Judge: Loren G. Freestone, Case: 37-2024-00003383-CU-PA-CTL, Date: 2024-06-28 Tentative Ruling

SUPERIOR COURT OF CALIFORNIA,

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HALL OF JUSTICE

TENTATIVE RULINGS - June 27, 2024

06/28/2024  10:30:00 AM  C-64 COUNTY OF SAN DIEGO

JUDICIAL OFFICER:Loren G. Freestone

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Civil - Unlimited  Petition re: Arbitration Award Hearing on Petition 37-2024-00003383-CU-PA-CTL VDB&A HOLDINGS INC VS CONNOR GROUP GLOBAL SERVICES LLC [IMAGED] CAUSAL DOCUMENT/DATE FILED:

TENTATIVE RULING Petitioners/Claimants VDB&A Holdings Inc. and Esther van den Boom's petition to correct the arbitration award is DENIED.

Respondents Connor Group Global Services LLC, Connor Group Holdings I Inc., and Jeffrey Pickett's counterpetition to vacate or correct is GRANTED IN PART and DENIED IN PART.

After six days of testimony and thousands of pages of exhibits, the arbitrator issued an Interim Award.

The arbitrator found in favor of Claimants on their claim for rescission based on mistakes and failures of consideration relative to competition in the life science industry and the identity of the entity that would be acquiring a 50% stake of van den Boom's company. The arbitrator ordered the Operating Agreement and Purchase Agreement rescinded and set forth various conditions to effectuate the rescission, including that full ownership be restored to van den Boom, van den Boom return the $6.5 million she netted on the investment after taxes, pay interest on that amount, return the $3.5 million she paid in taxes on the investment in the event she received that amount back from tax agencies, and return approximately $760,000 in working capital plus interest. The arbitrator also later corrected the Interim Award to also require van den Boom to pay almost an additional $1.2 million to account for the tax burden that fell upon Respondents throughout the parties' relationship. The arbitrator denied Claimants' request for restitutionary damages as speculative and their claim for punitive damages as not supported by clear and convincing evidence. The arbitrator also denied Respondents' counterclaims both as moot in light of the rescission and on the merits. The arbitrator deemed Claimants the prevailing party, and in the Final Award, awarded them approximately $1.575 million in attorney fees.

Claimants seek to correct the award on the ground the arbitrator exceeded his powers when he required them to pay the additional $1.2 million following the issuance of the Interim Award. Respondents seek to vacate or correct the award based on the arbitrator (1) exercising jurisdiction over a nonarbitrable dispute, including equitable claims that were carved out of the arbitration provision, (2) awarding rescission when that remedy is precluded by severability provisions, (3) creating equitable claims sua sponte, (4) considering tax issues in contravention of stipulations and arbitral rules, and (5) conducting an unfair proceeding that prejudiced their rights.

As set forth below, Respondents' first argument is dispositive. As such, it is unnecessary to address the parties' other arguments.

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3127483  28 CASE NUMBER: CASE TITLE:  VDB&A HOLDINGS INC VS CONNOR GROUP GLOBAL SERVICES LLC  37-2024-00003383-CU-PA-CTL Courts generally defer to an arbitrator's choice of remedy. (See Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 372–375.) However, an arbitrator's exercise of discretion in ordering relief is not 'unrestricted or unreviewable. Such an extreme position enjoys no support in our states or cases.

The powers of an arbitrator derive from, and are limited by, the agreement to arbitrate. Awards in excess of those powers may, under [Code of Civil Procedure] sections 1286.2 and 1286.6, be corrected or vacated by the court. Unless the parties have conferred upon the arbitrator the unusual power of determining his own jurisdiction, the courts retain the ultimate authority to overturn awards as beyond the arbitrator's powers, whether for an unauthorized remedy or decision on an unsubmitted issue.' (Id.

