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Tapper v. Wedelstedt

California Court of Appeals, Fourth District, Third Division
Jun 19, 2008
No. G039475 (Cal. Ct. App. Jun. 19, 2008)

Opinion

NOT TO BE PUBLISHED

Appeal from a order of the Superior Court of Orange County No. 07CC08412, Robert J. Moss, Judge.

Freeman, Freeman & Smiley, Bradley D. Ross, Robert M. Miller, Azadeh Allayee, Sims & Boster, Glen B. Goldman and Frank W. Suyat for Defendants and Appellants.

Glassman, Browning, Saltsman & Jacobs, Inc., and Alexander Rufus-Isaacs for Plaintiffs and Respondents.


OPINION

SILLS, P. J.

We affirm the trial court’s refusal to compel arbitration of damage and restitution claims based on an arbitration clause that is among the narrowest we have seen. Rather than an all-inclusive arbitration provision (such as one dealing with “any” dispute arising out of the contract), the arbitration clause in question only relates to termination, and does not make this remedy exclusive. Under these circumstances, we reverse and remand to allow the trial court to exercise its discretion to delay arbitration of the termination remedy until the nonarbitrable court proceedings have been resolved.

I

Factual and Procedural Background

The following allegations and facts are taken from the complaint and the evidence submitted on the motion to compel arbitration.

In the early 1990’s, shortly after her husband’s death, plaintiff Rosalie Tapper sold his interests in a small shopping center in Garden Grove and its anchor tenant, an adult bookstore, to various entities associated with defendant Edward Wedelstedt. Wedelstedt already was involved in the adult video and bookstore business.

These arrangements were memorialized in a complex series of separate contracts, including two purchase agreements for the bookstore, a purchase agreement for the shopping center, a partnership agreement pertaining to management of the bookstore, a joint venture agreement pertaining to ownership and operation of the bookstore, and a lease between the shopping center and the bookstore.

The critical agreement for purposes of the underlying motion to compel is a management agreement, dated January 1, 1992, between the bookstore and a Wedelstedt entity, defendant N.L. Management Co. (NLM). Wedelstedt, as NLM’s president, executed the management agreement on its behalf and personally guaranteed its obligations.

This management agreement provided that NLM would manage the bookstore and that, in lieu of any other consideration, the bookstore would purchase its adult video inventory from another Wedelstedt affiliate at the lowest wholesale prices then being charged. The bookstore was entitled to terminate the management agreement for cause, subject to notice and a right to cure, but the dispute about NLM’s continued performance had to be resolved by arbitration.

Tapper sued Wedelstedt in July 2007. Tapper was joined as plaintiffs by various entities, including the shopping center and bookstore partnerships. Plaintiffs named as defendants various entities allegedly associated with Wedelstedt, including NLM.

Plaintiffs sought more than $5 million damages for breach of the various contracts. They alleged that defendants breached the nonassignability provisions in the contracts, inflated overhead expenses for the bookstore, did not file timely tax returns, commingled the bookstore’s accounts with other expenses, and overbilled for its inventory of adult videos. Plaintiffs asked for an accounting, disgorgement of lost profits, a constructive trust, and termination of NLM’s management.

Defendants moved to compel arbitration of “all management disputes,” claiming that plaintiffs’ “objective” was to oust NLM as manager. They relied on the arbitration provision in paragraph 8 of the management agreement between the bookstore and NLM.

Following a hearing, the trial court denied defendants’ motion to compel arbitration. The trial court determined that the arbitration clause in the management agreement was “unusually narrow.” The trial court indicated it would have ordered arbitration had there been a standard arbitration provision. This appeal ensued.

II

Discussion

A. Governing Principles Regarding “Broad” Versus “Narrow” Arbitration Clauses.

Because there is no conflicting extrinsic language regarding the terms of the arbitration clause or factual dispute about its language, we conduct a de novo review. (Balandran v. Labor Ready, Inc. (2004) 124 Cal.App.4th 1522, 1527 (Balandran).) We identify the nature of the particular controversy in the litigation and determine whether it falls within the scope of the contractual arbitration clause. (Bono v. David (2007) 147 Cal.App.4th 1055, 1063 (Bono).)

