Sirott v. East Bay Medical Oncology CA1/2

Filed 1/28/22 Sirott v. East Bay Medical Oncology CA1/2
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not
been certified for publication or ordered published for purposes of rule 8.1115.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
FIRST APPELLATE DISTRICT
DIVISION TWO
MATTHEW SIROTT et al.,
Plaintiffs and Appellants,
A161353; A161555
v.
EAST BAY MEDICAL (Alameda County
ONCOLOGY et al., Super. Ct. No.
RG20064527)
Defendants and Respondents.
Appellants were claimants and counter-respondents in an arbitration
held before three experienced arbitrators. Following five days of hearing, the
arbitrators issued a final award, which award incorporated a comprehensive
46-page decision finding for appellants on two of their claims, but awarded
less than they sought; the decision also found against appellants on a
counter-claim. Appellants filed a petition to correct the award that was
denied by the superior court in an 11-page order.
Appellants assert essentially the same three arguments rejected below,
arguing that the award must be corrected in three specific ways.
We conclude that none of the arguments has merit, and we affirm.
1
BACKGROUND
The Parties, the Participants, and the General Setting
This appeal is by Matthew Sirott, M.D. and Robert Robles, M.D.,
derivatively on behalf of California Radiation Treatment Center, LLC
(CRTC), (when referred to collectively, appellants). CRTC is a limited
liability company that was founded in 2008 for the purpose of acquiring and
operating radiation therapy equipment for lease to medical groups practicing
medical and radiation oncology. It has an operating agreement that expires
in 2028. CRTC has three members: Sirott, who owns 25 percent; Robles,
who owns 25 percent;1 and East Bay Medical Oncology-Hematology Medical
Associates, Inc. (usually Epic), which owns 50 percent. Sirott and Robles are
also associated with a medical group known as Diablo Valley Oncology and
Hematology Medical Group, Inc. (DVO). The managers of CRTC are Sirott
and Bimal Patel, M.D., the latter of whom is President and CEO of Epic.
CRTC leases a portion of the building at 400 Taylor Boulevard,
Pleasant Hill. The building is owned by 400 Taylor Holdings, LLC, which in
turn is owned by Sirott (25 percent), Robles (25 percent), and EBO Properties
North, LLC (50 percent). The managers of 400 Taylor Holdings, LLC are
Patel and Sirott. Patel is also the manager of EBO Properties North, LLC.
CRTC owns radiation therapy equipment, specifically two Elekta
Synergy linear accelerators (Linacs) that are installed in concrete vaults in
the building at 400 Taylor Boulevard. The Epic physicians and the DVO
physicians both use the CRTC facilities in treating their respective patients,
subleasing the facilities for such use. Epic and DVO doctors bill and collect
1For consistency with most of the proceedings below, and briefing here,
we refer to the participants, many of whom are physicians, by their last
name.
2
their fees from their patients/insurers; and from what they collect, a portion
is paid to CRTC for the sublease use of the personnel services, space, and
equipment owned by CRTC.
In 2014, trouble began to brew after DVO hired a physician, Dr.
Karamlou, who had previously been with Epic. According to Patel, this
caused a “lack of trust” between DVO and Epic. Sometime in 2015, Patel, in
conjunction with other Epic doctors (and third parties), began exploring the
potential for acquiring a CyberKnife machine, a fact he disclosed to Sirott in
about December 2016.
At a subsequent CRTC meeting, Sirott told Patel his plan to acquire a
CyberKnife was a business opportunity of CRTC that should be pursued by
it. Patel declined because he wanted to dissolve CRTC and cease investing in
it.
In January 2017, Patel and others formed the CyberKnife Center, LLC
(the Center) to operate a CyberKnife radiation treatment machine. The
Center leases a building with the CyberKnife equipment at 3003 Oak Street,
Walnut Creek, within five miles of the CRTC space, which building and
equipment are owned by ECCC Properties, LLC (ECCC). The Center is
owned by Epic (75 percent) and an entity known as Select Health Care
(Select) (25 percent). The Center became operative in June 2017, for the
purpose of operating a cancer radiation treatment facility, leading to the
arbitration here.
The Arbitration
In August 2017, appellants, derivatively on behalf of CRTC, filed a
demand for arbitration pursuant to section 14.7 of the CRTC Operating
Agreement, a demand that made two claims on behalf of CRTC and one
personal claim. The first derivative claim alleged that in establishing the
3
Center, Epic and Patel breached section 5.12 of the Operating Agreement by
competing and usurping a business opportunity of CTRC. The second
derivative claim alleged that the complained-of conduct breached Patel’s
fiduciary duty as a manager of CTRC. And the personal claim sought the
attorney fees and arbitration costs involved in bringing the derivative claims.
Epic and Patel (when referred to collectively respondents) responded
with three counterclaims. The first counter-claim was for breach of contract
against Sirott, claiming that in disregard of its regular practice, CRTC did
not make its usual and customary distributions for a nine-month period
(September 2016 to May 2017) because Sirott, as a manager of CRTC, refused
to approve them. The second counter-claim sought an accounting of those
delayed distributions. And the third alleged that the delay in distributions
breached Sirott’s fiduciary duty, and sought actual and punitive damages and
Sirott’s removal as manager of CRTC.
The CRTC operating agreement provides that the arbitration shall be
conducted in accordance with the commercial arbitration rules of the
American Arbitration Association (AAA), and three arbitrators were
designated to serve: The Honorable Nickolas Dibiaso (Ret.), The Honorable
Brian Van Camp (Ret.), and Professor Jack Garvey.
The arbitrators heard evidence for five days, following which the
parties filed post-hearing briefs, and then supplemental briefs on the issue of
constructive trust. Following all that, on November 19, 2019, the arbitrators
issued their unanimous “final interim decision.” It was 46 pages in length, a
thoughtful, comprehensive decision that analyzed in detail the issues before
them, which issues will be discussed in detail below to the extent they bear
on the arguments raised by appellants. Suffice to say here that the decision
began with six pages of background; a description of the “issues presented”;
4
seven pages of “discussion and analysis; and a lengthy discussion of
“remedies.” And included within that discussion was an exhaustive 15-page
explanation why the testimony of appellants’ expert witness on damages was
insufficient to support appellants’ claimed damages, which concluded that
appellants “have not proved the amount of CRTC’s damages with respect to
either their cause of action for breach of contract or their cause of action for
breach of fiduciary duty.” Reaching that conclusion, the arbitrators
determined that as triers of fact under AAA Commercial Rule R-34(b), they
were entitled to reject the expert’s opinion, as it did not rest on a reasonable
basis in evidentiary fact or express convincing analytical reasoning. And as a
result, the arbitrators awarded nominal compensatory damages of $1.00 for
Patel’s and Epic’s breach of contract and breach of fiduciary duty.
