Ahern v. Asset Management Consultants

Filed 2/1/22
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
THOMAS AHERN et al., B309935
Plaintiffs and Appellants, (Los Angeles County
Super. Ct. No. BC484356)
v.
ASSET MANAGEMENT
CONSULTANTS, INC., et al.,
Defendants and
Respondents.
APPEAL from a judgment of the Superior Court of
Los Angeles County, Daniel J. Buckley and Ann I. Jones, Judges.
Reversed and remanded with directions.
Catanzarite Law Corporation, Kenneth J. Catanzarite,
Nicole M. Catanzarite-Woodward and Eric V. Anderton for
Plaintiffs and Appellants Thomas Ahern and Amlap Ahern, LLC.
Jackson Tidus and Charles M. Clark for Defendants and
Respondents Asset Management Consultants, Inc., BH &
Sons, LLC and James R. Hopper.
_______________________
The superior court granted the petition filed by Asset
Management Consultants, Inc. (AMC), BH & Sons, LLC and
James R. Hopper (collectively BH parties) to confirm an
arbitration award dismissing the investment fraud claims of
Thomas Ahern and Amlap Ahern, LLC (collectively Ahern
parties) as barred by the governing statutes of limitation; denied
the Ahern parties’ petition to vacate or correct the award; and
entered judgment in favor of the BH parties. The arbitration was
conducted pursuant to the arbitration provision in the cotenancy
agreement between BH & Sons, on the one hand, and
tenant in common investors in commercial property located on
East La Palma Avenue in Anaheim (the Amlap property),
including Amlap Ahern, on the other hand.
On appeal the Ahern parties contend arbitration should not
have been compelled because the cotenancy agreement was void
as an unlawful contract to provide services requiring a real estate
broker’s license, which BH & Sons did not (and could not) have,
and, in any event, their investment fraud claims were outside the
scope of that agreement’s arbitration provision. Ahern separately
contends he was not a party to the cotenancy agreement and
should not have been compelled to arbitrate his dispute with the
BH parties. Even if arbitration was properly ordered, the Ahern
parties argue, the award should have been vacated under Code of
Civil Procedure section 1286.2, subdivision (a)(4) and (5), because
the arbitrator exceeded his powers by applying a statute of
limitations not authorized by California law and refusing to hear
material evidence relating to the BH parties’ limitations defense.
We agree the Ahern parties’ claims were not within the
scope of the arbitration provision in the cotenancy agreement,
reverse the judgment and remand with directions to the trial
2
court to deny the petition to confirm the arbitration award and to
grant the Ahern parties’ petition to vacate the award.
FACTUAL AND PROCEDURAL BACKGROUND
1. The Tenant in Common Investment
Based on tax advice from their lawyers and accountants,
Ahern and his wife, Priscilla Ahern,1 sold a fractional tenant in
common interest in property on South Robertson Boulevard in
Los Angeles in mid-2006 and reinvested a portion of the net
proceeds from that sale in a tenant in common interest in the
Amlap property, an office building in Anaheim, which had been
acquired by BH & Sons from iStar CTL I (iStar) to market to tax-
motivated investors.2
BH & Sons and its manager, AMC,3 provided preliminary
information to qualified sophisticated investors in connection
with the investors’ evaluation of the property. After receiving
that information, interested investors were provided with a
property information package (or private placement
memorandum) with due diligence and underwriting material and
a tenant in common purchase and sale agreement. Both the
property information package and the purchase and sale
agreement stated the purchase price for the Amlap property was
$34,550,000. The property information package also disclosed,
“At closing, AMC will receive a real estate commission of One
1 Priscilla Ahern was originally a plaintiff. She passed away
while the litigation was pending.
2 The reinvestments were to be done in accordance with
Internal Revenue Code section 1031, a “1031 exchange.”
3 Hopper was an owner and the president of AMC.
3
Million, Three Hundred Thousand Dollars ($1,300,000) from the
Seller.”
The tenant in common purchase and sale agreement for
direct investors like the Aherns provided BH & Sons was selling
a property interest to the investor and assigning and transferring
to the investor BH & Sons’s rights and remedies under the iStar
agreement with respect to the investor’s property interest. Those
investors were required to form their own single purpose limited
liability companies to hold the investment. Amlap Ahern was the
Aherns’ limited liability company. Other investors in the Amlap
property became limited partners in Amlap Venture, L.P., which
then purchased a tenant in common interest in the property.
Ultimately, Amlap Venture had 39 limited partners and owned a
24.17 percent interest in the property as a tenant in common;
13 newly formed limited liability companies owned remaining
portions of the property as tenants in common. The tenants in
common acquired the Amlap property through a combination of
$12.6 million contributed by them and a loan from PNC Bank.
The venture performed according to expectations for
approximately three years (through September 2009) when the
lease of the sole tenant (Cingular Wireless) ended; no
replacement tenant was found. The secured lender foreclosed on
the Amlap property in May 2010, eliminating the tenant in
common investors’ interests.
2. The Cotenancy Agreement
The tenant in common investment in the Amlap property
was managed and operated pursuant to the terms of a cotenancy
agreement. That agreement, which defined BH & Sons as
“Manager,” recited that the cotenants “have agreed to join
together as tenants in common to acquire, hold and operate
4
certain Property (defined below) for investment purposes” and
declared, “The Cotenants desire to enter into this Agreement to
arrange for the management and operation of the Property, and
to govern the respective rights and obligations of each Cotenant.”
In a paragraph titled “Acquisition” the agreement further
provided, “The Cotenants have agreed to jointly acquire and
operate the property. The rights and obligations of the Cotenants
shall be determined pursuant to this Agreement. The Cotenants
do not intend by this Agreement to create a partnership or a joint
venture, but merely to set forth the terms and conditions upon
which Cotenants shall hold and manage undivided interests in
the Property, and to meet the requirements of the holder of the
Mortgage Loan.”
