Filed 2/20/15 Sachs v. GP/T Holdings CA2/5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FIVE
MICHAEL M. SACHS, as Trustee, etc., B254289
Plaintiff and Respondent, (Los Angeles County
Super. Ct. No. BS141237 )
v.
GP/T HOLDINGS, LLC et al.,
Defendants and Appellants.
APPEAL from orders of the Superior Court of Los Angeles County, James C.
Chalfant, Judge. Affirmed.
Law Offices of Amir M. Kahana, Amir M. Kahana and Avi M. Attal, for
Defendants and Appellants.
Locke Lord, Jon L. Rewinski and Christopher Lee, for Plaintiff and Respondent.
I. INTRODUCTION
Defendants, GP/T Holdings, LLC and TSC Acquisition Corporation, appeal from
orders denying their motions to compel arbitration. Plaintiff, Michael M. Sachs, as
Trustee of Westrec Properties, Inc. & Affiliated Companies 401(k) Plan filed petitions to
compel defendants to produce certain records for his inspection. Plaintiff alleged he had
an economic interest under the Corporations Code to view these records. Defendants
moved to compel arbitration under an operating agreement’s arbitration clause signed by
GP/T Holdings, LLC. Defendants’ motions. It found the operating agreement’s
arbitration clause did not apply to the subject matter raised by plaintiff’s mandate
petitions. Even if it did, the trial court found defendants had waived their arbitration
rights. Defendants contend the trial court erred. They assert the arbitration agreement
applied to plaintiff’s claims. They also maintain they did not waive their arbitration
rights. We affirm the orders because defendants waived their right to arbitrate.
II. BACKGROUND
A. Plaintiff’s Mandate Petitions
1. Introduction
There are two mandate petitions in this case, both filed on January 14, 2013.
Plaintiff’s first mandate petition is brought against GP/T Holdings, LLC and Nathan and
Matthew Johnson (the Johnsons). The Johnsons are not parties to this appeal. Plaintiff’s
second mandate petition was filed against TSC Acquisition Corporation only. The
Johnsons are not named in the second mandate petition. The two mandate petitions’
allegations parallel one another. We will set forth the allegations of the first petition in
some detail and then, without repeating the common allegations, briefly summarize the
second petition.
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2. The First Petition
On January 14, 2013, plaintiff filed his verified mandate petition to compel
delivery, inspection and copying of records against GP/T Holdings, LLC and the
Johnsons. Plaintiff alleges the following. The Johnsons were managers of GP/T
Holdings, LLC. GP/T Holdings, LLC is a limited liability company formed to invest in
Telscape Communications, Incorporated. GP/T Holdings, LLC owned stock in TSC
Acquisition Corporation. The purpose of TSC Acquisition Corporation was to purchase
all the outstanding Telscape Communications, Incorporated stock. GP/T Holdings, LLC
is a California company. TSC Acquisition Corporation is a Delaware corporation with its
principal executive offices in California.
On March 30, 2006, plaintiff became a member of GP/T Holdings, LLC by
investing $1,000,000. On May 17, 2006, TSC Acquisition Corporation acquired
Telscape Communications, Incorporated. Plaintiff’s investment became 60,400 shares of
the series A preferred stock of TSC Acquisition Corporation. On August 29, 2007,
plaintiff, as an individual and trustee of his trust, wired an additional $1,000,000 to GP/T
Holdings, LLC as part of a $6,000,000 “capital raise” suggested by the Johnsons. The
purpose was to purchase $3,000,000 of series A preferred stock of TSC Acquisition
Corporation. The series B preferred stock of TSC Acquisition Corporation would be sold
to raise an additional $3,000,000. The purpose was to invest further in Telscape
Communications, Incorporated. The capital raise documents advised that plaintiff and
his trust would be issued series A preferred stock of TSC Acquisition Corporation within
90 days from the receipt of the funds. Plaintiff and his trust never received the stock.
Over the following six years, GP/T Holdings, LLC provided insufficient and incomplete
information to plaintiff regarding its operations, finances and affairs.
