Browne v. Falk CA1/1 ( 2023 )

Filed 1/12/23 Browne v. Falk CA1/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or
ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION ONE
JOHN BROWNE,
Petitioner and Respondent,
A163049
v.
DANIEL FALK, (Sonoma County
Super. Ct. No. SPR-094267)
Appellant.
Appellant Daniel Falk is the trustee of a trust, and respondent John
Browne is one of the trust’s beneficiaries. The documents governing the trust
do not include an arbitration provision, but the main asset of the trust is a
company with an operating agreement that does include an arbitration
provision. Both Falk and Browne are members of the company. After
Browne filed this action in probate court seeking a trust accounting and the
removal of Falk as trustee, Falk filed a motion to compel arbitration of the
dispute. The trial court denied the motion. It concluded that because
Browne’s claims were brought as a beneficiary of the trust, and not as a
member of the company, they were not covered by the arbitration provision in
the company’s operating agreement. We affirm.
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I.
FACTUAL AND PROCEDURAL
BACKGROUND
Browne worked for a man named Harold Richardson starting around
1978. In 2006, Richardson executed as settlor and trustee the Harold F.
Richardson Revocable Trust (“Trust”), later amended in 2011 and 2013.
There is no arbitration agreement in the Trust.
Richardson placed into the Trust around 8,400 acres of real property in
Sonoma County along with the tools, equipment, vehicles and cattle on the
property, and the rights to timber associated with the property. The land has
been owned and managed by members of the Richardson family for more
than 150 years.
Then in 2012, Richardson formed the Richardson Ranch LLC (RRLLC
or the Ranch) in Nevada and registered it in California as a foreign limited
liability company. Its primary business is the sale of timber and timber
products on the land owned by the Richardson family. Shortly after the
Ranch was registered in Nevada, Richardson executed an operating
agreement for it. The operating agreement includes an arbitration clause,
which provides in part that “[a]ny action to enforce or interpret this
Agreement or to resolve disputes between the Members, or by or against any
Member, will be settled by arbitration.”
At first, the Trust was the sole member of the Ranch (meaning the
Trust owned 100 percent of the company), and appellant Daniel Falk was the
manager. At some point Richardson transferred part of the Trust’s
membership in the Ranch to its current members: Browne, Falk, Falk’s
mother (Richardson’s niece), and Falk’s brother. The Trust currently owns a
79.586 percent membership interest in the Ranch.
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Apparently as part of the transfer, in December 2013 Richardson
signed an “Assignment of Membership Interests,” which transferred a
0.069 percent membership interest in the Ranch to Browne. Browne signed
the document under the heading “Acceptance of Assignment,” which stated
that Browne accepted the assignment and assumed “all obligations and
undertakings of a Member” under the Ranch’s operating agreement.
Richardson resigned as trustee of the Trust in 2015 and appointed Falk
as successor trustee. Richardson died in 2016. Browne and Richardson’s
niece (Falk’s mother) are currently the only two beneficiaries of the Trust.
According to Browne, Falk has acted improperly since becoming
trustee. In March 2020 Browne filed a petition in probate court to compel an
accounting and to remove Falk as trustee for breach of fiduciary duty.
Because the parties dispute whether the operating agreement’s arbitration
clause covers the allegations in the petition, we summarize the allegations in
detail.
According to the petition, after Richardson died Falk regularly
discussed at Ranch member meetings the sale of Trust assets and how sale
proceeds would benefit the Ranch. Falk, allegedly without permission from
Trust beneficiaries, “frequently divulge[d] confidential information about the
Trust’s accounts, stock and loans at these meetings.” Falk also discussed how
the Trust could “bolster” the Ranch but never discussed “a mutual benefit
back to the Trust.”
The petition further alleges that Falk paid himself trustee fees before
he had earned them and paid himself duplicative fees as trustee and as
manager of the Ranch. As manager of the Ranch, Falk allegedly persuaded
Ranch members to sell a parcel of Ranch property to help pay for
Richardson’s estate taxes. But although he was required to use sale proceeds
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to pay estate taxes, Falk—as trustee of the Trust—lent a portion of the
proceeds to the Ranch to “build up its reserves.” According to the petition,
this benefitted Falk personally to the detriment of Trust beneficiaries,
because the Trust had less money to pay down its estate-tax liability, which
led to the Internal Revenue Service seeking a lien against Trust property.
Falk allegedly misrepresented the intended use of the sales proceeds as
Ranch manager, then acted improperly as trustee of the Trust by failing to
carry out the Trust’s “explicit provision listing the payment of estate taxes as
one of the paramount uses of Trust assets upon Mr. Richardson’s death.”
