Judge: Anne Richardson, Case: 23STCV13061, Date: 2023-09-12 Tentative Ruling

Case Number: 23STCV13061    Hearing Date: September 12, 2023    Dept: 40

Superior Court of California

County of Los Angeles

Department 40

Background

Pleadings

Plaintiffs Allison Margolin and Margolin & Lawrence sue Defendant James Raza Lawrence, Erez Gargir, Gargir Financial Services, and Does 1-50 pursuant to a June 7, 2023 Complaint alleging claims of (1) Conversion, (2) Constructive Fraud, and (3) Common Counts against Defendant Lawrence and Does 1-50, (4) Breach of Fiduciary Duty against all Defendants, and (5) Professional Negligence against Defendants Gargir and Gargir Financial Services (Accountant Defendants; former accountants for Margolin & Lawrence), as well as against Does 1-50.

The claims arise, in part, from allegations that Plaintiff Margolin and Defendant Lawrence are attorneys that until 2020 worked together under an unregistered partnership (Plaintiff M&L), that due to Defendant Lawrence’s deteriorating work product, he was reclassified as an employee between 2018 and 2019, that Defendant received W-2 wages as well as partnership distributions and paid expenses for those years from the Accountant Defendants, that M&L was registered as a partnership in 2020 with a 67%-33% split in favor of Plaintiff Margolin, that Defendant Lawrence left the firm at the end of 2021, and that in March 2022, Defendant Lawrence initiated an arbitration against Plaintiffs for breach of partnership agreement and fiduciary duty, among other claims, based on skewed partnership profits for 2018 and 2019. The claims also arise from allegations that the Accountant Defendants were professionally negligent and breached their fiduciary duty to Plaintiffs by improperly preparing tax returns for M&L and failing to preserve M&L’s documents.

Arbitration

On March 14, 2022, Defendant Lawrence filed an arbitration demand against Plaintiffs alleging claims of (1) Breach of Partnership Agreement, (2) Breach of Fiduciary Duty, (3) Conversion, (4) Constructive Fraud, (5) Accounting, and (6) Conversion – Derivative Claim.

The claims arose from allegations that Plaintiffs withheld distributions from Defendant Lawrence despite the parties’ partnership agreement.

The arbitration remains pending.

Motion to Consolidate or Stay Arbitration

On June 7, 2023, Plaintiffs filed this action.

On June 23, 2023, Plaintiffs moved to consolidate the arbitration proceeding with this civil action.

On August 25, 2023, Defendant Lawrence opposed the motion to consolidate or stay.

On September 5, 2023, Plaintiffs replied to the opposition.

This motion is now before the Court.

Motion to Compel Arbitration

On July 26, 2023, Defendant Lawrence moved to compel this action into arbitration and stay the case pending the outcome of arbitration.

On August 30, 2023, Plaintiffs opposed the motion to compel arbitration.

On September 5, 2023, Defendant Lawrence replied to the opposition.

This motion is now before the Court.

Motion to Compel Arbitration

Legal Standard

The Federal Arbitration Act (FAA), while a federal statute, applies in California courts and requires state courts to enforce arbitration agreements as required by the federal common law developed under the FAA. (See Southland Corp. v. Keating (1984) 465 U.S. 1, 15-16; Broughton v. Cigna Healthplans (1999) 21 Cal.4th 1066, 1074-78, superseded by statute on another ground as stated in Ferguson v. Corinthian Colleges, Inc. (9th Cir. 2013) 733 F.3d 928, 937.).) The FAA preempts and invalidates state law and state judicial decisions that disfavor arbitration or require arbitration provisions to pass higher scrutiny. (Southland Corp. v. Keating, supra, at p. 12; Perry v. Thomas (1987) 482 U.S. 483, 490.) If the parties designate the FAA applies, then California arbitration law is preempted. (See, e.g., Rodriguez v. American Techs., Inc. (2006) 136 Cal.App.4th 1110, 1121-1122.) However, courts have found that where the FAA is found not to apply, the California Arbitration Act (Code Civ. Proc. § 1280 et seq.) applies. (See Valencia v. Smyth (2010) 185 Cal.App.4th 153, 178.)