We are mindful of two equally important policies: (1) California’s public policy favoring arbitration (Code Civ. Proc., § 1281.2 ; see, e.g., Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9), and (2) the parties’ freedom to structure their own relationships by contract. While doubts as to the meaning and interpretation of an arbitration clause should be resolved in favor of arbitration, “no dispute may be ordered to arbitration unless it is within the scope of the arbitration agreement.” (Titolo v. Cano (2007) 157 Cal.App.4th 310, 317 (Titolo).) “Because the parties to an arbitration clause surrender this substantial right [to a civil suit], the general policy favoring arbitration cannot replace an agreement to arbitrate.” (Marsch v. Williams (1994) 23 Cal.App.4th 250, 254 (Marsch).)

All statutory references are to the Code of Civil Procedure, unless otherwise noted.

Unless the parties have conferred upon the arbitrator the unusual power to determine jurisdiction, arbitrability, including the scope of an arbitration clause, is a matter for decision by the court, not the arbitrator. (Parker v. Twentieth Century-Fox Film Corp. (1981) 118 Cal.App.3d 895, 903-904 (Parker); see also Patchett v. Bergamot Station, Ltd. (2006) 143 Cal.App.4th 1390, 1397.)

In determining the scope of an arbitration clause, we apply ordinary principles of contract interpretation. We give effect to the mutual intentions of the parties at the time the contract was formed by looking at the usual and ordinary meaning of the contractual language. (Bono, supra, 147 Cal.App.4th at p. 1063.) “The policy in favor of arbitration does not apply when the contract cannot be interpreted in favor of arbitration. There is no policy in favor of arbitrating a dispute the parties did not agree to arbitrate.” (Balandran, supra, 124 Cal.App.4th at p. 1528.)

There is an extensive body of case law and resource materials on arbitration clauses and motions to compel arbitration. So-called “broad form” agreements to arbitrate “any dispute of any kind whatsoever regarding the meaning, interpretation or enforcement” of the contract will be broadly interpreted and enforced to encompass all disputes having a significant relationship to the contract. (Vianna v. Doctors’ Management Co. (1994) 27 Cal.App.4th 1186, 1188 (Vianna); see also Titolo, supra, 157 Cal.App.4th at p. 317 [“any dispute as to medical malpractice”]; Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1280 (Rowe) [“All disputes under this Agreement shall be subject to mandatory arbitration”]; Gravillis v. Coldwell Banker Residential Brokerage Co. (2006) 143 Cal.App.4th 761, 768 (Gravillis) [“Buyer and Seller agree that any dispute or claim in Law or equity arising between them out of this Agreement or any resulting transaction . . . shall be decided by neutral, binding arbitration”]; Larkin v. Williams, Woolley, Cogswell, Nakazawa & Russell (1999) 76 Cal.App.4th 227, 229 [“Any controversy or claim arising out of or relating to any provision of this Agreement or the breach thereof shall be settled by arbitration”]; cf. Simula, Inc. v. Autoliv, Inc. (9th Cir. 1999) 175 F.3d 716, 720 (Simula) [“All disputes arising in connection with this Agreement . . . .”].)

By contrast, in dealing with a “narrow” arbitration clause, the court must determine whether the specific dispute at issue falls within the substantive scope of the clause. “[T]he terms of the specific arbitration clause under consideration must reasonably cover the dispute as to which arbitration is requested.” (Bono, supra, 147 Cal.App.4th at p. 1063 [affirming trial court’s order refusal to compel arbitration of defamation lawsuit based upon “narrow” arbitration clause in land development agreement].) As the Bono court cautioned, narrow arbitration clauses “are considered ‘dangerous to utilize’ [citation] — presumably meaning ‘dangerous’ to the party wanting to arbitrate disputes under it.” (Bono, supra, 147 Cal.App.4th at p. 1067, quoting Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2005) ¶ 5:223.)

In the absence of broad form wording, a narrow arbitration clause in one contract will not be applied to require arbitration of separate or collateral contracts. (Marsch, supra, 23 Cal.App.4th at p. 256.) But that does not mean, as defendants erroneously contend, that arbitration always must be ordered whenever there is an arbitration clause in a single contract, regardless of the scope of the arbitration clause. The key criterion is to effectuate the plain and clear meaning of the contract. (See Bratt Enterprises, Inc. v. Noble Intern. Ltd. (6th Cir. 2003) 338 F.3d 609, 613 [“Thus, this aspect of [the] breach of contract claim is not within the scope of the arbitration clause and is, therefore, not arbitrable”].)

