London Finance Group v. Amstem Corp.
Filed 7/9/13
London Finance Group v. Amstem Corp. CA2/8
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
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IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
EIGHT
LONDON FINANCE GROUP, LTD.,
Plaintiff and Respondent,
v.
AMSTEM CORPORATION,
Defendant and Appellant.
B241811
(Los Angeles County
Super. Ct. No. BC 459101)
APPEAL from
a judgment of the Superior Court of
County, Willaim F. Fahey, Judge.
Reversed and remanded.
Greenberg
Traurig, Karin L. Bohmholdt, Denise M. Mayo and Alan A.
Greenberg for Defendant and Appellant.
Corporate
Legal Services and Mark J. Leonardo for Plaintiff and Respondent.
* * * * * *
Defendant Amstem Corporation (Amstem) appeals from the
default judgment for $1,436,766 against it.
Amstem argues we must reverse the default judgment because (1) plaintiff
London Finance Group, Ltd. (London Finance) did not sufficiently plead one
cause of action and did not establish a prima facie case of another; and (2)
the damages award was not supported by substantial evidence. We agree that London Finance did not make a
prima facie case for its breach of
contract cause of action and did not support the damages award with
sufficient evidence. These defects do
not affect the underlying default of Amstem, however. We reverse and remand for a new default
prove-up proceeding.
Facts and Procedure
London
Finance’s complaint against Amstem alleged causes of action for negligent
misrepresentation and breach of contract.
London Finance and Amstem entered into an agreement “as of†September
20, 2010, in which London Finance agreed to provide consulting services to
Amstem. The consulting agreement was
effective as of October 1, 2010. The
consulting period commenced on October 1, 2010, and was to terminate no earlier
than October 1, 2011, except if Amstem reasonably determined London Finance had
not performed its duties and was dissatisfied with its performance. As compensation, Amstem was to give London
Finance (1) a retainer fee of $20,000 per month; (2) on an unspecified date,
restricted shares of Amstem common stock equal to 5 percent of the issued and
outstanding common stock; (3) reasonable expenses incurred by London Finance
during the consulting period; (4) 10 percent of the consideration paid for any
acquisition or sale by Amstem resulting from London Finance’s consulting
services; and (5) a warrant to purchase up to 5 percent of the issued and
outstanding Amstem common stock. The
warrant would allow London Finance to purchase Amstem common stock at the lower
of (1) 50 percent of the average closing bid price of the stock for the 20
preceding trading days or (2) $0.05 per share.
The warrant would vest on April 2, 2011, and London Finance could
exercise it on or after that date.
London Finance attached the consulting agreement to its complaint,
though not in its entirety. Pages were
missing from the agreement, and at least one exhibit to the agreement ‑‑
the form for the warrant ‑‑ was absent. London Finance never presented a copy of the
warrant form exhibit to the trial court.
The
complaint alleged London Finance entered into the consulting agreement based on
negligent misrepresentations by Amstem.
Namely, Amstem allegedly represented it had merged with its Korean
parent company, the regulatory authorities in Korea and the shareholders had
approved the merger, and everything necessary to otherwise complete the
transaction had been completed. Amstem
also allegedly represented in their SEC
and it directed London Finance to review those filings. After signing the consulting agreement,
London Finance allegedly learned Amstem’s representations about the merger were
not true. London Finance alleged it had
been damaged “in the sum equal to the benefits that [it] would have received in
the Consulting Agreement had the representations originally made by
defendants . . . been true.â€
That sum allegedly exceeded $2 million.
The breach of contract cause of action alleged Amstem had breached by
failing to pay London Finance any sums whatsoever other than an initial $20,000
payment. London Finance alleged it had
“performed all conditions, covenants, and promises required by it on its part
to be performed according to the terms and conditions of the Consulting Agreement.†The prayer for relief sought damages of $2
million or according to proof.
Amstem
filed an answer to the complaint. The
court afterward granted its attorneys’ motion to be relieved as counsel and set
for hearing an order to show cause (OSC) regarding corporate
representation. The court also struck
Amstem’s answer. On the date of the OSC
hearing, the court entered default against Amstem.
