Judge: Cynthia A Freeland, Case: 37-2012-00057479-CU-BC-NC, Date: 2023-12-08 Tentative Ruling

SUPERIOR COURT OF CALIFORNIA,

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SOUTH BUILDING TENTATIVE RULINGS - December 07, 2023

12/08/2023  01:30:00 PM  N-27 COUNTY OF SAN DIEGO

JUDICIAL OFFICER:Cynthia A. Freeland

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Civil - Unlimited  Breach of Contract/Warranty Motion Hearing (Civil) 37-2012-00057479-CU-BC-NC EMERALD AERO LLC VS. KAPLAN [IMAGED] CAUSAL DOCUMENT/DATE FILED: Motion - Other, 08/18/2023

Plaintiffs Emerald Aero, LLC, NCHF AMS II Houston, LLC, JWC AMS II Houston, LLC, Scott Rogers, AMS Houston Investments, LP, NCHF AMS II Houston Holdings, LP, JWC AMS II Houston Holdings, LP, and AEC AMS II Houston Holdings, LP (collectively, 'Plaintiffs')'s petition to confirm contractual arbitration award (the 'Petition') is granted.

As an initial matter, the court notes that Plaintiffs' reply brief does not comply with the pertinent California Rules of Court ('CRC'). CRC, Rule 3.1113 provides that a reply memorandum cannot exceed 10 pages unless the party filing such a brief obtains leave of court to file a longer memorandum at least 24 hours before the memorandum is due. See Cal. R. Ct. 3.1113(d), (e). A reply memorandum exceeding the applicable page limit must be considered in the same manner as a late-filed paper. See Cal. R. Ct.

3.1113(g). Plaintiffs, without first seeking leave of court, have submitted a reply memorandum that is nearly 16 pages long. The court has discretion to refuse to consider such a filing. See Cal. R. Ct.

3.1300(d). However, in light of the issues presented and the lack of discernible prejudice to Defendant Stephen Kaplan ('Defendant'), the court will disregard the foregoing procedural deficiency, consider Plaintiffs' reply brief in full, and proceed to the motion's merits. Plaintiffs are on notice that future failure(s) to comply with the applicable Rules of Court may not result in the same treatment.

Factual Background and Procedural History On July 21, 2008, AMS II Houston Investments, LP, NCHF AMS Houston Holdings, LP, JWC AMS II Houston Holdings, LP, and AEC AMS II Houston Holdings, LP entered into a Tenants In Common Agreement (the 'Agreement') under which the Tenants agreed to administer and delegate authority and responsibility for the operation and management of the real property and improvements located at 810 Gladstell Road, Conroe, TX 77304 (the 'Property'). See Petition, Attachment 4(b). In pertinent part, ¶ 12(b) of the Agreement, entitled 'Binding Arbitration,' provides that: Any controversy arising out of or related to this Agreement or the breach or alleged breach thereof or an investment in the Interests shall be settled by binding arbitration held in San Diego, California in accordance with the then existing rules of the American Arbitration Association (or any successor organization thereof). The arbitration panel shall consist of one member, which member shall be the mediator if mediation has occurred or shall be a person agreed to by each party to file a dispute within thirty (30) days following notice by one party that he desires that a matter be arbitrated. If there was no mediation and the parties are unable within such thirty (30) days period to agree upon an arbitrator, then the panel shall be one arbitrator selected in accordance with the then existing rules of the American Arbitration Association, provided, however, that any such arbitrator shall be an individual experienced in Calendar No.: Event ID:  TENTATIVE RULINGS

3038856 CASE NUMBER: CASE TITLE:  EMERALD AERO LLC VS. KAPLAN [IMAGED]  37-2012-00057479-CU-BC-NC the area of real estate and limited partnerships/limited liability companies, and who shall be knowledgeable with respect to the subject matter of the dispute. The losing party in any such proceeding shall bear any fees and expenses of the arbitrator, other tribunal fees and expenses, reasonable attorney's fees of the prevailing party, any costs of producing witnesses and other reasonable costs or expenses incurred by him or the prevailing party . . . .

See Agreement, ¶ 12(b). In addition, the prevailing party in any action or proceeding arising from or related to the Agreement is entitled to recover from the losing party(s) the reasonable attorney's fees and costs as fixed by the court or arbitrator therein. Ibid., ¶ 12(c).

On September 26, 2012, Plaintiffs commenced this action by filing a Complaint against Defendant and Defendants Marc Barmazel and AMS II Houston Investments Management, LLC alleging causes of action for breach of fiduciary duty, aiding and abetting, and quiet title. See ROA No. 1. The Complaint alleges that Defendant, as manager of the Property, purposefully kept the Property underfunded and allowed the Property to go into distress, breached his fiduciary duty(ies) by mismanaging distribution of funds and assets of the Property, and breached his duty of loyalty to investors through various self-dealings. On March 22, 2013, the court granted Defendants' motion to compel arbitration. See ROA Nos. 29-30.

