Eastern Environmental Controls, Inc. (1979) 96 Cal.App.3d 810, 814-815, for the proposition that a finding that an arbitration provision was waived cannot be made if there are other possible explanations for a party’s delay in asserting the provision. Although that might be the test for the trial court to use when determining whether there is clear and convincing evidence of waiver, the New Linen court erred when it applied that language to the appellate standard of review. (Rubin v. Los Angeles Fed. Sav. & Loan Assn. (1984) 159 Cal.App.3d 292, 297-298.) Instead, as previously mentioned, regardless of the burden of proof below, on appeal we will affirm a trial court’s finding that an arbitration provision was waived as long as the finding is supported by substantial evidence. (Burton, supra, 190 Cal.App.4th at pp. 945-946.)
Finally, AVS contends that it was excused from bringing a petition to compel arbitration until the church admitted the 2006 contract amendment was genuine, because until that time, AVS did not know it had a valid and enforceable arbitration provision. AVS cites no authority for this proposition, perhaps because the notion is contrary to the rules governing petitions to compel arbitration.
Under this contention, AVS implicitly concedes that it knew of the amended contract, but was unable to enforce it until the church admitted through discovery that the amendment was genuine, thus excusing its delay in doing so. Instead, as the party seeking to compel arbitration, AVS bore the initial burden of alleging only the existence of an agreement to arbitrate, which it could have satisfied by nothing more than supplying a copy of the agreement or by reciting its terms. Once it did so, the burden would have then shifted to the church to prove by a preponderance of the evidence that the agreement did not exist or was unenforceable. (Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 218-219; Cal. Rules of Court, rule 3.1330.)
AVS also contends that it did not waive its right to arbitrate because it raised the issue as an affirmative defense. AVS’s carefully phrased affirmative defense – that it demanded arbitration if an agreement to do so existed – does not help its cause. Instead, it supports an inference that it knew there was an agreement to arbitrate, but was unsure of its validity.
If AVS is correct, then a party who knows an arbitration agreement exists but is unsure of its validity must refrain from bringing a petition to compel arbitration until and unless the other party affirms the existence of the agreement. That interpretation confounds the policy favoring arbitration, the need to swiftly assert such an arbitration provision’s existence, and the statutorily approved procedure for doing so. In short, if a party believes an arbitration agreement exists, the other party’s failure to admit the validity of the agreement is no excuse for delay in bringing a petition to compel arbitration because that is one of the issues a section 1281.2 hearing is designed to resolve. We therefore affirm the trial court’s finding that AVS knew the arbitration provision existed, and unjustifiably delayed in its efforts to assert its right to arbitrate.
AVS cites three decisions for the proposition that the church should not profit from its asserted efforts to mislead AVS about the existence of the arbitration provision. Each concerns the application of equitable estoppel against a party who sues nonsignatories to a contract containing an arbitration provision solely as an attempt to avoid arbitrating the dispute. (Rowe v. Exline (2007) 153 Cal.App.4th 1276; Turtle Ridge Media Group, Inc. v. Pacific Bell Directory (2006) 140 Cal.App.4th 828; Metalclad Corp. v. Ventana Environmental Organizational Partnership (2003) 109 Cal.App.4th 1705.) Both the legal issues and the factual record before us make those decisions inapplicable.
B. AVS Acted Inconsistently With the Right to Arbitrate, Thereby Causing Prejudice to the Church
AVS’s waiver argument is based primarily on the contention that it did not know about the arbitration provision, or its validity, until the church admitted the provision was genuine during discovery. As just discussed, we reject that contention. Even though AVS raised the possible existence of an arbitration provision in its answer to the church’s complaint, AVS filed a cross-complaint without seeking to stay the proceedings, which is one indicator of waiver. (St. Agnes, supra, 31 Cal.4th at p. 1196, citing with approval Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 992.) In addition, AVS: filed a case management statement that requested a jury trial and provided a timeline for extensive discovery, including the use of expert witnesses; propounded extensive written discovery requests; brought a motion for summary adjudication of issues; and did not bring its petition to compel arbitration until little more than two months before the trial date. Such conduct is not only inconsistent with the right to arbitrate, it is also a near- perfect match with the five other signs of waiver described in St. Agnes, supra, 31 Cal.4th at page 1196.
AVS relies on Roman v. Superior Court (2009) 172 Cal.App.4th 1462 (Roman) and Groom v. Health Net (2000) 82 Cal.App.4th 1189 (Groom) for the proposition that its mere participation in the litigation, including conducting discovery and making motions, is not sufficient proof of an arbitration waiver. Neither decision applies here. In Groom, the court found no prejudice when the party opposing arbitration had not yet responded to discovery requests from the party seeking to compel arbitration. (Groom, supra, at p. 1196; see Augusta v. Keehn & Associates (2011) 193 Cal.App.4th 331, 340-341.) In Roman, the trial court found no prejudice where the defendant petitioned to compel arbitration within two months of when the complaint was filed and no substantive discovery requests had been served by either side. In addition, the arbitration provision said that any arbitration would be conducted under the rules of the American Arbitration Association (AAA), and the discovery requests that were sent out, but not answered, were authorized under those rules. As a result, the moving party did not take advantage of discovery tools unavailable in arbitration. (Roman, supra, at p. 1479; see Augusta, supra, at pp. 341-342.)
Unlike Groom and Roman, the arbitration provision at issue here does not state that arbitration is subject to the rules of the AAA, or to any other rules, and says nothing about the parties’ right to conduct discovery. As a result, AVS had no right to propound its 197 discovery requests, most of which the church answered. (§§ 1283.05, 1283.1; Alexander v. Blue Cross of California (2001) 88 Cal.App.4th 1082, 1088.) Obtaining discovery not available through arbitration is evidence of prejudice. (St. Agnes, supra, 31 Cal.4th at p. 1204; Berman v. Health Net (2000) 80 Cal.App.4th 1359, 1366-1367.) Because that is what happened here, we hold that there was sufficient evidence to support the trial court’s finding of waiver, and therefore its order denying AVS’s petition to compel arbitration.
AVS suggests that its discovery was proper because the arbitration provision did not limit the parties’ ability to conduct discovery. As the authorities just cited demonstrate, this contention is clearly wrong. AVS also contends that any prejudice to the church was offset by the church’s own discovery efforts. Assuming for the sake of argument that prejudice could be offset in this manner, the record does not support such a contention. The church’s discovery requests and AVS’s responses are not in the record, leaving us no way to evaluate AVS’s contention. All we do know about the church’s discovery requests is that it brought various motions against AVS to compel discovery that are still awaiting resolution.
DISPOSITION
The order denying AVS’s petition to compel arbitration is affirmed. Respondent shall recover its appellate costs.
WE CONCUR: BIGELOW, P.J., GRIMES, J.
AVS is equally canny in its opening appellate brief, contending that it filed its cross-complaint as a protective measure against the church’s “misrepresentations” about the existence of the arbitration provision. As set forth below, its doubts were not a sufficient excuse for delay. This assertion also suggests that AVS knew of the amended contract with the arbitration provision when it both answered and cross-complained, but held off on asserting it.