 A court’s inquiry is limited to a determination of (1) whether a valid arbitration agreement exists and (2) whether the arbitration agreement covers the dispute. (9 U.S.C. § 4; Chiron Corp. v. Ortho Diagnostics Systems, Inc. (9th Cir. 2000) 207 F.3d 1126, 1130; Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 84; see Simula, Inc. v. Autoliv, Inc. (9th Cir. 1999) 175 F.3d 716, 720 [if the finding is affirmative on both counts the FAA requires the Court to enforce the arbitration agreement in accordance with its terms].) “An order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.” (United Steelworkers of America v. Warrior & Gulf Navigation Co. (1960) 363 U.S. 574, 582-583.) 

 Moreover, the general rule is that the FAA governs all agreements to arbitrate in contracts “involving interstate commerce.” (Higgins v. Superior Court (2006) 140 Cal.App.4th 1238, 1247.) The term “involving” commerce “is broad and is indeed the functional equivalent of “affecting’ commerce.” (Allied-Bruce Terminix Companies, Inc. v. Dobson (1995) 513 U.S. 265, 273-274.) The U.S. Supreme Court has held that this broad interpretation includes employment contracts. (See Circuit City Stores v. Adams (2001) 532 U.S. 105, 106.) The defendant bears the burden of proving applicability of the FAA by showing that its activities constitute interstate commerce. (Hoover v. Am. Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1207.) Failure to demonstrate that the employment agreement affects interstate commerce renders the FAA inapplicable. (See Lane v. Francis Capital Management LLC (2014) 224 Cal.App.4th 676, 687-688; Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 212.)

Even where the FAA governs the interpretation of arbitration clauses, California law governs whether an arbitration agreement has been formed in the first instance. (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 893.) 

 The party seeking arbitration has the “burden of proving the existence of a valid arbitration agreement by a preponderance of the evidence.” (Ruiz v. Moss Bros. Auto Group, Inc. (2014) 232 Cal.App.4th 836, 842.) “Once that burden is satisfied, the party opposing arbitration must prove by a preponderance of the evidence any defense to the petition.” (Lacayo v. Cataline Restaurant Group Inc. (2019) 38 Cal.App.5th 244, 257.) “The trial court sits as the trier of fact, weighing all the affidavits, declarations, and other documentary evidence, and any oral testimony the court may receive at its discretion, to reach a final determination.” (Ruiz v. Moss Bros. Auto Group, Inc., supra, at p. 842.) 

On a petition to compel arbitration, the court must grant the petition unless it finds (1) no written agreement to arbitrate exists, (2) the right to compel arbitration has been waived, (3) grounds exist for revocation of the agreement, or (4) litigation is pending that may render the arbitration unnecessary or create conflicting rulings on common issues. (Code Civ. Proc., § 1281.2; see Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 218-219.)

In determining the enforceability of an arbitration agreement, the court considers “two ‘gateway issues’ of arbitrability: (1) whether there was an agreement to arbitrate between the parties, and (2) whether the agreement covered the dispute at issue.” (Omar v. Ralphs Grocery Co. (2004) 118 Cal.App.4th 955, 961.) If these issues are satisfied in favor of the movant, (3) the party opposing arbitration must prove by a preponderance of the evidence any defense to the petition. (Lacayo v. Cataline Restaurant Group Inc., supra, 38 Cal.App.5th at p. 257.)

I.

