Judge William A. Crowfoot, Case Number: 23AHCV01338, Date: 2023-11-15 Tentative Ruling

Judge: William A. Crowfoot, Case: 23AHCV01338, Date: 2023-11-15 Tentative Ruling

On June 12, 2023, this action was filed by Incentax, LLC (“Plaintiff”) against Martini Akpovi Partners, LLP (“Martini LLP”), Christopher Passmore (“Passmore”), Steve Martini (“Martini”), and Withum Smith + Brown, PC (“Withum”). Plaintiff asserts causes of action for: (1) breach of fiduciary duty, (2) aiding and abetting breach of fiduciary duty, (3) breach of contract, (4) breach of implied covenant of good faith and fair dealing (5) intentional interference with contractual relations (6) unjust enrichment, (7) gross negligence, (8) intentional interference with prospective economic relationships. (9) negligent interference with prospective economic relationships.

Plaintiff alleges that it formed a joint venture with Martini LLP, Passmore, and Steve Martini to provide tax incentive services through a limited liability company, MAP Tax Credits, LLC (“MTC”). Plaintiff alleges that Passmore, Martini, and Martini LLP used the success of MTC to sell Martini LLP to Withum, which sale effectively shut down the joint venture.

On August 14, 2023, Martini LLP, Passmore, and Martini (collectively, “Defendants”) filed this motion to compel arbitration and stay action.

On November 15, 2023, after oral argument, the Court continued the hearing on this motion so that the parties could file supplemental briefs. Defendants filed a supplemental brief on December 6, 2023; Plaintiff filed one on January 10, 2024.

On January 29, 2024, the Court continued the hearing once more so the parties could file supplemental briefs summarizing the oral arguments made at the hearing. Supplemental briefs were filed by both parties on February 5, 2024.

In deciding a motion to compel arbitration, trial courts must decide first whether an enforceable arbitration agreement exists between the parties, and then determine the second gateway issue whether the claims are covered within the scope of the agreement. (Omar v. Ralphs Grocery Co. (2004) 118 Cal.App.4th 955, 961.) The party seeking arbitration has the “burden of proving the existence of a valid arbitration agreement by a preponderance of the evidence, while a party opposing the petition bears the burden of proving by a preponderance of the evidence any fact necessary to its defense.” (Ruiz v. Moss Bros. Auto Group, Inc. (2014) 232 Cal.App.4th 836, 842.) The trial court “sits as the trier of fact, weighing all the affidavits, declarations, and other documentary evidence, and any oral testimony the court may receive at its discretion, to reach a final determination.” (Id.) General principles of contract law govern whether parties have entered a binding agreement to arbitrate. (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236; see also Winter v. Window Fashions Professions, Inc. (2008) 166 Cal.App.4th 943, 947.)¿

“The party seeking to compel arbitration bears the burden of proving the existence of a valid arbitration agreement.” (Flores v. Evergreen at San Diego, LLC (2007) 148 Cal.App.4th 581, 586.)

14.10 Arbitration. Except as otherwise provided in this Agreement, any controversy between the Members or Managers arising out of this Agreement shall be submitted before a retired judge or appellate justice affiliated with JAMS for arbitration in Los Angeles, California. The costs of the arbitration, including any JAMS administration fee, the arbitrator's fee, and costs for the use of facilities during the hearings, shall be borne equally by the parties to the arbitration. Attorneys' fees may be awarded to the prevailing or most prevailing party at the discretion of the arbitrator. The provisions of Sections 1282.6, 1283, and 1283.05 of the California Code of Civil Procedure apply to the arbitration. The arbitrator shall not have any power to alter, amend, modify or change any of the terms of this Agreement nor to grant any remedy which is either prohibited by the terms of this Agreement, or not available in a court of law."

Defendants argue that the arbitrator must decide whether Plaintiff’s claims are arbitrable because there is a delegation clause. While courts often decide issues of “arbitrability,” the “'parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.” (Aanderud v. Superior Court (2017) 13 Cal.App.5th 880, 891, quoting Rent–A–Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 68-69.) To establish this exception, it must be shown by “clear and unmistakable” evidence that the parties intended to delegate the issue to the arbitrator. (Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 68, 70, fn.1; Howsam v. Dean Witter Reynolds (2002) 537 U.S. 79, 84; see also Peleg v. Neiman-Marcus Group, Inc. (2012) 204 Cal. App. 4th 1425, 1439-1445.)

