Opinion
A156242
03-24-2020
CNE USA CORPORATION et al., Plaintiffs and Respondents, v. FANG DUANMU, et al., Defendants and Appellants.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (San Mateo County Super. Ct. No. 18CIV04571)
Three individuals, whom we will refer to collectively as "Duanmu et al.," sought to arbitrate employment-related claims against the company they alleged had employed them, CNE California Holdings USA (CNE California), along with its parent and other related companies. CNE California agreed to arbitrate, but the related companies refused because they were not signatories to the employment agreements containing the arbitration clause on which Duanmu et al. relied. The related companies, in turn, sued Duanmu et al. and one of the companies' own officers, Guozhen Liu, in superior court, alleging they had misappropriated corporate funds, and moved to stay the arbitration and consolidate it with their case. The trial court denied Duanmu et al.'s petition for arbitration as to the related companies, stayed the arbitration as to CNE California and consolidated the arbitration claims with the related companies' superior court action so that all claims could be resolved in a single forum. Duanmu et al. appealed from that decision.
The three appellants, Fang Duanmu, Jun Fu and Qiaoling Xie, were joined by a fourth, Yu Zhao, in the arbitration and trial court proceedings, but Zhao has not appealed.
BACKGROUND
I.
The Statute
The statute on which the parties and the trial court relied is the California Arbitration Act (Code Civ. Proc., § 1280, et seq.), specifically section 1281.2. That section requires trial courts to grant motions to arbitrate disputes covered by contractual arbitration provisions except in specified circumstances. The exception the related companies invoked here is where "[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, subd. (c).) A "pending court action or special proceeding" is defined to include "an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition." (Ibid.) When that exception applies, the trial court also "may refuse to enforce the arbitration agreement," "order . . . joinder of all parties in a single action or special proceeding," and "may stay arbitration pending the outcome of the court action or special proceeding." Alternatively, the court "may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding." (§ 1281.2, subd. (d).)
All further statutory references are to the Code of Civil Procedure.
II.
The Standard of Review
On a petition to compel arbitration, the party seeking to compel arbitration bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence, and the party opposing the petition bears the burden of proving by a preponderance of the evidence any fact necessary to its defense, including that an arbitration provision is invalid or otherwise unenforceable. (Engalla v. Permanente Medical Group, Inc. 15 Cal.4th 951, 972.) "In these summary proceedings, the trial court sits as a trier of fact, weighing all the affidavits, declarations, and other documentary evidence, as well as oral testimony received at the court's discretion, to reach a final determination." (Ibid.)
"When section 1281.2[, subdivision] (c) applies, 'the trial court's discretionary decision as to whether to stay or deny arbitration is subject to review for abuse.' [Citations.] The trial court's decision whether section 1281.2[, subdivision] (c) applies, however, is reviewed under either the substantial evidence standard or de novo standard. If the court based its decision on a legal determination, then we adopt the de novo standard. [Citations.] If the court based its decision on a factual determination, then we adopt the substantial evidence standard of review. [Citation.] Whether there are conflicting issues arising out of related transactions is a factual determination subject to review under the substantial evidence standard." (Acquire II, Ltd. v. Colton Real Estate Group (2013) 213 Cal.App.4th 959, 971-972.)
III.
Trial Court Decision
The trial court found that the litigation and pending arbitration "are directly related and substantially overlapping, that this dispute should [be] heard in one forum with all parties present, and that the Court is the appropriate forum" for the following reasons. "First, except for CNE-Calif., none of the CNE-related entities can be compelled to arbitrate. . . . Except for CNE-Calif., none of the CNE entities is even arguably a party to any arbitration agreement. The offer letters that contain the arbitration provisions do not even mention any CNE entity other than CNE-California." "Second, the evidence before the court does not provide grounds to pierce the corporate veil and treat the other CNE entities (CNECG, CNE-USA, and CNE-LTD.) as alter egos of CNE-Calif., such that their corporate separateness can be disregarded. . . . Defendants offer no compelling evidence any of the CNE entities were inadequately capitalized, failed to follow corporate formalities, commingled funds or records, or otherwise engaged in conduct that would create an inequitable result if the Court were to recognize their corporate separateness." "Third, all the relevant persons/witnesses are parties to the court proceedings, whereas participation in the arbitration is necessarily limited. As stated, only CNE-Calif. can be compelled to arbitrate (although the other CNE entities could voluntarily participate). Further, Guozhen Liu is a key witness and a named Defendant in this case, but cannot be named as a party to the arbitration."
