Goldberg v. The Coggins Co. CA2/2 ( 2013 )

Filed 9/4/13 Goldberg v. The Coggins Co. CA2/2
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
STEPHEN GOLDBERG et al., B245236
Plaintiffs and Respondents, (Los Angeles County
Super. Ct. No. BC477765)
v.
THE COGGINS COMPANY et al.,
Defendants and Appellants.
APPEAL from an order of the Superior Court of Los Angeles County. Mary H.
Strobel, Judge. Affirmed.
Gartenberg Gelfand Hayton & Selden, Edward Gartenberg and Jason Bluver for
Defendants and Appellants.
Christman, Kelley and Clarke, Matthew M. Clarke and Dugan P. Kelley for
Plaintiffs and Respondents.
Defendants and appellants Sanford Coggins (Coggins) and The Coggins Company
(Coggins Company) (collectively, defendants) appeal from an order denying their
petition to compel arbitration of claims brought against them by plaintiffs and
respondents Stephen Goldberg (Goldberg) and Victoria Pynchon (collectively, plaintiffs).
Because plaintiffs‟ claims do not come within the scope of the parties‟ agreement to
arbitrate, we affirm the order denying the petition.
FACTUAL BACKGROUND
The parties and the investment services agreement
Coggins Company is a financial advisory firm, and Coggins is its president.
Plaintiffs are a married couple who engaged defendants as their investment advisors. On
January 24, 2008, plaintiffs signed an “Engagement of Investment Advisory Services”
agreement (the investment services agreement), in which defendants agreed to provide
fee-based investment services. The investment services to be provided by defendants
included defining plaintiffs‟ major life goals, analyzing asset allocation, reviewing and
selecting investment products, and managing and monitoring plaintiffs‟ portfolio. The
investment services agreement contains no provision for arbitration of disputes.
In February 2008, plaintiffs informed defendants that Goldberg was ending a long-
term employment relationship and that he would be receiving approximately $1.1 million
from a pension plan maintained by his soon to be former employer. Defendants created a
rollover IRA account at Charles Schwab and Company for Goldberg‟s benefit (Schwab
IRA account) in which the pension plan funds could be deposited.
The first Wildomar investment
In March 2008, Coggins recommended that plaintiffs invest in an offering
involving certain real property in Riverside County, California. The property, called
Wildomar Square (Wildomar), was to be developed into a retail shopping center.
Defendants did not disclose to plaintiffs that defendants also had an interest in Wildomar
that might constitute a conflict of interest. Based on defendants‟ recommendations,
plaintiffs agreed to invest $300,000 in Wildomar. Coggins thereafter sent plaintiffs a
private placement memorandum that described the Wildomar investment, which
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consisted of membership interests in Wildomar Investors, LLC, a California limited
liability company that owned a 50 percent interest in Wildomar Square Partners, LLC, a
company formed for the purpose of acquiring approximately five acres of land in an
unincorporated area of Riverside County. Plaintiffs signed an amended form of the
Wildomar private placement memorandum dated June 12, 2008, thereby authorizing
defendants to purchase on their behalf a $300,000 interest in Wildomar (Interest No. 1),
using funds from a joint living trust account plaintiffs had established at Charles Schwab
and Company. The joint living trust account was separate and distinct from the Schwab
IRA account established for Goldberg.
On June 20, 2008, approximately $1.3 million was transferred from Goldberg‟s
prior pension fund to his Schwab IRA account. On June 30, 2008, plaintiffs transferred
$100,000 from the Schwab IRA account to their joint living trust account and wire
transferred $300,000 from their joint living trust account to purchase Interest No. 1.
The second Wildomar investment
Within a few days after plaintiffs authorized the purchase of Interest No. 1,
defendants advised plaintiffs that there were tax advantages to owning their $300,000
interest in Wildomar in a retirement account rather than through their joint living trust
account. Defendants had not raised this issue before plaintiffs had authorized the
purchase of Interest No. 1 using funds from their joint living trust account. Coggins told
plaintiffs that defendants would either sell Interest No. 1 to a third party or simply roll
Interest No. 1 into a second transaction that would enable plaintiffs to hold that interest in
a retirement account. Coggins assured plaintiffs that they would own only a single
$300,000 interest in Wildomar, and not two such interests.