London
Finance’s summary of the case for the default prove-up stated it was seeking
damages and a judgment in the amount of $1,436,371. It argued the elements of its causes of
action were established in the declaration of Ari Kaplan, its president. Kaplan’s declaration stated London Finance
reasonably relied on Amstem’s misrepresentations regarding the merger with its
Korean parent company, London Finance was harmed by these misrepresentations,
and London Finance’s reliance was a substantial factor in causing its
harm. He also stated London Finance had
performed as required under the consulting
agreement. Kaplan calculated London
Finance’s $1,436,371 in damages as follows.
·
The unpaid retainer fee of $20,000 for 11 months
totaled $220,000.
·
Five percent of the outstanding Amstem stock
totaled $810,914. He stated 180,203,188
shares were outstanding, and 5 percent of those shares at $0.09 each amounted
to $810,914. Nine cents was the closing
price of the shares on September 20, 2010, the date as of which the parties
entered into the consulting agreement.
·
The equity value of the warrant to purchase 5
percent of Amstem stock totaled $405,457.
He again used 180,203,188 for the total outstanding shares, and he used
a per share price of $0.045 (50 percent of the $0.09 closing price on September
20, 2010).
London
Finance submitted the declaration of a stock broker, Darren Goodrich, who
stated the price of Amstem stock on September 20, 2010, was $0.09 per
share. The court entered default
judgment for London Finance in the requested amount of $1,436,371, plus another
$395 in costs. Amstem timely appealed.
discussion
“The
court’s role in the process of entering a default judgment is a serious,
substantive, and often complicated one, and it must be treated as such.†(Kim v. Westmoore Partners, Inc.
(2011) 201 Cal.App.4th 267, 272-273.)
“[I]t is the duty of the court to act as gatekeeper, ensuring that only
the appropriate claims get through.†(Heidary
v. Yadollahi (2002) 99 Cal.App.4th 857, 868.) In a default prove-up proceeding, “[t]he
court shall hear the evidence offered by the plaintiff, and shall render
judgment in the plaintiff’s favor for that relief, not exceeding the amount
stated in the complaint . . . as appears by the evidence to be
just.†(Code Civ. Proc., § 585, subd.
(b).)
judgment based on declarations from London Finance’s witnesses in lieu of live
testimony. This is permitted under
section 585, subdivision (d) and is the preferred procedure under rule 3.201 of
the Local Rules of Los Angeles County Superior Court.
A default
judgment “confesses†material facts alleged by the plaintiff -- that is, “‘“the
defendant’s failure to answer has the same effect as an express admission of the
matters well pleaded in the complaint.â€â€™
[Citation.] The ‘well-pleaded
allegations’ of a complaint refer to ‘“‘all material facts properly pleaded,
but not contentions, deductions or conclusions of fact or law.’â€â€™ [Citations.]â€
(Kim v. Westmoore Partners, Inc., supra, 201 Cal.App.4th at p. 281.) On appeal, we may consider an objection that
the complaint fails to state facts sufficient to constitute a cause of
action. (Id. at p. 282.) If the
well-pleaded allegations of the complaint do not state a proper cause of
action, the default judgment will not stand.
(Ibid.; Taliaferro v. Davis (1963) 216 Cal.App.2d 398, 409.) We independently review whether the complaint
states a proper cause of action. (
Cal.4th 468, 515.)
Regarding
the negligent misrepresentation cause of action, London Finance alleged its
damages consisted of the benefits it would have received under the consulting
agreement, had the misrepresentations regarding Amstem’s merger with the parent
company been true. Amstem first contends
London Finance did not state a valid cause of action for negligent
misrepresentation because its “benefit of the bargain†theory of damages is
improper.
Two of the
essential elements of negligent misrepresentation are justifiable reliance on a
misrepresentation and resulting damage.
(Apollo Capital Fund LLC v. Roth Capital Partners, LLC (2007) 158
Cal.App.4th 226, 243.) Generally, the
proper measure of damages for negligent misrepresentation is the plaintiff’s
“out-of-pocket†losses, not the benefit of the bargain measure. (Fragale
v. Faulkner (2003) 110 Cal.App.4th 229, 236; Christiansen v. Roddy (1986) 186 Cal.App.3d 780, 790.) “The benefit-of-the-bargain measure places a
defrauded plaintiff in the position he [or she] would have enjoyed had the
false representation been true.†(Fragale
v. Faulkner, supra, at p.
