Isaka
Investments v. Reerva

 

 

 

 

 

 

Filed
1/23/14  Isaka Investments v. Reerva CA2/3

 

 

 

 

 

NOT TO BE PUBLISHED IN THE
OFFICIAL REPORTS

 

 

 

 

California Rules of Court, rule 8.1115(a),
prohibits courts and parties from citing or relying on opinions not certified
for publication or ordered published, except as specified by rule
8.1115(b).  This opinion has not been
certified for publication or ordered published for purposes of rule 8.1115.

 

 

 

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

 

SECOND APPELLATE DISTRICT

 

DIVISION THREE

 

 
>

ISAKA INVESTMENTS, LTD., et al.,               Plaintiffs and Appellants,               v.   RESERVA, LLC, et al.,               Defendants and Respondents.

B245650            (href="http://www.mcmillanlaw.us/">Los Angeles County          Super. Ct. No. BC342134)

 

            APPEAL
from judgment of the Superior Court of Los
Angeles County, Barbara M. Scheper, Judge. 
Affirmed.

 

            Pircher,
Nichols & Meeks, James L. Goldman and I.
Bruce Speiser for Plaintiffs and Appellants.

 

            Dickstein
Shapiro, James H. Turken and Chanda R. Hinman for Defendants and Respondents.

_____________________

>INTRODUCTION

Plaintiffs
Isaka Investments, LTD. (Isaka), Sand Hill Capital International, Inc. (Sand
Hill), and Richbourg Financial, LTD. (Richbourg Financial) (collectively,
Plaintiffs) appeal from a judgment entered in favor of Defendants Hythiam, Inc.
(Hythiam), Reserva, LLC (Reserva) and Terren S. Peizer (Peizer) (collectively,
Defendants) after the sustaining of a demurrer and two bench trials.

Plaintiffs
initiated this action in August 2006, claiming standing to sue as alleged
shareholders and creditors of Xino Corporation (Xino).  Plaintiffs principally sought to set aside an
alleged fraudulent transfer whereby Hythiam acquired most of Xino’s assets at a
foreclosure sale stemming from a loan transaction between Xino and Peizer’s
company, Reserva.  Plaintiffs also
alleged Reserva breached a contract connected to the foreclosure sale that
required Reserva to cause Hythiam to transfer 360,000 shares of Hythiam common
stock to Xino in exchange for Xino obtaining releases from its creditors.  Reserva and Hythiam claimed Xino breached
this obligation by failing to obtain Plaintiffs’ releases.  In their initial complaint, Plaintiffs
asserted derivative claims on behalf of Xino, and also named Xino, Xino’s
director Michael Hinton (Hinton) and Xino’s former officer Joseph Dunn (Dunn)
as defendants.

The
principal issues in this appeal concern the interpretation of two settlement
agreements and the effect of those agreements on Plaintiffs’ standing to sue
Defendants.  In 2007, after Plaintiffs
filed their second amended complaint, Xino and Hythiam entered into a
settlement agreement (the Xino/Hythiam Agreement) whereby Hythiam agreed to
deliver a total of 310,000 shares of its common stock to Xino, notwithstanding
Xino’s alleged failure to obtain all requisite creditor releases, and Xino
agreed to release all claims against Hythiam, its “officers, directors, [and]
shareholders” arising through the date of the href="http://www.sandiegohealthdirectory.com/">agreement.  At the time, Reserva was Hythiam’s largest
shareholder and Peizer was an officer and director of Hythiam.

In
2009, Plaintiffs entered into a settlement agreement with Xino, Hinton and Dunn
(the Plaintiff/Xino Agreement) whereby Xino assigned all “claims alleged by
Plaintiffs . . . against Hythiam, Reserva and Terren Peizer” to Plaintiffs and
Plaintiffs agreed that debts owed by Xino to Plaintiffs would be “non-recourse
as to Xino’s current and future assets.”

In
2011, Plaintiffs filed the operative fourth amended complaint.  In their capacity as Xino’s creditors,
Plaintiffs asserted a cause of action to set aside the alleged fraudulent
transfer of Xino’s assets to Hythiam.  In
their capacity as Xino’s assignees, Plaintiffs asserted claims for breach of
fiduciary duty, conversion, fraud, breach of contract, unfair business
practices, and interference with contractual
relations and prospective business advantage.

In
April 2012, the court held a bench trial to determine whether Plaintiffs had
standing to pursue a fraudulent transfer claim as Xino’s creditors,
notwithstanding provisions in the Plaintiff/Xino Agreement purporting to
release all debts owed by Xino.  After
considering the extrinsic evidence offered by Plaintiffs, the trial court
determined that the integrated Plaintiff/Xino Agreement was not susceptible of
the interpretation urged by Plaintiffs, and held that Plaintiffs’ release of
Xino’s debts extinguished Plaintiffs’ standing to pursue a fraudulent transfer
claim as Xino’s creditors.

In
October 2012, a second bench trial was held concerning the admissibility of the
Xino/Hythiam Agreement and the scope of Xino’s release.  The trial court determined the agreement was
admissible, notwithstanding Plaintiffs’ contention they had been denied
relevant discovery.  The court also found
the agreement released all claims Xino had or could have asserted against
Defendants as of the agreement’s effective date.  Because all such claims were released, the
court held the agreement barred Plaintiffs from asserting their remaining
claims as Xino’s assignees.

We
agree with the trial court that the Plaintiff/Xino Agreement unambiguously
extinguishes any creditor claim Plaintiffs had against Xino’s assets.  Accordingly, Plaintiffs lack standing to
pursue a fraudulent transfer claim.  We
also hold the trial court properly admitted the Xino/Hythiam Agreement into
evidence and that the agreement unambiguously releases all claims Plaintiffs
asserted as Xino’s assignees.  The
judgment is affirmed.

FACTUAL AND PROCEDURAL BACKGROUND

1.         The
Xino/Reserva Loan Transaction and Hythiam’s Acquisition of Xino’s Assets

Since 2001, Xino has been engaged in the
business of providing technology, information, and administrative services for
treatment and rapid detoxification of persons addicted to heroin, methadone,
and other opiate-based drugs.  Dunn and
Hinton were elected to serve as Xino directors in 1997.  Dunn also was designated Chairman and CEO and
Hinton was designated Secretary.