The parties have since arbitrated their dispute on three separate occasions which has resulted in two appeals. The first arbitration hearing was conducted on September 1, 2015 before Peter Shenas, Esq.

and resulted in a $30,835,152.57 award in Plaintiffs' favor. See ROA No. 42. On March 29, 2016, the court entered Judgment in Plaintiffs' favor and against Defendant and AMS II Houston Investments Management, LLC, jointly and severally, consistent with the first arbitration award. See ROA No. 70.

Defendant filed a notice of appeal on June 13, 2016. See ROA No. 88. On February 28, 2017, the Fourth District Court of Appeal published its decision in Emerald Aero, LLC v. Kaplan (2017) 9 Cal. App. 5th 1125 ('Emerald Aero I'). The Emerald Aero I court reversed for several reasons. First, the Court determined that the AAA rules and the principles of fundamental fairness restricted Mr. Shenas' ability to award Plaintiffs punitive damages because they did not provide Defendant, who was not represented by counsel at the time, with sufficient notice that Plaintiffs were amending their claim (by e-mailing Defendant and Mr. Shenas that information less than 24 hours before the arbitration hearing). Second, the Court found that, under the totality of the facts and circumstances, Defendant did not have a fair arbitration hearing on the issue of damages because: (1) the record was unclear as to whether Defendant had notice of several of the critical hearings and orders in the case; (2) there was substantial ambiguity as to the amount of claimed compensatory damages; and (3) the AAA administrator's refusal to appoint a new arbitrator once Mr. Shenas recused himself from all AAA matters was improper. The Court ultimately remanded with directions for the court to: (1) vacate the first Judgment confirming the first arbitration award, and (2) issue an order vacating the first arbitration award with Defendant being entitled to a new arbitration hearing on the issue of Plaintiffs' claimed damages. On June 21, 2017, the court vacated the first Judgment confirming the first arbitration award. See ROA No. 162.

The second arbitration hearing was conducted on February 27 and 28, 2018 before the Honorable Carl West Anderson (Ret.) and resulted in a $258,181.03 award in Defendant's favor and against Plaintiffs.

See ROA No. 229. On December 18, 2018, the court entered Judgment in Defendant's favor and against Plaintiffs consistent with the second arbitration award. See ROA No. 258. Plaintiffs filed a notice of appeal on February 15, 2019. See ROA No. 276. On July 13, 2020, the Fourth District Court of Appeal issued its decision in NCHF AMS II Houston, LLC v. Kaplan, 2020 WL 3957569 (July 13, 2020) ('Emerald Aero II'). The Emerald Aero II court reversed, finding that Judge Anderson exceeded his authority by reconsidering liability issues in the second arbitration despite the Emerald Aero I court's instruction that the second arbitration hearing be limited to damages only. Notably, the court stated the following: We have determined the second Arbitrator acted beyond his authority in permitting the parties to relitigate the liability issues, and the award cannot be corrected without affecting the merits of the decision. We therefore vacate the award. (§ 1286.2, subd. (a)(4).) On remand, the arbitrator and the Calendar No.: Event ID:  TENTATIVE RULINGS

3038856 CASE NUMBER: CASE TITLE:  EMERALD AERO LLC VS. KAPLAN [IMAGED]  37-2012-00057479-CU-BC-NC parties should accept the liability finding on plaintiffs' breach of fiduciary/fraud claims against Kaplan, and the arbitrator should determine the amount of plaintiffs' damages (if any) resulting from Kaplan's wrongful conduct. In determining the nature of the liability findings, the arbitrator is authorized to consider plaintiffs' complaint, plaintiffs' Arbitration brief and attached evidence filed in the prior proceedings, and any arguments provided by the parties.

NCHF AMS II Houston, LLC v. Kaplan, 2020 WL 3957569, *10. On October 21, 2020, the court vacated the second Judgment confirming the second arbitration award. See ROA No. 317.

On March 27-29, 2023, a third arbitration was conducted before Peter K. Rundle, Esq. (Case No.

73-20-1400-0010). On August 4, 2023, Mr. Rundle issued a Final Arbitration Award in Plaintiffs' favor and against Defendant in the total amount of $1,417,204.50 (the 'Third Arbitration Award'). See Petition, Attachment 8(c). Plaintiffs now seek an order confirming the Third Arbitration Award to which Defendant has opposed.

