Opinion
B325554
05-28-2024
JAE PARK, Cross-Complainant and Respondent, v. AUTO HOLDINGS, LLC, et al. Cross-Defendants and Appellants.
Snell & Wilmer, William E. Peterson, Patricia Brum and Jing (Jenny) Hua for Appellants Auto Holdings LLC and John Hurry. Law Offices of Stephen M. Harris and Stephen M. Harris for Respondent Jae Park.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. 22GDCV00119, Margaret L. Oldendorf, Judge. Affirmed.
Snell & Wilmer, William E. Peterson, Patricia Brum and Jing (Jenny) Hua for Appellants Auto Holdings LLC and John Hurry.
Law Offices of Stephen M. Harris and Stephen M. Harris for Respondent Jae Park.
CURREY, P. J.
INTRODUCTION
The trial court denied a motion to compel arbitration of this business and employment dispute among the companies and individuals who owned and/or operated an auto dealership, Hyundai of Glendale, LLC (Hyundai Glendale). We affirm that order.
Hyundai Glendale sued its former general manager, Jae Park, for trespass, alleging that after terminating him for alleged misconduct, he continued to return to the property. Park then filed a cross-complaint against Hyundai Glendale; Auto Holdings, LLC (Auto Holdings); and John Hurry, individually, as trustee of the Veicolo Trust, and as trustee of The Mama Bear Trust. Park's cross-complaint asserts several causes of action, including breach of five separate agreements, wrongful termination in violation of public policy, and breach of fiduciary duty.
Auto Holdings then moved to compel arbitration of Park's claims against it, based on an arbitration clause in an agreement signed by Park and Auto Holdings. Auto Holdings also asked the trial court to order to arbitration claims Park asserted against Auto Holdings' agent, Hurry.
Even though Hurry was not identified as a moving party in the motion papers, the trial court deemed both Auto Holdings and Hurry moving parties because Auto Holdings sought relief on behalf of both. It then denied the motion to compel arbitration, primarily under Code of Civil Procedure section 1281.2, subdivision (c) (section 1281.2(c)), reasoning that if Park's claims against Auto Holdings and Hurry were arbitrated, while his claims against Hyundai Glendale were tried in court, inconsistent rulings were possible. The court secondarily concluded the arbitration agreement is unconscionable.
On appeal, Auto Holdings and Hurry contend the trial court erred by denying the motion to compel arbitration for several reasons, including: (1) Hurry was not a moving party; and (2) the arbitration agreement contains a Nevada choice-of-law provision and, therefore, it was improper for the trial court to rely on California law (specifically, section 1281.2(c)). For the reasons discussed below, we conclude Auto Holdings forfeited its argument based on the choice-of-law provision by not raising it in the trial court, and the trial court did not abuse its discretion by applying section 1281.2(c). We further conclude that even if the trial court erred in finding Hurry was a moving party, he has not demonstrated prejudicial error. Accordingly, we affirm.
Because these conclusions are case dispositive, we do not address the other issues raised in the briefing (i.e., unconscionability and the agreement's purported delegation clause).
FACTUAL AND PROCEDURAL BACKGROUND
We summarize here only the facts and procedural history relevant to our resolution of the appeal from the denial of the motion to compel arbitration.
A. The Parties
We draw the following alleged facts from Park's cross-complaint. It alleges Park was "an employee, general manager, owner, and Dealer Principal of [Hyundai Glendale]." It also asserts Hyundai Glendale is a limited liability company that operates an auto dealership in Glendale, California.
The cross-complaint further states Auto Holdings is a Nevada limited liability company formed in 2016. It has a 100 percent ownership interest in Hyundai Glendale by virtue of its status as the sole member of Hyundai Glendale. Park initially owned a 10 percent interest in Auto Holdings, but his interest has since been diluted.
John Hurry, individually, and as trustee of both the Veicolo Trust and the Mama Bear Trust, operates and manages Auto Holdings. The cross-complaint alleges Hurry was the alter ego of Hyundai Glendale, Auto Holdings, Veicolo Trust and Mama Bear Trust.
B. The Auto Holdings Operating Agreement
In 2016, Park and Investment Services Capital, LLC (ISC) formed Auto Holdings. At the time, Park held a 10 percent ownership interest in Auto Holdings, and ISC held the remaining 90 percent.