The arbitrators also denied appellants’ alternative request for the
imposition of a constructive trust, finding they failed to establish the
necessary elements for that remedy. The arbitrators specifically identified
appellants’ failure to identify specific property or the value of property on
which such a trust could be imposed and, moreover, any reasonable or
workable means of implementing such a trust.
On respondents’ counterclaims, the arbitrators ordered CRTC to pay
Epic $14,583.33 in interest on the late distributions and ordered Sirott to
reimburse CRTC for the interest payment. They also ordered Sirott to pay
Epic $10,000 in punitive damages for having intentionally withheld the
distributions.
Appellants later moved to have CRTC indemnify them for the attorney
fees and costs. The arbitrators denied the request on several grounds,
including that the claimed statutory “mandates” do not apply; that the
operating agreement waived them; that contractual indemnification does not
5
apply to a derivative action involving company constituents rather than third
parties; and that a nominal damages award does not justify applying the
substantial benefit doctrine. The arbitrators also denied without comment
respondents’ request for fees.
On May 11, 2020, the arbitrators issued a final award incorporating
their final interim decision and their rulings on attorney fees and costs.
The Proceedings Below
On June 5, appellants filed their verified petition to correct the award.
It was a voluminous pleading, over 60 pages, that attached 23 exhibits, none
of which was the transcript of the arbitration hearing. The petition was
accompanied by a 21-page memorandum of points and authorities, which
argued that the court should correct the award in three particulars: (1) to
impose a constructive trust on the profits of CRTC; (2) to order that CRTC
indemnify Sirott and Robles; and (3) to change the award to the extent it
ordered (a) CRTC to pay interest to Epic and (b) Sirott to reimburse CRTC
and pay punitive damages to Epic.
Respondents filed a verified response and opposition, appellants filed a
reply, and the petition came on for hearing on August 17. On August 20, the
trial court issued its order denying the petition, an order that was, as noted, a
comprehensive 11-page analysis. The order began with a thorough
description of the background of “the dispute,” then the petition, and then the
limited scope of judicial review. And from there the trial court went on to
reject, one-by-one, appellants’ three arguments.
On August 20, the trial court entered its order confirming the award.
And on October 16, appellants filed their notice of appeal from the order “and
from any judgment that may subsequently be entered . . . ,” which appeal was
docketed in this court as A161353.
6
On November 20, the trial court filed a judgment conforming to the
award. Five days later, appellants appealed from the judgment and from the
August 20 order “merged into that judgment,” which appeal was docketed as
A161555. In January 2021, we granted appellants’ unopposed motion to
consolidate the appeals for briefing, oral argument, and decision. 2
DISCUSSION
Introduction
As noted, appellants moved to correct the award, which correction is
provided for in Code of Civil Procedure section 1286.6, which reads in its
entirety as follows: “Subject to section 1286.8, the court, unless it vacates the
award pursuant to section 1286.2, shall correct the award and confirm it as
corrected if the court determines that:
“(a) There was an evident miscalculation of figures or an evident
mistake in the description of any person, thing or property referred to in the
award;
“(b) The arbitrators exceeded their powers but the award may be
corrected without affecting the merits of the decision upon the controversy
submitted; or
“(c) The award is imperfect in a matter of form, not affecting the merits
of the controversy.” (Code Civ. Proc., § 1286.6.)
Appellants rely on subdivision (b), and make essentially the identical
three arguments they made below. In appellants’ words here, the award
should be corrected to (1) “to include a constructive trust because the
arbitrators exceeded their powers by awarding nominal damages that do not
compensate for the harm caused by the breach”; (2) “because the arbitrators
2The parties have filed separate briefs in each appeal, which briefs
appear to be identical.
7
exceeded their powers by failing to award Sirott and Robles the attorneys’
fees and expenses they incurred to bring derivative claims on CRTC’s behalf”;
and (3) “because the arbitrators exceeded their powers by deciding issues
beyond the scope of the counterclaim submitted to them by making an
unlawful punitive damages award.” Each of appellants’ arguments has
subparts, the first argument, seven, the second, three, and the third, four.
We reject the arguments, but before discussing why, we begin with
some observations about appellants’ briefing.
As indicated above, the arbitrators issued a comprehensive decision
that described at length the “background,” the facts that in the arbitrators’
view was necessary to decide the matter before them. Appellants’ opening
brief was accompanied by a request for judicial notice, seeking judicial notice
of the reporter’s transcript of the arbitration hearing, which, as indicated,
was not before the trial court. The claimed basis for judicial notice was that
the transcripts would be “helpful as the source materials for the arbitration
award under review” and to “avoid any question whether the briefs properly
characterize the record or the testimony of any witness.”
Respondents opposed the request for judicial notice, and we issued an
order that ruling on the request would be deferred and decided with the
merits of the appeal, in accordance with rule 6(b) of our Local Rules of Court.
We now deny the request.
The transcripts sought to be judicially noticed are not necessary—
indeed, even helpful—to our decision. But more importantly, appellants’
brief attempts to use the transcripts in a way we find inappropriate, in
essence attempting to put a spin or gloss on the facts that is inconsistent with
the principles of appellate review, most significantly, that the record is to be
8
reviewed in the light most favorable to the decision below. (Cassim v.
Allstate Ins. Co. (2004) 33 Cal.4th 780, 787.)
Appellants’ opening brief has a 17-page statement of facts, representing
that the “statement summarizes the facts in the light most favorable to the
arbitration record, based on evidence presented and presumably credited by
the arbitrators.” While we have not counted, a cursory review of those
17 pages reveals that a significant percentage of the claimed record
references are to the “MJN,” the motion for judicial notice. And in doing so,
appellants’ brief misuses the transcripts in many ways, all of which we need
not detail here. Three examples should suffice.
