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Massaji v. Rofeh

California Court of Appeals, Second District, Seventh Division
Nov 17, 2008
No. B202059 (Cal. Ct. App. Nov. 17, 2008)

Opinion


SCHAFA MASSAJI, Plaintiff and Appellant, v. MARK ROFEH, Defendant and Respondent. B202059 California Court of Appeal, Second District, Seventh Division November 17, 2008

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

APPEAL from an order of the Superior Court of Los Angeles County No. BS107044, Irving S. Feffer, Judge.

Christopher L. Campbell; Geragos Law Group and Matthew J. Geragos for Plaintiff and Appellant.

Law Offices of Ramin Azadegan and Ramin Azadegan for Defendant and Respondent.

PERLUSS, P. J.

Schafa Massaji appeals from the trial court’s order denying his petition to confirm and granting Mark Rofeh’s petition to set aside and vacate the arbitration award Massaji obtained against Rofeh, resolving business disputes involving aspects of the financing and operation of Serengeti Tea Company (Serengeti). Massaji contends the court erred in setting aside the arbitration agreement on the grounds the arbitrator selected by JAMS, retired Los Angeles Superior Court Judge Sherman W. Smith, Jr., was not a qualified arbitrator under the terms of the parties’ arbitration agreement and the arbitrator exceeded his authority by including a usurious interest rate in the award and by awarding relief against Serengeti, which, although a party to the arbitration agreement, was not a party to the arbitration proceedings. We reverse and remand with directions.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Parties’ Dispute

Rofeh and another individual started Serengeti in 1995. Rofeh invested money in the company for its operating expenses.

Massaji, Rofeh’s nephew, made a series of loans to Rofeh and/or Serengeti between June 1995 and October 2001. In 1998 Massaji began working for Serengeti as its manager and received a 15 percent interest in the business for his services. Ultimately, a dispute arose between Massaji and Rofeh concerning the balance due on the loans Massaji had made (the parties disagreed on the amounts Rofeh had repaid) and the extent of Massaji’s ownership interest in Serengeti (Massaji asserted, in addition to his original 15 percent interest, he had acquired another 10 percent of the company from his cousin).

2. The Agreement To Arbitrate and Selection of an Arbitrator

On June 24, 2006 Massaji, on the one hand, and Rofeh and Serengeti, on the other hand, entered into a six-page arbitration agreement. Rofeh and Serengeti were collectively referred to in the agreement as “the ‘Serengeti Parties’”; Rofeh signed the arbitration agreement twice, once for himself and then again on behalf of Serengeti.

Pursuant to section 2 of the arbitration agreement (“Agreement to Submit to Binding Arbitration”), Massaji, Rofeh and Serengeti agreed to resolve through binding arbitration any dispute regarding Massaji’s loans and the nature and extent of his equity interest in Serengeti, as well as any accounting relating to those issues. Section 3.2 confirmed the scope of arbitration included those disputes and provided “[t]he arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures.” By handwritten interlineation, the parties agreed to represent themselves, without counsel, in the arbitration proceedings.

Section 3.1 of the arbitration agreement (part of the “arbitration protocol”) specified that arbitration of their disputes would commence by written request to JAMS “setting forth the nature and extent of the dispute and the relief requested along with the request for an arbitrator possessing the specific background and experience as stated in Section 3.3 hereunder (‘Submission’).” Section 3.3, in turn, provided, “In the Submission, the Parties shall request that JAMS provide arbitrator candidates who possess no less than seven (7) years of corporate and accounting experience with a preference that such arbitrator candidates also possess experience as a certified public accountant and/or tax attorney. If the Parties cannot mutual[ly] select one (1) arbitrator within seven (7) days of [receipt] from JAMS of the candidates, then the JAMS coordinator shall so choose and designate the arbitrator for the Parties.”

On the same day they signed the arbitration agreement, Massaji and Rofeh submitted on a preprinted JAMS form their Demand for Arbitration Before JAMS, identifying Massaji as the claimant and Rofeh as the respondent. Both men signed the demand form. With respect to the loan repayment issue, the demand stated, “The remaining balance, if any, of the loans (principle [sic] and interest) is disputed,” and further recited, in a handwritten interlineation initialed by both Massaji and Rofeh, “Rofeh alleges that Schafa Massaji has received more money from Rofeh than he had any right to and as such Rofeh alleges that Massaji in fact owes Rofeh a balance.” The completed JAMS demand form does not include a request that the arbitrator candidates proposed have corporate and accounting experience or otherwise specify any particular background or qualifications required or desired by the parties. (The JAMS form directs the parties to attach two copies of their arbitration agreement. Without citation to the record Rofeh asserts in his respondent’s brief a copy of the agreement was, in fact, submitted with the arbitration demand.)

