Non-Parties To The Arbitration Agreement Were Not “Third Parties” Within The Meaning Of Section 1281.2(c).
The trial court denied defendants’ motion to compel arbitration, under the third party litigation exception found in Cal. Code Civ. Proc. 1281.2(c) to the general rule requiring enforcement of an arbitration agreement. Here, only one of several defendants was a party to arbitration agreements with plaintiffs. Therefore, the trial court was concerned that litigation filed against “third parties” who were not entitled to enforce the arbitration agreements would result in inconsistent results, if one defendant was allowed to arbitrate. Defendants were smart to appeal the denial of their motion to compel arbitration. Alpert v. HDA Mortgage Fund, LLC, No. B247142 (2nd Dist. Div. 3 April 23, 2014) (Croskey, Klein, Kitching) (unpublished).
Plaintiffs were investors who had invested in an investment fund holding loans secured by deeds of trust. Plaintiff Alpert was investors’ business manager. Defendants included the company providing investment counseling and portfolio management services, the company investing in the secured loans and offering shares in the investment fund, the fund manager, and two officers. Only defendant HDA Properties Inc. was actually a party to the arbitration agreement with plaintiffs.
The Court of Appeal, however, concluded that the so-called “third parties” were in fact entitled to enforce the arbitration agreement, and therefore, they were not “third parties” for purposes of section 1281.2(c). The parties fell within the rule that a nonparty acting as an agent of a party to the agreement to arbitrate may enforce that agreement. Indeed, plaintiffs had alleged that the the defendants were all related entities and individuals and that they acted as agents for one another.
Reversed, with directions to grant the motion to arbitrate, and stay the action in whole or in part.
This left one housekeeping matter for the Court of Appeal. The trial court had to stay the pending litigation in whole or in part, because a trial court granting a motion to compel arbitration must do so. Cal. Code Civ. Proc. section 1281.4. But who decides the scope of the required stay, i.e., to what extent are the claims subject to arbitration severable from the claims to be litigated? Here, the parties’ Operating Agreement stated that the arbitrator must decide any questions concerning arbitrability of the dispute – “so any questions concerning which claims are subject to arbitration must be decided by an arbitrator, rather than the trial court.”