Judge: Daniel S. Murphy, Case: 23STCV29147, Date: 2024-02-02 Tentative Ruling

Case Number: 23STCV29147    Hearing Date: February 2, 2024    Dept: 32

BACKGROUND

            On November 29, 2023, Plaintiff The Crème Shop Inc. filed this action against Defendants Russ August & Kabat (RAK), Larry C. Russ, Christine S. Shin, and Nathan D. Meyer. The complaint asserts causes of action for (1) breach of fiduciary duty, (2) professional negligence, (3) injunctive relief, (4) constructive fraud, (5) embezzlement, (6) conversion, (7) receipt of stolen property, and (8) accounting. The complaint alleges that Defendants, as attorneys, concurrently represented Plaintiff and two of Plaintiff’s minority shareholders even though Plaintiff and the shareholders had conflicting interests.  

            On January 3, 2024, Defendants filed the instant motion to compel arbitration. Plaintiff filed an opposition on January 24, 2024. Defendants filed their reply on January 26, 2024.

LEGAL STANDARD

“On 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. Prima Facie Proof of an Arbitration Agreement

“The moving party ‘can meet its initial burden by attaching to the motion or petition a copy of the arbitration agreement purporting to bear the opposing party's signature.’” (Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165, quoting Bannister v. Marinidence Opco, LLC (2021) 64 Cal.App.5th 541, 543-44.)

On August 18, 2020, Defendant Shin sent a letter to Plaintiff’s CEO, Olive Kim, in response to Ms. Kim’s request to retain Defendant RAK. (Shin Decl., Ex. A, p. 1.) “The purpose of this letter [was] to confirm and document the terms of [Plaintiff’s] engagement of Russ, August & Kabat as counsel regarding various corporate legal matters for The Crème Shop.” (Ibid.) The last page of the letter contains a paragraph on arbitration, which provides as follows:

“In the event of any claim or dispute in any way regarding or arising out of our engagement, this Agreement, our statements and/or our work, of any nature . . . you may have a right to an initial non-binding arbitration of such Claim pursuant to applicable law. If you have a right to such non-binding arbitration, and if you elect to exercise such right, you and we shall engage in such non-binding arbitration to seek to resolve such Claim, unless you waive such right or you and we agree to make such non-binding arbitration instead to be binding arbitration in which event the following provisions shall also be applicable to such agreed binding arbitration. Subject to the foregoing regarding non-binding arbitration, any Claim shall only be raised and decided by mandatory, final and binding arbitration . . . This mandatory, final and binding arbitration agreement is instead of traditional court proceedings and procedure including without limitation a right to a jury trial, court trial or appeal, and all such and other differing court proceedings and procedure including without limitation to a jury trial, court trial and appeal are accordingly waived.”

(Shin Decl., Ex. A, p. 4.)

The final paragraph of the letter asks Ms. Kim to return a signed copy of the agreement to confirm that she has “read this engagement agreement and understand and agree to all of its terms and have received a copy.” (Shin Decl., Ex. A, p. 4.) Ms. Kim signed the signature page as Plaintiff’s CEO, while Ms. Shin signed on behalf of RAK. (Id. at p. 5.) Therefore, Defendants have tendered sufficient proof of an arbitration agreement.

II. Validity of the Engagement Agreement

            An arbitration agreement need not be enforced if “[g]rounds exist for rescission of the agreement.” (Code Civ. Proc., § 1281.2(b).) “The agreement” refers to the arbitration agreement only, not the larger agreement containing the arbitration clause. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 29.) Therefore, where a plaintiff alleges that some part of the larger contract is illegal (other than the arbitration clause), that illegality is itself an arbitrable issue. (Id. at pp. 29-30.) However, if “grounds exist to revoke the entire contract, such grounds would also vitiate the arbitration agreement. Thus, if an otherwise enforceable arbitration agreement is contained in an illegal contract, a party may avoid arbitration altogether.” (Ibid.)

