Organic Compounds v. Watkins CA2/4 ( 2014 )

Filed 6/25/14 Organic Compounds v. Watkins CA2/4
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication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 FOUR
ORGANIC COMPOUNDS, INC., B246124
Plaintiff and Appellant; (Los Angeles County
Super. Ct. No. NC052101)
REX WATKINS et al.,
Cross-defendants and Appellants,
v.
JOSEPH FREIRE et al.,
Defendants, Cross-Complainants
and Respondents.
APPEAL from a judgment of the Superior Court for Los Angeles County,
Patrick T. Madden, Judge. Affirmed in part, reversed in part and remanded.
Hassen & Associates, Richard J. Hassen; Ward & Ward and Alexandra S.
Ward for Plaintiff, Cross-defendants and Appellants.
Furman Usher, Richard S. Usher; Alan S. Yockelson for Defendants, Cross-
complainants and Respondents.
Plaintiff and cross-defendant Organic Compounds, Inc. (Organic) and cross-
defendants Rex and Helen Watkins (the Watkins) appeal from a judgment
confirming an arbitration award in favor of defendants and cross-complainants
Strategic Growth Incorporated (Strategic) and Joseph Freire. Organic and the
Watkins contend the trial court erred by (1) failing to determine whether the
contract from which the parties’ disputes arose was enforceable before ordering the
parties to arbitration; (2) ordering arbitration of the cross-claims against the
Watkins without first determining whether they were bound by the contract’s
arbitration clause; and (3) failing to vacate the arbitration awards on the grounds
that the arbitrator exceeded his powers and the rights of Organic and the Watkins
were substantially prejudiced. We conclude the trial court erred by ordering the
Watkins to arbitration, because they were not signatories to the contract at issue in
the claims asserted against them and the court did not find they were bound by the
contract as alter egos of Organic. Accordingly, we reverse the judgment as to the
Watkins. We affirm the judgment as to Organic.
BACKGROUND
A. Relationships Between the Parties
The Watkins are the shareholders, or trustees for the shareholders of
Organic, and owners of the business property used by Organic. Freire is the
president and/or principal of Strategic.
In December 2005, Strategic entered into an “Acquisition Advisory Services
Agreement” (the Services Agreement) with Organic and the Watkins. The
Services Agreement was an exclusive agreement under which Strategic, a private
investment banking advisory services provider, agreed to provide services to assist
in the sale of Organic. Specifically, Strategic agreed to prepare documents and
material necessary to inform prospective buyers of the opportunity, identify,
contact, brief and introduce prospective buyers to Organic and assist Organic in the
successful closure of a sales transaction. Organic agreed to pay Strategic an
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installment fee for three months and a transaction fee on the closing date of any
transaction. The Services Agreement included a “Limitation of Service” clause
stating that the agreement “relates solely to Services described herein,” as well as
an integration clause. It also had an arbitration clause requiring the parties to
submit any claim “relating to this Agreement” to binding arbitration by JAMS in
Los Angeles. The Services Agreement was signed by Rex Watkins, both on behalf
of Organic and as “An individual shareholder or trustee for shareholder of Organic
Compounds, Inc., and owner of the business property used by same.” Helen
Watkins signed the Services Agreement as “An individual shareholder or trustee
for shareholder of Organic Compounds, Inc., and owner of the business property
used by same.” Freire signed as President on behalf of Strategic.
Organics was not sold, and in April 2007, Organic and Strategic entered into
a different contract (the Contract) under which Strategic agreed to provide Freire to
serve as President of Organic, and Organic agreed to pay Strategic $12,000 per
month for those services. The “essential duties and responsibilities” of Strategic
were set forth in an exhibit to the Contract, and Strategic specifically agreed “to
use its best efforts to achieve the revenue and pre-tax profit performance objectives
. . . determined by [Strategic] and approved by the Board of Directors.” The
Contract included an integration clause stating: “This Agreement, together with
the documents and exhibits referred to herein, embodies the entire understanding
among the parties. This Agreement may be modified only by a writing duly
executed by all parties.”1 The Contract also included a mediation and arbitration
clause requiring “[a]ny controversy between the parties arising out of this
Agreement” to be submitted first for mediation and, if no resolution is achieved, to
binding arbitration before JAMS in Orange County. The Contract was signed on
1
The Contract made no reference to the December 2005 Services Agreement.
