2015-00174213-CU-BC

Stephen C. Patterson vs. Institute of Technology

Nature of Proceeding: Motion to Stay or Dismiss

Filed By: Duvernay, Stephen M.

Cross-Defendant Arlington Capital Partners, L.P.’s (“Arlington”) Motion to Stay or Dismiss for Forum Non Conveniens is granted.

Cross-complainant Mason Myers’ request for judicial notice is granted.

Arlington moves to stay or dismiss the First Amended Cross-Complainant as to Mason Myers pursuant to CCP §§ 410.30, 418.10(a)(2) on the basis that the FACC is subject to a mandatory contractual forum selection clause designating Wilmington, Delaware as the exclusive forum. Arlington also filed a demurrer and motion to strike the cross-complaint. Myers has not opposed either the demurrer or motion to strike.

This case arises out of a strip mall lease for a vocational school. After the SEG Defendants operated briefly at the Citrus Heights location as a subtenant, Institute of Technology (“lOT”) shuttered the Citrus Heights campus and vacated the premises. The landlord-Patterson Family Trust-filed this lawsuit in 2015 against lOT, Brightstar Education Group, Inc. (“Brightstar”), and Select Education Group, LLC (“SEG”). Patterson took a default against IOT and Brightstar, which ceased operations after selling their assets to SEG Defendants. Patterson Trust also added National Holistic Institute (“NHI”) as a party in the First Amended Complaint. (NHI and SEG will be referred to collectively as the “SEG Defendants.”). The SEG Defendants filed a Cross-Complaint for indemnity against moving party Arlington, the majority shareholder of defendant lOT. The SEG Defendants allege that Arlington, an investment fund which was the majority owner of Brightstar, which in turn owned lOT-assured them that it would assume responsibility for the lease after the sale-closed. The First Amended

Cross-Complaint (“FACC”) alleges that Arlington caused Brightstar and the lOT to default on the Citrus Heights Lease and did so by stripping those entities of their assets while falsely assuring SEG, NHI, and Myers that Brightstar and lOT’s obligations under the Citrus Heights Lease would be satisfied.

The Court previously granted Arlington’s motion with respect to the cross-complaint filed by the SEG Defendants. In connection with opposing the previous motion, SEG and NHI filed the FACC which added Mason Myers as a cross-complainant. Myers is the president and CEO of NHI and the president of SEG. The Court’s ruling stayed the claims in the FACC asserted by SEG and NHI. The ruling did not apply to Mason Myers’ claims given that at the time Arlington filed the first motion, the cross-complaint only included claims by SEG and NHI. Arlington’s prior motion could not have requested relief as to Myers’ claims which were added for the first time in the FACC filed after the motion was filed.

In connection with Arlington’s forum non conveniens motion, the Court found that SEG and NHI’s claims arose out of the Asset Purchase Agreement’s (“APA”) negotiation and was subject to the mandatory forum selection clause in the APA. The Court concluded that even though Arlington was not a signatory to the APA, it had a sufficiently close relationship with IOT and Brightstar. The Court further concluded that SEG and NHI failed to demonstrate that enforcement of the forum selection clause would be unreasonable. The Court granted the motion to stay SEG and NHI’s FACC.

Arlington now argues that while Myers has since been added to the SEG Defendants’ cross-complaint, his claims also arise out of the APA. Arlington argues that Myers’ claims are premised on the identical alleged misrepresentations made during the course of negotiations of the APA and Myers is closely related to the contractual relationship based on the fact that he negotiated the terms of the APA, and signed the APA on behalf of his entities SEG and NHI. Arlington essentially argues that the same rationale which led the Court to grant its motion with respect to SEG and NHI applies equally to Myers. The parties to the APA were Brightstar, IOT and SEG and NHI. The APA provides:

“12.11 Consent to Jurisdiction and Service of Process. EACH PARTY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE CITY OF WILMINGTON, DELAWARE SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE PARTIES PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT, EACH PARTY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISIDCTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH PARTY HEREBY WAIVES ANY OBJECTION THAT SUCH PARTY MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT…” (Hillard Decl. Exh. 1 [APA p. 30, ¶ 12.11] [emphasis in original].)

