Opinion
D071445
09-15-2017
WILLIAM S. SCHWARTZ, Plaintiff and Respondent, v. JOEL H. SCHWARTZ, Defendant and Appellant.
Caldarelli Hejmanowski Page & Leer, Jack R. Leer and Marisa Janine Page for Defendant and Appellant. Finch, Thornton & Baird, Phillip Randolph Finch Jr., Jason R. Thornton; Williams Kastner Greene & Markley and S. Ward Greene for Plaintiff 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NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. 37-2013-00060322-CU-BC-CTL) APPEAL from a judgment of the Superior Court of San Diego County, Joel R. Wohlfeil, Judge. Affirmed. Caldarelli Hejmanowski Page & Leer, Jack R. Leer and Marisa Janine Page for Defendant and Appellant. Finch, Thornton & Baird, Phillip Randolph Finch Jr., Jason R. Thornton; Williams Kastner Greene & Markley and S. Ward Greene for Plaintiff and Respondent.
Joel H. Schwartz appeals from a superior court judgment confirming an arbitration award. In postarbitration proceedings, prior to entering judgment, the court granted the petition of William S. Schwartz to confirm the award and denied the petition of Joel H. Schwartz to amend and/or correct the award.
The two parties are brothers and share a surname. Like the parties, the arbitrator and the trial judge, for convenience and clarity, we will refer to the parties by their first names; we intend no disrespect.
While the ultimate issue on appeal is whether the trial court erred in confirming (and in failing to amend and/or correct) the arbitration award, the specific issue we must decide is whether the arbitrator exceeded his powers by awarding William prevailing party attorney fees and costs incurred at the arbitration. As we will explain, with regard to an alleged illegality associated with the award of certain of the attorney fees, Joel first waived all judicial review by failing to raise the issue at the arbitration and further forfeited appellate review by failing to raise the issue until his reply brief in the superior court; and, even without a waiver, the issue is not judicially reviewable. As we will further explain, because the other errors asserted by Joel are directed to the factual and legal bases on which the attorney fees and costs were awarded, Joel is not entitled to judicial review of these claims. Accordingly, we affirm the judgment.
I.
FACTUAL AND PROCEDURAL BACKGROUND
As applicable to both parties and their briefs, "[s]tatements of fact that are not supported by references to the record are disregarded by the reviewing court." (McOwen v. Grossman (2007) 153 Cal.App.4th 937, 947 (McOwen), citing Cal. Rules of Court, rule 8.204(a)(1)(C).) As applicable to Joel and his briefs, appropriate references to the record (or to concessions in William's brief on appeal) are also required for the many statements of fact that he tells us are "undisputed." To the extent that a party's argument is thereafter unsupported by sufficient facts, we deem the argument to be forfeited. (Stover v. Bruntz (2017) 12 Cal.App.5th 19, 28.)
A. The Complaint in the Underlying Civil Action
In the underlying civil action, William "as a member of the Joel-William Schwartz LLC" filed a complaint against Joel. Although the case caption also identifies as defendants the "Joel-William Schwartz Limited Liability Company, a California limited liability company" (LLC) and "The Schwartz Family Limited Partnership, a California limited partnership" (LP), the only defendant specifically identified in the body of the complaint is Joel.
According to the Amended and Restated Agreement of Limited Partnership of Schwartz Family L.P. (LP Agreement), the proper name of the LP is " '1995 Schwartz Family L.P., A California Limited Partnership.' "
As relevant to the issues on appeal, William alleged as follows: that he and Joel were each "a 50 percent member of the LLC"; that the LLC was the general partner of the LP; that William and Joel were each limited partners in the LP (along with others whose identities and relationships are irrelevant to the issues on appeal); that William and Joel entered into an agreement to operate the LLC (LLC Operating Agreement); that "the sole purpose of the LLC was to manage the [LP]"; that the LP "is in the business of operating three rental properties in the San Diego area"; and that the LP Agreement requires the general partner of the LP to distribute all net income to the limited partners. From these alleged facts, William asserted causes of action against Joel for breach of fiduciary duty, breach of contract, an accounting and an injunction based on "[Joel's] position(s) as managing member, partner, and/or other fiduciary of both the [LP] and the LLC and because of his ability to control the business and financial affairs of both the [LP] and the LLC."
"An injunction is a remedy, not a cause of action." (Marlin v. Aimco Venezia, LLC (2007) 154 Cal.App.4th 154, 162.)
The LLC Operating Agreement and the LP Agreement both contain arbitration provisions. Pursuant thereto, William, Joel, the LLC and the LP stipulated — and the superior court ordered — to stay the superior court action and to resolve by binding arbitration all parties' "claims, including affirmative claims, counterclaims and defenses." William's complaint was to be his claim in the arbitration, and Joel would submit his response to the arbitrator. The LLC and the LP agreed that the arbitrator was authorized to enter rulings for or against either of them, that each would "be fully bound" by any arbitration award, and that the superior court could enter any order or judgment for or against either of them. Thus, William (as claimant/counterrespondent) and Joel (as respondent/counterclaimant) were the only parties to the arbitration. B. The Arbitration
Based on documents in the record on appeal, we understand that, after the matter went to arbitration, William filed a supplemental complaint, and Joel filed a counterclaim and amended counterclaim. Joel sought to dissolve the LLC and to dissolve and/or partition the assets of the LP. Although William and Joel named additional claimants, respondents, counterclaimants and counterrespondents in these pleadings, because the additional parties are not relevant to the issues on appeal, we do not attempt to identify them. Further references to William and Joel may, depending on the context, include other claimants/counterrespondents and respondents/counterclaimants, respectively.