Whether Arbitration Agreement Exists

“Parties are not required to arbitrate their disagreements unless they have agreed to do so. [Citation.] A contract to arbitrate will not be inferred absent a ‘clear agreement.’ [Citation.] When determining whether a valid contract to arbitrate exists, we apply ordinary state law principles that govern contract formation. [Citation] In California, a ‘clear agreement’ to arbitrate may be either express or implied in fact. [Citation.]” (Davis v. Nordstrom, Inc. (9th Cir. 2014) 755 F.3d 1089, 1092-93 [applying California law].) The court is only required to make a finding of the agreement’s existence, not an evidentiary determination of its validity. (Condee v. Longwood Management Corp., supra, 88 Cal.App.4th at p. 219.)

Here, Defendant Lawrence’s position is that an arbitration agreement exists between himself and Plaintiffs and attaches a copy of the agreement to his declaration. (Arbitration Mot., Lawrence Decl., Ex. 1, Partnership Agreement of Margolin & Lawrence (Partnership Agreement).)

Defendant Lawrence also argues that the claims advanced by M&L against him are arbitrable because there was a principal-agent relationship between M&L and Defendant Lawrence such that M&L’s nonsignatory status does not prevent compelling M&L’s claims into arbitration. (Arbitration Mot., pp. 8-9.)

Plaintiffs’ opposition does not contest the existence of an agreement between the parties. Neither do Plaintiffs argue that Plaintiff Margolin did not execute the agreement. Instead, Plaintiffs argue that the arbitration agreement is not enforceable because the claims in this action lie outside the scope of that agreement and because application of Code of Civil Procedure section 1281.2, subdivision (c), compels the conclusion that the claims in this action are not arbitrable. Indeed, the opposition tacitly agrees that such an agreement exists by arguing that the claims in this action are not encompassed by the parties’ agreement. (See Arbitration Opp’n, pp. 6-9.)

Here, the Court finds that an agreement to arbitrate exists between Defendant Lawrence and Plaintiff Margolin. Defendant Lawrence’s verified declaration attached a copy of an agreement executed by these parties, which contains an arbitration provision. (Mot., Lawrence Decl., Ex. 1, Partnership Agreement, § 18 at p. 13 [arbitration provision] and p. 14 [signatures].)

As to Plaintiff M&L, the Court finds that application of Norcal Mutual Ins. Co. v. Newton (2000) 84 Cal.App.4th 64 (Norcal) is sufficiently on point. Defendant Lawrence argues that the principal-agent relationship between M&L and Defendant Lawrence, despite M&L’s nonsignatory status, allows Defendant Lawrence to move to compel M&L’s claims into arbitration. A reading of Norcal shows a summary of cases where there was an agreement to arbitrate between two parties and a non-signatory party was bound to that agreement based on “the existence of an agency or similar relationship between the nonsignatory and one of the parties to the arbitration agreement.” (Norcal, supra, at pp. 72-79.) To illustrate, Norcal refers to one California case where “the general partner of a limited partnership, as agent of the partnership and beneficiary of its contracts, was bound by an arbitration agreement entered by the partnership.” (Id. at p. 76, citing to Keller Construction Co. v. Kashani (1990) 220 Cal.App.3d 222, 228.) Here, it makes sense for the arbitration agreement to be applied to M&L because there exists a principal-agent relationship between M&L and Defendant Lawrence. This conclusion is reinforced by Plaintiff M&L suing Defendant Lawrence based on obligations that arose from Defendant Lawrence entering into the M&L partnership.

Accordingly, the Court finds an agreement to arbitrate exists as to Margolin, Lawrence, and M&L.

II.

Scope of, and Defenses to, the Arbitration Agreement

“‘[P]arties may agree to have an arbitrator decide not only the merits of a particular dispute but also ‘“‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.”’ [Citation.] But ‘[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is “clea[r] and unmistakabl[e]” evidence that they did so.’ [Citation.] This is a ‘heightened standard,’ and it ‘pertains to the parties’ manifestation of intent, not the agreement’s validity.’ [Citation.]” (Najarro v. Superior Court (2021) 70 Cal.App.5th 871, 879-880.) 

