Benaroya v. Willis
Benaroya v. Willis
Opinion of the Court
*810*464Benaroya Pictures (Benaroya) contracted with Westside Corporation (Westside) to pay the well-known actor Bruce Willis, the president of Westside, to perform in a movie to be produced by Benaroya. After a dispute arose regarding Willis' payment, Willis and Westside (collectively *465respondents) commenced arbitration proceedings against Benaroya, pursuant to the arbitration clause in the agreement. While in arbitration, respondents moved to amend their arbitration demand to name appellant Michael Benaroya individually, even though he was not a party to the agreement, on the ground that he was the alter ego of Benaroya. The arbitrator granted the request, found appellant to be Benaroya's alter ego, and awarded damages to respondents for which both Benaroya and appellant, as Benaroya's alter ego, were liable. The trial court denied appellant and Benaroya's petition to vacate the award as to appellant, and granted respondents' petition to confirm the award. In this appeal from the confirmation of the award, appellant contends the trial court erred because he was a nonsignatory to the arbitration agreement, and only the court, not the arbitrator, had authority to determine whether he was compelled to arbitrate as the alter ego of Benaroya. We agree and therefore reverse the judgment. We remand the case to the trial court with directions to: (1) set aside its rulings denying appellant and Benaroya's petition to vacate the award and granting respondent's petition to confirm; and (2) enter new orders granting appellant and Benaroya's petition to vacate the award as to appellant, and granting respondents' petition to confirm the award only as to Benaroya.
FACTUAL AND PROCEDURAL BACKGROUND
In September 2014, Benaroya and Westside entered an escrow agreement for Creative Artists Agency to hold $8 million in trust for the services of Bruce Willis in a movie. Willis signed the agreement as president of Westside, designated in the contract as "Lender," and appellant signed on behalf of Benaroya Pictures, identified as "Producer." The agreement contained an arbitration clause, providing in relevant part: "If there is any dispute between Producer and Lender with respect to the disposition of funds deposited in the Escrow Account, the parties agree that such dispute shall be resolved exclusively through arbitration ... pursuant to the rules and regulations of JAMS [Judicial Arbitration and Mediation Service] before a single arbitrator. If the parties are unable to agree upon an arbitrator, the arbitrator will be selected according to the Commercial Arbitration Rules of JAMS."
In May 2015, respondents filed a demand for arbitration pursuant to the arbitration clause, alleging that Benaroya breached the escrow agreement by failing to pay Willis. Benaroya filed an answer and counterclaim, alleging money had and received, conversion, and breach of the contract by Willis.
On September 10, 2015, respondents moved before the arbitrator to amend the arbitration demand to name appellant as an additional party. The motion *466for leave to amend asserted that appellant is "the founder, principal, managing member, sole officer and Chief Executive Officer of Benaroya Pictures."
Benaroya opposed the motion, arguing that appellant was not a party to the escrow *811agreement and arbitration clause, and that the question whether a nonsignatory can be compelled to arbitrate is a question for the trial court alone.
After the arbitrator issued a tentative ruling granting respondents' motion for leave to amend, Benaroya and appellant informed the arbitrator and respondents "that they would submit" on the tentative ruling. The arbitrator then granted the motion to amend and named appellant as a party to the arbitration, relying on Rule 11(b) of the JAMS Comprehensive Arbitration Rules and Procedures, which "provides that jurisdictional disputes, including regarding who are proper parties to the Arbitration, 'shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction ... issues as a preliminary matter.' " In support of the ruling, the arbitrator cited Comerica Bank v. Howsam (2012)
Following the ruling, Benaroya's arbitration brief continued to dispute the arbitrator's exercise of jurisdiction over appellant. For their part, respondents' brief asked the arbitrator to draw an adverse inference against appellant on the alter ego issue, because Benaroya had not produced financial documents in response to a subpoena. Benaroya and appellant opposed the request, reiterating their position that the arbitrator lacked authority to bind appellant as Benaroya's alter ego.
