Case Name: Traditions Psychology Group, Inc. v. Mavericks Capital LLC, et al.
Case No.: 2014-1-CV-273320
Currently before the Court is the motion by plaintiff and cross-defendant Traditions Psychology Group, Inc. dba Traditions Behavioral Health (“TBH”) for summary judgment or, alternatively, summary adjudication of the fourth amended cross-complaint of defendants and cross-complainants Mavericks Capital LLC (“Mavericks”) and Mavericks Capital Securities LLC (“MCS”) (collectively, “Mavericks Entities”).
Factual and Procedural Background
This action arises from a dispute over a contract to provide services (“Financial Services Agreement”) for TBH during a one-year period. In the complaint filed November 17, 2014, TBH asserts a claim for declaratory relief against Mavericks Entities. TBH asserts that it is not required to pay a commission under the Financial Services Agreement or a subsequent assignment contract (“Assignment Agreement”) (collectively, “the Contracts”) because after it received it offer from a potential buyer (“Buyer A”), it did not execute a sale.
In the cross-complaint and in the first amended cross-complaint (“FAXC”), Mavericks Entities asserted causes of action against TBH and its president, cross-defendant Gary A. Hayes, Ph.D. (“Hayes”) (collectively, “Cross-Defendants”), for: (1) promissory fraud; (2) breach of written contract; (3) breach of implied covenant of good faith and fair dealing; and (4) money owing for services rendered (quantum meruit). After Cross-Defendants filed a demurrer to the cross-complaint, Mavericks Entities filed a FAXC. Thereafter, Cross-Defendants demurred to each claim in the FAXC for failure to state a claim. In an order filed on August 26, 2015, the court (Hon. Patricia Lucas) sustained the demurrer with leave to amend.
On September 10, 2015, Mavericks Entities filed a second amended cross-complaint (“SAXC”), asserting claims against Cross-Defendants for: (1) breach of written contract; (2) breach of implied covenant of good faith and fair dealing; (3) money owing for services rendered (quantum meruit); (4) reformation of written contract; and (5) deceit.
On October 15, 2015, Cross-Defendants filed a demurrer to each cause of action in the SAXC. On December 23, 2015, the court (Hon. Patricia Lucas) sustained the Cross-Defendants’ demurrer to the first, second, third, and fifth causes of action of the SAXC without leave to amend and sustained the Cross-Defendants’ demurrer to the fourth cause of action for reformation with leave to amend.
On January 19, 2016, Mavericks Entities filed a third amended cross-complaint (“TAXC”) against TBH asserting a single cause of action for reformation. Cross- Defendants filed a demurrer to the TAXC on February 23, 2016. In an order filed on April 7, 2016, the court (Hon. Beth McGowen) overruled the demurrer to the TAXC.
Thereafter, on May 24, 2016, the court (Hon. Beth McGowen) granted Mavericks Entities leave to file a fourth amended cross-complaint (“4AXC”), which was filed that same day.
The factual allegations of the 4AXC are lengthy so this memorandum will only focus on those allegations deemed relevant to the pending motion. In November 2013, TBH’s president and sole shareholder, Hayes, approached Jeffrey Karan (“Karan”), who was a partner at Woodside Capital Partners International LLC (“Woodside”), seeking consulting and financial advisory services in connection with a potential sale or strategic partnership for TBH. (4AXC, ¶ 13.) Hayes’s objective was to sell TBH for at least $30 million in cash. (Id. at ¶ 15.) As TBH was aware, Woodside was not a licensed securities broker. (Id. at ¶ 16.) Woodside’s agreements with clients allegedly permitted it to associate an affiliate that was a licensed securities broker, Woodside Capital Securities (“WCS”), if it became necessary to perform services requiring licensure. (Ibid.) Woodside’s standard services agreement included a commitment fee of $20,000 per month. (Id. at ¶ 23.) Hayes, on behalf of TBH, allegedly asked Woodside to waive its standard monthly commitment fee and instead charge a break-up fee and a higher transaction fee. (Ibid.)
On or about December 5, 2013, TBH and Woodside entered into a Financial Services Agreement. (4AXC, ¶ 24.) At the time the parties executed the Financial Services Agreement, they contemplated that the services thereunder might require a securities license. (Id. at ¶ 25.) “[I]t was anticipated and fully acknowledged by the parties that Woodside could, without prior TBH approval, assign all such services to WCS” and Woodside would remain responsible for services not requiring a securities license. (Ibid.) In recognition thereof, the Financial Services Agreement provided:
Notwithstanding the foregoing, [Woodside] may assign this Agreement at any time at its sole discretion to WCS pursuant to FINRA and SEC requirements, but [Woodside] will remain obligated under this Agreement for the obligations set forth herein for all services that do not by law require a securities license. All of the terms and provisions of this Agreement will transfer to WCS and remain in full force and effect for Term.
(Ibid.) “It was Woodside’s practice to informally, orally agree with WCS that WCS would perform all services for which any license would be required, and then to execute a formal, written assignment shortly before securities were actually about to change hands.” (Id. at ¶ 27.) “Once a formal written assignment took place …, Woodside’s practice was from that point forward to treat WCS as the assignee for all purposes, including the collection of any fees or commissions; but prior to such formal, written assignment, Woodside and WCS would share their obligations ….” (Ibid.)