The petition further alleges, under a section titled “Failure to Protect
and Preserve Trust Assets,” that Falk acted improperly as manager of the
Ranch by, among other things, doing business with entities that he or his
family members controlled, mismanaging Ranch equipment, and abusing his
management authority. Falk also is alleged to have engaged in self-dealing
contracts with his and his family’s separate businesses by engaging in
exclusive contracts between the Ranch and the family businesses. The Ranch
allegedly lost profits and absorbed unnecessary expenses by not opening
logging bids to competitive third parties. And the Ranch’s rights have not
been protected or pursued, because “timber sales have declined while labor
costs have increased, resulting in decreased profitability of the overall timber
business unit.”
Under a section titled “Employment Issues,” the petition alleges that
after Richardson died, Falk converted Browne from an employee of the Ranch
to an independent contractor even though his duties remained the same.
According to the petition, the alleged misclassification exposes the Ranch and
Falk to liability.
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Starting around 2017 and 2018, Falk allegedly ignored requests from
Ranch members for information they were entitled to receive and inspect.
Then in January 2019 Falk proposed at a Ranch members meeting that a
parcel of property be sold to finance and develop an event-venue business he
was developing elsewhere on Ranch property. Falk allegedly listed the
property for sale even though members did not approve. He also allegedly
spent unapproved money on the business and refused to provide Browne with
information about “secret profits” being earned by Falk’s own businesses,
according to the petition. Additionally, Falk allegedly abused his authority
as manager of the Ranch and “has acted contrary to the explicit language of
RRLLC’s Operating Agreement and has breached numerous fiduciary
duties.” The petition alleged, “By failing to take action to protect RRLLC
from the abuses and breaches of its manager, Mr. Falk, as majority owner of
RRLLC, by virtue of being Trustee has breached his fiduciary duties owed to
the beneficiaries.”
Finally, the petition alleged that Falk had “obvious conflicts of interest
which render him unable to act impartially and incapable of representing the
best interests of the Trust beneficiaries or the members of RRLLC.” Falk
allegedly “clearly acted contrary to the explicit directions and intent of the
Trust and the various fiduciary laws applicable to him.” Falk characterizes
all the foregoing allegations as ones that he has harmed the Ranch and
Browne’s membership interest in the company.
The remedies sought by Browne related solely to the Trust. Browne
(1) sought to compel an accounting under Probate Code sections 16062
through 16064 and 17200, subdivision (b)(7)(B)),1 (2) alleged that Falk had
breached his fiduciary duties as trustee (§§ 16420 & 16440), and (3) asked the
1 All statutory references are to the Probate Code.
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court to remove Falk as trustee and to appoint a neutral successor trustee
(§§ 15642, 17200).
Falk opposed the petition and claimed that the parties’ dispute was
subject to arbitration under the arbitration clause in the Ranch’s operating
agreement. He filed a motion to compel arbitration and to stay the action,
which Browne opposed.
The trial court denied the motion to compel arbitration because Falk
had not met his burden to show the existence of an arbitration agreement
governing the claims at issue. The court acknowledged that the language of
the operating agreement’s arbitration clause was broad and that the Trust
and Ranch were related, but concluded that the arbitration clause did not
cover Browne’s claims, which were related to the Trust.
II.
DISCUSSION
Falk argues that the trial court should have granted his motion to
arbitrate because Browne is bound by the arbitration clause in the Ranch’s
operating agreement. Although Browne argues that he is not bound by the
clause, we assume for purposes of this appeal that he is. Still, Falk failed to
satisfy his burden of proving the existence of an enforceable arbitration
agreement covering the parties’ dispute over Falk’s role as trustee. (See
Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC
(2012) 55 Cal.4th 223, 236.) “Where, as here, the evidence is not in conflict,
we review the trial court’s denial of arbitration de novo.” (Ibid.)
We agree with Falk to the extent that the operating agreement’s
arbitration clause is broad, providing that “[a]ny action to enforce or interpret
this Agreement or to resolve disputes between the Members, or by or against
any Member, will be settled by arbitration.” But Browne’s petition is not
seeking to “enforce or interpret” the operating agreement, as such. Instead, it
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seeks to compel an accounting by Falk as trustee of the Trust (§§ 16062–
16064, 17200, subd. (b)(7)(B)) and to remove Falk as trustee for breach of
fiduciary duty (§§ 15642, 17200, subd. (b)(10)). The allegations center on
Falk’s alleged wrongdoing in his role as trustee: his alleged failures to
provide a requested accounting of the Trust (§ 17200), to treat Trust
beneficiaries impartially (§ 16003), to enforce Trust claims against other
business entities (§ 16010), and to preserve Trust property (§ 16006).
