Opinion
G055604
11-26-2018
JAMES E. MASSICOTTE et al., Plaintiffs and Respondents, v. A-ONE JANITORIAL, LLC, et al., Defendants and Appellants.
Dempsey Law, Michael D. Dempsey and Rebecca A. Asuan-O'Brien for Defendants and Appellants. Hennelly & Grossfeld, Michael G. King and Thomas H. Case for Plaintiffs and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. 30-2017-00914519) OPINION Appeal from an order of the Superior Court of Orange County, Beth Eagleson, Temporary Judge. (Pursuant to Cal. Const., art. VI, § 21.) Reversed and remanded. Dempsey Law, Michael D. Dempsey and Rebecca A. Asuan-O'Brien for Defendants and Appellants. Hennelly & Grossfeld, Michael G. King and Thomas H. Case for Plaintiffs and Respondents.
Defendants A-One Janitorial, LLC (LLC) and Kenneth Alston (collectively, Buyers) appeal from the trial court's order denying their motion to compel arbitration and to stay the action. LLC entered into an Asset Purchase Agreement (APA) with A-One Janitorial Services (A-One), James E. Massicotte, and Ricardo De Law O Lemos (collectively, Sellers) to purchase certain assets belonging to A-One. Under the APA, the parties agreed an independent accounting firm would render a conclusive and binding decision concerning any disagreement the parties had over a specific accounting issue. The Buyers contend the court erred in finding this provision of the APA was not an arbitration clause. We agree and therefore reverse and remand for the court to decide whether it should delay arbitration until the nonarbitrable claims are resolved.
I.
FACTS
In February 2017, LLC entered into an APA with Sellers to purchase certain assets belonging to A-One. LLC agreed to pay $1,100,000 on the closing day of the transaction and an earnout and consulting fee after closing. The amount of the earnout and consulting fee depended on certain earnings calculations before interest, tax, depreciation, and amortization (EBITDA). The parties agreed LLC would provide the relevant EBITDA calculations to Sellers. If A-One disputed the calculations, the parties agreed to resolve the dispute through a specific accounting procedure. Section 2.13 of the APA provided: "In the event that . . . [A-One] disputes calculation of the First Calculation of EBITDA to Determine the Purchase Price, the 12 Month EBITDA for the Earnout or the Second Calculation EBITDA to Determine the Purchase Price, or any other reduction in the Earnout or the Purchase Price . . . then, within seven days of . . . [A-One's] receipt of [LLC's] computation of such calculation, . . . [A-One] shall give written notice to [LLC] of the reason(s) for such dispute. . . . If . . . [A-One] and [LLC] are unable to resolve the disputed matters within such 30-day period, . . . [A-One] and [LLC] shall refer the disputed matters to an unaffiliated, reputable and regional and independent accounting firm mutually agreeable to [LLC] and . . . [A-One] (the "Accounting Firm"), and the determination of the Accounting Firm . . . shall be conclusive and binding on . . . [James E. Massicotte, Ricardo De Law O Lemos], . . . [A-One] and [LLC] and not subject to collateral attack for any reason absent manifest error or fraud. . . . The determination of the Accounting Firm shall be based solely on written submissions by . . . [A-One] and [LLC] . . . ."
Sellers filed the underlying complaint when a dispute arose over the earnout and consulting fee,. In May 2017, Sellers filed a first amended complaint against Buyers and alleged causes of action for breach of contract, anticipatory breach of contract, and fraud. Sellers generally alleged Buyers artificially decreased business profits so they could avoid paying the full earnout and consulting fee.
A few days later, LLC provided a relevant EBITDA calculation to Sellers pursuant to the APA. Sellers disputed the calculation. In June 2017, Sellers' counsel sent an e-mail to Buyers' counsel requesting the parties "refer the disputed calculation . . . to an unaffiliated, independent forensic accounting firm" per Section 2.13 of the APA. Buyers' counsel agreed, recommended a few accounting firms, and also reminded Sellers' counsel that Sellers were required to pay for the accounting procedure. In July 2017, Sellers' counsel sent an e-mail informing Buyers' counsel that Sellers would not submit to the accounting procedure. Among other points, Sellers' counsel claimed: "Section 2.13 (which is not an arbitration clause in any event) . . . is now moot . . . in the context of [the] litigation."
Buyers filed a motion to compel arbitration and to stay the action, which Sellers opposed. After a hearing, the trial court issued a minute order denying the motion. The court found Section 2.13 of the APA was not an arbitration clause because "[t]he word 'arbitration is not used.'" The court also stated: "By the language of . . . [S]ection [2.13 of the APA], the parties agreed to submit one specific type of dispute, calculation of the EBITDA for purposes of determining the purchase price, earnout, and payout to a 'binding and conclusive' determination by a mutually selected accounting firm. There is no language indicating that 'any and all disputes' arising out of the agreement are going to be decided by the accounting firm or any other mutually agreed-upon third party."
