the Energy Group, Inc. v. Liddington

• Decision Date: 30 June 1987
• Court: California Court of Appeals Court of Appeals
• Parties: Robert F. LIDDINGTON et al., Cross-Complainants and Respondents, v. The ENERGY GROUP, INC., Cross-Defendant and Appellant. A035419.

Page 202

238 Cal.Rptr. 202

192 Cal.App.3d 1520

Robert F. LIDDINGTON et al., Cross-Complainants and Respondents, v. The ENERGY GROUP, INC., Cross-Defendant and Appellant.

A035419.

Court of Appeal, First District, Division 4, California.

June 30, 1987.

Steven P. Krakowsky, Wolfe & Linden, Los Angeles, for cross-defendant and appellant.

Kathleen Courts, White, Courts & Mitchell, Oakland, for cross-complainants and respondents.

SABRAW, Associate Justice.

The Energy Group, Inc. ("TEG") appeals from an order which, in effect, denied its petition to compel arbitration of a dispute and instead stayed the arbitration until resolution of pending litigation. We first hold that the Federal Arbitration Act ("FAA"; 9 U.S.C., § 1 et seq.) has preempted Code of Civil Procedure section 1281.2, subdivision (c), to the extent it is used to stay arbitration under an agreement governed by the FAA. Second, we hold that the trial court should have granted the petition to compel arbitration. Accordingly, we reverse.

I. FACTS AND PROCEDURAL HISTORY

The present controversy arises out of a tax shelter program involving so-called "energy management systems." As part of the scheme, individuals would lease interests in such systems from American Energy Systems, Inc. ("American Energy"). American Energy has its principal place of business in Phoenix, Arizona. It claimed that each system cost it $80,000 and it assigned to the lessees its claim for investment tax credits based on that amount. Installation of the systems was the responsibility of the lessees who were to receive income from energy savings obtained by the "end users" of the systems.

On December 31, 1984, Robert and Katherine Liddington leased 1.6 energy management systems from American Energy. ¹ The Liddingtons were told that they would receive tax savings and credits based on their investment in the systems. ²

On the same day, the Liddingtons also entered into service contracts with United States Energy Management Systems, Inc., ("U.S. Energy") in which the latter agreed to obtain "end-user" locations for the two energy management systems and to install them within 90 days. U.S. Energy has its principal place of business in Los Angeles. Among other things, the agreements provided that the Liddingtons would be paid a significant percentage of the energy savings produced by the systems and received by the end-users. Paragraph 11 of the contract consisted of an agreement to arbitrate contractual disputes before the American Arbitration Association ("AAA"). ³ Although paragraph 17 expressly provided that U.S. Energy could assign its "obligation" under the contract without the prior written consent of the Liddingtons, the contract made no mention of U.S. Energy's ability to assign its rights under the agreement. ⁴

On March 7 and 13, 1985, U.S. Energy notified the Liddingtons that it had assigned their service contract to TEG, a corporation licensed as a contractor to perform heating, air conditioning and ventilation work. (TEG has its principal place of business in Alhambra, California.) The assignment apparently took place on January 21, 1985. By written agreement of that date, TEG agreed to assume U.S. Energy's obligations under 750 similar service agreements with investors in exchange for $1,250,000 and assignment of U.S. Energy's rights under the service agreements. It was not until after the cross-complaint was served almost one year later that the Liddingtons' attorney first obtained a copy of the assignment agreement.

California First Bank (the "Bank") provided financing for the Liddingtons' acquisition of the two energy management systems. The debt was evidenced with a promissory note executed by the Liddingtons. When the Liddingtons failed to make payments on the promissory note, the Bank filed a complaint against them. The Liddingtons, in turn, cross-complained against the Bank, U.S. Energy, TEG, and others. Among other things, the Liddingtons alleged that neither U.S. Energy nor TEG had ever installed the two energy management systems financed by the Bank.

