Jones v. Dykstra

Filed 11/17/08 Jones v. Dykstra CA2/6

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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 SIX

Lindsay Jones appeals from an order denying his motion to vacate a judgment entered upon an arbitration award. The award and judgment dissociated Jones from a business partnership with respondent Lenny K. Dykstra with no buyout compensation, and required Jones to pay $2.9 million in damages to Dykstra, Lenny Dykstra's Car Wash Corporation, Lenny Dykstra's Car Wash, Ltd., Lenny Dykstra's Car Wash III, Ltd. and South Corona Center Limited Partnership (the Dykstra entities). Jones contends that destruction of evidence, false appraisals and a surprise dissociation claim in the arbitration proceeding constituted extrinsic fraud, and that the trial court erred when it denied his request for an equitable order vacating the judgment. We affirm the judgment and we unseal the record pursuant to rule 8.160(f) of the California Rules of Court.

FACTS

The Partnerships

In the 1990's, Lindsay Jones and Lenny K. Dykstra started several car wash and automotive service businesses. Dykstra provided start up capital exceeding $10 million. Jones operated the businesses and did not contribute capital. Dykstra and Jones entered into various written partnership agreements, pursuant to which Dykstra was the controlling limited partner, with interests ranging from 74 percent to 79 percent, and Jones was a minority limited partner, with interests ranging from 20 percent to 25 percent. The general partner of each partnership, with a one percent interest, was a corporation owned solely by Dykstra named Lenny Dykstra's Car Wash Corporation. The parties also entered into a written management agreement. Each agreement contained an arbitration clause.

In 2003, Jones and Dykstra had a falling out. This resulting dispute involves businesses owned by three of the partnerships: (1) a car wash in North Corona owned by the partnership Lenny Dykstra Car Wash, Ltd.; (2) a car wash, adjoining gas station and planned retail shopping center in South Corona owned by the partnership South Corona Center Limited Partnership; and (3) a car wash, an adjoining oil change business and an auto repair business in Simi Valley owned by the partnership Lenny Dykstra Car Wash, III, Ltd.

The North Corona business opened in 1994, the South Corona car wash and gas station opened in 1999, and the Simi Valley car wash and gas station opened in 2003. The South Corona planned retail shopping center was under construction in 2003, when the Simi Valley businesses opened. On the day that the Simi Valley businesses opened in 2003, Dykstra and Jones had a disagreement and Jones either quit or was forced to leave the partnership businesses.

Pre-Arbitration Proceedings

In April of 2004, Jones filed suit against Dykstra and the Dykstra entities for breach of contract and breach of fiduciary duty, among other things. Jones prayed for "an order that the limited partnership be dissolved," an accounting, appointment of a receiver to wind up the partnership affairs, damages, and other relief.

At about the same time, Dykstra filed an arbitration claim against Jones on behalf of himself and the Dykstra entities (hereafter collectively Dykstra), in which Dykstra accused Jones of embezzlement, fraud, breach of contract, conversion and breach of fiduciary duty. Dykstra requested compensatory and punitive damages and any other relief deemed appropriate by the arbitrator.

In June of 2004, the trial court granted Dykstra's motion to compel arbitration of Jones' complaint. Jones does not challenge the propriety of that order.

Proceedings Before the Arbitrator

In the arbitration, Jones filed a cross-claim, in which he reasserted his superior court claims and continued to request dissolution of the partnership. The parties conducted discovery in the Fall of 2004. Jones' discovery requests included requests for appraisals of the partnership businesses and his attorney deposed Dykstra on the appraised value of the partnership businesses.

After granting Jones two continuances of the arbitration hearing, the arbitrator issued a scheduling order that required the parties to designate witnesses by January 21, 2005. It set discovery cut off for February 4, 2005.

On January 10, 2005, Dykstra amended his arbitration demand to include a request for dissolution. On January 21, 2005, Dykstra designated Steve Herron as an appraisal expert to offer opinions on the value of the businesses.

Jones did not designate an appraiser and objected to Dykstra's designation. Jones claimed surprise and argued that evidence of appraised values was irrelevant. Jones disclosed that that he might not pursue his claim for dissolution and he argued that Dykstra was not entitled to dissolution. Further, Jones argued, if the partnerships were dissolved their assets would be sold on the open market, rendering appraised values irrelevant. Jones also argued that Dykstra could not exclude Jones from the partnerships because Dykstra's arbitration claim did not pray for dissociation. (Corp. Code,  16601.)

On February 1, 2005, the arbitrator overruled Jones' objection to Dykstra's appraiser, stating that "[I]t appears to the Arbitrator that all counsel have been cognizant, for a substantial period of time, of the appraisal and related issues which may be the subject of Mr. Herron's expert witness testimony." The arbitrator set February 5, 2005, as the deadline for mutual exchange of expert information. (Corp. Code, 2034.210.)

