California Business Lawyer Blog

It is an unfortunate fact of life: if you are in business today, you are going to have disputes. They may be contract disputes with suppliers or they may be claims made by your customers. They may be contract disputes or banking disputes. They may very well be disputes with your employees.
Many things can be done to avoid such problems, but this article is intended to deal with the methods in which those disputes can be handled.

There may be occasions where you simply have no input into the method of dispute resolution. There may be no contract in which you can make a choice, or no invoice in which you can insert a dispute resolution requirement. However, where the choice is yours, your basic options are to go to court and litigate, or to choose the alternative dispute resolution of arbitration. Both of those methods of resolution could include a side trip known as mediation, which is a good place to start.

MEDIATION
Irrespective of whether your ultimate dispute resolution may be litigation or arbitration, you may choose to include in your contracts an obligation to mediate before the matter is allowed to proceed. Mediation has become a cottage industry in the last 15 years, as many lawyers have chosen to emphasize their positions as mediators, rather than advocates, and many retired judges have set up shop as mediators.

Mediation is nothing more complicated than having a third party getting involved in your dispute, receiving information from both parties, and then sitting down to talk separately with each party in an effort to find some middle ground in which a settlement of the issues is possible. Mediators emphasize to the participants:

•The cost of arbitrating or litigating their claims;
•The uncertainly of that resolution; and
•The time and effort it will cost both sides to proceed past mediation.
With that framework, a mediator uses his or her training and skills to find a solution that both parties can live with, if not be excited about.

Most people would be amazed at the percentage of success rate enjoyed by mediators in finding a solution to often difficult and complicated issues. In addition to a skilled mediator, a successful outcome is going to depend, to a large degree, on both sides being willing to:

•Listen;
•Continue to engage in the process;
•Keep in mind the cost benefit ratios of moving on in the dispute process; and
•Put aside the "principal" involved.
ARBITRATION

If mediation does not resolve your issues, the alternative is to "try" your lawsuit. You can do that either in the traditional way in front of a court and a jury, or you can put your case before an arbitrator selected by the parties or one selected by the American Arbitration Association ("AAA"). The AAA is a national organization that provides qualified arbitrators (and for that matter mediators) in each jurisdiction and handles the administrative aspects of moving your dispute along to a final arbitration. Once the parties "try" their case to an arbitrator and that arbitrator gives a decision, it is virtually impossible to successfully appeal the result absent fraud on the arbitrator's part. The courts will generally reject an appeal from an arbitration award absent such fraud, and not even a clear error of law or fact by an arbitrator will cause a court to intervene.

The advantages of arbitration are:

•It is quicker than getting entangled in the legal system;
•More likely to result in a final resolution without any prospect of further appeals; and
•The usual "discovery period" provided for in litigation which involves the parties sending questions back and forth to be answered under oath, the parties demanding document exchanges, and the parties taking depositions of witnesses ahead of time, are for the most part reduced or eliminated in the arbitration system.
Offsetting those savings, are the costs of the arbitrator who charges on an hourly basis, and the costs of an organization such as the AAA. Those costs are generally split between the parties. Despite the administrative costs that exist in arbitration and not in litigation, everyone would agree that arbitration is quicker and less expensive than a traditional court setting.

COURTROOM TRIAL
Why then, do you ask, would anyone choose not to arbitrate? Probably because some of the advantages in arbitration turn to disadvantages in certain disputes. If your issues are extremely complicated and you have a concern that it is going to be impossible for an arbitrator to understand the complete story unless you have the opportunity to utilize all of the discovery techniques that are unquestionably available in litigation, you may choose a courtroom setting. In addition, many people believe that arbitrators may choose to "cut the baby in half" more often than a judge or jury would.

Trying your case to a court and a jury does give you the advantage of obtaining fuller disclosures through the discovery process. It also has some disadvantage, including the likelihood that no one on the jury is going to have the background, experience, education, and training of an arbitrator. Many lawyers believe that trying a very complicated piece of litigation to a jury is a major gamble and their client would be better off selecting an arbitrator with background in the industry in question.

Your attorney can help you make a decision about which of your contracts or agreements might prudently include an alternative dispute resolution provision mediation and/or arbitration as a method of resolving your issues depending on the amount of money involved, the complexity of the issues, and the collective view of what makes the most sense in your circumstances.

Continue reading "Business Dispute Resolution" »

While the administration is lauding the advancement of the Financial Regulatory Reform Bill and is expected to sign it into law next week, two key items of the bill actually will hurt the protection of consumers.

One element is that securities brokers will be held to a fiduciary standard enforced by the SEC, just as investment advisers are today. How could this hurt consumers one might ask?

First, the bill specifically allows brokers to earn commissions and sell proprietary products while acting as a fiduciary. Before the bill, fee-only fiduciary registered investment adviser's only compensation was in the form of fully disclosed fees paid by the client leaving conflicted commission based brokers outside of the fiduciary standard. Now, the same brokers that peddled big commission products (or conflicted proprietary products) will be able to call themselves a fiduciary while they earn the same big fat conflicted compensation they have in the past. Although relatively few consumers really understood the difference between the two, at least some have grown to learn the difference. Now the consumer will have no easy means of discerning the difference between the them because the product peddler will be able to call himself a fiduciary too.

For a client to actually collect on a fiduciary breach requires expensive legal action. SEC Registered Fee- Only Investment Advisers had no financial incentive to breach their fiduciary duty so their actions were relatively self policing. But now there is a whole new army of brokers that will be fiduciaries too, except unlike an objective fee-only adviser these brokers will still be tempted by the bribe of a big fat commission. The result will NOT be a wholesale clean-up of brokerage firm activities. Instead, all it will create is a ton of fiduciary violations because they will continue to accept product commission bribes that are specifically allowed in the bill. The real ending result of this means nothing more than being a securities lawyer is going to become a HUGE growth industry.
The other provision in the bill that absolutely contradicts the notion of consumer protection is that Congress has specifically prevented the SEC from enforcing more disclosures for equity index annuities. The SEC has been attempting to have them treated as securities which are subject to many federal disclosure laws designed to protect consumers.

Continue reading "New Financial Regulatory Reform Bill will Change The Way Business Is Handled" »

Arbitration, a form of alternative dispute resolution (ADR), is a legal technique for the resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or more persons (the "arbitrators", "arbiters" or "arbitral tribunal"), by whose decision (the "award") they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides. Other forms of ADR include mediation (a form of settlement negotiation facilitated by a neutral third party) and non-binding resolution by experts. Arbitration is most commonly used for the resolution of commercial disputes, particularly in the context of international commercial transactions. The use of arbitration is far more controversial in consumer and employment matters, where arbitration is not voluntary but is instead imposed on consumers or employees through fine-print contracts, denying individuals their right to access the courts says California Business Attorney Steven C. Peck.

Arbitration can be either voluntary or mandatory and can be either binding or non-binding. Non-binding arbitration is, on the surface, similar to mediation. However, the principal distinction is that whereas a mediator will try to help the parties find a middle ground on which to compromise, the (non-binding) arbitrator remains totally removed from the settlement process and will only give a determination of liability and, if appropriate, an indication of the quantum of damages payable.

Arbitration is a proceeding in which a dispute is resolved by an impartial adjudicator whose decision the parties to the dispute have agreed will be final and binding.

Advantages and disadvantages:
Parties often seek to resolve their disputes through arbitration because of a number of perceived potential advantages over judicial proceedings:

When the subject matter of the dispute is highly technical, arbitrators with an appropriate degree of expertise can be appointed (as one cannot "choose the judge" in litigation)
arbitration is often faster than litigation in court
arbitration can be cheaper and more flexible for businesses
arbitral proceedings and an arbitral award are generally non-public, and can be made confidential because of the provisions of the New York Convention 1958, arbitration awards are generally easier to enforce in other nations than court judgments
in most legal systems, there are very limited avenues for appeal of an arbitral award

Some of the disadvantages include:
Arbitration may become highly complex
Arbitration may be subject to pressures from powerful law firms representing the stronger and wealthier party
Arbitration agreements are sometimes contained in ancillary agreements, or in small print in other agreements, and consumers and employees sometimes do not know in advance that they have agreed to mandatory binding pre-dispute arbitration by purchasing a product or taking a job
if the arbitration is mandatory and binding, the parties waive their rights to access the courts and to have a judge or jury decide the case
in some arbitration agreements, the parties are required to pay for the arbitrators, which adds an additional layer of legal cost that can be prohibitive, especially in small consumer disputes
in some arbitration agreements and systems, the recovery of attorneys' fees is unavailable, making it difficult or impossible for consumers or employees to get legal representation; however most arbitration codes and agreements provide for the same relief that could be granted in court
if the arbitrator or the arbitration forum depends on the corporation for repeat business, there may be an inherent incentive to rule against the consumer or employee
there are very limited avenues for appeal, which means that an erroneous decision cannot be easily overturned. Although usually thought to be speedier, when there are multiple arbitrators on the panel, juggling their schedules for hearing dates in long cases can lead to delays.

In some legal systems, arbitral awards have fewer enforcement options than judgments; although in the United States arbitration awards are enforced in the same manner as court judgments and have the same effect.

Unlike court judgments, arbitration awards themselves are not directly enforceable. A party seeking to enforce an arbitration award must resort to judicial remedies, called an action to "confirm" an award although grounds for attacking an arbitration award in court are limited, efforts to confirm the award can be fiercely fought, thus necessitating huge legal expenses that negate the perceived economic incentive to arbitrate the dispute in the first place.

Continue reading "Arbitration A Technique For The Resolution of Legal Disputes Outside The Courthouse" »

The equitable doctrine of judicial estoppel can be invoked to prevent a party from taking a position contrary to one the party advanced in prior litigation says California Business Lawyer Steven C. Peck.

The purpose of the doctrine has been stated in multiple, but substantially similar, forms: to "protect the integrity of the judicial process," Jackson v. County of Los Angeles; to "protect against a litigant playing fast and loose with the courts"; and to implement "general considerations of the orderly administration of justice and regard for the dignity of judicial proceedings," Prilliman v. United Air Lines, Inc.

While the doctrine of judicial estoppel has long been recognized in California, as of 1998 the California courts had not established a clear set of principles for applying it (i.e., a standard with well-defined elements). Instead, the courts had merely recited certain observations about the doctrine, such as that "one to whom two inconsistent courses of action are open and who elects to pursue one of them is afterward precluded from pursuing the other," that the "seemingly conflicting positions must be clearly inconsistent so that the one necessarily excludes the other," and that the doctrine "cannot be invoked where the position first assumed was taken as a result of ignorance or mistake."indicates California Business Attorney Steven C. Peck.

The uncertainty disappeared in 1998 with the publication of Jackson v. County of Los Angeles by the Second District Court of Appeal, which held that the doctrine of judicial estoppel "should apply" whenever:
(1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake.

Continue reading "The Equitable Doctrine of Judicial Estoppel" »

FACTUAL and PROCEDURAL HISTORY
Miracle Star, owned and operated by Jeffrey and Staretta Moffatt, provides drug and alcohol treatment and rehabilitation services at a location in Lancaster, California. On June 8, 1999, Miracle Star and COLA entered into contract H210224, for the period of April 1, 1999, to June 30, 2000; twice this contract was later amended in writing to extend to June 30, 2001, and then to extend to June 30, 2003. Under the contracts, Miracle Star provided drug and alcohol services to qualified Los Angeles County residents, and billed COLA monthly. COLA then compensated Miracle Star for performing those services. COLA's maximum obligation for all services provided under the contract was $ 32,098 for April 1 through June 30, 1999; $128,390 from July 1, 1999, through June 30, 2000; and $128,390 from July 1, 2000, through June 30, 2001.