William and Joel, through counsel, presented their positions to the arbitrator regarding their disputes under both the LLC Operating Agreement and the LP Agreement. In July 2014, the arbitrator issued a thorough, detailed 23-page written corrected interim award (Interim Award) that contained findings of fact, conclusions of law and relief. Following the Interim Award, the arbitrator issued other rulings, only two of which are relevant to this appeal: (1) a December 2014 order on both parties' requests for attorney fees and costs (Fees Award); and (2) a July 2016 final award (Final Award), summarizing the proceedings and the principal rulings and directing certain payments, including attorney fees and costs, to William.
1. The Interim Award
With regard to the relationships among and between the parties and entities, as relevant to the issues on appeal, the arbitrator found, in part, as follows: (1) William, as trustee of a living trust, holds a 36.67 percent interest in the LP; (2) Joel and his wife, as cotrustees of a living trust, hold a 36.67 percent interest in the LP; (3) five others, each with a 5.132 percent interest in the LP, collectively hold a 25.66 percent interest in the LP; (4) the LLC is the general partner of, and holds a 1 percent interest in, the LP; (5) William and Joel are the only two members of the LLC; and (6) William and Joel, as "co-managers of the LLC," have the equal right to control both the LLC and the LP.
With regard to the merits of the dispute, as relevant to the issues on appeal, the arbitrator found and concluded, in part, as follows: (1) "The parties intended that the [LP] Agreement and LLC Operating Agreement be harmonized and applied to their rights and obligations with respect to the [LP]"; (2) Joel owed William a fiduciary duty both "as a co-member of the LLC and as a general and managing partner of the [LP]"; (3) Joel "engaged in self-dealing and breached his fiduciary duty by intentionally paying himself management fees that were excessive and commercially unreasonable"; (4) Joel "further breached his fiduciary duties by causing the [LP] to pay thousands of dollars of his own personal expenses"; (5) Joel "breached the [LLC] Operating Agreement and the [LP] Agreement, by, among other things, failing to distribute all excess cash to the Limited Partners" (italics added); (6) as damages, Joel was required to pay $426,834 to the LP; (7) Joel was further required to pay "interest at the legal r[ate] from the date of each improper advance, distribution or improper expense reimbursement"; (8) because William and Joel, "as equal co-managers of the sole corporate general partner of the [LP]," were "deadlocked with respect to how to operate the LLC and [LP]," the LLC and the LP would be dissolved; and (9) as expressly at issue in this appeal, William was awarded "reasonable attorney's fees pursuant to ¶ 12.11 of the [LLC] Operating Agreement."
More specifically, the arbitrator determined that Joel owed the LP: $275,077 as "excessive fees" that he had received through 2013, plus $78,370 in interest thereon; $14,460 as "excess over a reasonable salary" beginning in 2014; $56,933 as "unnecessary and/or personal expenses," plus $1,994 in interest thereon. The arbitrator denied William's request for punitive damages.
Having ordered dissolution of the LP, the arbitrator denied (as impractical) William's request for a mandatory injunction to appoint an independent property manager to manage the LP's real estate assets.
Finally, while reserving jurisdiction over certain issues, the arbitrator also denied William's request for what the arbitrator described as "a further accounting," on the basis that Joel had already provided through discovery everything that he could in the way of documents that might allow for an accounting. (Italics added.)
2. The Fees Award
After further proceedings, the arbitrator awarded William $264,559.89 in attorney fees and costs, as follows: $234,865 for professional services and $18,802.89 in costs advanced by Oregon counsel, and $10,892 for professional services and costs advanced by San Diego counsel. Because we will conclude at part II.B.1. & 2., post, that Joel waived any right that he may have had to challenge the award of certain fees awarded to William on the basis that one of William's Oregon attorneys, S. Ward Greene, was not licensed to practice law (or admitted pro hac vice) in California, we describe in detail the pleadings submitted in support of and in opposition to the parties' requests for attorney fees and costs.
William petitioned for an award of attorney fees and costs based on that portion of the Interim Award in which the arbitrator ruled in favor of William on the claims for breach of fiduciary duty and breach of contract and, accordingly, ruled that he was entitled to recover reasonable attorney fees pursuant to paragraph 12.11 of the LLC Operating Agreement. More specifically, William requested an award of attorney fees pursuant to Civil Code section 1717 and an award of costs pursuant to Code of Civil Procedure sections 1033.5 and 998, subdivision (d). Joel opposed William's petition on the sole basis that, by turning down Joel's section 998 offer to compromise and failing to obtain a more favorable award, William was not entitled to an award of any of the postoffer attorney fees he incurred. William filed a reply, in which he set forth what he contended were the factual and legal bases on which Joel's opposition was flawed.
Further undesignated statutory references are to the Code of Civil Procedure.
In part, Civil Code section 1717 provides: "In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs." (Id., subd. (a).)
In part, section 1033.5 lists certain items "allowable as costs under Section 1032" (§ 1033.5, subd. (a)) and other items "not allowable as costs, except when expressly authorized by law" (§ 1033.5, subd. (b)). Section 1032 defines " 'prevailing party' " for purposes of the recovery of costs in an action or proceeding (id., subd. (a)(4)) and provides in part that "[e]xcept as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding" (id., subd. (b)).
Section 998 provides in part that the costs allowed under section 1032 "shall be withheld or augmented" based on standards and a procedure set forth in section 998.
In his opening brief on appeal, Joel tells us that he also argued to the arbitrator that he opposed William's petition on the basis that the claims on which William prevailed were brought under the LP Agreement (which does not have an attorney fee provision), not under the LLC Operating Agreement (which contains an attorney fee provision). We have disregarded this statement, because Joel's record reference does not support it. (McOwen, supra, 153 Cal.App.4th at p. 947.) According to the record reference in his opening brief, Joel did not raise this argument until almost two years later in the superior court proceedings in opposition to William's petition to confirm the arbitration award.
