Kurtin v. Elieff (215 Cal. App. 4th 455, 2013)

Opinion

RYLAARSDAM, Acting P. J.

We affirm the trial court’s judgment holding defendant Bruce Elieff liable for misstating his authority to bind a group of real estate businesses known as the “Joint Entities” in the course of agreeing to buy out his former partner, plaintiff Todd Kurtin. We affirm the trial court’s posttrial order denying Elieff’s motion for judgment notwithstanding the verdict. And we affirm the trial court’s grant of a new trial as to the issue of the precise amount of damages which Kurtin may recover.

However, as to one of Kurtin’s causes of action—for liability under Civil Code section 2343 for lack-of-good-faith breach of an agent’s warranty of authority—the new trial order must extend to liability as well. (All further statutory references to sections 2343, 2342, or 3318 will be to the Civil Code.) The jury returned inconsistent verdicts. Liability under section 2343 requires either (1) the lack of a good faith belief on an agent’s part that “he has authority” to bind “his principal,” or (2) an act by the agent that is “wrongful” in its nature. Case law has equated “wrongful” with tortious. Here, the jury found that Elieff did have a good faith belief in his authority to bind what the parties refer to as the Joint Entities when he signed the agreement. Furthermore, the jury specifically exonerated Elieff of all tort claims presented against him to the jury, including even the claim for negligent misrepresentation.

The proper remedy for inconsistent verdicts is a new trial. (See Shaw v. Hughes Aircraft Co. (2000) 83 Cal.App.4th 1336, 1344 [100 Cal.Rptr.2d 446] (Shaw) [“Inconsistent verdicts are ‘against the law,’ and the proper remedy is a new trial.”].) Accordingly, we will modify the new trial order on appeal to provide for the trial of liability under section 2343, as well as damages. (Code Civ. Proc., § 906.) As modified, we affirm that new trial order.

BACKGROUND

1. The 2005 Settlement Agreement

Kurtin and Elieff had been equal partners in a series of real estate ventures in the 1990’s, doing business under the rubric of SunCal Companies. In 2003, growing disagreements between the two led Kurtin to sue Elieff to “separate” themselves. By that time SunCal Companies had already been “transformed” into “basically” Elieff’s company.

The litigation led to a mediation, which in turn led to a settlement agreement. The agreement, signed in August 2005, provided that Elieff was to buy out Kurtin for $48.8 million in four installment payments.

As Kurtin and Elieff structured their partnership, each real estate project was its “own little company.” The settlement agreement provided that of the $48.8 million, both Elieff and the Joint Entities were jointly and severally responsible for the first installment of $21 million. However, only the Joint Entities were responsible for making the last three installments.

2. Default on the Payments

Elieff made the $21 million first and only installment payment for which he could be held personally responsible. The Joint Entities made the $1.8 million second installment payment for which they alone were responsible. But the Joint Entities paid only about $3.5 million of the $13.1 million third installment payment, and nothing on the final installment of $12.9 million.

Elieff had signed the settlement agreement both “individually and on behalf of the Elieff Separate Entities and the Joint Entities.” The agreement had provided that if there was a default in any of the last three payments, Kurtin would be “entitled to have judgment entered pursuant to C.C.P. Section 664.6 against the Joint Entities” in an amount equal to the unpaid balance.

But when Kurtin sought to enforce the agreement against the Joint Entities under section 664.6 of the Code of Civil Procedure in the context of the 2003 litigation, the trial judge denied his request. The judge determined that the Joint Entities were not “parties” to Kurtin’s 2003 litigation.

Elieff opposed the attempt to enforce the agreement. He argued that the trial judge had correctly determined the Joint Entities had to be added as parties to the lawsuit before any judgment could be entered against them.

The trial judge did not address the question of whether Elieff had the authority to bind the Joint Entities. However, in opposition to a writ petition filed in this court by Kurtin contesting the trial court’s order, Elieff pointed out that “some of the Joint Entities are majority owned by independent third-parties,” and further asserted “that only his interest in the Joint Entities, if anything, is subject to legal action.” (Italics omitted.) Pursuant to Evidence Code section 452, subdivision (d), on our own motion we have taken judicial notice of the records in the writ proceeding in this court’s docket No. G037674 (Kurtin v. Superior Court (Nov. 11, 2006) [peta. den.]).

Two of the Joint Entities, Moorpark 150 LLC (Moorpark), and SJD Partners (SJD), appeared through their own counsel, and argued that Elieff did not have any authority to bind their assets “to resolve his personal dispute with Kurtin.” As they asserted in opposing the writ relief sought by Kurtin, Elieff “might as well have pledged the Brooklyn Bridge to Kurtin.”

Elieff further argued that Kurtin had an adequate remedy at law. Besides Kurtin’s bringing the Joint Entities into the case, Elieff took the position that Kurtin could either (1) demand arbitration under the arbitration clause of the settlement agreement, or (2) sue for breach of the settlement agreement.

3. Arbitration

Kurtin never tried to bring the Joint Entities into the case. Instead he sought arbitration. We will recount the relevant facts involving the arbitration when we discuss whether the arbitration decision precludes any judgment against Elieff in more detail. For the moment, we need only note two things about the result of the arbitration. First, the arbitrator determined that the amount owing to Kurtin was $24,411,433.86. Second, the arbitrator announced a decision that only gave Kurtin the right, along the lines previously advocated by Elieff’s attorneys in the writ proceeding, to foreclose on Elieff’s own interests in the Joint Entities to the extent of that amount.

4. The Litigation

a. Phase 1 court trial: accounting

After the arbitration, Kurtin filed this action against Elieff and the Joint Entities. A “distribution” clause in the settlement agreement prompted the trial judge to propose a bifurcated trial. The clause provided that “Elieff shall not take any distribution from any of the Joint Entities if such distribution prevents satisfaction of payment of the Settlement Payments.” With reference to that clause, the trial judge noted that Kurtin was “alleging certain causes of action concerning how the defendant handled certain funds or assets of’ the Joint Entities. There was thus a “sub-issue” as to whether “distributions are measured in every entity at the very moment they emerge or whether the alleged pre-existing practice treating the joint entities as a single unified economic force allows somebody to exercise the business judgment to consider it more as a whole and utilize what might be considered net profit from one entity to help preserve the viability of another entity for the purpose allegedly of making more money for everybody as to all the entities.” That is, the judge was concerned whether, if Elieff moved money around from one entity to another for the purpose of maximizing total aggregate profit, such movement might constitute a violation of the agreement.

