Green v. Mt. Diablo Hospital Dist.

Decision Date11 January 1989
Docket NumberNo. A039971,A039971
Citation207 Cal.App.3d 63,254 Cal.Rptr. 689
CourtCalifornia Court of Appeals Court of Appeals
PartiesRiley M. GREEN, Jr., et al., Plaintiffs and Appellants, v. MT. DIABLO HOSPITAL DISTRICT, Defendant and Appellant, Taxpayers of the Mt. Diablo Hospital District, Respondent.

Richard C. Raines, Gregory L. McCoy, Cynthia Love Marek, Thiessen, Gagen & McCoy, Danville, for plaintiff and appellant.

Douglas C. Straus, M. Jeffrey Micklas, Richard E. Norris, Colin J. Coffey, Norris & Norris, Richmond, for defendant and appellant.

David J. Levy, Arlene Segal, Trembath, McCabe, Schwartz, Evans & Levy, Concord, for respondent.

LOW, Presiding Judge.

A petition to compel arbitration is properly denied where there are sufficient grounds alleging illegality of the underlying agreement. The allegations, if proved, would render the entire contract void. The legality of the contract should first be judicially determined before any contractual disputes may be arbitrated. It is within the trial court's discretion to decide whether the claims of third parties not bound by the arbitration agreement should be brought in one judicial forum. This does not circumvent the policy favoring arbitration, because should the court determine that all or a portion of the contract is untainted by illegality, it must submit those matters to arbitration.

Riley M. Green, Jr., appeals the denial of his petition to compel arbitration of disputes arising from an employment contract and a buy-out agreement between Green and defendant Mt. Diablo Hospital District (Hospital District). The trial court denied Green's petition pursuant to Code of Civil Procedure section 1281.2, subdivisions (b) and (c). Hospital District cross-appeals, contending that the trial court should have awarded attorney fees. We affirm.

On November 2, 1982, Green entered into a written employment agreement with the Hospital District to serve as its chief executive officer. The agreement specified a four-year term. The agreement further provided an "evergreen" clause which automatically extended Green's term for four years from each subsequent day of the contract period. The Board of Directors of the Hospital District (board) could terminate the contract by a majority vote and payment of 24 months salary, including a housing allowance, to Green. Green could terminate the agreement by giving 120 days notice. All disputes arising from the agreement were to be resolved through arbitration.

On December 10, 1985, the parties amended the agreement to require a four-fifths vote of the board to terminate the contract and extended Green's severance benefits from 24 months to 48 months. The amendment also changed the condition that nullified the agreement if Green intentionally committed illegal acts in the performance of his duties, to a condition that only nullified the agreement if "GREEN is convicted and proven to have intentionally committed a crime amounting to a felony, and involving moral turpitude."

In the November 1986 Hospital District election, Art Bacigalupo was reelected, but Charlotte Allen lost to Mary Mahoney. On November 18, 1986, Dr. Jason Appel, Director of the Hospital District, wrote to board member Bacigalupo requesting an executive meeting of the board to determine Green's future role with the Hospital District. In anticipation of his removal as chief executive officer, Green's counsel prepared a proposed termination agreement to establish a trust fund for the benefit of Green, and forwarded a copy of the trust agreement to the Hospital District's counsel. On November 28, 1986, the board met for the final time and approved a "buy-out" agreement for the benefit of Green and his wife. By a three-to-two vote, the board approved the agreement in a closed session and then invited the public to attend the meeting, where it announced the approval of Green's proposed agreement.

The written contract required immediate termination of Green as chief executive officer and required the Hospital District to deposit $822,614 in a trust fund for Green. The contract guaranteed Green annual payments from the trust fund of $95,000 for life (more than his salary), and upon Green's death, payments of $47,500 annually for the life of Mrs. Green. Green also received comprehensive medical and dental insurance for Green and his family for the lifetime of Green and his wife, and a group life insurance policy on Green for $237,500. The contract allotted Green 14 years vested retirement credit for 10 years of actual service. Finally, the agreement contained an arbitration clause and provided for attorney fees to the prevailing party in the event of arbitration and reasonable attorney fees to the prevailing party in the event of litigation between the parties.

