Kraut v. Quintana CA2/4 ( 2023 )

Filed 12/18/23 Kraut v. Quintana 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NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
JONATHAN KRAUT, B320522
Plaintiff and Respondent, (Los Angeles County
Super. Ct. No. EC068294)
v.
LEVI QUINTANA,
Defendant and Appellant.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Ralph C. Hofer, Judge. Affirmed.
Levi Quintana, in pro. per., for Defendant and Appellant.
Clark Hill, Richard H. Nakamura, Jr., Pamela A. Palmer,
for Plaintiff and Respondent.
Levi Quintana appeals from a judgment confirming an
arbitration award in favor of his former business partner,
Jonathan Kraut, and their former partnership, Secure Net
Protection (SNP). Quintana contends the arbitrator exceeded her
authority by improperly classifying his partnership draws as
loans and creating a loan and promissory agreement that did not
meet legal requirements for a valid written contract. He further
argues that the arbitrator ignored the terms of the partnership
agreement and the statute of frauds. These contentions
fundamentally are challenges to the legal and factual bases for
the arbitrator’s award, which are not reviewable. We therefore
affirm.
FACTUAL AND PROCEDURAL BACKGROUND
I. Original Partnership Agreement
In 2007, Quintana and Kraut formed SNP, a private
security and asset protection firm. The parties agreed that
Quintana would be responsible for “manpower, client contracts,
client accounts, and day-to-day operations,” while Kraut would be
responsible for “administrative and general business functions . .
. beyond the scope of manpower management and customer
service.” Their partnership agreement “recognized that Quintana
is not in a financial position that will offer significant company
funding.” He thus “pledged his contacts, energies, and time to
assist in creating and maintaining” the partnership, while Kraut
provided $100,000 in seed money.1 Kraut also agreed to loan
1 Kraut also previously loaned Quintana money to purchase
a 1999 Ford Explorer, which Quintana largely failed to repay.
Under the partnership agreement, Kraut agreed to waive
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Quintana up to $2,000 per month in “subsistence loans,” “as
necessary for a period not to exceed four (4) months”; it was
“anticipated that Quintana will receive loans directly from [SNP]
on or before the fifth (5th) month of [SNP] operations.”
The partnership agreement provided that the initial
valuation of SNP for purposes of calculating vestment and
reimbursement was the $100,000 furnished by Kraut, which was
to accrue interest at the rate of 0.5 percent per month. It further
provided that Kraut initially would have a 100 percent interest in
the partnership, with vestment “expected to reach an equal fifty-
fifty balance in time” as Quintana became progressively vested in
conjunction with the repayment of Kraut’s loans to SNP. Fifty
percent of SNP’s net profits were to be used to “retire Kraut’s
debt until all debts and loans to Kraut have been repaid,” while
Kraut and Quintana were to evenly divide the remaining 50
percent. Kraut agreed to provide Quintana with a monthly
statement of loans, expenditures, and interest due to Kraut while
any monies remained unpaid. Both parties agreed not to take a
fixed salary until SNP earned net income for three consecutive
months.
The partnership agreement contained a covenant not to
compete. It also contained an arbitration provision, pursuant to
which Kraut and Quintana agreed to use binding arbitration “as
the first means of resolving any alleged dispute, breach,
misconduct, default, or misrepresentation in connection with any
of the provisions hereof.” They further agreed that any arbitral
penalties and interest, and to “accept Quintana’s existing debt in
the amount of twelve (12) months at $257.00 which equals
$3,084.00, as fair resolution which is to be applied to [SNP] as a
loan to Quintana.”
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ruling would be binding, and that “the unsuccessful or non-
prevailing party will be responsible for all arbitration and
attorneys’ fees, court costs, and other costs actually incurred in
such action or proceeding, in addition to any other relief to which
he may be entitled [sic].”
II. New Partnership Agreement
Effective January 1, 2016, Kraut and Quintana brought in
a third partner to SNP, Aldric Horton.2 They prepared a new
partnership agreement that by its terms “supersedes all previous
Agreements, whether written or oral, between the parties.”