Park and ISC memorialized their rights and duties relating to Auto Holdings in the "Operating Agreement of Auto Holdings, LLC" dated September 30, 2016 (the operating agreement). The operating agreement contains an arbitration provision, which provides: "In the event the parties to a Dispute [defined as a controversy or claim arising out of or relating to this Agreement, or the breach thereof] are unable to resolve such Dispute by mediation, such Dispute shall be settled by binding arbitration administered in Douglas County, Nevada in accordance with the American Arbitration Association's [AAA] Commercial Arbitration Rules (the 'Rules'). Each of the parties shall equally bear any arbitration fees and administrative costs associated with the arbitration. The prevailing party, as determined in arbitration, shall be awarded its costs, arbitration fees and administrative costs, and reasonable attorneys' fees in connection with the arbitration. Judgment on the award rendered in arbitration may be entered in any court having jurisdiction thereof."
The operating agreement provides that Auto Holdings' sole manager is Newmgt, LLC, which is in turn managed by The Mama Bear Trust. In 2019, ISC transferred its ownership interest in Auto Holdings to Veicolo Trust. Hurry is the trustee of both the Mama Bear Trust and the Veicolo Trust.
The AAA's commercial arbitration rules, in turn, vest the arbitrator with "the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim." The rules further provide that "[t]he arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part. Such an arbitration clause shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitrator that the contract is null and void shall not for that reason alone render invalid the arbitration clause."
We grant appellants' motion to take judicial notice of the AAA commercial arbitration rules. (Evid. Code, § 452, subd. (h).)
The operating agreement also contains the following choice-of-law provision: "This agreement shall be construed, performed and enforced in accordance with the laws of the State of Nevada, without giving effect to its principles or rules of conflict of laws to the extent such principles or rules would require or permit the application of the laws of another jurisdiction."
C. Hyundai Glendale v. Park
In March 2022, Hyundai Glendale filed a complaint for trespass against Park. The complaint alleges that Park is a former employee of Hyundai Glendale, yet he continues to enter and access the dealership without the dealership's consent. After obtaining a preliminary injunction enjoining Park from entering Hyundai Glendale's premises, Hyundai Glendale filed a first amended complaint alleging additional causes of action for breach of the employment agreement between Hyundai Glendale and Park, breach of fiduciary duty, fraud, accounting, declaratory relief, intentional interference with contractual relations, and intentional interference with prospective economic relations.
D. Park v. Glendale Hyundai, Auto Holdings, & Hurry
In August 2022, Park filed a first amended cross-complaint against Hyundai Glendale, Auto Holdings, and Hurry (individually and as trustee of the Veicolo Trust and the Mama Bear Trust) (the cross-complaint). The cross-complaint alleges nine causes of action against all cross-defendants for: (1) breach of contract; (2) wrongful termination in violation of public policy; (3) breach of fiduciary duty; (4) interference with contractual relations; (5) interference with prospective business advantage; (6) violation of California Labor Code section 2802; (7) common count for reasonable value of services; (8) accounting; and (9) theft of property in violation of California Penal Code sections 484, 496(a), 503 and 532.
E. Motion to Compel Arbitration
In response to the cross-complaint, Auto Holdings moved to compel arbitration under the Federal Arbitration Act (FAA) and the California Arbitration Act (CAA) of all claims against it and "Hurry for [Park's] actions taken by and through Auto Holdings in his official capacity as manager" based on the arbitration provision in the operating agreement. Under the heading "Legal Standard," Auto Holdings cited the CAA, FAA, and the Nevada Uniform Arbitration Act.
In opposition to the motion, Park first argued California law applies because Park "is a resident of California" and Auto Holdings "has brought its motion to compel arbitration in this state." He then made several arguments in support of his position that the motion to compel should be denied, including: (1) the arbitration agreement is unenforceable because it is unconscionable; (2) Auto Holdings waived its right to compel arbitration; (3) California Labor Code section 925 prohibits arbitration of the dispute in Nevada; (4) the court should exercise its discretion to deny the motion under section 1281.2(c) due to the potential for conflicting rulings; and (5) Auto Holdings has no right to seek to compel arbitration of claims asserted against Hurry.
Labor Code section 925 prohibits an employer from requiring an employee who resides and works in California, as a condition of employment, to agree to a provision requiring the employee to adjudicate outside California a claim arising in California, or a provision that deprives the employee of substantive protection of California law with respect to a controversy arising in California.
Auto Holdings filed a reply which did not address Park's argument under section 1281.2(c).
At the hearing on the motion, counsel for Auto Holdings argued for the first time that the FAA applies because the arbitration provision incorporates by reference the AAA's commercial arbitration rules: "[T]he rule is by selecting the [AAA] rules to the parties' agreement incorporating them . . . . That is what should apply. Now, why is that relevant here. It is relevant for two reasons. One is that the [AAA] rules say[ ] that it is the arbitrator that should be deciding the issues of - of the arbitrability, and the second issue is that the [AAA] rules doesn't [sic] provide for California law to apply. So we have an issue here whether it is proper . . . to apply 1281.2 to this analysis, especially [because] the arbitration provision here is so directed at interstate commerce. So [Auto Holdings'] argument is that . . . given all the different factors here, the [AAA] rules should . . . apply and consequently the FAA rule and - and that basically avoids the whole issue of unconscionability . . . ." Counsel for Auto Holdings cited Rodriguez v. American Technologies, Inc. (2006) 136 Cal.App.4th 1110 (Rodriguez) in support of his arguments. In response, counsel for Park argued that whether "the arbitrator has the right to determine whether there's an agreement to arbitrate has nothing to do with this court's discretionary power to decline - to order arbitration under [section 1281.2]." After noting Auto Holdings did not make these arguments in its briefs, the trial court took the matter under submission to "look at the Rodriguez case."
