Gree Gate Services, LLC v. Koetting CA1/3 ( 2020 )

Filed 12/4/20 Gree Gate Services, LLC v. Koetting CA1/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or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 THREE
GREEN GATE SERVICES, LLC et
al.,
Plaintiffs and Respondents, A158316
v. (Humboldt County
DANIEL KOETTING et al., Super. Ct. No. CV190030)
Defendants and Appellants.
The appellants in this case are Redondo Management, LLC (Redondo),
its managing partner Mark Koetting, Rockhill Consulting Group, LLC
(Rockhill), and its president Daniel Koetting (collectively, appellants).1 The
respondents are Clear Loan Solutions, LLC (Clear Loan) and Green Gate
Services, LLC (Green Gate) (collectively, respondents), tribal lending entities
who entered into contracts with Redondo and Rockhill to manage their online
lending programs.
In challenging the trial court’s confirmation of an arbitration award in
favor of respondents, appellants contend the arbitrator exceeded his
authority by: (1) determining the Koettings were subject to arbitration as
alter egos of Redondo and Rockhill; and (2) awarding respondents damages in
1 For clarity and brevity, we use the Koettings’ first names. No
disrespect is intended.
1
excess of an express contractual provision that limited their compensation.
We disagree with the latter contention but agree with the first, as
respondents did not show that the Koettings impliedly consented to
arbitration or that clear and unmistakable evidence showed the Koettings
consented to have the arbitrator determine the gateway question of whether
they, as nonsignatories, were individually bound by the arbitration
agreement. Accordingly, the judgment is reversed and remanded with
directions.
FACTUAL AND PROCEDURAL BACKGROUND2
Respondents are tribal lending entities organized under the laws of the
Big Lagoon Rancheria (the tribe), a federally recognized tribe of Yurok and
Tolowa Indians. The tribe formed respondents to engage in marketing and
servicing of small-dollar short-term loans made over the Internet.
In 2013, respondents retained Redondo and Rockhill to manage their
online lending programs. Green Gate entered into a Consultant and
Independent Contractor Agreement with Rockhill, and Clear Loan entered
into a substantially identical agreement with Redondo. Each agreement
defined the terms “ ‘Party’ ” or “ ‘Parties’ ” to mean Green Gate and Rockhill,
and Clear Loan and Redondo, respectively. Daniel signed the agreement
2 Parts of the record and the parties’ briefs pertaining to the arbitration
proceeding were filed under seal in this court (Cal. Rules of Court, rule
8.46(b)), but some of the relevant facts are otherwise already in the public
record. At oral argument, the court requested that the parties identify the
specific factual material in the record each party believes must remain
sealed. Based on the parties’ responses and in light of the facts that are
otherwise known to be in the public record, this opinion narrowly excludes
only certain details claimed by respondents as trade secrets. (Cal. Rules of
Court, rule 2.550(d); NBC Subsidiary (KNBC TV) v. Superior Court (1999) 20
Cal.4th 1178, 1222, fn. 46.)
2
with Green Gate in his capacity as president of Rockhill, and Mark signed the
agreement with Clear Loan in his capacity as managing partner of Redondo.
Under the agreements, Redondo and Rockhill were responsible for
acquiring capital for the loans, contracting with vendors and service
providers, ensuring regulatory compliance, preparing financial statements,
and managing respondents’ banking relationships. According to the
agreements, respondents agreed to pay Redondo and Rockhill a “salary” and
performance fee. According to a “Compensation Schedule” attached to the
agreements, respondents would first receive a specified portion of profits
based on a formula before Redondo and Rockhill received their agreed
payments and fees.
The agreements each contain a section on “Dispute Resolution”
requiring the parties to arbitrate any “dispute arising under this Agreement,”
including claims of breach and “any dispute over the proper interpretation of
the terms and conditions hereof.” Relevant to this appeal is section 8(a)(ii),
which provides “[t]he remedies available through arbitration are limited to
enforcement of the provisions of this Agreement.”