First, as noted, CRTC stopped its customary distributions for nine
months, a fact the arbitrators attributed to Sirott’s displeasure with Patel
and for which they held Sirott responsible—indeed, for punitive damages.
Despite that, appellants’ brief refers to Sirott’s testimony that he stopped the
distributions “because of his concern about an equipment maintenance
problem.”
Second, as also noted, the arbitrators rejected the opinion of appellants’
expert, with a lengthy explanation supporting their decision. Apparently
undaunted, appellants spend several pages extolling the expert’s testimony,
and also referring to the fact the arbitrators did not discuss other expert
testimony.
Third, appellants’ brief has a heading that reads, “Patel threatens
‘vengeance on all fronts,’ including CRTC, when Sirott and Robles’s medical
group hires a doctor who had quit Epic.” The passage that follows includes
reference to the “opening statement” of Patel’s and Epic’s attorney, and that
Patel “testifies to this effect.” The passage then goes on to recite claimed
facts about what the parties observed about “large Silicon Valley companies,”
9
and how no-poach agreements violate anti-trust laws, going so far as to cite a
“public message” to employers from federal authorities. The brief then
discusses warnings from the Justice Department and the “aggressive civil
enforcement action” of the California Attorney General, followed by the
assertion that “antitrust enforcement doesn’t matter to Patel,” and from there
to quote after quote attributable to Patel. After all that, appellants’ last
paragraph acknowledges that “Patel disputes making some of these threats,”
and after more quotes attributable to Patel, concludes with this: “The
arbitrators find, ‘as a matter of credibility, that Patel did utter [the] threats’
to ‘ “rain hell down” upon Sirott and Robles, and . . . “seek vengeance on all
fronts.” ’ [Citation.]”
The Governing Principles
In the seminal case of Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1(Moncharsh), our Supreme Court issued a 40-page opinion that, tracing the
history of the law, held that the merits of an arbitration award, either on
questions of fact or law, are not subject to judicial review except as provided
by Code of Civil Procedure sections 1286.2 (vacation of award) and
1286.6 (correction). And among other things Moncharsh specifically held that
even though an error of law appears on the face of an award and causes
substantial injustice, such error is not subject to judicial relief.
Since Moncharsh, that court has issued several opinions addressing the
limited review of arbitration awards, one illustration of which is Richey v.
AutoNation, Inc. (2015) 60 Cal.4th 909 (Richey)—a case, not incidentally,
involving among other things a claim by Richey that he was deprived of an
“unwaivable statutory right,” a claim appellants make here. Richey was
terminated while on medical leave, and sought reinstatement. An arbitrator
found that Richey had been terminated for violating the employer’s policy
10
prohibiting outside employment while on medical leave. The trial court
confirmed the award. The Court of Appeal reversed.
The Supreme Court reversed the Court of Appeal, holding that even if
the arbitrator committed an error of law in considering the employer’s
assertion of an honest belief, Richey was not deprived of an unwaivable
statutory right because any error was harmless in light of the arbitrator’s
finding that the employee had been dismissed for engaging in outside
employment. Thus the award was not in excess of the arbitrator’s powers,
the Supreme Court held, in an opinion that began its “discussion” with this
exposition of the law:
“California law favors alternative dispute resolution as a viable means
of resolving legal conflicts. ‘Because the decision to arbitrate grievances
evinces the parties’ intent to bypass the judicial system and thus avoid
potential delays at the trial and appellate levels, arbitral finality is a core
component of the parties’ agreement to submit to arbitration.’ (Moncharsh v.
Heily & Blase[, supra,] 3 Cal.4th [at p.] 10 . . . . Generally, courts cannot
review arbitration awards for errors of fact or law, even when those errors
appear on the face of the award or cause substantial injustice to the parties.
(Id. at pp. 6, 28.) This is true even where, as here, an arbitration agreement
requires an arbitrator to rule on the basis of relevant law, rather than on
principles of equity and justice. (Cable Connection [Inc. v. DIRECTV, Inc.
(2008)] 44 Cal.4th [1334,] 1360 [‘A provision requiring arbitrators to apply
the law leaves open the possibility that they are empowered to apply it
“wrongly as well as rightly” ’]; see City of Richmond v. Service Employees
Internat. Union, Local 1021 (2010) 189 Cal.App.4th 663, 669, fn. 1 [‘The
arbitration provision here, reciting generally that the arbitrator “shall . . .
11
make no decisions in violation of existing law” is a standard arbitration
provision that does not provide for [judicial] review’].)
“The California Arbitration Act (Code Civ. Proc., § 1280 et seq.) . . .
provide[s] limited grounds for judicial review of an arbitration award. . . .
Our analysis concerns whether the arbitrator acted in excess of his powers
when he rejected plaintiff’s claim. (Code Civ. Proc., § 1286.2, subd. (a)(4).)
“Arbitrators may exceed their powers by issuing an award that violates
a party’s unwaivable statutory rights or that contravenes an explicit
legislative expression of public policy. [Citations.] However, ‘ “[a]rbitrators
do not ordinarily exceed their contractually created powers simply by
reaching an erroneous conclusion on a contested issue of law or fact, and
arbitral awards may not ordinarily be vacated because of such error . . . .” ’ ”
(Cable Connection, supra, 44 Cal.4th at pp. 1360−1361.)” (Richey, supra,
60 Cal.4th at pp. 916−917.)
Another case— and one particularly apt to the setting here, where
appellants contest the remedy awarded by the arbitrators—is Advanced
Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362 (AMD), a case heavily
relied on by appellants, cited in their brief as “passim.” AMD was a complex
intellectual property dispute between two technology giants, a dispute that
resulted in an arbitration that lasted “four and one-half years and included
three hundred and fifty-five days of hearings.” (AMD, supra, 9 Cal.4th at
p. 369.) The arbitrator found Intel breached a technology transfer agreement
by secretly deciding not to accept any more of AMD’s product, while at the
same time maintaining a public position that AMD would be a second source
for Intel’s new microprocessors, thus delaying AMD’s entry into the market.
The arbitrator found the amount of actual damages indeterminable and
nominal damages inequitable, and thus awarded AMD a permanent,
12
nonexclusive, royalty-free license to any Intel intellectual property embodied
in the microchip AMD developed through reverse engineering, and also
awarded it a further two-year extension of certain patent and copyright
licenses, insofar as they related to Intel’s new microprocessor.