Paragraph 2.3 of the agreement governed cotenant
advances: “Upon Closing of the acquisition of the Property, each
of the Cotenants shall deposit with the Manager or its designee
such Cotenant’s proportionate share of funds reasonably required
by the Manager for Reserves.” Paragraph 3.1 delegated
management responsibility to BH & Sons: “Except as otherwise
required by the Majority in Interest of the Cotenants or this
Agreement, the Cotenants delegate responsibility for the
management and supervision of the Cotenants’ Ownership
Interests in the Property, and all decisions concerning the
business and affairs of the Property shall be made by the
Manager.”
Paragraph 9.7 provided California law applicable to
contracts made and to be fully performed in California governed
“[a]ll questions with respect to the construction of this
5
Agreement[4] and the rights and liabilities of the parties with
respect thereto.” Paragraph 9.8 required arbitration of disputes
arising in connection with the Agreement: “Unless the relief
sought requires the exercise of the equity powers of a court of
competent jurisdiction, any dispute arising in connection with the
interpretation or enforcement of the provisions of this Agreement,
or the application or validity thereof, shall be submitted to
arbitration.”
The cotenancy agreement contained an integration clause.
Hopper signed the agreement for BH & Sons as president of
AMC, BH & Sons’s manager. Ahern signed as president of
Amlap Ahern.
3. The Initial Iteration of Ahern’s Lawsuit5
Ahern initially filed this lawsuit in May 2012 against
BH & Sons, AMC, Hopper and a number of others, including
several affiliated attorneys and accountants, alleging in a
77-page, 16-cause-of-action putative class action complaint that
he had been fraudulently induced to enter into the Amlap
investment through the promotional materials developed and
distributed by BH & Sons and AMC. Specifically, Ahern alleged
the offering materials falsely represented the purchase price for
the Amlap property was $34,550,000 and a $1.3 million
4 “Agreement” was defined as “[t]his Cotenancy Agreement
as originally executed and as amended from time to time.”
5 The history of this litigation has been detailed in prior
opinions of this court: Ahern v. Asset Management Consultants
Inc. (Aug. 11, 2015, B253974 & B257684) [nonpub. opn.]; Ahern v.
Asset Management Consultants, Inc. (May 22, 2017, B271851)
[nonpub. opn.]; Ahern v. Chicago Title Company (May 20, 2021,
B304119) [nonpub. opn.].
6
commission was to be paid by the seller to AMC and related
individuals as the buyer’s broker. In fact, the true purchase price
was $30 million or less and “what was purported to be a
commission was an illegal and secret mark-up of the Property
purchase price in which the defendants conspired to inflate the
price to hide the fact the Property could have been purchased for
$30,000,000 or less.” That is, the purported real estate
commission did not reduce the negotiated purchase price received
by the seller, as it would if the seller truly paid the commission,
but was added to the negotiated price so that its economic burden
was shifted to the investors, thereby diluting the value of the
investment.6
The BH parties and three related defendants (Gloria
Hopper, Argent Associates, LLC and Argent Real Estate
Associates, L.P.) demanded arbitration and then petitioned the
court to compel arbitration pursuant to the mandatory
arbitration provisions in the iStar purchase and sale agreement
and the cotenancy agreement. As it related to the iStar
agreement, the Ahern parties opposed arbitration, arguing, even
if BH & Sons had standing after assigning all its interest in the
agreement to the cotenants, the claims in their complaint were
6 The Ahern parties additionally alleged the BH parties and
others had misrepresented the likelihood that Cingular Wireless
would renew its lease at the property, that a new institutional
tenant could be found if Cingular left the premises and that a
portion of the loan from PNC Bank would be used to create a
reserve account for lost rent in the event of a vacancy. Claims
were asserted (among others) for breach of fiduciary duty,
intentional misrepresentation, fraud by concealment and unfair
business practices under Business and Professions Code
section 17200 et seq.
7
outside the scope of the arbitration provision, which was
expressly limited to disputes between the seller (iStar) and the
buyer (BH & Sons), and did not cover disputes between BH &
Sons (and its agents) and the tenant in common investors. The
trial court granted the petition based solely on the arbitration
provision in the iStar purchase and sale agreement.
Following the court’s order the Ahern parties elected not to
pursue their claims against the BH parties and the related
defendants who had successfully moved to compel arbitration,
and voluntarily dismissed the complaint as to them. On
January 3, 2013, pursuant to a stipulation between the Ahern
parties and the remaining defendants, the court dismissed the
complaint’s class allegations without prejudice; and the Ahern
parties were permitted to proceed individually.
Notwithstanding their dismissal from the litigation, the
BH parties initiated arbitration pursuant to the court’s order
compelling arbitration, seeking a determination their dismissal
was with prejudice; a finding they had not orchestrated a
fraudulent scheme to induce the Ahern parties to purchase
fractional interests in the Amlap property in order to earn a
secret profit; and contractual indemnity from Ahern under the
tenant in common purchase and sale agreement and from Amlap
Ahern under the cotenancy agreement. The Ahern parties did
not participate in the arbitration hearing, maintaining their
objection that there was no valid arbitration agreement between
them and the BH parties and that the arbitrator thus lacked
jurisdiction over them.
Proceeding in the absence of the Ahern parties as
permitted under the governing arbitration rules, the arbitrator
found no merit to the Ahern parties’ claims against the
8
BH parties. To the contrary, the arbitrator concluded the Ahern
parties’ complaint arose from their own breach of their
representations and warranties that they were sophisticated
investors, had reviewed and understood the various offering and
purchase materials, including the descriptions of risk involved in
the investment in the Amlap property, and would conduct an
independent investigation of facts determined to be material to
their investment decision. As a result, the Ahern parties were
found liable for $399,000 in contractual indemnity. The superior
court confirmed the award and entered judgment in favor of the
BH parties.