On July 13, 2006 JAMS sent Massaji and Rofeh a letter entitled “commencement of arbitration,” which included a list of five candidates for arbitrator and their resumes. The letter also advised the parties the candidates’ resumes were available on the JAMS website. Judge Smith was one of the five candidates. The parties did not agree on an arbitrator. Accordingly, on July 26, 2006 JAMS sent Massaji and Rofeh a letter advising them Judge Smith had been appointed as arbitrator.

This material was first submitted to the trial court with Massaji’s motion for reconsideration of the order vacating the arbitration award. Although Rofeh opposed that motion and the trial court ultimately denied it on the ground Massaji had not shown sufficient diligence in discovering this correspondence and presenting it to the court, there is no dispute regarding the accuracy of the chronology.

Apparently after the appointment of Judge Smith to serve as the arbitrator, Rofeh submitted a handwritten counterclaim, which included allegations that Massaji had converted assets of the company and removed files and e-mails from Serengeti without authorization. There was also a claim regarding the allocation of tax losses from Serengeti, which included the statement, “We need an acontent [sic] to see total Serengeti transaction for a true aconting [sic] - many many issues for one day to be resolved.”

3. The Arbitration Proceedings and Award

The arbitration hearing took place on October 25, 2006. As provided in the arbitration agreement, the men represented themselves. Each testified and offered exhibits consisting of cancelled checks, balance sheets, tax returns, bank statements and invoices from the business, as well as statements as to their positions on the evidence. Rofeh was granted permission to submit additional evidence following the hearing. The matter was submitted on October 31, 2006.

In his final award, issued on November 17, 2006, Judge Smith noted Rofeh did not contest the fact that Massaji loaned money to Serengeti or that Rofeh had personally agreed to pay back the loans with 12 percent interest. Judge Smith credited Massaji’s evidence of the sums he had loaned to Serengeti and the amount of Rofeh’s repayments, as set forth on a schedule prepared by Massaji, and found Rofeh had not produced competent evidence he had repaid more than Massaji alleged. The arbitrator further found Massaji had been given a 15 percent interest in the company when he started working and had obtained another 10 percent from his brother (corrected to “cousin” in the arbitrator’s subsequent clarification of final award). Finally, Judge Smith found Rofeh’s argument that Massaji had mismanaged Serengeti was unsupported by the evidence and “the statement that [Massaji] agreed to work full time for seven years without pay is not credible.”

The arbitrator awarded Massaji $212,963.71 on his claim for money damages, plus interest of 12 percent annually compounded on the unpaid balance from June 16, 1995 to November 15, 2006. The award was against Rofeh individually and Serengeti “jointly and severally.” Judge Smith also awarded Massaji a 25 percent interest in Serengeti.

On December 6, 2006 Massaji sent a letter to Judge Smith requesting a clarification of his ruling with regard to his 25 percent interest in Serengeti. (There apparently was some question whether Massaji was responsible for investment losses suffered by the company.) The letter shows a copy sent to Rofeh by facsimile transmission; Rofeh denies receiving a copy. On December 19, 2006 Judge Smith issued a clarification of final award, which declared Massaji was not responsible for the debts of the business and his interest in the company was to be paid from operation profits or profits on the sale of the business.

4. The Trial Court Order Vacating the Arbitration Award

On January 24, 2007 Massaji filed a petition in the Los Angeles Superior Court to confirm the arbitration award. On February 11, 2007 Rofeh filed a petition and on April 17, 2007 a first amended petition to set aside and vacate the award. Rofeh’s petition to vacate argued Judge Smith did not have the requisite accounting or tax background specified in the parties’ arbitration agreement and, therefore, was not qualified to act as arbitrator. In addition, Rofeh asserted the arbitrator had acted in excess of his authority by making Serengeti jointly and severally liable for the damage award even though the company was not a party to the arbitration, by awarding a usurious rate of interest (12 percent annually compounded) and by correcting the final award more than 30 days after service of a signed copy of the award on the parties. (Rofeh also noted he had not received a copy of Massaji’s request for clarification as required by Code of Civil Procedure section 1284.) Rofeh also challenged the award on the ground the arbitrator had failed to rule on his counterclaims.