Phase 1 of the bifurcated proceedings consisted of a five-day trial “concerning the accounting issues arising out” of Kurtin’s claim that Elieff had breached the settlement agreement by, among other things, taking distributions from entities that prevented repayment of remaining payments. Kurtin had charged that some $22.4 million of “distributions” had been diverted to Elieff himself or Elieff-controlled entities.

After hearing evidence, the court made certain limited findings. The “evidence received by the Court,” said the judge, “has, in fact, accounted for every penny of the funds that could be classified in any way as a distribution from a joint entity in the period following the August 2005 settlement agreement.”

But the “every penny” comment did not mean the trial judge was ruling that Elieff had taken no “distributions” in contravention of the agreement. In fact, the trial judge did not actually define the word with the exception of ruling, as a matter of law, that the word “distribution” could not “be interpreted as precluding any and all distributions from being utilized for the good of the whole.”

b. Phase 2: jury trial

The result of phase 1 was an elaborate jury instruction (Jury Instruction No. 10 in the record). The jury instruction encapsulates what happened at phase 1. In summary, the court ruled—and only ruled—that the $22.4 million in “distributions” fell into one of five categories, and left to the jury the task of deciding whether money falling into any given one of those categories was a “distribution” in contravention of the settlement agreement. We quote the relevant parts:

“At an earlier trial, the Court found that after the Settlement Agreement between Mr. Elieff and Mr. Kurtin was signed, Mr. Elieff used distributions of money from various of the Joint Entities in the total amount of $22,384,632.22. . . . The Court found that all of this money was used by Mr. Elieff in the following five categories: (1) management services; (2) management expenses; (3) management costs; (4) loan repayment or return of capital; and (5) payments to Mr. Kurtin. . . . [f] The Court did not decide whether the taking of these distributions of money did or did not violate Paragraph 14 of the Settlement Agreement. The Court found that Paragraph 14 does not preclude Mr. Elieff from taking distributions from the Joint Entities, so long as the distributions were used to enhance, and not prevent or jeopardize, the possibility of Mr. Kurtin being paid the Settlement Payments required under the Settlement Agreement.”

Attached to the instruction was a chart giving the jury a list of 19 specific money outflows totaling $22,384,632.22 from various of the Joint Entities, and a recapitulation of the five categories (management services, management expenses, and so on) which the judge had identified. Fourteen of the 19 outflows listed told the jury only that the court had made “no specific findings other than to conclude that the amount distributed was used for one or more” of those categories. For example: Item No. 4 showed that on November 6, 2006, $1.5 million from one entity, Serrano Heights East, went into “one or more” of those five categories.

The remaining five outflows were more specific. About $4 million was used (by Rancho Etiwanda 685 and Serrano Heights East) to reimburse “Elieff/SunCal” for “costs incurred on joint projects.” Another outflow from Moorpark Equity Partners consisted of $1 million to repay a deposit from a third party, another $250,000 going to pay a third party owner, with the balance (roughly half a million dollars) going either to Moorpark Equity Partners itself ($263,000) or to reimburse “Elieff/SunCal for advances made by Elieff” ($241,500). Only one item, a $1.8 million outflow from Rancho Etiwanda, was unambiguously shown to have been used to repay Kurtin. (Presumably this was the same $1.8 million referenced above as the second installment payment.)

Even though the settlement agreement had not personally obligated Elieff to pay more than $21 million of the $48.8 million buyout price, Kurtin sought recovery from Elieff on the theory that Elieff had misrepresented his authority to obligate the Joint Entities to pay the balance. Concomitantly, Kurtin also claimed that Elieff had breached a provision in the settlement agreement to execute the customary documents “necessary to perfect this security interest” in Elieff’s interests in the Joint Entities. And, as just discussed, Kurtin asserted that Elieff had taken distributions from the Joint Entities that should have gone to pay off the buyout price.

From these basic claims the following six causes of action against Elieff were submitted to the jury: No. 2, for breach of warranty of an agent’s authority under section 2342; No. 3, for breach of warranty of an agent’s authority under section 2343; No. 4, for fraud or intentional misrepresentation in representing to Kurtin that he had the authority to sign for the Joint Entities; No. 5, for negligently misrepresenting that he had the authority to sign for the Joint Entities; No. 6, for breaching the provision of the settlement agreement that he would execute the documents necessary to perfect Kurtin’s security interests in Elieff’s share of the Joint Entities; and No. 7, for breaching the provision of the settlement agreement not to take distributions which prevented the Joint Entities from paying the balance of the buyout amount.

The jury, however, came back with an anomalous result. On the one hand, it found Elieff liable for breaching the warranty of authority under both sections 2342 and 2343, and in each case determined the amount of damage to be $24,411,433.86, which was the exact amount the arbitrator had determined was owing on the unpaid balance. The jury further determined that Elieff had breached the provision requiring him to provide Kurtin with perfected security interests in Elieff’s interests in the Joint Entities. And it likewise determined that Elieff had breached the provision precluding him from taking distributions that prevented the Joint Entities from paying off the balance of the $48.8 million. And, again, in each case the jury assessed Kurtin’s damages at exactly $24,411,433.86.

But on the other hand the jury exonerated Elieff on both the intentional and negligent misrepresentation causes of action. It specifically found, in answering the special verdict form, that Elieff did not know his representation that he had authority to obligate the Joint Entities was false when he made it. And it specifically found that Elieff did not make the representation recklessly and without regard for its truth. Further, the jury concluded that Elieff did not lack reasonable grounds to believe his representation was true when he made it. Likewise, the jury found, in answering the special verdict form in regard to liability under section 2343, that Elieff did not “lack a good faith belief’ in his authority to sign on behalf of the Joint Entities.