Under the new agreement, “monies owed, primarily to Kraut, will
continue to be repaid through company operations.” The
partners agreed to assign a quarterly percentage of SNP’s net
income “towards debt repayment to Kraut at an amount equal to
or greater than 50% of disposable income.” They further agreed
that “all loans, funds, expenditures, and credit applied to [SNP]
by Kraut shall continue to accrual [sic] as a loan from Kraut a
straight line interest benefit to Kraut at a rate of ten percent
(10%) per year.” Monthly disbursements to the partners were to
total $8,000, with Quintana, who worked for SNP full time, to
receive $3,758 per month, and Kraut and Horton, who worked
part time, to respectively receive $1,636 and $2,606 per month.
The new partnership agreement provided that “regarding
issues with more profound than day-to-day and routine
operations be considered, [sic] all partners must agree to take a
new direction or no change in policy will be made at that time.”
It further included first rights of purchase should any partner
wish to divest his ownership, a covenant not to compete for a
2 Horton was not a party to the underlying arbitration or
trial court proceedings and is not a party to this appeal.
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longer period, and, as most relevant here, an arbitration
provision similar to that contained in the original partnership
agreement. The updated arbitration provision stated that
binding arbitration was to be the “final means of resolving any
alleged dispute, breach, misconduct, default, or
misrepresentation in connection with any of the provisions
hereof,” to be used where informal dispute resolution failed. As
under the previous arbitration provision, the “unsuccessful or
non-prevailing party will be responsible for all arbitration and
attorneys’ fees, court costs, and other costs actually incurred in
such action or proceeding, in addition to any other relief to which
he may be entitled [sic].”
III. Memorandum of Understanding
On March 30, 2017, Quintana and SNP signed a three-page
memorandum of understanding (MOU).3 It provided that SNP
had been established “entirely based on [Quintana’s]
commitments” to achieving certain business goals, including
generating 2,500 hours per week of business within the first six
months and 10,000 hours per week within two years; generating
“significant income” from training officers and collecting training
fees; minimizing unnecessary expenses and inefficiencies;
“[o]perating in a more compassionate and respectful way” than
other security firms to attract clients; and generating “significant
profits and growth in order to sell the business in 5-7 years.”
“The reality of the situation,” however, was that few of these
goals were achieved. SNP “never achieved more than 750 hours
3 Quintana maintained during the arbitration that he only
saw the final page of the MOU, which bears his signature. He
claimed he was not presented with the first two pages, which set
forth the “financial obligation” described post.
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per week in business” or more than approximately $100 per year
in income from officer training and “lost an average of $100,000
per year” during its first nine years, including Quintana’s draw.
It also experienced staffing problems, threats of litigation, and
other challenges under Quintana’s oversight of its day-to-day
operations. SNP’s fortunes began to turn after Horton was hired
as an employee in 2015; it “added over $1,000,000 in revenue” in
a single year. Horton “voiced numerous times a need to eliminate
the disruptions and instability created by [Quintana’s] continued
engagement and participation.”
In late 2016, SNP hired a new operations manager, Miguel.
Quintana “continued to meddle, interfere, withhold, and sabotage
the new chain of command with employees, staff, and clients.”
Pursuant to the MOU, Quintana “agree[d] to make personal
adjustments,” including “letting go and completely dissociating
with day-to-day operations which allows Aldric [Horton] and
Miguel to take full responsivity [sic] with security clients, staff,
and activities” and turning his attention to “the creation and
development of new revenue streams, i.e., OSHA inspections,
behavioral assessments, and expanded opportunities for service.”
He also agreed to “eliminate all contact with officers, supervisors,
employees, and staff,” and “disengage fully from Secure Net
activities” except under specified circumstances.
In addition to setting forth the above “realities” and
“remedies,” the MOU required Quintana to place a portion of his
equity in trust “as a means of ensuring these terms are met.” It
further provided that the equity in trust would be forfeited
“[s]hould intentional conduct or activity occur that violates this
commitment on three occasions in 2017.” The MOU also stated
that “[t]he financial obligation resulting from 10 years loans due
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from Levi [Quintana] to Jonathan [Kraut] as of 27 March 2017 is
$827,110 to include $243,882 in draws.”