In addition, the terms of the Financial Services Agreement stated that Woodside would receive compensation for its services upon either (1) the closing of a transaction (i.e., a sale of TBH, strategic partnership, or financing) or (2) if TBH “receives a bona fide offer in the form of a Letter of Intent, Term Sheet, Memorandum of Understanding, or equivalent, that includes a valuation for [TBH] of $30 million or greater payable in cash upon Closing, and [TBH] decides to terminate or abandon that Transaction, [TBH] will pay [Woodside] the Transaction Fees that [Woodside] would have been paid had [TBH] proceeded with that Transaction …” (“Break-Up Fee”). (4AXC, ¶¶ 29-31.)
Soon after TBH and Woodside executed the Financial Services Agreement, Karan and his healthcare team at Woodside planned to join a new spinoff firm, Mavericks, and continue providing services to TBH under the Financial Services Agreement. (4AXC, ¶ 44.) In late June 2014, Hayes signed the Assignment Agreement; Woodside and Mavericks did not execute the Assignment Agreement until August 2014, at which time they entered into a formal separation agreement. (Id. at ¶¶ 45-46.) Mavericks Entities allege that they, Woodside, and WCS did not perform any services for TBH requiring a real estate broker’s license; alternatively, to the extent the services performed required such a license, the services were performed by WCS. (4AXC, ¶¶ 17-18 and 34-40.)
TBH subsequently received a Letter of Intent from Buyer A offering to purchase TBH for an all cash price of $35 million due at closing. (4AXC, ¶¶ 69-71.) TBH and Buyer A engaged in subsequent negotiations, but ultimately on October 6, 2014, Buyer A formally notified TBH of its termination of the transaction. (Id. at ¶¶ 72-73, 86-88, 94-98, 104-106, 109.) TBH refused to pay the Mavericks Entities the Break-Up Fee. (Id. at ¶ 110.) One of the reasons proffered by TBH for refusal to pay the Break-Up Fee was that Mavericks was not licensed to perform the services under the Financial Services Agreement and Mavericks did not have any contractual right to assign either the Financial Services Agreement or the Assignment Agreement to MCS. (Id. at ¶ 92.)
Based on the foregoing, the 4AXC alleges claims for (1) breach of contract and (2) reformation.
On May 18, 2017, TBH filed the instant motion for summary judgment or, alternatively, summary adjudication. Mavericks Entities filed a joint opposition to the motion on July 20, 2017. The next day, Mavericks Entities filed an “Errata Memorandum of Points and Authorities in Opposition to TBH’s Motion for Summary Judgment or, in the Alternative, Summary Adjudication,” which made minor, unsubstantial changes to Mavericks Entities’ previously filed memorandum of points and authorities. Thereafter, on July 28, 2017, Mavericks Entities’ filed a separate statement responding to each of the material facts contended by TBH to be undisputed. That same day, TBH filed a reply in support of its motion.
Discussion
Pursuant to Code of Civil Procedure section 437c, TBH moves for summary judgment of the 4AXC or, alternatively, summary adjudication of the first cause of action for breach of contract and the second cause of action for reformation.
I. Procedural Issue
Before deliberating the merits of the motion, the Court should address a procedural issue regarding Mavericks Entities’ separate statement.
Code of Civil Procedure section 437c, subdivision (b) provides that opposition papers (1) must be served and filed not less than 14 days preceding the noticed hearing date and (2) must “include a separate statement that responds to each of the material facts contended by the moving party to be undisputed, indicating whether the opposing party agrees or disagrees that those facts are undisputed. … Failure to comply with this requirement of a separate statement may constitute a sufficient ground, in the court’s discretion, for granting the motion.” (Code Civ. Proc., § 437c, subd. (b)(2)-(3).)
Here, the noticed hearing date is August 3, 2017. Consequently, Mavericks Entities’ opposition papers needed to be filed and served by July 20, 2017. However, Mavericks Entities’ did not file a responsive separate statement by that date. The Court’s electronic case management system only reflects the filing of Mavericks Entities’ memorandum of points and authorities and the declarations of Adam Bernstein (“Bernstein”), Karan, and Preston DuFauchard (“DuFauchard”) on July 20, 2017. Mavericks Entities eventually filed their responsive separate statement late on July 28, 2017.
The Court has discretion to consider late-filed papers. (See Cal. Rules Ct., rule 3.1300(d); see also Code Civ. Proc., §437c, subd. (b)(3); Batarse v. Service Employees Intern. Union Local 1000 (2012) 209 Cal.App.4th 820, 828 (“Batarse”) [when an opposing party fails to file a responsive separate statement, the trial court has the discretion to permit the filing of a proper separate statement].) As the pending motion involves multiple issues with substantial evidentiary support, the Court finds that it is appropriate to allow and consider the late-filed separate statement. (See Batarse, supra, 209 Cal.App.4th at pp. 828-29; see also Cal. Rules Ct., rule 3.1300(d).)
II. Request for Judicial Notice
TBH asks the Court to take judicial notice of the 4AXC, the petition to compel arbitration filed by Mavericks Entities, and the reply filed by Mavericks Entities in support of their petition to compel arbitration.
