Herzog v. Foster & Marshall, Inc.

• Decision Date: 27 December 1989
• Docket Number: No. 24127-3-I,24127-3-I
• Citation: 783 P.2d 1124,56 Wn.App. 437
• Court: Washington Court of Appeals
• Parties: Philip HERZOG and Phyllis Herzog, husband and wife, Respondents, v. FOSTER & MARSHALL, INC.; Foster & Marshall Realty, Inc.; Shearson Lehman Brothers, Inc.; Cherry Street Properties, Ltd.; Queen Anne Square, Ltd.; Picnic Point Development Co., Ltd.; Diagonal Way Development Co., Ltd.; Lakewood Business Park, Ltd.; and Deschutes Business Park Co., Ltd., Appellants.

Page 437

56 Wn.App. 437

783 P.2d 1124

Philip HERZOG and Phyllis Herzog, husband and wife, Respondents, v. FOSTER & MARSHALL, INC.; Foster & Marshall Realty, Inc.;

Shearson Lehman Brothers, Inc.; Cherry Street Properties,

Ltd.; Queen Anne Square, Ltd.; Picnic Point Development

Co., Ltd.; Diagonal Way Development Co., Ltd.; Lakewood

Business Park, Ltd.; and Deschutes Business Park Co., Ltd.,

Appellants.

No. 24127-3-I.

Court of Appeals of Washington,

Division 1.

Dec. 27, 1989.

Daniel J. Riviera, Peter S. Ehrlichman, and Stellman Keehnel, Foster, Pepper & Shefelman, Seattle, for appellants.

Christopher Youtz, Sirianni & Youtz, Seattle, for respondents.

PER CURIAM.

On June 15, 1989, a commissioner of this court denied appellants' motion for discretionary review of a trial court order denying appellants' motion for a stay pending arbitration. On September 25, 1989, a panel of this court denied appellants' motion to modify the commissioner's ruling. Since appellants had also sought review as a matter of right under RAP 2.2(a)(3), respondents ¹ then moved to dismiss the appeal. A commissioner granted the motion to dismiss and appellants now move to modify the commissioner's ruling. We grant the motion to modify.

FACTS

Respondents filed the complaint below as a class action on behalf of investors in several limited partnerships sold by appellants. Each of the respondents purchased interests between 1978 and 1981 in the limited partnership entities which are the appellants in this action. Foster & Marshall Realty, Inc. is the general partner of each limited partnership. Foster & Marshall, Inc. is the stock brokerage firm which underwrote the limited partnership offers. Although the respondents signed subscription agreements and partnership agreements, these documents do not require arbitration of any claims which might arise between the parties to them.

In 1982, the F & M Corporation, the parent of both Foster & Marshall, Inc. and Foster & Marshall Realty, Inc. merged into Shearson Lehman Hutton, Inc. with Shearson becoming the parent corporation. After the merger, the respondents, except for Thompson, signed customer agreements with Shearson which provide as follows:

In consideration of your accepting my account and your agreement to act as my broker, I agree to the following with respect to any of my accounts with you for the purchase and sale of securities, and put and call options....

13. This agreement shall inure to the benefit of your successors and assigns, shall be binding on the undersigned, my heirs, executors, administrators and assigns, and shall be governed by the laws of the State of New York. Unless unenforceable due to federal or state law, any controversy arising out of or relating to my accounts, to transactions with you for me or to this agreement or the breach thereof, shall be settled by arbitration in accordance with the rules then in effect, of the National Association of Securities Dealers, Inc. or the Boards of Directors of the New York Stock Exchange, Inc. and/or the American Stock Exchange, Inc. as I may elect. If I do not make such election by registered mail addressed to you at your main office within 5 days after demand by you that I make such election, then you may make such election. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof.

The accounts appellants previously maintained became Shearson accounts.

In 1988, the respondents filed suit against appellants alleging violations of the Washington State Securities Act, violations of the Consumer Protection Act, and common law claims. On April 19, 1989, appellants sent arbitration demand letters to each of the respondents. On April 24, appellants filed a motion for a stay pending arbitration. On May 2, the superior court heard argument and ruled that only Robert Thompson's claims were subject to arbitration. Thompson had signed an arbitration agreement before purchasing his partnership interests. The court granted a stay as to Thompson's claims and denied a stay as to the other respondents on the ground that their claims were not within the scope of the arbitration agreements.

Appellants filed both a notice for discretionary review and a notice of appeal. On May 19, 1989, appellants moved for discretionary review. A commissioner denied that motion, and appellants' motion to modify was denied. Respondents then moved to dismiss the appeal. Appellants responded, and argued that the trial court's order was appealable as a matter of right. A commissioner granted the motion to dismiss, and appellants now move to modify that ruling.

