Filed 8/18/20 Avetisyan v. Mitchell Silberberg & Knupp CA2/5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

AVETIS AVETISYAN, et al.,

Plaintiffs and Respondents,

v.

MITCHELL SILBERBERG & KNUPP, et al.,

Defendants and Appellants.

B299642

(Los Angeles County

Super. Ct. No.

19STCV08082)

APPEAL from an order of the Superior Court of the County of Los Angeles, Elizabeth Allen White, Judge. Reversed.

Halpern May Ybarra Gelberg, Joseph J. Ybarra and Kevin H. Scott for Defendants and Appellants.

Murphy Rosen, David E. Rosen and Daniel N. Csillag for Plaintiffs and Respondents.

I. INTRODUCTION

The trial court denied the attorney defendants’ motion to compel arbitration of plaintiffs’ legal malpractice claims. On appeal, defendants contend, among other things, that the court erred because an arbitration clause in a 2013 client engagement agreement bound plaintiffs as nonsignatories under agency, third-party beneficiary, and estoppel theories. Under the facts of this case, we agree with defendants that plaintiffs, as third-party beneficiaries, were required to arbitrate their claims under the 2013 agreement. We therefore reverse the order denying arbitration.

II. FACTUAL AND PROCEDURAL BACKGROUND

A. December 2013 Client Engagement Agreement

Avetis and Peter founded PRN Ambulance, Inc. (Ambulance) in 2000. They were the sole shareholders of Ambulance and, at all times before its sale, acted as its president and vice-president, respectively.

In 2013, Ambulance “was approached by a number of investors about acquisition.” Ambulance, however, “believed it would be in a stronger position to engage in such negotiations if [Ambulance] first acquired some additional business.” Because Avetis had no experience with complicated merger and acquisition transactions, he contacted Adler to discuss retaining defendants to represent Ambulance in the acquisition of another ambulance business. Avetis told Adler he “would need a lot of ‘hand-holding’ throughout the process.” Adler assured Avetis that defendants “could provide all the [legal] services necessary for [Ambulance] to acquire another company, and agreed to provide the necessary ‘hand-holding’ throughout the process.”

On December 6, 2013, Avetis executed a client engagement agreement (2013 agreement) on behalf of Ambulance as its president. Mitchell, on the one hand, and Ambulance, on the other, were the only parties identified in that agreement, which was written in the form of a letter addressed to Ambulance as “you.”

The agreement provided, in part, “You have asked us and we agree to represent you with respect to possible acquisitions of one or more ambulance businesses. Unless you and we make a different agreement in writing, this Agreement will govern all future services we may perform for you on any other individual matter that you request us to handle and we agree to handle.” (Italics added.)

In addition to specifying the fees, costs, and billing procedures that would apply to Mitchell’s representation of Ambulance, the agreement contained an arbitration clause that provided, in pertinent part: “Except for claims that are subject to and resolved by the arbitration procedure set forth in paragraph 9 above [related to disputes over fees], any claim between the parties, whether contract, tort, or otherwise, arising out of or related to this Agreement, the attorney-client relationship which is the subject of this Agreement, or the services rendered under this Agreement shall be submitted to binding arbitration upon the written request of one party after service of that request on the other party.”

Following their retention in December 2013, defendants performed legal services for Ambulance on the possible acquisition of other ambulance businesses, but no such transaction was consummated. Instead, in early 2014, Ambulance, Avetis, and Peter began negotiations with ProTransport-1, LLC (ProTransport) regarding its acquisition of the equity interest in Ambulance. Because Avetis and Peter owned 100% of the shares of Ambulance, the proposed acquisition required them to sell their individual shares in Ambulance to ProTransport.

In or around April or May 2014, “[Ambulance, Avetis, and Peter] approached [defendants] seeking legal representation in connection with the equity purchase transaction between them and [ProTransport].” Although defendants agreed to jointly represent Ambulance and its two individual shareholders, defendants did not ask any of them to execute a new written client engagement agreement.

Defendants provided legal services to Ambulance, Avetis, and Peter in connection with the ProTransport transaction from May through November 2014, the month during which the “definitive deal documents” with respect to Avetis and Peter were executed.