In 2017, the parties’ relationships began to deteriorate, and Redondo
and Rockhill began winding down the loan portfolios. Appellants allegedly
implemented a “remarketing program,” telling loan customers that the tribe
would no longer be making loans and persuading the customers to continue
borrowing from new lenders unaffiliated with the tribe. In January 2018,
respondents terminated the agreements and instructed Redondo and Rockhill
not to make any payments to themselves or third parties of any money
derived from the lending partnership.
3
In late January 2018, Green Gate filed a demand for arbitration
against Rockhill and Daniel.3 In February 2018, Rockhill filed a demand for
arbitration and counterclaim against Green Gate, and Redondo filed a
demand for arbitration against Clear Loan. In March 2018, Clear Loan filed
counterclaims against Redondo and Mark.
Respondents’ claims against appellants included breach of contractual
and fiduciary duties (for diverting respondents’ customers to new lenders),
fraud, theft, failure to safeguard customer data, payment to themselves
following termination, and failure to transfer revenue owed. Respondents
alleged the Koettings operated Redondo and Rockhill as their alter egos. In
turn, Redondo and Rockhill accused respondents of breaching the agreements
by failing to “enhance compliance” of the lending program, using licensed
intellectual property following the termination of the agreements, lacking
good faith, and interfering in the winding down process.
Early in the arbitration, appellants filed an answering statement
denying the allegations in Green Gate’s arbitration demand and asserting
that the Koettings were not proper parties to the agreements or subject to the
arbitrator’s jurisdiction. A few months later, in May 2018, Redondo and
Rockhill jointly filed a “Motion Relating to Joinder of Parties” (joinder
motion) in which they “formally object[ed] to the inclusion of” the Koettings in
the arbitration and requested dismissal of the Koettings. Redondo and
Rockhill further requested that the arbitrator “hold” any ruling on the joinder
motion until an upcoming status conference due to their concern that
immediate dismissal of the Koettings would require Redondo and Rockhill to
3 Green Gate’s arbitration demand also named Rivo Holdings, LLC,
another entity belonging to Daniel that was eventually dismissed from
arbitration.
4
defend a separate suit simultaneously with the arbitration. The arbitrator
eventually denied the motion, finding that respondents’ allegations against
the Koettings were “so intertwined” with the agreements that the Koettings
were estopped from objecting to being parties to the arbitration.
During the arbitration, the arbitrator issued “Procedural Order #2
Regarding Stipulation of the Parties Concerning Filing of Additional
Proceedings,” which indicated that (1) “Claimants (Rockhill and Redondo)”
would provide respondents with login and password information to access the
customer lending program databases, and (2) respondents “will not prior to
the end of arbitration proceedings file a lawsuit or seek any type of injunctive
proceeding against the loan management software companies, the service
providers . . . or other affiliates or vendors of the Claimants . . . unless the
Respondents have given the Claimants and the arbitrator 5 business days[’]
prior written notice in order for the Claimants to have an opportunity to seek
an emergency hearing in front of the arbitrator.”
After briefing, two days of hearing, and post-hearing briefs, the
arbitrator issued a final award in favor of respondents. The arbitrator found
that appellants breached the covenant of good faith and fair dealing to act for
the benefit of respondents by “remarketing” respondents’ customers to
unrelated entities controlled by the Koettings and writing off loans belonging
to respondents so that new business could be generated for the other Koetting
entities. Specifically, the arbitrator found appellants “liable to Respondents
for damages which arise from their breaches, including the amount of loans
they diverted to their own entities. Had the funds not been loaned to
unrelated entities controlled by the Koettings, the loaned funds should have
remained in the bank accounts belonging to [respondents] since neither
[Green Gate] nor [Clear Loan] was making new loans.” The arbitrator
5
awarded a monetary sum to Clear Loan and a larger monetary sum to Green
Gate “for loans made to customers of” respondents. The arbitrator further
ruled that the Koettings were jointly and severally liable with Redondo and
Rockhill.
