This question has now been considered in two significant appellate decisions. In the more recent of the two cases, the defendant sellers filed a cross-complaint. Did that have any effect on the outcome? Did the defendant lose his opportunity to recover fees because he failed to mediate? Let us explore these two decisions.
Both of the cases of Van Slyke vs. Gibson and Johnson vs. Siegel involved lawsuits brought by the buyer or would-be buyer of real estate against the seller. In each case the parties used a California Association of Realtors purchase agreement. Like most real estate contracts used in California these each contained dispute resolution provisions that, in the event of a dispute, required the parties to first resort to mediation, and if no resolution was reached by that means, then to proceed to a private, binding arbitration not involving the courts.
The purchase contracts also contain provisions for an award of attorney fees and costs to the prevailing party in any dispute arising out of the contract. However, the contracts also provided that if any party commenced an action without first attempting to resolve the dispute through mediation, that party would lose its eligibility for an attorney fee award, even if that party was ultimately the winner in the action.
So, let us first examine the earlier of the two cases, Johnson vs. Siegel, decided in late 2000. Mr. Johnson bought a house in Aptos from the Siegels in August 1998. With the winter rains in January 1999 Mr. Johnson experienced significant flooding in his new home. There was no mention of flooding problems in the Transfer Disclosure Statement (TDS) that is required by law, and the specific questions regarding drainage, flooding, grading and soil problems were all answered “No” as was every other question on the TDS form.
After the floods Mr. Johnson contacted the Siegels and met with them to demand rescission of the sale. It was alleged that at the meeting Mr. Siegel admitted that he had used sandbags to protect his house whenever it rained. Indeed, a neighbor also gave evidence that he had seen Mr. Siegel sandbag the side of his house and around his driveway whenever it rained.
Mr. Johnson wrote several letters to the Siegels demanding rescission, but not demanding mediation or arbitration. Eventually Mr. Johnson sued the Siegels for rescission of the transaction, and for damages for fraud and misrepresentation. The Siegels responded with an answer to the complaint and a motion for summary judgment. The basis of the motion for summary judgment was that arbitration was required (a condition precedent) before a party could commence a lawsuit and thus the action was barred by plaintiff Johnson’s failure to first seek arbitration.
Johnson opposed the motion for summary judgment on several bases, all of which were quickly disposed of by the court. Among Johnson’s arguments was that the Siegels had waived arbitration by not demanding it. There was some slight evidence that the Siegels’ attorney had verbally requested it, but the request was rejected. However, in the Siegels’ answer to the complaint they expressly said they were not waiving arbitration.
In rejecting this and other arguments of Mr. Johnson, the court of appeal concluded that the dispute was covered by the arbitration provision in the contract and that Johnson should have, but did not, initiate arbitration procedures.
Having won the motion for summary judgment the Siegels took the position that the entire dispute was adjudicated and any attempt by Johnson to then initiate arbitration procedures was too late, as there was nothing left to adjudicate. The appellate court disagreed. It said that such a rule would allow defendants to take advantage of plaintiffs who inadvertently overlooked an arbitration provision, and no defendant would ever seek to compel arbitration if they could instead file a motion for summary judgment and escape all liability. So, the court held that the motion for summary judgment was conclusive as to the issue that plaintiff Johnson had chosen the wrong forum in which to commence an action, but that the judgment did not necessarily preclude Johnson from subsequently initiating arbitration.
The court of appeal stated that it was expressing no opinion on how a court should rule on a petition to compel arbitration should Johnson subsequently bring one. It said that the trial court should employ the standard three questions used to determine the outcome of such a petition: (1) whether plaintiff had taken steps inconsistent with arbitration, (2) whether plaintiff had unreasonably delayed in seeking arbitration, and (3) whether the defendant had been prejudiced by any delay.
Because the Siegels won the motion for summary judgment they sought to recover their attorney fees pursuant to the attorney fee provision in the contract. Johnson argued that because the Siegels had not demanded mediation, they should be barred from an award of attorney fees because of the provision in the contract that if any party commenced an action without first attempting to resolve the dispute through mediation they would be ineligible for attorney fees.