Independent of William's petition and Joel's opposition thereto, Joel filed his own motion for attorney fees and costs. In his motion, Joel asserted three separate grounds for recovery: (1) because William failed to obtain a better result than he would have under Joel's section 998 offer to compromise, Joel was entitled to his fees and costs from that date forward; (2) because Joel was the partially prevailing party, he was entitled to fees and costs under Civil Code section 1717 and the attorney fee provision in the LLC Operating Agreement; and (3) Joel was the prevailing party on his nonmonetary counterclaim to dissolve the LP. Although the Fees Award indicates that William filed an opposition to Joel's motion and Joel filed a reply to William's opposition, the parties have not directed us to where, if at all, the record on appeal contains copies of these documents.
This premise for this argument — namely, that William failed to obtain a better result than he would have under Joel's section 998 offer to compromise — involves essentially the same legal principle as Joel asserted in opposition to William's petition for attorney fees and costs. In his opposition, Joel used the argument to support a limitation to any award to William; in his motion, Joel used the argument to support an affirmative award for himself.
In the December 2014 Fees Award, the arbitrator granted William's petition and denied Joel's motion. The arbitrator first confirmed his earlier ruling that William was the prevailing party. Next, in an analysis that includes factual findings based on the evidence presented and legal rulings under section 998 and cases interpreting it, the arbitrator determined that the statute neither limited a recovery to William nor allowed for a recovery to Joel. Finally, the arbitrator awarded William $264,559.89 in attorney fees and costs as follows: $253,667.89 for professional services and costs advanced by Oregon counsel, Greene & Markley, P.C.; and $10,892 for professional services and costs advanced by San Diego counsel, Marks, Finch, Thornton & Baird, LLP.
3. The Final Award
By late 2014, the parties began liquidating the LP's assets as required by the Interim Award. In early January 2016, the arbitrator ruled on various issues, some expressly reserved in prior rulings, that affected the final distribution of the LP's assets — including, as relevant to this appeal, an additional award to William of $7,012.50 in attorney fees.
Joel did not oppose William's motion that resulted in the award of these fees.
Having decided all of the issues submitted to him, the arbitrator issued the Final Award in July 2016. In it, he reviewed the prior proceedings, rulings and interim awards and calculated interest on certain monetary awards through the date of the Final Award. As pertinent to the issues in this appeal, the Final Award summarized a finding from the Interim Award — i.e., "The Arbitrator also found that William was the prevailing party for purposes of the Arbitration and awarded him attorney's fees pursuant to ¶ 12.11 of the [LLC] Operating Agreement" — and ordered Joel to pay William specified amounts of attorney fees, costs, and interest on these fees and costs. C. The Postarbitration Superior Court Proceedings
After receiving the Final Award, William and Joel filed competing petitions with the superior court. William petitioned to confirm the Final Award, and Joel petitioned to amend and/or correct the Final Award. In particular, Joel asked that the court "delete the award of attorney[] fees, costs, and interest thereon that was awarded in William Schwartz's favor."
With his petition, William presented evidence and argument in support of his position that, because there was no indication that the Final Award was procured as a result of fraud or corruption or that the arbitrator exceeded his power, there was no basis on which to vacate or correct the award; thus, William's argument concluded, the trial court should confirm the Final Award.
In his opening brief on appeal, Joel tells us that he opposed William's petition by arguing, in part, "that the Arbitrator exceeded his authority by awarding William . . . attorney's fees for Mr. Greene because Mr. Greene was an out-of-state attorney who was not admitted pro hac vice and therefore had engaged in the unauthorized and unlawful practice of law in California." However, we have disregarded this statement for two reasons. First, Joel provides no record reference for this statement. (See McOwen, supra, 153 Cal.App.4th at p. 947.) Moreover, our independent review of the record discloses that, in his opposition to William's petition, Joel did not mention Mr. Greene (other than to rely on the declaration he submitted in support of William's petition) or the purportedly unauthorized or unlawful practice of law by Mr. Greene. Rather, Joel argued only that the arbitrator "lacked jurisdiction to award attorneys' fees and costs" and "exceeded his authority" by awarding attorney fees and costs based on an agreement — i.e., the LP Agreement — that did not contain an attorney fee provision. (Some capitalization omitted.)
In his reply to Joel's opposition, William asserted that, in fact, the arbitrator had awarded him attorney fees and costs based on the attorney fee provision in the LLC Operating Agreement, not based on the LP Agreement. William explained that, prior to awarding fees and costs, the arbitrator first determined that the LLC Operating Agreement and the LP Agreement "were inextricably intertwined" and then ruled that Joel breached both agreements and his fiduciary duty to William under both agreements.
In his competing petition, Joel requested that the superior court amend and/or correct the Final Award by striking the awards of attorney fees and costs and interest thereon to William. Contending that the only agreement with an attorney fee provision was the LLC Operating Agreement and that the only relief awarded to William was under the LP Agreement, Joel presented evidence and argument in support of his position that the arbitrator exceeded his powers in allowing William to recover his attorney fees and costs. Joel also presented evidence and argument in support of an alternative position that, even if William was entitled to an award of fees and costs, the arbitrator exceeded his powers "by relying on [William's] demonstrably excessive" billing records in analyzing the effect of Joel's offer to compromise under section 998.
As he did in describing his opposition to William's petition, Joel tells us that, in support of his petition, he argued "that the Arbitrator exceeded his authority by awarding William . . . attorney's fees for Mr. Greene because Mr. Greene was an out-of-state attorney who was not admitted pro hac vice and therefore had engaged in the unauthorized and unlawful practice of law in California." As before, because Joel provides no record reference for this statement, we disregard it. (McOwen, supra, 153 Cal.App.4th at p. 947.) Also as before, our independent review of the record confirms that, in support of his petition, Joel did not mention Mr. Greene or the unauthorized or unlawful practice of law.
