Plaintiffs and respondents
Defendants filed six motions seeking to compel six of the 12 groups of Plaintiffs to arbitrate their claims relating to these investments. Defendants could not compel all Plaintiffs to arbitrate their claims because Defendants failed to include arbitration provisions in the governing documents for each investment option in each fund. Based on Code of Civil Procedure section
Section 1281.2(c) grants a trial court discretion to refuse to enforce written arbitration agreements when (1) a party to the agreement also is a party to pending litigation with a third party who did not agree to arbitration; (2) the pending third party litigation arises out of the same transaction or series of related transactions as the claims subject to arbitration; and (3) the possibility of conflicting rulings on common factual or legal issues exists. A trial court has no discretion to deny arbitration under section 1281.2(c) unless all three of these conditions are satisfied.
Because Defendants failed to request a statement of decision, we must presume the trial court found section 1281.2(c)'s conditions were satisfied on each of Defendants' six motions. We must, however, reverse the trial court's decision because the record lacks substantial evidence to support the implied finding each of section 1281.2(c)'s conditions were satisfied on each motion. We remand the matter for the court to consider each motion under section 1281.2(c). As explained below, some groups of Plaintiffs may satisfy section 1281.2(c)'s conditions, but we cannot make that determination on the current record.
The Colton Entities are in the business of purchasing and managing commercial real property. They create separate "funds," formed as either limited partnerships or limited liability companies, to solicit investors and take title to each portfolio of commercial office buildings they purchase. One of the Colton Entities serves as the general partner or managing member for each fund and manages the portfolio of properties the fund holds. The Coltons and McClintock are directors, officers, and shareholders of the Colton Entities.
Each fund the Colton Entities created had two types of investors. "Share investors" purchased an interest in the fund itself and became either limited partners or members depending on whether the fund was formed as a limited partnership or a limited liability company. Share investors did not hold title to any of the commercial properties held in the fund, but rather held a passive
The Colton Entities issued a separate private placement memorandum to solicit investors in each fund. They first solicited share investors for a fund and then later solicited tenant in common investors for specific properties the fund purchased. Share investors executed a subscription agreement and either an operating agreement or a limited partnership agreement that defined the interest they purchased and the Colton Entities' rights and obligations. Tenant in common investors executed a subscription agreement, tenant in common agreement, and property management agreement to define their interests in the property they purchased and the Colton Entities' rights and obligations regarding the property.
At issue in this case are six funds the Colton Entities created: (1) Integrity Fund II, LP; (2) Provider Fund, LP; (3) Advantage Fund, LLC; (4) Discovery Fund, LLC; (5) Freedom Fund, LLC; and (6) Victory Fund, LLC. The Colton Entities created and solicited investors for each of these funds at different times between 1994 and 2004. Each of these funds had both share investors and tenant in common investors, owned separate properties, and were governed by separate contracts with their investors.
Plaintiffs comprise approximately 250 investors in these six funds. Some Plaintiffs are share investors only, some are tenant in common investors only,
Plaintiffs filed this action in March 2011, alleging a wide variety of claims against Defendants based on their fraudulent conduct in soliciting investors and managing the properties held by the funds. Plaintiffs filed a first amended complaint in August 2011 alleging some combination of the following 12 causes of action regarding each fund for a total of 70 causes of action: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) breach of fiduciary duty; (4) fraudulent concealment; (5) constructive fraud; (6) unfair business practices; (7) accounting; (8) declaratory relief; (9) unjust enrichment; (10) failure to make financial information available in violation of Corporations Code sections 17106 and 15903.04; (11) elder abuse under California law; and (12) elder abuse under Utah law.