But then again, the jury found liability under section 2343 because Elieff had committed an act “wrongful in its nature” when he signed on behalf of the Joint Entities. As we discuss in more detail below, Kurtin’s counsel had argued to the jury that the precise acts committed by Elieff that were “wrongful in their nature” were the alleged intentional and negligent misrepresentations, and yet the jury absolved Elieff of both intentional and negligent misrepresentation.

c. Judgment, posttrial motions and appeal

Judgment was filed May 17, 2010, decreeing that Kurtin recover $24,411,433.86 from Elieff. Within 12 days Elieff gave notice of his intent to move for new trial. The notice was supported by four juror declarations all stating that the jury “solely” looked at the $24,411,433.86 from the arbitration decision, and (as stated in each of the four declarations) did not discuss or “look at any other evidence to determine damages.” The new trial motion focused on the anomaly of liability under section 2343 in light of the jury’s exoneration of Elieff on the intentional and negligent misrepresentation claims. The motion further pointed out that even Kurtin’s own counsel had not asked the jury for damages in excess of $8 million on the violation of the no-distribution clause. Elieff also filed a motion for judgment notwithstanding the verdict (JNOV).

The trial judge denied the motion for JNOV, but granted the new trial motion as to damages only. The judge reasoned that the evidence would not support a $24,411,433.86 verdict on any of the four causes of action on which Kurtin had prevailed. The court noted that the $24,411,433.86 figure “exceeded the total amount of all” distributions from the Joint Entities, and even exceeded “Kurtin’s argued-for damages of $7,852,222.22.” The judge in particular rejected Kurtin’s argument that the $24,411,433.86 might be justified under section 2343 on the theory that Elieff’s “ ‘wrongful acts’ ” subjected him to the “full liability of his principal.” She ruled that damages under section 2343 were governed by section 3318, and under section 3318, Elieff could only be liable for what Kurtin could have “recovered and collected” from the Joint Entities.

Elieff filed a timely notice of appeal, challenging the judgment, the order denying the JNOV motion, and the order granting in part and denying in part his motion for new trial. Kurtin countered with a notice of cross-appeal, also challenging the order granting in part and denying in part the new trial motion.

DISCUSSION

1. The Effect of the Arbitration

Elieff contends that the arbitration decision precludes the subsequent civil court judgment (either by way of res judicata or collateral estoppel, or both). Because the arbitration issue most clearly brings the various textual provisions of the settlement agreement into sharp relief, we now set them forth:

a. Relevant terms of the settlement agreement

A number of particular features of the settlement agreement are relevant. First, the recitations at the beginning purport to treat Elieff and the Joint Entities as one collective entity. (“This Settlement Agreement is entered into . . . between Todd Kurtin . . . and Bruce Elieff, the Elieff Separate Entities identified in Exhibit ‘A’ and the Joint Projects identified in Exhibit ‘B’ on the other hand (collectively ‘Elieff’).”)

Second, the text of the agreement is clear that Elieff personally was only responsible for the initial $21 million installment payment, and not for the balance contemplated to come from the Joint Entities. The point is made in three separate instances. Paragraph 2 directly says it: “Elieff and each of the Joint Entities are jointly and severally liable for making the first Settlement Payment in the amount of $21,000,000. The Joint Entities are liable for making the remainder of the Settlement Payments.” Paragraph 3 strongly implies it, both by (a) defining default in terms of the particular “Elieff Party obligated to pay” (thus excluding Elieff parties, like Elieff himself, not obligated to pay) and also by (b) specifically separating Kurtin’s remedy for failure to pay the first installment from failure to pay the other installments.

Third, the text of the settlement agreement contemplates that the assets of the Joint Entities would secure the obligations of the Joint Entities under the agreement. It does so in paragraph 14 by both requiring Elieff personally to “execute customary documents necessary to perfect” a security interest to be held by Kurtin and by preventing Elieff from taking distributions which impair that security. Rather than attempting to paraphrase the remainder of that paragraph, we now quote it in full: “Payment to Kurtin of the Settlement Payments shall be secured by the interest of Elieff and the Joint Entities in the projects owned by the Joint Entities. Elieff and the Joint Entities shall execute customary documents necessary to perfect this security interest, including UCC-1 filings, provided however that Kurtin shall, within ten (10) business days of written notice execute those consents and/or subordination agreements necessary for Elieff to refinance the Pacific Point project. Elieff shall not take any distribution from any of the Joint Entities if such distribution prevents satisfaction of payment of the Settlement Payments.”

Fourth, paragraph 15 of the settlement agreement contains an arbitration clause. The arbitration clause reads: “The Parties believe that all of the material terms of their agreement are set forth herein. It is the intent of the parties that this Settlement Agreement shall be final and binding and that this Settlement Agreement shall be enforceable under C.C.P. Section 664.6. In the event that any Party claims that one or more material terms have been omitted from this Settlement Agreement, or that the Parties failed to reach an agreement as to one or more material terms, or that any other defect exists with respect to this Settlement Agreement that would make it unenforceable, the Parties agree to final and binding arbitration before Tony Piazza or, if Mr. Piazza is unable, before a mutually agreeable arbitrator. At such arbitration, the arbitrator shall imply a reasonable term that the arbitrator finds consistent with the purpose and intent of this Settlement Agreement or otherwise cure any defect in the Settlement Agreement by amending its terms. The sole act of the arbitrator shall be to issue an amendment to this Settlement Agreement implying such additional terms, curing any ambiguity or otherwise curing any defect in this Settlement Agreement that would make this Settlement Agreement unenforceable. The Settlement Agreement, together with any amendment issued by the arbitrator, shall be enforceable under C.C.P. Section 664.6.”

Finally, in paragraph 17, the agreement contains an integration clause: “This agreement contains the entire and only understanding between the Parties pertaining to the subject matter contained in it and supersedes any and all prior and/or contemporaneous oral or written negotiations, agreements, representations and understandings. This agreement shall be governed by California law.”

b. The arbitration award

Despite the “sole act” language in the settlement agreement, at the arbitration Kurtin sought a direct award for the balance due. His arbitration brief asserted; “Therefore, the arbitration award here should include an award against Elieff personally for the principal balance owing under the Settlement Agreement which, as explained below, is now $22,934,809.16 plus interest, attorney’s fees and costs in an amount according to proof at the hearing.”

What Kurtin received, however, was in substance simply an amendment to the terms of the settlement agreement. The arbitrator decreed that any recovery against Elieff would be restricted to Elieff’s own interests in the Joint Entities, as distinct from the total assets of the Joint Entities themselves: “If payment of $24,411,433.86 is not made to Todd Kurtin by June 30, 2007, then Kurtin shall have the right to require Bruce Elieff to transfer to Kurtin or his designee by July 10, 2007, any and all of Elieff’s right, title and interest—held directly or indirectly—in and to any or all of the Joint Entities listed on ‘Exhibit B’ to the Settlement Agreement of August 5, 2005 and Elieff shall promptly execute all documents necessary to effectuate such transfer.”