IV.
Arguments and Analysis
Duanmu et al. first attack the trial court's finding that only CNE-California and none of the related entities could be compelled to arbitrate, contending that "[n]on-signatories who are related to parties to the arbitration agreement can be compelled to arbitrate where 'the significant issues in the dispute arose out of the contractual relationship between the parties . . . .' " Duanmu et al. relies on Cohen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840, 864 (Cohen) for this exception to the general rule.
In Cohen, the court held that a parent company is not generally liable on a contract signed by its subsidiary simply because the subsidiary is wholly owned by the parent, but that a parent can be liable if two conditions are met. First, the parent must exercise a degree of control over the subsidiary beyond that to be expected as an incident of the parent's ownership of the subsidiary that reflects a " ' "purposeful disregard of the subsidiary's independent corporate existence." ' " (Cohen, supra, 31 Cal.App.5th at pp. 861-862.) Stated otherwise, the degree of control must be sufficient to conclude that "the subsidiary was a mere agent or instrumentality of the parent." (Id. at pp. 864-865.) Second, the claims against the parent must arise out of the relationship between the parent and subsidiary. (Ibid.)
Duanmu et al. cannot prevail on this argument because they did not raise the agency theory in the trial court. There, they argued only that the related entities should be compelled to arbitrate under alter ego and single enterprise theories and under an equitable or direct benefits estoppel theory. Having failed to raise the control-based principal/agent theory in the trial court, Duanmu et al. has forfeited it. (People v. Stowell (2003) 31 Cal.4th 1107, 1114 [" '[A]n appellate court will not consider claims of error that could have been—but were not—raised in the trial court' "].) This is especially so because whether and to what extent the related entities were exercising control over CNE-California such that the court could conclude CNE-California was acting as an agent for the related entities presents issues of fact that are the trial court's province to decide. (Cohen, supra, 31 Cal.App.5th at p. 865; see Henry v. Alcove Investment, Inc. (1991) 233 Cal.App.3d 94, 100-101 [applying the forfeiture rule is particularly appropriate where new argument raises issues of fact not litigated in trial court].)
Cohen was decided on January 29, 2019, shortly after the trial court in this case had decided the arbitration-related motions. Cohen's holding, however, was based on traditional principles of contract and agency law established well before it was decided. (Cohen, supra, 31 Cal.App.5th at pp. 859-864 [discussing principles and cases]; see, e.g., Buckner v. Tamarin (2002) 98 Cal.App.4th 140, 142-143 [" 'common thread' " of cases holding non-signatories bound to arbitration agreement is " 'the existence of an agency or similar relationship between the nonsignatory and one of the parties to the arbitration agreement' "].)
Even if Duanmu et al. had not forfeited the issue, the trial court's order makes plain that it would have rejected it. Key to determining that a person or corporation is an alter ego of another corporation is a finding that the latter is dominated or controlled by the former. (9 Witkin, Summary of Cal. Law, Corporations § 13 (11th ed. 2019.) As we have already indicated, in addressing Duanmu et al.'s alter ego theory, the court found Duanmu et al. had failed to show any of the CNE entities were inadequately capitalized, failed to follow corporate formalities, commingled funds or records, "or otherwise engaged in conduct that would create an inequitable result if the Court were to recognize their corporate separateness." We infer from this quoted language that the court found no evidence the related companies exercised control over CNE-California to a degree " ' "over and above that to be expected as an incident of the parent's ownership of the subsidiary" ' " or reflecting their " ' "purposeful disregard of the subsidiary's corporate existence." ' " (Cohen, supra, 31 Cal.App.5th at p. 862.)