We reversed the judgment in Ahern v. Asset Management
Consultants, Inc. (Aug. 11, 2015, B253974 & B257684) [nonpub.
opn.], holding the trial court had erred in compelling arbitration
and thereafter confirming the arbitration award against the
Ahern parties based on the arbitration provision in the real
estate purchase and sale agreement between iStar and BH &
Sons.7 We explained that agreement neither established nor
governed any relationship between the Ahern and the
BH parties. The matter was remanded with directions to the
superior court to vacate its September 19, 2012 order compelling
arbitration, to deny the BH parties’ petition to confirm the
arbitration award and to grant the Ahern parties’ petition to
vacate that award.
7 Our opinion expressly noted the arbitration provision in the
cotenancy agreement had not been the basis for the order
compelling arbitration, the arbitration proceedings or the order
confirming the award. (Ahern v. Asset Management Consultants,
Inc., supra, B253974 & B257684 at fn. 1.)
9
4. The Amended Pleadings and the New Demand for
Arbitration
The Ahern parties, who had filed a first amended complaint
on March 13, 2013, were granted leave to file a second amended
complaint on October 13, 2016, which, among other changes,
reinstated the BH parties, identified Thomas Ahern as Priscilla
Ahern’s surviving spouse and conformed certain allegations to be
consistent with discovery and investigation following the filing of
the first amended complaint. The second amended complaint
was filed October 19, 2016.8
In December 2016 the BH parties moved to compel
arbitration of the Ahern parties’ claims based on the arbitration
provision in the cotenancy agreement. The Ahern parties opposed
the petition, arguing their tenant in common interest in the
Amlap property had been acquired through the tenant in common
purchase and sale agreement, which did not contain an
arbitration provision, and had been promoted through
misrepresentations and omissions in the marketing and offering
materials. The cotenancy agreement concerned only the
management and operation of the investment after its
acquisition, they insisted. Accordingly, the narrow arbitration
provision in that agreement did not apply to their fraud and
breach of fiduciary duty claims. The Ahern parties also argued
the cotenancy agreement was void because it obligated BH &
Sons to provide services requiring a real estate broker’s license,
which BH & Sons, as a limited liability company, did not have
and could not obtain; AMC and Hopper were not signatories to
the cotenancy agreement and could not compel arbitration; Ahern
8 Gloria Hopper, Argent Associates, LLC and Argent Real
Estate Associates, L.P. were not named as defendants.
10
was neither a signatory to, nor a party otherwise bound by, the
agreement and could not be compelled to arbitrate; and the BH
parties had abandoned (waived) any right to compel arbitration
under the cotenancy agreement by initially proceeding to
arbitration based solely on the iStar purchase and sale
agreement.
The trial court rejected the Ahern parties’ arguments and
granted the motion to compel arbitration on January 27, 2017.9
With respect to the Ahern parties’ argument their claims against
the BH parties did not fall within the scope of the arbitration
provision in the cotenancy agreement, the court quoted Buckhorn
v. St. Jude Heritage Medical Group (2004) 121 Cal.App.4th 1401(Buckhorn), which held that, once a valid arbitration agreement
has been proved, the burden is on the party opposing arbitration
to demonstrate the arbitration clause cannot be interpreted to
require arbitration of the parties’ dispute (id. at p. 1406) and
that, even if a plaintiff was not suing on a claim based on a
contract that requires arbitration of disputes concerning the
enforcement or interpretation of their agreement, tort claims
“rooted” in the contract relationship between the parties must be
arbitrated (id. at p. 1408). The court then explained, “The
Aherns attempt to downplay the significance of the Cotenancy
Agreement to their claims, arguing that the relationship created
by that agreement ‘was BH’s retention as the cotenants’ manager
to manage and operate the Amlap Property following its
acquisition.’ [Citation.] However, the Cotenancy Agreement
itself states that ‘[t]he Cotenants have agreed to join together as
9 The court corrected its order nunc pro tunc on March 13,
2017. The court did not modify its rationale for granting the
motion to compel arbitration.
11
tenants in common to acquire, hold and operate certain Property
(defined below) for investment purposes’ and ‘[t]he Cotenants
desire to enter into this Agreement to arrange for the
management and operation of the Property, and to govern the
respective rights and obligations of each Cotenant.’ [Citation.]
Further, as the BH Defendants point out, the Aherns’ original
complaint had a different view of the Cotenancy Agreement,
alleging that ‘each [Special Purpose Entity] and the Company
were required to enter into a Cotenancy Agreement which passed
control of the aggregate investment funds and Property to the
HOPPER Defendants [defined to include the BH parties] who
were the effective issuer, broker, investment manager and the
Property Manager.’”
5. Arbitration
In the arbitration proceeding the BH parties demurred to
the claims asserted by the Ahern parties (as did the respondents
in seven other consolidated arbitration cases involving various
participants in the same or similar tenant in common or limited
partnership investments, including lawyers, accountants and real
estate brokers), asserting each cause of action in the lawsuit,
filed nearly six years after the Amlap transaction, was barred by
the governing statutes of limitation. Relying on this court’s
decision in Stella v. Asset Management Consultants, Inc. (2017)
8 Cal.App.5th 181, the BH parties argued the delayed discovery
doctrine did not save the Ahern parties’ claims because
disclosures in the informational materials provided with the
tenant in common investments—specifically, the statement in the
risk factors section of the property information package that “the
Seller would have sold the Property for a lower Purchase Price if
it were not obligated to pay such commission”—were sufficient to
12
put the investors on inquiry notice of their claims at the time of
the transaction.
Over the Ahern parties’ objection they were entitled to an
evidentiary hearing on the issue of delayed discovery,10 the
arbitrator ruled it was proper to use a demurrer procedure in an
10 Ahern has argued he first became aware of the actual
purchase price of the Amlap property and the existence of the
hidden syndication fee falsely identified as a commission in April
2012 when he was contacted by a lawyer in connection with the
lawyer’s investigation of a case brought by another investor. He
contends nothing between acquisition of the Amlap investment in
2006 and April 2012 put him on notice of this information and he
did not suspect, nor did he have reason to discover, that the
purchase price for the property, as represented to the investors,
had been marked up to include syndication fees to be paid by the
investors. To the contrary, periodic property accountings for
financial statement purposes provided by AMC and its
accountants as part of AMC’s asset management services
concealed the true facts by classifying the $1.3 million as a
tangible asset that was part of land/building values. In fact,
according to Ahern, disclosure, tax and accounting rules require
syndication fees to be broken out separately as intangible assets
reducing land/building values and separately classified in the
balance sheet as an intangible asset amortized over 180 months
for income tax purposes.
