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Tentative Ruling
Judge Pauline Maxwell
Department 6 SB-Anacapa
1100 Anacapa Street P.O. Box 21107 Santa Barbara, CA 93121-1107

CIVIL LAW & MOTION

Hummingbird Rock Ranch Investments LLC vs Trueconnect Mobile LLC et al

Case No: 17CV02917
Hearing Date: Wed Mar 14, 2018 9:30

Nature of Proceedings: Motion: Compel Arbitration

TENTATIVE RULING:

For the reasons set forth herein, the petition of defendants TruConnect Mobile LLC, TruConnect Communications, Inc., and Matthew Johnson to compel arbitration is denied.

 

Background:

On June 30, 2017, plaintiff Hummingbird Rock Ranch Investments, LLC, (Hummingbird) filed its original complaint in this action against defendants TruConnect Mobile LLC (TruConnect Mobile), TruConnect Communications, Inc. (TruConnect Communications), and Matthew Johnson. The original complaint asserted one cause of action against defendants for violation of Corporations Code section 25401. The section 25401 claim seeks rescission of the purchase of securities by which Hummingbird obtained an interest in Truconnect Mobile.

Also on June 30, 2017, Hummingbird commenced arbitration of claims relating to mismanagement and breach of duties in the operation of Truconnect Mobile. (Menzies decl., ¶ 5 & exhibit B; Large decl., ¶ 8.)

Defendants’ original counsel suggested that the parties mediate the dispute and stay the arbitration proceeding. (Large decl., ¶ 9.) On August 8, 2017, counsel for defendants filed a declaration pursuant to Code of Civil Procedure section 430.41 obtaining an automatic continuance to respond to the complaint.

Defendants’ original counsel was subsequently replaced by defendants’ second counsel of record. After this substitution, Hummingbird commenced written discovery. (Large decl., ¶ 11.) Defendants responded to this discovery with responses Hummingbird asserts are insufficient and without producing any documents. (Large decl., ¶ 12.) Hummingbird began a meet and confer process. (Ibid.) Hummingbird also noticed four depositions of defendant Matthew Johnson and other board members of Truconnect Mobile to which no objections were received. (Large decl., ¶ 13.)

On November 13, 2017, Hummingbird filed its first amended complaint (FAC). The FAC, like the original complaint, asserts one cause of action against defendants for violation of Corporations Code section 25401.

On November 15, 2017, with both counsel present at a case management conference, the court ordered the parties to mediation and set a trial date of June 13, 2018.

On December 12, 2017, defendants filed their motion to transfer the case to Los Angeles County Superior Court. The effect of filing the motion was to stay proceedings in this action until resolution of the motion. (River West, Inc. v. Nickel (1987) 188 Cal.App.3d 1297, 1312; Pickwick Stages System v. Superior Court (1934) 138 Cal.App. 448, 449.)

On January 17, 2018, the court denied the motion to transfer without prejudice and granted Hummingbird leave to file a second amended complaint. After the court’s ruling, counsel for the parties spoke with the mediator about scheduling the mediation session. (Large decl., ¶17.)

On January 29, 2018, Hummingbird filed its second amended complaint. Also on January 29, defendants’ second counsel was substituted out and present counsel was substituted in.

Counsel for Hummingbird and new counsel for defendants discussed the status of the outstanding discovery and the mediation session. (Large decl., ¶ 19.) Because of the rapidly approaching trial date, counsel for Hummingbird agreed to postpone filing of motions to compel discovery and to reschedule depositions contingent upon defendants’ counsel’s promise to provide the further responses set forth in the meet and confer letters to be received no later than February 14, 2018. (Large decl., ¶ 20.) Counsel agreed. (Large decl., ¶¶ 20-21 & exhibit 6.) The parties agreed to the mediation session on February 20. (Large decl., ¶ 22 & exhibit 7.)

On February 9, 2018, defendants filed this petition to compel arbitration of the claims set forth in this action. (Note: The petition does not attach a proof of service. The date of service is unknown to the court. Nonetheless, Hummingbird has filed opposition and the court considers the petition on the merits.)

On February 14 and 15, 2018, when counsel for Hummingbird did not receive the discovery responses as promised, counsel for Hummingbird contacted counsel for defendants twice by email inquiring about the discovery responses. (Large decl., ¶ 23.) Counsel for defendants responded that he had been out would respond on February 16. (Large decl., ¶ 23 & exhibit 8.) Counsel for Hummingbird followed up on February 16 by email. (Large decl., ¶ 25.) In response, counsel for defendants stated that on that day defendant Johnson had filed his special motion to strike pursuant to Code of Civil Procedure section 425.16, and by operation of law all discovery was stayed until the hearing scheduled for April 3, 2018. (Large decl., ¶ 25 & exhibit 10.)