In Balandran, supra, 124 Cal.App.4th 1522, the court affirmed the trial court’s refusal to compel arbitration under a restrictively worded arbitration provision in a job application for a temporary labor service. While the arbitration clause applied to any dispute arising out of the applicants’ employment, the agreement provided that applicants were not to be considered employed until they were assigned to work on a job. Balandran found that this definition limited the scope of the arbitration clause, and did not preclude the applicants from litigating preemployment discrimination claims when the service illegally agreed to send only male workers to a customer’s jobsite. “This arbitration clause plainly applies only to those employment related issues which arise out of employment. As plaintiffs were never employed, the arbitration clause does not apply.” (Id. at p. 1530.)

Most notably, in Parker, supra, 118 Cal.App.3d 895, the court affirmed an order denying a petition to compel arbitration in a dispute between an actor and a film producer arising from the hit television series “Daniel Boone,” and a spin-off “Young Dan’l Boone.” The joint venture agreement provided for arbitration (by certified public accountants) of any controversy as to the “receipts and proceeds from the distribution of the series or the expenses pertaining thereto . . . .” (Id. at p. 899.) The Parker court held this provision was “far too narrow to encompass the issues. Certain issues involve financial issues but the causes of action go beyond mere financial questions which are not readily severable.” (Id. at p. 902.) The court distinguished the unique provision in the joint venture from standard arbitration clauses “found in the contracts between parties seek to resolve any and all issues of controversy arising out of the contract.” (Id. at p. 903.) “As stated earlier, we are not dealing with the usual, all-inclusive arbitration clause.” (Id. at p. 904.)

B. The Narrow Arbitration Provision in the Management Agreement Does Not Require Plaintiffs To Arbitrate Their Claims for Damages and Restitution.

The management agreement between the bookstore and NLM contains limited terminology regarding arbitration. It is substantially more restrictive than, for example, the clauses at issue in Titolo, supra, 157 Cal.App.4th 310, Rowe, supra, 153 Cal.App.4th 1276, Gravillis, supra, 143 Cal.App.4th 761, and Vianna, supra, 27 Cal.App.4th 1186, all of which used terminology such as “any dispute,” “[a]ll disputes,” “any controversy or claim” and the like. In contrast, paragraph 8 only speaks to “this dispute” in a context relating to “continued [future] performance” by NLM.

Here is the language of the arbitration clause in the management agreement between the bookstore and NLM:

“8. TERMINATION FOR CAUSE.

“Notwithstanding the provisions of Paragraph 1, above, [the bookstore] shall have the right to terminate this agreement if [NLM’s] performance hereunder is unsatisfactory so that operation of [the bookstore’s] business has been materially and adversely affected. In order to exercise its rights under this paragraph, [the bookstore] shall give [NLM] written notice and specify the manner in which [the bookstore] claims [NLM’s] performance is unsatisfactory, and [NLM] shall have a period of 30 days within which to cure the alleged deficiencies. If the parties thereafter are unable to agree upon [NLM’s] continued performance, then the dispute shall be settled by binding arbitration under the Rules of the American Arbitration Association then in effect.” (Italics added.)

There is a measurable difference between an arbitration provision that speaks of “any” dispute “arising in connection with” and one that addresses “the” dispute about “continued performance.” Because it only calls for arbitration for the termination remedy, it cannot be interpreted to require arbitration for suits in law or equity for damages or restitution. (Bono, supra, 147 Cal.App.4th 1055; Balandran, supra, 124 Cal.App.4th 1522; Parker, supra, 118 Cal.App.3d 895.)

The trial court was correct in concluding that many of the claims for relief encompassed by plaintiffs’ complaint fall outside the scope of the above-quoted arbitration clause in the management agreement. In addition to termination, plaintiffs seek damages and restitution for defendants’ past actions over a 15-year period. Plaintiffs argue that defendants commingled cash from the bookstore with other revenues, overcharged for inventory and took more than $5 million to which they were not entitled by “paying themselves under the table . . . .” Numerous other contracts and contracting parties are involved as well. Neither the termination clause of the management agreement nor its arbitration provision precludes plaintiffs’ legal quest for damages from defendants.

While it is true that plaintiffs seek termination of the NLM management arrangement as an objective of the lawsuit, there is nothing in the complaint to support defendants’ assertion that termination was the complaint’s sole objective, or, as defense counsel asserted below, that plaintiffs’ damage claims were “outlandish” and a “red herring.” We are in no position, at this preliminary stage of the litigation, to weigh the merits of any of plaintiffs’ claims, or to determine which, if any, of their remedies, whether damages, restitution or termination, are more “real” than the others. (See California Correctional Peace Officers Assn. v. State of California (2006) 142 Cal.App.4th 198, 211.)

