Starr v. Mayhew

• Docket Number: G060277
• Decision Date: 01 September 2022
• Citation: Starr v. Mayhew, 83 Cal.App.5th 842, 299 Cal.Rptr.3d 99 (Cal. App. 2022)
• Parties: David STARR et al., Plaintiffs and Respondents, v. Jeffrey MAYHEW, Defendant and Appellant.
• Court: California Court of Appeals

83 Cal.App.5th 842

299 Cal.Rptr.3d 99

David STARR et al., Plaintiffs and Respondents,

v.Jeffrey MAYHEW, Defendant and Appellant.

G060277

Court of Appeal, Fourth District, Division 3, California.

Filed September 1, 2022

Musick, Peeler & Garrett and Cheryl A. Orr, Los Angeles, for Defendant and Appellant.

Jeff Lewis Law, Jeffrey Lewis, Rolling Hills Estates, and Sean C. Rotstan for Plaintiffs and Respondents.

OPINION

MOORE, ACTING P. J.

DefendantJeffrey Mayhew and PlaintiffsDavid Starr and Thomas Hunt formed a limited liability company to operate a shopping center in Tustin.They agreed Mayhew would manage the company and Starr and Hunt would provide startup capital.In exchange, Mayhew was entitled to 50 percent of the company's profits and Starr and Hunt were entitled to the remaining 50 percent.After the shopping center's business declined in 2008, Mayhew asked Starr and Hunt for additional capital.They agreed to do so only if Mayhew also contributed capital.Mayhew reported a $100,000 contribution, which caused Starr and Hunt to contribute roughly the same amount.The shopping center was later sold for a substantial profit.Around this time, Mayhew claimed he was entitled to about 56.3 percent ownership interest in the company based on his additional capital contribution.Starr and Hunt disagreed and submitted the dispute to arbitration along with several other claims for damages.Mayhew disputed these claims and also argued the company's operating agreement entitled him to indemnity for any sums awarded against him.

The arbitrator ruled in favor of Starr and Hunt, finding Mayhew only held a 50 percent interest in the company.For their other claims, she awarded Starr and Hunt $53,384 in damages, $439,087.50 in attorney fees, and found that Mayhew would bear all arbitration costs.She also determined Mayhew was only entitled to $250,000 in indemnity for attorney fees.Mayhew sought clarification as to whether he was entitled to indemnity for any of the sums awarded against him.In response, the arbitrator issued a clarification of the award, stating he was not.The superior court later confirmed the award over Mayhew's petition to vacate and entered judgment against him.

On appeal, Mayhew asserts the trial court erred by failing to vacate the award.He contends the arbitrator lacked authority to clarify the award, that the award was procured by undue means, and that the arbitrator's award exceeded her powers.We disagree.Since Mayhew has failed to identify any basis for vacating the award, we affirm the judgment.

IFACTS AND PROCEDURAL HISTORY

A.Formation and Sale of Company

Mayhew, Starr, and Hunt formed Strata Tustin, LLC(Strata) in 2003 to develop a shopping center in Tustin.Starr and Hunt were investors in Strata (investing $350,000 and $250,000, respectively) while Mayhew agreed to manage the entity and provide sweat equity.Strata's operating agreement (the operating agreement) expressly identified Starr and Hunt as members at the company's formation, and they remained members throughout the relevant time period.Mayhew was identified as Strata's manager in the operating agreement, but it was ambiguous as to whether he was also a member.

For their respective contributions, the operating agreement specified Starr and Hunt owned a combined 50 percent share of Strata while Mayhew owned the remaining 50 percent.The operating agreement allowed for these ownership percentages to be modified if new members were admitted to Strata.Strata's capital structure and list of members were set forth on exhibit B of the operating agreement (exhibit B), which could be "modified as necessary to reflect the addition[ ] of new Members and/or new Capital Contributions."

The shopping center's business began to decline in 2008.During this period, Mayhew covered some of Strata's expenses, and he also deferred taking property management fees he was owed under the operating agreement.Eventually, in December 2012, Mayhew requested additional capital from Starr and Hunt to keep the company afloat.Starr and Hunt opposed the capital call unless Mayhew also contributed cash.Mayhew vowed to contribute $100,000 and requested that Starr and Hunt also provide $100,000.Rather than contributing $100,000 in cash, in March 2013, Mayhew forgave $100,000 of the debt Strata owed him and represented to Starr and Hunt he had made his contribution.Starr and Hunt later contributed a combined $99,340 in additional capital.

