Tarantino's v. Herringbone Tavern CA1/4 ( 2021 )

Filed 10/6/21 Tarantino’s v. Herringbone Tavern CA1/4
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
TARANTINO’S, INC., et al.,
Plaintiffs and Respondents, A162257
v. (City & County of San Francisco
HERRINGBONE TAVERN, INC., Super. Ct. No. CGC-19-581505)
et al.,
Defendants and Appellants.
Herringbone Tavern, Inc. (Herringbone), Chris Henry (Henry), and
their codefendants appeal from an order denying their petition to compel
arbitration of claims made against them in a suit brought by Gary Burns and
Timothy McDonnell, the former owners of Tarantino’s Restaurant
(Tarantino’s or the Restaurant). The suit arises out of a dispute over the
purchase of Tarantino’s by Herringbone and Henry and their alleged default
in paying for it. The trial court found a waiver of the right to arbitrate and
on that basis denied relief. We affirm.
BACKGROUND
On December 13, 2019, Tarantino’s, Inc., Burns, and McDonnell
(collectively, the Burns-McDonnell Parties) filed a complaint in superior court
against Henry, Herringbone (named as “Herringbone Tavern, Inc., a
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California corporation and dba Tarantino’s”), Barrel House Tavern, and
Apple Annie’s, LLC dba Tommy’s Joynt (collectively, the Herringbone
Parties), alleging as follows.
For nearly 40 years, Burns and McDonnell owned and operated
Tarantino’s in San Francisco’s Fisherman’s Wharf area. They decided to sell
the Restaurant because they were both advancing in age and Burns had
fallen seriously ill. After Henry learned that Burns and McDonnell wished to
sell Tarantino’s, he expressed interest in buying the Restaurant. Henry, an
experienced restaurateur who owned and operated or was acquiring various
other eating establishments, including the Barrel House Tavern, Tommy’s
Joynt, and Fisherman’s Grotto, eventually convinced Burns and McDonnell
to sell the Restaurant to him.
Henry drafted and presented a purchase agreement under which he
would buy Tarantino’s for $2 million from McDonnell. Under this initial
purchase agreement, Henry was to pay a $600,000 deposit at the
November 30, 2017 closing, and the remainder of the purchase price over 192
installments. Henry also drafted and presented a $1.4 million promissory
note in favor of Tarantino’s, Inc., the entity through which Burns and
McDonnell owned and operated the Restaurant. Henry signed the
promissory note on Herringbone’s behalf and personally guaranteed the
payment obligations under it.
Paragraph 18 of the initial purchase agreement, headed “Disputes,”
stated in part, “If a dispute arises concerning this agreement or the sale,
Seller and Buyer will try in good faith to settle it through mediation
conducted by a mediator to be mutually selected. [¶] . . . [¶] If the dispute is
not resolved within 30 days after it is referred to the mediator, Seller and
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Buyer agree that the dispute will be arbitrated by an arbitrator to be
mutually selected.”
After missing the November 30, 2017 closing date, Henry and his
escrow agent drafted a second purchase agreement (this time between
Herringbone and Tarantino’s, Inc.) with a new closing date but containing
the same Paragraph 18 related to “Disputes.” Henry signed this agreement
for Herringbone on December 19, 2017, but put off the closing date until
March 19, 2018, and failed to produce the promised $600,000 down payment,
claiming to only have $450,000. To cover the shortage, Henry persuaded
Burns and McDonnell to take a second promissory note in the amount of
$150,000. Henry signed this second promissory note on Herringbone’s behalf
and personally guaranteed it. Despite the restructured payment terms,
Henry and Herringbone again failed to make agreed payments.
On the foregoing alleged facts, the Burns-McDonnell Parties pleaded
claims against the Herringbone Parties for breach of contract, elder abuse,
unjust enrichment, fraud, unfair business practices, and breach of the
implied covenant of good faith and fair dealing. They sought damages and an
injunction to stop the Herringbone Parties from spending, dispersing,
transferring or otherwise withdrawing money from accounts at numerous
financial institutions.