These documents are generally proper subjects of judicial notice as they are court records, which are relevant to issues raised by the pending motion. (See Evid. Code, § 452, subd. (d) [permitting judicial notice of court records]; see also People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 422, fn. 2 [“There is … a precondition to the taking of judicial notice in either its mandatory or permissive form—any matter to be judicially noticed must be relevant to a material issue.”].) However, the Court cannot take judicial notice of the truth of hearsay statements in the subject records. (See People v. Woodell (1998) 17 Cal.4th 969B, 455 [“Evidence Code sections 452 and 453 permit the trial court to ‘take judicial notice of the existence of judicial opinions and court documents, along with the truth of the results reached-in the documents such as orders, statements of decision, and judgments-but [the court] cannot take judicial notice of the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact.’”].)
Accordingly, the request for judicial notice is GRANTED only as to the existence of the documents.
III. Evidentiary Objections
With its reply, TBH submits evidentiary objections to the evidence offer by Mavericks Entities in opposition to the motion and a proposed order in the proper format pursuant to California Rules of Court, rule 3.1354.
Upon review of the objections, the Court overrules Objection Nos. 1, 3, 5-6, 8-11, 15, 20, and 31 (as to Exhibit 27 to the Karan declaration only) to the Karan declaration.
The remaining objections, Objection Nos. 2, 4, 7, 12-14, 16-19, and 21-37 to the Karan declaration, Objection No. 1 to the Bernstein declaration, and Objection Nos. 1-7 to the DuFauchard declaration, do not require rulings as they are immaterial to the disposition of the pending motion. (See Code Civ. Proc., § 437c, subd. (q) [“In granting or denying a motion for summary judgment or summary adjudication, the court need rule only on those objections to evidence that it deems material to its disposition of the motion.”].)
IV. Legal Standard
“Summary judgment is properly granted when no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. A defendant moving for summary judgment bears the initial burden of showing that a cause of action has no merit by showing that one or more of its elements cannot be established or that there is a complete defense. Once the defendant has met that burden, the burden shifts to the plaintiff ‘to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto.’ ‘There is a triable issue of material fact if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.’ ” (Madden v. Summit View, Inc. (2008) 165 Cal.App.4th 1267, 1272, internal citations omitted; California Bank & Trust v. Lawlor (2013) 222 Cal.App.4th 625, 631 [a party cannot avoid summary judgment or adjudication by asserting facts “based on mere speculation and conjecture, but instead must produce admissible evidence raising a triable issue of fact”].)
“Summary adjudication works the same way, except it acts on specific causes of action or affirmative defenses, rather than on the entire complaint. A summary adjudication is properly granted only if a motion therefor completely disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of duty. Motions for summary adjudication proceed in all procedural respects as a motion for summary judgment.” (Hartline v. Kaiser Foundation Hospitals (2005) 132 Cal.App.4th 458, 464, internal citations omitted.)
For purposes of establishing their respective burdens, the parties involved in a motion for summary judgment or adjudication must present admissible evidence. (Saporta v. Barbagelata (1963) 220 Cal.App.2d 463, 468.) Additionally, in ruling on the motion, a court cannot weigh said evidence or deny the motion on the ground that any particular evidence lacks credibility. (See Melorich Builders v. Super. Ct. (1984) 160 Cal.App.3d 931, 935; see also Lerner v. Super. Ct. (1977) 70 Cal.App.3d 656, 660.) The court must liberally construe evidence in support of the party opposing the motion and resolve all doubts concerning the evidence in favor of that party. (See Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389; see also v. Lockheed-California Co. (1978) 86 Cal.App.3d 714, 717-718.)
V. Merits of the Motion
A. First Cause of Action
TBH argues that the first cause of action for breach of contract fails as a matter of law because: (1) Woodside, which performed all of the work under the Financial Services Agreement, and its assignee, Mavericks, never had a securities broker or real estate broker license as required by statute and, consequently, the Financial Services Agreement is void and unenforceable; (2) the break-up fee provision, as interpreted by Mavericks Entities, is an unenforceable penalty under Civil Code section 1671, subdivision (b); (3) the Letters of Intent that it received do not constitute bona fide offers; (4) the entities that issued the Letters of Intent were not qualified buyers; and (5) it never terminated a transaction to sell its business.
1. Woodside and Mavericks’ Lack of a Securities Broker License or a Real Estate Broker License
TBH contends that the Financial Services Agreement is void and unenforceable because Woodside and Mavericks did not possess a securities broker or real estate broker license as required by Corporations Code sections 25004 and 25210 and Business and Professions Code sections 10130, 10136, and 143.
Corporations Code section 25210 provides that “no broker-dealer shall effect any transaction in, or induce or attempt to induce the purchase or sale of, any security in this state unless the broker-dealer has first applied for and secured from the commissioner a certificate, then in effect, authorizing that person to act in that capacity.” Corporations Code section 25004 defines a broker-dealer as “any person engaged in the business of effecting transactions in securities in this state for the account of others or for his own account.” “[I]f an individual in the course of his business participates in negotiations that involve the purchase or sale of securities (§ 25210), he is effecting or attempting to effect a transaction (§ 25004) in such securities and is a ‘broker-dealer.’ ” (Nationwide Investment Corp. v. California Funeral Service, Inc. (1974) 40 Cal.App.3d 494, 502.) Furthermore, a contract is void for illegality when a contract provides that services requiring a real estate broker or security broker-dealer license are to be performed by non-licensed individuals. (Id. at pp. 499 and 504-05 [the plaintiff sought a commission for successfully negotiating the sale of a business to the defendant although not licensed as a real estate broker or as a securities broker; the court found that the contract was void and unenforceable due to the lack of a license].)