3
behalf of Organic by Helen Watkins as Vice President; it was signed on behalf of
Strategic by Freire as Principal.
B. Disputes Upon Termination of the Contract
Organic terminated the Contract in February 2008. Strategic contended that
at the time the Contract was terminated, Organic owed it past due fees as well as
other fees related to the termination. In accordance with the arbitration provision
of the Contract, Strategic demanded mediation over the amounts due. The parties
engaged in mediation in September 2008, but no resolution was reached. Strategic
served a demand for arbitration on Organic’s counsel in October 2008; JAMS
opened an arbitration proceeding, but Organic contested JAMS’ jurisdiction and
refused to participate.
In November 2008, Organic filed a lawsuit against Freire and Strategic
alleging causes of action for breach of fiduciary duty, intentional
misrepresentation, conversion of money, accounting, negligence, fraud and deceit,
and rescission. All of the causes of action except the sixth cause of action for fraud
and deceit expressly related to the Contract and/or Freire’s conduct under the
Contract. The sixth cause of action made reference to the Services Agreement, and
alleged that a transaction fee Organic paid to Strategic for a sale of property that
took place while Freire was president of Organic was improper. In the rescission
cause of action, Organic alleged, among other things, that the Contract was
voidable because Strategic entered into the Contract when its corporate powers
were suspended by the Secretary of State. The Watkins were not parties to
Organic’s complaint.
Freire and Strategic filed answers to Organic’s complaint, and filed a cross-
complaint (and a subsequent first amended cross-complaint) against Organic and
the Watkins. All of the causes of action in the cross-complaint were based upon
4
the services performed under the Contract; the cross-complaint alleged that the
Watkins were liable as alter egos of Organic.
1. Motion to Compel Arbitration
A few months after filing the cross-complaint, Freire and Strategic filed a
motion to compel Organic -- and only Organic -- to arbitrate its claims. Freire and
Strategic contended that Organic’s first, second, third, fourth, fifth, and seventh
causes of action were subject to the arbitration clause of the Contract, and that
Organic’s sixth cause of action was subject to the arbitration clause of the Services
Agreement. Freire and Strategic also requested that further proceedings be stayed
pending the final determination of the arbitration.
Organic opposed the motion to compel arbitration. It argued, among other
things, that Strategic did not have the capacity to enter into a contract at the time it
signed the Contract, because the corporation had been suspended by the State of
California. Therefore, Organic argued, the Contract, including its arbitration
provision, was void. In support of its opposition, Organic provided the declaration
of its counsel, who stated that in October 2008, he obtained from the California
Department of Corporations a certified copy of a notice of status for Strategic,
which indicated that Strategic was a suspended corporation, and that it had been
suspended since July 20, 2006. The notice -- which was attached as an exhibit to
Organic’s opposition (as well as to Organic’s complaint) -- states that the Secretary
of State suspended Strategic’s powers, rights and privileges in July 2006 under the
provisions of the Corporations Code, and that the Franchise Tax Board suspended
Strategic’s powers, rights and privileges in December 2007 under the Revenue and
Taxation Code.
In support of its reply to Organic’s opposition, Strategic submitted the
declaration of its counsel, who stated that Strategic was granted a revivor of its
5
corporate status on December 23, 2008. Counsel attached a copy of the Certificate
of Revivor to his declaration.
It appears that the trial court requested supplemental briefing regarding
Freire’s standing to enforce the arbitration provision of the Contract, since Freire
was not a party to the Contract. Along with their supplemental brief, Freire and
Strategic submitted a written ruling by the JAMS arbitrator on JAMS’ jurisdiction
to arbitrate. In that ruling, the arbitrator, retired Judge Luis Cardenas, concluded
that (1) under the Contract, Strategic and Organic clearly intended to resolve all
differences through arbitration; and (2) Organic has the right to be heard on the
validity of the Contract, but that issue must be resolved in arbitration. The
arbitrator noted, however, that he did not have the authority to order a reluctant
party to proceed to arbitration, and therefore he could not proceed to arbitrate the
disputes until the Superior Court ordered Organic to participate.
