Filed 7/10/26 Linderoth v. Relola, Inc. CA1/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION ONE
JOEL LINDEROTH,
Plaintiff and Appellant,
A171857
v.
RELOLA, INC., et al., (Alameda County
Super. Ct. No. 22CV009972)
Defendants and Respondents.
After binding arbitration resolved an investment dispute between
plaintiff Joel Linderoth and defendant Heather Sittig, Sittig moved to
confirm the award (which was in her favor), while Linderoth requested it be
vacated. The trial court granted Sittig’s motion and confirmed the award.
Linderoth appeals, arguing the arbitrator exceeded his powers within the
meaning of Code of Civil Procedure section 1286.2, subdivision (a)(4)1 by: (1)
failing to consider the theory of constructive fraud; and (2) ignoring various
unwaivable fiduciary duties and strong public policies that assertedly
militate against upholding the award. Linderoth further complains the
arbitrator failed to resolve all of the questions before him by written
All statutory references are to the Code of Civil Procedure unless
1
otherwise specified.
1
statement as required by the relevant arbitration agreements and section
1283.4. We affirm.
BACKGROUND
Relationships Among the Parties
In 2015, Sittig co-founded Relola Inc., a software development
company, for which she served as Chief Executive Officer and chairman of
the board of directors. Between March 2015 and January 2017, Linderoth
loaned $475,000 to Relola (via 13 different convertible notes, all of which
were converted into Relola stock and are not here at issue).
In December 2018, Linderoth and Relola entered into a Simple
Agreement for Future Equity, or SAFE agreement, pursuant to which
Linderoth paid $250,000 for certain future rights to acquire shares of the
company’s capital stock—specifically, shares of preferred stock in the event of
an equity financing or shares of common stock or its cash equivalent should a
liquidity event occur. In executing the agreement, Linderoth represented he
had “such knowledge and experience in financial and business matters that
[he was] capable of evaluating the merits and risks of such investment, [was]
able to incur a complete loss of such investment without impairing [his]
financial condition and [was] able to bear the economic risk of such
investment for an indefinite period of time.”
In April 2019, Linderoth and Relola entered into a second SAFE
agreement under similar terms in the amount of $200,000.
That same month, Linderoth extended a $500,000 unsecured loan to
Relola. Relola executed a promissory note, pursuant to which all outstanding
principal and interest was due and payable six months later, on October 31,
2019. The note was subsequently amended 11 times between September
2019 and November 2021, extending the maturity date to March 31, 2022,
2
providing for various prepayments, and authorizing the issuance to Linderoth
of warrants for shares of Class A common stock at a price of $1.75 per share.
The amendments recite that Relola had repaid $70,000 in May 2021 and that
the outstanding balance as of May 1, 2021, was $412,282.78. According to
Sittig, as of May 2022, Relola had paid Linderoth $283,000 of the total
amount due under the note and issued 229,000 warrants as consideration for
extending the original payment deadline.
Arbitration Provisions
The three agreements here at issue all include arbitration clauses. The
two SAFE agreements provide: “Any dispute, claim or controversy arising out
of or relating to this instrument or the breach, termination, enforcement,
interpretation or validity thereof, including the determination of the scope or
applicability of this agreement to arbitrate, will be determined by binding
arbitration in Oakland, California, before a single arbitrator, in accordance
with the laws of the State of California for agreements made in and to be
performed in California. The arbitration will be administered by JAMS Inc.
(also known as the Judicial Arbitration and Mediation Service) pursuant to
its Streamlined Arbitration Rules and Procedures (for claims less than or
equal to $250,000.00, excluding costs and fees) or the JAMS Comprehensive
Arbitration Rule and Procedures (for claims over $250,000.00). Judgment
may be entered upon any award granted in any such arbitration in any court
of competent jurisdiction. The arbitrator will be instructed to include in the
award an allocation of all of the costs of the arbitration, including the fees of
the arbitrator and the reasonable attorneys’ fees of the prevailing party
against the party who did not prevail.
“By becoming a party to this instrument, each party is agreeing
to have all disputes, claims or controversies arising out of or relating
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to this instrument decided by binding arbitration, and is giving up
any rights he, she or it might possess to have those matters litigated
in a court or jury trial. By becoming a party to this instrument, each
party is giving up his, her or its judicial rights to discovery and
appeal. By becoming a party to this instrument, each party confirms
that his, her or its agreement to this arbitration is voluntary.”
The arbitration provision in the promissory note is identical in all
material respects.
Linderoth Sues and the Matter is Sent to Arbitration
In April 2022, Linderoth filed his initial complaint against Relola and
Sittig for breach of promissory note, fraudulent misrepresentation,
fraudulent concealment, breach of fiduciary duties (individual and
derivative), and securities fraud. According to Linderoth, Sittig defrauded
Relola investors by: (1) falsely claiming that Zillow Group Inc. had offered to
buy the company for $20,000,000; (2) exaggerating revenue projections and
interest in Relola’s products and services; (3) misreporting revenues and
losses to analysts preparing a 409A stock valuation of Relola,2 thereby
inducing them to arrive at an inflated valuation; (4) failing to disclose to
investors and lenders hundreds of thousands of dollars in back pay owed to
employees; and (5) repeatedly and falsely asserting that further investment
was imminent to induce additional loans and investment whenever operating
cash became depleted.
Linderoth further alleged that, as chairman of the board, majority
stockholder, and Chief Executive Officer of Relola with the authority to
2 A 409A valuation is an independent third-party valuation of a
startup’s common stock that informs the price of employee stock options.
Startups need 409A valuations to grant employees stock options on a tax-free
basis.
4
control all material company decisions, Sittig owed Relola shareholders
duties of care, loyalty and disclosure and had additional obligations to act in
good faith and use her best judgment to promote the corporation’s interests
above her own. Sittig assertedly breached these duties by: (1) obtaining a
“ ‘hard money’ ” loan for Relola on commercially unfavorable terms in order to
finance a merger with another company (for which she was also Chief
Executive Officer), where the merger would provide her a significant
financial reward; (2) granting restricted stock units, or RSU’s, in Relola to
several individuals for personal reasons; (3) repeatedly changing the business
model of the company to attract new investors; and (4) paying herself
significant amounts while employees bonus payments remained unpaid.
