Filed 6/1/16

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION ONE

WILLIAM E. RICE,

Plaintiff and Appellant,

v.

GARY P. DOWNS,

Defendant and Appellant.

___________________________________

GARY P. DOWNS,

Plaintiff and Appellant,

v.

WILLIAM E. RICE,

Defendant and Appellant.

 B261860

 (Los Angeles County

 Super. Ct. No. BC506921)

 B264964

 (Los Angeles County

 Super. Ct. No. BC507050)

APPEALS from a judgment of the Superior Court of Los Angeles County. Yvette 

M. Palazuelos, Judge. Affirmed in part and reversed in part.

Glaser Weil Fink Howard Avchen & Shapiro, Michael Cypers, Julia B. Cherlow;

Greines, Martin, Stein & Richland, Robin Meadow and Jeffrey E. Raskin for Plaintiff and 

Appellant and Defendant and Appellant William E. Rice.
2

Shartsis Friese, Joel Zeldin, Frank A Cialone and Felicia A. Draper for Defendant

and Appellant and Plaintiff and Appellant Gary P. Downs.

_________________________________

William E. Rice and others1 sued Attorney Gary P. Downs for legal malpractice, 

breach of fiduciary duty, and breach of a written agreement Downs drafted to govern a 

limited liability corporation he formed with Rice and others. The trial court ordered Rice 

to arbitrate all of his claims pursuant to an arbitration provision in the written agreement. 

After arbitration, both Rice and Downs appealed, raising various contentions, including 

Rice’s contention that the arbitration provision did not encompass his tort claims. We 

agree with Rice on this point and conclude the trial court erred by compelling arbitration 

of those claims. Accordingly, we partially reverse the judgment and conclude the other 

contentions on appeal are moot.

BACKGROUND

1. Allegations of Rice’s complaint

In April of 2013 Rice filed a complaint in Los Angeles Superior Court alleging 

legal malpractice and other claims. (Super. Ct. L.A. County, No. BC506921.) The 

complaint alleged that as of 2003, Downs and law firms in which he was a partner served 

as counsel for Rice, Kristoffer Kaufmann, and companies they were affiliated with. Rice, 

Kaufmann, and their companies did business in the affordable housing market. “Downs, 

Rice and Kaufmann decided they would form a company together to develop properties 

with affordable rents and government subsidies.” To that end, Downs, acting as counsel 

for Rice, Kauffmann, and the new company, Highland Property Development, LLC 

(HPD) prepared an operating agreement and formed HPD. Downs entered into joint 

1 The other plaintiffs were Douglas B. Day, Highland Property Development, 

LLC, and Highland Property Construction, Inc. The business entities did not appeal and 

Day dismissed his appeal.
3

ownership of HPD with Rice and Kaufmann while still acting as counsel to them, but 

“neither Downs, nor any of the law firms in which he was a partner, advised Rice, 

Kaufmann or HPD with respect to actual or potential conflicts of interest, nor did they 

comply with California Rules of Professional Conduct, Rule 3-300.”

The operating agreement contained the following provisions relevant to this 

appeal: “Each member hereby consents to the exclusive jurisdiction of the state and 

federal courts sitting in California in any action on a claim arising out of, under or in 

connection with this Agreement or the transactions contemplated by this Agreement.” 

“Except as otherwise provided in this Agreement, any controversy between the parties 

arising out of this Agreement shall be submitted to the American Arbitration Association 

for arbitration in Los Angeles, California.” It further provided, “No Member or Affiliate 

of a Member, is entitled to remuneration for services rendered to the Company except as 

otherwise expressly provided for in this Agreement.”

In 2007, Douglas B. Day joined HPD as a fourth member. The complaint alleges 

that Downs, “again acting as counsel for all of the Plaintiffs,” prepared an amended 

operating agreement for HPD and formed Highland Property Construction, Inc. (HPC) to 

contract for construction work on HPD projects. Downs, Rice, Day, and Kaufmann were 

the shareholders in HPC. “At no time did Downs, or the law firms of which he was a 

partner, advise of potential or actual conflicts, or comply with California Rules of 

Professional Conduct, Rule 3-300.” The amended operating agreement contained the 

same terms regarding arbitration, jurisdiction, and compensation quoted above.

The complaint further alleges that pursuant to the compensation provisions in the 

operating agreement and the amended operating agreement, Downs was not entitled to 

bill HPD for time he spent working on HPD legal (or other) matters, and he was not 

entitled to “be personally compensated for any HPD related work performed by others at 

his law firm.”

The complaint further alleges that in 2012, based upon legal advice by Downs, 

Kaufmann was removed as a member and manager of HPD for cause. Kaufmann 
4

demanded arbitration, seeking a declaration that his removal was improper and he was 

still a member of HPD, along with damages and attorney fees. Downs arranged for a 

single attorney to represent himself, Rice, and Day in the Kaufmann arbitration, without 

disclosure or waiver of conflicts of interest.

The complaint alleges that, as a result of the Kaufmann arbitration, Rice and Day 

“learned that Downs had been billing HPD, through his law firm, for his personal time in 

providing legal services, both with respect to internal HPD affairs, and with respect to the 

various projects, contracts and other activities of HPD, even though this was prohibited 

under the terms of the Operating Agreement. Rice, Day and Kaufmann were not aware 

of this previously” because the law firms sent non-detailed invoices that did not specify 

the attorneys working on matters or the hours and billing rates of those attorneys. Rice 

and Day also “learned, for the first time, that Downs had . . . also been sharing in 

overrides and/or bonuses from his law firm, as a billing partner, for HPD work done by 

other attorneys at the firm. When confronted with this disclosure, Downs became hostile, 

accused Rice and Day of breaching the Operating Agreement or attempting to rescind or 

modify it unlawfully by challenging the payments Downs had received for HPD related 

legal services, and Downs filed an arbitration demand against Rice and Day, making 

those same accusations.”

