Rice v. Downs
248 Cal. App. 4th 175
| Cal. Ct. App. | 2016Background
- Rice (and co-plaintiffs) sued attorney Gary P. Downs for legal malpractice, breach of fiduciary duty, breach of a written operating agreement, unjust enrichment, and rescission based on Downs’s conduct as counsel and later as an HPD/HPC member.
- The HPD operating agreement (and its 2007 amendment) contained: (1) a broad jurisdiction clause consenting to California courts for claims “arising out of, under or in connection with this Agreement,” and (2) a narrower arbitration clause requiring arbitration of “any controversy between the parties arising out of this Agreement.”
- Downs moved to compel arbitration of all of Rice’s claims based on the arbitration clause; the trial court granted the motion and Rice’s claims were litigated/arbitrated, resulting in arbitration rulings and contested dismissals.
- Rice later dismissed his arbitration claims without prejudice; the arbitrator converted the dismissal to one with prejudice. The trial court reinstated the dismissal without prejudice but otherwise confirmed the arbitration award.
- Both parties appealed. The appellate court considered whether the arbitration clause encompassed Rice’s tort-based claims (malpractice, breach of fiduciary duty, rescission) and whether compelling arbitration of those claims was proper.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the arbitration clause covers Rice’s legal malpractice claim | Rice: malpractice arises from duties created by the attorney-client relationship predating the operating agreements and thus does not “arise out of” the agreement | Downs: the clause covers “any controversy arising out of” the agreement, and tort claims that relate to the agreement are arbitrable (but‑for/connectedness) | Held: malpractice claim does not arise out of the operating agreements and is not subject to arbitration |
| Whether the arbitration clause covers Rice’s breach of fiduciary duty claim | Rice: fiduciary duties arose from the attorney-client relationship before the agreements and are independent of the contracts | Downs: fiduciary/duty-based tort claims are connected to the agreement and therefore arbitrable | Held: breach of fiduciary duty claim does not arise out of the agreements and is not subject to arbitration |
| Whether the arbitration clause covers Rice’s rescission/restitution claim | Rice: rescission is grounded in alleged malpractice/fiduciary breaches, not in contract performance | Downs: rescission arises from benefits claimed under the agreement and thus is arbitrable | Held: rescission claim is premised on independent tort duties and does not arise out of the agreements; not arbitrable |
| Whether the trial court properly partially vacated the arbitration award (conversion of dismissal with/without prejudice) | Rice: arbitration process was tainted by discovery obstruction and unfair tactics; dismissal should remain without prejudice | Downs: arbitrator acted within authority to convert dismissal to with prejudice; trial court erred in partially vacating | Held: issue is moot because malpractice (the core subject of that relief) is not arbitrable; appellate court construed trial court’s vacatur as effectively limited to the malpractice claim |
Key Cases Cited
- Simula, Inc. v. Autoliv, Inc., 175 F.3d 716 (9th Cir.) ("arising in connection with" construed broadly to cover disputes having a significant relationship to the contract)
- Mediterranean Enterprises v. Ssangyong, 708 F.2d 1458 (9th Cir.) ("arising under/out of" language construed narrowly to contract interpretation/performance disputes)
- Tracer Research v. Nat. Environ. Servs. Co., 42 F.3d 1292 (9th Cir.) (rejects simplistic "but for" test for arbitrability of tort claims)
- Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d 914 (9th Cir.) (reinforces narrow reading of "arising under" language when precedent so interprets)
- EFund Capital Partners v. Pless, 150 Cal.App.4th 1311 (Cal. Ct. App.) (arbitration language "arising from or out of" treated broadly to include torts connected to contract)
- Bono v. David, 147 Cal.App.4th 1055 (Cal. Ct. App.) (arbitration clause scope determined by contract text and ordinary meaning)
- Coast Plaza Doctors Hospital v. Blue Cross of California, 83 Cal.App.4th 677 (Cal. Ct. App.) (broad clause may reach torts that have roots in contractual relationship)
- Bos Material Handling, Inc. v. Crown Controls Corp., 137 Cal.App.3d 99 (Cal. Ct. App.) (torts arbitrable when they have their roots in the contractual relationship)
- Adam v. DeCharon, 31 Cal.App.4th 708 (Cal. Ct. App.) (but‑for existence of contract not dispositive; factual context matters)
- Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak St., 35 Cal.3d 312 (Cal.) (discussion of FAA/Prima Paint principles re: fraud-in-the-inducement and arbitrability)