The arbitrator initially scheduled a two-week evidentiary
hearing on the limitations issue, but ultimately cancelled the
hearing. His ruling recited the general standards for deciding a
demurrer, emphasizing, “‘Where written documents are the
foundation of an action and are attached to the complaint and
incorporated therein by reference, they become a part of the
complaint and may be considered on demurrer.’” The arbitrator
also took judicial notice of our decision in Stella v. Asset
Management Consultants, Inc., supra, 8 Cal.App.5th 181.
13
arbitration and sustained the demurrer in its entirety without
leave to amend.11 In his January 2019 ruling the arbitrator
found “the language of the offering Memoranda as to the ‘fee’ or
‘commission’ was an unambiguous disclosure that the buyers
would be paying money on top of the original purchase price. If
the Claimants thought that there was some sort of fraudulent
meaning to this ‘fee’ or ‘commission’ then they should have made
a full and thorough inquiry before signing the [purchase and sale
agreements].” The arbitrator issued an interim award in favor of
the BH parties and other demurring parties in the consolidated
proceedings. In April 2020 the arbitrator adjudicated the issue of
attorney fees for the BH parties as prevailing parties and issued
a final award. Following a motion by the Ahern parties, the
arbitrator issued a corrected final award on June 24, 2020,
rejecting the Ahern parties’ requests by making two corrections
sua sponte that did not affect the fees awarded.
6. Confirmation of the Arbitration Award
The Ahern parties petitioned to vacate the award or, in the
alternative, to correct it. The BH parties cross-petitioned to
confirm the award. After hearing oral argument, the trial court
on September 8, 2020 granted the petition to confirm the award
and denied the petition to vacate.12
11 The arbitrator’s ruling decided 21 demurrers to the
operative complaints or statements of claims in eight
consolidated arbitration cases.
12 The trial court’s order granting the petition to confirm in
this case also granted petitions to confirm and denied petitions to
vacate a number of other arbitration awards from the underlying
consolidated arbitration proceedings.
14
The court ruled the plaintiffs were not prejudiced by the
arbitrator’s use of a demurrer procedure or his refusal to consider
evidence. The arbitrator’s ruling, the court explained,
demonstrated that his “findings” were derived from a favorable
reading of the allegations in the complaint, “which presumably
‘contains their strongest statement of th[ose] cause[s] of action.’
[Citation.] If the unchallenged allegations in Plaintiffs’ detailed
complaint could not save their claims, then it is unlikely that
immaterial, redundant evidence could.” Moreover, although
there was no evidentiary hearing, the court continued, the
plaintiffs had ample opportunity to present their opposition and
counterarguments. The court also ruled the arbitrator did not
exceed his jurisdiction when applying the statute of limitations to
the claims, pointing out that the plaintiffs’ contention statutes of
limitation do not apply in arbitration unless explicitly agreed to
by the parties was unsupported by any authority and, in any
event, at most constituted an unreviewable error of law.
As to the argument the arbitrator lacked jurisdiction
because the cotenancy agreement was illegal, the court ruled any
illegal aspect of the agreement (the provision of real estate broker
services by an unlicensed entity) was severable from the
remainder of the agreement, including the arbitration provision.
The court rejected various procedural objections to the nature of
the findings and ruled the arbitrator did not exceed his
jurisdiction in awarding attorney fees.
Judgment was entered in favor of the BH parties and
against the Ahern parties on October 28, 2020. The Ahern
parties filed a timely notice of appeal.
15
DISCUSSION
1. Governing Law and Standard of Review
Code of Civil Procedure section 1281.2, first paragraph,
requires the superior court to order arbitration of a controversy
“[o]n petition of a party to an arbitration agreement alleging the
existence of a written agreement to arbitrate a controversy and
that a party to the agreement refuses to arbitrate that
controversy . . . if it determines that an agreement to arbitrate
the controversy exists.” As the language of this section makes
plain, the threshold questions presented by every motion or
petition to compel arbitration are whether an agreement to
arbitrate exists (American Express Co. v. Italian Colors
Restaurant (2013) 570 U.S. 228, 233 [133 S.Ct. 2304, 186 L.Ed.2d
417] [it is an “overarching principle that arbitration is a matter of
contract”]; Bautista v. Fantasy Activewear, Inc. (2020)
52 Cal.App.5th 650, 656 [“[u]nder both federal and state law, the
threshold question presented by a petition to compel arbitration
is whether there is an agreement to arbitrate” (cleaned up)]; see
Esparza v. Sand & Sea, Inc. (2016) 2 Cal.App.5th 781, 787
[“[t]here is a strong public policy favoring contractual arbitration,
but that policy does not extend to parties who have not agreed to
arbitrate”]) and, if so, whether the parties’ dispute falls within
the scope of that agreement. (Mitsubishi Motors Corp. v. Soler
Chrysler–Plymouth, Inc. (1985) 473 U.S. 614, 626 [105 S.Ct. 3346,
87 L.Ed.2d 444] [“the first task of a court asked to compel
arbitration of a dispute is to determine whether the parties
agreed to arbitrate that dispute”]; Pinnacle Museum Tower Assn.
v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223,
236 (Pinnacle) [“‘“a party cannot be required to submit to
arbitration any dispute which he has not agreed so to submit”’”];
16
Performance Team Freight Systems, Inc. v. Aleman (2015)
241 Cal.App.4th 1233, 1244 [“[o]nly disputes that fall within the
scope of an arbitration provision are arbitrable”].)
