Judge: Daniel S. Murphy, Case: 22STCV13925, Date: 2022-09-21 Tentative Ruling

Case Number: 22STCV13925    Hearing Date: September 21, 2022    Dept: 32

BACKGROUND

            On April 27, 2022, Plaintiff Xuenan Xie filed this action against Defendants Henry Chiao (“Henry”), PTI Development, Inc. (“PTI”), Angie Chiao (“Angie”), Cabinent World LLC (“Cabinent World”), Andrew Chiao (“Andrew”), and Shining Rowland Company LLC (“Shining Rowland”), alleging the following causes of action: (1) breach of contract; (2) breach of fiduciary duty; and (3) unjust enrichment.

            The complaint alleges that Plaintiff entered into an agreement with Henry’s company PTI to form an LLC called Fontana Village. The relationship between the two members of Fontana Village is governed by the LLC’s Operating Agreement. The complaint asserts breach of contract against PTI for PTI’s failure to make the agreed-upon capital contribution to Fontana Village and for entering into conflicted transactions with Fontana Village without Plaintiff’s written consent. The complaint asserts breach of fiduciary duty against Henry for causing Fontana Village to enter into the abovementioned conflicted transactions and for transferring Fontana Village funds to his own family members and their companies. Lastly, the complaint asserts unjust enrichment against all Defendants for the benefits they retained as a result of Henry’s actions.

            On August 26, 2022, Defendants filed the instant motion to compel arbitration based on an arbitration provision contained in the Operating Agreement. Plaintiff contends that the arbitration provision does not cover the present dispute and that the non-signatory Defendants cannot enforce the arbitration clause.

LEGAL STANDARD

The Federal Arbitration Act (“FAA”) states that “[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) California law incorporates many of the basic policy objectives contained in the Federal Arbitration Act, including a presumption in favor of arbitrability. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-72.)

California law states that “[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” (Code Civ. Proc, § 1281.2.) “The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.” (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236.)

DISCUSSION

I. Applicability of the Arbitration Clause

Plaintiff does not dispute that the Operating Agreement contains an arbitration clause. The provision states as follows: “Except as otherwise provided in this Agreement, any dispute arising out of this Agreement shall be submitted to the American Arbitration Association.” (Ta Decl., Ex. A, § 11.10.) Plaintiff focuses on the qualifying language, “[e]xcept as otherwise provided in this Agreement,” and argues that the Agreement provides otherwise in the instant case. Plaintiff relies on Section 11.8 of the Agreement, which states: “Each Member agrees to submit to the exclusive jurisdiction of the federal and state courts of the State of California in any action arising out of a dispute under or in connection with this Agreement or any transaction contemplated by this Agreement.” (Id., § 11.8.) Plaintiff argues that this means disputes between the Members of Fontana Village, such as the present dispute, must be litigated in California courts. The Court disagrees.

            Section 11.8 merely states that in the event of an action arising out of the Agreement, the parties agree to submit to the jurisdiction of California courts. It does not reflect the parties’ intent to not arbitrate their disputes, but merely designates the jurisdiction and venue in the event of litigation. Section 11.10 is the only provision in the Agreement that speaks directly on the issue of arbitration, and it does so by unambiguously requiring arbitration of disputes arising out of the Agreement. The Agreement does not provide otherwise by, for example, excluding certain claims from arbitration. The present dispute, which arises from Henry’s conflicted transactions in violation of Section 5.10 of the Agreement, falls under the arbitration clause. (See Compl. ¶¶ 30-31.)

II. Equitable Estoppel

            Equitable estoppel applies to allow non-signatories to an agreement to enforce arbitration. (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 220.) The policy behind equitable estoppel is to prevent a plaintiff from simultaneously asserting claims against non-signatories based on an agreement while also disavowing an arbitration provision within the same agreement. (Ibid.) “[E]quitable estoppel applies only if plaintiffs' claims against the nonsignatory are dependent upon, or inextricably bound up with, the obligations imposed by the contract plaintiff has signed with the signatory defendant.” (Id. at pp. 229-30.)

            Defendants contend that the non-signatory Defendants (Henry’s relatives and their companies) may enforce arbitration under equitable estoppel because the unjust enrichment claim against them is intertwined with Henry’s obligations under the Operating Agreement. The Court agrees. According to the complaint, Henry breached his fiduciary duties by entering Fontana Village into conflicted transactions without ensuring that the terms of such transactions were fair to Fontana Village and without obtaining Plaintiff’s written consent. (See Compl. ¶¶ 34-35, 38-39, 57.) Henry’s alleged breaches are derived from specific terms within the Operating Agreement, namely Section 5.10 on conflicted transactions. (See Compl. ¶¶ 30-31; see also Compl. ¶ 34 [acknowledging that Henry’s transfer to Cabinet World was a “breach of the Operating Agreement”].) These conflicted transactions in violation of the Agreement serve as the basis for Defendants’ alleged wrongful retention of Fontana Village assets. (See Compl. ¶¶ 61-62.) This creates sufficient entanglement between Plaintiff’s claim against the non-signatories and the obligations under the Agreement. Thus, the non-signatories are allowed to enforce arbitration through equitable estoppel. (See Goldman, supra, 173 Cal.App.4th at pp. 229-30.)

CONCLUSION

            Defendants’ motion to compel arbitration is GRANTED. The Court hereby stays the case in its entirety.