The complaint alleges Downs, acting as counsel for Rice, Day, Kaufmann, HPD, 

and HPC, committed legal malpractice by, inter alia, “failing to advise his clients of 

potential or actual conflicts, and obtain their informed consent before forming HPD and 

HPC, and drafting the Operating Agreements;” “entering into business transactions with 

his clients, specifically the formation of HPD and HPC, and the preparation and 

execution of their Operating Agreements, without advising of the potential conflicts and 

without complying with California Rules of Professional Conduct, Rule 3-300;” “placing 

his own interests above those of his clients, in part by drafting and structuring the 

Operating Agreement for HPD in a manner that, based on Downs’ present contentions, 

was detrimental to his clients and beneficial to Downs;” and “providing poor or incorrect 
5

legal advice and counseling with respect to the dispute with Kaufmann, resulting in 

exposure of HPD, Rice and Day to damages and litigation, including strategies premised 

on incorrect readings of the Operating Agreement, or ambiguities in the Operating 

Agreement drafted by Downs, and by arranging for a single attorney to represent Downs, 

Rice and Day without disclosing and obtaining informed consent to actual or potential 

conflicts.”

The legal malpractice cause of action also alleges five categories of deficiencies in 

the original and amended operating agreements and alleges that Downs “cost HPD and 

the plaintiffs hundreds of thousands of dollars of damages and extra expenses by 

deliberately interfering with pending transactions involving HPD which were being 

handled by Nixon Peabody [Downs’s firm], in order to obtain personal gain at the 

expense of HPD and the other members. . . . Downs caused the attorneys at Nixon 

Peabody to take actions that were detrimental to HPD and Plaintiffs, in an effort to coerce 

benefits for himself at the expense of his clients.”

The complaint further alleged Downs and Nixon Peabody (also a named 

defendant) owed a fiduciary duty to Rice and the other plaintiffs “by virtue of their 

relationship as attorney and client,” which Downs and Nixon Peabody breached by, inter 

alia, “failing to disclose and obtain waivers of actual and potential conflicts between 

Downs and his law firms on the one hand, and the other members . . . or . . . HPD or HPC 

on the other hand;” “by engaging in business transactions with clients without complying 

with the provisions of [California Rules of Professional Conduct,] Rule 3-300”; and 

causing “the attorneys at Nixon Peabody to take actions that were detrimental to HPD 

and plaintiffs, in an effort to coerce benefits for himself at the expense of his clients.”

The complaint also asserted a breach of contract cause of action against Downs 

alleging that he breached the operating agreement “by secretly billing and being 

compensated for his own time” working on HPD matters and receiving “overrides or 

bonuses . . . for the services provided by others in his firm.” The complaint further 

alleged Downs and Nixon Peabody were unjustly enriched by plaintiffs because Downs 
6

and Nixon Peabody were “paid attorneys fees that were not owed, and which Downs, 

individually, and as a partner of Nixon Peabody, had agreed would not be charged.”

Finally, the complaint sought rescission and restitution, alleging: “By virtue of 

Downs’s legal malpractice, breach of fiduciary duty, his failure to comply with California 

Rules of Professional Conduct, Rule 3-300, and his failure to disclose and obtain 

informed consent with respect to actual and potential conflicts with his clients, Downs 

has improperly obtained benefits under the terms of the Operating Agreement and the 

Amended Operating Agreement of HPD. [¶] . . . But for the breach of fiduciary duty, 

legal malpractice and other misconduct of Downs, he would not have obtained those 

benefits and would not have rights under the Operating Agreement. Based on the 

conduct of Downs, his rights under the Operating Agreement are rescinded, and he is 

obligated to pay restitution to Rice, Day and Kaufmann, specifically, his 25% share of all 

profits received from HPD and HPC.”

2. Downs’s complaint

The day after Rice’s complaint was filed, Downs filed his own complaint in Los 

Angeles Superior Court against Rice, Day, and Kaufmann. (Super. Ct. L.A. County, 

No. BC507050.) Downs sought declaratory and injunctive relief to void and prevent 

performance of a settlement agreement between Rice, Day, and Kaufmann.

3. Trial court compels arbitration

Downs moved to compel arbitration as to all causes of action in Rice’s complaint, 

based upon the arbitration provisions in the original and amended operating agreements. 

Downs informed the court that the Kaufmann and Downs arbitrations had already been 

consolidated, and he wanted the claims in Rice’s complaint to be resolved in the 

consolidated arbitration.

Rice simultaneously moved to stay the Downs arbitration in favor of litigating 

Rice’s overlapping claims, which also involved Nixon Peabody, which was not a 

signatory to the agreements containing the arbitration provision. Rice also opposed the 

motion to compel arbitration. Nixon Peabody filed its own response to the motion to 
7

compel arbitration, opposing arbitration of the malpractice and breach of fiduciary duty 

causes of action but not the remaining causes of action.

