Emerald Aero, LLC v. Kaplan

• Decision Date: 28 February 2017
• Docket Number: D070579
• Citation: 215 Cal.Rptr.3d 5,9 Cal.App.5th 1125
• Court: California Court of Appeals Court of Appeals
• Parties: EMERALD AERO, LLC, et al., Plaintiffs and Respondents, v. Stephen KAPLAN, Defendant and Appellant.

9 Cal.App.5th 1125

215 Cal.Rptr.3d 5

EMERALD AERO, LLC, et al., Plaintiffs and Respondents,

v.Stephen KAPLAN, Defendant and Appellant.

D070579

Court of Appeal, Fourth District, Division 1, California.

Filed February 28, 2017

As Modified on Denial of Rehearing March 21, 2017

Smaha Law Group, John L. Smaha, San Diego, Kristen Marquis Fritz, Irvine, and John Paul Teague, Palm Desert, for Defendant and Appellant.

Horwitz + Armstrong, John R. Armstrong, Irvine, and Matthew S. Henderson, Lake Forest, for Plaintiffs and Respondents.

HALLER, J.

Stephen Kaplan appeals from a judgment confirming a $30 million arbitration award against him. Although the award does not specify the nature of the damages, the parties agree a substantial portion of the award consists of punitive damages. The arbitrator issued the award after a hearing which Kaplan elected not to attend. We conclude the judgment must be reversed. The arbitrator exceeded his authority by awarding punitive damages without adequate prior notice to Kaplan, in violation of the parties' arbitration agreement and fundamental procedural fairness principles.

OVERVIEW

This matter arose when several investors (plaintiffs¹ ) sued Kaplan and a limited liability company (referred to as Houston LLC² ) alleging defendants breached fiduciary duties pertaining to plaintiffs' investment in a self-storage facility located in Texas. Plaintiffs sought compensatory damages and declaratory relief, but did not seek punitive damages. After the court granted defendants' unopposed motion to compel the matter to private arbitration, the arbitration hearing was stayed while Kaplan was criminally prosecuted for his conduct in soliciting and handling investments in self-storage facilities, including the property at issue in plaintiffs' lawsuit.

After Kaplan pled guilty to a wire fraud charge in the criminal action but before his sentencing hearing, a telephonic arbitration hearing was scheduled. The parties had about two and one-half weeks' notice of the hearing date. On the day before the hearing, plaintiffs emailed a brief substantially increasing their original arbitration damages claim and requesting punitive damages for the first time. Defendants did not appear at the hearing. After the telephonic hearing, the arbitrator awarded plaintiffs $30,835,152.57, without specifying the grounds or nature of the award. Kaplan then requested that the arbitrator vacate or modify the award, but the assigned arbitrator recused himself from all further arbitration proceedings and the arbitration administrator declined to reassign the case.

In the superior court, Kaplan moved to vacate the award, and plaintiffs moved for an order confirming the award. The court denied Kaplan's motion to vacate, and entered judgment of $30,835,152.57 against defendants.

In challenging the judgment on appeal, Kaplan recognizes courts have limited authority to review arbitration awards, but contends the court erred in confirming the award based on several statutory exceptions to this rule. (See Code Civ. Proc., § 1286.2, subd. (a)(1), (3), (4).)³ We agree with one of these arguments. We determine the superior court erred in entering judgment on the award because the arbitrator "exceeded [his] powers" by issuing an award that violated applicable arbitration rules and procedural fairness principles. (§ 1286.2, subd. (a)(4).) Specifically, less than 24 hours before the arbitration hearing, plaintiffs notified Kaplan for the first time they were seeking punitive damages. Plaintiffs did so by requesting punitive damages in a late-filed arbitration brief attached to an email sent to the arbitrator and copied to Kaplan (who was not represented by counsel at the time). This notice violated the parties' arbitration agreement because it was not reasonably calculated to inform Kaplan of the punitive damages claim and precluded a fair arbitration proceeding. The notice defects were also compounded by other procedural irregularities in the arbitration process. The arbitrator acted beyond his authority.

The applicable code section provides that when an arbitrator issues an award beyond his authority and there is no basis to correct the award without affecting the merits of the decision, the arbitration award must be vacated. (§ 1286.2, subd. (a)(4).) These circumstances occurred here. Accordingly, we reverse the judgment confirming the award against Kaplan, with directions for the superior court to enter an order vacating the arbitration award as to Kaplan and remanding the matter for a new arbitration hearing on damages.