Defendants represented to plaintiffs that Goldberg‟s Schwab IRA account could
not own real estate assets. They recommended that a second retirement account be
established for Goldberg with a custodian that could hold real estate assets. With
plaintiffs‟ approval, defendants opened a second retirement account for Goldberg at
Pensco Trust Company (the Pensco account). Defendants then recommended that
plaintiffs transfer $300,000 from Goldberg‟s Schwab IRA account to the Pensco account
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in order to purchase a second $300,000 interest in Wildomar (Interest No. 2) as a
substitute for Interest No. 1. Defendants assured plaintiffs that Interest No. 2 would be a
substitute for Interest No. 1 and not an additional interest in Wildomar. Plaintiffs never
agreed to a $600,000 investment in Wildomar.
On July 8, 2008, upon receiving the Schwab statement for their joint living trust
account, plaintiffs learned that funds from that account had been used to purchase Interest
No. 1. Plaintiffs emailed Coggins asking whether Interest No. 1 would be held by their
joint living trust account or within a retirement account as defendants had recommended.
On July 29, 2008, Goldberg checked the balance in his Schwab IRA account and
discovered that defendants had transferred $301,000 from that account to some other
account or location. The Schwab online statement did not indicate where those funds had
been sent.
Goldberg emailed defendants on July 30, 2008, and asked for an explanation of
the activity shown on the online statement for his Schwab IRA account and whether the
$301,000 fund transfer had anything to do with Wildomar. Mickey Payne, Coggins‟s
director of operations, informed plaintiffs that $300,000 had been transferred from the
Schwab IRA account to the Pensco account to purchase the Wildomar interest. Goldberg
responded to Payne by stating that he was confused by the Wildomar investment and the
additional proposed purchase, noting that “it seems that we have paid twice for this
investment.” Coggins responded on August 1, 2008, by assuring plaintiffs that they “did
not pay double for Wildomar.”
On August 28, 2008, defendants caused Pensco to purchase Interest No. 2 for the
benefit of Goldberg‟s Pensco account, bringing their total investment in Wildomar to
$600,000. On September 8, 2008, Coggins sent an email to “Wildomar Investors” asking
them to sign an escrow amendment extending the Wildomar offering to September 18,
2008. The email indicated that plaintiffs were to sign the escrow agreement twice.
Goldberg responded to Coggins‟ email on September 9, 2008, asking whether the
$300,000 that had been used to purchase Interest No. 1 had been refunded to plaintiffs‟
joint living trust account and why they were required to sign the escrow amendment
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twice if they owned only one interest in Wildomar. Goldberg reiterated plaintiffs‟
understanding that they should have only a single $300,000 investment in Wildomar.
Coggins responded on September 8 or 9, 2008, by explaining that he needed to
purchase Interest No. 2 in Goldberg‟s Pensco account and that the transaction was merely
an “accounting function.” Based on Goldberg‟s representations and actions, plaintiffs
believed that defendants had either already sold Interest No. 1 to another purchaser or
transferred that interest into Goldberg‟s Pensco account.
On September 29, 2008, plaintiffs wrote Coggins, asking whether they still owned
Interest No. 1 and Interest No. 2 or just a single interest in Wildomar. On September 30,
2008, Payne, not Coggins, informed plaintiffs that they owned two interests in Wildomar
for a total of $600,000 and suggested that they speak with Coggins regarding the
“logistics” of that investment. The Wildomar investment subsequently failed, and
plaintiffs lost $600,000.
The Wildomar operating agreements
In connection with the Wildomar offering, plaintiffs executed an operating
agreement for Wildomar Investors, LLC (the LLC). The operating agreement governs
management and control of the LLC; allocation of profits, losses, and distributions; and
the transfer and assignment of interests, among other things. It also contains an
arbitration provision that provides in relevant part:
“[A]ny controversy or dispute arising out of this Agreement, the
interpretation of any of the provisions hereof, or the action or inaction of
any Member or Manager hereunder shall be submitted to arbitration in Los
Angeles, California before a retired Superior Court or Court of Appeal
judge selected by the American Arbitration Association („AAA‟) under the
commercial arbitration rules then obtaining of the AAA. . . . No action at
law or in equity based upon any claim arising out of or related to this
Agreement shall be instituted in any court by any Member or Manager
except (a) an action to compel arbitration pursuant to this Section 14.11 or
(b) an action to enforce an award obtained in an arbitration proceeding in
accordance with this Section 14.11.”
