Opinion
G061926
11-07-2023
BEACH ORANGETHORPE HOTEL, LLC, Plaintiff and Respondent, v. EVERTRUST BANK, Defendant and Appellant; M &D REGIONAL CENTER, LLC, et al., Defendants and Respondents.
Frandzel Robins Bloom &Csato, Thomas M. Robins III, Michael Gerard Fletcher and Bruce D. Poltrock for Defendant and Appellant. HGT Law, Hung G. Ta and Alexander H. Hu for Plaintiff and Respondent. No appearance for Defendants and Respondents.
NOT TO BE PUBLISHED
Appeal from an order of the Superior Court of Orange County No. 30-2022-01252985, James L. Crandall, Judge. Affirmed.
Frandzel Robins Bloom &Csato, Thomas M. Robins III, Michael Gerard Fletcher and Bruce D. Poltrock for Defendant and Appellant.
HGT Law, Hung G. Ta and Alexander H. Hu for Plaintiff and Respondent.
No appearance for Defendants and Respondents.
OPINION
MOTOIKE, J.
Arbitration is a favored method of dispute resolution. However, before a party's right to a jury trial is denied, there must be a clear agreement by that party to arbitrate the claim at issue. In this case, the operating agreement of a limited liability company contained an arbitration provision. The limited liability company sued its manager for breach of fiduciary duty and other parties for aiding and abetting that breach. One of those other parties (a nonsignatory to the operating agreement) moved to compel arbitration of the action based on the operating agreement's arbitration provision. The trial court denied the motion, and this appeal followed.
We affirm. Even if we were to conclude the limited liability company is bound by the arbitration provision, the causes of action for breach of fiduciary duty and aiding and abetting breach of fiduciary duty are not founded in or inextricably intertwined with the operating agreement.
FACTUAL BACKGROUND
The Source Hotel, LLC (TSH), proposed to construct a hotel in Buena Park, California. Non-parties Donald Chae and Min Chae (together, the Chaes) were the ultimate owners of TSH. The Chaes formed Beach Orangethorpe Hotel, LLC (Beach) to receive investments from foreign individuals and combine them to make loans to TSH. The Chaes also established and were the principals of M &D Regional Center, LLC (M &D Regional) and M+D Properties, a California corporation. M &D Regional was the manager of Beach and its initial Class A member; M+D Properties was the manager of M &D Regional. An operating agreement for Beach was executed by M &D Regional as a member of Beach and as its manager (through M+D Properties) as of August 1, 2013 (the Operating Agreement).
In June 2014, Beach made a $10 million secured loan to TSH. Beach alleges that in the private placement memorandum, for the purpose of attracting investors, the Chaes, M &D Regional, and M+D Properties represented the $10 million secured loan would be junior only to a $16 million secured construction loan.
However, the senior construction loan obtained from Evertrust Bank (Evertrust) in May 2016 was actually in the amount of $29.5 million. Evertrust later sold its interest in the construction loan to Shady Bird Lending, LLC (Shady Bird). Donald Chae and TSH both declared bankruptcy. With the approval of the bankruptcy court in TSH's bankruptcy proceeding, Shady Bird conducted a nonjudicial foreclosure sale of substantially all of TSH's assets. Beach received nothing from the foreclosure sale and its lien was extinguished. Beach was never repaid.