On March 3, 2003, Reserva loaned Xino $300,000.  At the time, Reserva was Peizer’s wholly-owned
investment vehicle and Hythiam’s sole shareholder.  Xino planned to use the funds for continuing
operations and to build a revenue stream that would allow Xino to pay back the
loan.  The loan agreement consisted of a
Promissory Note, Guaranty, and a Security Agreement.  Pursuant to the Promissory Note, Xino
promised to pay $300,000 plus interest within 100 days from March
3, 2003.  The Security Agreement secured the Note and
granted Reserva a continuing lien on Xino’s assets, including its patents,
licenses, trademarks and contracts with service providers.

The Security Agreement provided for a
series of remedies should Xino default, one of which included the following
condition:  “If Secured Party [Reserva]
sells or makes any type of transfer of all or substantially all of the
Collateral to a newly-formed public corporation, [Reserva] will cause such
corporation to agree to grant to [Xino] three percent (3%) of its common stock,
subject to any agreement by which other shareholders are bound.  Upon the issuance of such shares, any and all
payment obligations under this Section shall immediately terminate.”

Xino defaulted on the Reserva loan.  On June 17, 2003, Reserva served a Notice of Default advising
Xino that there would be an “Event of Default” if the balance of the loan was
not paid within 30 days.  Xino failed to
repay the amount due.  On July
30, 2003, Reserva
served Xino with a Notice of Disposition of Collateral, advising Xino that
Reserva intended to conduct a foreclosure sale.

On August 20, 2003, Reserva sold the collateral at a public
auction.  With the exception of some
items of personal property, Hythiam acquired all of Xino’s remaining assets,
including its patents and other intellectual property.

In connection with the foreclosure sale,
Dunn, Xino’s then-CEO, executed a Consent to Foreclosure and General Release
(Consent to Foreclosure) on behalf of Xino. 
Peizer counter-executed the Consent to Foreclosure on behalf of
Reserva.  In the Consent to Foreclosure,
Xino acknowledged that the public auction had occurred after proper notice and
public advertising, and that the auction had been conducted in a commercially
reasonable manner.  Xino also
acknowledged that upon completion of the sale, it had no further right, title,
or interest in or to any of the collateral.

Pursuant to the Consent to Foreclosure, Reserva
agreed to cause Hythiam to grant Xino 360,000 shares of Hythiam common stock,
subject to the condition that Xino first obtain releases from its creditors.  A list of Xino’s creditors was attached to
the Consent to Foreclosure.  Although
that list did not include Plaintiffs, Plaintiffs’ president and chief operating
officer, Terry Marsh (Marsh), claimed Plaintiffs were creditors, but refused to
provide releases.

Due to Plaintiffs’ refusal to release their
creditor claims, Reserva and Hythiam maintained that Xino had failed to obtain
all required releases.  The Consent to
Foreclosure gave Reserva discretion to “agree or cause Hythiam to agree to
grant a portion of the Shares before all Creditors have granted releases, if
[Xino] obtains releases from a substantial portion of significant Creditors.”  Pursuant to that provision, Hythiam initially
agreed to release 100,000 of the 360,000 shares that had been issued to
Xino.  Hythiam later released an
additional 150,000 shares to Xino.

2.         >The Zinn Action and Plaintiffs’ Complaint

This litigation commenced on October 27,
2005, when Gary Zinn (Zinn), a shareholder and former Xino director, filed a
complaint against Xino, Hinton and Dunn alleging, inter alia, that Hinton and
Dunn, as directors and officers of Xino, breached their fiduciary duties in
connection with the Reserva loan transaction (the Zinn Action).  On January 31, 2005, Xino filed a cross-complaint against Zinn
and Plaintiffs’ principal, Marsh.

On August 18, 2006, Plaintiffs filed their initial complaint
against Xino, Hinton, Dunn, Hythiam, Reserva, Peizer and others.  The complaint asserted causes of action for
an accounting and declaratory relief against Xino to establish the nature and
amount of Plaintiffs’ alleged equity and debt investments.  Plaintiffs also asserted derivative claims as
Xino shareholders for breach of fiduciary duty against Hinton and Dunn;
fraudulent transfer against Reserva and Hythiam; and conversion against all
defendants except Xino.  Plaintiffs’
derivative claims were all based upon Defendants’ alleged misconduct with
respect to the Reserva loan transaction, foreclosure, and Hythiam’s acquisition
of Xino’s assets.

On February 2, 2007, the Zinn Action and Plaintiffs’ action
were consolidated.  On February
7, 2007,
Plaintiffs filed their first amended complaint, asserting the same causes of
action.

On July 19, 2007, Plaintiffs filed their second amended
complaint.  The second amended complaint
added a new cause of action for breach of contract, asserted derivatively on
behalf of Xino, in which Plaintiffs alleged Reserva had breached the Consent to
Foreclosure by failing to cause Hythiam to deliver all 360,000 shares.

3.         >The Xino/Hythiam Agreement

On August 8, 2007, Hythiam and Xino entered into the
Xino/Hythiam Agreement.  The agreement
included recitals stating that Hythiam had issued Xino 360,000 shares of
Hythiam common stock pursuant to the Consent to Foreclosure and acknowledging
Hythiam had withheld 110,000 of those shares due to the parties’ dispute over
Xino’s obligation to obtain releases from its creditors.

The Xino/Hythiam Agreement provides for
Hythiam to deliver 60,000 of the withheld shares to Xino, with the other 50,000
shares to be canceled, such that Xino would “own, hold and control all of the
remaining 310,000 shares of Common Stock” free and clear of any security interest.  In exchange, Xino agreed, on behalf of itself
and its shareholders, to release and discharge Hythiam and Hythiam’s current
and former “officers, directors [and] shareholders . . . from any and
all . . . claims, demands, liabilities, obligations, causes of action and
rights of action arising up through and including the date of this Agreement,
whether known or unknown, vested or contingent.”  At the time, Reserva was Hythiam’s largest
shareholder and Peizer was an officer and director of Hythiam.  With
respect to intended beneficiaries, the agreement states that it is “for the
benefit of the Parties hereto and for the benefit of the individuals and
entities released hereby whether or not parties hereto.”  The agreement further provides that it “shall
inure to the benefit and shall be binding upon the respective successors and
assigns of each of the Parties hereto.”