In opposition to Joel's petition, William argued that the arbitrator did not err, because he (William) prevailed on his claims against Joel under both the LLC Operating Agreement, which has an attorney fee provision, and the LP Agreement. In any event, William continued, even if the arbitrator erred, Joel was not entitled to relief, because an arbitrator's factual or legal error is not in excess of the arbitrator's powers — the requisite showing for an amendment or correction of an arbitration award.
In his reply to William's opposition, Joel first repeated his contentions that William received relief under only the LP Agreement, yet the LLC Operating Agreement was the only contract containing an attorney fee provision. Then, for the first time, Joel suggested that the court should, in the first instance, disallow all attorney fees incurred by Mr. Greene on the basis that, because he engaged in the unauthorized practice of law in California, Mr. Greene was precluded from recovering compensation for his efforts.
Following oral argument, the superior court granted William's petition and denied Joel's petition, expressly ruling that, in awarding attorney fees and costs to William, the arbitrator did not exceed his authority. The court agreed with the arbitrator's findings and conclusions, ultimately ruling that, even if the arbitrator had erred in his analysis, any such error would have been one of fact or law — which would not have been a ruling in excess of his authority and, thus, not a basis on which to have corrected or amended the Final Award.
The court filed a judgment that confirmed the Final Award and directed specific payments consistent with the Final Award. Joel timely appealed.
II.
DISCUSSION
Joel argues that, because the superior court confirmed an arbitration award that included an award to William of attorney fees and costs, the trial court erred. According to Joel, William was not entitled to recover attorney fees and costs for the following reasons: (1) the arbitrator exceeded his authority when awarding William fees incurred by Mr. Greene, because Mr. Greene, an Oregon attorney, was neither admitted to the California bar nor authorized to appear pro hac vice in the arbitration proceedings; (2) the trial court erred in not independently determining the legality of the arbitrator's award of fees incurred by Mr. Greene; (3) the arbitrator exceeded his authority in awarding attorney fees and costs "in the absence of any fee provision in the contract upon which [William] prevailed"; and (4) the arbitrator exceeded his authority in awarding "inflated attorney[] fees" in order to preclude the application of section 998, which (if applied) would have limited William's recovery.
Section 1282.4 sets forth the requirements and procedures for an attorney who is not admitted to the State Bar of California, but is admitted to the bar of another state, to represent a party in a California arbitration.
In determining whether the arbitrator exceeded his powers, we independently review the decision of the superior court. (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 376, fn. 9; Safari Associates v. Superior Court (2014) 231 Cal.App.4th 1400, 1408 (Safari).)
As we explain below, Joel waived our consideration of the illegality issue in his first two arguments (based on Mr. Greene's bar and pro hac vice admissions) on two independent bases: (1) Joel waived judicial review of the alleged illegality by failing to raise the issue in the arbitration (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 30, 31 (Moncharsh)); and (2) Joel waived our appellate review of any issue of alleged illegality by failing to raise the issue in the superior court prior to filing his reply brief in support of his petition (Schram Construction, Inc. v. Regents of University of California (2010) 187 Cal.App.4th 1040, 1052, fn. 7 (Schram)).
We further explain that, with regard to the final two arguments (applications of the attorney fee provision and of § 998), under long-standing Supreme Court authority, Joel is not entitled to judicial review, because courts are not authorized to review the merits of the dispute, which include the legal and factual bases of the arbitrator's award. (Moncharsh, supra, 3 Cal.4th at pp. 6, 11, 28, 33; Richey v. AutoNation, Inc. (2015) 60 Cal.4th 909, 916 (Richey); Moshonov v. Walsh (2000) 22 Cal.4th 771, 775-776 (Moshonov).) For the same reason, even if Joel had not waived judicial review of the alleged illegality described in the preceding paragraph, such an issue is not reviewable in any event. A. Judicial Review of Arbitration Awards Is Limited
" 'Because the decision to arbitrate grievances evinces the parties' intent to bypass the judicial system . . . , arbitral finality is a core component of the parties' agreement to submit to arbitration.' " (Richey, supra, 60 Cal.4th at p. 916, quoting Moncharsh, supra, 3 Cal.4th at p. 10.) For this reason, courts cannot review arbitration awards for errors of fact or law, regardless whether those errors appear on the face of the award or cause substantial injustice to the parties. (Moncharsh, at pp. 6, 11, 28, 33; Richey, at p. 916.) For example, a provision that requires the arbitrator to rule on the basis of specified law empowers the arbitrator "to apply the law . . . 'wrongly as well as rightly.' " (Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1360.)
The California Arbitration Act (§ 1280 et seq.) provides limited grounds for judicial review. (Richey, supra, 60 Cal.4th at p. 916.) Following a final arbitration award, any party to the arbitration "may petition the [superior] court to confirm, correct or vacate the award." (§ 1285.) As applicable here, "the [superior] court shall confirm the award as made" according to William's request, unless "it corrects the award and confirms it as corrected" according to Joel's request. (§ 1286.)
