Judge: James L. Crandall, Case: 22-1252985, Date: 2022-10-06 Tentative Ruling
1. Motion to Compel Arbitration
Defendant Evertrust Bank’s (ETB) Motion to Compel Submission of Action to Arbitration and Stay Action (Motion) is DENIED.
The court DENIES ETB’s Request for Judicial Notice, as ETB has not demonstrated that this document satisfies any of the requirements of Evidence Code section 452.
“California law reflects a strong public policy in favor of arbitration as a relatively quick and inexpensive method for resolving disputes. To further that policy, Code of Civil Procedure, section 1281.2 requires a trial court to enforce a written arbitration agreement unless one of three limited exceptions applies. Those statutory exceptions arise where (1) a party waives the right to arbitration; (2) grounds exist for revoking the arbitration agreement; and (3) pending litigation with a third party creates the possibility of conflicting rulings on common factual or legal issues.” (Code of Civ. Proc., § 1281.2; Acquire II, Ltd. v. Colton Real Estate Group (2013) 213 Cal.App.4th 959, 967.) Similarly, public policy under federal law favors arbitration and the fundamental principle that arbitration is a matter of contract and that courts must place arbitration agreements on an equal footing with other contracts and enforce them according to their terms. (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 339.)
In deciding a motion or petition to compel arbitration, trial courts must first decide whether an enforceable arbitration agreement exists between the parties and then determine whether the claims are covered within the scope of the agreement. (Omar v. Ralphs Grocery Co. (2004) 118 Cal.App.4th 955, 961.) The opposing party has the burden to establish any defense to enforcement. (Gatton v. T-Mobile USA, Inc. (2007) 152 Cal.App.4th 571, 579 [“The petitioner ... bears the burden of proving the existence of a valid arbitration agreement and the opposing party, plaintiffs here, bears the burden of proving any fact necessary to its defense.”].)
ETB moves for the following orders:
1. To compel submission of plaintiff's complaint against (a) all defendants1 and/or (b) ETB only to arbitration pursuant to the arbitration clause stated at § 10.9 of the Beach Orangethorpe Hotel, LLC ("BOH1") Operating Agreement, pp. 29-30, a true and correct copy of which (that had been obtained by ETB's counsel in April 2016) is attached hereto as Exhibit 1 and incorporated herein by this reference pursuant to CRC 3.1330; and
2. For an order staying this action as to ETB and all other defendants pending completion of the arbitration proceeding.
Existence of an Arbitration Agreement
A motion to compel arbitration or stay proceedings must state verbatim the provisions providing for arbitration or must have a copy of them attached. (Cal. Rules of Court, rule 3.1330.)
A party may demonstrate express acceptance of the arbitration agreement in order to be bound (e.g., Mago v. Shearson Lehman Hutton Inc. (9th Cir. 1992) 956 F.2d 932 [agreement to arbitrate included in job application]; Nghiem v. NEC Electronic, Inc. (9th Cir. 1994) 25 F.3d 1437 [agreement to arbitrate included in handbook executed by employee]; Lagatree v. Luce, Forward, Hamilton & Scripps (1999) 74 Cal. App. 4th 1105 [employer may terminate employee who refuses to sign agreement to arbitrate]) or implied-in-fact in fact acceptance (Asmus v. Pacific Bell (2000) 23 Cal. 4th 1, 11 [implied acceptance of changed rules regarding job security]; DiGiacinto v. Ameriko-Omserv Corp. (1997) 59 Cal. App. 4th 629, 635 [implied acceptance of changed compensation rules]). (Craig v. Brown & Root (2000) 84 Cal.App.4th 416, 420 (Craig).)
“A signed agreement is not necessary, however, and a party’s acceptance [of an agreement to arbitrate] may be implied in fact….” (Pinnacle Museum Tower Ass’n v. Pinnacle Market Dev. (US), LLC (2012) 55 Cal.4th 223, 23 (Pinnacle), 6.) “An arbitration clause within a contract may be binding on a party even if the party never actually read the clause.” (Ibid.)
ETB argues that Plaintiff, Beach Orangethorpe Hotel, LLC’s (BOH1) Operating Agreement contains an arbitration clause which applies to this action. (Motion, 5-6.) Specifically, ETB contends: (1) the Operating Agreement’s arbitration clause is binding on BOH1 even though it is not a signatory because of Corporations Code section 17701.02, 17701.10(a), and 17701.11(a) and the Operating Agreement’s references to actions that the “Company” will take, (2) the Operating Agreement’s arbitration clause can be enforced through the principle of equitable estoppel.
ETB also cites to JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222, 1236 (JSM) for the argument that a signatory plaintiff may be compelled to arbitrate against a nonsignatory defendant when Plaintiff is suing based on a contract that has an arbitration clause.
According to ETB, BOH1’s claims are inextricably intertwined with the Operating Agreement because the Complaint is based on BOH1’s Operating Agreement, which names M&D as its manager and states that M&D owes certain fiduciary duties in its capacity as manager. (Motion, 13-14; Complaint, ¶¶ 11, 13, 26, 48-51 and 63-70.)