The court of appeal upheld the Siegels’ entitlement to recover fees and costs. It said that the contract provided that the prevailing party in any action would be entitled to attorney fees unless that party commenced the action without first seeking mediation. In this case it was Johnson who filed the lawsuit without first attempting mediation, and thus it was only Johnson who forfeited his eligibility for fees had he been the prevailing party.
Johnson petitioned the Supreme Court for review, but it was denied. Thus the holding from that case is that seeking mediation is a condition precedent to a fee award only for the party who initiates the action, not for the party defending himself.
Did that holding is change in the more recent case of Van Slyke vs. Gibson, in which the defendant seller filed a cross-complaint against the plaintiff buyer, and neither party first attempted mediation.
In that 2007 case Mike Van Slyke made an offer to buy 23 acres in Santa Maria from the Gibsons. The offer had a financing contingency, meaning it was dependent on Van Slyke getting a loan. The Gibsons counter-offered, adding a provision that upon acceptance Van Slyke was to provide a prequalification letter from his lender, together with a letter from the lender saying they were willing to loan on acreage improved only by a modular home.
Van Slyke accepted the counter-offer, but did not perform either condition relating to the lender’s approval. The Gibsons received a competing offer from an all-cash buyer, and concluding that Van Slyke was out-of-contract, accepted the competing offer. Van Slyke sued for breach of contract and specific performance, meaning he sought to force the Gibsons to sell to him.
The Gibsons responded by filing a cross-complaint, without first demanding mediation or arbitration, against Van Slyke and his realtor for interfering with the sale to the competing cash buyers. However, two months later the Gibsons dismissed that portion of their cross-complaint that concerned Van Slyke as seller, and the remainder of the cross-complaint against the realtor was severed (split out into a separate action).
Van Slyke’s case went to trial. The alternative buyers also participated. The trial court held that Van Slyke had not accepted the Gibsons’ counter-offer because he had not performed the conditions regarding lender approval. Moreover, his deposit check had been returned NSF. Thus the Gibsons prevailed against Van Slyke.
The Gibsons then sought their attorney fees and the trial court awarded them nearly $100,000. Van Slyke opposed on the basis that the Gibsons had not sought mediation prior to filing their cross-complaint against him.
Now, knowing that the holding in Johnson vs. Siegel was that seeking mediation is a condition precedent to a fee award only for the party who initiates the action, not for the party defending himself, how would you decide this case where the Gibsons filed a cross-complaint without first seeking mediation?
Well, the Court of Appeal gave thorough consideration to the earlier Johnson vs. Siegel case, and noted that the Gibsons were seeking attorney fees only for the defense of Van Slyke’s suit against them, and not for the prosecution of their cross-complaint against Van Slyke during the two months that claim had been pending. Further, they had dismissed their cross-complaint against Van Slyke after only two months. I question the reader, do you think this should matter? Does this violate the rule, no mediation means no attorney fees?
Additionally, the Court put some importance on the fact that the remainder of the Gibsons’s cross-complaint had been severed by the trial court, thus making it a separate action. And finally, there had been some evidence that the Gibsons’ attorney had proposed mediation in a telephone call to Van Slyke’s attorney.
The Court of Appeal held that the Gibsons were entitled to attorney fees, notwithstanding that they had filed a cross-complaint, later dismissed, without first seeking mediation.
Would you have decided that case differently? In any event, the lesson to be learned is when in doubt, seek mediation, and arbitration if the contract requires it in the event mediation is unsuccessful.
This article written and © Peter N. Brewer, Esq.
Brewer Offord & Pedersen LLP (www.BrewerFirm.com) serves the legal needs of homeowners, real estate and mortgage brokers, agents, brokerages, title companies, developers, investors, other real estate professionals and their clients. Mr. Brewer and his firm also represent clients in debt collection, breach of contract matters, and other litigation and transactional work. The firm’s client range from homeowners, brokers and lenders based in Santa Clara County, San Mateo County, San Francisco County, as well as throughout other counties in California.