USC v. USCUniv.Hospital

Filed 8/30/07 USC v. USC Univ. Hospital CA2/4

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

APPEAL from an order of the Superior Court for Los Angeles County, Richard L. Fruin, Judge. Affirmed.

Skadden, Arps, Slate, Meagher & Flom, Eric S. Waxman, Jason D. Russell, Stacy R. Horth-Neubert, Jennifer K. Del Castillo and Thomas J. Nolan for Defendant and Appellant.

Bingham McCutchen, Frank M. Hinman, Jonathan Gluck, Seth M. Gerber, Melissa A. Fien and Marshall B. Grossman for Plaintiff and Respondent.

USC University Hospital, Inc. (USCUHI) appeals from an order denying its petition to compel arbitration of a dispute between it and the University of Southern California (USC) regarding USCs termination of the agreements governing USCUHIs operation and management of a medical complex (the Complex) on the USC campus. The trial court found that a contractual provision that required arbitration before termination did not apply if the termination was based upon certain events set forth in a different provision. Because USC alleged that it terminated the agreements based upon the latter provision, the trial court denied USCUHIs petition to compel arbitration. We affirm the trial courts order.

BACKGROUND

In 1985, NME Hospitals, Inc. (NME) entered into two agreements with USC -- a Development and Operating Agreement (the Operating Agreement) and a Ground Lease (the Lease) -- to build and operate the Complex.[1] USCUHI, a subsidiary of Tenet Healthcare Corporation (Tenet), is the successor of NME. NME constructed the Complex, and it or its successor USCUHI has operated the Complex since it opened for patients in 1991.

In August 2006, USC provided notice to USCUHI that it was terminating the Operating Agreement under section 9.2.2 of that agreement.[2] At the same time it sent notice of termination to USCUHI, USC also filed a complaint in the superior court asserting claims for declaratory relief, ejectment, and quiet title. In its complaint, USC asks the court to declare, among other things, that the Operating Agreement and Lease have been terminated, to eject USCUHI from the Complex, and to order USCUHI to execute a quitclaim deed or any other document necessary to clear title to the Complex.

USCUHI filed a petition to compel arbitration. It argued that USC could not terminate the Operating Agreement without first complying with section 9.3 of the agreement, which required, among other things, an arbitration to determine whether USCUHI had defaulted in the performance of its duties or obligations. USC countered that section 9.3 did not apply to terminations under section 9.2.2. The trial court found that a termination under any of the provisions of section 9.2 (including section 9.2.2) was not subject to the requirements of section 9.3, and denied USCUHIs petition. USCUHI timely filed a notice of appeal from the order denying its petition.

DISCUSSION

A. Governing Law

California law, like federal law, favors enforcement of valid arbitration agreements. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97.) As many courts have noted, there is a strong public policy in favor of arbitration, and any doubts regarding the arbitrability of a dispute should be resolved in favor of arbitration. (See, e.g., Cione v. Foresters Equity Services, Inc. (1997) 58 Cal.App.4th 625, 642; Balandran v. Labor Ready, Inc. (2004) 124 Cal.App.4th 1522, 1527.) But [b]ecause the obligation to arbitrate arises from contract, the court may compel arbitration only if the dispute in question is one which the parties have agreed to arbitrate. (Weeks v. Crow (1980) 113 Cal.App.3d 350, 352.) There is no policy in favor of arbitration of a dispute the parties did not agree to arbitrate. (Lawrence v. Walzer & Gabrielson (1989) 207 Cal.App.3d 1501, 1505.)

The party seeking to compel arbitration of a dispute bears the initial burden of proving the existence of a valid agreement to arbitrate. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972.) The burden then falls upon the party opposing arbitration to show the agreement cannot be interpreted to apply to the dispute at issue. (Balandran v. Labor Ready, Inc., supra, 124 Cal.App.4th at p. 1527.) In determining whether an arbitration agreement applies to a specific dispute, the court may examine only the agreement itself and the complaint filed by the party refusing arbitration. [Citation.] The court should attempt to give effect to the parties intentions, in light of the usual and ordinary meaning of the contractual language and the circumstances under which the agreement was made. (Weeks v. Crow, supra, 113 Cal.App.3d at p. 353.) On appeal, we review the trial courts determination de novo. (Balandran v. Labor Ready, Inc., supra, 124 Cal.App.4th at p. 1527.)

B. Dispute Resolution Procedures Under the Operating Agreement

The provision upon which USC alleges it relied in terminating the Operating Agreement, section 9.2.2, is part of Article IX of the agreement. That Article sets forth the parties right of termination and the dispute resolution procedures, and governs the resolution of this appeal. Hence, we discuss its relevant provisions in detail.

Section 9.1 sets forth the term of the agreement: This Agreement shall commence as of the date hereof and shall continue until terminated in accordance with Sections 9.2 or 9.3.

