Cohen v. TNP 2008 Participating Notes etc. ( 2019 )

Filed 1/29/19
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
MARK COHEN et al., B266702
Plaintiffs, Cross-defendants, (Los Angeles County
and Respondents, Super. Ct. No.
BS139842)
v.
TNP 2008 PARTICIPATING NOTES
PROGRAM, LLC, et al.,
Defendants, Cross-
complainants, and Appellants.
TNP 2008 PARTICIPATING NOTES
PROGRAM, LLC, et al.,
(Los Angeles County
Petitioners, Cross-respondents, Super. Ct. No.,
and Appellants, BS152825)
v.
MARK COHEN et al.,
Respondents, Cross-petitioners,
and Appellants.
APPEALS from a judgment and orders of the Superior
Court of Los Angeles County, Conrad R. Aragon and Michael L.
Stern, Judges. Reversed in part, affirmed in part, and remanded
with directions.
Sitzer Law Group, Michael Ferdinand Sitzer, Stefanie
Michelle Sitzer; Callahan & Blaine, Daniel J. Callahan,
David J. Darnell and Stephanie A. Sperber for Defendants,
Cross-complainants, and Appellants.
Gerard Fox Law, Gerard P. Fox and Marina V. Bogorad for
Plaintiffs, Cross-defendants, and Respondents.
___________________________
INTRODUCTION
An attorney who had recommended that his clients and his
law firm’s retirement plan invest in two real estate companies
sought to arbitrate claims by his clients and the retirement plan
against the companies, their parent company, and the parent
company’s chief executive officer. Only the lawyer’s clients, the
retirement plan, and the two real estate companies signed the
operative arbitration agreements. After the two real estate
companies agreed to arbitration, the trial court granted a petition
to compel the nonsignatory parent company and its officer to
arbitrate, and subsequently granted a petition to confirm the
resulting arbitration award in favor of the attorney’s clients.
To resolve the ensuing appeals and cross-appeals in this
action, we hold (1) an attorney does not have standing to petition
to compel arbitration of his clients’ claims; (2) a signatory to an
arbitration agreement can compel a nonsignatory parent
company of a signatory subsidiary on an agency theory where (a)
the parent controlled the subsidiary to such an extent that the
2
subsidiary was a mere agent or instrumentality of the parent and
(b) the claims against the parent arose out of the agency
relationship; (3) the arbitrator did not exceed his authority by
substituting the attorney’s clients as the real parties in interest
in the arbitration; and (4) the arbitrator did not exceed his
authority by denying attorneys’ fees to a party that prevailed in
the arbitration. The last holding requires us to part company
with DiMarco v. Chaney (1995) 31 Cal. App. 4th 1809 (DiMarco)
and agree with Safari Associates v. Superior Court (2014) 231
Cal. App. 4th 1400 (Safari Associates). In the end, we vacate the
judgment and remand with directions for the trial court to enter
new orders on the petition to compel arbitration and the cross-
petitions to vacate and to correct the award. We also reverse the
trial court’s order denying attorneys’ fees to the prevailing party
in the postarbitration proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
A. The Investments
In 2008 Thompson National Properties, LLC (TNP) created
two subsidiary limited liability companies to raise funds from
accredited investors for various real estate investments. The
companies, TNP 2008 Participating Notes Program, LLC (the
2008 Program) and TNP 12% Notes Program, LLC (the 12%
Program),1 issued private placement memoranda offering
investments through the sale of promissory notes. TNP, which
held a 100 percent membership interest in each of the Programs,
1 We refer to the 2008 Program and the 12% Program
collectively as “the Programs,” and to each as a “Program.”
3
guaranteed the performance of the Programs’ obligations under
the notes, including the payment of principal and interest.
The Programs’ private placement memoranda described the
nature of the investments, the Programs’ intended use of the
money raised from the investments, various risk factors, and the
procedures for accredited investors to invest in each Program. To
participate, accredited investors completed and signed a
subscription agreement included as an exhibit to the private
placement memoranda, and upon payment and completion of
other formalities, the investor received a promissory note. The
promissory notes required the Programs to make monthly
interest payments on the principal amount of the notes at a
specified rate. The Programs agreed to pay each investor’s
principal and any unpaid interest in full on the notes’ maturity
dates. TNP pledged “all” of its (unspecified) membership interest
in the Programs as collateral for its guaranty to repay the notes.
Mark Cohen, an investment advisor and attorney,
recommended the Programs to his clients based on Cohen’s prior
business dealings with Anthony Thompson, the managing
member and chief executive officer of TNP. More than 30 of
Cohen’s clients invested up to $200,000 each in one or both of the
Programs. Cohen also invested his law firm’s retirement plan,
the Cohen & Burnett P.C. Profit Sharing 401(k) Plan (the Plan),
of which Cohen served as trustee, in the 12% Program. Cohen
did not personally invest in either Program, but he received fees
and commissions for the investments by his clients and his firm’s
retirement plan.2
2 Cohen contended he received “only a part” of the
commissions paid to Pacific West Securities, Inc., a “broker-
4
B. The Programs’ Defaults and Cohen’s Arbitration
Demands
The Programs defaulted on the promissory notes in 2012.
On June 25, 2012 Thompson, acting in his capacity as CEO of
TNP, sent a letter to noteholders in the 12% Program advising
them the Program would defer all interest payments through the
end of 2012 while TNP pursued “exciting new ventures” and
hired an investment banking firm to raise additional capital for
“significant transactions that would allow TNP to receive greater
fee revenue.” Neither the Programs nor TNP made payments on
the notes after June 25, 2012.
On July 12, 2012 Cohen submitted two statements of
claims and demands for arbitration to the American Arbitration
Association (AAA) based on an arbitration provision in the
subscription agreement for each Program. The arbitration
provision stated: “I hereby covenant and agree that any dispute,
controversy or other claim arising under, out of or relating to this
Agreement or any of the transactions contemplated hereby, or
any amendment thereof, or the breach or interpretation hereof or
thereof, shall be determined and settled in binding arbitration in
Los Angeles, California,[3] in accordance with applicable
dealer” that purchased the notes for Cohen’s clients and for
whom Cohen was a “registered representative.” Cohen claimed
he paid his portion of the commissions to another entity, which
then “rebated the commissions” to Cohen’s clients.
3 The subscription agreement for the 12% Program specified
arbitration in Irvine, California. None of the parties involved in
the eventual arbitration in Los Angeles appears to have
demanded arbitration in Irvine.
5
California law, and with the rules and procedures of The
American Arbitration Association.” The subscription agreements
were signed by investors in each Program and by an unidentified
representative of TNP.4
Cohen’s statement and demand against the 2008 Program
identified the claimant as Cohen, “individually and as a
representative of his client noteholders,” and the respondents as
the 2008 Program, TNP, and Thompson. The statement and
demand against the 12% Program identified the claimants as the
Plan and Cohen, “individually and as a representative of his
client noteholders,” and the respondents as the 12% Program,
TNP, and Thompson. Cohen alleged the terms of TNP’s guaranty
gave “a third-party attorney or agent” the ability to bring an
action to enforce the arbitration provision in the subscription
agreements.5 Both statements of claims alleged, among other
things, breach of the promissory notes and TNP’s guaranty,
intentional misrepresentation, and breach of the implied
covenant of good faith and fair dealing. The statements of claims
4 The record does not include executed copies of the
subscription agreements, but both Programs submitted to
arbitration and apparently did not contest the existence of a valid
arbitration agreement with each noteholder.
5 The guaranty for each Program stated, in relevant part:
“Guarantor acknowledges that the Noteholders may, by simple
majority vote or consent, appoint one of them or a third-party
attorney or agent, to prosecute the Noteholders’ rights hereunder
and such party shall be entitled to bring any suit, action or
proceeding against the undersigned for the enforcement of any
provision of this Guaranty on behalf of all Noteholders and it
shall not be necessary in any such suit, action or proceeding to
make each Noteholder a party thereto.”
6
also alleged that Thompson was an alter ego of TNP and each
Program and that TNP was “a sham company that does not have
its own adequate capital or means of paying on the guaranty.”
Both Programs agreed to arbitrate, but “decline[d] to
submit to arbitration claims brought by [Cohen] in his
representative capacity.” TNP and Thompson did not agree to
arbitrate because neither had signed an arbitration agreement
with Cohen or the noteholders.
C. The Petition To Compel Arbitration
Cohen and the Plan filed a petition to compel arbitration
against TNP and Thompson in the superior court. They
contended that “Petitioners and TNP are parties” to the 2008
Program and 12% Program private placement memoranda, even
though Cohen did not invest in either Program and the Plan
invested only in the 12% Program. Cohen and the Plan
requested an order enforcing the arbitration provision in the
Programs’ subscription agreements against TNP and Thompson
because the arbitration claims were based on the respondents’
collective breach of those agreements and TNP’s guaranty and
because Thompson was the alter ego of TNP and the Programs.
To support their allegation that Thompson controlled the
Programs, Cohen and the Plan submitted “official
correspondence” sent to investors in the 12% Program signed by
Thompson in his capacity as CEO of TNP. Cohen and the Plan
also argued that “litigating the controversy in multiple forums
would be a colossal waste of judicial resources.”
In response, TNP and Thompson argued Cohen and the
Plan failed to show TNP or Thompson was a signatory to any
arbitration agreement with Cohen or the Plan. Indeed, TNP and
7
Thompson argued Cohen and the Plan had not provided a signed
copy of any agreement, but had merely attached unsigned form
agreements to the petition. TNP and Thompson also argued that
Cohen did not have standing to bring claims on behalf of his
clients and that TNP’s guaranty gave standing to represent
investors only to a representative appointed or elected by a
majority of the noteholders. TNP and Thompson argued that,
because Cohen’s clients did not represent a majority of
noteholders, the guaranty did not give Cohen standing to bring
an action or proceeding on their behalf. TNP and Thompson
denied Thompson was an alter ego of TNP or the Programs and
argued the limitation of liability provisions of the 2008 Program
notes insulated Thompson from any obligation to arbitrate.
In reply, Cohen and the Plan argued for the first time that
Cohen could enforce the arbitration agreement between his
clients and the Programs because he was an agent for his clients.
Cohen and the Plan cited Westra v. Marcus & Millichap Real
Estate Investment Brokerage Co., Inc. (2005) 129 Cal. App. 4th 759
(Westra), which held that “[a] nonsignatory to an agreement to
arbitrate may be required to arbitrate, and may invoke
arbitration against a party, if a preexisting confidential
relationship, such as an agency relationship between the
nonsignatory and one of the parties to the arbitration agreement,
makes it equitable to impose the duty to arbitrate upon the
nonsignatory.” (Id. at p. 765.) Cohen and the Plan argued
“Cohen ha[d] the authority to act on his clients’ behalf in the
arbitrations with the [AAA] and in enforcing the arbitration
agreements through the instant Petition to Compel Arbitration.”
They also asserted the Plan could enforce the arbitration
agreements as a signatory to the subscription agreement for the
8
12% Program. Cohen and the Plan also argued for the first time
on reply that TNP’s guaranty required TNP to arbitrate. The
guaranty required TNP to perform “all of the [Programs’]
obligations” under the notes, which Cohen and the Plan
interpreted to include the Program’s “obligations” to arbitrate.