at p. 375.) Simply, 'arbitrators may not award remedies expressly forbidden by the arbitration agreement.' (Id. at pp. 381–382; see, e.g., J.C. Gury Co. v. Nippon Carbide Indus. (USA) Inc. (2007) 152 Cal.App.4th 1300, 1305.) In J.C. Gury, for example, the arbitration provision in the parties' contract broadly applied to 'any controversy or claim arising out of or relating to the Contract.' (J.C. Gury, supra, 152 Cal.App.4th at p. 1305.) However, the arbitration provision also included the following clause expressly limiting the arbitrator's power: '(a) Scope of Power: In any arbitration proceeding arising under this Contract, the arbitrators shall not have the power to change, modify or alter any expressed condition, term or provision of this Contract or to grant an award which has such effect, and to that extent the scope of their authority is so limited.' (Ibid.) The arbitrator awarded consequential damages by declaring that a disclaimer and damage exclusion in the contract was unconscionable and therefore unenforceable. (Id. at p. 1303–1304.) The court stated that the arbitrator exceeded his power under the arbitration agreement because 'an award founded on the conclusion a contractual provision is unenforceable 'has the effect' of 'changing, modifying or altering' that provision of the contract.' (Id. at p. 1305; see also O'Flaherty v. Belgum (2004) 115 Cal.App.4th 1044, 1057–1061 [trial court erred in failing to vacate arbitration award that ordered defaulting partners in partnership dispute to forfeit their capital accounts when agreement prohibited such relief]; Bonshire v. Thompson (1997) 52 Cal.App.4th 803, 809–812 [arbitrator exceeded authority in reforming contract to include omitted term because the agreement limited his authority to consider extrinsic evidence of parties' intent to show that term had been omitted].) Here, the arbitration provision in the Operating Agreement states, in pertinent part: 'Except for ancillary measures in aid of arbitration and for proceedings to obtain provisional or equitable remedies and interim relief, including injunctive relief, any controversy, dispute or claim arising out of or in connection with or relating to this Agreement, or the breach, termination or validity thereof or any transaction contemplated hereby (any such controversy, dispute or claim being referred to as a 'Dispute') shall be finally settled by arbitration conducted expeditiously in accordance with the Commercial Arbitration Rules then in force (the 'AAA Rules') of the American Arbitration Association or any successor entity (the 'AAA').' AAA Rule R-49 states: 'The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including but not limited to, specific performance of contract.' (Emphasis added.) The key issue is whether the phrase in the arbitration agreement '[e]xcept for . . . equitable remedies' expressly prohibits the arbitrator from ordering rescission. It does. (See generally Eminence Healthcare, Inc. v. Centuri Health Ventures LLC (2022) 74 Cal.App.5th 869.) In Eminence, the parties' asset purchase agreement contained an arbitration provision that stated, in pertinent part: 'Except for claims seeking injunctive or other equitable relief, the Parties shall resolve . . . any dispute, controversy or claim arising out of or relating to this Agreement . . . by arbitration administered by the Calendar No.: Event ID:  TENTATIVE RULINGS

3127483  28 CASE NUMBER: CASE TITLE:  VDB&A HOLDINGS INC VS CONNOR GROUP GLOBAL SERVICES LLC  37-2024-00003383-CU-PA-CTL American Health Lawyers Association.' (Id. at p. 876.) The court explained that the 'use of 'except for' unambiguously creates an exception to or limitation of the broad arbitration provision.' (Id. at p. 880.) The court also explained that the phrase 'claims seeking injunctive or other equitable relief' was also 'not ambiguous' and expressed 'the parties' intent as to the type of 'claims'-that is, causes of action or theories of relief-that fall outside the scope of the agreement to arbitrate the dispute.' (Ibid.) The court noted that the exception did 'not contain any qualifying language. For instance, the exception is not limited to claims seeking injunction or other equitable relief that have no overlapping issues with claims subject to arbitration.' (Ibid.) The court therefore held that 'based on the plain meaning of the agreement's language, any claim seeking equitable relief is excluded from the agreement to arbitrate.' The court then applied the exception to the plaintiffs' claims seeking rescission based on fraud, negligent misrepresentation, and mutual mistake as follows: 'Under California law, rescission is an equitable remedy, with certain qualifications that limit its application. The qualifications that limit the availability of rescission do not change the fact that rescission, when available, is an equitable remedy. The purpose of rescission is to restore both parties to their former position as far as possible and to bring about substantial justice by adjusting the equities between the parties even though the status quo cannot be exactly reproduced. Based on established principles of California law, we conclude Sellers' 12th, 13th, and 14th causes of action are 'claims seeking equitable relief' and, therefore, fall within the exception and are not subject to arbitration.

(Id. at p. 881.) Eminence compels the conclusion that the arbitrator exceeded his authority. The arbitration provision in the parties' Operating Agreement expressly carved out 'equitable remedies,' which is precisely the type of remedy the arbitrator awarded.

Claimants note that the issue of rescission was submitted to the arbitrator, and that some of Respondents' counterclaims were themselves equitable (e.g., 'reformation' and 'equitable relief-sale/purchase of vdB&A Holding's remaining 50%'). The further inquiry is therefore whether Respondents waived their right to raise this argument in their counterpetition. (See J.C. Gury, supra, 152 Cal.App.4th at p. 1304–1306.) Circling back to J.C. Gury, although the court determined that the arbitrator exceeded his authority in awarding compensatory damages by declaring the disclaimer and damage exclusion were unenforceable, the court also held that 'the conduct of the parties at the arbitration proceeding operated to waive that limitation.' (J.C. Gury, supra, 152 Cal.App.4th at p. 1304.) The court explained that 'the parties may submit for decision issues they were not contractually compelled to submit to arbitration. In such an event, courts look both to the contract and to the scope of submissions to determine the arbitrator's authority.' (Id. at p. 1305.) The court noted that before the arbitration, the parties had briefed the merits of the unconscionability issue, but 'in no portion of its brief did [defendant] contend that the issue of unconscionability exceeded the arbitrator's authority.' The court also noted that during the subsequent arbitration hearing, the parties presented evidence on the disclaimer and damage exclusion, but 'at no time during the hearing' did defendant object to the arbitrator considering the issue.

