Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
Santa Clara County Super. Ct. No. CV019511
ELIA, J.After an arbitrator found appellant Anna Manayan liable to her business associate, respondent Wayne Baird, she unsuccessfully moved to vacate the award in superior court. On appeal, Manayan maintains that the contract enforced by the arbitration award was illegal because it prohibited the parties from doing business together. She further challenges the superior court's award of the attorney fees Baird incurred before and after the arbitration proceeding. We find no error and therefore must affirm the judgment.
Background
In September 2000 Manayan, an acupuncturist, entered into an "Operating Agreement" with Baird, a chiropractor, to establish a limited liability company called Delicate Balance Health Care Center LLC. In mid-2001, however, shortly after the company opened for business, Manayan failed to make a capital contribution to keep the business going and the relationship began to deteriorate. Baird asked for an accounting of the company's finances, but Manayan did not provide one. In November 2001 Baird left the clinic on the condition that Manayan buy his half ownership and provide an accounting. Through their attorneys the parties agreed that Manayan would purchase Baird's interest with a valuation date of November 10, 2001. Manayan failed to follow through on her promise, however.
In April or May of 2004, Baird filed a complaint against Manayan for accounting, involuntary dissolution, breach of fiduciary duty, common count, defamation, and frustration of purpose. In July 2004 the superior court entered an order compelling arbitration under the Operating Agreement.
This cause of action was later dismissed.
The arbitration hearing did not begin, however, until March 2006. The proceeding was bifurcated into a liability phase and a damages phase. At the outset of the hearing Baird was permitted to amend the complaint to add the LLC as a defendant and add a cause of action for breach of contract against the center. In an interim award on September 28, 2006, the arbitrator found Manayan liable to Baird for failing to compensate him for the value of his economic interest in the health center as of November 10, 2001, pursuant to the parties' second (buy-out) agreement. At the conclusion of the damages phase in early 2007, the arbitrator determined that the net economic value of Baird's interest was $67,089.16. As the prevailing party, Baird was awarded his fees and costs of arbitration, but the parties were to bear their own attorney fees and other costs.
Baird attributed the delay to Manayan's resistance to discovery, failure to pay arbitration fees, and repeated excuses for being unavailable on several scheduled hearing dates. In July 2005 Baird asked the court to reassume jurisdiction based on Manayan's "persistent refusal to arbitrate." The appellate record does not reflect the outcome of the request.
Citing Code of Civil Procedure sections 1286.2, subdivision (a)(4) and 1286.6, subdivision (b), Manayan moved to vacate or (alternatively) correct the award on the ground that the underlying Operating Agreement was an illegal contract. She pointed to the arbitrator's finding that the purpose of the LLC was "to provide chiropractic and alternative health care, including acupuncture, retail store and clinic." Such business arrangements were illegal, Manayan argued, because neither chiropractors nor acupuncturists were permitted to operate as an LLC, and because they were not permitted to do business together in a single practice. By upholding the parties' contract, the arbitrator had assertedly exceeded his powers, and vacation of the award was therefore required. Manayan further contended that the subsequent agreement to buy out Baird was nothing more than a "classic 'agreement to agree' " and was not part of the order for arbitration; in addition, an agreement "to buy out the interest in an illegal company [was in] itself, an illegal contract."
Manayan cited 16 California Code of Regulations section 312.1, which prohibits unlicensed individuals from owning a chiropractic practice in any form; though that person may own the facility. She also cited Business and Professions Code section 4975 and 16 California Code of Regulations section 1399.470, et seq, which, in section 1399.475, generally requires each shareholder, director, officer, and employee of a professional acupuncture corporation to hold a valid acupuncture certificate. Business and Professions Code sections 1050 et seq describe the procedures for establishing and maintaining valid chiropractic corporations in the state.
Baird responded that Manayan's claim of illegality should be rejected in equity because she had drafted the agreement herself and therefore had unclean hands. He also maintained that the agreement should be upheld because the "vast majority" of the income to the business was for product sales and services other than acupuncture or chiropractic, a fact the arbitrator recognized when he calculated the award without including earnings from either party's licensed practice. Baird petitioned to confirm the award and requested attorney fees of $50,000.