Additionally, Business and Professions Code section 10130 states that “[i]t is unlawful for any person to engage in the business of, act in the capacity of, advertise as, or assume to act as a real estate broker or a real estate salesperson within this state without first obtaining a real estate license from the department ….” Business and Professions Code section 10131, subdivision (a) defines a real estate broker as “a person who, for a compensation or in expectation of a compensation, regardless of the form or time of payment, does or negotiates to … [s]ells or offers to sell, buys or offers to buy, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property or a business opportunity.” “A person is not a broker … where he merely brings a buyer and a seller together so that they may make their own contract without aid from him, but any participation, however slight, in the negotiations will bring him within the definition.” (Evans v. Riverside Intern. Raceway (1965) 237 Cal.App.2d 666, 675 (“Evans”), italics omitted.) A “business opportunity” is defined as including “the sale or lease of the business and goodwill of an existing business enterprise or opportunity.” (Salazar v. Interland, Inc. (2007) 152 Cal.App.4th 1031, 1036.) “Solely with regard to any transaction involving the sale, lease, or exchange of a business opportunity …, this division shall not apply to any person licensed at the time of the transaction as a securities broker or securities dealer under any law of this state or of the United States, or by any employee, officer, or agent of that person while acting under the direction of, and within the scope of, his or her employment with that person in connection with the transaction.” (Bus. & Prof. Code, § 10008.5.) A real estate broker must be licensed at the time a cause of action arises and may not bring or maintain any action for the collection of compensation for the performance of an act or contract, for which a license is required, without proving that he or she was duly licensed at all times. (See Bus. & Prof. Code, §§ 143 and 10136.)
Notably, under Business and Professions Code section 10008.5, the real estate broker license requirement does not apply to any person licensed at the time of the transaction as a securities broker or securities dealer under any law of this state or of the United States “with regard to any transaction involving the sale, lease, or exchange of a business opportunity.”
TBH asserts that the undisputed facts demonstrate the following: TBH hired Woodside to sell its business; the purpose of the Financial Services Agreement was to close a transaction to sell the stock of TBH to a qualified buyer for at least $30 million payable in cash upon closing; Woodside performed all of the work under the Financial Services Agreement; Woodside only assigned the Financial Services Agreement to Mavericks pursuant to the August 15, 2014 Assignment Agreement; both Woodside and Mavericks were unlicensed; Woodside never assigned the Financial Services Agreement to WCS, which possessed a securities broker license; the Financial Services Agreement stated, in part, that Woodside would contact and provide information regarding TBH to possible buyers, advise TBH as to strategy and tactics for negotiations related to one or more transactions, assist in evaluating proposals, and, if requested, participate in the negotiations; Woodside was trying to sell a security (i.e., TBH’s stock); Woodside was soliciting purchasers of a business opportunity; and Woodside advised TBH on negotiation strategy and directly negotiated with potential buyers on TBH’s behalf. (Undisputed Material Facts (“UMF”) Nos. 1, 6, 56-62.) Based on the foregoing, TBH argues that Woodside was required to, and did not possess, a securities broker or real estate broker license, and the Financial Services Agreement is therefore void and unenforceable.
TBH’s UMF and evidence are sufficient to meet its initial burden to establish that Woodside was to perform, and did perform, services under the Financial Services Agreement for which a securities broker or real estate broker license was required even though Woodside did not possess such a license. For example, there is evidence showing that Woodside provided TBH with strategies and tactics for negotiations related to one or more transactions, Woodside “put forward” marketing material and “Dr. Hayes’s objective regarding price,” Woodside attempted to advise TBH as to the form and structure of the transaction, Woodside screened interested parties and evaluated their proposals, and Woodside directly negotiated with prospective buyers. (See Hayes Dec., ¶ 15; see also Honkamp Dec, Ex. 14 (Karan Depo. at pp. 247:4-250-12 and 274:19-275:3); see also Rees v. Department of Real Estate (1977) 76 Cal.App.3d 286, 296 [company acted as a broker when it provided terms regarding price to prospective parties and advice regarding negotiations].)
Nonetheless, in opposition, Mavericks Entities demonstrate that there is a triable issue of material fact. Mavericks Entities point out that the Financial Services Agreement allowed Woodside to assign the contract “at any time at its sole discretion to WCS” and Woodside would remain obligated with respect to “all services that do not by law required a securities license.’ (See Burger Dec., Ex. 1, ¶ 15.) Mavericks Entities also submit evidence establishing that Woodside orally assigned the “securities aspects” of the Financial Services Agreement to WCS at the outset of the engagement with TBH. (Karan Dec. ¶ 8 and Ex. D, pp. 59-61 and 282-283.) As Mavericks Entities persuasively argue, an assignment may be oral (see Civ. Code, § 1052 [“A transfer may be made without writing, in every case in which a writing is not expressly required by statute.”]; see also Berg Metals Corp. v. Wilson (1959) 170 Cal.App.2d 559, 575 [under California law, an oral assignment of a contract is sufficient]) and the Financial Services Agreement does not require any assignment to be in writing. Maverick Entities further present evidence that any and all services for which a securities license was required were performed by team members in their capacity and on behalf of the licensed broker-dealer, WCS. (Karan Dec., ¶¶ 3-4 and 6-8.) This evidence demonstrates that there are disputed material facts regarding whether Woodside assigned portions of the Financial Services Agreement to WCS and whether WCS performed those tasks requiring a license.