The trial court granted the motion to compel arbitration of all of the claims in 

Rice’s complaint and denied Rice’s motion to stay the Downs arbitration. With respect 

to the motion to compel, the trial court concluded that the arbitration clause was “broad 

enough to encompass tort causes of action” and “because the gravamen of these claims 

involves the Operating Agreements, these causes of action ‘arise out of’ the Operating 

Agreement.”

4. Arbitration proceedings

Rice refiled his claims against Downs as a cross-claim in arbitration.

Rice apparently encountered significant difficulty, delay, and obstruction by 

Downs and Nixon Peabody in obtaining documentary discovery. In its postarbitration 

ruling on motions to confirm and vacate the arbitration award, the trial court recounted 

some of these problems and referred to “what Rice and Day persuasively characterize as 

a coordinated campaign to delay and deflect.” Eventually, on the evening of December 

20, 2013, a Friday, with the arbitration hearing scheduled to commence on January 13, 

2014, Nixon Peabody sent “a disk containing approximately 20,000 emails and nearly 

34,000 documents,” yet failed to include all documents responsive to Rice’s discovery 

requests. The following Monday, Rice dismissed his claims without prejudice.

Upon Downs’s request, the arbitrator ordered Rice’s claims dismissed with 

prejudice. 

The arbitrator ultimately awarded Downs declaratory relief on two points: That he 

did not breach the original or amended operating agreement or any other obligation “by 

billing his time for legal services performed in connection with representing HPD” and 

that the settlement agreement between Rice, Day, and Kaufmann was void and Downs 

did not interfere with it. The arbitrator did not decide Downs’s claim for declaratory 

relief to the effect he did not commit malpractice or breach of fiduciary duty. The 
8

arbitration award required Rice, Day, and Downs to repay certain sums to HPD and 

awarded Downs and Kaufmann attorney fees against Rice and Day.

5. Trial court partially vacates, but otherwise confirms arbitration award

Downs filed a petition in the trial court to confirm the arbitration award. Rice

filed a petition to vacate the arbitration award to the extent the arbitrator had converted 

his dismissal without prejudice into a dismissal with prejudice.

After extensive briefing and a lengthy hearing, the trial court granted both 

petitions, i.e., it reinstated Rice’s dismissal without prejudice, but otherwise confirmed 

the arbitration award.

6. Judgment and appeals

The trial court entered judgment. Both Rice and Downs appealed, and the appeals 

were consolidated.

DISCUSSION

1. Pertinent legal principles

A party who claims that there is an applicable written arbitration agreement may 

petition the superior court for an order compelling the parties to arbitrate. (Code Civ. 

Proc., § 1281.2.) Such a petition essentially seeks specific performance of the arbitration 

agreement. (Banner Entertainment, Inc. v. Superior Court (1998) 62 Cal.App.4th 348, 

356.) “In determining whether an arbitration agreement applies to a specific dispute, the 

court may examine only the agreement itself and the complaint filed by the party refusing 

arbitration.” (Weeks v. Crow (1980) 113 Cal.App.3d 350, 353 (Weeks).) Because the 

trial court sits as a trier of fact in ruling on such a petition, its decision on the existence of 

a valid arbitration agreement will be affirmed on appeal if substantial evidence supports 

the ruling. (Banner, at pp. 356–357.) Where, as here, “there is no ‘factual dispute as to 

the language of [the] agreement’ [citation] or ‘conflicting extrinsic evidence’ regarding 

the terms of the contract [citation], our standard of review of a trial court order granting 

or denying a motion to compel arbitration under [Code of Civil Procedure] section 1281.2 

is de novo.” (Bono v. David (2007) 147 Cal.App.4th 1055, 1061–1062 (Bono).) “We are 
9

not bound by the trial court’s construction or interpretation.” (Coast Plaza Doctors 

Hospital v. Blue Cross of California (2000) 83 Cal.App.4th 677, 684 (Coast Plaza).)

“California has a strong public policy in favor of arbitration and any doubts 

regarding the arbitrability of a dispute are resolved in favor of arbitration. . . . This strong 

policy has resulted in the general rule that arbitration should be upheld ‘unless it can be 

said with assurance that an arbitration clause is not susceptible to an interpretation 

covering the asserted dispute.’ ” (Coast Plaza, supra, 83 Cal.App.4th at p. 686.) The 

party opposing arbitration has the burden of demonstrating that an arbitration clause 

cannot be interpreted to require arbitration of the dispute. (Id. at pp. 686–687.) 

Nonetheless, this policy does not override ordinary principles of contract interpretation. 

“[T]he contractual terms themselves must be carefully examined before the parties to the 

contract can be ordered to arbitration: ‘Although “[t]he law favors contracts for 

arbitration of disputes between parties” [citation], “ ‘there is no policy compelling 

persons to accept arbitration of controversies which they have not agreed to arbitrate

. . . .’ ” [Citations.] In determining the scope of an arbitration clause, “[t]he court should 

attempt to give effect to the parties’ intentions, in light of the usual and ordinary meaning 

of the contractual language and the circumstances under which the agreement was made 

[citation].” ’ ” (Bono, supra, 147 Cal.App.4th at p. 1063.) “[T]he terms of the specific 

arbitration clause under consideration must reasonably cover the dispute as to which 

arbitration is requested.” (Ibid.)

The ordinary rules of contract interpretation apply to arbitration agreements. 