On June 11, 2012, after a series of communications, plaintiff’s attorneys delivered
to GP/T Holdings, LLC a written demand to inspect and copy its books, records and
documents. On June 21, 2012, the attorneys of GP/T Holdings, LLC advised that they
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would produce the documents, but did not. On November 26, 2012, having found the
response of GP/T Holdings, LLC inadequate, plaintiff delivered a formal request
demanding a copy of the information required under Corporations Code section 17058,
subdivision (a). Plaintiff also requested a copy of any written operating agreement.
Plaintiff also requested these records be available for copying and inspection during
reasonable business hours. These documents were not made available. On December 4,
2012, plaintiff’s counsel sent an e-mail to GP/T Holdings, LLC’s attorney. Plaintiff
requested the demanded documents be sent to his office. The attorney for GP/T
Holdings, LLC sent the Telscape Communications, Incorporated financial statements to
plaintiff. The attorney for GP/T Holdings, LLC also sent the consolidated tax returns of
TSC Acquisition Corporation and promised to send additional information when it
became available. Plaintiff’s attorney responded on December 5, 2012, stating the
documents were an insufficient response to November 26, 2012 demand. On December
26, 2012, plaintiff’s attorney sent another e-mail to GP/T Holdings, LLC’s attorney
indicating that none of the sent documents was responsive to the November 26, 2012
demand. Plaintiff’s attorney indicated a mandate petition would be filed unless a
significant number of documents were delivered. To date, no response came.
Plaintiff alleges GP/T Holdings, LLC had a duty to deliver information and permit
plaintiff and his attorneys to inspect and copy records under Corporations Code section
17058, subdivision (a). Plaintiff seeks a writ of mandate ordering GP/T Holdings, LLC
to deliver the required information and make it available for inspection and for copying
the records it is required to maintain. Plaintiff also requests costs of suit, attorney’s fees,
and other further relief.
3. The Second Petition
Also on January 14, 2013, the second mandate petition to compel inspection and
copying of records against TSC Acquisition Corporation was filed. Plaintiff alleges the
following. He is a GP/T Holdings, LLC shareholder and holds shares of preferred stock.
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GP/T Holdings, LLC owns more than half of the outstanding voting shares of TSC
Acquisition Corporation. Plaintiff, as alleged previously, invested an additional
$1,000,000 with GP/T holdings, LLC for the purpose of purchasing additional series A
preferred TSC Acquisition Corporation stock, but never received it. Plaintiff similarly
alleges that after six years of owning preferred TSC Acquisition Corporation stock, it
provided insufficient and incomplete information on its operations, finances and
corporate affairs. Plaintiff declined to convert his Series A preferred stock to Series C
preferred stock and continued to request access to the earlier demand for books, records
and documents. Like his allegations against GP/T Holdings, LLC concerning the events
of November 26 to December 26, 2012, plaintiff complained of the inadequacy of the
responses. Plaintiff alleges he has inspection rights as a shareholder and TSC Acquisition
Corporation must keep records and produce documents under Corporations Code sections
1500, 1501, and 1600. Plaintiff seeks issuance of a writ of mandate directing TSC
Acquisition Corporation to permit inspection, copying and compiling extracts of records
and accounting books. Plaintiff also seeks costs of suit and further relief.
B. Litigation Prior to Motions to Compel Arbitration
On February 19, 2013, GP/T Holdings, LLC moved to quash the petition for writ
of mandate. GP/T Holdings, LLC argued plaintiff’s service of the petition was
insufficient. Plaintiff later filed additional proofs of service of the mandate petitions on
April 2, 2013.
On May 15, 2013, GP/T Holdings, LLC filed a demurrer and motion to strike.
GP/T Holdings, LLC demurred as to plaintiff’s cause of action against the Johnsons.
GP/T Holdings, LLC argued the Johnsons were not personally liable under the
Corporations Code. Plaintiff opposed the demurrer. On July 30, 2013, the trial court
overruled the demurrer. It found liability was not at issue, but rather whether the
Johnsons were subject to Corporations Code section 17106.
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GP/T Holdings, LLC also moved to strike certain portions of the petition as being
irrelevant. Plaintiff opposed the motion. On July 30, 2013, the motion to strike was
denied. The trial court ruled the statements were relevant and not improper or false. On
August 9, 2013, GP/T Holdings, LLC filed its verified answer to the mandate petition.