Statutory references are to the Code of Civil Procedure unless otherwise indicated.

Following briefing and oral argument, on June 8, 2007 the court issued its order denying Massaji’s petition to confirm and granting Rofeh’s petition to vacate and set aside the arbitration award. The court concluded Judge Smith was not a qualified arbitrator under the terms of the parties’ arbitration agreement and found “[t]he parties were not informed of Judge Smith’s lack of qualification.” The court also ruled the arbitrator had exceed his authority by awarding a usurious interest rate and by including Serengeti in the award although it was not a party to the arbitration proceeding. Finally, the court stated, “Additionally, the court notes that there was an ex parte communication from Massaji to the arbitrator” -- an apparent reference to the December 6, 2006 letter requesting clarification of the arbitrator’s ruling on Massaji’s equity interest. Although granting Rofeh’s first amended petition to set aside and vacate arbitration award, in its ruling the court sustained Massaji’s evidentiary objections to five exhibits attached to the petition.

On June 15, 2007 Massaji filed a motion for reconsideration and submitted a copy of the JAMS’s July 13, 2006 package sent to Massaji and Rofeh listing arbitrator candidates and including Judge Smith’s resume, which did not indicate he had any particular accounting or corporate tax experience. Massaji also provided a declaration in which he explained at some length various personal difficulties that had prevented him from locating his JAMS file before the hearing on the petition to vacate the award. The court denied the motion on July 27, 2007, concluding Massaji had failed to show sufficient diligence in locating the JAMS correspondence. The court also reiterated its statement, included in its June 8, 2007 order, that “the parties to the arbitration were entitled to expect that all the potential arbitrators provided by JAMS met the parties’ qualification requirements.”

DISCUSSION

1. Grounds for Vacating an Arbitration Award and Standard of Review

When parties agree to private arbitration, the scope of judicial review is strictly limited in order to give effect to the parties’ intent “to bypass the judicial system and thus avoid potential delays at the trial and appellate levels . . . .” (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 (Moncharsh).) A court may not review the merits of the controversy between the parties, the validity of the arbitrator’s reasoning or the sufficiency of the evidence supporting the arbitration award. (Ibid.) “‘[I]t is within the power of the arbitrator to make a mistake either legally or factually. When parties opt for the forum of arbitration they agree to be bound by the decision of that forum knowing that arbitrators, like judges, are fallible.’” (Id. at p. 12; accord, Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334,1340 [“the California Legislature ‘adopt[ed] the position taken in case law . . . that is, “that in the absence of some limiting clause in the arbitration agreement, the merits of the award, either on questions of fact or of law, may not be reviewed except as provided in the statute”’”].)

Judicial review of an arbitration award is limited to “circumstances involving serious problems with the award itself, or with the fairness of the arbitration process.” (Moncharsh, supra, 3 Cal.4th at p. 12.) The only grounds on which a court may vacate an award are enumerated in section 1286.2. “[C]ourts are authorized to vacate an award if it was (1) procured by corruption, fraud, or undue means; (2) issued by corrupt arbitrators; (3) affected by prejudicial misconduct on the part of the arbitrators; or (4) in excess of the arbitrators’ powers.” (Cable Connection, Inc. v. DIRECTV, Inc., supra, 44 Cal.4th at p.1344.) “There is a presumption favoring the validity of the award, and [the party challenging the award] bears the burden of establishing [a] claim of invalidity.” (Betz v. Pankow (1993) 16 Cal.App.4th 919, 923.)

“[T]he court shall vacate the award if the court determines any of the following: [¶] (1) The award was procured by corruption, fraud or other undue means. [¶] (2) There was corruption in any of the arbitrators. [¶] (3) The rights of the party were substantially prejudiced by misconduct of a neutral arbitrator. [¶] (4) The arbitrators exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted. [¶] (5) The rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrators to hear evidence material to the controversy or by other conduct of the arbitrators contrary to the provisions of this title. [¶] (6) An arbitrator making the award either: (A) failed to disclose within the time required for disclosure a ground for disqualification of which the arbitrator was then aware; or (B) was subject to disqualification upon grounds specified in Section 1281.91 but failed upon receipt of timely demand to disqualify himself or herself as required by that provision. However, this subdivision does not apply to arbitration proceedings conducted under a collective bargaining agreement between employers and employees or between their respective representatives.” (§ 1286.2, subd. (a).)

