Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County. No. BC429580 Kenneth R. Freeman, Judge.
Law Office of Gary Brown and Gary Brown for Defendant and Appellant.
Law Offices of Henry N. Jannol, Henry N. Jannol and Paul H. Levine for Plaintiffs and Respondents.
GRIMES, J.
Bialik Benjamin is a shareholder and president of MDL Medical Diagnosis Laboratories (MDL). MDL borrowed money from Moshe Shram. Benjamin signed a written promissory note on behalf of MDL and a separate personal guaranty of MDL’s loan, as well as deeds of trust securing two parcels of real property as collateral. The personal guaranty included an arbitration agreement. After paying off the principal loan amount plus $279,000 in interest, MDL and Benjamin sued Shram, contending the interest extracted from them was usurious. In response, Shram moved to compel arbitration of the entire action on the grounds the personal guaranty agreement bound both Benjamin and MDL to arbitrate any controversy arising out of the interrelated loan documents. The trial court denied the motion. We conclude the court correctly denied arbitration of the dispute between MDL and Shram but erred in failing to order Benjamin to arbitrate his dispute with Shram. We therefore affirm in part, reverse in part and remand with directions as explained herein.
FACTS
In 2007, Benjamin was seeking investment capital for MDL. He entered into negotiations with Shram, presenting Shram various investment options with MDL, including the possibility of part ownership of the corporation. In December 2007, while negotiations were ongoing, Benjamin advised Shram that MDL had a short-term emergency and asked Shram to make a $500,000 loan to MDL, which Benjamin offered to personally guarantee.
On December 26, 2007, Shram and MDL signed a promissory note memorializing their agreement that Shram would lend MDL $500,000 at the rate of 18 percent annual interest, with a two-year maturity date (the Note). Benjamin executed the Note on behalf of MDL in his capacity as president. Shortly thereafter, Benjamin executed a personal guaranty agreement, promising to repay the debt of MDL in the event of default (the Guaranty). Benjamin secured his performance under the Guaranty by executing deeds of trust, pledging as collateral, two parcels of real property Benjamin owned as his sole and separate property.
An escrow company prepared and recorded the documentation for the loan transaction. One of the documents Benjamin signed was a three-page, preprinted form titled “Arbitration Rider.” Benjamin signed the Arbitration Rider in his individual capacity as the identified “borrower” with respect to the Guaranty and deeds of trust. Shram is identified as the “lender” in the Arbitration Rider but he did not sign the document as it contained a signature block only for the “borrower.” The Note between MDL and Shram did not contain any arbitration provision.
After making some initial payments, MDL defaulted under the Note. Benjamin then made payments to Shram in accordance with the Guaranty. By December 2009, the principal sum of $500,000 had been repaid to Shram, along with interest totaling $279,000. Shortly thereafter, MDL and Benjamin filed a complaint in the superior court against Shram seeking, among other remedies, a refund of the interest paid on the grounds the interest was usurious. Shram responded by filing a motion to compel arbitration of the dispute based on the Arbitration Rider executed by Benjamin. The court denied the motion, and this appeal followed.
DISCUSSION
Pursuant to Code of Civil Procedure section 1281.2, a party to an arbitration agreement may petition the court for an order compelling arbitration of a dispute covered by the agreement. A defendant may file a motion to compel arbitration instead of filing an answer or other responsive pleading to the complaint. (Code Civ. Proc., § 1281.7.) The documents before the court on Shram’s motion to compel arbitration were: (1) the operative complaint, including attached and incorporated copies of the Note, the Guaranty and the deeds of trust; (2) Shram’s motion with supporting declarations from Shram and his counsel; (3) MDL and Benjamin’s opposing and supplemental briefs; and (4) Shram’s reply brief. In opposing the motion, MDL and Benjamin did not object to Shram’s supporting declarations and exhibits and did not offer any evidence in opposition.