On May 15, 2013, TSC Acquisition Corporation filed its own special demurrer.
TSC Acquisition Corporation argued plaintiff failed to join Telscape Communications,
Incorporated as a necessary and indispensable party. Plaintiff opposed the demurrer.
On July 30, 2013, the demurrer was overruled. The trial court ruled TSC Acquisition
Corporation failed to show Telscape Communications, Incorporated was indispensable or
necessary to the action. TSC Acquisition Corporation filed its verified answer on August
9, 2013. Neither defendant mentioned a right to arbitration in any of these filings. The
trial court set the hearing on the two mandate petitions for March 6, 2014.
C. Defendants’ Motions to Compel Arbitration and the Responses Thereto
1. The Motion of GP/T Holdings, LLC
On September 12, 2013, GP/T Holdings, LLC moved to compel arbitration.
GP/T Holdings, LLC argued: a written arbitration agreement existed; the right to compel
arbitration was not waived; there were no grounds to revoke the agreements; and there is
no pending litigation rendering the arbitration unnecessary or duplicative.
As to the existence of an agreement to arbitrate, GP/T Holdings, LLC cites to its
operating agreement’s arbitration clause. It is undisputed plaintiff and GP/T Holdings,
LLC are parties to its operating agreement dated March 21, 2006. Section 16.1 of the
GP/T Holdings, LLC operating agreement provides, “In the event of a dispute among or
between Members regarding this Agreement or the subject matters hereof, the Members
shall submit such dispute to binding arbitration before a single arbiter conducted in the
city of Los Angeles pursuant to the commercial arbitration rules of the American
Arbitration Association.” GP/T Holdings, LLC argued the mandate petition concerned
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matters pertaining to the operating agreement and plaintiff’s initial investment in the
enterprise.
Further, GP/T Holdings, LLC asserted no waiver of the right to arbitrate had
occurred. As an explanation for the nine month delay in seeking to arbitrate their dispute,
defense counsel stated he was unaware of the arbitration clause until it was pointed out to
him. Defense counsel declared, “It was not until after July, 2013 when [GP/T Holdings,
LLC’s] former corporate counsel sent [TSC Acquisition Corporation] the Operating
Agreement that we discovered the arbitration clause within the Amended and Restated
Operating Agreement of GP/T Holdings, LLC.” GP/T Holdings, LLC maintained it
originally moved to dismiss plaintiff’s petition because he was not a member of the
enterprise and thus lacked standing to compel record inspection. Because plaintiff
insisted he was a GP/T Holdings, LLC member, it invoked the terms of the operating
agreement and moved to compel arbitration. GP/T Holdings, LLC filed an answer on
August 9, 2013. The reason a demurrer and verified answers were filed, according to
defense counsel was, “I tried to resolve this matter early on by filing demurrers, and then
verified answers.” The only discovery, according to defense counsel, was a document
exchange.
On January 9, 2014, plaintiff filed his response to the motion to compel arbitration
of GP/T Holdings, LLC. Plaintiff asserted: the operating agreement’s arbitration clause
did not apply to their dispute; he was asserting a statutory inspection right not involving
the terms or construction of the operating agreement; and GP/T Holdings, LLC waived its
right to arbitrate by actively engaged in litigation for nine months prior to filing its
motion to compel arbitration. As evidence of waiver, plaintiff argued: GP/T Holdings,
LLC moved to quash service of the mandate petition on the Johnsons; GP/T Holdings,
LLC demurred and moved to strike all or portions of the mandate petition without
referring to an arbitration right; GP/T Holdings, LLC filed an answer without referring to
a right to arbitration; GP/T Holdings, LLC served discovery responses without referring
to the arbitration clause; GP/T Holdings, LLC also propounded document requests; and
the matter was set for trial on March 6, 2014. Plaintiff maintained he was prejudiced
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because he was forced to litigate multiple substantive motions and discovery requests.
Plaintiff also asserted his statutory rights could not be limited by an arbitration
agreement.
