Infogroup v. Core Wealth Management

Filed 8/16/06 Infogroup v. Core Wealth Management CA2/6

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SIX

Infogroup Ltd. (Infogroup) appeals from the judgment confirming an arbitration award in favor of respondents Core Wealth Management, LLC and Michael Klein. (Code Civ. Proc., § 1294, subd. (b).)^[1] The trial court denied Infogroup's petition to vacate the arbitration award. We affirm.

Facts and Procedural History

This is a securities dispute involving a securities offering by Prado CDO Ltd. (Prado). The term "CDO" means collateralized debt obligation in which a portfolio of high yield bonds is used as collateral for the issuance of new bonds. The new bonds are sold to investors at a different rate of return.

Prado is a special purpose entity formed to issue bonds and preference shares for a CDO. The Prado CDO includes Class D bonds that earn 9.75 percent per annum interest.

In 2003, approximately $50 million in investor money was used to fund issuance of the Class D bonds valued at $76 million. The investors received Class D bonds that had a $50 million face value. The remaining bonds, which had a $26 million face value, were issued to Core Wealth Management, LLC (Core) and another collateral manager (Atlantic Asset Management) as partial payment for their management services.

Infogroup

Infogroup,^[2] a Bahamas corporation, claimed it was entitled to 6 percent of the Class D bonds (6% of $76 million = $4.56 million) based on the theory that its $3 million investment represented 6 percent of the $50 million used to buy the bonds that served as collateral for the Class D bonds. Infogroup claimed that Core and Core's CEO, Michael Klein, failed to disclose the management fee or that Core had received some of the Class D bonds.

Core asserted that Infogroup knew about the management fee and offered to rescind Infogroup's investment. Infogroup rejected the offer.

On July 15, 2005, Core requested that Judicial Arbitration and Mediation Services (JAMS) arbitrate the dispute pursuant to the Core-Infogroup Investment Management Agreement.^[3]

Rather than arbitrate the dispute, Infogroup sued for damages. Core filed a motion to compel arbitration and to stay the action. The superior court, in granting the motion, found that Infogroup "has gone to extraordinary lengths to attempt to avoid contractual binding arbitration of its dispute with Core Wealth and Klein."

On September 10, 2004, about three months before the superior court granted the motion to compel arbitration, JAMS appointed Judge Diane Wayne (Ret.) to arbitrate the dispute. Judge Wayne set an April 25, 2005 hearing date and scheduled discovery.

After a seven day hearing, Judge Wayne found in favor of Core. The superior court denied Infogroup's petition to vacate the award, confirmed the September 6, 2005 arbitration award, and entered judgment for respondents.

Self-Executing Arbitration Agreement

Infogroup contends that JAMS lacked jurisdiction to set an arbitration hearing date until the superior court granted the motion to compel arbitration. On August 27, 2004, JAMS advised Infogroup that it would "proceed with the administration of this arbitration until there is a ruling to the contrary by a court of competent jurisdiction."

We reject the argument that JAMS lacked authority to proceed with the arbitration. Where the arbitration agreement is self-executing, a court order to arbitrate the dispute is not necessary. (Mitchum, Jones & Templeton, Inc. v. Chronis (1977) 72 Cal.App.3d 596, 600.) "A 'self-executing' arbitration clause is one which permits and provides for arbitration under rules therein incorporated. [Citation.]" (Ibid; 6 Witkin, Cal. Procedure (4th ed. 1977) Proceedings Without Trial, § 494, pp. 924-925.)

Here the arbitration agreement incorporated JAMS rules and procedures to arbitrate the dispute without a court order. (See e.g. Kustom Kraft Homes v. Leivenstein (1971) 14 Cal.App.3d 805, 811; Knight & Fanin, Cal. Practice Guide (Rutter 205) Alternate Dispute Resolution ¶[¶] 5:414.4 & 5:414.7, pp. 5-210.14 to 5-211.) "If the arbitration agreement provides a method of appointing an arbitrator, that method shall be followed." (§ 1281.6; see e.g., Maggio v. Windward Capital Management Co. (2000) 80 Cal.App.4th 1210, 1215.)

Infogroup cites no authority, and we have found none, that JAMS' contractual authority to proceed with the arbitration was suspended until the superior court ruled on the motion to stay the civil action. "The arbitrator, and not the court, decides questions of procedure and discovery. [Citations.] It is also up to the arbitrator, and not the court, to grant relief for delay in bringing an arbitration to a resolution. [Citations.]" (Titan/Value Equities Group, Inc. v. Superior Court (1994) 29 Cal.App.4th 482, 488. Fn. omitted.)

