Present: Hassell, C.J., Keenan, Koontz, Kinser, Lemons, and
Agee, JJ., and Russell, S.J.
MISSION RESIDENTIAL, LLC OPINION BY
SENIOR JUSTICE CHARLES S. RUSSELL
v. Record No. 062250 January 11, 2008
TRIPLE NET PROPERTIES, LLC
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY
Gaylord L. Finch, Judge∗
This is an appeal from an order denying a motion to stay
arbitration proceedings pursuant to Code § 8.01-581.02(B).
Facts and Proceedings
The facts are not in dispute. In 2004, Triple Net
Properties, LLC (Triple) was a firm engaged in the business of
syndicating commercial properties for sale to investors as
real estate securities. Mission Residential, LLC (Mission)
was a firm with expertise in locating, evaluating, purchasing
and managing multi-family apartment properties. The two
firms, which were otherwise unrelated, entered into a joint
venture for the purpose of identifying, purchasing, managing
and selling multi-family properties for investors seeking to
avail themselves of the tax advantages offered by Section 1031
∗
The record shows that Judge J. Howe Brown heard the case
and made the ruling that is the subject of this appeal. Judge
Gaylord L. Finch later entered the amended order from which
the appeal is taken. Judge M. Langhorne Keith subsequently
entered an order denying a stay of arbitration pending appeal.
of the Internal Revenue Code, 26 U.S.C. § 1031, for like-kind
exchanges of qualifying properties.
In order to accomplish that purpose, Mission and Triple
agreed to form a limited liability company named NNN/Mission
Residential Holdings, LLC (Holdings) and executed an
“Operating Agreement” for Holdings dated “as of October 1,
2004.” The operating agreement provides that Mission and
Triple are to be the sole members of Holdings, with equal
membership interests, and are to manage Holdings jointly. The
sole question presented by this appeal is the effect of
Section 13.9 of the operating agreement, which provides in
pertinent part:
“Disputes. The Members shall in good faith use
their best efforts to settle disputes regarding
their rights and obligations hereunder. All
disputes that the parties have failed to resolve
shall be submitted to arbitration. All arbitration
to resolve a dispute shall be conducted in
accordance with the provisions of this Section 13.9
and to the extent not inconsistent therewith, the
Commercial Arbitration Rules of the American
Arbitration Association (“AAA”) . . . . The
arbitrator’s award shall be final, binding and not
subject to appeal.”
In March 2006, Triple commenced an arbitration proceeding
against Mission, asserting a direct claim for breach of
contract and also a derivative claim against Mission on behalf
of Holdings. The arbitrator ruled that Triple lacked standing
to assert the direct claim, but allowed Triple’s derivative
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claim on behalf of Holdings to go forward. In August 2006,
Mission brought this action in the circuit court, seeking a
declaratory judgment that there was no agreement to arbitrate
disputes between Holdings and Mission, requesting an order to
stay the arbitration proceeding pursuant to Code § 8.01-
581.02(B), and seeking other relief.
Mission asked the arbitrator to defer a ruling on the
arbitrability of Triple’s derivative claims pending a judicial
determination of that issue, but the arbitrator declined to do
so, and on August 29, 2006, ruled that the derivative claims
were arbitrable. The arbitrator based his ruling on Rule R-
7(a) of the Commercial Arbitration Rules of the American
Arbitration Association, which was incorporated by reference
in Section 13.9 of the operating agreement. Rule R-7(a) makes
the arbitrator the sole judge of the issue of arbitrability.
In October 2006, after a review of the pleadings,
exhibits and arguments of counsel, the circuit court ruled
that the arbitrator had correctly decided the issue of
arbitrability. The court entered an order denying the motion
to stay arbitration and dismissing Mission’s complaint. We
awarded Mission an appeal.
Analysis
The law of contracts governs the question whether there
exists a valid and enforceable agreement to arbitrate. Such
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an agreement must contain the essential elements of a valid
contract at common law. The question whether such a contract
exists is a pure question of law, to which we apply a de novo
standard of review. Phillips v. Mazyck, 273 Va. 630, 635-36,
643 S.E.2d 172, 175 (2007) (citations omitted).
“A party cannot be compelled to submit to arbitration
unless he has first agreed to arbitrate.” Doyle & Russell,
Inc. v. Roanoke Hosp. Ass’n, 213 Va. 489, 494, 193 S.E.2d 662,
666 (1973) (citations omitted). When the question before the
court is whether the parties have agreed to arbitrate, there
is no presumption in favor of arbitrability. Rather, the
party seeking arbitration has the burden of proving the
existence of the agreement. See First Options of Chicago,
Inc. v. Kaplan, 514 U.S. 938, 945-46 (1995). A presumption in
favor of arbitrability arises only after the existence of such
an agreement has been proved, and the remaining question is
whether the scope of the agreement is broad enough to include
the disputed issue. Id. Here, Triple bore the burden of
proving that Mission had contracted to arbitrate Mission’s
disputes with Holdings.
We adhere to the view that the public policy of Virginia
favors arbitration. TM Delmarva Power, L.L.C. v. NCP of Va.,
L.L.C., 263 Va. 116, 122-23, 557 S.E.2d 199, 202 (2002).
Nevertheless, that policy does not impair the constitutional
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right of a party to have access to the courts, including the
right to a jury trial if requested, unless that party has, by
contract, voluntarily waived those rights.
Triple argues that the operating agreement committed the
parties to that agreement, Mission and Triple, to arbitrate
all "disputes regarding their rights and obligations
hereunder,” and that Triple’s derivative claim was nothing
more than a dispute regarding Mission’s duties under the
operating agreement. We do not agree. Triple’s argument
ignores the separate existence of Holdings, which was not a
party to the operating agreement.
Like a corporation, a limited liability company is a
legal entity entirely separate and distinct from the
shareholders or members who compose it. Code §§ 13.1-1009, -
1019; C.F. Trust, Inc. v. First Flight Ltd. P’ship, 266 Va. 3,
9, 580 S.E.2d 806, 809 (2003). A derivative action is an
equitable proceeding in which a member asserts, on behalf of
the limited liability company, a claim that belongs to that
entity rather than the member. Code § 13.1-1042. The
derivative claims asserted by Triple belonged to Holdings, not
to Triple. Little v. Cooke, 274 Va. 697, 709, 652 S.E.2d 129,
136 (2007); Simmons v. Miller, 261 Va. 561, 573, 544 S.E.2d
666, 674 (2001) (citation omitted). A party asserting a
derivative claim is not the real party in interest, but is “at
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best the nominal plaintiff.” Ross v. Bernhard, 396 U.S. 531,
538 (1970); see also Little, 274 Va. at 709, 652 S.E.2d at 136
(citing Mount v. Radford Trust Co., 93 Va. 427, 431, 25 S.E.
244, 245 (1896)). Although Mission and Triple might have
chosen to employ language that would have committed them to
arbitrate their disputes with Holdings, they did not do so.
Thus, there was no contractual undertaking by which Mission
had agreed to arbitrate any dispute with Holdings.
Conclusion
Because Triple failed to carry its burden of proving the
existence of an agreement by Mission to submit to arbitration
its disputes with Holdings, we will reverse the judgment
appealed from and remand the case for further proceedings
consistent with this opinion.
Reversed and remanded.
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