The trial court issued a tentative ruling that would have
allowed Cohen to enforce the arbitration agreements between his
clients and the Programs because Cohen was an agent for his
clients. The tentative ruling also would have compelled TNP and
Thompson to arbitrate because they were agents for the
Programs.6 At the hearing, counsel for TNP and Thompson
argued Cohen and the Plan did not raise the argument that
Cohen was an agent for his clients until the reply brief and had
never, even in their reply brief, sought to compel TNP and
Thompson to arbitrate as agents of the Programs.
Counsel for Cohen and the Plan argued that, because
Cohen had acted as an agent for his clients for many years, “he
had the authority, their explicit authority to bring this action.”
Counsel contended that Cohen and the Plan had “raised the law
of agency” and “the law of alter ego” and that these were two of
“many theories under which TNP and Mr. Thompson should be
compelled to arbitrate.” With regard to TNP, counsel for Cohen
and the Plan argued the guaranty required TNP to participate in
the arbitration. The court volunteered that “agency law probably
bound Mr. Thompson.” Counsel for TNP and Thompson said she
6 The tentative ruling is not included in the record on appeal,
but the arguments by counsel at the hearing on the petition to
compel and the court’s ultimate ruling indicate the grounds on
which the court based its tentative decision.
9
was not prepared to respond to that argument because Cohen
and the Plan had not raised it in their pleadings. The court
therefore granted TNP and Thompson leave to file a brief
addressing why the court should not compel TNP and Thompson
to arbitrate as agents of the Programs.
In their post-hearing brief, TNP and Thompson argued
Cohen and the Plan had not presented evidence of an agency
relationship between TNP or Thompson and the Programs. They
acknowledged TNP and Thompson had authority to execute
agreements on behalf of the Programs, but argued TNP and
Thompson did not become liable for the Programs’ obligations
merely by signing documents on behalf of the Programs. TNP
and Thompson distinguished Westra, supra, 129 Cal. App. 4th 759
by arguing that, although the court there allowed a nonsignatory
agent to enforce an arbitration agreement, the court did not
compel a nonsignatory to arbitrate.
The trial court granted the petition. The court concluded it
could not determine whether TNP and Thompson were alter egos
of the Programs “on this record,” but found they acted as agents
for the Programs. In support of this ruling, the court found
(1) Thompson “took a number of actions” on behalf of the
Programs, including informing investors the 12% Program would
not make interest payments for the remainder of 2012 and
submitting to investors a proposed modification of the terms of
the 12% Program; (2) Thompson, TNP, and the Programs were all
affiliated entities because Thompson was TNP’s Chief Executive
Officer, TNP was the parent company of both Programs, and
10
Thompson was the managing member of both Programs;7 and
(3) TNP was the guarantor of both Programs’ notes. The court
ruled that, “[o]n these evidentiary facts,” TNP and Thompson
were “either agents or principals of the TNP parties to the
arbitration agreement.” The court also concluded Cohen had
standing to bring the petition to compel because “a number of
investors have appointed him to be their representative in claims
against respondents.”
D. The Arbitration Award
The arbitration occurred in Los Angeles from March 31,
2014 to April 2, 2014. According to Cohen and the Plan, the
parties stipulated to the amounts owed to each noteholder. The
primary issues for the arbitrator were whether Thompson was an
alter ego of TNP and the Programs, whether Cohen’s role in
recommending the investments to his clients affected his and his
clients’ rights to recover, and whether Cohen had standing to
bring claims on behalf of his clients.
On July 14, 2014, after the arbitration hearing but before
the award, Cohen, “individually and as a representative for
Cohen & Burnett, P.C., a Virginia corporation, individually and
as a representative of their client noteholders, and as a trustee
for [the Plan],” along with Cohen’s individual clients, filed with
the arbitrator a document titled “Notice of Motion and Motion for
Leave To File Amended Caption.”8 The motion sought to add as
7 The private placement memoranda identify Thompson as
the managing member of TNP, not of the Programs.
8 It is unclear whether Cohen & Burnett, P.C. had been
added as a claimant to the arbitration before the motion for leave
11
claimants to the pending arbitration all of Cohen’s clients
pursuant to Code of Civil Procedure sections 473 and 576,9 which
generally concern the substitution of parties and amendments to
pleadings. The moving parties argued that courts liberally grant
motions for leave to amend and that adding Cohen’s clients as
claimants to the arbitration would not prejudice the Programs,
TNP, or Thompson because they “have at all times
acknowledged” the identities of Cohen’s clients. The motion
stated: “The individual client noteholders have all asserted and
affirmed their agreement and belief that Mark Cohen and Cohen
& Burnett, P.C. would represent their claims against
Respondents in a suit against Respondents, and they have relied
to their detriment on their belief that the language in the [private
placement memoranda], and their signing of the Subscription
Agreements, Powers of Attorney, and Affidavits, allowed for
Mark Cohen and Cohen & Burnett, P.C. to represent their claims
such that their names were not required on the pleading
caption.”10 The Programs, TNP, and Thompson opposed the
motion.
to amend the caption. The initial statements of claims and
demands for arbitration identified only Cohen as a claimant in
the demand against the 2008 Program and only Cohen and the
Plan as claimants in the demand against the 12% Program.
9 Undesignated statutory references are to the Code of Civil
Procedure.
10 Cohen submitted letters he sent on behalf of his firm to
each of his clients with a subject matter line stating, “Re: Power
of Attorney, Allocation, and Waiver of Conflicts Agreement.” The
letters concluded with a signature block for the recipient below
12
The arbitrator issued his award on September 4, 2014. The
arbitrator granted the motion to amend the caption to include
Cohen’s clients as the real parties in interest. The arbitrator
found that neither Cohen, in his individual capacity, nor Cohen &
Burnett, P.C. was a real party in interest, but did find that Cohen
was a real party in interest as trustee of the Plan. The arbitrator
also found that the Programs, TNP, and Thompson “have known
all along the names and amounts invested by the real parties in
interest . . . . Under the rules of the [AAA], the caption has been
amended so that a just and equitable award can be made to the
real parties in interest, and not their representatives nor to
parties who have not invested in either [Program].”
The arbitrator rejected Cohen’s argument that the
guaranty gave him standing to bring claims on behalf of the
investors. Instead, as argued by the Programs, TNP, and
Thompson, the arbitrator concluded the guaranty allowed only a
representative who represents a majority of all investors in the
notes to bring a representative action. Thus, the arbitrator ruled,
the powers Cohen received from his clients as their attorney
“conferred on him the right to oversee litigation,” but not “to bring
litigation on their behalf as their representative.”
The arbitrator ruled the Programs breached the terms of
their contracts with the investors by defaulting on their
obligations to make interest and principal payments under the
notes. The arbitrator awarded Cohen’s clients individual awards
the following statement: “I agree with the above terms and
appoint Cohen & Burnett, P.C. as my Agent under the terms set
out above, I agree to the settlement or judgment award
allocation, and I waive any conflicts of interest involved in Cohen
& Burnett, P.C. in acting as my Agent on this matter.”
13
equal to the amounts unpaid under the notes plus interest. The
arbitrator concluded, however, neither Cohen nor Cohen &
Burnett, P.C. was entitled to an award, even though Cohen &
Burnett, P.C. “advanced substantial fees for the litigation
brought on behalf of Cohen’s clients.” The arbitrator also denied
the Plan an award because “[i]t was not an innocently injured
investor. It could not have relied upon misrepresentations made
by Cohen, unlike Cohen’s clients.” The arbitrator stated the
awards were “based on breach of contract, and no other cause of
action.”
The arbitrator also ruled TNP was liable for the amounts
owed to Cohen’s clients “because it guaranteed the Notes, and
therefore breached its contractual obligations.” The arbitrator
also found Thompson was personally liable as an alter ego of the
Programs and TNP. The arbitrator concluded: “Thompson
moved substantial moneys between each of the Programs and
numerous other entities controlled by him, and also between the
Programs and his wife and him. . . . [T]he respondents failed to
provide timely, sufficient accounting records to explain or justify
the millions of dollars which were transferred in and out of the
Programs at Thompson’s sole discretion.” The arbitrator also
found “Thompson drained the Programs and their guarantor,
TNP, of all funds necessary to fulfill their obligations under the
Notes.” Thus, “[t]o allow Thompson to render insolvent the
Programs and their guarantor, TNP, in order to avoid their
contractual obligations, would be an inequitable result.”
The arbitration agreement for both Programs included a
provision stating “[t]he prevailing party shall be entitled to an
award of its reasonable costs and expenses, including, but not
limited to, attorneys’ fees, in addition to any other available
14
remedies.” The arbitrator concluded that the “attorneys’ fees and
costs paid by Cohen & Burnett, P.C. to the attorneys (Law Offices
of Gerard Fox, Inc.) for Cohen’s clients who invested in the
Programs [were] reasonable.” The arbitrator nevertheless denied
the clients’ request for attorneys’ fees and costs because “the
attorneys’ fees and costs were paid in advance by a party who is
not a real party in interest as a claimant” and “were not paid by a
prevailing party.” The arbitrator found Cohen, his firm, and the
Plan were “not prevailing parties.” The arbitrator also found the
attorneys’ fees and costs “were advanced by a party whose
founding partner, Cohen, was culpable for advising his clients to
invest in the Programs.”
With respect to Cohen, the arbitrator found “[i]f any
fraudulent misrepresentations did occur, Cohen probably made
them to his clients, assuring them that the investments were safe
based solely on Thompson’s record, rather than on the [private
placement memoranda], which contained all the information
upon which the investors were entitled to rely. The [private
placement memoranda] clearly show that the Programs involved
Notes issued by new limited liability companies with no other
assets, and that the Notes were guaranteed by TNP, a new entity
with insufficient assets to meet its obligations under its guaranty
once all the Notes were issued.” The arbitrator also suggested
Cohen “promised to advance his clients’ attorneys’ fees and costs”
to avoid legal action against himself for recommending
“unsuitable investments to his clients,” most of whom were over
70 years old and retired. The arbitrator concluded that
“[a]warding attorneys’ fees and costs to the law firm whose
founding partner is a culpable party, who profited from his
mistaken advice, would be a gross injustice and violate the
15
equitable principle of unclean hands.” The arbitrator directed
that “[a]ll fees, expenses and compensation shall be borne equally
by claimants (50%), jointly and severally, and by respondents
(50%), jointly and severally.”
E. Postarbitration Proceedings
The Programs, TNP, and Thompson filed a petition to
vacate the arbitration award in the superior court. They argued
the arbitrator exceeded his authority by issuing an award against
nonsignatories TNP and Thompson, finding Thompson was an
alter ego of TNP and the Programs, and permitting Cohen to
litigate claims on behalf of his clients. Cohen, Cohen & Burnett,
P.C., the Plan, and Cohen’s clients (collectively, the Cohen
Parties) filed three cross-petitions to “correct and confirm as
corrected” the arbitration award. Two of the cross-petitions
argued the arbitrator exceeded his authority by denying the
prevailing parties attorneys’ fees and by denying the Plan an
award for the 12% Program’s breach of contract. The third cross-
petition argued the arbitrator made a mistake in the amount of
the award for one investor.