According to the trial court, Sellers' complaint "implicates the EBITDA in the sense that it is alleged that . . . [Buyers] took certain actions designed to prevent [Sellers] from earning it. However, it is further alleged that [Buyers'] actions were a part of a fraudulent scheme. Section 2.13, which by its terms covers an 'Accounting Dispute' does not cover the allegations of breach of contract and fraud." Relying on Parker v. Twentieth Century-Fox Film Corp. (1981) 118 Cal.App.3d 895 (Parker), which the court found to be "both persuasive and controlling," the court held: "[I]f a calculation of the matters stated in Section 2.13 [of the APA] is required during the course of this litigation, its provisions will be considered by the Court."
II.
DISCUSSION
A. Section 2.13 of the APA Qualifies as an Arbitration Clause
Buyers contend the trial court erred by interpreting the APA not to contain an arbitration clause. We agree the court erred when it concluded the provision authorizing an independent accounting firm to resolve the parties' dispute over EBITDA was not an arbitration agreement.
"'There is no uniform standard of review for evaluating an order denying a motion to compel arbitration. [Citation.] If the court's order is based on a decision of fact, then we adopt a substantial evidence standard. [Citations.] Alternatively, if the court's denial rests solely on a decision of law, then a de novo standard of review is employed. [Citations.]' [Citation.] Interpreting a written document to determine whether it is an enforceable arbitration agreement is a question of law subject to de novo review when the parties do not offer conflicting extrinsic evidence regarding the document's meaning." (Avery v. Integrated Healthcare Holdings, Inc. (2013) 218 Cal.App.4th 50, 60 (Avery).) Because the parties offered no extrinsic evidence, we review the trial court's order under the de novo standard.
The first "step in determining whether there is an enforceable [arbitration] agreement . . . involves applying ordinary state law principles that govern the formation and interpretation of contracts in order to ascertain whether the parties have agreed to some alternative form of dispute resolution. Under . . . California law, arbitration is a matter of contract between the parties." (Badie v. Bank of America (1998) 67 Cal.App.4th 779, 787.) The party seeking to compel arbitration bears the burden to establish the existence of a valid arbitration agreement. (Avery, supra, 218 Cal.App.4th at p. 59.)
The trial court found Section 2.13 of the APA did not qualify as an arbitration clause because it did not use the word "arbitration." Sellers do not address this issue on appeal, perhaps because it is well-settled the designation or title the parties give to a contractual provision does not determine if it created an arbitration procedure. The "failure of [an] agreement to identify the grievance procedure as 'arbitration' is not fatal to its use as a binding mechanism for resolving disputes between the parties." (Painters Dist. Council No. 33 v. Moen (1982) 128 Cal.App.3d 1032, 1036.) "More important is the nature and intended effect of the proceeding." (Ibid.) In determining if a dispute resolution mechanism qualifies as an arbitration agreement, we evaluate its substance. The "attributes of a true arbitration agreement [are]: (1) a third party decision maker; (2) a mechanism for ensuring neutrality with respect to the rendering of the decision; (3) a decision maker who is chosen by the parties; (4) an opportunity for both parties to be heard, and (5) a binding decision." (Cheng-Canindin v. Renaissance Hotel Associates (1996) 50 Cal.App.4th 676, 684.)
Here, Section 2.13 of the APA provided: "If . . . [A-One] and [LLC] are unable to resolve the disputed matters within such 30-day period, . . . [A-One] and [LLC] shall refer the disputed matters to an unaffiliated, reputable and regional and independent accounting firm mutually agreeable to [LLC] and . . . [A-One] (the 'Accounting Firm'), and the determination of the Accounting Firm . . . shall be conclusive and binding on . . . [James E. Massicotte, Ricardo De Law O Lemos], . . . [A-One] and [LLC] and not subject to collateral attack for any reason absent manifest error or fraud. . . . The determination of the Accounting Firm shall be based solely on written submissions by . . . [A-One] and [LLC] . . . ." The provision provided for an independent third party chosen by the parties to render a final decision after evaluating any written submissions from the parties. Although the parties did not use the word "arbitration," it is clear they intended the accounting firm's decision to be final and binding. Thus, the agreement to have an accounting firm decide the dispute qualifies as an arbitration agreement.
Parker, which the trial court found "persuasive and controlling," is on point. In Parker, the parties included a provision in their agreement that any controversy relating to the distribution of proceeds from their joint venture would be submitted to certified public accountants acceptable to the parties or an accountant appointed by the American Arbitration Association, and the accountants' decision would be final and conclusive. (Parker, supra, 118 Cal.App.3d at pp. 898-899.) Although the provision did not use the word "arbitration" except in connection with "American Arbitration Association," the Parker court found this provision constituted a valid arbitration agreement. (Id. at pp. 902-904.) We see no fundamental difference between Section 2.13 of the APA and the provision in Parker requiring an accountant to settle controversies relating to disbursements. This conclusion is further supported by other cases finding appraisal provisions to be valid arbitration agreements even when they do not use the word "arbitration." (See, e.g., Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082, 1093 (Doan) ["An appraisal provision in an insurance policy constitutes an agreement for contractual arbitration."]; Kirkwood v. California State Automobile Assn. Inter-Ins. Bureau (2011) 193 Cal.App.4th 49, 57-58 [same].)