As a general rule, forum selection clauses should be welcomed. (Wimsatt v. Beverly Hills Weight etc. Internat., Inc. (1995) 32 Cal.App.4th 1511, 1523.) The burden rests with the plaintiff to show that the contractually agreed upon forum selection clause would be unreasonable under the circumstances of the case. (Lu v. Dryclean-U.S.A. of California, Inc. (1992) 11 Cal.App.4th 1490, 1493; Berg v. MTCElectronics

Technologies (1998) 61 Cal.App.4th 349.)

“The procedure for enforcing a forum selection clause is a motion to stay or dismiss for forum non conveniens.” (Olinick v. BMG Entertainment (2006) 138 Cal.App.4th 1286, 1294; see CCP §§ 410.30, 418.10(a)(2).) A mandatory contractual “forum selection clause is presumed valid and will be enforced unless the plaintiff shows that enforcement of the clause would be unreasonable under the circumstances of the case.” (Intershop Communications AG v. Superior Court (2002) 104 Cal.App.4th 191, 198; see also Smith, Valentino & Smith, Inc. v. Superior Court (1976) 17 Cal.3d 491, 496.) “[T]he test is simply whether application of the clause is unfair or unreasonable, and the clause is usually given effect.” (Berg, supra, 61 Cal.App.4th at 358.) The party opposing enforcement of a mandatory forum selection clause “bears the ‘substantial’ burden of proving why it should not be enforced.” (Global Packaging, Inc. v. Superior Court (2011) 196 Cal.App.4th 1623, 1633 [quoting CQL Original Products, Inc. v. National Hockey League Players’ Assn. (1995) 39 Cal.App.4th 1347, 1353].) To carry that burden, the party opposing the motion must “demonstrate enforcement of the clause would be unreasonable under the circumstances of the case.” (CQL Original Products, supra, 39 Cal.App.4th at 1354; see also, Rest.2d, Conf. of Laws, § 80; accord, Annot. (1984) 31 A.L.R.4th 404; 2 Witkin, op. cit. supra, Jurisdiction, § 289(b), p. 696.)

The salient question is whether “the contractually selected forum would be unavailable or unable to accomplish substantial justice or that no rational basis exists for the choice of forum” (Intershop Communications AG, supra, 104 Cal.App.4th at 199; see also CQL Original Products, supra, 39 Cal.App.4th at 1354.) “Neither inconvenience nor the additional expense of litigating in the selected forum are factors to be considered.” (Intershop Communications AG, supra, 104 Cal.App.4th at 199; see also Weil & Brown, et al., Cal. Prac. Guide Civ. Pro. Before Trial, 3:444.6 (The Rutter Group 2017).)

As the California Supreme Court has explained, where a contract has been “entered into freely and voluntarily by parties who have negotiated at arm’s length,” the parties “reasonably can be held to have contemplated in negotiating their agreement the additional expense and inconvenience attendant on the litigation of their respective claims in a distant forum.” (Smith, Valentino & Smith, Inc, supra, 17 Cal.3d at 496.) Accordingly, “[m]ere inconvenience or additional expense is not the test of unreasonableness since it may be assumed that the plaintiff received under the contract consideration for these things.” (Id.)

The Court first must address the issue of Myers’ filing of an amended cross-complaint on June 15, 2018 in connection with Myers’ opposition to the instant motion. As recounted above, SEG and NHI originally filed the cross-complaint which did not include Myers. In connection with the opposition to Arlington’s first motion, the FACC was filed which added Myers as a cross-complainant for the first time. On June 15, 2018, he [Myers] filed his own first amended cross-complaint (“MFACC”) in which he is the lone cross-complaint. Given that Myers was not included in SEG and NHI’s original cross-complaint and only named for the first time in their FACC, the FACC was his first cross-complaint and he was able to file his MFACC as a matter of right. Arlington makes no argument to the contrary and the Court is simply highlighting this procedural step. While Myers’ filing of the MFACC may have mooted the demurrer and motion to strike, it does not moot the motion to stay. In the end, regardless of whether the Court analyzes the motion as directed to Myers’ claims in the FACC, the

MFACC, or both, the result is the same and the motion shall be granted.

