Cohen v. TNP 2008 Participating Notes Program, LLC
| Citation | 31 Cal.App.5th 840,243 Cal.Rptr.3d 340 |
| Decision Date | 29 January 2019 |
| Docket Number | B266702 |
| Parties | Mark COHEN et al., Plaintiffs, Cross-defendants, and Respondents, v. TNP 2008 PARTICIPATING NOTES PROGRAM, LLC, et al., Defendants, Cross-complainants, and Appellants. TNP 2008 Participating Notes Program, LLC, et al., Petitioners, Cross-respondents, and Appellants, v. Mark Cohen et al., Respondents, Cross-petitioners, and Appellants. |
| Court | California Court of Appeals |
Sitzer Law Group, Michael Ferdinand Sitzer, Stefanie Michelle Sitzer, Newport Beach; Callahan & Blaine, Daniel J. Callahan, David J. Darnell and Stephanie A. Sperber, Santa Ana, for Defendants, Cross-complainants, and Appellants.
Gerard Fox Law, Gerard P. Fox and Marina V. Bogorad, Los Angeles, for Plaintiffs, Cross-defendants, and Respondents.
An attorney who had recommended that his clients and his law firm's retirement plan invest in two real estate companies sought to arbitrate claims by his clients and the retirement plan against the companies, their parent company, and the parent company's chief executive officer. Only the lawyer's clients, the retirement plan, and the two real estate companies signed the operative arbitration agreements. After the two real estate companies agreed to arbitration, the trial court granted a petition to compel the nonsignatory parent company and its officer to arbitrate, and subsequently granted a petition to confirm the resulting arbitration award in favor of the attorney's clients.
To resolve the ensuing appeals and cross-appeals in this action, we hold (1) an attorney does not have standing to petition to compel arbitration of his clients’ claims; (2) a signatory to an arbitration agreement can compel a nonsignatory parent company of a signatory subsidiary on an agency theory where (a) the parent controlled the subsidiary to such an extent that the subsidiary was a mere agent or instrumentality of the parent and (b) the claims against the parent arose out of the agency relationship; (3) the arbitrator did not exceed his authority by substituting the attorney's clients as the real parties in interest in the arbitration; and (4) the arbitrator did not exceed his authority by denying attorneys’ fees to a party that prevailed in the arbitration. The last holding requires us to part company with DiMarco v. Chaney (1995) 31 Cal.App.4th 1809, 37 Cal.Rptr.2d 558 ( DiMarco ) and agree with Safari Associates v. Superior Court (2014) 231 Cal.App.4th 1400, 182 Cal.Rptr.3d 190 ( Safari Associates ). In the end, we vacate the judgment and remand with directions for the trial court to enter new orders on the petition to compel arbitration and the crosspetitions to vacate and to correct the award. We also reverse the trial court's order denying attorneys’ fees to the prevailing party in the postarbitration proceedings.
In 2008 Thompson National Properties, LLC (TNP) created two subsidiary limited liability companies to raise funds from accredited investors for various real estate investments. The companies, TNP 2008 Participating Notes Program, LLC (the 2008 Program) and TNP 12% Notes Program, LLC (the 12% Program),1 issued private placement memoranda offering investments through the sale of promissory notes. TNP, which held a 100 percent membership interest in each of the Programs, guaranteed the performance of the Programs’ obligations under the notes, including the payment of principal and interest.
The Programs’ private placement memoranda described the nature of the investments, the Programs’ intended use of the money raised from the investments, various risk factors, and the procedures for accredited investors to invest in each Program. To participate, accredited investors completed and signed a subscription agreement included as an exhibit to the private placement memoranda, and upon payment and completion of other formalities, the investor received a promissory note. The promissory notes required the Programs to make monthly interest payments on the principal amount of the notes at a specified rate. The Programs agreed to pay each investor's principal and any unpaid interest in full on the notes’ maturity dates. TNP pledged "all" of its (unspecified) membership interest in the Programs as collateral for its guaranty to repay the notes.
