Welcome to the Salisian | Lee LLP Newsletter
Welcome to the spring edition of our newsletter. As always, we aim to provide you timely and useful insights into recent legal, regulatory and industry news in a brief, accessible and interesting way. We look forward to your feedback and to any suggestions you might have on how we can improve our efforts in this regard. Happy reading!
In this Issue
Case & Law News

By Natalie Rastegari, Salisian | Lee LLP
CASE LAW: DisputeSuite.com, LLC v. Scoreinc.com, California Supreme Court Case No. S226652 (235 Cal. App. 4th 1261, mod. 236 Cal. App. 4th 529, Case No. B248694; Los Angeles County Superior Court, Case No. BC489083.)
The California Supreme Court is reviewing this case after the Court of Appeal affirmed an order denying an award of attorney fees in a civil action. According to the Court's docket, this case presents the following issue: In an action on a contract in which the defendants obtained a dismissal pursuant to the applicable of a Florida forum selection clause, were the defendants entitled to an award of attorneys' fees under Civil Code section 1717 as the prevailing parties?
Plaintiff DisputeSuite.com, LLC, a provider of credit repair software and services to credit repair organizations ("CROs"), sued defendants for breach of contract, fraud, misappropriation of trade secrets, and interference with contract. Plaintiff provided defendants, who work directly for CROs, its confidential list of CROs and other proprietary information, and entered into agreements allowing defendants to act as plaintiff's licensed reseller of its software. The agreements identify Florida as the choice of venue for dispute resolution – also known as a "forum selection clause," and allow prevailing parties to recoup their fees and costs – also known as "fee-shifting" and "cost-shifting" clauses.
The trial court granted a temporary restraining order that barred defendants from transferring any of plaintiff's customers to any entity that did not use plaintiff's software, and barred defendants from making commercial use of plaintiff's software. Defendants then moved to dismiss the action based on the forum-selection clause in the subject agreements, and the trial court ultimately held that the issues presented in this case "are governed by contracts that select Florida as the proper forum." The trial court stayed the case and extended the restraining order pending plaintiff's filing of a new lawsuit in Florida, and after plaintiff re-filed in Florida, the trial court dismissed the action and dissolved the preliminary injunction. Upon the Court granting defendants' motion to dismiss, and based on a fee-shifting provision in the subject agreements, defendants sought attorneys' fees in the amount of $84,640 as the prevailing parties. Specifically, under Civil Code section 1717, a prevailing party may recover its attorneys' fees based upon a contract with a fee-shifting clause.
The trial court denied defendants' motion for attorneys' fees, and the court of appeal agreed, holding that there has been no final resolution of the contract claims to find defendants as the prevailing parties entitling them to fees. But the trial court also noted the "split in the existing appellate authority" as to whether a party may obtain contractual attorneys' fees in the absence of a final determination of the merits of a case and thus, the California Supreme Court's review of this case aims to finally resolve this conflict.
CASE LAW: 926 North Ardmore Avenue v. County of Los Angeles, California Supreme Court Case No. S222329 (229 Cal.App.4th 1335, Case No. B248536; Los Angeles County Superior Court, Case No. BC476670.)
The California Supreme Court is reviewing this case after the Court of Appeal affirmed the judgment in a civil action. According to the Court's docket, this case presents the following issue: Does Revenue and Taxation Code section 11911 authorize a county to impose a documentary transfer tax based on a change in ownership or control of a legal entity that directly or indirectly holds title to real property?
Under Revenue and Taxation Code section 11911, also known as the California Documentary Transfer Tax Act ("DTTA"), counties may pass an ordinance that imposes a documentary transfer tax ("DTT") on "each deed, instrument, or writing by which any lands, tenements or other realty sold within the county shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers..." Los Angeles County has adopted this language in Los Angeles County Code section 4.60.020.
In this case, BA Realty LLLP ("BA Realty") fully owned 926 North Ardmore Avenue, LLC ("Ardmore"), a single-member entity established to hold and manage an apartment building. In 2008, the owners of BA Realty sold 90% of their partnership interests - 45% to each of two trusts. Following the sale, the Los Angeles County Registrar-Recorder issued a notice demanding that Ardmore pay a DTT pursuant to Revenue and Taxation Code section 11911 based on the apartment building's value, claiming that BA Realty's change in ownership is sufficient evidence of "realty sold" subject to transfer tax. Although Ardmore argued in this tax refund action that section 11911 does not authorize a DTT based on the ownership change of a legal entity that owns the legal entity holding title to realty, the trial court entered judgment in favor of Los Angeles County after a bench trial.