The June 8, 1999, contract stated that "Additional Provisions" was attached to the agreement and that its terms and conditions became part of the agreement. Miracle Star, however, alleged it never agreed to add "Additional Provisions" to the contract, that "Additional Provisions" was not part of the contract, and that "Additional Provisions" was not discussed or presented to Miracle Star until five months after the signing of the contracts.

1. "Additional Provisions" to the Contract: The "Additional Provisions" required Miracle Star to document the delivery of all specific services identified in the contract, by daily and monthly reports of staff activities, records of specific service activities, and other records as specified by COLA's Alcohol and Drug Program Administration (ADPA). The "Additional Provisions" required Miracle Star to retain this documentation and to allow COLA access to it pursuant to the "Records and Audits" section of the contract. The "Additional Provisions" required Miracle Star to maintain service records for each participant and records of services provided by professional personnel, and to provide these records to COLA for program review and fiscal audit.

With regard to financial records, the "Additional Provisions" required Miracle Star to prepare and maintain a written cost allocation plan, and complete financial records in accordance with generally accepted accounting principles and the COLA Department of Health Services Abuse Program Contract Financial Handbook. These records were to reflect the actual cost of each mode of service provided by Miracle Star for which payment was claimed. The "Additional Provisions" also required Miracle Star to provide COLA's Department of Health Services Financial Services with an annual cost report for each mode of service and service delivery site.

COLA also alleged that its "Contract Financial Handbook"--which is not in the record on appeal--required a Miracle Star staff employee who was independent of cashiering, depositing, and bookkeeping functions, to receive and reconcile bank statements.

2. The Contract: The contract required COLA to compensate Miracle Star for its performance of alcohol and drug services, except for fees reimbursed by Medi-Cal, medical insurance, or other third party coverage. The contract required Miracle Star, at the close of each month, to bill COLA monthly in arrears on forms provided by COLA, setting forth information about services provided and for which a claim was being made and any payments due Miracle Star by or on behalf of a participant.

If Miracle Star did not deliver the annual cost report by the date specified, the "Additional Provisions" allowed COLA to withhold payments to Miracle Star until it delivered that report to COLA.

The contract stated that if COLA audited Miracle Star regarding services it provided under the contract, and if that audit found that COLA's dollar liability for those services was less than COLA's payments to Miracle Star, the difference would be either repaid by Miracle Star or, at COLA's option, credited against any amounts due Miracle Star from COLA under the contract. The "Additional Provisions" also authorized COLA to withhold Miracle Star's claims for payment for delinquent amounts due COLA as determined by a cost report or audit report settlement.

The contract contained the following clause regarding breach of the agreement: "Notwithstanding any other provision of this Paragraph, the failure of Contractor or its officers, employees, agents, or subcontractors, to comply with any of the terms of this Agreement or any written directions by or on behalf of County issued pursuant hereto shall constitute a material breach hereto, and this Agreement may be terminated by County immediately."

3. Audit: COLA's Request for Documents: On August 3, 2000, COLA notified Miracle Star that COLA would conduct a fiscal review and provided a list of documents and records that auditors would require Miracle Star to produce. The audit began on August 24, 2000. Claiming that COLA demanded confidential patient files, Miracle Star's Executive Director Staretta Moffatt refused to allow COLA employees access to review requested records and documents needed to verify costs billed. On September 27, 2000, COLA sent a letter to Miracle Star explaining the cost of ownership principle and the necessity of documents needed to calculate allowable costs. In November 2000, COLA resumed its audit and requested that Miracle Star provide census records of its non-County residential days, i.e., of clients whose services were not funded by the COLA contract. Miracle Star again declined to provide these census reports, citing concerns that doing so would violate patients' confidentiality. On February 6, 2001, Miracle Star received a letter from Olga L. Lopez, Head of COLA's Contract Fiscal Compliance Unit, advising Miracle Star that it was required to maintain participant records in accordance with state laws, to maintain reports, studies, statistical surveys, or other information to determine and allocate indirect costs, and to make these records available to COLA representatives for a fiscal audit. The letter requested that Miracle Star provide financial records and census information so that COLA could finalize its audit, and requested that Miracle Star contact the COLA auditor by March 6, 2001. Lopez's letter stated that if COLA did not hear from Miracle Star by March 6, 2001, it would finalize the audit report without reviewing the requested documents.

4. Miracle Star's Response: Miracle Star's written response to Lopez's letter stated that Miracle Star contracted with COLA at a non-provisional rate, which meant that test census records of non-County residential days were not relevant to COLA's audit. Miracle Star's letter asked Lopez to state whether Miracle Star's interpretation of the non-provisional rate contract was correct, and if incorrect, Miracle Star would reconsider providing the test census records. COLA conducted a site inspection of Miracle Star for fiscal year 2000-2001 on March 21, 2001.

5. COLA Requests Plan of Corrective Action: On April 19, 2001, COLA's ADPA sent Miracle Star a draft of the Program Monitoring Summary, which requested a Plan of Corrective Action. COLA's Program Monitoring Summary Report set forth a series of deficiencies and the actions Miracle Star was required to take to correct the deficiencies. Among the deficiencies were incomplete Form of Business Organization, Fiscal Disclosure, and Real Property Disclosure documents, an expired business license, lack of a sexual harassment and contact policy, unauthorized transportation of patients, and defects in the Miracle Star facility requiring repairs. The Program Monitoring Summary noted that Miracle Star leased the property where program services were delivered from its owners, Jeffrey and Staretta Moffatt. The total square footage of the leased premises was charged to the budget, but Miracle Star provided other services at this location, and the Moffatts lived at the location. This use of space was questionable and there appeared to be a conflict of interest between the landlord and the tenant. COLA stated that the matter would be referred to COLA's Contract Fiscal Compliance Unit for a determination.

COLA's auditor's personnel review found numerous deficiencies in staff records. After learning that Miracle Star stopped accepting CalWORKs (California Work Opportunity and Responsibility to Kids) recipients under the contract after December 2000, the auditor advised Jeffrey and Staretta Moffatt that the contract was reimbursed on actual costs, and not on a fee-for-services rate. The auditor advised Miracle Star that the matter would be referred to COLA's Contract Fiscal Compliance Unit, and that reimbursements were subject to disallowance.

COLA's auditor also stated that Miracle Star did not provide adequate records for the audit, which caused the auditor to be unable to determine if Miracle Star had provided all specific services stated in the contract. Miracle Star also did not provide requested time sheets for Dr. Vail, and Staretta Moffatt's time sheets did not include a daily breakdown of hours worked under the contract. Miracle Star also refused to make available all program records pertaining to the COLA contract.

6. COLA Again Requests a Plan of Corrective Action: On May 30, 2001, COLA's Contract Fiscal Compliance Unit sent a draft financial evaluation report to Miracle Star, and gave Miracle Star 30 days to prepare and submit a Plan of Corrective Action. Miracle Star did not provide that Plan of Corrective Action and declined to meet and discuss the audit report findings.

7. COLA's Financial Report Becomes Final: On July 19, 2001, a deputy of COLA's Administrative and Financial Services Department notified Miracle Star that the financial report was final and that Miracle Star must submit a check for $160,487.76 to COLA's financial office. The attached report stated the following deficiencies disclosed by the audit of Miracle Star: (1) bank statements were not reconciled to financial records; (2) the landlord-tenant relationship appeared to be a less-than-arms-length association; (3) Fiscal Year 1999-2000 cost reports were not submitted to the ADPA office; (4) the Executive Director's time sheets did not allocate hours worked on each program; (5) Miracle Star did not develop a written cost allocation plan allocating shared costs between benefitting programs; (6) Miracle Star made no clear separation of duties among staff for handling different aspects of accounting transactions; (7) Miracle Star did not require a second signature on checks issued for cash disbursements; (8) costs on monthly reimbursement claims were reported based on budget estimates instead of actual costs; (9) billing claim costs were not reconcilable to financial records; (10) Miracle Star failed to provide client census data on non-County clients to determine cost allocation; and (11) monthly reimbursement claims reported unsupported costs totaling $160,487.76.

8. Miracle Star Disputes the Audit: Miracle Star disputed that it failed to prepare a written cost allocation plan to allocate shared costs between beneficiary programs. Miracle Star disputed that it did not reconcile bank statements. Miracle Star did not dispute that it refused to allow COLA access to requested records and documents, but disputed that the requested records and documents were necessary to verify costs billed. Miracle Star did not dispute that it did not maintain client fee determination system forms in each client's file, but disputed that the contracts required it to do so. Miracle Star disputed that it did not bill COLA based on actual costs, and disputed that it did not submit cost reports to COLA, as required by the contracts. Miracle Star disputed that the contract required the landlord/tenant relationship between Miracle Star and the Moffatts to be an arms-length association. Miracle Star disputed that the contracts required Miracle Star to maintain a clear separation of duties among staff for handling different aspects of accounting transactions. Miracle Star alleged that the contracts did not require it to maintain a written cost allocation plan to allocate costs among different programs. Because Miracle Star alleged that the COLA-Miracle contracts were non-provisional rate contracts, which provided pre-determined rates at which COLA could reimburse Miracle Star, Miracle alleged that the lack of a cost allocation plan was irrelevant to determining COLA's obligations under its contracts with Miracle Star. Miracle Star alleged that COLA had no authority to unilaterally adjust the predetermined rate in the budgets attached to its contracts with Miracle Star, or to seek overpayment collections against COLA ADPA-contracted service providers. Miracle Star alleged that the COLA contracts did not require it to maintain timesheets allocating time among various programs, to maintain a strict separation of duties among staff handling aspects of accounting transactions, or to reconcile financial records or bank statements, and that COLA suffered no damage from Miracle Star's failure to do so. Miracle Star alleged that during COLA audits, Miracle Star provided documents and records to which COLA was entitled.

Miracle Star alleged that in September 2001 COLA arbitrarily placed Miracle Star on a "do not refer" list, forbidding any patients from being referred to Miracle Star. Citing declarations of Patrick Ogawa, Lopez, and George Weir, COLA alleged that those individuals never placed Miracle Star under a "freeze" or "do not refer" order.

9. Miracle Star Files a Claim for Damages: On March 15, 2002, Miracle Star filed a claim for damages against COLA based on (1) a mandated reporter violation, (2) a do not refer" status placed on Miracle Star, and (3) illegal audits, fraud, conspiracy, and failure to pay Miracle Star in the current fiscal year. The COLA Board of Supervisors denied Miracle Star's claim for damages on April 2, 2002.

10. The Complaint: The operative complaint is a third amended complaint filed on June 25, 2004, by plaintiffs Miracle Star, Jeffrey D. Moffatt, and Staretta Moffatt. Miracle Star alleged a cause of action for breach of written contract against COLA; all plaintiffs alleged a cause of action for breach of oral contract against COLA; and all plaintiffs alleged a cause of action for intentional interference with prospective economic advantage against COLA and three individual defendants, COLA employees Patrick Ogawa, Olga Lopez, and George Weir. In this appeal plaintiffs have abandoned their claims against these individual defendants.[ 1 ]

The complaint alleged that on May 11, 1999, Miracle Star and COLA entered into a written "Alcohol and Drug Services Agreement" contract that required Miracle Star to provide in-patient alcohol and drug treatment services to welfare recipients and services to persons who qualified under CalWORKs. COLA agreed to pay specified sums for Miracle Star's services. The complaint alleged that Miracle Star had performed all conditions required by the contract and its amendment, except for those which defendants prevented Miracle Star from performing. The complaint also alleged that Jeffrey Moffatt and Staretta Moffatt were third party beneficiaries of the contract who, in reliance on the contract and its amendment, leased premises to Miracle Star to the enrichment of defendants. The complaint alleged that on April 1, 2001, COLA breached the contracts by refusing to pay Miracle Star sums due, and that on July 1, 2001, COLA breached the contracts by refusing to refer, and refusing to allow referral of, individuals and families to Miracle Star for treatment.