IV. Complaint
On March 22, 2018, Kraut and SNP (collectively plaintiffs)
filed a verified complaint against Quintana; both partnership
agreements and the MOU were attached as exhibits. Plaintiffs
alleged that from “about April 1, 2007 through December 31,
2017, Kraut loaned to Secure Net Protection and Quintana
$285,246.28 as a draw for living expenses while Secure Net
Protection was being developed to be repaid by Quintana, which
includes an amount of $3,084.00 from a previous, unpaid loan to
Quintana, plus interest of $92,223.13 at 6% annual, for a total
debt Quintana owes Secure Net Protection and Kraut jointly of
$377,469.41.” Plaintiffs further alleged that the full sum
“became due and payable when Quintana withdrew from Secure
Net Protection effective January 1, 2018.” Since his withdrawal,
plaintiffs alleged, Quintana “was actively soliciting existing
customers of Secure Net Protection in violation of the Secure
Partnership Agreement as Amended, his covenant not to
compete, and his fiduciary duties.”
Plaintiffs asserted four causes of action against Quintana,
all of which incorporated all preceding allegations. In the first
cause of action for misappropriation of trade secrets, plaintiffs
alleged that Quintana misappropriated SNP’s customer list,
threatened to establish a competing company, and solicited
customers on the list. Plaintiffs alleged that Kraut initiated
arbitration proceedings against Quintana on or about February
28, 2018, but a hearing could not take place until June 2018 even
if Quintana cooperated and “the American Arbitration
Association reports to Kraut that Quintana is not cooperating.”
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Due to their belief that Quintana would take customers from
SNP “beginning April 1, 2018,” plaintiffs requested a temporary
restraining order and preliminary injunction “to preserve the
status quo pending final resolution of Kraut and Secure Net
Protection’s dispute with Quintana.”
In the second cause of action for breach of the covenant not
to compete, plaintiffs alleged that Quintana breached the
covenant contained in the new partnership agreement by actively
soliciting SNP’s customers after his departure. In the third cause
of action for breach of fiduciary duty, plaintiffs alleged that
Quintana violated his fiduciary duties to Kraut, Horton, and SNP
“by soliciting business for his own account, misappropriating
Secure Net Protection’s trade secrets, and soliciting its employees
for employment by his new entity.” They further alleged that
Quintana’s conduct was wanton, malicious, and undertaken with
the intent to injure plaintiffs. In the fourth cause of action for
common count—money lent, plaintiffs alleged that “[w]ithin the
last four years, Quintana became indebted jointly to Plaintiffs
Secure Net Protection and Kraut for money lent to Defendant
Quintana in the amount of $$285,246.28 [sic], plus interest of
$92,223.13 at 6% annual, for a total debt Quintana owes of
$377,469.41. No part of this obligation has been paid. This
obligation became due and payable on January 1, 2018.”
In their prayer for relief, plaintiffs requested injunctive
relief on the first and second causes of action. For the fourth
cause of action, they requested payment of the $377,469.41
Quintana allegedly owed, plus interest from January 1, 2018.
For all causes of action, they requested at least $1,000,000 in
compensatory damages, $400,000 in punitive damages,
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prejudgment interest, attorney fees and costs, and any other
relief the court deemed proper.
On April 20, 2018, the trial court issued a preliminary
injunction enjoining Quintana from various conduct, including
misappropriating SNP’s property, soliciting its customers, and
using SNP’s name.
V. Arbitration
As previously noted, Kraut initiated arbitration with
Quintana on or about February 28, 2018, prior to filing the
lawsuit. Quintana filed an answering statement on or about
June 7, 2018. In addition to denying and asserting affirmative
defenses to Kraut’s claims and allegations, Quintana asserted
counterclaims against Kraut, Horton, and SNP, “including a
request for compensatory damages of ‘not less than $500,000’ for
numerous alleged torts, including breach of fiduciary duty and
fraud, plus an order requiring Kraut and Horton to buy out his
interest in SNP based on his alleged dissociation from SNP.”