The complaint also alleged Sittig committed securities fraud by
intentionally misrepresenting the financial health of the company to
analysts, thereby obtaining a favorable 409A stock valuation to stimulate
additional funding from investors.
Linderoth claimed he heavily relied on the purported Zillow offer and
the 409A valuation in making his subsequent investment and lending
decisions. He asserted he would not have made the $500,000 loan to Relola
had he been aware of the extent of monies owed to Relola employees. And he
alleged Sittig approached him in early 2022 asking him to step in as Chief
Executive Officer because she had to resign for personal reasons and
instructing him to take certain actions. Linderoth declined, and soon
thereafter the proposed merger failed, Relola became insolvent, and the
company defaulted on both the primary “hard money” loan and Linderoth’s
subordinate loan.
Based on these alleged facts, the complaint asserted a cause of action
solely against Relola for breach of Linderoth’s promissory note. It also
5
asserted five causes of action solely against Sittig: (1) fraudulent
misrepresentation for inducing him to invest based on the allegedly fabricated
Zillow offer, inflated 409A valuation, promises of major investors imminently
coming on board, and purportedly advantageous changes to Relola’s business
model; (2) fraudulent concealment for failing to disclose that the data
underlying the 409A report was inflated; (3) breach of fiduciary duty based on
Sittig’s allegedly fraudulent misrepresentations and concealment, as well as
self-dealing, mortgaging the company’s assets on commercially
unconscionable terms, and failing to disclose the windfall she would have
received as a result of the merger; (4) federal securities fraud (15 U.S.C.
§ 771) based on the same facts alleged in support of the fraudulent
misrepresentation claim; and (5) a similar claim of securities fraud based on
California law (Corp. Code, § 25401). The complaint additionally alleged a
derivative claim against Sittig for breach of fiduciary duty.
Sittig moved to stay the action and compel arbitration based on the
arbitration clauses set forth above. Linderoth acknowledged the claims
against Sittig were arbitrable, but he asserted the claim against Relola was
not given its asserted failure to timely compel arbitration. He therefore
requested the claims against Sittig be stayed (§ 1281.2, subd. (c)) while the
Relola claim was litigated in the trial court.
In June 2022, the trial court granted Sittig’s motion to compel
arbitration as to all the causes of action in the complaint, declining to find
waiver and concluding all the claims were based on the same nucleus of
operative facts.
Arbitration Proceedings
In October, Linderoth filed a first amended claim in arbitration,
fleshing out some of the alleged facts but asserting the same causes of action
6
as in his complaint, except for the federal securities fraud cause of action,
which he dropped.
In November, Relola filed for bankruptcy, staying claims against it.
After briefing, the arbitrator ruled Linderoth’s cause of action against Relola
for breach of the promissory note was stayed, as was Linderoth’s derivative
claim on Relola’s behalf. The arbitrator further ruled some aspects of
Linderoth’s fiduciary duty cause of action against Sittig were stayed—
specifically, while Linderoth’s claims involving Relola investments based on
alleged misstatements or omissions by Sittig were “direct claims” and could
therefore move forward, “[t]he remaining claims alleging ‘exorbitant pay
raises’, ‘personal loans’ and ‘conflict of interest’ ” were effectively derivative
claims based on injury to the corporation and therefore also stayed.
The arbitration hearing was held over six days in December, with live
testimony from five witnesses—including Sittig and Linderoth—as well as
submission of witness declarations, multiple exhibits, and related briefing.
First Interim Award
In February 2023, the arbitrator issued his first award, finding in favor
of Sittig. The award describes in detail the evidence presented by the parties.
After reviewing the evidence with respect to the alleged Zillow offer, the
arbitrator found that, other than a single e-mail, no evidence was produced
establishing that Linderoth ever saw a $20 million offer from Zillow or
documents reflecting such an offer. Further, Linderoth was a sophisticated
investor, and no such investor would consider the single e-mail an offer to
purchase. As for the 409A valuation, the arbitrator found “[t]he valuation is
not based on the ‘income producing capability’ of Relola because ‘[g]iven the
stage and size of the Company, reliable financial projections were not
available.’ ” Rather, the valuation utilized a market approach. The report
7
was thus not based on bogus revenue as Linderoth claimed. Moreover,
Linderoth did not see the report until shortly before he filed suit.
The arbitrator therefore concluded Linderoth failed “to prove
reasonable reliance on the alleged representations regarding Zillow and the
409A valuation.” He went on to discuss other possible information on which
Linderoth may have relied in making his SAFE investment decisions.3
However, in that respect the arbitrator ultimately drew no conclusions,
finding that Linderoth had failed to establish damages, which was fatal to his
causes of action for fraudulent misrepresentations/omissions and breach of
fiduciary duty, as well as a proposed claim of negligent misrepresentation.
With respect to Linderoth’s cause of action for state securities fraud,
the arbitrator concluded the statutory remedy of recission was not available
to Linderoth because Sittig was not the holder of the SAFE securities and,
3 For instance, a Keiretsu Forum report regarding Relola was issued in
June 2018 at the request of a company paid by Relola to help it raise
investment capital. The report was prepared by “four individuals with
business, financial, legal and sales expertise” and stated it was “ ‘solely the
assessment of the authors.’ ” It painted a rosy picture of Relola’s technology,
executive team, and potential, but also noted several red flags such as the
company’s need to convert “freemium” users into paid users and to expand
into other target markets. One of the declarants in the arbitration stated he
attended a Keiretsu presentation by Sittig in January 2020 and subsequently
invested in Relola. He explained he “ ‘very much understood that it was a
start up in the very beginning stages.’ ”
Additionally, in November 2018, Marble Arch Research Inc. released a
generally favorable report on Relola. Marble Arch—which produced research
reports on publicly traded and privately held companies—was paid $19,000
by Relola to prepare the report, which was based on “information provided by
the Company and the firms due diligence.” The arbitrator noted the Marble
Arch report did “set forth the company’s lack of revenue and one could
reasonably expect a sophisticated investor to ascertain that Relola, to date,
has not converted freemium users to paid users as contemplated.”