The breach of oral contract cause of action alleged that COLA referred persons to Miracle Star for in-patient alcohol and drug treatment services to welfare recipients, and at COLA's request, Miracle Star also provided services to persons qualifying under CalWORKs. The complaint alleged that defendants breached their agreement by failing to pay Miracle Star sums due under the contract, and that COLA's refusal to refer such persons to Miracle Star for treatment proximately caused plaintiffs to sustain damages.

The cause of action for intentional interference with prospective economic advantage alleged that on July 1, 2001, COLA and the individual defendants put plaintiffs' facilities under a "do not refer" order, prevented COLA personnel and agencies from referring persons to plaintiffs for treatment, and refused to grant plaintiffs a contract under Proposition 36, with the specific intent of destroying plaintiffs' business opportunities and for the purpose of preventing plaintiffs from obtaining individuals and families for treatment and receiving compensation.

11. Answer and Cross-Complaint: On July 28, 2004, COLA filed an answer and a cross-complaint against cross-defendant Miracle Star for breach of contract and declaratory relief.

12. COLA's Motion for Summary Judgment: On December 30, 2005, COLA moved for summary judgment, or in the alternative for summary adjudication.

13. Trial Court's Grant of Summary Judgment: On March 20, 2006, the trial court granted defendants' motion for summary judgment. The trial court found that plaintiffs had admitted they failed to prepare a written cost allocation plan to allocate shared costs between beneficiary programs, and failed to reconcile bank statements as required in the contract, and therefore breached the contract. The trial court found that Miracle Star presented no evidence of an oral agreement, and that the parole evidence rule barred any oral agreements which were inconsistent with the integrated written contracts. Regarding the cause of action for interference with prospective economic advantage caused by COLA's alleged issuance of a "do not refer" order against Miracle Star, the trial court found that Miracle Star had only an ongoing economic relationship with COLA and not with third party clients. Therefore Miracle Star failed to establish that COLA's conduct was wrongful by some legal measure other than the fact of interference itself. The trial court also found that the "do not refer" order was issued in the exercise of COLA employees' discretionary authority and that no evidence rebutted the immunities pertinent to such a discretionary act under Government Code section 820.2.

Judgment in favor of COLA and individual defendants Ogawa, Lopez, and Weir was entered on April 10, 2006. Notice of entry of judgment was served on the same day. Plaintiffs filed a timely notice of appeal.

Plaintiffs claim on appeal that:

1. There are triable issues of fact as to the breach of contract claims with regard to COLA's disallowance of $160,487.76, COLA's placement of Miracle Star on "do not refer" status, whether Miracle Star materially breached the written contracts so as to relieve COLA of its contractual obligations, and whether Jeffrey and Staretta Moffatt are third party beneficiaries of the contracts;
2. There are triable issues of fact as to whether COLA intentionally interfered with plaintiffs' prospective economic advantage.
DISCUSSION
1. The Appeal Is Not From a Final Judgment, But This Court Exercises Our Discretion to Treat the Appeal as a Petition for Writ

The existence of COLA's unadjudicated cross-complaint against Miracle Star means that no final judgment exists in the action as to those parties, even though the judgment is final as to individual plaintiffs Staretta and Jeffrey Moffatt in their complaint against COLA (and against individual defendants Ogawa, Lopez, and Weir, as to whom plaintiffs do not appeal). Thus the judgment is not appealable as to COLA and Miracle Star, because the judgment has not disposed of all causes of action framed by the pleadings. (Morehart v. County of Santa Barbara (1994) 7 Cal.4th 725, 741.) Because the briefs and record before us contain all the elements prescribed by rule 8.490 of the California Rules of Court and extraordinary circumstances justify the exercise of our discretionary power, we treat this appeal as a petition for writ. (Angell v. Superior Court (1999) 73 Cal.App.4th 691, 698.)

2. Standard of Review

"A trial court properly grants summary judgment where no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) We review the trial court's decision de novo, considering all of the evidence the parties offered in connection with the motion (except that which the court properly excluded) and the uncontradicted inferences the evidence reasonably supports. [Citation.] In the trial court, once a moving defendant has `shown that one or more elements of the cause of action, even if not separately pleaded, cannot be established,' the burden shifts to the plaintiff to show the existence of a triable issue; to meet that burden, the plaintiff `may not rely upon the mere allegations or denials of its pleadings . . . but, instead, shall set forth the specific facts showing that a triable issue of material fact exists as to that cause of action. . . .' [Citations.]" (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476-477.)

3. Plaintiffs Have Not Created Triable Issues of Fact as to the Breach of Written Contract Cause of Action

Plaintiffs claim that the existence of triable issues of material fact precludes a grant of summary judgment as to the cause of action for breach of contract. We disagree.

a. COLA's Disallowance of $160,487.76 in Compensation to Miracle Star

Pursuant to the "Records and Audits" section of the "Additional Provisions" to the contract, beginning in August 2000, COLA conducted a financial evaluation of Miracle Star and its performance of the contract. COLA's financial evaluation noted deficiencies in financial records and billing substantiation. Specifically, the financial evaluation found that: bank statements were not reconciled to financial records; the landlord/tenant relationship appeared to be a less-than-arms-length association; fiscal year 1999-2000 cost reports for the contract were not submitted to the Alcohol and Drug Program Administration office; the Executive Director's time sheets did not allocate hours worked on each program; Miracle Star did not develop a written cost allocation plan allocating shared costs between benefiting programs; there was no clear separation of duties among staff for handling different aspects of accounting transactions; Miracle Star did not require a second signature on checks issued for agency cash disbursements; on monthly reimbursement claims, Miracle Star reported costs based on budget estimates instead of actual costs; billing claim costs were not reconcilable to financial records; Miracle Star failed to provide client census on non-COLA clients to determine cost allocation; and Miracle Star reported unsupported costs of $160,487.76 on monthly reimbursement claims.

b. The Recitation in the Contract That Miracle Star Received the "Additional Provisions" Is Conclusive, and No Triable Issue of Fact Exists Whether "Additional Provisions" Were Part of the Contract

The first issue concerns whether these audit requirements were included in the contract. As we have seen, COLA stated that it conducted its financial audit pursuant to the "records and audits" section of the "Additional Provisions." The COLA-Miracle Star contract states: "Contractor [Miracle Star] hereby acknowledges receipt of the above referenced documents numbers (1) through (3) attached hereto." Document No. 3 is "Additional Provisions." Elsewhere the contract states: "ADDITIONAL PROVISIONS: Attached hereto and incorporated herein by reference, is a document labeled `Additional Provisions'. The terms and conditions therein contained are part of this Agreement." The contract also contained an integration clause specifically referencing the "Additional Provisions:" "This Agreement, together with the Additional Provisions, Exhibit(s), Schedule(s), and any Budget(s) and/or Statement of Work forms, attached hereto, fully expresses all understandings of the parties concerning all matters covered and shall constitute the total Agreement. No addition to, or alteration of, the terms of this Agreement, whether by written or verbal understanding of the parties, their officers, agents or employees, shall be valid and effective unless made in the form of a written amendment to this Agreement which is formally approved and executed by the parties in the same manner as this Agreement." (Italics added.)

Plaintiffs Jeffrey Moffatt and Staretta Moffatt stated in their declarations that the "Additional Provisions" were not present at the time the contract was signed, and the County delivered the "Additional Provisions" five months after signing. The recitation in a contract that the plaintiffs received "Additional Provisions," however, is conclusive. (Evid. Code, § 622; Banco Do Brasil, S.A. v. Latian, Inc. (1991) 234 Cal.App.3d 973, 995, fn 30.) Therefore no triable issue of fact arises as to whether Miracle Star received the "Additional Provisions."

c. No Triable Issue Exists as to Whether Breaches of the Contract Were Material

Plaintiffs claim that the contract provision making any failure to comply with any contract terms a material breach is unenforceable. The contract states: "Notwithstanding any other provision of this Paragraph, the failure of Contractor or its officers, employees, agents, or subcontractors, to comply with any of the terms of this Agreement or any written directions by or on behalf of County issued pursuant hereto shall constitute a material breach hereto, and this agreement may be terminated by County immediately." COLA's disallowance of $160,487.76 as unsupported costs reported by Miracle Star on monthly reimbursement claims relied on this contract clause, as did the trial court in granting summary judgment for COLA.

i. The Contract Provision Making Non-Compliance With Any Contract Term a Material Breach Is Enforceable

Plaintiffs cite authority that whether a breach is sufficiently material as to give the injured party cause to terminate a contract is a question for the trier of fact. (Superior Motels, Inc. v. Rinn Motor Hotels, Inc. (1987) 195 Cal.App.3d 1032, 1051-1052; Gold Min. & Water Co. v. Swinerton (1943) 23 Cal.2d 19, 28; Assoc. Lathing etc. Co. v. Louis C. Dunn, Inc. (1955) 135 Cal.App.2d 40, 49; Whitney Inv. Co. v. Westview Dev. Co. (1969) 273 Cal.App.2d 594, 601; Integrated, Inc. v. Alec Fergusson Electrical Contractor (1967) 250 Cal.App.2d 287, 297; Pacific Allied v. Century Steel Products (1958) 162 Cal.App.2d 70, 77.) However, these cases did not involve contracts with a provision like the one in the COLA-Miracle Star contract, stating that the contractor's failure to comply with any contract terms constituted a material breach and gave COLA the right to terminate the contract.

The contract provision stating that the contractor's failure to comply with any contract terms constitutes a material breach is enforceable. (See Galdjie v. Darwish (2003) 113 Cal.App.4th 1331, 1341 [California courts enforce time deadlines in real estate sales contracts, permitting the seller to cancel after the time specified where time is specifically made of the essence, unless there has been a waiver or potential forfeiture].) Moreover, "[a] contract may contain a valid provision giving one or the other party an option to terminate it on specified conditions." (Call v. Alcan Pac. Co. (1967) 251 Cal.App.2d 442, 447.) Therefore plaintiffs did not create a triable issue of fact as to the materiality of Miracle Star's failure to comply with contract terms.

ii. Because Plaintiffs Failed to Create a Triable Issue of Fact as to Their Performance of the Contract, Which Is an Essential Element of Their Breach of Contract Cause of Action, the Grant of Summary Judgment Was Appropriate

Plaintiffs admitted that they did not provide all documentation required by COLA's fiscal review; that Miracle Star failed to keep time sheets for employees to allocate hours worked on each program of the contracts administered by Miracle Star; that Miracle Star refused to allow COLA employees access to review requested records and documents necessary to verify costs billed; that Miracle Star failed to maintain client fee determination system forms in each client's file; and that Miracle Star made no clear separation of duties among staff for handling different aspects of accounting transactions as required by the contracts. Although plaintiffs disputed that they did not comply with contract terms, they provided no evidence creating a triable issue of fact that they failed to reconcile bank statements as provided by the contracts.[ 2 ] Although Miracle Star disputed that they did not reconcile their billing claim costs to financial records as required by the contracts, they provided no evidence creating a triable issue of fact as to this issue.[ 3 ]

Because of the contract provision stating that Miracle Star's failure to comply with any term of the contract constituted a material breach, plaintiffs' admission of numerous breaches prevents plaintiffs from showing that they performed the contract. To prevail on a breach of contract cause of action, plaintiff must prove: (1) the contract; (2) plaintiff's performance or excuse for nonperformance; (3) defendant's breach; and (4) resulting damages to plaintiff. (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1388.) Thus by showing that an essential element of the breach of contract cause of action cannot be established, COLA met its burden of showing that a cause of action has no merit. (Code Civ. Proc., § 437c, subd. (p)(1).) The burden then shifted to plaintiffs, who failed to create a triable issue of fact as to this essential element of their cause of action. Thus the trial court correctly granted summary judgment as to plaintiff's breach of contract cause of action.