Thereafter, appellants filed a motion with the arbitrator for
modification of the final award. Notably, they reasserted their objection that
the Koettings were not proper parties to the arbitration and argued that the
court, not the arbitrator, must decide whether nonsignatories may be
required to arbitrate. Appellants also challenged the amounts of the final
award as exceeding the contractual limitation of remedies set forth in section
8(a)(ii) of the agreements. The arbitrator summarily denied the motion.
In January 2019, respondents petitioned the trial court to confirm the
arbitration award. Daniel, Rockhill, and Redondo opposed the petitions, filed
a cross-petition to vacate the arbitration award, and moved to dismiss Daniel
from the proceedings. Mark moved to quash service of summons for lack of
personal jurisdiction.
After a hearing on the matters, the trial court ultimately issued orders
granting respondents’ petition to confirm the arbitration award, denying the
cross-petition to vacate the award, and denying the motions to dismiss and
quash summons. The court subsequently entered judgment in favor of
respondents and against appellants. This appeal followed.
DISCUSSION
“Any party to an arbitration in which an award has been made may
petition the court to confirm, correct or vacate the award.” (Code Civ. Proc.,
§ 1285.) The court “shall” vacate an arbitration award if the arbitrator
exceeded his or her powers and the award cannot be corrected without
affecting the merits of the decision. (Code Civ. Proc., § 1286.2, subd. (a)(4).)
6
We review the trial court’s order confirming the arbitration award de novo.
(Greenspan v. LADT, LLC (2010) 185 Cal.App.4th 1413, 1435.)
A. Nonsignatories in Arbitration
“[A]n arbitrator has no power to determine the rights and obligations of
one who is not a party to the arbitration agreement.” (American Builder’s
Assn. v. Au-Yang (1990) 226 Cal.App.3d 170, 179.) There is a logical reason
for this. “If an arbitrator, rather than a trial court, were to determine
whether an arbitration provision were operative against a nonsignatory, a
stranger to the agreement might be subjected to and be bound by an
arbitration to which such stranger had not consented and would be without
effective review.” (Ibid.)
Thus, whether an arbitration agreement is operative against a
nonsignatory is generally a question for the trial court and reviewed de novo.
(Benroya v. Willis (2018) 23 Cal.App.5th 462, 473 (Benaroya).) “ ‘[P]arties
may delegate threshold arbitrability questions to the arbitrator, so long as
the parties’ agreement does so by “clear and unmistakable” evidence.’ ”
(Moritz v. Universal City Studios LLC (2020) 54 Cal.App.5th 238, 247.) This
is a “ ‘heightened’ standard of proof.’ ” (Ajamian v. CantorCO2e, L.P. (2012)
203 Cal.App.4th 771, 782 (Ajamian).) “[A] contract’s silence or ambiguity
about the arbitrator’s power in this regard cannot satisfy the clear and
unmistakable evidence standard.” (Ibid., citing First Options of Chicago, Inc.
v. Kaplan (1995) 514 U.S. 938, 943–945 (First Options).)
While there are several recognized theories for compelling
nonsignatories to arbitration, including when a nonsignatory is the alter ego
of a party to the arbitration agreement (Suh v. Superior Court (2010) 181
7
Cal.App.4th 1504, 1513 (Suh)),4 it remains the case that an arbitrator’s
exercise of jurisdiction over a nonsignatory on an alter ego theory cannot
occur in the absence of clear and unmistakable evidence that the
nonsignatory consented to delegate that threshold arbitrability question to
the arbitrator. (Benaroya, supra, 23 Cal.App.5th at pp. 474–475.)