The court denied the petitions to vacate and to correct the
award (with the exception of correcting the award for the
individual investor) and granted the petitions to confirm. In its
statement of decision, the court ruled that “no grounds exist to
correct the award as requested by cross-petitioners or vacate the
award as requested by petitioners.” The court entered judgment
on July 1, 2015. The Cohen Parties filed a motion for attorneys’
fees and costs incurred in connection with the petition to vacate
and cross-petitions to correct and confirm the award. The court
denied the motion.
16
The Programs, TNP, and Thompson filed a timely notice of
appeal. The Cohen Parties filed a timely notice of cross-appeal
and an appeal from the order denying their motion for attorneys’
fees and costs. We consolidated the appeals.
DISCUSSION
I. Cohen Did Not Have Standing To Bring the Petition To
Compel Arbitration, and The Plan Had Standing Only for
Its Claims Against the 12% Program
A. Applicable Law and Standard of Review
“‘Standing’ derives from the principle that ‘[e]very action
must be prosecuted in the name of the real party in interest.’”
(City of Santa Monica v. Stewart (2005) 126 Cal. App. 4th 43, 59;
see § 367.) “‘“The real party in interest has ‘“an actual and
substantial interest in the subject matter of the action,’ and
stands to be ‘benefited or injured’ by a judgment in the action.’”’”
(Turner v. Seterus, Inc. (2018) 27 Cal.App.5th 516, 525; see
Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal. App. 4th
42, 54-55; City of Santa Monica v. Stewart, at pp. 59-60.) “‘“[A]
plaintiff generally must assert his own legal rights and interests,
and cannot rest his claim to relief on the legal rights or interests
of third parties.”’” (Airline Pilots Assn. Internat. v. United
Airlines, Inc. (2014) 223 Cal. App. 4th 706, 726; see City of
Brentwood v. Campbell (2015) 237 Cal. App. 4th 488, 504 [the real
party in interest “is the person who possesses the right to sue
under the substantive law involved”].)
Someone who is not a party to a contractual arbitration
provision generally lacks standing to enforce it. (See Ronay
17
Family Limited Partnership v. Tweed (2013) 216 Cal. App. 4th
830, 837 [“[t]he general rule is that only a party to an arbitration
agreement may enforce it”]; Smith v. Microskills San Diego L.P.
(2007) 153 Cal. App. 4th 892, 896-900 (Smith) [nonsignatory to a
promissory note containing an arbitration provision lacks
standing to compel arbitration]; see generally CAZA Drilling
(California), Inc. v. TEG Oil & Gas U.S.A., Inc. (2006) 142
Cal. App. 4th 453, 465; Jones v. Aetna Casualty & Surety Co.
(1994) 26 Cal. App. 4th 1717, 1722.) Third parties may enforce a
contract with an arbitration provision, however, where they are
intended third party beneficiaries or are assigned rights under
the contract. (Smith, at pp. 898-900; see Goonewardene v. ADP,
LLC (2016) 5 Cal.App.5th 154, 171-172 [third party beneficiary],
review granted Feb. 15, 2017, S238941; Applera Corp. v. MP
Biomedicals, LLC (2009) 173 Cal. App. 4th 769, 786-787
[assignee].) Third parties may also have standing to enforce a
contract without joining as parties the persons for whose benefit
the action is prosecuted where the plaintiff is a personal
representative as defined in the Probate Code, a trustee of an
express trust, or any other person “expressly authorized by
statute.” (§ 369, subd. (a).)
The rules are the same for third parties who are agents of a
party to a contract. “[A]n agent for a party to a contract not made
with or in the name of the agent is not a real party in interest
with standing to sue on the contract.” (Powers v. Ashton (1975)
45 Cal. App. 3d 783, 789; see Epic Communications, Inc. v.
Richwave Technology, Inc. (2009) 179 Cal. App. 4th 314, 334
[agents ordinarily do not have “a cause of action based upon some
third person’s violation of its principal’s rights,” and “[w]ithout
some breach of a duty owed to him, [the agent] has no power to
18
sue on the principal’s claim”].) An agent acting on behalf of a
principal might have standing to sue, however, if the agent “has
some beneficial interest in the subject matter.” (4 Witkin, Cal.
Procedure (5th ed. 2008) Pleading, § 141, p. 209.) For example,
an agent has standing to sue where a contract creates obligations
for the agent as a fiduciary to the principal. (Ibid.; see Walter J.
Warren Ins. Agency v. Surpur Timber Co. (1967) 250 Cal. App. 2d
99, 104.)
We review de novo the trial court’s determination that
Cohen (and impliedly, the Plan) had standing to enforce
the arbitration agreements. (M & M Foods, Inc. v. Pacific
American Fish Co., Inc. (2011) 196 Cal. App. 4th 554, 559; see
Smith, supra, 153 Cal.App.4th at p. 896 [reviewing de novo a
trial court’s determinations on standing to compel arbitration].)
B. Cohen Did Not Have Standing To Compel Arbitration
as an Agent of His Clients
Cohen concedes that he did not hold a note issued or sold
by either Program and that he was not a party to either
Program’s subscription agreement. Cohen does not argue he had
any personal legal interests or rights under the subscription
agreements, and he and his firm (perplexingly) admitted neither
of them has ever been a party to this case. And as trustee of the
Plan, Cohen concedes the Plan invested only in the 12% Program.
Yet Cohen asserts he had standing to petition the court to compel
TNP and Thompson to arbitrate because he had an agency
relationship with his clients, on whose behalf he contends he
brought the petition.
TNP and Thompson contend the fact that Cohen’s clients
appointed him to be their representative did not give Cohen
19
standing to compel TNP and Thompson to arbitrate. TNP and
Thompson also contend the Plan lacked standing to compel them
to arbitrate disputes arising from the 2008 Program because the
Plan invested only in the 12% Program. TNP and Thompson are
right on both counts.
Even if Cohen acted as an agent for his clients, he did not
have standing to bring a “representative petition” to compel
arbitration on their behalf. Cohen was not a party to the
subscription agreements, nor does he identify any substantial,
personal interest in the agreements. He does not claim to be a
third party beneficiary, his clients did not assign him the notes or
any of their rights under the subscription agreements, and he
identifies no statute giving him standing to enforce the
subscription agreements on behalf of his clients. He was perhaps
an attorney-in-fact or an investment manager, neither of which
gave him standing to enforce the agreements. (See JSM
Tuscany, LLC v. Superior Court (2011) 193 Cal. App. 4th 1222,
1240, fn. 20 [“when a nonsignatory of a contract is attempting to
seek relief for breach of the contract itself, that nonsignatory
must be doing so by means of either a third-party beneficiary
argument, or a legal theory which entitles that nonsignatory to
‘stand in the shoes’ of a party to the agreement—either by virtue
of a preexisting relationship, or as an assignee or successor in
interest”]; Northstar Financial Advisors, Inc. v. Schwab
Investments (N.D.Cal. 2009) 609 F. Supp. 2d 938, 942 [investment
manager could not “bring claims on behalf of its clients simply by
virtue of its status as an investment advisor”], revd. on another
ground (9th Cir. 2010) 615 F.3d 1106.)
Cohen appears to conflate standing to enforce an
arbitration agreement with the enforceability of an arbitration
20
agreement by or against a nonsignatory. As discussed in part II,
in some circumstances California law allows nonsignatory agents
of a party to an arbitration agreement to enforce that agreement,
and in other circumstances it requires nonsignatory agents of
contracting parties to submit to arbitration. That does not
suggest, however, that an agent who is not a third party
beneficiary of an arbitration agreement and who does not have
any actual and substantial interest in the agreement has
standing to enforce it. Although standing is “closely
connected . . . to the ultimate determination whether to compel
arbitration,” standing is still a preliminary requirement for
justiciability. (Bouton v. USAA Casualty Ins. Co. (2008) 167
Cal. App. 4th 412, 425; see M & M Foods, Inc. v. Pacific American
Fish Co., Inc., supra, 196 Cal.App.4th at pp. 560-561.) Because
Cohen lacked standing to enforce the arbitration agreements, we
reverse the trial court’s order compelling TNP and Thompson to
arbitrate Cohen’s claims against them.
As stated, however, while the Plan did not invest in the
2008 Program, it did invest in the 12% Program. Therefore, the
Plan had standing to petition to compel TNP and Thompson to
arbitrate its claims relating to that Program.11 Thus, we must
consider whether the trial court erred in granting the Plan’s
petition to compel TNP and Thompson to arbitrate the Plan’s
claims against them relating to the 12% Program.
11 TNP and Thompson do not challenge the existence of an
arbitration agreement between the Plan and the 12% Program.
21
II. The Trial Court Properly Granted the Plan’s Petition To
Compel TNP To Arbitrate, but Erred in Granting the Plan’s
Petition to Compel Thompson To Arbitrate
A. Applicable Law and Standard of Review
“A party to an arbitration agreement may petition the court
to compel other parties to arbitrate a dispute that is covered by
their agreement.” (Jones v. Jacobson (2011) 195 Cal. App. 4th 1,
15; § 1281.2.) “California has a strong public policy in favor of
arbitration as an expeditious and cost-effective way of resolving
disputes.” (Avila v. Southern California Specialty Care,
Inc. (2018) 20 Cal.App.5th 835, 843 (Avila); see Moncharsh v.
Heily & Blase (1992) 3 Cal. 4th 1, 9 (Moncharsh).) “Even so,
parties can only be compelled to arbitrate when they have agreed
to do so. [Citation.] ‘Arbitration . . . is a matter of consent, not
coercion.’” (Avila, at p. 843; see Suh v. Superior Court (2010) 181
Cal. App. 4th 1504, 1512 (Suh) [“‘[e]ven the strong public policy in
favor of arbitration does not extend to those who are not parties
to an arbitration agreement or who have not authorized anyone
to act for them in executing such an agreement’”].)
“Whether an agreement to arbitrate exists is a threshold
issue of contract formation and state contract law.” (Avila,
supra, 20 Cal.App.5th at p. 843; see DMS Services, LLC v.
Superior Court (2012) 205 Cal. App. 4th 1346, 1353, fn. 3 [“the
question whether a contract containing an arbitration provision
can be enforced by or against nonparties to the contract is
governed by state law principles”].) “The party seeking to compel
arbitration bears the burden of proving the existence of a valid
arbitration agreement.” (Avila, at p. 844; accord, Espejo v.
22
Southern California Permanente Medical Group (2016) 246
Cal. App. 4th 1047, 1057.)
“‘Whether an arbitration agreement is binding on a third
party (e.g., a nonsignatory) is a question of law subject to de novo
review.’” (Benaroya v. Willis (2018) 23 Cal.App.5th 462, 468; see
Suh, supra, 181 Cal.App.4th at p. 1512.) Nevertheless, we
presume the court found every fact and drew every permissible
inference necessary to support its judgment or order, and we
defer to the court’s determination of credibility of the witnesses
and weight of the evidence in resolving disputed facts. (Jones v.
Jacobson, supra, 195 Cal.App.4th at p. 12.) “[I]f there are
material facts in dispute, we must accept the trial court’s
resolution of such disputed facts when supported by substantial
evidence.” (Ibid.; accord, Suh, at p. 1511.)