We review a trial court’s order vacating an arbitration award de novo. (Malek v. Blue Cross of California (2004) 121 Cal.App.4th 44, 55.) “To the extent that the trial court’s ruling rests upon a determination of disputed factual issues, we apply the substantial evidence test to those issues.” (Id. at pp. 55-56.)

2. The Arbitrator’s Lack of Accounting Expertise Does Not Support the Trial Court’s Order Vacating the Arbitration Award

The parties’ arbitration agreement provided their submission initiating arbitration would request that JAMS provide arbitrator candidates who possess corporate and accounting experience with a preference that the arbitrator candidates also have professional experience as a certified public accountant or tax attorney. Although clearly expressing a preference for an arbitrator with these qualifications, neither the agreement itself nor the parties’ arbitration demand specified that only an individual with the desired tax or accounting background could serve as an arbitrator. In fact, the parties’ joint demand for arbitration as submitted to JAMS omitted any reference to the arbitrator’s prior professional experience -- either mandatory or precatory -- and stated no requirements in that regard.

In his petition to vacate, Rofeh insisted he did not know Judge Smith did not have the professional background or experience the parties desired and stated he relied upon JAMS to determine the arbitrator’s qualifications. Yet in response to the motion for reconsideration, Rofeh conceded JAMS had provided the parties with a list of five potential arbitrators, including Judge Smith, prior to the arbitration, together with their resumes. Although Judge Smith served for 20 years on the Los Angeles Municipal Court and the Los Angeles Superior Court and is described in his JAMS resume as having extensive experience in complex commercial litigation, he does not have a professional tax or accounting background; and nothing in the one-page resume Rofeh admittedly received would suggest he does. Faced with this fact, Rofeh simply asserted “[i]t is not reasonable to expect that a party, without being represented by counsel, could correctly determine the qualification of an arbitrator by reviewing a general and brief description of his background contained in his resume.”

Without citing any statutory provision or case law on this point, the trial court agreed with Rofeh it was “common sense” to “expect that only qualified arbitrators were being provided to them for approval” and identified Judge Smith’s failure to inform the parties of his purported lack of qualification as one ground for vacating the arbitration award. This was error. As discussed, nothing in the arbitration agreement or the parties’ joint arbitration demand required JAMS to provide arbitrator candidates or select an arbitrator with any specific professional qualifications. At most, the parties’ agreement expressed a preference as to the background of the arbitrator; and they failed even to communicate that preference to JAMS and to Judge Smith in their arbitration demand. Section 1286.2, subdivision (a)(6)(A), which authorizes the court to vacate an award if the arbitrator has failed to disclose in a timely fashion grounds for disqualification of which the arbitrator was aware -- grounds that go to the arbitrator’s impartiality (see §§ 1281.9, 1281.91), not his or her qualifications -- is simply inapplicable to this situation. (See, e.g., International Alliance of Theatrical Stage Employees, Etc. v. Laughon (2004) 118 Cal.App.4th 1380, 1386-1387 [when Legislature amended §§ 1281.9 and 1286.2, subd. (a)(6)(A), in 2001, it intended to require disclosure of “‘[a]ll matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial’”].)