The trial court questioned Manayan's assertion that the parties' conduct was illegal. It suggested that "what's wrong is the form of the corporation as opposed to something being done illegally"—that is, it was permissible to form a professional corporation, but not as a limited liability corporation. On this point the court distinguished the primary case on which Manayan relied, Yoo v. Jho (2007) 147 Cal.App.4th 1249, noting that here the parties had not agreed to engage in illegal conduct such as dispensing drugs, but had only created a corporate form that was unacceptable. Finally, the court expressed concern that Manayan had evidently drafted the agreement herself, and that she had engaged in arbitration without raising the issue of illegality at that time. Manayan's counsel protested that Manayan had raised the issue during the arbitration. He also maintained that illegality inhered not only in the LLC form of the corporation, but in the joining in business by a chiropractor and an acupuncturist. The trial court regarded the parties' conduct as more of a legal mistake, as they had not intended to violate any law. There was "nothing reprehensible" and no "moral issue in this thing at all." The court accordingly denied Manayan's motion and granted Baird's petition to confirm the award.
Baird had stated in his declaration that he had trusted Manayan to draft the agreement and fulfill any legal requirements for the business, as she was a licensed attorney at the time. In his opposition to Manayan's motion to vacate, Baird's attorney stated that Manayan had been suspended from practicing law in California.
Addressing the question of attorney fees, Manayan's counsel pointed out that the arbitrator had denied Baird those fees. The trial court assumed jurisdiction over fees and costs incurred outside the arbitration, including efforts to enforce the award. The court awarded pre-arbitration fees of $7,125, incurred between April 16, 2004 and July 12, 2004 as well as fees incurred in connection with mediation and fees incurred to enforce the award, for a total of $25,477. With fees and costs added to the arbitration award, the judgment against Manayan totaled $109,765.63.
Discussion
1. Illegality of the Business
Manayan first renews her contention that no part of the Operating Agreement should have been enforced because it was illegal and therefore entirely void. The trial court expressed the view that the contract was not "necessarily illegal," even if the LLC form was improper. The court further pointed out that an arbitrator's power is "very broad," extending to a determination "that he could do what he did," which the court believed was beyond its province to review. Baird, representing himself on appeal, emphasizes the second point made by the trial court, arguing that the arbitrator's decision was entitled to deference. He urges agreement with the court's suggestion that the buy-out agreement was independently proper, even if the existence of the LLC was not permitted.
We need not resolve the merits of the parties' debate over whether their entire business relationship was in fact illegal, nor the corollary issue of whether there are legal provisions in their contract that are severable from the allegedly illegal terms. (See Moncharsh v. Heily & Blasé (1992) 3 Cal.4th 1, 30 [when alleged illegality goes to only a portion of the contract, the entire controversy, including the issue of illegality, remains arbitrable]; Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 124 [if central purpose of the contract is "tainted with illegality," then the contract as a whole cannot be enforced, whereas "[i]f the illegality is collateral to the main purpose of the contract, and the illegal provision can be extirpated from the contract by means of severance or restriction, then such severance and restriction are appropriate"].) For purposes of appellate review, the most salient finding expressed by the trial court in its ruling is that Manayan should not be heard to complain about a defect that (a) she created in drafting the challenged agreement and (b) she apparently failed to assert during arbitration.
As to the first point, essentially one of equitable estoppel, we agree that Manayan should not be rewarded for having created the very illegality she now invokes to avoid liability. The arrangement to operate with Baird as an LLC was the product of her own undertaking. Then a licensed attorney, Manayan assumed the task of drafting the agreement and assured Baird that she would take care of all legal prerequisites for organizing and starting the business. Baird relied on Manayan's representation that operating as an LLC would alleviate their concern about an acupuncturist and a chiropractor sharing earnings. Manayan cannot avoid liability to Baird by asserting an infirmity caused by her own failure to adhere to proper procedures. (Cf. Sinclair v. Aquarius Electronics, Inc. (1974) 42 Cal.App.3d 216, 228 [Where plaintiff inexperienced in patent application procedures fully relied to his detriment on company representative's superior knowledge, representative's misleading representation that patent application was unnecessary for contract equitably estopped defendant from claiming that parties' royalty agreement was unenforceable for lack of a valid patent].) Even if, as the trial court suggested, the parties simply made a mistake in assuming they had complied with the law, Manayan cannot now take advantage of that mistake by relying on a defect she herself caused.
As to the court's suggestion of waiver, we note that Manayan has provided us no record indicating that she called attention to the asserted illegality before the arbitrator. She has submitted a series of pre-hearing orders by the arbitrator; the first hearing transcript, at which the arbitrator entertained a motion to add a defendant; and the arbitrator's final summary of the dispute. None of these mentions the illegality argument. Nor does the transcript of the hearing sending the matter to arbitration or the trial court's written orders indicate that the issue was raised. The available portions of the record thus permit the inference that the issue was not presented to the arbitrator.