8
after Relola defaulted on its obligations, its shares were converted into shares
in another company. The arbitrator further ruled the promissory note was
not a security, and Sittig was not the issuer of the note. Further, the note
was not paid because the contemplated Series A financing and subsequent
financing efforts did not occur, and Linderoth had failed to link those failures
to the alleged misconduct at issue.
Second Interim Award
Linderoth moved for reconsideration, arguing the arbitrator had
applied an incorrect legal standard with respect to damages. Due to this
asserted error, Linderoth maintained the arbitrator had erroneously found it
unnecessary to determine whether he “had carried his burden of proof on the
other elements, such as a false statement of material fact, intent to deceive,
and reasonable reliance.” Linderoth asked the arbitrator to “weigh and
consider the evidence on the remaining elements . . . using the applicable
standard for each—a mere preponderance of the evidence.” He then argued
that if the court did so, it would necessarily find he had proved those
elements even without considering the alleged Zillow offer and 409A
valuation.
In June, the arbitrator issued a second interim award granting
Linderoth’s motion for reconsideration and then discussing the merits of
Linderoth’s arguments.
After detailing the evidence of apparent misrepresentations regarding
the number of Relola users in 2017 and 2018, the arbitrator ruled there were
“many facts surrounding Mr. Linderoth’s investment decision as to the 2018
and 2019 SAFE investments as well as the agreement to loan Relola
$500,000. To meet his burden of proof, Mr. Linderoth must establish that
Ms. Sittig’s representations and/or material omissions constitute the
9
substantial factor in his investment decisions. By a preponderance of the
evidence, he has done so.” Specifically, with respect to the two SAFE
investments, Linderoth “sustained his burden of proof that he was misled;
that Ms. Sittig knew the truth of Relola’s lack of success in developing a
viable [subscription] business; and Mr. Linderoth did reasonably rely on the
central representation that Relola was on its way to becoming a viable
[subscription] enterprise.” But Linderoth did not sustain his burden as to the
short-term $500,000 loan. Rather, the evidence was that he made this loan
in reliance on upcoming financing (for which a signed letter of intent was
presented), which Sittig ultimately walked away from for strategic reasons.
Linderoth therefore failed to meet his “burden of proof” as to reliance with
respect to the $500,000 loan. The arbitrator further instructed the parties to
provide briefing regarding how damages should be calculated based on an
outlined asset value approach.
Third Interim Award
Sittig then moved for reconsideration, and in November, the arbitrator
issued a third interim award, granting Sittig’s reconsideration motion and
reversing his decision on Linderoth’s motion.
The arbitrator first concluded his previous ruling in Linderoth’s favor
was not based on a sufficiently detailed analysis of the evidence regarding
Linderoth’s motivations for making his SAFE investments in 2018 and 2019.4
Specifically, the arbitrator now focused on the alleged misrepresentations
with respect to Relola becoming a viable subscription enterprise and the
number of Relola users.
4 Given accusations and declarations related to Sittig’s credibility, the
arbitrator made “an effort to place minimal reliance on her oral statements
and to emphasize the written record” when reviewing the evidence.
10
The arbitrator concluded the evidence was insufficient to support his
previous finding that Sittig knew or should have known Relola was a failed
business at the time of Linderoth’s SAFE investments. In reaching this
conclusion, he rejected Linderoth’s purported reliance on the Marble Arch
and Keiretsu Forum reports, observing that future projections are not
actionable, both reports contained strong disclaimers, and there was no
evidence of Sittig being involved in the preparation of the reports. “Nothing
is known about what the analysts took from their interaction with Ms. Sittig,
other Relola employees, third parties and why they described Relola’s
business as they did. The fact that Ms. Sittig ‘adopted’, meaning accepted[,]
the forecasts is not enough.”
As to the asserted misrepresentations regarding the number of Relola
users, the arbitrator pointed out Linderoth was already an investor when
such statements were made in 2017. And in February 2018, a power point to
investors stated Relola would “ ‘temporarily give Relola [subscriptions] away
to drive adoptions, and that Relola would therefore have zero revenue until
well into the third quarter of 2018.’ ” Thus, at that point, Linderoth
“understood Relola was using a freemium model where the accounts first are
free and would subsequently be charged for continued use.” Moreover,
throughout the extensive contacts between Sittig and Linderoth, there was
no evidence of references to users of the Relola platform. The arbitrator
therefore concluded any asserted misrepresentations regarding the number of
Relola users did not influence Linderoth’s investment decisions in late 2018
and early 2019.
The arbitrator also revisited and rejected Linderoth’s claim of
fraudulent concealment. He first concluded the less than successful result of
the initial rollout of the Relola product in the real estate context “was
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material information that Mr. Linderoth and other investors were entitled to
know.” However, he went on to conclude: “The facts surrounding whether
Mr. Linderoth knew of the lack of success at the time of the SAFE
investments is subject to debate. On balance, it appears he did. Assuming he
did not, the evidence does not support a finding that Ms. Sittig withheld
disclosure of the facts to investors as reflected in the financial information in
the Marble Arch report.” Linderoth acknowledged he never requested
Relola’s financial statements during this timeframe. The arbitrator therefore
found Sittig had not withheld facts regarding the company’s initial lack of
success to induce Linderoth to invest in the SAFE securities. Rather, based
on the record of the exchanges between Sittig and Linderoth during the
timeframe of the SAFE investments, the arbitrator found Linderoth’s focus
was on the anticipated Series A financing. He also concluded Linderoth had
failed to prove Sittig’s intent to defraud in this context, as she still believed
Relola was a viable company and many sophisticated individuals saw it as
promising.
Final Award
Linderoth responded with a barrage of documents asking for further
reconsideration, filing five pleadings to that effect in January and February
2024. Sittig filed two responses which, among other things, objected to the
presentation of any new evidence.