On December 16, 2019, the Burns-McDonnell Parties filed an ex parte
application for a right to attach order and an order for the issuance of a writ
of attachment against the Herringbone Parties. On January 2, 2020, the
trial court granted the request and issued a right to attach order along with
an order for issuance of a writ of attachment against Henry and Herringbone
and in favor of Tarantino’s Inc. in the amount of $1,731,768. The
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Herringbone Parties filed a notice of appeal from the January 2, 2020 order,
but later abandoned the appeal, leading this court to dismiss it.
On January 15, 2020, the Herringbone Parties filed a demurrer. In the
demurrer, they argued the action was premature because the parties had not
followed the dispute resolution process set forth in either form of the
purchase agreement, which called for mediation and then submission of any
claims that could not be settled to arbitration. They did not, however, seek to
compel arbitration or to stay the proceedings until the agreed private dispute
resolution process was completed. The trial court never heard the demurrer
as the parties agreed to hold it in abeyance pending settlement discussions.
Concurrently with the filing of the demurrer, Herringbone filed a cross-
complaint against Tarantino’s, Inc., and a newly added party, Jeff
Scharosch.1 In the cross-complaint, Herringbone sought to rescind the
purchase agreement and promissory notes and additionally sought an award
of damages based on its claim that it had been induced to enter into those
agreements by the Burns-McDonnell Parties’ misrepresentations and
concealment concerning the income of Tarantino’s and the condition of the
building in which it was housed.
The Herringbone Parties also served discovery, including three sets of
requests for admission, three sets of requests for production of documents,
and three sets of form interrogatories. The Burns-McDonnell Parties
continued with their own discovery by issuing a deposition subpoena for the
Herringbone Parties’ financial records to Poppy Bank. In October 2020, the
Herringbone Parties filed a motion to quash the Poppy Bank subpoena. At
the hearing on that motion, the pro tem judge delayed ruling on the motion
1Scharosch is not a party to either of the purchase agreements and
therefore never agreed to arbitrate.
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because the Herringbone Parties represented that they intended to file a
petition to compel arbitration.
On November 30, 2020, the Burns-McDonnell Parties filed a first
amended complaint that added a cause of action for fraudulent transfer
under California’s Uniform Voidable Transactions Act, Civil Code
section 3439 et seq. and Doe defendants Dipsea, LP dba Dipsea Cafe, Bon Air
Management, LLC, general partner of Dipsea, LP, Sabrina Henry, and the
CBH1 2014 Trust. The Burns-McDonnell Parties named these newly added
defendants because of their alleged participation with the Herringbone
Parties in a scheme to carry out the fraudulent and voidable transfer of
assets and thus frustrate the Burns-McDonnell Parties’ ability to recover on
the claims asserted in the complaint.
On December 14, 2020, the Herringbone Parties filed their petition to
compel arbitration and request for a stay of this proceeding. The Burns-
McDonnell Parties opposed the petition, arguing, among other things, that
even if there was an agreement to arbitrate, the Herringbone Parties had
waived their right to arbitration under it. In their reply to the opposition, the
Herringbone Parties argued, in essence, that they did not waive their right to
compel arbitration because their delay was justified by a purported
“standstill” agreement, and that they had preserved their right to compel
arbitration by seeking dismissal, in part, because of the existence of an
arbitration agreement.
Agreeing with the Burns-McDonnell Parties, the trial court issued an
order on January 20, 2021, denying relief on the ground that the Herringbone
Parties had waived the right to arbitrate. It framed its analysis under
St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187,
1196 (St. Agnes Medical Center), the leading California case on waiver of
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arbitral rights. In its analysis, the court weighed and considered the various
factors outlined in St. Agnes Medical Center for the evaluation of whether a
waiver of arbitral rights has occurred.