Beach sued M &D Regional, M+D Properties, and Evertrust for breach of fiduciary duty and/or aiding and abetting a breach of fiduciary duty, unjust enrichment, and breach of the unfair competition law. The complaint alleges M &D Regional breached its fiduciary duties as Beach's manager by agreeing to subordinate the Beach loan to the Evertrust loan, which was almost twice the size the investors had been promised it would be; failing to inform the investors about the amount of the Evertrust loan; failing to timely record a lien on TSH's property on behalf of Beach; failing to properly prepare the Beach loan documents; failing to protect Beach's interest as a secured creditor of TSH; facilitating self-dealing transactions by the Chaes and their entities; and failing to provide Beach investors with contact information for other Beach investors. The complaint alleges Evertrust knew of M &D Regional's fiduciary duties to Beach because the subordination agreement to which Evertrust was a party identified M &D Regional as the manager of Beach and because Evertrust had reviewed documents and conducted due diligence regarding the financing of Beach's loan to TSH. The complaint alleges Evertrust aided and abetted M &D Regional's breach of fiduciary duty by providing financing to TSH and by seeking the subordination of the Beach loan to the Evertrust loan "despite recognizing flagrant irregularities." The claims for unjust enrichment and unfair business competition rely on the alleged wrongful acts of breach and/or aiding and abetting a breach of fiduciary duties. The Operating Agreement is not relied on or even mentioned in the complaint.
Evertrust filed a motion to compel arbitration and stay the litigation based on an arbitration clause in the Operating Agreement. After briefing and a hearing, the trial court denied the motion. This appeal followed.
DISCUSSION
I.
GENERAL PRINCIPLES OF LAW AND STANDARD OF REVIEW
"'Both the California Arbitration Act (Code Civ. Proc., § 1280 et seq.) and the FAA [Federal Arbitration Act] (9 U.S.C. § 1 et seq.) recognize "'"arbitration as a speedy and relatively inexpensive means of dispute resolution"' and are intended '"to encourage persons who wish to avoid delays incident to a civil action to obtain an adjustment of their differences by a tribunal of their own choosing."' [Citation.]" [Citations.] The fundamental policy underlying both acts "is to ensure that arbitration agreements will be enforced in accordance with their terms." [Citations.] [¶] Arbitration is therefore a matter of contract.' [Citation.]
"General contract law principles include that '[t]he basic goal of contract interpretation is to give effect to the parties' mutual intent at the time of contracting. [Citations.] . . . "The words of a contract are to be understood in their ordinary and popular sense."' [Citation.] Furthermore, '"[t]he whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other." [Citation.]' [Citation.]
"'The "'"'" . . . policy favoring arbitration cannot displace the necessity for a voluntary agreement to arbitrate."' [Citation.] 'Although "[t]he law favors contracts for arbitration of disputes between parties" [citation], "'there is no policy compelling persons to accept arbitration of controversies which they have not agreed to arbitrate ....'" [Citations.]'" [Citation.] "Absent a clear agreement to submit disputes to arbitration, courts will not infer that the right to a jury trial has been waived."'"' [Citation.]
"'"There is no uniform standard of review for evaluating an order denying a motion to compel arbitration. [Citation.] If the court's order is based on a decision of fact, then we adopt a substantial evidence standard. [Citations.] Alternatively, if the court's denial rests solely on a decision of law, then a de novo standard of review is employed. [Citations.]" [Citation.] Interpreting a written document to determine whether it is an enforceable arbitration agreement is a question of law subject to de novo review when the parties do not offer conflicting extrinsic evidence regarding the document's meaning.' [Citation.]" (Franco v. Greystone Ridge Condominium (2019) 39 Cal.App.5th 221, 226-227.)
In this case, the parties offered no extrinsic evidence regarding the meaning of the Operating Agreement, and we therefore review the trial court's order denying the motion to compel arbitration under the de novo standard of review.
Evertrust requested judicial notice of the subordination agreement among TSH, Beach, the Chaes, and Evertrust, but the trial court denied that request. Evertrust does not challenge that evidentiary ruling on appeal.
II.
THE OPERATING AGREEMENT
Corporations Code section 17701.10 sets forth the functions, scope, and limitations of operating agreements for limited liability companies in California. As noted ante, the Operating Agreement was executed by M &D Regional and M+D Properties in August 2013. Between February 2014 and November 2015, the investors signed joinder agreements by which they agreed to be bound by the terms of the Operating Agreement. Evertrust is neither a party nor a signatory to the Operating Agreement.