Strata's 2013 tax return reflected a capital contribution of $100,000 by Mayhew.But it also stated Mayhew only owned a 50 percent interest in Strata.Similarly, Mayhew received and signed schedule K-1 tax forms in 2013, 2014, 2015, 2016, and 2017, which all confirmed he only held a 50 percent interest in Strata.

The parties eventually listed the shopping center for sale in late 2017 or early 2018.It sold for $11,550,000 in July 2018.This resulted in a profit of roughly $7.8 million for Starr, Hunt, and Mayhew to share based on their ownership interests in Strata, which had become a source of dispute among the parties.In May 2018, while the property was listed for sale, Strata made its first ever distribution of profits.The distribution was accompanied by documentation prepared by Mayhew.It reflected he owned a roughly 56.3 percent interest in Strata, while Starr and Hunt's combined interest had decreased to 43.7 percent.Mayhew explained that under Strata's operating agreement, his $100,000 capital contribution in March 2013 allowed him to unilaterally increase his ownership of Strata by a proportionate amount.This was the first time Starr and Hunt were informed of any purported change to Strata's ownership structure.They had never consented to any such modifications.At their request, Mayhew served them with a copy of the amended exhibit B, documenting the changes.

B.The Arbitration Proceeding

In June 2018, Starr and Hunt filed individual and derivative claims on behalf of Strata with the American Arbitration Association.Primarily, they sought a declaration that Mayhew only held a 50 percent interest in Strata.In addition, they sought damages from Mayhew for (a) $350,000 for failing to collect common area maintenance charges, (b) $500,000 for failing to refinance Strata's debt at lower interest rates, (c) $150,000 for payment of excessive management fees to himself, (d) $75,000 for unsubstantiated expense reimbursements, and (e) an unspecified sum for failing to execute a beneficial tax exchange of the shopping center under Internal Revenue Code section 1031.They also sought punitive damages.

After the initiation of arbitration but prior to the hearing, Mayhew requested an advance of attorney fees under an indemnity clause in Strata's operating agreement (the indemnity clause).The indemnity clause provided that Strata's "[m]anager ... shall not be liable for and shall be indemnified and held harmless ... from any loss or damage incurred by them, ... in connection with the business of the Company, including costs and reasonable attorneys' fees and any amounts expended in the settlement of any claims of loss or damage resulting from any act or omission performed or omitted in good faith, which shall not constitute gross negligence or willful malfeasance, pursuant to the authority granted, to promote the interests of the Company."The arbitrator granted Mayhew $250,000 in advanced indemnity, and he requested additional indemnity during the arbitration hearing.

With respect to Strata's capital structure, Mayhew argued in arbitration that he was permitted to increase his ownership percentage under section 3.2.2 of the operating agreement.This section governed the addition of new members to Strata.It provides, "[i]t is anticipated that the Initial Members shall be joined in the investment by other Members.The percentage [of] ownership interest of such Members shall be proportionate to the percentage their Capital Contributions bear to the Capital Contributions all Members.To the extent required by law, the Manager shall amend this Agreement and take such other action as the Manager deems necessary or appropriate ... to reflect the admission of those persons to the Company as a Member."Mayhew believed his capital contribution in March 2013 made him a new member, allowing him to proportionally increase his ownership stake.He further asserted that Section 3.2.2 and various other provisions of the operating agreement allowed him to modify Strata's ownership structure without Starr and Hunt's consent.In response, Starr and Hunt maintained Mayhew was a member at Strata's formation.Therefore, he was not entitled to increase his ownership interest as a new member under section 3.2.2 through his purported capital contribution.

C.Arbitrator's Decision

Following the hearing, the arbitrator issued her final award on December 9, 2019(the final award).She found for Starr and Hunt on the ownership issue, ruling Mayhew only owned a 50 percent share of Strata.As for their other claims, the arbitrator concluded they were entitled to $53,384 in damages, consisting of "50% of $56,892 of unauthorized third party expenses charged by Mayhew, $19,938 in disallowed attorney's fees paid to Mayhew, and 50% of $10,000 of uncollected [common area maintenance] charges."Mayhew was not liable for any of the remaining claims, including punitive damages.The arbitrator awarded Starr and Hunt $439,087.50 in attorney fees and costs and ruled that Mayhew would be responsible for $53,897.30 in arbitration expenses.

As to indemnity, the arbitrator denied Mayhew's request for additional indemnity for his incurred attorney fees.But she also rejected Starr and Hunt's argument that Mayhew had been grossly negligent, was not entitled to any indemnity, and was required to refund the $250,000 in advanced indemnity.Rather, the arbitrator found Mayhew's "attorney fees to date compensated from [Strata would] be allowed but nothing further [was] deemed...