The matter proceeded through arbitration. Ultimately, in the final arbitration award, the arbitrator determined appellant to be Benaroya's alter ego. The arbitrator found "considerable unity of interest between [Benaroya] and [appellant]," reasoning that appellant "solely controls" and "adds funds" to Benaroya. He further reasoned that appellant "personally made the misrepresentations to Willis' agents on behalf of [Benaroya]." The arbitrator further *467cited appellant's admission of "sloppy record-keeping," his failure to "produce many documents," and his lack of credibility. The arbitrator concluded that, although it was "a close call, ... an inequity would result if [appellant] was not found to be [Benaroya's] alter ego." On the merits of the contract dispute, the arbitrator found in favor of respondents and awarded them $5,024,778.61 in damages, plus prejudgment interest, attorney fees, and costs, for which Benaroya and appellant (as Benaroya's alter ego) were liable.
Appellant and Benaroya moved to vacate the arbitration award or to correct it to remove appellant as a party. They argued that the arbitrator exceeded his authority by making the alter ego finding and exercising jurisdiction over appellant, a nonsignatory to the arbitration agreement. They further argued that the arbitrator's determination usurped the authority of the court and was legally unsupportable. Respondents filed a petition to confirm the award. The trial court granted respondents' petition, denied appellant and Benaroya's petition, *812and entered judgment in favor of respondents. Appellant timely appealed.
DISCUSSION
Appellant contends the trial court erred in confirming the arbitration award because the decision whether a nonsignatory to an arbitration agreement can be compelled to arbitrate is a matter solely within the authority of the trial court, not the arbitrator. We agree: while the relevant JAMS rule here permits an arbitrator to determine whom among signatories to an arbitration agreement are proper parties for the dispute to be arbitrated, the rule cannot (and does not) permit the arbitrator to determine whether a nonsignatory to the arbitration agreement can be compelled to arbitrate. The authority to decide that question resides, by law, solely with the trial court.
The escrow agreement stated that it was "between Benaroya Pictures ('Producer') and Westside Corp ... ('Lender') [for the services of] Bruce Willis ('Artist')." As we have noted, the arbitration provision in the escrow agreement provided in pertinent part: "If there is any dispute between Producer and Lender with respect to the disposition of funds deposited in the Escrow Account, the parties agree that such dispute shall be resolved exclusively through arbitration in Los Angeles, California pursuant to the rules and regulations of JAMS before a single arbitrator. If the parties are unable to agree upon an arbitrator, the arbitrator will be selected according to the Commercial Arbitration Rules of JAMS." In the provision on governing law, the agreement stated, in part that "all disputes which may arise between the parties hereto under or with respect to this Escrow Agreement ... will be determined pursuant to California law and shall be resolved either by arbitration in accordance with the rules of JAMS or by a determination by a *468SAG-AFTRA arbitration tribunal, based upon the election of fora permitted by this Escrow Agreement. All such procedures shall be held in Los Angeles, California and Producer and Lender hereby submit to personal jurisdiction in the State of California for such purposes."
The trial court reasoned that the arbitrator's powers derive from the agreement to arbitrate and therefore examined the arbitration provision in the escrow agreement to determine if the arbitrator exceeded his powers. Because the escrow agreement stated that the rules of JAMS applied, the court looked to those rules, which state that the arbitrator shall determine its own jurisdiction, and concluded that the arbitrator correctly determined the alter ego issue and did not impermissibly expand the scope of the arbitration provision.