B. November 2014 Conflict Waiver Agreement

On November 13, 2014, Adler, on behalf of Mitchell, sent Avetis and Ambulance a letter (2014 conflict waiver) seeking their agreement to waive the potential conflicts of interest implicated by defendants’ joint representation of Avetis, individually, and Ambulance in connection with the ProTransport transaction. The 2014 conflict waiver stated: “As you know, we [Mitchell] were originally engaged to represent [Ambulance] with respect to the possible acquisition by [Ambulance] of a medical transportation business. Over the last few months, however, we have been representing [Ambulance] and you [Avetis], as one of the two shareholders of [Ambulance] in connection with the proposed sale of [Ambulance] (the ‘Sale of [Ambulance]’). We have not been representing Peter [], your brother who is the other shareholder of [Ambulance], in connection with the Sale of [Ambulance]. [¶] [Ambulance] has agreed to pay our fees for representing both [Avetis] and [Ambulance] in the Sale of [Ambulance].” After detailing the potential conflicts and the corresponding ethical duties of counsel arising from such joint representation, the letter explained, “If it remains your and [Ambulance]’s desire that we represent both you and [Ambulance] in the Sale of [Ambulance], we can proceed with the joint representation. We can represent both you and [Ambulance] with respect to the Sale of [Ambulance] if each of you waives the conflict of interest we would have in representing both you and [Ambulance] in the Sale of [Ambulance]. This waiver is accomplished by your dating and signing the enclosed copy of this letter and returning it to me [Adler].” The letter ended by requesting that Avetis and Ambulance “acknowledge [their] understanding of and agreement to the foregoing by signing the enclosed copy of this letter . . . .”

On January 18, 2015—immediately below the sentence which read, “[w]e hereby consent to the foregoing joint representation and waive any potential or actual conflict of interest with respect thereto”—Avetis executed the letter on his own behalf and Peter executed it on behalf of Ambulance, presumably in his capacity as its vice president.

The ProTransport transaction formally closed in July 2015, with defendants performing additional legal work on that matter from December 2014 through April 2015.

C. Complaint

Sometime in 2017, Avetis first “learned that the equity [he and Peter] had acquired in [ProTransport] as part of [the Ambulance sales] transaction was essentially worthless.” On March 8, 2019, Avetis, Peter, and their holding company, AVPET, filed a legal malpractice complaint against defendants, asserting a single cause of action for professional negligence based upon legal advice provided to Avetis and Peter in connection with the ProTransport transaction.

According to the complaint, defendants began representing the interests of Ambulance, Avetis, and Peter in the ProTransport transaction in April or May 2014, but without a written retainer agreement. The complaint further alleged that Peter and AVPET were the intended third-party beneficiaries of defendants’ legal services, at least those performed in connection with the ProTransport transaction. The complaint concluded that “[defendants] negligently, carelessly and/or recklessly rendered legal advice and services to [p]laintiffs” in connection with the ProTransport transaction.

D. Motion to Compel Arbitration

Defendants filed their motion to compel arbitration on April 25, 2019. They supported the motion with Adler’s declaration which attached copies of the 2013 agreement, the 2014 conflict waiver, and another engagement agreement signed in 2016 (which is not relevant for purposes of this appeal). Among other things, defendants argued in support of the motion that Avetis and Peter were bound under the 2013 agreement to arbitrate as third-party beneficiaries of the legal services provided pursuant to that agreement; and AVPET was bound under the 2013 agreement for substantially the same reasons Peter was bound.

Plaintiffs opposed the motion, arguing that the arbitration provision in the 2013 agreement did not require them to arbitrate their claims because the third-party beneficiary exception did not apply. Among the documents submitted in support of the opposition were copies of the monthly billing statements from Mitchell for the period December 2013 through April 2015.