On July 23, 2009, the trial court issued its ruling on the motion to compel
arbitration. The minute order stated: “The [motion to compel arbitration] is
granted based on the agreements between the parties, together with the finding of
Judge Luis Cardenas, Retired, that ‘the contract and all controversies arising from
the agreement between the parties are subject to the arbitration before JAMS,
Orange County, California.’ [¶] The case is dismissed and the court retains
jurisdiction to (1) enforce the order to arbitrate the dispute, and (2) confirm the
arbitration award.”
2. Arbitration and Award
The arbitration between Strategic and Organic was conducted on December
16, 2009. The arbitrator described the proceedings in the arbitration award issued
February 19, 2010: “Richard Usher, Esq., appeared with his client, Joseph Freire,
on behalf of the claimant Strategic Growth, Inc., a California Corporation; Richard
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Hassen, Esq., represented the respondent but his client selected not to appear and
not to pay its share of the fees. [¶] The arbitrator did allow Mr. Hassen to
participate in the proceedings, including examination of claimant’s witness and
introduction of exhibit ‘A’ (Minutes of a Board of Director’s Meeting dated
February 11, 2008) on behalf of the defense. Organic did not call any witnesses.”
The arbitrator noted that the jurisdictional basis for arbitrating the dispute
was the Contract. The arbitrator also noted that the only witness at the arbitration
was Freire, that he found Freire’s testimony and evidence to be credible, and that
there was nothing introduced to rebut Strategic’s case. The arbitrator therefore
found in favor of Strategic, and awarded it $103,200 (plus interest) for wages and
contractual penalties, $38,357.75 in attorney fees, and $7,900 in costs.
3. Strategic’s Petition to Confirm Arbitration Award and Motion to
Correct Order and Lift Stay
Following issuance of the arbitration award, Strategic filed a petition to
confirm the award against Organic. Strategic also filed a motion to correct what it
believed was a clerical error in the trial court’s order granting Strategic’s motion to
compel arbitration. Strategic noted that the trial court had ordered the case
dismissed when it granted Strategic’s motion to compel Organic to arbitrate. It
argued that the case should have been stayed under section 1281.4 of the Code of
Civil Procedure2 because it had filed a cross-complaint seeking to hold the Watkins
liable as alter egos. It explained that “[a]s those individual[s] did not execute the
original Contract as individuals, they were not subject to the arbitration provision
of the Contract and were not parties to the JAMS arbitration. Thus, the issue of
their alter ego liability for [Organic’s] obligations was not determined in the
2
Further undesignated statutory references are to the Code of Civil Procedure.
7
arbitration. Upon the entry of judgment based on the arbitration award, [Strategic]
seeks to proceed on its alter ego claims in the Cross-Complaint to establish the
[Watkins’] liability for the judgment.”
In opposing Strategic’s motion to correct the trial court’s order, Organic
argued that the asserted error was not clerical, but rather was a judicial error that
could not be corrected because the case was dismissed. Organic also argued that
any claims Strategic had against Organic or the Watkins were encompassed in the
arbitration award, and that Strategic was barred from prosecuting its alter ego
claims against the Watkins. Organic argued: “Although Rex and Helen Watkins
are not individual parties to the Contract containing the arbitration clause,
[Strategic] must and has arbitrated all of its claims against them as called for in the
arbitration agreement of the Contract.”
In its reply to Organic’s opposition, Strategic stated: “The alter ego claims
against [Organic’s] shareholders, Rex and Helen Watkins, were not subject to
arbitration, have not been litigated or arbitrated and became ripe only once
[Strategic] obtained a damage award against [Organic]. . . . [¶] Rex and Helen
Watkins did not execute the Contract individually and thus were not bound by the
arbitration agreement.” Strategic noted that its motion to compel arbitration only
sought to compel Organic to arbitrate, and did not ask that its alter ego claims
against the Watkins be arbitrated because it did not believe there was any
arbitration jurisdiction over them.
At the hearing on Strategic’s motion to correct the prior minute order, the
trial court stated that there was no error: “I did mean to dismiss the case. The
minute order accurately reflects what I intended to do; it wasn’t a clerical error.”
