Epitech, Inc. v. Kann
204 Cal. App. 4th 1365
Cal. Ct. App.2012Background
- AutoLife sought long-term financing to pay short-term creditors; financing never occurred and AutoLife entered bankruptcy.
- AutoLife's two groups of shareholders included majority and minority, with minority funding led to transfer of control and debt obligations to AutoLife.
- AutoLife engaged Kann Capital to assist in obtaining financing, with an arbitration clause in Kann's engagement letter.
- Secured creditors alleged Kann’s misrepresentations induced them to forbear foreclosure, enabling asset draining from AutoLife.
- Kann sought to compel arbitration, arguing the secured creditors were intended third-party beneficiaries of AutoLife’s contract with Kann; trial court denied."
- Court affirmed that the secured creditors were not third-party beneficiaries and thus arbitration was not appropriate; waiver issue not reached.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are secured creditors third-party beneficiaries of Kann’s contract with AutoLife? | Secured creditors are intended beneficiaries of Kann’s audit to secure funding. | No preexisting duty discharged; creditors not direct beneficiaries by contract terms. | No; creditors are not third-party beneficiaries. |
| Does arbitration clause bind non-signatories as third-party beneficiaries? | If beneficiary, arbitration clause applies to secured creditors. | Not a creditor beneficiary; clause inapplicable. | Arbitration clause does not bind secured creditors. |
| Was Kann's arbitration-avoidance waiver valid? | Delay in seeking arbitration waived rights. | Waiver issue unnecessary to decide for this outcome. | Waiver not reached; no need to decide. |
Key Cases Cited
- Neverkovec v. Fredericks, 74 Cal.App.4th 348 (Cal. App. 1999) (intended beneficiary inquiry; class-beneficiary inquiry)
- Souza v. Westlands Water Dist., 135 Cal.App.4th 879 (Cal. App. 2006) (contract interpretation; uncontradicted evidence; law applied)
- Lake Almanor Associates L.P. v. Huffman-Broadway Group, Inc., 178 Cal.App.4th 1194 (Cal. App. 2009) (creditor beneficiary analysis; preexisting duty)
- Crowley Maritime Corp. v. Boston Old Colony Ins. Co., 158 Cal.App.4th 1061 (Cal. App. 2008) (public policy favoring arbitration; nonsignatories)