In a decision that will have practical impacts on what claims may be
arbitrated involving the sale of real estate in California, the Court of Appeal,
Second District, ruled in Lindemann v. Hume (2012) Westlaw 569385
("Lindemann case") that the purchaser of a home which had brought an action
against the home builder for construction defects could not be required to
separately arbitrate the purchaser's non-disclosure claims against a previous
owner of the home which had sold the home to the purchaser. The Court of
Appeal ruled that the nondisclosure claims against the prior owner (and seller)
arose out of the same series of transactions as the negligent design and
construction claims against the original builder, and the potential for inconsistent
rulings precluded arbitration.
The Lindemann case involves movie star Nicolas Cage. In 2002, Mr. Cage,
through a trust he controls known as the Hancock Park Real Estate Trust
("Hancock Park Trust") acquired an exclusive single family residence on the
Ocean Front Walk in Venice (sometimes herein, "The Ocean Walk Home").
Escrow closed on February 22, 2002. The Hancock Park Real Estate Trust
purchased the home from the Lee Group, which was the developer builder.
Prior to close of escrow, the Lee Group agreed to provide, in addition to a limited
construction warranty, a warranty for ten years, "[t]o remedy and repair any and
all damage resulting from water infiltration, intrusion or flooding ... ". Soon after
Mr. Cage moved into the Ocean Front Walk Home, however, he encountered
serious water intrusion problems and decided to list the home. In December
2002, Cage's agent received an offer from Hedy and Samy Kaminowicz, who
later entered into an agreement to purchase the property, but then cancelled after
receiving a report by Robert Anderson, a civil engineer, indicating there was no
"quick fix" for the site drainage problems at the home. Mr. Cage, at that time,
also engaged a colleague of his, Richard Nazarian ("Nazarian"), a local
contractor, to address issues with the home. Nazarian disagreed with the
conclusions in Anderson's report.
In May 2003, Barbara Trent Lindemann, as the Trustee of the Bradford
Lindsley Schlei Trust II ("Schlei Trust"), made an offer to purchase the Ocean
Walk Home, which the Hancock Park Real Estate Trust accepted. The purchase
agreement with the Schlei Trust included an arbitration clause which required
the arbitration of any disputes arising out of the purchase agreement or any
resulting transaction. During the escrow period, Cage's agent provided the
Schlei Trust with a disclosure statement describing as the only significant defect,
"wood floor at basement needs to be replaced in places," and did not disclose the
Anderson report. Escrow then closed on May 23, 2003. The Lee Group's
construction warranties were transferred to the Schlei Trust and Schlei moved in.
Thereafter, in February 2004, the Schlei Trust notified Nazarian and the
Lee Group that Ocean Walk Home had experienced very serious flooding, water
intrusion and other problems with the windows. From February 2004 to May of
2008, Nazarian and the Lee Group conducted various investigations and worked
to resolve the construction defect problems, but were unsuccessful. In May 2009,
Barbara Lindemann, on behalf of the Schlei Trust, filed a Complaint against the
Lee Group and related parties for construction defects. In June 2009, Lindemann
filed a First Amended Complaint, adding additional causes of action, naming as
Doe Defendants the Hancock Park Defendants. In August 2009, Lindemann filed
a Second Amended Complaint. Thereafter, in October and November 2009, the
Hancock Park Defendants and the Lee Group filed Cross-Complaints against
each other for indemnity. A Third Amended Complaint was then filed by
Lindemann in December 2009 which set forth distinct causes of action against the
Lee Group for strict liability, fraudulent concealment, negligent disclosure,
negligence per se, negligence and breach of express warranties; and discreet
causes of action against the Hancock Park Defendants for fraudulent
concealment and negligent nondisclosure.
In January 2010, the Hancock Park Defendants moved to compel
Lindemann to arbitrate her nondisclosure causes of action against them. In June
2010, the Trial Court denied the Motion on the basis that a third party, the Lee
Group, was litigating with the two parties and that the exception found under
Code of Civil Procedure § 1281.2(c), dealing with the potential for conflicting
rulings, applied. Shortly, thereafter, Lindemann amended her Third Amended
Complaint by substituting Mr. Nazarian and others as fictitiously named
Defendants. Mr. Nazarian and the newly named Defendants filed Cross-
Complaints against each other and the Hancock Park Defendants, asserting
various causes of action, including equitable indemnity, express indemnity and
apportionment of fault.
In January 2011, before one of the newly named Defendants had filed a
Cross-Complaint for indemnification against the Hancock Park Defendants, the
Hancock Park Defendants moved to compel arbitration of Nazarian's
indemnification claims. In March 2011, the Hancock Park Defendants again
moved to compel arbitration of claims involving one of the other newly named
Defendants. In April 2011, the Trial Court denied the motions to compel.
The Hancock Park Defendants appealed from the Orders denying the
motions to compel arbitration and the Trial Court stayed all proceedings except
certain construction defect site inspections.
On appeal, the Court of Appeal noted that California law recognizes a
strong public policy in favor of arbitration, citing Madden v. Kaiser Foundation
Hospitals (1976) 17 Cal.3d 699, 706. However, the Court of Appeal ruled that, in
this case, there could be inconsistent rulings if the matter were arbitrated in
regard to the nondisclosure claims between Lindemann and the Hancock Park
Trust Defendants, because, among other things, while inconsistent rulings would
not be inevitable, the Arbitrator could find a design or construction defect existed
as a predicate to holding the Hancock Park Defendants' liable for failing to
disclose a material condition of the property; and the finder of fact in the
Superior Court could reach a contrary conclusion.
The Court of Appeal, as to Nazarian, noted the decision in Westra v.
Marcus & Millichap Real Estate Investment Brokerage Co., Inc. (2005) 129
Cal.App.4th 759, where a nonsignatory to an arbitration agreement could compel
arbitration, the Court noted that even if Nazarian were bound by the arbitration
agreement, and could be compelled to arbitrate certain disputes arising from the
sale of the Ocean Front Walk Home, the claims for indemnity by the Hancock
Park Defendants were outside the scope of the arbitration provision, anyway.
The Lindemann case is important in that it generally provides that an
arbitration agreement between a vendor and purchaser of a single family
residence may not, necessarily, be enforceable where there are claims of
construction defects against the builder.
About the Authors: Edward F. Morrison, Jr. is the founding partner and
Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional
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