On February 29, 2024, the arbitrator issued a final award, which
included rejecting Linderoth’s most recent reconsideration argument, namely
that he had relied on the representations as to user adoption and growth in
the Marble Arch report as the “determinative fact” in making his SAFE
investment decisions. In doing so, the arbitrator sustained Sittig’s objection
to new evidence. The arbitrator first discredited Linderoth’s veracity,
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stating: “No mention has been made in the prior rulings of [Sittig’s] challenge
to [Linderoth’s] credibility that is premised on the contention that Mr.
Linderoth repeatedly changes the basis for his claim. The Marble Arch
report now is the reason [given] for the SAFE investments, a claim absent
from material assertions in prior pleadings. Its absence does bear on the
weight to be accorded [Linderoth’s] present arguments.” The arbitrator also
rejected Linderoth’s premise that Sittig should be held responsible for alleged
misrepresentations in the Marble Arch report as there was no evidence
provided from the drafters of the report, or otherwise, indicating her
involvement.
The final award went on to reject all of Linderoth’s claims against
Sittig, including his causes of action for fraud, breach of fiduciary duty,
Corporations Code section 25501, and negligent misrepresentation. It
additionally granted Sittig attorney fees and costs.
Motions to Confirm/Vacate Arbitration Award
Sittig filed a motion to confirm the arbitration award and lift the stay
in May 2024, arguing all the conditions for confirmation were met.
Linderoth filed a cross-petition to vacate the award, claiming the award
should be vacated pursuant to section 1286.2, subdivision (a)(4) because it
assertedly violated an explicit legislative expression of dominant public
policy. Specifically, Linderoth claimed the arbitrator “violated public policy
by his failure to apply any fiduciary analysis of [Sittig’s] actions (ignoring
Constructive Fraud) when its application was clear, obvious and necessary to
uphold an intentional legislative express[ion] of dominant public policy.”
According to Linderoth, had the arbitrator considered constructive fraud, “a
presumptive assumption regarding Sittig’s intent to defraud and his
13
reasonable reliance on her material lies and omissions would have applied
and Linderoth would have prevailed as a result.”
The trial court granted Sittig’s motion to confirm and denied
Linderoth’s petition to vacate, stating: “Essentially, Plaintiff’s argument is
that the arbitrator (in [Plaintiff’s] opinion) failed to apply the correct legal
standards to his claims and made incorrect factual findings based on his
application of those legal standards. Neither (an alleged) misapplication of
the law [n]or incorrect factual findings provides grounds for vacating an
arbitration award. [Citation.] To the extent Plaintiff contends the
arbitrator exceeded his powers because he reached an (allegedly) incorrect
decision, that is not a basis to vacate the award, or to refuse to confirm it,
pursuant to [section] 1286.2(a)(4).”
DISCUSSION
Review of Arbitration Awards
Legal Framework
“Judicial review of an arbitrator’s award is very limited because of the
strong public policy in favor of private arbitration.” (Cotchett, Pitre &
McCarthy v. Universal Paragon Corp. (2010) 187 Cal.App.4th 1405, 1416
(Cotchett), citing Moncharsh v. Heily & Blasé (1992) 3 Cal.4th 1, 8–13
(Moncharsh).) “As a general rule, the courts may not review an arbitrator’s
decision for errors of fact or law. [Citation.] A contractual arbitration
agreement gives the arbitrator the power to decide the historical facts, the
relevant law and the interpretation and validity of the contract. [Citations.]
Inherent in this power is the possibility the arbitrator may make legal or
factual errors. [Citation.] An arbitration award ordinarily will not be
vacated due to such error because the arbitrator’s resolution of the issues is
what the parties bargained for.” (Cotchett, at p. 1416.)
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However, “[t]he general rule that arbitration awards are immune from
judicial review is not without its limits. Code of Civil Procedure section
1286.2 lists the grounds on which a court may vacate an award, including
‘[t]he arbitrators exceeded their powers and the award cannot be corrected
without affecting the merits of the decision upon the controversy submitted.’
(Id., subd. (a)(4).) An arbitrator may exceed her powers within the meaning
of this section by issuing an award that violates an explicit legislative
expression of public policy. [Citations.] But this is the exception, not the
rule: ‘Absent a clear expression of illegality or public policy undermining this
strong presumption in favor of private arbitration, an arbitral award should
ordinarily stand immune from judicial scrutiny.’ ” (Cotchett, supra,
187 Cal.App.4th at p. 1416, quoting Moncharsh, supra, 3 Cal.4th at p. 32.)
Thus, “ ‘arbitrators do not “exceed[] their powers” within the meaning of
section 1286.2, subdivision [(a)] and section 1286.6, subdivision (b) merely by
rendering an erroneous decision on a legal or factual issue, so long as the
issue was within the scope of the controversy submitted to the arbitrators.’ ”
(Roehl v. Ritchie (2007) 147 Cal.App.4th 338, 348 (Roehl).)
Standard of Review
We review the trial court’s ruling on the confirmation motion de novo,
but defer to the factual and legal findings made by the arbitrator. (Cotchett,
supra, 187 Cal.App.4th at p. 1416; accord, Roehl, supra, 147 Cal.App.4th at
p. 347 [“[W]e do not review the arbitrator’s findings . . . , but take them as
correct.”].)
Linderoth’s Constructive Fraud Claim
Linderoth’s principal argument on appeal is that the arbitrator
erroneously failed to consider “constructive fraud” and had the arbitrator
done so he would certainly have ruled in Linderoth’s favor. Sittig maintains
15
Linderoth has forfeited this argument since he never made a constructive
fraud claim either in his original complaint or at any time during the
arbitration proceedings. We agree Linderoth has forfeited the issue.
Actual Versus Constructive Fraud
Actual fraud generally involves some form of “active misconduct, such
as an intent to deceive, or misrepresentation, by the defendant.” (Tyler v.