The court explained that it intended by its previous order to send all of the claims
in the case to arbitration. Addressing the claims against the Watkins, the court
stated: “As for the Watkins[], they are . . . not signatories to the 2007 Contract, but
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they were signatories to the earlier contract [i.e., the Services Agreement] which
contains an arbitration provision; and more importantly, all of the claims against
them arose from the April 200[7] Contract as to which they are alleged to be alter
egos.” The court therefore indicated it would order the matter back to arbitration
for the arbitrator “to consider all of the claims of all of the parties.”
The court then asked if anyone wished to be heard. Counsel for Strategic
and Freire questioned the court about ordering the Watkins to arbitrate even though
they were not signatories to the Contract. The court responded that they were
signatories to the Services Agreement. Counsel replied, “Right, but it’s not subject
to the pending arbitration. . . . [¶] Nobody has moved those claims to arbitration.”
The court stated that it was making the order on its own motion, because the
parties all agreed to have binding arbitration. Counsel for Strategic and Freire
noted that the Services Agreement does not allow for arbitration in Orange County,
where the arbitration was held under the Contract. Counsel explained, “They are
separate contracts. They are separate issues. They are totally separate matters.”
Nevertheless, the court ordered that the claims against the Watkins be arbitrated
before retired Judge Cardenas. Counsel for Organic and the Watkins did not make
any comment during this exchange.
4. Organic’s Motion for Clarification of Order
Although the trial court issued its order sending all parties back to arbitration
in April 2010, no action was taken until September 2011, when Strategic filed a
claim with JAMS seeking to arbitrate the alter ego claims against the Watkins.
The parties’ attorneys did not agree on the scope of the issues to be arbitrated
under the trial court’s order, so the matter was submitted to the JAMS National
Arbitration Committee. The Committee issued a ruling stating: “‘JAMS views the
Court’s Minute Order as authorization to proceed with arbitration before Judge
9
Cardenas on the claims for alter ego liability of Rex Watson [sic] and Helen
Watson [sic].’” The attorneys still could not agree to the scope of phase two of the
arbitration, so the arbitrator ordered briefing and oral argument. On January 21,
2012, the arbitrator issued a written ruling, finding that (1) the award in phase one
remained in full force and effect; (2) Strategic may present evidence on its alter
ego theory in phase two; and (3) Organic’s claims were no longer before the
arbitrator and would not be included in phase two.
In April 2012, Organic filed a motion with the trial court, seeking
clarification of the court’s April 2010 order. Organic noted that Strategic filed a
claim for further arbitration with JAMS stating that the court had ordered the
parties to arbitrate all remaining disputes, but Organic contended that the court
ordered the parties to resolve all disputes and claims of all parties. Organic argued
that, under this order, the arbitration must include the claims Organic alleged in its
complaint, because they were not addressed in the original arbitration. Organic
also argued that Strategic should be barred by res judicata from arbitrating its alter
ego theory because it could have been raised in the previous arbitration, but at the
same time Organic argued that the Watkins were not parties to the Contract and
therefore could not be parties to any arbitration.
The second phase of the arbitration was scheduled for May 16, 2012, the day
after Organic’s motion for clarification was scheduled to be heard. Counsel for
Organic contacted JAMS to inform the arbitrator that a motion for clarification had
been filed, and to request a continuance of the arbitration due to the court hearing
and the unavailability of Helen Watkins to appear at the arbitration due to health
issues. The arbitrator denied the request (as well as a subsequent request for a
continuance), finding that Organic and the Watkins had no standing to request a
continuance because they had not yet posted the required arbitration fees.
10
At the hearing on Organic’s motion for clarification, the trial court reviewed
its records and the arbitrator’s award in phase one and the arbitrator’s ruling on the
scope of phase two of the arbitration. The court concluded that the arbitrator
intended by the award in phase one to deny Organic’s claims against Strategic
and/or Freire based upon Organic’s implied waiver of those claims due to its
refusal to pay the arbitration fees. The court also reiterated that it believed the alter
ego claims against the Watkins were arbitrable because there were two agreements
(i.e., the Services Agreement and the Contract), both of which had arbitration
provisions. The court acknowledged that the Watkins were parties only to the
Services Agreement, but reasoned: “Since the parties’ only relationship is
contractual, the two agreements taken together can be read as an accord among all
of the parties to resolve all the disputes that arise from the relationship by way of
arbitration.” The court then clarified its April 2010 order, ordering the parties to
return to the arbitrator to resolve any disputes and/or claims that were not resolved
by the award in phase one, and deferring to the arbitrator to determine what
disputes and/or claims remain to be resolved.