We review the trial court’s interpretation of an arbitration
agreement de novo when, as here, that interpretation does not
depend on conflicting extrinsic evidence. (Pinnacle, supra,
55 Cal.4th at p. 236; Banc of California, N.A. v. Superior Court
(2021) 69 Cal.App.5th 357, 367; DMS Services, LLC v. Superior
Court (2012) 205 Cal.App.4th 1346, 1352.) “‘Whether an
arbitration agreement applies to a controversy is a question of
law to which the appellate court applies its independent
judgment where no conflicting extrinsic evidence in aid of the
interpretation was introduced in the trial court.’” (Jones v.
Jacobson (2011) 195 Cal.App.4th 1, 12; accord, Brown v. Ralphs
Grocery Co. (2011) 197 Cal.App.4th 489, 497.)
“In determining the scope of an arbitration clause, ‘[t]he
court should attempt to give effect to the parties’ intentions, in
light of the usual and ordinary meaning of the contractual
language and the circumstances under which the agreement was
made.’” (Victoria v. Superior Court (1985) 40 Cal.3d 734, 744;
accord, Laymon v. J. Rockcliff, Inc. (2017) 12 Cal.App.5th 812,
820; see Civ. Code, § 1648 [“[h]owever broad may be the terms of
a contract, it extends only to those things concerning which it
appears that the parties intended to contract”].) As a general
rule, arbitration should be upheld “‘“unless it can be said with
assurance that the arbitration clause is not susceptible to an
interpretation covering the asserted dispute.”’” (Rice v. Downs
(2016) 248 Cal.App.4th 175, 185; accord, Ericksen, Arbuthnot,
McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983)
35 Cal.3d 312, 323 [“doubts concerning the scope of arbitrable
17
issues are to be resolved in favor of arbitration”].) “Nonetheless,
this policy does not override ordinary principles of contract
interpretation. ‘[T]he contractual terms themselves must be
carefully examined before the parties to the contract can be
ordered to arbitration . . . .’ ‘[T]he terms of the specific
arbitration clause under consideration must reasonably cover the
dispute as to which arbitration is requested.’” (Rice, at p. 185.)
2. The Trial Court Erred in Compelling Arbitration of the
Ahern Parties’ Claims Pursuant to the Arbitration
Provision in the Cotenancy Agreement
The Ahern parties’ lawsuit seeks to recover for injuries
suffered as a result of misrepresentations and material omissions
in the marketing and sale of their tenant in common investment
in the Amlap property. Those claims did not “aris[e] in
connection with the interpretation or enforcement of the
provisions of [the cotenancy agreement], or the application or
validity thereof” and should not have been ordered to arbitration.
To reiterate, the Ahern parties’ tenant in common interest
was acquired through the purchase and sale agreement between
BH & Sons and Thomas and Priscilla Ahern, which provided BH
& Sons was selling to the Aherns an undivided percentage share
of the Amlap property and assigning and transferring to them
BH & Sons’s rights under the iStar purchase and sale agreement
with respect to their interest in the property. The purchase and
sale agreement recited that the underlying contract price for the
Amlap property was $34,550,000 and specified the cost of the
Aherns’ interest as $1,265,438. The agreement further provided
the Aherns were to deliver a deposit upon execution of the
agreement to a designated escrow holder and, unless they had
exercised their cancellation rights following receipt from BH &
18
Sons of certain additional information, to deliver the total of the
purchase price (with various adjustments) three business days
before the closing date. The tenant in common purchase and sale
agreement, prepared by BH & Sons and AMC and provided by
them to the tenant in common investors, contained no arbitration
provision.
The cotenancy agreement provided for the operation and
management of the Amlap property and the respective rights of
the tenants in common in those decisions once the tenant in
common interests had been acquired, not the purchase (or
marketing) of those interests. Although the purchase and sale
and cotenancy agreements were related to each other,13 the
acquisition of the tenant in common interests was accomplished
entirely through the purchase and sale agreement. None of the
terms for the purchase of the tenant in common interests was
contained in the cotenancy agreement; and the alleged
misrepresentations and omissions by AMC, BH & Sons and
Hopper that induced the Aherns’ investment, to the extent based
on written materials, occurred in connection with the sale of the
tenant in common interests, not the execution of the cotenancy
agreement.
a. The cotenancy agreement contains a narrow
arbitration provision
Significantly, not only did the BH parties elect not to
include an arbitration agreement in the tenant in common
13 The tenant in common purchase and sale agreement
required execution of the cotenancy agreement: Pursuant to
paragraph 6(c) of the purchase and sale agreement, delivery of an
executed cotenancy agreement “to govern the respective rights
and obligations of each Cotenant” was a condition of closing.
19
purchase and sale agreement but also the arbitration provision
they drafted for the cotenancy agreement was a limited one. As
our colleagues in Division One of this court explained in Rice v.
Downs, supra, 248 Cal.App.4th 175, “‘[T]he decision as to
whether a contractual arbitration clause covers a particular
dispute rests substantially on whether the clause in question is
“broad” or “narrow.”’” (Id. at p. 186; accord, Howard v.
Goldbloom (2018) 30 Cal.App.5th 659, 663-664.) A broad clause
includes language that requires arbitration of “‘“any claim arising
from or related to”’” the agreement. (Rice, at p. 186; see, e.g.,
Yuen v. Superior Court (2004) 121 Cal.App.4th 1133, 1138
[arbitration clause stating all disputes relating to contract shall
be submitted to arbitration was “broad”]; Coast Plaza Doctors
Hospital v. Blue Cross of California (2000) 83 Cal.App.4th 677,
684, 681 & fn. 2 [agreement to arbitrate “‘any problem or dispute’
that arose under or concerned the terms of the [service
agreement]” is “clear,” “plain” and “very broad,” giving rise to a
presumption parties intended to arbitrate claims including tort
claims relating to the agreement].)
A narrow clause, on the other hand, typically includes
language that requires arbitration of “a claim, dispute, or
controversy ‘arising from’ or ‘arising out of’ an agreement, i.e.,
excluding language such as ‘relating to this agreement’ or ‘in
connection with this agreement.’” (Rice v. Downs, supra,
248 Cal.App.4th at p. 186.) Narrow arbitration clauses are
generally interpreted “‘“to be more limited in scope”’” (Howard v.
