HILLARY FREDRICKSON, ET AL v. 155 MELVILE LLC, A LIMITED LIABILITY COMPANY ET AL

The Court now considers Oswald, Seller LLC, and Contractor Manager, Inc.’s motion to compel arbitration.

LEGAL STANDARD

A party to an arbitration agreement may seek a court order compelling the parties to arbitrate a dispute covered by the agreement. (Code Civ. Proc., § 1281.) A written agreement to submit future controversies to arbitration “is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (Ibid.) “On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines” that one of certain exceptions applies. (Code Civ.

Proc., § 1281.2.) If the Federal Arbitration Act (“FAA”), as opposed to state law, governs an arbitration agreement, the court is required to compel arbitration “upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue” and to order a stay pending the outcome of the arbitration. (9 U.S.C. §§ 3, 4.)

On a motion to compel arbitration, the moving party must prove by a preponderance of evidence the existence of the arbitration agreement and that the dispute is covered by the agreement. The burden then shifts to the resisting party to prove by a preponderance of evidence a ground for denial (e.g., fraud, unconscionability, etc.). (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413; Hotels Nevada v. L.A. Pacific Center, Inc. (2006) 144 Cal.App.4th 754, 758.)

DISCUSSION

Seller LLC conveyed the property to Plaintiffs through a Residential Purchase Agreement and Joint Escrow Instructions (“Agreement”) executed on March 31, 2017. (Oswald Dec., ¶ 4 & Ex. A.) The Agreement provides that its parties agreed “to mediate any dispute or claim arising between them out of this Agreement, or any resulting transaction, before resorting to arbitration or court action.” (Id. at Ex. A., ¶ 22(A).) The parties further agreed “that any dispute or claim in Law or equity arising between them out of this Agreement or any resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration.” (Id. at Ex. A., ¶ 22(B).)

A. Scope of Arbitration Provision

Plaintiffs argue that certain of their claims are outside the scope of the Agreement’s arbitration provision.

• The First Cause of Action for negligence alleges that Defendants negligently performed the remodel and renovation work that took place prior to Plaintiffs’ purchasing the San Anselmo property. (Complaint, ¶¶ 27-28.) • The Second Cause of Action for breach of contract alleges that Defendants breached the Agreement by failing to disclose material defects affecting the property. (Id. at ¶¶ 35-37.) • The Third Case of Action for breach of the implied covenant of good faith and fair dealing alleges that Defendants violated the implied covenant by performing defective

construction work, concealing defects, and misrepresenting the condition of the property. (Id. at ¶¶ 46-47.) • The Fourth Cause of Action for fraud and Fifth Cause of Action for negligent misrepresentation allege that Defendants misrepresented the property’s condition and the construction work’s legal compliance, which induced Plaintiffs to buy the property. (Id. at ¶¶ 50-51, 58-59.)

Plaintiffs do not dispute that their claims for breach of contract and breach of the implied covenant fall within the scope of the Agreement’s arbitration provision. They argue, however, that their tort claims (First Cause of Action for negligence, Fourth Cause of Action for fraud, and Fifth Cause of Action for negligent misrepresentation) are not claims “arising . . . out of [the] Agreement or any resulting transaction” and thus are beyond the scope of the arbitration clause. (See Oswald Dec., Ex. A., ¶ 22(B).)

The Agreement is a standard form contract. As a result, appellate courts have addressed the scope of the very arbitration provision at issue in this case, and whether claims like Plaintiffs’ fall within it.

In Johnson v. Siegel (2000) 84 Cal.App.4th 1087, a homeowner sued the sellers of a property for fraud and negligent misrepresentation, alleging that the sellers had neglected to disclose flooding and drainage issues. (84 Cal.App.4th 1087, 1089.) The court held that the arbitration provision – the same one at issue here – was broad enough to encompass these claims, reasoning that the alleged misrepresentations were an “integral” part of the overall real estate transaction, and the clause was “clearly broad enough to encompass disputes arising from” critical components of the transaction, if not from the real estate purchase agreement itself. (Id. at pp. 1094.)

The Second District considered the same arbitration provision in Victrola 89, LLC v. Jaman Properties 8 LLC (2020) 46 Cal.App.5th 337, another dispute involving allegations that a seller had “deceived [the plaintiff buyer] about both the initial condition of the Property and the repairs of the Property’s defects.” (46 Cal.App.5th 337, 344.) Victrola 89 involved claims for (among other things) fraud and negligence, with the negligence claim alleging that certain defendants “breached their duty of care to [the plaintiff] by failing to construct/repair the Property in a good and workmanlike manner.” (Id. at p. 354.)