On July 11, 2019, the trial court conducted a hearing on defendants’ motion to compel arbitration. The court described the 2013 agreement as a “preexisting retainer agreement, which is not in any way related to what’s alleged here, clearly not even applying to the services that Mitchell . . . performed in this instance.” Following the hearing, the court issued a written ruling denying the motion to compel arbitration. It concluded that plaintiffs could not be bound under an agency theory. Although the court did not expressly discuss the third-party beneficiary theory in its written ruling, it stated, “[n]or is the fact that [Ambulance] is a client of [d]efendants sufficient to bind [Peter], as shareholder of [Ambulance], nor [AVPET], to an arbitration agreement to which [Ambulance] may have agreed. ‘The corporation and the shareholders are distinct parties in contracts made by one or the other.’ [Citation.]” The court also concluded that Peter and AVPET could not be bound under an equitable estoppel theory. Finally, the court found there was a valid arbitration agreement between defendants and Avetis pursuant to the 2016 agreement, but concluded that “for the reasons discussed above, [d]efendants cannot compel Peter and [AVPET] to arbitrate their claims. In this regard, [Code of Civil Procedure section] 1281.2 gives the [c]ourt discretion not to enforce the arbitration agreement[] as against Avetis . . . because there is a possibility of conflicting rulings on a common issue of law or fact to the extent litigation of Peter and [AVPET’s] claims against [d]efendants proceeds while arbitration between Avetis against [d]efendants proceeds as well. [¶] Accordingly, the motion to compel arbitration is DENIED.”

III. DISCUSSION

A. Legal Principles: Compelling Nonsignatories to Arbitrate

“‘The purpose of arbitration is to have a simple, quick and efficient method to resolve controversies.’ [Citation.] For this reason, there is a strong public policy favoring contractual arbitration. [Citation.] But that policy ‘“‘does not extend to those who are not parties to an arbitration agreement, and a party cannot be compelled to arbitrate a dispute that he has not agreed to resolve by arbitration.’”’ [Citation.]” (Molecular Analytical Systems v. Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 704 (Molecular).)

“‘Generally speaking, one must be a party to an arbitration agreement to be bound by it or invoke it.’ [Citations.] ‘There are[, however,] exceptions to the general rule that a nonsignatory to an agreement cannot be compelled to arbitrate and cannot invoke an agreement to arbitrate, without being a party to the arbitration agreement.’ [Citations.]” (Molecular, supra, 186 Cal.App.4th at p. 706.) “One treatise has stated that there are ‘six theories by which a nonsignatory may be bound to arbitrate: “(a) incorporation by reference; (b) assumption; (c) agency; (d) veil-piercing or alter ego; (e) estoppel; and (f) third-party beneficiary.”’ [Citations.] ‘The California cases binding nonsignatories to arbitrate their claims fall into two categories. In some cases, a nonsignatory was required to arbitrate a claim because a benefit was conferred on the nonsignatory as a result of the contract, making the nonsignatory a third[-]party beneficiary of the arbitration agreement. In other cases, the nonsignatory was bound to arbitrate the dispute because a preexisting relationship existed 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.’ [Citation.]” (Jensen v. U-Haul Co. of California (2017) 18 Cal.App.5th 295, 300–301 (Jensen).)

B. Burden of Proof and Standard of Review

“‘The [moving party] bears the burden of proving the existence of a valid arbitration agreement by the preponderance of the evidence, and a party opposing the [motion] bears the burden of proving by a preponderance of the evidence any fact necessary to its defense.’ [Citation.] To satisfy the moving party’s initial burden, the . . . motion must be ‘accompanied by prima facie evidence of a written agreement to arbitrate the controversy’ in question. [Citation.] In ruling on the . . . motion, ‘the court must determine whether the parties entered into an enforceable agreement to arbitrate that reaches the dispute in question, construing the agreement to the limited extent necessary to make this determination.’ [Citation.]” (Molecular, supra, 186 Cal.App.4th at pp. 705–706.)

“‘“Whether an arbitration agreement is binding on a third party (e.g., a nonsignatory) is a question of law subject to de novo review.”’ [Citations.] Nevertheless, we presume the court found every fact and drew every permissible inference necessary to support its judgment or order, and we defer to the court’s determination of credibility of the witnesses and weight of the evidence in resolving disputed facts. [Citation.] ‘[I]f there are material facts in dispute, we must accept the trial court’s resolution of such disputed facts when supported by substantial evidence.’ [Citations.]” (Cohen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840, 859.)

Here, the material facts concerning whether plaintiffs, as nonsignatories of the 2013 agreement, are bound by its arbitration provision are undisputed. We therefore review the trial court’s determination of that issue de novo.