Here, the arbitration provision states any controversy between members or managers arising out of the Operating Agreement will be submitted “before a retired judge or appelate [sic] justice affiliated with JAMS for arbitration in Los Angeles, California.” In turn, Rule 11(b) of JAMS Comprehensive Arbitration Rules and Procedures (“Rules”) states that “Jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter.”

In opposition, Plaintiff argues that there is no “clear and unmistakable” delegation of arbitrability to the arbitrator. Plaintiff claims that the arbitration agreement only states that the arbitrator would be affiliated with JAMS and that JAMS would be the arbitral provider, not that the arbitration would be conducted in accordance with JAMS’ Rules. (Opp., p. 11.) In its supplemental opposition, Plaintiff emphasizes that the Operating Agreement does not state that the arbitration will be conducted in accordance with, pursuant to, or under JAMS Rules. (Plfts. Supp. Brief, pp. 8-9.) Plaintiff argues that the specific reference to the JAMS-affiliated arbitrator and the JAMS administration fee show that if the parties intended for JAMS’ rules to apply, that it would also be explicitly referred to. (Id.)

This ambiguity in determining whether JAMS’ Rules were intended to apply, let alone JAMS’ Rule 11(b), leads the Court to conclude that there is no “clear and unmistakable” evidence that the parties agreed to delegate the issue of arbitrability.

The next question is determining which of Plaintiff’s claims fall within the scope of the arbitration provision. As recited above, the Operating Agreement provides that “any controversy between the Members or Managers arising out of this Agreement” shall be submitted to arbitration.

In its supplemental brief and second supplemental brief, Defendants argue that Plaintiff’s derivative claims on behalf of MTC must be arbitrated. Defendants cite to California Corporations Code section 17701.10, which provides that a limited liability company’s operating agreement “governs . . . [r]elations among the members as members and between the members and the limited liability company.” (Defs. Supp. Brief, p. 3.) Defendants also compare the California Revised Uniform Limited Liability Company Act (the “Act”) with similar statutes in Washington and Delaware. Defendants rely on cases from Washington and Delaware courts interpreting their respective statutory schemes and contend that here, Plaintiff, not MTC, is the real party in interest in a derivative action. The Court has reviewed these cited cases and finds them unpersuasive considering California law and the language of the Operating Agreement.

In its supplemental opposition brief, Plaintiff asserts that the derivative claims belong to MTC, which is a separate legal entity defined as “Company” in the Operating Agreement and not included in the definitions of “Member” or “Manager.” (Pltf. Supp. Brief, p. 4-5.) Section 14.11 of the Operating Agreement addresses the issue of attorney fees “[i]n the event that any dispute between the Company and the Member or among the Managers or Members should result in litigation or arbitration.” This distinction between a “dispute between the Company and the Member” and a dispute “among the Managers or Members” belies Defendants’ claim that the Operating Agreement contemplated arbitration all claims including derivative ones. Plaintiff also argues that the out-of-state cases cited by Defendants should be disregarded because they conclude, in contrast to California law, that a member bringing a derivative claim is the real party in interest. (Plft. Supp. Brief, p. 7.)

Accordingly, the Court DENIES Defendants’ motion to compel arbitration of Plaintiff’s derivative claims brought on behalf of MTC.

Next, Defendants have not shown that an arbitration agreement exists between Plaintiff and Withum, or Plaintiff and Martini, because neither Withum nor Martini are parties to the Operating Agreement. Although Withum has expressed a willingness to arbitrate, Plaintiff is not required to arbitrate its claims against Withum and cannot be compelled to do so. Therefore, the motion to compel arbitration of Plaintiff’s claims against Withum and Martini, is also DENIED.

Lastly, with respect to its claims against Passmore and Martini LLP, Plaintiff argues that it should be allowed to conduct limited discovery regarding Passmore and Martini LLP’s assignment of their ownership rights to Withum to determine whether Passmore and Martini LLP retain the right to enforce the arbitration agreement.