Myers opposes the motion on the basis that the MFACC does not arise out of or relate to the APA. Myers contrasts the FACC in which he (and SEG and NHI) alleged causes of action for fraud and negligent misrepresentation based on allegations that Arlington made various misrepresentations in connection with negotiating the APA. There was also a cause of action for indemnity. In the MFACC, Myers only asserts claims for equitable indemnity. He has removed references to the APA and the alleged misrepresentations. Specifically, he alleges that Arlington intentionally interfered with the contractual relations of IOT/Brightstar and Plaintiff Patterson regarding the underlying Lease Agreement and Guaranty of Lease and as a result, he seeks indemnity for any damages Plaintiff is awarded against him as a result of any breach of the Lease and Guaranty. Myers argues that he is entitled to pursue these separate claims for indemnity even if the misrepresentation claims would be subject to the APA. According to Myers, it is “entirely legitimate” for him “to decide not to pursue its wholly separate claim[s]” for misrepresentation, “whether the decision was based on a desire to avoid litigating in [Delaware], or for some other reason.” (Berclaim America Latina v. Baan Co. (1999) 74 Cal.App.4th 401, 408.)

First, the Court would note that the SEG Defendants had an indemnity claim in their cross-complaint and the Court still concluded that the claim was subject to the mandatory forum selection clause in the APA. The SEG Defendants specifically argued that the indemnity claims did not require interpretation of the APA. The Court rejected that argument finding that the APA’s mandatory forum selection clause was broad and applied to “any claims or disputes…pertaining to this agreement or to any matter arising out of or relating to this agreement.” The Court cited to case law finding that broad clauses reach disputes over alleged misrepresentations made in the course of negotiating an agreement. (Cal-State Bus. Prod. & Servs., Inc. v. Ricoh (1993) 12 Cal.App.4th 1666.)

Myers has essentially conceded that the FACC arises out of the APA and is therefore governed by the forum selection clause given the fact that he makes no attempt in the opposition to argue that his claims in the FACC did not arise out of the APA. Instead he filed the MFACC and argued that the MFACC does not arise out of the APA. As with the SEG Defendants’ claims in the FACC (which the Court concluded were subject to the forum selection clause), Myers’ claims in the FACC all are expressly based on Arlington’s negotiation and performance of the APA. All of Arlington’s alleged misrepresentations occurred in the context of the negotiation of the APA with the SEG Defendants and which were made to the SEG Defendants and Myers. Any and all claims by Myers in the FACC were clearly subject to the APA’s forum selection clause just as the Court determined with respect to the SEG Defendants.

Myers argues that the Court must focus solely on the allegations of the MFACC in analyzing this motion. However, the authority cited by Myers does not support the proposition that an amended pleading filed as a matter of right after a motion to stay/dismiss on forum non conveniens was filed requires the Court to focus solely on the allegations of the amended pleading. While the amended pleading may moot the demurrer, the authority cited by Myers does not stand for the proposition that the Court is required to focus solely on the amended pleading as neither case involved a party seeking to evade a forum selection clause by amending the complaint. Indeed, the SEG Defendants previously amended their cross-complaint when they filed the FACC while Arlington’s previous motion was pending and the Court nevertheless analyzed

the motion to stay/dismiss and concluded that the SEG Defendants’ claims were subject to the forum selection clause.