C. Third-Party Beneficiary Theory

Defendants contend, among other things, that plaintiffs are bound to arbitrate their malpractice claims as third-party beneficiaries of the 2013 agreement between Mitchell and Ambulance. “Under the third[-]party beneficiary theory, a nonsignatory may be compelled to arbitrate where the nonsignatory is a third[-]party beneficiary of the contract. [Citation.] Whether a nonsignatory is an intended third[-]party beneficiary to the contract is determined from the parties’ intent, as gleaned from the contract as a whole and the circumstances under which it arose. [Citation.]” (Philadelphia Indemnity Ins. Co. v. SMG Holdings, Inc. (2019) 44 Cal.App.5th 834, 841; see also Jensen, supra, 18 Cal.App.5th at p. 301.) “‘“If the terms of the contract necessarily require the promisor to confer a benefit on a third person, then the contract, and hence the parties thereto, contemplate a benefit to the third person. The parties are presumed to intend the consequences of a performance of the contract.” [Citation.]’ [Citation.]” (Souza v. Wetlands Water Dist. (2006) 135 Cal.App.4th 879, 891.)

Under the 2013 agreement, Ambulance sought legal advice from Mitchell, with the goal, according to the complaint, of being placed in a “stronger position” before its contemplated acquisition by an interested investor. In other words, the primary purpose of the legal advice rendered under the 2013 agreement was to increase the monetary value of Ambulance in anticipation of its ultimate sale. Moreover, the complaint and the Mitchell invoices attached to Avetis’s opposition declaration demonstrate that, as president and vice-president, Avetis and Peter were the parties who would receive and act on any legal advice from defendants intended to achieve that purpose. And, the 2014 conflict waiver, which recited Ambulance’s agreement to pay Mitchell’s fees for representing both Avetis and Ambulance, further reinforced that Mitchell represented a single interest in connection with the ultimate sale of Ambulance. Indeed, as the only shareholders of Ambulance, Peter and Avetis were the parties who would primarily benefit from an increase in the value of Ambulance and from its ultimate acquisition by an investor. Also, as alleged in the complaint, Avetis expected to receive “a lot of ‘hand-holding’” from defendants under the 2013 agreement with respect to the anticipated acquisitions.

The 2013 agreement expressly contemplated the provision of legal services beyond those related to Ambulance’s purchase of a medical transport business, as it stated it would “govern all future services we may perform for you on any other individual matter that you request us to handle and we agree to handle.” It also provided that any such services would be governed by the terms and conditions of that agreement. As noted, one of the terms of the 2013 agreement was the arbitration clause which expressly covered disputes, “whether contract, tort, or otherwise, arising out of or related to this Agreement . . . or the services rendered under this Agreement . . . .” Thus, by its express terms, the 2013 agreement extended to and governed the legal advice Mitchell would eventually provide to Ambulance concerning the ProTransport transaction.

The undisputed facts, as evidenced by the terms of the 2013 agreement and the allegations of the complaint, demonstrate that Mitchell, as the promisor under the 2013 agreement, agreed to perform legal services for Ambulance, the presumed consequence of which—an increase in the value of Ambulance—would inure to the ultimate benefit of Avetis and Peter.

The facts of this case are thus analogous to those of RN Solution, Inc. v. Catholic Healthcare West (2008) 165 Cal.App.4th 1511, 1520 (RN Solution). In that case, the nonsignatory plaintiff was the president, CEO, and founder of RN Solution, Inc., a company that recruited nurses on behalf of the corporate defendant, an entity that operated hospitals and medical centers. (Id. at p. 1514.) RN Solution, Inc. provided those services pursuant to a recruiting agreement with the corporate defendant that was signed on RN Solution, Inc.’s behalf by the plaintiff in her capacity as its president and CEO. (Id. at p. 1520.) According to the court in RN Solution, because the plaintiff “benefited financially and professionally” from the recruitment agreement, she was bound to arbitrate her contract and tort claims against the corporation, as both an agent-employee of RN Solution, Inc. and a third-party beneficiary of the recruiting agreement. (Ibid.)

In their briefing on defendants’ agency theory, plaintiffs attempt to distinguish RN Solution, supra, 165 Cal.App.4th 1511, reasoning that “unlike [the individual plaintiff in that case], [p]laintiffs [here] are not suing for breach of any written contract or the implied covenant contained in any written contract.” But, contrary to plaintiff’s suggestion, the plaintiff in RN Solution sued the corporate defendant not only for breach of contract, but also for various other tort claims, and the court in that case concluded that the plaintiff was obligated to arbitrate those non-contract claims as well. (Id. at pp. 1516–1517.)

