CRONUS INVESTMENTS v. Concierge Services

• Decision Date: 10 March 2005
• Docket Number: No. S116288.,S116288.
• Citation: 107 P.3d 217,25 Cal.Rptr.3d 540,35 Cal.4th 376
• Court: California Supreme Court
• Parties: CRONUS INVESTMENTS, INC., Plaintiff, Cross-defendant and Appellant; Howard Jon Colman, Cross-defendant and Appellant, v. CONCIERGE SERVICES, Defendant, Cross-complainant and Respondents; Westrec Marina Management, Inc., et al., Defendants and Respondents.

25 Cal.Rptr.3d 540

35 Cal.4th 376

107 P.3d 217

CRONUS INVESTMENTS, INC., Plaintiff, Cross-defendant and Appellant;

Howard Jon Colman, Cross-defendant and Appellant, v. CONCIERGE SERVICES, Defendant, Cross-complainant and Respondents;

Westrec Marina Management, Inc., et al., Defendants and Respondents.

No. S116288.

Supreme Court of California.

March 10, 2005.

William A. Soroky; 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.

Greines, Martin, Stein & Richland, Robert A. Olson and Cynthia E. Tobisman, Los Angeles, for Health Net of California as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant and Cross-defendant and Appellant.

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

CHIN, J.

Code of Civil Procedure section 1281.2, subdivision (c)¹ permits a trial court, under specified circumstances, to stay arbitration pending the outcome of related litigation. In Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ. (1989) 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (Volt), the United States Supreme Court held that the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et. seq., which applies to and favors the enforcement of arbitration agreements affecting interstate commerce, does not preempt the application of section 1281.2, subdivision (c) where the parties have agreed that their arbitration agreement would be governed by the law of California. In this case, the parties agreed that their arbitration agreement would be governed by California law, but they further agreed that the designation of California law "shall not be deemed an election to preclude application of the [FAA], if it would be applicable." As explained below, we conclude that, in this situation, the FAA also does not preempt the application of section 1281.2, subdivision (c).

FACTS AND PROCEDURAL HISTORY

In July 2000, Howard Colman transferred a home-management business, Dew-All Services, Inc. (Dew-All), to a newly created company, Concierge Services, LLC (Concierge). Cronus Investments, Inc. (Cronus), which is wholly owned by Colman, has a 20 percent interest in Concierge, while Westrec Marina Management, Inc. (Westrec) owns the remaining interest. The transactions involved six agreements: (1) a limited liability company (LLC) agreement between Cronus and Westrec, which created Concierge; (2) a stock purchase agreement by which Concierge bought the stock in Colman's preexisting company, Dew-All; (3) an employment agreement by which Concierge employed Colman as its president; (4) a covenant not to compete and confidentiality agreement between Colman and Concierge; (5) a consulting agreement between Cronus and Concierge; and (6) a guaranty agreement executed by Westrec of a promissory note payable by Concierge to Colman.

Four of the six agreements provide for the arbitration of any disputes between the parties "arising out of, in connection with, or in relation to the interpretation, performance or breach of this Agreement...."² The arbitration clause further specifies: "The designation of a situs or specifically a governing law for this agreement or the arbitration shall not be deemed an election to preclude application of the [FAA], if it would be applicable."³ The agreements also contained a choice-of-law clause providing that "[t]his agreement shall be construed and enforced in accordance with and governed by the laws of the State of California, without giving effect to the conflict of laws provisions thereof."

Problems arose after the execution of the agreements, resulting in Colman's discharge from his employment with Concierge. On March 19, 2002, Cronus sued Concierge, Westrec, Westrec Contracting, LLC (an affiliate of Westrec), Michael M. Sachs (chief executive officer of Westrec), and William W. Anderson and Michael P. Robbins (principals in Westrec). The complaint asserted claims for breach of contract, breach of fiduciary duty, conversion and fraud. After Cronus filed its complaint, Colman and Cronus submitted a demand for arbitration to the American Arbitration Association (AAA) under the arbitration clauses in the underlying agreements.