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The instant lawsuit and defendants’ petition to compel arbitration
Plaintiffs filed the instant action on January 25, 2012, asserting claims for breach
of oral and written contract, breach of the covenant of good faith and fair dealing,
professional negligence, breach of loyalty and fiduciary duty, concealment and
constructive fraud, intentional and negligent misrepresentation, violation of Corporations
Code sections 25400 and 25401, unfair competition, and rescission.
Defendants filed a petition to compel arbitration based on the arbitration clause
contained in the Wildomar operating agreement.1 The trial court denied the petition on
the ground that plaintiffs‟ claims regarding defendants‟ allegedly deceptive investment
actions arose out of the investment services agreement, and not the Wildomar operating
agreement. The trial court found that because plaintiffs‟ claims did not arise out of the
Wildomar operating agreement, they were outside the scope of the arbitration provision
in that agreement. Defendants appeal the denial of their petition to compel arbitration.
DISCUSSION
I. Applicable law and standard of review
Before a party may be compelled to arbitrate a claim, the petitioning party has the
burden of proving both the existence of a valid arbitration agreement and that the dispute
is covered by the agreement. (Engalla v. Permanente Medical Group, Inc. (1997) 15
Cal.4th 951, 972.) The question before us is whether the dispute as described in
plaintiffs‟ complaint is covered by the Wildomar operating agreement‟s arbitration
clause. We review that question de novo. (See EFund Capital Partners v. Pless (2007)
150 Cal.App.4th 1311, 1320 (EFund).)
1 Defendants also filed a previous petition to arbitrate based on arbitration clauses in
the parties‟ subscription agreements, which the trial court denied on the ground that
defendants were not parties to those agreements. Defendants have not appealed the
denial of their previous petition to arbitrate.
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II. The instant dispute is not within the scope of the Wildomar operating
agreement’s arbitration clause
The arbitration provision in the Wildomar operating agreement states that “any
controversy or dispute arising out of this Agreement, the interpretation of any of the
provisions hereof, or the action or inaction of any Member or Manager hereunder shall be
submitted to arbitration . . . .” Defendants argue that the instant dispute comes within the
scope of the arbitration provision because the gravamen of plaintiffs‟ claims is that they
would not have invested in Wildomar but for defendants‟ allegedly inaccurate
representations.
The Wildomar operating agreement concerns the formation of an LLC to acquire
an ownership interest in land to be developed, management of the LLC, and allocation of
profits, losses, and distributions associated with the development. Plaintiffs‟ claims
against defendants for breach of contract, professional negligence, breach of fiduciary
duty, fraud, misrepresentation, and other alleged misdeeds do not arise out of the LLC or
the conduct of the LLC‟s manager or any of its members. Rather, they are premised on
defendants‟ acts and omissions as plaintiffs‟ investment advisors and breaches of duties
and obligations owed to plaintiffs under the investment services agreement.
In their causes of action for breach of contract, plaintiffs specifically allege that
defendants breached the investment services agreement by advising them to invest in a
high risk venture, by purchasing two $300,000 interests in Wildomar even though
plaintiffs never intended to purchase more than a single interest, and by failing to
communicate with plaintiffs regarding the status of their investments and the terms and
conditions of the Wildomar investment. In their breach of fiduciary duty, professional
negligence, and fraud causes of action, plaintiffs allege that defendants breached duties
and standards of care owed to them as plaintiffs‟ financial advisors by failing to disclose
that defendants themselves owned a 15 percent interest in Wildomar and by misleading
plaintiffs into purchasing two $300,000 interests in Wildomar when plaintiffs intended to
purchase only a single interest.
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Plaintiffs‟ complaint contains no allegations of mismanagement or fraud by the
Wildomar LLC or its manager, or of any breaches of the Wildomar operating agreement.
None of plaintiffs‟ claims arise out of the Wildomar operating agreement or the
interpretation of any of its provisions. Plaintiffs‟ complaint seeks to vindicate rights
created by the investment services agreement, not the Wildomar operating agreement.