5. Second Arbitration
The second phase of the arbitration was conducted on May 16, 2012.
Organic, the Watkins, and their counsel did not appear for the proceeding.
Strategic put on its evidence regarding the alter ego issue, and the arbitrator took
the matter under submission. The arbitrator issued the final award on July 7, 2012.
The arbitrator found the Watkins were alter egos of Organic and are personally
responsible for payment of all awards and judgment rendered in both phases of the
arbitration, and awarded Strategic $32,240 in attorney fees for phase two of the
arbitration proceedings, as well as reimbursement of $8,824 in JAMS fees, plus
interest on the entire award.
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6. Petition to Confirm Arbitration Award
Strategic filed a petition to confirm the arbitration award. Organic opposed
the petition, and asked the trial court to vacate the award. Organic noted that the
arbitrator refused to continue the second phase of the arbitration even though
Organic submitted evidence that Helen Watkins was unable to travel to the
proceedings due to a medical issue. It argued that the arbitrator’s refusal to
continue, based upon financial reasons (i.e., their lack of standing to request a
continuance because they failed to pay the arbitration fees), prevented Organic and
the Watkins from presenting evidence showing that the Watkins were not alter
egos of Organic.
The trial court confirmed the arbitration awards from both phases and denied
Organic’s motion to vacate the awards. Judgment was entered in favor of Strategic
and Freire, from which Organic and the Watkins timely filed a notice of appeal.
DISCUSSION
A. The Enforceability of the Contract Was an Arbitrable Issue
As noted, in opposing Strategic’s original motion to compel arbitration,
Organic submitted evidence that Strategic’s corporate status had been suspended at
the time it entered into the Contract. Organic argued that Strategic therefore did
not have the capacity to enter into the Contract, and the Contract, with its
arbitration provision, was void. In reply, Strategic argued that its suspension by
the Franchise Tax Board was not effective until December 2007 -- after the
Contract was signed -- and that, in any event, it was granted a certificate of revivor,
making the Contract fully enforceable. On appeal, Organic and the Watkins argue
that the trial court committed reversible error by failing to hold an evidentiary
12
hearing to determine whether the Contract was enforceable before the court
ordered the parties into arbitration. They are mistaken.
The California Supreme Court has instructed that “when a petition to compel
arbitration is filed and accompanied by prima facie evidence of a written
agreement to arbitrate the controversy, the court itself must determine whether the
agreement exists and, if any defense to its enforcement is raised, whether it is
enforceable. Because the existence of the agreement is a statutory prerequisite to
granting the petition, the petitioner bears the burden of proving its existence by a
preponderance of the evidence. If the party opposing the petition raises a defense
to enforcement -- either fraud in the execution voiding the agreement, or a
statutory defense of waiver or revocation [citation] -- that party bears the burden of
producing evidence of, and proving by a preponderance of the evidence, any fact
necessary to the defense. [Citation.]” (Rosenthal v. Great Western Fin. Securities
Corp. (1996) 14 Cal. 4th 394, 413 (Rosenthal).)
In this case, had Organic presented evidence to the trial court indicating that
the Contract was void at its inception, we might find the court erred by not holding
an evidentiary hearing. But Organic’s evidence indicated only that the Contract
was voidable rather than void, because “[a] contract entered into by a suspended
corporation is not void but is merely voidable by the other party.” (Performance
Plastering v. Richmond American Homes of California, Inc. (2007) 153
Cal. App. 4th 659, 669; see also Rev. & Tax. Code, § 23304.1.) “‘Voidable’ means
subject to be avoided by judicial action of a court of adequate jurisdiction.”
(Depner v. Joseph Zukin Blouses (1936) 13 Cal. App. 2d 124, 127.) A voidable
contract, however, remains in full force and effect until there is a judgment
declaring it void. (Id.)
The difference between a void contract and a voidable one is significant in
this case. When a party to a contract that includes an arbitration clause alleges
13
facts supporting a claim that the contract is void, the trial court must conduct an
evidentiary hearing on that claim before the court may send the matter to
arbitration. (Rosenthal, supra, 14 Cal.4th at p. 413.) The reason for this is that if
the contract is void, the parties have not agreed to arbitrate any controversy. (Id. at
p. 416.) But where the party opposing arbitration alleges facts showing that the
contract is voidable, as in this case, no such hearing is required because the
contract -- including the arbitration provision -- remains in full force and effect
until the contract is found to be void.