If she did not submit the illegality question to the arbitrator, she waived it. (Moncharsh v. Heily & Blasé, supra, 3 Cal.4th at p. 31.) "Any other conclusion is inconsistent with the basic purpose of private arbitration, which is to finally decide a dispute between the parties. Moreover, we cannot permit a party to sit on his rights, content in the knowledge that should he suffer an adverse decision, he could then raise the illegality issue in a motion to vacate the arbitrator's award. A contrary rule would condone a level of 'procedural gamesmanship' that we have condemned as 'undermining the advantages of arbitration.' [Citations.] Such a waste of arbitral and judicial time and resources should not be permitted." (Id. at p. 30.)
The principles discussed in Moncharsh are particularly applicable here. The arbitrator's final decision sets forth the facts and the parties' arguments and explains the reasoning behind the award. It does not reflect any assertion regarding the illegality of either the parties' business relationship or the ensuing agreement that she would buy out Baird's economic interest in the health center. To have waited until after an adverse decision to raise the issue indicates a game-playing strategy the trial court properly recognized and declined to condone.
Loving & Evans v. Blick (1949) 33 Cal.2d 603, All Points Traders, Inc. v. Barrington Associates (1989) 211 Cal.App.3d 723, and Lindenstadt v. Staff Builders, Inc. (1997) 55 Cal.App.4th 882, on which Manayan relies, are distinguishable. First, in those cases the issue was presented to the arbitrator. The reviewing court in each case emphasized that courts may decide the illegality of a contract in post-arbitration proceedings, even if it was considered and rejected by the arbitrator. (See, e.g., Loving & Evans v. Blick, supra, 33 Cal.2d at pp. 609-610 [finality of arbitrator's award inapplicable when legality of entire transaction is in dispute]; All Points Traders, Inc. v. Barrington Associates, supra, 211 Cal.App.3d at pp. 737-738 [issue of whether an investment banking firm without a real estate broker's license could claim a commission from appellant in the sale of appellant's business investment was reviewable by the courts, even though the arbitrator had found in the firm's favor]; Lindenstadt v. Staff Builders, Inc., supra, 55 Cal.App.4th at pp. 892-893 [court required to decide illegality issue even though arbitrator had already determined it against party asserting that defense].) Here, Manayan does not dispute Baird's representation that she failed to raise it until the judicial proceedings. She thus appears to have waived the issue for purposes of judicial review.
Moreover, in those cases the party asserting the illegality was a member of the group the legal restriction was intended to protect. Thus, for example, in Loving it was the contractor's client who asserted the illegality of the construction contract at issue because the contractor's construction partnership was unlicensed. The legal prohibition on the partnership was created for the benefit of the public, including the very person who was asserting the defect. In those circumstances, the court was not bound by the arbitrator's decision, but was permitted to consider and rule upon the illegality question. Here, however, a prohibition against acupuncturists and chiropractors engaging in a business together was invoked not by an innocent party whose interests were protected by that prohibition, but by a party who had consciously engaged in that business and even set it up. Manayan cannot now be heard to use her own illegal conduct– whether mistaken or intentional— as a weapon against Baird, who unknowingly agreed to an arrangement Manayan assured him was legitimate. (Cf. Asdourian v. Araj (1985) 38 Cal.3d 276, 292 [as defendants were not members of the group primarily in need of the statute's protection, underlying public policy of proscribing statute would not be defeated by allowing plaintiff to recover for the reasonable value of the work performed].)
Even if we assume, giving Manayan the benefit of the doubt, that she did raise an illegality defense before the arbitrator, it is apparent that she was not contesting the legality of the entire transaction at that time. Had she done so, she would have been conceding the invalidity of the agreement to arbitrate as well. (Moncharsh v. Heily & Blasé, supra, 3 Cal.4th at p. 29 [where otherwise enforceable arbitration agreement is contained in an illegal contract, arbitration clause may be vitiated and a party may avoid arbitration altogether].) Having moved to compel arbitration, she evidently did not believe that the arbitration clause was improper. She therefore has no basis to complain that the trial court viewed the improper LLC as severable from the allocation of interests in the business. And more significantly, she offers no sound basis to challenge the court's implied finding that Manayan's subsequent agreement to purchase Baird's interest in the company, a tentative resolution of the parties' dispute, created an independent enforceable obligation that Manayan could not avoid by challenging the legality of the underlying business relationship.
