Opinion
G053190
11-20-2017
HARI S. LAL et al., Plaintiffs and Appellants, v. ANIL V. SHAH, M.D., Defendant and Respondent.
Rydstrom Law, Richard I. Rydstrom; The Lal Law Firm and Hari S. Lal, in pro. per., for Plaintiffs and Appellants. Shook, Hardy & Bacon, Frank C. Rothrock, Marc P. Miles and Kristy A. Schlesinger for Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2015-00816438) OPINION Appeal from an order of the Superior Court of Orange County, Deborah C. Servino, Judge. Affirmed. Rydstrom Law, Richard I. Rydstrom; The Lal Law Firm and Hari S. Lal, in pro. per., for Plaintiffs and Appellants. Shook, Hardy & Bacon, Frank C. Rothrock, Marc P. Miles and Kristy A. Schlesinger for Defendant and Respondent.
* * *
INTRODUCTION
Appellants Hari S. Lal and the Lal Law Firm (collectively, plaintiffs) appeal from an order denying the Lal Law Firm's petition to compel arbitration of claims asserted against defendant Anil V. Shah, M.D. Plaintiffs claim they are owed over $7 million in compensation for legal services rendered to Orange County Physician Investment Network, LLC (OCPIN), an entity for which Shah served as the sole managing agent.
The petition to compel arbitration sought to enforce a binding arbitration provision contained in a professional services agreement, entered into by the Lal Law Firm and OCPIN, against Shah in his individual capacity. Plaintiffs argue that although Shah signed the agreement in his capacity as the manager of OCPIN, he is personally subject to the binding arbitration provision because, inter alia, he guaranteed OCPIN's payment under the professional services agreement, he was a third party beneficiary of the agreement, and a preexisting relationship warranted enforcement of the arbitration provision against him personally.
We affirm. It is well established that, with some exceptions inapplicable here, a party cannot be compelled to arbitrate a dispute that he or she has not agreed to resolve by arbitration. The trial court did not err in concluding that Shah never agreed to resolve the claims alleged against him in his individual capacity through binding arbitration. No potential exception to that rule, such as the existence of third party beneficiary status or a preexisting relationship, applies here. The petition to compel arbitration was properly denied.
BACKGROUND
In October 2015, the Lal Law Firm filed a complaint against Shah for breach of written contract, breach of express and implied covenants, intentional fraud and deceit, misrepresentation, embezzlement and theft, breach of fiduciary duties and trust, unfair business practices, promissory estoppel, and a common count of quantum meruit. A copy of the original complaint is not contained in the appellate record.
The Lal Law Firm then filed a petition to compel arbitration of its claims against Shah based on a binding arbitration provision contained in a professional services agreement between OCPIN and the Lal Law Firm. The professional services agreement begins: "The undersigned authorized members of OC-PIG and or OCPIN, LLC by and through it managers or authorized representatives including any real estate holding company of OCPIG AND OC-PIN hereinafter collectively referred to as CLIENT, hereby employs THE LAL LAW FIRM, 'LLF or Firm or Attorney' and any and all attorneys employed now or in the future by the firm, as independent contractors, hereinafter collectively designated as The Lal Law Firm, Inc. or the Firm or the Attorney to represent CLIENT in the following matters: [¶] Purchase and sale of 4 Tenet Hospitals including all real estate therein and any or all transactional documents therein with IHHI and Tenet."
We quote the professional services agreement exactly as it appears in the record, including all typographical and grammatical errors.
The professional services agreement further states: "CLIENT has agreed with attorney to pay seven (7%) percentile of the total number of shares issued at closing including additional seven (7%) percentile of the total value of the all real estate obtained in this matter. Attorney will adjust the above shares directly from Integrated Health Care Hospital 'sellers' at closing and client agrees to adjust the real estate allocation once the title is transferred. Dr. Shah on behalf of client has agreed to guarantee this agreement and pay out of his shares if the attorney is successful in his negotiation for over a period of time to close the transaction and make an adjustment therein and client does not pay the attorney therein. Client has advised attorney that another Law Firm have quoted then a fee retainer deposit of six hundred thousand dollars plus and realize the volume of work involved in closing the deal with Tenet and other multiple parties over a period of 6-9 months. Dr. Shah is the designated Manager of Client and has full authority to deal with Attorney and make decisions." (Italics added.)
