Cal. Union Square L.P. v. Saks & Co.

50 Cal.App.5th 340

263 Cal.Rptr.3d 841

CALIFORNIA UNION SQUARE L.P., Plaintiff and Appellant,

v.SAKS & COMPANY LLC, Defendant and Respondent.

A158015

Court of Appeal, First District, Division 3, California.

Filed June 11, 2020

Orrick, Herrington & Sutcliffe, Brian P. Goldman, Samuel T. Harbourt, William A. Molinkski, David P. Faud and Benjamin F. Aiken ; Moskovitz Appellate Team, Myron Moskovitz and William Stein for Plaintiff and Appellant.

Allen Matkins Leck Gamble Mallory & Natisis, Anthony J. Oliva, Marissa M. Dennis, Stacey A. Villagomez, Los Angeles, and Marshall C. Wallace, San Francisco, for Defendant and Respondent.

Petrou, J.

This matter comes to this court after landlord/appellant California Union Square L.P. (Union Square) and tenant/respondent Saks Company L.L.C. (Saks) participated in two arbitration proceedings regarding the rent Saks should pay for a building it leased from Union Square. The trial court vacated the first arbitration award (in favor of Union Square) and confirmed the second arbitration award (in favor of Saks). Union Square contends the trial court erred in vacating the first arbitration award. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

Union Square owns a 131,000-square foot building at 384 Post Street in San Francisco (384 Post). In 1991, Saks entered into a lease (Lease) to operate a department store at 384 Post. The Lease provides Saks an initial 25-year lease period followed by five successive options to renew for a period of 10 years each. It requires base rent to be set at " ‘Fair Market Rent’ ... [which] mean[s] the open market rental value of [384 Post] for first-class retail use compatible with the then current standard in Union Square taking into account the size of [384 Post]." The Lease further provides that, if the parties are unable to agree to the rent amount, they are to submit the issue to arbitration in accordance with the provisions of section 3.1 of the Lease (Section 3.1).

Section 3.1 sets forth the arbitrator's authority in determining fair market rent: "The arbitrator shall have the right to consult experts and competent authorities with factual information or evidence pertaining to the matter to be determined by them, but any such consultation shall be made in the presence of both parties with full right on their part to cross-examine.... The arbitrator shall have no power to modify the provisions of this Lease." Section 3.1 also provides for what is known as " ‘baseball’ arbitration," in which each party proposes its own rent determination to the arbitrator and the arbitrator "select[s] which of the two determinations proposed by the parties most closely approximates [the arbitrator's] determination of [rent]. The arbitrator shall have no right to propose a middle ground or any modification of either of the two proposed resolutions."

In January 2016, Saks exercised its option to renew the Lease for 10 years, to commence February 1, 2017. The parties were unable to agree on rent and selected arbitrator Jan Kleczewski to resolve their dispute. The arbitration agreement set forth the arbitration process and scope of Kleczewski's role as arbitrator as follows: "As the neutral arbitrator, the scope of my work will include review [of] the parties[’] Opening Briefs and Reply Briefs, inspection of the subject property, inspection of the party experts’ lease comparables, conducting the arbitration hearing in accordance with the Arbitration Process as set forth by the parties, review of the Closing Briefs, and finally ruling on fair market rent."¹

Thereafter, the parties submitted their opening and reply briefs, accompanied Kleczewski on a site visit to 384 Post, and participated in an arbitration hearing from January 23 to 25, 2017, during which they presented documentary and testimonial evidence and argument and conducted cross-examination in accordance with a streamlined 16-hour process set forth in the arbitration agreement.² After the close of evidence, Union Square asked the arbitrator to receive certain evidence and Saks’ attorney objected, stating no additional evidence should be allowed because Saks would not have the opportunity to rebut the evidence. The arbitrator agreed with Saks, stating the evidence was closed and no new evidence would be considered.

The parties exchanged their closing briefs on February 8, 2017. Union Square submitted with its closing brief a valuation report from its expert that it had not introduced at the hearing. Saks again objected and Union Square responded that its report did not constitute new evidence because it did not contain new information.

