Washington state courts favor enforcing contractual arbitration clauses, and will strictly enforce an LLC operating agreement to arbitrate claims, including derivative claims, where agreement language is broad enough to include the same. Moreover, a contractual arbitration clause will be enforced absent evidence clearly indicating waiver of an intention to arbitrate.
A limited liability company in Washington is bound by an arbitration clause in its operating agreement. The Washington Court of Appeal, In Berman v. Tierra Real Estate Grp. No. 83311-1-I (Wash. Ct. App. Aug. 22, 2022), found that individual as well as derivative claims were within the scope of the arbitration agreement in place between the entities and the members.
Background Facts
Joel Berman is a minority owner of three limited liability companies- Tierra Real Estate Group, LLC (TREG), Boyden Investment Group (BIG), and Phat Sacks Corp. All three own and operate retail cannabis stores. Berman owned these entities with three other owners Todd Shirley, Ryan Kunkel, and Charles Boyden. Shirley, Kunkel and Boyden were also owners of two other entities, Green Outfitters, LLC and Have a Heart Compassion Care, LLC, which were also involved in retail cannabis. Shirley, Kunkel and Boyden formed corporation together called Interurban Capital Group, Inc. (ICG).The purpose of this new corporation was to centralize and coordinate the management between all of the retail stores of the five entities and to prepare for possible expansion of the business.
Berman received shares of ICG at the time of its incorporation in August 2017. A few months later Berman signed a "sublease agreement" in exchange for half of his shares in ICG equaling $35,000 per month until ICG could acquire all of the retail stores in its business plan. ICG was acquired by Harvest Health & Recreation, Inc. (Harvest) in March of 2020. Harvest terminated the payments to Berman. In an unrelated matter, Harvest also had an ongoing lawsuit with ICG that was settled. Berman objected to that settlement.
Berman filed a complaint against all five entities (TREG, BIG, Phat Sacks, Green Outfitters and Have a Heart) in March 2021 claiming a breach of the "sublease agreement." In August 2021 he amended his complaint to also include the individual owners, Shirley, Kinkel and Boyden and added eight additional causes of action, both on in his individual capacity, and as derivative claims. The amended complaint alleged improper activity as to the merger and settlement, promissory estoppel, breach of the operating agreement, unjust enrichment, tortious interference with contract, breach of fiduciary duty and civil conspiracy.
After Berman filed the amended complaint, the defendants moved to compel arbitration pursuant to the terms of the parties’ LLC operating agreement. The trial court ruled that the claims brought against the individual defendants were subject to arbitration per the operating agreements, but the identical derivative claims on behalf of BIG and TREG were not subject to arbitration. Defendants appealed, and the Court of Appeals reversed, holding that all claims, including derivative claims, were subject to contractual arbitration per the terms of the LLC operating agreement.
Are Limited Liability Companies Bound by Arbitration Clauses in Their Operating Agreements?
A limited liability company is one "with a flexible business structure that is authorized by statute." Chadwick Farms Owners Ass'n v. FHC LLC, 166 Wn.2d178, 186-87, 207 P.3d 1251 (2009). Pursuant to the Washington Limited Liability Company Act (WLLCA) a "limited liability company agreement governs…. relations among the members as members and between the members and the limited liability company." RCW 25.15.018(1)(a). Thus, courts will look to the terms of an LLC operating agreement to determine how to treat disputes arising under the agreement, including whether claims between members are subject to contractual arbitration. In this regard, the WLLCA is in line with the provisions of the Uniform Limited Liability Company Act (ULLCA), which provides, "a limited liability company is bound by or may enforce the operating agreement, whether or not the company has itself manifested assent to the operating agreement." UNIF. LTD. LIAB. CO. ACT §106(a) (amended 2013), 6C U.L.A. 1. 40 (2016).
Washington law specifically provides that an operating agreement that contains an arbitration agreement will bind both the LLC and its members. Therefore, both BIG and TREG were bound by the arbitration agreement in place between the parties here. However, after deciding that an arbitration clause in an operating agreement is enforceable, the court turned to whether the actual terms of the clause in this case could be invoked to compel arbitration of all claims, including Berman’s derivative and individual claims. In so doing, the court also analyzed the circumstances whereby the right to compel arbitration could be waived by taking actions in the state court litigation inconsistent with the desire privately arbitrate.
May the Court Compel Arbitration?
In deciding whether to compel arbitration, Washington courts generally apply contract principles. "Arbitration is a matter of contract and, therefore, parties cannot be compelled to arbitrate unless they have agreed to do so." Healy v. Seattle Rugby, LLC, 15 Wn.App.2d 539, 587, 476 P.3d 583 (2020). The court will look to the language of the contract as well as the parties intent in forming that contract. Hearst Commc'ns, Inc. v. Seattle Times Co., 154 Wn.2d 493, 503, 115 P.3d 262 (2005). However, absent some ambiguity, the court will not impose a contract interpretation that is different from the plain and stated intent set forth in the agreement. Id. In addition, Washington courts "apply a strong presumption in favor of arbitrability." Peninsula Sch. Dist. No. 401 v. Pub. Sch. Emps. of Peninsula, 130 Wn.2d 401, 414, 924 P.2d 13 (1996).
Berman argued that the language of the agreement was limited to claims specifically between members, and thus did not include derivative claims. The appellate court disagreed, finding that the plain language of the agreement clearly provided that all claims between the parties to the agreement must be resolved by arbitration, and derivative claims could not be carved out.
The court relied on the following language to support its position: “all disputes, claims and/or otherwise, [between the parties] including without limitation management, contract, quasi contract, equitable claims, tort claims, statutory claims or any other kind of controversy, claim or dispute ... by non-binding mediation and arbitration as provided [in the agreement].” Because TREG and BIG were parties to the agreement, and the operating agreement arbitration clause was enforceable against them, the fact that Berman’s claims were derivative claims was of no moment. The agreement’s plain language controlled TREG and BIG’s claims.
Moreover, the court of appeals held that Berman’s individual claims were also subject to the arbitration clause. The individual claims filed by Berman involved civil conspiracy against the entities and were built on identical facts as the derivative claims. The court stated, "The claim against BIG falls within the BIG arbitration clause both because it is a dispute between the parties to the agreement and because it is a dispute between members. The claim against TREG falls within the TREG agreement because it is related to the TREG agreement." Therefore, Berman's individual civil conspiracy claims are arbitrable.
Did the Parties Waive Arbitration?
Berman also argued that the defendants had waived arbitration by effectively engaging in litigation activities for five months before filing a motion to compel arbitration. Under Washington law, a contractual right to arbitrate can be waived by taking actions inconsistent with an intent to enforce a contractual arbitration clause. Berman pointed to the fact that the defense had filed a motion to dismissed and served discovery before moving to compel arbitration as evidence of actions inconsistent with an intent to arbitrate. However, in rejecting Berman’s arguments, the court noted that all of these actions took place before Berman filed his amended complaint, which contained the claims that would be within the scope of arbitration. A motion to compel arbitration was filed within 30 days of the amended complaint and thus was a timely motion. Therefore, the right to arbitrate was not waived.
Key Takeaways
- Washington law specifically provides that an operating agreement that contains an arbitration clause will bind both the LLC and its members.
- If the intent of the parties to arbitrate is clear from the language of the agreement, the court will favor arbitration to resolve the case.
- Individual claims should be treated in the same manner as derivative claims as it relates to arbitration.
- Contractual arbitration is not waived unless, with full knowledge of a right to arbitrate, the movant acts inconsistently with an exercise of that right.