Legal Analysis California Code of Civil Procedure ('CCP') § 1285 provides that '[a]ny party to an arbitration in which an award has been made may petition the court to confirm, correct or vacate the award.' Cal. Code Civ. P. § 1285, 1286. See also EHM Productions, Inc. v. Starline Tours of Hollywood, Inc. (2018) 21 Cal. App. 5th 1058, 1063 ('Once a petition to confirm an award is filed, the superior court must select one of only four courses of action: It may confirm the award, correct and confirm it, vacate it, or dismiss the petition.'). A party seeking to vacate or correct an arbitration award may do so by filing and serving a response to the award within 100 days after the of service of a signed copy of the award. See Cal. Code Civ. P. §§ 1285.2, 1288.2; Law Finance Group, LLC v. Key (2021) 67 Cal. App. 5th 307, 316. The California Supreme Court has explained that 'it is the general rule that parties to a private arbitration impliedly agree that the arbitrator's decision will be both binding and final.' Moncharsh v. Heily & Blase (1992) 3 Cal. 4th 1, 9. Indeed, the California Arbitration Act (the 'CAA') minimizes judicial intervention.

Ibid., at 10. Toward that end, the Second District Court of Appeal has noted that: Under the CAA, the merits of a controversy that has been submitted to arbitration are not subject to judicial review. This means that we may not review the validity of the arbitrator's reasoning, the sufficiency of the evidence supporting the award, or any errors of fact or law that may be included in the award .... Judicial review is severely limited because the result vindicates the intentions of the parties that the award be final, and because an arbitrator is not ordinarily constrained to decide according to the rule of law ....

Mave Enterprises, Inc. v. Travelers Indemnity Co. (2013) 219 Cal. App. 4th 1408, 1430 (internal quotation omitted). See also Moncharsh, 3 Cal. 4th at 11, 33 ('Thus, it is the general rule that, with narrow exceptions, an arbitrator's decision cannot be reviewed for errors of fact or law . . . [Even] the existence of an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review.').

The exclusive grounds upon which the court may vacate or correct and confirm an award are found in CCP §§ 1286.2 and 1286.6, respectively. See Soni v. SimpleLayers, Inc. (2019) 42 Cal. App. 5th 1071, 1085-1086. The court may vacate an award under CCP § 1286.2 if: (1) The award as procured by corruption, fraud or other undue means.

(2) There was corruption in any of the arbitrators.

(3) The rights of the party were substantially prejudiced by misconduct of a neutral arbitrator.

(4) The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.

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3038856 CASE NUMBER: CASE TITLE:  EMERALD AERO LLC VS. KAPLAN [IMAGED]  37-2012-00057479-CU-BC-NC (5) The rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title.

(6) An arbitrator making the award either: (A) failed to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware; or (B) was subject to disqualification upon grounds specified in Section 1281.91 but failed upon receipt of timely demand to disqualify himself or herself as required by that provision. However, this subdivision does not apply to arbitration proceedings conducted under a collective bargaining agreement between employers and employees or between their respective representatives.

Cal. Code Civ. P. §§ 1286.2(a)(1)-(6). If the court does not vacate an award under CCP § 1286.2, then it must correct the award and confirm it as corrected if the court determines that: (a) There was an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award; (b) The arbitrators exceeded their powers but the award may be corrected without affecting the merits of the decision upon the controversy submitted; or (c) The award is imperfect in a matter of form, not affecting the merits of the controversy.

Cal. Code Civ. P. §§ 1286.6(a)-(c).

Having carefully considered the parties' respective arguments and evidence, and in light of the significant deference afforded to arbitrators' legal and factual findings under California law, the court grants the Petition and confirms the Third Arbitration Award as requested. Toward that end, the court finds that Defendant has not provided the court with a sufficient basis to either vacate or correct/confirm the Third Arbitration Award. More specifically, Defendant contends that the Third Arbitration Award should be vacated, and the Petition dismissed, because Mr. Rundle did not consider Defendant's standing and capacity arguments during the third arbitration hearing which substantially prejudiced Defendant's rights under CCP §§ 1286.4(a)(3) and (5). The court must respectfully disagree for two reasons.

First, pursuant to the Court of Appeal's previous instructions in Emerald Aero I and Emerald Aero II, Mr.

