Speier v. Advantage Fund, LLC

63 Cal.App.5th 134

277 Cal.Rptr.3d 514

Steven M. SPEIER, Plaintiff, Cross-defendant and Appellant,

v.The ADVANTAGE FUND, LLC, et al., Defendants, Cross-complainants and Respondents.

G059216

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

Filed April 19, 2021

Law Office of William B. Hanley and William B. Hanley, Newport Beach, for Plaintiff, Cross-defendant and Appellant.

O'Melveny & Myers, Michael G. Yoder and Brandon C. Amash, Newport Beach, for Defendants, Cross-complainants and Respondents.

OPINION

FYBEL, J.

INTRODUCTION

Exercising de novo review, we affirm the trial court's judgment entered after the trial court granted a motion to confirm an arbitration award and denied a motion to vacate that award. The applicable statute states that an award can only be vacated for a failure to disclose if the arbitrator "failed to disclose ... a ground for disqualification." ( Code Civ. Proc., § 1286.2, subd. (a)(6)(A).)¹ Appellant contends the arbitrator failed to make required disclosures. Appellant does not contend the arbitrator was actually biased. The sole basis for the appeal is the argument the arbitrator did not disclose information that could cause a reasonable person aware of the facts to entertain a doubt that the arbitrator would be able to be impartial.

The arbitration involved claims by a former investment fund manager and his former employers, namely, the investment funds. All parties were sophisticated and engaged in a business—not consumer—dispute. Both the fund manager and the investment funds were represented by large law firms—Alston & Bird for the fund manager and O'Melveny & Myers for the investment funds. Both law firms were frequent users of the services of the ADR provider, JAMS; they each had 245 matters before JAMS in the five-year period preceding this arbitration.

We explain in detail in this opinion how the arbitrator and JAMS made extensive prearbitration disclosures. The motion to vacate was based on the sole ground that the arbitrator did not disclose the extent of JAMS's "business relationship" with O'Melveny & Myers and the arbitrator's ownership interest in JAMS (not more than .1 percent of total revenue in a given year).

Based on the facts and circumstances shown by this record, and applying the analytical framework we discuss, we hold that the arbitrator's and JAMS's disclosures were sufficient, and the arbitrator was not required to disclose more information about the extent of JAMS's business with O'Melveny & Myers, or the arbitrator's own ownership interest in JAMS. There is no issue of a repeat party or lawyer being favored over a non-repeat party or lawyer; the parties in this business dispute are sophisticated; and the law firms were both frequent users of JAMS to the same extent.

* * *

Before addressing the merits in detail, we will make some observations of the big picture to give context to our decision.

First and foremost, the issues of disqualification and disclosure are vitally important to the integrity of decisions and the decision-making process. (See Rothman, Fybel, MacLaren & Jacobson, Cal. Jud. Conduct Handbook (4th ed. 2017) § 7:1, p. 387.)

Second, the extent to which a disclosure is required is considered under an objective standard depending on the facts of each case. Hence, the test focuses on a reasonable person aware of the facts. As a result, there is no bright-line rule and, in another case, the type of disclosures we conclude were not required here may be required, depending on the facts of that case.

Third, disclosures are required where a reasonable, informed person could entertain a doubt about the impartiality of the arbitrator. Significantly, "[a]ll the possible things that might be of interest to litigants and lawyers are not things which would be considered, in reason," to be relevant to the question of disqualification. (Rothman et al., Cal. Jud. Conduct Handbook, supra , § 7:74, p. 496.) The statutes and ethical standards governing arbitrator disqualification upon which this appeal is based do not require the disclosure of information other than that which could cause a person aware of all the facts to reasonably question the prospective arbitrator's impartiality. None of the relevant statutes and ethical standards provides that an arbitrator would be disqualified for failing to disclose information outside of the reasonable person standard.

Fourth, under the relevant terms of the statute governing vacation of arbitration awards, the award could only be vacated and not confirmed if the arbitrator "failed to disclose ... a ground for disqualification." ( § 1286.2, subd. (a)(6)(A).) Under the governing statutes and ethical standards, required disclosures are limited to matters reasonably related to disqualification. (See Rothman et al., Cal. Jud. Conduct Handbook, supra , § 7:17, p. 414, citing Code Civ. Proc., §§ 170.1 - 170.5 & Cal. Code Jud. Ethics, canon 3E(2)(a).) Here, that ground of disqualification is whether the arbitrator was required to disclose additional facts that could or might cause a person aware of the facts to reasonably entertain a doubt the arbitrator could not be impartial.