However, “[c]ourts have held that ‘there is no clear and unmistakable delegation to the arbitrator’ to decide arbitrability where the contract ‘includes a severability clause stating a court of competent jurisdiction may excise an unconscionable provision.’” (Id. at p. 880.) “In other words, pursuant to an exception …, if a severability clause states that a court may excise unconscionable provisions, the delegation clause does not meet the heightened standard necessary for enforcement, because it is no longer clear that only the arbitrator may decide issues such as unconscionability.” (Ibid.) 

Here, and though not raised by the parties, the Court finds that the arbitrator must determine whether the arbitration agreement between the parties encompasses the claims in this action and whether valid defenses apply to its enforcement.

The agreement between the parties contains a provision providing that “[a]ny controversy concerning whether an issue is arbitrable shall be determined by the arbitrator.” The Court also notes that there is no clause in the parties’ agreement that addresses severability and unconscionability. (Mot., Lawrence Decl., Partnership Agreement, Ex. 1, § 18.1 at p. 13.)

Thus, the issues of whether (1) the agreement encompasses Plaintiffs’ claims and (2) Code of Civil Procedure section 1281.2, subdivision (c) compel the non-arbitrability of Plaintiffs’ claims are controversies concerning whether this action should be arbitrated. Accordingly, the arbitrator should make a determination as to these and related questions.

III.

Defendant Lawrence’s motion to compel arbitration is GRANTED as to all claims against Lawrence in this lawsuit.

The Court directs this action to the already pending arbitrator with AAA to determine whether the claims in this action are arbitrable.

The Court also STAYS this action pending that determination and, if the arbitrator determines that the claims in this action are arbitrable, until a final outcome is reached as to Plaintiffs claims. (See Code Civ. Proc., § 1281.4.)

The stay extends to the claims advanced against the Accountant Defendants and Does 1-50, which should allay concerns Plaintiffs may have regarding inconsistent judgments or determinations by the arbitrator and this Court.

Motion to Consolidate or to Stay Arbitration

Motion to Compel Consolidate or Stay Arbitration: DENIED.

Based on the outcome of the motion to compel arbitration, this motion is DENIED.

The Court also notes that Code of Civil Procedure section 1281.2, subdivision (c), does not appear to be applicable to this case because the parties’ agreement to arbitrate is governed by the FAA and contains no adoption of California arbitration law, for which reason section 1281.2, subdivision (c) is not applicable. The Court will not rewrite the parties’ agreement. (Consolidate Mot., Ex. 1.A., Partnership Agreement, § 16 at p. 13 [“This Agreement shall be governed by the internal laws of the State of [state]” [sic]] & § 18.1 at p. 13 [“The arbitration shall be conducted in accordance with the Federal Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association”]; see Rodriguez v. American Technologies, Inc. (2006) 136 Cal.App.4th 1110, 1122 [where FAA is adopted in its entirety into an arbitration agreement, and no California arbitration law is incorporated, FAA rules govern, including procedural rules].) 

Conclusion

Plaintiffs Allison Margolin and Margolin & Lawrence’s Motion to Consolidate or Alternatively Stay Arbitration Proceeding is DENIED.

Defendant James Raza Lawrence’s Motion to Compel Arbitration and Stay Action is GRANTED.

The Court ORDERS this action to arbitration before the already-appointed AAA arbitrator to determine whether any disputed issues as to whether the claims raised in this action by Plaintiffs Allison Margolin and Margolin & Lawrence are subject to arbitration. If the claims are arbitrable, resolution of the claims will lie with the arbitrator.

The Court STAYS this action pending the outcome of the arbitrability determination. If the arbitrator determines that Allison Margolin and Margolin & Lawrence’s claims are arbitrable, the action will remain STAYED until a final outcome is reached in the arbitration.

The stay is applicable to all Defendants in this action, including Defendants Erez Gargir, Gargir Financial Services, and Does 1-50.