Ahdout v. Hekmatjah

• Decision Date: 25 January 2013
• Docket Number: B236764
• Citation: 152 Cal.Rptr.3d 199,213 Cal.App.4th 21
• Parties: Mouris AHDOUT, Plaintiff and Appellant, v. Majid HEKMATJAH et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

213 Cal.App.4th 21

152 Cal.Rptr.3d 199

Mouris AHDOUT, Plaintiff and Appellant,

v.Majid HEKMATJAH et al., Defendants and Respondents.

B236764

Court of Appeal, Second District, Division 4, California.

Filed January 25, 2013

Etehad Law Firm, Van Nuys, Simon P. Etehad and Rabin Saidian ; Benedon & Serlin, Los Angeles, Douglas G. Benedon and Gerald M. Serlin for Plaintiff and Appellant.

Law Offices of Rosenthal & Associates, Canoga Park, and Lisa F. Rosenthal for Defendants and Respondents.

WILLHITE, J.

INTRODUCTION

Appellant Mouris Ahdout appeals from a judgment entered following the superior court's denial of his petition to vacate an arbitration award and its grant of a petition to confirm the award filed by respondents Majid Hekmatjah also known as Michael Braum (Braum), Hekmatjah Family Limited Partnership (Hekmatjah), and Braum Investment & Development, Inc. (BIDI). Ahdout and respondent Hekmatjah were the sole members of 9315 Alcott, LLC (the Company), a limited liability company they formed for the purpose of developing a condominium project, with respondent Braum designated as manager of the Company.

Disputes between the parties were submitted to binding arbitration. Ahdout argued that BIDI, the general contractor owned by Braum that was hired to construct the project, was not licensed and thus was required to disgorge all compensation for its contracting services pursuant to Business and Professions Code section 7031, subdivision (b).¹ The arbitrators' denial of Ahdout's claims based on section 7031 underlies Ahdout's petition to vacate the award.

The trial court concluded that the arbitrators’ decision was not reviewable, and thus denied the petition to vacate the award. We find that Ahdout's claims under section 7031 fall within the "public policy" exception to the general prohibition of judicial review of arbitration awards, because section 7031 constitutes a clear-cut and explicit legislative expression of public policy mandating the disgorgement of compensation received by an unlicensed contractor. Thus, the trial court erred in deferring to the arbitrators’ finding that section 7031 does not apply. We remand the matter to the trial court to conduct a de novo review.

BACKGROUND

The Operating Agreement for the Company

Ahdout and Hekmatjah owned adjoining parcels of real property, at 9311 and 9315 Alcott Avenue, respectively. In 2002, Ahdout and Hekmatjah formed the Company, the purpose of which was to acquire both parcels (the Property) and to build a 14-unit condominium project there (the Project).

Ahdout and Hekmatjah were the sole members of the Company. They entered into an operating agreement for the Company (the Agreement) that included the following terms, among others:

For initial capital, Ahdout was to contribute the property at 9311 Alcott and Hekmatjah was to contribute the property at 9315 Alcott. A capital account for each member was credited with $565,000, based on the fair market value of each property.

Profits resulting from the Project were to be allocated in accordance with the profit and loss sharing percentages of each member. Section 3.10 of the Agreement provides for the profit and loss sharing percentages of each members to be determined as follows: "After the Project has been completed the costs of construction (both hard and soft costs) shall be determined and HEKMATJAH shall be credited with an amount equal to 25% thereof and AHDOUT and HEKMATJAH shall each be credited with an amount equal to 50% of said construction costs. The total amount credited to both AHDOUT and HEKMATJAH shall be determined and the percentage of profits and losses of each of AHDOUT and HEKMATJAH shall be the percentage that the total amount credited to each Member bears to the total amount credited to both Members." The Agreement provides an example, assuming that the total costs of construction were $3 million:

                     "HEKMATJAH
                     "$    565,000      capital contribution
                           750,000      25% of construction costs
                         1,500,000      50% of construction costs
                     "$  2,815,000
                     "AHDOUT
                     "$    565,000      capital construction
                         1,500,000      50% of construction costs
                     "$  2,065,000
                     "$  2,065,000 + $2,815,000 = $4,880,000
                     "Percentage of profits and losses of HEKMATJAH
                     "$2,815,000 divided by $4,880,000 = 57.7%
                     "Percentage of profits and losses of AHDOUT
                     "$2,065,000 divided by $4,880,000 = 42.3%"
                

Braum, who was the general partner of Hekmatjah, was appointed the manager of the Company, and as such was empowered to direct, manage and control the business and affairs of the Company. He was not to receive compensation for his services as manager.