Shram contends on appeal the court erred in denying his motion to compel arbitration because the underlying dispute arises primarily from payments Benjamin made under the Guaranty after MDL defaulted on the primary obligation; it is undisputed Benjamin executed the Arbitration Rider incorporated into the Guaranty; and MDL is properly joined in the arbitration because of Benjamin’s status in the corporation and the interrelated nature of the overall loan transaction. As in the court below, MDL and Benjamin contend only that arbitration of the entire action was properly denied on the grounds MDL did not sign any arbitration agreement or otherwise consent to arbitration of any disputes arising from the loan transaction.
Because the material facts are undisputed, we review the trial court’s order de novo. (Turtle Ridge Media Group, Inc. v. Pacific Bell Directory (2006) 140 Cal.App.4th 828, 833; NORCAL Mutual Ins. Co. v. Newton (2000) 84 Cal.App.4th 64, 71-72.) We conclude the court erred in denying the motion as to Benjamin, but correctly denied arbitration as to MDL.
1. Benjamin
California has a strong public policy favoring contractual arbitration. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9; Slaught v. Bencomo Roofing Co. (1994) 25 Cal.App.4th 744, 748.) Parties are free to consent to resolve their disputes in an arbitral forum and waive their right to a jury trial. Because arbitration is a favored method of dispute resolution, “ ‘ “[d]oubts as to whether an arbitration clause applies to a particular dispute are to be resolved in favor of sending the parties to arbitration....” ’ [Citation.]” (Cione v. Foresters Equity Services, Inc. (1997) 58 Cal.App.4th 625, 642.)
Benjamin has never denied he signed the Arbitration Rider in his individual capacity. He offered no evidence or argument that the arbitration agreement was invalid, unconscionable or otherwise unenforceable as to him personally. The Arbitration Rider was a preprinted form arbitration agreement apparently generated by Fannie Mae for general use in real estate transactions. The parties did not modify the language other than to insert, where appropriate, the names of Benjamin as the “borrower, ” Shram as the “lender, ” the effective date of the agreement, and the APN numbers of the parcels of real property pledged by Benjamin as security. The Arbitration Rider, by its own terms, is expressly incorporated into the agreement between borrower and lender, which is only reasonably interpreted to be the Guaranty between Benjamin and Shram and the related deeds of trust.
Benjamin did raise, briefly, the argument that he fully performed under the Guaranty, which he contends rendered the Guaranty, and the incorporated Arbitration Rider, “null and void” and/or moot. However, Benjamin presented no legal authority to the lower court or this court in support of this novel theory and we will not consider it.
The Arbitration Rider refers to the deed or other security instrument and agreement of the “same date” as the Rider. Only deeds of trust given by Benjamin bear the same effective date as the Rider, i.e., December 28, 2007. The Note executed by MDL was signed two days earlier.
The agreement provides, in pertinent part, that: “THIS ARBITRATION RIDER is made this 28 day of December 2007 and is incorporated into and shall be deemed to amend and supplement the Mortgage, Deed of Trust or Security Deed (the ‘Security Instrument’) of the same date given by the undersigned (the ‘Borrower’) to secure Borrower’s Note... [to] Moshe Shram (the ‘Lender’), of the same date and covering the Property described in the Security Instrument and located at: [¶] APN No. 2212-001-019 and APN No. 2276-029-004. [¶] This Arbitration Rider is signed as part of your Agreement with Lender... and is made a part of that Agreement. By signing this Arbitration Rider, you agree that either Lender... or you may request that any claim, dispute, or controversy (whether based upon contract; tort, intentional or otherwise; constitution; statute; common law; or equity and whether pre-existing, present or future), including initial claims, counter-claims, cross-claims and third party claims, arising from or relating to this Agreement or the relationships which result from this Agreement... shall be resolved... by binding arbitration....” At the end of the three-page document, there is a signature block bearing Benjamin’s signature. “Bialik Benjamin--Borrower” is the only designation printed beneath the signature block.