Section 9.2 describes, in sections 9.2.1 through 9.2.7, certain Events of Default and provides that USC shall have the right to terminate this Agreement and the affiliation created hereby and take such other action as is authorized under Section 9.4 by written notice to [USCUHI] upon the occurrence of any of the following Events of Default. The Event of Default set forth in section 9.2.2 is described as follows: By virtue of governmental or regulatory action, [USCUHIs] right to manage and operate the Complex is terminated, suspended or substantially altered or varied. Section 9.2.8 states that [f]or the purpose of this Section 9.2, [USCUHI] shall be defined to include any parent entity and [USCUHIs] ultimate parent entity.[3]

Section 9.3 is entitled Breaches by Either Party; Arbitration of Breaches and sets forth the procedure to be followed if one party believes the other Party to be in default in the performance of any duty or obligation to be performed by the other Party hereunder. Under section 9.3, the non-defaulting party must give notice to the defaulting party. The defaulting party then has a certain time to cure (or, in some circumstances, start to cure) the default. If the defaulting party does not cure (or start to cure) the default within the specified time, the non-defaulting party may, at its option, terminate the Operating Agreement, but only after an arbitration conducted in accordance with section 9.7 and entry of a final arbitration award finding the existence of the specified default. Section 9.3 specifically exempts from this procedure matters subject to the fact finding procedures set forth in Section 9.8, which governs Quality Issues.

Section 9.4 contains two provisions regarding additional remedies upon the occurrence of an Event of Default. Section 9.4.1 provides that, in addition to the right of termination, USC or USCUHI may exercise any right or remedy it has by law or under any agreement related to the Complex, except as provided in Sections 9.3, 9.8 and 9.9 with respect to the arbitration and fact finding procedures required as a condition of the exercise of other rights. The other provision of section 9.4, section 9.4.2, states that upon the occurrence of an Event of Default or in the event of a threatened breach, the defaulting party may be enjoined from any continued operation or breach of the Operating Agreement.

Section 9.7 sets forth the procedures to be followed in any arbitration. It provides the method for appointing arbitrators, describes who may or may not act as an arbitrator and how the issues are to be presented to the arbitrators, sets forth the time within which a decision must be reached, and provides that the parties are to share equally the cost of the arbitration.

The remaining sections of Article IX do not require much discussion. Sections 9.5, 9.6, and 9.9 have no relevance to this appeal, and section 9.8 sets forth the procedure to be followed if either party believes the other party is not complying with its obligations regarding quality issues.

C. Application of Article IX to This Case

The complaint alleges that the Operating Agreement permits USC to terminate the agreement upon the occurrence of certain Events of Default, including the Event of Default described in section 9.2.2. It also alleges that Tenet and some of its subsidiaries and affiliates have been the target of extensive governmental and regulatory action over the past three-and-a-half years, and that as a result of this governmental and regulatory action, the management and operation of the Complex entrusted to [USCUHI] has been substantially altered and varied. Finally, the complaint alleges that USC gave notice to Tenet and USCUHI that the Operating Agreement has been terminated pursuant to section 9.2.2, and that USC seeks a judicial declaration that the Operating Agreement has been terminated.

The complaint also contains detailed allegations of the governmental and regulatory activity directed at Tenet and some of its subsidiaries and affiliates, and the purported effect of those activities on USCUHIs ability to operate and manage the Complex. The parties in their briefs on appeal discuss these allegations, as well as the history of their relationship, at some length. None of those allegations or factual details is relevant to this appeal. While USCUHI no doubt disputes that the facts USC alleges establish an Event of Default, it does not dispute that USC asserts that its termination of the Operating Agreement was based upon an alleged Event of Default under section 9.2.2. The only question before us is whether USC is required to arbitrate whether an Event of Default has occurred.

USCUHI argues that USC cannot terminate the Operating Agreement for an Event of Default until it complies with section 9.3 and obtains an arbitration award finding that the default has occurred. It contends that section 9.2 merely defines as defaults certain events that would not otherwise constitute defaults of the agreement and that, with respect to any alleged default (except those involving quality issues, which are governed by section 9.8), section 9.3 prohibits either party from simply declaring that a default has occurred and terminating the Operating Agreement. It draws support for its contention from (1) the absence of language in sections 9.2 and 9.3 exempting terminations under section 9.2 from the requirements of section 9.3; (2) language in sections 9.4.1 and 9.7.1 that USCUHI asserts demonstrates that Events of Default are subject to the arbitration provisions of section 9.3 or the alternative procedures set forth in section 9.8; and (3) the inherent unfairness of allowing USC to unilaterally determine whether an Event of Default has occurred, particularly when some of those Events are not easily or objectively verifiable.

USCUHIs argument ignores the plain language of both section 9.2 and section 9.3, and misreads sections 9.4.1 and 9.7.1. Section 9.2 does not merely define Events of Default. It also grants USC the specific right to terminate the Operating Agreement under very specific circumstances: USC shall have the right to terminate this Agreement . . . by written notice to [USCUHI] upon the occurrence of any of those defined Events of Default. Moreover, even if section 9.2 defines certain non-default events as defaults, section 9.3 does not apply to all such defaults. Instead, it sets forth procedures that must be followed in the event that either Party believes the other Party to be in default in the performance of any duty or obligation to be performed by the other Party under the Operating Agreement. (Italics added.) In short, the express language of section 9.3 limits its application to defaults in the performance of duties or obligations set forth in the Operating Agreement.

