The Key: Close Reading Of Provision Providing For Arbitration If Reference Became “Legally Unavailable.”
The short but interesting opinion in Freeman v. Froehlich Signature Homes, Inc., F073374 (5th Dist. 12/15/16) (Levy, Gomes, Kane) (unpublished), merits close reading, because it reads like a finely-worded exam question.
In a construction defect lawsuit, the trial court considered plaintiffs/homeowners’ motion to compel a judicial reference with a developer against the backdrop of a CC&R requirement that disputes be resolved by judicial reference but, “if ‘for any reason the judicial reference procedures . . . are legally unavailable at the time a dispute would otherwise be referred to judicial reference, then such dispute shall be submitted to binding arbitration.’”
At first blush, a motion for judicial reference would seem appropriate. Not so fast, said the trial court: another case involving the same development project was pending, and a reference might negatively impact judicial economy. So the trial court, in the exercise of judicial discretion, denied the motion for judicial reference – but without prejudice.
Therefore, plaintiffs’ attorneys took the next logical step, and moved to compel arbitration. After all, the court had denied their request for a judicial reference. However, the motion to compel arbitration was also denied. Plaintiffs appealed.
The Court of Appeal upheld the order denying the motion to compel arbitration, because the denial of a reference without prejudice did not make a reference legally unavailable.
COMMENT: Sometimes timing is everything. This outcome does not foreclose plaintiffs from getting a reference or an arbitration. The trial court ordered the cases consolidated, noting that, “motions for judicial reference, and when appropriate, motions [to] compel arbitration may be renoticed.” So another round of law and motion can be anticipated. Nothing prevents plaintiffs from moving again for a reference, and in the alternative, arbitration,
This is a case in which the application of the Federal Arbitration Act makes a real difference, because if California law applies, the trial court could stay a reference or stay arbitration to avoid results inconsistent with a pending court case. Here, the Court of Appeal concluded that the FAA applies – not because interstate commerce was involved, but because the dispute resolution provision expressly provided for application of the FAA. In this case, the preemptive effect of the FAA sweeps away inconsistent California law that would otherwise give the trial judge more discretion to deny a reference or to deny arbitration. Let’s see what happens after the inevitable “next round.”