The narrowness of the arbitrator’s decision (it would be a misnomer to call it an “award,” though the arbitrator himself referred to it as that) was emphasized by a statement which soon followed the sentence quoted above, the essence of which was that Kurtin could still assert further rights under the settlement agreement: “Exercise of this right [to require Elieff to give security in his own interests in the Joint Entities] shall not, of itself, extinguish Kurtin’s rights to payment under the Settlement Agreement, but shall only reduce the amount due under the Settlement Agreement by the fair market value of any Elief [szc] right, title or interest transferred to Kurtin.”

The second paragraph of the award then bolstered the right of Kurtin to recover from Elieff’s own interests in the Joint Entities by prohibiting Elieff from encumbering those interests until Kurtin was “paid in full.” It also provided that Elieff would hold “in constructive trust for Kurtin anything he received from said Joint Entities from this date [(June 11, 2007)] forward.”

The next 2 one-sentence paragraphs suggested that there was no winner in the arbitration. Paragraph one read: “No attorney fees or costs are awarded.” Paragraph two read: “This award is not intended to preclude any other remedy that Kurtin may have at law, or in equity.”

The final paragraph of the award referred back to the arbitration paragraph of the original agreement. It self-consciously recognized that arbitration decision was, in fact, amending the terms of the original settlement agreement: “This award shall also constitute an amendment to the Settlement Agreement of August 15, 2005, pursuant to Paragraph 15 of that Agreement, and shall be enforceable under C.C.P. Section 664.6, as well as enforceable as an arbitration award.”

c. Discussion

Elieff argues the arbitration decision, as the result of a prior proceeding, necessarily precluded further litigation of his liability on the unpaid balance under the settlement agreement in this civil action as a matter of res judicata. As summarized by our Supreme Court in Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797 [108 Cal.Rptr.3d 806, 230 P.3d 342], the doctrine of res judicata requires that the cause of action in the prior proceeding be the same as in the present cause of action, the prior proceeding result in a final judgment on the merits, and the parties be the same as in the prior proceeding. (Or in privity with parties in the prior proceeding.) If applicable, the doctrine “not only precludes the relitigation of issues that were actually litigated, but also precludes the litigation of issues that could have been litigated in the prior proceeding.” (Bullock v. Philip Morris USA, Inc. (2011) 198 Cal.App.4th 543, 557 [131 Cal.Rptr.3d 382].)

Elieff emphasizes the “could have been” aspect of the res judicata doctrine. He argues that Kurtin asserted his “primary right” to be made whole in the arbitration proceeding, which is the same primary right he subsequently asserted in this civil case, and therefore must be satisfied with the decision the arbitrator handed down.

The flaw in Elieff’s logic is that he confuses what Kurtin asked for in the arbitration with the arbitrator’s power to give it in light of the scope of the arbitrator’s powers to which the parties had agreed. It is well established that the scope of an arbitrator’s powers are fixed by the agreement to arbitrate. (E.g., Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 8 [10 Cal.Rptr.2d 183, 832 P.2d 899] [the “ 1 “powers of an arbitrator are limited and circumscribed by the agreement or stipulation of submission” ’ ”]; Kelly Sutherlin McLeod Architecture, Inc. v. Schneickert (2011) 194 Cal.App.4th 519, 528 [125 Cal.Rptr.3d 83] [“An arbitrator’s powers ‘derive from, and are limited by, the agreement to arbitrate.’ ”].)

Here, the settlement agreement conferred only limited powers on the arbitrator. There is no provision giving the arbitrator power to make an award against any party for money. The arbitrator’s powers are limited to interpreting the settlement agreement and, at the most, amending it to insert intended but inadvertently omitted material terms.

And the arbitrator did just that. He interpreted and amended the agreement to insert terms which had been understood by the parties, but did not find their way into the final text. Thus, to the degree that the agreement was initially ambiguous as to Kurtin’s right to security involving all the assets of each Joint Entity, the arbitrator cleared up that ambiguity by limiting Kurtin’s right to security to just Eliejf’s interests in each Joint Entity.

The “primary right,” then, that was adjudicated in the arbitration was not Kurtin’s “right to be made whole,” but Kurtin’s right, under the agreement, to have the mediator who midwifed the settlement agreement interpret, and if necessary amend, the agreement. This case thus presents the opposite of the usual could-have-been-decided situation in res judicata analysis, where a litigant seeks to litigate in a second proceeding what could have been litigated in the first place. Here, a litigant sought to litigate more in the first proceeding than he could have possibly obtained from it.

Elieff’s argument that O’Malley v. Petroleum Maintenance Co. (1957) 48 Cal.2d 107 [308 P.2d 9] (O’Malley), University of San Francisco Faculty Assn. v. University of San Francisco (1983) 142 Cal.App.3d 942, 954 [191 Cal.Rptr. 346] (University of San Francisco), Felner v. Meritplan Ins. Co. (1970) 6 Cal.App.3d 540, 544 [86 Cal.Rptr. 178] (Felner), and Crofoot v. Blair Holdings Corp. (1953) 119 Cal.App.2d 156, 186-187 [260 P.2d 156] (Crofoot) compel a contrary result is unpersuasive. All these cases are distinguishable.

O’Malley and University of San Francisco both involved second agreements to specifically submit disputes to arbitrators which clearly encompassed the scope of what was later challenged in court. (See O’Malley, supra, 48 Cal.2d at pp. 108 [submission agreement made after initial collective bargaining agreement specifically included question of arbitrability by arbitrators], 110 [holding employer bound by terms of its submission agreement]; University of San Francisco, supra, 142 Cal.App.3d at pp. 945, 953-954 [noting that “additional agreement” plus “discussion at the hearing” showed that supplemental pension provisions “were properly a subject of arbitration,” plus “the parties stipulated” that the arbitrator had the power to decide issue of his own “jurisdiction”].)

Crofoot involved an agreement to arbitrate after a “plethora” of litigation which, by its terms, included issues of law as well as fact. The court rejected, as a matter of textual interpretation of the agreement to arbitrate, one party’s argument that the terms of the agreement “necessarily” excluded issues of law. (Crofoot, supra, 119 Cal.App.2d at pp. 164, 186.) Likewise, in Felner, the text of the agreement to arbitrate—there, an uninsured motorist provision in an insurance policy—was held “broad enough” and “sufficiently comprehensive” to include a dispute over whether an uninsured motorist actually came into “physical contact” with the insured. (Felner, supra, 6 Cal.App.3d at pp. 543-544.)