Defendants filed six motions to compel different groups of Plaintiffs to arbitrate their claims based on arbitration agreements certain Plaintiffs signed when they purchased their investments. Specifically, Defendants filed separate motions to compel the following groups of Plaintiffs to arbitrate their claims: (1) Advantage Fund share investors; (2) Discovery Fund share investors; (3) Freedom Fund share investors; (4) Freedom Fund tenant in common investors; (5) Victory Fund share investors; and (6) Victory Fund tenant in common investors. Defendants did not seek to compel arbitration with Plaintiffs who are Integrity Fund tenant in common investors, Provider Fund share investors, Provider Fund tenant in common investors, Advantage Fund tenant in common investors, or Discovery Fund tenant in common investors because they did not sign arbitration agreements.
Plaintiffs opposed the motions, arguing the trial court should refuse to enforce the arbitration agreements under section 1281.2(c) because Defendants would remain parties in pending litigation with those investors who did not agree to arbitration, which created the possibility of conflicting rulings on common factual or legal issues. Only the Freedom Fund tenant in common investors opposed the motions on the ground they did not agree to arbitrate their claims. All other groups of Plaintiffs conceded they agreed to arbitration. No group of Plaintiffs argued the arbitration agreements were unenforceable on any ground other than section 1281.2(c).
Unlike the agreement in Biomagic, Defendants' agreement with the Victory Fund tenant in common investors included both a general choice of law provision and an arbitration provision that made three separate references incorporating California's procedural rules on arbitration. Specifically, the arbitration provision stated: "[J]udgment entered upon the award rendered may be enforced by appropriate judicial action pursuant to the California Code of Civil Procedure. ... By executing this Agreement you are agreeing to have any dispute arising out of this Agreement included in the arbitration of disputes provision decided by neutral arbitration as provided by California law...." "[I]n any event each Tenant shall be entitled to discovery in accordance with California Code of Civil Procedure Section 1283.05." (Italics added.) These repeated references to California's procedural rules on arbitration establish the parties intended section 1281.2(c) to apply in this case; a specific reference to section 1281.2(c) was not required. (Mount Diablo, supra, 101 Cal.App.4th at p. 722 [a contract's general choice of law
A party's failure to request a statement of decision when one is available has two consequences. First, the party waives any objection to the trial court's failure to make all findings necessary to support its decision. Second, the appellate court applies the doctrine of implied findings and presumes the trial court made all necessary findings supported by substantial evidence. (Agri-Systems, supra, 168 Cal.App.4th at p. 1135; Metis, supra, 200 Cal.App.4th at p. 691, fn. 7.) This doctrine "is a natural and logical corollary to three fundamental principles of appellate review: (1) a judgment is presumed correct; (2) all intendments and presumptions are indulged in favor of correctness; and (3) the appellant bears the burden of providing an adequate record affirmatively proving error." (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 58 [58 Cal.Rptr.3d 225].)
Here, section 1291 permitted Defendants to request a statement of decision on the principal controverted issue: Whether Plaintiffs met section
Although Plaintiffs point out Defendants' failure to request a statement of decision, they nonetheless argue we should review the trial court's ruling under the abuse of discretion standard. But the issue is not whether the trial court abused the discretion granted by section 1281.2(c), but whether the trial court erred in deciding section 1281.2(c) applied. In other words, the issue is whether the trial court erred by impliedly finding each of section 1281.2(c)'s conditions was satisfied.
When section 1281.2(c) applies, "the trial court's discretionary decision as to whether to stay or deny arbitration is subject to review for abuse." (Laswell, supra, 189 Cal.App.4th at p. 1406; see Birl v. Heritage Care, LLC (2009) 172 Cal.App.4th 1313, 1318 [91 Cal.Rptr.3d 777]; Rowe, supra, 153 Cal.App.4th
We emphasize the allegations of the parties' pleadings may constitute substantial evidence sufficient to support a trial court's finding that section 1281.2(c) applies. (Abaya v. Spanish Ranch I, L.P. (2010) 189 Cal.App.4th 1490, 1498-1499 [118 Cal.Rptr.3d 345] (Abaya).) A party relying on section 1281.2(c) to oppose a motion to compel arbitration does not bear an evidentiary burden to establish a likelihood of success or make any other showing regarding the viability of the claims and issues that create the possibility of conflicting rulings. (Abaya, at pp. 1498-1499.) An evidentiary burden is unworkable under section 1281.2(c) because the question presented is whether a "`possibility'" of conflicting rulings exists (Abaya, at p. 1499) and a motion to compel arbitration is typically brought before the parties have conducted discovery. Moreover, section 1281.2(c) prohibits a trial court from considering the merits of a party's claims when ruling on a motion to compel arbitration. (§ 1281.2(c); California Correctional Peace Officers Assn. v. State of California (2006) 142 Cal.App.4th 198, 205, 211 [47 Cal.Rptr.3d 717].)