The arbitration clause in the Operating Agreement reads, in relevant part, as follows: "Any controversy, dispute, or claim between the parties to this Agreement arising out of, in connection with, or in relation to the formation, negotiation, interpretation, performance or breach of this Agreement shall be submitted to JAMS . . . and shall be settled exclusively by arbitration, before a three-member arbitration panel, in accordance with this Section 10.9. This agreement to resolve any disputes by binding arbitration shall extend to claims against any parent, subsidiary or Affiliate of each party, and, when acting within such capacity, any officer, director, member, employee or agent of each party, or of any of the above, and shall apply as well to claims arising out of state and federal statutes and local ordinances as well as to claims arising under the common law. Arbitration shall be the exclusive remedy for determining any such dispute, whether in tort, contract or otherwise, regardless of its nature."
III.
A NONSIGNATORY TO AN ARBITRATION AGREEMENT MAY INVOKE IT UNDER CERTAIN CIRCUMSTANCES, INCLUDING ON THE BASIS OF EQUITABLE ESTOPPEL
"'"Generally speaking, one must be a party to an arbitration agreement to be bound by it or invoke it." [Citations.] "There are exceptions to the general rule that a nonsignatory to an agreement cannot be compelled to arbitrate and cannot invoke an agreement to arbitrate, without being a party to the arbitration agreement."' [Citation.] '"'As one authority has stated, there are six theories by which a nonsignatory may be bound to arbitrate: "(a) incorporation by reference; (b) assumption; (c) agency; (d) veilpiercing or alter ego; (e) estoppel; and (f) thirdparty beneficiary."'"'" (Pillar Project AG v. Payward Ventures, Inc. (2021) 64 Cal.App.5th 671, 675.)
Equitable estoppel "'"precludes a party from asserting rights 'he otherwise would have had against another' when his own conduct renders assertion of those rights contrary to equity."' [Citations.] [¶] So, if a plaintiff relies on the terms of an agreement to assert his or her claims against a nonsignatory defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement. In other words, a signatory to an agreement with an arbitration clause cannot '"have it both ways"'; the signatory 'cannot, on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration's applicability because the defendant is a non-signatory.'" (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 220, fn. omitted (Goldman).)
In the context of arbitration, equitable estoppel may apply "when the claims against the nonsignatory are founded in and inextricably bound up with the obligations imposed by the agreement containing the arbitration clause. In other words, allegations of substantially interdependent and concerted misconduct by signatories and nonsignatories, standing alone, are not enough: the allegations of interdependent misconduct must be founded in or intimately connected with the obligations of the underlying agreement." (Goldman, supra, 173 Cal.App.4th at p. 219, fn. omitted.)
Equitable estoppel may also apply "'when the signatory to a written agreement containing an arbitration clause "must rely on the terms of the written agreement in asserting [its] claims" against the nonsignatory.'" (Goldman, supra, 173 Cal.App.4th at p. 218.) Evertrust does not rely on this theory of equitable estoppel.
"'"[T]he equitable estoppel doctrine applies when a party has signed an agreement to arbitrate but attempts to avoid arbitration by suing nonsignatory defendants for claims that are '"based on the same facts and are inherently inseparable"' from arbitrable claims against signatory defendants."' [Citations.] Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable. [Citation.] [¶] Thus, a nonsignatory defendant may compel a signatory plaintiff to arbitrate under the doctrine of equitable estoppel. For the doctrine to apply, 'the claims plaintiff asserts against the nonsignatory must be dependent upon, or founded in and inextricably intertwined with, the underlying contractual obligations of the agreement containing the arbitration clause.' [Citation.] 'This requirement comports with, and indeed derives from, the very purposes of the doctrine: to prevent a party from using the terms or obligations of an agreement as the basis for his claims against a nonsignatory, while at the same time refusing to arbitrate with the nonsignatory under another clause of that same agreement.' [Citation.] Application of the doctrine in a proper case is not unfair to signatory plaintiffs resisting arbitration: Not only have such plaintiffs 'decided the theories on which to sue' the nonsignatory, they also have 'consented to arbitrate the claims against [the signatory defendant] anyway.' [Citation.] [¶] 'Courts applying equitable estoppel against a signatory have "looked to the relationships of persons, wrongs and issues, in particular whether the claims that the nonsignatory sought to arbitrate were '"'intimately founded in and intertwined with the underlying contract obligations.'"'"' [Citation.] Application of 'the estoppel doctrine in this context does not require a conscious or subjective intent to avoid arbitration, but turns upon the nexus between the contract and the causes of action asserted.' [Citation.] 'The focus is on the nature of the claims asserted by the plaintiff against the nonsignatory defendant.' [Citation.] 'Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable.'" (JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222, 1238-1239.)