Relying on Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1 (Moncharsh), Sellers argue Section 2.13 of the APA cannot qualify as an arbitration agreement because "the decision of the CPA can be overturned for manifest error." Sellers point to the following language in Section 2.13 of the APA: "[T]he determination of the Accounting Firm . . . [will] not [be] subject to collateral attack for any reason absent manifest error or fraud." We do not find the argument persuasive.
In Moncharsh, our Supreme Court held "an arbitrator's decision is not generally reviewable for errors of fact or law, whether or not such error appears on the face of the award and causes substantial injustice to the parties." (Moncharsh, supra, 3 Cal.4th at p. 6.) Instead, judicial review is limited to circumstances where "there exists a statutory ground to vacate or correct the award." (Id. at p. 28.) Moncharsh addressed judicial review of an arbitrator's award, but it did not address when a contractual provision qualifies as an arbitration agreement, which is the precise issue here. Following Moncharsh, our Supreme Court explained courts may review arbitration decisions for legal errors if the parties contractually agreed to judicial oversight. (Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1355-1356.) Here, the parties agreed to judicial oversight by allowing for review in the event of "manifest error or fraud." The language Buyers rely on merely shows the parties agreed to expand their rights and avoid the general rule that "'an arbitrator's decision is not ordinarily reviewable for error by either the trial or appellate courts.'" (Id. at p. 1354.)
Sellers' reliance on American Federation of State, County & Municipal Employees v. Metropolitan Water Dist. (2005) 126 Cal.App.4th 247 also is misplaced. American Federation involved a multi-step grievance procedure in a memorandum of understanding. (Id. at p. 254.) The final step in the grievance procedure allowed for an appeal to a neutral hearing officer. (Id. at p. 254, 258) Although the agreement stated the hearing officer's decision was "'final and binding on the parties,'" the parties agreed the decision could be appealed to a court under Code of Civil Procedure, section 1094.5. (Ibid.) In holding the grievance procedure was not an agreement to arbitrate, the appellate court concluded the appeal procedure did not provide for a "final and binding decision by the hearing officer" because it allowed for an appeal under section 1094.5. (Id. at pp. 258-259.) The court explained administrative decisions are open to "more extensive trial court examination under . . . section 1094.5." (Id. at p. 259.) Courts specifically are "authorized to (1) examine whether the decision maker proceeded in excess of jurisdiction; (2) whether there was a fair trial; and (3) whether there was any prejudicial abuse of discretion because of a failure to proceed as required by law, the order or decision was not supported by the findings, or the findings were not supported by the evidence. The court is also authorized to consider the weight of the evidence." (Ibid.) Here, the same concerns are not implicated because Buyers and Sellers did not agree to extensive judicial review under section 1094.5.
All statutory references are to the Code of Civil Procedure. --------
Based on the foregoing, we conclude Section 2.13 of the APA was a valid arbitration provision. The trial court therefore erred when it denied the motion to compel arbitration. B. On Remand, the Trial Court Should Exercise Its Discretion Under Section 1281 .2
Although section 1281.2 generally requires a trial court to order arbitration if there is a valid arbitration agreement, the court has discretion to delay an arbitration proceeding under certain circumstances. Section 1281.2, subdivision (d) provides: "If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies." Under this provision, a trial court may order litigation of nonarbitrable claims to proceed before arbitration if determination of the nonarbitrable claims "may make the arbitration unnecessary." (Ibid.; see also Doan, supra, 195 Cal.App.4th at pp. 1103-1104 [finding the trial court had discretion to stay an appraisal proceeding pending resolution of legal issues because litigation would inform the appraisal process and promote judicial economy].)
Sellers claim the trial court has discretion to allow litigation to proceed because "resolution of the main fraud and contract issues may make the CPA review unnecessary." True, but the court did not make any findings on whether resolution of these issues might make the accounting procedure unnecessary. (See § 1281.2 [allowing court to delay arbitration if litigation of nonarbitrable issues "may make the arbitration unnecessary"].) Thus, we reverse and remand for the court to determine whether to defer arbitration of the accounting issue. D. Waiver
Sellers argue Buyers waived their right to submit the accounting dispute to an accounting firm. The trial court did not reach the issue of waiver, and we decline to do so in the first instance. Waiver of an arbitration agreement is a question "of fact, and an appellate court's function is to review a trial court's findings regarding waiver to determine whether these are supported by substantial evidence." (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 983-984.) Accordingly, we leave the issue of waiver for the court to address on remand.
III.
DISPOSITION
The order denying arbitration is reversed. On remand, the trial court is directed to exercise its discretion under section 1281.2. The Buyers shall recover their costs incurred on appeal.
ARONSON, J. WE CONCUR: BEDSWORTH, ACTING P. J. MOORE, J.