## Facts

- Mission Residential, LLC and Triple Net Properties, LLC formed a joint venture to acquire and manage multi-family properties for investors using like-kind exchanges under I.R.C. § 1031.
- The parties formed NNN/Mission Residential Holdings, LLC (Holdings), with Mission and Triple as the only members, each holding equal interests and joint management rights.
- The members executed an operating agreement dated “as of October 1, 2004,” containing an arbitration clause requiring that unresolved disputes be submitted to arbitration under AAA Commercial Arbitration Rules, with a final and binding award.
- In March 2006, Triple initiated AAA arbitration against Mission, asserting (i) a direct breach-of-contract claim and (ii) a derivative claim on behalf of Holdings against Mission.
- The arbitrator dismissed the direct claim for lack of standing but allowed the derivative claim to proceed and ruled the derivative claim was arbitrable, relying on AAA Rule R-7(a) (arbitrator may rule on jurisdiction).
- Mission filed suit in the Fairfax County Circuit Court seeking a declaratory judgment that Holdings had not agreed to arbitrate disputes with Mission and seeking a stay of arbitration under Va. Code § 8.01-581.02(B).
- The circuit court denied the stay, agreed the arbitrator could decide arbitrability, and dismissed Mission’s complaint.

## Issues

1. Whether Holdings, as a separate legal entity, agreed to arbitrate disputes such that a derivative claim asserted on its behalf against Mission must be arbitrated.
2. Whether incorporation of AAA Rule R-7(a) authorized the arbitrator to decide the threshold question of the existence of an arbitration agreement binding Holdings, rather than requiring judicial determination.

## Decision

- The Supreme Court of Virginia reversed the circuit court’s judgment.
- The Court held the operating agreement did not bind Holdings to arbitrate disputes between Holdings and its members; the arbitration clause covered disputes between the members regarding their rights and obligations under the agreement.
- The Court held the existence of an arbitration agreement is a contract-formation question for courts, and incorporation of AAA rules did not displace judicial authority on that threshold issue.
- Mission was entitled to a stay of arbitration as to the derivative claim asserted on behalf of Holdings.

## Legal Principles

- Arbitration is a matter of consent; a party cannot be compelled to arbitrate absent an agreement to do so.
- Ordinary contract law governs whether a valid and enforceable arbitration agreement exists; the existence of such an agreement is a question of law reviewed de novo.
- When the dispute is whether the parties agreed to arbitrate at all, there is no presumption favoring arbitrability; the proponent of arbitration bears the burden to prove an agreement exists.
- A presumption favoring arbitrability applies only after an arbitration agreement is shown to exist, and the remaining dispute concerns the scope of that agreement.
- Courts, not arbitrators, decide whether a valid arbitration agreement exists; contractual incorporation of arbitral rules addressing jurisdiction does not transfer to the arbitrator the court’s role in resolving contract existence.
- A derivative claim asserts the entity’s rights; compelling arbitration of a derivative claim effectively compels the entity to arbitrate and requires proof that the entity agreed to arbitrate.

## Conclusion

The Supreme Court of Virginia held that the operating agreement’s arbitration clause did not obligate the LLC to arbitrate claims asserted in its name and that courts must decide the threshold question whether an arbitration agreement exists, entitling Mission to a stay of arbitration of the derivative claim.


Mission Residential, LLC v. Triple Net Props., LLC, 275 Va. 157, 654 S.E.2d 888 (Va. 2008)