The court of appeal affirmed the trial court's judgment, holding that section 11911 permits a DTT "when a transfer of interest in a legal entity results in a ‘change of ownership' within the meaning of Revenue and Taxation Code section 64, subdivision (c) or (d)." Revenue and Taxation Code section 64 describes two situations in which the purchase or transfer of interests in legal entities is deemed a "change of ownership" of real property owned by the legal entity or its subsidiary entity. Under subdivision (c), it occurs when a single individual or entity obtains, in one or more transactions, majority control of a legal entity that holds title to realty or owns separate legal entities that hold title to realty. And under subdivision (d), which the court of appeal found applicable here, it occurs when real property is transferred to a legal entity in an "excluded proportional interest transfer" governed by section 62(a)(2), and the original co-owners of the legal entity thereafter transfer more than 50% of the interests in the legal entity in on or more subsequent transactions. The court of appeal held that "[a]lthough section 11911 refers to the ‘sale' of realty, the legislative history indicates the documentary transfer tax was intended to apply to any instrument reflecting a sale resulting in the ‘transfer' of real property."
The California Supreme Court is set to review the court of appeal's decision, which aptly acknowledged that Ardmore's interpretation of the DTTA is not "unreasonable, recognizing that the Act is not a model of clarity." If upheld, counties such as Los Angeles, Napa, Monterey, and Santa Clara may proceed in imposing transfer taxes even where there is only a transfer of interests in a legal entity that owns real property, and there is no actual "deed, instrument or other writing" recorded and real property is not being sold or transferred.
CASE LAW: Baral v. Schnitt, California Supreme Court Case No. S225090 (233 Cal. App. 4th 1423, Case No. B253620; Los Angeles County Superior Court, Case No. BC475350.)
The California Supreme Court is reviewing this "mixed causes of action" case after the court of appeal affirmed an order denying a special motion to strike in a civil action. According to the Court's docket, this case presents the following issue: Does a special motion to strike under Code of Civil Procedure section 425.16 authorize a trial court to excise allegations of activity protected under the statute when the cause of action also includes meritorious allegations based on activity that is not protected under the statute? The trial and appellate courts concluded that the statute does not, as the statute – which aims to prohibit strategic lawsuits against public participation ("SLAPP") - applies only to an entire cause of action.
Plaintiff Robert Baral and defendant David Schnitt owned a company together, IQ BackOffice, LLC ("IQ"). Plaintiff filed an amended complaint alleging breach of fiduciary duty, fraud, negligent misrepresentation and declaratory relief relating to defendant's pre-litigation fraud investigation and secret sale of IQ, while excluding plaintiff's membership and management interests. Defendant filed an anti-SLAPP motion, seeking to strike all references to the audit in plaintiff's causes of action on the grounds that the litigation privilege precluded such claims under Civil Code section 47(b) and that the trial court could excise parts of a cause of action under the SLAPP statute. But the trial court denied defendant Schnitt's motion, holding that the anti-SLAPP statute does not allow striking allegations per se: "[The] Anti-SLAPP motion still applies to causes of action or to an entire complaint, not allegations... if a cause of action contains portions that are subject to anti-SLAPP and portions that are not, the defendant can move to strike those portions that are subject" to anti-SLAPP.
The Court of Appeal, Second Appellate District, Division One in Los Angeles, affirmed the trial court's denial. While the Court of Appeal held that plaintiff's allegations regarding the pre-litigation audit described protected activity under the SLAPP statute, other allegations were not protected by the law, rendering plaintiff's causes of action "mixed." The Court of Appeal ultimately held that "mixed causes of action" containing potentially meritorious claims that did not involve protected activity should withstand an anti-SLAPP motion in its entirety. Appellate courts having wrestled with this issue, the California Supreme Court review of this case will provide some much-needed clarity to the lower courts on this issue and if upheld, will allow "mixed causes of action" to proceed unfettered.
California Senate Bill 383: New Legislative Effort to Unclog Court Dockets May Do More Harm Than Good

