Judge Mark A. Young, Case 23SMCV00594 2023-05-09 Tentative Ruling

Judge: Mark A. Young, Case: 23SMCV00594, Date: 2023-05-09 Tentative Ruling

Case Number: 23SMCV00594 Hearing Date: May 9, 2023 Dept: M

CASE NAME: Hermosa Capital Management v. Marina Caregivers Cooperative Inc.

CASE NO.: 23SMCV00594

MOTION: Petition/Motion to Compel Arbitration

HEARING DATE: 5/9/2023

Legal Standard

Under California and federal law, public policy favors arbitration as an efficient and less expensive means of resolving private disputes. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 8-9; AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 339.) Accordingly, whether an agreement is governed by the California Arbitration Act (“CAA”) or the Federal Arbitration Act (“FAA”), courts resolve doubts about an arbitration agreement’s scope in favor of arbitration. (Moncharsh, supra, 3 Cal.4th at 9; Comedy Club, Inc. v. Improv West Assocs. (9th Cir. 2009) 553 F.3d 1277, 1284; see also Engalla v. Permanente Med. Grp., Inc. (1997) 15 Cal.4th 951, 971-972 [“California law incorporates many of the basic policy objectives contained in the Federal Arbitration Act, including a presumption in favor of arbitrability [citation] and a requirement that an arbitration agreement must be enforced on the basis of state law standards that apply to contracts in general”].) “[U]nder both the FAA and California law, ‘arbitration agreements are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’ ” (Higgins v. Superior Crout (2006) 140 Cal.App.4th 1238, 1247.)

“Code of Civil Procedure section 1281.2 requires a trial court to grant a petition to compel arbitration if the court determines that an agreement to arbitrate the controversy exists.” (Avery v. Integrated Healthcare Holdings, Inc. (2013) 218 Cal.App.4th 50, 59, quotations omitted.) Accordingly, “when presented with a petition to compel arbitration, the court’s first task is to determine whether the parties have in fact agreed to arbitrate the dispute.” (Ibid.) A petition to compel arbitration is in essence a suit in equity to compel specific performance of a contract. (Id. at 71.) As with any other specific performance claim, “a party seeking to enforce an arbitration agreement must show the agreement’s terms are sufficiently definite to enable the court to know what it is to enforce.” (Ibid. [internal citations omitted].) “Only the valid and binding agreement of the parties, including all material terms well-defined and clearly expressed, may be ordered specifically performed.” (Ibid.) An arbitration agreement “must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.” (Civ. Code, § 1636.) The language of the contract governs its interpretation if it is clear and explicit. (Civ. Code, § 1368.) If uncertainty exists, “the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.” (Civ. Code, § 1654.)

The party seeking to compel arbitration bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972.) It would then be plaintiff’s burden, in opposing the motion, to prove by a preponderance of the evidence any fact necessary to her opposition. (See Ibid.) “In these summary proceedings, the trial court sits as a trier of fact, weighing all the affidavits, declarations, and other documentary evidence, as well as oral testimony received at the court’s discretion, to reach a final determination.” (Ibid.)

Analysis

Plaintiff Hermosa Capital Management (“HCM”) moves to compel arbitration of its claims against Defendant Marina Caregivers Cooperative, Inc. (“MCC”).

As with any contract, mutual assent or consent is necessary for the formation of a valid arbitration agreement. (Civ. Code, §§ 1550, 1565.) “Consent is not mutual, unless the parties all agree upon the same thing in the same sense.” (Civ. Code, § 1580.) The moving party bears the initial burden of showing the existence of an agreement to arbitrate by a preponderance of the evidence. (Mitri v. Arnel Mgmt. Co. (2007) 157 Cal.App.4th 1164, 1169 [“Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence.”].)

On May 27, 2018, Plaintiff, acting through its president Chip Hackley, and Defendant, acting through its president Larry Epstein, entered into a Non-Exclusive Fee Agreement (“Agreement”). (Hackley Decl., Ex. 1.) Epstein added to the Agreement the phrase “Both parties agree to Arbitration.” (Id.) In the Agreement, Plaintiff agreed to act as a “finder” to provide any services, including assisting in identifying and screening prospective Investors, coordinating contact with prospective Investors, and introducing Defendant to financial institutions, broker-dealers and high net worth individuals for the purpose of closing a transaction. Defendant was to pay Plaintiff a transactional fee of $735,000. Plaintiff identified a person/entity purchaser, and Defendant closed a transaction in February 2020. Epstein promised payment in full to Plaintiff. However, Defendant refused to pay Plaintiff and retained the proceeds for itself.