Quintana also sought punitive damages, attorney fees, costs, and
an accounting. Kraut and Quintana both subsequently made
supplemental filings.
The arbitration proceeded to a four-day evidentiary hearing
in February 2020. The arbitrator issued a 50-page written
interim award on May 20, 2020. The interim award by its terms
“fully and finally determines liability and damages with respect
to the submitted claims” and “is in full settlement of all claims
and requests for relief submitted in this arbitration.” The only
issues outstanding were attorney fees and costs. Those issues
were resolved in the final award, issued August 7, 2020, which
fully incorporated the interim award.
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The arbitrator made numerous findings adverse to
Quintana. For instance, she found that “Kraut was the more
credible witness because he (a) rarely ‘forgot’ an important event,
and (b) answered forthrightly and fully even when the truth was
not flattering to him. Quintana, on the other hand, was only
comfortable answering questions on direct exam and had a
convenient lapse of memory when asked about things that were
not favorable to him. Additionally, there were times when
Quintana’s answers to questions drilling down on the particulars
of the underlying transactions and events came off sounding
glib.” The arbitrator further found that “to the extent that Kraut
put any money into the venture, he required that Quintana
agree, as between them as partners, that those monies would be
treated as loans and not capital contributions.” Indeed, she
stated that the evidence was clear “that Kraut would not have
agreed to be Quintana’s partner without Quintana’s agreement
that any monies Kraut advanced would be repaid as loans.” She
also found that “any monies Quintana took out before or beyond
profits were to be treated as loans,” that any payments made to
Quintana “in advance of profits being available for distribution to
partners would be treated as ‘loans from Kraut,’” that both
parties were aware that SNP lost money every year from 2007
through 2015, and that Kraut “personally made sure that all of
SNP’s debts were paid as they came due, and that is the basis for
which he has charged a note payable obligation due him from the
partnership.”
Notably, the arbitrator found that “Quintana does not
dispute that he agreed both orally and in writing that the
monthly stipend he received was a loan obligation to Kraut. The
2007 Agreement says exactly that, and Kraut provided a sample
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of the initial set of checks written to Quintana during 2007 . . . ,
all of which state ‘loan’ in the memo section of the check.” She
also found that “Quintana acknowledged that he did not report
the payments he received as income on his personal tax returns,”
and that SNP’s QuickBooks database “reflected loan payments
made to Quintana over the years.”
The arbitrator ultimately concluded that “[t]he evidence
established that Quintana received loans from both Kraut and
SNP, that he understood and treated them as exactly that, and
that he has no excuse or defense to avoid these obligations.” She
concluded that Quintana owed SNP $3,084.00 and Kraut
$352,193.00. She also ruled that Kraut and SNP were entitled to
$140,605.45 in attorney fees and costs as the prevailing parties.
VI. Petitions to Confirm and Vacate
On December 30, 2020, Kraut and SNP filed a petition to
confirm the arbitration award. The following day, Quintana filed
a form petition to vacate the award. Quintana checked the box
indicating that “the arbitrator exceeded his or her authority, and
the award cannot be fairly corrected.”
The trial court heard the reciprocal petitions on January
15, 2021. The minute order indicates that neither Quintana nor
his counsel was present, but the signed order and judgment filed
the same day indicate that Quintana’s counsel was present. The
trial court concluded that Quintana’s petition to vacate was not
timely filed within 100 days of the award’s service on Quintana,
as required by Code of Civil Procedure section 1288.4 It further
concluded the petition to vacate, “even if it had been timely, does
not submit any evidence affirmatively challenging the award or
4 All further statutory references are to the Code of Civil
Procedure unless otherwise indicated.
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the sufficiency of the evidence supporting confirmation.” The
court thus denied the petition to vacate, granted the petition to
confirm, and entered judgment confirming the arbitration award.
On March 15, 2021, Quintana filed a motion to set aside
the judgment on the ground that he had not been given notice of
the January 15, 2021 hearing. The trial court heard and granted
the motion on June 11, 2021. It ordered Quintana to respond to
the petition to confirm by June 18, 2021, gave Kraut and SNP
leave to reply, and stated that it would “hear the petition to
confirm the arbitration award and the petition to vacate on July
16, 2021.”
