Valley Pizza, Inc. v. Herbst

• Court: District Court, N.D. California
• Decided: October 3, 2024
• Docket: 3:24-cv-02934
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 VALLEY PIZZA, INC., Case No. 24-cv-02934-TSH

8 Plaintiff, ORDER DENYING MOTION TO 9 v. COMPEL ARBITRATION

10 JOHN A. HERBST, et al., Re: Dkt. No. 14 11 Defendants.

12 13 I. INTRODUCTION 14 Pending before the Court is a Motion to Compel Arbitration brought by Defendants John 15 A. Herbst, Allen M. Toy, Neil Cortesi and John G. Budd. ECF No. 14. Plaintiff Valley Pizza, 16 Inc. filed an Opposition (ECF No. 18) and Defendants filed a Reply (ECF No. 20). The Court 17 finds this matter suitable for disposition without oral argument and VACATES the October 10, 18 2024 hearing. See Civ. L.R. 7-1(b). For the reasons stated below, the Court DENIES the 19 motion.1 20 II. BACKGROUND 21 On May 15, 2024, Plaintiff Valley Pizza, Inc. initiated this lawsuit in this Court against 22 individual Defendants John A. Herbst, Allen M. Toy, Neil Cortesi and John G. Budd. See 23 Complaint, ECF No. 1 at 1. In its Complaint, Plaintiff alleges causes of action for (1) violation of 24 26 U.S.C. § 7431 against Defendant Budd (Compl. ¶¶ 23–30); (2) invasion of privacy against 25 Defendant Budd (Compl. ¶¶ 31–37); (3) violation of California Business and Professions Code 26 § 17200 against Defendant Budd (Compl. ¶¶ 38–42); (4) abuse of process against Defendant Budd 27 1 (Compl. ¶¶ 43–47); and (5) civil conspiracy against Defendants Herbst, Cortesi and Toy (Compl. 2 ¶¶ 48–54). 3 On July 15, Defendants filed the instant Motion to Compel Arbitration. ECF No. 14. On 4 July 29, Plaintiff filed an opposition to Defendants’ motion. ECF No. 18 (“Opp’n”). On August 5 5, Defendants filed a reply. ECF No. 20 (“Reply”). 6 Defendants have proffered a copy of a stock purchase and sale agreement (“Stock Purchase 7 Agreement”) dated March 1, 2022 and signed by Defendants and Circle Pizza, LLC, which is not 8 a party in this action. Decl. of John Budd, ECF No. 14-1 (“Budd Decl.”) ¶¶ 2, 5 & Ex. A to Budd 9 Decl. The Stock Purchase Agreement includes an arbitration provision, which provides:

10 Section 9.12 Disputes. Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, 11 enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to 12 arbitrate, shall be determined by arbitration in Sacramento, California before one arbitrator(s). The arbitration shall be administered by 13 JAMS pursuant to its Comprehensive Arbitration Rules and Procedures and in accordance with the Expedited Procedures in those 14 Rules. Judgment on the Award may be entered in any court having jurisdiction. This clause shall not preclude parties from seeking 15 provisional remedies in aid of arbitration from a court of appropriate jurisdiction. The parties shall maintain the confidential nature of the 16 arbitration proceeding and the Award, including the Hearing, except as may be necessary to prepare for or conduct the arbitration hearing 17 on the merits, or except as may be necessary in connection with a court application for a preliminary remedy, a judicial challenge to an 18 Award or its enforcement, or unless otherwise required by law or judicial decision. 19 20 Stock Purchase Agreement at 18–19, Sec. 9.12. The Stock Purchase Agreement collectively 21 identifies Defendants as “Seller” and Circle Pizza LLC as “Buyer.” Stock Purchase Agreement at 22 1. The last page of the Stock Purchase Agreement includes e-signatures dated March 1, 2022 by 23 each of Defendants and by Kuljeet Singh as a member of Circle Pizza, LLC. Stock Purchase 24 Agreement at 20. Defendants have also proffered a complaint Defendants filed against Circle 25 Pizza in JAMS arbitration. Budd Decl. ¶ 5 & Ex. A to Budd Decl. 26 III. 27 IV. LEGAL STANDARD 1 and enforceable, save upon such grounds as exist at law or in equity for the revocation of any 2 contract.’” Viking River Cruises, Inc. v. Moriana, 596 U.S. 639, 649–50 (2022) (quoting 9 U.S.C. 3 § 2). The purpose of the FAA is to “rigorously enforce” private arbitration agreements according 4 to their terms. Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 233 (2013). The FAA 5 “mandates that district courts shall direct the parties to proceed to arbitration on issues as to which 6 an arbitration agreement has been signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 7 (1985) (emphasis in original). The Court’s role is to decide: “(1) whether there is an agreement to 8 arbitrate between the parties; and (2) whether the agreement covers the dispute.” Brennan v. Opus 9 Bank, 796 F.3d 1125, 1130 (9th Cir. 2015). “If the response is affirmative on both counts, then 10 the Act requires the court to enforce the arbitration agreement in accordance with its terms.” 11 Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). “[A]ny doubts 12 concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Id. at 1131. 13 “When deciding whether the parties agreed to arbitrate a certain matter (including 14 arbitrability), courts generally . . . should apply ordinary state-law principles that govern the 15 formation of contracts.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). 16 “California law, like federal law, reflects a strong policy favoring arbitration agreements[.]” 17 Wagner Constr. Co. v. Pac. Mech. Corp., 41 Cal. 4th 19, 31 (2007). Still, “[a] party petitioning 18 the court to compel arbitration bears the burden of proving by a preponderance of evidence the 19 existence of an arbitration agreement.” Olvera v. El Pollo Loco, Inc., 173 Cal. App. 4th 447, 453 20 (2009) (citation omitted), abrogated on other grounds by AT&T Mobility LLC v. Concepcion, 563 21 U.S. 333, 339 (2011). Under California law, a contract requires (1) parties capable of contracting; 22 (2) consent; (3) a lawful object; and (4) consideration. Cal. Civ. Code § 1550. “A written 23 agreement to submit to arbitration an existing controversy or a controversy thereafter arising is 24 valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any 25 contract.” Cal. Civ. Proc. Code § 1281. 26 In deciding a motion to compel arbitration, courts must “treat the facts as they would when 27 ruling on a motion for summary judgment, construing all facts and reasonable inferences that can 1 Adecco USA, Inc., No. 15-cv-5102-EMC, 2016 WL 1322994 at *2 (N.D. Cal. Apr. 5, 2016) (citing 2 Chavez v. Bank of Am., No. 10-cv-653-JCS, 2011 WL 4712204, at *3 (N.D. Cal. Oct. 7, 2011)). 3 V. DISCUSSION 4 “[A]s a general rule, ‘the right to arbitration depends on a contract, and a party can be 5 compelled to submit a dispute to arbitration only if the party has agreed in writing to do so.’” 6 Jensen v. U-Haul Co. of California, 18 Cal. App. 5th 295, 300 (2017) (quoting Matthau v. 7 Superior Ct., 151 Cal. App. 4th 593, 598 (2007)). “Even the strong public policy in favor of 8 arbitration does not extend to those who are not parties to an arbitration agreement or who have 9 not authorized anyone to act for them in executing such an agreement.” Suh v. Superior Ct., 181 10 Cal. App. 4th 1504, 1512 (2010) (quotations omitted). See also Kramer v. Toyota Motor Corp., 11 705 F.3d 1122, 1126 (9th Cir. 2013) (“The strong public policy in favor of arbitration does not 12 extend to those who are not parties to an arbitration agreement”) (quoting Comedy Club, Inc. v. 13 Improv W. Assocs., 553 F.3d 1277, 1287 (9th Cir. 2009)). Because “arbitration is a matter of 14 contract,” the FAA cannot require a party “to submit to arbitration any dispute which he has not 15 agreed so to submit.” United Steelworkers of Am. v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 16 (1960). California courts have, however, recognized circumstances under which a “nonsignator[y] 17 to an agreement containing an arbitration clause can be compelled to arbitrate under that 18 agreement.” Suh, 181 Cal. App. 4th at 1513. A nonsignatory plaintiff may be required to arbitrate 19 its claims, inter alia, based on estoppel, where the plaintiff is the third-party beneficiary of the 20 contract containing the arbitration provision, or based on agency principles. Id.; see also Jensen, 21 18 Cal. App. 5th at 301–07. 