If the parties to a voidable (but not void) contract agreed that all disputes
arising out of a contract would be resolved in binding arbitration, a dispute
regarding the enforceability of the contract ordinarily is subject to that arbitration
clause because the contract is in full force and effect until it is found (by the
arbitrator) to be void. We say ordinarily because it is possible that this rule might
not apply where a party to the contract seeks rescission of the contract based upon
the suspension of corporate powers of the other party under the Revenue and
Taxation Code. That is because the statutes governing contracts voidable the under
Revenue and Taxation Code provide that a party seeking to exercise its right to
declare a contract to be voidable “may exercise that right only in a lawsuit brought
by either party with respect to the contract in a court of competent jurisdiction.”
(Rev. & Tax. Code, § 23304.5, italics added.) Thus, it appears that only the trial
court, and not the arbitrator, can resolve such a claim.
This statutory provision does not assist Organic in this case, however,
because the evidence it submitted showed that Strategic’s corporate powers were
not suspended under the Revenue and Taxation Code at the time it entered into the
Contract. Instead, the evidence showed that, although Strategic’s corporate powers
were suspended under the Corporations Code beginning in July 2006, its powers
were not suspended under the Revenue and Taxation Code until December 2007,
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several months after it signed the Contract. We have found no statutory provision
(and Organic has cited to none) requiring a party seeking to exercise its right to
declare a contract voidable under the Corporations Code to exercise that right only
in a lawsuit brought in a court of competent jurisdiction. Therefore, we conclude
that the issue of enforceability of the Contract is subject to arbitration, as in most
cases involving voidable contracts. Thus, the trial court did not err in granting
Strategic’s motion and ordering Organic to arbitration.
B. The Trial Court Erred by Ordering the Watkins to Arbitration Without First
Determining Whether They Were Alter Egos of Organic
The claims Strategic and Freire asserted in their cross-complaint against the
Watkins (who were not parties to the complaint) all were based upon the Contract.
The Watkins did not sign the Contract in their individual capacity; Strategic sought
to hold them liable as alter egos of Organic. Recognizing that the Watkins were
not parties to the arbitration provision of the Contract, Strategic’s motion to
compel arbitration was directed only at Organic, and the subsequent arbitration
involved only Organic. On its own motion, however, the trial court ordered the
Watkins to arbitration because they were signatories to the earlier Services
Agreement, which also had an arbitration provision.
On appeal, Organic and the Watkins contend the trial court committed
reversible error by ordering the claims against the Watkins to arbitration without
conducting an evidentiary hearing to determine whether the Watkins were bound
by the contract as alter egos of Organic. We agree.
“The right to arbitration depends on a contract. [Citation.] Accordingly, a
party can be compelled to submit a dispute to arbitration only where he has agreed
in writing to do so. [Citation.] While arbitration is a favored method of resolving
disputes, the policy favoring arbitration cannot displace the necessity for an
15
agreement to arbitrate [citation] and does not extend to those who are not parties to
such an agreement. [Citation.] Whether or not an arbitration agreement is
operative against a person who has not signed it involves a question of ‘substantive
arbitrability’ which is to be determined by the court. [Citation.]” (Boys Club of
San Fernando Valley, Inc. v. Fidelity & Deposit Co. (1992) 6 Cal. App. 4th 1266,
1271; accord, Suh v. Superior Court (2010) 181 Cal. App. 4th 1504, 1512.)
Strategic and Freire argue the trial court properly relied on the arbitration
provision in the Services Agreement as support for its order compelling arbitration
of their cross-claims against the Watkins.3 In making this argument, they rely
upon cases that hold that “signatories must arbitrate all claims that ‘“have their
roots in the relationship between the parties which was created by the contract.”’”
(Citing Izzi v. Mesquite Country Club (1986) 186 Cal. App. 3d 1309, 1315-1316;
Berman v. Dean Witter & Co., Inc. (1975) 44 Cal. App. 3d 999, 1003; Merrick v.