By Jay Lichter, Salisian | Lee LLP
In an effort to unclog the congestion of the courts and streamline an often tedious part of the litigation process, California passed a new rule for 2016. Senate Bill 383 is specifically aimed at discouraging demurrers and promoting the resolution of pleading disputes before documents are even filed with the court. The law, however, has a long way to go before it can be considered effective.

Senate Bill 383 adds, among other provisions, Section 430.41 to the Code of Civil Procedure, and includes new requirements for parties contemplating bringing a demurrer to challenge the pleadings of an opposing party. Section 430.41(a) specifically provides:

Before filing a demurrer pursuant to this chapter, the demurring party shall meet and confer in person or by telephone with the party who filed the pleading that is subject to demurrer for the purpose of determining whether an agreement can be reached that would resolve the objections to be raised in the demurrer. If an amended complaint, cross-complaint, or answer is filed, the responding party shall meet and confer again with the party who filed the amended pleading before filing a demurrer to the amended pleading.

Section 430.41 further specifies that during the meet and confer session, the demurring party shall identify all of the specific causes of action it believes are subject to demurrer, and to identify with legal support the basis of the deficiencies. The opposing party shall in turn provide either legal support for its position that the pleading is legally sufficient or explain how the pleading can be amended to cure the deficiency.

In addition to the meet and confer requirement, Section 430.41 also requires the demurring party to file and serve a declaration along with the demurrer which describes the meet and confer process and its outcome.

Section 430.41 thus gives courts the opportunity to avoid processing, hearing, and ruling on demurrers by putting procedural obstacles in the way of the demurring parties. The effort behind the law is to encourage resolution of pleading disputes without the need for court intervention. If parties are required to discuss potential legal issues with each other and actually provide each other legal support for their positions, the dispute is teed-up for an amicable resolution before a demurrer is ever filed.

Such a resolution, of course, is not guaranteed. Similar meet and confer requirements govern the conduct of parties before they are permitted to bring certain discovery motions, and such motions continue to burden court resources. Moreover, the meet and confer requirement often causes the parties to exchange in formal, lengthy, and costly meet and confer letters. Many discovery motions thus include declarations which attach the drawn-out and tiresome email and letter exchanges between the parties that courts are forced to read and analyze, resulting in the draining of even more court resources.

Against this backdrop, the effectiveness of this new law is doubtful. Parties have always been free to meet and confer on issues concerning pleading sufficiency, so it stands to reason that if a demurring party is actually interested in an amicable resolution through this process, it would be that party's first and least expensive course of action. A meet and confer requirement, however, may ultimately amount to a formality that is not taken seriously by the demurring party.

In fact, the legislature seems to have codified the ineffectiveness of its new meet and confer requirement. That is, Section 430.41(4) specifically provides that, "[a]ny determination by the court that the meet and confer process was insufficient shall not be grounds to overrule or sustain a demurrer." By the terms of the new law itself, a demurring party that does not take the meet and confer process seriously will see no difference in the court's analysis and ruling on its demurrer. This provision effectively renders the new law toothless, without a punishment or oversight mechanism for parties unwilling to engage in legitimate meet and confer discussions.

All too often, demurrers are used as a means to delay litigation or stall discovery efforts by calling the sufficiency of the pleadings into question. Where court dockets now face waiting lists for hearings that can last over a year, a serious effort to curb wasteful law and motion practice is needed. Section 430.41, however, seems only to pay lip service to this problem, and may ultimately give courts even more paperwork to digest when a demurrer reaches a judge's desk.
The Uniform Voidable Transactions Act: New Stripes for California Fraudulent Transfer Law?

By H. Han Pai, Salisian | Lee LLP
California creditors seeking relief when debtors dispose of assets out of their reach typically turn first to California's Uniform Fraudulent Transfer Act ("UFTA"). The UFTA was designed to prevent debtors from placing assets beyond the reach of their creditors when the assets should be made available to satisfy the creditors' claims.

Yet, because of the terminology contained in the UFTA, the case law has sometimes led to divergent interpretations between the courts, resulting in the need for legislative action. The Legislature responded by passing Senate Bill 161, which was approved by the Governor in the summer of 2015, and went into effect on January 1, 2016.

The first notable feature of the new law is that it amends and renames California's UFTA, which is now called the Uniform Voidable Transactions Act ("UVTA"). The new nomenclature serves an overarching purpose and is more than a simple name change.

In particular, California's UVTA is based on the model 2014 UVTA promulgated by the Uniform Law Commission, which is the successor to the model UFTA and is in effect in a number of states. The UVTA is primarily intended to address judicial inconsistency in applying the Act and to bring it into conformity with the Bankruptcy Code and Uniform Commercial Code.

To accomplish these purposes, the term "fraudulent transfer" is replaced with "voidable transaction" throughout the UVTA. This is because the use of the words "fraudulent," "constructive fraud," and "actual fraud" in connection with the prior Act was misleading and caused confusion, as the types of transactions subject to the Act typically do not involve the type of common-law "fraud" as it is typically understood, and also do not necessarily involve fraudulent intent.

