Tuesday, January 13, 2015

Arbitration Clause Excluded Equitable Relief, So Action for Accounting and Judicial Dissolution Would Proceed in Court


Arbitration Clause Excluded Equitable Relief, So Action for Accounting and Judicial Dissolution Would Proceed in Court

 

            In a decision rendered last week, the California Court of Appeals interpreted the arbitration clause in an LLC operating agreement that provided in part:


Notwithstanding the foregoing, no arbitrator shall have the power to render equitable relief of any kind, and requests for such relief shall be referred to a court of competent jurisdiction.


In the face of this language, the court held that an action for an accounting and judicial dissolution of the LLC was not subject to arbitration.  Bachrach v. Compagno, No. B252454, 2015 WL 78143 (Ca. Ct. App. 2nd Dist. Jan. 6, 2015).


            The plaintiffs held 25% of the LLC.  Initially they sued Compagno for three torts and as well for an accounting and for judicial dissolution.  After the suit was filed Compago’s counsel sent to the plaintiff’s a demand for arbitration, which they refused.  When Compagno sought a court order of arbitration the plaintiffs dropped the three tort claims.  They then argued that as an accounting and judicial dissolution are equitable in nature they are not subject to arbitration, a position that the trial court accepted.  Compagno appealed.


            The Court of Appeals would affirm the trial court. While arbitration agreements are to be enforced, there can be no enforcement of an agreement that was never made.  Here the agreement was to arbitrate disputes that did not involve equitable relief.  As an accounting and dissolution are equitable relief, the denial of the order seeking to arbitrate the matter was properly granted.

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