The appellate court held that, due to the “resulting transaction” language in the arbitration provision, the clause covered any disputes or claims arising out of “[the plaintiff’s] purchase of the Property.” (Id. at p. 356.) Because the plaintiff’s claims “concern[ed] . . . defects in the construction of the Property, along with defendants’ alleged deceit regarding those defects in order to induce [the plaintiff] to purchase the Property[,]” the claims “ar[o]se out of the Agreement and the resulting transaction” and were within the scope of the arbitration provision. (Ibid.)

“Given that [the plaintiff’s] claims all center around the defects in the Property – purchased because of the Agreement – and the alleged misrepresentations and concealments surrounding the purchase transaction, we conclude the claims arise out of the ‘Agreement or any resulting transaction,’ and are thus within the scope of the arbitration provision.” (Id. at p. 357.)

Under the weight of this authority, the court finds Plaintiffs’ claims fall within the scope of the Agreement’s arbitration provision.

B. Seller LLC’s Standing to Compel Arbitration

Seller LLC filed a Certificate of Cancellation with the California Secretary of State in July 2018. (Opp. Request for Judicial Notice,1 Ex. A.) Plaintiffs contend that as a result, defendant lacks standing to move to compel arbitration.

“Upon filing a certificate of cancellation . . ., a limited liability company shall be canceled and its powers, rights, and privileges shall cease.” (Corp. Code, § 17702.02, subd. (c).) A canceled LLC “continues to exist for the purpose of winding up its affairs, prosecuting and defending actions by or against it in order to collect and discharge obligations, disposing of and conveying its property, and collecting and dividing its assets. A limited liability company shall not continue business except so far as necessary for its winding up.” (Corp. Code, § 17707.06, subd. (a).)

Plaintiffs argue that a motion to compel arbitration seeks affirmative relief, and based on the foregoing statutes, a canceled LLC is not permitted to do that. But a canceled LLC “continues to exist for the purpose of . . . defending actions . . . against it in order to . . . discharge obligations[.]” (Corp. Code, § 17707.06, subd. (a).) Plaintiffs have filed a lawsuit against a canceled LLC, alleging that the company has financial obligations to Plaintiffs based on its alleged misconduct involving the property in San Anselmo. As part of an effort to discharge those obligations, Seller LLC has filed a motion seeking an order kicking this case out of court based on the Agreement’s arbitration provision. This strikes the Court as permitted under the plain language of Section 17707.06(a).

In Vera v. REL-BC, LLC (2021) 66 Cal.App.5th 57, a plaintiff filed a lawsuit against an LLC and others, alleging that they had withheld material facts from her when they sold her a property. (66 Cal.App.5th 57, 62-63.) The trial court entered judgment in favor of the defendants based on the statute of limitations, and the defendants requested attorney’s fees based on a fee provision in the property purchase agreement. (Id. at p. 64.) The trial court denied the LLC’s request for fees on the basis that it “had dissolved and therefore lacked capacity to request fees.” (Ibid.)

The First District, interpreting the same statutes Plaintiffs are invoking in this case, held that the LLC “cannot be denied its fees merely because it is a dissolved or canceled entity.” (Id. at p. 74.) Thus a canceled LLC that has been sued is not prohibited from requesting affirmative relief from the court in that litigation.

Plaintiff’s argue that an LLC’s rights under a valid and binding contract to arbitrate would terminate upon cancelation. Vera’s holding that a canceled LLC is permitted to enforce a contractual attorney’s fees provision notwithstanding its cancelation suggests that this Court cannot deprive Seller LLC of its rights under a contractual arbitration provision “merely because it is a . . . canceled entity.” (66 Cal.App.5th 57, 74.) The Court concludes that Seller LLC has standing to bring this motion.

C. Oswald and Contractor Manager, Inc.’s Ability to Enforce the Agreement

“Generally speaking, one must be a party to an arbitration agreement to be bound by it or invoke it.” (Westra v. Marcus & Millichap Real Estate Investment Brokerage Co., Inc. (2005) 129 Cal.App.4th 759, 763.) The parties to the Agreement are Plaintiffs and Seller LLC. (See Oswald Dec., Ex. A, ¶¶ 1(E) [“Buyer and Seller are referred to herein as the ‘Parties.’”], 32 [Oswald and Foster signing the Agreement on behalf of “Seller,” which is described as “155 Melville LLC”].)