At least two further issues, however, remain to be tried in COLA's cross-complaint for breach of contract.

iii. Plaintiffs' Failure to Timely Raise the Defense of Unconscionability Forfeits This Claim in This Appeal, But This Forfeiture Is Not a Ruling on the Merits and Does Not Bar Plaintiffs From Raising This Defense to COLA's Cross-Complaint

In their reply brief, plaintiffs asserted for the first time that the contract with COLA was a contract of adhesion which should not be enforced against Miracle Star.

The "courts will not enforce provisions in adhesion contracts which limit the duties or liability of the stronger party unless such provisions are `conspicuous, plain and clear' . . . and will not operate to defeat the reasonable expectations of the parties[.]" (Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 710.) Characteristically, in adhesion contracts the stronger party drafts the contract and the weaker party has no opportunity to negotiate its terms; the weaker party lacks any realistic opportunity to look elsewhere for a more favorable contract, and must choose either to adhere to the standardized contract or forego the needed service; and adhesion contracts contain "weighted contractual provisions which served to limit the obligations or liability of the stronger party." (Id. at p. 711.) The determination that a contract is one of adhesion does not make that contract invalid or unenforceable; after a finding of adhesion, the question becomes "whether a particular provision within the contract should be denied enforcement on grounds that it defeats the expectations of the weaker party or it is unduly oppressive or unconscionable." (Intershop Communications AG v. Superior Court (2002) 104 Cal.App.4th 191, 201.)

Plaintiffs' opposition to the summary judgment motion did not argue that the contract provision stating that the contractor's failure to comply with any contract terms constituted a material breach was unenforceable as a contract of adhesion that defeated the weaker party's expectations or was unduly oppressive or unconscionable. A party may not raise an argument that was not factually presented or fully developed in the trial court for the first time on appeal. (Wilson v. Blue Cross of So. California (1990) 222 Cal.App.3d 660, 673, fn 7; Kilroy v. State of California (2004) 119 Cal.App.4th 140, 149.) Moreover, by raising this argument for the first time in their reply brief, plaintiff forfeited this claim on appeal. (Locke v. Warner Bros., Inc. (1997) 57 Cal.App.4th 354, 368.)

We hasten to add, however, that the forfeiture of this claim applies only to this appeal, and is not a ruling on the merits of the defense. We do not regard the forfeiture of this claim in this appeal as something that stops or prohibits plaintiffs from timely arguing, as a defense to COLA's cross-complaint for breach of contract, that the contract provision stating that the contractor's failure to comply with any contract terms constituted a material breach was unenforceable as a contract of adhesion that defeated the weaker party's expectations or was unduly oppressive or unconscionable. We express no opinion as to the resolution of this issue.

iv. COLA Must Prove Its Damages in the Proceeding on Its Cross-Complaint for Breach of Contract

An additional point will have to be addressed in the trial of COLA's cross-complaint. COLA's cross-complaint alleges the same breaches of contract terms as have been found to constitute material breaches of the contract in this summary judgment proceeding, and alleges audit disallowances of $160,487.76. There has not yet been any adjudication of whether COLA's determination of the value of these breaches of contract was correct, and what, if any, damages COLA sustained as a result. In the trial of its cross-complaint, COLA will have to provide evidence linking those material breaches of contract terms to specific monetary damages. COLA has not yet made this showing. Instead it has simply asserted that for Miracle Star's breaches of contract terms, $160,487.76 was due COLA for audit disallowances, of which $74,662.00 remains owing by Miracle Star. COLA must prove a causal connection between the breach and the damages sought: "For the breach of an obligation arising from contract, the measure of damages . . . is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom." (Civ. Code, § 3300.) The nonbreaching party is entitled to recover only those damages "proximately caused" by the specific breach. (Postal Instant Press, Inc. v. Sealy (1996) 43 Cal.App.4th 1704, 1709.) To put it another way, "the breaching party is only responsible to give the nonbreaching party the benefit of the bargain to the extent the specific breach deprived that party of its bargain." (Ibid.) Damages must also be certain: "No damages can be recovered for a breach of contract which are not clearly ascertainable in both their nature and origin." (Civ. Code, § 3301.) These issues remain to be tried in the proceeding on COLA's cross-complaint.

d. Jeffrey Moffatt and Staretta Moffatt Have Not Proved That They Can Enforce the COLA-Miracle Star Contract as Third Party Beneficiaries

Although the cause of action for breach of written contract was brought by plaintiff Miracle Star only, that cause of action alleged that plaintiffs Jeffrey Moffatt and Staretta Moffatt were third party beneficiaries of the Miracle Star-COLA contract, and based on that contract the Moffatts leased premises to Miracle Star to the enrichment of the defendants. COLA's summary judgment motion argued that Jeffrey and Staretta Moffatt could not establish their status as third party beneficiaries to the contract, because they could not provide evidence that the Miracle Star-COLA contract intended to confer a direct benefit on the Moffatts.

A third party beneficiary may enforce a contract made expressly for his benefit. (Civ. Code, § 1559.) The putative third party's contract rights, however, are predicated on the contracting parties' intent to benefit that third party. (Garcia v. Truck Ins. Exchange (1984) 36 Cal.3d 426, 436.) "`The circumstance that a literal contract interpretation would result in a benefit to the third party is not enough to entitle that party to demand enforcement.'" (Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 524.) "The party claiming to be a third party beneficiary bears the burden of proving that the contracting parties actually promised the performance which the third party beneficiary seeks." (Sessions Payroll Management, Inc. v. Noble Construction Co. (2000) 84 Cal.App.4th 671, 680.) "Ascertaining this intent is a question of ordinary contract interpretation. [Citation.] `[T]he circumstance that a literal contract interpretation would result in a benefit to the third party is not enough to entitle that party to demand enforcement.'" (Hess v. Ford Motor Co., supra, at p. 524.)

We see nothing in the contract that the parties promised the performance plaintiffs seek. Plaintiffs' opposition to the summary judgment motion argued only that COLA knew Staretta and Jeffrey Moffatt were owners and directors of Miracle Star and that money in the budget specifically paid Staretta Moffatt's salary and rent to the Moffatts for leased premises. The sole evidence cited for this assertion was Jeffrey Moffatt's declaration, which stated: "At the time of contracting, the County was aware that Star Moffatt would be paid a salary and Star Moffatt and I would [be] paid the rent under the Contract." Plaintiffs' separate statement of disputed material facts contains no reference to this evidence. The contracts do not name Jeffrey Moffatt, although he signed the June 20, 2000, amendment and the June 19th, 2001, contract as CEO on behalf of Miracle Star. The contract names Star Moffatt as Executive Director in giving the address to which notices to Miracle Star are to be sent. Staretta Moffatt also signed the initial June 8, 1999, contract as Executive and Program Director on behalf of Miracle Star. None of these contracts, however, contains any statement that Staretta Moffatt would be paid a salary and that the Moffatts would be paid rent under the contract. Thus the contract was not made expressly for the benefit of Staretta Moffatt or Jeffrey Moffatt, and does not show that COLA and Miracle Star actually promised the performance the Moffatts seek. The Moffatts have not proven that they are third party beneficiaries of the COLA-Miracle Star contract. The Moffatts are at best remotely benefited, and as incidental beneficiaries cannot enforce the contract. (Martinez v. Socoma Companies, Inc. (1974) 11 Cal.3d 394, 406-407.)

4. Plaintiffs Have Not Created a Triable Issue of Fact as to the Breach of Oral Contract Cause of Action

Plaintiffs claim on appeal that triable issues of fact require reversal of summary judgment as to the breach of oral contract cause of action.

a. Allegations of the Breach of Oral Contract Cause of Action

The breach of oral contract cause of action alleged that COLA referred individuals and families to plaintiffs for the purpose of providing in-patient alcohol and drug treatment services to welfare recipients. At COLA's request, plaintiffs also provided services to men and women qualifying under the CalWORKs program. COLA agreed, orally and in writing, to pay plaintiffs specified sums for these services. The complaint alleged that Jeffrey and Staretta Moffatt were third party beneficiaries of this oral contract, and based on that oral contract and Miracle Star's anticipated income from prospective referrals by COLA, leased certain premises to Miracle Star and to the enrichment of COLA.

b. Plaintiffs' Opposition to the Summary Judgment Motion Produced No Evidence Creating a Triable Issue of Fact as to the Breach of Oral Contract Cause of Action

Defendants' summary judgment motion argued that plaintiffs could not carry their burden of demonstrating the existence of any oral agreement between plaintiffs and COLA, and could not carry their burden of demonstrating that Staretta and Jeffrey Moffat were third party beneficiaries of such an oral contract. Plaintiffs' separate statement in opposition to the summary judgment motion contained no evidence showing that plaintiffs and COLA made an oral contract.

Plaintiffs cannot create a triable issue of fact by the allegations in the complaint. (Lyons v. Security Pacific Nat. Bank (1995) 40 Cal.App.4th 1001, 1014.) The opponent of summary judgment cannot rely on pleadings, but must make an independent showing of sufficient proof of matters alleged to raise a triable issue of fact. (Tressemer v. Barke (178) 86 Cal.App.3d 656,668.) Without a separate statement of undisputed facts with references to supporting evidence in the form of affidavits or declarations, it is impossible for the plaintiff to demonstrate the existence of disputed facts. (Lewis v. County of Sacramento, supra, 93 Cal.App.4th at p. 116.) We therefore conclude that the trial court correctly granted summary judgment as to the cause of action for breach of oral contract.

5. Plaintiffs Have Not Created a Triable Issue of Fact as to Their Cause of Action for Intentional Interference with Prospective Economic Advantage

Plaintiffs claim that the trial court erroneously granted summary judgment as to their cause of action for intentional interference with prospective economic advantage.

a. Allegations of the Complaint

The cause of action for intentional interference with prospective advantage alleged that COLA and its employees Ogawa, Lopez, and Weir, acting within the scope of their employment, interfered with plaintiffs' business opportunities, prospective clients, and prospective contracts, with the purpose and specific intent of harming plaintiffs' business.

The complaint alleged that plaintiffs operated alcohol and drug treatment facilities for the State of California Department of Alcohol and Drug Program since 1998, and provided similar services to persons and families referred by COLA. The complaint alleged that a shortage of facilities of the type plaintiffs operate existed and continued to exist, and that there was a substantial number of eligible persons who qualified for and would ordinarily be referred to plaintiffs for care and treatment. The complaint alleged, however, that on July 1, 2001, COLA put plaintiffs' alcohol and drug treatment facilities under a "do not refer" order, prevented COLA personnel and agencies from referring any persons to plaintiffs for treatment, and refused to grant plaintiffs a contract under the provisions of Proposition 36, with the specific intent of destroying plaintiffs' business opportunities.

b. Plaintiffs Have Not Alleged or Proved the Necessary Elements of This Cause of Action, and Their Failure to Present a Claim Against the County of Los Angeles Bars Them from Filing a Lawsuit Against COLA

The cause of action for intentional interference with prospective economic advantage requires that plaintiff plead and prove: (1) an economic relationship between the plaintiff and a third party, with the probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of the relationship; (3) intentional acts by the defendant designed to disrupt the relationship; (4) defendant's conduct which was wrongful by some legal measure other than the fact of interference itself; (5) actual disruption of the relationship; and (6) defendant's acts which proximately caused economic harm to the plaintiff. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153.)