"We are concerned with the doctrine of equitable estoppel. When a plaintiff brings a claim which relies on contract terms against a defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement. [Citations.] There is no reason why this doctrine should not be equally applicable to a nonsignatory plaintiff. When that plaintiff is suing on a contract-on the basis that, even though the plaintiff was not a party to the contract, the plaintiff is nonetheless entitled to recover for its breach, the plaintiff should be equitably estopped from repudiating the contract's arbitration clause. [Citations.] [¶] This is particularly true where, as appears to be the case here, all of the plaintiffs, signatory and nonsignatory, are related entities. A nonsignatory can be compelled to arbitrate when a preexisting relationship existed between the nonsignatory and one of the parties to the arbitration agreement, making it equitable to compel the nonsignatory to arbitrate as well." (JSM Tuscany, LLC v. Superior Court, supra, 193 Cal.App.4th at pp. 1239-1240, fn. omitted.)
"[U]nder federal law, a signatory to an arbitration clause may be compelled to arbitrate against a nonsignatory when the relevant causes of action rely on and presume the existence of the contract containing the arbitration provision." (Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1286-1287.)
In Goldman, the appellate court distinguished MS Dealer Service Corp. v. Franklin (11th Cir. 1999) 177 F.3d 942. A car buyer (Franklin) purchased a car from a dealer (Burke) pursuant to a written contract containing an arbitration clause. Franklin was charged for a service contract from MS Dealer, which was incorporated by reference in the purchase contract; MS Dealer was not a signatory to any contract with Franklin. Franklin claimed MS Dealer colluded with Burke, among others, to defraud her by charging an excessive amount for the service contract. The appellate court concluded MS Dealer's petition to compel arbitration should be granted, despite the fact it was not a signatory to the contract containing an arbitration provision. Franklin's claims against Burke and MS Dealer were "'based on the same facts and are inherently inseparable.'" (MS Dealer Service Corp. v. Franklin, supra, 177 F.3d at p. 948.) Because the claims against MS Dealer were "'intimately founded in and intertwined with the obligations imposed by'" the contract with Burke, nonsignatory MS Dealer could enforce the contract's arbitration provision. (Ibid.)
Based on this analysis, the Goldman court held "mere allegations of collusive behavior between signatories and nonsignatories to a contract are not enough to compel arbitration between parties who have not agreed to arbitrate ....[Citation.] It is the relationship of the claims, not merely the collusive behavior of the signatory and nonsignatory parties, that is key." (Goldman, supra, 173 Cal.App.4th at p. 223.)
IV.
EQUITABLE ESTOPPEL DOES NOT PERMIT NONSIGNATORY DEFENDANT EVERTRUST TO COMPEL ARBITRATION BY BEACH
In the present case, there is no claim for breach of contract. Nevertheless, Evertrust argues the "claims are intimately founded in, intertwined with, rely upon, presume the existence of, and cannot be fully adjudicated without reference to the Operating Agreement." Under this theory, however, every lawsuit to which Beach is a party would be subject to the Operating Agreement and its arbitration clause because, according to Evertrust, "by its terms [Beach] owes its existence to the Operating Agreement." Evertrust argues Beach cannot prosecute its breach of fiduciary duty claims against M &D Regional without referring to the provisions in the Operating Agreement that give M &D Regional the authority to act.