(Hotels Nevada, LLC v. Bridge Banc, LLC (2005) 130 Cal.App.4th 1431, 1435.) “The 

court should attempt to give effect to the parties’ intentions, in light of the usual and 

ordinary meaning of the contractual language and the circumstances under which the 

agreement was made (Civ. Code, §§ 1636, 1644, 1647).” (Weeks, supra, 113 Cal.App.3d 

at p. 353.) “The whole of a contract is to be taken together, so as to give effect to every 

part, if reasonably practicable, each clause helping to interpret the other.” (Civ. Code, 

§ 1641.) “ ‘A court must view the language in light of the instrument as a whole and not 
10

use a “disjointed, single-paragraph, strict construction approach” [citation].’ ” (City of 

El Cajon v. El Cajon Police Officers’ Assn. (1996) 49 Cal.App.4th 64, 71.) An 

interpretation that leaves part of a contract as surplusage is to be avoided. (Ibid.)

“[T]he decision as to whether a contractual arbitration clause covers a particular 

dispute rests substantially on whether the clause in question is ‘broad’ or ‘narrow.’ ” 

(Bono, supra, 147 Cal.App.4th at p. 1067.) “A ‘broad’ clause includes those using 

language such as ‘any claim arising from or related to this agreement’ ” (ibid.) or “arising 

in connection with the [a]greement” (Simula, Inc. v. Autoliv, Inc. (9th Cir. 1999) 175 F.3d 

716, 720–721 (Simula)). “It has long been the rule in California that a broadly worded 

arbitration clause . . . may extend to tort claims that may arise under or from the 

contractual relationship. ‘There is no requirement that the cause of action arising out of a 

contractual dispute must be itself contractual. At most, the requirement is that the dispute

must arise out of contract.’ ” (Coast Plaza, supra, 83 Cal.App.4th at p. 686.) “ ‘[W]here 

contracts provide arbitration for “ ‘any controversy . . . arising out of or relating to the 

contract . . .’ ” the courts have held such arbitration agreements sufficiently broad to 

include torts, as well as contractual, liabilities so long as the tort claims “have their roots 

in the relationship between the parties which was created by the contract.” ’ ” (Izzi v. 

Mesquite Country Club (1986) 186 Cal.App.3d 1309, 1315–1316.) As the Ninth Circuit 

stated in Simula: “Every court that has construed the phrase ‘arising in connection with’

in an arbitration clause has interpreted that language broadly. We likewise conclude that 

the language ‘arising in connection with’ reaches every dispute between the parties 

having a significant relationship to the contract and all disputes having their origin or 

genesis in the contract.” (175 F.3d at p. 721.) “To require arbitration, [the] factual 

allegations need only ‘touch matters’ covered by the contract containing the arbitration 

clause and all doubts are to be resolved in favor of arbitrability.” (Ibid.)

But clauses requiring arbitration of a claim, dispute, or controversy “arising from”

or “arising out of” an agreement, i.e., excluding language such as “relating to this 

agreement” or “in connection with this agreement,” are “generally considered to be more 
11

limited in scope than would be, for example, a clause agreeing to arbitrate ‘ “any 

controversy . . . arising out of or relating to this agreement,” ’ which might thus cover 

misconduct arising out of the agreement as well as contractual issues.” (Cobler v. 

Stanley, Barber, Southard, Brown & Associates (1990) 217 Cal.App.3d 518, 530

(Cobler).) Several Ninth Circuit cases have held that agreements requiring arbitration of 

“any dispute,” “controversy,” or “claim” “arising under” or “arising out of” the

agreement are intended to encompass only disputes relating to the interpretation and 

performance of the agreement. (Mediterranean Enterprises v. Ssangyong (9th Cir. 1983) 

708 F.2d 1458, 1461, 1464 (Mediterranean); Tracer Research v. Nat. Environ. Services 

Co. (9th Cir. 1994) 42 F.3d 1292, 1295 (Tracer); Cape Flattery Ltd. v. Titan Mar., LLC

(9th Cir. 2011) 647 F.3d 914, 921, 924 (Cape Flattery).)

2. The trial court erred by compelling arbitration of certain claims.

Rice contends the trial court erred by compelling arbitration of his legal 

malpractice, breach of fiduciary duty, and rescission claims because they are tort claims 

and the narrow arbitration provision in the operating agreements does not encompass 

them.2 Downs contends the arbitration provision is sufficiently broad to encompass 

Rice’s claims: “The parties’ arbitration agreement governs ‘any controversy arising out 

of’ the HPD Operating Agreements. . . . ‘Any controversy’ includes tort claims, and tort 

claims can—and, in this case, they all do—arise out of those agreements.”

Each party’s approach is somewhat inadequate to resolve the issue before us. The 

issue is not resolved simply by determining whether the arbitration clause is narrow or 

broad, whether the arbitration clause could encompass tort claims, or even whether the 

claims in issue sound in tort, not contract. The issue is whether the particular claims in 

issue are controversies “arising out of” the operating agreements. While they clearly fall 

2 Downs argues Rice waived his contention that the rescission claim was not 

arbitrable by failing to raise it in the trial court. He is wrong. Rice asserted this claim in 

both his motion to stay arbitration and his opposition to Downs’s motion to compel 

arbitration.
12

within the category of “any controversy,” we conclude that they did not arise out of the 

operating agreements and should not have been ordered to arbitration.

a. “Any controversy”

Several courts have held that a phrase such as “any dispute” or “any controversy”

potentially encompasses tort claims. (EFund Capital Partners v. Pless (2007) 150 

Cal.App.4th 1311, 1322 (EFund); Lewsadder v. Mitchum, Jones & Templeton, Inc.