A defendant's summary judgment motion necessarily includes a test of the legal sufficiency of the complaint. In this context, the court applies the rule applicable to demurrers, accepts the allegations of the complaint as true, and treats the summary judgment as a motion for judgment on the pleadings. (American Airlines, Inc. v. County of San Mateo (1996) 12 Cal.4th 1110, 1117-1118.) Here the complaint failed to plead an economic relationship between plaintiffs and a third party. No relationship between plaintiffs and future COLA-referred patients yet existed. Moreover, that relationship was not an economic relationship, because COLA, not the patients themselves, paid plaintiffs for treatment of those patients. The relationship must exist at the time of defendant's allegedly tortious acts, "lest liability be imposed for actually and intentionally disrupting a relationship which has yet to arise." (Westside Center Associates v. Safeway Stores 23, Inc. (1996) 42 Cal.App.4th 507, 526.) No such relationship existed between plaintiffs and those persons not yet referred to Miracle Star by COLA and not yet known by plaintiffs.

On appeal, plaintiffs change the allegations of the complaint to instead allege their economic relationship with the federal government. In a summary judgment motion, however, the issues which are material are limited to the allegations of the complaint. (Lewinter v. Genmar Industries, Inc. (1994) 26 Cal.App.4th 1214, 1223.) Summary judgment cannot be granted on a ground not raised by the pleadings. (Bostrom v. County of San Bernardino (1995) 35 Cal.App.4th 1654, 1663.) Neither can it be reversed on appeal on a ground not raised by the pleadings or on a triable issue of fact which has not been shown by evidence placed before the trial court. This court's review of summary judgment is limited to facts presented in documents submitted to the trial court. (Monteleone v. Allstate Ins. Co. (1996) 51 Cal.App.4th 509, 514-515.) Nothing in plaintiff's separate statement in opposition provides evidence of plaintiffs' existing economic relationship with the federal government. We additionally find no evidentiary showing in plaintiffs' separate statement in opposition of any evidence of defendant's conduct which was wrongful by some legal measure other than the fact of interference itself.

In addition, plaintiffs' claim for damages, dated March 15, 2002 with the COLA Board of Supervisors contains no claim for intentional interference with prospective economic advantage. Government Code section 945.4 states, in relevant part: "no suit for money or damages may be brought against a public entity . . . until a written claim therefor has been presented to the public entity and has been acted upon by the board, or has been deemed to have been rejected by the board[.]" Failure to present a claim for money or damages to a public entity bars a plaintiff from filing a lawsuit against that entity. (Sofranek v. County of Merced (2007) 146 Cal.App.4th 1238, 1246.) This constitutes a separate ground for the grant of summary judgment as to this cause of action.

We conclude that plaintiffs have not shown error in the grant of summary judgment as to this cause of action.

Appellant tenants contend that the trial court erred when it denied their motion for contractual attorneys' fees arising from an action brought against them and later voluntarily dismissed by respondent landlords. Relying on Santisas v. Goodin (1998) 17 Cal.4th 599, the tenants say the case falls outside the bar set out in Civil Code section 1717, subdivision (b)(2), on contractual attorneys' fees in voluntarily dismissed cases because the action contained noncontract claims covered by the fee clause. We disagree. The trial court correctly held that all the claims in the action were claims on the contract--the parties' lease--since none of those claims, however styled, could have been established in any way except by proof of a breach of the lease. The judgment is affirmed.

FACTUAL AND PROCEDURAL HISTORIES
James and Sharon Norris, the landlords, leased commercial property in 2003 to Oliverio Herrera and George Thomas, the tenants. In 2006, the landlords filed a complaint against the tenants in superior court. The complaint alleged that the tenants had stopped using the property and had sublet it or assigned the lease to third parties in violation of the no-sublet and no-assignment clauses in the lease. The complaint alleged six additional breaches of the lease: (1) placement of large signs on the property in violation of a covenant not to alter, add to, or improve the property without consent; (2) painting of the building in violation of the same covenant; (3) operation of an unlicensed business in violation of a provision prohibiting illegal activities; (4) failure to maintain insurance in violation of a covenant requiring the tenants to maintain insurance; (5) failure to maintain the property in a good and safe condition in violation of a covenant requiring this; and (6) failure to maintain equipment on the property in good and working condition in violation of a covenant requiring this be done.

On the basis of these alleged breaches of the lease, the complaint included three causes of action. The first, titled ejectment, stated that the tenants were withholding possession of the property despite the landlords' demands that they vacate because of their breaches of the lease. On this cause of action, the landlords prayed for a decree that they were entitled to possession; a writ of execution directing the sheriff to remove the tenants; and damages. The second cause of action, titled declaratory relief, asked the court for a declaration that the tenants breached the lease; that the lease, including a purchase option, was of no further effect; and that the tenants were in possession unlawfully because of their breaches. The third, titled quiet title, stated that the landlords sought to quiet title to the property in their favor on the ground that the tenants had breached the lease. On this cause of action, the landlords prayed for a judgment that they were the sole owners of the property; a decree that the landlords would retain all money paid to them by the tenants; restitution of the property to the landlords; and damages. The tenants filed a cross-complaint claiming they attempted to exercise the purchase option but the landlords refused, and in doing so breached the lease.

The parties later reached an agreement on the exercise of the option, and the property was sold to the tenants. The complaint and cross-complaint were voluntarily dismissed.

The tenants filed a motion for $53,532.75 in attorneys' fees. They relied on an attorneys' fees clause in the lease:

"In case suit shall be brought for recovery of the premises, or for any sum due hereunder, or because of any act which may arise out of possession of the premises, by either party, the prevailing party shall be entitled to all costs incurred in connection with such action, including reasonable attorney's fees."
They cited Code of Civil Procedure section 1032, subdivision (a)(4), which defines "a defendant in whose favor a dismissal is entered" as a prevailing party for purposes of awarding costs, and Code of Civil Procedure section 1033.5, subdivision (a)(10), which allows attorneys' fees to be awarded as costs if authorized by contract.

The trial court issued an eight-page written order denying the request for fees. It relied on Civil Code section 1717. Subdivision (a) of this section provides for the enforcement of contractual attorneys' fees clauses by prevailing parties, but subdivision (b)(2) makes an exception for voluntarily dismissed cases: "Where an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section." The court acknowledged that Santisas v. Goodin, supra, 17 Cal.4th at page 617, held that the Civil Code section 1717, subdivision (b)(2), exception does not apply if the action is not an action on the contract and the fee clause is broad enough to cover noncontract claims. In that situation, Code of Civil Procedure section 1021 authorizes--and Civil Code section 1717, subdivision (b)(2), does not bar--enforcement of the parties' fee-shifting agreement. The court concluded, however, that all the causes of action in the complaint were based on the contract and that the action was an action on the contract, so Civil Code section 1717, subdivision (b)(2), did bar a fee award. The tenants filed this appeal.

DISCUSSION
The tenants' argument on appeal is the same as the argument they made before the trial court: The landlords' claims are not contract claims, as ejectment is a tort theory, quiet title a real property theory, and declaratory relief an equitable remedy. The tenants contend that, regardless of the fact that all the landlords' claims were based on alleged breaches of the lease, each of those claims "sounds in" something other than contract in the abstract, and that is what matters. They argue that, because the Supreme Court stated that Civil Code section 1717 bars contractual attorneys' fees in voluntarily dismissed cases only with respect to "causes of action sounding in contract" (Santisas v. Goodin, supra, 17 Cal.4th at p. 617), our consideration must be limited to the labels attached to the causes of action in the complaint, and the fact that the only basis of liability alleged in the complaint for any of the causes of action is a breach of a contract is irrelevant. This is a question of law that we review de novo. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799.)

The tenants' view that the labels control over the substance is not supported by authority or reason. The superior court refuted this view in a well-reasoned and detailed analysis. We adopt the following portion of it:

"We must determine if the three causes of action are contract or noncontract causes of action. There is no bright line rule for determining if an action is on the contract. Such a finding depends on the facts of each case.
"The complaint contains three causes of action: ejectment, declaratory relief and quiet title. There was no `breach of contract' cause of action alleged. However, this does not mean that the action is not on the contract.
"The court gives more weight to the substance of an action than to its form[;] therefore the court looks beyond the parties' characterization of whether an action is on a contract in determining whether the action is `on a contract' for purposes of CC §1717. See Boyd [v.] Oscar Fisher Co. (1989) 210 Cal.App.3d 368, 377. The court held that, in determining whether a party prevailed on the contract, `the court should consider the pleaded theories of recovery, the theories asserted and the evidence produced at trial, if any, and also any additional evidence submitted on the motion in order to identify the legal basis of the prevailing party's recovery.' Id.
"In applying the approach set out in Boyd the court finds that the three causes of action in the present case are all based on the contract. The suit fundamentally was based upon the lease, in that plaintiff sought redress for breaches of the lease. See Beeman [v.] Burling (1990) 216 Cal.App.3d 1586, 1608.
"Ejectment is a legal action to recover possession of real property wrongfully withheld from the plaintiff. Caperton [v.] Schmidt (1864) 26 Cal. 479[, 495]; McNulty [v.] Copp (1954) 125 Cal.App.2d 697[, 705-706, 708]. The gravamen of an ejectment action is frustration of the plaintiff's right to possession. B & B Sulfur Co. [v.] Kelley (1943) 61 Cal.App.2d 3[, 9].. . . In this case, the plaintiff was seeking to eject the defendant and recover the property under the lease agreement because of a breach. The cause of action is on the contract.
"The declaratory relief COA alleges a dispute under the lease. Under CCP §1060, any person interested under a contract or under a written instrument, excluding a trust or will, may seek declaratory relief and obtain a judicial declaration of respective rights and duties under the instrument. In this case, the cause of action for declaratory relief is based upon the lease agreement. In his claim for declaratory relief, the plaintiff is requesting that the court determine the parties' rights and duties under the lease. Such a claim is `on a contract' for purposes of section 1717. See Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698, 707; City and County of San Francisco v. Union Pacific R.R. Co. (1996) 50 Cal.App.4th 987, 999-1000; Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1259.
"Also, the quiet title cause of action seeks to quiet title based upon a breach of the lease.. . . The court therefore finds that the cause of action is based on [the] contract.
"The action was voluntarily dismissed and there is no prevailing party on the contract for purposes of §1717. CC §1717 (b)(2); Santisas [v.] Goodin (1998) 17 Cal.4th 599[, 619]. Because there are no noncontract causes of action in this case, attorney's fees will not be awarded."
In sum, relief was sought for nothing but a set of alleged breaches of contract. The landlords sought an order ejecting the tenants from the property because they breached the lease; they sought a declaratory judgment that the tenants breached the lease; and they sought an order quieting title in their favor on the ground that the tenants breached the lease. In substance, the complaint alleged breaches of the lease and asked for remedies called ejectment, declaratory relief, and quiet title. The conclusion that this action, or any portion of it, was not an action on a contract would plainly not be correct.