As USCUHI concedes in its appellants opening brief, the Events of Default described in section 9.2 are events that normally would not be deemed defaults or breaches of the Operating Agreement.[4] Hence, the absence of language in sections 9.2 or 9.3 exempting terminations based upon Events of Default from the procedures required in section 9.3 does not assist USCUHI. There is no need to include such language because Events of Default are not included within the express scope of section 9.3.

Nor does the language of sections 9.4.1 or 9.7.1 assist USCUHI. Section 9.4.1 states: In addition to the right of termination set forth in Sections 9.2 and 9.3 above, upon the occurrence of any Event of Default, and except as provided in Sections 9.3, 9.8 and 9.9 with respect to the arbitration and fact finding procedures required as a condition of the exercise of other rights, USC or [USCUHI] may exercise any right or remedy which it has under the Ground Lease, this Agreement or any other agreement with the other Party relating to the Complex, or otherwise available at law or in equity or by statute, and all of USCs and [USCUHIs] rights and remedies will be cumulative. (Italics added.) USCUHI argues that, [i]f the Events of Default defined in Section 9.2 were not subject to the arbitration provisions of Section 9.3 or the alternative processes of Section 9.8, it would be unnecessary to exempt out Sections 9.3 and 9.8 from the clause upon the occurrence of any Event of Default. USCUHI misreads the provision. The exception set forth in the italicized portion of the provision above does not relate to the upon the occurrence of any Event of Default clause. Rather, it relates to the clause that immediately follows it: USC or USCUHI may exercise any other right or remedy it has (i.e., other than the right of termination), but it must comply with sections 9.3, 9.8, and 9.9 to the extent they apply to the exercise of those other rights.

Section 9.7.1 provides in relevant part, If either Party shall notify the other in writing of its election to have a matter resolved by arbitration, within ten (10) days of receipt by the non-electing party of the notice of election of arbitration, USC and [USCUHI] shall each select an arbitrator. USCUHI concedes that this provision does not create[] an independent contractual right to arbitration, but it contends that the provision demonstrates the intent of the parties that any dispute would be handled in arbitration. It does no such thing. Rather, it merely sets forth the procedure to be followed in the event that a party invokes its right to arbitration -- a right that is granted by section 9.3.

Finally, regardless of whether it is unfair to allow USC to unilaterally declare that an Event of Default has occurred, as USCUHI asserts, the parties granted USC that power under the plain language of section 9.2. We are not at liberty to rewrite that clear and explicit language. (Civ. Code,  1638 [The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity].) In short, sections 9.2 and 9.3 are not susceptible of the interpretation USCUHI urges. This does not mean, however, that USCUHI has no recourse if it believes USC has improperly exercised that power. USCUHI may still challenge USCs declaration; it simply must do so in court, rather than in an arbitration.

To reiterate, the only issue before us is whether USC is required to arbitrate whether an Event of Default has occurred. We hold that it is not. We express no opinion regarding whether the facts alleged establish an Event of Default under section 9.2.2.

DISPOSITION

The order denying USCUHIs petition to compel arbitration is affirmed. USC shall recover its costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

WILLHITE, J.

We concur:

EPSTEIN, P. J.

SUZUKAWA, J.

Publication courtesy of California free legal advice.

Analysis and review provided by Carlsbad Property line attorney.

[1] Although both agreements contain similar arbitration provisions, the parties agree that the Operating Agreement governs this dispute.

[2] USC also gave notice that it was terminating the Lease and would purchase the Complex and leasehold estate, as well as certain equipment, furniture, trade fixtures, and other property, pursuant to the Lease.

[3] The other Events of Default are: termination or expiration of USCUHIs right to possession of the Complex (section 9.2.1), initiation by USCUHI of a voluntary bankruptcy proceeding (section 9.2.3), initiation of an involuntary bankruptcy proceeding against USCUHI (section 9.2.4), merger of USCUHI into another corporation unless USCUHI is the surviving entity (section 9.2.5), a corporate change of control of USCUHI (section 9.2.6), or qualitative standards are not adhered to after findings are made in accordance with section 9.8 (section 9.2.7).

[4] USCUHI argues, however, that many of the Events of Default . . . would result in other breaches of the Operating Agreement sooner or later. That may be true, but it is irrelevant to the interpretation of sections 9.2 and 9.3, particularly under the circumstances of this case. As USCUHI notes in its appellants opening brief, USC does not allege that USCUHI has failed to perform any of its duties or obligations under the Operating Agreement. Instead, USCUHI concedes that USC terminated the Operating Agreement solely based upon its declaration that the governmental and regulatory action taken against Tenet constituted an Event of Default under section 9.2.2.