Even assuming that the Court was constrained to the allegations of the MFACC in analyzing this motion, the claims in the MFACC are subject to the forum selection clause. While Myers has removed all express references to the APA from the MFACC and no longer has claims for misrepresentation, an examination of his equitable indemnity cause of action reveals that it does arise out of the APA and that the equitable indemnity claims in the FACC and the MFACC are essentially the same. To that end in the MFACC he alleges that Arlington interfered with the contractual relationship of IOT, Brightstar and Plaintiff Patterson with respect to the Lease and the Guaranty by allowing IOT and Brighstar to go into default. He argues that his indemnity claim arises only out of the Lease and Guaranty, agreements which were executed years before the APA. He argues that a claim which seeks indemnity for damages sought by Plaintiff Peterson based on any alleged breach of the Lease and the Guaranty have no relation to the APA. While that argument appears to have some appeal, a critical analysis of the basis of the indemnity claim reveals that it is misplaced. In the original cross-complaint and the FACC, it was alleged that Arlington essentially caused IOT and Brightstar to default on the Lease after the APA closed and represented in the course of negotiating the APA that it would take responsibility for the Lease knowing it intended to let the Lease go into default. Simply removing the specific allegations from the amended cross-complaint regarding Arlington’s alleged representations and references to the APA does not save Myers from the reach of the forum selection clause. The basis of the alleged interference is the same conduct that was present in the previous cross-complaints which this Court found was related to the APA. That is, the very conduct alleged to be the interference with the Lease and the Guaranty, specifically, allowing IOT and Brightstar to go into default on the Lease, is the same conduct that formed the basis of the misrepresentation claims. The SEG Defendants and Myers alleged in the FACC that Arlington repeatedly assured them that it would assume IOT and Brightstar’s obligation under the Lease all the while intending to leave IOT and Brightstar as shell companies unable to satisfy their obligations under the Lease and knowing it would allow IOT and Brighstar to go into default under the Lease after the APA closed. The core conduct in the FACC and the MFACC is the same, specifically, Arlington’s conduct in allowing IOT and Brightstar to go into default under the Lease, all of which the SEG Defendants and Myers have maintained was contrary to representations made during the APA negotiation. While Myers has removed references to the APA and the alleged representations from the MFACC, the indemnity causes of action premised on Arlington’s decision to let IOT and Brightstar go into default under the Lease is premised on the conduct of Arlington that occurred during the same time the APA was being negotiated. The alleged conduct of Arlington in making misrepresentations in the course of the negotiations of the APA is part and parcel with its decision to allow IOT and Brightstar to default under the Lease. Myers’ claims against Arlington arise out of or are related to the APA. The indemnity claims are not, as Myers argues, entirely separate from the APA.

The above conclusion that Myers’ indemnity claims in the MFACC are subject to the forum selection clause is reinforced when examining Plaintiff Patterson’s allegations in the complaint. Plaintiff Patterson’s claim against Myers focus on Myers’ conduct in negotiating the APA on the SEG Defendants’ behalf which Patterson alleged was taken to interfere with the Lease. (SAC 25, 26, 50.) Myers in turn seeks indemnity from Arlington with respect to Arlington’s failure to live up to its representations that it would assume IOT’s and Brightstar’s obligations under the Lease. Equitable indemnity

requires joint liability among tortfeasors to the plaintiff. (Stop Loss Ins. Brokers v. Brown & Toland Medical Group (2006) 143 Cal.App.4th 1036, 1040.) The only possible way that Myers and Arlington could be jointly liable to Plaintiff (based on Plaintiff’s allegations of Myers’ conduct under the APA) is pursuant to the APA and associated negotiations. Absent the APA, Myers and Arlington have no relationship. Despite Myers’ attempts to eliminate references to the APA in the MFACC, Myers’ claims against Arlington necessarily arise out of or relate to the APA and are subject to the forum selection clause.

Myers next argues that he is not bound by the APA in his individual capacity. Myers points out that he signed the APA in his representative capacity for SEG and was not a party to the APA. “[A] range of transaction participants, parties and non-parties, should benefit from and be subject to forum selection clauses.” (Lu v. Dryclean-U.S.A. of California, Inc. (1992) 11 Cal.App.4th 1490, 1494 [citations omitted].) “A forum selection clause may…be enforced against a plaintiff who is not a party to the contract in question if the plaintiff is ‘closely related to the contractual relationship.’” ( Net2Phone, Inc. v. Superior Court (2003) 109 Cal.App.4th 583, 588 [citations omitted].) Federal case law in this area has found that an entity’s directors and officers may be subject to a forum selection clause even in cases where they are parties in their individual capacity. For example, a company’s president was subject to a forum selection clause in an agreement that he signed in a representative capacity where the president signed the agreement (in a representative capacity), was involved in negotiations, and had personal knowledge of the matter and would have been called to testify as a witness in his representative capacity even if he was not a party to the action in his individual capacity. (Firefly Equities, LLC v. Ultimate Combustion Co. (S.D.N.Y. 2010) 736 F.Supp.2d 797, 800.) Here too, Myers signed the APA in his representative capacity, was involved in the APA’s negotiations and has personal knowledge of the transaction. In such circumstances, it is “difficult for the Court to imagine parties more closely related…” (Id.) Like the president in Firefly, Myers would be called to testify as a witness in his representative capacity even if he were not a party in his individual capacity. An individual who was a “shareholder, officer, and director of [an entity], which was a party to the agreements…is, without question, ‘closely related’ to the disputes arising out of agreements and properly bound by the forum-selection provisions.” (Marano Enters. Of Kansas v. Z-Teca Restaurants, L.P. (8th Cir. 2001) 254 F.3d 753, 757-58 [emphasis in original]) There are numerous similar cases cited in Arlington’s moving papers.