Plaintiffs also try to distinguish RN Solution, supra, 165 Cal.App.4th 1511 by arguing that “[p]laintiffs have not alleged anywhere in the complaint that they have benefitted financially or professionally from the 2013 [agreement].” But, as explained above, plaintiffs expressly alleged that they contacted Mitchell only after they had been approached by certain investors about an acquisition of Ambulance and had decided, in contemplation of that acquisition, to increase the value of Ambulance by purchasing a medical transport business, thereby strengthening their negotiating position. Thus, the complaint, fairly construed, demonstrates that the services of defendants pursuant to the 2013 agreement were intended, at least in part, for the ultimate benefit of Avetis and Peter, as the sole shareholders of Ambulance and the primary beneficiaries of any increase in value of the shares of Ambulance.

Finally, plaintiffs contend that they are not third-party beneficiaries because they did not successfully benefit from the 2013 agreement: because Ambulance “did not acquire any businesses . . . [p]laintiffs could not have derived any benefit from this contract.” But the issue here is whether plaintiffs were the intended third-party beneficiaries of the legal services rendered under the 2013 agreement, not whether they successfully reaped the intended financial benefits. Implicit in any claim for breach of contract is the premise that the plaintiff did not realize the benefits of the agreement. (Souza v. Westlands Water Dist., supra, 135 Cal.App.4th at p. 891 [the third-party beneficiary doctrine “presupposes that the defendant made a promise which, if performed, would have benefited the third[-] party” (italics added)].)

Further, the “‘hand-holding’” that Avetis sought and obtained from defendants, although not pecuniary in nature, was also a personal benefit to him that was intended under the 2013 agreement. Thus, Avetis and Peter were both intended third-party beneficiaries of the 2013 agreement.

Finally, we also conclude that AVPET was an intended beneficiary of the legal services provided to Ambulance under the 2013 agreement. As noted, the parties to that agreement contemplated at its inception that Ambulance would ultimately be acquired by an investor. Therefore, although AVPET had not been formed as an entity at the time the 2013 agreement was executed, that agreement was nevertheless intended to confer a benefit on Avetis and Peter, as sole shareholders of Ambulance; and, as the complaint alleged, “AVPET was created at the advice and recommendation of [defendants] for the purpose of holding the equity in [ProTransport] to be received by [Avetis and Peter]. As such, AVPET was an intended third[-]party beneficiary of the services provided by [defendants].” Thus, the complaint implicitly alleged that Ambulance and Mitchell intended the firm’s legal advice under the 2013 agreement to benefit not only Avetis and Peter, but also any company that was formed, pursuant to that advice, for the sole purpose of holding their shares in ProTransport.

IV. DISPOSITION

The order denying the petition to compel arbitration is reversed and the matter is remanded to the trial court with instructions to enter a new order compelling arbitration of plaintiffs’ claims. Defendants are awarded costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

KIM, J.

I concur:

MOOR, J.
Avetisyan, et al. v. Mitchell Silberberg & Knupp, et al.

B299642

BAKER, Acting P. J., Dissenting

I disagree with my colleagues’ decision to reverse the order denying the motion to compel arbitration. The client engagement agreements in this case were drafted by a sophisticated law firm that is surely capable of structuring client relationships to avoid stretching to rely on estoppel and third-party benefit concepts as a basis to compel arbitration. The law firm failed to do that, however, and I do not believe Peter Avetisyan and AVPET are intended beneficiaries of the 2013 engagement agreement—at best, they are incidental beneficiaries, which is not enough. (Civ. Code, § 1559; Jensen v. U-Haul Co. of California (2017) 18 Cal.App.5th 295, 301–302; Ronay Family Limited Partnership v. Tweed (2013) 216 Cal.App.4th 830, 838 [“To invoke the third party beneficiary exception, [the defendants] had to show that the arbitration clause of the account agreement was ‘made expressly for [their] benefit’”]; Matthau v. Superior Court (2007) 151 Cal.App.4th 593, 602 [“The mere fact that a contract results in benefits to a third party does not render that party a ‘third party beneficiary’”].) As to the other esoteric theory of arbitrability the law firm advanced, the trial court was right to reject it for substantially the reasons the court gave.

BAKER, Acting P. J.