First, the trial court found that the Herringbone Parties had filed a
cross-complaint in January 2020 without asking for a stay of the proceedings.
Second, the trial court found that the Herringbone Parties had substantially
invoked the “litigation machinery” in court over the prior year. It pointed to
the facts that the Herringbone Parties had appealed from the court’s
attachment order, filed a demurrer, propounded discovery, and moved to
quash deposition subpoenas the Burns-McDonnell Parties served on third
parties. It acknowledged that, in their demurrer, the Herringbone Parties
specifically referred to and quoted the mediation and arbitration provisions of
the purchase agreements, but noted that they did not move to compel
arbitration or seek a stay at that time. In the trial court’s view, the
Herringbone Parties’ filing of a petition to compel arbitration many months
later was a “ ‘belated strategy’ ” in response to the steps taken by the Burns-
McDonnell parties in court, if not a “ ‘strategy of last resort.’ ”
Third, the trial court found that the Herringbone Parties had
unreasonably delayed for a long period before seeking a stay, although they
were well aware of the arbitration agreement. It rejected the Herringbone
Parties’ contention that the parties had entered into a standstill agreement
in late February 2020, to allow them time to discuss settlement. Instead, the
trial court found that the Burns-McDonnell Parties’ showing established that
the parties’ negotiations quickly dissolved, and the parties continued with
litigation. It also pointed out that, in their case management statement filed
on June 25, 2020, the Herringbone Parties made no reference to a standstill
agreement or to any intention to move to compel arbitration, but stated that
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the demurrer (the hearing date for which had been vacated due to the
COVID-19 pandemic) should be calendared for hearing, and took the position
that the parties’ contemplated discovery would be completed by sometime in
the latter half of 2020. Even assuming a standstill agreement was in place
for several weeks in early 2020, the court concluded that the Herringbone
Parties’ lack of diligence in seeking to compel arbitration was unreasonable.
This timely appeal followed.2
DISCUSSION
We agree with the trial court’s analysis of the waiver issue presented
here, substantially for the reasons given in the court’s January 20, 2021
order. It is true that, as explained in St. Agnes Medical Center, supra,
31 Cal.4th at pp. 1195–1196, under both federal and state law, there is a
policy favoring arbitration; that under this policy “any doubts regarding a
waiver allegation should be resolved in favor of arbitration”; and that, as a
result, “waivers are not to be lightly inferred . . . .” But we think the Burns-
McDonnell Parties have met the “heavy burden” St. Agnes Medical Center
placed upon them to show a waiver.
The Herringbone Parties filed a cross-complaint and failed to seek a
stay of the proceedings. They argue that, by raising the issue of arbitration
as a ground for dismissal via demurrer, they reserved their right to arbitrate.
Granted, had the Herringbone Parties succeeded in obtaining dismissal
because of the existence of an arbitration clause, the inevitable next step
would have been for the Burns-McDonnell Parties to assert their claims in
arbitration. But raising the issue of arbitration indirectly via demurrer is not
2We granted a motion from the Burns-McDonnell Parties seeking
calendar preference in this appeal on the ground that Burns is 71 years of
age and has cancer. (Code Civ. Proc., § 36, subd. (a); see Fox v. Superior
Court (2018) 21 Cal.App.5th 529, 533–536.)
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the same as doing so affirmatively by a petition to compel arbitration,
accompanied by a request for a stay. Nearly a year passed after the
Herringbone Parties filed their demurrer before they sought to compel
arbitration and stay proceedings. The trial court found, and we agree, that
their delay was unreasonable. To justify their inaction, the Herringbone
Parties point to the pandemic. We do not see the pandemic as a general
excuse. The emergency conditions that created court closures and other
severe problems moving civil cases forward in the spring of 2020 were
temporary. We take judicial notice that, by June 1, 2020, the superior court
was open for business and calendaring motions in the normal course. (Super.