236.) By contrast, “[t]he out-of-pocket measure
restores a plaintiff to the financial position he [or she] enjoyed prior to the
fraudulent transaction, awarding the difference in actual value between what
the plaintiff gave and what he [or she] received.†(Ibid.) London Finance did not plead or proffer any
evidence of out-of-pocket losses in the default prove-up. Its evidence related to what it should have
received under the contract ‑‑ the unpaid retainer fee, the value
of the shares of Amstem stock, and the value of the stock warrant ‑‑
but not any money or property it “gave†to Amstem, and thereby lost, when it
entered into the consulting agreement.
Assuming
London Finance failed to properly plead damages for negligent
misrepresentation, this was not fatal to any
recovery of damages. London Finance also
alleged and sought damages for breach of contract. Under section 580, the court may award
damages in the amount demanded in the complaint, and it should grant the
“relief consistent with the case made by the complaint and embraced within the
issue.†(§ 580, subd. (a).) “The primary purpose of this section is to
insure that defendants in cases which involve a default judgment have adequate
notice of the judgments that may be taken against them.†(Becker v. S.P.V. Construction Co.
(1980) 27 Cal.3d 489, 493.) Both the
allegations in the body of the complaint and the prayer for relief may serve to
give notice to defendants of the specific amount of damages sought. (Greenup
v. Rodman (1986) 42 Cal.3d 822, 830; Barragan
v. Banco BCH (1986) 188 Cal.App.3d 283, 305.) These demands
for relief set a ceiling on the amount the court may award. (Barragan
v. Banco BCH, supra, at p. 305.)
Here, the prayer for relief stated London Finance was seeking $2 million
in damages, which was more than the court awarded. The breach of contract cause of action
incorporated the paragraph from the negligent misrepresentation cause of action
alleging damages in the amount London Finance would have received under the
consulting agreement. And the breach of
contract cause of action alleged Amstem failed to pay any sum under the
agreement except the initial $20,000 retainer, while the agreement (setting
forth the consideration to be paid to London Finance) was attached to the
complaint and incorporated by reference.
The complaint thus gave Amstem sufficient notice of its potential
liability for breach of contract, and the judgment did not award damages above
that ceiling.
Still, we
must examine whether $1.4 million in damages for breach of contract was
supported. Amstem does
theory is inappropriate to remedy a breach of contract. Such a theory is entirely appropriate. Contract damages are generally described “as
the benefit of the bargain that full performance would have brought†and
attempt to place the plaintiff in the same position he or she would have been,
had the contract been performed. (
Angeles Unified School Dist. (2010) 187 Cal.App.4th 831, 844.) Instead, Amstem argues London Finance failed
to establish a prima facie case for breach of contract.
In default
prove-up proceedings, no proof is required of matters admitted by the
well-pleaded allegations of the complaint.
(Scognamillo
v. Herrick
(2003) 106 Cal.App.4th 1139, 1150.)
But as to matters not well-pleaded, this rule does not apply. (Vasey
v. California Dance Co. (1977) 70 Cal.App.3d 742, 749.) Plaintiffs in default prove-up proceedings
must establish a prima facie case of matters not admitted by the
complaint. (Johnson v. Stanhiser (1999) 72 Cal.App.4th 357, 361-362, 364-365.)
On
appeal, we review whether substantial evidence supports the default
judgment. (Scognamillo v. Herrick,
supra, at p. 1150; Ostling v.
Loring (1994) 27 Cal.App.4th 1731, 1746.)
One of the
essential elements of breach of contract is the plaintiff’s performance under
the contract or excuse for nonperformance.
(Oasis West Realty, LLC v. Goldman
(2011) 51 Cal.4th 811, 821.) Amstem contends it did not
admit performance because the element was not well-pleaded in the complaint,
and furthermore, London Finance did not make a prima facie showing of
performance. We agree with Amstem.