Accordingly, TBH is not entitled to summary judgment or adjudication on this ground.
2. Unenforceable Penalty Under Civil Code Section 1671, Subdivision (b)
TBH contends that the break-up fee provision of the Financial Services Agreement constitutes an unenforceable penalty under Civil Code section 1671, subdivision (b) because “[Mavericks Entities] interpret the break-up commission provision such that they should be paid a multi-million dollar break-up commission based on a non-binding letter of intent, even though the prospects of a transaction and commission are nothing more than speculation without an actual binding purchase agreement.” (TBH’s Mem. Ps. & As., p. 19:12-15.) TBH concludes that “[a]s a result, there is a substantial disconnect between the alleged damages and actual damages so that [Mavericks Entities’] interpretation of the break-up commission provision operates as an unenforceable penalty ….” (Id. at p. 19:15-17.)
TBH’s argument lacks merit. “Civil Code section 1671, subdivision (b), provides in relevant part: ‘[A] provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.’ Absent a relationship between the liquidated damages and the damages the parties anticipated would result from a breach, a liquidated damages clause will be construed as an unenforceable penalty. [Citation.] The question whether a contractual provision is an unenforceable liquidated damages provision is one for the court. [Citation.]” (Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1314.)
Here, the break-up fee provision of the Financial Services Agreement states:
If the Company receives a bona fide offer in the form of a Letter of Intent, Term Sheet, Memorandum of Understanding, or equivalent, that includes a valuation for the Company of $30 million or greater payable in cash upon Closing, and the Company decides to terminate or abandon that Transaction, the Company will pay Woodside Capital the Transaction Fees that Woodside Capital would have been paid had the Company proceeded with that Transaction under those terms within 30 days of such termination, according to the Transaction Fee section 3b I, ii, and iii, above.
(Burger Dec., Ex. 1, ¶ 3(c).)
This provision does not provide for the imposition of liquidated damages upon a breach of the Financial Services Agreement. As Mavericks Entities persuasively argue, it is readily apparent from the terms of the break-up provision that a break-up fee is not incurred in the event of a breach of the Financial Services Agreement. Instead, such a fee is incurred if TBH decides to terminate or abandon a transaction after receiving a bona fide offer meeting certain specifications. Therefore, Civil Code section 1671, subdivision (b) is inapplicable.
Furthermore, though this point is not raised by the parties, TBH cannot rely on an objection to liquated damages without amending its answer to the 4AXC. An objection to liquidated damages is an affirmative defense and TBH failed to plead this defense in its answer to the 4AXC. (See El Centro Mall, LLC v. Payless ShoeSource, Inc. (2009) 174 Cal.App.4th 58, 65 [party seeking to establish that a liquidated damages provision is an impermissible penalty bears the burden of proof; consequently, the facts necessary to establish the same are “new matter” that the defense must allege in its answer]; see also Carranza v. Noroian (1966) 240 Cal.App.2d 481, 488 [stating that a defendant cannot raise an affirmative defense that it has not pleaded].)
Accordingly, TBH is not entitled to summary judgment or adjudication on this ground.
3. Bona Fide Offer
TBH contends that the break-up fee provision of the Financial Services Agreement was never triggered because it did not receive a bona fide offer to purchase its business. TBH asserts that “[a]s a matter of law, the non-binding letters of intent relied on by [Mavericks Entities] were not … ‘bona fide offers’ ” because the Letters of Intent would not result in a binding contract if accepted. (TBH’s Mem. Ps. & As., p. 8:3-23.) TBH states that the Letters of Intent were simply manifestations of a party’s willingness to enter into a bargain. TBH points out that such a manifestation does not constitute an offer, in a strictly legal sense, if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent. Because the Letters of Intent expressly state that they are non-binding, TBH concludes that the Letters of Intent are not offers, let alone bona fide offers, under the terms of the Financial Services Agreement.
In opposition, Mavericks Entities assert that the Letters of Intent constitute bona fide offers under the Financial Services Agreement. Mavericks Entities highlight the fact that the break-up provision expressly states that a bona fide offer may take “the form of a Letter of Intent, Term Sheet, Memorandum of Understanding, or equivalent ….” (Burger Dec., Ex. 1, ¶ 3(c), italics added.) Mavericks Entities further argue that the term “offer” must be understood in its ordinary and popular sense as opposed to the technical legal meaning assigned to it by TBH. Mavericks Entities conclude that even if TBH’s interpretation of the break-up provision was plausible, there are two equally plausible interpretations of the language such that summary judgment and/or adjudication is precluded.
To determine whether TBH has met its initial burden, the Court applies general rules of contract interpretation. Civil Code section 1636 states, “A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.” Civil Code section 1638 states, “The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.” Civil Code section 1639 states, in pertinent part, “When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible.” Civil Code section 1644 states, “The words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed.” “Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. Such intent is to be inferred, if possible, solely from the written provisions of the contract. The ‘clear and explicit’ meaning of these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the parties in a technical sense or a special meaning is given to them by usage’, controls judicial interpretation. Thus, if the meaning a layperson would ascribe to contract language is not ambiguous, we apply that meaning.” (Santisas v. Goodin (1998) 17 Cal.4th 599, 608, internal citations omitted.)