As the trial court concluded, while some of the petition’s allegations
may be related to Falk’s role as manager of the Ranch, “the claims
themselves are brought by [Browne] as a beneficiary of the trust, not as a
member of the [Ranch]; and the claims are made against [Falk] in his
capacity as the trustee, not as the Manager of the [Ranch].” The court
correctly observed that the petition invokes the court’s equitable jurisdiction
to oversee the Trust’s affairs and to enforce the trustee’s duties, which “are
the inherent duties of the Court and would only be tangentially related to
matters involving the operations of the” Ranch.
Falk argues that the court must examine whether the arbitration
agreement encompasses the factual allegations of the petition, regardless of
whatever “legal label” Browne assigned to the claims. (J.J. Ryan & Sons,
Inc. v. Rhone Poulenc Textile, S.A. (4th Cir. 1988) 863 F.2d 315, 319.) He
goes so far as to claim that Browne’s counsel “admitted” at the hearing in the
trial court that Browne’s petition was “artfully pleaded to avoid arbitration.”
What counsel acknowledged was that the petition was carefully drafted to
make clear that Browne was pursuing his rights as a Trust beneficiary, as
opposed to as a member of the Ranch. Falk claims that the term “[a]ny
action” and the fact the clause contemplates arbitration “between . . . or by or
against any Member” mean that “any dispute between members (including
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Mr. Browne and Mr. Falk, both of whom are Members) or against a Member
must be arbitrated.” We decline to interpret the term so expansively as to
encompass non-operating agreement disputes.
Falk argues that “any action that requires interpretation of any
provision of the” Ranch’s operating agreement “is within the wide ambit of
the provision.” But we disagree with his contention that “Browne’s claims
are inexorably intertwined with the provisions of the [operating agreement]
and the duties and standards of care that they impose upon the manager,
Mr. Falk, requiring interpretation and enforcement of the [operating
agreement].” Falk apparently refers to a provision of the agreement stating
that the manager may be removed “for cause” only if members owning two-
thirds of all membership interests determine that there is good cause, defined
as “gross negligence or willful misconduct.” Falk claims that because Browne
“wants the probate court to order the trustee to remove Mr. Falk as Manager,
one of the issues central to this litigation is who has the right to remove the
Manager of the Ranch LLC for good cause.” The reference to removing Falk
as manager of the Ranch appears in a section of the petition titled “Conflict of
Interest.” The petition alleges that Falk has conflicting and competing
interests as the trustee of the Trust, a member of the Ranch, the Ranch’s
manager, and an owner and manager of separate businesses. It then states
that “[t]hese conflicts can be mitigated only by his suspension and removal as
trustee of the Trust and as manager of RRLLC.” But the petition’s causes of
action seek only removal of Falk as trustee of the Trust pursuant to the
Probate Code, not as manager of the Ranch because of a violation of the
operating agreement.
Falk similarly asserts that “whether [he] violated the [operating
agreement] is an indispensable predicate of Mr. Browne’s claim that Mr. Falk
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breached his fiduciary duties as trustee.” We accept that the Trust and the
Ranch are interconnected and that litigation over the Trust will affect the
Ranch because it is the Trust’s primary asset. But this effect does not
transform this trust into one governed by the operating agreement’s
arbitration clause. Even if the trust documents themselves contained an
arbitration provision, the arbitrability of the parties dispute would be
uncertain. (See McArthur v. McArthur (2014) 224 Cal.App.4th 651, 663.)
Browne has pointed to no authority, nor are we aware of any, that leads to a
conclusion that when—as here—the governing trust documents contain no
arbitration provision, a probate court must nonetheless compel arbitration in
trust proceedings because a company that is an asset of the trust has an
operating agreement with an arbitration provision.
In light of our conclusion, we need not address the parties’ arguments
regarding Browne’s alternative contention below, that the operating
agreement’s arbitration clause is unconscionable.
III.
DISPOSITION
The order denying the motion to compel arbitration is affirmed.
Browne shall recover his costs on appeal.
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_________________________
Humes, P.J.
WE CONCUR:
_________________________
Margulies, J.
_________________________
Devine, J. *
*Judge of the Superior Court of the County of Contra Costa, assigned
by the Chief Justice pursuant to article VI, section 6 of the California
Constitution.
Browne v. Falk A163049
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