Petition to Vacate Arbitration Award

Infogroup argues that the superior court abused its discretion in not vacating the arbitration award based on prejudicial misconduct by the arbitrator. Section 1286.2, subdivision (a)(5) provides that the arbitration award should be vacated if the court determines that: "The rights of the party were substantially prejudiced by the refusal of the arbitrator[] to postpone the hearing upon sufficient cause being shown therefor or by the refusal of the arbitrator[] to hear evidence material to the

Controversy . . . ." Section 1286.2 is "a safety valve in private arbitration that permits a court to intercede when an arbitrator in private arbitration has prevented a party from fairly presenting its case." (Hall v. Superior Court (1993) 18 Cal.App.4th 427, 439.)

Discovery

Infogroup complains that it was not granted enough time to review subpoenaed documents. The record shows that the arbitrator set discovery deadlines that favored neither side. Documents were produced by third parties and reviewed by counsel before and on the first day of the arbitration hearing. The documents were available for further inspection but Infogroup did not inspect them.

Infogroup claimed that the arbitrator unreasonably refused to postpone the arbitration hearing. The superior court, in denying the petition to vacate the arbitration award, found: "Infogroup refers to documents it contends it was allowed only minimal opportunity to review, yet again fails to make any showing of what information it hoped to find in such documents, later found in such documents, or how Infogroup was placed in any different a position than was Core Wealth with respect to the ability to examine such documents. . . . Without a showing that it was deprived of the opportunity to adequately review documents, and/or that there was relevant and material information in the documents which the time restrictions prevented it from presenting in the arbitration, Infogroup cannot establish the 'sufficient cause' required to justify a continuance."

Substantial evidence supports the superior court's findings. (Pierotti v. Torian (2001) 81 Cal.App.4th 17, 24.) Infogroup has failed to show substantial prejudice or that the arbitrator acted unreasonably. "Absent a clear expression of illegality or public policy undermining th[e] strong presumption in favor of private arbitration, an arbitral award should ordinarily stand immune from judicial scrutiny." (Moncharsh v. Heily & Blaise (1992) 3 Cal.4th 1, 32.)

Priore Deposition

Infogroup argues that the arbitration hearing should have been continued because Thomas Priore, the managing director for the CDO underwriter (Links Securities LLC) did not appear for his New York deposition. Core noticed Priore's deposition in New York. When Priore failed to appear for the April 15, 2005 deposition, Infogroup demanded that the arbitration hearing be continued. The arbitrator denied the continuance request.

Infogroup concedes that Priore was a friendly witness. On April 8, 2005, two weeks before the arbitration hearing, Priore signed a declaration that was submitted by Infogroup in opposition to a summary judgment motion. Priore signed a corrected declaration on April 11, 2005, stating that he was unaware of any written agreement to pay Core $26 million in Class D bonds. Infogroup submitted the declaration at the arbitration hearing and demanded that the arbitrator continue the hearing so that Infogroup could compel Prior's appearance.^[4] The arbitrator denied the request.

The superior court found no substantial prejudice: "What is not provided is any showing that the evidence Infogroup hoped to obtain from Mr. Priore could not be obtained from any other source, was not cumulative of other testimony, or that a court order compelling the deposition could not be obtained on shortened notice from the New York courts, such that postponement of the arbitration was the only means by which Infogroup could obtain his additional testimony, and that Infogroup was therefore truly substantially prejudiced by the failure of the arbitrator to postpone the arbitration, scheduled to commence 11 days later (and which proceeded through May 4, some 20 days after Mr. Priore's non-appearance)."

Infogroup's assertion that it was prejudiced is without merit. Infogroup had ample time to prepare for the hearing and obtain Priore's testimony.

Expert Testimony

Infogroup contends that the arbitrator refused to hear material evidence when it excluded the expert testimony of James Merkur. (§ 1286.2, subd. (a)(5).) Pursuant to the arbitration Scheduling Order, Infogroup identified 29 witnesses but did not list Merkur as an expert witness.^[5] The Scheduling Order required that the parties "identify all non-rebuttal percipient and expert witnesses and the manner in which they are to testify . . . . Witnesses not so identified shall not be permitted to testify."

At the arbitration hearing, Core objected to two questions calling for Merkur to express an expert opinion. The arbitrator sustained the objection on the ground that Merkur was not a designated expert. Right or wrong, the arbitrator had broad discretion to determine the admissibility of evidence. (§ 1282.2, subd. (c); Evans v. CenterStore Development Co. (2005) 134 Cal.App.4th 151, 164.)

