Kum Tat Ltd. v. Linden Ox Pasture, LLC

• Decision Date: 05 December 2014
• Docket Number: Case No. 14-cv-02857-WHO
• Court: U.S. District Court — Northern District of California
• Parties: KUM TAT LIMITED, Plaintiff, v. LINDEN OX PASTURE, LLC, Defendant.

KUM TAT LIMITED, Plaintiff, v. LINDEN OX PASTURE, LLC, Defendant.

Case No. 14-cv-02857-WHO

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

December 5, 2014

ORDER DENYING MOTION TO COMPEL ARBITRATION

Re: Dkt. No. 50

INTRODUCTION

Plaintiff Kum Tat Limited ("Kum Tat") and defendant Linden Ox Pasture, LLC ("Linden Ox") entered negotiations for the purchase of residential property owned by Linden Ox. When Linden Ox terminated negotiations and contracted to sell the property to a third-party, Kum Tat sued for breach of contract and specific performance. Kum Tat moves to compel Linden Ox to arbitrate the dispute. Because Kum Tat has not shown the existence of a binding contract between the parties, the motion is DENIED.

BACKGROUND

I. FACTUAL BACKGROUND

Except where otherwise indicated, the following facts are drawn from the Court's September 18, 2014 order granting Linden Ox's motion to expunge lis pendens. See Dkt. No. 43 at 1-4. I include them here for ease of reference.

The property at issue is a residential estate located in Atherton, California. In early 2014, Linden Ox listed the property for sale through its real estate agent, Mary Gullixson. On May 12, 2014, Kum Tat executed a Real Estate Purchase Contract ("REPC") offering to purchase the property for $38 million. Lam Decl. ¶ 2, Ex. A (Dkt. No. 27). The offer provided that the purchase price would include all the property's furniture, artwork, and other furnishings, and that Linden Ox would be required to submit an "exclusion list" - i.e., a list of such items to beexcluded from the sale - within five days of accepting the offer. At the time, the property's furniture, artwork, and other furnishings were valued in the millions of dollars.

The REPC includes an arbitration provision, which Kum Tat initialed. It provides in relevant part:

ARBITRATION OF DISPUTES: By initialing Paragraph 29B . . . , Buyer and Seller agree to submit any disputes between them concerning and/or arising out of this Contract to binding arbitration if those disputes are not resolved by mediation . . . Arbitration shall be conducted pursuant to Title 9 of the California Code of Civil Procedure including, but not limited to, the right of discovery under Section 1283.05.

Lam Decl., Ex. A § 29.B. The REPC also contains a choice-of-law provision that states, "This Contract and all other documents referenced in this Contract shall be governed by, and shall be construed according to, the laws of the State of California." Id. § 27.I.

Kum Tat sent the offer to Linden Ox on May 19, 2014. Gullixson Decl. ¶ 6 (Dkt. No. 5). On May 21, 2014, Linden Ox responded with a counteroffer to sell the property for $39.5 million. The counteroffer provided that, at the close of escrow, Kum Tat would pay an additional $3.5 million for the property's furnishings, excluding certain artwork and other items. Although the counteroffer specifically identified several pieces of art and other furnishings for exclusion, it did not enumerate all such items to be excluded from the sale. To that end, the counteroffer required Linden Ox to submit an exclusion list within seven days of Kum Tat's acceptance of the counteroffer; Kum Tat would then approve the list within seven days of receiving it. Linden Ox initialed the REPC's arbitration provision as part of the counteroffer. Lam Decl. ¶ 3, Ex. B.

Kum Tat did not accept the counteroffer. Instead, on May 25, 2014, Kum Tat countered at $41 million for the property and all its furnishings, excluding certain artwork and other personal items. Like Linden Ox's counteroffer, Kum Tat's counteroffer specifically identified several pieces of art and other furnishings for exclusion but did not enumerate all such items to be excluded. It provided instead that Linden Ox would submit an exclusion list to Kum Tat, which Kum Tat would then "review and approve" in order to "fully ratify" the contract. The provision (i.e., the "review and approve clause") states in whole:

Seller to provide a specific exclusion and inclusion lists the same day signingCounter Offer No. Two (2) as the Record, and Buyer to review and approve in order to Fully Ratify this Purchase Contract.

Lam Decl., Ex. C (grammar and mechanics as in original).