The tenants contend that B & B Sulfur Co. v. Kelley, supra, 61 Cal.App.2d 3 supports their position. They point out that, although the court there had to consider the terms of a lease to decide the plaintiffs' ejectment claim, the claim nevertheless was "based on a . . . tort of defendants." (Id. at p. 6.) The case is easily distinguished. The defendants there were not parties to the lease; the complaint did not allege that they breached any lease; and the significance of the lease was simply that it gave the plaintiffs a right of possession against the defendants as trespassers. (Id. at pp. 5-6.) In this case, by contrast, the landlords' right of possession could be asserted against the tenants only if the tenants breached the lease. The tenants' breach was the only alleged basis of their liability.

The tenants also rely on Stout v. Turney (1978) 22 Cal.3d 718 and Lerner v. Ward (1993) 13 Cal.App.4th 155, in which fraud claims arising out of contractual relationships were held not to be claims upon a contract for purposes of awarding attorneys' fees under Civil Code section 1717. Neither case is helpful to the tenants. In both, the fraud claims were independent of any contract claims--i.e., they were claims that the defendants were liable for fraud whether they breached the parties' contract or not. (Stout v. Turney, supra, at pp. 721-722, 730; Lerner v. Ward, supra, at pp. 157, 158-159.) To prevail on the fraud claims, the plaintiffs did not have to prove breach of contract. All the claims in the present case did depend on proof of a breach of contract. The tenants' citation of McKenzie v. Kaiser-Aetna (1976) 55 Cal.App.3d 84 is similarly not helpful. There, the court held that a claim for negligent misrepresentation was not "on [the] contract" for purposes of Civil Code section 1717. Again, unlike here, the plaintiffs did not need to show a breach of the contract to prevail on the claim in question. (McKenzie v. Kaiser-Aetna, supra, at pp. 88-89.)

The tenants next argue that the landlords' suit was not an action on the contract to the extent that it sought other remedies than damages. They say that "[b]ecause [the landlords] elected the non-contract remedies, they must bear the consequences of their actions." The tenants' assumption is that only a claim for contract damages is a contract claim. Under this reasoning, a complaint consisting of a cause of action for breach of contract and a prayer for specific performance would not be an action on a contract. To state this view is to refute it. In their reply brief, the tenants acknowledge that an unlawful detainer action seeking an eviction order would also be an action on a contract. There is no authority for the idea that a lawsuit is a contract action only when the remedies sought are damages or an eviction order, however.

Finally, the tenants say the trial court, in its discussion of declaratory relief, should have relied on Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141 instead of the cases it cited. The tenants claim Persson "superseded" the cases on declaratory relief the trial court relied on, but we do not see how. In fact, the holding of Persson is not applicable to the present case at all. In Persson, the Court of Appeal held that a declaratory relief action was not an action on a contract for purposes of applying Civil Code section 1717. The suit in Persson, however, sought declaratory relief for fraud, deceit, negligent misrepresentation, securities fraud, and breach of fiduciary duty. Unlike in the present case, the complaint did not allege that the defendants breached a contract; proof of breach of a contract was not necessary to show liability. (Persson v. Smart Inventions, Inc., supra, at pp. 1174, fn. 23, 1149-1150.) Where, as here, the relief sought is a declaration that the defendants breached a contract, the claim is a contract claim. As the Court of Appeal stated in City and County of San Francisco v. Union Pacific R.R. Co., supra, 50 Cal.App.4th at page 1000, the contention that an action for declaratory relief to determine the rights of the parties under a contract is not an action on the contract is "patently absurd."

In their reply brief, the tenants argue for the first time that "a careful review of the complaint shows the gravamen of the case claims is actually trespass ab initio," which, if correct, arguably would mean that the tenants could have prevailed without showing a breach of the lease. We generally do not address arguments made for the first time in an appellant's reply brief. (Feitelberg v. Credit Suisse First Boston, LLC (2005) 134 Cal.App.4th 997, 1022; California Recreation Industries v. Kierstead (1988) 199 Cal.App.3d 203, 205, fn. 1.) Further, the tenants have not cited any authority for, or made any genuine argument supporting, the proposition that a complaint alleging breaches of a lease and praying for ejectment, declaratory relief, and quiet title is, in reality, a suit for trespass ab initio. We need not address a point that has been inadequately briefed. (Associated Builders & Contractors, Inc. v. San Francisco Airports Com. (1999) 21 Cal.4th 352, 366, fn. 2.)

It really is of essential implication that people ought to be educated regarding business law and commercial litigation . A business is also called a company, enterprise or firm is really a legally credited organization designed to provide goods or services to customers. Businesses are best in capitalist economies most being privately held and made to generate income that will improve the wealth of its possessors and improve the business itself. The keepers and operators of a business have, as one of their major objectives, the receipt or generation of a financial return in return for work and acceptance of risk. Notable exceptions consist of cooperative enterprises and state-owned enterprises. Businesses can also be formed not-for-profit or be state-owned. It really is of crucial implication that people must be educated about business law and commercial litigation . A business is otherwise known as a company, enterprise or firm is really a legally acknowledged organization designed to provide goods or services to customers. Businesses are best in capitalist economies most being privately possessed and made to earn profit that may optimize the success of its owners and grow the business itself. The keepers and operators of a business have, as one of their major objectives, the receipt or generation of a financial return in return for work and acceptance of risk. Notable exceptions can include cooperative enterprises and state-owned enterprises. Businesses can also be formed not-for-profit or be state-owned.

In layman terminology it's just the typical activity or enterprise entered into for profit is known as business. It doesn't necessarily mean that it has to be a company, a corporation, partnership, or have any such formal organization, but it can range from a street peddler to General Motors. It is sometimes significant to figure out if an accident, visit, travel, meal or other activity was part of "business" or for pleasure or no particular reason. Classic examples include suits for :

* Misrepresent of Intellectual Property: Patents, copyrights, trademarks, trade dress, service marks, and trade secrets.

*Antitrust Violations: Monopolization of a line of business, group boycotts, price discrimination, tying arrangements, and conspiracies to fix prices, allocate consumers, divide territories, or if not prevent competition.

*Fraud and Deceptive Trade Practices: Misrepresentations and fraud in business transactions.

*Securities Law Violations: Includes the act of manipulation or deception along with purchase and selling stocks, bonds, mutual funds, and various securities transaction, whether or not privately or on an open market like the New York Stock Exchange or Nasdaq.

Abuses of Trust: Breaches of fiduciary responsibilities by people found in positions of trust, including corporation's officers and administrators, representatives, trustees, partners, or majority stockholders.

Employer/Employee Disputes: Overtime, disabilities, health and pension packages, and also partiality age, including but not limited to race, in addition to gender.

Gathering of Debt: Promissory notes, guarantee agreements, and mortgages/deeds of trust.

Failure of Agreement: Mergers and acquirement|, acquisitions and deals of securities, transactions in real estate and other business assets, and contracts to provide goods or services.

Tortuous Interference with Deal: A third party's hindering or avoiding efficiency of an agreement.

Agreements Restraining Rivalry: Non-competition, non-solicitation, and non-disclosure agreements by former business owners and employees. These suits often include requests for emergency relief such as a restraining order or pre-trial admonition.

Potential arguments between the possessors aren't even on the radar, frequently because the business partners are long-time friends or relatives. Commercial transactions and business relationships sometimes get difficult and sadly, transform into disputes, ending up in pricey litigation. Failure to settle the dispute by way of negotiations or discussions among the parties, one party may find that litigation is the only means to end the matter. Regrettably, litigation is often a truth of modern business life. When you are confronted with commercial litigation issues, you need the guidance of an experienced commercial litigation attorney to help you resolve the problem with possible minimal cost. Commercial litigation is a general term that applies to any type of litigation or controversy related to business issues. This generally entails two or more businesses in a dispute over money or other assets.

Continue reading "The Business Law Attributes of Commercial Business" »

Claims against a broker may be based on three separate types of laws:

•Federal securities law

•State securities law

•Common law

The Feds - Going to the Top
The most significant laws regulating the sale of securities - and the behavior of brokers, investment advisers and mutual fund managers - are the Securities Act of 1933 and the Securities Exchange Act of 1934. These are the laws that set out the entire framework of federal securities regulation, including establishing the Securities Exchange Commission says California Business Attorney Steven C. Peck.

They, and the rules made under their authority, dominate U.S. securities regulations - though there are other laws, such as state "blue sky" laws or common law that also regulate the markets and the behavior of people in them. But they are nowhere near as important as the '33 act and '34 act and their rules.

Of the two, the 1934 act is more important if you feel that your broker did you dirty. So let's start with the 1933 act, to get it out of the way.

The 1933 act primarily regulates the initial offering of stocks. It requires that most securities are registered before they can be sold, that a written prospectus containing certain critical information accompanies them, and that this information is accurate.

Section 12 of the 1933 act establishes civil liability for violations - in other words, it lets you sue if the broker didn't provide you critical information, or if the information was untrue. However, most of the time, if your broker is buying or selling securities for you, it's in the secondary market, which means after the securities were initially offered to the public. As a result, the 1993 act is usually less important for establishing liability against your broker.

The 1934 act regulates any purchase or sale of securities, including on the secondary market. Section 10 of the 1934 act says that it's illegal to use or employ any manipulative or deceptive device or contrivance in connection with the purchase or sale of any security indicated California Business Attorney Steven C. Peck.

The most important rule under the authority of the '34 act, Rule 10b-5, says that is illegal for anyone, while buying or selling securities, to:

•Employ any device, scheme or artifice to defraud;

•Make any untrue statement of material, or important, fact, or fail to say something necessary to avoid misleading or deceiving - basically, no lying by either commission or omission; and,

•Engage in any act, practice or course of business that intends to defraud or deceive an individual.

As you can see, Section 10 of the 1934 act and Rule 10b-5 cast a very broad net. Pretty much any deceit or trickery is forbidden. And since the Supreme Court has found that there is private right of action - i.e., you can sue - under the '34 act, you can use this powerful and broad tool to sue if you feel you were deceived or tricked.

However, since liability under the '34 act is based in fraud - deliberate deceit - you have to show what's called scienter, or the intent to deceive. So you need to find evidence establishing a "bad state of mind" on the part of your broker.

Without evidence that your broker meant to deceive you, you have no case, though some courts have allowed a showing of recklessness, which is even "more negligent" than gross negligence, to be enough.

State Your Claim
States have their own securities laws, called "blue sky" laws, that vary from state to state. Most state laws typically require companies to register their offerings before they can be sold in that state. The laws also license brokerage firms, brokers and investment advisers in the state.

Sometimes, as with New York, the state law helps the government regulate brokers and mutual funds but doesn't provide a "private right of action" - i.e., you can't use the law to sue.

Other times, they do establish additional legal grounds for the victims of unscrupulous or negligent brokers and fund managers to seek redress. You should be sure to check your own state law to see what rights they provide.

Other Common (Law) Grounds for Legal Action
Common law is law based in court cases and judicial decisions, rather than statute or legislation. It's a key feature of English and American law, and it's law that has grown up organically over time, as judges apply principles and decide cases, rather than being laid down by a state legislature or Congress, or by some administrative or rule-making body. Many important areas of law such as torts - which is the law of "somebody done somebody wrong," such as suing your neighbor because his dog bit you - are defined mostly by common law, not by statute.

Your state of residency matters. Remember, courts make common law. A court in New York doesn't have to listen to a Delaware court, or Pennsylvania, or California. The different court systems interpret the common law in different ways. What might be a winning legal proposition in one state is not necessarily one in another state. You have to check your own state's laws to know where you stand on common law causes of action.