Plaintiff seeks limited discovery of “the transaction documentation between Withum and Moving Defendants to establish whether an assignment actually occurred or whether under Section 10.5, an assignment was deemed to have occurred.” Section 10.5 states, in relevant part:

For purposes of this Article 10, any transfer or assignment of any direct or indirect ownership or other interests in a Member that (taking into account any prior such transfers or assignments) results in such Member being controlled by a Person or Persons other than the Person or Persons that control such Member on the date hereof, shall be deemed an assignment of the Ownership Interest in the Company of such Member and therefore subject to all of the restrictions and provisions of this Article 10.

Plaintiff contends that when Martini LLP assigned its interests to Withum, Martini LLP ceased to be a Member of MTC LLC and does not have the right to compel arbitration. In addition, Plaintiff claims that Passmore would no longer have the right to compel arbitration if he ceased to be a Manager of MTC LLC, since under section 8.1(a) of the Operating Agreement, Passmore would only serve as a Manager “at the pleasure of the designating Member [Martini LLP].”

Plaintiff argues that the Operating Agreement expressly contemplates a circumstance where a membership interest is assigned by a member (and thus divesting that person or entity of its membership interest) but the assignee has not acquired the full legal rights as a member. Under Section 10.6, the would-be assignee only receives and is entitled to receive the economic interests of the assignor until the conditions of Section 10.2 are satisfied, i.e., both Managers provide written consent. Therefore, according to Plaintiff, Withum, despite having been assigned Martini LLP’s ownership interest in MTC LLC, cannot be considered a Member of MTC LLC entitled to Martini LLP’s full rights under the Operating Agreement, including the right to compel arbitration, whereas Martini LLP is no longer a Member and has lost the right to compel arbitration.

Plaintiff’s argument makes sense when explaining why Withum is not yet a Member with the right to compel arbitration, but it does not lead to the conclusion that Martini LLP has been “divested” of its rights and is no longer a Member. Section 9.3 of the Operating Agreement states: “Except as expressly provided in this Agreement, no Member shall have the right or power to voluntarily withdraw from the Company.” Section 10.1 states that “[a] Member may not sell, assign, transfer, mortgage or otherwise, encumber or suffer or permit any third party to sell, assign, transfer, mortgage or otherwise, encumber, whether voluntarily or by operation of law, all or any part of its Ownership Interest in the Company without the prior written consent of the Managers, which consent may be granted or withheld in the Managers' sole and absolute discretion.” Sections 12.1 and 12.2 discuss the circumstances which would cause MTC LLC to dissolve, including “30 days’ written notice by a Member that it desires to cease participation in the company” and [t]he occurrence of any other event that terminates the Manager’s continued membership as Manager in the Company.”

These three contractual provisions suggest that a Member may not assign its interests – other than the rights to “Profits, Losses, Cash Available for Distribution and other distributions to the Member pursuant to this Agreement” identified in section 10.6 – without prior written consent of the Managers. (Section 10.1) Accordingly, Martini LLP would retain the remainder of its interests and rights – including the right to compel arbitration – until both Members consented to an assignment. There does not seem to be any dispute that Plaintiff did not consent to an assignment to Withum.

Accordingly, the motion to compel arbitration of Plaintiff’s claims against Martini LLP and Passmore is GRANTED.

The remainder of the action is stayed pursuant to section 1281.2(d). Plaintiff’s individual claims and derivative claims are identical and there is a possibility of conflicting rulings on common issues of law and fact if the case were to proceed in two forums.

The motion to compel arbitration is GRANTED in part with respect to Plaintiff’s individual claims against Martini LLP and Passmore. The motion is DENIED in part as to Plaintiff’s derivative claims on behalf of MTC and Plaintiff’s claims against Withum and Martini. The action is STAYED pending completion of arbitration.

The Court sets a status conference for August 13, 2024, at 8:30 a.m. in Department 3 of the Alhambra Courthouse. The parties are to submit a joint report no later than 5 days before the date of the hearing.

William A. Crowfoot

Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the Court at ALHDEPT3@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org. Please be advised that if you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the matter. Unless you receive a submission from all other parties in the matter, you should assume that others might appear at the hearing to argue. If the Court does not receive emails from the parties indicating submission on this tentative ruling and there are no appearances at the hearing, the Court may, at its discretion, adopt the tentative as the final order or place the motion off calendar.