Indeed, the terminology in the prior Act had caused confusion among the courts, leading to significant consequences, such as mistakenly applying the heighted pleading requirements for common-law "fraud" as well as a higher evidentiary burden. The new Act attempts to steers away from this confusion by clarifying the terminology.

The new labels are only the start of the changes. The following highlights other key changes in the UVTA:
  1. Creditor's Burden of Proof
    1. To further clear up the labeling confusion noted above, the UVTA explicitly states that the creditor bears the burden to establish its claims by the lower "preponderance of the evidence" standard, rather than the higher "clear and convincing" standard which typically applies to fraud claims and which was sometimes applied by courts under the prior Act.
  2. Choice of Law
    1. Another source of confusion created by the prior UFTA was which jurisdiction's law to apply, which could become problematic, for example, when dealing with a debtor who transfers assets to a multitude of different states, each of which may have adopted non-uniform versions of the UFTA.
    2. To provide some predictability, the UVTA uses the debtor's location to determine the local law that governs the avoidance action, as opposed to the jurisdiction where the property transferred is located. Thus, the debtor's location is defined as follows:
      1. A debtor who is an individual is located at the individual's principal residence.
      2. A debtor that is an organization and has only one place of business is located at its place of business.
      3. A debtor that is an organization and has more than one place of business is located at its chief executive office.
  3. Presumption of Insolvency
    1. Under the UFTA, a debtor was presumed insolvent if it failed to pay debts as they became due. The UVTA refines this rebuttable presumption by clarifying that (i) debts subject to a "bona fide dispute" are to be excluded from the analysis, and (ii) the party defending against the claim of insolvency expressly has the burden to rebut the presumption.
    2. As well, the UVTA deleted a definition of insolvency specifically for partnerships that existed under the UFTA. The deletion is significant because under the prior Act, a general partner's non-partnership assets – which are not liable for partnership debts – were included in the insolvency determination. Now, partnerships no longer have special treatment for purposes of evaluating insolvency, and are treated the same as other debtors.

While the UVTA is certainly not an overhaul of the UFTA, the changes are significant enough to warrant consideration by creditors and debtors alike. At the very least, the UVTA should provide some much-needed clarity and guidance to courts and litigants as they navigate the UVTA and its seemingly hyper-technical rules.
California Supreme Court to Review McGill v. Citibank

By Yujin Chun, Salisian | Lee LLP
One of the many important decisions businesses and individuals make in the course of contract drafting is whether to include an arbitration agreement. It can, at first glance, seem tempting for all involved parties: turning to the courts is often said to be more expensive and time-consuming than arbitration, which allows for simplified rules of evidence and procedure and generally less time spent than thorough litigation. Arbitration proceedings may also be preferred due to their largely private nature as well as flexibility.

Despite these certain benefits of arbitration, however, it can be problematic, especially for the plaintiff. Arbitrators can be subject to pressure from stronger and wealthier parties who bring them more business - often the companies with the drafting power. These companies can, and do, routinely specify a pool from which an arbitrator is to be chosen, and there is a clear incentive for them to choose an arbitration group that has demonstrated a tendency to find in their favor. Furthermore, arbitration leaves parties with a binding decision that they cannot appeal, and the privacy it is afforded can also mean lack of transparency in what went into the decision-making process. Many arbitration clauses also limit or altogether remove the possibility of certain damages and relief. This can be particularly problematic, especially for the average consumer, who is rarely is involved in the drafting of the arbitration agreement. Often they simply sign a long document containing an arbitration agreement with "take it or leave it" type of terms.

California consumers, however, have had a significant way of making sure they got to the courts. In Broughton v. Cigna Healthplans of California, 21 Cal.4th 1066 (1999), and Cruz v. Pacificare Health Systems, Inc., 30 Cal.4th 303 (2003), the California Supreme Court held that public policy prohibits arbitration of claims for public injunctive relief under consumer protection statutes - the Consumer Legal Remedies Act (CLRA), Unfair Competition Law (UCL), and False Advertising Law (FAL) - and that the Federal Arbitration Act (FAA) does not preempt this. The FAA, which generally favors arbitration, does not require arbitration when doing so would prevent the effective vindication of a federal statutory right. The Broughton-Cruz rule, in a sense, was a state equivalent. Thus, the rule allows court adjudication of these state statutes even if there was an arbitration agreement.