On January 15, 2014, GP/T Holdings, LLC filed its reply. GP/T Holdings, LLC
asserted the operating agreement provided members inspection rights, citing section 3.7
of the operating agreement, “‘Membership Interest’ means an ownership interest in the
Company, which includes a Member’s share of the profits and losses of the Company, a
Member’s right to receive distributions of the Company’s assets, a Member’s right (if
any) to vote or participate in the management of the Company as permitted in this
Agreement, and a Member’s right to information concerning the business and affairs of
the Company, as provided in this Agreement and under the [Beverly-Killea Limited
Liability Company] Act.” GP/T Holdings, LLC thus argued the arbitration agreement
applied. GP/T Holdings, LLC also maintained that the procedural history of the litigation
did not demonstrate it had waived its arbitration rights.
2. The Motion to Compel Arbitration of TSC Acquisition Corporation and the Responses
Thereto
On September 12, 2013, TSC Acquisition Corporation moved to compel
arbitration. TSC Acquisition Corporation noted GP/T Holdings, LLC was a shareholder.
TSC Acquisition Corporation cited to the GP/T Holdings, LLC operating agreement
signed by plaintiff. TSC Acquisition Corporation asserted the two mandate petitions
were premised on plaintiff’s initial investment in GP/T Holdings, LLC. Plaintiff
allegedly invested money with GP/T Holdings, LLC, which then used that money to
purchase TSC Acquisition Corporation shares. Thereafter, GP/T Holdings, LLC
provided plaintiff with series A preferred stock in TSC Acquisition Corporation. Thus,
TSC Acquisition Corporation argued the GP/T Holdings, LLC operating agreement and
its arbitration clause applied to the action. TSC Acquisition Corporation also argued it
did not waive any right to arbitration.
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On January 9, 2014, plaintiff filed his opposition to the motion to compel
arbitration of TSC Acquisition Corporation. Plaintiff argued: TSC Acquisition
Corporation was not a party to the GP/T Holdings, LLC operating agreement; the
operating agreement’s arbitration clause did not apply because it pertained only to
matters concerning the disputes of GP/T Holdings, LLC members; the disputes covered
by the arbitration clause only concerned the operating agreement or subject matters
thereof; and he had an express statutory right to inspect the corporation’s books and
records which could not be limited by an arbitration agreement. Plaintiff also argued
TSC Acquisition Corporation waived its right to arbitration, citing their litigation
conduct.
On January 15, 2014, TSC Acquisition Corporation filed its reply. TSC
Acquisition Corporation argued: relying on the equitable estoppel doctrine, a
nonsignatory to an arbitration agreement may still invoke arbitration; the two mandate
petitions were inextricably intertwined; and the arbitration agreement did not limit
plaintiff’s inspection rights. TSC Acquisition Corporation also asserted plaintiff failed to
demonstrate he was prejudiced by any delay.
D. Orders Denying Defendants’ Motions to Compel Arbitration
On January 23, 2014, following a hearing on both motions, the trial court issued
tentative decisions denying both defendants’ motions to compel arbitration. As to the
motion of GP/T Holdings, LLC, the trial court rejected the applicability of the arbitration
agreement, finding: “[Plaintiff] is making a claim for statutory inspection under
Corporations Code section 17106. He makes no claim about the Operating Agreement.
Nor does he make a claim about the subject matter of the Operating Agreement, which is
the operation of a business to invest in Telscape Communications, Inc. Operating
Agreement, ¶ 4.1. There is not even a dispute between the parties regarding the
Operating Agreement.”
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The trial court further found GP/T Holdings, LLC had waived its arbitration rights.
Based on the litigation conduct prior to the motion to compel arbitration, the trial court
concluded GP/T Holdings, LLC had acted in a manner inconsistent with seeking
arbitration. The trial court found plaintiff was prejudiced by the conduct of GP/T
Holdings, LLC.
As to TSC Acquisition Corporation, the trial court found it was not a party to the
arbitration agreement. The trial court concluded plaintiff’s petition against TSC
Acquisition Corporation did not involve the GP/T Holdings, LLC operating agreement in
any way. Even if the operating agreement did apply, the trial court found TSC
Acquisition Corporation waived its arbitration rights by its litigation conduct. The trial
court adopted both its tentative decisions as the orders of the court. Both GP/T Holdings,
LLC and TSC Acquisition Corporation appealed the trial court’s orders.