Corporations Code section 17701.11 subdivision (a) states: “A limited liability company is bound by and may enforce the operating agreement.”
BOH1 opposes ETB’s motion. M&D Regional Center (M&D) and M+D Properties (M+D) (together, M&D Defendants) also separately oppose ETB’s motion.
In opposition, BOH1 asserts that Corporations Code sections 17701.02, 17701.10(a) and 17701.11(a) do not apply because they became effective on 1-1-14, after the effective date of the Operating Agreement. (BOH Opposition, 3.)
BOH1 argues that the Complaint is not inextricably intertwined with the Operating Agreement because it alleges M&D’s breach of fiduciary duty, which arise by operation of statute. (BOH1 Opposition, 7.)
BOH1 also cites to Goldman v. KPMG LLP (2009) 173 Cal.App.4th 209, 220 (Goldman) for the argument that a plaintiff’s claims are not inextricably intertwined with a contract containing an arbitration agreement if they do not allege a breach of that contract’s terms. In Goldman, the court found that equitable estoppel did not apply because plaintiff’s claims did not allege a direct violation of any of the terms of the agreement. (Id. at 231-232.) Therefore, the plaintiffs’ claims were “at least one step removed from” the agreement containing the arbitration clause. (Id. at 233.)
M&D Defendants also argue that the Complaint is not inextricably intertwined with the Operating Agreement. (MD Opposition, 6-9.)
In reply, ETB admits that Corporations Code section 17701.11(a) was not in effect at the time of the Operating Agreement. However, ETB asserts that Corporations Code section 17701.11(a) nevertheless applies because the Operating Agreement states: “'Act' means the California Beverly-Killea Limited Liability Company Act as set forth in Title 2.5 (commencing with Section 17001) of the Corporations Code of the State of California as same may be amended or superseded from time to time."
According to ETB, this means that the parties contemplated agreeing to subsequent amendments to the agreement enacted before the dispute arises. (Reply, 3.) ETB cites to Cione v. Foresters Equity Services, Inc.,(1997) 58 Cal.App.4th 625, 640-645 (Cione)
In Cione, a defendant employer appealed an order denying its motion to compel arbitration, asserting that it was the third party beneficiary of an agreement by the employee to arbitrate the parties’ dispute. (Id. at 629-630.) The employee applied for registration with a securities self-regulatory organization after beginning to work for the employer and as part of his registration, agreed to arbitrate any dispute with the employer as required under the regulatory organization’s rules. (Id. at 630.) Thereafter, the employee and employer executed a written employment agreement containing no reference to arbitration. (Id.) The Court of Appeal analyzed whether the employee’s written employment agreement superseded his agreement to arbitrate with the regulatory organization and concluded that it did not, and that the previous agreement to arbitrate applied to the employee’s claims in this case. (Id. at 640-646.)
This court finds that Cione is inapplicable to the instant action because there is no issue of successive agreements by or between the parties.
The Operating Agreement states:
This Operating Agreement for Beach Orangethorpe Hotel, LLC, a California limited liability company (the “Company”), is made and entered into effective as of August 1, 2013 (the “Effective Date”) by and among the Members (as defined below), with reference to the following facts:..
M&D signs the Operating Agreement at page 33 as BOH1’s Member and Manager. No other parties to this action have signed the Operating Agreement. The court finds ETB’s arguments that BOH1 is a party because the Operating Agreement includes such phrases as “the Company shall..” are unavailing. These phrases cannot be reasonable interpreted to mean that BOH1 is a party given that BOH1 is not named as party elsewhere in the Operating Agreement and did not sign the Operating Agreement.
Based on the foregoing, the court finds that an enforceable arbitration agreement does not exist and equitable estoppel does not apply.
JSM states: ““Generally speaking, one must be a party to an arbitration agreement to be bound by it or invoke it.” [citation] One pertinent exception is based on the doctrine of equitable estoppel.[citation]; see generally, Knight, et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2009) ¶¶ 5:266.10–5:266.25, pp. 5–189 to 5–192.) Under that doctrine, as applied in “both federal and California decisional authority, a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are ‘intimately founded in and intertwined’ with the underlying contract obligations.” [citation] “By relying on contract terms in a claim against a nonsignatory defendant, even if not exclusively, a plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement.” [citation] (JSM, supra, 193 Cal.App.4th at 1236.)
Pursuant to JSM, equitable estoppel applies with a non-signatory defendant moves to compel arbitration against a signatory plaintiff because the signatory plaintiff’s claims against the nonsignatory defendant are inextricably intertwined with an underlying contract which contains an arbitration agreement.
Here, having found that BOH1 is not a party to the Operating Agreement, ETB may not invoke the principle of equitable estoppel to compel arbitration.
Therefore, ETB’s motion is denied.
Plaintiff BOH1 is to give notice.
2. Case Management Conference
Future hearing dates
10/13/22 – Demurrer/Mtn. to Strike