Copenbarger v. McNaughton

 

 

 

 

 

 

 

 

 

Filed 9/6/13  Copenbarger v. McNaughton CA4/3

 

 

 

 

 

 

 

 

 

 

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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opinion has not been certified for publication or ordered published for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

 

FOURTH APPELLATE
DISTRICT

 

DIVISION THREE

 

 
>

PAUL D. COPENBARGER,         Plaintiff and Appellant,               v.   KENT A. McNAUGHTON,         Defendant and Respondent.

G046975            (Super. Ct. No. 30-2008-00106367)            O P I N I O N

 

                        Appeal from an order of
the Superior Court
of Orange County,
John C. Gastelum, Judge.  Affirmed in
part and dismissed in part.

                        HamptonHolley and George
L. Hampton IV for Plaintiff and Appellant.

                        Prenovost, Normandin,
Bergh & Dawe, Michael G. Dawe and Kristin F. Godeke for Defendant and
Respondent.

*                      *                      *

 

>INTRODUCTION

                        Paul Copenbarger
appeals from a judgment confirming an arbitration award in favor of his former
business partner, Kent McNaughton. 
Copenbarger and McNaughton formed a limited liability company to develop
a parcel of land in Hawaii.  They fell out over whether McNaughton had to
buy Copenbarger out and wound up suing each other in Orange County Superior
Court.  The trial court ordered the case
to arbitration, over Copenbarger’s objection that McNaughton had waived the
right to arbitrate.  Copenbarger appeals
from the order granting the petition to compel arbitration.

                        The subsequent
arbitration award was a mixed bag, with Copenbarger prevailing on some of the
claims and McNaughton on others.  The
trial court denied Copenbarger’s motion to vacate the award, and granted
McNaughton’s petition to confirm it. 

                        Copenbarger appeals from
one of the arbitrators’ rulings, which gave both him and McNaughton control
over the project, as they had had in their prior business dealings.  Copenbarger asserts that the arbitrators
exceeded their powers when they rewrote the company’s operating agreement to
restore joint control.  The rest of the
award, as he recognizes, is not subject to correction on appeal.

                        We affirm the order
granting the petition to compel arbitration. 
Although, as the trial court recognized, McNaughton’s delay in
requesting arbitration was troubling, we see no basis for disturbing the trial
court’s ultimate conclusion that he did not waive arbitration.  

                        That determination
having been made, the rest of the appeal is moot.  We agree with Copenbarger that the
arbitrators exceeded their powers by re-writing the operating agreement, but
restoring the agreement to its original form would accomplish nothing.  The limited liability company is out of
business, so it no longer matters who controls it.  This portion of the appeal must be dismissed.

 

>FACTS

>                        In
2006, McNaughton found some property on the island
of Maui that he thought could be
profitably developed as commercial real estate. 
He sought investors to go in with him on the project.  Among the people he approached was
Copenbarger, with whom he had participated in several successful real estate ventures
in the past.  The one in Hawaii,
however, was the biggest project McNaghton had yet undertaken.

                        McNaughton found two
other investors who were willing to put some money into the project.  Most of the upfront money, however, was his
and Copenbarger’s.href="#_ftn1" name="_ftnref1"
title="">[1]  As they had done in two prior real estate
deals, McNaughton and Copenbarger agreed to share control of the project.  McNaughton would be in charge of day-to-day
operations, and Copenbarger would oversee the project’s legal affairs.  The other two investors would be “economic
interest holders,” without any significant ability to control operations.

                        The development was to
proceed in three stages, with a different limited liability company for each
one.  At some point, however, the
structure changed, and Keawe Commercial
Center, LLC (Keawe), became the
“umbrella” company, with three subsidiary limited liability companies of which
it was the sole member.

                        The project also changed
in other ways.  Initially, Copenbarger
and McNaughton agreed that the operating agreement for Keawe would be
essentially a duplicate of the prior agreements they had had for earlier
projects.  The first draft of the Keawe
operating agreement was in fact a former agreement with some minor adjustments
to take into account the new circumstances.href="#_ftn2" name="_ftnref2" title="">[2]  The agreement went through several drafts as
the closing date of June 19, 2006, drew nearer.

                        The final version of the
agreement made a significant alteration in the provisions concerning control of
the project.  Instead of control shared
between McNaughton and Copenbarger, McNaughton would have “full, complete, and
exclusive authority, power, and discretion to manage and control the business,
property, and affairs of [Keawe], to make all decisions regarding those matters
and to perform any and all acts or activities customary or incident to the
management of [Keawe’s] business, property and affairs.”

