Cronus Investments v. Concierge Services, LLC

• Decision Date: 21 April 2003
• Docket Number: No. B159591.,B159591.
• Citation: 107 Cal.App.4th 1308,133 Cal.Rptr.2d 384
• Court: California Court of Appeals Court of Appeals
• Parties: CRONUS INVESTMENTS, INC., Plaintiff, Cross-Defendant and Appellant, v. CONCIERGE SERVICES, LLC, Defendant, Cross-Complainant and Respondent; Westrec Marina Management, Inc., et al., Defendants and Respondents; Howard Jon Colman, Cross-Defendant and Appellant.

133 Cal.Rptr.2d 384

107 Cal.App.4th 1308

CRONUS INVESTMENTS, INC., Plaintiff, Cross-Defendant and Appellant, v. CONCIERGE SERVICES, LLC, Defendant, Cross-Complainant and Respondent Westrec Marina Management, Inc., et al., Defendants and Respondents Howard Jon Colman, Cross-Defendant and Appellant.

No. B159591.

Court of Appeal, Second District, Division 4.

April 21, 2003.

Review Granted July 16, 2003.

William A. Soroky, Woodland Hills; Rehwald Rameson Lewis & Glasner, William Rehwald, Lawrence M. Glasner and Daniel R. Chaleff, Woodland Hills, for Plaintiff, Cross-defendant and Appellant, and for Cross-defendant and Appellant.

Thomas J. Ready, San Francisco, for Defendant, Cross-complainant and Respondent, and for Defendants and Respondents.

CURRY, J.

Appellants challenge an order of the trial court denying their petition to compel arbitration. We affirm.

RELEVANT FACTUAL AND PROCEDURAL HISTORY

On March 19, 2002, appellant Cronus Investments, Inc. (Cronus), filed a complaint against respondents Concierge Services, LLC (Concierge), Westrec Marina Management, Inc. (Westrec), Westrec Contracting, LLC, Michael M. Sachs, William W. Anderson, and Michael P. Robbins. The complaint asserted claims for breach of contract, breach of fiduciary duty, conversion, and fraud, and sought an accounting and declaratory relief.

The complaint alleged the following facts: Cronus is wholly owned by Howard Jon Colman, who also owns a 20 percent interest in Concierge. Westrec owns the remaining interest in Concierge and is affiliated with Westrec Contracting. Sachs is the chairman and chief executive officer of Concierge, and is also a principal in Westrec, as are Anderson and Robbins.

The complaint further alleges that in 1980, Colman operated a corporation named "Dew-All Services, Inc." (Dew-All) that managed homes at exclusive properties. In 1999, Sachs and Colman entered into a one-year trial relationship during which Colman provided home management services for Westrec at its Lake Las Vegas project. At the end of the one-year period, Westrec participated in the formation of Concierge, and Colman sold Dew-All to Concierge. Colman continued to provide services through Concierge in a complex transaction involving six agreements, four of which contain arbitration clauses.¹ Problems arose following the execution of the agreements, and on January 29, 2002, Sachs fired Colman from his employment with Concierge.

After Cronus filed its complaint, Colman and Cronus also submitted a demand for arbitration to the American Arbitration Association (AAA) under the arbitration clauses in the underlying agreements. On April 19, 2002, Concierge filed a cross-complaint against Colman and Cronus, as well as Nelson Colman, Colman's father, and Desert Home Services, Inc. (Desert), which is operated by Nelson Colman.

The cross-complaint asserts claims for breach of contract, fiduciary fraud, unjust enrichment, and inducement of breach of contract, and seeks an accounting and declaratory relief. It refers to five of the six agreements identified in the complaint, and alleges that Colman and Cronus improperly diverted business from Concierge to Nelson Colman and Desert, who were unjustly enriched by this conduct.

On May 6, 2002, Colman and Cronus filed a petition to stay the litigation and to compel arbitration. They stated that they had already demanded arbitration, and contended that five of the cross-claims implicated agreements containing an arbitration clause.

On May 9, 2002, respondents filed motions under Code of Civil Procedure section 1281.2, subdivision (c),² to consolidate the arbitration proceeding with the underlying action, and to enjoin arbitration pending the outcome of this action. They contended that permitting the arbitration proceeding and underlying action to proceed risked inconsistent results, and that the underlying action involved nonarbitrable issues whose resolution might render arbitration unnecessary. In response, Cronus and Colman argued, inter alia, that although the underlying agreements identify California law as governing law, the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) precluded application of section 1281.2 because the pertinent arbitration clauses specifically invoke the FAA.