On February 1, 2005, the arbitrator granted Jones leave to designate up to two appraisal experts, notwithstanding the January 26 deadline. The arbitrator emphasized by letter that simultaneous exchange of information for such experts would be due on February 4, 2005. On February 4, Dykstra disclosed to Jones the appraisal reports of Herron and the opinions of Dykstra's accounting expert. Jones did not disclose any expert information on February 4. Jones' made another request to continue the arbitration, which the arbitrator denied, but the arbitrator extended the deadline for exchange of expert information to February 7. The arbitrator also denied a request by Jones to strike Dykstra's dissolution claim.

On February 7, Jones did not disclose any information concerning an appraisal expert. With respect to his accounting expert, he produced spreadsheets concerning only the Simi Valley partnership and a statement that the accountant had not completed his analysis and would produce more information later.

The arbitration hearing spanned three weeks between February 14, 2005 and March 11, 2005. Dykstra's appraiser assigned values to the businesses as follows: North Corona $5,000,000; Simi Valley $7,980,000; South Corona $2,920,000 for the gas station; and $2,580,000 for the shopping center's land and entitlements to develop. Several employees testified against Jones, including Dykstra's brother Kevin who testified that Jones took extensive amounts of cash from the businesses to use for gambling, drugs and personal expenses and instructed Kevin to destroy cash out ledgers. Jones denied telling Kevin to destroy the ledgers. Jones testified that he had a right to take cash from the car washes for gambling.

Moments before Herron offered his appraisal opinions on February 16, 2005, Jones' counsel announced that he had decided to present an appraisal expert. Dykstra objected because none had previously been disclosed. The arbitrator said he was inclined to exclude the expert, but that Jones would be allowed to make a written offer of proof. Jones did not make a written offer of proof. Five days later, Jones offered the name of his proposed expert, Earl Carson, but still made no written offer of proof. Jones' counsel acknowledged that he had not begun looking for an appraisal expert until Dykstra designated his expert. The arbitrator renewed his request for a written offer of proof. "[A]pparently you made a tactical decision not to retain a valuation expert until you learned that the claimants had retained one." [] . . . "I am going to allow you to offer whatever you want to offer in writing."

On February 23 and 25, Jones' counsel asked for a decision on his proffered expert. The arbitrator told him again to make a written offer of proof. On February 28, Jones made a written offer of proof concerning Carson's testimony. The arbitrator issued an order on March 2 excluding Carson.

On April 25 the arbitrator issued his decision. He found that Jones took over $2 million from the partnership without authority, owed $328,000 in unpaid loans, falsified partnership books and records to enhance his own partnership position and that Jones' conduct made a continuing business relationship with Dykstra impracticable. The arbitrator removed Jones from the partnerships by way of dissociation, and did not order liquidation. The arbitrator found that Jones was not entitled to any payment from Dykstra under the partnership agreements because unpaid loans and embezzled funds more than offset Jones' share of the partnership assets. The arbitrator awarded Dykstra $2.4 million in actual damages and $500,000 in punitive damages against Jones.

The Petition to Confirm the Arbitration Award

Dykstra moved in superior court to confirm the arbitration award. Jones opposed the motion and asked the court to vacate the arbitration award on the grounds that he had not been permitted to present appraisal evidence, among other things. Jones argued, as he had to the arbitrator, that Herron's appraised values were "distorted, low-ball figures [that] ensured a finding that Jones had 'zero' equity in all of the partnerships," and were based on theoretical revenues lower than actual revenues, overstated expenses, and unjustified capitalization rates. The trial court confirmed the arbitration award. Judgment was entered on June 3, 2005. Jones did not appeal the decision.

In the year following judgment, Dykstra terminated the employment of his bother Kevin and several other employees. Dykstra sold the North Corona car wash at a profit 20 percent greater than that predicted by his expert. Dykstra resumed construction of the Simi Valley retail center. Kevin Dykstra and other former partnership employees gave Jones sworn affidavits describing these events and asserting that they had each committed perjury in the arbitration under pressure from Dykstra. In August of 2006, Jones presented this new evidence to the court in a "Motion for Renewal of Plaintiff's Petition to Vacate Arbitrator's Award" based on newly discovered evidence, pursuant to Code of Civil Procedure section 1008. Dykstra filed counter-affidavits contradicting the employee declarations, and declaring that several of these employees, including Kevin Dykstra, had recently been terminated for theft or misconduct.

The trial court denied Jones' motion to vacate the award, for lack of jurisdiction to consider a renewed motion to vacate an arbitration award after judgment had been entered. Jones did not appeal the decision.

One month later, Jones filed a motion to vacate the judgment on equitable grounds based on essentially the same evidence, arguing that the arbitration award and judgment were procured by extrinsic fraud. In a supplemental declaration, Jones offered evidence that the South Corona car wash, gas station and retail center were being sold for $28 million.

For purposes of deciding the motion to vacate judgment, the trial court assumed the truth of the declarations and other evidence presented by Jones, but found that there was no basis in law to grant relief because Jones has not established the existence of any fraud extrinsic to the arbitration proceedings. Jones appeals from this order.

DISCUSSION

The Arbitration Award

Jones appeals to this court as a court "sitting in equity" to reverse the order denying his motion to vacate the judgment. This cannot be done.