" 'Where, as here, a party complains of excluded material evidence, the reviewing court should generally focus first on prejudice, not materiality. To find substantial prejudice the court must accept, for purposes of analysis, the arbitrator's legal theory and conclude that the arbitrator might well have made a different award had the evidence been allowed.' [Citation.]" (Schlessinger v. Rosenfeld, Meyer & Susman, supra, 40 Cal.App.4th at p. 1111.) No such showing has been made here.

Dura Pharmaceuticals, Inc. v. Broudo

Infogroup finally argues that it was denied a fair hearing because it was not afforded the opportunity to fully brief Dura Pharmaceuticals, Inc. v. Broudo (2005) 544 U.S. 336 [125 S.Ct. 1627] (Dura). A few days before the arbitration hearing, the United States Supreme Court issued its opinion in Dura holding that a "plaintiff who claims securities fraud must prove that the defendant's fraud caused an economic loss. [Citation.]" (Id., at p. 338 [125 S.Ct. at p. 1629].)

Dura is consistent with California law which requires a causal link between defendant's fraud and plaintiff's damage. "[F]raud without damage or injury is not remediable. Deception which does not cause loss is not a fraud in the legal sense. [Citations.]" (Hill v. Wrather (1958) 158 Cal.App.2d 818, 825; see Civ. Code, § 3333; 5 Witkin, Cal. Procedure (4th ed. 1997) Pleading § 687, pp. 147-148.) In a securities fraud case, "[t]he plaintiff must prove both actual cause ('transaction causation') and proximate cause ('loss causation'). [Citation.]" (Ambassador Hotel Co., Ltd. v. Wei-Chuan Investment (9th Cir. 1999) 189 F.3d 1017, 1025.)

On May 4, 2005, at the conclusion of the arbitration hearing, the arbitrator asked whether Infogroup had established loss causation, referred counsel to Dura, and requested briefing by May 23, 2005. Infogroup filed a closing brief discussing Dura. We reject the argument that it was not provided adequate time to research and brief Dura. Nor was Infogroup prejudiced when the arbitrator denied a request to submit additional briefing after the arbitrator issued the arbitration award.

Infogroup's remaining arguments have been considered and merit no further discussion. Where " '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.' [Citation.]" (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 12.) Section 1286.2, subdivision (a)(5) does not " 'provide[] a back door to Moncharsh through which parties may routinely test the legal theories of arbitrators.' " (Schlessinger v. Rosenfeld, Meyer & Susma, supra, 40 Cal.App.4th at pp. 1110-1111.)

The judgment (order confirming arbitration award and order denying motion to vacate arbitration award) is affirmed. Respondents are awarded costs on appeal.

NOT TO BE PUBLISHED.

YEGAN, J.

We concur:

GILBERT, P.J.

COFFEE, J.

Thomas P. Anderle, Judge

Superior Court County of Santa Barbara

______________________________

Michael D. Dempsey, Arlene M. Turinchak; Dempsey & Johnson, for Appellant.

Timothy J. Trager; Hill & Trager, for Respondents.

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^[1] All statutory references are to the Code of Civil Procedure unless otherwise stated.

^[2] Infogroup refers to itself as an "Investor Class." The first amended complaint alleges that Infogroup is suing on behalf of itself and "all others similarly situated . . . ."

^[3] Paragraph 19 of the Investment Management Agreement states in pertinent part: "Arbitration. The parties waive their rights to seek remedies in court, including any right to a jury trial. The parties agree that any dispute between or among any of the parties arising out of, relating to or in connection with this Agreement or the Account, shall be resolved exclusively through binding arbitration conducted under the auspices of JAMS pursuant to its Arbitration Rules and Procedures. . . . Disputes shall not be resolved in any other forum or venue. The arbitration shall be conducted by a retired judge who is experienced in resolving disputes regarding the securities business. The parties agree that the arbitrator shall apply the substantive law of California to all state law claims, [and] that limited discovery shall be conduced in accordance with JAMS' Arbitration Rules and Procedures . . . ." (Emphasis added.)

^[4] Infogroup's witness list stated that Priore's testimony would be by declaration and take no longer than 10 minutes.

^[5] The Scheduling Order required that counsel submit an expert witness list and list of all non-rebuttal percipient witnesses by March 1, 2005. Infogroup served a witness list stating the Merkur would testify by declaration and telephone, that the estimated time was three hours, and that Merkur would testify about "Disclosures and statements by Core Wealth/Klein, agreements with Core Wealth and Infogroup due diligence."