Accordingly, the issue before us is whether the allegations of the parties' pleadings or other evidence in the record supports an implied finding that Plaintiffs' claims arise out of a series of related transactions and create the possibility of conflicting rulings on common factual and legal issues.
Defendants made six separate motions to compel six distinct groups of Plaintiffs to arbitrate their claims. The trial court denied the motions based on section 1281.2(c) without separately addressing each of the three conditions required for that subdivision to apply. Accordingly, to affirm the trial court's ruling we must find substantial evidence in the record to support the implied finding section 1281.2(c)'s three conditions were satisfied for each motion.
For example, to affirm the trial court's decision denying Defendants' motion to compel the Victory Fund share investors to arbitrate their claims, the record must contain substantial evidence to support the findings that (1) Defendants are involved in pending litigation with third parties who did not agree to arbitration (e.g., the Provider Fund share investors, Integrity Fund tenant in common investors, Provider Fund tenant in common investors, Advantage Fund tenant in common investors, or Discovery Fund tenant in common investors);
After reviewing the entire record, we are unable to find substantial evidence to support the findings required to deny any of Defendants' six motions based on section 1281.2(c). Although the record shows some parties to the arbitration agreements (i.e., Defendants) also are defending claims brought by third parties who did not agree to arbitration, the record fails to show that (1) the claims of any group of Plaintiffs who agreed to arbitration and the claims of any group of Plaintiffs who did not agree to arbitration arose out of the same transaction or series of related transactions and (2) the claims of those same two groups of Plaintiffs share a common factual or legal issue that creates the possibility of conflicting rulings.
Plaintiffs' claims regarding Defendants' management of the funds and properties also arose out of separate transactions because Defendants managed different funds and different properties for each group of Plaintiffs. A transaction regarding one property or fund did not affect a separate property held in a separate fund. Separate agreements governed Defendants' management of each fund and each group of properties. Specifically, Defendants managed the properties the funds held for the share investors under separate operating agreements governing each fund and they managed the separate properties each fund owned with the tenant in common investors under separate property management agreements.
For similar reasons, the record does not show a common factual or legal issue that would create the possibility of conflicting rulings between those Plaintiffs who agreed to arbitration and those who did not. Defendants' alleged misconduct related to different funds and properties, occurred at different times, and different contracts applied for each group of Plaintiffs.
Plaintiffs argue section 1281.2(c) applies to all of their claims because Defendants engaged in the same pattern of mismanagement as to all funds and properties. Plaintiffs, however, fail to cite any allegations in their complaint or other evidence in the record to show how Defendants' conduct in managing separate properties held in separate funds arose from the same transaction or a series of related transactions, or how Defendants' conduct in managing separate properties and funds created the possibility of conflicting rulings on common factual or legal issues. Because the record shows each fund owned and managed separate properties governed by separate agreements entered into at different times, Plaintiffs' bare conclusion that Defendants engaged in the same pattern of mismanagement with all properties and funds fails to satisfy section 1281.2(c)'s requirements. Plaintiffs must point to specific allegations in their complaint or other evidence in the record showing how separate transactions regarding separate properties and funds amount to a series of related transactions and how the claims regarding those separate transactions present the possibility of conflicting rulings on legal or factual issues common to the claims arising from those separate transactions. (See
Plaintiffs' counsel in the trial court displayed a PowerPoint presentation of claims they contend arose out of a series of related transactions and shared a common issue creating the possibility of conflicting rulings. None of Plaintiffs' examples, however, shows all three of section 1281.2(c)'s conditions were satisfied for any single group of Plaintiffs who agreed to arbitrate their claims. At best, Plaintiffs' examples potentially satisfy one or two of section 1281.2(c)'s conditions for a particular group of Plaintiffs. But even when considered together, Plaintiffs' examples failed to show all three of section 1281.2(c)'s conditions were satisfied for any single group of Plaintiffs.