The trial court confirmed the award. The Court of Appeal reversed.
The Supreme Court reversed the Court of Appeal, in the course of which it
said this: “The choice of remedy, then, may at times call on any
decisionmaker’s flexibility, creativity, and sense of fairness. In private
arbitrations, the parties have bargained for the relatively free exercise of
those faculties. Arbitrators, unless specifically restricted by the agreement to
following legal rules, ‘ “may base their decision upon broad principles of
justice and equity . . . .” [Citations.] As early as 1852, this court recognized
that, “The arbitrators are not bound to award on principles of dry law, but
may decide on principles of equity and good conscience, and make their
award ex aequo et bono [according to what is just and good].” [Citation.]’
(Moncharsh, supra, 3 Cal.4th at pp. 10−11.) Were courts to reevaluate
independently the merits of a particular remedy, the parties’ contractual
expectation of a decision according to the arbitrators’ best judgment would be
defeated.
“Independent reevaluation by a court, moreover, is unlikely to be either
expeditious or accurate. . . . A reviewing court is thus not in a favorable
position to substitute its judgment for that of the arbitrators as to what relief
is most just and equitable under all the circumstances. Further, independent
review of remedies, no less than of other arbitrated questions, would tend to
increase the cost and delay involved. ‘If the courts were free to intervene on
these grounds [disagreement with the arbitrators’ “honest judgment” as to
remedy] the speedy resolution of grievances by private mechanisms would be
13
greatly undermined.’ (Paperworkers v. Misco, Inc. (1987) 484 U.S. 29, 38.)”
(AMD, supra, 9 Cal.4th at pp. 374−375, fn. omitted.)
It is against that background that we analyze appellants’ arguments
here.
The Arbitrators Did Not Exceed Their Powers
As noted, appellants contend the arbitrators exceeded their powers in
three specific ways, each of which appellants assert, without citation to
authority, “implicates an aspect of arbitral fairness and integrity.” We see
nothing—and appellants point to nothing—that demonstrates the arbitration
was unfair or lacking in integrity. Rather, appellants simply do not like the
result, hardly a basis for correction under the statute or the case law. In any
event, none of appellants’ claims has merit.
No Constructive Trust and Nominal Damages
Appellants first contend that the award should be corrected to “include
a constructive trust because the arbitrators exceeded their powers by
awarding nominal damages that do not compensate for the harm caused by
the breach.” Appellants’ treatment of the issue ignores the arbitrators’
detailed analysis that led to this aspect of the award, and we thus begin with
an exposition of that analysis.
After their conclusion that the testimony of appellants’ expert witness
was insufficient to prove damages, the arbitrators turned to “Remedies—
Imposition of Constructive Trust on Res,” a discussion that consumed the
next several pages of the decision, which discussion began with this:
“[Appellants] declare that an award of damages is their preferred
remedy. However, they also maintain that constructive trust would be a
satisfactory alternative remedy to be imposed on ‘all property, profit or
benefit that Patel and Epic have derived from their ownership interest in the
14
Center and ECCC.’ [Citation.] The nature of the case and the evidence
presented demonstrates that neither the legal nor the practical requirements
for imposition of a constructive trust as requested, or indeed of a constructive
trust of any scope, have been satisfied.
“There are a number of critical deficiencies for imposition of a
constructive trust. Most prominent are the inordinate challenges to defining
the res, that is, the value on which a trust could be imposed. There are also
critical impediments to achieving the designation of the beneficiary of the
trust, as well as the party to be designated as the involuntary trustee for
effectuation of a constructive trust.”
Then, after some two pages describing—accurately, we note—the law of
constructive trusts, the decision noted that while a constructive trust was
“appropriate in theory,” the imposition of a constructive trust in the
circumstances here “founders on critical concerns of practical application.”
And the decision observed: “In an attempt to alleviate these concerns, we
posed to the parties for briefing the question whether, ‘assuming a
constructive trust were to be imposed on either or both of Patel’s and/or
Epic’s interests in either the Center and/or ECCC, how could or should such
interests be broken out and either disgorged to, or held in trust for, CRTC,
taking into account the interests of all parties and any other affected
individuals or entities, including all shareholders in Epic.’
“The briefs submitted by the parties in response to our question did
not, and probably could not, provide a formulation that would equitably take
into account all of the various interests that would be affected by any version
of a constructive trust applied to the Center and ECCC, the entities proposed
by claimants as the targets for a constructive trust. In their briefing in
response to our question, [appellants] continue to argue for a constructive
15
trust to be imposed on all gains Patel and Epic have derived or will derive
from their ownership interest in the Center and ECCC. Respondents
continue to deny the propriety of any such remedy. But neither [appellants]
nor respondents could articulate a formula, other than speculation, as to how
the ‘gain’ or ‘profit’ from the alleged wrongful activity could be quantified and
collected for the benefit of CRTC.
“The lack of a satisfactory response to the question we posed is critical.
The viability of the remedy of constructive trust depends on the certitude
with which the property on which the trust may be imposed can be identified,
and the coherence of that res over a reasonable period long enough to achieve
the relief sought.
“Constructive trust is an equitable remedy available to a plaintiff when
the target of the trust is specific property, the relief being to make the
defendant a constructive trustee with a duty to transfer that specific property
to the plaintiff. (See, Blair v. Mahon (1951) 104 Cal.App.2d 44, 50; Cramer v.
Biddison (1968) 257 Cal.App.2d 720, 724; Weiss v. Marcus (1975)
51 Cal.App.3d 590, 600.) It is accordingly essential that there be a
reasonably identifiable and definable res and the likely continuing existence
and identification of that res sufficient to achieve the objective of the sought-
after remedy, i.e., return of the ill-gotten gain to the rightful owner. (Burke v.
Maguire (1908) 154 Cal. 456.)”
From there, the decision went on for several pages pointing out among
other things that the passage of time would be an “impediment” when the res
and the entity involved “are a moving and evolving target.” The arbitrators
then described an “entirely speculative matter,” and went on to note that the
“deficiencies” in appellants’ expert’s testimony “similarly demonstrate the
16
inadequacy of the proof of a res for imposition of a constructive trust,” going
on to describe the various “deficiencies.”