The court then held as follows: 'Nippon Carbide [defendant] at no time 'reminded the arbitrator' of the contractual limitation on the scope of his authority in the arbitration clause of the contract. Nippon Carbide does not, because it cannot, cite to any evidence, pleading or argument in the record showing it ever suggested to the arbitrator that he had no authority to find the warranty clause unconscionable or to refuse to enforce it. In short, the record supports only one conclusion: that both parties unequivocally submitted the issue of unconscionability to arbitration. Having done so, Nippon Carbide may not now complain that the arbitrator exceeded his authority.' Calendar No.: Event ID:  TENTATIVE RULINGS

3127483  28 CASE NUMBER: CASE TITLE:  VDB&A HOLDINGS INC VS CONNOR GROUP GLOBAL SERVICES LLC  37-2024-00003383-CU-PA-CTL (Id. at p. 1306.) Unlike J.C. Gury, Respondents did object-repeatedly. In their initial answering statement, Respondents 'den[ied] the claims asserted are subject to arbitration' and moved to terminate the arbitration proceedings on the ground they did 'not consent to or agree to arbitration of these claims.' In their reply brief in support of the motion to terminate arbitration proceedings, Respondents argued: 'Claimants wrongfully initiated this arbitration proceeding asking for the MIPA to be rescinded as void. Clearly this requested relief is not something that is subject to arbitration and this arbitration must be terminated for lack of subject matter jurisdiction. An arbitrator exceeds his or her powers when granting a remedy expressly forbidden by the parties' arbitration agreement.' Despite acknowledging 'the provisions in the Op Agreement arbitration clause, which expressly left open the right of the parties to utilize the court system for certain limited purposes, i.e., 'for ancillary measures in aid of arbitration and for proceedings to obtain provisional or equitable remedies and interim relief, including injunctive relief,' the arbitrator denied the motion outright. Respondents did not assert any counterclaims until after their motion to terminate the arbitration proceeding was denied. Later, in their opposition to Claimants' motion for orders compelling distribution of profits, Respondents thoroughly briefed the same argument they raise in their counterpetition, to wit, that the 'Arbitrator's purview is defined by the parties' contract, and the parties' contract specifically excepted equitable remedies from arbitration.' The arbitrator denied the motion for orders compelling distribution of profits without prejudice. In doing so the arbitrator noted, but did not substantively address, the following issue that was 'raised in opposition: Jurisdiction, based on the claim that the arbitrator lacks authority under the contract to award equitable relief (while noting that equitable relief is also requested by Respondents in their counterclaim.' It was not until oral closing arguments that Claimants formally elected rescission in lieu of their claim for contract damages. When the arbitrator ordered rescission in the Interim Award, Respondents again promptly raised the issue of the arbitrator's authority to grant such relief in light of the carve-out for 'equitable remedies.' In light of Respondents' repeated objections in the arbitration proceedings as to the arbitrator's authority to consider equitable remedies including rescission, their arguments on the merits of that claim and their assertion of their own equitable claims in arbitration did not waive their right to reassert their objection in court. (See Glaser, Weil, Fink, Jacobs & Shapiro, LLP v. Goff (2011) 194 Cal.App.4th 423, 445 [party need only raise objection to arbitrator once to preserve the issue]; see also Boyle v. CertainTeed Corp.

(2006) 137 Cal.App.4th 645, 650 ['No waiver may be implied where, as here, a party alleging error has made its objection and then acted defensively to lessen the impact of the error'].) Having concluded the arbitrator exceeded his authority in ordering rescission, the court must determine whether to correct the award or vacate the award. The court can only correct the award if it 'may be corrected without affecting the merits of the decision upon the controversy submitted.' (Code Civ. Proc., § 1286.6, subd. (b).) If a modification would 'potentially affect[] other aspects of the award,' the award must instead be vacated. (O'Flaherty, supra, 115 Cal.App.4th at p. 1064; see Code Civ. Proc., § 1286.2, subd. (a)(4).) Here, the arbitrator largely denied Respondents' counterclaims on the ground they were moot in light of the rescission. However, the arbitrator also went on to conclude that he 'would not have awarded the remedies sought by Respondents with their counterclaims, even if such counterclaims otherwise were not found to be moot.' Correcting the rescission order therefore would not appear to impact the merits of the decision on Respondents' counterclaims. However, the order granting rescission did bear on a different aspect of the award, namely the order awarding Claimants their attorney fees. The arbitrator explained: 'Respondents have sought enforcement of the contracts in this case, which this award denies, as set forth hereinabove. Claimants have elected to rescind the contracts, which has been confirmed by the Arbitrator. Therefore, Claimants properly should be regarded as the prevailing parties.' If Claimants had not been awarded rescission, it is not clear the arbitrator would have deemed them to be the prevailing parties. As such, the court cannot correct the award in this scenario.

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3127483  28 CASE NUMBER: CASE TITLE:  VDB&A HOLDINGS INC VS CONNOR GROUP GLOBAL SERVICES LLC  37-2024-00003383-CU-PA-CTL For the reasons set forth above, the counterpetition is granted in part and denied in part. The counterpetition is granted to the extent it seeks to vacate the award, and denied to the extent it seeks to correct the award. As the award is vacated, the petition to correct the award is denied as moot.

Claimants' request for attorney fees is therefore also denied.

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