On February 20, 2018, neither defendants nor their counsel appeared for the scheduled mediation session. (Large decl., ¶ 26.) According to counsel for defendants, counsel for defendants planned to attend but was concerned that if he filed the petition to compel arbitration, Hummingbird would argue that defendants waived its arbitration rights by participating in the mediation. (Menzies reply decl., ¶ 4.)

On March 1, 2018, Hummingbird filed its opposition to the petition to compel arbitration, arguing that the arbitration agreement is void, that the Corporations Code violation alleged is not subject to arbitration, and that defendants have waived any right to compel arbitration.

Analysis:

“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: [¶] (a) The right to compel arbitration has been waived by the petitioner.” (Code Civ. Proc., § 1281.2, subd. (a).)

Hummingbird argues that, notwithstanding whether or not an arbitration agreement exists and covers the subject matter of this action, any right to arbitration has been waived by defendants.

“State law, like the [Federal Arbitration Act (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 [citation], waivers are not to be lightly inferred and the party seeking to establish a waiver bears a heavy burden of proof.” (Saint Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195 (Saint Agnes).) “ ‘In determining waiver, a court can consider “(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.]” (Id. at p. 1196.)

“[T]he filing of a lawsuit, without more, does not result in a waiver (and is not so inconsistent with the exercise of the right to arbitration as to constitute an abandonment of that right) ….” (Saint Agnes, supra, 31 Cal.4th at p. 1201.) Similarly, “while ‘ “[w]aiver does not occur by mere participation in litigation” ’ if there has been no judicial litigation of the merits of arbitrable issues, ‘ “ ‘waiver could occur prior to a judgment on the merits if prejudice could be demonstrated.’ ” ’ [Citation.]” (Id. at p. 1203.) “Prejudice typically is found only where the petitioning party’s conduct has substantially undermined this important public policy or substantially impaired the other side's ability to take advantage of the benefits and efficiencies of arbitration. [¶] For example, courts have found prejudice where the petitioning party used the judicial discovery processes to gain information about the other side's case that could not have been gained in arbitration [citations]; where a party unduly delayed and waited until the eve of trial to seek arbitration [citation]; or where the lengthy nature of the delays associated with the petitioning party’s attempts to litigate resulted in lost evidence [citation].” (Id. at p. 1204.)

“Because merely participating in litigation, by itself, does not result in a waiver, courts will not find prejudice where the party opposing arbitration shows only that it incurred court costs and legal expenses.” (Saint Agnes, supra, 31 Cal.4th at p. 1203.) A motion for change of judicial venue or having to oppose a motion for change of venue, by itself, is not a waiver of arbitration. (Id. at p. 1205.)

An analysis of the Saint Agnes factors demonstrates that defendants have waived their right to arbitrate this dispute. Defendants’ actions are wholly inconsistent with the right to arbitrate. Defendants knew of their right to arbitrate at the time of the commencement of this action when Hummingbird brought arbitration claims against defendants under the same arbitration clause that defendants seek to invoke now. While merely filing a motion to change venue is not sufficient to waive the right to arbitrate, the pattern of conduct by defendants demonstrates not only that defendants’ actions are inconsistent with the right to arbitrate but these actions have been deliberately designed to delay and impede resolution on the merits whether by arbitration or otherwise, all to Hummingbird’s prejudice.

The arbitration proceeding filed concurrently with this action has not proceeded further while this action has been pending and litigated. (See Large decl., exhibit 10.) Hummingbird argues that, from its perspective, the arbitration is protective because it would be mooted by Hummingbird’s success in this action by obtaining rescission. Hummingbird has engaged in discovery in this action. Rather than responding to discovery requests with information and documents, defendants have responded with objections. The court does not need to address whether these objections do or do not have merit. Defendants agreed to provide further responses, including documents, by a time certain in order to facilitate a mediation that was court-ordered, voluntarily agreed, and cooperatively scheduled. The court notes, as defendants point out in reply, that the arbitration agreement provides that the “parties shall be entitled to discovery in such proceeding in accordance with rules applicable to proceedings before the Superior Court for Los Angeles County, California.” (Petition, exhibit A [Operating Agreement, § 17.09(b)].) Under defendants’ argument that arbitration should proceed with all available discovery, there was no basis for defendant not to respond as agreed. The discovery was agreed by defendant as due on February 14. In response to emails on February 14 and February 15, counsel for defendants stated on February 15: “Thank you for being patient. I have been out and I’ll be responding tomorrow.” (Large decl., exhibit 8.) The response instead was to file in this court a special motion to strike on February 16 which had the effect of staying discovery in this action.