Writers Guild of America, West, Inc. (1982) 130 Cal. App. 3d 212, 219.) They
argue that “[c]laims are rooted in the relationship formed by the contract as long as
they are not ‘wholly independent’ of the agreement.” (Citing Buckhorn v. St. Jude
Heritage Medical Group (2004) 121 Cal. App. 4th 1401, 1408.)
Their argument fails because the claims at issue here are wholly independent
of the only agreement to which the Watkins are signatories, i.e., the Services
Agreement. The Services Agreement related to Strategic providing services to sell
Organic. The Contract related to Strategic providing Freire’s services to run
Organic. Each contract had an integration clause and neither made reference to the
other. In fact, the Services Agreement expressly stated that it “relates solely to
Services described herein.” All of the causes of action alleged in Strategic’s cross-
3
This argument is, of course, directly contrary to the position they took in the trial
court.
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complaint seek to recover money allegedly owed to Strategic and/or Freire for
services provided in running Organic. Those causes of action are rooted in the
relationship formed by the Contract, and have nothing to do with the relationship
formed by the Services Agreement. Thus, the Watkins could not be compelled to
arbitrate based upon the arbitration provision in the Services Agreement.4
Although the trial court could have compelled the Watkins to arbitrate had it
first conducted an evidentiary hearing and found they were alter egos of Organic
(see, e.g., Southern Cal. Pipe Trades Dist. Council No. 16 v. Merritt (1981) 126
Cal. App. 3d 530, 536), it did not do so, and therefore the judgment must be
reversed to the extent it confirms the arbitration award for phase two of the
arbitration. A question remains regarding the proper procedure on remand to the
trial court. Strategic and Freire argue that on remand, the portion of the judgment
confirming the arbitration award against Organic for phase one should remain
intact, and the trial court should decide whether the judgment should be amended
to add the Watkins as additional judgment debtors on an alter ego theory. We
agree.
“Judgments may be amended to add additional judgment debtors on the
ground that a person or entity is the alter ego of the original judgment debtor.
[Citations.] ‘Amendment of a judgment to add an alter ego “is an equitable
4
We are not persuaded by Strategic and Freire’s argument that the Watkins
forfeited this issue. While they are correct that the Watkins did not make an appearance
to contest the trial court’s order below, Organic did, and specifically argued that the
Watkins could not be compelled to arbitrate because they did not sign the Contract. The
fact that Helen Watkins “participated in pre-arbitration proceedings” does not constitute a
waiver of her right to contest the order compelling her to arbitrate, because her
participation, if any, came after the trial court ordered her to arbitration. (Warner Constr.
Corp. v. City of Los Angeles (1970) 2 Cal. 3d 285, 299-300, fn. 17 [party’s acquiescence
in order made over party’s objection does not waive party’s right to challenge order on
appeal].)
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procedure based on the theory that the court is not amending the judgment to add a
new defendant but is merely inserting the correct name of the real defendant. . . .
‘Such a procedure is an appropriate and complete method by which to bind new
. . . defendants where it can be demonstrated that in their capacity as alter ego of
the corporation they in fact had control of the previous litigation, and thus were
virtually represented in the lawsuit.’ . . .”’ [Citation.]” (Hall, Goodhue, Haisley &
Barker, Inc. v. Marconi Conf. Center Bd. (1996) 41 Cal. App. 4th 1551, 1555
[involving a motion to add an alter ego as additional judgment debtor to judgment
confirming an arbitration award]; see also Misik v. D’Arco (2011) 197 Cal. App. 4th
1065, 1072-1075.)
Accordingly, we direct the trial court on remand to hold an evidentiary
hearing and determine whether the judgment confirming the arbitration award for
the first phase of the arbitration may be amended to add the Watkins as additional
judgment debtors. In doing so, we emphasize that, to hold the Watkins liable for
the judgment against Organic, Strategic and Freire must show not only that the
Watkins were alter egos of Organic, but also that they had control of the first
arbitration in their capacity as alter egos of Organic. (See Minton v. Cavaney
(1961) 56 Cal. 2d 576, 581.)
C. There Were No Grounds For Vacating the Award as to Organic
Organic and the Watkins contend the trial court erred by denying their
motion to vacate the arbitration awards on the grounds that (1) the arbitrator
refused to grant their request for a continuance of the phase two arbitration
proceeding, and (2) the arbitrator conducted both phases of the arbitration without
allowing Organic or the Watkins to present any evidence. We need not address the
first ground in light of our conclusion that the judgment must be reversed to the
18
extent it confirmed the arbitration award for phase two of the arbitration. As to the
second ground, we find no error.