" 'Two reasons for severing or restricting illegal terms rather than voiding the entire contract appear implicit in case law. The first is to prevent parties from gaining undeserved benefit or suffering undeserved detriment as a result of voiding the entire agreement--particularly when there has been full or partial performance of the contract. [Citations.] Second, more generally, the doctrine of severance attempts to conserve a contractual relationship if to do so would not be condoning an illegal scheme. [Citations.] The overarching inquiry is whether " 'the interests of justice . . . would be furthered' " by severance. [Citation.] Moreover, courts must have the capacity to cure the unlawful contract through severance or restriction of the offending clause, which . . . is not invariably the case.' (Armendariz, supra, 24 Cal.4th at pp. 123-124.)" (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1074.)
Manayan's resort to Yoo v. Jho, supra, 147 Cal.App.4th 1249 does not assist her. That case involved a contract for the sale of a business dealing in counterfeit goods, an obvious violation of law and policy designed to protect the public from fraud. The appellate court properly applied the principle that courts will not lend their aid to the enforcement of an illegal agreement or one that violates public policy, because "the public importance of discouraging such prohibited transactions outweighs equitable considerations of possible injustice between the parties." (Southfield v. Barrett (1970) 13 Cal.App.3d 290, 294.) That rule, however, "is not an inflexible one to be applied in its fullest rigor under any and all circumstances," but is subject to a "wide range of exceptions"—in particular, "to avoid unjust enrichment to a defendant and a disproportionately harsh penalty upon the plaintiff." (Ibid; accord, Asdourian v. Araj (1985) 38 Cal.3d 276, 291 [contracts enforceable under policy of transgressed law to protect unsophisticated consumers.) Here the trial court emphasized that the activities in which the parties were engaged were not in themselves illegal (each party performed the services for which he or she was licensed); the essence of the illegality was in their operating a joint professional business through an LLC. In any event, unlike the plaintiff in Yoo, who knew that she was buying a business partially dependent on the sale of counterfeit goods, Baird was not attempting to enforce a promise that he knew would allow him to engage in illegal activity. The holding in Yoo is simply inapposite here. Not to hold Manayan to her promise to buy Baird's interest upon his withdrawal from the business, even if considered as part of the original agreement, would unjustly enrich her and impose a "disproportionately harsh penalty" upon Baird. (Southfield v. Barrett, supra, 13 Cal.App.3d at p. 294.)
2. Attorney Fees
Manayan next challenges the trial court's award of attorney fees for both pre-arbitration litigation and post-award proceedings. As to pre-arbitration fees, she contends that the award was improper because this was the province of the arbitrator, who had already decided that no one should receive attorney fees. In Manayan's view, only those incurred in proceedings to confirm the award were permissible; but even the award of those was not supported by declarations from the attorneys who represented Baird. We disagree with both contentions.
In its initial decision that Baird was entitled to attorney fees, the court referred to paragraphs 11.3(c) and 11.6 of the Operating Agreement. The first of these provisions, pertaining to arbitration, stated that the unsuccessful party was to bear the costs of the arbitration proceeding "and any proceeding in court to confirm or to vacate any arbitration award, as applicable, including each party's attorney's fees and costs" or as otherwise awarded by the arbitrator. Paragraph 11.6, entitled "Attorney Fees," more generally stated, "In the event that any dispute between the Company and/or the Members should result in litigation or arbitration, the prevailing party in that dispute shall be entitled to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including without limitation, reasonable attorney fees and expenses."
After receiving Baird's declaration and Manayan's opposition to the fee request, the trial court awarded fees claimed by Baird for three attorneys from November 2001 to October 2002 ($5,365), April 16 to July 12, 2004 ($7,125), mediation ($5,425), and enforcement of the award ($7,562) for a total of $25,477. The court reasoned that there were "two jurisdictions": one governing fees and costs associated with the arbitration, which was subject to the arbitrator's determination; and one for fees and costs "outside of the arbitrator, including those efforts to enforce the arbitration award." On appeal, Manayan takes issue with this distinction, arguing that the court "was to confirm the award as made" and not second-guess the arbitrator's decision not to award any pre-arbitration fees.