In the case before us, unlike O’Malley and University of San Francisco, there was no second agreement specifically to arbitrate which encompassed the arbitrability of some issue which might have been outside some initial agreement. And unlike Crofoot and Felner, the actual text of this arbitration agreement—here, the settlement agreement itself—will not support the resolution by the arbitrator of the question of damages. We need only note additionally that while Kurtin may have sought more from the arbitrator than the arbitrator had the power to give, Elieff vigorously opposed Kurtin’s attempt, and Elieff was successful in that opposition.

2. The Mediation Privilege

What we have just said about the nature of the settlement agreement bears on Elieff’s main argument against the judgment, namely that Kurtin’s invocation of the mediation privilege denied Elieff a fair trial. Elieff’s argument goes like this: Various terms of the settlement agreement were ambiguous, particularly the clauses requiring Elieff to execute “customary” security documents. Typically, in contract litigation, extrinsic evidence is allowed so that the trier of fact may resolve the issue of what the parties intended when they used ambiguous terms in a contract. (E.g., Duncan v. The McCaffrey Group, Inc. (2011) 200 Cal.App.4th 346, 381 [133 Cal.Rptr.3d 280], disapproved on another point in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169, 1176, 1182 [151 Cal.Rptr.3d 93, 291 P.3d 316] [“extrinsic evidence can be admitted to explain the ambiguity in the contract”].) But here, by asserting the “mediation privilege” (see Evid. Code, § 1119), Kurtin effectively prevented the trier of fact from hearing evidence from the mediation bearing on any ambiguities in the settlement agreement. Therefore, just as an attorney sued by a former client for malpractice must be allowed to use otherwise confidential information received from that client (cf. McDermott, Will & Emery v. Superior Court (2000) 83 Cal.App.4th 378, 385 [99 Cal.Rptr.2d 622]), Kurtin’s decision to hold firm to the mediation privilege means Elieff did not get a fair trial. Elieff should either have been allowed to present evidence otherwise precluded by the mediation privilege to defend himself or Kurtin should have been required to drop his claims. (See Solin v. O’Melveny & Myers (2001) 89 Cal.App.4th 451 [107 Cal.Rptr.2d 456] [client’s invocation of attorney-client privilege vis-á-vis attorneys sued for malpractice required dismissal of malpractice action against them].)

There are two flaws in the argument: One, Elieff already had a chance to clear up ambiguities in the settlement agreement before trial in arbitration. In fact, he actually used the arbitration process to clear up, in his favor, at least one ambiguity. (Here the parties acknowledge that the initial out-of-court proceeding was a mediation. The later proceeding which resulted in clarification of the settlement agreement is referred to by the parties as an arbitration. Mediation and arbitration are two different things, as Evid. Code, § 1119, subd. (a) makes clear. What went on at the mediation was the subject of the mediation privilege. Further proceedings in arbitration would not be so privileged.)

Two, even if, arguendo, Elieff did not have a chance to clear up ambiguities by way of arbitration prior to going to civil trial, Kurtin still did not forfeit his right to sue Elieff by asserting the mediation privilege. The California Supreme Court has clearly signaled the policy behind the mediation privilege is so strong that California law is willing to countenance the “high price” of the loss of relevant evidence to protect the privilege. (Cassel v. Superior Court (2011) 51 Cal.4th 113, 138 [119 Cal.Rptr.3d 437, 244 P.3d 1080] (conc. opn. of Chin, J.) (Cassel).)

a. Elieff’s chance to clear up ambiguities before trial

The first flaw in Elieff’s mediation privilege argument is that he ignores the opportunity he had to resolve ambiguities in the settlement agreement by returning to the original mediator in arbitration. Accordingly, Elieff cannot now be heard to complain that he was denied the chance to resolve ambiguities at trial. The arbitration paragraph gave each party the right to go to arbitration in front of the one person most familiar with what the parties achieved at their mediation—the mediator himself—where any ambiguity in its terms might be resolved.

As against such an opportunity, Elieff counters with the argument that the arbitration paragraph (giving the parties the right to return to the arbitrator) really is restricted to situations absolutely necessary to make the settlement agreement enforceable. Outside of those situations, he now argues, the arbitrator did not have the power to interpret ambiguous terms in the settlement agreement.

We cannot agree. The text of the arbitration clause is, on balance, most naturally read to set forth three sets of arbitral powers, with only the last of those three tethered to the idea of some need to avoid making the agreement unenforceable.

We begin by observing the arbitration clause (quoted in Ml on p. 465, ante) consists of six sentences. The first two make the points that the settlement agreement consists of all material terms, and the parties want the agreement to be enforceable, while the sixth sentence specifies the intent that the agreement indeed be enforceable as the settlement of pending litigation under Code of Civil Procedure section 664.6.

It is sentences 3 and 5 on which Elieff relies to confine the arbitrator’s power to interpret or cure ambiguities only to situations where the cure was absolutely needed to preserve enforceability. For reader convenience, we quote those two sentences again here, and include the intervening sentence 4:

“[Sentence 3:] In the event that any Party claims that one or more material terms have been omitted from this Settlement Agreement, or that the Parties failed to reach an agreement as to one or more material terms, or that any other defect exists with respect to this Settlement Agreement that would make it unenforceable, the Parties agree to final and binding arbitration before Tony Piazza or, if Mr. Piazza is unable, before a mutually agreeable arbitrator. [Sentence 4;] At such arbitration, the arbitrator shall imply a reasonable term that the arbitrator finds consistent with the purpose and intent of this Settlement Agreement or otherwise cure any defect in the Settlement Agreement by amending its terms. [Sentence 5:] The sole act of the arbitrator shall be to issue an amendment to this Settlement Agreement implying such additional terms, curing any ambiguity or otherwise curing any defect in this Settlement Agreement that would make this Settlement Agreement unenforceable.”