Respondents contend this case is similar to Douglass v. Serenivision,
Inc. (2018) 20 Cal.App.5th 376 (Douglass), in which the court concluded that
the conduct of a nonsignatory (Douglass) demonstrated his implicit consent to
arbitration as well as to the arbitrator’s power to decide arbitrability. In
answering the arbitration demand, Douglass did not object to the arbitrator’s
jurisdiction, and he affirmed at a preliminary hearing that he was
“ ‘appear[ing] voluntarily and submit[ting] to the jurisdiction of this
Arbitrator.’ ” (Id. at p. 382.) In letters to the opposing party’s counsel and to
the arbitrator, Douglass reaffirmed that he was voluntarily appearing in the
arbitration because of its efficiency, but that his appearance was conditioned
on the opposing party posting a bond to cover his attorney fees. (Ibid.) It was
only after the arbitrator denied his bond request that Douglass sought to
withdraw. (Ibid.) The appellate court held that Douglass had clearly and
unmistakably, through his words and conduct, consented to have the
arbitrator decide which disputes were arbitrable because “he willingly and
without objection participated in the arbitration proceedings for over 10
months” while also “avail[ing] himself of the arbitrator’s authority when he
asked the arbitrator to issue an order requiring Serenivision to post a bond.”
(Id. at p. 388.) “Douglass’s participation in the arbitration was no accident,”
4 Other theories involve incorporation by reference, assumption, agency,
estoppel, and third-party beneficiaries. (Suh, supra, 181 Cal.App.4th at
p. 1513.)
8
as he indicated “he was making a conscious and tactical decision to
participate in the arbitration forum because it was cheaper.” (Id. at pp. 388–
389.)
Respondents’ reliance on Douglass is misplaced. Here, the Koettings
objected to the arbitrator’s jurisdiction in an answering statement filed at the
outset of the arbitration proceeding and before any adverse decision of the
arbitrator, and they never expressed their “voluntary” participation in
arbitration. (Douglass, supra, 20 Cal.App.5th at p. 389.) As Douglass
acknowledged, “consent to arbitration (or to the arbitrator’s power to decide
arbitrability) will not be inferred solely from a party’s conduct of appearing in
the arbitral forum to object to the arbitrator’s exercise of jurisdiction, . . . if
the party makes that objection ‘prior to participat[ing]’ in the arbitration” (id.
at p. 387), as the Koettings did here.
Respondents nevertheless contend the Koettings clearly and
unmistakably consented to the arbitrator’s power to decide his own
jurisdiction because “appellants” filed a motion that (1) sought dismissal of
the Koettings and submitted the alter ego issue for the arbitrator’s decision,
and (2) asked the arbitrator to delay his ruling until a prehearing conference.
Respondents further argue that “appellants” availed themselves of the
arbitrator’s authority by “obtaining an order from the Arbitrator prohibiting
[respondents] from suing them in court.”
Again, we are not persuaded. The record demonstrates the joinder
motion was filed by Redondo and Rockhill, not the Koettings,5 and the order
5 At oral argument, respondents’ counsel argued there was sufficient
evidence of the Koettings’ consent for the arbitrator to decide the alter ego
issue. Specifically, they point to appellants’ post-award motion for
modification which referred to the Koettings as the parties requesting to be
dismissed, as well as the Koettings’ inclusion in the list of parties submitting
9
that respondents reference memorialized a stipulation between respondents
and “Claimants,” expressly defined as “Rockhill and Redondo.” Likewise,
Procedural Order #2 made no mention of the Koettings or of any efforts on
their behalf to obtain any relief from the arbitrator. Were we to attribute
these examples of Redondo’s and Rockhill’s actions to the Koettings without
an alter ego finding by the proper decisionmaker, we would be “ ‘plac[ing] the
proverbial cart before the horse.’ ” (Benaroya, supra, 23 Cal.App.5th at
p. 468, citing Sandquist v. Lebo Automotive, Inc. (2016) 1 Cal.5th 233, 252.)
Furthermore, “merely arguing the arbitrability issue to an arbitrator
does not indicate a clear willingness to arbitrate that issue, i.e., a willingness
to be effectively bound by the arbitrator’s decision on that point.” (First
Options, supra, 514 U.S. at p. 946.) To the contrary, because the Koettings
objected to the arbitrator’s jurisdiction over them from the very beginning,
“one naturally would think that [the Koettings] did not want the arbitrator[]
to have binding authority over them.” (Ibid.)