Children’s Home Society (1994) 29 Cal.App.4th 511, 548.) As the arbitrator
recited in his third interim award, to establish a claim based on an
intentional misrepresentation, “the plaintiff must prove seven essential
elements: (1) the defendant represented to the plaintiff that an important
fact was true; (2) that representation was false; (3) the defendant knew that
the representation was false when the defendant made it, or the defendant
made the representation recklessly and without regard for its truth; (4) the
defendant intended that the plaintiff rely on the representation; (5) the
plaintiff reasonably relied on the representation; (6) the plaintiff was
harmed; and (7) the plaintiff’s reliance on the defendant’s representation was
a substantial factor in causing that harm to the plaintiff.” (Manderville v.
PCG&S Group, Inc. (2007) 146 Cal.App.4th 1486, 1498, italics & fn. omitted.)
“The required elements for fraudulent concealment,” in turn, “are (1)
concealment or suppression of a material fact; (2) by a defendant with a duty
to disclose the fact to the plaintiff; (3) the defendant intended to defraud the
plaintiff by intentionally concealing or suppressing the fact; (4) the plaintiff
was unaware of the fact and would not have acted as he or she did if he or she
had known of the concealed or suppressed fact; and (5) plaintiff sustained
16
damage as a result of the concealment or suppression of the fact.” (Graham
v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 606.)
Constructive fraud, in contrast, is defined by statute as “any breach of
duty which, without an actually fraudulent intent, gains an advantage to the
person in fault . . . by misleading another to [their] prejudice,” or, “any such
act or omission as the law specially declares to be fraudulent, without respect
to actual fraud.” (Civ. Code, § 1573.) Thus, constructive fraud differs from
actual fraud in that no fraudulent intent is required. Rather, “if one who is
under a fiduciary duty to provide complete and accurate information to the
plaintiff fails to do so and the plaintiff is misled to the plaintiff’s prejudice,
there is a claim for constructive fraud despite the lack of any intent to
mislead or deceive.” (Use Note to CACI No. 4111.) Moreover, “a
representation in the context of a trust or fiduciary relationship creates a
rebuttable presumption of reasonable reliance subject to being overcome by
substantial evidence to the contrary.” (Edmunds v. Valley Circle Estates
(1993) 16 Cal.App.4th 1290, 1302 (Edmunds).) Thus, “[i]n its application,
constructive fraud not only expands the range of conduct which may be
characterized as fraudulent, it also presumes the element of reliance absent
substantial evidence to the contrary.” (Ibid.)
Both actual fraud and constructive fraud “must be pleaded with
specificity.” (Knox v. Dean (2012) 205 Cal.App.4th 417, 434.)
Forfeiture in the Arbitration Context
“ ‘ “[I]t is well settled that a party may not sit idle through an
arbitration proceeding and then collaterally attack that procedure on grounds
not raised before the arbitrators when the result turns out to be adverse.” ’ ”
(Mossman v. City of Oakdale (2009) 170 Cal.App.4th 83, 93; Moncharsh,
supra, 3 Cal.4th at pp. 30–31 [failure to raise a claim before an arbitrator
17
“waives the claim for any future judicial review”].) Our high court has made
clear the reasons for its endorsement of this bright line rule: “Any other
conclusion is inconsistent with the basic purpose of private arbitration, which
is to finally decide a dispute between the parties. Moreover, we cannot
permit a party to sit on [their] rights, content in the knowledge that should
[they] suffer an adverse decision, [they] could then raise the illegality issue in
a motion to vacate the arbitrator’s award. A contrary rule would condone a
level of ‘procedural gamesmanship’ that we have condemned as ‘undermining
the advantages of arbitration.’ [Citations.] Such a waste of arbitral and
judicial time and resources should not be permitted.” (Moncharsh, at p. 30.)
Linderoth has Forfeited Any Claim of Constructive Fraud
As we have recited, both Linderoth’s initial complaint and his first
amended claim before the arbitrator alleged causes of action for fraudulent
misrepresentation and fraudulent concealment by Sittig, along with a claim
for breach of fiduciary duty based on her allegedly fraudulent actions as well
as asserted self-dealing and other conduct damaging to Relola. After Relola
filed for bankruptcy, the arbitrator further clarified which aspects of
Linderoth’s cause of action for breach of fiduciary duty could move forward—
namely, his claims involving the investments he made in Relola based on
Sittig’s alleged misstatements or omissions. The other aspects of his breach
of fiduciary duty cause of action were effectively derivative claims based on
injury to Relola and therefore were stayed. Thus, the only aspect of
Linderoth’s breach of fiduciary duty cause of action before the arbitrator was
that involving Linderoth’s own claim of actual fraud based on asserted
misrepresentations and concealments.
In short, Linderoth did not plead a claim of constructive fraud, let alone
plead such a claim with particularity. Nor did he ever state in any of his
18
voluminous briefing in the arbitration that he was making a constructive
fraud claim. Moreover, he never made any mention of the constructive fraud
statute (Civ. Code, § 1573). Thus, he never asserted he was not required to
prove intent to defraud or bear the initial burden to prove actual reliance. To
the contrary, he argued repeatedly that he, in fact, proved Sittig acted with
fraudulent intent and that he detrimentally relied on her asserted
misrepresentations and omissions.
Linderoth nevertheless advances three reasons why the issue of
constructive fraud should not be deemed forfeited. None are persuasive.
First, Linderoth argues he did, in fact, raise the issue of constructive
fraud, pointing to language in his reply to Sittig’s response to his second
motion for reconsideration, filed after the arbitrator issued its third interim
award in favor of Sittig. Linderoth stated in that final reply: “California
courts have held that duty of care obligations include a reasonable duty to
investigate. Where the acts or omissions involve a question of policy or
business judgment, a director can only be held liable with a showing of fraud,
bad faith or negligence. Findley v. Garrett, (1952) 109 Cal.App.2d 166,
178.[5] The standard of care for a director is that the director’s duties must be
performed in ‘good faith’ and in a manner the director believes to be in the
best interests of the corporation and with the care, including reasonable
inquiry, that an ordinary prudent person in a like position would
exercise under similar circumstances. Cal. Corp. Code § 309(a).”