In December 1986, the new board of directors voted to rescind the November 28 agreement. On December 15, 1986, Green filed a claim under Government Code sections 910 and 910.2 against the Hospital District and individual board members, Jason Appel and John Baie. The claim alleged tortious breach of contract, bad faith breach of contract, tortious interference with prospective economic advantage, tortious interference with contractual relationships, conspiracy, breach of contract, and specific performance of the contract. Green's claim alleged damages for emotional distress for $100 million and requested punitive and exemplary damages in the amount of $100 million. Mrs. Joyce Green filed a similar claim.

On January 12, 1987, Taxpayers of the Mt. Diablo Hospital District (Taxpayers) filed a complaint for declaratory relief in Contra Costa County Superior Court. Taxpayers asked the court to rule the November 2, 1982, contract expired by its own terms, and that the December 1985 amendment and the November 1986 buy-out agreement be declared void and unconstitutional. Specifically, Taxpayers' complaint alleged: (1) the 1982 contract violated Health and Safety Code section 32121.5; (2) that the November 1982 and November 1986 agreements provided for illegal gifts of public funds; (3) that the December 1985 amendment violated public policy; (4) that the November 1986 buy-out agreement was the result of mistake of fact and fraud; (5) that Green initiated private meetings with certain board members to persuade them to accept the November 1986 agreement, in violation of the Ralph M. Brown Act; and (6) that the establishment of a separate trust fund for the benefit of Green violated Health and Safety Code section 32121, subdivision (e). The trial court found that these allegations encompass additional grounds for illegality in the supermajority provision of the December 1985 agreement and in extra compensation to a public official in the November 1986 buy-out agreement, in violation of California Constitution, article XI, section 10.

Green filed a petition to compel arbitration of the Taxpayers' complaint for declaratory relief, pursuant to the terms of the November 1982 and November 1986 agreements, and on August 13, 1987, the court denied Green's petition. The trial court relied on Code of Civil Procedure section 1281.2, subdivisions (b) and (c).


Code of Civil Procedure section 1281.2 provides: "On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: [p] (b) Grounds exist for the revocation of the agreement. [p] (c) 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...."

In a petition to compel arbitration under Code of Civil Procedure section 1281.2, the moving party, in essence, requests specific performance of a contractual agreement to arbitrate the controversy. (Los Angeles Police Protective League v. City of Los Angeles (1985) 163 Cal.App.3d 1141, 1146, fn. 3, 209 Cal.Rptr. 890, disapproved on other grounds in Laurel Heights Improvement Assn. v. Regents of the University of California (1988) 47 Cal.3d 376, 427, fn. 28, 253 Cal.Rptr. 426, 764 P.2d 278, rehg. pending.) The trial court must determine in advance whether there is a duty to arbitrate the controversy. (Parker v. Twentieth Century-Fox Film Corp. (1981) 118 Cal.App.3d 895, 904, 173 Cal.Rptr. 639.) This determination "necessarily requires the court to examine and, to a limited extent, construe the underlying agreement." (Freeman v. State Farm Mut. Auto. Ins. Co. (1975) 14 Cal.3d 473, 480, 121 Cal.Rptr. 477, 535 P.2d 341.) The standard on appeal is whether there is substantial evidence to support the trial court's finding. ( Parker, supra, at p. 902, 173 Cal.Rptr. 639.)


Relying on Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 197 Cal.Rptr. 581, 673 P.2d 251, Green contends that, at most, the Taxpayers' complaint alleged fraud in the inducement of the written buy-out agreement. Since Ericksen held that an allegation of fraud in the inducement was not sufficient grounds for revocation of an agreement to arbitrate, Green contends that the trial court erred in denying Green's petition to compel arbitration. We disagree.

Ericksen involved a dispute between a tenant and its landlord for breach of contract arising out of faulty air conditioning in the leased premises. The tenant alleged, inter alia, that the landlord fraudulently induced the contract (the landlord never intended to repair the air conditioning), and argued that the fraud allegations were sufficient to defeat the contractual arbitration clause. The court ruled that so...

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