1. Contract enforcement.

1 Plaintiffs’ request for judicial notice is granted. (Evid. Code, §§ 452, subds. (c), (h).)

There are exceptions to the rule that a nonparty to an arbitration agreement cannot enforce it, one of them based on the doctrine of equitable estoppel. (Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 706.) “Under that doctrine, as applied in ‘both federal and California decisional authority, a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are “intimately founded in and intertwined” with the underlying contract obligations.’ ” (Ibid. [quoting Boucher v.

Alliance Title Company, Inc. (2005) 127 Cal.App.4th 262, 268].) Stated differently, “ ‘if a plaintiff relies on the terms of an agreement to assert his or her claims against a nonsignatory defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement.’ ” (Id. at p. 714 [quoting Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 220.)

Arguably the equitable estoppel doctrine “prevents a ‘plaintiff who seeks to hold nonsignatories liable for damages under a contract’ from taking ‘the inconsistent position that the arbitration provision in the contract is unenforceable by or against those individuals’ or entities.” (Id. at pp. 714-715 [quoting Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1288; see also Turtle Ridge Media Group, Inc. v. Pacific Bell Directory (2006) 140 Cal.App.4th 828, 833 [“The rule applies to prevent parties from trifling with their contractual obligations.”].)

“For the doctrine to apply, ‘the claims the plaintiff asserts against the nonsignatory must be dependent upon, or founded in and inextricably intertwined with, the underlying contractual obligations of the agreement containing the arbitration clause.’” (Molecular Analytical Systems, supra, 186 Cal.App.4th 696, 715 [quoting Goldman, supra, 173 Cal.App.4th 209, 217-218].) “ ‘Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable.’ ” (Ibid. [quoting Rowe, supra, 153 Cal.App.4th 1276, 1287].)

Although Plaintiffs argue Oswald and Contractor Manager, Inc. cannot enforce the Agreement based on their nonparty status, they are suing Oswald and Contractor Manager, Inc. for breach of the Agreement on the theory that they violated contractual obligations to disclose material defects in the property. (Complaint, ¶¶ 35-37.)

Plaintiffs are also suing these defendants for breach of the implied covenant of good faith and fair dealing for depriving them of the benefits of the Agreement by “performing defective construction work on the Property, failing to disclose material defects, concealing the true condition of the Property, and misrepresenting that the construction work complied with applicable building codes and permits[.]” (Id. at ¶ 46.) Plaintiffs allege that this “unfairly interfered with Plaintiffs’ rights to receive the benefits of the purchase contract, namely, a Property that met the represented and bargained-for condition and quality.” (Ibid.)

That Oswald and Contractor Manager, Inc. are parties to the Agreement is a prerequisite to their liability on this cause of action. (See Smith v. City and County of San Francisco (1990) 225 Cal.App.3d 38, 49 [“The prerequisite for any action for breach of the implied covenant of good faith and fair dealing is the existence of a contractual relationship between the parties, since the covenant is an implied term in the contract.”].)

Oswald and Contractor Manager, Inc. are thus plainly entitled to compel arbitration of Plaintiffs’ Second and Third Causes of Action notwithstanding that they are not parties to the Agreement.

2. Negligence, fraud, and negligent misrepresentation

The remaining three claims against these defendants are negligence, fraud, and negligent misrepresentation. Here, the Court turns to a different rule enabling parties to litigation to invoke arbitration agreements to which they are not parties: the alter ego exception. In Rowe, supra, 153

Cal.App.4th 1276, 1284-1285, the First District held that a nonsignatory to an arbitration agreement who is sued as the alter ego of a signatory can enforce the arbitration provision. This rule applies only to the specific causes of action for which the plaintiff is proceeding against the nonsignatory defendant on an alter ego theory. (Id. at p. 1286.)

In this case, Plaintiffs allege that Oswald and Contractor Manager, Inc. (in addition to Summit and Foster) are all alter egos of Seller LLC. (Complaint, ¶¶ 8-10.) That characterization pervades the entire complaint, and Plaintiffs appear to be proceeding against the non-Seller LLC defendants on this theory (among others) for purposes of all five causes of action. This appears through global, unqualified statements like the following, which are not made in connection with any particular cause(s) of action:

• “At all relevant times, Seller LLC was not operated as a separate and distinct legal entity from its members, Summit, Contractor Manager, LLC [sic], Foster, and Oswald, but instead functioned as the alter ego of these individuals and entities.” (Complaint, ¶ 8 [emphasis added].)