Joel relies on section 1286.6, which allows the court to "correct the award and confirm it as corrected if the court determines that: [¶] (b) The arbitrators exceeded their powers but the award may be corrected without affecting the merits of the decision upon the controversy submitted . . . ." Under this standard, "California law is clear that 'arbitrators do not "exceed[] their powers" . . . merely by rendering an erroneous decision on a legal or factual issue, so long as the issue was within the scope of the controversy submitted to the arbitrators.' " (Safari, supra, 231 Cal.App.4th at pp. 1403-1404, quoting Moshonov, supra, 22 Cal.4th at p. 775.) B. Joel Did Not Meet His Burden of Establishing Reversible Error Based on Mr. Greene's Alleged Unauthorized Practice of Law in California
Joel does not contend that the arbitrator decided an issue — namely, awarding attorney fees and costs — that was not within the scope of the controversy submitted under the arbitration provision in either the LLC Operating Agreement (¶ 12.6) or the LP Agreement (¶ 11).
Before analyzing Joel's substantive argument regarding an alleged illegality associated with that portion of the Final Award based on fees generated from Mr. Greene's professional services, we must first resolve a procedural objection raised by William. William contends that Joel waived judicial consideration of the illegality issue because Joel did not first raise this argument until his reply to William's opposition to Joel's petition to amend and/or correct the Final Award. As we explain, we agree; Joel forfeited both (1) the opportunity for judicial review by failing to raise the illegality issue during the arbitration (Moncharsh, supra, 3 Cal.4th at pp. 30, 31), and (2) the opportunity for appellate review of the superior court's judgment by failing to raise the illegality issue until his reply brief in the superior court proceedings (Schram, supra, 187 Cal.App.4th at p. 1052, fn. 7).
1. No Judicial Review
The superior court ordered the parties' disputes to arbitration in October 2013, and the arbitrator issued the Final Award in July 2016. The record provided by the parties reveals that, during this almost four years of arbitration, Joel did not once mention, let alone argue in opposition to William's multiple requests for attorney fees and costs, that an award to William based on fees he incurred to Mr. Greene would involve an illegality — on the basis that an attorney must be licensed (or admitted pro hac vice) to appear at an arbitration and that Mr. Greene was not licensed to practice law (or admitted pro hac vice) in California. In failing to raise the issue of illegality during the arbitration, Joel waived the opportunity for judicial review of the alleged illegality.
Indeed, in his opposition to William's first request for attorney fees and costs in late 2014, Joel specifically discussed the details of William's retention of Oregon counsel — including a copy of the engagement agreement — without mentioning, or arguing against an award of fees on the basis, that Mr. Greene was not admitted to practice law in California.
Where, as here, a party to an arbitration argues that an alleged illegality resulted from an arbitration award, the issue of illegality "[i]s a question for the arbitrator in the first instance." (Moncharsh, supra, 3 Cal.4th at pp. 30.) Thus, if the parties do not present such an issue for the arbitrator's determination, they "waive[] the claim for any future judicial review." (Id. at p. 31.)
This type of alleged illegality — namely, one that arises as a result of the award made — must be distinguished from an alleged illegality that may be considered by the superior court in the first instance. For instance, if the alleged illegality provides a basis on which to invalidate either the entire contract or the arbitration provision in particular, determination of such an issue is one for the court, not the arbitrator, and for that reason may first be raised in postarbitration judicial proceedings. (See Moncharsh, supra, 3 Cal.4th at p. 29 ["If a contract includes an arbitration agreement, and grounds exist to revoke the entire contract, such grounds would also vitiate the arbitration agreement."], 30; Loving & Evans v. Blick (1949) 33 Cal.2d 603, 609 (Loving & Evans) ["[T]he rules which give finality to the arbitrator's determination of ordinary questions of fact or of law are inapplicable where the issue of illegality of the entire transaction is raised in a proceeding for the enforcement of the arbitrator's award."].) "But if the alleged illegality goes only to a portion of the contract [that does not include the agreement to arbitrate], the entire controversy, including the issue of illegality, is deferred to the arbitrator." (Epic Medical Management, LLC v. Paquette (2015) 244 Cal.App.4th 504, 512 (Paquette).)
In comparison, while not illegal per se, arbitrators do exceed their powers — and thereby provide a statutory basis on which to correct an award (§ 1286.6, subd. (b)) — by granting a remedy not authorized by law. In such event, the superior court may review the issue in the first instance in postarbitration proceedings. For example (and without limitation), only a court is empowered to appoint a receiver (Marsch v. Williams (1994) 23 Cal.App.4th 238, 248), impose economic sanctions to enforce an award (Luster v. Collins (1993) 15 Cal.App.4th 1338, 1350, or order an attachment (Outdoor Services, Inc. v. Pabagold, Inc. (1986) 185 Cal.App.3d 676, 685). The present case does not involve such a remedy. Here, pursuant to an attorney fee provision in a contract that neither party contends is illegal or otherwise unenforceable, the arbitrator merely determined that William was the prevailing party and awarded him what the parties agreed the prevailing party would be entitled to receive — "all reasonable fees, costs and expenses . . . , including without limitation, reasonable attorney[] fees and expenses."
Indeed, at the arbitration, Joel contended that he was the prevailing party on the counterclaim and requested an award of attorney fees under the same provision.
In Moncharsh, an attorney petitioned the superior court to vacate (§ 1286.2) and modify (§ 1286.6) an arbitration award entered under his employment agreement with his former law firm in a dispute arising over fees generated by the attorney's clients after the attorney left the firm. (Moncharsh, supra, 3 Cal.4th at pp. 6-8.) In part, the attorney contended that the arbitrator erred in issuing an award under an employment contract that resulted in fee-splitting — which, the lawyer argued, "is illegal and in violation of public policy." (Id. at p. 29; accord, id. at p. 31.) In part, the law firm countered that the attorney had waived judicial review of the fee-splitting issue on the basis that the attorney failed to raise the illegality objection prior to the arbitration hearing. (Id. at p. 29.) The Moncharsh court disagreed; because the alleged illegality was not directed to the entire agreement generally or to the arbitration provision specifically, the attorney did not waive the issue by failing to object on this ground prior to the arbitration. (Ibid.; id. at p. 30 [when the alleged illegality does not go to the specific agreement to arbitrate, "the entire controversy, including the issue of illegality, remains arbitrable"].) Significantly, since the attorney had raised the issue at the arbitration, he had preserved the issue for judicial review. (Moncharsh, at p. 31.)