“Unless a court can ‘to a certainty and with sureness by a mere reading of the document, determine which is the correct interpretation … extrinsic evidence becomes admissible as an aid to interpretation.’ ” (Denver D. Darling v. Controlled Environments Construction, Inc. (2001) 89 Cal.App.4th 1221, 1236 (“Denver”).) “Where the meaning of the words used in a contract is disputed, the trial court must provisionally receive any proffered extrinsic evidence which is relevant to show whether the contract is reasonably susceptible of a particular meaning. [Citation.] Indeed, it is reversible error for a trial court to refuse to consider such extrinsic evidence on the basis of the trial court’s own conclusion that the language of the contract appears to be clear and unambiguous on its face. Even if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible.” (Wolf v. Super. Ct. (2004) 114 Cal.App.4th 1343, 1350 (“Wolf”).) “When the language used is fairly susceptible to one of two constructions, extrinsic evidence may be considered, not to vary or modify the terms of the agreement but to aid the court in ascertaining the true intent of the parties [citation], not to show that ‘the parties meant something other than what they said’ but to show ‘what they meant by what they said.’” (Denver, supra, 89 Cal.App.4th at p. 1236.)
Here, there is no dispute that the parties entered into the Financial Services Agreement and the break-up provision states:
If the Company receives a bona fide offer in the form of a Letter of Intent, Term Sheet, Memorandum of Understanding, or equivalent, that includes a valuation for the Company of $30 million or greater payable in cash upon Closing, and the Company decides to terminate or abandon that Transaction, the Company will pay Woodside Capital the Transaction Fees that Woodside Capital would have been paid had the Company proceeded with that Transaction under those terms within 30 days of such termination, according to the Transaction Fee section 3b I, ii, and iii, above.
(Burger Dec., Ex. 1, ¶ 3(c).)
The term “bona fide offer” as used in the Financial Services Agreement is ambiguous because the subject language is capable of the two different constructions offered by the parties. (TRB Investments, Inc. v. Fireman’s Fund Ins. Co. (2006) 40 Cal.4th 19, 27 [“A … provision will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable.”].) Most importantly, the break-up provision is reasonably susceptible to the interpretation urged by Mavericks Entities. In its ordinary and popular sense, “bona fide” simply means “in good faith” or “genuine.” (Covert v. State Bd. of Equalization (1946) 29 Cal.2d 125, 134 [“ ‘Bona fide’ is defined as ‘in or with good faith; without fraud or deceit; genuine.’ ”]; Black’s Law Dict. (10th ed. 2014) 17c [“bona fide (boh-nə fid or boh-nə fi-dee) adj. [Latin “in good faith”] (17c) 1. Made in good faith; without fraud or deceit. 2. Sincere; genuine.”].) Furthermore, in its ordinary and popular sense, “offer” means “a communication of interest in buying or selling an asset,” “[t]he act or an instance of presenting something for acceptance,” or “a statement that one is willing to do something for another person or to give that person something.” (Black’s Law Dict. (10th ed. 2014) 15c [“offer n. (15c) 1. The act or an instance of presenting something for acceptance; specif., a statement that one is willing to do something for another person or to give that person something
Accordingly, TBH is not entitled to summary judgment or adjudication on this ground.
4. Qualified Buyer
TBH contends that the break-up fee provision of the Financial Services Agreement was never triggered because it did not receive an offer from a “qualified buyer.” TBH points to section 1(a) of the Financial Services Agreement, which states, “[Woodside] acknowledges that the Company is a California professional psychology corporation, and that as a consequence its equity ownership is restricted to certain classes of professionally licensed persons. [Woodside] agrees to carry out its services accordingly.” (Burger Dec., Ex. 1, ¶ 1(a).) TBH asserts that its shares could only be sold to a natural person with the requisite license under Business and Professions Code sections 13401, subdivision (d) and 13406, subdivision (a). TBH notes that the letters of intent were issued by private equity firms and the letters of intent indicated that new, separate entities would be formed to later acquire TBH’s stock. TBH concludes that because no duly licensed natural person, or an entity owned by such a person, submitted an offer to purchase its business, the break-up provision was not triggered.
TBH’s argument is not well-taken. As Mavericks Entities persuasively argue, the break-up provision does not require a bona fide offer to be made by a “qualified buyer” or by a natural person licensed in accordance with Business and Professions Code sections 13401, subdivision (d) and 13406, subdivision (a). (See Burger Dec., Ex. 1, ¶ 3(c).) Furthermore, the language set forth in section 1(a) of the Financial Services Agreement does not impose any such condition. Rather, that section merely reflects the fact that the ultimate purchaser of TBH’s stock must be a properly licensed natural person. As Mavericks Entities point out, the Letters of Intent state that affiliated entities would be established in order to acquire TBH’s stock in compliance with the Business and Professions Code. (See e.g. Hayes Dec., Ex. 4, p. 1; see also Bernstein Dec., Exs. 40-41.) There is no indication that the proposed arrangement set forth in the Letters of Intent somehow prevented the break-up provision from being triggered.
