Pacific Inv. Co. v. Townsend

• Decision Date: 04 May 1976
• Citation: 58 Cal.App.3d 1,129 Cal.Rptr. 489
• Parties: PACIFIC INVESTMENT COMPANY, a limited partnership doing business as Pacific Gardens, et al., Plaintiffs and Respondents, v. Michael D. TOWNSEND and Margaret Torma, Defendants and Appellants. Civ. 47083.
• Court: California Court of Appeals Court of Appeals

Page 489

129 Cal.Rptr. 489

58 Cal.App.3d 1

PACIFIC INVESTMENT COMPANY, a limited partnership doing business as Pacific Gardens, et al., Plaintiffs and Respondents, v. Michael D. TOWNSEND and Margaret Torma, Defendants and Appellants.

Civ. 47083.

Court of Appeal, Second District, Division 2, California.

May 4, 1976.

As Modified May 18, 1976.

Costello, Manfredi & Thorpe, Los Angeles, for defendants and appellants

Richard I. Wideman, Los Angeles, for plaintiffs and respondents.

FLEMING, Associate Justice.

Defendants Michael Townsend and Margaret Torma appeal an order denying their petition to stay proceedings and compel arbitration ¹ in an action brought by plaintiffs Pacific Investment Company, a limited partnership doing business as Pacific The primary issue is whether an arbitration clause in a limited partnership agreement covers matters raised in plaintiffs' complaint.

Gardens, Todd Schiffman, Larry Larson, Donald and Leonard Olds, Smile Peres, Hugh Rouse, and Robert Dahl.

BACKGROUND

Defendants Michael Townsend and Margaret Torma and plaintiffs Schiffman, Larson, Ronald and Leonard Olds, Peres, Rouse, and Dahl are limited partners in Pacific Investment Company. Michael Townsend initially was also the general partner. Michael Townsend, his brother defendant Thomas Townsend, and their mother Margaret Torma, own defendant General Management Company. Margaret Torma's husband, defendant Tibor Torma, does business as Quality Maintenance Company. The partnership and General Management Company maintain bank accounts or certificates of deposit with defendants Bank of California, Crocker Bank, and Brentwood Savings & Loan. Pacific Investment Company was formed in December 1970 to acquire and manage Pacific Gardens, a 47-unit apartment building at 111 Marquez Place, Pacific Palisades. Nine limited partners contributed a total of $120,000 to capital.

The partnership agreement provided that a $12,000 contribution entitled a limited partner to 9 percent of partnership income. On sale of the partnership property, proceeds would be allocated, first to the return of the limited partners' capital investment, and, then, any excess would be divided 90 percent of the limited partners and 10 percent to the general partner. The partnership agreement recognized that general partner Michael Townsend was a real-estate broker and would receive a 5 percent commission on the sale of Pacific Gardens to the partnership, and that General Management Company (in which Michael Townsend had an interest) would receive 2 percent of the partnership's annual receipts for management services. No partner, general or limited, would receive additional compensation for partnership duties. The agreement gave the general partner full power over partnership operations and imposed a duty on him to maintain records and provide the limited partners with annual financial statements. The limited partners retained the power to remove the general partner and elect a new one, on condition that the general partner's 10 percent interest in excess proceeds of a sale of partnership property be converted to an equivalent limited partnership interest. The agreement further provided that the general partner would have a right of first refusal on any sale of a limited partnership interest. The general partner could purchase the interest on behalf of the partnership or on his own behalf. Admission of new partners was conditioned on acceptance of the provisions of the partnership agreement. Finally, the agreement provided:

'In the event of any disagreement between one or more of the partners and the limited partnership, or with reference to any of the activities of the General Partner that cannot properly be settled or adjudicated by the General Partner under its general authority as created herein, such dispute or disagreement shall be arbitrated pursuant to the rules and regulations of the American Arbitration Association then in effect. . . .'

In a related transaction, in December 1970 Schiffman and Larson executed promissory notes for $12,000 and $8,000, respectively, payable to Michael Townsend with 8 percent interest from 30 April 1971. $4,500 and $3,000, respectively, was due on 31 December 1971 with the remainder payable solely from distributions to Schiffman and Larson on their limited partnership interests. The notes were secured by the limited partnership interests.