The arbitrator's refusal to grant attorney fees to Baird does not, however, compel the inference that the arbitrator was resolving a pre-arbitration claim-- nor can we infer that the absence of a pre-arbitration award means Baird is foreclosed from such a recovery. Manayan suggests that "[p]resumably, [Baird] was seeking all of his attorney's fees from the inception of the case to the date of the award." She further suggests that whether or not Baird was seeking pre-arbitration fees, the issue was "nevertheless submitted to arbitration." She then implicitly assumes that the arbitrator considered and rejected the option of awarding fees for the pre-arbitration litigation. The record before us, however, does not support this series of inferences. Baird's arbitration brief contains no mention of attorney fees, much less pre-arbitration fees. That procedural fact alone is not dispositive, as the arbitrator could have granted or denied attorney fees for the arbitration under the terms of the agreement. But there is no evidence that the arbitrator even considered pre-arbitration fees, with or without a request. The parties' contract said nothing specifically about those fees; paragraph 11.3(c) gave the arbitrator the discretion to award fees and costs "of the arbitration proceeding and any proceeding in court to confirm or to vacate any arbitration award, as applicable." Paragraph 11.6 was only a statement that the prevailing party was entitled to "reasonable attorney fees and expenses" for "enforcing any right" in litigation or arbitration.
The judgment confirming the award properly did not disturb the arbitrator's implied decision not to award attorney fees. The only conclusion we can fairly draw from that decision, however, is that the arbitrator did not believe Baird should receive fees incurred in the course of the arbitration. Nothing in the parties' agreement or the rules governing judicial review of arbitration decisions prevented the trial court from applying paragraph 11.6 to award Baird the attorney fees he had incurred for enforcing his right to recover from Manayan.
The cases Manayan relies on do not alter this conclusion. The court in Carole Ring & Associates v. Nicastro (2001) 87 Cal.App.4th 253, 259 held that the appellant was not entitled to attorney fees incurred at the arbitration level, as he was bound by the final judgment confirming the award, which had allowed no attorney fees or costs for the arbitration proceeding. Likewise, Moshonov v. Walsh (2000) 22 Cal.4th 771 and Moore v. First Bank of San Luis Obispo (2000) 22 Cal.4th 782, had nothing to do with the specific issue before us, whether pre-arbitration fees are recoverable after an arbitrator declines to award any to the prevailing party. In both of those cases, the Supreme Court upheld the trial court's denial of a motion to correct an award, in conformance with the rule of arbitral finality discussed in Moncharsh v. Heily & Blasé, supra, 3 Cal.4th at page 28. In Moshonov the arbitrator had refused attorney fees to the prevailing parties. That decision, the Supreme Court held, whether correct or not, was within the arbitrator's power. (22 Cal.4th at pp. 778-779.) The court in Moore likewise upheld the arbitrators' refusal to award attorney fees as well as their refusal even to designate a prevailing party. Both of these decisions were deemed to be within the arbitrators' discretion. (22 Cal.4th at p. 790.)
Corona v. Amherst Partners (2003) 107 Cal.App.4th 701, discussed by Manayan at length, is also not helpful. There the parties submitted their dispute over a real estate purchase to binding arbitration, which resulted in an award for the plaintiff. Plaintiff did not ask the arbitrator for attorney fees and costs, but in his subsequent motion to confirm the award, plaintiff sought those fees and costs for both the arbitration and the judicial proceedings. The trial court denied that request. On appeal, the Fourth District, Division One, upheld the trial court's denial of arbitration-associated fees and costs, but it reversed the trial court insofar as the fees for the judicial proceedings had been denied. Citing Moshonov, the reviewing court invoked the rule of limited judicial review of arbitration decisions. The court also stated, however, that under the parties' contract plaintiff was entitled to attorney fees and costs related to the judicial proceedings. It did not specifically express any view regarding pre-arbitration proceedings, even though the plaintiff asked for those fees; instead, it referred only to "judicial proceedings" and remanded the matter for the trial court to determine the correct amount. (Id. at p. 707.) Here, neither the parties' contract nor the prevailing party's request referred to pre-arbitration judicial proceedings. No other authority cited by Manayan supports her assertion that Baird was not permitted to seek attorney fees for the period before arbitration under paragraph 11.6 of the Operating Agreement.
As for the fees Baird incurred to obtain confirmation of the award, Manayan asserts that no evidence was produced in support of the claim. The record demonstrates otherwise. Both Baird and his most recent attorney submitted declarations attesting to the amounts spent at different stages of the dispute, together with billing statements. The court found this evidence sufficient, and we have no basis for finding that determination erroneous. (See PLCM Group v. Drexler (2000) 22 Cal.4th 1084, 1095 [explaining discretionary standard and procedure for evaluating attorney fees claim]; see also Niederer v. Ferreira (1987) 189 Cal.App.3d 1485, 1507-1508 [discussing factors to consider in awarding attorney fees].) No abuse of discretion is shown on this record.
Disposition
The judgment is affirmed.
WE CONCUR: PREMO, Acting P. J. BAMATTRE-MANOUKIAN, J.