Significantly, the instant matter more closely resembles Benaroya,
where the appellate court concluded a nonsignatory did not clearly and
unmistakably delegate the arbitrability issue to the arbitrator because he
“repeatedly disputed the arbitrator’s power to determine the alter ego issue,
and never voluntarily submitted to the arbitrator’s jurisdiction.” (Benaroya,
supra, 23 Cal.App.5th at p. 474.) Respondents argue that Benaroya is
distinguishable because the nonsignatory there specifically argued that
a reply brief to the joinder motion. But in all of these instances, appellants
were unequivocally objecting to the arbitrator’s jurisdiction over the
Koettings. Any imprecise wording used in the modification motion
demonstrates, at best, an ambiguity as to the Koettings’ consent, which is
insufficient to meet the heightened clear and unmistakable standard. (First
Options, supra, 514 U.S. at pp. 943–945.)
10
arbitrability should be decided by the trial court rather than the arbitrator,
whereas appellants forfeited the “who decides” issue on appeal by not raising
it with the arbitrator. (See Comerica Bank v. Howsam (2012) 208
Cal.App.4th 790, 830 [party forfeited argument by withdrawing from
arbitration and raising issue in court collaterally for first time].)
We are not inclined to find forfeiture, as appellants timely and
repeatedly objected to the arbitrator’s jurisdiction and specifically raised the
“who decides” issue before the arbitrator, albeit in their motion for
modification of the arbitration award. Furthermore, and in any event, we
have discretion to consider new legal arguments on appeal that present a
question of law to be applied to undisputed facts. (RN Solution, Inc. v.
Catholic Healthcare West (2008) 165 Cal.App.4th 1511, 1518.) Our resolution
of the “who decides” question does not involve disputed facts regarding the
Koettings’ conduct, only whether the undisputed evidence of their conduct
met the clear and unmistakable threshold.
On this score, we emphasize again that the joinder motion seeking the
Koettings’ dismissal was brought by Redondo and Rockhill, not the Koettings.
Furthermore, the alter ego question—though certainly important to the
broader issue of the extent of liability—was also directly related to the issue
of whether the Koettings were bound by the arbitration agreement. (Suh,
supra, 181 Cal.App.4th at p. 1513.) Redondo’s and Rockhill’s mere argument
against arbitrability on an alter ego theory was not clear and unmistakable
evidence of the Koettings’ consent to be bound by the arbitrator’s ruling.
(First Options, supra, 518 U.S. at p. 946.)6
6 Contrary to respondents’ contention, George Day Constr. Co. v. United
Broth. of Carpenters (9th Cir. 1984) 722 F.2d 1471 does not compel otherwise.
George Day predates First Options and did not apply the high court’s clear
and unmistakable evidence standard. Indeed, George Day seemingly
11
In sum, the arbitrator was not the proper decisionmaker to determine
whether the Koettings were bound, in their individual capacities, to the
arbitration provisions in the agreements. Respondents nevertheless argue
that the trial court’s confirmation of the arbitration award may still be
affirmed by independent review. We disagree. “[T]he error in permitting the
arbitrator to decide whether [the Koettings] could be compelled to arbitrate
as the alter ego of [Redondo/Rockhill] is not subject to harmless error”
because “[t]he wrong decision maker decided the issue; the arbitrator
exceeded his authority by purporting to compel appellant[s] to arbitrate and
making [them] liable for the award as [Redondo/Rockhill’s] alter ego[s].”
(Benaroya, supra, 23 Cal.App.5th at p. 475.) Furthermore, we are
unpersuaded by respondents’ contention that the trial court made an implied
alter ego finding, as respondents merely cite the arbitrator’s ultimate
findings of alter ego liability without identifying any other evidence
presented to the trial court that might have supported such an implied
finding.