Plaintiffs' first example involves an approximately $7.2 million loan they contend the Freedom Fund made to a partnership that owned "Discovery Fund Property [N]umber 4," an entity not subject to arbitration. According to
Making and taking a loan are opposite sides of the same transaction and each involves different risks and obligations. The Freedom Fund's operating agreement governed Defendants' conduct in making the loan while the Discovery Fund's tenant in common agreement and property management agreement governed Defendants' conduct in taking the loan. A ruling that Defendants breached their duties to the Freedom Fund share investors by making the loan and a ruling Defendants did not breach their duties to the Discovery Fund tenant in common investors by taking the loan (or vice versa) are not conflicting rulings on a common factual or legal issue because different rights and duties are involved on each side of the transaction.
Plaintiffs' second example involves a property they refer to as "parcel number 3." Plaintiffs contend this is a single parcel of land that includes two office buildings owned by different funds — one owned by the Victory Fund and one owned by the Freedom Fund — without separately recording those interests on the title. According to Plaintiffs, this parcel shows the Victory and Freedom Funds are "`tied at the hip'" and have claims arising out of the same transaction or series of related transactions. Plaintiffs, however, identify no factual or legal issue regarding this parcel common to the claims of the Victory Fund and Freedom Fund Plaintiffs that could create conflicting rulings. Indeed, Plaintiffs identify no specific claim relating to this parcel at all.
Plaintiffs' third example involves a group of several Plaintiffs who invested in both the Provider Fund and the Advantage Fund. Plaintiffs contend enforcing the arbitration agreements would require this group of Plaintiffs to litigate their claims regarding the Provider Fund while arbitrating their claims regarding the Advantage Fund. But Plaintiffs identify no specific factual or legal issue common to these two sets of claims that could create the possibility of conflicting rulings. More importantly, these Plaintiffs are not third parties for section 1281.2(c)'s purposes because they agreed to arbitrate some of their claims even though they did not agree to arbitrate all of them.
When the dispute between parties to an arbitration agreement includes both arbitrable and nonarbitrable claims, section 1281.2(c) limits the trial court's discretion to delaying arbitration, and only if the court first determines that resolving the nonarbitrable claims in court may make arbitration of the arbitrable claims unnecessary. (RN Solution, supra, 165 Cal.App.4th at pp. 1521-1522; see § 1281.2(c) ["If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies."].) Accordingly, the fact a Plaintiff who made multiple investments may have to arbitrate his or her claims regarding one investment and litigate his or her claims regarding another investment is not a sufficient basis for denying arbitration under section 1281.2(c).
Plaintiffs' final example involves a group of Plaintiffs who invested in the Discovery Fund as both share investors and tenant in common investors. According to Plaintiffs, enforcing the arbitration agreements would require these Plaintiffs to both litigate and arbitrate claims regarding Defendants' management of the same properties because the Discovery Fund share investors signed an arbitration agreement but the Discovery Fund tenant in common investors did not. Section 1281.2(c), however, does not allow a trial court to deny arbitration under these circumstances because these Plaintiffs are not third parties for section 1281.2(c)'s purposes. As explained above, when parties who agree to arbitration assert both arbitrable and nonarbitrable claims, section 1281.2(c) does not allow the court to deny arbitration. (Laswell, supra, 189 Cal.App.4th at pp. 1407, 1409; RN Solution, supra, 165 Cal.App.4th at pp. 1519, 1521.) Instead, the court's discretion is limited to delaying arbitration if first resolving the nonarbitrable claims may make arbitration of the other claims unnecessary.
