Berman v. Tierra Real Estate Grp., LLC

515 P.3d 1004

Joel BERMAN, individually and on behalf of Tierra Real Estate Group, LLC, a Washington limited liability company, Boyden Investment Group LLC, a Washington limited liability company, and Phat Sacks Corp., a Washington corporation, Respondents,

v.TIERRA REAL ESTATE GROUP, LLC, a Washington limited liability company, Boyden Investment Group LLC, a Washington limited liability company, Todd Shirley, an individual, Ryan Kunkel and Sokha Kunkel, husband and wife and the marital community thereof, Charles Boyden and Stephanie Boyden, husband and wife and the marital community thereof, Appellants,Green Outfitters, LLC, a Washington limited liability company, Phat Sacks Corp., a Washington corporation, and Have a Heart Compassion Care Inc., a Washington corporation, Defendants.

No. 83311-1-I

Court of Appeals of Washington, Division 1.

Filed August 22, 2022

Wright A. Noel, Stacy Sue Goodman, Carson & Noel PLLC, 20 6th Ave. Ne, Issaquah, WA, 98027-3428, Michael Patrick Brown, John Douglas Cadagan, Gordon Tilden Thomas & Cordell LLP, 600 University St. Ste. 2915, Seattle, WA, 98101-4172, for Appellants.

Emanuel Jacobowitz, Arnold & Jacobowitz PLLC, 2701 1st Ave. Ste. 200, Seattle, WA, 98121-1127, for Respondents.

Wright A. Noel, Stacy Sue Goodman, Carson & Noel PLLC, 20 6th Ave. Ne, Issaquah, WA, 98027-3428, for Other Parties.

PUBLISHED OPINION

Dwyer, J.

¶1 Boyden Investment Group, LLC (BIG), Tierra Real Estate Group, LLC (TREG), and members of these entities, Ryan Kunkel, Charles Boyden, and Todd Shirley, appeal from an order denying in part their motion to compel arbitration of an investment dispute with another member, Joel Berman. The trial court compelled arbitration as to Berman's individual claims against individual appellants, but declined to do so as to Berman's derivative claims on behalf of the entities and Berman's individual claims against the entities. Because limited liability companies are bound by arbitration agreements found in their operating agreements and Berman's claims fall within the scope of the arbitration agreements, we reverse.

I

¶2 Respondent Joel Berman is a minority owner of three limited liability companies that own and operate retail cannabis stores: Tierra Real Estate Group, LLC (TREG), Boyden Investment Group, LLC (BIG), and Phat Sacks Corp. The other owners, individual appellants Todd Shirley, Ryan Kunkel, and Charles Boyden, also own part of two other entities: Green Outfitters, LLC and Have a Heart Compassion Care Inc., LLC. In August 2017, the individual appellants formed a new corporation, Interurban Capital Group, Inc. (ICG), to coordinate management services between all retail stores of the five entities and to facilitate expansion. Berman received shares of ICG at its inception. In April 2018, under a so-called "Sublease Agreement" Berman agreed to exchange approximately half of his shares of ICG for $35,000 per month until ICG acquired all of the planned retail stores.

¶3 In March 2020, ICG was acquired by another company, Harvest Health & Recreation, Inc. Harvest stopped making monthly payments to Berman. Harvest also had an unrelated dispute with ICG resulting in litigation, which was settled on December 31, 2020. Berman objected to the settlement.

¶4 In March 2021, Berman filed a complaint against the five entities for breach of the "Sublease Agreement." In August 2021, Berman, represented by new counsel, amended his complaint, adding the individual managers as defendants and bringing eight additional causes of action based on alleged wrongdoing related to the merger and settlement agreement: promissory estoppel, breach of operating agreement, unjust enrichment, tortious interference with contract, breach of fiduciary duty, declaratory relief, civil conspiracy, and dissolution. Several claims were brought on behalf of Berman individually, whereas several were brought derivatively on behalf of the entities of which he is a member, BIG and TREG.

¶5 Various defendants moved to compel arbitration based on arbitration clauses within either the BIG or TREG operating agreement, as applicable. The trial court compelled arbitration on some, but not all, of Berman's claims. The trial court determined that Berman's individual claims for breach of fiduciary duty and civil conspiracy brought against the individual appellants were arbitrable under the respective operating agreements but that his identical derivative claims on behalf of BIG and TREG were not. In addition, the trial court did not compel arbitration of Berman's personal civil conspiracy claims against BIG and TREG.

¶6 TREG, BIG, Shirley, Kunkel, and Boyden appeal.

II

¶7 As an initial matter, we must determine whether limited liability companies themselves are bound by arbitration clauses in their operating agreements. Because Washington law provides that limited liability company agreements govern the relations between the limited liability company and the members, we conclude that the entities are so bound.