Goldbloom, supra, 30 Cal.App.5th at p. 664; Rice, at p. 186) and
“apply only to disputes regarding the interpretation and
performance of the agreement” (Ramos v. Superior Court (2018)
28 Cal.App.5th 1042, 1052; accord, Howard, at p. 664).
20
The arbitration provision in the cotenancy agreement is
particularly narrow, both omitting any general reference to
disputes “related to” the agreement and specifically providing for
arbitration only of those disputes arising in connection with “the
interpretation and enforcement of the provisions of the
agreement.” The BH parties’ efforts to fit the Ahern parties’
claims regarding the marketing of the investment into this
narrowly drafted arbitration provision in an agreement governing
the post-acquisition management of the investment fail.
b. The investors did not pool funds through the
cotenancy agreement for the purchase of
tenant in common interests
The BH parties’ principal argument that the tenant in
common investors pooled funds pursuant to the cotenancy
agreement to purchase the property is belied by the relevant
documents. The funding activity required by the cotenancy
agreement and cited by the BH parties relates to advances that
may be necessary for “reserves,” a term defined by the agreement
as “[t]he funds set aside or amounts allocated by the Manager on
a quarterly basis for reserves for use as working capital of the
Property, to pay taxes, insurance, debt service or other costs or
expenses incident to the Property, or for any other purpose
related to the operation of the Property.” Neither the paragraph
potentially requiring advances for reserves nor any other portion
of the cotenancy agreement concerned the Aherns’ payment of
$1,265,438 to purchase an interest in the Amlap property.
To be sure, in recitals before the actual terms of the
cotenancy agreement, the parties stated, “A. The Cotenants have
agreed to join together as tenants in common to acquire, hold and
operate certain Property (defined below) for investment purposes.
21
[¶] B. The Cotenants desire to enter into this Agreement to
arrange for the management and operation of the Property, and
to govern the respective rights and obligations of each Cotenant.”
The trial court’s emphasis on sentence A when ordering
arbitration was misplaced. That sentence simply described the
historic background (as demonstrated by the tenant in common
purchase and sale agreement), which led to sentence B and its
identification of the purpose of the cotenancy agreement—a
description repeated, without variation, in multiple documents
surrounding this transaction prepared by BH & Sons and AMC.
Similarly, reading paragraph 2.1 as a whole, as we must (see Civ.
Code, § 1641), the statement the cotenants “have agreed to jointly
acquire and operate the Property” does not mean they jointly
agreed to acquire the Amlap property through the operation of
the cotenancy agreement. A subsequent sentence in
paragraph 2.1 makes clear the agreement “merely [sets] forth the
terms and conditions upon which Cotenants shall hold and
manage undivided interests in the Property,” not the terms and
conditions under which those interests were acquired.
The trial court’s reasoning notwithstanding, the superseded
allegation in the Ahern parties’ original complaint that, pursuant
to the cotenancy agreement, “control of the aggregate investment
funds and Property” was passed to the “Hopper defendants” is
also insufficient to bring claims regarding the marketing of the
investments within the scope of the cotenancy agreement’s
narrow arbitration provision.14 First, as the Ahern parties
14 In addition to the language from the original complaint
quoted by the trial court when ordering arbitration, the
BH parties in their respondents’ brief note that in a subsequent
paragraph of the original complaint the Ahern parties alleged the
22
explain, the original complaint’s description of the cotenancy
agreement as a device for aggregating investor funds was
incorrect (and, indeed, inconsistent with the express terms of the
cotenancy agreement) and was not repeated in the first amended
complaint, filed in March 2013, long before the January 2017
order compelling arbitration, or in subsequent iterations of their
pleading. Second, even if the cotenancy agreement had been the
conduit for distribution of the allegedly secret buyer-funded
commission, as well as for payment of various professional fees
relating to the Amlap property transaction, claims based on the
BH parties’ fraudulent representations during the marketing of
the investors’ interests would not fall within the scope of the
agreement’s arbitration provision, which, as discussed, did not
broadly encompass any dispute between the parties relating to
the cotenancy agreement, but was limited to disputes concerning
the interpretation or enforcement of that agreement’s terms.
(See Howard v. Goldbloom, supra, 30 Cal.App.5th at pp. 669-671
[claims for breach of fiduciary duty to minority shareholders did
not fall within scope of narrow arbitration provisions in plaintiff’s
employment agreements or stock repurchase agreement with
defendants].)
c. The Ahern parties’ extracontractual claims are not
“rooted in” the cotenancy agreement
Neither the “rooted in” concept, as articulated in Buckhorn,
supra, 121 Cal.App.4th 1401, nor Civil Code section 1642’s
interpretative tool, as applied in Brookwood v. Bank of America
(1996) 45 Cal.App.4th 1667 (Brookwood)—authority on which the
cotenancy agreement was the vehicle for aggregating funds
raised in the offering “to be used to pay legal and accounting fees
[and] the secret $1,300,000 AMC commission . . . .”
23
BH parties rely—supports broadly reading the arbitration clause
in the cotenancy agreement to include the Ahern parties’ claims.
The “rooted in” concept for determining arbitrability
applies in cases involving parties whose employment agreements
or other contractual arrangements include a broad arbitration
provision. Tort claims that arise from those contractual
relationships—that have their roots in it—are subject to
arbitration. (E.g., Coast Plaza Doctors Hospital v. Blue Cross of
California, supra, 83 Cal.App.4th at pp. 686, 689 [arbitration
required where hospital’s complaint was based on insurer’s
refusal to renegotiate reimbursement rates provided for in
contract; “[i]t has long been the rule in California that a broadly
worded arbitration clause, such as we have here, may extend to
tort claims that may arise under or from the contractual
relationship”].) As more recently explained in Howard v.