Readers will see that sentences 3 and 5 are constructed in two parallel series of three clauses, each clause dealing with, in order, (1) omission of material terms; (2) curing ambiguity or disagreement as to those material terms; and (3) unspecified defects. In each sentence, only the last clause, concerning unspecified defects, is unambiguously connected to the idea of remedying unenforceability. Thus, to make the unenforceability language apply to either of the first two clauses, one must relate back to the first and second clauses the unenforceability language one finds in the third clause. And that of course is how Elieff reads sentences 3 and 5 in this appeal.

To be sure, Elieff’s argument is consistent with the references to “other defect” in sentence 3, and the reference to “otherwise” in sentence 5. Those two references can indeed be stretched to suggest a connection between what happens in the third clause and what has gone before in clauses 1 and 2.

All else being equal, however, courts prefer a more natural reading of text to a less natural one, whether that text be found in a statute (e.g., Runyon v. Board of Trustees of California State University (2010) 48 Cal.4th 760, 768 [108 Cal.Rptr.3d 557, 229 P.3d 985]; Munson v. Del Taco, Inc. (2009) 46 Cal.4th 661, 672 [94 Cal.Rptr.3d 685, 208 P.3d 623]) or a contract (Lapp-Gifford Co. v. Muscoy Water Co. (1913) 166 Cal. 25, 27-28 [134 P. 989] [more natural interpretation of letter to creditor containing check for “ ‘final payment’ ” was that it did not refer to payment in full of the disputed debt]; Dover Village Assn. v. Jennison (2010) 191 Cal.App.4th 123, 128-129 [119 Cal.Rptr.3d 175] [more natural reading of homeowners association covenants, conditions and restrictions was that sewer pipes were not “ ‘exclusive use’ ” items for purposes of repair responsibility].) And of course courts are directed by statute to read contracts as a whole, so, if reasonably practical, no part is deprived of effect. (Civ. Code, § 1641.)

In this case, we conclude Elieff’s interpretation of the arbitration provision is not the more natural reading and does not give effect to the whole of the arbitration provision.

First, Elieff’s reading is by no means compelled. Sentence 3’s phrase “other defect,” and sentence 5’s use of the word “otherwise” do not necessarily require a connection to the first two clauses. Logically, each of the three clauses can be seen as independent of the others, i.e., the arbitrator has three sets of powers: (1) omission of material terms; (2) curing ambiguity or disagreement as to material terms; and (3) curing any unspecified defects which might make the agreement not enforceable. The independence of the three clauses is confirmed when one realizes that, grammatically, in sentence 3 the third clause is not even necessary to make an intelligible English sentence. Sentence 3 is written so the first two clauses easily survive even if the third were completely omitted. (Thus: “In the event that any Party claims that one or more material terms have been omitted from this Settlement Agreement, or that the Parties failed to reach an agreement as to one or more material terms, ... the Parties agree to final and binding arbitration . . . .”)

By the same token, sentence 5, like sentence 3, also can be read logically to set forth three independent clauses, though the gerundrbased parallel construction (“implying . . . curing ... or otherwise curing”) makes it impossible to simply omit the third clause. Even so, the “or” separating the third clause from the other two emphasizes the independence of each clause: Either (1), (2) “or otherwise” (3). In that sequence, whatever is attached to (3) is not necessarily attached to (1) or (2).

Second, Elieff’s reading of the arbitration clause tends to reduce sentence 4 to a meaningless afterthought. Sentence 4 begins by pegging off sentence 3 (“[a]t such arbitration”) but articulates two powers of the arbitrator without any qualification as to enforceability. To be sure (as shown by sentences 1, 2 and 6), the parties clearly wanted their mediated agreement to be enforceable. But if they wanted to confine the arbitrator’s powers solely to what was necessary to “save” that enforceability, there was no need to write sentence 4. By stating powers in sentence 4 without any reference to enforceability, an intention is evidenced to give the arbitrator powers to construe the contract without a need to justify their use on a “saving” theory—an intention particularly demonstrated by the structure of the preceeding sentence 3, where the reference to enforceability (as shown above) is not even grammatically necessary.

Third, and most importantly, the last antecedent rule strongly indicates the arbitrator’s powers are not necessarily pinned down by a requirement to only be exercised to “save” the agreement. (See ACS Systems, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 147 Cal.App.4th 137, 150 [53 Cal.Rptr.3d 786] [applying last antecedent rule, which usually applies to statutes, to contracts as well].)

The last antecedent rule is the commonsense presumption that the tail should not wag the dog in sentence construction, i.e., qualifiers apply to words and phrases immediately preceding them, as distinct from words and phrases more remote. (See Renee J. v. Superior Court (2001) 26 Cal.4th 735, 743 [110 Cal.Rptr.2d 828, 28 P.3d 876].) In this regard, we note that if the parties really meant to confine the arbitrator’s power to interpret terms or cure ambiguities to only situations where it was absolutely necessary to make the agreement enforceable, they could easily have been much clearer than appending that limitation to the last of three successive clauses. (Here’s one possibility: “In order to make sure this agreement is absolutely enforceable, the arbitrator shall have the power to (1) insert omitted terms, (2) cure ambiguities, or (3) remedy defects, but the arbitrator’s power to do so shall be limited only to those situations where it is necessary to make sure the agreement is enforceable; otherwise the arbitrator shall have no power at all.”)

Fourth, a reading of the arbitrator’s powers not dependent on a need to “save” the agreement was one Elieff himself used with ease at both the trial and appellate levels in other contexts when describing the arbitration clause. At the trial level, in the context of opposing Kurtin’s attempt to obtain judgment under section 664.6 of the Code of Civil Procedure, Elieff’s trial counsel observed: “The Settlement Agreement provided for final and binding arbitration in front of the person who mediated the settlement, Tony Piazza, if a party claimed that a material term had been omitted or that another defect with the agreement existed.” The sentence lacks any qualifier about “only if necessary to save the agreement.”

Likewise, at the appellate level, after Kurtin sought writ relief in this court because the trial court refused to grant the Code of Civil Procedure section 664.6 motion, Elieff’s counsel quoted with approval Kurtin’s counsel’s characterization of the arbitration provision that “ ‘if there’s anything in this agreement that prevents the express intent of the parties from being carried out, the arbitrator can fix it basically.’ ” The context of that quotation, ironically, was Elieff’s point that Kurtin already had a remedy to enforce the agreement in arbitration. And again, nothing was said about enforceability qua enforceability being a prerequisite for resort to the arbitrator.