The arbitrators also noted that CRTC is itself a “complex entity,” and
then observed: “In their papers filed with the Panel after issuance of our
‘[tentative] interim award,’ [appellants] argued that we have a ‘responsibility
to fashion a remedy of constructive trust’ if we decline to award damages. We
disagree where, as here, [appellants] have expressed a firm preference for
damages, have recognized the practical problems inherent in a constructive
trust remedy, and have not provided the Panel with any proposed award
language describing the nature of the trust, or the interests or assets
constituting the res, or the persons or entities holding the interests or assets
constituting the res.”
And from there the award went on for an additional three pages of
analysis supporting the award of nominal damages, in the course of which it
observed—again, accurately—why appellants’ reliance on AMD was
misplaced.
That, then, is the background against which the arbitrators came to
their conclusions, rejecting a constructive trust and awarding appellants
nominal damages. There was no error, let alone error reviewable in the
arbitration context.
As the arbitrators observed, a constructive trust is an equitable
remedy. (Kraus v. Willow Park Public Golf Course (1977) 73 Cal.App.3d 354,
374.) And the propriety of granting such equitable relief in a particular case
rests in the sound discretion of the trial court exercised in accord with the
facts and circumstances of the case. (Hicks v. Clayton (1977) 67 Cal.App.3d
251, 265.) Appellants show no abuse of such discretion.
17
Appellants first address the award of nominal damages, and assert that
nominal damages can be awarded “only in cases of inability to show that
actual damage was inflicted upon the plaintiff,” citing to Sweet v. Johnson
(1959) 169 Cal.App.2d 630, 632−633. Sweet says no such thing. To the
contrary, Sweet held that “nominal damages, which are presumed as a matter
of law to stem merely from the breach of a contract [citation], may properly
be awarded for the violation of such a right. [Citation.]” (Id. at pp. 632−633.)
In short, appellants’ argument essentially asks us to “reevaluate
independently the merits of a particular remedy.” (AMD, supra, 9 Cal.4th at
p. 375.) This, we will not do.
Appellants next cite various authorities, starting with Civil Code
section 3300,3 to argue that the award of nominal damages bears no rational
relationship to the contractual breach because it “does not seek to award the
constructive trust mandated by statute or its monetary equivalent in
disgorgement or damages.” Again, appellants fail to explain how, as AMD
put it, the remedy chosen is not rationally drawn from the situation as
interpreted by the arbitrators. (AMD, supra, 9 Cal.4th at p. 377.) And to the
extent appellants assert—though this is not clear—that the arbitrators
committed an error of law, such is not reviewable on appeal. (Richey, supra,
60 Cal.4th at p. 916; Cotchett, Pitre & McCarthy v. Universal Paragon Corp.
(2010) 187 Cal.App.4th 1405, 1416; Baize v. Eastridge Companies, LLC
(2006) 142 Cal.App.4th 293, 300−302.)
3 Civil Code section 3300 provides as follows: “For the breach of an
obligation arising from contract, the measure of damages, except where
otherwise expressly provided by this Code, is the amount which will
compensate the party aggrieved for all the detriment proximately caused
thereby, or which, in the ordinary course of things, would likely to result
therefrom.”
18
Turning to the refusal to impose a constructive trust, appellants
contend the arbitrators erred because they fashioned a remedy that violated
a statutory right or public policy. Though nowhere quoting the sections in
full, appellants cite in claimed support Corporations Code section 17704.09,
subdivisions (b) and (f), and assert that the statute sets forth a “unwaivable
statutory right.” By no means.
Section 17704.09, subdivision (b) provides that: “A member’s duty of
loyalty to the limited liability company and the other members is limited to
the following:
“(1) To account to the limited liability company and hold as trustee for
it any property, profit, or benefit derived by the member in the conduct and
winding up of the activities of a limited liability company or derived from a
use by the member of a limited liability company property, including the
appropriation of a limited liability company opportunity.
“(2) To refrain from dealing with the limited liability company in the
conduct or winding up of the activities of the limited liability company as or
on behalf of a person having an interest adverse to the limited liability
company.
“(3) To refrain from competing with the limited liability company in
the conduct or winding up of the activities of the limited liability company.” 4
4 Subdivision (f) provides only that: “In a manager-managed limited
liability company, all of the following rules apply:
“(1) Subdivisions (a), (b), (c), and (e) apply to the manager or managers
and not the members.
“(2) Subdivision (d) applies to the members and managers.
“(3) Except as otherwise provided, a member does not have any
fiduciary duty to the limited liability company or to any other member solely
by reason of being a member.”
19
An accurate reading of subdivision (b) is that it sets a limit on the
rights of a limited liability company, not a minimum. The four cases cited by
appellants are not only not to the contrary, at least one of them contains
language devastating to appellants here. That case is Ahdout v. Hekmatjah
(2013) 213 Cal.App.4th 21 (Ahdout), which held that Business and
Professions Code section 7031, which provides for disgorgement of
compensation received by an unlicensed contractor, was a clear-cut and
explicit legislative expression of public policy, such that if the statute was not
enforced, it would constitute grounds for judicial review. (Ahdout, supra,
213 Cal.App.4th at p. 38.) But, the court cautioned, “[t]his exception is
applicable only when there has been ‘ “a clear expression of illegality or
public policy” ’ that undermines the presumption in favor of private
arbitration.” (Ibid.) Without an explicit legislative expression of public
policy, however, courts should be reluctant to invalidate an arbitrator’s
award on this ground. The reason is clear: the Legislature has already
expressed its strong support for private arbitration and the finality of arbitral
awards. Absent a clear expression of illegality or public policy undermining
this strong presumption in favor of private arbitration, an arbitral award
should ordinarily stand immune from judicial scrutiny. (Ahdout, supra, 213
Cal.App.4th at p. 37, citing Moncharsh, supra, 3 Cal.4th at p. 32.)5 No such
“clear expression” exists here.