A binding arbitration provision is contained in paragraph 10 of the professional services agreement: "Dispute: Any dispute between Attorney and Client as to the flat fee or reasonable value of legal services performed and or attorneys fees dispute or any provisions herein shall be subject to binding arbitration in the County of Orange, State of California. The parties agree to resolve all their disputes through binding arbitration with Judicate West or Jams mediation services. The parties agree to jointly appoint an arbitrator and if unable to do so within 60 days of notice to one another, than the parties agree that the director of the mediation services has the right to appoint the most highly qualified jurist/arbitrator in this matter. Either party may give a list of five names of arbitrators to the other and the other party shall agree to one. The parties agree not to initiate any lawsuits in the court of law and should either the client or the attorney files any lawsuit and is not deemed to be the prevailing party, than the defending party defendant therein shall be entitled to attorneys fees and costs incurred in the matter for defending the lawsuit and asserting its rights therein. The defending party has an absolute right to enforce the binding arbitration provisions of this agreement and transfer the case to arbitration. The decision of the arbitrator is final non-appealable."
Shah signed the agreement on behalf of OCPIN.
In the memorandum of points and authorities filed in support of the petition to compel arbitration, the Lal Law Firm argued that, in November 2004, Shah had received $19 million from the sale of property "held in trust" for the Lal Law Firm and thus, under the professional services agreement, the Lal Law Firm was owed $7.8 million of that amount, which Shah had failed to pay.
In December 2015, after Shah filed a demurrer to the complaint, an amended complaint was filed which added Hari S. Lal as a plaintiff. The amended complaint asserted the same claims against Shah as an individual as had the original complaint.
After a hearing, the trial court denied the petition: "Plaintiff the LAL Law Firm's Petition to compel mandatory arbitration is denied. [¶] Defendant Shah's evidentiary objections nos. 1-3, filed on January 15, 2016, are sustained. Defendant Shah's evidentiary objections nos. 1-8, filed on January 26, 2016, are sustained. [¶] The request to strike the opposition is denied. [¶] Under Code of Civil Procedure section 1281.2, the Court must first decide whether there was an agreement to arbitrate. (Mitri v. Arnel Management Co. (2007) 157 Cal.App.4th 1164, 1169.) Arbitration will not be compelled where there is no agreement to do so. When read in its entirety, the Professional Services Agreement was between OC-PIG, Inc. or LLC or OCPIN, LLC and The LAL Law Firm. [¶] A corporate agent who executes a document containing an arbitration clause in his or her representative capacity cannot be compelled to arbitrate personal claims. (Bensara [v.] Marciano (2001) 92 Cal.App.4th 987, 990-993.) The guaranty language in paragraph 20 of the Professional Services Agreement did not necessarily show Defendant Shah's intent to be personally bound by the arbitration clause. (See Grundstad v. Ritt (7th Cir. 1997) 106 F.3d 201, 205.) [¶] Plaintiff has not met its burden of showing that an agreement to arbitrate existed between the LAL Law Firm and individual Defendant Shah. Plaintiff's Petition to Compel Arbitration is denied. [¶] Defendant Shah shall give notice of the ruling."
DISCUSSION
I.
GENERALLY APPLICABLE LEGAL PRINCIPLES AND STANDARD OF REVIEW
"[W]hen a petition to compel arbitration is filed and accompanied by prima facie evidence of a written agreement to arbitrate the controversy, the court itself must determine whether the agreement exists and, if any defense to its enforcement is raised, whether it is enforceable. Because the existence of the agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence." (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413.)
We review an order denying a petition to compel arbitration under the substantial evidence standard unless the trial court considered no extrinsic evidence, in which case we review the order de novo. (Lane v. Francis Capital Management LLC (2014) 224 Cal.App.4th 676, 683.)
II.
