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Gilbert Street Developers, LLC v. LA Quinta Homes

June 11, 2009

GILBERT STREET DEVELOPERS, LLC, ET AL., PLAINTIFFS AND APPELLANTS,
v.
LA QUINTA HOMES, LLC, DEFENDANT AND RESPONDENT.



Appeal from an order of the Superior Court of Orange County, Gregory Munoz, Judge. Affirmed. (Super. Ct. No. 30-2008-00108366).

The opinion of the court was delivered by: Sills, P. J.

CERTIFIED FOR PUBLICATION

OPINION

In this case we hold that a contract which contains the mere possibility that American Arbitration Association rules might one day in the future provide that arbitrators would have the power to decide their own jurisdiction does not "clearly and unmistakably" provide that arbitrators will determine their own jurisdiction.

I. BACKGROUND

In July 1998, Tone Yee Investments and La Quinta Homes formed Gilbert Street Development, a limited liability company, in order to acquire and develop certain property on Gilbert Street in Garden Grove. A third entity, Prince Properties, also controlled by Yee, became a member of the company in February 1999. The operating agreement had an arbitration clause that provided for arbitration of all disputes arising out of or related to the agreement, the arbitration to be "conducted in accordance with the Rules of the American Arbitration Association existing at the date thereof." However, there was an express exception in the arbitration clause for "matters which are expressly within the discretion of the Members."*fn1

At the time the agreement was signed in 1998, and at the time Prince Properties became a member in 1999, the American Arbitration Association had no rule providing that arbitrators had jurisdiction to rule on their own jurisdiction. However, in September 2000, American Arbitration Association adopted a new rule, R-8(a), that provided arbitrators could rule on their own jurisdiction.*fn2 (Readers of opinions do not need another acronym to learn, but since "AAA" is often used for the American Arbitration Association, we will occasionally refer to the association as the AAA.)

The operating agreement also had a buy-out clause. We will discuss and quote the buy-out clause in detail in part II. B. of this opinion. For the moment suffice to say that if the clause were invoked by one of the members of the company, it would mean the invoking member would either buy out another member's interest, or have its interest bought out by another member.

Roughly ten years after the formation of the company, in early 2008, a dispute arose between the Yee parties and La Quinta in regard to an offer to purchase the Gilbert Street property for some $13.3 million. The Yee parties liked the idea. La Quinta didn't. The Yee parties invoked the buy-out clause, and thereafter scheduled an arbitration for May 2008.

Let us stop here for a moment so that last fact does not glide by: While there was, of course, due notice, the Yee parties simply went ahead and held an arbitration without first filing a petition to compel arbitration under section 1281.2 of the Code of Civil Procedure.*fn3

La Quinta objected, by letter, both to (1) having the dispute arbitrated in the first place, since La Quinta contended that the buy-out clause was a matter within the "discretion" of the respective members, and (2) having arbitrators decide their own jurisdiction.

An arbitration was held at the end of May 2008, with the arbitrators noting that La Quinta did not appear. The Yee parties swept the field. In an award signed in early June 2008, the arbitrators first held that, yes indeed, they had jurisdiction even though the provision in the AAA rules giving them jurisdiction to decide their jurisdiction did not exist in 1998. The arbitrators said (a) the idea was "implicit" in the language of AAA rule 43 in 1998,*fn4 and (b) in any event, AAA rule 1, which was in effect in 1998, contemplated future amendment of the rules.*fn5

Turning to the merits, the arbitrators held these things: (1) The company owed Tone Yee more than $29 million; (2) the Yee parties had properly invoked the buy- out agreement; (3) La Quinta "no longer has a membership interest" in the company; (4) the company could go ahead and sell the property; (5) $13.3 million was a fair price for the Gilbert Street property; (6) La Quinta was entitled to zero from the sale of the property; and (7) La Quinta had to sign whatever documents necessary to both relinquish its interest in the company and effectuate the sale of the property.

By the end of June 2008, the Yee parties had filed a petition for an order confirming the arbitration award. The trial court, however, rejected the petition. Noting that the AAA rules were "silent" back in 1998 on the question of whether arbitrators could decide their own jurisdiction, in August 2008 the trial court held that "the possibility of a change in the Rules is not sufficient to show a clear and unmistakable intent by the parties that the arbitrator would decide issues of arbitrability at the time the agreement was entered." That is, the arbitrators had no jurisdiction to decide their jurisdiction.

Then, turning to the issue of whether the dispute concerning the buy-out clause was indeed arbitrable, the trial court handed the Yee parties a second defeat. The court held that the buy-sell procedure is discretionary and "not subject to the arbitration agreement." The Yee parties timely appealed from the judgment denying the petition to confirm the arbitration award and vacating the arbitration award.*fn6

II. DISCUSSION

A. Did the Parties Clearly and Unmistakably Agee that Arbitrators Would Have Jurisdiction to ...


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