THE COMPLAINT

Plaintiffs' second amended complaint asserts three causes of action.

On behalf of all plaintiffs against all defendants the first cause of action charges The first cause of action additionally alleges that Michael Townsend improperly enabled Margaret Torma to acquire the limited partnership interest of a former partner without notice to the other limited partners and by a loan of partnership funds.

the Townsends and the Tormas with looting the partnership. It alleges that since the inception of the partnership Michael Townsend has improperly paid himself 10 percent of the partnership income and failed to keep proper records and furnish financial reports. He paid General Management Company more than 2 percent of annual receipts, made unauthorized payments of expenses for General Management Company and Margaret Torma, and paid Tibor Torma for work he did not perform. Michael Townsend also paid himself the interest earned on partnership bank accounts. Michael and Thomas Townsend occupied apartments at Pacific Gardens without payment of rent. On 21 October 1974 Michael Townsend transferred an undivided 10 percent interest in Pacific Gardens to himself. Michael and Thomas Townsend, who knew of the transfer, represented to plaintiffs that the partnership still owned Pacific Gardens.

Plaintiffs allege that as a result of an independent audit of the partnership, they discovered the improper activities on 14 October 1974. On 5 December 1974 they removed Michael Townsend as general partner, elected Schiffman and Larson as co-general partners, and canceled the management contract of General Management Company. Michael Townsend nevertheless continues to act as general partner and to occupy an apartment rent-free, and he refuses to turn over the partnership records to his successors.

On the first cause of action plaintiffs seek damages, punitive damages, an accounting, appointment of a receiver, injunctive relief, and declaration of constructive trusts.

The second cause of action seeks declaratory relief for plaintiffs and Michael Townsend. It alleges that a dispute has arisen over the limited partnership agreement provisions concerning the interest to be received by a former general partner on removal and on conversion of his interest to 'an equivalent limited partnership interest.' If the general partner is removed with or without cause, is his converted interest subordinate to that of the other limited partners?

The third cause of action, by Schiffman and Larson against Michael Townsend, alleges that in October 1974 Schiffman and Larson still owed $764.74 and $519, respectively, on their promissory notes to Michael Townsend. There was a distribution of partnership income but they refused to make payment on the notes, assertedly, because Michael Townsend as a consequence of his improper conduct owed them more than the amounts payable on the notes. When Townsend threatened to appropriate the security for the notes, Schiffman and Larson tendered payment but Townsend refused the tender. The third cause of action claims Townsend violated the Commercial Code provisions for foreclosure of security and seeks injunctive relief, damages, and punitive damages.

DISCUSSION

1. Parties. Arbitration is a matter of contract and a party cannot be required to arbitrate a dispute he has not agreed to submit. (United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582--583, 80 S.Ct. 1347, 4 L.Ed.2d 1409; Unimart v. Superior Court, 1 Cal.App.3d 1039, 1045, 82 Cal.Rptr. 249.) Of the defendants, Thomas Townsend, Tibor Torma, Bank of California, Crocker Bank, and Brentwood Savings & Loan did not participate in the limited partnership agreement and therefore cannot be bound by its arbitration provision. Michael Townsend and Margaret Torma are clearly bound and desire to be bound.

Of the plaintiffs, only Donald Olds claims not to be bound by the agreement. He avers he did not sign the original limited 2. Issues. Arbitration is highly favored as a method for settling disputes. (Berman v. Dean Witter & Co., Inc., 44 Cal.App.3d 999, 1003, 119 Cal.Rptr. 130.) Courts should indulge every intendment to give effect to such proceedings (Lewsadder v. Mitchum, Jones & Templeton, Inc., 36 Cal.App.3d 255, 259, 111 Cal.Rptr. 405) and order arbitration unless it can be said with assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. (Retail Clerks Union, Local 775 v. Purity Stores, Inc., 41 Cal.App.3d 225, 231, 116 Cal.Rptr. 40.) At bench, the clause provides for arbitration '(i)n the event of any disagreement between one or more of the partners and the limited partnership, or with reference to any of the activities of the General Partner . . ..'

partnership agreement. In the complaint, however, Donald Olds alleges he is now a limited partner. By the terms of the limited partnership agreement, to become a limited partner Olds must have accepted and adopted in writing all the terms of the...