In addition, at various times while the arbitration proceeding was pending before Judge Smith, both parties suggested an accountant was needed to resolve the dispute -- plainly indicating Massaji and Rofeh each understood Judge Smith did not have the necessary accounting background. Rofeh’s counterclaim stated (in a close paraphrase) an accountant was required in order to review all the Serengeti transactions for a true accounting. For his part, Massaji submitted (and provided Rofeh) a ledger sheet showing amounts loaned and repaid and a balance due, but added, “For an exact balance, I think we need a professional accountant to go over all the figures/dates.” While Rofeh may be correct these facts, coupled with the Rofeh’s failure to object to Judge Smith’s service as an arbitrator until after the adverse award was returned, do not amount to a “waiver” -- that is, the voluntary relinquishment of a known right (see Saint Agnes Medical Center v. PacificCare of California (2003) 31 Cal.4th 1187, 1195, fn. 4) -- they do constitute an acquiescence in, or forfeiture of any right to challenge, the arbitration proceedings as conducted. (Ibid. [“[w]hile ‘waiver’ generally denotes the voluntary relinquishment of a known right, it can also refer to the loss of a right as a result of a party’s failure to perform an act it is required to perform, regardless of the party’s intent to relinquish the right”]; see Blatt v. Farley (1990) 226 Cal.App.3d 621, 629 [party who continues with arbitration without objection despite knowledge of an irregularity in the proceedings cannot subsequently challenge arbitration award based on that irregularity]; American Home Assurance Co. v. Benowitz (1991) 234 Cal.App.3d 192, 201 [party may be estopped from questioning selection of arbitrator not authorized by arbitration contract].)

3. The Arbitrator’s Award of “Interest of 12% Annually Compounded” Does Not Support the Trial Court’s Order Vacating the Arbitration Award

In his final award the arbitrator concluded Massaji was entitled to monetary damages in the sum of $212,963.71 for repayment of loans he had made, plus interest at a compound annual rate of 12 percent on the unpaid balances from June 16, 2005 to November 15, 2006. The 12 percent interest rate awarded is consistent with both Massaji’s position in the arbitration and the arbitrator’s finding that “Respondent [Rofeh] agrees that Claimant [Massaji] loaned the company money and that he personally agreed to pay back the loans with 12% interest.”

Article XV, section 1, of the California Constitution sets forth California’s prohibition of usury. It limits the interest rate lenders can charge on commercial loans to the higher of 10 percent or 5 percent plus the Federal Reserve Bank of San Francisco’s rate on the 25th day of the month preceding the date the agreement was contracted. (See Stoneridge Parkway Partners, LLC v. MW Housing Partners III, L.P. (2007) 153 Cal.App.4th 1373, 1379.) In his petition to vacate and set aside the arbitration award, as well as his opposition to Massaji’s petition to confirm the award, Rofeh argued the award of a usurious rate of interest exceeded the arbitrator’s powers. (§ 1286.2, subd. (a)(4).) Even if Rofeh were correct that the interest rate used by the arbitrator exceeded the maximum allowed, to the extent this simply constitutes an error of law, it is not a ground to vacate the award. (See Gueyffier v. Ann Summers, Ltd. (2008) 43 Cal.4th 1179, 1184 [“When parties contract to resolve their disputes by private arbitration, their agreement ordinarily contemplates that the arbitrator will have the power to decide any question of contract interpretation, historical fact or general law necessary, in the arbitrator’s understanding of the case, to reach a decision. [Citations.] Inherent in that power is the possibility the arbitrator may err in deciding some aspect of the case. Arbitrators do not ordinarily exceed their contractually created powers simply by reaching an erroneous conclusion on a contested issue of law or fact, and arbitral awards may not ordinarily be vacated because of such error, for ‘“[t]he arbitrator’s resolution of these issues is what the parties bargained for in the arbitration agreement.”’”].)

Rofeh argued, however, and the trial court found, by virtue of California’s strong and well-defined public policy against usury (see, e.g., Mencor Enterprises, Inc. v. Hets Equities Corp. (1987) 190 Cal.App.3d 432, 440; Gamer v. duPont Glore Forgan, Inc. (1976) 65 Cal.App.3d 280, 287), the arbitrator’s award was properly vacated on this ground. (See Jordan v. Department of Motor Vehicles (2002) 100 Cal.App.4th 431, 443 [arbitrator exceeds his or her powers when he or she “issues an award that violates a well-defined public policy”]; Department of Personnel Administration v. California Correctional Peace Officers Assn. (2007) 152 Cal.App.4th 1193, 1200 [“courts may, indeed, must, vacate an arbitrator’s award when it violates a party’s statutory rights or otherwise violates a well-defined public policy”]; cf. Board of Education v. Round Valley Teachers Assn. (1996) 13 Cal.4th 269, 276 [arbitrator’s award properly vacated when it violates a party’s statutory rights]; see generally Knight et al., Cal. Practice Guide: Alternative Dispute Resolution (The Rutter Group 2007) ¶ 5:472, pp. 5.321 to 5.322 (rev. #1, 2007) [award may exceed the arbitrator’s power if it violates a well-defined and dominant public policy].)