The Xino/Hythiam Agreement contains a
“Litigation Cooperation” clause, whereby Xino and Hinton voluntarily agreed “to
cooperate with Hythiam and its legal counsel in defending all claims against
Hythiam, its officers or directors.”  The
provision also prohibits Hinton from communicating with “any opposing parties .
. . about the litigation or the subject matter of the litigation, except as
required by law in response to a subpoena, deposition notice, or other legal
process, until the litigation is concluded.”

The Xino/Hythiam Agreement is fully
integrated.  Hinton executed the
agreement individually and on behalf of Xino as its president.  Xino represented that the agreement had been
“authorized and unanimously approved by XINO’s board of directors.”  Chuck Timpe (Timpe), Hythiam’s chief
financial officer, counter-signed on behalf of Hythiam.

4.         >Plaintiffs’ Discovery Concerning the
Xino/Hythiam Agreement

In May and July of 2008, Plaintiffs deposed
Hinton, Timpe and John Kirkland (Kirkland), corporate counsel for Reserva and
Hythiam, concerning the Xino/Hythiam Agreement. 
Hinton testified that he executed the agreement on behalf of Xino after
negotiating the agreement with Timpe. 
According to Hinton, Timpe was concerned about the pending lawsuit and
claimed Xino had not fulfilled its agreement to obtain releases from
Plaintiffs.  Hinton confirmed the
litigation cooperation provision was added to address Plaintiffs’ lawsuit.  When asked whether Xino intended the release
to encompass the Plaintiffs’ derivative claims, Hinton testified that he could
not recall whether that was the intent.

Timpe testified that he and Hinton had
negotiated the substantive terms of the Xino/Hythiam Agreement and then turned
it over to their attorneys to document those terms.  He could recall his discussions with Hinton
in only “general terms.”  The principal
points they negotiated required Hythiam to deliver a certain number of the
withheld shares, and cancel the remainder, in exchange for a mutual release of
claims.  Timpe was unable to recall
discussions with Hinton regarding specific paragraphs of the agreement.

Kirkland testified that he had participated in
drafting the Xino/Hythiam Agreement, but could not recall any direct
communications with Xino regarding the terms.

Plaintiffs did not move to compel further
responses from Hinton, Timpe or Kirkland. 
Instead, Plaintiffs subpoenaed Defendants’ trial counsel, Dickstein Shapiro
(Dickstein), and Xino’s trial counsel, Douglas Kuber (Kuber).  On September 29, 2008, the trial court denied Plaintiffs’ motion
to compel the Dickstein deposition on the ground that Plaintiffs had failed to
make a sufficient showing regarding the need to depose trial counsel.  Thereafter, the parties stipulated that, if
requested, the court would grant a protective order precluding Kuber’s
deposition on identical grounds.

5.         >Defendants’ Motion for Summary Judgment

On January 15, 2009, the trial court granted Defendants’
motion for summary judgment on Plaintiffs’ then-operative second amended
complaint.  The court held Plaintiffs’
fraudulent conveyance and conversion claims failed as a matter of law because
the Consent to Foreclosure had released Defendants from all claims arising from
the foreclosure sale.  The trial court likewise
rejected Plaintiffs’ breach of contract claim.

In granting Defendants’ motion for summary
judgment, the trial court explained that its ruling was not based on the
general release in the Xino/Hythiam Agreement, and noted that Plaintiffs’
counsel had “said there was discovery outstanding on that issue.”

Plaintiffs appealed the summary judgment.

6.         >The Plaintiff/Xino Agreement

In March 2009, Plaintiffs, Marsh and Zinn
on the one hand and Xino, Hinton and Dunn on the other entered into the
Plaintiff/Xino Agreement.  In the
agreement, Xino acknowledged that Plaintiffs owned shares of Xino common stock,
referred to as the “Xino Shares,” and that Plaintiffs had made loan advances to
Xino, referred to as the “Xino Debts.” 
The agreement provides for Plaintiffs to assign all of their rights with
respect to the Xino Shares to Xino, with the exception of one share per
Plaintiff, referred to as the “Retained Shares.”  As for the Xino Debts, the agreement provides
that the “Xino Debts will be non-recourse as to Xino’s current and future
assets.”

In exchange, Xino agreed to assign
Plaintiffs “without representation or warranty, any and all rights that it may
have to prosecute the claims alleged by Plaintiffs in the Xino Actions against
Hythiam, Reserva and Terren Peizer . . . .” 
Xino also released its cross-claims against Zinn and Plaintiffs’
principal, Marsh.

Additionally, paragraph 10, entitled
“Plaintiffs and Marsh Agreement regarding Equity and Debt in Xino,”
states:  “If and to the extent any
Plaintiff in the Xino Actions or Marsh have any equity, debt or other interest
in Xino they hereby agree that, except for the Retained Shares, any such interest
is hereby relinquished, released and extinguished.”

7.         Reversal of Summary
Judgment, the Operative Fourth Amended Complaint, and Demurrer to the Breach of
Fiduciary Duty Claim

In October 2010, this court reversed the
summary judgment entered in favor of Defendants.  With respect to the fraudulent transfer cause
of action, we held Plaintiffs had standing to assert the claim directly as Xino
creditors, but lacked standing to challenge the transfer derivatively as Xino
shareholders.  We further held that Xino’s
release in the Consent to Foreclosure extended to only its claims, and Xino had
no authority to release Plaintiffs’ fraudulent transfer claim, which was brought
directly by Plaintiffs as Xino’s creditors.