For all of these reasons, we conclude the Koettings are entitled to relief
from the arbitration award.
required that a party take extensive measures to preserve the arbitrability
question for the court. (George Day, at p. 1476 [in determining party
implicitly consented to arbitrator’s determination of arbitrability, court notes
party “could have taken the initiative by seeking declaratory and injunctive
relief prior to the commencement of arbitration” to obtain independent
judicial examination of arbitrability question].) Rather than follow George
Day’s dated analysis, we shall adhere to the high court’s dual admonitions
that arbitrability is an issue for the trial court to decide unless clear and
unmistakable evidence shows the parties’ delegation of the issue to the
arbitrator, and that silence and ambiguity cannot commit the question of
arbitrability to an arbitrator. (First Options, supra, 514 U.S. at pp. 945–946;
Benroya, supra, 23 Cal.App.5th at p. 473.)
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B. Remedial Authority
Appellants contend the arbitrator exceeded his remedial powers by
awarding respondents the full principal amounts of the loans diverted from
respondents to other lenders. According to appellants, the arbitration
agreement expressly limited the arbitrator’s remedial authority to
“enforcement of the provisions of the Agreement[s],” and this meant that
respondents were only entitled to damages based on the formula set forth in
the compensation schedule.
“[A]rbitrators may not award remedies expressly forbidden by the
arbitration agreement or submission.” (Advanced Micro Devices, Inc. v. Intel
Corp. (1994) 9 Cal.4th 362, 381 (Advanced Micro).) But an award “will be
upheld so long as it was even arguably based on the contract; it may be
vacated only if the reviewing court is compelled to infer the award was based
on an extrinsic source.” (Id. at p. 381.) In Advanced Micro, the Supreme
Court rejected the argument “that arbitrators may not award a party benefits
different from those the party could have acquired through performance of
the contract—the cases do not support [this] position. No exact
correspondence is required between the rights and obligations of a party had
the contract been performed and the remedy an arbitrator may provide for
the other party’s breach.” (Ibid.)
We conclude the arbitrator did not exceed his remedial powers. The
arbitrator awarded a monetary sum to Clear Loan and a larger sum to Green
Gate to enforce the covenant of good faith and fair dealing. Not only is the
covenant implied in every contract (see Bushell v. JPMorgan Chase Bank,
N.A. (2013) 220 Cal.App.4th 915, 928–929; Dieckman v. Regency GP LP (Del.
2017) 155 A.3d 358, 367–368), but section 5(d) of the agreements expressly
provides that upon termination of the agreements, “[i]n order to preserve the
13
goodwill of each Party with the customer, both Parties shall act in good faith
and cooperate wherever possible in order to ensure a smooth and orderly
termination of their relationship and the termination and wind-down of the
Consumer Lending Program, regardless of the reason for termination.”
(Italics added.) Accordingly, the damage awards were “rationally derived
from the contract and the breach,” and the arbitrator had “the authority to
fashion relief [he] consider[ed] just and fair under the circumstances existing
at the time of arbitration.” (Advanced Micro, supra, 9 Cal.4th at p. 383.)
The compensation formula was not an express limitation on this power.
(See Advanced Micro, supra, 9 Cal.4th at p. 383 [rights and obligations of
parties under contract are not “an unfailing guide to the remedies available”
upon breach].) The compensation schedule was not expressly cited in the
dispute resolution section of the agreements, and the formula pertained only
to the manner of profit sharing. As discussed, the limitation of remedies to
“enforcement” of the agreements rationally entailed providing relief for
breaches of the duty to act in good faith during winddown. Accordingly, we
conclude the arbitrator’s awards to Clear Loan and to Green Gate did not
exceed any express contractual limitations on arbitration remedies.
DISPOSITION
The judgment is reversed. The case is remanded to the trial court with
directions to: (1) set aside its rulings denying appellants’ petition to vacate
the award and granting respondents’ petition to confirm the award; and
(2) enter new and different orders granting appellants’ petition to vacate the
award as to the Koettings, and granting respondents’ petition to confirm the
14
award only as to Redondo and Rockhill.7 Each side shall bear its own costs
on appeal.
_________________________
Fujisaki, Acting P. J.
WE CONCUR:
_________________________
Petrou, J.
_________________________
Jackson, J.
A158316
7 We express no opinion on the availability of other mechanisms for
respondents to add the Koettings to the judgment as alter egos.
15