The second defendant, Houston LLC, did not file a notice of appeal or appear in this action, nor has any counsel appeared on its behalf. Kaplan nonetheless seeks to assert arguments on its behalf. We have no jurisdiction to consider these arguments, and thus the judgment remains as to Houston LLC, which is not a party to this appeal. (See Van Be u rden Ins. Services, Inc. v. Customized Worldwide Weather Ins. Agency, Inc. (1997) 15 Cal.4th 51, 56, 61 Cal.Rptr.2d 166, 931 P.2d 344 ; Caressa Camille, Inc. v. Alcoholic Beverage Control Appeals Bd. (2002) 99 Cal.App.4th 1094, 1102, 121 Cal.Rptr.2d 758.)

FACTUAL AND PROCEDURAL SUMMARY

Because the legal issues involve procedural fairness of the arbitration proceeding and the parties disagree about the procedural facts leading to the arbitration hearing, it is necessary that we set forth those facts in some detail. We describe only the facts contained in the appellate record, viewing those facts in the light most favorable to plaintiffs.⁴

In September 2012, plaintiffs (individually and on behalf of certain involuntary plaintiffs) sued Kaplan and Houston LLC alleging these defendants breached duties in managing a self-storage facility in which plaintiffs had invested substantial funds. Plaintiffs alleged defendants engaged in "schemes to redirect benefits intended to go to Plaintiffs and [other] investors" and obtained "unfair financial benefits." Based on these and other allegations, plaintiffs asserted causes of action for (1) breach of fiduciary duty; (2) aiding and abetting breach of fiduciary duty; and (3) quiet title. On the first two causes of action, plaintiffs sought "actual and consequential damages in excess of $10,000,000.00 to be proven at trial." There was no mention of punitive damages in the complaint.

The parties' contract contained an arbitration provision requiring "binding arbitration" under American Arbitration Association (AAA) rules, in which the parties agreed to give up their rights to a "court or jury trial" and to "discovery and appeal." (Capitalization omitted.) Based on this provision, defendants filed an unopposed motion to compel arbitration. In March 2013, the superior court ordered the matter to arbitration.

About 10 months later, in January 2014, plaintiffs submitted a request to the AAA "to have a case opened...." In the attached "CLAIM SUMMARY " form, plaintiffs identified "[$]1,000,000.00" as the "Claim Amount." In the "Claim Description," plaintiffs stated: "Plaintiffs base their claim as ... outlined in [their] complaint ... which includes allegations of fraud, breach of fiduciary duty and aiding and abetting. For money damages Plaintiffs have reasonably incurred to clear the cloud on Plaintiffs['] title to the Property and to prevent the sale of the Property by Defendants and such other damages to be proved at arbitration. Prejudgment interest ... at the applicable legal rate, for the costs of suit herein [including] attorney fees, and any and all penalty damages and other remedies available in law and equity. Please see the attached document entitled ‘Complaint’ for the facts and allegations of this claim."

After an arbitrator was appointed, the arbitrator issued an order stating: (1) "The complaint will be treated as the claim," and all allegations in the complaint are deemed denied; and (2) "The [AAA] Commercial Arbitration Rules dated October 1, 2013 will be used in this case."⁵

In about August 2014, Kaplan's attorney (Daniel Levinson) moved for a stay of the arbitration proceedings, asserting an arbitration of the civil case would conflict with potential federal criminal proceedings against Kaplan (and Kaplan's father and brother) involving their management of self-storage properties, including the facility at issue in plaintiffs' case. Kaplan's counsel argued that Kaplan's right to assert his privilege against self-incrimination would preclude him from fully defending himself in the civil proceeding. Plaintiffs opposed the stay.

At about the same time, the assigned arbitrator disclosed a possible conflict and was replaced by arbitrator Peter Shenas (hereinafter referred to as the Arbitrator).

On November 13, 2014, the Arbitrator granted Kaplan's stay motion. The order stated the arbitration proceedings would be stayed "until February 2, 2015."

Five months later, on April 21, 2015, plaintiffs' attorney sent an email to the AAA administrator (without copying Kaplan or Kaplan's counsel), stating: "This matter was stayed in November 2014 due to a related criminal investigation by the attorney general's office. Since that time, the criminal investigation has concluded and Defendant Kaplan has entered a guilty plea. Thus [plaintiffs] request that the stay in this matter [be] lifted and the action allowed to proceed forward. Please advise when we may hold a status conference with the arbitrator."

Later that day, the AAA administrator emailed plaintiffs' counsel, with a copy to Kaplan's attorney (Levinson), stating: "I have requested [the Arbitrator's] availability, but I request that you please include opposing counsel on all communications with AAA."

About three weeks later, on May 8, the Arbitrator held a telephonic scheduling hearing. Plaintiffs' counsel appeared, but there was no appearance on behalf of defendants. The record does not show that Kaplan or his attorney were provided notice of this hearing.

Three days later, on May 11, the Arbitrator...