Kum Tat's counteroffer was set to expire on May 30, 2014. Id. Linden Ox signed Kum Tat's counteroffer in the space marked "Acceptance," returned it to Kum Tat on May 27, 2014, and emailed its exclusion list to Kum Tat on May 30, 2014.¹

Kum Tat did not accept the exclusion list. Certain items it had believed would be included in the sale had been marked for exclusion. On May 31, 2014, Kum Tat's real estate agent, Fred Lam, informed Gullixson by telephone that Kum Tat intended to seek a reduction in the purchase price.² On June 2, 2014, Lam sent an email to Gullixson stating that Kum Tat was "exercising the review and approve clause," that Kum Tat had "disapproved the exclusion list," and that Kum Tat would request a $500,000 reduction of the purchase price, from $41,000,000 to $40,500,000.³ Shortly thereafter, Kum Tat submitted to Linden Ox a written addendum to Kum Tat's counteroffer. The addendum provided that Kum Tat accepted Linden Ox's exclusion list "with a purchase price reduction of $500,000 - total purchase price to be $40,500,000." The addendum also provided: "Contract to be fully ratified by acceptance of this addendum."⁴

Linden Ox rejected the addendum and terminated negotiations with Kum Tat by email that day. On June 3, 2014, Linden Ox entered an agreement to sell the property to a third party.

II. PROCEDURAL BACKGROUND

Kum Tat filed this action on June 10, 2014 in the Superior Court of California, County of San Mateo, alleging breach of contract and seeking specific performance. Dkt. No. 1, Ex. A. Kum Tat also filed a notice of pendency of action (lis pendens) against the property. Dkt. No. 1, Ex. D. Linden Ox removed the case to federal court on June 20, 2014 and filed a motion to expunge lis pendens shortly thereafter. Dkt. Nos. 1, 4. On September 18, 2014, I issued an order granting the motion to expunge lis pendens on the ground that Kum Tat had not carried its burden of showing, by a preponderance of the evidence, that it was likely to prevail against Linden Ox on its breach of contract claim. Dkt. No. 43. Kum Tat filed the instant motion on October 27, 2014. Dkt. No. 50. I heard argument from the parties on December 3, 2014.

LEGAL STANDARD

Under both federal and state law, the threshold question presented by a motion to compel arbitration is whether the parties agreed to arbitrate. The United States Supreme Court has stated that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Technologies, Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 648 (1986); see also, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985) ("[T]he first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute."). Likewise, under California law, "[t]he right to arbitration depends on the existence of an agreement to arbitrate, and hence a party cannot be forced to arbitrate in the absence of an agreement to do so." Frederick v. First Union Sec., Inc., 100 Cal. App. 4th 694, 697 (2002); see also, Cal. Civ. P. Code § 1281.2.

Accordingly, where a party contests the existence of an arbitration agreement, the court, and not the arbitrator, must decide whether such an agreement exists. Sanford v. MemberWorks, Inc., 483 F.3d 956, 962 (9th Cir. 2007); Sparks v. Vista Del Mar Child & Family Servs., 207 Cal. App. 4th 1511, 1517-19 (2012). This rule applies not only to "challenges to the arbitration clause itself, but also [to] challenges to the making of the contract containing the arbitration clause."Sanford, 483 F.3d at 962; see also, Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S. 287, 296 (2010) ("It is . . . well settled that where the dispute at issue concerns contract formation, the dispute is generally for courts to decide."); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 n.1 (2006) (distinguishing the generally arbitral issue of a contract's validity from the generally nonarbitral issue of "whether any agreement between the alleged obligor and obligee was ever concluded").

The question of whether the parties entered a contract containing an arbitration agreement is ordinarily decided under state law. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995); see also, Cheng-Canindin v. Renaissance Hotel Associates, 50 Cal. App. 4th 676, 683 (1996) ("The question of whether the parties agreed to arbitrate is answered by applying state contract law even when it is alleged that the agreement is covered by the [Federal Arbitration Act]."). In California, the party seeking to compel arbitration has the burden of proving the existence of the agreement to arbitrate by a preponderance of the evidence. Engalla v. Permanente Med. Grp., Inc., 15 Cal.4th 951, 972 (1997).

DISCUSSION

I. WHETHER THE PARTIES ENTERED A BINDING AGREEMENT TO ARBITRATE IS A QUESTION FOR THE COURT, NOT THE ARBITRATOR.

Kum Tat argues that under Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), and Buckeye Check Cashing, Inc. v. Cardegna, the arbitration provision in the REPC must be enforced. Linden Ox contends that arbitration may only be compelled if the Court first determines that the parties entered a binding agreement to arbitrate, which Linden Ox argues it did not. Linden Ox is right.

In Prima Paint, the Supreme Court held that "claims of fraud in the inducement generally" - that is, claims of fraud not going specifically to the arbitration clause - are decided by the arbitrator rather than the court. 388 U.S. at 403-404. In Buckeye, the Court reviewed a state supreme court decision refusing to enforce an arbitration clause in a contract challenged as unlawful...