We also held Plaintiffs’ evidence raised a triable
issue of fact concerning the validity of the Consent to Foreclosure and that
the sale of Xino’s collateral, if unauthorized, would constitute a
conversion.  We also reversed the
judgment with respect to Plaintiffs’ breach of contract cause of action, and
held that Plaintiffs had standing to assert the breach of contract and
conversion claims derivatively as Xino shareholders.  Our opinion did not address the effect of the
Xino/Hythiam Agreement’s release provisions on the derivative claims Plaintiffs
asserted on behalf of Xino.

After remand, Plaintiffs filed their third
amended complaint.  The trial court
sustained Defendants’ demurrer to the complaint, with leave to amend.

On September 2, 2011, Plaintiffs filed the operative fourth
amended complaint.  Plaintiffs asserted a
claim for fraudulent transfer as Xino creditors, seeking to set aside the loan
transaction and foreclosure sale.  With
respect to the remaining causes of action for breach of fiduciary duty,
conversion, fraud, breach of contract, unfair business practices and
interference with contractual relations and prospective business advantage,
Plaintiffs asserted standing to pursue those claims as Xino’s assignees
pursuant to the Plaintiff/Xino Agreement.

Defendants demurred to the complaint.  The trial court sustained the demurrer to the
breach of fiduciary duty claim without leave to amend, holding that the
complaint failed to allege facts sufficient to establish a fiduciary
relationship between Plaintiffs and Defendants. 
The court also sustained the demurrer to the interference claim without
leave to amend, and overruled Defendants’ demurrer in all other respects.

8.         The April Bench Trial
Concerning the Plaintiff/Xino Agreement

Beginning on April 16, 2012, the trial court conducted a two-day bench
trial to determine whether Plaintiffs had standing to pursue the fraudulent
transfer claim as Xino’s creditors under the Plaintiff/Xino Agreement.href="#_ftn1" name="_ftnref1" title="">[1]  Plaintiffs presented testimony by their
counsel, James Goldman (Goldman), who participated in drafting the agreement,
and Marsh, Plaintiffs’ principal and signatory to the Plaintiff/Xino
Agreement.  No other witnesses testified.

Goldman testified that he and Xino’s
attorney, Christopher Cella (Cella), extensively negotiated the Plaintiff/Xino
Agreement.  He asserted the release was
intended to benefit only Xino, Hinton and Dunn—not Defendants.  Hence, Goldman maintained that the Xino Debts
had been carved out from the general release, and were made “non-recourse . . .
non-collectible as to Xino’s assets.” 
Goldman testified Cella drafted paragraph 10 and that the provision was
intended to ensure Plaintiffs would have no “debt interest” in any Xino assets
“other than whatever they can recover in this case.”  When asked whether Plaintiffs could sue Xino
to recover the Xino Debt, Goldman responded that the Xino Debts “were not
extinguished,” but were “nonrecourse, so technically [Plaintiffs] could have
gotten a judgment, but then they couldn’t collect on the judgment so it would
have been pointless to file the lawsuit.”

Marsh similarly testified that he did not believe
Plaintiffs had relinquished all debts owed by Xino when he executed the
Plaintiff/Xino Agreement.  The assertion
contradicted his prior deposition testimony, in which Marsh affirmed that he
“understood that [he] and the corporate Plaintiffs were all giving up any
claims for moneys owing . . . by Xino” when he signed the Plaintiff/Xino
Agreement.

The trial court concluded the
Plaintiff/Xino Agreement unambiguously released any creditor claim Plaintiffs
may have had against Xino’s assets and that Plaintiffs’ evidence failed to
expose a latent ambiguity permitting a different interpretation.  Because Plaintiffs had relinquished their
creditor claims against Xino’s assets, the court held Plaintiffs lacked
standing to pursue the fraudulent transfer claim.

9.         The Addendum to the
Plaintiff/Xino Agreement and Plaintiffs’ Motion to Amend

On April 19, 2012, two days after the trial court announced
its decision, Plaintiffs and Hinton executed an “Addendum” to the
Plaintiff/Xino Agreement pursuant to the agreement’s further assurances
clause.  With respect to the Xino Debts,
the Addendum states that “the Xino Debts were intended to remain outstanding,
but the [Plaintiffs] would be precluded from enforcing them only as against
Xino’s current and future assets, and not against any recovery against the
Hythiam Defendants . . . .” 
The Addendum further provides, “[n]otwithstanding any other provision
herein, the Xino Debts will remain non-recourse as to Xino’s former, current
and future assets . . . .”

On April 25, 2012, Plaintiffs filed an ex parte application
seeking to reopen evidence to introduce the Addendum.  The trial court denied the application.

On May 3, 2012, Plaintiffs filed a motion for leave to
amend the complaint to allege standing under the Addendum.  The trial court denied the motion, concluding
that Plaintiffs could not avoid the effect of its decision by filing an amended
complaint.

10.       >Post-Appeal Discovery Concerning the
Xino/Hythiam Agreement

In late-2011, Plaintiffs propounded new
wide-ranging discovery requests, two of which related to the Xino/Hythiam
Agreement.  With respect to documents,
Plaintiffs requested that Hythiam produce all documents “reflecting, referring
to, consisting of, evidencing, or relating to any contract or agreement between
YOU and [Xino].”  Plaintiffs also
propounded a special interrogatory on Reserva requesting identification of
“each ORAL COMMUNICATION that occurred in connection with the [Xino/Hythiam
Agreement].”

Defendants objected to the requests on
several grounds, including attorney-client privilege and overbreadth.  Plaintiffs moved to compel responses.  With the parties’ consent, the trial court
referred the motion to a discovery referee. 
The discovery referee recommended that the motion be denied as to the
document request and granted in part as to the interrogatory.  With respect to the interrogatory, the
referee recommended that Reserva be compelled to “identify non-privileged
communication[s], if any, in connection with the [Xino/Hythiam Agreement].”  Defendants objected to the
recommendation.  The trial court
sustained the objection, ruling that the interrogatory was overbroad and should
be narrowed to “identif[y] people involved in the communication as well as a
time frame for the communications . . . .”