Fifth, and finally, simply because a matter may not seem to be required to be disclosed by an arbitrator does not mean the arbitrator should not disclose the matter. Indeed, disclosure may cause a meaningful discussion to better inform the arbitrator on the question of disqualification. (Rothman et al., Cal. Jud. Conduct Handbook, supra , § 7:73, p. 495.)

FACTUAL AND PROCEDURAL BACKGROUND²

I. THE FUNDS AND THEIR INVESTMENT MANAGERS

The Advantage Fund, LLC, the Discovery Fund, LLC, the Freedom Fund, LLC, and the Victory Fund, LLC (collectively, the Funds) invested in portfolios of commercial office buildings. Entities formed by David Colton (the Colton entities) served as the original fund manager for the Funds. After many years, the Funds' shareholders and investors became dissatisfied with the Funds' performance and filed lawsuits against the Colton entities. In 2013, certain of the asserted claims were submitted to arbitration. During the pendency of that arbitration, in March 2015, the Funds' shareholders elected Steven M. Speier as the new fund manager.

About two years later, and in accordance with a settlement agreement between the Colton entities and shareholders of the Funds, the shareholders agreed to cooperate in removing Speier as fund manager and restoring the Colton entities to that role for the Funds. Speier received written notice of his removal for cause.

In July 2017, Speier sent the Funds a letter alleging he was entitled to shareholder distribution payments and backend interest payments in the Funds' profits. The Funds principally asserted that Speier had taken a shareholder distribution payment, improperly appointed himself president of the Funds, and paid himself a salary for performing the same duties as fund manager.

II. INITIATION OF ARBITRATION BETWEEN SPEIER AND THE FUNDS

After the parties unsuccessfully attempted to agree on an arbitrator to resolve their disputes, Speier filed a petition in the trial court to compel arbitration and for an order appointing an arbitrator. The trial court granted the petition and nominated five retired judges from the list of potential arbitrators submitted by the parties to serve as arbitrator. The court ordered that either the parties agree to one of the five nominees, or the court would select an arbitrator from that list. The parties failed to stipulate to an arbitrator before the court's deadline and the court thereafter appointed the Honorable Gail A. Andler (Ret.) (the arbitrator) from that list to serve as the arbitrator. Later that month, Speier filed his demand for arbitration with JAMS, asserting claims against the Funds for breach of operating agreements, breach of the implied covenant of good faith and fair dealing, declaratory relief, and an accounting.

III. PREARBITRATION DISCLOSURES

JAMS and the arbitrator provided the parties with disclosures under (1) sections 170.1, 1281.6, 1281.85, 1281.9, 1281.95, and 1297.121, (2) the California Rules of Court Ethics Standards for Neutral Arbitrators in Contractual Arbitration (the Ethics Standards), and (3) JAMS Ethical Guidelines for Arbitrators. As relevant to the issues on appeal, the disclosures included the arbitrator's statement: "I practice in association with JAMS. Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS. In addition, because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future."

The arbitrator further disclosed that, within the preceding five years, she had served as a neutral arbitrator in other matters involving a party, a lawyer for a party, or law firm for a party to the current arbitration. JAMS provided the parties with reports showing matters involving the arbitrator and Speier, Speier's arbitration counsel (Alston & Bird), the Funds, and the Funds' arbitration counsel (O'Melveny & Myers). Those reports showed the arbitrator had a then-open mediation involving attorneys from Alston & Bird who were not involved in the instant arbitration, one then-open mediation involving two attorneys from O'Melveny & Myers who were also serving as the Funds' counsel in the instant arbitration, and one then-open arbitration involving attorneys from O'Melveny & Myers who were not involved in the instant arbitration. No party filed any objection to the arbitrator's assignment.

IV. THE ARBITRATION

The Funds filed a response to Speier's statement of claims and asserted their counterclaims against Speier for declaratory relief, breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, corporate waste, and unjust...