5 We note Findley was not a constructive fraud case. Rather, it was a
derivative action alleging self-dealing, fraud, and fraudulent concealment by
members of the board of directors. (Findley v. Garrett, supra, 109 Cal.App.2d
at pp. 167, 175.) The page cited by Linderoth contains a discussion upholding
the decision of the board not to commence litigation with respect to the
alleged fraud under the business judgement rule. (Id. at p. 178.)
19
While this elaborates on fiduciary duties Sittig owed Linderoth as a
minority shareholder, it says nothing about the elements of, or proof required
to establish, constructive fraud. To the contrary, Linderoth’s briefing both
before and after his reference to Corporations Code section 309 describes a
string of representations Sittig assertedly knew to be false and discusses how
intent to conceal can be inferred therefrom. In short, Linderoth was arguing
actual, rather than constructive, fraud.
Second, Linderoth points to section 425.10 which requires that a
complaint include “[a] statement of the facts constituting the cause of action,
in ordinary and concise language” (id., subd. (a)(1)), asserting “California’s
fact-based pleading requirements allow an issue to be appealed if the legal
argument was presented at trial, even if the statute wasn’t cited.” This
argument does not get out of the starting gate for the simple reason that
Linderoth never advanced “the legal argument” that he had alleged, let alone
proved, a claim of constructive fraud. The only fraud claim he ever alleged
and attempted to prove was common law fraud.
Third, Linderoth insists that merely by alleging a cause of action for
breach of fiduciary duty, he necessarily asserted a cause of action for
constructive fraud as well, regardless of the fact he never pleaded,
mentioned, briefed, or otherwise argued, constructive fraud. Linderoth cites
no authority for the proposition that a cause of action against a corporate
director for breach of fiduciary duty inherently carries with it, sub silentio, a
cause of action for constructive fraud that can lie dormant throughout trial or
arbitration proceedings, to emerge only after an adverse judgment in an
attempt to effectuate its reversal on appeal. Not only did Linderoth never
plead, brief, or argue a constructive fraud claim, but the arbitrator expressly
asked the parties at the outset of the arbitration to brief their relative
20
burdens of proof. Linderoth did not then, or at any other time during the
arbitration proceedings, assert fraudulent intent could be implied or that his
reliance, at least initially, should be assumed. In short, he never even hinted,
let alone stated, he was asserting a claim for constructive fraud.6
In sum, allowing Linderoth to raise a claim of constructive fraud at this
late date would not only undercut the statutory provisions constraining
judicial review of arbitration decisions, it also would be manifestly unfair to
both Sittig and the arbitrator.
At oral argument, Linderoth attempted to resurrect his breach of
fiduciary duty/constructive fraud argument with respect to his $500,000 loan
by contending the arbitrator’s assertedly complete failure to apply the
framework of breach of fiduciary duty to the case should be reviewable as
something beyond a mere error of law. Linderoth complained he relied on
various “omissions” listed in his breach of fiduciary duty claim in making his
decision to move forward with the loan which were never considered within
the breach of fiduciary duty framework. Specifically, he claimed he would
never have made or extended the loan had he been aware that: Sittig would
pay herself before him; Relola had entered into a “hard money” loan on
commercially unfavorable terms to which his loan was subordinate; and
employees remained unpaid. Linderoth posits these allegations from his
6 And even if a claim of constructive fraud could be “implied” merely
from the assertion of a breach of fiduciary duty claim, any error on the part of
the arbitrator in failing to detect such an implied claim would not be subject
to judicial review. (See Sapp v. Barenfeld (1949) 34 Cal.2d 515, 523 [“The
claim must be expressly raised at some time before the award. If it can only
be implied from the facts alleged, the failure to consider it is only an error of
judgment that in the absence of fraud or gross misconduct is not subject to
judicial review.”]; Cotchett, supra, 187 Cal.App.4th at p. 1416.)
21
operative complaint were never addressed because they were improperly
treated as derivative and therefore stayed when, in fact, they were also direct
claims as omissions of Sittig that influenced his loan decision. In other
words, as the arbitrator found, he was entitled to proceed on them because
they were “ ‘allegations of misstatements and omissions resulting in [his]
investments in Relola.’ ” However, while it may have been permissible for
Lindroth to point to these allegations as support for his personal breach of
fiduciary duty claim, Linderoth never argued them to the arbitrator. Rather,
as we have described, Linderoth initially focused on the alleged Zillow offer
and misrepresentations in the company’s 409A valuation. But the arbitrator
found Linderoth was not persuaded to make the loan on the basis of these
supposed misrepresentations and, instead, relied on the Series A financing.
The arbitrator also found “Linderoth ha[d] not linked the failure of such
efforts to the conduct at issue.”
Linderoth moved for reconsideration but did not suggest the omissions
he now identifies formed a basis for either fraudulent concealment or his
breach of fiduciary claim. Rather, he shifted his focus to arguments relying
on alleged misrepresentations and/or concealments related to the Marble
Arch and Keiretsu Forum reports, Relola’s user numbers, and its failure as a
subscription business. The arbitrator granted the motion for reconsideration,
changing his position with respect to the SAFE investments, but reiterating
that Linderoth entered into the loan in reliance on the upcoming Series A
financing.
Sittig then moved for reconsideration, and the arbitrator again changed
his position with respect to the SAFE investments only. In doing so, the
arbitrator reiterated he “did not address Claimant’s fiduciary duty claims
given Relola’s bankruptcy filing. What remained were the common claims of
22
fraud based on affirmative misstatements and failure to disclose material
facts.” This interim award focused solely on the SAFE investments and the
new potential misrepresentations/omissions Linderoth had identified.
The final award considered and rejected Linderoth’s additional motion
for reconsideration and focused solely on the SAFE investments and the
Marble Arch report.
In sum, the arbitrator decided early on that Linderoth’s fraud and
breach of fiduciary duty claims with respect to the loan failed because
Linderoth did not rely on any of the alleged misconduct by Sittig in entering
into the loan. Linderoth never asked the arbitrator to reconsider this
conclusion based on the omissions he now identifies. Nor did he object to the
arbitrator’s use of the framework of actual fraud to assess the
misrepresentations and omissions Linderoth did identify. The arbitrator was
not required to determine issues not presented to him for decision, and we
are certainly not obliged to address them at this late date.
