A Critical Letter Provided The Evidentiary Linchpin.
The Court of Appeal in Gamma Eta Chapter of PI Kappa Alpha, B25667 (2/8 2/6/20) (Wiley, Bigelow, Grimes), reversed the trial court's order denying a motion to compel arbitration and remanded so that the trial court could grant the motion and stay the case pending arbitration. The somewhat unusual circumstance here is that the defendants who moved to compel arbitration against the fraternity chapter were not signatories to the arbitration agreement -- and neither was the chapter.
The arbitration agreement in question was between the national fraternity (Fraternity) and the local chapter (Chapter). It required that the Chapter mediate disputes, and if mediation did not resolve disputes, then arbitrate disputes with entities or persons "affiliated" with the Fraternity.
A dispute erupted between the Chapter and a housing corporation (Housing Corporation) created "to serve as a non-profit facilitator to ensure that the [Fraternity] at USC would consistently have a fraternity house to house and host its members." The Chapter sued the Housing Corporation and its director for constructive fraud, breach of fiduciary duty, unjust enrichment, negligent misrepresentation, and other claims.
In a critical letter the Fraternity sent to its Chapter and the Housing Corporation, it asserted the Housing Corporation was affiliated with the Chapter, the Chapter lacked standing to sue, the Chapter must mediate, and if mediation did not resolve the dispute, then it must arbitrate. The Housing Corporation and its director then moved to compel arbitration, which the trial court, without explanation, denied.
The Court of Appeal reasoned, based on the record it had, that the Fraternity "is an overarching and governing international organization, and the local chapter . . . is merely a subordinate fraternal component of the international fraternity. ΒΆ The international fraternity wanted arbitration, and so did the defendant housing corporation. This was in effect a stipulation for arbitration."
COMMENTS:
Several things helped the Court of Appeal reach this result. First, the record on appeal was scant. There was no transcript. The trial judge had not explained his reasoning in a minute order, nor was there a statement of decision. And there were no disputes of fact. Therefore, the standard of review was de novo.
Second, the critical letter in which the Fraternity aggressively asserted its control over the Chapter, was not objected to, and was "in evidence for the truth of the matter it asserts."
Third, the effectiveness of the arbitration agreement depended on the interpretation of the word "affiliated." At first blush, it is not clear that the Housing Corporation is "affiliated" to the Chapter in the way the word is sometimes used, to mean one entity owning a majority of another entity's stock. However, once the Court of Appeal concluded that the Chapter was a subordinate unit of the Fraternity, then because the Fraternity staked the position that the Housing Agency and the Chapter were "affiliated", "the letter established that affiliate relationship from the perspective that counts: the perspective of the governing international fraternity."
Presumably there is some "perspective that counts" from which the Court of Appeal could have rejected a completely off-the-wall interpretation of the meaning of "affiliated". However, since the Housing Corporation was set up for the purpose of securing housing for the Chapter, and because it acted as an agent for the Chapter, the Fraternity's interpretation of "affiliated" was colorable.
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