22 Defendants do not assert that Plaintiff Valley Pizza was a party to the Stock Purchase 23 Agreement. Instead, Defendants argue that “Plaintiff is estopped from refusing to arbitrate since 24 its claims arise from the Stock Purchase Agreement, Plaintiff is an agent of Circle Pizza, and 25 Plaintiff was a third party beneficiary of the Stock Purchase Agreement.” Mot. at 2. 26 1. Estoppel 27 Defendants contend that Plaintiff is estopped from refusing to arbitrate because its claims 1 an arbitration provision. Mot. at 5–6; see Stock Purchase Agreement at 18–19, Sec. 9.12. 2 “A nonsignatory plaintiff may be estopped from refusing to arbitrate when he or she 3 asserts claims that are ‘dependent upon, or inextricably intertwined with’ the underlying 4 contractual obligations of the agreement containing the arbitration clause.’” Jensen, 18 Cal. App. 5 5th at 306 (quoting JSM Tuscany, LLC v. Superior Court, 193 Cal. App. 4th 1222, 1239 (2011)). 6 However, “[e]ven if a plaintiff’s claims ‘touch matters’ relating to the arbitration agreement, ‘the 7 claims are not arbitrable unless the plaintiff relies on the agreement to establish its cause of 8 action.’” Id. See also Goldman v. KPMG, LLP, 173 Cal. App. 4th 209, 229 (2009) (holding 9 “[t]he purpose of the [equitable estoppel] doctrine is to prevent a plaintiff from . . . relying on the 10 contract when it works to his advantage by establishing the claim, and repudiating it when it works 11 to his disadvantage by requiring arbitration. The plaintiff’s actual dependence on the underlying 12 contract in making out the claim against the nonsignatory defendant is therefore always the sine 13 qua non of an appropriate situation for applying equitable estoppel.”) (cleaned up) (emphasis in 14 original). 15 The Court finds Plaintiff does not rely or depend on the terms of the Stock Purchase 16 Agreement in asserting its claims against Defendants. In its complaint, Plaintiff alleges that 17 Defendant Budd called the IRS to inquire about Valley Pizza’s tax filings while falsely 18 representing that he was president of Valley Pizza. Compl. ¶¶ 17–18. Defendants contend this 19 means Plaintiff’s claims are dependent upon and arise from the Stock Purchase Agreement 20 because Valley Pizza would not have changed hands and the payment of Valley Pizza’s tax 21 refunds would not be in dispute were it not for the Stock Purchase Agreement. Mot. at 6. The 22 Stock Purchase Agreement may well explain why Defendant Budd allegedly called the IRS, and 23 some of Defendants’ anticipated defenses to Plaintiff’s claims may well find their footing in the 24 terms of the Agreement. See Mot. at 3 (discussing provisions of Stock Purchase Agreement 25 excluding from the purchase and sale of Valley Pizza federal employee retention credits for 2020 26 and 2021 and providing that Defendants “may maintain signatory power over a Company bank 27 account or accounts for negotiation and retention of same”); Stock Purchase Agreement at 2, Sec. 1 claims. Plaintiff alleges causes of action for violation of 26 U.S.C. § 7431, invasion of privacy, 2 violation of California Business and Professions Code § 17200, abuse of process, and civil 3 conspiracy, and its claims ultimately concern whether Defendant Budd misrepresented himself as 4 president of Valley Pizza and whether the remaining defendants conspired for him to do so. Those 5 allegations do not themselves depend on any terms of the Stock Purchase Agreement, and the 6 Court finds they do not estop Plaintiff from refusing to arbitrate its claims. 7 Defendants further characterize Plaintiff’s Complaint as “contain[ing] numerous 8 allegations about how the actions giving rise to its pending claims relate to the claims currently 9 pending in binding arbitration between Valley Pizza’s now parent Company, Circle Pizza, and 10 Defendants.” Mot. at 6. The allegations Defendants cite in support of this argument, however, 11 merely acknowledge that there is a pending arbitration. Compl. ¶¶ 15, 20–21. The complaint does 12 not describe those pending claims. See generally Compl. The Court finds mere references to an 13 ongoing arbitration in which Plaintiff is not a party do not demonstrate a reliance on the 14 underlying contract pursuant to which the parties in the arbitration agreed to arbitrate. 15 In their reply, Defendants argue Plaintiff has failed to demonstrate that its claims are not 16 dependent upon the Stock Purchase Agreement. But the burden to demonstrate a binding 17 agreement to arbitrate lies with the moving party. See, e.g., Ashbey v. Archstone Prop. Mgmt., 18 Inc., 785 F.3d 1320, 1323 (9th Cir. 2015) (“A party seeking to compel arbitration has the burden 19 under the FAA to show (1) the existence of a valid, written agreement to arbitrate; and, if it exists, 20 (2) that the agreement to arbitrate encompasses the dispute at issue”). Plaintiff is not a party to the 21 Stock Purchase Agreement, and Defendants have not otherwise demonstrated that Plaintiff’s 22 claims are “dependent upon, or inextricably intertwined with” the obligations of the Stock 23 Purchase Agreement. Jensen, 18 Cal. App. 5th at 306 (quotations omitted). 