On February 15, Kleczewski sent an email to the parties, stating: "Gentlemen, [¶] I am largely recovered from a flu I came down with on Sunday, which delayed my response to the [parties’ correspondence regarding whether Union Square's report constitutes new evidence]. Today I am flying to Los Angeles to look at Beverly Hills properties presented in testimony, and on Thursday [tomorrow] I am taking a trip to Manhattan to look at properties that were discussed in testimony in terms of sales volumes. I will be considering the correspondence during my travels." Union Square's attorney responded, "Thank you Jan. Glad you are recovered. Safe travels." Saks’ attorney did not respond.

On February 27, Kleczewski ruled in favor of Union Square on the issue of whether he would receive Union Square's report into evidence. Kleczewski reiterated that "no new evidence should be presented after the close of the arbitration hearing" but stated the report was proper closing argument—and not new evidence—because it was essentially a summary of what had already been presented at the hearing.

Kleczewski issued his award (the Award) on March 2, 2017. He noted that Union Square's rent determination was $13,917,364 and Saks’ rent determination was $6,250,000; the midpoint was therefore $10,083,682. Kleczewski's own fair market rent determination was approximately $10.9 million—higher than the parties’ midpoint. Thus, pursuant to the principles of "baseball" arbitration, he ruled the annual rent for the new lease term would be $13,917,364.

Kleczewski conducted the following work in reaching his decision: "As the neutral arbitrator, the scope of my work included review of the lease, review of the party's Opening and Reply Briefs, presiding over the three-day arbitration hearing ... and review of each party's Closing Briefs. I inspected the property with party representatives in attendance on January 5, 2017. I also informally toured the property on multiple other occasions. I inspected the party experts’ lease comparables, which included travel to Beverly Hills to inspect the Saks store there. Although no lease comparables were used by either party in New York, ^{[3 ]} [Union Square's] expert introduced data on total annual rent for various store leases on Fifth Avenue. I traveled to Manhattan to look at these, and visited the Saks store on Fifth Avenue as well."

Kleczewski explained how he reached his rent determination, stating, among other things, that 384 Post's multi-level space could be used in manners other than sales space, such as "putting a restaurant on the top floor, as Saks has done on Fifth Avenue [in New York]." He also found higher rent is justified in Union Square because of the marketing value of maintaining a store in a premium location. He used Coach New York as an example, stating: "While the arbitrator fully understands that Fifth Avenue [New York] retail leases are not comparable to Union Square, it is instructive to know that you can find recent retail leases there for spaces much smaller than 384 Post that leased for upwards of $20 million a year, such as the new Coach 3-level, approximate 24,000 [square foot] flagship store [in Manhattan] that the arbitrator visited. While Manhattan tourism is on a much higher magnitude than Union Square, it is unlikely that sales alone support that level of rent."

Union Square filed a motion in the superior court to confirm the Award. Saks filed a motion to vacate the Award on the grounds that Kleczewski: (1) violated the arbitration agreement's limitations on conducting his own due diligence and investigation by visiting certain properties in New York; (2) failed to disclose a conflict of interest that was revealed after the Award was issued; and (3) erred in allowing Union Square to submit a previously undisclosed report after the close of evidence. Saks argued it had no forewarning Kleczewski would obtain new evidence in New York and rely on that evidence in reaching his decision.

Union Square opposed Saks’ motion to vacate the Award and filed a three-page declaration from Kleczewski in support of its position that the Award should be confirmed. Kleczewski declared as to Saks’ conflict of interest claim that he was "unaware of any existing or past relationship with the parties or their affiliates, their counsel or their experts that would preclude [him] from being impartial...." Kleczewski did not respond to Saks’ other two claims—that he should not have visited the New York properties and should not have admitted Union Square's report into evidence. As to the New York trip, Union Square argued Saks was not prejudiced by the trip and that Saks also waived the claim by not objecting when Kleczewski mentioned in his email that he was going to go to New York.

After a hearing on the parties’ motions, the trial court issued a written order granting Saks’ motion to vacate the Award and denying Union Square's motion to confirm the Award. The court found it significant that the parties carefully defined the scope of the arbitrator's authority before commencing arbitration and "specifically removed language from a prior draft objectionable to [Saks] which allowed the Arbitrator to perform his own ‘due diligence and other analysis.’ " The court found Kleczewski violated that agreement by visiting certain New York properties and also found the visit influenced...