5 The other three cases are equally unsupportive. Jordan v.
Department of Motor Vehicles (2002) 100 Cal.App.4th 431, 443, 452, held that
the award against the State of California must be vacated because it violated
the constitutionally declared public policy against gifts of public funds. Ling
v. P.F. Chang’s China Bistro, Inc. (2016) 245 Cal.App.4th 1242, 1252−1257,
corrected the award because it violated the employee’s nonwaivable statutory
right against paying the employer’s attorney fees for an unsuccessful
20
In a brief argument, less than a page, appellants assert that the
arbitrators chose nominal damages based “on their improper extrinsic
concern over whether they would have to supervise a constructive trust,” in
claimed support of which appellants again cite to AMD. It is not supportive,
as it held “[t]he award will be upheld so long as it was even arguably based
on the contract; it may be vacated only if the reviewing court is compelled to
infer the award was based on an extrinsic source.” (AMD, supra, 9 Cal.4th
381.) Here, the arbitrators reasoned that ongoing “policing” of any
constructive trust would be needed, “creating a controversy with no end in
sight.” Appellants do not demonstrate how this concern by the arbitrators
derived from an extrinsic source. In any event, the arbitrators determined
that appellants did not meet the requirements for imposition of a
constructive trust.
Beyond all that, appellants have not demonstrated how correcting the
award to provide a constructive trust would not “affect the merits of the
decision.” As quoted, section 1286.6 provides that an award can be corrected
if it is found that the “arbitrators exceeded their powers but the award may
be corrected without affecting the merits of the decision upon the controversy
submitted.” (Code Civ. Proc., § 1286.6, subd. (b).) Here, the arbitrators were
charged with resolving the entire “merits” of the “controversy submitted” by
the parties (Moncharsh, supra, 3 Cal.4th at p. 28), which “merits” include all
the contested issues of law and fact submitted to them. (Ibid.) The
arbitrators decided that appellants had not met the requirements for
overtime claim. And Armendariz v. Foundation Health Psychare Services,
Inc. (2000) 24 Cal.4th 83, 100 affirmed an order denying a petition to compel
arbitration when the arbitration agreement violated public policy by limiting
the damages available for violating the Fair Employment and Housing Act.
21
imposition of a constructive trust. To hold to the contrary would affect the
“merits” of the “decision.”
We end this discussion with the arbitrators own summary of their
decision: “Last, we have discretion to provide appropriate remedy. The
arbitration provision in the CRTC [operating agreement], Section 14.7,
subd. (iii), authorizes the Arbitrators to ‘grant any remedy or relief that a
state or federal court in California could grant within the scope hereof and
any ancillary relief necessary to make effective any award.’[6] Additionally,
section 14.7 provides that ‘this arbitration shall be conducted in accordance
with the commercial arbitration rules then in effect of the American
Arbitration Association.’ Under Rule R-47 of the Commercial Rules, ‘[t]he
arbitrator[s] may grant any remedy or relief that the arbitrator[s] deem just
and equitable within the scope of the agreement of the parties.’ California
law recognizes and confirms the broadest possible scope for the exercise of
such arbitral discretion, to the degree that an arbitration panel may grant
equitable relief where a court could not, or award damages when a court
would grant equitable relief. ([AMD, supra,] 9 Cal.4th [at p.] 395, quoting
Steinberg v. Amplica, Inc. (1986) 42 Cal.3d 1198, 1210.)
“Accordingly, that [appellants’] proof of the amount of CRTC’s damages
is inadequate and the remedy of constructive trust unsupportable does not
prevent the Panel from a determination of a nominal damage award
appropriate to affirming the interests of the applicable law in upholding the
fiduciary duties and contractual rights here at issue. Indeed, it is incumbent
on the Panel to further the policies of the law, and not leave rights without
6 “We do not interpret this authorization as a limitation or restriction
on the type of relief we may grant or as a prohibition on the application of
Commercial Rule R-47.”
22
remedy despite the exactitude of the evidentiary record. [¶] In light of the
evidence presented, we therefore find as a reasonable basis for an award to
[appellants], on behalf of CRTC, and against Patel and Epic, jointly and
severally, of nominal damages in the amount of $1.00 (one dollar and no
cents.)”
Denial of Attorney Fees and Expenses
Appellants’ second argument is that the arbitrators exceeded their
powers by failing to award them the attorney fees and expenses incurred in
bringing the derivative claims. Their primary position is that the ruling
violated the “substantial benefit doctrine, an important public policy,” in
claimed support of which appellants cite to Cziraki v. Thunder Cats, Inc.
(2003) 111 Cal.App.4th 552 and Fletcher v. A.J. Industries, Inc. (1968)
266 Cal.App.2d 313.
We recently discussed the substantial benefit doctrine at some length,
in Gateway Bank, F.S.B. v. Metaxas (2021) 65 Cal.App.5th 71 (Metaxas), a
case not even mentioned, let alone discussed, by appellants. There, we began
our discussion with this: “The special benefit doctrine is based on section 920
of the Restatement Second of Torts (section 920). Section 920 is entitled
‘Benefit to Plaintiff Resulting From Defendant’s Tort,’ and provides in its
entirety as follows: ‘When the defendant’s tortious conduct has caused harm
to the plaintiff or to his property and in so doing has conferred a special
benefit to the interest of the plaintiff that was harmed, the value of the
benefit conferred is considered in mitigation of damages, to the extent that
this is equitable.’ ” (Metaxas, supra, 65 Cal.App.5th at p. 89.)
We also cited to and quoted from cases involving the special benefit
doctrine, as follows:
23
“Maben v. Rankin [(1961)] 55 Cal.2d [139,] 144: ‘[C]onsideration may
be given, where equitable, to the value of any special benefit conferred by
that act to the interest which was harmed.’
“Turpin v. Sortini [(1982)] 31 Cal.3d [220,] 236 (plur. opn.): ‘ “the value
of the benefit conferred is considered in mitigation of damages, to the extent
that this is equitable.” ’
“Heckert v. MacDonald (1989) 208 Cal.App.3d 832, 839: ‘ “the value of
the benefit conferred is considered in mitigation of damages, to the extent
that this is equitable.” ’ ” (Metaxas, supra, 65 Cal.App.5th at p. 90.)
