Macfadden v. Sotheby's International Realty CA2/8 ( 2024 )

Filed 5/14/24 Macfadden v. Sotheby’s International Realty CA2/8
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
PATRICIA JEAN MACFADDEN B318882
et al.,
Los Angeles County
Plaintiffs and Respondents, Super. Ct. No. 19STCV07265
v.
SOTHEBY’S INTERNATIONAL
REALTY, INC. et al.,
Defendants and Appellants.
APPEAL from an order of the Superior Court of Los
Angeles County. Michelle Williams Court, Judge. Affirmed.
Manning & Kass Ellrod, Ramirez, Trester, Fredric W.
Trester and Steven J. Renick for Defendant and Appellant
Sotheby’s International Realty, Inc.
Wilson, Elser, Moskowitz, Edelman & Dicker, Martin K.
Deniston, Valeria Granata and Robert Cooper for Defendant and
Appellant Guy Miracle.
Machtinger Law, John Machtinger; The Salem Law Firm
and Edmond E. Salem for Plaintiffs and Respondents.
_____________________________
SUMMARY
Defendants Sotheby’s International Realty, Inc. and Guy
Miracle appeal from an order denying Sotheby’s motion to compel
arbitration. The trial court found Sotheby’s waived its right to
arbitration, citing the unexplained delay of more than two years
after the complaint was filed before demanding arbitration, as
well as two demurrers, a successful motion to strike punitive
damages, an answer to the complaint that did not raise an
affirmative defense of arbitration, and extensive discovery.
Defendants appealed, contending principally that plaintiffs
were not prejudiced by their conduct.
Several months after the trial court’s ruling, the United
States Supreme Court decided that federal courts may not
“condition a waiver of the right to arbitrate on a showing of
prejudice.” (Morgan v. Sundance, Inc. (2022) 596 U.S. 411, ___
[142 S.Ct. 1708, 1712-1713] (Morgan); see also id. at p. 1713 [“the
FAA’s [Federal Arbitration Act’s] ‘policy favoring arbitration’ does
not authorize federal courts to invent special, arbitration-
preferring procedural rules”].)
Because the enforceability of the arbitration agreement in
this case is governed by the FAA (9 U.S.C.S. § 1 et seq.), we agree
with precedents concluding that federal law supplies the law on
waiver. Consequently, no showing of prejudice was required.
And even if prejudice were a necessary element, we would
conclude the trial court did not err in finding defendants waived
arbitration.
FACTS
Plaintiff Patricia Macfadden, and later a trust she created,
owned a home in Hollywood. (We refer to Ms. Macfadden and the
trust collectively as plaintiff.) Defendant Sotheby’s is a licensed
real estate broker that employed defendant Guy Miracle, a
licensed real estate agent. Plaintiff sued defendants and others,
2
including plaintiff’s daughter Jennifer Macfadden, in connection
with the sale of plaintiff’s Hollywood home, alleging elder abuse
and breach of fiduciary duty. The substance of the lawsuit is that
plaintiff was coerced to sell her house for less than market value,
while defendants knew and had previously arranged for the
buyer to immediately sell the property to another interested
purchaser for a substantially larger amount.
In connection with the transaction, plaintiff signed a listing
agreement with a separate arbitration agreement, as well as a
purchase agreement with an arbitration clause. Both
agreements stated that enforcement of the arbitration agreement
“shall be governed by the Federal Arbitration Act.”
Plaintiff sued defendants on February 28, 2019.
Defendants filed a motion to compel arbitration well over two
years later, on September 13, 2021. During this time, the parties
engaged in litigation.
On April 15, 2019, plaintiff filed a first amended complaint
(FAC).
On June 24, 2019, defendants filed a case management
statement, stating they were unwilling to participate in binding
private arbitration.
On July 29, 2019, defendants filed a demurrer to the FAC,
and a motion to strike plaintiff’s punitive damages claim.