To the contrary, while the Operating Agreement gives M &D Regional the authority to act, Corporations Code section 17704.09 sets forth the fiduciary duties which it owed to Beach and Beach's members and which must govern M &D Regional's actions: "(a) The fiduciary duties that a member owes to a member-managed limited liability company and the other members of the limited liability company are the duties of loyalty and care under subdivisions (b) and (c). [¶] (b) A member's duty of loyalty to the limited liability company and the other members is limited to the following: [¶] (1) To account to the limited liability company and hold as trustee for it any property, profit, or benefit derived by the member in the conduct and winding up of the activities of a limited liability company or derived from a use by the member of a limited liability company property, including the appropriation of a limited liability company opportunity. [¶] (2) To refrain from dealing with the limited liability company in the conduct or winding up of the activities of the limited liability company as or on behalf of a person having an interest adverse to the limited liability company. [¶] (3) To refrain from competing with the limited liability company in the conduct or winding up of the activities of the limited liability company. [¶] (c) A member's duty of care to a limited liability company and the other members in the conduct and winding up of the activities of the limited liability company is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. [¶] (d) A member shall discharge the duties to a limited liability company and the other members under this title or under the operating agreement and exercise any rights consistent with the obligation of good faith and fair dealing. [¶] (e) A member does not violate a duty or obligation under this article or under the operating agreement merely because the member's conduct furthers the member's own interest. [¶] (f) In a manager-managed limited liability company, all of the following rules apply: [¶] (1) Subdivisions (a), (b), (c), and (e) apply to the manager or managers and not the members. [¶] (2) Subdivision (d) applies to the members and managers. [¶] (3) Except as otherwise provided, a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member." Therefore, a breach of fiduciary duty claim by an LLC against its manager is first and foremost a statutory and not a contractual claim.
Although the Operating Agreement discusses the fiduciary duties owed by the manager to the LLC and its members, it does so in reference to the statutory discussion of fiduciary duties and does not create any duties not already imposed by statute. The Operating Agreement incorporated the Corporations Code's definitions of the fiduciary duties owed to an LLC and/or its members by its managers. Section 5.5 of the Operating Agreement provides: "Notwithstanding any contrary provision of this Agreement or the Articles or any other agreement to which the Company or the Members are parties, each Manager shall have and owe to the Company and to the Members the fiduciary duties provided by [former] Section 17153 of the California Corporations Code (as amended or superseded), including without limitation the duty of loyalty, the duty of care and the duty of good faith and fair dealing, and such additional duties as expressly set forth in this Agreement. Without limiting the generality of the foregoing, each Manager and officer of the Company shall perform its or his duties as Manager or officer in good faith, consistent with the terms of this Agreement and with any duties generally imposed by applicable law, in a manner that the Manager or officer reasonably believes to be in the best interests of the Company, and with such care as an ordinarily prudent person in a like position would use under similar circumstances."
Former Corporations Code section 17153 provided: "The fiduciary duties a manager owes to the limited liability company and to its members are those of a partner to a partnership and to the partners of the partnership." Corporations Code section 16404 sets forth the fiduciary duties of partners; the language of that statute is virtually identical to that of current Corporations Code section 17704.09.
Evertrust argues "[w]ithout the Operating Agreement, no statutory fiduciary duties of a manager that [Beach] sought to enforce would ever have arisen." This argument is directly contradicted by Corporations Code section 17704.09.