24 Accordingly, the Court finds Plaintiff is not equitably estopped from refusing to arbitrate. 25 2. Third-Party Beneficiary 26 Defendants argue Plaintiff is compelled to arbitrate its claims as a third-party beneficiary 27 of the Stock Purchase Agreement. Mot. at 6–7. An arbitration agreement may be enforced against 1 Jensen, 18 Cal. App. 5th at 300–01. “A third party beneficiary is someone who may enforce a 2 contract because the contract is made expressly for his benefit.” Id.at 301 (quoting Matthau v. 3 Superior Ct., 151 Cal. App. 4th 593, 602 (2007)). “The test for determining whether a contract 4 was made for the benefit of a third person is whether an intent to benefit a third person appears 5 from the terms of the contract.” Id. (quoting Cargill, Inc. v. Souza, 201 Cal. App. 4th 962, 967 6 (2011)). 7 Defendants contend that Plaintiff benefited directly from the Stock Purchase Agreement 8 because the Agreement concerned the sale of its entire ownership. Mot. at 7. But Defendants do 9 not point to any provision within the Stock Purchase Agreement indicating that the Stock Purchase 10 Agreement was made for the benefit of Valley Pizza. See generally Mot. at 6–7. Moreover, “[t]he 11 mere fact that a contract results in benefits to a third party does not render that party a ‘third party 12 beneficiary.’” Matthau v. Superior Ct., 151 Cal. App. 4th 593, 602 (2007). Defendants do not 13 offer any authority to support their assertion that a company being sold necessarily benefits from 14 the contract concerning its sale. The fact that the Agreement concerned the sale of Valley Pizza 15 just means Plaintiff was the object of the Agreement, not that it benefited from it. 16 Finally, Defendant argues in its reply that the arbitration clause applies to “any dispute[,] 17 claim or controversy arising out of, or relating to the Agreement . . .” and maintains that this 18 action “arises from Defendant Budd’s alleged misrepresentation to the IRS of his role at Valley 19 Pizza, a role that was only modified by virtue of the Stock Purchase Agreement.” Reply at 3. 20 Although Defendant Budd’s role vis à vis Valley Pizza certainly would have changed when he 21 sold his shares in the company, this assertion provides no basis to find that Valley Pizza is a third- 22 party beneficiary of the Stock Purchase Agreement. 23 Accordingly, the Court finds Valley Pizza is not a third party beneficiary of the Stock 24 Purchase Agreement between Defendants and Circle Pizza, and rejects that theory as a basis to 25 require Plaintiff to arbitrate its claims. 26 3. Agency Relationship 27 Defendants argue that Plaintiff is properly compelled to arbitration as an agent of Circle 1 preexisting confidential relationship, such as an agency relationship between the nonsignatory and 2 one of the parties to the arbitration agreement, makes it equitable to impose the duty to arbitrate 3 upon the nonsignatory.” Westra v. Marcus & Millichap Real Est. Inv. Brokerage Co., 129 Cal. 4 App. 4th 759, 765 (2005). A nonsignatory to an arbitration agreement may not be bound by the 5 agreement absent a “preexisting agency relationship with one of the signatories to the arbitration 6 agreement . . . of such a nature that [the preexisting agency relationship] supports a finding of 7 implied authority for one of the signatories to bind the nonsignatory by their arbitration 8 agreement.” Jensen, 18 Cal. App. 5th at 303 (cleaned up). 9 Defendants contend that “[b]y acquiring Plaintiff outright, Circle Pizza (the signatory) 10 clearly has implicit authority to act on Plaintiff’s behalf and control its operations. Thus, Plaintiff 11 is an agent of Circle Pizza, and is properly compelled to arbitration under the Stock Purchase 12 Agreement.” Mot. at 6. However, Defendants provide no evidence of any preexisting agency 13 relationship between Plaintiff and Circle Pizza. Plaintiff was an asset transferred via the Stock 14 Purchase Agreement and could not have been an agent of Circle Pizza at the time of the 15 Agreement. Moreover, although Defendants maintain that Circle Pizza is Plaintiff’s “parent 16 company” (Mot. at 2; Reply at 2), Plaintiff asserts that Circle Pizza transferred ownership of 17 Plaintiff to Kuljeet Singh several days after the Stock Purchase Agreement was executed and does 18 not have any interest in Plaintiff. Opp’n at 6; Decl. of Christina M. Morgan ¶ 5, ECF No. 18-1; 19 Decl. of Kuljeet Singh ¶ 4, ECF No. 19-1. Defendants provide no other authority to support their 20 agency argument, and do not address Plaintiff’s opposition in their reply. See generally Reply. 21 Defendants further rely on Cohen v. TNP 2008 Participating Notes Program, LLC, 31 Cal. 22 App. 5th 840, 862 (2019) for the proposition that agency principles “may bind a parent to the 23 contracts of its subsidiary where . . . the parent company exercises ‘sufficient control over the 24 [subsidiary’s] activities’ such that the subsidiary becomes a ‘mere agen[t] or ‘instrumentality’ of 25 the parent.’” (citations omitted). But Defendants seek to bind a purported subsidiary, Valley 26 Pizza, to the acts of its purported parent, not vice versa, and make no argument as to why Cohen 27 should apply. 1 Purchase Agreement under agency principles. 2 VI. CONCLUSION 3 For the reasons stated above, the Court DENIES Defendants’ motion. 4 IT IS SO ORDERED. 5 6 Dated: October 3, 2024

THOMAS S. HIXSON 8 United States Magistrate Judge 9 10 11 12

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