"We review de novo the trial court's order confirming the arbitration award. [Citations.]" ( Greenspan v. LADT, LLC (2010)
Here, while it is true that the language of an arbitration agreement determines the scope of the arbitrator's powers granted by the signatories, the agreement cannot bind nonsignatories, absent a judicial determination that the nonsignatory falls within the limited class of third-parties who can be compelled to arbitrate. (See Sandquist v. Lebo Automotive, Inc. (2016)
" 'Although California has a strong policy favoring arbitration [citations], our courts also recognize that the right to pursue claims in a judicial *469forum is a substantial right and one not lightly to be deemed waived. [Citations.] Because the parties to an arbitration clause surrender this substantial right, the general policy favoring arbitration cannot replace an agreement to arbitrate. [Citations.] Thus, the right to compel arbitration depends upon the contract between the parties, [citations], and a party can be compelled to submit a dispute to arbitration only where he has agreed in writing to do so. [Citation.]' [Citation.]" ( Smith v. Microskills San Diego L.P. (2007)
"There are circumstances in which nonsignatories to an agreement containing an arbitration clause can be compelled to arbitrate under that agreement. As one authority has stated, there are six theories by which a nonsignatory may be bound to arbitrate: '(a) incorporation by reference; (b) assumption; (c) agency; (d) veil-piercing or alter ego; (e) estoppel; and (f) third-party beneficiary' [citations]." ( *814Suh , supra , 181 Cal.App.4th at p. 1513,
Although a nonsignatory can be compelled to arbitrate, California caselaw is clear that "an arbitrator has no power to determine the rights and obligations of one who is not a party to the arbitration agreement. [Citation.] The question of whether a nonsignatory is a party to an arbitration agreement is one for the trial court in the first instance." ( American Builder's Assn. v. Au-Yang (1990)
This rule is grounded on policy concerns explained by the court in American Builder's : "If an arbitrator, rather than a trial court, were to determine whether an arbitration provision were operative against a nonsignatory, a stranger to the agreement might be subjected to and be bound by an arbitration to which such stranger had not consented and would be without effective review. While a court will vacate an arbitration award if the arbitrators exceeded their powers, courts may not examine the sufficiency of the evidence supporting the award. [Citations.] [Fn. omitted.] Thus, if [the plaintiff] were to bring a motion to vacate the award asserting the arbitrator had exceeded his powers in ordering joinder due to insufficient evidence to support a finding that [the corporation] was the [defendants'] principal, the trial court, constrained by the limited grounds set forth in [ Code of Civil Procedure section] 1286.2, would decline to review the arbitrator's factual finding." ( American Builder's , supra , 226 Cal.App.3d at pp. 179-180,
In American Builder's , a builder and a homeowner entered into a written construction contract that contained an arbitration clause. When a dispute arose about the contract, the plaintiff builder sued the owners of the property. The defendant owners filed a demand for arbitration. The arbitrator found that, although the defendants were the signatories to the contract, they had signed the contract as agents for a corporation. The arbitrator therefore ordered the defendants to join the nonsignatory corporation in the proceedings. The plaintiff moved to stay the proceedings to obtain judicial review of the order. The arbitrator continued the hearing, and the plaintiff filed a complaint seeking to enjoin the defendants from including the corporation in the arbitration proceedings.
The trial court denied the injunction on the grounds that the arbitrator had jurisdiction to determine whether the defendants signed as agent for the corporation, and that the " 'all claims' " language in the arbitration clause was sufficient to bind the plaintiff to arbitration. ( American Builder's , supra , 226 Cal.App.3d at p. 175,
Similarly, in Retail Clerks Union v. L. Bloom Sons Co. (1959)
In First Options of Chicago, Inc. v. Kaplan (1995)
The trial court here relied on Greenspan, supra ,
Distilling Greenspan 's complicated procedural background to its essence, the essential facts were as follows. After the plaintiff in Greenspan filed a civil action alleging breach of contract, the defendants filed a petition to compel arbitration in the trial court. ( Greenspan , supra , 185 Cal.App.4th at p. 1425,
Appealing from the trial court's denial of their petition to vacate the award, the defendants argued that the arbitrator exceeded his authority, because the plaintiff did not plead the theory of joint and several liability, and therefore, under relevant JAMS rules, the theory of joint and several liability was not an issue the arbitrator could decide. ( Greenspan, supra , 185 Cal.App.4th at pp. 1435-1436,
In that context, the Greenspan court framed the initial issue presented as "who in this case determines what issues were arbitrable-the arbitrator or a judge. In other words, does the arbitrator or the court decide the question of arbitrability?" ( 185 Cal.App.4th at p. 1439,
*473The holding of Greenspan -that by incorporating JAMS rules in their agreement the parties to that agreement gave the arbitrator the power to decide what issues in their dispute were arbitrable-does not stand for the proposition that by incorporating JAMS rules, parties to an arbitration agreement can give the arbitrator the power to compel a nonsignatory to the agreement to become a party to the arbitration.