Goldbloom, supra, 30 Cal.App.5th at page 664, “Broad arbitration
clauses are interpreted to apply to extracontractual disputes
between the contracting parties, ‘“so long as they have their roots
in the relationship between the parties which was created by the
contract.”’” (Accord, Rice v. Downs, supra, 248 Cal.App.4th at
p. 188 [“even under a very broad arbitration provision, such as
‘any controversy or claim arising out of or relating to this
agreement,’ tort claims must ‘“have their roots in the relationship
between the parties which was created by the contract”’ before
they can be deemed to fall within the scope of the arbitration
provision”].)
As the BH parties observe, in Buckhorn, supra,
121 Cal.App.4th 1401, the court of appeal concluded an
arbitration clause in an employment agreement, which all parties
agreed covered the wrongful termination claim of a doctor who
24
had been dismissed by a medical group, also applied to the
doctor’s causes of action for defamation and interference with
prospective business advantage even though those alleged torts
occurred after termination. Those additional claims were based
on allegations the medical group had informed the doctor’s
patients he was no longer with the group “because of marital
problems, mental problems, [or] loss of his insurance coverage,
and that he was no longer practicing medicine, or that he had
‘“just disappeared.”’” (Id. at p. 1405.) The appellate court held
the issue of arbitrability “turns on whether the tort claims are
‘rooted’ in the contractual relationship between the parties, not
when they occurred.” (Id. at p. 1407.) And his claims were so
rooted: They were based on his expectation of future income from
his patients, who had consulted him in his capacity as an
employee of the defendant medical group. Thus, the court
reasoned, the employment agreement “would inform the extent of
any economic interest” of the doctor’s with which the medical
group might have interfered. (Id. at pp. 1407-1408.) “Because
[the doctor] failed to demonstrate his tort claims were ‘wholly
independent’ of the employment agreement,” the court concluded
his claims must be submitted to arbitration. (Id. at p. 1408.)
Contending the arbitration provision in Buckhorn involved
a narrow arbitration provision similar to the one in the cotenancy
agreement, the BH parties argue the “rooted in” doctrine applies
here and the Ahern parties’ claims are rooted in the cotenancy
agreement. Neither prong of this argument is correct. The
original arbitration agreement between Dr. Buckhorn and his
medical group was similar to the narrow clause in the cotenancy
agreement. It read, “In the event that a dispute arises between
the parties concerning the enforcement or the interpretation of
25
any provisions of this Agreement, such dispute shall be
submitted to arbitration for resolution.” (Buckhorn, supra,
121 Cal.App.4th at p. 1404, fn. 1.) But, as the court of appeal
explained, a year after Dr. Buckhorn entered into his original
professional services agreement with the medical group, the
group modified the agreement, which, as amended “provided for
mandatory arbitration of ‘[a]ny dispute between the parties.’”
(Id. at p. 1404.) The medical group’s motion to compel arbitration
relied on both the original, narrow clause and the amended, all-
encompassing arbitration provision. (Id. at p. 1405.) No
comparable all-inclusive arbitration agreement existed between
the BH parties and the Ahern parties.
In addition, even were we to apply the “rooted in” concept
in this case when evaluating the scope of the arbitration
provision in the cotenancy agreement, the Ahern parties’ claim
they were fraudulently induced by the BH parties to invest in the
Amlap property has its roots in the contractual relationship
between the Aherns and BH & Sons created by the tenant in
common purchase and sale agreement, not the cotenancy
agreement. (See Rice v. Downs, supra, 248 Cal.App.4th at p. 188
[to be arbitrable, tort claims must have their roots in the
relationship between the parties that was created by the contract
containing the arbitration provision].)
d. Civil Code section 1642 does not authorize importing
the arbitration provision into the tenant in common
purchase and sale agreement
Civil Code section 1642 provides, “Several contracts
relating to the same matters, between the same parties, and
made as parts of substantially one transaction, are to be taken
together.” As an alternative to their position the Ahern parties’
26
claims are “rooted in” the cotenancy agreement, the BH parties,
citing only Brookwood, supra, 45 Cal.App.4th 1667, argue the
cotenancy agreement and the tenant in common purchase and
sale agreement should be construed together pursuant to
section 1642 and, as a consequence, the arbitration provision in
the former applies to disputes involving the latter.
The BH parties misconstrue Civil Code section 1642 when
they simplistically contend the terms of one agreement are
necessarily incorporated into all other agreements that form
parts of a single transaction. As the Supreme Court explained in
Mountain Air Enterprises, LLC v. Sundowner Towers, LLC (2017)
3 Cal.5th 744, section 1642 directs courts to construe agreements
relating to one transaction in light of one another, not to merge
them into a single contract: “‘While it is the rule that several
contracts relating to the same matters are to be construed
together [citation], it does not follow that for all purposes they
constitute one contract.’ [Citation.] ‘“[J]oint execution would
require the court to construe the two agreements in light of one
another; it would not merge them into a single written
contract.”’” (Mountain Air Enterprises, at p. 759; accord, R.W.L.
Enterprises v. Oldcastle, Inc. (2017) 17 Cal.App.5th 1019, 1031.)
The fundamental canon of contract interpretation remains
to give effect to the mutual intention of the parties as it existed at
the time of contracting. (Civ. Code, § 1636; Hartford Casualty
Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, 288;
Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264.)
That basic principle applies equally to the interpretation of
contracts with arbitration provisions. (Victoria v. Superior Court,
supra, 40 Cal.3d at p. 743.) Civil Code section 1642 is simply one
27
of the rules referred to in section 163715 for aiding in the
interpretation of a contract when the intent of the parties is
otherwise doubtful. (See Subaru of America, Inc. v. Putnam
Automotive, Inc. (2021) 60 Cal.App.5th 829, 838; Hartford
Accident & Indemnity Co. v. Sequoia Ins. Co. (1989)
211 Cal.App.3d 1285, 1300 [“[S]ection 1642 is simply a rule to aid
in the interpretation of contracts and to allow the construction of
two contracts together in pursuit of that purpose. It does not, as
Transamerica appears to contend, make two contracts one for all
purposes”].)