And finally, in this regard, we also further note that at the arbitration that was actually held, Elieff won an important interpretational victory independent of any need to save the contract—a victory he certainly has not repudiated as beyond the arbitrator’s powers. Namely, he established that Kurtin’s claims under the agreement only extended to Elieff’s own interests in the Joint Entities, as distinct from being directly against the Joint Entities themselves.

In sum, on balance, we conclude the better reading of the text of the arbitration clause is that Elieff could have cleared up any ambiguities he thought necessary to his defense by going back to the mediator prior to trial. Doing so, we note, would also have been consonant with the zealous regard the law affords the mediation privilege, which we now address.

b. California’s zealously guarded mediation privilege

Even if the arbitration clause is limited to just clearing up what is minimally necessary to have an enforceable agreement, Elieff’s more basic argument—that Kurtin forfeited his claims against Elieff by invoking the mediation privilege (see Evid. Code, §§ 1115-1128 and particularly § 1119)—cannot prevail. The mediation privilege carries with it different dynamics than simple attorney malpractice cases where a party can indeed be required to give up an evidentiary privilege as the price of asserting its claim. (E.g., Solin v. O’Melveny & Myers, supra, 89 Cal.App.4th at p. 467; McDermott, Will & Emery v. Superior Court, supra, 83 Cal.App.4th at p. 385 [corporate outside counsel entitled to judgment in shareholder derivative action where counsel could not make use of attorney-client communications].) Elieff’s theory concerning mediation simply cannot be squared with what our Supreme Court unanimously both did and said in Cassel, supra, 51 Cal.4th 113.

In Cassel, a plaintiff in a legal malpractice action claimed his attorneys had, in a pretrial mediation, pressured, harassed and otherwise coerced him into accepting a lower price than he wanted for certain licensing rights. The Supreme Court upheld a trial court order precluding the admission of evidence related to the mediation, including the discussions the plaintiff had with his attorneys. (Cassel, supra, 51 Cal.4th at pp. 121, 138.) The high court acknowledged that the exclusions “may indeed hinder the Ghent’s ability to prove a legal malpractice claim against the lawyers.” (Id. at p. 122.) But, as Justice Chin separately wrote to explain why he was “reluctantly” concurring in the judgment, the high court was willing to pay such “a high price ... to preserve total confidentiality in the mediation process.” (Id. at p. 138 (conc, opn. of Chin, J.).)

The application of the mediation privilege in Cassel meant, under the particular circumstances of that case, the plaintiff’s ability to present a claim was hindered. Here, Elieff argues that application of the mediation privilege supposedly hindered his ability as defendant to defend against a claim. And on that difference—the difference between one’s status as a plaintiff or as a defendant—Elieff hangs all attempts to distinguish Cassel.

But we cannot see any meaningful difference between plaintiffs and defendants in the mediation privilege situation. In fact, differentiating between them makes no sense. One need only think of the consequence of Elieff’s position to understand it was never intended by the Legislature. Under Elieff’s theory, parties to a mediation would know that if they were successful in achieving a mediated settlement in which they were the obligee, they could not enforce the settlement without running the risk of their adversaries claiming terms of the settlement were ambiguous, and forcing either (1) the disclosure of communications made in the course of the mediation or (2) the loss of the very benefit of that mediation, which was the mediated agreement itself. By contrast, obligors would have a natural advantage over obligees. They could put obligees to the Hobson’s choice of giving up the benefit of the settlement or allowing the airing of privileged communications. The Legislature obviously never intended such asymmetry.

Due process is an underlying theme of Elieff’s argument. Somehow, he says, it was fundamentally unfair that he was sued under a mediated agreement but was not allowed to bring evidence bearing on what the parties discussed concerning the actual terms of that agreement. But the Cassel decision itself confronted and rejected the idea that enforcing the mediation privilege statutes “in strict accordance with their plain terms” deprives a civil litigant of due process. (Cassel, supra, 51 Cal.4th at p. 124.) Said the court: “We further emphasize that application of the mediation confidentiality statutes to legal malpractice actions does not implicate due process concerns so fundamental that they might warrant an exception on constitutional grounds. Implicit in our decisions ... is the premise that the mere loss of evidence pertinent to the prosecution of a lawsuit for civil damages does not implicate such a fundamental interest.” (Cassel, supra, 51 Cal.4th at p. 135, italics added.)

Moreover, and significantly, a page after the “mere loss of evidence” statement, the Cassel opinion again rejected the notion that somehow due process was implicated by protection of the privilege, but phrased its idea in such a way as to apply to both sides of a dispute; “The Legislature decided that the encouragement of mediation to resolve disputes requires broad protection for the confidentiality of communications exchanged in relation to that process, even where this protection may sometimes result in the unavailability of valuable civil evidence.” (Cassel, supra, 51 Cal.4th at p. 136, italics added.)

This court followed Cassel in its recent decision in Provost v. Regents of University of California (2011) 201 Cal.App.4th 1289 [135 Cal.Rptr.3d 591] (Provost), where we rejected the claim of a party seeking to disavow a stipulated settlement arrived at through mediation, even though the party claimed coercion from threats of criminal prosecution by the other party if he did not enter into the agreement. (See id. at pp. 1302-1304.) If evidence of coercion in the achievement of a mediated agreement itself was properly excluded by the mediation privilege in Provost, how much less compelling is Elieff’s contention that Kurtin should forfeit his claim to repayment where the assertion of the privilege entails only an incidental loss of evidence from a mediation bearing on allegedly ambiguous contract terms?

Elieff places great reliance on In re Marriage of Kieturakis (2006) 138 Cal.App.4th 56 [41 Cal.Rptr.3d 119] (Kieturakis) for his forfeiture theory, but the case does not help him.

Kieturakis is a somewhat complicated case that arose from a mediated divorce settlement which lopsidedly favored the husband, so we must explore it in some detail to show why it does not stand for what Elieff claims. In fact, Kieturakis is a case which strongly upholds the mediation privilege.

After the mediated divorce settlement in Kieturakis the wife attempted to set it aside. Under substantive family law, the question then arose as to whether the husband had exerted undue influence in obtaining the settlement agreement, and, again as a matter of substantive family law, on that issue the husband bore the burden of showing he did not exert undue influence. To ascertain whether the husband had indeed exerted undue influence, the trial court allowed in evidence from the mediation in the interests of “ ‘justice’ ” (Kieturakis, supra, 138 Cal.App.4th at p. 75)—something which, we now note, would clearly not be correct under Cassel or Provost. But, having made that mistake, the trial court concluded the husband had carried his burden of showing an absence of undue influence, so the trial court did not set aside the agreement. In effect, the trial court’s finding the husband had indeed carried his burden rendered harmless the earlier error of admitting evidence from the mediation.