Rather than propound a more narrow
interrogatory, Plaintiffs served deposition notices on Hythiam and Reserva for
their “most qualified” witnesses concerning the Xino/Hythiam Agreement and 26
other subjects.  The deposition notices
also included requests for production of non-privileged documents, narrowed to
the last half of 2007.  Defendants again
produced Timpe to testify concerning the Xino/Hythiam Agreement.  Timpe testified that he participated in the
negotiations to “a limited extent” and that “the agreement was produced between
the attorneys.”  Timpe reaffirmed that
the agreement was prompted by the instant lawsuit and that Hinton had
approached him with the proposal as a “way to get it all resolved . . . .”  With respect to the litigation cooperation
provision, Timpe testified that he and Hinton did not discuss whether the
provision extended to cooperating with Reserva and/or Mr. Peizer.  Timpe also confirmed that he did not have any
documents related to the Xino/Hythiam Agreement.

Plaintiffs moved to compel compliance with
the deposition notices.  Their motion
focused on Timpe’s alleged refusal to testify concerning subjects unrelated to
the Xino/Hythiam Agreement, but did not challenge Timpe’s qualification to
testify concerning the agreement.  The
trial court denied the motion to compel.

11.       >The October Bench Trial Concerning the
Xino/Hythiam Agreement

In October 2012, the parties were asked to submit
briefs concerning the admissibility of the Xino/Hythiam Agreement and the
effect of the agreement on Plaintiffs’ remaining claims. Plaintiffs argued the
agreement should not be received into evidence because they had been denied
discovery concerning the circumstances surrounding the negotiation and
execution of the agreement.  Plaintiffs
also argued the agreement could not be construed as a release of their
then-pending derivative claims because there was no evidence that it had been
approved by Xino’s shareholders, a disinterested committee of Xino’s board of
directors, or the court.  Defendants argued
Plaintiffs had been allowed adequate discovery and that there was no basis for
imposing an evidentiary sanction because Defendants had not withheld any
discovery they were ordered to produce.

While Plaintiffs were clear that they were
not waiving their right to have a jury decide factual issues, Plaintiffs
acknowledged there was no extrinsic evidence to establish a latent ambiguity in
the Xino/Hythiam Agreement.  Accordingly,
the parties stipulated that the trial court should rule on the admissibility of
the Xino/Hythiam Agreement and interpret the agreement to determine whether it
barred Plaintiffs’ remaining claims.

The trial court ruled that the Xino/Hythiam
Agreement was admissible and that its unambiguous terms effectively released
Plaintiffs’ remaining claims against Defendants.  In reaching this conclusion, the court
determined Plaintiffs failed to establish that shareholder, disinterested board
or court approval was required to release the derivative claims Plaintiffs
asserted at the time the agreement was executed.

The trial court entered judgment for
Defendants on November 19, 2012. 
Plaintiffs timely appealed.

>DISCUSSION

1.         >The Xino/Hythiam Agreement

a.         >Xino released all claims against Defendants,
including those asserted by Plaintiffs as Xino’s assignees

In holding Plaintiffs were barred from
suing Defendants as Xino’s assignees, the trial court determined that the
release provision in the Xino/Hythiam Agreement extended to all claims Xino had
or could have asserted against Hythiam and its officers, directors and
shareholders, including Reserva and Peizer, at the time the agreement was
executed.

Plaintiffs challenge the trial court’s
rulings on multiple grounds.  First,
Plaintiffs contend the Xino/Hythiam Agreement should not have been admitted
into evidence because they were denied relevant discovery concerning the
agreement.  Second, Plaintiffs argue the
trial court’s construction of the release provision is inconsistent with the
agreement’s terms because the agreement does not identify Plaintiffs’
then-pending derivative claims, nor does it specifically name Reserva or Peizer
as intended beneficiaries.  Third,
Plaintiffs contend the trial court erroneously concluded the agreement was
enforceable, despite the absence of any evidence establishing that the
agreement had been approved by Xino’s shareholders, a disinterested committee
of its board of directors, or the court.

The trial court’s decision to receive the
Xino/Hythiam Agreement into evidence was a reasonable exercise of
discretion.  Defendants complied with all
discovery orders and Plaintiffs were permitted ample discovery concerning the
agreement.  We also agree with the
court’s construction of the release provision, and hold that the release bars Plaintiffs,
as Xino’s assignees, from pursuing any claims that Xino had or could have
asserted against Defendants at the time the agreement was executed.  On this ground, we affirm the judgment with
respect to all claims asserted by Plaintiffs as Xino’s assignees—namely, the
breach of fiduciary duty, conversion, fraud, breach of contract, and unfair
business practices claims.href="#_ftn2"
name="_ftnref2" title="">[2]

b.         Receiving the
Xino/Hythiam Agreement into evidence was not an abuse of discretion

Plaintiffs contend the trial court abused
its discretion by receiving the Xino/Hythiam Agreement into evidence despite
denying Plaintiffs’ attempts to obtain discovery regarding “the parties’ intent
on [the] scope of the releases and whether the agreement was part of a
fraudulent scheme.”  Plaintiffs contend
“Defendants never produced any documentary
evidence of the negotiations for the agreement, and they provided only a small,
useless portion of the testimonial evidence that they should have
provided.”  On this basis, Plaintiffs
argue Defendants “should not have been permitted to rely on the [Xino/Hythiam
Agreement] to support their ‘release’ defense.” 
We disagree.

We review a discovery sanction order “under
the abuse of discretion standard and resolve all evidentiary conflicts most
favorably to the trial court’s ruling.  We will reverse only if the trial court’s
order was arbitrary, capricious, or whimsical.  It is appellant’s burden to affirmatively
demonstrate error and where the evidence is in conflict, we will affirm the
trial court’s findings.  [Citation.]  We presume the trial court’s order was
correct and indulge all presumptions and intendments in its favor on matters as
to which it is silent.”  (>Williams v. Russ (2008) 167 Cal.App.4th
1215, 1224.)