Following the hearing, the trial court determined that (1) some of the causes of action and controversies in the underlying action were not subject to arbitration, (2) only three of the cross-claims were arbitrable, and (3) some of the litigants were not parties to agreements containing an arbitration agreement. On June 14, 2002, it denied the petition to compel arbitration and to stay the litigation, enjoined arbitration, and consolidated the three arbitrable cross-claims with the action "for all purposes ...." This appeal followed.

DISCUSSION

Appellants' sole contention is that under the circumstances of this case, the FAA precluded the application of section 1281.2, subdivision (c) (section 1281.2(c)). In our view, they are mistaken.

Subparts (1) and (4) of section 1281.2(c) permit a trial court to "refuse to enforce the arbitration agreement" or "stay arbitration pending the outcome of the court action" if 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." Rulings on these matters are consigned to the trial court's discretion. (Henry v. Alcove Investment, Inc. (1991) 233 Cal.App.3d 94, 101, 284 Cal.Rptr. 255.)³

As our Supreme Court observed in Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 405-410, 58 Cal.Rptr.2d 875, 926 P.2d 1061 (Rosenthal), the procedures that the FAA imposes on federal courts resemble California law in many respects. Thus, the FAA and California law (§ 1281.2, subd. (c)(3)) alike provide that "when a court has ordered arbitration of a controversy, any pending litigation on the same controversy is to be stayed." (14 Cal.4th at pp. 406-407, 58 Cal.Rptr.2d 875, 926 P.2d 1061, fn. omitted.) However, the FAA lacks any provision similar to section 1281.2(c), insofar as it authorizes the trial court to deny or stay arbitration pending completion of related litigation. (14 Cal.4th at p. 407, fn. 5, 58 Cal.Rptr.2d 875, 926 P.2d 1061.)

The focus of this appeal is section 2 of the FAA (9 U.S.C. § 2), which provides that an arbitration clause in a "contract evidencing a transaction involving commerce" is enforceable, "save upon such grounds as exist at law or in equity for the revocation of any contract." (Italics added.) Appellants' central contention is that section 2 of the FAA precluded the trial court from enjoining arbitration under section 1281.2(c).

As we elaborate below (see pt. A, ante), although section 2 of the FAA establishes a broad principle of enforceability regarding arbitration agreements subject to the FAA, it permits parties to such agreements to bind themselves to the application of section 1281.2(c). In view of these principles, appellants contend that (1) the arbitration clauses at issue, properly understood, do not authorize the application of section 1281.2(c), and (2) section 2 of the FAA precludes the operation of section 1281.2(c) absent such contractual authorization. For reasons that we explain below (see pts. B & C, ante), we accept (1) but reject (2), and thus conclude that appellants' contention fails.

A. Governing Principles

A complex body of case authority has evolved regarding when the terms of an arbitration agreement subject to the FAA permit the operation of state laws that regulate or otherwise affect arbitration. We recount this authority, with due emphasis on the role that section 1281.2(c) has played in its development.

1. Broad Principle of Enforceability Under Section 2 of the FAA

The central import of section 2 of the FAA is well established. This section "is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. The effect of the section is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the [FAA]." (Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765.) Thus, the FAA generally bars the application of a state law—whether substantive or procedural—to prevent the enforcement of an arbitration agreement subject to the FAA, unless the state law meets the requirements of section 2 of the FAA.

As the United States Supreme Court stated in Southland Corp. v. Keating (1984) 465 U.S. 1, 10-11, 104 S.Ct. 852, 79 L.Ed.2d 1 (Southland): "We discern only two limitations on the enforceability of arbitration provisions governed by the [FAA]: they must be part of a written maritime contract or a contract `evidencing a transaction involving commerce' and such clauses may be revoked upon 'grounds as exist at law or in equity for the revocation of any contract.' We see nothing in the [FAA] indicating that the broad principle of enforceability is subject to any additional limitations under state law." (Fn. omitted, italics added.)

In Perry v. Thomas (1987) 482 U.S. 483, 492-493, footnote 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (Perry), the United States Supreme Court further explained this broad principle of enforceability: "[S]tate law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of [section 2 of the FAA]." (Italics omitted.)

Following Southland and Perry, the court in Energy Group, Inc. v....