Mere conclusions of fact or law are
not well-pleaded allegations for purposes of default proceedings. (Kim v. Westmoore Partners, Inc.,
supra, 201 Cal.App.4th at
p. 281.) London Finance alleged
that it had “performed all conditions, covenants, and promises required by it
on its part to be performed according to the terms and conditions of the
Consulting Agreement.†Section 457
permits plaintiffs in a breach of contract action to plead performance
generally, but beyond the initial pleading stage, still requires facts showing
performance when the defendant controverts the general allegation. The general allegation that a plaintiff has
performed all the conditions of the agreement, “while specifically authorized
by the code, is none the less the statement of a conclusion.†(Willis
v. Page (1937) 19 Cal.App.2d 508, 512; see also Careau & Co. v.
Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1390
[allegations that conditions precedent “‘had been met and satisfied’†were
“simply general conclusionsâ€].) As a
mere conclusion of fact rather than a well-pleaded allegation, Amstem did not
simply admit the allegation by default.
London
Finance was therefore required to establish performance with prima facie
evidence. Its “evidence†consisted
solely of the Kaplan declaration in which he repeated verbatim the conclusory
allegation of performance in the complaint.
A conclusion of performance is not evidence establishing
performance. Performance is the ultimate
fact, and particular, probative facts are required to establish it. (Central
Valley General Hospital v. Smith (2008) 162 Cal.App.4th 501, 513 [“the term
‘ultimate fact’ generally refers to a core fact, such as an essential element
of a claim,†and is distinguished from an evidentiary fact].) The consulting agreement required London
Finance to do a number of things. By way
of example, it was to use its “reasonable and best efforts†to assist Amstem
with “identifying, analyzing, structuring and/or negotiating business sales
and/or acquisitions†and with reorganizing Amstem’s capital structure. London Finance failed to present substantial
evidence it had performed any of these obligations under the consulting
agreement. Without this evidence, it was
not entitled to damages.
Amstem next
contends that, even if London Finance had proffered the necessary evidence of
performance, there was not substantial evidence to support over $1.4 million in
damages. We agree, except as to the
$220,000 attributable to the unpaid monthly retainer fee. The consulting agreement provided for a term
of at least one year and a monthly retainer fee of $20,000. Kaplan declared that London Finance received
the retainer fee for just one month.
Assuming London Finance can establish prima facie evidence of
performance, substantial evidence
supported the damages for the unpaid retainer fee.
The damages
attributable to the stock and warrant are a different matter, however. London Finance grossly oversimplified the
calculation of these damages and did not establish the amounts with sufficient
evidence. The calculation of these
damages involved numerous moving parts and should have been rather
complex. The consulting agreement stated
Amstem was to grant London Finance restricted shares of stock equal to 5
percent of Amstem’s outstanding stock.
The agreement does not specify when Amstem would issue these
shares. London Finance valued them at
$0.09 each, the price of the shares on September 20, 2010. It did not provide any evidence or law
establishing this was the appropriate date to value the shares, other than a
notation that the parties “entered into†the agreement on September 20. The agreement did state the parties entered
into it on that date, but the agreement also said it became effective on
October 1, 2010, Kaplan’s declaration stated the parties entered into the
agreement on or about October 1, and Amstem signed the agreement on October 6.
There was
no reason to suppose September 20 was the appropriate date to value the shares
as opposed to October 1, October 6, or some other date.
Finance was to receive restricted
shares of stock. London Finance did not
offer any evidence of what restrictions were placed on the shares. But restricted securities are typically
subject to a minimum holding period ranging from six months to one year before
the holder may resell them. (17 C.F.R. §
230.144, subd. (d)(1); Chessen v. American Registrar and Transfer Co.
(D.Minn. 1998) 8 F.Supp.2d 1161, 1162, fn. 3.)
London Finance’s calculation assumed without support it could have
resold the restricted shares immediately upon issuance on September 20,
2010. Moreover, the number of
outstanding shares used to calculate the 5 percent due to London Finance is
unsupported. Kaplan’s declaration states
“there was a total of 180,203,188 shares of stock.†He does not explain how he personally came by
this knowledge of Amstem’s stock or otherwise offer a foundation for this
number. He also does not explain what
date was used to determine the number of outstanding shares. We can only assume September 20 was used, but
again, this assumes without justification that September 20 was indeed the
appropriate date.