The only issue presented is whether the trial court's order denying a motion to stay judicial proceedings and compel arbitration is appealable as of right under RAP 2.2(a)(3). That rule allows for an appeal as of right from

[a]ny written decision affecting a substantial right in a civil case which in effect determines the action and prevents a final judgment or discontinues the action.

Applying RAP 2.2(a)(3) to the instant case, it is clear that the trial court's decision was a "written decision affecting a substantial right...." RAP 2.2(a)(3). The court's written decision denied the motion for a stay pending arbitration, and the right to arbitrate the claims is a "substantial right" within the meaning of RAP 2.2(a)(3). See Pewter Mug, Inc. v. M.U.G. Enterprises, Inc., 46 Ohio App.2d 93, 345 N.E.2d 426, 427 (1975).

Whether the trial court's decision also "in effect determines the action and prevents a final judgment or discontinues the action " is the dispositive issue. (Emphasis added.) Under the facts in this case, the words "the action", as used in RAP 2.2(a)(3), could potentially apply to the respondents' action or appellants' motion for stay pending arbitration. If the words "the action" are applied to the respondents' class action, the trial court's order is clearly not appealable as of right because the order denying the stay in no way "determines" or "discontinues" that court action. If the words "the action" are applied to the motion for stay, then the court's order would be appealable as of right as long as the motion for stay is itself an "action" within the meaning of RAP 2.2(a)(3).

In this regard, appellants argue that since the trial court's order decides and discontinues "the arbitration special proceeding", the order "in effect determines ... and ... discontinues the action" within the meaning of RAP 2.2 because it discontinues the "action" for arbitration. They contend that the motion for stay pending arbitration should be viewed as a separate proceeding or action, for purposes of appealability, because (a) the proceeding to determine whether arbitration is required is a separate statutory proceeding involving issues that are separate from the merits of the dispute, and (b) because an effective challenge to the order cannot be brought without an immediate appeal. We find these arguments persuasive.

Motions to compel arbitration of a dispute are governed by RCW 7.04.040, ² which is located in the "Special Proceedings" title of the revised code. That statute requires an "application to the court for an order directing the parties to proceed with arbitration", and sets forth the proper procedures, including a possible mini-trial on the existence or validity of an arbitration agreement, for deciding whether arbitration should be compelled. The statute allows a party to move for an order compelling arbitration even if no action on the merits of the dispute has been filed in court. See RCW 7.04.040(1). Thus, a proceeding under the statute to determine whether arbitration should be compelled has a status independent from the underlying cause of action or controversy. Clearly, if appellants had filed an action to compel arbitration prior to the filing of respondents' lawsuit, a decision refusing to compel arbitration would have discontinued or determined "the action", and would have been immediately appealable under RAP 2.2(a)(1) or (3). Cf. Cantwell v. Safeco Ins. Co., 37 Wash.App. 133, 678 P.2d 852 (1984) (court decided merits of appeal from an action to compel arbitration under RCW 7.04.040, but did not address (appealability). In our view, the fact that appellants did not file a separate action to compel arbitration, but instead sought arbitration by motion in the pending lawsuit, is not fatal to their appeal. A motion to stay litigation pending arbitration commences a distinct statutory proceeding which has as its objective the initiation of an action in the forum of arbitration. Thus, the denial of a motion for stay pending arbitration in effect determines or discontinues the proceeding or action for arbitration.

In this regard, one court has pointed out that an order on a motion to compel arbitration is an appealable order because the issue in such a motion "is a matter wholly separate from ... the merits of [plaintiff's] cause" and is an "independent matter, anterior to the merits and not enmeshed in the factual and legal issues comprising the plaintiff's cause of action." Association of Owners of Kukui Plaza v. Swinerton & Walberg Co., 68 Haw. 98, 705 P.2d 28 (1985) (quoting Local No. 438 Constr. & General Laborers' Union v. Curry, 371 U.S. 542, 548, 83 S.Ct. 531, 535-36, 9 L.Ed.2d 514 (1963) and Mercantile Nat'l Bank v. Langdeau, 371 U.S. 555, 83 S.Ct. 520, 522, 558, 9 L.Ed.2d 523 (1963)). Though the Association of Owners of Kukui Plaza case does not involve a court rule with language like that in RAP 2.2(a)(3), it nevertheless lends support to the argument that a ruling denying a motion to compel arbitration is separate from any related legal proceeding and should be appealable as of right under the language of RAP 2.2(a)(3).

There is also support for the argument that orders like the one at issue here should be immediately appealable because "it will be too late to effectively review" such an order once...