In yet another signal of the Courts recognition of the strong public policy favoring arbitration as a method for resolving disputes, the California Court of Appeal, 4th District, ruled in Acquire II Ltd. v. Colton Real Estate Group (2013) 213 Cal.App.4th 959 ("Acquire II Ltd.") that the Trial Court had no discretion to deny a Motion to Compel Arbitration in a real estate investment case where the Plaintiffs failed to establish that their claims involved common factual or legal issues with third parties. The Court of Appeal also ruled that Plaintiff (investors) who signed arbitration agreements with the Defendants as to some investment funds, but not others, would not be considered "third parties," even for disputes involving investment funds for which they did not sign arbitration agreements.
In Acquire II Ltd., the Plaintiffs invested in six commercial real estate investment funds with the Defendants. The investments occurred over a ten year period of time in which the Defendants purchased and managed six portfolios of commercial real estate. Each fund was separate from the other funds and presented two distinct investment options. The investors could become a member or partner in the entity that held title to the entire portfolio or investors could purchase a fractional ownership interest in a specific property included in the portfolio, without becoming a member or partner in the entity. Some Plaintiffs became members in one or more of the investment funds, some became joint owners of one or more individual properties, and some did both. There were approximately 250 individual Plaintiffs.
Suit was later filed by the Plaintiff investors against the Defendants based on various theories arising from the purchase and management of the six investment funds. Thereafter, the Defendants filed Motions seeking to compel six of the twelve groups of Plaintiffs to arbitrate their claims relating to their investments. The Defendants concluded they could not compel all Plaintiffs to arbitrate their claims because the Defendants failed, in some cases, to include arbitration provisions in the governing documents for each investment option in each fund.
Based on Code of Civil Procedure § 1281.2(c) (the third party litigant exception),1 the Trial Court denied all six motions because, in the Trial Court's view, requiring some investor Plaintiffs to pursue their claims in an arbitral form, while other investors pursued their claims in a judicial form, would be inefficient and could lead to conflicting rulings. The Defendants failed to request a Statement of Decision.
The Defendants later appealed and the Court of Appeal reversed. In its ruling, the Court of Appeal initially noted that, given the absence of a Statement of Decision, the Court "presumed" that the Trial Court found the Code of Civil Procedure § 1281.2(c) conditions were satisfied in each of the Defendants' Motions. The Court of Appeal then went on to hold that the record before it lacked substantial evidence to support the implied finding for each of Code of Civil Procedures § 1281.2(c)'s three conditions and remanded the matter back to the Trial Court with instructions to augment the record on this issue and then issue a further ruling. In addition, the Court of Appeal ruled that the investor Plaintiffs that signed arbitration agreements for certain funds, but not others, would not be considered to be third parties for purposes of Code of Civil Procedure § 1281.2(c). The Court held, in that regard, the case presented a situation where the Plaintiffs simply asserted both arbitrable and non-arbitrable claims and the Trial Court had no discretion to deny arbitration under those circumstances.
The Acquire II Ltd. decision is important in that it holds that the third party litigation exception – which provides the Trial Court with discretion to deny a Motion to Compel arbitration, only applies when there is substantial evidence that all three prongs of Code of Civil Procedure § 1281.2(c) have been met. It is also important for its holding that parties which sign multiple contracts, only some of which contain arbitration clauses, will not be considered to be third parties for the arbitrable claims.
About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com.
1 Code of Civil Procedure § 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 a claim subject to arbitration; and (3) the possibility of conflicting rulings and common factual legal issues exist.
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