Accordingly, TBH fails to meet its initial burden and it is not entitled to summary judgment or adjudication on this ground.
5. TBH’s Termination or Abandonment of a Transaction to Sell Its Business
TBH contends that the break-up fee provision of the Financial Services Agreement was never triggered because it did not terminate or abandon a “transaction” as that term is defined in the Financial Services Agreement. The Financial Services Agreement defines a transaction as a “Sale of Company.” (Burger Dec., Ex. 1, ¶ 8(ii)(j).) “Sale of Company” means “one or a series of transactions whereby, directly or indirectly, control of or a material interest in the Company or any of its businesses or assets, such that the value of such interest or businesses or assets is equal to or greater than fifty-one percent (51%) of the total equity or value of the Company, are transferred to or combined with that of any person or one or more persons formed by or affiliated with such person, including, without limitations, an acquisition, a disposition or exchange of capital stock or assets, a merger or consolidation, a tender or exchange offer, a leveraged buyout, or the formation of a joint partnership or any similar transaction.” (Burger Dec., Ex. 1, ¶ 8(ii)(f).) TBH argues that the non-binding Letters of Intent “could not have been accepted by [it] to create a contract of ‘transaction’ for a buyer to acquire ‘a material interest in the Company.’ ” (TBH’s Mem. Ps. & As., p. 11:22-26.) Finally, TBH contends that even if there was a transaction, the potential buyer, Riverside, terminated the transaction pursuant to its October 6, 2014 email.
As Mavericks Entities persuasively argue, TBH’s interpretation of the break-up provision is not well taken. The break-up provision states:
If the Company receives a bona fide offer in the form of a Letter of Intent, Term Sheet, Memorandum of Understanding, or equivalent, that includes a valuation for the Company of $30 million or greater payable in cash upon Closing, and the Company decides to terminate or abandon that Transaction, the Company will pay Woodside Capital the Transaction Fees that Woodside Capital would have been paid had the Company proceeded with that Transaction under those terms within 30 days of such termination, according to the Transaction Fee section 3b I, ii, and iii, above.
(Burger Dec., Ex. 1, ¶ 3(c).)
As previously explained, given the ordinary and popular meaning the language used in the break-up provision, the receipt of a non-binding letter of intent may constitute a bona fide offer sufficient to trigger the break-up provision. Thus, the termination or abandonment of the transaction is not dependent upon the receipt of a legally binding offer.
Furthermore, Mavericks Entities’ evidence in opposition raises a triable issue of material fact regarding the party that initiated the termination or abandonment of the transaction between TBH and Riverside. Mavericks Entities submit an October 3, 2014 email from Hayes in which he terminated any further negotiation with Riverside and stated that TBH would not be “doing a transaction” with Riverside. (See Karan Dec., Ex. 27, p. TPG10004346 [“So to answer your question, since you have indicated that you can’t pay $36,000,000 at close as you can’t alter your view that you have a right to our accounts receivable for the pre-transaction period and since while $36,000,000 is acceptable and under $34,000,000 is not, I do think you should halt the due diligence process immediately now & we will consider todays meetings cancelled. While we won’t be traveling to Cleveland next week, nor doing a transaction, I do want to thank you very much for taking such a comprehensive look at TBH and offering creative terms. [¶] I regret the costs that both our companies have incurred in the process & that we were not able to accomplish the $36,000,000 close ….”].) This email is sufficient to raise a triable issue of material fact as to whether TBH terminated or abandoned the subject transaction.
Accordingly, TBH is not entitled to summary judgment or adjudication on this ground.
6. Conclusion
Because all of the grounds asserted as the basis for TBH’s motion with respect to the first cause of action fail, the motion for summary adjudication of the first cause of action and summary judgment of the 4AXC is DENIED.
B. Second Cause of Action
TBH argues that the second cause of action for reformation fails as a matter of law because: (1) the Financial Services Agreement is void and, therefore, the Assignment Agreement cannot be reformed; (2) Mavericks Entities’ judicial admissions and the integration clause in the Assignment Agreement preclude reformation of the Assignment Agreement; and (3) reformation of the Assignment Agreement would be futile.
1. Inability to Reform Assignment Agreement Because the Financial Services Agreement is Void
TBH contends that the Assignment Agreement, which assigns the Financial Services Agreement from Woodside to Mavericks, cannot be reformed because the Financial Services Agreement is a void contract. This argument is based on TBH’s contention that the Financial Services Agreement is void and unenforceable because Woodside and Mavericks did not possess a securities broker or real estate broker license as required by Corporations Code sections 25004 and 25210 and Business and Professions Code sections 10130, 10136, and 143. As articulated above, TBH’s argument is not well-taken because the evidence demonstrates that there are disputed material facts regarding the assignment of portions of the Financial Services Agreement to WCS and WCS’s performance of those tasks requiring a license.
Because TBH has not established that the Financial Services Agreement is void, it is not entitled to summary judgment or adjudication on this ground.