In his opposition to the petition to confirm, which he filed
in propria persona, Quintana argued that the arbitrator exceeded
her powers by ignoring evidence, much of which he attached to
the filing. In their reply, Kraut and SNP argued that Quintana’s
petition to vacate should be denied as untimely and because
Quintana “provides nothing to show that [the arbitrator]
exceeded her authority.” They further argued that the arbitration
award should be confirmed.
The court heard the matter on July 16, 2021. It again
concluded that Quintana’s petition to vacate was untimely filed
and lacked merit in any event. It further stated that it had
reviewed the opposition and evidentiary materials Quintana
filed, and “finds that defendant has failed to establish that the
arbitrator exceeded the arbitrator’s authority or that there is any
other ground to vacate or correct the award.” It explained that
each of Quintana’s arguments included “some component of
credibility, the weight of the evidence, and the inferences drawn
from the evidence, which is within the purview and authority of
the arbitrator.” It continued, “The court is not authorized to
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substitute its evaluation of the evidence on these matters for that
of the arbitrator, which is what is being requested here.” The
court concluded that “[s]ince there is no ground to vacate or
correct the award, the petition to confirm the award will be
granted, and the petition to vacate the award will be denied.” It
entered judgment confirming the arbitration award on March 11,
2022. Quintana timely appealed.
DISCUSSION
“Any party to an arbitration in which an award has been
made may petition the court to confirm, correct or vacate the
award.” (§ 1285.) “If a petition or response under this chapter is
duly served and filed, the court shall confirm the award as made,
. . ., unless in accordance with this chapter it corrects the award
and confirms it as corrected, vacates the award or dismisses the
proceeding.” (§ 1286.) After a signed copy of the arbitration
award is served on a party, the party has four years to seek
confirmation of the award but only 100 days to file a petition to
vacate it.5 (§ 1288.)
“The scope of judicial review of arbitration awards is
extremely narrow because of the strong public policy in favor of
arbitration and according finality to arbitration awards.”
(Ahdout v. Hekmatjah (2013) 213 Cal.App.4th 21, 33 (Ahdout).)
Thus, “an arbitrator’s decision is not generally reviewable for
5 Kraut argues that Quintana’s failure to challenge the trial
court’s ruling that his petition to vacate was untimely “alone
compels affirmance.” As Quintana points out, however, the trial
court granted Quintana leave to file an opposition to the petition
to confirm and considered the merits of the arguments raised
therein, namely that the arbitrator exceeded her powers.
We similarly consider whether the ruling was properly confirmed,
not whether the petition to vacate was properly denied.
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errors of fact or law, whether or not such error appears on the
face of the award and causes substantial injustice to the parties.”
(Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 6 (Moncharsh).)
“However, Code of Civil Procedure section 1286.2 provides
limited exceptions to this general rule.” (Ahdout, supra, 213
Cal.App.4th at p. 33.) “The party seeking to vacate an arbitration
award bears the burden of establishing that one of the six
grounds listed in section 1286.2 applies and that the party was
prejudiced by the arbitrator’s error.” (Royal Alliance Associates,
Inc. v. Liebhaber (2016) 2 Cal.App.5th 1092, 1106.)
Quintana relies on section 1286.2, subdivision (a)(4) as the
statutory basis for challenging the award. Subdivision (a)(4)
requires a court to vacate an award when “[t]he arbitrators
exceeded their powers and the award cannot be corrected without
affecting the merits of the decision upon the controversy
submitted.” (§ 1286.2, subd. (a)(4).) “‘[W]hether the arbitrator
exceeded his or her powers…, and thus whether the award should
have been vacated on that basis, is reviewed on appeal de novo.’”
(Ahdout, supra, 213 Cal.App.4th at p. 33.)
