E-Commerce Lighting, Inc. v. E-Commerce Trade LLC

• Decision Date: 09 December 2022
• Docket Number: E074525
• Citation: 86 Cal.App.5th 58,302 Cal.Rptr.3d 218
• Parties: E-COMMERCE LIGHTING, INC., et al., Plaintiffs and Appellants, v. E-COMMERCE TRADE LLC, Defendant and Respondent; Banc of California, National Association, Intervener and Respondent.
• Court: California Court of Appeals Court of Appeals

86 Cal.App.5th 58

302 Cal.Rptr.3d 218

E-COMMERCE LIGHTING, INC., et al., Plaintiffs and Appellants,

v. E-COMMERCE TRADE LLC, Defendant and Respondent;Banc of California, National Association, Intervener and Respondent.

E074525

Court of Appeal, Fourth District, Division 2, California.

Filed December 9, 2022

Best Best & Krieger, Howard B. Golds, Thomas M. O'Connell, Riverside, Sunny H. Huynh, Irvine, Christina M. Morgan, San Diego, Adam P. Smith, Sacramento, and Victor L. Wolf, Riverside, for Plaintiffs and Appellants.

The Daley Law Firm, Darrell Daley; Slovak Baron Empey Murphy & Pinkney and Brent S. Clemmer, Palm Springs, for Defendant and Respondent.

Buchalter, Robert S. McWhorter and Jacqueline N. Vu, Sacramento, for Intervener and Respondent.

OPINION

RAPHAEL, J.

An arbitrator determined that a borrower and lender were liable to each other for similar amounts, each roughly two and a half million dollars. He then offset the awards against each other, resolving the disputed issue of whether a setoff was proper.

A bank, however, had also lent money to the borrower. That bank, not a party to the arbitration, believed that the setoff effectively circumvented the agreement among it, the borrower, and the other lender that the bank's loan had priority and would be paid back first. Instead of being offset against the other lender's award, the bank believed, the borrower's award should go toward satisfying the bank's loan. It thus convinced the trial court to correct the arbitrator's award by eliminating the setoff.

Per statute, the trial court could correct the award only "without affecting the merits of the decision upon the controversy submitted." ( Code Civ. Proc., § 1286.6, subd. (b).) This helps ensure that a party cannot use a petition to correct an arbitration award as an appeal of an arbitrator's considered decision. We hold that, on the facts presented, the correction affected the merits of the arbitrator's decision. Accordingly, the correction was improper, and we reverse.¹

BACKGROUND

Frank Halcovich started E-Commerce Lighting, Inc (ECL) in 2013 to sell lighting equipment on the internet. In 2015, E-Commerce Trade LLC (Trade) purchased ECL's assets for $11.5 million.

Trade obtained three loans when purchasing the assets. It borrowed $2.5 million of the purchase price from ECL under a promissory note. It also obtained two loans from Banc of California, National Association (the Bank), one for $5 million and the other for approximately $1.25 million. Trade, ECL, and the Bank also entered into a subordination agreement whereby ECL's promissory note would be subordinated to the Bank's loans.

In 2017, ECL sued Trade for breach of contract, alleging that Trade defaulted on the promissory note. Trade moved to compel arbitration, and the two soon stipulated to arbitration.

ECL pursued its breach of contract claim against Trade in arbitration, but Trade also sought damages against ECL for breach of contract by violating the asset purchase agreement. The Bank did not participate in the arbitration.

The arbitrator found that ECL, Halcovich, and Wendy Hertz (ECL's chief financial officer and Halcovich's wife) "all engaged in numerous breaches" of the asset purchase agreement by concealing information from Trade during the sale. ECL thus owed Trade contract damages. (The arbitrator found in ECL's favor on a fraud claim based on the same allegations.) But the arbitrator also found that Trade owed ECL under the note, so Trade also owed ECL contract damages.

The two awards largely cancelled each other out. In its closing brief in arbitration, Trade argued that it had "an equitable right to set off" the two awards, citing California cases and distinguishing a case ECL cited for the proposition that an offset was not warranted. (Our record does not contain ECL's closing brief in arbitration.) After finding that Trade owed ECL $2,756,635.66 and that ECL owed Trade $2,611,463.58, with each amount representing damages, interest, attorneys' fees, and costs, the arbitrator offset the awards against each other, issuing only a single final award of the difference, $145,172.08, to ECL. The arbitrator explained that there was "a dispute between the parties" as to whether the amounts can be offset and that "I find that an offset is allowable under California law."

