Tuesday, February 12, 2013
Trial Court Ordered to Reconsider Denial of Binding Arbitration
Panel Limits Judge’s Discretion Under Statute Dealing With Possibility of Conflicting Adjudications
By KENNETH OFGANG, Staff Writer
An Orange Superior Court judge abused his discretion by denying all motions to compel arbitration in a case where at least some of the claims might have been arbitrated without potentially resulting in conflicting adjudications, the Fourth District Court of Appeal ruled yesterday.
Div. Three said the trial judge must reconsider the denials of six motions to compel arbitration of claims against the promoters of a series of real estate investments. Judge Nancy Wieben Stock had denied the motions under Code of Civil Procedure Sec. 1281.2(c).
The statute lays out three conditions under which parties may avoid arbitration, despite a valid, enforceable agreement. At least one of the parties to the agreement must be involved in litigation with a party that did not agree to arbitration, that litigation must involve the same transaction or related transactions, and there must be a possibility of conflicting factual or legal rulings if the litigation and arbitration go forward separately.
Delay of Arbitration
The law also provides that where the dispute between parties to an arbitration agreement involves both arbitrable and non-arbitrable claims, the court may delay arbitration if it determines that litigating the non-arbitrable claims may make arbitration unnecessary.
The case ruled on yesterday involved about 250 plaintiffs who sued David and Linda Colton and related defendants who promoted six real estate investment funds between 1994 and 2004. Each fund involved a portfolio of commercial real estate, and gave each investor two distinct investment options, creating 12 distinct groups of plaintiffs.
“Share” investors became partners in an entity that managed a fund’s entire portfolio. “Tenant-in-common” investors acquired a fractional ownership in specific properties within a fund’s portfolio.
Some investors held only one type of investment, others held both. The defendants could not compel all plaintiffs to arbitrate because for two of the funds, the relevant documents contained no arbitration clauses, and for two others, only the share investors signed agreements to arbitrate.
Causes of Action
The plaintiffs alleged causes of action including bad faith, fraud, breach of fiduciary duty, and elder abuse with regard to each of the funds.
In denying the motions to compel arbitration, the trial judge concluded that allowing arbitration would “raise the potential of incomplete remedies, inconsistent rulings and substantial delays for either the arbitration Investors or the Court Investors.”
Subsequent to that ruling, the judge sustained demurrers to all causes of action, with leave to amend. Prior to the filing of an amended complaint, however, the Court of Appeal stayed the entire action pending a ruling on the arbitration motions.
Justice Richard Aronson, writing yesterday for the Court of Appeal, said the record did not contain substantial evidence to support denial of the motions.
The jurist explained that the court can only deny arbitration under Sec. 1281.2(c) if all three of the statutory conditions are met, so that if any of those conditions were not met as to any of the six motions, it was an abuse of discretion to grant the motion. Because the trial judge did not distinguish among the motions in making the order, he added, reversal is required unless there was substantial evidence that the conditions were met as to all of the claims.
The mere fact that the same arguments and evidence might have to be presented in both arbitration and litigation is insufficient to deny arbitration of distinct claims, Aronson said.
In this particular case, he concluded, the plaintiffs failed to show that any of the six groups of plaintiffs who agreed to arbitration met all three of the Sec. 1281.2(c) conditions. He noted, for example, that if an investor put money into two different were forced to litigate his claims with respect to one fund, but to arbitrate his claims with respect to another, this would not necessarily result in conflicting rulings in the sense used in the statute, absent a showing—which the plaintiffs did not make, but could make on remand—that there were issues of fact or law common to the claims regarding those funds.
The case is Acquire II, Ltd. v. Colton Real Estate Group, G046241.
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