These events give rise to conflicting inferences. Present counsel for defendants, the chief legal officer for TruConnect Communications, Inc., states that he did not engage in “any bad faith with respect to my engagement to date.” (Menzies reply decl., ¶¶ 1, 2.) (Note: The choice of language is remarkable in limiting the scope of the very general denial to his “engagement” “to date.” As chief legal officer for defendant, the language leaves open what conduct present counsel permitted or controlled prior to becoming counsel of record.) But even with the denial as to events since becoming counsel of record, there is a strong inference of bad faith tactics by defendants. Hummingbird was preparing to file motions to compel discovery that Hummingbird believed was legally due it. Hummingbird was enticed into delay of filing such a motion by the promise of a timely further response. When the new date came and no documents were received, defendants’ counsel again enticed a delay long enough for defendants to have filed their special motion to strike staying discovery. It is a reasonable inference from defendants’ conduct that at the time of the original promise to respond and again at the time of the February 15 email, defendants knew that they would not provide the documents as promised and in bad faith put off responding to discovery in order to gain an advantage by filing the special motion to strike.

There is no procedure available in arbitration comparable to a special motion to strike. (See Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2017) ¶ 5:389.) The immediate benefit to defendants in filing such a motion in this litigation is the automatic stay of discovery. There is no showing that this benefit would be available in arbitration. By invoking this judicial procedure, defendants both obtained a substantial benefit not available in arbitration and prejudiced Hummingbird by further delaying discovery where the trial date in this action is set for June and the motion will not be resolved until April.

Moreover, the special motion to strike is not merely a procedural challenge such as a demurrer. “Resolution of an anti-SLAPP motion involves two steps. First, the defendant must establish that the challenged claim arises from activity protected by section 425.16. [Citation.] If the defendant makes the required showing, the burden shifts to the plaintiff to demonstrate the merit of the claim by establishing a probability of success. We have described this second step as a ‘summary-judgment-like procedure.’ [Citation.] The court does not weigh evidence or resolve conflicting factual claims. Its inquiry is limited to whether the plaintiff has stated a legally sufficient claim and made a prima facie factual showing sufficient to sustain a favorable judgment.” (Baral v. Schnitt (2016) 1 Cal.5th 376, 384-385, fn. omitted.) By that motion, defendants assert that the single claim in this action arises from protected activity and therefore opposition to this motion will require not just argument from the allegations of the complaint but a presentation of Hummingbird’s evidence sufficient for Hummingbird to sustain judgment for Hummingbird. Whether the motion is or is not successful, the filing of the motion obligates Hummingbird to organize and disclose its evidence in a manner that would resolve the case on the merits of the evidence or substantially aid defendants in their defense of the merits without a corresponding disclosure of evidence required by defendants because of the shifting burden of the anti-SLAPP motion. Defendants have thereby substantially invoked the “litigation machinery” of this action to the prejudice of Hummingbird.

An important feature of arbitration is that it is speedy and economical as compared with judicial proceedings. (See Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 978.) The approach of defendants has been the opposite. A reasonable inference from the conduct of defendants is that defendants have sought to delay and to impede the resolution of this dispute. The arbitration has so far not proceeded, again, because resolution of the issue of this action may moot consideration of the issues now pending in the arbitration proceeding. This action is near trial. Defendants have delayed discovery in this action, without seeking to compel arbitration, until the passage of time brought this action to the point that trial was near and deadlines would no longer countenance delay. Then, defendants invoked judicial procedures to further delay discovery and to obtain a procedural advantage not available in arbitration. At essentially the same time, defendants also seek to stay these proceedings so as to begin anew in arbitration. This sequence of events strongly implies bad faith manipulation of the judicial and arbitration processes to the benefit of defendants and to the prejudice of Hummingbird rather as contrasted with the conclusory denial of bad faith asserted by defendants.

Applying the factors set forth in Saint Agnes to the factual determinations here on conflicting inferences, and in consideration of the arguments and evidence presented by the parties, the court finds that defendants have waived any right to arbitration of the dispute contained in this action. Defendants’ petition for arbitration will therefore be denied.

In light of this determination, the court does not reach the other arguments made by Hummingbird that the dispute in this action is not subject to arbitration.

 
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