Mark Cohen, an investment advisor and attorney, recommended the Programs to his clients based on Cohen's prior business dealings with Anthony Thompson, the managing member and chief executive officer of TNP. More than 30 of Cohen's clients invested up to $200,000 each in one or both of the Programs. Cohen also invested his law firm's retirement plan, the Cohen & Burnett P.C. Profit Sharing 401(k) Plan (the Plan), of which Cohen served as trustee, in the 12% Program. Cohen did not personally invest in either Program, but he received fees and commissions for the investments by his clients and his firm's retirement plan.2
The Programs defaulted on the promissory notes in 2012. On June 25, 2012 Thompson, acting in his capacity as CEO of TNP, sent a letter to noteholders in the 12% Program advising them the Program would defer all interest payments through the end of 2012 while TNP pursued "exciting new ventures" and hired an investment banking firm to raise additional capital for "significant transactions that would allow TNP to receive greater fee revenue." Neither the Programs nor TNP made payments on the notes after June 25, 2012.
On July 12, 2012 Cohen submitted two statements of claims and demands for arbitration to the American Arbitration Association (AAA) based on an arbitration provision in the subscription agreement for each Program. The arbitration provision stated: "I hereby covenant and agree that any dispute, controversy or other claim arising under, out of or relating to this Agreement or any of the transactions contemplated hereby, or any amendment thereof, or the breach or interpretation hereof or thereof, shall be determined and settled in binding arbitration in Los Angeles, California,[3 ] in accordance with applicable California law, and with the rules and procedures of The American Arbitration Association." The subscription agreements were signed by investors in each Program and by an unidentified representative of TNP.4
Cohen's statement and demand against the 2008 Program identified the claimant as Cohen, "individually and as a representative of his client noteholders," and the respondents as the 2008 Program, TNP, and Thompson. The statement and demand against the 12% Program identified the claimants as the Plan and Cohen, "individually and as a representative of his client noteholders," and the respondents as the 12% Program, TNP, and Thompson. Cohen alleged the terms of TNP's guaranty gave "a third-party attorney or agent" the ability to bring an action to enforce the arbitration provision in the subscription agreements.5 Both statements of claims alleged, among other things, breach of the promissory notes and TNP's guaranty, intentional misrepresentation, and breach of the implied covenant of good faith and fair dealing. The statements of claims also alleged that Thompson was an alter ego of TNP and each Program and that TNP was "a sham company that does not have its own adequate capital or means of paying on the guaranty."
Both Programs agreed to arbitrate, but "decline[d] to submit to arbitration claims brought by [Cohen] in his representative capacity." TNP and Thompson did not agree to arbitrate because neither had signed an arbitration agreement with Cohen or the noteholders.
Cohen and the Plan filed a petition to compel arbitration against TNP and Thompson in the superior court. They contended that "Petitioners and TNP are parties" to the 2008 Program and 12% Program private placement memoranda, even though Cohen did not invest in either Program and the Plan invested only in the 12% Program. Cohen and the Plan requested an order enforcing the arbitration provision in the Programs’ subscription agreements against TNP and Thompson because the arbitration claims were based on respondents’ collective breach of those agreements and TNP's guaranty and because Thompson was the alter ego of TNP and the Programs. To support their allegation that Thompson controlled the Programs, Cohen and the Plan submitted "official correspondence" sent to investors in the 12% Program signed by Thompson in his capacity as CEO of TNP. Cohen and the Plan also argued that "litigating the controversy in multiple forums would be a colossal waste of judicial resources."
In response, TNP and Thompson argued Cohen and the Plan failed to show TNP or Thompson was a signatory to any arbitration agreement with Cohen or the Plan. Indeed, TNP and Thompson argued Cohen and the Plan had not provided a signed copy of any agreement, but had merely attached unsigned form agreements to the petition. TNP and Thompson also argued that Cohen did not have standing to bring claims on behalf of his clients and that TNP's guaranty gave standing to represent investors only to a representative appointed or elected by a majority of the noteholders. TNP and Thompson argued that, because Cohen's clients did not represent a majority of noteholders, the guaranty did not give Cohen standing to bring an action or proceeding on their behalf. TNP and Thompson denied Thompson was an alter ego of TNP or the Programs and argued the limitation of liability provisions of the 2008 Program notes insulated Thompson from any obligation to arbitrate.
In reply, Cohen and the Plan argued for the first time that Cohen could enforce the arbitration agreement between his clients and the Programs because he was an agent for his clients. Cohen and the Plan cited Westra v. Marcus & Millichap Real Estate Investment Brokerage Co., Inc. (2005) 129 Cal.App.4th 759, 28 Cal.Rptr.3d 752 ( W...
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