Though it had sought the setoff in arbitration, Trade petitioned to correct the arbitration award to eliminate it. Trade's primary basis for eliminating the setoff was that the offset "negatively impacted the rights" of the Bank. The Bank intervened and joined that position. The Bank had no quarrel with the arbitrator's finding that ECL and Trade each was liable to the other, nor for the particular amounts. The Bank claimed, however, that the arbitrator erred by offsetting the awards against each other. The Bank contended that the offset effectively prioritized Trade's promissory note payments to ECL over Trade's loan obligations to the Bank, when the subordination agreement required the opposite. As the Bank pointed out, if the arbitrator had not offset the awards against each other, ECL would have paid Trade roughly $2.61 million, and Trade would have been obligated to use that money to pay off the Bank's senior debt. Instead, the offset resulted in Trade effectively paying that amount (and roughly $145,000 more) back to ECL.² Trade and the Bank also argued that the setoff was in error because the individuals were jointly liable to Trade but Trade was not liable to them.

Finding that the arbitrator's setoff "effectively allow[ed] ECL to circumvent the subordination agreement" and that "[t]he award can be easily corrected by simply eliminating the setoff," the trial court granted Trade's petition to correct the award and denied ECL's petition to confirm it. After the trial court entered judgment accordingly, ECL, Halcovich, and Hertz appealed. Only Trade was designated as a respondent in the notice of appeal, but we have since granted the Bank's motion to proceed as an intervenor and respondent in this appeal.³

DISCUSSION

"The scope of judicial review of arbitration awards is extremely narrow." ( Department of Personnel Administration v. California Correctional Peace Officers Assn. (2007) 152 Cal.App.4th 1193, 1200, 62 Cal.Rptr.3d 110.) With very limited exceptions, "an award reached by an arbitrator pursuant to a contractual agreement to arbitrate is not subject to judicial review except on the grounds set forth in sections 1286.2 (to vacate) and 1286.6 (for correction)." ( Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 33, 10 Cal.Rptr.2d 183, 832 P.2d 899 ( Moncharsh ).) "[C]ourts will not review the arbitrator's reasoning or the sufficiency of the evidence supporting the award." ( Cooper v. Lavely & Singer Professional Corp. (2014) 230 Cal.App.4th 1, 12, 178 Cal.Rptr.3d 322.) On a trial court's ruling on a petition to confirm, correct, or vacate an arbitration award, issues of statutory interpretation and application of that interpretation to a set of undisputed facts "are questions of law subject to independent review." ( Soni v. SimpleLayers, Inc. (2019) 42 Cal.App.5th 1071, 1087, 255 Cal.Rptr.3d 842.)

Section 1286.6 permits a trial court to correct an arbitration award in three circumstances: "(a) There was an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award; [¶] (b) The arbitrators exceeded their powers but the award may be corrected without affecting the merits of the decision upon the controversy submitted; or [¶] (c) The award is imperfect in a matter of form, not affecting the merits of the controversy."

The trial court relied only on section 1286.6, subdivision (b), and the Bank does not claim that subdivisions (a) or (c) apply, so we focus on the only subdivision at issue. The question for us, then, is the scope of authority that section 1286.6, subdivision (b) allows trial courts in identifying circumstances where "[t]he arbitrators exceeded their powers but the award may be corrected without affecting the merits of the decision upon the controversy submitted."

Our Supreme Court has stated that the term "merits," when used in this context, includes "all the contested issues of law and fact submitted to the arbitrator for decision." ( Moncharsh, supra , 3 Cal.4th at p. 28, 10 Cal.Rptr.2d 183, 832 P.2d 899.) Our Supreme Court has also made clear that those " ‘contested issues of law and fact submitted to the arbitrator for decision’ " can include issues surrounding remedies, such as awards of attorneys' fees; in other words, " ‘contested issues’ " is not synonymous with "substantive issues." ( Moshonov v. Walsh (2000) 22 Cal.4th 771, 776, 94 Cal.Rptr.2d 597, 996 P.2d 699 ( Moshonov ) [noting that "[t]he recovery or nonrecovery of fees" was "one of the ‘contested issues of law and fact submitted to the arbitrator for decision,’ " citing Moncharsh ]; Moore v. First Bank of San Luis Obispo (2000) 22 Cal.4th 782, 787, 94 Cal.Rptr.2d 603, 996 P.2d 706 ( Moore ) [same].) Under Moncharsh , Moshonov , and Moore , when the parties have contested an issue in the arbitration, the arbitrator's resolution of that issue is a decision on the "merits."

Applying that authority here, we conclude that section 1286.6, subdivision (b) did not allow the trial court's action because its correction of the award (by reversing the arbitrator's decision to setoff one award against the other) undoubtedly "affect[ed] the merits of the decision upon the controversy submitted." Under the caselaw cited above, the "merits" of the arbitrator's decision did not involve merely whether ECL violated the asset purchase agreement and Trade the promissory note. Trade argued to the arbitrator that it had a right to a setoff under California law, such that the damages due to it from "[r]espondents' conduct"—namely, ECL, Halcovich, and Hertz's conduct—should excuse it from paying ECL what it owed on the note. ECL argued to the...