(1973) 36 Cal.App.3d 255, 259 (Lewsadder).) We agree, but that alone is not 

determinative. The parties did not simply agree to arbitrate “any controversy,”

effectively meaning every controversy between them. “Any controversy” is necessarily 

modified by “arising out of this Agreement.”

Moreover, even under a very broad arbitration provision, such as “any controversy 

or claim arising out of or relating to this agreement,” tort claims must “ ‘have their roots 

in the relationship between the parties which was created by the contract’ ” before they 

can be deemed to fall within the scope of the arbitration provision. (Bos Material 

Handling, Inc. v. Crown Controls Corp. (1982) 137 Cal.App.3d 99, 105 (Bos).) In Coast 

Plaza, where the parties had “agreed to arbitrate ‘any problem or dispute’ that arose 

under or concerned the terms of the Service Agreement” (83 Cal.App.4th at p. 684), the 

appellate court examined the claims and concluded, “These claims unquestionably have 

arisen under the Service Agreement and are inextricably related to its terms and 

provisions” (id. at p. 685).

Similarly, the EFund and Lewsadder courts did not end their analysis by 

concluding that tort claims were potentially embraced within the scope of “any dispute”

or “any controversy.” In each case, the court examined the nature of the agreement and 

of the claims and their relationship to one another, determining that the particular claims 

arose “from or out of” the agreement (EFund, supra, 150 Cal.App.4th at pp. 1325–1326) 

or arose “ ‘out of my employment or the termination of my employment’ ” (Lewsadder, 

supra, 36 Cal.App.3d at pp. 257, 259–261).
13

b. “Arising out of” the operating agreements

We view the operating agreements’ arbitration provision in the context of the 

whole agreements, in light of the usual and ordinary meaning of the contractual language 

and the circumstances under which the agreements were made, and attempting to give 

effect to every part, if reasonably practicable, with each clause helping to interpret others. 

In this case, the parties’ intent is revealed by contrasting the narrowly worded arbitration 

clause with the immediately preceding, expansively worded jurisdiction clause. While 

the parties consented to jurisdiction in state and federal courts sitting in California for 

“any action on a claim arising out of, under or in connection with this Agreement or the 

transactions contemplated by this Agreement” (italics added), they agreed to arbitrate

only “any controversy between the parties arising out of this Agreement.” Viewing these 

adjacent provisions together, it seems clear that the parties intended to arbitrate only a 

limited range of claims, i.e., those arising out of the agreement, while litigating a much 

broader range of claims, i.e., any claim arising out of, under, or in connection with the 

agreement or transactions contemplated by the agreement. The parties could easily have 

copied and pasted the broader text from the jurisdiction clause to the arbitration clause, 

but chose not to do so. This omission has significance, especially in light of precedent in 

the courts specified in the jurisdiction clause, on which the parties and the attorneys who 

drafted the agreement (Downs and/or others in his firm) were entitled to, and presumably 

did, rely.

“ ‘As a general rule of construction, the parties are presumed to know and to have 

had in mind all applicable laws extant when an agreement is made. These existing laws 

are considered part of the contract just as if they were expressly referred to and 

incorporated.’ [Citation.] Existing law includes the common law of the state.” 

(Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263, 281.) With 

respect to the wording of arbitration clauses, the court in Cape Flattery observed and 

held: “There is a good reason to indicate clearly to contracting parties what specific 

language will signify that the scope of their arbitration agreement is narrow. Once they 
14

know the specific language that is required, they can rely on that language to produce a 

result they jointly desire. . . . [I]n this case, when [the parties] entered into the 

Agreement, Mediterranean and Tracer had both been decided. The Agreement 

concerned the salvage of a vessel that had run aground in the Ninth Circuit. There is no 

reason to believe that the experienced lawyers representing both parties intended that the 

language they chose would be interpreted differently than it had been in those cases. [¶] 

We conclude that because the language in the arbitration provisions in Mediterranean

and Tracer is the same as the language in the Agreement, the narrow interpretation of 

‘arising under’ in those cases controls.” (647 F.3d at p. 923.)

The parties in this case entered into the original operating agreement in 2003, by 

which time it was well established in both state and Ninth Circuit decisions that an 

arbitration provision that included both the “arising from” or “arising out of” type of 

language and a phrase such as “in connection with” or “relating to” extended the scope of 

an arbitration provision to also encompass tort claims having “ ‘their roots in the 

relationship between the parties which was created by the contract’ ” (Bos, supra, 

137 Cal.App.3d at p. 105) and “every dispute between the parties having a significant 

relationship to the contract and all disputes having their origin or genesis in the contract”

(Simula, supra, 175 F.3d at p. 721), whereas provisions using only phrases such as 

“arising out of” or “arising from” were narrower in application and extended only to 

disputes relating to the interpretation and performance of the agreement (Cobler, supra, 

217 Cal.App.3d at p. 530; Mediterranean, supra, 708 F.2d at p. 1464; Tracer, supra,

42 F.3d at p. 1295).

Four years later, when the parties entered into the amended operating agreement in 

October of 2007, the state of the law remained the same in California courts and the 