As they did in the trial court, Duanmu et al. again rely on the parent-subsidiary relationships between CNE and CNE USA, and between CNE USA and CNE-California, respectively, and the parent companies' sole ownership of the subsidiaries. But as the Cohen court stated, "[i]n general, a parent company is not liable on a contract signed by its subsidiary 'simply because it is a wholly owned subsidiary." (Cohen, supra, 31 Cal.App.5th at p. 861.) Duanmu et al. also cite their allegation that Liu served as Deputy General Manager of CNE and the sole officer and director of CNE USA and CNE-California. This fact could provide some support for an agency relationship, but it is not enough to establish the kind of control that Cohen requires. Duanmu et al. point to no evidence of the degree of control held sufficient in Cohen, where the parent entity (TNP) communicated directly with the noteholders of the subsidiary (12% Program) and invited them to contact it directly, thereby "substantially blurr[ing] the lines between the two entities and [holding itself] out to the noteholders as more than just parent, managing member and guarantor of the [subsidiary]." (Id. at pp. 865-866.) In short, Duanmu et al.'s arguments of agency fall short of proving CNE-California was acting as the mere agent of the related entities. Therefore, Duanmu et al.'s argument that the trial court erred in finding the related entities could not be compelled to arbitrate fails.
Duanmu et al. also contend the trial court erred in holding that section 1281.2 applied, and they further argue that the court had no discretion to deny arbitration because the related entities are not "third parties" for purposes of that section. They acknowledge that a third party has been interpreted to mean a party who is not bound by the arbitration agreement. (See Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 393 ["Section 1281.2(c) addresses the peculiar situation that arises when a controversy also affects claims by or against other parties not bound by the arbitration agreement"].) Nor do they dispute that the purpose of section 1281.2, subdivision (c) is "to avoid potential inconsistency in outcome as well as duplication of effort." (Ibid.) However, relying on Laswell v. AG Seal Beach, LLC (2010) 189 Cal.App.4th 1399 (Laswell) and Rowe v. Exline (2007) 153 Cal.App.4th 1276 (Rowe), they argue that persons or entities who were not signatories are not "third parties" if they "could have availed themselves of arbitration" to adjudicate the claims they are instead asserting in litigation. Their argument fails because neither case is apposite.
In Rowe, a co-founder of a corporation filed a suit alleging breach of a settlement agreement in which he had agreed to transfer his interests in the corporation to it and to resign as a director in return for $428,500 to be paid in installments. (Rowe, supra, 153 Cal.App.4th at pp. 1279-1280.) Rowe sued the corporate entity and two of the officers (his fellow founders), alleging they were alter egos of the corporate defendant on behalf of which the agreement had been signed. (Id. at pp. 1280-1281.) The three defendants moved to compel arbitration based on an arbitration clause in the settlement agreement. (Id. at p. 1281.) The trial court held that only the corporation could enforce the arbitration clause because the individual defendants were not signatories to the agreement. Because Rowe's suit was against the officers who were "third parties" within the meaning of that section, the trial court exercised its discretion to deny the motion to compel arbitration against the corporation. (Id. at pp. 1281-1282.) Our colleagues in Division Five reversed, reasoning that by suing the individual defendants as alter egos Rowe had essentially alleged they were the corporation, and if they were the corporation they were entitled to the benefit of the arbitration provision. (Id. at pp. 1285, 1291.) Thus, under Rowe, Duanmu et al. could have conferred standing on the related entities to enforce the arbitration clause if they had sued the entities and alleged they were CNE-California's alter egos. But this is not what happened. It is not Duanmu et al. who sued the related entities, and it is not the related entities who petitioned to compel arbitration; it is the other way around. The non-signatory entities do not seek to compel Duanmu et al. to arbitrate; rather, Duanmu et al. seek to compel the entities to do so.
Laswell was a negligence and elder abuse suit by an elderly woman against three entities—the licensee operator of the rehabilitative care facility where she had resided, the owner of the facility and corporate parent of the licensee/operator and the management company in charge of the facility's day-to-day operation, patient care and maintenance. (Laswell, supra, 189 Cal.App.4th at p. 1402.) The defendants sought to compel arbitration, invoking an agreement providing for arbitration of all disputes arising out of provision of services by the facility. (Id. at p. 1403.) The trial court denied arbitration based on the exception that applies where there are disputes with third parties who are not subject to the arbitration agreement. It reasoned that only the licensee operator was a signatory to the agreement and that the non-signatories were "third parties." (Id. at pp. 1406-1407.) The Second District reversed, holding the other two entities were "not third parties for purposes of . . . section 1281.2, subdivision (c)" and were equally "bound by the agreement and thus entitled to enforce it against Laswell." (Id. at p. 1407) It relied on Laswell's allegations "that all of the defendants are responsible for the improper care that she received while she resided at [the facility]" and that all three defendants were represented by the same counsel and had agreed to participate in the arbitration. (Ibid.) Thus, like Rowe, Laswell involved non-signatory persons and entities who sought to compel arbitration, not non-signatories against whom arbitration was sought.