On the merits, the Supreme Court declined judicial review of the alleged illegality, because such a claim is not one of the express statutory bases for vacating or correcting an arbitration award. (Moncharsh, supra, 3 Cal.4th at p. 33; §§ 1286.2, 1286.6.) For this reason, " '[t]he merits of the controversy,' " including facts & law, " 'between the parties are not subject to judicial review.' " (Moncharsh, at p. 11.) Even "an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review." (Id. at p. 33.)
Like Moncharsh, the present appeal does not involve an alleged illegality in either the LLC Operating Agreement or the LP Agreement or in either of their arbitration provisions. Unlike Moncharsh, however, Joel did not raise the issue of illegality before the arbitrator. This distinction is critical, because it affects whether Joel is entitled to judicial review of the Final Award on the basis of an allegedly illegal award. In dictum, which we find persuasive and controlling, the Supreme Court stated: "The issue [of illegality] would have been waived, however, had [the attorney] failed to raise it before the arbitrator." (Moncharsh, supra, 3 Cal.4th at p. 30; accord, id. at p. 31 ["Failure to raise the claim [of illegality] before the arbitrator . . . waives the claim for any future judicial review."].)
Therefore, by failing to argue to the arbitrator that he should not award William attorney fees for Mr. Greene's work because Mr. Greene was neither authorized to practice law in California nor admitted pro hac vice for the arbitration, Joel forfeited any opportunity for judicial review of the Final Award on that basis.
The authorities on which Joel relies do not suggest, let alone compel, a different result. In Loving & Evans, supra, 33 Cal.2d 603, for example, the dispute involved money due on a construction contract, and the property owner claimed that the contractors could not legally recover a fee because the contractors were unlicensed in violation of the Business and Professions Code. (Id. at pp. 604-605.) The Supreme Court reversed the arbitration award in favor of the contractors, holding that "the rules which give finality to the arbitrator's determination of ordinary questions of fact or of law are inapplicable where the issue of illegality of the entire transaction is raised in a proceeding for the enforcement of the arbitrator's award." (Loving & Evans, at p. 609, italics added.) In Lindenstadt v. Staff Builders, Inc. (1997) 55 Cal.App.4th 882, as in Loving & Evans, the defense to the plaintiff's claim for a finder's fee was that the entire transaction was illegal on the basis that the plaintiff was not licensed as a real estate broker; and, for that reason, the court (not the arbitrator) was required to decide the legality issue. (Lindenstadt, at p. 886.) Finally, in Malek v. Blue Cross of California (2004) 121 Cal.App.4th 44, the court considered the illegality issue, because the plaintiff contended that the arbitration provision violated statutory arbitration disclosure requirements. (Id. at pp. 70-72.)
At oral argument, Joel's counsel maintained that Loving & Evans requires the court, not the arbitrator, to decide all issues of alleged illegality. We do not read Loving & Evans as broadly as counsel does. Loving & Evans only requires court determination of illegality when the alleged illegality infects "the entire transaction." (Loving & Evans, supra, 33 Cal.2d at p. 609.) Here, Joel's contention is that part of the arbitration award — namely, a portion of the attorney fees awarded to William — was made in violation of California public policy under California case law.
In contrast, here the alleged illegality arose only as a result of a portion of what the arbitrator awarded and was not directed to either the agreements generally or the arbitration provisions specifically. The arbitrated claims involved breach of fiduciary duty, breach of contract and dissolution of the LLC and the LP; significant relief was awarded under all of these claims; yet the alleged illegality affected only an award of prevailing party attorney fees and costs to William. Indeed, Joel has never contended that any provision in either agreement was illegal or part of an illegal contract.
2. Appellate Review of Trial Court Judgment
In addition, Joel forfeited appellate review of the superior court's ruling on illegality, because Joel did not first raise the issue in the superior court until his brief in reply to William's opposition to Joel's petition to amend and/or correct the Final Award. (E.g., Schram, supra, 187 Cal.App.4th at p. 1052, fn. 7.) Indeed, by the time Joel first raised the issue of potential illegality, he had already filed two challenges in the superior court to the award of attorney fees in the Final Award without mentioning the issue — the first in his petition to amend and/or correct the Final Award, and the second in his opposition to William's petition to confirm the award.
In Schram, for example, Schram challenged the award of a construction subcontract by the Regents of the University of California (through the Regents' prime contractor) on the basis that the Regents (through its prime contractor) did not comply with the required competitive bidding requirements applicable to the Regents' award of a public contract. (Schram, supra, 187 Cal.App.4th at pp. 1044, 1051.) Schram first protested the award, and in the administrative proceedings before the construction review board, Schram presented various arguments. (Id. at pp. 1049-1050.) After the hearing officer denied Schram's protest, Schram filed a petition for writ of mandate in the superior court to compel the Regents to award the subcontract to Schram. (Id. at pp. 1050-1051.) In its reply brief in the superior court mandate proceedings, Schram first presented facts and argument in support of its contention that the hearing officer was biased. (Id. at p. 1052, fn. 7.) The trial court denied Schram's petition. (Id. at pp. 1045, 1051.)
Schram urged the appellate court not to afford the usual deference to the hearing officer's decision because of the alleged bias. (Schram, supra, 187 Cal.App.4th at p. 1052, fn. 7.) The Court of Appeal rejected Schram's request on the basis that Schram had "waive[d] its challenge to the independence of the hearing officer" by "assert[ing] the alleged bias for the first time it its reply brief in the trial court." (Ibid., italics added.)