And we summed up our exposition of the law with reference to Witkin,
saying this: “the equitable nature of the special benefit doctrine means that
the value of the benefit may be considered. Or, as Witkin succinctly states it,
mitigation under the special benefit doctrine is ‘sometimes’ appropriate: ‘If
the defendant’s tort causes injury to the plaintiff, but also confers a special
benefit on the plaintiff, the value of the benefit may sometimes be considered
and the plaintiff’s recovery limited to the net loss. (Maben v. Rankin[, supra,]
55 Cal.2d [at p.] 144 [“In determining the damages suffered as a result of a
tortious act, consideration may be given, where equitable, to the value of any
special benefit conferred by that act to the interest which was harmed”];
Rest.2d, Torts § 920; see Dakota Gardens Apartment Investors “B” v. Pudwill
(1977) 75 Cal.App.3d 346, 352, 354, citing the text [defendant cannot
diminish amount of damages by paying a debt of plaintiff without plaintiff’s
consent; mitigation will be denied where it is inequitable]; 22 Am.Jur.2d
(2013 ed.) [Citations.’) (6 Witkin, Summary of Cal. Law (11 ed. 2021) Torts,
§ 1803.” (Metaxas, supra, 65 Cal.App.5th at p. 91.)
Like Metaxas there, appellants make no attempt here to demonstrate
why equity—a word, along with companions “equitable” and “equitable in
24
nature,” mentioned many times in the decision—was such that fees and costs
had to be awarded.
Beyond that, appellants ignore that the arbitrators denied appellants’
request for recovery under the substantial benefit doctrine because they
failed to meet the required elements. The arbitrators expressly questioned
how it could be that appellants “conferred a substantial benefit on CRTC”
when “[t]here was no distinct fund created.” And, they stated, “[t]he failure
of [appellants] to establish damages to any reasonable degree of certainty
resulted in the award of nominal damages of only one dollar for [appellants’]
compensatory claims.” Finally, the arbitrators noted that the award of
$30,000 in punitive damages did not meet requirements of the substantial
benefit doctrine because “the application of the common fund doctrine, and its
partnering doctrine, ‘benefit conferred,’ depends entirely on compensatory
and restitutionary considerations. The award of punitive damages, being
non-compensatory and not limited in any sense to restitution of a benefit
conferred, does not constitute a fund to which ‘a number of persons are
entitled.’ ”
Appellants also contend that there was a statutory mandate to
reimburse Sirott under Corporations Code section 17704.08, subdivisions (a)
and (d)(1).7 Neither is availing. As to subsection (a), the arbitrators
7 Which sections provide in pertinent part: “(a) A limited liability
company shall reimburse for any payment made and indemnify for any debt,
obligation, or other liability incurred by a member of a member-managed
limited liability company or the manager of a manager-managed limited
liability company in the course of the member’s or manager’s activities on
behalf of the limited liability company, if, in making the payment or
incurring the debt, obligation, or other liability, the member or manager
complied with the duties stated in Section 17704.09. [¶] . . . [¶]
25
determined that there was no mandatory duty of indemnification under
subsection (a), citing to section 17701.10, subdivision (g), which provides in
part that the “operating agreement may alter or eliminate the
indemnification for a member or manager provided by subdivision (a) of
Section 17704.08.’ ” The arbitrators concluded that the indemnification
provisions of the operating agreement did not apply to inter se disputes, and
thus had eliminated the indemnification requirement in the setting here.
As to subdivision (d)(1), the arbitrators determined the subsection was
inapplicable. The arbitrators reasoned that appellants had not defended or
settled a claim against them, as parties, arising from their status as limited
liability company agents, but rather sought indemnification for equitable
derivative claims asserted on behalf of CRTC against respondents.
There was no error in refusing fees. And even if there were, it would
not be correctable. Moshonov v. Walsh (2000) 22 Cal.4th 771 is persuasive.
Moshonov involved an arbitration that arose out of a real estate purchase.
The arbitrator found for defendant sellers but, notwithstanding the language
in the agreement, refused to award them attorney fees as prevailing parties.
The sellers moved to correct the award, which the trial court denied. The
Court of Appeal and Supreme Court both affirmed, the latter court saying
this:
“(d)(1) Without limiting subdivision (a), to the extent that an agent of a
limited liability company has been successful on the merits in defense or
settlement of any claim, issue, or matter in any proceeding in which the
agent was or is a party . . . or was an agent of the limited liability company, if
the agent acted in good faith and in a manner that the agent reasonably
believed to be in the best interests of the limited liability company and its
members, the agent shall be indemnified against expenses actually and
reasonably incurred by the agent in connection therewith.”
26
“We agree with the courts below that, under the principle of arbitral
finality as explained in Moncharsh, the arbitrator’s award in the present case
could not be judicially corrected to award defendants their attorney fees. As
discussed above, all parties had prayed for fees in their various pleadings.
The parties then submitted ‘this matter to binding arbitration, without any
pertinent limitation on the issues to be arbitrated. Under the agreed rules of
arbitration, the California Rules of Court ordinarily governing judicial
arbitration, the arbitrator was empowered ‘to decide the law and facts of the
case and make an award accordingly.’ (Cal. Rules of Court, rule 1614(a)(7).)
The award was to ‘determine all issues properly raised by the pleadings,
including a determination of any damages and an award of costs if
appropriate.’ (Id., rule 1615(a).) The arbitrator was expressly empowered ‘to
award costs, not to exceed the statutory costs of the suit.’ [Citation.] Under
these circumstances, the arbitrator had the power to decide the entire matter
of recovery of attorney fees. The recovery or nonrecovery of fees being one of
the ‘contested issues of law and fact submitted to the arbitrator for decision’
(Moncharsh, supra, 3 Cal.4th at p. 28), the arbitrator’s decision was final and
could not be judicially reviewed for error.” (Moshonov, supra, 22 Cal.4th at
p. 776.)
The companion case of Moore v. First Bank of San Luis Obispo (2000)
22 Cal.4th 782, also involving denial of attorney fees, went perhaps further.
Citing to Moshonov, and then discussing the parties’ submissions and the
AAA rules, the Supreme Court concluded as follows:
“Plaintiffs’ argument fails for the same reason as in Moshonov: the
entire controversy, including all questions as to the ingredients of the award,
was in fact submitted to the arbitrators in this case. Plaintiffs submitted the
question of fees to the arbitrators, first, by submitting the entire controversy
27
created by the pleadings, including the prayer for fees contained in their
complaint, and, second, by actually requesting an award of fees from the
arbitrators themselves. Having submitted the fees issue to arbitration,
plaintiffs cannot maintain the arbitrators exceeded their powers, within the
meaning of [Civil Code of Procedure] section 1286.6, subdivision (b), by
deciding it, even if they decided it incorrectly.” (Moore v. First Bank of San
Luis Obispo, supra, 22 Cal.4th at p. 787.)