• “There existed, and continues to exist, a unity of interest and ownership among Seller LLC, Summit, Contractor Manager, LLC [sic], Foster, and Oswald such that the separate personalities of Seller LLC, Summit, and Contractor Manager and its members and managers no longer existed.” (Id. at ¶ 9.)

• “Recognition of Seller LLC, Summit and Contractor Manager as a separate entity from its members and managers and [sic] would sanction a fraud and promote injustice because Seller LLC, Summit and Contractor Manager were formed and used to construct and sell defective property, conceal those defects from Plaintiff, and then shield the individuals and entities responsible for those defects by distributing all assets and dissolving Seller LLC. Plaintiff is therefore entitled to hold Summit, Contractor Manager, LLC [sic], Foster, and Oswald personally liable for the obligations and liabilities of Seller LLC.” (Id. at ¶ 10.)

In light of these allegations, one cannot reasonably interpret the complaint as not advancing its claims against Oswald and Contractor Manager, Inc. for negligence, fraud, and negligent misrepresentation on an alter ego theory.

The Court concludes that Oswald and Contractor Manager, Inc. are entitled to enforce the arbitration agreement as to all five of Plaintiffs’ causes of action notwithstanding the fact that they are not signatories to the agreement.

D. Section 1281.2(c)

Code of Civil Procedure, section 1281.2, subdivision (c) gives a court discretion to refuse to arbitrate a controversy, even where it determines that the parties have in fact agreed to arbitrate, where “[a] party to the agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.”

Here, the court concludes that Plaintiffs and Seller LLC agreed to arbitrate all of the claims Plaintiffs assert in this litigation, and that Oswald and Contractor Manager, Inc. may invoke the arbitration clause as well.

As to whether the court should deny the motion to compel arbitration under Section 1281.2(c) considering Summit’s and Foster’s involvement in the litigation. “‘Section 1281.2(c) addresses the peculiar situation that arises when a controversy also affects claims by or against other parties not bound by the arbitration agreement.’ ” (Rowe, supra, 153 Cal.App.4th 1276, 1290 [quoting Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 393 [emphasis added by Rowe court].) Everything the Court has held about Oswald and Contractor Manager, Inc.’s ability to enforce the arbitration provision as to all five causes of action applies equally to Summit and Foster. They are not “third parties” within the meaning of Section 1281.2(c). (Id. at p. 1290.) Accordingly, Section 1281.2(c) does not apply.

CONCLUSION

The motion is GRANTED as to all three moving defendants and all five of Plaintiffs’ causes of action.

Plaintiffs are alleging a fraudulent scheme perpetrated by all five defendants and are proceeding on alter ego and agency theories. (Complaint, ¶¶ 7, 8-10, 12, 14-15.) Also, Plaintiffs’ claims against Seller LLC are based in part on Summit’s conduct, and therefore necessarily based in part on Foster’s conduct, as entities can only act through the people who control them. (Id. at ¶¶ 5, 8- 10, 13.) The Court finds that Plaintiffs’ claims against the moving defendants are not severable from their claims against Summit and Foster. (See Code Civ. Proc., § 1281.4.) Accordingly, litigation of Plaintiffs’ claims against Summit and Foster is stayed until the arbitration of Plaintiffs’ claims against the moving defendants is complete. (Ibid.)

Parties must comply with Marin County Superior Court Local Rules, Rule 2.10(A), (B), which provides that if a party wants to present oral argument, the party must contact the Court at (415) 444-7046 and all opposing parties by 4:00 p.m. the court day preceding the scheduled hearing. Notice may be by telephone or in person to all other parties that argument is being requested (i.e., it is not necessary to speak with counsel or parties directly.) Unless the Court and all parties have been notified of a request to present oral argument, no oral argument will be permitted except by order of the Court. In the event no party requests oral argument in accordance with Rule 2.10(B), the tentative ruling shall become the order of the court.

IT IS ORDERED that evidentiary hearings shall be in-person in Department L. For routine appearances, the parties may access Department L for video conference via a link on the court website. Kindly turn your camera on when your case is called and make sure the party or lawyer making the appearance is properly identified on the screen.

FURTHER ORDERED that the parties are responsible for ensuring that they have a good connection and that they are available for the hearing while using the virtual remote courtroom. If the connection is inadequate, the Court may proceed with the hearing in the party’s absence. If it is determined that you are driving your car during the hearing, you will be removed from the virtual courtroom. (Yes, this happens).