On December 18, 2019, the case was restored to the civil
active list after some confusion over the dismissal of one of the
defendants on May 8, 2019 (with the court apparently dismissing
the whole case instead).
On January 23, 2020, defendants filed another case
management statement, again stating they were not willing to
participate in binding private arbitration.
On February 6, 2020, defendants filed another demurrer
and motion to strike punitive damages.
3
On June 17, 2020, defendants filed a third case
management statement, stating a third time they were not
willing to participate in binding private arbitration.
On July 2, 2020, the trial court overruled the demurrer and
granted the motion to strike punitive damages.
On July 20, 2020, defendants answered, and did not assert
arbitration as an affirmative defense.
On August 7, 2020, defendants again filed a fourth case
management statement, stating for the fourth time they were not
willing to participate in binding private arbitration. Later that
month, trial was scheduled for September 13, 2021.
There was, according to the trial court, “extensive written
discovery,” described in the following footnote.1
On May 3, 2021, the trial court, based on a stipulation by
the parties, ordered a new trial date of April 4, 2022.
As mentioned, defendants moved to compel arbitration on
September 13, 2021. Defendants gave no reason for the delay,
but argued that none of the factors courts consider in assessing a
claimed waiver of arbitration had been met, including that there
was no showing the delay prejudiced plaintiff. Plaintiff’s
opposition contended otherwise, citing extensive discovery, 177
hours prosecuting the case plus an additional significant number
1 According to a declaration from plaintiff’s counsel,
defendants’ discovery requests consisted of form interrogatories,
21 special interrogatories, 44 requests for production of
documents (two sets), to which plaintiff responded with 208 files
totaling 321MB of data, and a six-page meet and confer letter.
Plaintiff’s requests were form interrogatories, 66 requests for
production of documents (to which Sotheby’s responded with
1,344 pages of documents), and a 10-page meet and confer letter,
“and a negotiated Protective Order covering documents produced
by Sotheby’s.”
4
of hours from cocounsel, and advancing a significant sum in costs
for a real estate expert, in part to assist in an effort to reinstate
plaintiff’s punitive damages claim.
The trial court found, recounting the points stated at the
outset, that Sotheby’s waived its right to seek arbitration. The
court acknowledged that participating in litigation of an
arbitrable claim does not by itself waive the right to later seek
arbitration, and quoted the six factors courts “must consider” in
determining whether there has been a waiver. The court did not
otherwise mention the prejudice factor.
Defendants filed timely notices of appeal.
DISCUSSION
1. The Legal Background
Under Iskanian v. CLS Transportation Los Angeles, LLC
(2014) 59 Cal.4th 348 (Iskanian),2 six factors are relevant to the
waiver inquiry, one of them being whether the delay “affected,
misled, or prejudiced” the opposing party. (Id. at p. 375, citing
St. Agnes Medical Center v. PacifiCare of California (2003)
31 Cal.4th 1187, 1196 (St. Agnes).) The factors also include
whether the party’s actions are inconsistent with the right to
arbitrate; whether the litigation machinery had been
“substantially invoked” and the parties were well into lawsuit
preparation; whether a party either requested arbitration
enforcement close to the trial date or delayed for a long period
before seeking a stay; and whether “important intervening steps”
such as taking advantage of judicial discovery procedures not
available in arbitration had taken place. (Iskanian, at p. 375.)
2 Iskanian was overruled on another ground in Viking River
Cruises, Inc. v. Moriana (2022) 596 U.S. 639, 662.
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St. Agnes also observed that the presence or absence of
prejudice from the litigation of the dispute “ ‘is the determinative
issue under federal law’ ” and that in California, “whether or not
litigation results in prejudice also is critical in waiver
determinations.” (St. Agnes, supra, 31 Cal.4th at p. 1203.)