2. Inability to Reform Assignment Agreement Due to Prior Judicial Admissions and the Integration Clause
TBH contends that the reformation claim fails because Mavericks Entities made judicial admissions that defeat their claim. TBH contends that Mavericks Entities admitted that its written consent was required to assign the Financial Services Agreement to MCS. In support of this argument, TBH points to statements made by Mavericks Entities in their petition to compel arbitration and reply papers filed in support thereof. (See UMF 73-74.) “A judicial admission is a party’s unequivocal concession of the truth of a matter, and removes the matter as an issue in the case. Judicial admissions may be made in a pleading …. Facts established by pleadings as judicial admissions are conclusive concessions of the truth of those matters, are effectively removed as issues from the litigation, and may not be contradicted, by the party whose pleadings are used against him or her.” (See Minish v. Hanuman Fellowship (2013) 214 Cal.App.4th 437, 456.) “Not every document filed by a party constitutes a pleading from which a judicial admission may be extracted. Code of Civil Procedure section 420 explains that pleadings serve the function of setting forth the formal allegations by the parties of their respective claims and defenses, for the judgment of the Court. The pleadings allowed in civil actions are complaints, demurrers, answers, and cross-complaints. When these pleadings contain allegations of fact in support of a claim or defense, the opposing party may rely on the factual statements as judicial admissions.” (Myers v. Trendwest Resorts, Inc. (2009) 178 Cal.App.4th 735, 746, citations and internal quotation marks omitted.) Here, the petition to compel arbitration and the reply papers filed in support thereof are not pleadings. Consequently, the statements made by Mavericks Entities therein cannot be relied on as judicial admissions. For this reason, TBH’s argument is not well-taken.
TBH also contends that the reformation claim fails because the integration clause set forth in the Assignment Agreement “confirms it was the parties’ intent that an assignment would require TBH’s prior written consent.” (TBH’s Mem. Ps. & As., p. 18:1-2.) TBH points out that section 3.2 of the Assignment Agreement contains the following integration clause:
This Agreement is an integrated agreement which contains the entire agreement and understanding among the parties or between any of them with respect to the subject matter of this Agreement … and merges and supersedes all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations, whether written or oral, among the parties or between any of them with respect to such subject matter, and there are no agreements or understandings regarding such subject matter among the parties or between any of them other than those set forth in this Agreement.
(Burger Dec., Ex. 2, ¶ 3.2.) TBH then concludes that “the Assignment Agreement specifically adopts Section 15 of the Broker Agreement,” which states that the Financial Services Agreement cannot be assigned without TBH’s prior written consent, except to WCS. (Id. at p. 18:7-11.)
“As a general rule, a written contract, having been deliberately executed, is presumed to correctly express the parties’ intentions. [Citations.] The presumption is not conclusive and may be overcome by satisfactory evidence which shows that the written instrument is not in conformity with the true agreement of the parties. [Citation.] Civil Code section 3399 allows reformation of a contract when, through mistake, it fails to express the true agreement of the parties. [The] mistake may be the mutual error of both parties to the contract, or the oversight of one party which the other knew or suspected at the time of entering the agreement. [Citation.]” (Appalachian Ins. Co. v. McDonnell Douglas Corp. (1989) 214 Cal.App.3d 1, 18 [internal quotations omitted].)
When reformation is sought, “the Court may inquire what the instrument was intended to mean, and what were intended to be its legal consequences, and is not confined to the inquiry what the language of the instrument was intended to be.” (Civ. Code, § 3401; First American Title Ins. & Trust Co. v. Cook (1970) 12 Cal.App.3d 592, 598.) Accordingly, “[t]he fact that the parties used the very words which they intended to use is not always sufficient cause for refusing relief of this character. There may be no mistake as to the words used or to be used, and at the same time there may have been a mutual mistake as to some other matter of fact affecting the meaning or application of the words, and by reason thereof the contract may not truly express the real intention of both parties, and in that case it may be revised and reformed at the instance of the aggrieved party and enforced accordingly, although the words were carefully chosen. [Citations.]” (F.P. Cutting Co. v. Peterson (1912) 164 Cal. 44, 47-48.)
Here, the fact that the Assignment Agreement contains an integration clause does not prevent Mavericks Entities from seeking a reformation which may be entirely inconsistent with the terms of the document at issue. Mavericks Entities can have the Assignment Agreement reformed if they can show mutual mistake and that the intentions of the parties are not represented by, and embodied in, the current agreement. Further, the Court may consider parol evidence in deciding whether a mutual mistake has occurred and it is not limited, as TBH seems to suggest, to the writing itself. (See Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 525 [extrinsic evidence is admissible to show mutual mistake even if the contracting parties intended the writing to be a complete statement of their agreement.].) In sum, extrinsic evidence is necessary in this case because the Court must derive the true intentions of the contracting parties and determine whether the written agreement accurately represents those intentions. Thus, TBH’s argument, which attempts to limit the Court’s review to the text of the Assignment Agreement, is not well-taken.
For the foregoing reasons, TBH is not entitled to summary judgment or adjudication on these grounds.
3. Futility
TBH contends that reformation of the Assignment Agreement would be futile as it would not overcome “the other fatal flaws in [Mavericks Entities’] case (i.e., the lack of any ‘bona fide offers’, lack of required licensure, etc.).” (TBH’s Mem. Ps. & As., p. 18:13-17.) This argument is wholly dependent on the other grounds for summary judgment or adjudication set forth in TBH’s motion. Because those other grounds are not well-taken, this argument fails as well.
4. Conclusion
Because all of the grounds asserted as the basis of TBH’s motion with respect to the second cause of action fail, the motion for summary adjudication of the second cause of action is DENIED.
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