Laswell and Rowe stand for the proposition that a non-signatory who seeks to arbitrate or agrees to arbitrate is not a "third party" for purposes of section 1281.2, subdivision (c).) Neither case addresses, much less holds, that a non-signatory who refuses to arbitrate may be compelled to do so simply because it could conceivably compel someone who is a signatory to arbitrate. Permitting a non-signatory to an arbitration agreement to compel arbitration against a signatory furthers the state's public policy in favor of arbitration. Compelling a non-signatory to arbitrate with a signatory does not. This is because the policy is in favor of enforcing agreements to arbitrate, not requiring parties to arbitrate when they have not chosen to do so. "[P]arties can only be compelled to arbitrate when they have agreed to do so. [Citation.] 'Arbitration . . . is a matter of consent, not coercion. . . .' " (Avila v. Southern California Specialty Care, Inc. (2018) 20 Cal.App.5th 835, 843 [quoting Volt Info. Sciences, Inc. v. Bd. of Trustees (1989) 489 U.S. 468, 479].) Contrary to Duanmu et al.'s argument, Laswell and Rowe provide no basis for concluding the trial court erred in determining that section 1281.2, subdivision (c) applies in this case.
Finally, Duanmu et al. contend that the trial court erred because it "had no basis to determine that Guonzhu [sic] Liu's 'presence' was 'indispensable' and no power to stay the ongoing arbitration and consolidate it with this action on the basis of his supposed status." They then devote several pages of their opening and reply briefs to attacking the related entities' trial court arguments about Liu. Duanmu et al.'s contentions, which focus on whether Liu will or can be made to appear in the action, are unpersuasive because the trial court did not agree with or rely on any of the related entities' arguments about Lui in making its ruling.
In an order the substance of which spans three and a half pages, the trial court made one reference to Liu. After noting that all of the relevant persons and witnesses are parties to the court proceedings, but that only CNE-California could be compelled to arbitrate, the court added the following: "Further, Guozhen Liu is a key witness and a named Defendant in this case, but cannot be named as a party to the arbitration." Nowhere does the order state that Liu was an "indispensable" party or witness or opine about whether he would or could be compelled to testify. Rather, it simply concludes that, as with the related entities, Liu could not be compelled to arbitrate. Duanmu et al. do not contest that conclusion. In short, Duanmu et al.'s arguments about Liu are largely beside the point.
Insofar as the trial court described Liu as a "key witness," there is ample basis for this finding. Duanmu et al. contend Liu approved their hiring and gave them authority to act on behalf of CNE-California and to do the things they did. They further rely on documents he signed conferring broad authority on them. The related entities contest the authenticity of the employment agreements and documents conferring authority on Duanmu et al. They argue Liu lacked authority to hire or agree to pay Duanmu et al. or to confer authority on others to carry out CNE-California's business. --------
In short, Duanmu et al. have failed to show the trial court erred or abused its discretion in concluding that this case should be adjudicated in the trial court rather than in piecemeal fashion in litigation and a separate arbitration. The trial court understandably found the two proceedings are "directly related and substantially overlapping." Duanmu et al. claim they worked for CNE-California, which failed to pay them according to their employment agreements and violated California's Labor Code, while the related entities dispute that the employment agreements are valid and claim Duanmu et al., with the assistance of Liu, engaged in self-help that amounted to theft by withdrawing millions of dollars from CNE-California's bank accounts and using it to pay themselves. Under these circumstances, the trial court acted well within its discretion in denying the motion to compel arbitration and consolidating the arbitration claims with the pending litigation.
DISPOSITION
The order is affirmed. Respondents are awarded their costs on appeal.
/s/_________
STEWART, J. We concur. /s/_________
RICHMAN, Acting P.J. /s/_________
MILLER, J.