In Rodriguez, supra, 136 Cal.App.4th at p. 1115, the court held the FAA procedural rules controlled where the parties expressly designated the FAA would govern their arbitration. The operating agreement here does not state the FAA shall govern.
After taking the matter under submission, the trial court issued an order denying the motion. The court adopted its tentative ruling and concluded: "The motion by Auto Holdings seeks relief on behalf of both itself and Hurry. For that reason, this order has referred to them both as moving parties. The request for arbitration is denied primarily on the basis that Park is a party both to this litigation with Glendale Hyundai and the proposed arbitration as to his claims against Auto Holdings and Hurry, which could result in conflicting rulings if the arbitration provision were enforced. Thus, pursuant to [Code of Civil Procedure, section 1281.2, subdivision (c)], the motion is denied. Secondarily, Park has shown the agreement to be unconscionable and therefore revocable."
Auto Holdings timely appealed.
DISCUSSION
"Under [section 1281.2(c)] of the CAA . . ., a court may refuse to compel arbitration if '[a] party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.'(§ 1281.2(c).)" (Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, 342.)
Auto Holdings contends the trial court erred in relying on this provision of the CAA to refuse to compel arbitration because the operating agreement contained a Nevada choice-of-law provision. According to Auto Holdings, the operating agreement involves interstate commerce and therefore, pursuant to Nevada law, the agreement is governed by the procedural rules of the FAA. The FAA has no analogous exception that allows denying a motion to compel arbitration when there is a risk of conflicting rulings in different fora.
Even if the Nevada choice-of-law provision is enforceable (an issue we need not decide), however, the record demonstrates Auto Holdings never made this argument in the trial court. As discussed above, in its moving papers, under the heading "Legal Standard[,]" Auto Holdings cited the CAA, FAA, and the Nevada Uniform Arbitration Act. But it did not argue the trial court should enforce the operating agreement's choice-of-law provision. (See Washington Mutual Bank v. Superior Court (2001) 24 Cal.4th 906, 917 [Before a court will enforce a choice-of-law provision, the proponent of the clause must demonstrate the chosen state has a substantial relationship to the parties or their transaction, or that a reasonable basis otherwise exists for the choice-of-law. If the proponent meets his or her burden, the choice-of-law provision will generally be enforced unless the other side can establish both that the chosen law is contrary to a fundamental policy of California and that California has a materially greater interest in the determination of the particular issue.].) In opposition to the motion, Park argued California law applies, and, among other arguments, urged the trial court to exercise its discretion under section 1281.2(c) based on the possibility of conflicting rulings. In reply, Auto Holdings did not address the section 1281.2(c) argument, and cited only California law.
Auto Holdings argues the "trial court failed to consider whether the choice[-]of[-]law provision should be honored in this case." But that is because Auto Holdings did not argue below that the FAA should apply based on the choice-of-law provision.
At the hearing on the motion, counsel for Auto Holdings argued for the first time that applying section 1281.2(c) is improper - not because of the Nevada choice-of-law provision - but because the operating agreement incorporates the AAA's commercial arbitration rules. The AAA's commercial arbitration rules are silent, however, on the procedural law to be applied in ruling on a motion to compel arbitration.
The failure to argue that the trial court should enforce the choice-of-law provision and therefore, the FAA applies, forfeits this argument on appeal. (See Newton v. Clemons (2003) 110 Cal.App.4th 1, 11 ["'Generally, issues raised for the first time on appeal which were not litigated in the trial court are [forfeited]'".) We acknowledge we may consider a forfeited argument when it presents an issue of law on undisputed facts. But "'[m]erely because an issue is one of law, does not give a party license to raise it for the first time on appeal . . . . Whether an appellate court will entertain a belatedly raised legal issue always rests with the court's discretion.'" (Meridian Financial Services, Inc. v. Phan (2021) 67 Cal.App.5th 657, 699-700.) We see no good grounds to exercise our discretion to review the issue but there are good reasons to decline to do so. Public policy favors arbitration as an expedient and economical method of resolving disputes. (See Jones v. Jacobson (2011) 195 Cal.App.4th 1, 17.) But here, by failing to raise the argument below, those objectives have been thwarted. Indeed, Auto Holdings has unnecessarily delayed the proceedings and increased costs.