Shram is not a signatory to the Guaranty or the incorporated Arbitration Rider, but is an identified party or express beneficiary and therefore entitled to enforce the arbitration provision. (See Harris v. Superior Court (1986) 188 Cal.App.3d 475, 478 [“[i]t is well established that a nonsignatory beneficiary of an arbitration clause is entitled to require arbitration”]; Banner Entertainment, Inc. v. Superior Court (1998) 62 Cal.App.4th 348, 361 (Banner Entertainment) [presence or absence of signature is not dispositive--evidence of agreement to arbitrate is primary consideration].) In any event, Benjamin did not argue Shram lacked standing to seek enforcement of the agreement as against him personally.
The Arbitration Rider is an enforceable agreement as between Shram and Benjamin according to established state law principles concerning formation, revocation and enforcement of contracts generally. (Banner Entertainment, supra, 62 Cal.App.4th at p. 357; Marcus & Millichap Real Estate Investment Brokerage Co. v. Hock Investment Co. (1998) 68 Cal.App.4th 83, 89 [general contract law applies to determine existence of valid agreement to arbitrate].) The broad language of the arbitration provision plainly encompasses the dispute betweem Benjamin and Shram. Given the strong policy favoring arbitration, the broad scope of the arbitration provision and Benjamin’s undisputed execution of the Arbitration Rider, there is no basis for denying arbitration of Benjamin’s individual claims against Shram arising under the Guaranty and the deeds of trust.
2. MDL
Notwithstanding California’s well-established public policy in favor of contractual arbitration, there is “a crucial caveat.” (Crowley Maritime Corp. v. Boston Old Colony Ins. Co. (2008) 158 Cal.App.4th 1061, 1069 (Crowley).) Contractual arbitration is consensual in nature, and therefore the existence of an enforceable agreement to arbitrate must be demonstrated. “[T]he strong public policy... does not extend to those who are not parties to an arbitration agreement or who have not authorized anyone to act for them in executing such an agreement.” (County of Contra Costa v. Kaiser Foundation Health Plan, Inc. (1996) 47 Cal.App.4th 237, 245 (Contra Costa).) As the party seeking to compel arbitration of the dispute, Shram bears the burden of establishing the existence of an enforceable arbitration agreement with MDL by a preponderance of the evidence. (Jones v. Jacobson (2011) 195 Cal.App.4th 1, 15; Banner Entertainment, supra, 62 Cal.App.4th at p. 356.)
It is undisputed the Note executed by MDL does not contain an arbitration provision. It is also undisputed that MDL did not execute any other arbitration agreement in connection with the loan transaction, including the Arbitration Rider which was only signed by Benjamin in his individual capacity. Shram nonetheless argues that MDL can be bound, as a nonsignatory, by the Arbitration Rider because of the interrelated nature of the various instruments related to the loan and because Benjamin was an agent of MDL, namely, president of the corporation.
“Under California law, a nonsignatory can be compelled to arbitrate under two sets of circumstances: (1) where the nonsignatory is a third party beneficiary of the contract containing the arbitration agreement; and (2) where ‘a preexisting relationship exist[s] between the nonsignatory and one of the parties to the arbitration agreement, making it equitable to compel the nonsignatory to also be bound to arbitrate his or her claim.’ [Citations.] [¶] The preexisting relationship generally gives the party to the agreement authority to bind the nonsignatory. Examples of the preexisting relationship include agency, spousal relationship, parent-child relationship and the relationship of a general partner to a limited partnership. [Citations.] In the absence of such a relationship, or third party beneficiary status, courts will generally not compel a nonsignatory to arbitrate.” (Crowley, supra, 158 Cal.App.4th at pp. 1069-1070.)