Section 1282.2 provides in relevant part: “Unless the arbitration agreement
otherwise provides . . . [¶] The parties to the arbitration are entitled to be heard, to
present evidence and to cross-examine witnesses appearing at the hearing, but rules
of evidence and rules of judicial procedure need not be observed.” (§ 1282, subd.
(d), italics added.) Under section 1286.2, the trial court must vacate an arbitration
award “if the court determines any of the following: [¶] . . . [¶] (4) The
arbitrators exceeded their powers and the award cannot be corrected without
affecting the merits of the decision upon the controversy submitted. [¶] (5) The
rights of the party were substantially prejudiced by . . . the refusal of the arbitrators
to hear evidence material to the controversy.”
Organic argues the trial court was required to vacate the arbitration award
under these provisions because “it is indisputable that the arbitrator refused to
allow Organic to be heard or to present evidence during the first arbitration hearing
simply because Organic had not paid its arbitration fees.” Organic’s argument fails
for two reasons.
First, Organic’s statement is not entirely accurate. As the arbitrator stated in
his ruling on the scope of the second phase of the arbitration proceedings, “the
arbitrator allowed Mr. Hassen [Organic’s attorney] to participate in the
proceedings [in phase one], where he examined witnesses and introduced exhibits.
However, he was not permitted to present evidence on the cross-action filed by
[Organic].” In other words, Organic was not precluded from presenting evidence
in defense of Strategic’s claims; it simply was not allowed to present evidence in
support of its own claims for affirmative relief in light of its failure to perform its
obligation under the arbitration agreement to pay its share of the arbitration fees.
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Second, Organic failed to meet its burden to show it suffered substantial
prejudice as a result of the arbitrator’s ruling. Under the express language of
section 1286.2, subdivision (a)(5), the trial court must vacate an arbitration award
only when it determines that “[t]he rights of the party were substantially prejudiced
by . . . the refusal of the arbitrators to hear evidence material to the controversy.”
Thus, a party seeking to vacate an arbitration award “must show substantial
prejudice . . . even though the protested irregularity involves some violation of an
applicable statute.” (United Brotherhood of Carpenters etc., Local 642 v. DeMello
(1972) 22 Cal. App. 3d 838, 840.) Prejudice is not shown by simply pointing to the
irregularity. Instead, to establish substantial prejudice from a refusal to hear
evidence, the party seeking to vacate the award must make a showing that the
arbitrator prevented the party from presenting a potentially meritorious argument
or defense. (Pacific Vegetable Oil Corp. v. C.S.T., Ltd. (1946) 29 Cal. 2d 228, 240-
241.) The refusal to hear evidence is substantially prejudicial only if “the
arbitrator might well have made a different award had the evidence been allowed.”
(Hall v. Superior Court (1993) 18 Cal. App. 4th 427, 439.)
In this case, Organic made no attempt -- in this court or in the trial court -- to
show it had a potentially meritorious defense to Strategic’s claims, and instead
relied solely on its (not entirely accurate) assertion that it was precluded from
presenting evidence in the arbitration.5 In other words, Organic failed to show its
5
Organic’s assertion in its appellants’ reply brief that it was not required to make an
offer of proof in the arbitration to preserve its argument that the arbitration award must be
vacated misses the point. The issue is whether Organic made an adequate showing in the
trial court that the evidence it was precluded from presenting in the arbitration raised a
meritorious defense. Without such a showing, the trial court had no ground to vacate the
award under section 1286.2, subdivision (a)(5).
*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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rights were substantially prejudiced by the arbitrator’s ruling. Therefore, the trial
court did not err by denying Organic’s request to vacate the first arbitration award.
DISPOSITION
The judgment is reversed to the extent it confirmed the arbitration
award for phase two of the arbitration, and affirmed in all other respects. On
remand, the trial court shall conduct an evidentiary hearing to determine whether
the judgment should be amended to add the Watkins as additional judgment
debtors. The parties shall bear their own costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
WILLHITE, J.
We concur:
EPSTEIN, P. J. EDMON, J.*
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