London
Finance’s valuation of the warrant also suffered from a number of defects. Amstem was to give London Finance a warrant
to purchase up to another 5 percent of outstanding Amstem stock. The purchase price was to be the lower of two
options ‑‑ 50 percent of the stock’s average closing price “for the
twenty trading days prior to the date hereof,†or $0.05 per share. It is unclear what the agreement meant by
“the date hereof,†whether that was the date the parties entered into the
agreement (September 20), the effective date of the agreement (October 1), or
some other date. It is also unclear what
date the parties should have used to determine the number of outstanding
shares. London Finance used the
September 20, 2010 price again to value the shares under the warrant, and
specifically 50 percent of the share price on that date. Even if that were the appropriate date,
London Finance missed significant nuances in the calculation. The warrant purchase price was supposed to
use the average closing price for the 20
prior trading days, not simply the closing price on one day. London Finance did not offer evidence of the
average price for the 20 days preceding September 20.
Additionally,
the warrant would not vest and London Finance could not exercise it until
April 2, 2011. If London Finance
could not actually purchase the shares until April 2, 2011, the earliest
it could resell them would also be April 2, 2011. The value of the warrant should account for
this and the fact that the warrant involves some out-of-pocket cost. Arguably, the value should be the difference
between the price London Finance would have paid for the shares, and the price
for which it could have resold the shares on April 2, 2011 (or some date
thereafter). London Finance completely
ignores the fact that a warrant to purchase is not the same thing as a
straightforward grant of shares. It
simply values 5 percent of the shares at 50 percent of the September 20,
2010 price, as if a warrant to purchase and a grant were identical. The warrant was an agreement to let London
Finance purchase discounted shares at
a later date, not a straight grant of shares.
Finally,
though the consulting agreement stated the form for the warrant was attached,
the warrant form never appeared in any version of the agreement London Finance
submitted to the court. We thus cannot
say whether the form included any additional terms that would be material to
the valuation, but it may have. To the
extent it did, London Finance should have proffered the warrant form.
* * *
In sum,
substantial evidence did not support the conclusion London Finance performed
its obligations under the consulting agreement and was therefore entitled to
damages. Moreover, the amount of damages
awarded under the judgment was not supported by substantial evidence. We must reverse the default judgment. This does not affect the underlying default,
however, and “simply returns the defendant to the default status quo
ante.†(Ostling v. Loring, supra,
27 Cal.App.4th at p. 1743.) The
appropriate disposition in this case is to reverse and remand for London
Finance to participate in a second default prove-up proceeding. (Devlin
v. Kearny Mesa AMC/Jeep/Renault, Inc. (1984) 155 Cal.App.3d 381, 386-387
[“[W]hen further proceedings are necessary following reversal of a default
judgment because the damages are determined to be excessive as a matter of
law, . . . those further proceedings only mean the plaintiff
must participate in a second judgment hearing.â€]; Uva v. Evans (1978) 83 Cal.App.3d 356, 365 [reversing default
judgment because damages award lacked evidentiary support and remanding to
“retry the issue of damagesâ€].)
Amstem
requests that we permit it to participate in any proceedings on remand because
London Finance was not candid with the trial court. But a “defendant cannot participate in a second
judgment hearing any more than it can in the first hearing between default and
appeal.†(Devlin v. Kearny Mesa AMC/Jeep/Renault, Inc., supra, 155 Cal.App.3d
at p. 387.) Amstem has not
convinced us we should carve out an exception to this general rule in its case.
DISPOSITION
The
judgment is reversed. The trial court is
directed to conduct new default prove-up proceedings consistent with the views
expressed in this opinion. Appellant to
recover costs on appeal.
FLIER,
J.
WE CONCUR:
BIGELOW, P. J.
GRIMES, J.
name="_ftn1" title="">[1] Securities
and Exchange Commission.
name="_ftn2" title="">[2] Further
undesignated statutory references are to the Code of Civil Procedure.