No party contends MDL was a third party beneficiary of the Guaranty between Benjamin and Shram, and neither offered evidence to prove MDL should be compelled to arbitrate as a third party beneficiary of Benjamin’s agreement to personally guarantee repayment of the corporate debt. There is no basis in the record to find the parties intended to bind MDL as a third party beneficiary of Benjamin’s agreement to arbitrate any dispute arising from the Guaranty. “A surety or guarantor is one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefor.” (Civ. Code, § 2787, italics added.) One already liable as a principal obligor cannot act as a true, independent guarantor or surety on the principal debt. (See, e.g., Riddle v. Lushing (1962) 203 Cal.App.2d 831, 834 [general partners already liable as principal obligors on purchase price for property bought in name of partnership were not also properly deemed guarantors].) The subject instruments are not reasonably interpreted as reflecting an intent by the parties to bind MDL as a guarantor of its own debt incurred on the principal obligation. Nor is it reasonable to infer that the parties intended MDL to be bound to the secondary security instruments based on a pledge of real property in which MDL held no ownership interest.
Moreover, the record does not reveal any basis for finding that Benjamin’s status as president of MDL makes it equitable to bind MDL to Benjamin’s personal agreement to arbitrate. No evidence was presented establishing MDL as a sham corporation or alter-ego of Benjamin. In signing the Arbitration Rider, Benjamin unequivocally acted in his own individual capacity, undertaking to personally guarantee the debt of MDL. There is nothing to suggest or indicate in any way that Benjamin purported to act on MDL’s behalf in executing those separate instruments, that MDL intended that Benjamin act on its behalf, or that Shram was in any way misled to believe MDL was to be bound by those documents because of the agency relationship between MDL and Benjamin. The mere fact of Benjamin’s agency relationship with MDL cannot provide a proper basis, standing alone, to compel MDL to arbitrate. (Benasra v. Marciano (2001) 92 Cal.App.4th 987, 990 [corporate president who signed licensing agreements with arbitration provision solely in capacity as officer of corporation could not be compelled to arbitrate his individual claims based on agency relationship].)
There are no facts here similar to the cases in which it has been held equitable to bind a nonsignatory to an arbitration agreement based on an agency relationship with the signatory. For instance, in Berman v. Dean Witter & Co., Inc. (1975) 44 Cal.App.3d 999, a nonsignatory husband was compelled to arbitrate his dispute with his wife’s securities broker, because his wife had signed an arbitration agreement with the broker and the dispute arose from a purchase the husband made on the wife’s account with the broker. The husband was properly deemed to have been acting as an agent of his wife in the use of her account. (Id. at pp. 1003-1004.) And, in Keller Construction Co. v. Kashani (1990) 220 Cal.App.3d 222, a nonsignatory general partner was required to arbitrate with a third party contractor based on an arbitration provision in the contract between the partnership and the contractor. The court held that a partnership is not treated as a separate legal entity and the general partner is an agent of the partnership, liable for all debts and obligations of the partnership, and therefore properly bound to the arbitration provision in the partnership contract. (Id. at pp. 228-229.)
Shram failed to produce evidence of a valid agreement to arbitrate with MDL or other legal basis for compelling MDL to arbitrate as a nonsignatory to the Arbitration Rider executed by Benjamin. “Absent a written agreement--or a preexisting relationship or authority to contract for another that might substitute for an arbitration agreement--courts sitting in equity may not compel third party nonsignatories to arbitrate their disputes.” (Contra Costa, supra, 47 Cal.App.4th at p. 245.) The May 26, 2010 order denying arbitration is therefore affirmed as to MDL.
DISPOSITION
The May 26, 2010 order denying Shram’s motion to compel arbitration is affirmed in part and reversed in part and remanded with directions. As to MDL, the order denying arbitration is affirmed. As to Benjamin, the order is reversed. On remand, if Shram and Benjamin both agree they prefer to litigate this dispute in a single forum, Shram may withdraw his motion to compel arbitration. Otherwise, the superior court may conduct any necessary further proceedings to consider whether the civil action as to MDL should be stayed, pursuant to Code of Civil Procedure, sections 1281.2, subdivision (c) and/or 1281.4, pending completion of the arbitration between Benjamin and Shram. (See, e.g., Heritage Provider Network, Inc. v. Superior Court (2008) 158 Cal.App.4th 1146, 1152.) Each side shall bear their own costs on appeal.
WE CONCUR: RUBIN, Acting P. J.FLIER, J.