Plaintiffs appear to argue that since Timpe
and Hinton could not recall any specific discussions regarding the scope of the
Xino/Hythiam Agreement’s release provision, and otherwise testified that they
deferred to their attorneys who drafted the agreement, this somehow required
the trial court to either compel the trial attorneys’ depositions or bar
Defendants from relying upon the Xino/Hythiam Agreement—a document that
undisputedly was produced in discovery. 
This conclusion is not compelled by any authority cited by Plaintiffs.href="#_ftn3" name="_ftnref3" title="">[3]  Indeed, such a holding would incongruously
expand the simple notion that a trial court may preclude a party from relying
on documents and evidence not produced in
discovery.  (See, e.g., >Thoren v. Johnston & Washer (1972)
29 Cal.App.3d 270, 273-274.)

In New
Albertsons, Inc. v. Superior Court (2008) 168 Cal.App.4th 1403, 1423, the
court emphasized that the Discovery Act permits an evidence sanction “only if a
party fails to obey a court order compelling discovery.”  As the court explained, “[t]he statutory
requirement that there must be a failure to obey an order compelling discovery
before the court may impose a nonmonetary sanction for misuse of the discovery
process provides some assurance that such a potentially severe sanction will be
reserved for those circumstances where the party’s discovery obligation is
clear and the failure to comply with that obligation is clearly apparent.”  (Ibid.)

Defendants produced the Xino/Hythiam
Agreement and complied with all discovery orders.  The trial court denied Plaintiffs’ motions to
compel the trial attorneys’ depositions and other related discovery
responses.  Plaintiffs have failed to
present any reasoned argument to overcome our presumption that these rulings
were correct.  We find no abuse of discretion
in receiving the Xino/Hythiam Agreement into evidence.

c.         The Xino/Hythiam
Agreement unambiguously released Xino’s claims against Defendants

The release by Xino in the Xino/Hythiam
Agreement provides:  “XINO, on behalf of
itself and its current and former . . . shareholders . . . hereby releases and
discharges Hythiam, and all those acting on its behalf and each of their
current and former . . . officers, directors, [and] shareholders . . . from any
and all . . . claims, demands, liabilities, obligations, causes of action
and rights of action arising up through and including the date of this
Agreement, whether known or unknown, vested or contingent . . .
.”  The trial court determined this
release language unambiguously extended to all claims asserted by Plaintiffs as
Xino’s assignees, including those claims asserted against Peizer (an officer
and director of Hythiam) and Reserva (Hythiam’s largest shareholder).

Plaintiffs challenge this construction on
two grounds.  First, Plaintiffs argue the
absence of a specific reference to Peizer and Reserva renders the release
ambiguous, thus placing the burden on Defendants to produce extrinsic evidence
establishing that Peizer and Reserva were intended beneficiaries.  Second, Plaintiffs contend the lack of any
reference to their derivative claims creates a further ambiguity, also requiring
Defendants to produce extrinsic evidence proving that Xino intended the release
to extend to those claims.

In support of their first contention, Plaintiffs rely
chiefly upon Neverkovec v. Fredericks
(1999) 74 Cal.App.4th 337 (Neverkovec).  That case arose from a two-car accident in
which the insurer for one of the car owners agreed to pay its policy limits and
obtained written releases from the injured parties extending to the insurer,
three named individuals, and “ ‘any other person . . . charged or chargeable
with responsibility or liability’ resulting from the accident.”  (Id.
at pp. 349-350.)  In a suit brought by
one of the injured parties against the second driver, the trial court entered
summary judgment for the driver on the ground that the release’s “any other
person” clause excused him from liability.  The Court of Appeal reversed.

In the passage cited by Plaintiffs, the >Neverkovec court observed “[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.”  (Neverkovec, supra, 74 Cal.App.4th. at p. 348.)  The court stated “[t]he burden of proof is on
the third party,” and “[b]ecause the
court must consider the circumstances of the contracting parties’ negotiations
to determine whether a third party not named in the release was an intended
beneficiary, it will seldom be sufficient for the third party simply to rely on
a literal application of the terms of the release.”  (Id. at p. 349.)  Relying upon this passage, Plaintiffs argue
“Defendants utterly failed to meet their burden of showing that
Xino intended to release parties and claims not identified in the Xino/Hythiam
[Agreement].”  We disagree.

To begin, Neverkovec is inapposite, because the Xino/Hythiam Agreement does
not contain a global “any other persons” release.  On the contrary, the release covers Hythiam
and its “officers, directors [and] shareholders”—a relatively limited class
which undisputedly includes Peizer and Reserva. 
Furthermore, the Xino/Hythiam Agreement explicitly states that it “is
for the benefit of the Parties hereto and
for the benefit of the individuals and entities released hereby >whether or not parties hereto.”  (Italics added.)  The terms of the agreement express a clear
intent to extend the benefits of the release beyond the named parties and to
those persons and entities who, due to their close affiliation and financial
ties to Hythiam, would naturally be included in an agreement seeking to
“resolve and settle all issues” between the contracting parties.

We also do not accept the premise that an
unnamed party, belonging to a class unambiguously covered by a release, bears
the additional burden of presenting extrinsic evidence to prove the contracting
parties actually intended the release to benefit that party.  If a contract expressly and unambiguously
grants rights to a class that undisputedly includes the person seeking to
enforce it, proof of the contract alone makes out the person’s threshold case
for enforcement of those contractual rights. 
(Rodriguez v. Oto (2013) 212
Cal.App.4th 1020, 1031 [rejecting plaintiff’s contention, premised on >Neverkovec, that there is a “general
burden on the person invoking the agreement to find a way to prove, as
plaintiff insists, an ‘actual intent
to benefit the third party’ ”].)  Here,
the plain language of the Xino/Hythiam Agreement itself established that Xino’s
release extended to Peizer (an officer and director of Hythiam) and Reserva
(Hythiam’s largest shareholder). 
Defendants were not required to present extrinsic evidence to prove that
Xino actually meant what its agreement said.

For much the same reason, we conclude the
absence of a specific reference to Plaintiffs’ derivative claims does not
render the release facially ambiguous, nor does it require Defendants to
present extrinsic evidence to prove Xino intended to release these derivative
claims.  The release states that it
applies to “all . . . claims, demands, liabilities, obligations, causes of
action and rights of action arising up through and including the date of this
Agreement, whether known or unknown, vested or contingent.”  The derivative claims that Plaintiffs
asserted on Xino’s behalf at the time the Xino/Hythiam Agreement was executed
are plainly included among those “causes of action and rights of action arising
up through and including the date of this Agreement . . . .”