Ninth Circuit. EFund, upon which Downs relies, and Bono, upon which Rice relies, had 

both been decided, but neither changed the state of the law. Bono involved a very 

specific and narrow arbitration clause applying to “any controversy among the parties 

involving the construction or application of any provision of this Agreement,” and the 
15

court concluded it did not encompass a defamation claim by one contracting party against 

another. (147 Cal.App.4th at pp. 1058, 1067, 1069.) EFund involved an unusually

worded arbitration provision applying to “[a]ny dispute or other disagreement arising 

from or out of” the agreement. (150 Cal.App.4th at p. 1317.) The appellate court not 

only concluded that each cause of action stemmed from the relationship created by the 

agreement and thus arose “ ‘from or out of’ ” it, it also distinguished the language of the 

parties’ arbitration clause from the standard narrow “ ‘arising out of’ ” type of clause: 

“The crucial language in the . . . arbitration clause differs from that discussed in the two 

Ninth Circuit opinions relied upon by the trial court. The critical language in the two 

Ninth Circuit opinions were ‘arising hereunder’ in Mediterranean Enterprises, Inc. and 

‘arising out of this Agreement’ in Tracer Research. [Citation.] By contrast the language 

in the arbitration clause in this case is materially broader—‘arising from or out of’—than 

that in Mediterranean Enterprises, Inc. or Tracer Research. Moreover, as we have 

explained, language of the type at issue here, when broadly construed, has consistently 

been applied in California opinions to require arbitration of tort claims.” (150 

Cal.App.4th at p. 1328, italics added.) Moreover, even if we were to assume EFund

effected some change in the state of the law, the parties did not modify the language of 

the arbitration provision in the amended operating agreement to take advantage of such a 

change. They easily could have added “from or” to their arbitration provision to take 

advantage of the ruling in EFund, but did not do so.

Given both the state of the law at the time the parties entered into the original and 

amended operating agreements and the stark contrast between the parties’ limited

arbitration provision applying only to controversies “arising out of” the agreement and

their much broader jurisdictional provision extending to claims “arising out of, under or 

in connection with” the agreements or “the transactions contemplated by” the 

agreements, we necessarily conclude the parties intended the arbitration provision to 

apply to a very limited range of controversies, not ones merely connected with the 

operating agreements or transactions contemplated by those agreements and certainly not 
16

all controversies between them. Had the parties intended a broadly applicable arbitration 

clause, they could have simply used the same phrasing they used in the jurisdiction 

clause. The parties, as well as the attorneys drafting the agreements, are presumed to be 

aware of and to have relied upon the judicial interpretation in California and the Ninth 

Circuit of the language they used.

Accordingly, we conclude that while the arbitration provision encompasses 

contractual claims and perhaps even tort claims arising from the agreement, a tort claim 

based upon violation of an independent duty or right originating outside of the agreement

does not arise from the agreement and falls outside the scope of the arbitration provision.

c. Rice’s malpractice, breach of fiduciary duty, and rescission claims do 

not arise out of the operating agreements

1. Malpractice cause of action

Rice’s complaint alleges that Downs and his law firms represented Rice and 

Kauffman before the three men decided to create a business together, before Downs 

formed HPD, and before he prepared the operating agreement. This attorney-client 

relationship did not arise out of the operating agreement or even the parties’ decision to 

go into business together. Moreover, neither the original nor the amended operating 

agreement addresses an attorney-client relationship between Downs and anyone else, 

including Rice or HPD. The legal malpractice cause of action alleges that Downs 

violated duties created by his attorney-client relationship with Rice by acts and omissions 

such as failing to advise of his actual and potential conflicts of interest, entering into 

business transactions with his clients, and providing poor or incorrect legal advice. The 

cause of action is based upon violations of duties created by the attorney-client 

relationship, not by the operating agreements. The cause of action does not turn on an 

interpretation of any clause in the contract and is not based upon performance or failure 

to perform under the contract. Thus, the malpractice cause of action does not arise out of

the agreements. It may relate to the agreements or be connected with them, but the 

parties’ arbitration provision is limited to claims arising out of the agreements. 
17

Accordingly, the arbitration provision does not encompass the legal malpractice claim,

and the trial court erred by compelling arbitration of it.

Downs argues, with respect to each cause of action, that it arises out of the

agreements because, but for the agreements, the claim would not exist. He cites Adam v. 

DeCharon (1995) 31 Cal.App.4th 708 (Adam) for the proposition that this “but for the 

agreement” standard is used to determine whether a claim arises out of an agreement. In 

Adam, a home seller failed to disclose known drainage and flooding problems, in 

violation of Civil Code section 1102 and a provision of the contract for the sale of the 

home that required the seller to deliver a disclosure statement. The purchasers prevailed 

on their failure to disclose cause of action, but not their breach of contract cause of 

action. The issue on appeal was whether the purchasers were entitled to attorney fees 

under the fees provision in the real property purchase-sale contract, which allowed the 

prevailing party to recover fees “in ‘any action . . . arising out of this agreement.’ ” (31 

Cal.App.4th at pp. 710–712.) Although the purchasers were not entitled to recover 

attorney fees under Civil Code section 1717 because they did not prevail on their breach 

of contract cause of action, the appellate court concluded they were entitled to recover 

fees under Code of Civil Procedure section 1021 and explained: “One of the causes of 

action on which the Adams prevailed was the failure of DeCharon to comply with the 

requirements of Civil Code section 1102 et seq. She did not complete the real estate 

transfer disclosure statement. That this cause of action concerns the violation of a statute 

does not make it any less one arising from the agreement. But for the agreement to 

purchase, there would be no cause of action for violation of section 1102 et seq. 

Moreover, section 13 of the real estate contract required DeCharon to deliver the 

disclosure statement within two calendar days of Seller’s acceptance.” (31 Cal.App.4th 

at p. 712.)