Applying the same standard here, we come to the same conclusion: Joel forfeited his right to appellate review of the trial court's ruling based on the alleged illegality of a portion of the attorney fees awarded to William because Joel asserted the alleged illegality for the first time it its reply brief in the trial court.
At least one reason commonly cited for such a rule is that, if the trial court were to consider an argument raised for the first time in a reply brief, the opposing party would be " 'deprive[d] . . . of an opportunity to counter the argument.' " (Holmes v. Petrovich Development Co. (2011) 191 Cal.App.4th 1047, 1064, fn. 2; see Varjabedian v. City of Madera (1977) 20 Cal.3d 285, 295, fn. 11 ["Obvious reasons of fairness militate against consideration of an issue raised initially in the reply brief . . . ."].) Here, Joel suggests that William was not deprived of an opportunity to counter the reply argument because William was represented at the hearing, yet his attorney "did not object or move to strike and [s]he never asked for a continuance to do supplemental briefing." There is no requirement (or basis on which to require) that William, as the party adversely affected by Joel's failure to follow basic pleading rules, request leave of court to continue the hearing to allow for the submission of evidentiary objections, additional briefing and/or evidence in order for Joel's untimely argument to be considered. Similarly, there is no requirement (or basis on which to require) that the trial court review another round of briefing or conduct another hearing due to Joel's belated argument, and Joel has not considered this unfairness in suggesting that William should have requested an opportunity to respond formally.
Joel raises this argument in his reply brief on appeal, thereby once again depriving William of an opportunity to respond.
For example and without deciding the validity of Joel's illegality argument, had William been given the opportunity, he could have presented evidence as to where Mr. Greene performed the various legal services, and William could have argued that the alleged illegality did not affect Mr. Greene's ability to recover fees for services performed outside California. (See Birbrower, Montalbano, Condon & Frank v. Superior Court (1998) 17 Cal.4th 119, 124, 139 (Birbrower).) Instead, the superior court was presented with Joel's argument that William could not recover for any of Mr. Greene's services, and William was unable to respond.
In short, prior to filing his reply brief, the burden was on Joel to have requested leave of court to submit a new argument in support of his petition and to allow William reasonable time to respond (and to continue the hearing if necessary), yet Joel did not attempt to meet this burden in the trial court.
3. Even If Joel Had Not Waived Judicial and Appellate Review of the Issue of Illegality, the Result Would Have Been No Different
Even if we were to consider Joel's substantive argument on the issue of the alleged illegality, under Moncharsh the result would be no different. Since the alleged illegality did not potentially invalidate either the LLC Operating Agreement or the LP Agreement (or either of their arbitration provisions), " '[t]he merits of the controversy . . . are not subject to judicial review.' " (Moncharsh, supra, 3 Cal.4th at p. 11.) Any potential error by the arbitrator would have been one of law, which "does not provide grounds for judicial review." (Id. at p. 33.)
In Paquette, supra, 244 Cal.App.4th 504, for example, a management services company and a physician submitted their disputes to arbitration after agreeing to terminate their (nonmedical) management services contract. (Id. at pp. 507-508.) The physician appealed from a judgment confirming an award in favor of the management company (and denying vacation of the award), in part arguing that, as a result of the arbitrator's interpretation and application of provisions in the contract, certain payments awarded to the management company were illegal on two grounds — i.e., they violated both "the statutory prohibition on the payment of referral fees" and "the law against the corporate practice of medicine." (Id. at p. 510.) The Court of Appeal affirmed; because such allegations of illegality "do[] not go to the entire contract, the arbitrator's decision is not [judicially] reviewable on this basis." (Paquette, at p. 513; accord, Cotchett, Pitre & McCarthy v. Universal Paragon Corp. (2010) 187 Cal.App.4th 1405, 1418 [no judicial review where argument was that the amount of attorney fees awarded resulted from an alleged illegality or violation of public policy].)
That said, an arbitrator's decision on a claim of partial illegality may be judicially reviewable "when according finality to the arbitrator's decision would be incompatible with the protection of a statutory right." (Moncharsh, supra, 3 Cal.4th at p. 33, italics added; accord, Pearson Dental Supplies, Inc. v. Superior Court (2010) 48 Cal.4th 665, 677 [limited exception for judicial review allowed where aggrieved party argued that, as a result of the arbitrator's decision, the party was not able "to fully vindicate his or her statutory cause of action in the arbitral forum"].) Here, Joel has not made such argument or attempted to identify such a statutory right or violation; nor could he, since the portion of the award that he is challenging does not involve a statutory claim or defense. Here, the arbitrator merely determined that William was the prevailing party and awarded him attorney fees according to a contractual provision in the parties' agreement.
The two principal cases on which Joel relies are both distinguishable, since the illegality — in each case, the unauthorized practice of law in California — invalidated either the entire agreement (Birbrower, supra, 17 Cal.4th at p. 124) or the specific provision for attorney fees (Golba v. Dick's Sporting Goods, Inc. (2015) 238 Cal.App.4th 1251, 1265). Birbrower involved an out-of-state law firm attempting to recover attorney fees pursuant to an engagement agreement with a former client, where the illegality invalidated the entire contract for the law firm's services provided in California. (Birbrower, at p. 124.) Golba involved an out-of-state lawyer attempting to recover fees from a class action settlement, where the illegality invalidated a portion of the attorney fee provision in the class action settlement agreement. (Golba, at p. 1265.) In contrast, here Joel does not contend that either the LLC Operating Agreement or LP Agreement (or the attorney fee provision in the LLC Operating Agreement) is illegal. C. Because Joel's Remaining Arguments on Appeal Require Consideration of the Merits of the Issues Determined by the Arbitrator, the Final Award Is Not Subject to Judicial Review on These Grounds
Joel argues that the arbitrator exceeded his authority in awarding attorney fees and costs (1) "in the absence of any fee provision in the contract upon which [William] prevailed," and (2) by approving "inflated attorney[] fees" in order to preclude the application of section 998, which (if applied) would have limited William's recovery. Because the consideration of both of these arguments requires a review and determination of factual and legal issues decided by the arbitrator, we may not review the Final Award for error on these grounds.