THE PETITION TO COMPEL ARBITRATION WAS PROPERLY DENIED BECAUSE SHAH DID
NOT AGREE TO SUBMIT CLAIMS ALLEGED AGAINST HIM PERSONALLY TO ARBITRATION,
AND NO EXCEPTION TO THE RULE REQUIRING SUCH AN AGREEMENT APPLIES.
"The strong public policy in favor of arbitration does not extend to those who are not parties to an arbitration agreement, and a party cannot be compelled to arbitrate a dispute that he has not agreed to resolve by arbitration." (Benasra v. Marciano (2001) 92 Cal.App.4th 987, 990 (Benasra).) "Rather, '"[t]he right to arbitration depends upon contract . . . ."' [citation] and the scope of arbitration 'is, of course, a matter of agreement between the parties.' [Citation.] [¶] The guiding principle is simple: 'A party cannot be compelled to arbitrate a dispute that it has not elected to submit to arbitration. [Citation.]' [Citation.] Federal law is in accord. [Citations.] 'It goes without saying that a contract cannot bind a nonparty.' [Citation.] [¶] Under both California and federal law, there are exceptions to the rule that a nonsignatory to an arbitration agreement cannot be compelled to arbitrate." (Crowley Maritime Corp. v. Boston Old Colony Ins. Co. (2008) 158 Cal.App.4th 1061, 1069.)
Plaintiffs do not dispute that Shah executed the professional services agreement solely in his capacity as a manager of OCPIN, and not in an individual capacity. In the trial court and in their appellate briefs, plaintiffs refer to Shah, in his individual capacity, as a nonsignatory to the professional services agreement. Shah's execution of the professional services agreement as its agent, therefore, is insufficient to enforce the agreement's arbitration provision against him personally. (See Benasra v. Marciano, supra, 92 Cal.App.4th at pp. 988-989, 990 [a corporation's president who signed a licensing agreement only as an officer of another corporation and not in his personal capacity is not personally bound to the agreement's binding arbitration provision].) We next turn to consider whether any exception to the rule against compelling nonsignatories to arbitrate would apply.
"Under California law, a nonsignatory can be compelled to arbitrate under two sets of circumstances: (1) where the nonsignatory is a third party beneficiary of the contract containing the arbitration agreement; and (2) where a 'preexisting relationship exist[s] between the nonsignatory and one of the parties to the arbitration agreement, making it equitable to compel the nonsignatory to also be bound to arbitrate his or her claim.'" (Crowley Maritime Corp. v. Boston Old Colony Ins. Co., supra, 158 Cal.App.4th at pp. 1069-1070.)
Plaintiffs argue Shah is a third party beneficiary of the professional services agreement thereby warranting enforcement of the arbitration provision against him personally. Plaintiffs contend Shah was the sole acting manager of OCPIN and also a personal guarantor of OCPIN's performance under the professional services agreement. That Shah was sole acting manager of OCPIN and executed the professional services agreement in that capacity does not render him a third party beneficiary of the professional services agreement. Otherwise, any individual signing an arbitration agreement as an agent on behalf of an entity automatically would be personally subject to the arbitration agreement. As discussed ante, cases have routinely held that an individual who, as the agent of an entity, enters into an arbitration agreement is not personally subject to that arbitration agreement, absent exceptional circumstances. (See Benasra, supra, 92 Cal.App.4th at p. 990.)
Plaintiffs argue Shah is personally subject to the arbitration provision as a third party beneficiary of the professional services agreement because he personally guaranteed OCPIN's performance. The professional services agreement states that "Dr. Shah on behalf of client has agreed to guarantee this agreement and pay out of his shares if the attorney is successful in his negotiation for over a period of time to close the transaction and make an adjustment therein and client does not pay the attorney therein." (Italics added.) This provision imposes a personal obligation upon Shah. Plaintiffs do not explain how this provision confers an individual benefit on Shah sufficient to impose the arbitration provision against him as a third party beneficiary.