In American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, the court considered what statute of limitations to apply to a claim for aiding and abetting a breach of fiduciary duty. Citing former Corporations Code section 17153, the court found the fiduciary duties of the defendants "were not created exclusively or even primarily by the [o]perating [a]greement but were imposed by law on them as members and managers of AML." (American Master Lease LLC v. Idanta Partners, Ltd., supra, at p. 1480.) Considering the gravamen of the claim was not related to the operating agreement in that case, the appellate court determined the claim for breach of fiduciary duties was a claim in tort, not contract, to which general tort limitations periods applied. (Id. at p. 1481.) We agree with the analysis of the American Master Lease court. Here, too, the gravamen of Beach's claim is not related to the Operating Agreement, but rather is a tort claim based in statute. Therefore, Evertrust may not rely on equitable estoppel to require arbitration of Beach's claims pursuant to the arbitration provision in the Operating Agreement.
V.
FOR PURPOSES OF THIS APPEAL, IT DOES NOT MATTER WHICH VERSION OF THE CORPORATIONS CODE APPLIES
Much of Evertrust's opening appellate brief focuses on the effective date of the Operating Agreement and which version of California's limited liability company law applies in this case. Currently, limited liability companies are governed by the California Revised Uniform Limited Liability Company Act, section 17701.01 et seq., which became operative January 1, 2014. As is relevant to this case, the current law provides: "A limited liability company is bound by and may enforce the operating agreement." (Corp. Code, § 17701.11, subd. (a).) The current law applies to "the acts or transactions by a limited liability company or by the members or managers of the limited liability company occurring, or an operating agreement or other contracts entered into by the limited liability company or by the members or managers of the limited liability company, on or after January 1, 2014." (Id., § 17713.04, subd. (b).)
When the Operating Agreement was first executed by M &D Regional and M+D Properties, the Beverly-Killea Limited Liability Company Act applied to California LLCs; that act did not include a provision similar to current Corporations Code section 17701.11 authorizing Beach to enforce the terms of the Operating Agreement. In this case, Beach is not a party to the Operating Agreement. Beach's ability to enforce the arbitration provision in the Operating Agreement and to have that provision enforced against it, is central to Evertrust's argument.
The Operating Agreement first defines the effective date as August 1, 2013. The trial court found the effective date of the Operating Agreement was before January 1, 2014. That finding is supported by substantial evidence.
However, in the Operating Agreement's definitions section, the effective date is defined as "the date upon which the Company admits its first Class B Member in accordance with this Agreement." Under the Operating Agreement's terms, members were not "admitted" until they made the required capital contribution. The first signed agreement by a Class B member agreeing to be bound by the terms of the Operating Agreement is dated in February 2014. Beach contends, and Evertrust concedes, the argument the Operating Agreement was not in effect until February 2014 was not raised in the trial court. Evertrust contends this is an issue of law based on undisputed facts. (In re N.R. (2017) 15 Cal.App.5th 590, 598 [claim involving "issue of fact rather than a pure question of law," is forfeited by failure to raise it below].)
Even if the effective date of the Operating Agreement was before January 1, 2014, Evertrust argues the new law still applies, and Beach is therefore bound by Corporations Code section 17701.11, subdivision (a), due to the language of the Operating Agreement. The Operating Agreement provided the Beverly-Killea Limited Liability Company Act would be its governing law, "as the same may be amended or superseded from time to time." Therefore, once the new law was operative, it became the law governing the Operating Agreement. (Cione v. Foresters Equity Services, Inc. (1997) 58 Cal.App.4th 625, 644 [agreement to abide by rules of National Association of Securities Dealers (NASD) as they might "'be amended from time to time'" is agreement to amendments to NASD rules on arbitrability].) Beach counters it was not a party to the language regarding the applicable law, so it cannot retroactively be a party to the Operating Agreement by that document's acceptance of future changes in the law. Additionally, as Beach notes, the Operating Agreement was an agreement between the members of the LLC and primarily addresses their relationship with each other.
Given our holding that arbitration of Beach's claims was not required by the equitable estoppel doctrine, we need not decide this issue.
DISPOSITION
The order is affirmed. Respondents to recover costs on appeal.
WE CONCUR: O'LEARY, P. J., BEDSWORTH, J.