A trial court must first determine whether section 1281.2(c) applies. Only then may the court consider judicial economy and other similar factors in deciding how to exercise the discretion section 1281.2(c) confers — for example, whether to deny arbitration and require all parties to litigate their dispute, whether to stay arbitration while the litigation proceeds, or whether to stay the litigation while the arbitration proceeds. (See Cronus Investments, Inc. v. Concierge Services (2005) 35 Cal.4th 376, 393 [25 Cal.Rptr.3d 540, 107 P.3d 217]; Doan v. State Farm General Ins. Co. (2011) 195 Cal.App.4th 1082, 1100-1101 [125 Cal.Rptr.3d 793].) But a trial court must decide whether section 1281.2(c) applies based only on the three conditions identified in that subdivision. (See Laswell, supra, 189 Cal.App.4th at p. 1405; Molecular Analytical, supra, 186 Cal.App.4th at p. 709; Rowe, supra, 153 Cal.App.4th at p. 1288, fn. 6.) Section 1281.2(c)'s primary purpose is to avoid conflicting rulings, not further judicial economy. (See Whaley v. Sony Computer Entertainment America, Inc. (2004) 121 Cal.App.4th 479, 488 [17 Cal.Rptr.3d 88] ["the statute was intended primarily to prevent conflicting rulings resulting from arbitration proceedings and other related litigation arising out of the same transaction"].)
Finally, based on Abaya, Plaintiffs argue claimants who join together to sue the same defendants on the same claims satisfy section 1281.2(c)'s conditions when some of the claimants agreed to arbitration and others did not. Abaya is distinguishable and provides no support for Plaintiffs' position the trial court properly denied all of Defendants' motions.
In Abaya, approximately 120 mobilehome park residents sued the park's owners, alleging a variety of claims based on the owners' failure to maintain
Abaya is distinguishable because the plaintiffs in Abaya lived in the same mobilehome park and complained about the owners' management of the same common facilities. Here, Plaintiffs are investors in six separate investment funds and numerous separate properties who complain about Defendants' conduct in inducing separate investments and managing separate properties. Abaya would be analogous if this case involved a single investment fund because Plaintiffs would be asserting claims relating to their investment in the same fund and Defendants' management of the same properties.
Although not raised by Plaintiffs, Abaya nonetheless points to a basis on which the trial court potentially could deny at least some of Defendants' motions under section 1281.2(c). Specifically, the trial court may base a denial on the possibility of conflicting rulings regarding claims share investors and tenant in common investors in the same fund assert against Defendants for their management of the same piece of property when the share investors agreed to arbitration, but the tenant in common investors did not.
As explained above, each of the six funds at issue had two types of investors: share investors and tenant in common investors. The share investors became partners or members in the entity that took title to the properties the fund purchased and managed, but did not own an interest in any specific property. The tenant in common investors purchased an ownership interest in one or more specific properties the fund owned and held a tenant in common ownership interest in the property or properties with the fund. The tenant in common investors were not partners or members in the entity that is the fund.
If the share investors in a fund assert a claim that Defendants engaged in misconduct relating to their management of a specific property, and the tenant in common investors in the same fund assert that Defendants engaged in misconduct relating to their management of the same property, a common factual or legal issue creating the potential for conflicting rulings exists if the share investors in that fund agreed to arbitration and the tenant in common investors in the same fund did not. This poses a different conflict from the
Plaintiffs do not identify a specific share investor and tenant in common investor who would satisfy these criteria. Plaintiffs' operative pleading at the time the trial court ruled on Defendants' motions to compel arbitration did not identify any specific act of mismanagement regarding any specific property. Plaintiffs' counsel provided the few examples discussed above at the hearing on Defendants' motions, but none of those examples satisfy the foregoing criteria. As a result, the record lacks substantial evidence to support the implied findings necessary to uphold the trial court's ruling based on a potential conflict between claims held by share investors and tenant in common investors in the same fund regarding the same property.