            Accordingly, “an agreement to arbitrate is invalid and unenforceable if it is made as part of a contract that is invalid and unenforceable because it violates public policy.” (Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018) 6 Cal.5th 59, 78-79.) “[A] contract may be held invalid and unenforceable on public policy grounds even though the public policy is not enshrined in a legislative enactment.” (Id. at p. 79.) Therefore, an attorney services contract that violates of the Rules of Professional Conduct may be rendered unenforceable depending on the circumstances. (Id. at pp. 79-80.) In Sheppard Mullin, an engagement agreement was found void in its entirety, including the arbitration clause, because the attorneys engaged in concurrent representation of clients with adverse interests without properly obtaining informed written consent under Rule 3-310, now codified as Rule 1.7. (Id. at pp. 80-81.)    

Plaintiff argues that there is no arbitration agreement because the entire engagement agreement is void for violating the Rules of Professional Conduct. Plaintiff similarly argues that Defendants engaged in concurrent representation of Plaintiff and the adverse shareholders (Olive Kim and her mother, Christina Kim) without Plaintiff’s informed written consent.

First, the Court notes Defendants’ reply argument that, under the terms of the arbitration clause, issues of arbitrability are to be determined by the arbitrator. However, Plaintiff’s argument goes to the very existence of an arbitration agreement. That is, if the entire engagement agreement is void, there would be no arbitration agreement at all, not even an agreement to let the arbitrator decide issues of arbitrability. “[C]hallenges to the very existence of the contract are, in general, properly directed to the court.” (Mendoza v. Trans Valley Transport (2022) 75 Cal.App.5th 748, 776.) As Moncharsh and Sheppard Mullin demonstrate, an arbitration clause may be voided if the entire contract is successfully challenged as illegal. Therefore, the Court must decide the issue. For the following reasons, the Court finds that there is a binding arbitration agreement.

 According to Plaintiff, the Kims’ interests “ceased to be 100% aligned with TCS’ interests” at the earliest on June 9, 2022, when the Kims sold a majority of their interest in Plaintiff and became minority shareholders. (Young Lee Decl. ¶ 6.) The engagement agreement at issue was signed long before that, on August 18, 2020. (Shin Decl., Ex. A.) In Sheppard Mullin, “at the time” that Sheppard Mullin agreed to represent the new client, it was already representing the adverse client. (Sheppard Mullin, supra, 6 Cal.5th at p. 80.) In other words, “entry into the engagement agreement itself was an ethical violation because . . . it was impossible for Sheppard to enter into the engagement agreement with J-M without committing an ethical breach. As a result, the entire object of the engagement agreement was an engagement that Sheppard was prohibited to take on.” (Brawerman v. Loeb & Loeb LLP (2022) 81 Cal.App.5th 1106, 1123.)  

By contrast, Defendants here agreed to represent Plaintiff while the Kims’ interests were admittedly still aligned with Plaintiff’s. In other words, there was no adverse concurrent representation “at the time” the parties executed the engagement agreement. At the time the engagement agreement was executed, it was possible for Defendants to perform it ethically. In other words, it was not an ethical violation to simply execute the agreement like it was in Sheppard Mullin. Assuming, arguendo, that Defendants violated the Rules of Professional Conduct in the performance of the engagement agreement, that does not work to retroactively void the agreement. (Brawerman, supra, 81 Cal.App.5th at p. 1123.) Plaintiff cites no authority suggesting that an engagement agreement may be retroactively voided if an attorney commits an ethical violation after the agreement is executed. Therefore, the engagement agreement is not void for violating public policy. Accordingly, there is a valid, binding arbitration agreement.

III. Arbitrability of the Claims at Issue

            Plaintiff alternatively argues that the claims asserted in its complaint are not covered by the arbitration agreement. However, as Defendants pointed out, the agreement contains a delegation clause. (See Shin Decl., Ex. A, p. 4 [“only the arbitrator to decide all issues regarding arbitrability and the existence, scope and enforceability of this mandatory, final and binding arbitration agreement”].) Because the Court finds that a valid arbitration agreement exists, the delegation clause therein must be enforced. In other words, the parties agreed to have the arbitrator, rather than the Court, decide which claims are arbitrable.  

CONCLUSION

            Defendants’ motion to compel arbitration is GRANTED. The case is stayed in its entirety pending the outcome of arbitration.