There are four common law grounds for suing your broker, investment adviser or fund manager: fraud, breach of fiduciary duty, breach of contract and negligence. Since three of those are also specific claims or causes of action against your broker, they're reviewed in the Types of Claims section.

However, since fraud cuts across several claims - including important ones, such as misrepresentation, churning and unsuitability - let's go over those elements of fraud important to any fraud-based claim.

Fraud is "theft by deception." It's stealing by trickery. Fraud is the chief common law basis for a claim against a broker, financial adviser or fund manager who lied to you, misrepresented risks, or misused control over your account to steal.

Ultimately, many different claims are based on fraud: churning is a type of fraud, as is making misrepresentations. It's broad; it's intuitively easy to grasp; it's powerful.

Fraud is a great basis for claims against brokers who have acted improperly, except for the fact that fraud requires intent to defraud or steal.

Sometimes that's just not there - your broker was an idiot or careless to the point of idiocy, but not a crook. And even when the intent to steal was there, it may be hard to prove.

Look to your state law to see exactly what you need to prove and how hard it is to prove it, and make sure to check out the potential claims in detail.

Continue reading ""Blue Sky" Claims Against Your Broker" »

Whether it's a private action under the 1934 act, an action under your state's securities laws, or a common law action for breach of fiduciary duty or contract, there are grounds for suing if your broker stole from you, lied to you or cheated you in some way.

Time to head for court? Not quite. It's very unlikely you can actually take your broker to court. Most likely, you'll need to bring him or her to arbitration.

So you may be asking yourself, "Why did they just waste my time telling me about grounds to sue if they don't matter and I can't get to court?" It's because the causes of action matter, as they are what give you right to take action. If there wasn't a violation of securities laws or a breach of a common law duty, there is no lawsuit or arbitration.

Arbitration is a method of dispute resolution in civil cases. It's an alternative to going to court. One or a group of arbitrators hear both sides of the story then render a decision. Basically, arbitration is a court without judge, jury or formality; the arbitrators, who take the place of judges, are essentially knowledgeable laypeople.

There is a lot to recommend arbitration. Because of the informality, it tends to be much less expensive than going to court. It's also quicker, so you'll get your "day in court" faster, and without mortgaging your home to pay your attorney. In fact, owing to the informality and the nature of the process, you could represent yourself without a lawyer, though one is still recommended - if you think your case is worth pursing, it's worth pursuing the right way.

But in life, you generally take the bad with the good, and that's true of arbitration, too. The downsides to arbitration are:

1.There is less right of review or appeal - if the decision goes against you in arbitration, it's very difficult to reverse it;

2.Arbitrators don't have to follow precedent, or what's been decided before, the way judges do, so the outcome may be more arbitrary; and,

3.Most importantly, your brokerage or mutual fund wants arbitration, which is itself almost enough reason to go to court instead.

In the typical securities arbitration, one of the three arbitrators will be an industry professional. That person may be more likely to find for your broker, or at least to reduce the amount you might win. After all, do you think your brokerage or mutual fund would want arbitration if it was more likely to be bad for them? Almost by definition in disputes, if the other side wants something, it's good for them, bad for you.

Unfortunately, you almost certainly do not have a choice. Almost all brokerage account or mutual fund agreements will contain a clause saying that any disputes - and a claim that your broker defrauded you is certainly a "dispute" - will go to arbitration. Remember, those agreements are contracts; you're bound by what you agreed to in writing by signing the agreement, and courts have consistently found arbitration clauses in brokerage contracts valid and enforceable.

By signing an account agreement, you agree to everything in it. Since pretty much all agreements have an arbitration clause - you'd have to look really hard to find one without - you're going to end up in arbitration if you bring an action, and you'll probably be in FINRA's arbitration process.

What Is FINRA?
The Financial Industry Regulatory Authority is the largest "non-governmental regulator" for securities firms in the United States. It's an SRO, or self-regulatory organization, and it does much of the regulation and policing of the securities industry. It was formed from a merger of the National Association of Securities Dealers and the self-regulatory functions of the New York Stock Exchange.

And it is very likely to provide the people who hear your arbitration case. Worried? You probably should be, since brokers and funds - you know, the entities you're thinking of suing - make up FINRA's membership.

FINRA says it's impartial, and let's give it the benefit of the doubt and assume it tries. But realistically, its members must find it hard to be unbiased toward the people they identify with, who they may have worked with in the past or may work for in the future, and whose funding keeps their organization afloat.

Just like the FDA is often accused of leaning too much in the direction of pharmaceutical companies, or the FAA of being too much about keeping airlines running and not enough about keeping air travel safe, industry organizations often end up being "captured" by their industries and putting industry interests first.

Typical Securities Arbitration
Since your claim is almost certainly going to end up in arbitration, let's look at a typical one. And since so many securities industry arbitrations are under the auspices of FINRA, let's look at the FINRA dispute resolution process.

Before getting to arbitration - that is, before filing a formal claim - FINRA recommends you report the problem to your broker's or adviser's manager. Their boss or company may be able to help you.

If there's no joy - i.e., they don't provide the relief or compensation you think you're entitled to - another FINRA-recommended option is voluntary mediation. A mediator - a professional negotiator or middleman - may be able to help you and your broker come to terms that work for both sides.

However, if that doesn't happen, it's on to the arbitration process:

•File a claim: In a lawsuit, you'd start the ball rolling by filing a complaint. Here, you file a Statement of Claim, which describes what happened, why you think you have a claim and how much money is at stake. You'll also file a Submission Agreement, which confirms that you have selected arbitration and agree to be bound by it. Of course, you're there in the first place only because your brokerage agreement said you had to arbitrate.

•Serve the claim on the respondent, which is the broker and/or brokerage. Now they know you're proceeding against them.

•Small claim - $25,000 or less: Usually, there will be one arbitrator, and he or she will resolve the matter and render a decision without any in-person hearings, based just on your and your broker's written materials and evidence. You do have the right to request in-person hearings, though, and if you do, or if it's a larger claim, you proceed to the next step.

•Large claim or request for in-person hearing: You'll present your case before an arbitration panel of three arbitrators. The parties - you and your broker - choose the arbitrators from computer-generated lists provided by FINRA. You'll appear before the arbitrators, and each side has an opportunity to present its case and rebut the other side's case. You need to have evidence to back up your claims, and you have the right to cross-examine the other side's witnesses.

•"The decision is...." If it was a single arbitrator, he or she just makes a decision; if it was a panel, majority rules. In either event, the arbitrators come up with a decision and that's that.

Note: They don't need to provide the reasons behind their decisions in writing unless you requested they do so in advance and in writing.

Arbitrator decisions are final. The arbitrators themselves cannot reconsider them; there's no "arbitration appeals panel"; and even courts are very limited in being able to review, and reluctant to second-guess, arbitration awards. You will almost never win if you later challenge the award in court.

Some of the best news is, besides arbitration being cheaper than a lawsuit, it's typically a lot faster, too. According to FINRA's typical time frame, from start to finish - claim to award - arbitration might take only two to three months. You will not get that kind of turnaround from court.

Arbitration vs. Mediation
Often talked about together as "alternative dispute resolution" - in other words, not court - arbitration and mediation are actually very different.

Arbitration has teeth, and the arbitrator's job is to use them. This means that an arbitrator listens to evidence and renders an enforceable decision. In that respect, arbitration is like court, just with fewer rules and procedures, no judge, less cost and less right of review or appeal. Think of it as an "alternative court."

Mediation is just suggestive. The mediator's job is to help you and the other side come to an agreement. It's not the mediator's job to cram down a decision, and he or she does not have the power to make one stick, anyway.

Mediation is purely voluntary. Note that a good mediator can help you get to a satisfactory result - FINRA claims 80 percent of mediations end up settling, which means that both sides came to something they could live with. Since it is voluntary and you could always walk away if you don't like where it's going, it may be well worth your while to try mediation.

Who is the "other side"? Consider who you should file a complaint against - just your broker or also your broker's employer.

Continue reading "Out of Court: Some Simple Facts Attributable to Arbitration" »

Broker or mutual fund: Suing your fund is suing yourself. A broker is someone who acts as your agent, buying or selling securities for you. However, like real estate brokers, they are buying or selling things that belong to other people, acting as middlemen.
When you invest in a mutual fund, you are buying a piece of the fund. Even if the fund then turns around and invests its money in stocks and bonds, what you own is a piece of the fund, not the underlying stocks and bonds. It's like investing in a business that happens to own real estate - you own a piece of the company, not a piece of Main Street says California Business Lawyer Steven C. Peck.

The reason this is a critical distinction is that mutual funds can use their money - which is really your money - to defend themselves from a lawsuit. That means that when you sue them, they hire their lawyers and experts, pay court costs and - if they lose - pay damages with your money. In some ways, therefore, you are suing yourself indicates California Business Attorney Steven C. Peck.

If you're a smaller investor, even though your money is a piece of the fund's money, it's only a small piece. If you think the fund did you dirty, it still makes sense to sue, because your money will be less than 1 percent - or less than 1 percent of 1 percent of 1 percent - of the fund, and most of the expenses will be borne by the other investors.

However, this "shoot the hostages" feature of mutual funds deters large institutional investors, such as pension funds, from suing. In other words, the institutional investor owns a large enough percentage of the mutual fund that suing can becounterproductive.

Brokers and their bosses or companies - sue 'em all and let the courts sort it out. Speaking of, "Whose money is it?" and, "How much money is there?" if you think you have a cause of action, sue the brokerage - your broker's boss or employer - as well as your broker says Los Angeles Business Attorney Steven C. Peck who may be contacted toll free at 1.866.999.9085.

The brokerage will have much deeper pockets as well as more at stake than an individual broker will. An individual, even a successful broker, may not have enough to pay your claim if you win. They may also find it to their advantage to simply declare bankruptcy or otherwise fold their tent and walk away if there's a large settlement against them. It's a much better bet that you'll collect from a business worth millions or billions.

And, no, suing your broker's boss isn't only about having access to deeper pockets. Your broker's supervisor has an obligation to supervise your broker, especially if they knew or had reason to know - such as from prior complaints, or your broker's previous work history - that they really should have been supervising him or her closely. A failure to supervise is actionable.

More generally, businesses are often responsible for the actions of their employees, at least actions taken within the course of business - which for a brokerage means: when brokers trade stocks.

Continue reading "The Irony of Suing Your Mutual Fund" »

Litigation is not only a nuisance for a business; it can also lead to a business's demise. The uncertainty of pending litigation can make existing and potential investors nervous and unwilling to provide the resources necessary for the business to succeed. The damage may be done even if the business is ultimately cleared of any wrongdoing. Of course, if the business is found liable for wrongdoing during litigation then the outcome can be even worse. In addition to losing investor confidence, and possibly good will from customers, the business may be required to pay damages that significantly harm its bottom line. Therefore, it is important for businesses to take precautions to prevent litigation whenever possible says California Business Attorney Steven C. Peck.