Because the Wildomar operating agreement does not form the basis of plaintiffs‟
complaint, the arbitration provision contained within that agreement does not cover this
action. (Marsch v. Williams (1994) 23 Cal.App.4th 250, 257 (Marsch).)
The circumstances presented here are similar to those in Marsch. In that case, the
parties had entered into separate partnership agreements concerning two different real
estate projects in La Jolla and in Rancho Santa Fe, California. The Rancho Santa Fe
agreement contained an arbitration clause, whereas the La Jolla agreement did not.
(Marsch, supra, 23 Cal.App.4th at p. 252.) The plaintiff in Marsch filed two separate
actions, the first seeking damages for breach of contract, breach of fiduciary duty, fraud,
and other tortious acts based upon the defendant‟s conduct in the Rancho Santa Fe
partnership, and a second subsequent action seeking damages for the same causes action
based on the defendant‟s conduct in the La Jolla partnerships. The defendant
successfully petitioned to compel arbitration of the Rancho Santa Fe action, but not the
La Jolla action.
In denying the petition to compel arbitration of the La Jolla action, the court in
Marsch rejected the defendant‟s arguments that the arbitration clause contained in the
Rancho Santa Fe agreement, which required arbitration of “any controversy . . . arising
out of or relating to the contract . . .” was “sufficiently broad to include tort, as well as
contractual liabilities so long as the tort claims „have their roots in the relationship
between the parties created by the contract‟” (Marsch, supra, 23 Cal.App.4th at p. 255,
italics omitted), and that the La Jolla claims were rooted in the relationship created by the
Rancho Santa Fe agreement because the plaintiff alleged that the defendant‟s conduct in
the Rancho Santa Fe partnership undermined operation of the La Jolla project. (Id. at pp.
255-256.) The court in Marsch noted that the La Jolla and Rancho Santa Fe agreements
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“were not closely connected in purpose, did not incorporate one another‟s terms, were not
executed at the same time” and that breach of one of the agreements did not necessarily
lead to breach of the other. (Id. at p. 256.) The court concluded that because the parties
had created “separate contractual relationships, which involve separate enterprises and
most importantly separate commercial risks, an arbitration clause which governs one
contractual relationship cannot be imposed in the other relationship without undermining
the parties‟ reasonable expectations.” (Ibid.)
The same is true in the instant case. The investment services agreement and the
Wildomar operating agreement involved separate enterprises, separate risks, and separate
contractual relationships. Because plaintiffs‟ complaint seeks redress only under the
investment services agreement, the arbitration provision in the Wildomar operating
agreement does not apply.
EFund on which defendants rely as support for their position, is inapposite. The
court in EFund addressed the scope of an arbitration clause contained within a contract
that formed the basis of the plaintiff‟s complaint. The plaintiff in EFund entered into an
agreement with RAP Technologies regarding acquisition of an equity interest in RAP.
The plaintiff later sued RAP‟s officers for fraud, alleging they had engaged in self-
dealing. In finding that the claims were subject to arbitration, the court in EFund held
that the broadly worded arbitration clause, requiring arbitration of “[a]ny dispute or other
disagreement arising from or out of this Consulting Agreement” encompassed not only
contract claims, but also “tort claims having their roots in the contractual relationship.”
(EFund, supra, 150 Cal.App.4th at pp. 1322, 1323.) The court reasoned that the parties‟
agreement “established and governed plaintiff‟s relationship with RAP Technologies”
and was the basis for the parties‟ contractual obligations to one another. (Id. at p. 1325.)
This is not the case here. Unlike EFund, the parties here entered into separate
agreements that establish separate contractual relationships that govern separate
enterprises and impose separate and distinct contractual obligations. The Wildomar
operating agreement does not govern defendants‟ duties and obligations as plaintiffs‟
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investment advisors and is not the subject of plaintiffs‟ claims in this case. The
arbitration clause contained in that agreement does not govern this dispute.
DISPOSITION
The order denying the petition to compel arbitration is affirmed. Plaintiffs are
awarded their costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
___________________________, J.
CHAVEZ
We concur:
___________________________, P. J.
BOREN
___________________________, J.*
FERNS
________________________________________________________________________
* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.
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