2018-00233627-CU-CO

MG CH4, LLC vs. Ray Brewer

Nature of Proceeding: Petition to Compel Arbitration and Stay

Filed By: Gonzalez, Jr., Louis A.

Defendants Ray Brewer (“Mr. Brewer”), CH4 Power, Inc. (“CH4 Power”), California Dairy Energy 4, LLC aka CDE4, CH4 Bioenergy, LLC, CH4 Engineering and Construction, LLC, CH4 Bioenergy Holdings, LLC, and Golden Biogas, LLC’s (collectively, “Moving Defendants”) petition to compel arbitration and stay of action pending hearing on petition is GRANTED.

Defendants’ request for judicial notice is granted.

Factual and Procedural Background

This action arises out of the plans of defendant CDE4 and its members, plaintiff MG CH4, LLC (“Plaintiff”) and defendant CH4 Power to plan, develop, permit, and profit from a biogas project in Fresno County. In 2016, Plaintiff purchased a 10% membership interest in CDE4 and agreed to be bound by CDE4’s Operating Agreement pursuant to an Addendum dated December 27, 2016. (Complaint at Exhs. 4-5.) Plaintiff contends defendants fraudulently induced it to invest $5 million into the

CDE4 project.

On May 23, 2018, Plaintiff filed its complaint against the Moving Defendants, William J. Crock (“Mr. Crock”), and Vernon E. Landeck (“Mr. Landeck”) alleging causes of action for negligent misrepresentation, fraud, civil conspiracy, breach of contract, breach of fiduciary duty, unjust enrichment, conversion, and money had and received.

The Moving Defendants now move to compel arbitration of Plaintiff’s entire action pursuant to the arbitration provision contained in CDE4’s Operating Agreement. While Mr. Landeck is represented by separate counsel and not included as a Moving Defendant, he has filed a separate response requesting that if the matter is stayed, all claims as to him also be stayed, or if the matter is ordered to arbitration, that all claims against him also be consolidated into the arbitration. Mr. Crock is not a party to this motion, but Mr. Crock is also represented by Moving Defendants’ counsel.

Discussion

“Under both federal and state law, the threshold question presented by a petition to compel arbitration is whether there is an agreement to arbitrate.” (Sparks v. Vista Del Mar Child and Family Svcs. (2012) 207 Cal.App.4th 1511, 1517.) “Absent a clear agreement to submit disputes to arbitration, courts will not infer that the right to a jury trial has been waived.” (Id. at 1518.) “A party seeking to compel arbitration has the burden of proving the existence of a valid agreement to arbitrate.” (Id.) “Once that burden is satisfied, the party opposing arbitration must prove by a preponderance of the evidence any defense to the petition.” (Id.)

On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy, the Court shall order the petitioner and the respondent to arbitrate the matter if it determines that an agreement to arbitrate the controversy exists, unless it determines that: (a) the right to compel arbitration was waived by the petitioner; (b) grounds exist for the revocation of the agreement; or, (c) a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. (Code Civ. Proc. §1281.2; Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413.)

“Although California has a strong policy favoring arbitration, the courts recognize that the right to pursue claims in a judicial forum is a substantial right and one not lightly to be deemed waived. Because the parties to an arbitration clause surrender this substantial right, the general policy favoring arbitration cannot replace an agreement to arbitrate. Thus, the right to compel arbitration depends upon the contract between the parties, and a party can be compelled to submit a dispute to arbitration only where that party has agreed in writing to do so.” (Smith v. Microskills San Diego L.P. (Cal. App. 4th Dist. 2007) 153 Cal. App. 4th 892, 896.) “’There is no policy compelling persons to accept arbitration of controversies which they have not agreed to arbitrate … .’ ” ( Bouton v. USAA Casualty Ins. Co. (2008) 43 Cal.4th 1190, 1199; accord, Zavala v. Scott Brothers Dairy, Inc. (2006) 143 Cal.App.4th 585, 590.)