                        Copenbarger executed the
Keawe operating agreement on or after June 9, 2006.  He and McNaughton also entered into a
separate agreement, the buy/sell agreement (of which more anon), which
McNaughton signed on June 14.  The deal
closed on June 19.

                        The Keawe project failed
to perform as expected, and Copenbarger notified McNaughton on January 9, 2008,
that he was exercising his right to be bought out under the buy/sell
agreement.  When McNaughton indicated
that he would not honor the agreement, Copenbarger filed suit to enforce it in
Orange County Superior Court in May 2008. 
His complaint consisted of one count, for breach of the buy/sell
agreement.

                        McNaughton fired back
with a cross-complaint, filed June 6, 2008. 
He filed an amended cross-complaint on August 5, 2008, seeking
declaratory relief, damages for breach of contract and breach of fiduciary
duty, and rescission.  Each
cross-complaint included a copy of the Keawe operating agreement as an
exhibit.  Copenbarger filed his first
amended complaint on December 5, 2008, expanding the causes of action to
include breach of the operating agreement, breach of fiduciary duty, and
several kinds of fraud.

                        McNaughton moved to
compel arbitration on December 12, 2008, based on an arbitration clause in the
Keawe operating agreement.href="#_ftn3"
name="_ftnref3" title="">[3]  The trial court granted the petition and
stayed the action.

                        The arbitration hearings
took place between April 26 and April 30, 2010, before a panel of three
arbitrators.  The panel issued an interim
award on May 26, 2010, and a final award, which included a ruling on attorney
fees, on June 16, 2010.

                        The focus of the
arbitration, and of the final award, was the enforceability of a separate
buy/sell agreement between McNaughton and Copenbarger alone.  Copenbarger testified at the arbitration that
he had insisted on the agreement to counter his loss of control over the Keawe
project.  Copenbarger said that in early
June, shortly before the deal was supposed to close, McNaughton stated he
wanted to change the division of labor embodied in the prior deals:  McNaughton in charge of daily operations, and
Copenbarger overseeing legal affairs. 
According to Copenbarger’s testimony, McNaughton wanted to get into real
estate development in Hawaii.  But to be
successful, he thought he needed to have a free hand, without Copenbarger
looking over his shoulder.  McNaughton
therefore sought to change the terms of the Keawe operating agreement to give
him “full, complete and exclusive authority, power, and discretion to manage
and control the business, property and affairs of [Keawe].”

                        Copenbarger testified
that he was willing to cede this control of Keawe to McNaughton, provided he
had an escape hatch, i.e., the buy/sell agreement.  Under the terms of this agreement, he could
require McNaughton to buy his interest in Keawe if he lost confidence in the
project. href="#_ftn4" name="_ftnref4" title="">[4]  Copenbarger was not willing to invest $1
million of his own money in the project and personally guarantee a $5 million
loan – and give up control – unless he could get out on favorable terms if
things started to go downhill.  He said
he and McNaughton discussed the terms of the buy/sell agreement before the
Keawe operating agreement was put into its final form.

                        McNaughton for his part
testified that he had never discussed the buy/sell agreement with Copenbarger
before June 14, 2006, when the agreement was faxed to him while he was in
Hawaii closing the deal.  He denied that
he had ever asked for complete control of the project and was unaware that the
operating agreement had been changed to give it to him.  He said he was taken completely by surprise
when he received the buy/sell agreement, and he signed it only because the deal
was going to fall through without Copenbarger’s $1 million investment and his
loan guarantee, which he understood would not be forthcoming if he did not
sign.  If the deal did not close, at the
very least McNaughton would lose all his escrow deposits and still be liable
for loans he had guaranteed.

                        In arbitration,
McNaughton argued that the buy/sell agreement was not enforceable for at least
two reasons.href="#_ftn5" name="_ftnref5"
title="">[5]  First, Copenbarger was his attorney, and Rule
3-300 of the Rules of Professional Conduct prohibits attorneys from entering
into business deals with their clients unless certain conditions are met.href="#_ftn6" name="_ftnref6" title="">[6]  Second, Copenbarger had obtained his consent
to the buy/sell agreement by duress.

                        The arbitrators found
Copenbarger’s testimony about the origin of the buy/sell agreement more
credible; they believed McNaughton had demanded total control of the Keawe
project and that Copenbarger had tried to counterbalance his loss of control
with an “exit plan,” so that he could get out if Keawe did not perform as
hoped.  The arbitrators dismissed the
idea that Copenbarger had been McNaughton’s attorney during the course of the
project and that he had therefore violated Rule 3-300 of the Rules of
Professional Conduct by engaging in a business deal with a client.  But they credited McNaughton’s testimony he
had signed the buy/sell agreement under duress, because he would face economic
disaster if Copenbarger pulled his $1 million investment a few days before the
Keawe deal was supposed to close.