Defendant asserts that no agreement exists to arbitrate the claims because the Agreement was superseded by a different separate contract which does not include an arbitration provision. The Court concludes, however, that Defendant fails to show that this agreement supersedes the Agreement containing the arbitration provision. The Finders Agreement includes an integration clause stating: “This Agreement may be modified or amended only with the expressed and written consent of both Parties.” (Agreement § 7.) There is no “written” or “expressed” consent to modification of the Agreement. The cited broker agreement does not contain any such written consent. Moreover, Plaintiff and Hackley were not parties to the broker agreement and did not sign the broker agreement. Thus, there is no evidence on the record that the parties agreed to supersede the original Finders Agreement containing the arbitration provision. The LOI and Purchase Agreement reflect that Plaintiff agreed to take a discounted fee. To the extent that this can even be considered a modification, there is no indication that this statement would modify the Finders Agreement beyond the modification to the amount of the fee.

Defendant further asserts that the underlying Finders Agreement is invalid and void as against public policy because the underlying agreement(s) would compensate Plaintiff for its conduct as an unregistered securities broker. Defendant reasons that because the underlying agreement is void, then the arbitration agreement would likewise be unenforceable.

Defendant notes that the Securities Exchange Act requires securities brokers and dealers to register with the Securities and Exchange Commission if such individuals are engaged in specified activities. 15 U.S.C.A. § 78o. Section 3(a)(4)(A) of the Exchange Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” The SEC uses a two-prong test to determine whether a person is a “broker”; if the person is: (1) “engaged in the business” and (2) “effecting transactions.” Section 29(b) of the SEA provides that “every contract made in violation of this title, or any rule or regulation thereunder… shall be void.” Defendant asserts that the Finders Agreement would be void because Plaintiff acted as an unregistered broker when they sourced and vetted multiple deals, negotiated deal terms between the prospective parties, assessed the financial metrics of deals, negotiated with Marina Caregivers’ landlord, exchanged deal redlines, communicated with the parties’ deal counsel, and suggested deal terms. However, the illegality of the underlying contract would not negate the enforceability of the agreement to arbitrate disputes.

It has long been settled that when parties have agreed to arbitration, challenges to the validity of the underlying contract, including contract defenses such as fraud in the inducement or illegality, are for the arbitrator to decide. (Nielsen Contracting Inc., v. Applied Underwriters Inc. (2018) 22 Cal.App.5th 1096, 1107-1108, citing Buckeye Check Cashing, Inc, v. Cardegna (2006) 546 U.S. 440, 443-445.) This is because the arbitration clause is viewed as separate from the underlying contract. (Id. at 445-446.) Courts have thus held that “allegations that the main contract is unlawful or unconscionable does not affect the enforceability of the arbitration clause.” (Nielsen, supra, 22 Cal.App.5th at 1108.) Only challenges to the validity of the arbitration clause itself are resolved by the court in the first instance. (Id. [providing for an exception where a valid delegation clause exists].) Here, Defendant does not attack the legality or enforceability of the arbitration clause itself. Viewing this clause as a separate agreement, the Court must enforce the agreement to arbitrate this dispute despite any challenges to the enforceability of the underlying contract.

Lastly, Defendant asserts that the parties did not mediate before filing this lawsuit, as required by the Finders Agreement. Defendant cites no authority that failure to mediate would prevent arbitration. In any event, mediation regarding the fee dispute occurred. (Jasper Decl., ¶¶ 2-4.) Counsel for the parties met and conferred regarding the scope of mediation on August 30, 2022. (Id.) Epstein admits that in September 2022, Plaintiff invited Epstein to mediation and Epstein agreed to attend the mediation regarding the fee dispute in his individual capacity. (Epstein Decl., ¶¶ 31-38.) Further, Defendant’s counsel also attended the deposition. However, Defendant apparently refused to mediate.

Plaintiff meets its burden to demonstrate the existence of an arbitration agreement between the parties that covers Plaintiff’s claims. Defendant, in turn, fails to demonstrate any defense to the agreement to arbitrate. Plaintiff’s motion is therefore GRANTED and the Court orders Plaintiff’s claims to arbitration, as discussed above. The entire action is STAYED pending the completion of the arbitration. (CCP § 1281.4.) The Court will set a Status Conference re Arbitration in approximately nine months to a year.