An arbitrator generally exceeds his or her powers only
where he or she acts in a manner not authorized by the parties’
contract or by law. This occurs when he or she “acts without
subject matter jurisdiction [citation], decides an issue that was
not submitted to arbitration [citation], arbitrarily remakes the
contract [citation], upholds an illegal contract [citation], issues an
award that violates a well-defined public policy [citation], issues
an award that violates a statutory right [citation], fashions a
remedy that is not rationally related to the contract [citation], or
selects a remedy not authorized by law [citations].” (Jordan v.
California Dept. of Motor Vehicles (2002) 100 Cal.App.4th 431,
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443.) Arbitrators generally do not exceed their powers simply by
reaching an erroneous conclusion on a contested issue of law or
fact, and we may not vacate arbitral awards on the basis of such
error. (Richey v. AutoNation, Inc. (2015) 60 Cal.4th 909, 917.)
Quintana contends the arbitrator exceeded her powers
because she “inexplicably found that the parties had a written
enforceable loan agreement by and between defendant and SNP,
specifically that defendant’s biweekly draws to him were loans
without requiring any elements to establish a written contract as
between the parties.” He continues, “the arbitrator artificially
created a valid and enforceable written loan agreement between
the defendant and SNP without any material terms of a loan,
including the loan amounts, interest rates, repayment terms, or
the names of the parties to the loan.” Quintana asserts that
these acts violated both the common law governing contract
formation and the statute of frauds set forth in Civil Code section
1624.
Although Quintana attempts to conform his challenges to
the limited exceptions under which review is permissible, they
are predicated upon the arbitrator’s allegedly “inexplicable”
findings and her interpretation of the parties’ written
agreements. These are matters outside the scope of our review.
An arbitrator does not exceed her authority by making factual
findings, inexplicable or not, or by interpreting the contract the
parties agreed to have her interpret. (Moncharsh, supra, 3
Cal.4th at p. 6.)
To the extent that Quintana contends the contract was
arbitrarily remade, we are not persuaded. The arbitrator
grounded her ruling in the explicit written language of the
parties’ agreements as well as other evidence presented at the
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hearing. We cannot review these factual and legal conclusions.
To the extent he challenges the remedy fashioned by the
arbitrator, the “critical question with regard to remedies is not
whether the arbitrator has rationally interpreted the parties’
agreement, but whether the remedy chosen is rationally drawn
from the contract as so interpreted.” (Advanced Micro Devices,
Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 377.) The remedies here,
repayment of loans Kraut made to Quintana and SNP and
payment of attorney fees and costs, are plainly connected to the
parties’ agreements as interpreted by the arbitrator. The MOU,
which was connected to the partnership agreements, specifically
provided that “[t]he financial obligation resulting from 10 years
loans due from Levi [Quintana] to Jonathan [Kraut] as of 27
March 2017 is $827,110 to include $243,882 in draws.” The
arbitrator’s award of significantly less than that amount is not
irrational and does not exceed her powers.
Quintana also argues that the arbitrator violated the
statute of frauds “since the alleged oral agreement cannot be
fulfilled or carried out in one year and exceeds the amount of
$100,000.” His reliance on the statue of frauds is unavailing for
at least three reasons. First, “[t]he statute of frauds is treated as
a rule of evidence which, if not properly raised, may be forfeited.”
(Secrest v. Security National Mortgage Loan Trust 2002-2 (2008)
167 Cal.App.4th 544, 551.) Here, nothing in the appellate record,
even as significantly augmented by Kraut, indicates that
Quintana raised the statute of frauds at any point before the
arbitrator or trial court. Second, the arbitrator expressly found
that “Quintana . . . agreed both orally and in writing that the
monthly stipend he received was a loan obligation to Kraut.”
This factual finding is beyond the scope of our review and
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precludes the application of the statute of frauds. Third, even if
the statute of frauds were applicable and preserved, a contract
that does not comply with the statute of frauds is not an illegal
contract. (City of Los Angeles v. City Bank (1893) 100 Cal. 18,
24.) There is thus no basis from which to conclude the arbitrator
exceeded her powers by upholding an illegal contract.
DISPOSITION
The judgment is affirmed. Kraut may recover his costs of
appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
COLLINS, J.
We concur:
CURREY, P.J.
ZUKIN, J.
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