                        The arbitration panel
issued its final award on June 16, 2010. 
The arbitrators set aside the buy/sell agreement as procured through
duress.  They then modified the Keawe
operating agreement to restore the divided control that had characterized the
prior agreements between Copenbarger and McNaughton and that had been present
in the early drafts of the Keawe operating agreement.  In essence, the parties were back where they
were before McNaughton had asked for total control and before the buy/sell
agreement existed.

                        Copenbarger moved to
vacate the award on the grounds that the arbitrators had exceeded their powers
by changing the operating agreement.  The
trial court denied the petition and confirmed the award, notwithstanding the
alteration of the Keawe operating agreement. 
The trial court held that Copenbarger had acceded to the expansion of
the arbitrators’ powers by requesting rescission himself.

                        We requested
supplemental briefing on Keawe’s current status.  The parties have informed us that Keawe is
out of business, having wound up its affairs as of September 2012.

DISCUSSION

>I.                      Waiver
of Right to Arbitrate

>                        Copenbarger
argued on appeal that McNaughton waived his right to compel arbitration in
three ways.  First, he failed to respond
to Copenbarger’s initial demand for arbitration, made after Copenbarger filed
his original complaint.  Second,
McNaughton delayed seeking arbitration after he filed his own
cross-complaint.  Finally, McNaughton
engaged in dilatory tactics after the court granted the petition to compel
arbitration.

>                        We
dealt with the issue of waiver of the right to arbitrate last year in >Lewis v. Fletcher Jones Motor Cars, Inc.
(2012) 205 Cal.App.4th 436 (Lewis),
and two years before that in Burton v.
Cruise (2010) 190 Cal.App.4th 939 (Burton).  We summarize the relevant law here as set out
in those two opinions.

                        “Whether a party waived
the right to contractual arbitration is a factual question we review under the
substantial evidence standard of review. 
[Citations.]  The trial court’s
‘determination of this factual issue, “‘if supported by substantial evidence,
is binding on an appellate court.’” [Citations.]’”  (Lewis,
supra, 205 Cal.App.4th at p. 443.) 
“‘“It was the trial court’s duty to determine whether” the petitioners
met their “burden of proof; it is our duty to determine whether there is
substantial evidence to support the trial court’s findings that it did.”’
[Citations.]”  (Burton, supra, 190 Cal.App.4th at p. 946.)

                        “Although the statute
[Code of Civil Procedure section 1281.2] speaks in terms of ‘waiver,’ the term
is used ‘“as a shorthand statement for the conclusion that a contractual right
to arbitration has been lost.”’ 
[Citation.]  This does not require
a voluntary relinquishment of a known right; to the contrary, a party may be
said to have ‘waived’ its right to arbitrate by an untimely demand, even
without intending to give up the remedy. 
In this context, waiver is more like a forfeiture arising from the
nonperformance of a required act. 
[Citations.]”  (>Burton, supra, 190 Cal.App.4th at p.
944.)

                        “In St. Agnes [Medical Center v.
PacifiCare of California (2003) 31 Cal.4th 1187], the California Supreme
Court adopted as the California standard the same  multifactor test employed by nearly all
federal courts for evaluating waiver claims. [Citations.]  [¶] 
Specifically, the St. Agnes
court identified the following as ‘factors [that] are relevant and properly
considered in assessing waiver claims’: 
‘“‘(1) whether the party’s actions are inconsistent with the right to
arbitrate; (2) whether “the litigation machinery has been substantially
invoked” and the parties “were well into preparation of a lawsuit” before the
party noticed the opposing party of an intent to arbitrate; (3) whether a party
either requested arbitration enforcement close to the trial date or delayed for
a long period before seeking a stay; (4) whether a defendant seeking arbitration
filed a counterclaim without asking for a stay of the proceedings; (5) “whether
important intervening steps [e.g., taking advantage of judicial discovery
procedure not available in arbitration] had taken place”; and (6) whether the
delay “affected, misled, or prejudiced” the opposing party.’”  [Citations.]’ 
[Citation.]”  (>Lewis, supra, 205 Cal.App.4th at p.
444.) With respect to the last
factor, prejudice, “the critical factor . . . is whether the party opposing
arbitration has been substantially deprived of the advantages of arbitration as
a ‘“‘speedy and relatively inexpensive’”’ means of dispute resolution.  [Citation.]” 
(Burton, supra, 190
Cal.App.4th at p. 948.)