Ct. S.F., Public Notice: Court to Restore Services Starting June 1 (May 27,
2020) [as of (Oct. 6, 2021)];
Evid. Code, §§ 452, subds. (c), (e), (g), 459, subd. (a).)
To be sure, the evidence is somewhat mixed as to whether, prior to
December 2020, the Herringbone Parties wished to force the dispute into
arbitration. The record suggests some ambivalence on their part about
whether the action should remain in a judicial forum. As the Burns-
McDonnell Parties point out, the Herringbone Parties sought discovery; filed
an appeal in this court; added a party to the litigation who had not agreed to
arbitrate; filed a case management statement addressing a schedule for
completion of discovery; and filed a motion to quash a subpoena. And they
did all this without mentioning or otherwise signaling any intention to invoke
the arbitration clause. On the other hand, the Herringbone Parties not only
raised the issue of arbitration in their demurrer and apparently arranged for
a standstill pending settlement negotiations, but after they changed counsel
in the summer of 2020, their new counsel stated in correspondence and other
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communications with opposing counsel that they were still interested in
pursuing settlement negotiations and still wished to reserve their right to
seek arbitration while negotiations were pending, which is consistent with an
understanding that the purported standstill the parties had agreed to in
February 2020 remained in effect.
But the trial court found as a factual matter that any standstill entered
by the parties in February 2020 to facilitate settlement negotiations had
expired by the summer of 2020. The court noted that the Herringbone
Parties did “not properly authenticate the evidence on which they rel[ied]” as
proof of an open-ended “standstill,” and even accepting such an agreement
was made, the Herringbone Parties still failed to “make [any] showing as to
how long that agreement remained in place.” Resolving this factual disputed
issue against the Herringbone Parties, the court accepted the Burns-
McDonnell Parties’ proof that the parties’ February 2020 settlement
negotiations “ ‘quickly dissolved’ ” and that “ ‘the Parties continued with
litigation’ ” almost immediately.
On this record, we are satisfied that the “ ‘ “ ‘litigation machinery’ ” ’ ”
in court was “ ‘ “ ‘substantially invoked’ ” ’ ” and that the parties were
“ ‘ “ ‘well into preparation of a lawsuit’ ” ’ ” (St. Agnes Medical Center, supra,
31 Cal.4th at p. 1196), before the Herringbone Parties finally gave notice in
December 2020 of an intention to seek arbitral resolution. When their
petition to compel was finally filed, it came two weeks after the Burns-
McDonnell Parties filed an amended complaint on November 30, 2020,
expanding the scope of the litigation by adding claims and parties that may
not have been subject to arbitration. Thus, the Burns-McDonnell Parties—
facing no impediment to doing so—sought to take steps in court that could
not have been taken in arbitration. That constitutes an “ ‘ “ ‘important
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intervening step[]’ ” ’ ” (ibid.) militating in favor of a finding of waiver. By
then, it was too late for the Herringbone Parties to try to block further
expansion of the litigation by forcing the proceedings into arbitration.
Procedurally, the parties disagree on what standard of appellate review
applies here, with the Herringbone Parties contending our review is de novo
because the material facts are undisputed, and the Burns-McDonnell Parties
contending that we should review for substantial evidence unless the only
inference that can be drawn from the record favors nonwaiver. As noted
above, the trial court appears to have interpreted the Herringbone Parties’
failure to invoke their right to arbitration immediately as tactical in nature.
We decline to second-guess that judgment. Because more than one inference
about the Herringbone Parties’ intentions may be drawn from the facts in the
record, we share the Burns-McDonnell Parties’ view of the applicable
standard of review. We therefore need go no further than to conclude the
trial court’s waiver determination is supported by substantial evidence.
(St. Agnes Medical Center, supra, 31 Cal.4th at p. 1196.)
DISPOSITION
Affirmed. Costs to the respondents.
STREETER, J.
WE CONCUR:
POLLAK, P. J.
BROWN, J.
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