B. A Signatory Can Sometimes Compel a Nonsignatory
To Arbitrate as an Agent or Principal of a Signatory
“‘There are circumstances in which nonsignatories to an
agreement containing an arbitration clause can be compelled to
arbitrate under that agreement. 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) veil-piercing or alter ego; (e) estoppel; and (f) third-
party beneficiary.”’” (Benaroya v. Willis, supra, 23 Cal.App.5th at
p. 469; accord, Suh, supra, 181 Cal.App.4th at p. 1513.) The trial
court concluded TNP and Thompson were bound by the
arbitration provision in the subscription agreements as “agents
or principals” of the Programs.
Not every agency relationship, however, will bind a
nonsignatory to an arbitration agreement. (See Jensen v. U-Haul
23
Co. of California (2017) 18 Cal.App.5th 295, 304-305 (Jensen)
[rejecting the argument that an “agency relationship alone gives
the signatory the authority to bind the nonsignatory”].) “Every
California case finding nonsignatories to be bound to arbitrate is
based on facts that demonstrate, in one way or another, the
signatory’s implicit authority to act on behalf of the
nonsignatory.” (Id. at p. 304; see County of Contra Costa v.
Kaiser Foundation Health Plan, Inc. (1996) 47 Cal. App. 4th 237,
243 [“[a]ll nonsignatory arbitration cases are grounded in the
authority of the signatory to contract . . . on behalf of the
nonsignatory—to bind the nonsignatory in some manner”].)
Courts also have stated that the agency relationship between the
nonsignatory and the signatory must make it “‘equitable to
compel the nonsignatory’” to arbitrate. (Jensen, at p. 301; see
Matthau v. Superior Court (2007) 151 Cal. App. 4th 593, 599;
Westra, supra, 129 Cal.App.4th at p. 765; NORCAL Mutual Ins.
Co. v. Newton (2000) 84 Cal. App. 4th 64, 76; County of Contra
Costa v. Kaiser Foundation Health Plan, Inc., supra, 47
Cal.App.4th at p. 243.)
But equity, without more, is not enough. (Jensen, supra, 18
Cal.App.5th at p. 304.) Courts must also ask “who is seeking to
bind whom, and on what basis.” (Id. at p. 303.) “[T]he question
of whether a principal’s acts bind an agent is fundamentally
different from the question of whether an agent’s acts bind a
principal.” (Ibid.) Courts look to traditional principles of
contract and agency law to determine whether a nonsignatory is
bound by an arbitration agreement signed by its principal or
agent. (Avila, supra, 20 Cal.App.5th at pp. 843-845; Comer v.
Micor, Inc. (9th Cir. 2006) 436 F.3d 1098, 1101; see 21 Williston
on Contracts § 57:19, p. 183 (4th ed. 2001) [“a nonsignatory may
24
acquire rights under or be bound by an arbitration agreement if
so dictated by the ordinary principles of contract and agency,”
fns. omitted].)
1. Principals Binding Agents
An agency relationship between an employer or company
(the principal) and its individual employee or officer (the agent)
does not normally bind the individual to an arbitration
agreement entered into by the employer or company. “Persons
are not normally bound by an agreement entered into by a
corporation in which they have an interest or are employees.”
(Suh, supra, 181 Cal.App.4th at p. 1513; see Jensen, supra, 18
Cal.App.5th at p. 304.) For example, in Jensen the employee of a
transport company sued a rental truck company for negligence
after the truck he was driving blew a tire. (Jensen, at p. 298.)
The driver’s supervisor had signed a rental contract with the
rental truck company that included an arbitration provision
requiring arbitration of all claims between the rental truck
company and the transport company, its agents, and employees.
(Id. at p. 299.) Despite the agency relationship between the
employee driver and his employer, the court applied the general
rule and held the driver’s company’s agreement did not bind the
driver personally. (Id. at p. 304.)
Similarly, courts generally do not compel corporate officers
and directors to arbitrate claims arising from contracts signed in
their representative capacities. (See Benasra v. Marciano (2001)
92 Cal. App. 4th 987, 991; Covington v. Aban Offshore Limited
(5th Cir. 2011) 650 F.3d 556, 561; Bel-Ray Co., Inc. v. Chemrite
(Pty) Ltd. (3d Cir. 1999) 181 F.3d 435, 445-446.) In such cases,
even if the officers and directors acted as agents for the entities
25
they represented, under ordinary rules of contract and agency
law a representative who unambiguously signs a contract as a
corporate officer or agent is not a party to the contract in his or
her personal capacity. (Ronay Family Limited Partnership v.
Tweed, supra, 216 Cal.App.4th at pp. 837-838; Benasra v.
Marciano, at p. 990; see Cal. U. Com. Code, § 3402, subd. (b).)
There are exceptions to the general rule. For example,
courts have compelled nonsignatory officers and employees to
arbitrate claims alleged against them in their individual
capacities even if they did not sign an arbitration agreement, or
signed only as representatives of their employers or principals,
where the officer or employee personally benefitted from the
underlying contract. (See, e.g., RN Solution, Inc. v. Catholic
Healthcare West (2008) 165 Cal. App. 4th 1511, 1520 (RN Solution)
[corporate officer “benefited financially and professionally” from
an agreement that included an arbitration provision]; Harris v.
Superior Court (1986) 188 Cal. App. 3d 475, 479 (Harris)
[arbitration clause in a contract between patients and their
health services program bound a doctor who voluntarily accepted
patients from the plan].)12
12 These courts distinguish this application of the agency
exception to the general rule that only a party to an arbitration
agreement may be compelled to arbitrate from the exception for
third party beneficiaries. (See RN Solution, at p. 1520 [officer
employee of corporation who signed arbitration agreement in her
representative capacity was bound by the agreement “both as an
agent-employee . . . and as a third party beneficiary”]; Harris, at
p. 479 [doctor’s “voluntary acceptance of the benefit of a
transaction” provided an additional basis on which to compel him
to arbitrate].)
26
2. Agents Binding Principals
The opposite issue, whether an arbitration agreement
signed by an agent also binds the agent’s nonsignatory principal,
is less commonly litigated. And cases involving a subsidiary
company allegedly signing an arbitration agreement as the agent
for its parent company are rare. In general, a parent company is
not liable on a contract signed by its subsidiary “simply because
it is a wholly owned subsidiary.” (Northern Natural Gas Co. v.
Superior Court (1976) 64 Cal. App. 3d 983, 991; see also Curci
Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 220
[“[o]rdinarily a [limited liability company] is considered a
separate legal entity, distinct from . . . its members and
managers”].) “Some other basis of liability must be established.”
(Northern Natural Gas Co. v. Superior Court, at p. 991.) Agency
is one such other basis of liability. (See Agricola Baja Best, S. De.
R.L. de C.V. v. Harris Moran Seed Co. (S.D.Cal. 2014) 44
F. Supp. 3d 974, 982 [applying California law]; Wallis v.
Centennial Ins. Co., Inc. (E.D.Cal. 2013) 927 F. Supp. 2d 909, 915-
916 [same].)
In a parent-subsidiary relationship, the agency doctrine
may bind a parent to the contracts of its subsidiary where, in
addition to owning the subsidiary, the parent company exercises
“sufficient control over the [subsidiary’s] activities” such that the
subsidiary becomes a “mere agen[t] or ‘instrumentality’ of the
parent.” (9 Witkin, Summary of Cal. Law (11th ed. 2017)
Corporations, § 19, p. 821; see Laird v. Capital Cities/ABC,
Inc. (1998) 68 Cal. App. 4th 727, 741 (Laird) [to hold a parent
corporation liable for acts or omissions of its subsidiary on an
agency theory, the plaintiff must show “‘a parent corporation
27
so controls the subsidiary as to cause the subsidiary to become
merely the agent or instrumentality of the parent’”], disapproved
on another ground by Reid v. Google (2010) 50 Cal. 4th 512;
Ruhnke v. SkinMedica, Inc. (C.D.Cal., Sept. 5, 2014, No. SACV
14-0420-DOC (JPRx)) 2014 WL 12577172, at p. 10 (Ruhnke)
[applying California law and observing that an agency
relationship may make a parent liable for contracts of its
subsidiary where “‘the nature and extent of the control exercised
over the subsidiary by the parent’ [is] ‘so pervasive and continual
that the subsidiary may be considered nothing more than an
agent or instrumentality of the parent’”]; cf. Sonora Diamond
Corp. v. Superior Court (2000) 83 Cal. App. 4th 523, 541 (Sonora
Diamond) [agency relationship between foreign parent and
domestic subsidiary may confer general jurisdiction over the
parent in the forum state].) “‘The nature of the control exercised
by the parent over the subsidiary . . . must be over and above that
to be expected as an incident of the parent’s ownership of the
subsidiary and must reflect the parent’s purposeful disregard of
the subsidiary’s independent corporate existence.’” (Ruhnke, at
p. 10; see 9 Witkin, Summary of Cal. Law, supra, Corporations
§ 19, p. 821; see also Sonora Diamond, at pp. 541-542; [“if a
parent corporation exercises such a degree of control over its
subsidiary corporation that the subsidiary can legitimately be
described as only a means through which the parent acts, or
nothing more than an incorporated department of the parent, the
subsidiary will be deemed to be the agent of the parent in the
forum state,” but “[a]s a practical matter, the parent must be
shown to have moved beyond the establishment of general policy
and direction for the subsidiary and in effect taken over
performance of the subsidiary’s day-to-day operations in carrying
28
out that policy”];13 Dougherty v. Bank of America, N.A. (E.D.Cal.
2016) 177 F. Supp. 3d 1230, 1254 [under California law, a
principal-agent relationship exists if “the principal has a right to
control the day-to-day conduct of the agent”].)
One of the few cases in which a party sought to bind a
nonsignatory parent of a signatory subsidiary to an arbitration
agreement on an agency theory (and we found no such published
cases in California) is E.I. DuPont de Nemours v. Rhone Poulenc
Fiber (3d Cir. 2001) 269 F.3d 187 (DuPont). In that case the
court held a nonsignatory parent could be compelled to arbitrate
based on an arbitration agreement signed by its subsidiary where
the subsidiary acted as an agent for the parent and the cause of
action arose out of that relationship. (Id. at p. 198; see id. at
p. 199 [citing dicta in J.J. Ryan & Sons v. Rhone Poulenc Textile,
S.A. (4th Cir. 1988) 863 F.2d 315 for the proposition that “a court
‘may’ refer claims against a non-signatory parent to arbitration
when the claims against the parent and the subsidiary are ‘based
on the same facts and are inherently inseparable’”].) The court in
DuPont applied Delaware law and held, “‘Unlike the alter
13 The court in Sonora Diamond distinguished the agency
theory of liability from the alter ego theory by explaining that
“the question is not whether there exists justification to disregard
the subsidiary’s corporate identity, the point of the alter ego
analysis, but instead whether the degree of control exerted over
the subsidiary by the parent is enough to reasonably deem the
subsidiary an agent of the parent under traditional agency
principles.” (Sonora Diamond, supra, 83 Cal.App.4th at p. 541;
see Bowoto v. Chevron Texaco Corp. (N.D.Cal. 2004) 312
F. Supp. 2d 1229, 1238 [“[u]nlike liability under the alter-ego or
veil-piercing test, agency liability does not require the court to
disregard the corporate form”].)