                        We recognize, as did the
trial court, that this is a close call on the issue of McNaughton’s delay in
seeking arbitration after he filed his cross-complaint.href="#_ftn7" name="_ftnref7" title="">[7]  McNaughton’s cross-complaint, based on the
Keawe operating agreement, was filed on June 6, 2008, but he made no mention of
any desire to arbitrate, even as he filed a first amended cross-complaint in
August and participated in a case management conference.  He did not file a petition to compel
arbitration until December 12, 2008, after he had lost a discovery motion in
October 2008.  Nevertheless, the
litigation based on the operating agreement was less than six months old when
McNaughton made his formal demand for arbitration.href="#_ftn8" name="_ftnref8" title="">[8]  The minimal discovery he had sought was
obtainable in arbitration, and Copenbarger was unable to demonstrate prejudice
severe enough to overcome the strong public policy favoring arbitration.href="#_ftn9" name="_ftnref9" title="">[9]  (See Lewis,
supra, 205 Cal.App.4th at p. 452.)

                        Unless we can say as a
matter of law that the trial court made a mistake, we cannot reverse its
finding of no waiver.  (>Burton, supra, 190 Cal.App.4th at p.
946.)  The trial court had substantial
evidence on which to base its finding, and this determination is binding on
us.  We therefore find no error in the
granting of the petition to compel arbitration.

                        Copenbarger also argued
McNaughton engaged in dilatory tactics after
the court granted his petition to compel arbitration, thereby waiving his right
to arbitration.  Copenbarger made two
efforts in the trial court to make McNaughton pay his arbitration fees.  One was an ex parte application, which the
court denied.href="#_ftn10" name="_ftnref10"
title="">[10]  The second was a voluminous attachment to an
attorney declaration, filed in anticipation of a status conference on the
progress of arbitration.

                        The threshold issue with
respect to these requests for court action was whether the trial court had
jurisdiction to entertain them, after the matter had been sent to
arbitration.  With respect to the ex
parte application, the court held that it did not have jurisdiction.

                        The trial court had to
determine whether it could hear the matter before it could decide whether McNaughton
was misbehaving.  Copenbarger did not
identify lack of jurisdiction – the primary issue – as one of the issues on
appeal, and he did not address this issue at all in his opening brief.  Naturally enough, he also failed to provide
any case authority for the proposition that a court may hear matters pertaining
to an arbitration after it has granted a petition to compel arbitration and a
stay.href="#_ftn11" name="_ftnref11" title="">[11]  We may therefore treat the issue as
abandoned.  (See Behr v. Redmond (2011) 193 Cal.App.4th 517, 538.)

>II.                    Mootness

                        We agree with
Copenbarger that the arbitrators exceeded their powers when they rewrote the
Keawe operating agreement to grant partial control of Keawe to him.   But the issue is now moot, because, as both
parties agree, Keawe is out of business.href="#_ftn12" name="_ftnref12" title="">[12]  As Copenbarger himself put it, working out
what to do about the arbitrators’ error would be even more futile than
rearranging the deck chairs on a sinking ship; it would be tantamount to
issuing new operating instructions to a ship at the bottom of the ocean.

                        “Appellate courts
generally will not review matters that are moot.  ‘A case is moot when the decision of the
reviewing court “can have no practical impact or provide the parties effectual
relief.”’”  (Mercury Interactive Corp. v. Klein (2007) 158 Cal.App.4th 60,
78; see also Vernon v. State of
California (2004) 116 Cal.App.4th 114, 120 [court’s duty to decide
controversies by judgment that can be carried into effect].)

                        This appeal is not
entirely moot, because whether the petition to compel arbitration should have
been granted is still a viable issue. 
Once we have determined that arbitration was properly compelled,
however, there is nothing more to decide. 
Even assuming the arbitrators exceeded their powers by dividing control
of Keawe between McNaughton and Copenbarger, there is nothing left to
control.  Keawe’s business has been wound
up, so it no longer matters whether McNaughton has sole control of the company
or whether Copenbarger and McNaughton must share it.  We cannot render a decision that will have
any practical impact on either party.

 

DISPOSITION

                        The order granting the
motion to compel arbitration is affirmed. 
The remainder of the appeal is dismissed as moot.  The parties are to bear their own costs on
appeal.

 

 

                                                                                   

                                                                                    BEDSWORTH,
J.

 

WE CONCUR:

 

 

 

RYLAARSDAM,
ACTING P. J.

 

 

 

MOORE, J.