III. DISCUSSION
The Federal Arbitration Act applies to the arbitration agreement here because it
involves interstate commerce. This case is subject to the limited preemptive effect of the
Federal Arbitration Act. (9 U.S.C. § 2 [“transaction involving commerce”]; Allied-Bruce
Terminix Companies, Inc. v. Dobson (1995) 513 U.S. 265, 277 [“word ‘involving,’ like
‘affecting,’ signals an intent to exercise Congress’ commerce power to the full”].) The
GP/T Holdings, LLC operating agreement concerned the purchase of TSC Acquisition
Corporation stock. GP/T Holdings, LLC is a California company and TSC Acquisition
Corporation is incorporated in Delaware. Issues of waiver are treated similarly in both
the federal and state context: “[T]he [Federal Arbitration Act] permits a party to obtain a
stay of judicial proceedings pending arbitration unless such party is ‘in default’ of that
right. [Citation.] ‘“Although this principle of ‘default’ is akin to waiver, the
circumstances giving rise to a statutory default are limited and, in light of the federal
policy favoring arbitration, are not to be lightly inferred.”’ [Citation.] Accordingly, a
party who resists arbitration on the ground of waiver bears a heavy burden [citation], and
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any doubts regarding a waiver allegation should be resolved in favor of arbitration
[citation]. [¶] Our state waiver rules are in accord. State law, like the [Federal
Arbitration Act], reflects a strong policy favoring arbitration agreements and requires
close judicial scrutiny of waiver claims. [Citation.] Although a court may deny a
petition to compel arbitration on the ground of waiver [citation], waivers are not to be
lightly inferred and the party seeking to establish a waiver bears a heavy burden of proof.
[Citations.]” (Saint Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th
1187, 1195 (Saint Agnes); Zamora v. Lehman (2010) 186 Cal.App.4th 1, 14.)
Our Supreme Court identified six factors relevant to assessing waiver claims: “‘In
Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, the Court of Appeal referred
to the following factors: ‘(1) whether the party’s actions are inconsistent with the right to
arbitrate; (2) whether ‘the litigation machinery has been substantially invoked’ and the
parties ‘were well into preparation of a lawsuit’ before the party notified the opposing
party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement
close to the trial date or delayed for a long period before seeking a stay; (4) whether a
defendant seeking arbitration filed a counterclaim without asking for a stay of the
proceedings; (5) ‘whether important intervening steps [e.g., taking advantage of judicial
discovery procedures not available in arbitration] had taken place’; and (6) whether the
delay ‘affected, misled, or prejudiced’ the opposing party.”’ [Citations.]” (Saint Agnes,
supra, 31 Cal.4th at p. 1196; accord, Wagner Construction Co. v. Pacific Mechanical
Corp. (2007) 41 Cal.4th 19, 31.) Generally, whether waiver of arbitration rights occurred
is a factual question and a trial court’s findings are reviewed for substantial evidence.
(Saint Agnes, supra, 31 Cal.4th at p. 1196; Owens v. County of Los Angeles (2013) 220
Cal.App.4th 107, 118.) However, where the facts are undisputed and subject to only one
reasonable inference, the issue of waiver becomes a question of law which we review de
novo. (Saint Agnes, supra, 31 Cal.4th at p. 1196; Owens v. County of Los Angeles, supra,
220 Cal.App.4th at p. 118.)
Here, defendants waived their arbitration rights. Defendants initially asserted in
their filings that plaintiff has no interest nor was a member of GP/T Holdings, LLC and
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thus had no standing to file the mandate petitions. Defendants initially maintained that
the GP/T Holdings, LLC operating agreement did not apply to plaintiff. As noted, the
arbitration clause appears in the GP/T Holdings, LLC operating agreement. This is a
position inconsistent with asserting there is a right to arbitrate under the GP/T Holdings,
LLC operating agreement. Defendants also made no mention of a right to arbitrate in any
pleadings or motions filed with the trial court prior to their motions to compel arbitration.