We need not decide whether the trial court correctly held an erroneous award of an impermissible rate of interest falls within the narrow category of arbitration awards properly vacated as violative of public policy. First, Rofeh failed to establish by competent evidence the interest awarded by the arbitrator was usurious. “A transaction is rebuttably presumed not to be usurious. [Citations.] The borrower bears the burden of proving the essential elements of a usurious transaction.” (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 798-799.) Rofeh attempted to meet his burden and to show 12 percent interest exceeded the legal maximum -- that is, it was more than 5 percent plus the applicable federal funds rate at the Federal Reserve Bank of San Francisco on the relevant dates -- by submitting an exhibit purporting to establish the governing federal funds rate was at all times less than 7 percent. However, Massaji objected to this evidence as lacking proper foundation and authentication and as hearsay, and the trial court sustained the objection. There was no other evidence before the court (and no request for judicial notice) from which a determination could be made to rebut the presumption that the interest rate claimed by Massaji, agreed to by Rofeh and awarded by the arbitrator was lawful.

Second, nothing in the record suggests Rofeh argued before the arbitrator the interest rate claimed by Massaji and which Rofeh had agreed to pay was excessive and, therefore, unlawful. Having failed to raise the issue of the illegality of the interest rate before the arbitrator, Rofeh was barred from raising it in the trial court as a ground to set aside the arbitration award. “Any other conclusion is inconsistent with the basic purpose of private arbitration, which is to finally decide a dispute between the parties. . . . [W]e cannot permit a party to sit on his rights, content in the knowledge that should he suffer an adverse decision, he could then raise the illegality issue in a motion to vacate the arbitrator’s award. A contrary rule would condone a level of ‘procedural gamesmanship’ that we have condemned as ‘undermining the advantages of arbitration.’” (Moncharsh, supra, 3 Cal.4th at p. 30.)

Rofeh also argues compounding interest (or construing the loan agreement to provide for interest on past due interest amounts) violates California’s Usury law, in the absence of an express written agreement and insists there was no such written agreement authorizing compound interest in this case. (Stats. 1919, p. lxxxiii (10 West’s Ann. Civ. Code (1985 ed.) foll. § 1916.12 at p. 148 [Deering’s Ann. Uncod. Measures 1919-1 (1973 ed.) p. 35.) Any legal error in the arbitrator’s selection of this remedy, however, is not so fundamental as to warrant a departure from the well-established rule strictly limiting judicial review of an arbitration award. “[A]rbitrators, unless expressly restricted by the agreement of the parties, enjoy the authority to fashion relief they consider just and fair under the circumstances existing at the time of arbitration, so long as the remedy may be rationally derived from the contract and the breach. The rights and obligations of the parties under the contract as it was to be performed are not an unfailing guide to the remedies available when the contract has been breached.” (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 383; see also Moncharsh, supra, 3 Cal.4th at p. 11 [“with narrow exceptions, an arbitrator’s decision cannot be reviewed for errors of fact or law”].)

4. The Arbitrator Did Not Exceed His Powers by Awarding Damages Jointly and Severally Against Rofeh and Serengeti

Serengeti’s explicit agreement to participate in the resolution through arbitration of Massaji’s claims relating to loan repayments and his equity interest in the company is unmistakable. The parties’ June 24, 2006 binding arbitration agreement, entered into after the parties disagreed concerning the amount, if any, still due Massaji on the loans he had made to Rofeh and/or Serengeti and the nature and extent of Massaji’s interest in Serengeti, was expressly made between Massaji, “an individual, on the one hand,” and Rofeh and Serengeti, “(collectively, the ‘Serengeti Parties’), on the other . . . .” The recitals introducing the agreement state, in part, “a controversy has arisen by and between Mass[aji] and Rofeh and the company” and assert “in the best interests of the parties hereto and in order to maintain peace between the parties, the parties have agreed to certain terms and conditions and protocol so as to resolve the Dispute.” Section 1.2 of the agreement, captioned “Serengeti Parties’ Representations and Warranties,” specifically refers to “each of Mark Rofeh and Serengeti Tea Company” and states, “The Serengeti Parties dispute the nature and extent of any claims made by Mass[aji] as related to the Loan and/or the Equity as stated hereinabove and desire that any such claims and Dispute arising from same be resolved in accordance with California law and by an Arbitrator pursuant to the protocol stated in this Agreement.”