29
ego/piercing the corporate veil theory, when customary agency is
alleged [as a basis for binding a parent to a contract of its
subsidiary] the proponent must demonstrate a relationship
between the corporation and the cause of action. Not only must
an arrangement exist between the two corporations so that one
acts on behalf of the other and within usual agency principles,
but the arrangement must be relevant to the plaintiff’s claim of
wrongdoing.’” (Dupont, at p. 198; accord, InterGen N.V. v. Grina
(1st Cir. 2003) 344 F.3d 134, 148; Siopes v. Kaiser Foundation
Health Plan, Inc. (2013) 130 Hawai’i 437, 454; 21 Williston on
Contracts, supra, § 57:19, p. 183.) The court in DuPont concluded
that, because the party seeking to compel arbitration did not
show the cause of action related to the agency relationship
between the parent and its subsidiary that entered into the
contract containing an arbitration agreement, the court would
not compel the parent to arbitrate a claim arising from the
underlying contract. (DuPont, at p. 199.)
Similarly, California law permits a nonsignatory defendant
to compel a signatory plaintiff to arbitrate where there is a
connection between the claims alleged against the nonsignatory
and its agency relationship with a signatory. (See Dryer v. Los
Angeles Rams (1985) 40 Cal. 3d 406, 418 [nonsignatory agents
were entitled to enforce a contract’s arbitration provision where
the plaintiff sued them in their capacities as agents for the
signatory and the significant issues in the dispute arose out of
the contractual relationship between the parties]; Fuentes v.
TMCSF, Inc. (2018) 26 Cal.App.5th 541, 551 [nonsignatory was
not entitled to compel a signatory plaintiff to arbitrate a dispute
unrelated to the nonsignatory’s agency relationship with a
signatory]; Smith, supra, 153 Cal.App.4th at p. 897 [same]; see
30
also Britton v. Co-op Banking Group (9th Cir. 1993) 4 F.3d 742,
743 [owner-agent of the defendant corporation could not enforce
the arbitration clause of a contract signed only by the corporation
because “none of his allegedly wrongful acts arose out of or were
related to the contract”]; Knight et al., Cal. Practice Guide:
Alternative Dispute Resolution (The Rutter Group 2017)
¶ 5.266.5, p. 5-274 [nonsignatories can enforce an arbitration
agreement where the claims against the nonsignatory “aris[e]
under the contract” containing an arbitration provision, “but not
other claims,” italics omitted].)14 A connection between the
causes of action alleged against the nonsignatory and that party’s
agency relationship to a signatory makes it equitable to allow the
nonsignatory to enforce the arbitration provision against a
signatory plaintiff. (See County of Contra Costa v. Kaiser
Foundation Health Plan, Inc., supra, 47 Cal.App.4th at p. 243;
Matthau v. Superior Court, supra, 151 Cal.App.4th at p. 599.)
As DuPont acknowledges, this connection may also make it
equitable for a signatory to compel a nonsignatory to arbitrate so
long as another signatory had authority to bind the nonsignatory
to the arbitration agreement. (See DuPont, supra, 269 F.3d at
14 Where a nonsignatory relies on the estoppel exception to
invoke an arbitration agreement, courts generally ask whether
“‘“the causes of action against the nonsignatory are ‘intimately
founded in and intertwined’ with the underlying contract
obligations.”’” (DMS Services, LLC v. Superior Court, supra, 205
Cal.App.4th at p. 1354; accord, Garcia v. Pexco, LLC (2017) 11
Cal.App.5th 782, 786.) California courts have not applied the
same standard when considering whether to compel a
nonsignatory to arbitrate under the agency exception. And this
case does not involve the estoppel exception.
31
p. 198.) The requirements for imposing arbitration on a
nonsignatory principal, as opposed to allowing a nonsignatory
agent to compel arbitration, however, must be “exacting.”
(InterGen N.V. v. Grina, supra, 344 F.3d at p. 148; 21 Williston
on Contracts, supra, § 57:19, p. 183; see Benasra v. Marciano,
supra, 92 Cal.App.4th at p. 991 [“[i]t is one thing to permit a
nonsignatory to relinquish his right to a jury trial, but quite
another to compel him to do so”]; DK Joint Venture 1 v. Weyand
(5th Cir. 2011) 649 F.3d 310, 316 [“‘it matters whether the party
resisting arbitration is a signatory or not’”]; Merrill Lynch Inv.
Managers v. Optibase, Ltd. (2d Cir. 2003) 337 F.3d 125, 131
[same].) Therefore, we adopt the standard in DuPont to
determine whether a party to an arbitration agreement can
compel a nonsignatory parent of a signatory subsidiary to
arbitrate under the agency exception. We emphasize, however,
that an arbitration agreement signed by a subsidiary may bind
the parent company only where the party seeking to compel
arbitration can show the parent had sufficient control over the
subsidiary’s activities such that the subsidiary was a mere agent
or instrumentality of the parent and the causes of action or
claims against the parent arise out of this relationship.
C. The Trial Court Properly Compelled TNP To
Arbitrate
The trial court found TNP acted as an agent or principal of
the Programs (although the court did not say which one). The
court ruled that, in either case, TNP was “clearly in a
principal/agency relationship” with the Programs and was their
guarantor. TNP challenges the trial court’s order compelling it to
arbitrate based on its agency relationship with the Programs, but
32
it does not challenge the court’s factual finding that an agency
relationship existed with the Programs. (See Secci v. United
Independent Taxi Drivers, Inc. (2017) 8 Cal.App.5th 846, 854
[“‘“[t]he existence of an agency is a factual question within the
province of the trier of fact whose determination may not be
disturbed on appeal if supported by substantial evidence”’”].) The
trial court did not distinguish between the two Programs for
purposes of assessing TNP’s agency relationship with them, and
TNP conceded at oral argument that it was equally involved with
each Program. However, because only the Plan had standing to
petition TNP to arbitrate and the Plan invested only in the 12%
Program, we limit our analysis to whether TNP’s agency
relationship with the 12% Program was sufficient to compel TNP
to arbitrate under that Program’s subscription agreement. We
conclude the trial court properly compelled TNP to arbitrate, but
only in connection with claims alleged by the Plan.
TNP acted as the 12% Program’s agent by signing the
subscription agreement as the “Managing Member.” As stated,
however, this action, without more, was not enough to bind TNP
to the arbitration agreement. (See Jensen, supra, 18 Cal.App.5th
at pp. 304-305.) But the record also shows TNP was the parent
company of the 12% Program (because TNP owned it) and
exercised sufficient control over the 12% Program to cause it to
become “‘merely the agent or instrumentality’” of TNP. (Laird,
supra, 68 Cal.App.4th at p. 741, italics omitted.) After the 12%
Program defaulted on the promissory notes in 2012, TNP sent a
letter dated June 25, 2012 on its letterhead to the 12% Program
noteholders that substantially blurred the lines between the two
entities and held out TNP to the noteholders as more than just
parent, managing member, and guarantor of the Program. The
33
letter stated TNP “formed” the 12% Program and “is also the
guarantor on the notes.” The letter continued: “We are
informing you that we will need to defer all interest payments
through the end of 2012. TNP understands that this is not the
answer you want to hear, but we want you to know that we fully
intend to pay to you any remaining interest and principal on or
prior to the maturity date of June 10, 2013. We are doing
everything we can to make this happen.” (Emphasis omitted.)
The letter invited noteholders to contact TNP employees and
officers with any questions. TNP’s direct communications with
the 12% Program noteholders went beyond its role as guarantor
and managing member and showed that TNP, as the 12%
Program’s parent, controlled the Program’s day-to-
day operations. The record also includes evidence that the
entities shared the same address and phone number.
The claims alleged against TNP arose directly from its
agency relationship with the 12% Program and were well within
the scope of the arbitration provision in the subscription
agreement. Indeed, the arbitration provision required arbitration
of any claim “arising under, out of or relating to this Agreement
or any of the transactions contemplated hereby,” including, for
example, TNP’s obligations as guarantor. The guaranty, like the
subscription agreement, was an exhibit to the private placement
memorandum, thus making the guaranty a “transaction[ ]
contemplated” by the subscription agreement. And the claims
alleged against TNP were “‘based on the same facts and are
inherently inseparable’” from the claims alleged against the
12% Program. (DuPont, supra, 269 F.3d at p. 199.) Therefore,
because the 12% Program acted as a mere agent or
instrumentality of its parent company TNP, and the
34
12% Program noteholders’ claims arose out of the relationship
between TNP and the Program, TNP is bound by the arbitration
provision in the 12% Program’s subscription agreement.
D. The Trial Court Erred in Compelling Thompson To
Arbitrate
The trial court also found Thompson was bound by the
arbitration provision of the subscription agreement because he
was “in a principal/agency relationship” with the Programs. As
with TNP, Thompson does not contend substantial evidence does
not support the trial court’s agency finding. Instead, he argues
his agency does not bind him to the arbitration agreement. And
he is correct. There was no evidence suggesting the general rule,
that a representative who signs a contract as a corporate officer
or agent is not a party to the contract in his or her personal
capacity, did not apply to Thompson. (See Ronay Family Limited
Partnership v. Tweed, supra, 216 Cal.App.4th at pp. 837-838;
Benasra v. Marciano, supra, 92 Cal.App.4th at p. 990.)
The Plan argues it can compel Thompson to arbitrate either
because he was an agent of the 12% Program who “accepted the
benefits” of the notes or because he was a third party beneficiary
of the notes. As evidence of the “benefits” Thompson received,
the Plan cites the arbitration award, in which the arbitrator
found “Thompson drained the Programs and their guarantor,
TNP, of all funds necessary to fulfill their obligations under the
Notes.”15 The evidence supporting the arbitrator’s finding,
15 The Plan did not present any evidence showing Thompson
was an intended third party beneficiary of the notes or of any
agreement between the noteholders and the 12% Program.
35
however, was not before the trial court when the Plan petitioned
to compel Thompson to arbitrate. Indeed, the Plan did not seek
to compel Thompson to arbitrate as an agent who benefitted from
the notes or as a third party beneficiary of them. While we can
affirm the trial court’s order compelling Thompson to arbitrate on
any theory supported by the record (Mayflower Ins. Co. v.
Pellegrino (1989) 212 Cal. App. 3d 1326, 1332), the record before
the trial court on the petition to compel did not contain any
evidence Thompson benefited from the notes by “draining” the
Programs of their funds. “[T]he trial court can base its decision
only on the material before it, and those materials circumscribe
our review of the trial court’s decision as well.” (Valentine
Capital Asset Management, Inc. v. Agahi (2009) 174 Cal. App. 4th
606, 619; see id. at p. 618, fn. 9 [rejecting new factual assertions
as a basis to reverse the trial court’s order denying a motion to
compel arbitration where the assertions were not “contained in
the pleadings or the evidence presented in support of or in
opposition to the motion to compel arbitration” in the trial
court].)16 Because Thompson was not a party to the 12%
16 Because we conclude the Plan could not compel Thompson
to arbitrate, we do not address Thompson’s argument that the
arbitrator exceeded his authority by making him personally
liable for the arbitration award as an alter ego of the Programs
and TNP. Although we vacate the order confirming the
arbitration award to the extent it applies to Thompson, nothing
in this opinion affects the clients’ ability to ask the trial court to
add Thompson as a judgment debtor as the alter ego of the
Programs and TNP. (See Greenspan v. LADT LLC (2010) 191
Cal. App. 4th 486, 507-508 [section 187 authorizes a trial court to
amend a judgment to add additional judgment debtors]; Hall,
36
Program’s subscription agreement, and the Plan failed to show
Thompson could be compelled to arbitrate as a nonsignatory, the
trial court erred by compelling Thompson to arbitrate the Plan’s
claims against him.