See footnote 1, ante. --------
To the extent plaintiffs argue the guarantee provision of the professional services agreement itself triggers application of the arbitration provision against Shah, that argument also fails. The guarantee provision appears to simply memorialize a prior agreement by Shah to guarantee OCPIN's financial obligations under the professional services agreement; neither the guarantee provision nor any other provision in the professional services agreement states that Shah ever agreed to arbitrate any claims asserted against him in his individual capacity. Furthermore, any ambiguity regarding the extent to which Shah's agreement to guarantee OCPIN's financial obligations has been incorporated into the professional services agreement is construed against the drafter of the agreement (Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 644); Lal stated in his declaration in support of the petition to compel arbitration that he drafted the professional services agreement.
Plaintiffs also argue Shah should be compelled to arbitrate the claims against him because "[t]he preexisting relationship such as a trustor-trustee between [plaintiffs] and [Shah] as long time best of friends generally gives the party to the agreement authority to bind the non-signatory." In the reply brief, plaintiffs argue, "Shah also fails to distinguish between pre-existing relationship with Lal as his 'best of family friend' for past twenty (20) years and Shah being the trustee to hold Lal's retainer proceeds in his portfolio for reasons of elevating his portfolio in OCPIN, LLC to be the majority member."
In Crowley Maritime Corp. v. Boston Old Colony Ins. Co., supra, 158 Cal.App.4th at page 1070, the appellate court stated: "The preexisting relationship [exception] generally gives the party to the agreement authority to bind the nonsignatory. Examples of the preexisting relationship include agency, spousal relationship, parent-child relationship and the relationship of a general partner to a limited partnership. [Citations.] In the absence of such a relationship, or third party beneficiary status, courts will generally not compel a nonsignatory to arbitrate."
Plaintiffs misapprehend the nature of the preexisting relationship exception. Their argument suggests that plaintiffs' preexisting relationship (long-term friendship and professional relationship) with Shah is of the type that would confer authority upon plaintiffs to bind Shah to binding arbitration of claims they have against him. Neither the factual circumstances of this case nor the law supports the determination that plaintiffs could unilaterally bind Shah to such an arbitration agreement. Even if plaintiffs had such authority, which they do not and cannot have, the language of the professional services agreement does not state that Shah is so bound and, as discussed ante, his execution of that agreement on behalf of OCPIN is in and of itself insufficient to subject him to the arbitration provision.
Plaintiffs cite NORCAL Mutual Ins. Co. v. Newton (2000) 84 Cal.App.4th 64 as an example of a nonsignatory being bound to arbitrate a dispute "because a preexisting relationship existed between the non-signatory and one of the parties to the arbitration agreement, making it equitable to compel the non-signatory to also be bound to arbitrate his or her claim." In NORCAL Mutual Ins. Co. v. Newton, the court held that a nonsignatory to an insurance policy, who accepted the benefits of an insurance policy signed by her spouse, was bound by the policy's arbitration provision. (Id. at pp. 78-79.)
This is not an insurance case. The record does not show Shah personally received professional legal services under the agreement that might render him personally subject to the arbitration provision or that he had a preexisting relationship with someone who had authority to so bind him to such an arbitration provision.
Harris v. Superior Court (1986) 188 Cal.App.3d 475, 476-478 (Harris), which plaintiffs cite in their appellate briefs, is also factually distinguishable. A physician was employed by a medical group that contracted with a health plan requiring patients to agree to binding arbitration of claims arising out of the medical group's care. (Id. at p. 477.) The physician refused to arbitrate two patients' claims against him. (Ibid.) The appellate court held that, although the physician was a nonsignatory to the arbitration agreement, the record showed "he was [the medical group's] employee and that he provided medical care to [its] patients, including plaintiffs. This relationship is sufficient to bind [the physician] to the arbitration agreement which named [the medical group]." (Id. at p. 478.)
The Harris court further noted: "Familiar principles of contract law also support our decision. A third party beneficiary of a contract can gain no greater rights under that contract than the contracting parties. [Citation.] Dr. Mirsaidi was a third party beneficiary of the contractual provision requiring arbitration of members' claims against 'employees or other contracting health professionals' of [the medical group]. Since [the health plan] and [the medical group], the contracting parties which procured this benefit for him, waived their rights to trial and agreed to arbitration instead, Dr. Mirsaidi's rights are no greater. [¶] Further, the voluntary acceptance of the benefit of a transaction constitutes consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting. [Citation.] Here, Dr. Mirsaidi obtained patients through enrollments in the . . . health plan. His acceptance of this benefit necessarily entailed acceptance of the agreement that members' claims would be subject to binding arbitration." (Harris, supra, 188 Cal.App.3d at p. 479.)