Prior to answering the cross-complaint, TEG filed a petition to compel arbitration of the Liddingtons' pursuant to the arbitration clause in the U.S. Energy service contract, the FAA, and the rules of the American Arbitration Association. It also asked the court to stay the litigation pursuant to section three of the FAA ⁵ until the arbitration was completed. TEG argued that the dispute was subject to the FAA because the contract involved interstate commerce. It argued that recent decisions of the United States Supreme Court had made it clear the FAA preempted the field of arbitration with respect to agreements such as the U.S. Energy contract, thereby mandating that its petition to compel arbitration be granted. (Citing, inter alia, Southland Corp. v. Keating (1984) 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1; Moses H. Cone Memorial Hospital v. Mercury Construction Corp. (1983) 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765.)

The Liddingtons asserted various reasons why TEG's petition should not be granted. They also argued that the question of whether arbitration should be ordered was subject to Code of Civil Procedure section 1281.2. ⁶

Although the trial court did not explicitly deny TEG's petition to compel arbitration, it stayed the arbitration proceeding pending resolution of the litigation. Apparently applying California law, the court first found that there had been no waiver of the right to arbitrate, that the arbitration clause was not unconscionable and that there was a valid assignment of the contract. It also found that the contract involved interstate commerce and ruled, therefore, that it was governed by the FAA. However, because the contract contained a choice of laws clause specifying that it would be construed under the laws of California, the court also ruled that Code of Civil Procedure section 1281.2, subdivision (c), was applicable to the proceedings. Finding that TEG was involved with third parties in the proceeding before it, that the proceedings involved common issue of law and fact, and that the possibility of conflicting rulings existed, the court decided that a stay of the arbitration was justified under California law.

TEG filed a timely notice of appeal from the stay order. ⁷

II. ANALYSIS

As it did below, TEG continues to assert that Code of Civil Procedure section 1281.2 is preempted to the extent it is used to stay arbitration of a dispute governed by the FAA. Based upon relevant United States Supreme Court cases, we agree.

Moses H. Cone Memorial Hospital v. Mercury Construction Corp., supra, 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765, involved a dispute between a hospital and a general contractor over the contractor's claims for costs incurred due to delay in the construction of a building. The primary issue on appeal was the propriety of a federal district court order staying the contractor's federal court petition for an order compelling arbitration pending resolution of a concurrent state court suit brought by the hospital. In holding that the order was erroneous, a majority of the Supreme Court stated that the FAA "is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." (Id., at 24, 103 S.Ct. at 941.)

Cone Memorial Hospital was followed by Southland Corp. v. Keating, supra, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1, where a number of Seven-Eleven convenience store franchisees brought individual and class actions against the franchisor, Southland, for fraud and breach of contract arising out of the franchise relationship. After the actions were consolidated, Southland sought to compel individual arbitrations under the auspices of the American Arbitration Association pursuant to arbitration clauses in the franchise agreements. The trial court concluded that the FAA preempted section 31512 of the California Franchise Investment Law (Corp.Code, § 31512) and granted the request to compel arbitration.

On appeal, the California Supreme Court held that the FAA did not preempt the field of arbitration where California's regulatory scheme voided franchisor efforts to require franchisees to waive their constitutional rights to trial by jury. (Keating v. Superior Court (1982) 31 Cal.3d 584, 602-603, 183 Cal.Rptr. 360, 645 P.2d 1192.)

A majority of the United States Supreme Court disagreed. Citing Cone Memorial Hospital, the court reiterated that the FAA had preempted the field: "In creating a substantive rule applicable in state as well as federal courts, Congress intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements [governed by the FAA]." (Southland Corp. v. Keating, supra, 465 U.S. 1, 16, 104 S.Ct. 852, 861.) The court held, therefore, that section 31512 of the California Franchise Investment Law violated the Supremacy Clause to the extent that it was used to bar the enforcement of arbitration agreements within the jurisdiction of the FAA. (Ibid.)

Finally, while this appeal was pending, the Supreme Court reiterated that the FAA preempts state legislation which treats the validity, revocability and enforcement of FAA--governed arbitration agreements differently than other contracts. (Perry v. Thomas (1987) 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426 .)

In this case, the trial court found that the U.S. Energy service agreement executed by the Liddingtons unquestionably involved interstate commerce and was governed by the FAA. As a result, it correctly ruled that the arbitration clause in the agreement was governed by the FAA. The question which remains, however, is whether the FAA bars a California court from utilizing Code of Civil Procedure section 1281.2 to merely stay arbitration pending the outcome of litigation between the parties.

The federal courts and state courts have been in some disagreement as...