Si V, LLC v. Fmc Corp.

• Decision Date: 07 October 2002
• Docket Number: No. 5:02-CV-02606JW.,5:02-CV-02606JW.
• Citation: 223 F.Supp.2d 1059
• Parties: SI V, LLC et al, Plaintiffs, v. FMC CORPORATION, Defendant. FMC Corporation, Counter-Claimant, v. SI V, LLC et al, Counter-Defendants.
• Court: U.S. District Court — Northern District of California

223 F.Supp.2d 1059

SI V, LLC et al, Plaintiffs, v. FMC CORPORATION, Defendant.

FMC Corporation, Counter-Claimant, v. SI V, LLC et al, Counter-Defendants.

No. 5:02-CV-02606JW.

United States District Court, N.D. California, San Jose Division.

October 7, 2002.

Jeffrey S. Lawson, San Jose, CA, for Plaintiffs.

James Bruen, Joshua A. Room, Derrick K. Watson, Farella Braun and Martel LLP, San Francisco, CA, San Jose, CA, for Defendant.

ORDER GRANTING DEFENDANT'S MOTION TO COMPEL ARBITRATION AND STAY FURTHER JUDICIAL ACTION ON PLAINTIFFS' CLAIMS; SETTING CASE MANAGEMENT CONFERENCE

WARE, District Judge.

I. INTRODUCTION

This suit arises out of a contract for sale of real property between Defendant FMC Corporation ("FMC"), the sellers, and Plaintiffs Sobrato Interests IV, LLC and Sobrato Interests V, LLC, the purchasers. Closure on the contract for sale has not occurred for reasons that are in dispute, and Plaintiffs have filed this action asserting several claims. Pursuant to an arbitration agreement between FMC and Plaintiffs, FMC has filed a motion to compel arbitration and stay further judicial action on Plaintiffs' claims. Plaintiffs oppose arbitration and contend that the arbitration agreement is unenforceable. Based upon all the papers filed to date and the undisputed evidence,¹ FMC's motion to compel arbitration and stay judicial action is GRANTED in part and DENIED in part.

II. BACKGROUND

FMC and Sobrato Interests IV, LLP ("Sobrato LLP") entered into a contract, effective April 30, 2001 (the "Agreement"), for the purchase and sale of 75 acres of real property (the "Property"), owned by FMC in San Jose and Santa Clara, California. Sections 18(c) and 19 of the Agreement indicated that the parties still needed to agree to some "Remaining Items" that would be incorporated by amendment. In particular, they contemplated the incorporation of an ADR clause that was eventually added to the Agreement by an amendment (the "Amendment") effective June 8, 2001. Prior to signing the Amendment, Sobrato LLP assigned its rights under the Agreement to Sobrato Interests IV, LLC, later renamed SI V, LLC (collectively, "Sobrato LLC"). Subsequently, the Amendment, including the ADR clause, was signed by Sobrato LLC and not Sobrato LLP.

Under the Agreement, the sale was to occur in two phases ("Phase I" and "Phase II"), and each phase included the sale of a separate parcel of the Property under separate closing conditions. This dispute relates to Phase I of the Agreement. Phase I was expected to close December 28, 2001 but the sale was not consummated. Sobrato LLC contends that, under the Agreement, it was not obligated to purchase the Phase I parcel because FMC failed to comply with certain closing conditions. In particular, FMC allegedly failed to have a Corrective Measure Study ("CMS") approved by the California Department of Toxic Substances Control (the "DTSC"). In contrast, FMC contends that it met all closing conditions for Phase I by the closing date, and, therefore, Sobrato LLC was obligated to purchase the Phase I parcel.

Pursuant to Section 12 of the Amendment, which amends Section 18(c) of the Agreement, FMC and Sobrato LLC agreed to the following dispute resolution terms:

[A]ny question, dispute or controversy arising out of this Agreement or resulting transactions ... (collectively "Arbitration Issues") shall be resolved through a two-step dispute resolution process administered by JAMS or another judicial mediation service mutually acceptable to the parties located in San Jose, California. The dispute resolution process shall involve first mediation followed, if necessary, by final and binding arbitration ... Subject to the foregoing, the arbitrators shall, by majority vote, make such decision as is appropriate and in accord with the terms of this Agreement and such decision shall be binding upon the parties and enforceable in a court of law, except that any party shall have the right to appeal any errors of law. (emphasis added).

In accordance with the above terms, FMC and Sobrato LLC engaged in a one-day mediation session on May 7, 2002 to resolve their dispute over the Phase I closing. The parties ended the session without a resolution, and Sobrato LLC filed this action in state court on May 8, 2002. Sobrato LLC states three claims including declaratory relief, breach of contract, and anticipatory breach of contract. FMC timely removed the action to federal court, asserting federal diversity jurisdiction. FMC has also joined Sobrato LLP as a Counter-Defendant and asserts three counterclaims against Sobrato LLC and Sobrato LLP including specific performance, breach of contract, breach of implied covenant of good faith and fair dealing, and declaratory relief.