Adam obviously did not pertain to the wording of an arbitration clause, and the 

court did not hold that a claim “arises out of” an agreement if, but for the agreement, the 

claim would not exist, as Downs urges. Moreover, Adam is distinguishable from the 
18

present case, even beyond the differing factual context. In Adam, the relationship 

between the seller and purchasers of the property stemmed solely from the real property 

purchase-sale contract. The seller’s disclosure obligation came into existence only upon 

formation of that contract, and the contract reflected the statutory disclosure obligation. 

Here, however, the attorney-client relationship between Rice and Downs and the duties 

Rice alleges Downs and his firm breached predated the operating agreements, were not 

created by the operating agreements, and were not even mentioned in the operating 

agreements.

Although other courts have sometimes used similar “but for” language in 

explaining their rationale for concluding that a claim was arbitrable (see, e.g., Larkin v. 

Williams, Woolley, Cogswell, Nakazawa & Russell (1999) 76 Cal.App.4th 227, 230 

[“very broad” arbitration clause extending to “ ‘[a]ny controversy or claim arising out of 

or relating to any provision of this [partnership] [a]greement or the breach thereof’ ”]), no 

court has adopted such a simplistic, sweeping standard to determine whether a claim 

arises out of an agreement, and the Ninth Circuit and other federal decisions have

expressly rejected it (Tracer, supra, 42 F.3d at p. 1295 [“The fact that the tort claim 

would not have arisen ‘but for’ the parties’ licensing agreement is not determinative”]; 

Cape Flattery, supra, 647 F.3d at p. 924 [“Tracer further clarified that a tort claim is not 

arbitrable just because it would not have arisen ‘but for’ the parties’ agreement”]; 

Armada Coal Export, Inc. v. Interbulk, Ltd. (11th Cir. 1984) 726 F.2d 1566, 1568

[“While certainly there is a connection between Armada’s claims and the charter party 

relationship between Armada and Interbulk—i.e., but for the two parties having entered 

into this business arrangement which was imperfectly performed, there would have been 

no wrongful attachment and conversion—such connection is not sufficiently close to 

constitute a dispute arising during the execution, or performance, of the charter party 

itself”]).

Citing Ericksen, Arbuthnot, McCarthy, Kearney, & Walsh, Inc. v. 100 Oak Street

(1983) 35 Cal.3d 312, Downs further argues that “claims going to the formation of a 
19

contract which contains an arbitration provision are subject to arbitration.” However, this 

applies only to claims of fraud in the inducement. “[A]n arbitration clause may be 

subject to enforcement even where a challenge exists to the validity of the overall 

agreement, if the challenge is based upon fraud in the inducement, and if the FAA 

applies. The reason for this is that under Prima Paint v. Flood & Conklin (1967) 388 

U.S. 395, 404 [18 L.Ed.2d 1270, 87 S.Ct. 1801], an FAA case, ‘claims of fraud in the 

inducement of the contract generally,’ that is, fraud claims not going ‘ “to the ‘making’ of 

the agreement to arbitrate,” are to be decided by the arbitrator rather than the court,’

unless the parties have agreed otherwise. (Rosenthal [v. Great Western Fin. Securities 

Corp. (1996) 14 Cal.4th 394,] 419.) There, the Supreme Court states that [Code of Civil 

Procedure] section 1281.2 embodies the same standard of enforceability as in the FAA. 

(Rosenthal, supra, at p. 415; Ericksen, Arbuthnot, McCarthy, Kearney, & Walsh, Inc. v. 

100 Oak Street[, supra, 35 Cal.3d at pp. 322–323].)” (Duffens v. Valenti (2008) 161 

Cal.App.4th 434, 448–449.) Rice does not allege either operating agreement was the 

product of fraud and does not challenge its overall validity. In his final cause of action, 

he seeks its rescission only as to Downs.

2. Breach of fiduciary duty

Like the malpractice cause of action, the breach of fiduciary duty cause of action 

is also premised upon a duty owed to Rice and the other plaintiffs “by virtue of their 

relationship as attorney and client,” which preceded the formation of the business and the 

operating agreements. These duties did not arise from the operating agreements, and the 

cause of action neither depends upon an interpretation of any portion of the agreements

nor is based upon performance or failure to perform under the agreements. Thus, the 

breach of fiduciary duty cause of action does not arise from the agreements, although it 

may relate to the agreements or be connected with them. Accordingly, the arbitration 

provision does not encompass the breach of fiduciary duty claim, and the trial court erred 

by compelling arbitration of it.
20

3. Rescission

The final cause of action in Rice’s complaint, seeking rescission and restitution,

was expressly based upon “Downs’s legal malpractice, breach of fiduciary duty, his 

failure to comply with California Rules of Professional Conduct, Rule 3-300, and his 

failure to disclose and obtain informed consent with respect to actual and potential 

conflicts with his clients.” All of these were alleged violations of duties owed to Rice by 

virtue of the attorney-client relationship between Downs and Rice, not as a result of any 

duty created by the operating agreements. Although the cause of action alleges that, as a 

result of Downs’s violations of these duties, he “improperly obtained benefits under the 

terms of the Operating Agreement and the Amended Operating Agreement of HPD,”

thereby connecting the cause of action to the agreements, it does not arise out of those 

agreements. The duties Downs allegedly violated did not arise from the operating 

agreements, and the cause of action neither depends upon an interpretation of any portion 

of the agreements nor is based upon performance or failure to perform under the 

agreements. Accordingly, the arbitration provision does not encompass this cause of 

action, and the trial court erred by compelling arbitration of it.