Having concluded Auto Holdings forfeited its argument that the CAA does not apply based on the operating agreement's choice-of-law provision, we now turn to whether the trial court nevertheless abused its discretion in denying the motion based on section 1281.2(c). (See Lindemann v. Hume (2012) 204 Cal.App.4th 556, 566 ["An order denying a petition to compel arbitration under [section 1281.2(c)], is generally reviewed for abuse of discretion."].) We discern no abuse of discretion.
The trial court found there was a risk of conflicting rulings given the cross-complaint's alter ego and agency theories of liability. The cross-complaint alleges that Hurry, at all times relevant, was the alter ego of Hyundai Glendale and Auto Holdings. Park alleges: "Hurry routinely used the shield of the business[ ] entities named herein to commit fraud and other misconduct. He failed to observe corporate formalities, as evidenced by refusal to appropriately obtain authorization of corporate acts, and severely undercapitalized the Hyundai dealership . . . ." Park further alleges that Hurry "used the management structure of Auto Holdings and Hyundai, as well as his status as a trustee, to misappropriate money from the revenues of Hyundai, commingle funds belonging to Hurry and the entities, intentionally dilute Park's ownership share, and impose loans as an obligation on the business enterprise which were shams in order to funnel money to Hurry, individually, and to facilitate his use [of] funds for other than corporate purposes." Park also alleges he was "employed by cross-defendants[.]" The cross-complaint's nine causes of action are alleged against all cross-defendants.
Auto Holdings contends that Park, as a matter of law and equity, cannot disregard the corporate form of Hyundai Glendale to recover from Auto Holdings. But we do not reach the merits of the underlying claims in the context of a motion to compel arbitration. (See Tornai v. CSAA Ins. Exchange (2023) 98 Cal.App.5th 974, 988 [it is inappropriate to rule on the potential merits of the underlying claims on a motion to compel arbitration].)
Moreover, Auto Holdings' reliance on Rowe v. Exline (2007) 153 Cal.App.4th 1276 (Rowe) is unavailing. In Rowe, all three defendants moved to compel arbitration-the signatory to the arbitration agreement, as well as two nonsignatories who were alleged to be the alter egos of the signatory entity. (Id. at p. 1281.) The Court of Appeal held that a signatory plaintiff seeking to enforce a written contract containing an arbitration clause "may be estopped from denying arbitration if he sues nonsignatories as related or affiliated persons with the signatory entity." (Id. at p. 1287.) But here, only Auto Holdings (the signatory) moved to compel arbitration. Thus, the trial court declined to compel arbitration of claims against Auto Holdings based on the possibility of conflicting rulings in the arbitration (between Park and Auto Holdings) and the proceedings in the trial court adjudicating the same claims (between Park and Hyundai Glendale/Hurry). Rowe is, therefore, inapplicable.
As noted above, the trial court also deemed Hurry a moving party. We address this issue in section B below.
Accordingly, we conclude the trial court did not abuse its discretion by declining to order arbitration on the ground that there is a risk of conflicting rulings in different fora involving the same claims against parties that are allegedly alter egos of each other, and are also alleged to be Park's joint employers.
B. Moving Parties
Auto Holdings and Hurry contend the trial court erred by deeming Hurry a moving party to the motion to compel arbitration. They argue the motion was brought solely on behalf of Auto Holdings, and its request to compel to arbitration claims asserted against Hurry while acting within the scope of his agency, did not make Hurry a moving party.
As an appellant, Hurry has the burden of affirmatively demonstrating the court's error was prejudicial. (See Champir, LLC v. Fairbanks Ranch Assn. (2021) 66 Cal.App.5th 583, 597 [appellant must affirmatively demonstrate both error and prejudice].) "The test for prejudice is whether there is a reasonable probability that in the absence of the error, a result more favorable to the appellant would have been reached." (In re Marriage of Knox (2022) 83 Cal.App.5th 15, 40.)
Here, even assuming the trial court erred by deeming Hurry a moving party, Hurry has not demonstrated prejudice. Auto Holdings and Hurry argue the trial court "deprived Hurry of his statutory and procedural rights to present his own argument and evidence as to why Park's claims against him must be arbitrated." But Hurry does not explain on what basis he would move to compel arbitration of claims against him in his individual capacity. Hurry was not a signatory to the operating agreement. Nor does he claim to have entered into any other contract with Park that contains an arbitration provision. Hurry, therefore, fails to demonstrate reversable error.
DISPOSITION
The order is affirmed. Park is awarded his costs on appeal.
We concur: COLLINS, J. MORI, J.