The actual language of the agreement to submit to arbitration reinforces the intended direct involvement of Serengeti: “THE PARTIES HEREBY AGREE that any controversy between Mass[aji] and Rofeh and the Company, arising out of or relating to the Dispute stated above as relating to the Loan and Equity interest and any accounting thereof including a final disposition of the Dispute including any award to either party resolving the Dispute with certainty and finality shall be resolved through binding arbitration before a forum chosen in accordance with the procedures set forth hereinbelow (‘Arbitration’).” Section 3.4, “Waiver of Jury Trial and Related Rights,” repeated the parties’ agreement “to have all disputes, claims or controversies arising between Mass[aji] and Rofeh or the Serengeti Parties and styled as the Dispute, decided by binding arbitration as provided in this Agreement . . . .” As discussed above, Rofeh signed the agreement twice, both times under the label “Serengeti Parties,” once on his own behalf and once “For: Serengeti Tea Company.” Moreover, because the parties agreed to forego lawyers and to represent themselves in the arbitration proceedings, it was apparently contemplated that Rofeh would appear at the arbitration for himself and the company.

Notwithstanding their agreement, however, the demand for arbitration jointly submitted by Massaji and Rofeh did not identify Serengeti as a party. (Of course, as Rofeh argues in a different context, a copy of the arbitration agreement was apparently submitted to JAMS with the arbitration demand, as called for by the arbitration demand form; and it was Rofeh’s expectation that JAMS would honor the parties’ intentions regarding the conduct of the arbitration as set forth in their agreement.) Under these rather unusual circumstances, where the parties’ agreement clearly called for Serengeti to participate in the arbitration and any such participation necessarily would have been through Rofeh himself since he and Massaji were Serengeti’s only partners, we believe it was reasonable for the arbitrator to conclude Serengeti, a party to the arbitration agreement, was a party to the arbitration proceeding as well. In this regard, the arbitrator’s view of the scope of his powers should receive the same judicial deference as we accord to the arbitrator’s determination on the merits. (See Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at p. 372 [“the deference due an arbitrator’s decision on the merits of the controversy requires a court to refrain from substituting its judgment for the arbitrator’s in determining the contractual scope of those powers”]; Glassman v. McNab (2003) 112 Cal.App.4th 1593, 1601 [“‘[o]n issues concerning whether the arbitrator exceeded his powers,’ reviewing courts ‘must give substantial deference to the arbitrator’s own assessment of his contractual authority’”]; see also Jones v. Humanscale Corp. (2005) 130 Cal.App.4th 401, 408 [in determining whether arbitrator has exceeded his or her powers, an appellate court “displays substantial deference towards the arbitrator’s determination of his or her contractual authority. [Citations.] All reasonable inferences must be drawn in support of the award.”].)

An arbitrator ordinarily has no power to determine the rights and obligations of a party who has not signed the arbitration agreement although a nonsignatory may enforce or be bound by an arbitration agreement under applicable principles of agency and contract law. (See, e.g., Dryer v. Los Angeles Rams (1985) 40 Cal.3d 406, 418 [holding individual defendants in breach of contract action are entitled to benefit of arbitration even though not parties to contract between plaintiff and corporate defendant]; City of Hope v. Bryan Cave, L.L.P. (2002) 102 Cal.App.4th 1356, 1358-1359; see generally Knight et al., Cal. Practice Guide: Alternative Dispute Resolution, supra, ¶¶ 5:261-5:284, pp. 5-182 to 5-198.1 (rev. #1, 2007).)

Even if, contrary to our conclusion, Serengeti were improperly included in the award, the trial court provided no explanation -- and we can identify none -- why the award could not have been corrected to eliminate Serengeti’s liability for damages, leaving Rofeh fully responsible for payment, “without affecting the merits of the decision upon the controversy submitted.” (§ 1286.2, subd. (a)(4) [not proper to vacate arbitration award on ground arbitrator exceeded powers if award can be corrected without affecting merits of the decision]; see Ikerd v. Warren T. Merrill & Sons (1992) 9 Cal.App.4th 1833, 1837 [affirming trial court’s order correcting arbitration award to delete award against nonparty and then confirming award].)