¶8 A limited liability company is a flexible business structure that is authorized by statute. Chadwick Farms Owners Ass'n v. FHC LLC, 166 Wash.2d 178, 186-87, 207 P.3d 1251 (2009). Washington's limited liability company act (WLLCA) provides that "the limited liability company agreement governs ... [r]elations among the members as members and between the members and the limited liability company ." RCW 25.15.018(1)(a) (emphasis added). Accordingly, to the extent that the claims at issue fall within the scope of the arbitration agreement, both the members and the limited liability company are bound by it, regardless of whether they are parties to the agreement. An agreement to arbitrate appearing in the operating agreement sets forth the manner in which relations between the members and the limited liability company will be governed.

¶9 This view is consistent with the approach taken by the Uniform Limited Liability Company Act (ULLCA), which specifically provides that "[a] limited liability company is bound by and may enforce the operating agreement, whether or not the company has itself manifested assent to the operating agreement." UNIF. LTD. LIAB. CO. ACT § 106(a) (amended 2013), 6C U.L.A. 1, 40 (2016). As Washington's act was substantially modeled on the ULLCA, we may look to the ULLCA to assist in our interpretation. Dragt v. Dragt/DeTray, LLC., 139 Wash. App. 560, 575, 161 P.3d 473 (2007).

¶10 The parties urge us to look to opinions which interpret the limited liability company statutes of other states. Appellants point to Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999). In Elf, the Delaware Supreme Court determined that, under Delaware limited liability company law, a limited liability company is bound by its operating agreement and derivative claims brought on its behalf are subject to arbitration and forum selection clauses of the agreement because "[i]t is the members who are the real parties in interest." 727 A.2d at 293. For his part, Berman responds with two opinions that reach the opposite conclusion, both of which have been superseded by statute in their respective states (Illinois and Virginia), Trover v. 419 OCR, Inc., 397 Ill. App. 3d 403, 337 Ill.Dec. 111, 921 N.E.2d 1249, 1254 (2010) and Mission Residential, LLC v. Triple Net Properties, LLC, 275 Va. 157, 654 S.E.2d 888, 891 (2008).¹

¶11 But Washington limited liability companies are created and governed by Washington law. As we have explained, Washington law directly addresses this issue. We thus have no need to consult opinions interpreting the statutes of other states. Under WLLCA, an arbitration provision in a limited liability company's operating agreement binds the limited liability company in addition to the members. Thus, BIG and TREG are each bound by the arbitration clauses in their own operating agreements.

III

¶12 We review de novo a trial court's decision to compel or deny arbitration. Burnett v. Pagliacci Pizza, Inc., 196 Wash.2d 38, 46, 470 P.3d 486 (2020). " ‘Courts resolve the threshold legal question of arbitrability of the dispute by examining the arbitration agreement without inquiry into the merits of the dispute.’ " Marcus & Millichap Real Estate Inv. Servs. of Seattle, Inc. v. Yates, Wood & MacDonald, Inc., 192 Wash. App. 465, 474, 369 P.3d 503 (2016) (quoting Heights at Issaquah Ridge, Owners Ass'n v. Burton Landscape Grp., Inc., 148 Wash. App. 400, 403, 200 P.3d 254 (2009) ).

¶13 Arbitration is a matter of contract and, therefore, parties cannot be compelled to arbitrate unless they have agreed to do so. Healy v. Seattle Rugby, LLC, 15 Wash. App. 2d 539, 587, 476 P.3d 583 (2020). The purpose of contract interpretation is to ascertain the intent of the parties. Roats v. Blakely Island Maint. Comm'n, Inc., 169 Wash. App. 263, 274, 279 P.3d 943 (2012). Washington courts "follow the objective manifestation theory of contracts." Hearst Commc'ns, Inc. v. Seattle Times Co., 154 Wash.2d 493, 503, 115 P.3d 262 (2005). Under this approach, courts "focus on the agreement's objective manifestations to ascertain the parties’ intent." Martin v. Smith, 192 Wash. App. 527, 532, 368 P.3d 227 (2016). When considering the language of a written agreement, we "impute an intention corresponding to the reasonable meaning of the words used." Hearst Commc'ns, Inc., 154 Wash.2d at 503, 115 P.3d 262 (citing Lynott v. Nat'l Union Fire Ins. Co. of Pittsburgh, 123 Wash.2d 678, 684, 871 P.2d 146 (1994) ).

¶14 Washington courts apply a " ‘strong presumption in favor of arbitrability,’ " and " ‘[d]oubts should be resolved in favor of coverage.’ " Peninsula Sch. Dist. No. 401 v. Pub. Sch. Emps. of Peninsula, 130 Wash.2d 401, 414, 924 P.2d 13 (1996) (quoting Council of County & City Emps. v. Spokane County, 32 Wash. App. 422, 424-25, 647 P.2d 1058 (1982) ). "If the dispute can fairly be said to invoke a claim covered by the agreement, any inquiry by the courts must end." Heights at Issaquah Ridge, 148 Wash. App. at 403, 200 P.3d 254....