Our conclusion that Linderoth has forfeited any claim of constructive
fraud or breaches of fiduciary duty not argued to the arbitrator also disposes
of his claims that the arbitrator failed to reach issues submitted to him. He
cites, for example, section 1283.4, which provides: “The award shall be in
writing and signed by the arbitrators concurring therein. It shall include a
determination of all the questions submitted to the arbitrators the decision of
which is necessary in order to determine the controversy.” (Italics added.)
The only relevant question submitted to the arbitrator here was whether
Sittig breached her fiduciary duties by committing actual fraud based on
alleged misrepresentations and concealments in her dealings with Linderoth.
Since the question of constructive fraud/breach of fiduciary duty was not
presented to the arbitrator, he was not required to address it.
23
For similar reasons, we reject Linderoth’s assertion that the
arbitrator’s award did not comply with rule 24(g) of the JAMS
Comprehensive Arbitration Rules and procedures because “it did not address
Linderoth’s claims regarding Sittig’s Constructive Fraud or provide any
reason for their exclusion.” That rule (now subdivision (h)) states an
arbitration award “shall consist of a written statement signed by the
Arbitrator regarding the disposition of each claim and the relief, if any, as to
each claim. Unless all Parties agree otherwise, the Award shall also contain
a concise written statement of the reasons for the Award.” The arbitrator
here properly disposed of the claim of breach of fiduciary duty before him
within the legal framework presented to him by the parties, that of actual
fraud.
No Dominant Public Policy Requires the Award be Vacated
Linderoth also asserts the arbitrator exceeded his powers within the
meaning of section 1286.2, subdivision (a)(4), by violating an explicit
legislative expression of dominant public policy—specifically, he supposedly
ignored Sittig’s unwaivable and statutorily defined fiduciary duties in his
analysis. Much of this claim is intertwined with Linderoth’s forfeited
constructive fraud argument; the balance lacks merit.
Statutory Framework
As we have discussed, in Moncharsh, supra, 3 Cal.4th 1, our Supreme
Court famously articulated the rule that the merits of an arbitrator’s decision
are “not generally reviewable for errors of fact or law, whether or not such
error appears on the face of the award and causes substantial injustice to the
parties.” (Id. at p. 6.) Linderoth, however, relies on the “limited exceptions to
this general rule.” (Ibid.) Specifically, an arbitrator may exceed his or her
powers by issuing an award that violates “an explicit legislative expression of
24
public policy.” (Id. at p. 32.) Put another way, “exceptional circumstances
justifying judicial review of an arbitrator’s decision” may be present where
“granting finality to an arbitrator’s decision would be inconsistent with the
protection of a party’s statutory rights.” (Ibid., citing in support
Shearson/American Express Inc. v. McMahon (1987) 482 U.S. 220, 225–
227 [federal statutory claims are arbitrable under the Federal Arbitration
Act unless party opposing arbitration demonstrates “that Congress
intended to preclude a waiver of judicial remedies for the statutory rights
at issue”].) “The exceptions to the limits on review of awards protect against
error that is so egregious as to constitute misconduct or so profound as to
render the process unfair.” (Heimlich v. Shivji (2019) 7 Cal.5th 350, 368.)
Case law has elucidated the reach of the Moncharsh exceptions. For
example, in Moncharsh, itself, the Supreme Court assessed whether a fee-
splitting arrangement between attorneys violated the California State Bar
Association’s Rules of Professional Conduct. The court concluded nothing in
the rules suggested resolution by an arbitrator of what was essentially an
ordinary fee dispute between two individuals would harm the public interest.
(Moncharsh, supra, 3 Cal.4th at pp. 32–33.)
Similarly, in City of Richmond v. Service Employees Internat. Union,
Local 1021 (2010) 189 Cal.App.4th 663, 669, the appellant argued an
arbitrator violated public policy by ordering the reinstatement of an employee
accused of sexual harassment on the grounds the sexual harassment claim
was time-barred, without adjudicating the truth or falsity of the underlying
sexual harassment claim. While our colleagues in Division Four of this
District acknowledged that “[t]he existence of a strong public policy against
sexual harassment in the workplace is indisputable,” they explained: “The
relevant question, however, is not whether there is a public policy against
25
sexual harassment generally but whether according finality to the
arbitrator’s decision would be incompatible with that public policy.” (Id. at
p. 671.) Accordingly, review of the arbitration award was not proper, because
appellant had not established that the general public policy precluded an
arbitrator from ordering an accused harasser reinstated where the
accusations were time-barred. (Id. at p. 672; see Marsch v. Williams (1994)
23 Cal.App.4th 238, 245 [where arbitration agreement did not specify “ ‘that
an unusual scope of judicial review is to be accorded an arbitration decision
on a question of law,’ ” failure to give the appellant the benefit of a particular
section of the Corporations Code was not a basis to set aside the arbitration
award].)
In contrast, Neubauer v. Goldfarb (2003) 108 Cal.App.4th 47 involved a
buy-sell stock agreement which included a waiver of fiduciary duties. (Id. at
pp. 54–55.) After considering Civil Code section 16687 and Corporations Code
section 204, subdivision (a)(10)8, the appellate court concluded that “waiver of
corporate directors’ and majority shareholders’ fiduciary duties to minority
shareholders in private close corporations is against public policy and a
contract provision in a buy-sell agreement purporting to effect such a waiver
is void.” (Id. at pp. 56–57.)
As another example, in Honchariw v. FJM Private Mortgage Fund,
7 That statute provides: “All contracts which have for their object,
directly or indirectly, to exempt anyone from responsibility for his own fraud,
or willful injury to the person or property of another, or violation of law,
whether willful or negligent, are against the policy of the law.” (Civ. Code,
§ 1668.)
8 Pursuant to that provision, articles of incorporation “may not
eliminate or limit the liability of directors [to the corporation] for acts or
omissions that involve intentional misconduct . . . or that involve the absence
of good faith on the part of the director.” (Corp. Code, § 204, subd. (a)(10).)