Here, as reflected in the language of the two agreements,
both of which were prepared by the BH parties, the intention is
clear that claims arising from the cotenancy agreement would be
subject to mandatory arbitration while claims arising from the
purchase and sale agreement would not. This is made plain not
only from the fact that only the cotenancy agreement contained
an arbitration provision but also from the legal costs provision in
the purchase and sale agreement (paragraph 9(d)), which
expressly contemplated the tenant in common investor or BH &
Sons could initiate a lawsuit or other proceeding before a “court,
arbitrator or other authority.” In addition, while not dispositive,
that the cotenancy agreement contained an integration clause
also weighs against merging its provisions with those of the
purchase and sale agreement. (See R.W.L. Enterprises v.
Oldcastle, Inc., supra, 17 Cal.App.5th at p. 1031.)
15 Civil Code section 1637 provides, “For the purpose of
ascertaining the intention of the parties to a contract, if
otherwise doubtful, the rules given in this Chapter are to be
applied.”
28
The decision in Brookwood, supra, 45 Cal.App.4th 1667,
upon which the BH parties rely, is not to the contrary.
Brookwood involved a lawsuit for wrongful termination/sex
discrimination in violation of California’s Fair Employment and
Housing Act (FEHA) (Gov. Code, § 12900 et seq.) filed by
Johnetta Brookwood against her former employers Bank of
America NT & SA (Bank) and BA Investment Services, Inc.
(BAIS), a Bank-affiliated company. BAIS hired Brookwood as an
investment specialist to promote and sell BAIS’s services (mutual
funds, stocks and bonds) to Bank’s clients; Bank hired Brookwood
to sell its annuities. (Id. at pp. 1670-1671.) Brookwood signed a
registered representative agreement with BAIS that recited she
was “‘dually employed by [Bank] pursuant to an additional
employment agreement’” that contained an arbitration provision.
In addition, Brookwood transferred to BAIS her existing
registration with the National Association of Securities Dealers
(NASD) using a U-4 form, which mandated arbitration of any
dispute between her “and my firm, or a customer, or any other
person” that was required to be arbitrated under NASD rules.
(Id. at p. 1672.) On the same day Brookwood signed an
employment agreement with Bank, which acknowledged her dual
employment with BAIS; provided that Bank or BAIS could
terminate Brookwood’s employment at any time, with or without
cause; and specified that termination by BAIS automatically
terminated her employment by Bank unless Bank determined
otherwise. That agreement contained no arbitration provision.
(Ibid.)
The court of appeal affirmed the order compelling
Brookwood to arbitrate her wrongful termination claims against
both BAIS and Bank, holding substantial evidence supported a
29
finding that Bank’s contract, BAIS’s contract and the
U-4 transfer form were parts of substantially one transaction and
should be taken together. (Brookwood, supra, 45 Cal.App.4th at
p. 1675.)16 The court explained, “Bank and BAIS are related
companies that hired plaintiff at the same time in a dual capacity
with principal responsibilities that required a securities
registration. This evidence supports a finding that the
employment agreement for salaried employees, registered
representative agreement, and U-4 form, were parts of
substantially one transaction and should be taken as one. Thus,
the arbitration covenant in the [r]egistered representative
agreement, U-4 form, and incorporated NASD provisions ran
between plaintiff and Bank notwithstanding there was no specific
arbitration provision in the employment agreement for salaried
employees.” (Id. at pp. 1675-1676.)
Given the express acknowledgement in the agreements of
Brookwood’s dual employment, her simultaneous termination by
the two related entities, and the fact her FEHA claims against
BAIS were unquestionably subject to arbitration, the conclusion
her FEHA claims against Bank should also be arbitrated—that
the parties intended Brookwood’s fully intertwined,
contemporaneous employment relationships with the two entities
be treated in the same manner—is unremarkable. Here, in
contrast, even if considered parts of substantially one
16 The court of appeal first rejected Brookwood’s primary
claim that arbitration should not be compelled because she did
not know the registered representative agreement and U-4 form
required arbitration. (Brookwood, supra, 45 Cal.App.4th at
pp. 1673-1674.)
30
transaction,17 no comparable interrelationship of the
tenant in common purchase and sale agreement and cotenancy
agreement existed. The purchase and sale agreement (and the
property information package that marketed the investment)
concerned acquisition of the Amlap property by the investors.
The cotenancy agreement governed management and operations
of the Amlap property once the investment had been made. And
as discussed, the separate agreements, covering distinct and
successive phases of the Amlap investment, contained different
provisions relating to dispute resolution, with nothing in the
tenant in common purchase and sale agreement suggesting
arbitration was mandatory.
In sum, the Ahern parties’ lawsuit does not involve the
interpretation or enforcement of a provision of the cotenancy
agreement; their claims are not “rooted in” the cotenancy
agreement; and applying Civil Code section 1642’s interpretative
tool does not justify requiring arbitration of a dispute that relates
to the acquisition of the Amlap investment, not to its
management and operation. The trial court erred in ordering
arbitration in January 2017, and the ensuing order confirming
17 The issue on appeal in Brookwood was whether substantial
evidence supported the trial court’s implied finding that Bank’s
contract, BAIS’s contract and the U-4 form were substantially
one transaction and should be taken together. (Brookwood,
supra, 45 Cal.App.4th at p. 1675.) The trial court here concluded
the controversy came within the scope of the cotenancy
agreement’s arbitration provision and did not consider, explicitly
or implicitly, whether a dispute relating only to the purchase and
sale agreement should nonetheless be subject to mandatory
arbitration.
31
the arbitration award and judgment in favor of the BH parties
must be reversed.
DISPOSITION
The judgment confirming the arbitration award is reversed.
The matter is remanded with directions to deny the petition to
confirm the arbitration award, to grant the petition to vacate the
award and to vacate the January 27, 2017 order compelling
arbitration. The Ahern parties are to recover their costs on
appeal.
PERLUSS, P. J.
We concur:
SEGAL, J.
FEUER, J.
32