Further, defense counsel admitted the reason he filed the demurrers, propounded
discovery and engaged in other law and motion procedures was to try to resolve the
matter.
The nine month delay between the filing of the mandate petitions and the motions
to compel arbitration was unreasonable. The only reason given for the delay was that
defense counsel was unaware of the existence of the arbitration clause. Defense
counsel’s awareness of the arbitration clause is irrelevant. (Saint Agnes, supra, 31
Cal.4th at p. 1195, fn. 4; Zamora v. Lehman, supra, 186 Cal.App.4th at p. 18.) There is
no evidence defendants or their principals were unaware of their right to arbitrate under
the GP/T Holdings, LLC operating agreement. Several appellate courts have found such
lengthy delays to be unreasonable. (See, e.g., Augusta v. Keehn & Associates (2011) 193
Cal.App.4th 331, 338 [motion to compel arbitration filed by plaintiff six months after the
filing attorney malpractice action was unreasonable]; Adolph v. Coastal Auto Sales, Inc.
(2010) 184 Cal.App.4th 1443, 1451 [defendant’s conduct inconsistent with intent to
arbitrate because of a six month delay in the filing petition to compel].)
Under both federal and state law, whether litigation results in prejudice to the
party opposing arbitration is critical in waiver determinations. (Saint Agnes, supra, 31
Cal.4th at p. 1203; Augusta v. Keehn & Associates, supra, 193 Cal.App.4th at p. 340;
Zamora v. Lehman, supra, 186 Cal.App.4th at p. 16.) Our Supreme Court explained:
“Because merely participating in litigation, by itself, does not result in a waiver, courts
will not find prejudice where the party opposing arbitration shows only that it incurred
court costs and legal expenses. [Citations.] [¶] Rather, courts assess prejudice with the
recognition that California’s arbitration statutes reflect ‘“a strong public policy in favor
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of arbitration as a speedy and relatively inexpensive means of dispute resolution”’ and
are intended to ‘“encourage persons who wish to avoid delays incident to a civil action to
obtain an adjustment of their differences by a tribunal of their own choosing.”’
[Citation.] Prejudice typically is found only where the petitioning party’s conduct has
substantially undermined this important public policy or substantially impaired the other
side’s ability to take advantage of the benefits and efficiencies of arbitration. [¶] For
example, courts have found prejudice where the petitioning party used the judicial
discovery processes to gain information about the other side’s case that could not have
been gained in arbitration [citations]; where a party unduly delayed and waited until the
eve of trial to seek arbitration [citation]; or where the lengthy nature of the delays
associated with the petitioning party’s attempts to litigate resulted in lost evidence
[citation].” (Saint Agnes, supra, 31 Cal.4th at pp. 1203-1204; see Augusta v. Keehn &
Associates, supra, 193 Cal.App.4th at p. 340.)
Defendants’ delay and actions were inconsistent with an intent to arbitrate and
have prejudiced plaintiff. Here, there was substantial law and motion proceedings before
the motion to compel arbitration was filed. Defendants filed demurrers, moved to quash
service and propounded some discovery during the nine-month interregnum. Further, on
October 7, 2013, it became necessary for plaintiff to file a motion to compel document
production. We have read the objections to plaintiff’s document production demand.
They are unmeritorious. And, the case had been set for trial. Coupled with the nine
month delay in filing their motions to compel arbitration, defendants have prejudiced
plaintiff by substantially impairing his ability to take advantage of arbitration’s benefits
and efficiencies. There is no merit to defendants’ assertion that the only discovery that
occurred was a document exchange. What actually occurred is plaintiff propounded a
document demand which was met with unmeritorious objections. It became necessary
for plaintiff to move to compel document production. Substantial evidence supports the
orders denying the motions to compel arbitration.
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IV. DISPOSITION
The January 23, 2014 orders denying the motions to compel arbitration are
affirmed. Plaintiff, Michael M. Sachs, as trustee of the Westrec Properties, Inc. &
Affiliated Companies 401(k) Plan, is entitled to recover his appeal costs from defendants,
GP/T Holdings, LLC and TSC Acquisition Corporation.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
TURNER, P. J.
We concur:
KRIEGLER, J.
GOODMAN, J.*
*
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.
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