26
LLC (2022) 83 Cal.App.5th 893 (Honchariw), the home loan at issue
stipulated that, if the borrowers missed a payment, they incurred a late fee
comprised of a one-time 10 percent fee of the overdue monthly payment and a
default interest charge of 9.99 percent per annum assessed against the total
amount of unpaid principal balance of the Loan. (Id. at p. 898.) The
borrowers demanded arbitration, but the arbitrator upheld the late fee,
concluding, among other things, that it did not constitute an unlawful
penalty in violation of Civil Code section 1671.9 (Honchariw, at p. 898.) After
the trial court declined to vacate the award (id. at pp. 898–899), our
colleagues in Division Three of this district did so. (Id. at p. 906.)
Specifically, the appellate court concluded the statute expressed a clear
public policy “that liquidated damages bear a ‘reasonable relationship’ to the
actual damages that the parties anticipate would flow from breach.”
(Honchariw, supra, 83 Cal.App.5th at p. 900.) A liquidated damages clause
that fails to meet this test is deemed an unenforceable “ ‘penalty.’ ” (Ibid.)
Noting that an arbitrator may “exceed their powers by enforcing a contract
that is in violation of public policy” the court determined that by the late fee’s
“very existence, the Honchariws have met their burden of showing an
unlawful penalty.” (Id. at pp. 901, 905.)
With these parameters in mind, we turn to Linderoth’s claims of
reviewable error.
The Award is Not Reviewable under the Moncharsh Exception
To begin, it bears repeating what the arbitrator actually decided here.
9 Civil Code section 1671, subdivision (b), provides that “a provision in
a contract liquidating the damages for the breach of the contract is valid
unless the party seeking to invalidate the provision establishes that the
provision was unreasonable under the circumstances existing at the time the
contract was made.”
27
He concluded that Linderoth had failed to prove Sittig breached her fiduciary
duties with respect to his two SAFE investments and the subsequent loan
because he failed to establish that any of her asserted misrepresentations or
concealments amounted to actual fraud. Specifically, the arbitrator
concluded that Linderoth failed to prove actionable reliance, finding instead
that he was relying on the anticipated Series A financing and the (non-
actionable) projected stock valuation in the Marble Arch Report. He also
concluded Linderoth failed to prove Sittig had an intent to defraud. Under
such circumstances, it would appear unnecessary to consider further Sittig’s
fiduciary duties of loyalty, reasonable inquiry, and disclosure. At best for
Linderoth, the arbitrator made a legal error by failing to expressly address
the point in his award—but that is not a circumstance within our judicial
oversight. (See Prima Donna Development Corp. v. Wells Fargo Bank, N.A.
(2019) 42 Cal.App.5th 22, 45–46 [“ ‘The exceptions to the limits on review of
awards protect against error that is so egregious as to constitute misconduct
or so profound as to render the process unfair.’ ” Because appellant was
allowed to bring its claims against Wells Fargo, the arbitration process
allowed for discovery, resulted in a multiday arbitration hearing, complete
with evidentiary rulings and a written award that applied the “relevant
principles of California law,” appellant’s “claim about the arbitrator’s failure
to address ‘good faith’ amounts only to a contention that the arbitrator made
a legal error—a question not subject to judicial review.”].)
Nevertheless, Linderoth strenuously asserts the arbitrator’s decision
should be vacated because he violated an explicit legislative expression of
dominant public policy when he ignored Sittig’s unwaivable and statutorily
defined fiduciary duties. First, Linderoth asserts there is a “ ‘strong public
interest in assuring that corporate officers, directors, majority shareholders
28
and others are faithful to their fiduciary obligations to minority
shareholders.’ ” (Meister v. Mensinger (2014) 230 Cal.App.4th 381, 395, citing
Steinberg v. Amplica, Inc. (1986) 42 Cal.3d 1198, 1210.) However, the
question here is not whether the dispute involves a public policy related to
fiduciary duties generally, but, instead whether the arbitrator’s decision is
incompatible with that public policy. Here, following the exchange of
discovery, a five-day hearing, evidentiary rulings, and multiple rounds of
briefing in response to reconsideration motions, Linderoth had a full and fair
opportunity to present his claims for breach of fiduciary duty. In the end, the
arbitrator made factual determinations regarding intent and reliance in
denying those claims. While Linderoth may be unhappy with this result, it
does not contravene general public policies related to fiduciary duties in
California.
Linderoth’s second argument fares no better. He interprets Civil Code
section 1573 as codifying a principal’s right to reasonably rely on a fiduciary
fulfilling its duties. Since Neubauer holds that a waiver of such protections
violates public policy, he posits the arbitrator’s actions in failing to consider
that statute violated his rights and renders the arbitration award subject to
judicial review. Put another way, Linderoth claims that, by ignoring Sittig’s
fiduciary duties and wrongly assigning the burden of proof to Linderoth, the
arbitrator violated Linderoth’s statutory right to rely upon the fiduciary duty
protections mandated by Civil Code section 1573 and Corporations Code
section 309. But neither of these statutes sets forth a statutory mandate
which made the SAFE transaction or the subsequent loan illegal on their face
as in Neubauer and Honchariw. Indeed, Corporations Code section 309 “does
not set forth any duties of a director, fiduciary or otherwise. Rather, it
establishes a standard of care and accords directors immunity from liability if
29
they comply with that standard.” (Lehman v. Superior Court (2006)
145 Cal.App.4th 109, 120.) And Civil Code section 1573 simply sets forth the
parameters for a cause of action based on constructive fraud. Neither makes
the transactions at issue obviously illegal. And nothing in the statutes
suggests resolution by an arbitrator of what was essentially an ordinary
fraud action between two individuals would harm the public interest. (See
Moncharsh, supra, 3 Cal.4th at pp. 32–33.)
DISPOSITION
The judgment is affirmed. Sittig is entitled to costs on appeal.
30
_________________________
Banke, J.
We concur:
_________________________
Humes, P. J.
_________________________
Smiley, J.
A171857, Linderoth et al v. Relola, Inc.
31