FMC now moves to compel arbitration of all Sobrato LLC's claims, compel Sobrato LLP to participate in the arbitration, and stay any further proceedings in this forum until that arbitration is complete pursuant to Section 18(c) of the Agreement. In response, Sobrato LLC contends, inter alia, that it should be allowed to litigate its claims in this Court because the arbitration agreement of Section 18(c) is unenforceable under California law. In particular, Sobrato LLC contends that the provision, "except that any party shall have the right to appeal any errors of law" (the "Appeal Provision"), unlawfully expands the jurisdiction of California courts beyond that which is set forth in Cal.Civ. Proc.Code §§ 1286.2 and 1286.6, and, therefore, renders the entire arbitration agreement unenforceable.

III. DISCUSSION

Three key issues are important in deciding FMC's motion to compel arbitration in this case. First, the Court must determine whether the Federal Arbitration Act applies to this dispute or whether California law applies. The Court must then determine whether the arbitration agreement is enforceable, and, if so, whether Sobrato LLP, being a nonsignatory to the arbitration agreement, is additionally bound by the arbitration agreement.

A. The Federal Arbitration Act Does Not Apply to this Dispute

The Court must first determine whether the Federal Arbitration Act, 9 U.S.C.A. § 1 et seq. (West 1999) ("FAA") is applicable to this dispute. Section 2 makes enforceable "only those arbitration agreements `in any maritime transaction or a contract evidencing a transaction involving commerce.'" 9 U.S.C.A. § 2. Section 1 defines commerce as "commerce among the several States or with foreign nations ..." 9 U.S.C.A. § 1. The Agreement does not involve a maritime transaction. The Court must then determine whether the Agreement evidences a transaction involving interstate commerce. The Court finds that it does not. An agreement to sell real property between an instate buyer and an out-of-state seller does not involve interstate commerce as defined in the FAA. Cecala v. Moore, 982 F.Supp. 609, 612 (N.D.Ill.1997); see also Mathews v. Fluor Corp., 312 S.C. 404, 440 S.E.2d 880, 881 (1994) (holding the FAA did not apply where the parties were residents of separate states and the real property was in yet another separate state) rev'd on other grounds Munoz v. Green Tree Fin. Corp., 343 S.C. 531, 539, 542 S.E.2d 360 (2001). Therefore, the FAA is not applicable to this dispute, but, rather, the state law governing the Agreement. In the Agreement the parties agreed to a choice of law provision. Under this provision California law, including the California Arbitration Act, Cal.Code of Civ. Proc. § 1280 et seq. (West 1982 & Supp.2002), is controlling in this case.

B. The Arbitration Agreement is Enforceable

Sobrato LLC contends that the Appeal Provision unlawfully expands the jurisdiction of California courts beyond that which is set forth by statute, and, therefore, renders the entire arbitration agreement unenforceable. In California, the review of an arbitrator's decision by a court is limited to those grounds for review provided by Cal.Civ.Proc.Code §§ 1286.2² and 1286.6.³ Moncharsh v. Heily & Blase, 3 Cal.4th 1, 11-12, 10 Cal. Rptr.2d 183, 832 P.2d 899 (1992). This scope of judicial review simply cannot be expanded by contract. Crowell v. Downey Comm. Hosp. Found., 95 Cal.App.4th 730, 739, 115 Cal.Rptr.2d 810 (2002). Consequently, a provision in an arbitration agreement allowing unspecified errors of fact or law to be appealed to a court is unenforceable, because it unlawfully expands the scope of judicial review. Oakland-Alameda County Coliseum Auth. v CC Partners, 101 Cal.App.4th 635, 124 Cal. Rptr.2d 363, 370-71 (2002).

Since the Appeal Provision in this dispute does not specify a forum to which appeals would be submitted, it is unclear that the provision contemplates appeals to a court of law. Although FMC argues that a reasonable construction of the provision is that appeals would go exclusively to an arbitration forum,⁴ e.g., a JAMS appeal panel, the Court is not convinced by this interpretation. In instances where a contract provision is ambiguous, the Court can look to the rest of the contract to shed light on the meaning of the provision. See Cal. Civ.Code § 1641 (West 1985) ("The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other."); Victoria v. Superior Court, 40 Cal.3d 734, 741, 222 Cal.Rptr. 1, 710 P.2d 833 (1985). The Agreement and its amendments are simply devoid of any reference to "errors of law" being appealable to an ADR forum. Moreover, there is no indication that it was the intent of the parties to grant an ADR forum exclusive power over appeals. On the contrary, the ADR clause states in part that: "`Arbitration Issues' shall be resolved through a two-step dispute resolution process administered by JAMS or another judicial mediation service ... involv[ing] first mediation followed, if necessary, by final and binding arbitration ..." (emphasis added). This leads the Court to only one conclusion when construing the Appeal Provision: it was...