Accordingly, the appellate court affirmed the order refusing to set aside the agreement. However, in affirming, it took the opportunity to explain that because the settlement was the product of mediation, the trial court had still erred in determining the husband bore the burden of proof. (Kieturakis, supra, 138 Cal.App,4th at p. 85.) To apply a presumption of undue influence from a lopsided agreement arising out of mediation would undermine the Legislature’s preference for mediation. (Id. at pp. 85-87.)

It was in the process of recognizing that there was indeed a cost to be paid for the Legislature’s value judgment placing a higher value on mediation than on the substantive family statutes involving possible undue influence, that the Kieturakis court made a comment which Elieff now asserts requires dismissal of Kurtin’s claims. “However, if there is a price to be paid in fairness to preserve mediation confidentiality, the cases have required that it be paid by parties challenging, not defending, what transpired in the mediation.” (Kieturakis, supra, 138 Cal.App.4th at p. 87.)

We are not persuaded by Elieff’s argument connecting (a) the observation made by the Kieturakis court and (b) the idea Kurtin was put to a forced choice of giving up the mediation privilege or dropping his claims. Elieff’s argument is a non sequitur. It does not follow from (a) Kieturakis’s proposition that a party to a mediated agreement who later wants to get out from under the terms of that agreement cannot use evidence from the mediation to achieve her purpose if the other party asserts the mediation privilege to Elieff’s proposition that (b) a party seeking to enforce a mediated agreement cannot do so without simultaneously losing the right to assert the mediation privilege.

Kieturakis’s observation was, in context, a simple recognition that a party, such as the wife in the case before it, who seeks to set aside an agreement resulting from a mediation, will have a “price” to pay in being unable to use what happened at the mediation to challenge the agreement. And under Cassel, that recognition is fairly unremarkable. Indeed, as applied to the case before us, the observation only strengthens our conclusion that the mediation privilege statutes mean that it was Elieff, not Kurtin, who was required to pay the “price” of the Legislature’s policy in favor of mediation confidentiality. The whole point of the passage in Kieturakis was that the mediation statutes reflect such a strong legislative policy that it even allows “unfair agreements to stand.” (Kieturakis, supra, 138 Cal.App.4th at p. 87.) As with Provost, if the Legislature is willing to allow even unfair mediated agreements to stand as a result of mediation confidentiality, it certainly is willing to stomach whatever incidental unfairness might result from a party’s inability to use mediation evidence to explain allegedly ambiguous terms within a mediated agreement.

In sum, Kurtin did not lose this case by asserting a mediation privilege which the Legislature has chosen to zealously protect.

3. The “Accounting” and Damages

Elieff argues that cause of action No. 7 (for violation of the “distribution” clause in paragraph 14) is precluded from any retrial because the “accounting” which Kurtin received established that Elieff took no “profits” and spent funds only for authorized purposes. As Elieff’s trial attorney said after the trial judge delivered her decision in the phase 1 trial from the bench, “I want to address the issue of whether there’s anything left to submit to a jury on the seventh cause of action.”

The argument overstates what happened in the trial court. There was indeed much left after the phase 1 trial. The trial judge did not rule that Elieff took no “distributions.” She ruled, rather, that money which was used by Elieff to maximize the “good of the whole” would not be covered by the distribution clause.

Only one of the five destinations of the outflows identified by the trial court, payments to Kurtin, is unequivocally not a “distribution” taken by Elieff to “prevent” repayment of the unpaid balance. (That distribution was the $1.8 million that was itself a payment to Kurtin.) A reasonable jury might readily conclude that outflows within the other four categories (management services, management expenses, management costs, return of capital) both (a) did not benefit the Joint Entities as a whole and (b) prevented repayment of the unpaid balance. And the ultimate categorization of the various outflows was left to the jury. The trial judge granted a new trial on damages because the numbers of available outflows did not add up to the $24.4 million which the jury awarded on the seventh cause of action.

Put another way, the “gist” or “essence” of Kurtin’s seventh cause of action was not one in equity. (Cf. De Guere v. Universal City Studios, Inc. (1997) 56 Cal.App.4th 482, 507-508 [65 Cal.Rptr.2d 438] [explaining when parties are, or are not, entitled to jury trial in context of contract actions involving accountings].) Tracing the various outflows from discrete Joint Entities was only ancillary to the true gravamen of that cause of action, focused as it was on whether various outflows came within the category of distributions that prevented repayment. A reasonable jury might very well find that much mischief might be done under the cover of management services, expenses, and costs. Even capital that was “returned” to Elieff might, if not otherwise linked to the “good of the whole,” and if that return had the effect of preventing repayment, constitute an improper “distribution” under the distribution clause. With the exception of the “good of the whole” qualifier appended to the definition of distribution by the trial judge, the whole tenor of the settlement agreement was that Kurtin would be paid off the top from any money available for outflows from any of the Joint Entities, even if it meant that Elieff might go out of pocket.

By the same token, we must reject Elieff’s argument that Kurtin did not prove any damages. While a requirement of actual collectability from the Joint Entities puts a limit on Elieff’s liability under section 2342 and under section 2343 per section 3318 (see discussion below in pt. 5. of this opinion), Kurtin had no need to establish collectability under his cause of action for violation of either the “distribution” or the security-document clauses of paragraph 14. And phase 1 showed that of $22.4 million in outflows from Joint Entities identified in the phase 1 trial, only $1.8 million was shown to have been paid to Kurtin. That leaves about $20 million in distributions for which Elieff might (at least in theory) be personally hable under the distribution and security clauses of the settlement agreement alone.

4. Inconsistent Verdicts Regarding Section 2343

Kurtin’s cause of action No. 3 for violation of section 2343 presents the problem of inconsistent jury verdicts. The text of section 2343 plainly requires either the absence of a good faith belief on the part of the agent that he or she “has authority” to enter into the contract on behalf of a principal, or acts “wrongful in their nature.” Here is the text of section 2343: “One who assumes to act as an agent is responsible to third person