Defendants cite a federal decision, Simula, supra, 175 F.3d 716, for the proposition that “[t]he measurement of whether a controversy is within the scope of an arbitration clause only requires that a claimant’s factual allegations ‘touch matters’ covered by the contract containing the arbitration clause; and all doubts are to be resolved in favor of arbitrability.”

That is not what Simula holds. Rather than liberally construing arbitration clauses in the abstract, Simula looked to the particular contractual language at issue. According to the court: “Every court that has construed the phrase ‘arising in connection with’ in an arbitration clause has interpreted that language broadly. We likewise conclude that the language ‘arising in connection with’ reaches every dispute between the parties having a significant relationship to the contract and all disputes having their origin or genesis in the contract.” (Simula, supra, 175 F.3d at p. 721, italics added.) “The broadly-worded arbitration clause mandates the submission of these claims to arbitration.” (Id. at p. 726, italics added.)

Had defendants desired to require arbitration for all disputes “arising in connection with” the management contract, they easily could have drafted such a broadly-worded provision. As the trial court pointed out, “Look, if [you] had used a standard arbitration clause, we wouldn’t be having this discussion. You’d be off to arbitration.” We will not judicially rewrite the contract between the parties to find a right to arbitrate damage claims where no such right exists.

III

The Trial Court Has Discretion to Delay Arbitration of the Termination Remedy

Even plaintiffs agree that part of the lawsuit, involving the bookstore’s efforts to terminate NLM’s ongoing management, is arbitrable under paragraph 8 of the management agreement.

Under these circumstances, the trial court has discretion to deny arbitration in its entirety only if it determines that there is a potential of inconsistent results in pending litigation with a third party. (§ 1281.2, subd. (c).) Without a third party determination, section 1281.2, subdivision (c) does not apply.

Section 1281.2, subdivision (c) provides that the court may deny arbitration where it determines that: “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.”

Defendants contend that that there are no true third parties involved in this dispute. As they argued at the hearing, “This is a management dispute between the two parties . . . .” “You know, [the bookstore] is its own entity, and the claims are by [the bookstore] and so by them combining all these claims and parties and allegations, that should not circumvent our right to arbitrate the management dispute, and that’s the issue here.” If defendants are correct (and we do not decide the issue), the trial court may not rely on section 1281.2, subdivision (c) to deny arbitration on the termination claims.

That, however, does not end the story. Defendants overlook the further provision in section 1281.2, which gives the trial court discretion to avoid the possibility of inconsistent results, even where no true third parties are involved. This part of statute 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.” (§ 1281.2, italics added.)

Under this paragraph, the trial court has the discretion to delay any remaining arbitration because pending court proceedings may “make the arbitration unnecessary.” Plaintiffs themselves suggest that delaying arbitration of the ongoing management claims is the “most logical” solution. “The most appropriate choice, given the very limited scope of the Arbitration Clause, and the potential for inconsistent rulings, would be to stay the arbitration, or to delay making an order on the Motion, pending the determination of [plaintiffs’] other claims before the trial court.” We leave this matter for the trial court on remand.

IV

Disposition

The order denying the petition to compel arbitration is affirmed in part as to plaintiffs’ first through sixth causes of action for damages, restitution and imposition of a constructive trust, but reversed and remanded in part insofar as it impliedly denies defendants’ contractual right to arbitrate plaintiffs’ seventh and eighth causes of action to terminate the management agreement for cause. Costs on appeal are awarded to plaintiffs.

WE CONCUR: RYLAARSDAM, J., IKOLA, J.


Summaries of

Tapper v. Wedelstedt

California Court of Appeals, Fourth District, Third Division
Jun 19, 2008
No. G039475 (Cal. Ct. App. Jun. 19, 2008)
Case details for

Tapper v. Wedelstedt

Case Details

Full title:ROSALIE TAPPER et al., Plaintiffs and Respondents, v. EDWARD J. WEDELSTEDT…

Court:California Court of Appeals, Fourth District, Third Division

Date published: Jun 19, 2008

Citations

No. G039475 (Cal. Ct. App. Jun. 19, 2008)