Arbitration awards are generally immune from judicial review. (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11.) "[B]oth because it vindicates the intentions of the parties that the award be final, and because an arbitrator is not ordinarily constrained to decide according to the rule of law, it is the general rule that, 'The merits of the controversy between the parties are not subject to judicial review.'" (Ibid., quoting O'Malley v. Petroleum Maintenance Co. (1957) 48 Cal.2d 107, 111.)

A trial court may, in its discretion, vacate an arbitration award on limited statutory grounds, which include an award procured by corruption, fraud or other undue means (Code Civ. Proc., 1286.2(a)(1)) or substantial prejudice to the rights of a party arising from the arbitrator's refusal to postpone the hearing upon sufficient cause shown or refusal to hear material evidence. (Id., subd. (a)(5).) The trial court in this case refused to vacate the award. It confirmed the award and entered judgment. That decision is final, having never been appealed. The resulting judgment has the same force and effect as any other judgment. (Code Civ. Proc., 1287.4.)

Rarely, a trial court may act in equity to vacate a judgment that was obtained by extrinsic fraud, "where it appears that the complaining party was fraudulently prevented from presenting his claim or defense in the prior action." (Kachig v. Boothe (1971) 22 Cal.App.3d 626, 632.) The fraud must be extrinsic. Judgment will not be vacated based on intrinsic fraud, i.e. fraud that was committed in the course of the underlying proceedings. "[O]nly upon proof of extrinsic and collateral fraud can plaintiff seek and secure equitable relief from the judgment. A showing of fraud practiced in the trial of the original action will not suffice. The authorities hold this to be intrinsic fraud, and uniformly hold that since there must be an end to the litigation, and the fraud was part of the case presented in the former action, equity will not reopen the litigation." (Caldwell v. Taylor (1948) 218 Cal. 471, 476.) Examples of extrinsic fraud include fraud that keeps a party away from the courthouse or keeps a party ignorant of the suit. (United States v. Throckmorton (1878) 98 U.S. 61, 65-66.)

In support of his extrinsic fraud claim, Jones contends that Dykstra caused the destruction of sales ledgers and cash out ledgers, concealed his dissociation claim until the eve of the arbitration, and presented false appraisals and accountings in the arbitration. Even assuming these events occurred, Jones has at best established intrinsic fraud. Concealment and suppression of evidence are intrinsic, not extrinsic, fraud. (Kachig v. Boothe, supra, 22 Cal.App.3d at p. 634.) Introduction of falsified documents and perjury are also intrinsic fraud. (Ibid.) Even a conspiracy to suborn perjury is intrinsic fraud. (LaSalle v Peterson (1934) 220 Cal. 739.) Any concealment of the dissociation claim was intrinsic to the arbitration proceedings, and dissociation was well within the arbitrator's broad powers to fashion a just and equitable resolution. (Moncharsh v. Heily & Blas, supra, 3 Cal.4th at p. 11.) Even if Jones had appealed from the decision to confirm the arbitration award we could not have reviewed the arbitrator's decisions for factual or legal errors. (Ibid.)

Unsealing the Record

In the trial court, portions of the arbitration record were sealed upon unopposed ex parte applications. (Cal. Rules of Court, rule 2.550.) The parties filed these portions of the record under seal in this court, pursuant to rule 8.160 (c) of the California Rules of Court.

Pursuant to rule 8.160(c), "If a record sealed by the trial court is part of the record on appeal: [] (1) The sealed record must be filed under seal in the reviewing court and remain sealed unless that court orders otherwise . . . . [] (3) The reviewing court may examine the sealed record." The record may be unsealed on motion of either party, or by the court on ten days notice to all parties. (Rule 8.160(f).)

The public right to access outweighs any privacy interests in the sealed records. The sealed portions include the arbitration claims, orders and final decision, transcripts, discovery and correspondence relating to the arbitration, all of which were considered by the trial court on the motions to confirm and vacate the award. The parties freely disclosed the contents of the sealed records in their unsealed appellate briefs. The briefs were not conditionally lodged under seal (rule 8.160(e)) and neither party applied for a sealing order from this court. On July 1, 2008, we gave notice to all parties or our intent to unseal the records pursuant to rule 8.160(f), and we received no response.

The judgment is affirmed. The previously sealed portions of the record are unsealed pursuant to California Rules of Court, rule 8.160(f). Respondents are awarded costs on appeal.

NOT TO BE PUBLISHED.

COFFEE, J.

We concur:

YEGAN, Acting P.J.

PERREN, J.

Thomas J. Hutchins, Judge

Superior Court County of Ventura

______________________________

Law Offices of Zev S. Brooks, Zev S. Brooks, for Plaintiff and Appellant.

O'Melveny & Myers, Daniel M. Petrocelli, Justin M. Goldstein, Phillip D. Lewis, for Defendants and Respondents.

Publication courtesy of San Diego free legal advice.

Analysis and review provided by Santee Property line attorney.

San Diego Case Information provided by www.fearnotlaw.com