Judge Curtis A. Kin, Case BC506921 2023-02-14 Tentative Ruling

Judge: Curtis A. Kin, Case: BC506921, Date: 2023-02-14 Tentative Ruling

Case Number: BC506921 Hearing Date: February 14, 2023 Dept: 72

MOTION TO STAY DISSOLUTION ACTION

MOTION TO ENJOIN ARBITRATION

Date: 2/14/23 (8:30 AM)

Case: William E. Rice et al. v. Gary P. Downs et al. (BC506921)

TENTATIVE RULING:

Subject to their demonstrating that plaintiff William E. Rice agreed to arbitration before JAMS, defendants Kristoffer J. Kaufmann and Gary P. Downs’ Motion to Stay Dissolution Action is GRANTED. Likewise, subject to Kauffman and Down’s demonstration that Rice agreed to arbitration before JAMS, plaintiff William E. Rice’s Motion to Stay and Enjoin Arbitration is DENIED.

On November 17, 2022, Kaufmann and Downs filed a motion seeking a stay of the instant dissolution action so that the issue of whether Rice is still a member of Highland Property Development LLC (“HPD”) can be adjudicated in arbitration. On December 5, 2022, Rice filed a motion seeking to enjoin the arbitration regarding Rice’s membership.

The Court finds that the issue of whether Rice is a member of Highland Property Development LLC (“HPD”) must be resolved in arbitration pursuant to Section 13.5 of the Amended and Restated Operating Agreement (“Operating Agreement”). (See Rice Decl. ¶ 2 & Ex. 14 at § 13.5 [“Except as otherwise provided in this Agreement, any controversy between the parties arising out of this Agreement shall be submitted to the American Arbitration Association for arbitration in Los Angeles, California or San Francisco, CA”].)

While it is true that, on October 19, 2016, the Court (Hon. Yvette M. Palazuelos) previously held that Rice’s cause of action for judicial dissolution in the BC619678 dissolution action complaint is not arbitrable (Correll Decl. ¶ 14 & Ex. 12 at 15:17-16:15), the issue of whether Rice is a member of HPD is distinct from the judicial dissolution cause of action. Regardless of how the issue is resolved in arbitration, the Court may apply the arbitrator’s finding, if appropriate, and thereafter determine whether plaintiff is entitled to a judicial decree for dissolution under Corporations Code § 17707.03(a). In other words, the judicial dissolution will still proceed in this Court, not arbitration.

It is also true that, on December 16, 2019, the Court (Hon. Rupert A. Byrdsong) granted Kaufmann and Downs’ motion to stay dissolution and commence appraisal (Correll Decl. ¶ 3 & Ex. 1) and that, on July 21, 2020, the Court (Judge Byrdsong) also granted Rice’s motion to enforce the Court’s December 16, 2019 order for appraisal pursuant to the Corporations Code (Correll Decl. ¶ 8 & Ex. 6). However, the Court does not find that, in litigating over those two prior orders, either Kaufmann or Downs waived their right to seek arbitration regarding Rice’s membership interest in HPD under the Operating Agreement. (See St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1196, quoting Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980 [factors in determining waiver include whether party’s actions are inconsistent with the right to arbitrate and whether the litigation machinery has been substantially invoked].)

Notably, during the July 21, 2020 hearing, even though Kaufmann and Downs had originally requested and obtained the order for statutory appraisal, Kaufmann argued that Rice was no longer a member of HPD because Rice did not cure a charging order, which required Rice to pay a previously issued judgment to Downs within 90 days after issuance of the charging order, i.e., January 28, 2020, per the Operating Agreement. (Correll Decl. ¶ 9 & Ex. 7 at 3:19-22 [“Unfortunately, we didn’t know in December that there would be a dissolution event in the end of January. Had we known that, we would have held off on the statutory appraisal process”].) The purported condition allowing for dissolution under the Operating Agreement did not occur until after Judge Byrdsong granted Kaufmann and Downs’ motion to commence statutory appraisal on December 16, 2019. Judge Byrdsong never decided whether Rice was a member of HPD or whether Kaufmann and Downs were entitled to invoke the contractual buyout provisions in the Operating Agreement. Indeed, Judge Byrdsong has stated that the contractual buyout rights exists but that the process would be stayed. (Correll Decl. ¶ 9 & Ex. 7 at 33:21-25 [“I do agree with you that those [contractual buyout process] rights exist. I’m just holding them to the side”]; 40:18-24.)

Under these circumstances, the Court finds no waiver of the right to arbitrate the issue of Rice’s membership in HPD. After the July 21, 2020 hearing, Kaufmann and Downs did not seek to adjudicate the issue of Rice’s membership in HPD before the Court. Instead, the parties litigated Rice’s legal malpractice claims against Downs and Nixon Peabody. Judgment was entered as to the legal malpractice claims on March 16, 2022, after which the dissolution action remains to be resolved. Kaufmann and Downs’ actions were not inconsistent with the right to arbitrate.

By contrast, Rice’s membership interest was squarely put at issue on October 26, 2022, when Rice filed a motion for an order directing Kaufmann and Downs to deposit Rice’s membership distributions due under the Operating Agreement with the Court. At that point, it was incumbent on Kaufmann and Downs to demand arbitration of the issue concerning Rice’s membership interest, lest they waive the right to arbitrate by invoking the litigation machinery and opposing Rice’s motion on the issue. Kaufmann and Downs submitted a demand for arbitration before JAMS on November 16, 2022. (Hyam Decl. ¶ 12 & Ex. 8.)

Rice also argues that the Operating Agreement calls for arbitration before the American Arbitration Association, not JAMS. “A selection [of an arbitrator] that is not authorized by the arbitration contract…confers no authority on the person selected.” (American Home Assurance Co. v. Benowitz (1991) 234 Cal.App.3d 192, 200-01.) Kaufmann and Downs contend that the parties later agreed to arbitration before JAMS and that there is an arbitration pending before JAMS. (Mtn. to Stay Dissolution at 7, fn. 3.) Rice does not dispute such assertions. However, Kaufmann and Downs do not provide evidence of any agreement to arbitrate before JAMS. Indeed, Kaufmann and Downs do not provide evidence that an arbitration is actually pending before JAMS. Assuming Kaufmann and Downs are correct that Rice agreed and/or acquiesced to a JAMS arbitrator, that would constitute a waiver of arbitration before the American Arbitration Association. (See American Home, 234 Cal.App.3d at 201.) The Court thus inquires of Kaufmann and Downs where evidence of Rice’s agreement to arbitrate before JAMS can be found in the record before this Court.

For the foregoing reasons, subject to Rice’s agreement to arbitrate before JAMS, the Court finds that a stay of the dissolution action is appropriate while the issue of whether Rice remains a member of Highland Property Development LLC is resolved in arbitration.