Here, Moving Defendants contend CDE4’s Operating Agreement warrants compelling this entire matter to arbitration. CDE4’s Operating Agreement is signed by Mr. Brewer as President of CH4 Power. On December 27, 2016, Plaintiff became a member in

CDE4, assenting to the terms of the Operating Agreement by executing an Addendum to that effect. The Addendum is signed by Plaintiff and Mr. Brewer as President of CH4 Power for CDE4. None of the other Moving Defendants executed the Operating Agreement, Addendum, or a separate Addendum. Accordingly, the only signatories to the Operating Agreement are CDE4, CH4, and Plaintiff.

Sections 13.8 and 13.9 of the Operating Agreement provide in relevant part:

“13.8 Jurisdiction. Each Member hereby consents to the exclusive jurisdiction of the state and federal courts sitting in California in the venue of Sacramento in any action on a claim arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement, provided such claim is not required to be arbitrated pursuant to Section 13.9. … .

13.9. Disputed Matters. Except as otherwise provided in this Agreement, any controversy or dispute arising out of this Agreement, the interpretation of any of the provisions hereof, or the action or inaction of any Member hereunder shall be submitted to the American Arbitration Association for arbitration in Sacramento, California. Any award or decision obtained from any such arbitration proceeding shall be final and binding on the parties, and judgment upon any award thus obtained may be entered in any court having jurisdiction thereof. No action at law or in equity based upon any claim arising out of or related to this Agreement shall be instituted in any court by any Member except (a) an action to compel arbitration pursuant to this Section 13.9 or (b) an action to enforce an award obtained in an arbitration proceeding in accordance with this Section 13.9.” (emphasis added.)

Moving Defendants argue that based on the foregoing, Plaintiff agreed to submit any claims arising under or related to the Agreement to arbitration and cannot now disclaim its terms. Moving Defendants argue section 13.9 is broad enough to apply to all of Plaintiff’s claims and by the express terms, the only claims that can be instituted in any court are an action to compel arbitration, an action to enforce an arbitration award, or an action that is deemed not subject to arbitration. Moving Defendants further contend that the non-signatory Moving Defendants can compel arbitration because they are all related to Mr. Brewer and joined to the action based on Plaintiff’s allegations that Mr. Brewer, CH4 Power, and CDE4, and any of his other entities were required to perform under the Addendum. Moving Defendants make no reference or argument regarding Mr. Crock’s or Mr. Landeck’s position on arbitration. However, the Court notes Mr. Landeck has filed a response indicating his willingness to submit to arbitration and Mr. Crock is represented by the same counsel as Moving Defendants and has not submitted any opposition to this instant motion.

Plaintiff does not dispute it executed the Addendum or that the Operating Agreement provides for arbitration of certain claims. Plaintiff argues instead that the Moving Defendants have failed to establish why all the non-signatory defendants can compel arbitration, including Mr. Crock and Mr. Landeck. Plaintiff also contends the arbitration provision is narrow, only applies to Plaintiff’s claims that arise out of the Operating Agreement (i.e., breach of contract, breach of fiduciary duty), and Plaintiff’s remaining claims of misrepresentation, fraud, and conspiracy are not subject to arbitration because they do not “arise out of” the Operating Agreement.

As to the moving non-signatory defendants, the law allows a non-party to enforce an

arbitration agreement provided the non-party has “a sufficient identity of interest” with a party to the agreement. (DMS Services Inc. v. Superior Court (2012) 205 Cal.App.4th 1346, 1353.) “In many cases, non-parties to arbitration agreements are allowed to enforce those agreements where there is sufficient identity of parties. For example, defendants who are not signatories to an arbitration agreement, but who are acting agents for the party to the arbitration provision, may be allowed to enforce the arbitration clause. (See Valley Casework, Inc. v. Comfort Construction, Inc. (1989) 76 Cal.App.4th 1013, 1021.) “Under both federal and California decisional authority, a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are intimately founded in and intertwined with the underlying contract obligations.” (Boucher v. Alliance Title Co., Inc. (2005) 127 Cal.App.4th 262, 271.)