III. The Trial Court Properly Confirmed the Arbitration Award
The trial court’s order confirming the arbitration award
and denying the petitions to vacate made TNP and Thompson
liable for the arbitration awards against both Programs. Because
we reverse the court’s orders compelling Thompson to arbitrate
all claims alleged against him and compelling TNP to arbitrate
claims alleged by Cohen regarding the 2008 Program, our review
of the trial court’s order granting the petition to confirm and
denying the petitions to vacate is limited to (1) the claims alleged
by the Plan against the 12% Program and TNP and (2) the claims
alleged by Cohen’s clients (added as claimants by the arbitrator)
against both Programs and against TNP with regard to the 12%
Program only. All parties contend the arbitrator exceeded his
authority in one way or another.
A. Applicable Law and Standard of Review
“The legal standards governing judicial review of
arbitration awards are well established.” (Sargon Enterprises,
Inc. v. Browne George Ross LLP (2017) 15 Cal.App.5th 749, 763.)
Goodhue, Haisley & Barker, Inc. v. Marconi Conf. Center
Bd. (1996) 41 Cal. App. 4th 1551, 1555 [“[j]udgments may be
amended to add additional judgment debtors on the ground that
a person or entity is the alter ego of the original judgment
debtor”].)
37
“California law favors alternative dispute resolution as a viable
means of resolving legal conflicts. ‘Because the decision to
arbitrate grievances evinces the parties’ intent to bypass the
judicial system and thus avoid potential delays at the trial and
appellate levels, arbitral finality is a core component of the
parties’ agreement to submit to arbitration.’ [Citation.]
Generally, courts cannot review arbitration awards for errors of
fact or law, even when those errors appear on the face of the
award or cause substantial injustice to the parties.” (Richey v.
AutoNation, Inc. (2015) 60 Cal. 4th 909, 916 (Richey); see
Moncharsh, supra, 3 Cal.4th at p. 10.)
The California Arbitration Act (§ 1280 et seq.) provides
limited grounds for judicial review of an arbitration award.
Courts are authorized to vacate an award if it was “(1) procured
by corruption, fraud, or undue means; (2) issued by a corrupt
arbitrator; (3) affected by prejudicial misconduct on the part of
the arbitrator; or (4) in excess of the arbitrator’s powers.”
(Richey, supra, 60 Cal.4th at p. 916; see § 1286.2, subd. (a).)
Section 1286.2 provides that “a court shall vacate an award if it
determines ‘[t]he arbitrators exceeded their powers and the
award cannot be corrected without affecting the merits of the
decision upon the controversy submitted.’” (O’Flaherty v.
Belgum (2004) 115 Cal. App. 4th 1044, 1055; see § 1286.2,
subd. (a)(4); Moncharsh, supra, 3 Cal.4th at p. 12.) The court
may correct, as opposed to vacate, an award where “[t]here was
an evident miscalculation of figures or an evident mistake,” “[t]he
arbitrators exceeded their powers but the award may be corrected
without affecting the merits of the decision,” or “[t]he award is
imperfect in a matter of form, not affecting the merits of the
controversy.” (§ 1286.6; see Richey, at p. 916.)
38
Arbitrators may exceed their powers when they act in a
manner not authorized by the contract or by law, act without
subject matter jurisdiction, decide an issue that was not
submitted to arbitration, arbitrarily remake the contract, uphold
an illegal contract, issue an award that violates a well-defined
public policy, issue an award that violates a statutory right,
fashion a remedy that is not rationally related to the contract, or
select a remedy not authorized by law. (O’Flaherty v. Belgum,
supra, 115 Cal.App.4th at pp. 1055-1056; Jordan v. Department
of Motor Vehicles (2002) 100 Cal. App. 4th 431, 443.) However,
“‘“[a]rbitrators do not ordinarily exceed their contractually
created powers simply by reaching an erroneous conclusion on a
contested issue of law or fact, and arbitral awards may not
ordinarily be vacated because of such error.”’” (Richey, supra,
60 Cal.4th at pp. 916-917; see Sargon Enterprises, Inc. v. Browne
George Ross LLP, supra, 15 Cal.App.5th at p. 763.)
“‘“In determining whether an arbitrator exceeded his [or
her] powers, we review the trial court’s decision de novo, but we
must give substantial deference to the arbitrator’s own
assessment of his [or her] contractual authority.”’” (Greenspan v.
LADT LLC (2010) 185 Cal. App. 4th 1413, 1437; see Safari
Associates, supra, 231 Cal.App.4th at p. 1408; O’Flaherty v.
Belgum, supra, 115 Cal.App.4th at p. 1056.)
B. The Arbitrator Did Not Exceed His Powers by Adding
Cohen’s Clients as Claimants to the Arbitration
TNP and the Programs contend the arbitrator exceeded his
authority by adding Cohen’s clients as claimants in the
arbitration. TNP and the Programs argue that such a
“substitution of parties in an action should not [be] permitted
39
where it will prejudice existing parties” and that the arbitrator’s
action prejudiced them.
As a preliminary matter, we have serious concerns about
whether the notice of appeal filed by TNP and the Programs gives
us jurisdiction to review this argument. TNP and the Programs
did not appeal from the judgment; they appealed from the order
granting the petition to compel arbitration. The notice of appeal
stated TNP and the Programs “hereby appeal from the Order on
Plaintiffs’ Motion to Compel Binding Arbitration filed January
30, 2013, which order was made final and appealable by the entry
of judgment on July 1, 2015.” Normally, “[a]n order granting a
petition to compel arbitration is not appealable, but is reviewable
on appeal from a subsequent judgment on the award.” (Jenks v.
DLA Piper Rudnick Gray Cary US LLP (2015) 243 Cal. App. 4th 1,
7.) The notice of appeal, however, does not state that TNP and
the Programs appeal from the subsequent judgment.
Nevertheless, we will liberally construe the notice of appeal from
the nonappealable order compelling arbitration to include an
appeal from the subsequent judgment for purposes of reviewing
the order compelling arbitration. (See Etheridge v. Reins
Internat. California, Inc. (2009) 172 Cal. App. 4th 908, 913, fn. 7;
Cal. Rules of Court, rule 8.100(a)(2).) But because the notice of
appeal does not state that TNP and the Programs appeal from
the judgment or the order confirming and denying the motion to
vacate the arbitration award, our jurisdiction may not extend to
arguments by TNP and the Programs relating to the trial court’s
order denying their petition to vacate the award.17
17 Our reversal of the judgment against Thompson and TNP
in connection with the 2008 Program moots some of these
40
In any event, there is no merit to the argument by TNP and
the Programs that the arbitrator exceeded his authority by
adding Cohen’s clients as claimants to the arbitration. “‘“The
powers of an arbitrator derive from, and are limited by, the
agreement to arbitrate.” . . . Thus, in determining whether the
arbitrator[ ] exceeded the scope of [his] powers here, we first look
to the parties’ agreement to see whether it placed any limitations
on the arbitrator[’s] authority.’” (Greenspan v. LADT LLC,
supra, 185 Cal.App.4th at p. 1437.) The arbitration provision in
the subscription agreements stated that the rules and procedures
of the AAA would apply to any arbitration. Rule R-6 of the AAA
Commercial Arbitration Rules and Mediation Procedures, titled
“Changes of Claim,” allows an arbitrator to approve amendments
to claims after the proceedings commence.18 TNP and the
arguments. In addition, by not raising it in the trial court, TNP
and the Programs forfeited their argument that the terms of
TNP’s guaranty precluded an award against TNP in favor of
fewer than all the noteholders and in a proceeding that was not
authorized by a majority vote of the noteholders. (See, Richey,
supra, 60 Cal.4th at p. 920, fn. 3.) The argument is also meritless
because the arbitrator had authority to interpret the language of
the guaranty and because the language of the guaranty does not
require a majority of noteholders to agree to bring suit against
TNP and does not preclude recovery in favor of fewer than a
majority of noteholders.
18 Rule R-6(b) of the AAA Commercial Arbitration Rules and
Mediation Procedures states, “Any new or different claim or
counterclaim, as opposed to an increase or decrease in the
amount of a pending claim or counterclaim, shall be made in
writing and filed with the AAA, and a copy shall be provided to
the other party, who shall have a period of 14 calendar days from
41
Programs do not suggest this rule precludes arbitrators from
substituting or adding claimants.
Moreover, TNP and the Programs conceded that adding
Cohen’s clients as parties to the arbitration was within the scope
of the arbitrator’s powers by submitting the issue to the
arbitrator. (See J.C. Gury Co. v. Nippon Carbide Industries
(USA) Inc. (2007) 152 Cal. App. 4th 1300, 1305 [“courts look both
to the contract and to the scope of the submissions to determine
the arbitrator’s authority”]; Porter v. Golden Eagle Ins. Co. (1996)
43 Cal. App. 4th 1282, 1292 [same].) In their response to the
Plan’s motion to amend the caption, TNP and the Programs
opposed the motion and referred to previous filings in the
arbitration proceeding (not included in the record on appeal)
explaining their position. They also argued the motion to amend
was untimely. They did not argue the arbitrator lacked authority
to decide whether to add the clients as claimants. TNP and the
Programs have not shown the arbitrator exceeded his authority
by applying the rules specified in the arbitration agreement.19
the date of such transmittal within which to file an answer to the
proposed change of claim or counterclaim with the AAA. After
the arbitrator is appointed, however, no new or different claim
may be submitted except with the arbitrator’s consent.” (AAA
Commercial Arbitration Rules and Mediation Procedures
(effective Oct. 1, 2013), available at
https://www.adr.org/sites/default/files/CommercialRules_Web.pdf,
as of January 29, 2019.)
19 TNP and the Programs also suggest the arbitrator should
have dismissed or stayed the arbitration after determining Cohen
lacked standing and allowed the parties to return to court “for a
determination of who the proper parties were and which claims
they were entitled to arbitrate.” The Plan, however, was a
42
C. The Arbitrator Did Not Exceed His Powers by Not
Awarding Damages to the Plan
The Plan contends the arbitrator exceeded his authority
under the arbitration agreement by refusing to award the Plan
damages for breach of contract. The arbitrator found the Plan
“was not an innocently injured investor” because it “could not
have relied upon misrepresentations made by Cohen, unlike
Cohen’s clients.” The arbitrator essentially found Cohen’s
unclean hands barred the breach of contract claim by his law
firm’s profit-sharing plan.
Rule R-47(a) of the AAA Commercial Arbitration Rules and
Mediation Procedures provides in part: “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.”
The Supreme Court has described this rule as “‘a broad grant of
authority to fashion remedies’ [citation], and as giving the
arbitrator ‘broad scope’ in choice of relief [citations].” (Advanced
Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal. 4th 362, 383-384
(Advanced Micro Devices); accord, Mave Enterprises, Inc. v.
Travelers Indemnity Co. (2013) 219 Cal. App. 4th 1408, 1431.)
Thus, the arbitrator had authority to grant relief he considered
“just and fair under the circumstances existing at the time of
arbitration, so long as the remedy may be rationally derived from
the contract and the breach.” (Advanced Micro Devices, at p. 383;
accord, Greenspan v. LADT, LLC, supra, 185 Cal.App.4th at p.