Iskanian and St. Agnes tell us that, “ ‘[b]ecause merely
participating in litigation, by itself, does not result in . . . waiver,
courts will not find prejudice where the party opposing
arbitration shows only that it incurred court costs and legal
expenses.’ ” (Iskanian, supra, 59 Cal.4th at p. 377, quoting
St. Agnes, supra, 31 Cal.4th at p. 1203.) Iskanian further
observed that some courts have interpreted St. Agnes “to allow
consideration of the expenditure of time and money in
determining prejudice where the delay is unreasonable,” and
others “have likewise found that unjustified delay, combined with
substantial expenditure of time and money, deprived the parties
of the benefits of arbitration and was sufficiently prejudicial to
support a finding of waiver to arbitrate.” (Iskanian, at p. 377,
citing cases.)
2. The Standard of Review
“In light of the policy in favor of arbitration, ‘waivers are
not to be lightly inferred and the party seeking to establish
a waiver bears a heavy burden of proof.’ [Citation.] ‘Generally,
the determination of waiver is a question of fact, and the trial
court’s finding, if supported by sufficient evidence, is binding on
the appellate court. [Citations.] “When, however, the facts are
undisputed and only one inference may reasonably be drawn, the
issue is one of law and the reviewing court is not bound by the
trial court’s ruling.” ’ ” (Iskanian, supra, 59 Cal.4th at p. 375; see
Spracher v. Paul M. Zagaris, Inc. (2019) 39 Cal.App.5th 1135,
6
1138 [“Because this is not a case where ‘only one inference may
reasonably be drawn’ from the underlying facts, we review the
trial court’s decision under a substantial evidence standard.”].)
“The appellate court may not reverse the trial court’s
finding of waiver unless the record as a matter of law compels
finding nonwaiver.” (Kokubu v. Sudo (2022) 76 Cal.App.5th
1074, 1083.)
3. Recent Developments
In Morgan, decided May 23, 2022, the high court held that
no showing of prejudice is required in federal courts to establish
waiver of the right to arbitrate. “[T]he Eighth Circuit was wrong
to condition a waiver of the right to arbitrate on a showing of
prejudice.” (Morgan, supra, 596 U.S. at p. __ [142 S.Ct. at
pp. 1712-1713].)
Morgan reasoned that a prejudice requirement “is not a
feature of federal waiver law generally.” (Morgan, supra, 596
U.S. at p. __ [142 S.Ct. at p. 1712]; see also id. at p. 1714 [“the
usual federal rule of waiver does not include a prejudice
requirement”].) And, “the FAA’s ‘policy favoring arbitration’ does
not authorize federal courts to invent special, arbitration-
preferring procedural rules.” (Id. at p. 1713.)
Morgan explained that the FAA “policy favoring
arbitration” is “to make ‘arbitration agreements as enforceable as
other contracts, but not more so.’ ” (Morgan, supra, 596 U.S. at p.
__ [142 S.Ct. at p. 1713].) The court continued: “Accordingly, a
court must hold a party to its arbitration contract just as the
court would to any other kind. But a court may not devise novel
rules to favor arbitration over litigation. [Citation.] If an
ordinary procedural rule—whether of waiver or forfeiture or
what-have-you—would counsel against enforcement of an
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arbitration contract, then so be it. The federal policy is about
treating arbitration contracts like all others, not about fostering
arbitration.” (Ibid.; see also id. at p. 1714 [“ ‘The Supreme Court
has made clear’ that the FAA’s policy ‘is based upon the
enforcement of contract, rather than a preference for arbitration
as an alternative dispute resolution mechanism’ ”].)
After Morgan, the Court of Appeal in Davis v. Shiekh
Shoes, LLC (2022) 84 Cal.App.5th 956 (Davis) held that “federal
law supplies the law on waiver” in a case where—as here—the
parties’ agreement provided that the FAA governed the
enforceability of the arbitration provisions of the agreement. (Id.
at pp. 963-964; see also id. at p. 963 [“where the FAA applies,
whether a party has waived a right to arbitrate is a matter of
federal, not state, law”].)