With regard to Joel's contention that the contract upon which William prevailed did not have an attorney fee provision, the arbitrator ruled, in part, as follows: Joel "breached the [LLC] Operating Agreement" (and the LP Agreement); William "is the prevailing party as to the issues which were subject to the arbitration"; and William was entitled to "reasonable attorney's fees pursuant to ¶ 12.11 of the [LLC] Operating Agreement." Joel's argument is that, in fact, William prevailed only on his claims under the LP Agreement and that by awarding attorney fees under the LLC Operating Agreement, the arbitrator exceeded his authority.
To accept Joel's argument, we would have to determine under which of the agreements William prevailed. This necessarily involves a review of the merits of the controversies submitted to arbitration and the accuracy of the arbitrator's rulings on the merits — which " 'are not subject to judicial review.' " (Moncharsh, supra, 3 Cal.4th at p. 11; accord, Richey, supra, 60 Cal.4th at p. 916 ["courts cannot review arbitration awards for errors of fact or law"].)
Joel suggests otherwise, relying on Thompson v. Jespersen (1990) 222 Cal.App.3d 964. In Thompson, the arbitrator awarded the claimant homeowners damages and attorney fees against a construction company based on the breach of a construction contract. (Id. at p. 966.) The trial court confirmed the entire award, but the appellate court reversed that portion of the judgment confirming the award of attorney fees. (Id. at pp. 966, 969.) The construction company successfully argued that the arbitrator exceeded his authority in awarding attorney fees because the contract at issue did not have an attorney fee provision. (Id. at pp. 967-968.) Thus, for at least the following reasons, Thompson is distinguishable from the present case: Here there is a contract with an attorney fee provision; here, the arbitrator ruled that Joel breached the contract that contained the attorney fee provision; and here, the arbitrator awarded William fees based on the attorney fee provision in the contract that Joel breached.
With regard to Joel's contention that the arbitrator awarded "inflated fees" to avoid the proper application of section 998 to limit William's request for attorney fees, the arbitrator ruled, in part, as follows: Up to and including the date of Joel's section 998 offer of $206,298.03, William incurred "reasonable attorney fees and costs" of $59,733; and when the $59,733 is added to the appropriate portion of the damages awarded, "they total $216,275, which exceeds . . . the requisite threshold" established by Joel's $206,298.03 offer. Joel argues that the arbitrator "should have disregarded" certain specified fees "because they were not reasonable, duplicative and, in some instances, unrelated to the arbitration claims"; and if the arbitrator had not awarded "inflated attorney[] fees," then Joel's section 998 offer would have exceeded William's recovery, and William would have been limited to his reasonable attorney fees incurred prior to Joel's offer. In support of his argument, Joel criticizes the number of attorneys William used as well as the legal services the attorneys provided.
These rulings are found at the conclusion of the arbitrator's one and a half page typewritten discussion of the law and applicable facts that the arbitrator considered in determining the potential effect of section 998 to William's request for attorney fees and costs.
To accept Joel's argument, at a minimum we would have to conclude that the arbitrator erred in finding that the legal services provided to William and the fees William incurred therefor were reasonable. However, since " 'arbitrators do not "exceed[] their powers" . . . merely by rendering an erroneous decision on a legal or factual issue' " (Safari, supra, 231 Cal.App.4th at p. 1403, quoting Moshonov, supra, 22 Cal.4th at p. 775), there can be no judicial review of the arbitrator's rulings on reasonableness of attorney fees and costs or on the applicability of section 998 to limit William's recovery of such fees and costs.
The issue decided in the arbitration in the Safari case — which was beyond the scope of judicial review because it involved at best an erroneous decision on a legal or factual issue — was whether, in awarding attorney fees and costs, the arbitrator exceeded his powers by not applying the definition of "prevailing party" in the arbitration agreement, instead applying the definition of "prevailing party" provided in Civil Code section 1717, subdivision (b)(1). (Safari, supra, 231 Cal.App.4th at p. 1403.)
In sum, even if Joel had been able to establish either of these alleged errors, neither is a decision in excess of the arbitrator's powers — a statutory prerequisite to amending or correcting an award as requested by Joel (§ 1286.6, subd. (b)). Elevating an error in a factual finding or legal conclusion to a ruling in excess of the arbitrator's powers requires more than an acknowledgement of the appropriate standard. Here, Joel failed both to discuss the scope of the arbitrator's powers and to explain why or how the arbitrator may have exceeded them.
Under the LLC Operating Agreement, the arbitrator was empowered to decide "any controversy between the parties arising out of this Agreement," and "[a]ttorney[] fees may be awarded to the prevailing or most prevailing party at the discretion of the arbitrator." Under the LP Agreement, the arbitrator was empowered to decide "a controversy between the parties."
DISPOSITION
The judgment is affirmed. William is entitled to recover his costs on appeal. (Cal. Rules of Court, rule 8.278(a)(2).)
Having denied judicial review to each of the four issues raised by Joel, we express no opinion as to the merits of the parties' substantive arguments of legal or factual error by the arbitrator.
IRION, J. WE CONCUR: HUFFMAN, Acting P. J. HALLER, J.