1448; see Emerald Aero, LLC v. Kaplan (2017) 9 Cal.App.5th
claimant and had standing to pursue its claims even if Cohen did
not.
43
1125, 1139 [“an arbitrator generally ‘does not exceed his or her
powers’ when imposing a particular remedy if the remedy ‘bears
a rational relationship’ to the underlying claim or breach, even if
the remedy could not have been awarded by a jury or court”].)
Nothing in the 12% Program’s arbitration provision or
Rule R-47 of AAA Commercial Arbitration Rules and Mediation
Procedures “indicates an intent to place any special restrictions
on the arbitrator’s discretion to fashion remedies.” (Advanced
Micro Devices, supra, 9 Cal.4th at p. 384; cf. Carbajal v. CWPSC,
Inc. (2016) 245 Cal. App. 4th 227, 253 [“[a]n arbitrator exceeds his
or her powers when granting a remedy expressly forbidden by the
parties’ arbitration agreement”].) Moreover, the unclean hands
doctrine the arbitrator applied is a recognized defense to a claim
for breach of contract under California law, which the parties
agreed would govern the 12% Program’s subscription agreement.
(See Jade Fashion & Co., Inc. v. Harkham Industries, Inc. (2014)
229 Cal. App. 4th 635, 653-654.) “‘The focus [of the unclean hands
defense] is the equities of the relationship between the parties,
and specifically whether the unclean hands affected the
transaction at issue.’” (Ibid.; see Peregrine Funding, Inc. v.
Sheppard Mullin Richter & Hampton LLP (2005) 133
Cal. App. 4th 658, 681 [“[t]he question is whether the unclean
conduct relates directly ‘to the transaction concerning which the
complaint is made,’ i.e., to the ‘subject matter involved’ [citation],
and not whether it is part of the basis upon which liability is
being asserted”].) The terms of the arbitration agreement did not
limit the arbitrator’s power to fashion an equitable remedy, and
the remedy he fashioned related directly to the Plan’s breach of
contract claim against the 12% Program. Therefore, the
arbitrator did not violate California law, let alone exceed his
44
powers, by not awarding the Plan damages on its breach of
contract claim.
The Plan argues “the Arbitrator had no jurisdiction to
make any findings as to Cohen because Cohen never agreed to
arbitrate.” The Plan cites Luster v. Collins (1993) 15 Cal. App. 4th
1338 for the proposition that an arbitrator exceeds his authority
by making findings about a third party’s liability. That case,
however, held only that an arbitrator exceeded his authority by
requiring a party to pay damages to a third party who did not
participate in or agree to the arbitration. (Id. at p. 1350.) Here,
the arbitrator did not require a party to compensate a third party
who did not agree to arbitrate; the arbitrator denied recovery to a
party to the arbitration agreement (the Plan) based on that
party’s conduct, which was related to the conduct of a third party
(Cohen). The arbitrator concluded the Plan could not recover
damages based on the finding that the Plan “was not an
innocently injured investor,” a finding well within his authority
under the arbitration agreement and the rules of arbitration.
(See Moshonov v. Walsh (2000) 22 Cal. 4th 771, 776 (Moshonov)
[arbitrator was empowered “to decide the law and facts of the
case” under the agreed rules of arbitration]; see also Gueyffier v.
Ann Summers, Ltd. (2008) 43 Cal. 4th 1179, 1184 (Gueyffier)
[“[w]hen parties contract to resolve their disputes by private
arbitration, their agreement ordinarily contemplates that the
arbitrator will have the power to decide any question of contract
interpretation, historical fact or general law necessary, in the
arbitrator’s understanding of the case, to reach a decision”].) The
arbitrator’s resolution of this issue was “what the parties
bargained for in the arbitration agreement.” (Moncharsh, supra,
3 Cal.4th at p. 28.)
45
Moreover, the record does not support Cohen’s contention
he did not agree to arbitrate. Cohen initiated the arbitration,
referring (falsely) to himself as a “Claimant.” And when the
Programs filed a counterclaim against Cohen for
misrepresentation and indemnification, Cohen did not object to
arbitrating the counterclaim.20
D. The Arbitrator Did Not Exceed His Powers by
Denying the Prevailing Parties’ Request for Attorneys’
Fees
The arbitration provision in the subscription agreements
entitled the prevailing party “to an award of its reasonable costs
and expenses, including, but not limited to, attorneys’ fees.” The
arbitrator concluded the amount of the fees paid to the attorneys
who represented Cohen and (later) Cohen’s clients was
reasonable, but the arbitrator did not award attorneys’ fees to the
clients as the prevailing parties because “the attorneys’ fees and
costs were not paid by a prevailing party.” As stated, the
arbitrator found that Cohen, whose law firm had advanced the
attorneys’ fees and costs, was “culpable for advising his clients to
invest in the Programs” and that Cohen’s firm and the Plan were
not prevailing parties. The arbitrator concluded: “Awarding
attorneys’ fees and costs to the law firm whose founding partner
is a culpable party, who profited from his mistaken advice, would
be a gross injustice and violate the equitable principle of unclean
hands.” The Plan contends the arbitrator exceeded his authority
20 According to Cohen and the Plan, the Programs abandoned
the counterclaim before the arbitrator issued his award.
46
by refusing to award the clients their attorneys’ fees as prevailing
parties and effectively “rewriting” the subscription agreements.
1. Applicable Law
As discussed, a court may correct or vacate an arbitration
award where the arbitrator exceeds his or her authority under
the arbitration agreement or a submission to arbitration.
(Gueyffier, supra, 43 Cal.4th at p. 1185; Safari Associates,
supra, 231 Cal.App.4th at p. 1409.) Thus, “[a]n exception to the
general rule assigning broad powers to the arbitrator[ ] arises
when the parties have, in either the contract or an agreed
submission to arbitration, explicitly and unambiguously limited
those powers.” (Gueyffier, at p. 1185; see Advanced Micro
Devices, supra, 9 Cal.4th at pp. 375-376.)
The Plan contends the terms of the arbitration agreement
limited the arbitrator’s authority by requiring him to award the
prevailing parties attorneys’ fees. The Plan relies on DiMarco,
supra, 31 Cal. App. 4th 1809, where the court held an arbitrator
exceeded his authority by refusing to award attorneys’ fees to the
prevailing party despite a provision of the arbitration agreement
stating “‘the prevailing party shall be entitled to reasonable
attorney’s fees and costs.’” (Id. at p. 1812, fn. 1.) The court in
DiMarco reasoned that, once the arbitrator determined that a
party was the prevailing party, the terms of the agreement
compelled the arbitrator to award that party reasonable
attorneys’ fees. (Id. at p. 1815.)
This holding of DiMarco has not fared well in the decades
since the court’s decision. In Moshonov, supra, 22 Cal. 4th 771
the Supreme Court clarified the circumstances in which an
arbitrator may deny the prevailing party a contractual fee award
47
without exceeding his or her authority. In that case the
arbitrator denied the prevailing parties’ request for attorneys’
fees, finding the contractual attorneys’ fees provision did not
encompass the non-contractual tort claims on which the
prevailing parties prevailed. (Id. at p. 775.) The Supreme Court
refused to vacate or correct the award, restating well-settled law
that arbitrators do not exceed their powers “merely by rendering
an erroneous decision on a legal or factual issue, so long as the
issue was within the scope of the controversy submitted to the
arbitrators.” (Id. at p. 775; see Moncharsh, supra, 3 Cal.4th at
pp. 11-12.) The Supreme Court distinguished DiMarco (stating
“[w]e need not decide whether DiMarco’s reasoning is correct”) on
the ground the arbitrator in DiMarco did not base his decision
denying an award of attorneys’ fees on an interpretation of the
underlying contract, but on a mistaken belief the contract gave
him discretion to deny fees to the prevailing party. (Moshonov,
at p. 779.)
In Moore v. First Bank of San Luis Obispo (2000) 22
Cal. 4th 782 (Moore) the Supreme Court held that, where the
parties submit the issue of attorneys’ fees to the arbitrator, the
arbitrator’s ruling on the request for fees does not exceed his or
her powers, even if the ruling is erroneous under California law.
(Id. at p. 784.) As in DiMarco, the arbitration agreement in
Moore appears to have mandated an award of attorneys’ fees in
certain circumstances,21 but the arbitrator nevertheless required
21 The arbitration agreement provided that “plaintiff
borrowers agreed to pay the Bank’s ‘collection costs,’ including
‘ . . . attorneys’ fees,’” and it incorporated deeds of trust that
“entitl[ed] the Bank, but not the borrowers, to reasonable
48
each party to pay its attorneys’ fees. (See id. at pp. 785-786.)
The Supreme Court acknowledged that, unlike the arbitrator in
DiMarco, the arbitrator in Moore did not designate a prevailing
party. “That failure amounted at most to an error of law on a
submitted issue, which does not exceed the arbitrators’ powers
under the holding of Moncharsh, supra, 3 Cal.4th at page 28.
DiMarco, in which the arbitrator expressly designated a
prevailing party but refused to award that party fees as
mandated by the contract [citation], is thus distinguishable.”
(Moore, at p. 788.)
Eight years later, in Gueyffier, supra, 43 Cal. 4th 1179, the
Supreme Court considered whether an arbitrator exceeded his
authority by excusing a party from complying with a notice-and-
cure provision in an agreement that identified the provision as “‘a
material term of this Agreement [that] may not be modified or
changed by any arbitrator in an arbitration proceeding or
otherwise.’” (Id. at p. 1183.) The Supreme Court concluded the
arbitrator did not exceed his powers because the agreement “did
not unambiguously prohibit the arbitrator from excusing
performance of a contractual condition.” (Id. at p. 1185.) “The
no-modification clause did not ‘explicitly and unambiguously’
[citation] bar the arbitrator from deciding that [the] notice-and-
cure provision was inapplicable on the facts of the case as he
found them.” (Ibid.) The Supreme Court acknowledged the “no-
modification clause could perhaps be interpreted as also
precluding equitable excusal of a condition, but the arbitrator
attorney fees ‘[i]f Lender institutes any suit or action to enforce
any of the terms of this Deed of Trust.’” (Moore, supra, 22
Cal.4th at p. 785.)
49
evidently did not adopt such an interpretation. As construction
of the contract was for the arbitrator, not the courts, we cannot
say he exceeded his powers, within the meaning of section 1286.2,
subdivision (a)(4), by failing to adopt a particular interpretation
of the agreement.” (Gueyffier, at p. 1186.) The Supreme Court
distinguished DiMarco, observing that the court in DiMarco
“found a direct, explicit contradiction between the contractual
command and the arbitrator’s refusal to award the prevailing
party fees, whereas no such inescapable contradiction exists in
this case.” (Gueyffier, at p. 1188.)
Safari Associates, supra, 231 Cal. App. 4th 1400 relied on
Gueyffier in declining to follow DiMarco and refusing to correct
an arbitration award that contradicted the terms of an attorneys’
fee provision. (Safari Associates, at p. 1412.) The arbitration
agreement in Safari Associates stated California law would
govern the agreement, but included a definition of “prevailing
parties” that conflicted with the definition in Civil Code section
1717. (Safari Associates, at p. 1403.) The arbitrator declared the
language in the attorneys’ fee provision void, found one party the
“prevailing party” under Civil Code section 1717, and awarded
that party attorneys’ fees. (Safari Associates, at pp. 1403, 1406.)