Plaintiffs admit they had no extrinsic
evidence to suggest the parties intended to exclude the derivative claims from
the release.  “[A]bsent such evidence, ‘ â€œ â€˜[t]he
law imputes to a person an intention corresponding to the reasonable meaning of
his words and acts.’ ” ’ 
[Citation.]”  (>Jefferson v. Department of Youth Authority
(2002) 28 Cal.4th 299, 305; see also id.
at pp. 303-304 [holding “ â€˜all claims and causes of action’ â€ release
was “enforceable as written” and applied to plaintiff’s FEHA claims where
plaintiff “offered no extrinsic evidence establishing the parties’ intent to
exclude her FEHA claim from the settlement”].) 
The release here is enforceable as written, without requiring Defendants
to present cumulative extrinsic evidence to establish Xino actually intended
the derivative claims to be included in its release of “all . . .
claims, demands, liabilities, obligations, [and] causes of
action . . . .”

As Xino’s assignees, Plaintiffs are bound
by any defenses available against Xino. 
(Utility Audit Co., Inc. v. City
of Los Angeles (2003) 112 Cal.App.4th 950, 962.)  Indeed, Xino and Hythiam expressly pledged
that the release would “inure to the benefit and shall be binding upon the
respective successors and assigns of each of the Parties hereto.”  Because the release in the Xino/Hythiam
Agreement bars Xino from prosecuting any causes of action against Defendants
arising through the date of the agreement, Plaintiffs, as Xino’s assignees, are
likewise barred from prosecuting such claims. 
This extends to Plaintiffs’ claims for breach of fiduciary duty,
conversion, fraud, breach of contract, and unfair business practices—all of
which Plaintiffs asserted as Xino’s assignees based on alleged facts occurring
prior to the execution of the Xino/Hythiam Agreement.

d.         Plaintiffs cannot
avoid the effect of the release by claiming Xino lacked authority to enter the
Xino/Hythiam Agreement

Plaintiffs’ final challenge to the
Xino/Hythiam Agreement concerns the approvals that Plaintiffs contend were
required to authorize Xino’s release of derivative claims.  Plaintiffs argue Defendants could not avail
themselves of the release’s protections without establishing that the agreement
was approved by Xino’s shareholders, a disinterested committee of Xino’s board,
or the court.  The applicable law is to
the contrary.

The parties agree that Xino is a Delaware corporation.  Delaware has abolished the ultra vires defense to
enforcement of a corporate contract where the defense is asserted by the
corporation or its stockholders against a party contracting with the
corporation.  Title Eight of the Delaware
Code, section 124, entitled “Effect of lack of corporate capacity or power;
ultra vires,” provides:  “No act of a
corporation . . . shall be invalid by reason of the fact that the corporation
was without capacity or power to do such act . . . , but such lack of capacity
or power may be asserted:  [¶]  (1) In a proceeding by a stockholder against the corporation to enjoin the doing of any
act or acts . . . .”  Thus, Delaware law relieves a party contracting with a
corporation of the burden to establish that the corporation obtained all
required corporate approvals, and shifts that burden to the stockholders who
dispute the corporation’s authority.   To
assert that challenge, the stockholders are required to bring an action >against the corporation—not the
contracting third party.

Plaintiffs were aware of the Xino/Hythiam
Agreement for several years prior to the October 2012 trial.  What is more, Plaintiffs were given multiple
opportunities to amend their complaint to challenge Xino’s authority to enter
the agreement.  Despite this, the
operative fourth amended complaint makes no mention of the Xino/Hythiam
Agreement, nor of Hinton’s purported lack of authority to execute it on behalf
of Xino.  In any event, Plaintiffs’
objection to the agreement should have been directed at Xino.  Defendants’ right to enforce the release
cannot be challenged by alleging Xino lacked capacity or authority to enter the
agreement.

As for court approval, it is true that when
a plaintiff in a derivative suit
seeks to settle or dismiss the action, court approval is required.  But this is because the plaintiff acts in a
representative capacity, as “a trustee for the corporation’s cause of action
and as such cannot dismiss the action without the consent of the trial court.”  (Ensher
v. Ensher, Alexander & Barsoom (1960) 187 Cal.App.2d 407, 410.)  The rule has no application where the >corporation resolves to settle and
release its own causes of action.  We
reiterate, insofar as Plaintiffs opposed Xino’s authority or decision to
release its claims in the Xino/Hythiam Agreement, Plaintiffs’ recourse was
against Xino—not the parties with whom Xino chose to contract.

The judgment is affirmed as to Plaintiffs’
claims for breach of fiduciary duty, conversion, fraud, breach of contract, and
unfair business practices.

2.         >The Plaintiff/Xino Agreement

a.         Plaintiffs lack
standing to pursue a fraudulent transfer claim as Xino’s creditors

As the Xino/Hythiam Agreement disposes of
all claims Plaintiffs asserted as Xino’s assignees, we turn now to Plaintiffs’
only remaining claim to set aside the alleged fraudulent transfer by Xino to
Hythiam.  Relying on the release in
paragraph 10 of the Plaintiff/Xino Agreement, the trial court concluded
Plaintiffs “unambiguously release[d] all debts for all purposes” and, thus,
lost standing to assert a fraudulent transfer claim.  Plaintiffs contend paragraph 10 cannot be
read as a blanket release of all debts because the agreement separately
acknowledges certain outstanding advances, collectively referred to as the
“Xino Debts,” and provides that the “Xino Debts will be non-recourse as to
Xino’s current and future assets.” 
Because paragraph 10 does not refer to the Xino Debts, Plaintiffs argue
the agreement is ambiguous and susceptible of an interpretation under which
they retain standing to pursue a fraudulent transfer claim as Xino’s
creditors.  We disagree.