5. The Clarification of Final Award Was Untimely

In his final award, signed and served on the parties on November 17, 2006 by facsimile transmission and mail, the arbitrator awarded Massaji “25% interest in Serengeti Tea Company.” In a letter dated December 6, 2006 (19 days after service of the award), Massaji requested a clarification of the ruling to specify he was not liable for Rofeh’s investment losses in the company. The letter indicates it was sent by facsimile transmittal to Rofeh at his office at Serengeti. Rofeh, however, declared in connection with his motion to vacate the award that he never received notice of Massaji’s application for clarification or correction.

In response to Massaji’s request, on December 19, 2006 (32 days after service of the award) the arbitrator issued his clarification of final award. The clarification stated, “It was clear from the evidence that the 25% interest was to be paid to Mr. Massaji once the company made a profit beyond Mr. Rofeh’s investment or on the profit made upon sale of the business. The evidence proved that Mr. Rofeh invested in the business with the understanding that Mr. Massaji would not be responsible for the debts of the business.”

The clarification also corrected the final order’s factual error regarding the identity of the individual from whom Massaji acquired his additional 10 percent interest in Serengeti, stating he had purchased the interest from his cousin, not his brother.

In his petition to vacate and set aside the arbitration award Rofeh argued the clarification was invalid because Massaji’s application had not been served on him within 10 days of the service of a signed copy of the award, as required by section 1284, second paragraph, and the arbitrator did not correct or clarify his final award “not later than 30 days after service of a signed copy of the award on the applicant.” (§ 1284, 1st para.) Although the trial court “note[d] there was an ex parte communication from Massaji to the arbitrator,” an apparent reference to Rofeh’s assertion he had never received Massaji’s letter requesting clarification, because the court vacated the final award, it did not address the validity of the clarification. In his respondent’s brief on appeal Rofeh renews his challenge to the clarification, reasserting his contention he was not properly served with a copy of Massaji’s application and the clarified award violated the time requirements of section 1284 and also arguing the clarification exceeded the arbitrator’s powers because the issue of Massaji’s responsibility for the debts of Serengeti was not included within the scope of the parties’ arbitration agreement and had not been submitted for decision by the arbitrator.

We agree with Rofeh the clarification of award was invalid because it was made outside the time limits specified by section 1284, first paragraph. Section 1284, fourth paragraph, expressly provides, “If no denial of the application or correction of the award is served within the 30-day period provided in this section, the application for correction shall be deemed denied on the last day thereof.” Accordingly, on December 18, 2006 (December 17, 2006 was a Sunday) Massaji’s application was deemed denied. The arbitrator had no power to make a correction or clarification of his final award on December 19, 2006. (See Roehl v. Ritchie (2007) 147 Cal.App.4th 338, 354.)

The dispute jointly submitted by the parties to arbitration, “[w]hether [Massaji] is still eligible to maintain ownership in the company and what percentage of shares, if any, he still holds,” is not dependent on a determination of Massaji’s responsibility for Serengeti debts or liabilities. Accordingly, the final award may be confirmed while disregarding the invalid clarification without affecting the merits of the decision upon the controversies submitted. (See § 1286.6, subd. (b) [court may confirm award as corrected if the arbitrator exceeded his or her power but award may be corrected without affecting the merits of the decision upon the controversy submitted].)

DISPOSITION

The order denying the petition to confirm and granting the petition to vacate and set aside the arbitration award is reversed, and the cause remanded with directions to enter a new order denying the petition to vacate, correcting the award to eliminate the language set forth in the arbitrator’s December 19, 2006 clarification of final award and confirming the award as corrected. Massaji is to recover his costs on appeal.

We concur: WOODS, J., JACKSON, J.


Summaries of

Massaji v. Rofeh

California Court of Appeals, Second District, Seventh Division
Nov 17, 2008
No. B202059 (Cal. Ct. App. Nov. 17, 2008)
Case details for

Massaji v. Rofeh

Case Details

Full title:SCHAFA MASSAJI, Plaintiff and Appellant, v. MARK ROFEH, Defendant and…

Court:California Court of Appeals, Second District, Seventh Division

Date published: Nov 17, 2008

Citations

No. B202059 (Cal. Ct. App. Nov. 17, 2008)

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