The Agreement further provides in section 4.1(D) that "[t]he Manager shall enter into an agreement with [BIDI] (the ‘Contractor’), a general contractor, to construct the Project and in this regard shall have the power and authority to execute any and all contracts and/or purchase orders with appropriate firms, persons or entities to obtain all services and materials required in order to carry out the development, construction and sale of the Project. The Contractor shall construct the Project without payment of any consideration it being understood and agreed that Contractor is owned by the general partner of HEKMATJAH [ (i.e., Braum) ] and that HEKMATJAH will benefit by Contractor constructing the Project on a ‘no fee’ basis by receiving an adjustment to its profits and losses as determined by Section 3.10." Thus, section 3.10 provides for Hekmatjah to be credited with an additional 25 percent of the construction costs for purposes of the profit-sharing formula to compensate for BIDI's contracting services.

Following the execution of the Agreement, titles to the parcels of property presumably were transferred to the Company pursuant to the Agreement, although the record does not reflect evidence of such transfer. The record also does not contain any evidence that the Company entered into a written construction contract with BIDI. However, the record contains evidence that BIDI indeed performed certain construction tasks for the Project and engaged numerous subcontractors for various aspects of the Project.

Dispute Between Ahdout and Respondents

Construction on the Project "suffered numerous setbacks, including the death of [the] architect, plan revisions mandated by the City of Los Angeles Department of Building and Safety, and construction delays." Construction was finally completed almost six years after the Company was formed, and the certificate of occupancy was received on January 29, 2008. Although the condominiums had been intended for sale, the Company, under Braum's management, decided to wait to sell them and instead to rent them until the real estate market rebounded. Ahdout was unhappy with the construction delays and cost overruns as well as alleged mismanagement and misuse of Company funds by Braum. He also had expected high-end, luxury condominiums to be built instead of what he claimed were economy-grade units. Under the Agreement, the parties were bound to arbitrate disputes arising thereunder, and Ahdout and respondents entered into two agreements to submit Ahdout's claims to binding arbitration before the Rabbinical Council of California.

Arbitration Proceedings

The arbitration was conducted over 27 days within an 11-month period. Ahdout made 24 separate claims before the arbitrators. Only the first and sixth claims concerning the application of section 7031 are at issue on this appeal.² Invoking section 7031's disgorgement remedy, the first claim sought alteration of the formula for sharing profits and losses whereby Hekmatjah was credited an additional 25 percent of the costs of construction as a form of compensation for BIDI's construction work on the Project. Instead, Ahdout sought to have Ahdout and Hekmatjah each be credited 50 percent of the costs. The sixth claim sought disgorgement of the total construction costs of $4,085,484.40, to be paid to the Company, half of which ($2,042,742.20) Ahdout alleged should either be paid in cash to him or credited to his capital account, pursuant to the adjusted 50/50 split for which he argued in the first claim.

Little of the evidence before the arbitrators appears in the record on appeal. The record contains a PowerPoint presentation that Ahdout's counsel attests was submitted to the arbitrators and read from by Braum during his testimony before the panel. It provides, in part: "Braum acted as a General Contractor, and NEVER claimed himself as a Licensed General Contractor (Ahdout was well aware of this). [¶] The partnership could have hired a licensed general contractor and charged [the Company] a substantial fee. [¶] Braum instead, hired 24 licensed sub-contractors and 11 architects/engineers/inspectors who have the requisite skills and knowledge of the applicable local laws and codes and charged the [Company] a very reasonable fee."

Braum further testified that "Ahdout agreed that Braum's fees as a developer would be 25% of the total construction (hard cost and soft cost)." He stated that "Braum understands the California State Law that whoever builds a commercial building must be B licensed.³ ... City of LA is not governed by that law. For the building part (demolishing, excavating, footing, concrete work, finish carpentry, floor installation, etc.) they ACCEPT THE MANAGER OF THE [COMPANY] as the owner of the project and will be issued the permit. [¶] City of LA accepted Braum ‘Manager’ of 9315 Alcott as the owner of the project; was issued the permit and recognized as an Owner/builder ."

Documents submitted by respondents to the arbitrators further assert that BIDI hired numerous contractors for various construction tasks at the Project, but that BIDI itself "[i]nstalled drywall, doors, and water proofing, concrete work, footing and concrete deck."

The arbitrators issued a judgment denying Ahdout's first claim seeking to reverse the extra...