After describing Morgan, the Davis court noted Morgan’s
conclusion that the waiver inquiry, stripped of its prejudice
requirement, “ ‘would focus on [the defendant’s] conduct,’ namely
by asking: ‘Did [the defendant] knowingly relinquish the right to
arbitrate by acting inconsistently with that right?’ ” (Davis,
supra, 84 Cal.App.5th at p. 966, quoting Morgan, supra, 596 U.S.
at p. ___ [142 S.Ct. at p. 1714].)
4. Contentions and Conclusions
Relying on Morgan and Davis, plaintiff contends that
California courts must apply federal law when considering a
waiver claim where, as here, the FAA governs the enforceability
of the arbitration agreement. And there were, plaintiff says,
“sufficient grounds for the trial court’s ruling regardless of the
issue of prejudice.” We agree with plaintiff, and would in any
event find prejudice on this record.
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a. Federal law on waiver applies
Sotheby’s contends that Davis “is misinterpreting Morgan”
in holding that federal law supplies the law on waiver in cases
governed by the FAA. Sotheby’s points out that the issue before
the high court was “whether the FAA authorizes federal courts”
to “create arbitration-specific variants of federal procedural rules,
like those concerning waiver, based on the FAA’s ‘policy favoring
arbitration.’ ” (Morgan, supra, 596 U.S. at p. __ [142 S.Ct. at
pp. 1711, 1712], italics added.) Sotheby’s observes the court
specifically stated it was not addressing issues that had been
raised by the Morgan parties in their briefing “about the role
state law might play in resolving when a party’s litigation
conduct results in the loss of a contractual right to arbitrate,” and
“whether to understand that inquiry as involving rules of waiver,
forfeiture, estoppel, laches, or procedural timeliness.” (Id. at
p. 1712.) Thus, Sotheby’s contends, the high court “was
discussing the issue of prejudice solely in the context of federal
court proceedings.”
The context in Morgan was indeed a federal court
proceeding. But in this case, the parties expressly agreed to
enforcement of their arbitration agreement under federal law,
and the only question is whether federal law on waiver applies.
Sotheby’s relies on cases stating the FAA’s procedural
provisions apply only in federal courts (see, e.g., Swissmex-Rapid
S.A. de C.V. v. SP Systems, LLC (2012) 212 Cal.App.4th 539, 544
[“The FAA’s substantive provisions are applicable in state as well
as federal court, while the FAA’s procedural provisions apply only
to proceedings in federal court”; finding § 9 of the FAA (“[a]ward
of arbitrators; confirmation; jurisdiction; procedure”) was
procedural]). Sotheby’s distinction between substantive and
9
procedural provisions is inapt. Waiver is a matter relating to
arbitrability, not a question whether a particular provision of the
FAA is procedural or substantive.
This case, unlike Swissmex, involves the circumstances
under which a defendant may be deprived of its right to arbitrate
a dispute. It is a question that implicates the fundamental issue
of arbitrability—whether an arbitrator or the court will decide
the case. Both state and federal precedents have held that
federal law governs the inquiry into whether a party has waived
its right to arbitration.
Danny’s Construction Co., Inc. v. Birdair, Inc. (W.D.N.Y.
2000) 136 F.Supp.2d 134 states the rule succinctly. After
observing that “[c]ourts may infer a waiver of a party’s right to
arbitrate only under certain circumstances,” the court rejected
both parties’ reliance on New York state law, stating that “it is
federal law, not state, that governs the inquiry into whether a
party has waived its right to arbitration.” (Id. at p. 142.) The
court cited Graphic Scanning Corp. v. Yampol (2d Cir. 1988)
850 F.2d 131, which tells us why this is so. There, the Second
Circuit found that, notwithstanding a choice of New York law,
the contract clearly evidenced a transaction involving interstate
commerce (citing the FAA), and “[t]he question of arbitrability is
therefore governed by federal law.” (Graphic Scanning, at
p. 133.) And under federal law, the defendant had not waived his
right to arbitration. (Ibid.)