Here, there is no dispute Plaintiff is bound by the Agreement and Plaintiff does not dispute CDE4 and CH4 Power are entitled to compel arbitration as signatory defendants. However, even as to the moving non-signatory defendants, the Court finds they can compel arbitration. The non-signatory defendants are seeking to enforce, and voluntarily seeking to be bound by, the arbitration provision in the Operating Agreement. Plaintiff’s allegations against the non-signatory defendants are based on the same facts and intertwined with the underlying contract obligations. Plaintiff alleges the Addendum (binding Plaintiff to the Operating Agreement) was a memorialization of certain representations made to it by defendants and now alleges those representations were false and seeks to impose liability on all defendants as a result. Plaintiff’s Complaint also contains allegations of agency between the parties and asserts many of its claims against all “defendants” without distinction. The defendants have a sufficient identity of interest with the parties to the Addendum and Operating Agreement to compel arbitration. Further, Mr. Landeck, while not a Moving Defendant, has expressly agreed to submit to arbitration and Mr. Crock is represented by Moving Defendant’s counsel and has not indicated any opposition to arbitration.

Next, turning to whether the arbitration provision is so broad that it encompasses all of Plaintiff’s claims, the Court finds that it does. “In determining the scope of an arbitration clause, ‘[t]he court should attempt to give effect to the parties’ intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made [citation].’ [Citation.]” (Bono v. David (2007) 147 Cal.App.4th 1055, 1063.) The contractual terms themselves must be carefully examined. (Ibid.) “’There is no policy compelling persons to accept arbitration of controversies which they have not agreed to arbitrate … .’ ” (Bouton v. USAA Casualty Ins. Co. (2008) 43 Cal.4th 1190, 1199; accord, Zavala v. Scott Brothers Dairy, Inc. (2006) 143 Cal.App.4th 585, 590.)

Here, section 13.8, which concerns “Jurisdiction,” first provides that each member consents to the exclusive jurisdiction of the California courts in Sacramento in any action on a claim arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement, provided such claim is not required to be arbitrated pursuant to section 13.9. This implies the parties intended the courts to retain jurisdiction over certain claims that are not required to be arbitrated. Section 13.9 then set the parameters for what claims must be submitted to arbitration. Section 13.9 specifies that “No action at law or in equity based upon any claim arising out of or related to this Agreement shall be instituted in any court by any Member except (a) an action to compel arbitration pursuant to this Section 13.9 or (b) an action to enforce an award obtained in an arbitration

proceeding in accordance with this Section 13.9.” The language of section 13.9 is broad and requires “any claim arising out of or related to this Agreement” to be submitted to arbitration (except a motion to compel arbitration or enforce an arbitration award). Seen in this context, section 13.8 clarifies the courts that have jurisdiction over any claims that can be instituted in court (i.e., California courts in Sacramento). Based on the foregoing, the Court agrees with Moving Defendants that the language of the Operating Agreement requires this matter to be submitted to arbitration.

As a separate issue to be addressed, when there is a possibility of conflicting rulings of law or fact, CCP 1281.2(c) permits the court to deny arbitration. There is a compelling public policy, embodied in C.C.P. § 1281.2(c), which authorizes the court to decline to enforce an arbitration agreement, and to allow the action as to all parties to proceed in court, when a party to the arbitration agreement is also a party to a pending court action with a third party arising out of the same transaction or series of related transactions, and there is a possibility of conflicting rulings of law or fact. (C.C.P. § 1281.2(c); Best Interiors, Inc. v. Millie & Severson, Inc. (2008) 161 Cal.App.4th 1320, 1329; Fitzhugh v. Granada Healthcare and Rehabilitation Center (2007) 150 Cal.App.4th 469, 475; Whaley v. Sony Computer Entertainment America, Inc. (2004) 121 Cal.App.4th 479, 488; C. V. Starr & Co. v. Boston Reinsurance Corp. (1987) 190 Cal.App.3d 1637, 1642; Rosenthal v. GreatWestern Fin. Securities Corp. (1996) 14 Cal.4th 394, 413.) The determinative issue is not whether inconsistent rulings are inevitable but whether they are possible, if arbitration is ordered. (Lindemann v. Hume (2012) 204 Cal.App.4th 556, 567.) The Court finds there is no the possibility of inconsistent rulings as all defendants, signatory and non-signatory, have agreed to submit the matter to arbitration.

Based on the foregoing, the motion to compel arbitration and stay the matter is GRANTED. This matter is ordered to arbitration in accordance with the parties’ agreement and the civil action is stayed pending arbitration.