Appellants have not shown that the arbitrators decided the issue
“incorrectly.” But even if they did, Moore held it would not matter.
And were all that not enough, we note that, as with appellants’ first
argument, the award cannot be corrected to indemnify appellants without
“affecting the merits of the decision.”
Ordering Sirott to Reimburse CRTC, and Awarding Punitive
Damages
Appellants’ last argument is that the arbitrators exceeded their powers
by deciding issues “beyond the scope of the counterclaim . . . and by making
an unlawful punitive damages award.” The bases of the argument are that
Sirott had “statutory protection” against indemnity under Corporations Code
section 17703.04, and that he has no liability for CRTC’s debts.
The arbitrators addressed these issues extensively in their decision.
So, too, did the trial court, in an analysis we can hardly improve on, and thus
quote at some length: “Section 5.9 of the [operating agreement] absolves
managers from personal liability for any debt, obligation, or liability by
CRTC, and section 6.8 provides that managers may make distributions.
Under [Corporations Code section] 17704.09[, subdivisions] (c) and (f)(1), a
manager owes the [limited liability company] a duty of care not to engage in
grossly negligent, reckless, or intentional conduct. Under [Corporations
Code] section 17704.09[, subdivisions] (d) and (f)(2), a manager must
28
discharge his duty with good faith. Under section 5.10(a) of the [operating
agreement], a manager is free of liability for a loss sustained by the [limited
liability company], unless the action was the result of fraud, deceit or reckless
or intentional conduct.
“If a manager (Sirott) has contractual discretion to refuse to declare a
distribution, and simply does so, the damaged parties would have a
contractual claim against CRTC, since CRTC owed the distributions. Sirott
would not be personally liable for a contract claim against the [LLC]. Since,
however, the panel concluded that . . . Sirott acted with intentional
misconduct, in breach of his statutory duty to the other managers under
[Corporations Code] section 17704.9[, subdivisions] (c) and (f)(1), and also
prohibited under [operating agreement] section 5.10(a), Epic ([a limited
liability company] member) may recover the interest from CRTC, and since
CRTC’s liability was caused by . . . Sirott, CRTC may recover the funds
from . . . Sirott. Having found . . . Sirott acted with malice, the panel ordered
him to pay $10,000 in punitive damages to Epic.”
In short, the arbitrators held Sirott accountable for his intentional
breach of fiduciary duties and the damage caused to CRTC. That holding
rationally related to the underlying issues presented to them. It was thus not
subject to review. As AMD put it in point blank terms: “[T]he remedy an
arbitrator fashions does not exceed his or her powers if it bears a rational
relationship to the underlying contract as interpreted, expressly or impliedly,
by the arbitrator and to the breach of contract found, expressly or impliedly,
by the arbitrator.” (AMD, supra, 9 Cal.4th at p. 367.) Or as AMD said at
another point: “Fashioning remedies for a breach of contract or other injury
is not always a simple matter of applying contractually specified relief to an
easily measured injury” and that “[t]he choice of remedy . . . may at times call
29
on any decisionmaker’s flexibility, creativity, and sense of fairness. In
private arbitrations, the parties have bargained for the relatively free
exercise of those faculties.” (Id. at p. 374.)
Appellants argue that the arbitrators exceeded their powers by holding
that Sirott must pay punitive damages even though he was not ordered to
pay compensatory damages. While, as respondents acknowledge, punitive
damages cannot be awarded unless actual damages are suffered (see Mother
Cobb’s Chicken Turnovers v. Fox (1937) 10 Cal.2d 203, 205), the rule is “based
on the principle that the defendant must have committed a tortious act before
exemplary damages can be assessed.” (Brewer v. Second Baptist Church
(1948) 32 Cal.2d 791, 801−802.) Sirott committed such tortious act here:
intentional breach of his fiduciary duty, to the detriment of their joint
enterprise and its members, including Epic. Epic proved its claim for
damages; CRTC was ordered to pay those damages to Epic; and the
arbitrators ordered Sirott to repay CRTC for causing the harm.
In a one-paragraph argument, appellants assert that the arbitrators
exceeded their powers “by remaking the contract, which gave managers
discretion to decide the time and amount of distributions.” The arbitrators
did no such thing, but in fact found that Sirott intentionally and in bad faith
withheld distributions—indeed, in violation of his fiduciary relationship with
his fellow members of CRTC. Such conduct constituted an act of “reckless or
intentional misconduct” towards CRTC and its members that was also
punishable under section 5.10, subdivision (a), of the operating agreement.8
8 Which provides in relevant part that no manager “shall be liable in
damages or otherwise to the Company or to any Member, Manager or officer
or their Specified Agents . . . in his capacity as such, unless the loss or
damage shall have been the result of fraud, deceit, reckless or intentional
30
Appellants’ last sub-argument is “the award can be corrected . . .
without affecting the merits of the arbitrators’ decision; alternatively, the
recovery on the counterclaim can be independently vacated.” Appellants
made no motion to vacate, and nothing more need be said.
The penultimate page of respondents’ brief has a brief paragraph that
says, “given the present appeal lacks any merit, respondents will seek
sanctions” citing California Rules of Court, rule 8.276, subdivision (a)(1).
And respondents did file a motion for sanctions, apparently a trend in the
setting of appeals involving arbitration awards. 9 While we have concluded
the appeal has no merit, we decline to award sanctions here.
DISPOSITION
The order and judgment are affirmed. Epic and Patel shall recover
their costs on appeal.
misconduct, gross negligence, or a knowing violation of law by such
Indemnitee.”
9 This is the advice the leading practice treatise gives, in the context of
petitions to vacate awards: “PRACTICE POINTER: Make certain that you
have proper grounds before filing a petition to vacate an arbitration award.
The application of the Moncharsh principle of no review for legal error
[citation] is so well-established, and its exceptions so narrow, that courts are
now looking carefully at petitions to vacate awards as constituting
sanctionable conduct.” (Knight et al., Cal. Practice Guide: Alternative
Dispute Resolution (The Rutter Group 2021) ¶ 5:455.8.)
31
_________________________
Richman, Acting P. J.
We concur:
_________________________
Kline, J.*
_________________________
Miller, J.
Sirott v. East Bay Medical Oncology (A161353; 161555)
*Assigned by the Chief Justice pursuant to article VI, section 6 of
the California Constitution.
32