While federal law applied in Graphic Scanning because the
contract affected interstate commerce, here the parties expressly
agreed to enforcement under the FAA. Accordingly, the same
result ensues: arbitrability is governed by federal law.
(Cf. Victrola 89, LLC v. Jaman Properties 8 LLC (2020)
10
46 Cal.App.5th 337, 342-343, 345-346 [where parties explicitly
agreed to enforcement under the FAA, they incorporated the
FAA’s procedural provisions into their agreement, and the FAA
governs whether the arbitration provision should be enforced].)
The point is further explained in Sovak v. Chugai
Pharmaceutical Co. (9th Cir. 2002) 280 F.3d 1266 (Sovak). Sovak
observed that parties “may agree to state law rules for
arbitration even if such rules are inconsistent with those set
forth” in the FAA. (Sovak, at p. 1269.) But parties “must clearly
evidence their intent to be bound” by state law rules; “[i]n other
words, the strong default presumption is that the FAA, not state
law, supplies the rules for arbitration.” (Ibid.) A general state
choice-of-law clause “does not trump the presumption that the
FAA supplies the rules for arbitration.” (Id. at p. 1270.)
Sovak stated: “We further conclude that waiver of the right
to compel arbitration is a rule for arbitration, such that the FAA
controls. Rules for arbitration include principles that affect the
‘allocation of power between alternative tribunals.’ [Citation.]
Waiver, in the arbitration context, involves the circumstances
under which a party is foreclosed from electing an arbitration
forum. Therefore, the question of whether a party has waived its
right to compel arbitration directly concerns the allocation of
power between courts and arbitrators. [Citation.] Accordingly,
the FAA, and not Illinois law, supplies the standard for waiver.”
(Sovak, supra, 280 F.3d at p. 1270.)
California cases are in accord. (See Davis, supra,
84 Cal.App.5th at p. 963, described ante, at p. 8.) And Davis is
not the only California case to hold that where the FAA applies,
whether the right to arbitrate has been waived is a matter of
federal law. So did Aviation Data, Inc. v. American Express
11
Travel Related Services Co., Inc. (2007) 152 Cal.App.4th 1522.
Aviation Data rejected a claim that, because the action was filed
in a state court, “the issue regarding waiver or abandonment of
arbitration is governed by New York law.” (Id. at p. 1535.) The
court pointed out that “the parties specified that the arbitration
provision is governed by the FAA.” (Ibid.) Aviation Data relied
on the rationale stated in Sovak that “ ‘[w]aiver of the right to
compel arbitration is a rule for arbitration, such that the FAA
controls.’ ” (Aviation Data, at p. 1535.) The court concluded that
“[t]herefore, ‘it is federal law, not state, that governs the inquiry
into whether a party has waived its right to arbitration.’ ” (Ibid.)
We agree with these authorities, which (except for Davis)
defendants do not mention. Sotheby’s could have provided for
enforcement in accordance with California law, and in that case
defendants might reasonably question what effect Morgan has in
such cases. Indeed, our Supreme Court is reviewing a case
presenting the issue whether California’s test for determining
whether a party has waived its right to compel arbitration
remains valid after the Morgan decision. (Quach v. California
Commerce Club, Inc. (2022) 78 Cal.App.5th 470, review granted
Aug. 24, 2022, S275121.) But that is not this case; the Court of
Appeal opinion in Quach contains no mention of the FAA. This is
a case like Davis, where federal law directly controls. (Davis,
supra, 84 Cal.App.5th at p. 966, fn. 5.)