The trial court also relied on Keller Construction Co. v. Kashani (1990)
None of the decisions cited by respondent is to the contrary. For example, respondents rely on Suh ,
Finally, although respondents concede that the alter ego issue is normally for the courts to decide, they argue that, here, "the parties have clearly and unmistakably delegated such arbitrability issues to the arbitrator." They are mistaken. Appellant, *818a nonsignatory to the agreement, did not agree to delegate any issues to the arbitrator. Moreover, while in some circumstances a party's conduct may evidence an implied agreement to arbitrate ( Douglass v. Serenivision, Inc. (2018)
"[M]erely arguing the arbitrability issue to an arbitrator does not indicate a clear willingness to arbitrate that issue, i.e., a willingness to be effectively bound by the arbitrator's decision on that point. To the contrary, *475insofar as [appellant and Benaroya] were forcefully objecting to the arbitrator[ ] deciding their dispute ..., one naturally would think that they did not want the arbitrator[ ] to have binding authority over them." ( First Options , supra , 514 U.S. at p. 946,
Harmless Error
Respondents contend that, even if the alter ego issue should have been decided by the court rather than the arbitrator, the confirmation of the arbitration award should be affirmed. The reason: any error was harmless, because there was "overwhelming evidence" in the arbitration of appellant's alter ego status. We note that the arbitrator did not find "overwhelming evidence." Instead, the arbitrator described the issue as a "close call."
Regardless, the error in permitting the arbitrator to decide whether appellant could be compelled to arbitrate as the alter ego of Benaroya is not subject to harmless error. "[I]ts effects are ' "unmeasurable" ' and ' "def[y] analysis by 'harmless-error' standards." ' [Citations.]" ( Sandquist , supra , 1 Cal.5th at p. 261,
DISPOSITION
The judgment is reversed. The case is remanded to the trial court with directions to: (1) set aside its rulings denying appellant and Benaroya's petition to vacate the award and granting respondent's petition to confirm the award; and (2) enter new and different orders granting appellant and *476Benaroya's petition to vacate the award as to appellant, and granting respondents' petition to confirm the award only as to Benaroya. Appellant is entitled to costs on appeal.
We concur:
EPSTEIN, P. J.
COLLINS, J.
We describe the terms of the arbitration agreement in more detail below in our Discussion.
They also contended that the subpoenas were served only three days before the commencement of the arbitration hearing, and were extremely overbroad and irrelevant to the alter ego issue. The subpoenas sought, among other documents, "All statements for any account at any financial institution of any kind in which Benaroya Pictures has held any interest from January 1, 2012 to the present" and "All documents evidencing or memorializing all monies paid by Benaroya Pictures for the production of the motion picture entitled Idol's Eye from January 1, 2013 to November 30, 2014."
The court cited JAMS Rule 11(b), which provided: "Jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted to and ruled on by the Arbitrator. The Arbitrator has the authority to determine jurisdiction and arbitrability issues as a preliminary matter." The court also relied on JAMS Rule 24(c): "In determining the merits of the dispute, the Arbitrator shall be guided by the rules of law agreed upon by the Parties. ... The Arbitrator may grant any remedy or relief that is just and equitable and within the scope of the Parties' agreement, including, but not limited to, specific performance of a contract or any other equitable or legal remedy."
We note that the cases relied upon by Greenspan similarly concerned whether a claim was within the scope of the arbitration agreement-not the initial determination whether a nonsignatory can be compelled to arbitrate. (See Greenspan, supra , 185 Cal.App.4th at p. 1441,
Respondents also rely on Comerica , but the question there was not whether a nonsignatory to the arbitration agreement could be compelled to arbitrate as an alter ego. Rather, in Comerica , the defendants who challenged the arbitrator's alter ego finding were signatories to the agreement and, in fact, they "all agreed to arbitrate the claims contained in the first amended complaint, with its alter ego allegations, under ... international arbitration rules." (Comerica, supra , 208 Cal.App.4th at p. 834,
Reference
- Full Case Name
- Michael BENAROYA, and v. Bruce WILLIS
- Cited By
- 28 cases
- Status
- Published