At oral argument, the parties agreed the appropriate remedy for the trial court's erroneous denial of Defendants' motions was to remand for further consideration under section 1281.2(c). Accordingly, we remand this matter for the trial court to separately consider Defendants' six motions and determine whether the claims of each group of Plaintiffs satisfy section 1281.2(c)'s conditions. (See Metis, supra, 200 Cal.App.4th at p. 694 [remanding to further consider whether § 1281.2(c)'s conditions were satisfied
In opposing Defendants' motions, Plaintiffs must provide the trial court with sufficient information regarding their claims to support a finding the claims of Plaintiffs who agreed to arbitration and the claims of Plaintiffs who did not agree to arbitration share a common factual or legal issue that could result in conflicting rulings. As explained above, allegations regarding Defendants' misconduct may satisfy this burden because Plaintiffs have no evidentiary burden to establish their claims at this stage of the proceedings. (Abaya, supra, 189 Cal.App.4th at pp. 1498-1499.)
Shortly after denying Defendants' motions to compel arbitration, the trial court sustained Defendants' demurrers to all causes of action with leave to amend, finding Plaintiffs failed to allege sufficient facts to state any cause of action. The court explained it found all of Plaintiffs' claims "nebulous" because they failed to identify any specific wrongdoing by Defendants. Plaintiffs have not yet filed an amended pleading because, after the trial court sustained the demurrers, the entire action was stayed pending the outcome of this appeal. Accordingly, we leave to the trial court's discretion whether Plaintiffs should file their amended pleading before the trial court reconsiders Defendants' motions or whether the court should simply rely on counsel's representations regarding the specific claims Plaintiffs will raise in an amended complaint. Similarly, the trial court also may determine whether the parties should file supplemental briefs addressing the issues raised in this opinion or allow Defendants to file new motions.
We express no opinion on whether section 1281.2(c)'s conditions may be satisfied for any one of Defendants' motions or how the trial court should exercise its discretion if it finds section 1281.2(c)'s conditions have been met.
The order is reversed and the matter remanded for further proceedings consistent with this opinion. Defendants shall recover their costs on appeal.
Fybel, J., and Ikola, J., concurred.
Share Investor Share Investor First Tenant Last Tenant
Offering Offering in in Common
Opening Closing Common Investment
Date Date Investment
Integrity Fund June 1994 Nov. 1995 May 1996 May 1996
Provider Fund Dec. 1995 June 1997 Aug. 1996 Mar. 1999
Advantage Fund Sept. 1996 Feb. 1998 June 1998 Aug. 1998
Discovery Fund Dec. 1997 June 1999 July 1998 Oct. 2000
Freedom Fund Feb. 2000 Jan. 2004 Oct. 2000 June 2004
Victory Fund June 2002 July 2004 Dec. 2003 Oct. 2004
At oral argument in the related Brown action, the Brown plaintiffs argued their fraudulent inducement claims satisfied section 1281.2(c)'s requirements because they presented common factual issues regarding (1) Defendants' concealment of David Colton's fraud judgment for running a similar investment scheme and (2) Defendants' identical misrepresentations during similar investment seminars to the Brown plaintiffs induced them to invest with Defendants. Here, Plaintiffs did not make the same argument. Moreover, we did not consider the argument in Brown because the Brown plaintiffs raised it for the first time at oral argument. (Palp, Inc. v. Williamsburg National Ins. Co. (2011) 200 Cal.App.4th 282, 291, fn. 2 [132 Cal.Rptr.3d 592] (Palp) ["`We do not consider arguments that are raised for the first time at oral argument.'"]; Rosen v. St. Joseph Hospital of Orange County (2011) 193 Cal.App.4th 453, 464, fn. 4 [122 Cal.Rptr.3d 87] (Rosen).)