It is possible to prevent many types of potential litigation simply by implementing good business practices. There are many different types of litigation that can face a company but if the following policies and records are in good order than many cases can be averted. For example:

· Good Financial Record Keeping: this is essential to any business. You need to have complete financial records that are properly updated and maintained, and that reflect all of your profits, expenses, and other financial transactions. These records can help you avoid litigation on tax issues, investor issues and other important matters.
· Written Policies and Procedures: businesses should have written employment policies and procedures that ensure that similarly situated employees are treated fairly in order to prevent employment related litigation.
Personnel Files: records of employee reviews and employee discipline should be maintained so that any allegation of discriminatory dismissals or other improper employment allegations can be properly defended.
It is important to consult appropriate experts before developing and when implementing business record keeping policies and procedures. For example, an accountant or tax professional can help you set up your financial record keeping system and periodically review it to make sure that it is being implemented correctly. Similarly, an employment lawyer can help you develop nondiscriminatory employment procedures and make sure that any adverse employment actions that you take are done in accordance with established policy and properly documented in personnel files.
Business recording keeping policies and procedures will not provide complete immunity to litigation for businesses but they can greatly reduce a business's likelihood of being sued. They can also be helpful if a business is sued and may provide for a quick dismissal or settlement since it is easy to obtain and interpret the information regarding wrongdoing.
While the best time to start keeping and implementing good records, policies and procedures is when you start your business, it is never too late to implement good practices. You can protect yourself against the threat of future litigation by implementing good financial record keeping systems, establishing employment policies and procedures, and maintaining complete personnel files at any time. Although these steps will significantly reduce, not eliminate, the threat of litigation, you can sleep well at night knowing that if you are sued that you have the necessary documentation to properly defend your business.

Continue reading "Good Business Practices May Help Stave Off Potential Litigation" »

Piercing the corporate veil describes a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil. A simple example would be where a businessman has left his job as a director and has signed a contract to not compete with the company he has just left for a period of time. If he set up a company which competed with his former company, technically it would be the company and not the person competing. But it is likely a court would say that the new company was just a "sham", a "fraud" or some other phrase, and would still allow the old company to sue the man for breach of contract. A court would look beyond the "legal fiction" to the reality of the situation.

Piercing the corporate veil is not the only means by which a director or officer of a corporation can be held liable for the actions of the corporation. Liability can be established through conventional theories of contract, agency, or tort law. For example, in situations where a director or officer acting on behalf of a corporation personally commits a tort, he and the corporation are jointly liable and it is unnecessary to discuss the issue of piercing the corporate veil. The doctrine is often used in cases where liability is found, but the corporation is insolvent.

Continue reading "The Business of Piercing the Corporate Veil" »

The Racketeer Influenced and Corrupt Organizations Act (commonly referred to as RICO Act or RICO) is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. RICO was enacted by section 901(a) of the Organized Crime Control Act of 1970 (Pub.L. 91-452, 84 Stat. 922, enacted October 15, 1970). RICO is codified as Chapter 96 of Title 18 of the United States Code, 18 U.S.C. § 1961-1968. While its intended use was to prosecute the Mafia as well as others who were actively engaged in organized crime, its application has been more widespread.

It has been speculated that the name and acronym were selected in a sly reference to the movie Little Caesar, which featured a notorious gangster named Rico. The original drafter of the bill, G. Robert Blakey, refused to confirm or deny this. G. Robert Blakey remains the country's foremost expert[peacock term] on RICO; his former student Michael Goldsmith also gained a reputation as one of the nation's leading RICO experts.

Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes--27 federal crimes and 8 state crimes--within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $250,000 and/or sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of "racketeering activity." RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.

When the U.S. Attorney decides to indict someone under RICO, he or she has the option of seeking a pre-trial restraining order or injunction to temporarily seize a defendant's assets and prevent the transfer of potentially forfeitable property, as well as require the defendant to put up a performance bond. This provision was placed in the law because the owners of Mafia-related shell corporations often absconded with the assets. An injunction and/or performance bond ensures that there is something to seize in the event of a guilty verdict.

In many cases, the threat of a RICO indictment can force defendants to plead guilty to lesser charges, in part because the seizure of assets would make it difficult to pay a defense attorney. Despite its harsh provisions, a RICO-related charge is considered easy to prove in court, as it focuses on patterns of behavior as opposed to criminal acts.

There is also a provision for private parties to sue. A "person damaged in his business or property" can sue one or more "racketeers." The plaintiff must prove the existence of a "criminal enterprise." The defendant(s) are not the enterprise; in other words, the defendant(s) and the enterprise are not one and the same. There must be one of four specified relationships between the defendant(s) and the enterprise. A civil RICO action, like many lawsuits based on federal law, can be filed in state or federal court.

Both the federal and civil components allow for the recovery of treble damages (damages in triple the amount of actual/compensatory damages).

Although its primary intent was to deal with organized crime, Blakey said that Congress never intended it to merely apply to the Mob. He once told Time, "We don't want one set of rules for people whose collars are blue or whose names end in vowels, and another set for those whose collars are white and have Ivy League diplomas."

The time before RICO was signed into law (October 15, 1970), was referred to as "The Golden Age" by those involved in organized crime. The term "The Golden Age" can be found on any of the multitude of "Mob Speak" glossaries on the internet.

Under the law, racketeering activity means:

Any violation of state statutes against gambling, murder, kidnapping, extortion, arson, robbery, bribery, dealing in obscene matter, or dealing in a controlled substance or listed chemical (as defined in the Controlled Substances Act);
Any act of bribery, counterfeiting, theft, embezzlement, fraud, dealing in obscene matter, obstruction of justice, slavery, racketeering, gambling, money laundering, commission of murder-for-hire, and several other offenses covered under the Federal criminal code (Title 18);
Embezzlement of union funds;
Bankruptcy fraud or securities fraud;
Drug trafficking; long-term and elaborate drug networks can also be prosecuted using the Continuing Criminal Enterprise Statute;
Money laundering and related offenses;
Bringing in, aiding or assisting aliens in illegally entering the country (if the action was for financial gain);
Acts of terrorism.
Pattern of racketeering activity requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years (excluding any period of imprisonment) after the commission of a prior act of racketeering activity. The U.S. Supreme Court has instructed federal courts to follow the continuity-plus-relationship test in order to determine whether the facts of a specific case give rise to an established pattern. Predicate acts are related if they "have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events." (H.J. Inc. v. Northwestern Bell Telephone Co.) Continuity is both a closed and open ended concept, referring to either a closed period of conduct, or to past conduct that by its nature projects into the future with a threat of repetition.

Continue reading "The Racketeer Influenced and Corrupt Organizations Act (RICO) May Be Used in Civil Business Law Actions" »

According to reports issued this week, the domain name Sex.com will be put up for auction next week by its owners, with the bidding set to start at $1 million.

The domain, once considered one of the Internet's most valuable, is definitely one of its most storied. Acquired by Escom LLC in 2006, the domain is set to be auctioned off March 18 by New York law firm Windels Marx Lane & Mittendorf LLP, as part of a foreclosure by lender DOM Partners LLC, which backed the acquisition.

Escom, which, according to a Reuters report, published in the Globe and Mail, has been in default on its loan for more than a year. The article quotes a lawyer for DOM Partners, Scott Matthews, who says the company is foreclosing according to its rights outlined in the loan agreement.

The company acquired the domain in 2006 - for an amount believed to be in the range of $14 million - from then-owner Gary Kremen, who first registered the domain in 1994. Prior to its sale, Sex.com had been the subject of a long legal battle, one that continued until 2007.

In May of 2007, lawyers for Kremen announced that the Ninth Circuit Court of Appeals had issued an order dismissing the most recent appeal of a $65,000,000 judgment against Stephen Michael Cohen, effectively ending the case - at the time, it was considered a landmark decision in Internet law.

The story, in brief, is that Cohen used a fraudulent fax to convince the domain's then-registrar, Network Solutions, to transfer the domain to him. While Kremen sought to have the domain returned, Cohen operated a banner farm on the domain that reportedly generated between $50,000 and $500,000 per month, and continued to operate until 2000, when the courts ordered Network Solutions to return the domain to Kremen. Cohen left the country, and was arrested in Mexico in 2005.

Sex.com's story has been the subject of several books. But to date, the most interesting thing anyone has done with sex.com is steal it. The 2006 sale would seem to have been designed to tie the domain to a proper business venture, but - as observed in this week's TechCrunch report on the auction - as of earlier this week, the domain pointed to the PG landing page of a fairly ill-conceived sex-related "portal" site (as of Friday morning, the domain pointed to a parked page).

One of the most interesting subplots to the story is the fact that one of the Internet's most valuable properties has never really been properly developed. It's not clear who the suitors for the domain might be, but according to the announcement, they'll be required to bring a certified check for $1 million to the auction.

"I'm sure you've heard it before but the analogy I use is: it's like real estate," says Adam Eisner, director of domain services at wholesale registrar Tucows. "There are lousy properties, good properties, and great properties. As an address, sex.com is a great property. And in general, more people are starting to realize the value in the good and great names. It doesn't only apply to the great properties, though. Even smaller businesses are increasingly shelling out one to five thousand dollars to get domain names that are a perfect reflection of their business. Sure, they can have an okay name for a few bucks. Or they can spend a bit of their marketing budget to secure a good or great name."

Obviously there is still a great deal of inherent value in the domain sex.com - it's a single word, extremely topical and relevant, a powerful keyword related directly to a product people have proven very willing to pay for online. The question is whether that inherent value in the specific domain has diminished over time, though the changes in the nature of web navigation, the domain space itself and the user's relationship with the domain.

The question of the specific value of sex.com will be answered at next week's auction. The question of whether something compelling can be done with the property may take a little longer to answer.

While the auction is set to be an in-person affair at the law firm's New York offices, the Globe story quotes one of the partners as saying the firm was arranging for potential buyers to be able to bid online.

Continue reading "Domain Name Sex.Com to be Put up For Auction" »

What exactly is a surety bond and why should small business owners care?
A lot of people like to sum up a surety bond as insurance, but in reality, surety bonds are a financial guarantee. They are a part of the insurance industry but they serve as a financial guarantee for the obligee (or person requiring the bond which is usually the state)

How do I know if my business/start-up needs a bond?
Almost every small business is required or can utilize a surety bond in some way. For instance, many states require a sales tax bond for stores to operate. Almost every business that requires a license to operate in the state will be required to post a surety bond. Some of the more common industries include car dealers, mortgage brokers, and even insurance brokers. If you aren't required to post a bond to operate, many companies look into getting a fidelity bond or a dishonesty bond which protect the owner against employee theft.

How do I obtain one?
Most of the time, it's a simple process. If the bond required is $25,000 or less, often just submitting an application is all that is necessary. With the application process there is a credit check and depending on how the credit check comes back, they may or may not need to submit and any sort of financial data or bank letter of credit. For most people with a good credit background, they only need to submit an application and they will be on their way with a bond in hand. This process usually takes anywhere from 24 to 48 hours. If there is a cosigner, letter of credit or collateral needed, or you want to do a premium financing surety bond then the process will usually take a little longer to complete.

One thing to consider before you get a surety bond that will save you time in the long run is that when you first submit an application, if there is another partner (or anyone with more than 10% share) in the company, they also need to be underwritten on the bond. So if there are three partners, there need to be three applications with three signatures.

What do surety bonds cost?
The cost is determined by examining the credit of the person needing the bond and what type of bond it is. A person with good credit will normally get standard rates that can range anywhere from .05% to 5% of the full bond amount. If the person has sub-standard credit, then they normally have to pay anywhere from 5% to 15% of the total bond amount.

Do I have to get a new one every year?
Most license and permit bonds are required to be renewed every year. There are thousands of types so it really depends on the specific bond that your company needs and the requirements that the obligee puts on the bond.

This guest post was written by Kevin Kaiser of Surety Bonds .com[link:http://www.suretybonds.com]. If you want to learn more about how surety bonds are involved in small business check out our podcast with David B. Willis on Texas Small Business Law[link:http://davidwillislaw.com/texassmallbusinesslaw/surety-bonds-for-small-businesses/] or visit the Surety Bond Education Center[link:http://www.suretybonds.com/edu/].