Myers attempts to distinguish the cases cited by Arlington mainly on the grounds that his claims do not arise out of or relate to the APA. But as discussed above, the Court has already concluded that the indemnity claims in the MFACC arise out of or relate to the APA. He also argues that he has brought the MFACC in his personal capacity.

But as discussed in the preceding paragraph, there is ample authority supporting enforcement of a forum selection clause against a corporate representative that signed the subject agreement in a representative capacity who asserts claims in a personal capacity. He also argues that he is not closely related to any party in the APA because he signed the APA in a representative capacity and yet “[d]irectors and officers are not personally liable on contracts signed by them for and on behalf of a corporation unless they purport to bind themselves individually.” (U.S. Liab. Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal.3d 586, 595.) That case has no application. It was only addressing the question of director/officer liability and was not addressing the question of whether a director/officer could be subject to a forum selection clause which the director/officer did not sign in an individual capacity. While it is true that

Myers did not purport to bind himself individually to the APA or that any party to the APA intended to benefit him personally, given his involvement in the negotiations and status with SEG and NHI, he has a defined business interest with a contracting party, e.g., SEG. Myers argues that the relationship must be with one of the contracting parties outside his role as an officer of SEG but provides no authority to support that claim.

Myers also cited to Berclain America Latina v. Baan Co. (1999) 74 Cal.App.4th 401,
407-408 for the proposition that a non-signatory subsidiary was not “closely related” to the parties to the contract with the forum selection clause where the non-signatory was not alleged to be the alter-ego of a signatory and not shown to have directly participated in the transaction. There, however, the Court emphasized that the non-signatory had no relationship with any party to the contract at the time it was signed and no involvement in any transaction surrounding the signing of the contract. Here by contrast, Myers had a relationship with the contracting parties (he signed the APA) and was involved with the negotiations. Further, Berclain does not, as Myers suggests, require that the involvement be personal as opposed to involvement as a representative of SEG. In fact Berclain noted that if the nonsignatory owned the company that was involved in the transaction at the time the company entered the transaction and had been involved in the transaction it would likely be appropriate to enforce the forum selection clause against the non-signatory. (Id. at 408.)

Myers is the principal officer of SEG and NHI, negotiated the APA on their behalf and signed the APA. “There is no question….[that]…key transaction participants–the deal

makers who negotiated, evaluated and otherwise put together” a transaction are “closely related to the contractual relationship.” (Bugna v. Fike (2000) 80 Cal.App.4th 229, 235.) This result “makes sense because the forum selection clause is part of the underlying contract, and it is the contractual relationship gone awry that presumably spawns litigation and activates the clause. Giving standing to all closely related entities honors general principles of judicial economy by making all parties closely allied to the contractual relationship accountable in the same forum, thereby abating a proliferation of actions and inconsistent rulings.” (Id.)

In short, the Court concludes that the forum selection clause may be enforced against Myers as he has a sufficiently close relationship to the parties to the APA.

The Court already concluded that Arlington had a sufficiently close relationship to the parties such that it may enforce the forum selection clause when it granted its previous motion. The result is the same here and Myers makes no argument that Arlington does not have a sufficiently close relationship.

Finally, Myers made no attempt to demonstrate that enforcement of the forum selection clause is unreasonable. As discussed above, the party opposing enforcement of a mandatory forum selection clause “bears the ‘substantial’ burden of proving why it should not be enforced.” (Global Packaging, Inc., supra, 196 Cal.App.4 th at 1633 [citations omitted].) Having failed to make any argument in this regard, Myers has not shown that “enforcement of the clause would be unreasonable under the circumstances of the case.” (CQL Original Products, supra, 39 Cal.App.4th at 1354.)

The Court declines to address the parties’ various accusations of gamesmanship. The arguments were not relevant to the Court’s determination of the instant motion.

Arlington’s motion to stay the claims in the cross-complaint as asserted by Myers pursuant to the mandatory forum selection clause is granted. The Court notes that Arlington moved to stay or dismiss but presented no argument, factual or legal, as to why the claims should be dismissed and the Court will simply stay the claims as it did with respect to Arlington’s motion against the SEG Defendants.