On March 20, 2012, the Second Appellate District Court of Appeal decided the case of Barbara Trent Lindemann v. Richard Hume. The Lindemann case shows that the road to arbitration is not easy, despite California’s stated public policy favoring arbitration. This case, and other previously alerted cases (see Haight Alerts dated October 3, 2011 and January 24, 2011), show the numerous impediments to those attempting to enforce an arbitration agreement.
The case involved the construction of a new home in Venice, California for actor Nicholas Cage. Mr. Cage assigned the purchase agreement to Richard Hume, as trustee of a trust in which Cage was the beneficiary. Soon after moving in to the property, Cage experienced water intrusion and flooding. The builders of the home, The Lee Group, were unable to fix the problems and Cage placed the home on the market after six months of ownership. Cage disclosed flooding at the property.
After a potential buyer was found, Cage’s real estate consultant, Nazarian, hired Anderson, a consultant, to look at the drainage problems and identify a resolution. Once the buyer realized that the repairs were extensive, the buyer backed out. Although Anderson made several recommendations to improve drainage on the property, Nazarian asked Anderson to withdraw several repair findings of his report. Anderson refused and the repairs were never made.
The property went back on the market and new buyer Lindemann emerged. The disclosures made to Lindemann referenced some damage to hardwood floors and a prior drainage problem that was resolved after consulting with an engineer. Significantly, there was no disclosure of the prior failed sale or Anderson’s report. Lindemann purchased the property and signed a purchase agreement containing an arbitration provision. Lindemann subsequently experienced flooding and water intrusion. For several years, the Lee Group and Nazarian tried to fix the problems but were unsuccessful. The Lindemanns hired their own experts who determined that the home had numerous defects, including defects in the foundation and with drainage.
The Lindemanns filed suit against The Lee Group, Cage and Hume for fraud, non-disclosure, strict liability, and breach of warranty, etc. Cage and Hume moved to compel arbitration based on the purchase agreement. The trial court denied the motion, finding that there was a possibility of conflicting rulings on common issues of law and fact if the nondisclosure causes of action against Cage and Hume were ordered to arbitration and the litigation against The Lee Group proceeded in superior court. (Code Civ. Proc., § 1281.2, subd. (c).) Cage and Hume appealed.
The Court of Appeal affirmed the ruling of the trial court, stating that the issue to be addressed under section 1281.2, subdivision (c) is not whether inconsistent rulings are inevitable, but whether they are possible if arbitration is ordered. “Here, since the arbitrator could find a design or construction defect existed as a predicate to holding the defendants liable for failing to disclose a material condition of the property and the finder of fact in the superior court action could reach a contrary conclusion is sufficient to satisfy that requirement. The Court also noted that the fact that the defendants have filed cross-complaints for indemnification against each other, further increased the risk of inconsistent rulings.”
In many situations, developers and contractors are better served waiving arbitration provisions such as where potentially culpable parties cannot be brought into the arbitration process. For some litigants (e.g., celebrities), the confidentiality of arbitration proceedings may outweigh those risks. Each case is different. The decision whether or not to enforce an arbitration agreement depends on the goals of the individual client, the circumstances under which the provision was agreed, and the applicable statutes and cases the Court will interpret to make a decision.
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