The other party cited DiMarco in support of its argument that
the arbitrator exceeded his powers in light of the contrary
language in the arbitration agreement. (Safari Associates, at p.
1412.) The court in Safari Associates declined to follow DiMarco,
explaining: “To the extent that DiMarco can be read as holding
that a trial court may vacate an arbitration award on the ground
that the arbitrator ‘explicit[ly] contradict[ed]’ the parties’
agreement [citations], we decline to follow such reasoning. In our
view, under the reasoning of Gueyffier [citation], Moore [citation],
50
and Moshonov [citation], a legally incorrect decision, even one
that ‘explicitly contradict[s]’ the parties’ agreement, is just that—
a legally incorrect decision, which is not subject to correction by a
trial court.” (Safari Associates, at pp. 1412-1413, fn. omitted.)
We agree with the court in Safari Associates that, in light
of Moshonov, Moore, and Gueyffier, the reasoning of DiMarco is
not persuasive. Indeed, even the court that decided DiMarco has
acknowledged that subsequent Supreme Court opinions have
“expressed ambivalence about the DiMarco decision.” (Century
City Medical Plaza v. Sperling, Isaacs & Eisenberg (2001) 86
Cal. App. 4th 865, 881.) As the Supreme Court in
Moore explained, “Where the entitlement of a party to attorney
fees under Civil Code section 1717 is within the scope of the
issues submitted for binding arbitration, the arbitrators do not
‘exceed[ ] their powers’ [citations], as we have understood that
narrow limitation on arbitral finality, by denying the party’s
request for fees, even where such a denial order would be
reversible legal error if made by a court in civil litigation.”
(Moore, supra, 22 Cal.4th at p. 784.) Similarly, where a party
submits the issue of attorneys’ fees to the arbitrator, the party
cannot argue the arbitrator exceeded his powers within the
meaning of section 1286.6, subdivision (b), by deciding the issue,
even if the arbitrator decided it incorrectly. (Moore, at p. 787.)
Thus, “where an arbitrator’s denial of fees to a prevailing party
rests on the arbitrator’s interpretation of a contractual provision
within the scope of the issues submitted for binding arbitration,
the arbitrator has not ‘exceeded [his or her] powers.’” (Moshonov,
supra, 22 Cal.4th at p. 773.)
51
2. The Subscription Agreements Did Not Restrict
the Arbitrator’s Power To Deny Attorneys’ Fees
to the Prevailing Party
The parties submitted the issue of attorneys’ fees to the
arbitrator.22 In ruling on that issue, the arbitrator interpreted
the subscription agreements as giving him discretion to deny an
award of attorneys’ fees where the prevailing parties’ fees had
been paid by a non-prevailing party. The arbitrator had the
authority to make that interpretation. (See Safari Associates,
supra, 231 Cal.App.4th at p. 1413.)
The subscription agreements did not explicitly and
unambiguously limit the arbitrator’s power to interpret the
agreements in this manner. (See Gueyffier, supra, 43 Cal.4th at
p. 1185.) In Gueyffier the Supreme Court stated the parties could
have prohibited the arbitrator from excusing performance of
material conditions, for example, by “expressly agreeing that the
arbitrator would have no power to ‘modify, change or excuse
performance of’ a material term.” (Gueyffier, at p. 1185, fn. 3.) In
Safari Associates the court stated the parties could have limited
“the arbitrator’s power to apply a definition of prevailing party
other than the definition contained in the [arbitration]
[a]greement” by including in the agreement language “evincing
such an intent.” (Safari Associates, supra, 231 Cal.App.4th at
p. 1411, italics omitted.) The court in Safari Associates held that,
22 The record does not include many of the parties’
submissions to the arbitrator, but the motion to correct the award
of the arbitrator filed by the Cohen Parties referred to their
supplemental closing brief to the arbitrator, in which they
requested an award of reasonable attorneys’ fees and costs.
52
absent such language, “we may not construe the provision in the
[a]greement defining the term ‘prevailing party,’ as being an
‘explicit[ ] and unambiguous[ ]’ [citation] limitation on the
arbitrator’s powers.” (Id. at p. 1412.) Similarly, had the parties
to the subscription agreements here wanted to tie the hands of
the arbitrator, they could have included language requiring the
arbitrator to award attorneys’ fees to the prevailing party.
The attorneys’ fees provision here did not do that. To
construe it otherwise would “intrude upon the ‘broad powers’
[citation] of the arbitrator to decide” questions of contract
interpretation and would “improperly expand the ‘narrow
limitation on arbitral finality.’” (Safari Associates, supra, 231
Cal.App.4th at p. 1412, citing Gueyffier, supra, 43 Cal.4th at
p. 1185, fn. 3 and Moore, supra, 22 Cal.4th at p. 787.) Therefore,
because the arbitrator’s award was rationally related to the
contract and the breach, the arbitrator had the authority to
decide whether to award attorneys’ fees to the prevailing parties
“‘on principles of equity and good conscience, and make [his]
award ex aequo et bono [according to what is just and good].’”
(Moncharsh, supra, 3 Cal.4th at p. 11; accord, Kelly Sutherlin
McLeod Architecture, Inc. v. Schneickert (2011) 194 Cal. App. 4th
519, 530.)
IV. The Trial Court Erred by Denying Attorneys’ Fees to the
Prevailing Parties in the Postarbitration Court Proceedings
The Cohen Parties filed a motion for attorneys’ fees
incurred in litigating the petition to vacate and the cross-
petitions to correct the award. The trial court denied the motion,
suggesting it agreed with the arbitrator’s ruling and reasons for
53
denying an award of attorneys’ fees. The court stated, “I think
the arbitrator had the authority and the analysis to do what was
done in the arbitration. I’m just going to leave it the way it is
and deny the motion for attorneys’ fees.” The court did not
appear to have considered whether the Cohen Parties were
prevailing parties in postarbitration proceedings. The Plan and
Cohen’s clients correctly contend the trial court erred.
A. Applicable Law
Section 1293.2 provides “[t]he court shall award costs upon
any judicial proceeding under this title [governing arbitration] as
provided in Chapter 6 (commencing with Section 1021) . . . of this
code.” Section 1033.5, subdivision (a)(10)(A), provides that items
recoverable as costs include attorneys’ fees when authorized by
contract. “The judicial proceedings covered by this provision
include petitions to confirm or vacate an arbitration award.”
(Marcus & Millichap Real Estate Investment Brokerage Co. v.
Woodman Investment Group (2005) 129 Cal. App. 4th 508, 513
(Marcus & Millichap); accord, Heimlich v. Shivji (2017) 12
Cal.App.5th 152, 161-162, review granted Aug. 23, 2017,
S243029.)
“The award of costs pursuant to section 1293.2, including
attorney fees when authorized by contract, is mandatory.”
(Marcus & Millichap, supra, 129 Cal.App.4th at p. 513; see
Corona v. Amherst Partners (2003) 107 Cal. App. 4th 701, 707 [“[a]
court must award costs in a judicial proceeding to confirm, correct
or vacate an arbitration award”]; Carole Ring & Associates v.
Nicastro (2001) 87 Cal. App. 4th 253, 260 (Carole Ring) [“the
superior court was required to award [the prevailing party]
reasonable attorney fees and costs for post-arbitration judicial
54
proceedings, pursuant to the statutory scheme governing
arbitration”].)
Postarbitration proceedings are distinct from arbitration
proceedings, and it may be that the prevailing party in the
arbitration is not the prevailing party in postarbitration
proceedings. (Marcus & Millichap, supra, 129 Cal.App.4th at
pp. 514, 516; see Carole Ring, supra, 87 Cal.App.4th at p. 261.)
Courts look to section 1032 to determine which party is the
prevailing party in postarbitration proceedings. (Marcus &
Millichap, at p. 514.)23 Section 1032, subdivision (a)(4), defines
“[p]revailing party” to include “the party with a net monetary
recovery, a defendant in whose favor a dismissal is entered, a
defendant where neither plaintiff nor defendant obtains any
relief, and a defendant as against those plaintiffs who do not
recover any relief against that defendant.”
B. The Trial Court Erred in Denying the Request by the
Plan and Cohen’s Clients for Attorneys’ Fees Incurred
in the Postarbitration Proceedings
23 The court in Carole Ring looked to Civil Code section 1717
to determine whether a party was the “prevailing party” for
purposes of awarding postarbitration attorneys’ fees. (Carole
Ring, supra, 87 Cal.App.4th at p. 261.) Like section 1032,
subdivision (a)(4), Civil Code section 1717 defines “prevailing
party” as “the party who recovered a greater relief in the action
on the contract.” (Civ. Code, § 1717, subd. (b)(1).) Section 1032 is
the applicable authority, however, because section 1293.2, which
governs costs recoverable in arbitration proceedings, cites the
chapter of the Code of Civil Procedure that includes section 1032.
55
The Cohen Parties requested attorneys’ fees after the trial
court confirmed the arbitration award and denied two of the
Cohen Parties’ cross-petitions to correct the award. As discussed,
the subscription agreements included a mandatory attorneys’
fees provision, and the Plan and Cohen’s clients were prevailing
parties in the postarbitration proceedings because they
successfully defeated the petition to vacate the award and
successfully confirmed the monetary awards in favor of Cohen’s
clients. (See Marcus & Millichap, supra, 129 Cal.App.4th at p.
514 [parties that defeated the petition to confirm were the
prevailing parties “[a]s a matter of law”]; Carole Ring, supra, 87
Cal.App.4th at p. 261 [party that obtained reversal on appeal
with directions to the trial court to enter judgment confirming an
arbitration award was the prevailing party].) The fact that the
arbitrator denied attorneys’ fees to the Cohen Parties did not give
the trial court discretion to deny attorneys’ fees under section
1293.2.
Because the Plan and Cohen’s clients were the prevailing
parties, the mandatory language of the contractual attorneys’
fees clause and section 1293.2 entitled them to reasonable
attorneys’ fees incurred in the postarbitration judicial
proceedings. Their entitlement to fees, however, was limited to
attorneys’ fees incurred in opposing the petition to vacate and
bringing the cross-petition to correct the award in favor of the
client investor whose award was inadvertently misstated and
corrected. The Plan and the clients did not prevail on their other
two cross-petitions. Therefore, we remand to the trial court with
directions to determine the appropriate amount of attorneys’ fees
to be awarded. (See Corona v. Amherst Partners, supra, 107
Cal.App.4th at p. 707.)
56
DISPOSITION
The judgment is vacated. The matter is remanded with
directions for the trial court (1) to vacate the order compelling
Thompson and TNP to arbitrate and to enter a new order
denying the petition to compel Thompson to arbitrate and
granting the petition to compel TNP to arbitrate claims involving
the 12% Program only; (2) to vacate the order confirming the
arbitration award and to enter a new order confirming the award
against the Programs and against TNP with respect to the 12%
Program only; and (3) to vacate the order denying the motion for
attorneys’ fees for postarbitration court proceedings and to enter
a new order granting reasonable fees in an amount to be
determined by the trial court. The motion to strike and request
for judicial notice are denied. The parties are to bear their costs
on appeal.
SEGAL, J.
We concur:
PERLUSS, P. J. FEUER, J.
57