The determination of whether an ambiguity
exists in an integrated contract is a question of law, subject to independent
review on appeal.  (Wolf v. Superior Court (2004) 114 Cal.App.4th 1343, 1350-1351.)  As we shall explain, under the plain terms of
the Plaintiff/Xino Agreement, Plaintiffs cannot satisfy the Xino Debts by
recourse to Xino’s assets.  Plaintiffs’
parol evidence is consistent with this interpretation and fails to expose any
latent ambiguity in the agreement’s terms. 
Because Plaintiffs have no right to payment from Xino’s assets,
Plaintiffs will obtain no benefit by setting aside Xino’s alleged fraudulent
transfer of those assets.  Plaintiffs
lack standing to pursue a fraudulent transfer claim.

b.         >The Plaintiff/Xino Agreement unambiguously
states Plaintiffs shall have no recourse against Xino’s assets

To obtain relief under the Uniform
Fraudulent Transfer Act, Civil Code section 3439 et seq.href="#_ftn4" name="_ftnref4" title="">[4]
(the UFTA), one must be “a creditor” of the transferor.  (§ 3439.07, subd. (a).)  A “Creditor” is a person who has a “claim”
against a “debtor.”  (§ 3439.01, subd.
(c).)  A “Claim” is “a right to payment,
whether or not the right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured, or unsecured.”  (>Id., subd. (b).)  Under the UFTA, a creditor seeking relief
against an alleged fraudulent transfer may obtain:  (1) “[a]voidance of the transfer . . . to the
extent necessary to satisfy the creditor’s claim”; (2) “[a]n attachment or
other provisional remedy against the asset transferred or its proceeds . . .”;
and (3) an injunction or other equitable remedy “against further disposition .
. . of the asset transferred or its proceeds.” 
(§ 3439.07, subd. (a).)

As the statutory scheme makes clear, the sine
qua non of standing under the UFTA is the plaintiff’s right to satisfy a claim
against the transferor by recourse to the “asset transferred or its
proceeds.”  Without a “right to payment”
from the debtor’s transferred asset, a plaintiff has suffered no injury from
the transfer and will receive no benefit from the remedies available under the
UFTA.  (See Fidelity Natural Title Ins. Co. v. Schroeder (2009) 179 Cal.App.4th
834, 845 [“A creditor has not been injured unless the transfer puts beyond
reach property the creditor could subject
to payment of his or her debt”]; Mehrtash
v. Mehrtash (2001) 93 Cal.App.4th 75, 81 [affirming judgment for defendant
on fraudulent transfer claim where “[p]laintiff produced no evidence that the
value of the property could support any net recovery for her in the event the
conveyance were set aside”].)

Plaintiffs contend the trial court failed to interpret
the Plaintiff/Xino Agreement in a way that gives effect to all its terms by
improperly focusing on the release in paragraph 10, while excluding parol
evidence suggesting the release was not intended to encompass the Xino
Debts.  While we have doubts about Plaintiffs’
contention that parol evidence should have been accepted to limit the scope of
the release, we agree that the focus on paragraph 10 is somewhat misplaced.href="#_ftn5" name="_ftnref5" title="">[5]

In our view, the critical provision is
Plaintiffs’ express pledge that the “Xino Debts will be non-recourse as to
Xino’s current and future assets.”  Under
the UFTA, were the transfer of Xino’s assets to be found fraudulent and
declared void, the transferred assets would be regarded as Xino’s assets, and
subject to “claims” by creditors having a “right to payment” against Xino.  (§§ 3439.01, 3439.07.)  Plaintiffs relinquished their right to
payment by agreeing the Xino Debts would be “non-recourse as to Xino’s current
and future assets.”  In doing so,
Plaintiffs surrendered their right to satisfy the Xino Debts by recourse to the
“asset transferred or its proceeds.”  (§
3439.07, subd. (a).)

Our conclusion is consistent with the federal
authorities cited by Plaintiffs. 
Although the district court in MFS/Sun
Life Trust-High Yield Series v. Van Dusen Airport Services (S.D.N.Y 1995)
910 F.Supp. 913 observed that “a settlement with the debtor can . . . preserve
the creditor’s claims against transferees” (id.
at p. 932), the court acknowledged that “[i]f the debt is satisfied, the
creditor no longer has a cause of action to recover assets conveyed by the
debtor to a transferee” (id. at p.
931).  Similarly, in In re Acequia, Inc. (9th Cir. 1994) 34 F.3d 800, the federal
appeals court reaffirmed that a plaintiff who “ ‘is no longer a creditor . . . is
not entitled to the remedy of setting aside [the debtor]’s conveyance . . . as
fraudulent’ ” (id. at p. 808), but
held the principle did not apply to a post-confirmation proceeding brought by a
bankruptcy trustee to recover an alleged fraudulent conveyance for the benefit
of the corporate debtor.  Unlike
Plaintiffs here, who released any interest they may have had in Xino’s current
or future assets, the corporate debtor in In
re Acequia retained an interest in having its fraudulently transferred
assets returned.  (See >Ibid.)

By unambiguously declaring the Xino Debts
to be “non-recourse as to Xino’s current and future assets,” the Plaintiff/Xino
Agreement relinquishes any right Plaintiffs had to receive payment from the
transferred assets.  Thus, Plaintiffs
lack standing to pursue a fraudulent transfer claim.

c.         The Addendum affirms
that Plaintiffs have no recourse against Xino’s assets

Plaintiffs contend the trial court abused
its discretion by denying their requests to reopen evidence and to amend the
complaint to assert standing under the Addendum.  Plaintiffs cannot show prejudicial
error.  The Addendum, like the
Plaintiff/Xino Agreement, states, “[n]otwithstanding any other provision
herein, the Xino Debts will remain non-recourse as to Xino’s former, current
and future assets . . . .” 
Because Plaintiffs have no right to satisfy the Xino Debts by recourse
to Xino’s transferred assets, they lack standing to pursue a fraudulent
transfer claim under the Addendum.

DISPOSITION

The judgment
is affirmed.  Defendants are entitled to their
costs on appeal.

 

            NOT
TO BE PUBLISHED IN THE OFFICIAL REPORTS

 

 

 

 

                                                                                    KITCHING,
J.

We concur:

 

 

 

 

                                    KLEIN,
P. J.

 

 

 

 

                                    ALDRICH,
J.