3. Order partially vacating arbitration

Downs contends that the trial court erred by partially vacating the arbitration 

award to convert the dismissal of Rice’s claims from one with prejudice to one without 

prejudice. Our review of the trial court’s order and rationale leads us to conclude the 

issue is moot in light of our conclusion that Rice was improperly compelled to arbitrate 

his malpractice claim.

Although Rice dismissed all of his claims, including his arbitrable contractually

based claims, the arbitrator converted the dismissal of all claims from one without 

prejudice to one with prejudice. Rice’s motion in the trial court seemingly addressed all 

of his claims. A close examination of the trial court’s rationale in reinstating the 

dismissal to one without prejudice reveals that the scope of the court’s ruling was 

necessarily confined to Rice’s malpractice claim. First, the court frequently referred to 
21

the malpractice claim in its order, but did not refer to any of Rice’s other claims. Second, 

the court addressed at length Rice’s contention that there was “Fraud in the Arbitration,”

based solely upon two matters pertinent to the issue of whether Downs represented Rice 

(and Day) as individuals. The first of these matters was Rice’s claim “that Downs falsely 

testified before this Court and the Arbitrator” that he and his firms represented only HPD 

and HPC. The second matter was what Rice relied upon to refute Downs’s purportedly 

false testimony, i.e., “23 fully-vetted Opinion Letters stating conclusively that the firms 

represented Rice and Day” issued by Nixon Peabody and Downs’s former firm, Pillsbury. 

The court stated, “Rice and Day argue that Downs and Nixon coordinated efforts to 

effectively deprive Rice and Day of documents pertaining to their malpractice claim that 

Plaintiffs requested even as of August 2013.” (Italics added.) The court addressed at 

length the difficulty Rice had in obtaining documentary evidence from Downs and Nixon 

Peabody through discovery requests in the arbitration, whether and when Rice became 

aware of the opinion letters—to which they had access through HPD servers—and their 

significance. The court stated that Rice “persuasively characterize[d]” the conduct of 

Downs and Nixon Peabody “as a coordinated campaign to delay and deflect.” The court 

noted that “Rice and Day’s attorney expressed the reason for dismissing the malpractice 

claim was that Plaintiffs’ efforts to procure discovery documents had been frustrated, 

despite the Arbitrator’s ruling on the matter.” (Italics added.) Also notable is the court’s 

reference to Rice’s “Appendix A: Index of Issues Affected by Downs’ Misstatements at 

Arbitration,” which mentioned several causes of action by other parties, but only one of 

Rice’s causes of action: malpractice, specifically the arbitrator’s conversion of the 

dismissal of his malpractice claim from one without prejudice to one with prejudice. 

Ultimately, the trial court found “that the Opinion Letters were available to counsel 

before counsel moved to dismiss the malpractice claim, without prejudice. However, as 

further explained below, the Court also finds that when the Opinion Letters were 

discovered by counsel is not determinative of the issues of whether the request to vacate 

the dismissal, with prejudice, was proper, or whether the Arbitrator exceeded her 
22

authority.” The trial court’s entire discussion of fraud and undue means in the arbitration 

leading to the dismissal pertained to competing evidence on the issue of whether Downs 

represented Rice, which is only pertinent to Rice’s tort causes of action, not the breach of 

contract and unjust enrichment causes of action, which were based upon Downs’s billing 

for legal services provided to HPD and HPC.

The trial court rejected the fraud and undue means theories and based its decision 

to restore Rice’s dismissal to one without prejudice upon a theory that the court had 

“inherent power to prevent unfair results.” The court explained: “[I]t is unjust to punish 

Rice and Day for their attorney’s choice to dismiss, without prejudice, when he would not 

have done so had he any idea that the dismissal, without prejudice, would be converted to 

a dismissal, with prejudice. Balancing the facts, both sides share blame about the 

Opinion Letters not rising to the surface in time. Rice and Day did not knowingly choose 

to avoid that information and certainly Downs never highlighted that information, if only 

to address it head on, in time either. [¶] The court finds that justice requires that the 

Arbitrator’s dismissal, with prejudice, be vacated and the dismissal, without prejudice, be 

reinstated. If the action is resumed, then the parties should commence arbitration of the 

malpractice claim.” (Italics added.)

Accordingly, we construe the trial court’s ruling as limited to the malpractice 

claim, and Down’s contention about the propriety of the court’s ruling is mooted by our 

conclusion that the malpractice claim was not subject to arbitration.

4. Rice’s claim regarding possibility of conflicting rulings

Rice also contends that the trial court abused its discretion by failing to deny 

Downs’s motion to compel arbitration pursuant to Code of Civil Procedure section 

1281.2, subdivision (c). This contention is based upon the inclusion of Nixon Peabody as 

a defendant in Rice’s breach of fiduciary duty cause of action, given that the firm was not 

a party to the operating agreements and therefore not subject to arbitration. In light of 

our disposition, this issue is also moot and we do not address it.
23

DISPOSITION

The judgment is reversed with respect to the court’s order compelling arbitration 

of Rice’s legal malpractice, breach of fiduciary duty, and rescission causes of action and 

is otherwise affirmed. Rice is awarded his costs on appeal and his own cross-appeal.

CERTIFIED FOR PUBLICATION.

LUI, J.

We concur:

CHANEY, Acting P. J.

JOHNSON, J.