Unlike Sotheby’s, defendant Miracle concedes that the FAA
applies to this case and that prejudice is no longer required to
establish waiver under the FAA. He contends ordinary state
contract law on waiver governs the analysis. Under state
contract law, waiver requires an existing right, knowledge of that
right, “and the party’s ‘actual intention to relinquish the right.’ ”
12
(Lynch v. California Coastal Com. (2017) 3 Cal.5th 470, 475
(Lynch).) That principle, however, does not change the result
here. Mr. Miracle contends the evidence was “equally consistent
with Miracle’s theory that other reasons (including the
undisputed Covid shutdown) resulted in the delay in seeking
arbitration.” But there was no evidence the COVID-19 shutdown
had any role in delaying this case, and Mr. Miracle does not
identify any “other reasons” causing the delay. And he ignores
Lynch’s further explanation that “[t]he intention may be express,
based on the waiving party’s words, or implied, based on conduct
that is ‘ “so inconsistent with an intent to enforce the right as to
induce a reasonable belief that such right has been
relinquished.” ’ ” (Id. at p. 475.)
b. The factors other than prejudice support
waiver
Defendants contend that, even without considering the
prejudice issue, none of the other factors courts use in
determining waiver support the trial court’s waiver finding in
this case. We cannot agree. Defendants acted inconsistently
with the right to arbitrate. They litigated two demurrers, they
eliminated a claim for punitive damages, they did not assert a
right to arbitration as an affirmative defense, and they
repeatedly stated in case management statements that they were
not willing to engage in binding private arbitration. They
engaged in extensive written discovery. And they delayed for
more than two years before seeking to stay the proceedings and
compel arbitration, offering no reason for the lengthy delay. On
this record, there is evidence both of an express intention not to
arbitrate—as stated in defendants’ case management
statements—and an implied intention, “based on conduct that is
13
‘ “so inconsistent with an intent to enforce the right as to induce a
reasonable belief that such right has been relinquished.” ’ ”
(Lynch, supra, 3 Cal.5th at p. 475.)
c. Plaintiff established prejudice
Even if a finding of prejudice were a factor to be considered
in this case, we would conclude that factor, too, has been
established. Defendants argue plaintiff did not demonstrate
prejudice because in this case the same discovery procedures
were available in arbitration, and Sotheby’s did not wait until the
eve of trial to file its motion to compel, doing so almost seven
months before the then-scheduled trial date. The trial court
implicitly concluded otherwise, listing all the factors, including
prejudice, that the court “must consider.” Substantial evidence
supports its conclusion.
Iskanian tells us that multiple cases have interpreted
St. Agnes “to allow consideration of the expenditure of time and
money in determining prejudice where the delay is
unreasonable.” (Iskanian, supra, 59 Cal.4th at p. 377, citing
Burton v. Cruise (2010) 190 Cal.App.4th 939 (Burton) and other
cases where the courts “have likewise found that unjustified
delay, combined with substantial expenditure of time and money,
deprived the parties of the benefits of arbitration and was
sufficiently prejudicial to support a finding of waiver to
arbitrate.” (Iskanian, at p. 377, citing cases.)
Defendants make no effort to explain more than two years
of delay, so the delay stands unjustified. (The trial court in
Davis, supra, 84 Cal.App.5th at pp. 961-962, stated that the
waiver issue came up at least once a month in its courtroom, and
“I’ve never seen one that’s as long as seventeen months.”) One of
plaintiff’s lawyers spent 177 hours prosecuting the case,
14
representing a significant amount of time and money, and other
lawyers were involved as well. As the court in Burton stated, “a
petitioning party’s conduct in stretching out the litigation process
itself may cause prejudice by depriving the other party of the
advantages of arbitration as an ‘expedient, efficient and cost-
effective method to resolve disputes.’ [Citation.] Arbitration
loses much, if not all, of its value if undue time and money is lost
in the litigation process preceding a last-minute petition to
compel.” (Burton, supra, 190 Cal.App.4th at p. 948.)
Defendants stretched out the litigation process over years,
not merely months, and filed what we view as a last-minute
petition to compel, eliminating any conceivable advantages of
arbitration. That amounts to prejudice sufficient, together with
the other factors discussed by the trial court, to establish
defendants’ waiver of the right to compel arbitration.
DISPOSITION
The order is affirmed. Plaintiff to recover costs on appeal.
GRIMES, Acting P. J.
WE CONCUR:
WILEY, J.
VIRAMONTES, J.
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