Concierge then filed a cross-complaint against Colman, Cronus, Nelson Colman (Colman's father), and Desert Home Services, Inc. (Desert), which is operated by Nelson Colman. The cross-complaint asserted claims for breach of contract, fiduciary fraud, unjust enrichment, and inducement of breach of contract. It alleged that Colman and Cronus improperly diverted business from Concierge to Colman's father and Desert.

Colman and Cronus then petitioned the superior court, under sections 1281.2 and 1281.4, to stay the litigation and compel arbitration, contending that they had already demanded arbitration and that some of the cross-claims implicated agreements containing an arbitration clause.

Defendants, in turn, moved to stay the arbitration pending the outcome of litigation and to consolidate the arbitration proceeding with the underlying action under section 1281.2, subdivision (c) (section 1281.2(c)). 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 eight cross-claims were arbitrable; (3) some of the litigants were not parties to agreements containing an arbitration agreement; and (4) the lawsuit and arbitration proceedings contained overlapping issues of fact and law. To avoid the possibility of contradictory outcomes and promote efficiency in the resolution of disputes, the court denied the petition to stay litigation and compel arbitration, granted the motion to stay the arbitration proceedings pending outcome of the litigation, and consolidated the three arbitrable cross-claims with the action "for all purposes."

The Court of Appeal affirmed the trial court's ruling. First, as a matter of contract interpretation, the Court of Appeal found that the "not ... preclude" language of the arbitration clause superseded the broader and more general choice-of-law provision and concluded that the parties intended that the FAA apply to the "fullest extent" and "without limitation" in those contracts containing arbitration agreements. Second, the Court of Appeal analogized a trial court's authority to stay arbitration proceedings (§ 1281.2(c)) to a court's authority to stay lawsuits when resolving problems of multiple litigation (§ 526, subd. (a)(6)) and found that section 1281.2(c) is a neutral law derived from equitable principles applicable to all contracts. The court thus determined that, because section 1281.2(c) on its face is "an evenhanded application of state principles addressing the general problem of multiple litigation," the FAA does not preempt its application.

In their petition for review, plaintiff Cronus and cross-defendant Colman (hereafter appellants) claim that the Court of Appeal erred in concluding that the FAA does not preempt the application of section 1281.2(c). Defendants (hereafter respondents) filed an answer to the petition, requesting that we determine whether the parties intended to incorporate section 1281.2(c) into the arbitration agreements and whether the FAA's procedural rules apply in California courts. Without limiting the issues, we granted review to determine, in this case, whether the FAA preempts the application of section 1281.2(c).

DISCUSSION

Section 1281.2(c) requires a court to order arbitration upon petition by one of the parties to an arbitration agreement, "unless [the court] determines that: [¶] ... [¶] (c) A party to the arbitration agreement is also a party to a pending court action ... 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." If the court makes such a determination, it:

"(1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action ...; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action ... pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action...."

The parties do not dispute that this case comes within the exception to the general rule of arbitration enforcement specified in section 1281.2(c). Three of the 10 parties to the court action (Concierge, Colman, and Cronus) are parties to arbitrable agreements and the arbitration proceeding. But, the other seven parties to the court action (Westrec, Westrec Contracting, Sachs, Anderson, Robbins, Nelson Colman, and Desert) are not parties to any arbitration agreement and thus are not amenable to arbitration. None of the parties appear to dispute that many of the claims in the lawsuit are nonarbitrable. On the other hand, the parties do dispute whether they intended that section 1281.2(c) procedures would govern the enforcement of those contracts that contain the arbitration provisions.

Under United States Supreme Court jurisprudence, we examine the language of the contract to determine whether the parties intended to apply the FAA to the exclusion of California procedural law and, if any ambiguity exists, to determine whether section 1281.2(c) conflicts with or frustrates the objectives of the FAA. We first examine the underlying purpose of and the rights created by the FAA and the applicable preemption principles.

A. The FAA's Purpose

In 1925, Congress passed the FAA to "overrule the judiciary's longstanding refusal to enforce agreements to arbitrate" and to place such agreements "`upon the same footing as other contracts, where it belongs.' [...