Cohen v. TNP 2008 Participating Notes Program, LLC, 31 Cal.App.5th 840 (2019)
An attorney for holders of promissory notes issued by a real estate investment company lacked standing, as agent of his client-investors, to enforce arbitration agreements in the promissory notes subscription agreements. However, the real estate investment company’s parent company exercised sufficient control over the investment company and, therefore, was bound to the arbitration provision. Lastly, there was no evidence that the corporate officer of the real estate investment company’s parent company benefited from the promissory notes; thus, he was not compelled to arbitrate as non-signatory of the arbitration provisions.
In 2008, Thompson National Properties, LLC (“TNP”) created two wholly-owned limited liability companies to raise funds from accredited investors for various real estate investments. The companies, TNP 2008 Participating Notes Program, LLC (the “2008 Company”) and TNP 12% Notes Program, LLC (the “12% Company” and, together with the 2008 Company, the “Notes Companies”), offered promissory notes to investors. To participate, accredited investors signed a subscription agreement and received a promissory note. TNP guaranteed the performance of the Notes Companies’ obligations under the promissory notes. TNP additionally pledged all of its membership interest in the Notes Companies as collateral for its guaranty to repay the notes.
Mark Cohen (“Cohen”), an investment advisor and attorney, recommended that his clients and his law firm retirement plan (the “Retirement Plan”) invest in the Notes Companies (the Retirement Plan invested only in the 12% Company) and purchase promissory notes. After the Notes Companies defaulted on the notes, Cohen, purportedly individually (although he did not own any notes) and purportedly as agent for his client-noteholders, submitted arbitration claims against TNP, the Notes Companies and TNP’s CEO based on arbitration provisions in the subscription agreements. After the two Notes Companies agreed to arbitration, Cohen and the Retirement Plan filed a petition in California state superior court (the “Superior Court”) to compel arbitration against TNP and its CEO, neither of which was a signatory to the subscription agreement. The Superior Court granted the petition to compel arbitration.
At arbitration, the arbitrator ruled in favor of the client investors, holding the Notes Companies and TNP liable to the investors for breach of contract and the CEO liable to the investors as an alter ego of the Notes Companies and TNP. However, the arbitrator denied the Retirement Plan’s claims, holding that it was not an innocently injured investor.
The Fifth District Court of Appeal (the “Fifth District Court”) held on appeal that Cohen did not have standing to bring the petition to compel arbitration, either personally or as agent of his noteholder-clients, because Cohen did not hold a note issued or sold by either Notes Company and was not a party to either Notes Company’s subscription agreement.
The Fifth District Court, reversing the Superior Court, held that the Retirement Plan lacked standing to compel TNP and its CEO to arbitrate disputes arising out of the 2008 Company, because the Retirement Plan had invested only in the 12% Company. The Fifth District Court, however, held that the Superior Court properly granted the Retirement Plan’s motion to compel TNP to arbitrate disputes arising out of the 12% Company. The Fifth District Court held that an arbitration agreement signed by a subsidiary may bind the parent company where the party seeking to compel arbitration can show both that the parent had sufficient control over the subsidiary’s activities such that the subsidiary was a mere agent or instrumentality of the parent and that the causes of action or claims against the parent arise out of this relationship. Because the 12% Company acted as a mere instrumentality of TNP and the Retirement Plan’s claims arose out of the relationship between TNP and the 12% Company, TNP was properly compelled to arbitrate.
In contrast, the Fifth District Court held that the Superior Court erred in compelling the CEO to arbitrate disputes. Under California law, the general rule is that a representative who signs a contract as a corporate officer or agent is not party to the contract in his or her personal capacity. However, an agent may be held liable if it personally benefits from the contract or is a third-party beneficiary. Because there was no evidence at the time the Superior Court compelled the CEO to arbitrate that he had personally benefited from the promissory notes or was a third-party beneficiary of the notes, the Superior Court erred in compelling the CEO to arbitrate the disputes.
Summary courtesy of David Simonds and Edward McNeilly of Akin Gump.