ADR Case Updates
Nonsignatories May Invoke Arbitration, 05/11/2012
In Thomas v. Westlake (2012) 204 Cal. App. 4th 605, Katherine Thomas, an elderly widow, opened an investment account and signed a Brokerage Client Agreement with an arbitration clause. After her death, her successor sued the investment advisor and other defendants, including insurance companies that sold her certain policies and annuities. Plaintiff alleged that the defendants were agents of each other. Defendants petitioned the court to compel arbitration. Finding that some of the defendants did not sign the arbitration agreement and the possibility of conflicting rulings existed, the court denied the petition pursuant to Code of Civil Procedure Section 1281.2(c).
Reversed and remanded. As a general rule, only a party to an arbitration agreement is bound by or may enforce it. However, when a plaintiff alleges a defendant acted as an agent of a party to an arbitration agreement, the nonsignatory defendant may invoke the arbitration provision. The plaintiff is bound by the legal consequences of such allegations. Thus, the trial court erred in denying the petition to compel arbitration.
However, in Epitech, Inc., v. Kann (2012) 204 Cal. App. 4th 1365, the court reached the opposite conclusion. AutoLife Acquisition Corp. retained Kann Capital Ltd., a financial advisor, to help it obtain financing. AutoLife and Kann entered into a written agreement with an arbitration clause. AutoLife then filed bankruptcy. Epitech, a creditor of AutoLife, sued Kann alleging that Kann made fraudulent misrepresentations that caused Epitech to forbear from foreclosing on AutoLife's security. Kann moved to compel arbitration claiming that Epitech was a third-party beneficiary of its contract with AutoLife. The trial court denied the motion.
Affirmed. A nonsignatory may not be compelled to arbitrate unless it is a third-party beneficiary to the agreement. A third-party beneficiary may be a creditor beneficiary if the performance of the promisor (Kann) will discharge some form of legal duty owed to the beneficiary (Epitech) by the promisee (AutoLife). Here, Epitech was not a third-party beneficiary because Kann did not contract to pay Epitech money, but only to enable AutoLife to obtain financing. Thus, Kann's performance under the contract would not have discharged AutoLife's pre-existing obligation to pay Epitech.
IN ADDITION, THE FOLLOWING CASES HOLD:
Lindemann v. Hume (2012) 204 Cal. App. 4th 556; and Bush v. Horizon West (2012) 204 Cal. App. 4th 556 (Party's contractual right to arbitration must yield if issue common to arbitration and pending action with third party would possibly result in conflicting rulings);
Kinecta Alternative Financial Solutions, Inc. v. Superior Court (Malone) (2012) 205 Cal. App. 4th 506 (Trial Court errs in denying motion to dismiss wage-and-hour class action allegations where arbitration agreement was enforceable and did not authorize class arbitration);
Tenzera, Inc. v. Osterman (2012) 205 Cal. App. 4th 16 (Prevailing plaintiffs are entitled to prejudgment interest between vacation and reinstatement of arbitration award);
Lewis v. Fletcher Jones Motor Cars, Inc., (2012) 205 Cal. App. 4th 436 (Defendant waives right to compel arbitration by waiting five months before demanding arbitration and after litigating merits of plaintiff's claims through demurrers and motions to strike);
Coneff v. AT&T Corp., 673 F. 3rd 1155 (Ninth Cir., 2012) (Federal Arbitration Act preempts Washington state law banning class action waivers in arbitration clauses as unconscionable);
Bagdasarian Productions, LLC, v. Twentieth Century Fox Film Corporation, 673 F. 3rd 1267 (Ninth Cir., 2012), (Order compelling enforcement of contractual agreement to submit dispute to referee and staying proceedings is not immediately appealable);
Peleg v. Neiman Marcus Group, Inc., (2012) 204 Cal. App. 4th 1425 (Motion to compel arbitration is erroneously granted where valid choice-of-law clause dictated that agreement is governed by Texas law, under which agreement is illusory); and
Fleur Du Lac Estates Association v. Mansouri (2012) 205 Cal. App. 4th 249 (Party may not appeal orders that followed court's denial of opposing party's first petition to compel arbitration because prior denial did not constitute final judgment).
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