The circumstances of this case bear no similarity to those of Harris. OCPIN was not Shah's employer, did not provide services to the public, and did not enter into arbitration agreements with members of the public on behalf of its employees. OCPIN did not have a preexisting relationship with Shah like the one the physician in Harris had with his medical group. Nor did Shah derive any personal benefit from the professional services agreement, as the physician derived a benefit from his employers' agreement with the health plan and patients; there is no support for the conclusion OCPIN, by agreeing to the arbitration provision in the professional services agreement with the Lal Law Firm, automatically bound Shah as an individual as well.
In the opening appellate brief, plaintiffs reassert their third party beneficiary argument by arguing that Shah should be equitably estopped from avoiding enforcement of the arbitration provision against him because he "accepted and received direct benefits of [plaintiffs'] compensation." Plaintiffs' estoppel argument fails for the same reasons plaintiffs' third party beneficiary and preexisting relationship arguments fail.
Plaintiffs argue the trial court erred by relying on Grundstad v. Ritt (7th Cir. 1997) 106 F.3d 201, 205 as contrary to California law. In its minute order, the trial court cited Grundstad after stating "[t]he guaranty language in paragraph 20 of the Professional Services Agreement did not necessarily show Defendant Shah's intent to be personally bound by the arbitration clause." The Seventh Circuit in Grundstad noted: "'As a general rule, a guarantor who is not a signatory to a contract containing an arbitration clause is not bound by the arbitration clause." (Id. at pp. 204.) Grundstad is in accord with California law that nonsignatories to arbitration agreement generally are not subject to binding arbitration absent an applicable exception. The trial court's reference to Grundstad did not conflict with California law.
Plaintiffs argue that at some point in time after executing the personal services agreement, Shah entered into a settlement agreement with other members of OCPIN which stated that, inter alia, as to Shah's compensation, additional interest "shall not be reduced nor changed as a result of any allocation of IHHI shares to attorney Hari [L]al" and that "Dr. Shah shall bear sole responsibility for any member interest in WCH awarded, or to be awarded, to attorney Hari La[l]." Plaintiffs argue this language in the settlement agreement establishes Hari Lal as a third party beneficiary of that agreement and, as such, he is eligible to compel arbitration of his claims under the professional services agreement against Shah pursuant to the settlement agreement's arbitration provision.
Plaintiffs' argument fails for several reasons. First, only the Lal Law Firm petitioned to compel arbitration of claims against Shah; the Lal Law Firm is not a party to or even mentioned in the settlement agreement. Hari Lal was not a party to the lawsuit in this case at the time the petition was filed and never filed a petition to compel arbitration on his own behalf or moved the join the Lal Law Firm's petition. Second, plaintiffs sought to compel arbitration pursuant to the arbitration provision contained in the professional services agreement, not the arbitration provision contained in the settlement agreement. Third, the settlement agreement does not incorporate the professional services agreement by reference or otherwise reflect an intention that claims arising out of the professional services agreement against Shah personally, or any other OCPIN member personally, would be subject to resolution through mandatory arbitration.
In their opening appellate brief, plaintiffs also argue the trial court erred by sustaining Shah's objections to evidence presented by plaintiffs in support of the petition to compel arbitration. We do not need to analyze whether any of the trial court's evidentiary rulings were erroneous because plaintiffs fail to address how any such rulings were prejudicial. (Employers Reinsurance Co. v. Superior Court (2008) 161 Cal.App.4th 906, 919.)
For all these reasons, the trial court properly denied the petition to compel arbitration.
DISPOSITION
The order is affirmed. Respondent shall recover costs on appeal.
FYBEL, J. WE CONCUR: MOORE, ACTING P. J. ARONSON, J.