Rundle was not required to make any determinations regarding liability – indeed, it would have been beyond the scope of his authority to do so. As the Court of Appeal made clear, for purposes of the third arbitration hearing, the parties were to accept the liability finding on Plaintiffs' breach of fiduciary duty and fraud claims against Defendant and any further findings should have been limited to the issue of the amount of damages Plaintiffs suffered as a result of Defendant's wrongful conduct. Mr. Rundle complied with the foregoing. While Defendant now raises issues concerning standing, capacity, and certain other defects impairing Plaintiffs' right to recover damages in this matter – issues he did, in fact, raise during the third arbitration hearing – he did not raise them at any point from the first arbitration hearing through the final decision in Emerald Aero II despite having ample opportunity to do so. These issues, which speak to Plaintiffs' right to damages and/or Defendant's liability (as opposed to the amount of damages, which was properly within Mr. Rundle's purview), are precluded under the law of the case doctrine. 'The law of the case doctrine requires lower courts and subsequent appeals to adhere to a principle or rule of law necessary to a decision in an initial appeal.' Kim v. R Consulting & Sales, Inc. (2021) 67 Cal. App. 5th 263, 276, fn. 6. The doctrine applies following a reversal with a general remand as well as after reversal with directions for particular proceedings on remand. See Yu v. Signet Bank/Virginia (2002) 103 Cal. App. 4th 298, 312. While the law of the case doctrine generally applies only to points expressly decided in an appellate court's opinion (see Olson v. Cory (1983) 35 Cal. 3d 390, 399), the fact remains that, under the instant action's specific procedural posture, the Court of Appeal, on two occasions, expressly summarized the scope of its remand – said scope did not include a reexamination of liability Calendar No.: Event ID:  TENTATIVE RULINGS

3038856 CASE NUMBER: CASE TITLE:  EMERALD AERO LLC VS. KAPLAN [IMAGED]  37-2012-00057479-CU-BC-NC issues and defenses. Necessary in the Court of Appeal's decisions were determinations as to the actions that Defendant did or, more importantly, did not, take in the first two arbitration hearings. Put differently, a fair reading of Emerald Aero I and Emerald Aero II is that Defendant already had a full and fair opportunity to litigate all issues concerning his liability and defenses with only the issue of damages remaining. Defendant could have sought clarification or modification of the Emerald Aero II ruling but declined to do so.

The foregoing is sufficient by itself to grant the Petition and confirm the Third Arbitration Award.

However, the court reasoning is further buttressed by the doctrine of arbitral finality. As set forth above, the CAA generally limits the court's ability to review the merits of a controversy that has been arbitrated.

The court cannot review the validity of an arbitrator's reasoning, the sufficiency of the evidence supporting the award, or any errors of fact or law that may be included in the award. In this case, despite Defendant's arguments to the contrary, Mr. Rundle, in a proverbial belt-and-suspenders manner, addressed Defendant's standing and capacity arguments in the alternative for the purpose of bringing this matter to a conclusion (assuming such issues were ripe for adjudication, which they were not given the limited scope of the Court of Appeal's remand). Toward that end, Mr. Rundle concluded that: (1) Defendant was dilatory in raising his capacity argument as to the Claimant entities; (2) Defendant has no basis to challenge the Assignment and Assumption Agreement which assigned to Mr. Rogers and NCHF AMS II Houston, LLC the right to prosecute claims on behalf of several other Claimant entities; (3) Mr.

Rogers, individually, had standing to pursue relief in the third arbitration hearing; (4) Defendant's standing argument as to NCHF AMS II Houston, LLC and JWC AMS Houston, LLC were misplaced as both were the general partners of their corresponding partnerships and thereby had the authority to bring derivative actions on those partnerships' behalf; and (6) Defendant was dilatory in raising his standing argument as to Emerald Aero, LLC. The court lacks discretion to revisit Mr. Rundle's findings in that regard. Moreover, Defendant has failed to demonstrate how his rights have been substantially prejudiced, particularly given the fact that he could have raised these issues at any point in the past eight years.

Accordingly, the court grants the Petition and confirms the Third Arbitration Award.

Conclusion In light of the foregoing, the court grants the Petition and, consistent with the Third Arbitration Award, the Agreement, and the above findings, confirms the Third Arbitration Award as follows: (1) $1,000,000.00 in compensatory damages, plus (2) $367,659.50 in contractual attorneys' fees and costs ($297,531.75 in attorneys' fees, $9,934.25 in court reporting fees, and $60,193.50 in expert witness fees), plus (3) $49,545.00 in AAA administrative fees and compensation and arbitrator expenses, plus (4) prejudgment interest from August 4 to December 8, 2023 at 5% per annum in the total amount of $24,655.47, plus (5) $7,579.95 in attorneys' fees and costs incurred in prosecuting the Petition, for a total award of $1,449,439.92 plus post-judgment interest accruing at the legal rate. Plaintiffs shall submit a proposed Judgment consistent with this ruling within fifteen (15) days of this hearing.

This is the tentative ruling for the hearing at 1:30 p.m. on Friday, December 8, 2023. If no party appears at the hearing, this tentative ruling will become the order of the court as of December 8, 2023. If the parties are satisfied with the court's tentative ruling or do not otherwise wish to argue the motion, they are encouraged to give notice to the court and each other of their intention not to appear, though this notice is not required.

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