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Berke v. Nan Hecht: Court Declined to Compel Board to Arbitrate Dispute Between Members After Board Declined

In Berke v. Nan Hecht, The Realty Investment Co., The Realty Investment Company (TRI) appealed from a court order denying its petition to compel the Board to arbitrate a dispute between it and another Board member, Berke. The facts of the case are complex but the key issue on appeal was whether, and to what extent, the Board had the power to decline to arbitrate their dispute. Ultimately, the California Appellate Department of the Superior Court affirmed the trial court's order denying TRI's request to compel arbitration.

TRI was the listing broker for the Hechts. Berke, a real estate broker, showed the property to a potential buyer, who made an offer on the property, but the offer was rejected. Shortly thereafter, Berke was discharged as the agent for the potential buyers. A few months later, these same potential buyers executed a written contract with the Hechts for the sale of the property and Berke received no commission on the sale.

Berke requested Board arbitration to resolve the dispute, alleging that TRI acted in bad faith by failing to inform him that his clients were continuing to negotiate a purchase with the Hechts. However, because of the magnitude of the commission involved, the Board decided not to arbitrate. Subsequently, TRI requested that the Board reconsider its decision. After hearing TRI's position at a second directors' meeting, the Board then decided to arbitrate the dispute. Afterward, Berke requested an opportunity to present his position. At the conclusion of the third hearing, the Board of Directors concluded that the dispute was legally too complex to arbitrate. Thus, the Board rejected Berke's arbitration request.

Berke then filed suit against TRI and others, alleging breach of contract, intentional and negligent interference with prospective economic advantage, fraud, and conspiracy. In response, TRI filed a request that the court compel the Board to arbitrate the dispute. The court denied this request and TRI appealed.

On appeal, TRI argued that the Board was required to arbitrate the dispute because it was "plainly" covered by the Arbitration Manual. In addressing this argument, the California Appellate Department of the Superior Court noted that TRI did not see the function of the court in reviewing the actions of the Board. Further, it noted that courts must guard against unduly interfering with an organization's autonomy by substituting judicial judgment for that of the organization in an area where the competence of the court does not equal that of the organization. (See Calif. Dental Assoc. v. American Dental Assoc., 23 Cal. 3d 346, 353, 590 P.2d 401, 152 Cal. Rptr. 546 (1979)).

The appellate department also noted that the practical and reasonable construction of the constitution and bylaws of a voluntary organization by its governing body was binding on the membership and would be recognized by the courts. (See Williams v. Inglewood Board of REALTORS®, 219 Cal. App. 2d 479, 33 Cal. Rptr. 289 (1963)). The court noted that its review was limited solely to whether the Board's action in declining to arbitrate plainly violated the bylaws. The court held that the Board did not violate its bylaws.

TRI's second argument was that the Board could not refuse to arbitrate its commission dispute with Berke simply because other issues were joined with it. The appellate department stated that this argument failed in three ways: (1) Berke's Request for Arbitration was not framed as a mere commission dispute; (2) TRI presented no evidence to support its conclusion; and (3) even if the Board's decision not to arbitrate was based on the presence of issues in addition to the commission dispute, the court would not intervene in determining which disputes to arbitrate.

TRI also argued that there was nothing in the Arbitration Manual which expressly excluded its dispute from being arbitrated. The appellate department reasoned that TRI failed to see its relationship with the Board. The court stated that by becoming a member, TRI agreed to submit its disputes with other members to arbitration. The Board agreed to arbitrate disputes between members, subject to its right to refuse to arbitrate when the disputes are legally too complex.

Finally, TRI argued that the Board's interpretation of the Arbitration Manual gave it unrestrained discretion to refuse to arbitrate commission disputes, and that the Board's interpretation of the Arbitration Manual rendered the agreement to arbitrate disputes between members unreal. The court disagreed, stating that the Board did not have "unrestrained discretion" to refuse to arbitrate disputes submitted by members. Specifically, before a Request for Arbitration is rejected, an arbitration panel must determine the issues involved, and this decision must be adopted by the Board of Directors. Thus, the Board was required to follow specific, detailed procedures before declining to arbitrate a controversy. The court ruled that the Board's obligations were not unreal.

For all these reasons, the California Appellate Department of the Superior Court affirmed the trial court's order denying TRI's request to compel arbitration.

Berke v. Nan Hecht, The Realty Investment Co., 208 Cal. App. 3d 463, 257 Cal. Rptr. 738 (1989).