This rule is at the heart of McGill v. Citibank (No. S224086). There, plaintiff McGill sued Citibank, N.A. under CLRA, UCL, and FAL for misrepresenting its "Credit Protector" insurance program to its cardholders. She brought claims both for damages and for an injunction to keep Citibank from continuing this practice statewide. Citibank moved to compel McGill to arbitrate her claims based on an arbitration provision in her account agreement. The trial court granted the motion as to monetary damages but denied it as to her claims for public injunctive relief, relying on the Broughton-Cruz rule.

The California Court of Appeal reversed the trial court's decision, finding that all of McGill's claims should have been sent to arbitration. The appellate court cited the United States Supreme Court's AT&T Mobility LLC v. Concepcion and held that the FAA preempted the Broughton-Cruz rule. In AT&T Mobility, the United States Supreme Court held that the FAA does preempt state laws, such as bans on class arbitration waivers, prohibiting the arbitration of claims that may be obstacles to the FAA's objective: ensuring enforcement of arbitration agreements. "The Broughton-Cruz rule falls prey to AT&T Mobility's sweeping directive," the Court of Appeal in McGill wrote, "because it is a state-law rule that prohibits arbitration of UCL, FAL and CLRA injunctive-relief claims brought for the public's benefit." The Court further explained that Broughton and Cruz incorrectly relied on the effective vindication exception, which applies only to federal statutory claims, not state.

The California Supreme Court is set to review McGill v. Citibank this year. The fully-briefed appeal appears to have received strong interest from those who understand the gravity of the upcoming decision; the Court has granted in the first two months of the year requests to file amicus curiae briefs from Chamber of Commerce, the California Bankers Association, Pacific Legal Foundation, Association for Southern California Defense Counsel, International Association of Defense Counsel, Public Citizen, Inc. and AARP.

All eyes are on the Supreme Court of California, which will be the ultimate arbiter of whether California consumers will be able to revive the Broughton-Cruz rule, opening the door to a very powerful tool for getting out of arbitration agreements and into the court system. On the one hand, ensuring that parties abide by agreements, arbitration or otherwise, is one of the main goals of the judicial system. Coupled with the FAA specifically focusing on enforcement of arbitration agreements, this is an even stronger interest in this case. Conversely, the California consumer with little to no bargaining power in contract drafting may benefit significantly from litigating in the courts. Depending on the decision from the California Supreme Court, this year could be one in which significant changes are made to the way countless California businesses and consumers approach their contracts.
Supreme Court to Decide Whether a Debtor Can Discharge a Debt By Using a Fraudulent-Transfer Scheme

By Stephanie Chau, Salisian | Lee LLP
One of the most important mechanisms of bankruptcy law - the bankruptcy discharge - has captured the attention of the U.S. Supreme Court.

Should a debtor be able to move money to avoid repaying debts, and then be able to discharge that debt through bankruptcy? That depends largely on whether the creditor can show that the debtor committed "actual fraud."

In March, the U.S. Supreme Court began hearing argument in Husky International Electronics v. Ritz, to resolve a split amongst the U.S. Courts of Appeals on whether fraudulent transfers meet the definition of "actual fraud" under Section 523(a)(2)(A) of the Bankruptcy Code. Some courts adhere to a narrower interpretation, holding that a fraudulent-transfer scheme alone, without proof of a debtor's affirmative misrepresentation, is insufficient. Others subscribe to a broader interpretation of fraud.

The case at issue arose when Husky International Electronics Inc. sold and delivered electronic device components to Chrysalis Manufacturing Corporation. Chrysalis never paid the $163,999 it owed Husky for the goods. Daniel Lee Ritz, one of Chrysalis' owners, transferred over $1 million from Chrysalis into several entities controlled and owned by Ritz.

Husky sued Ritz on the debt, and Ritz filed for Chapter 7 bankruptcy.

Husky then initiated an adversary proceeding in bankruptcy court to object to Ritz's attempt to discharge the $163,999 debt. Although the bankruptcy court ruled that the transfers Ritz orchestrated had not been made for reasonably equivalent value, it held that the "actual fraud" exception did not apply and allowed Ritz to discharge the debt.

On appeal, the district court affirmed and held that Husky had failed to meet its burden because it failed to show affirmative misrepresentation.

As the Husky case demonstrates, the bankruptcy discharge provides a meaningful way to protect debtors. A bankruptcy discharge releases the debtor from personal liability. But not all debts can be discharged. There are certain enumerated types of debts that, for public policy reasons, cannot be eliminated in bankruptcy.

And Congress has determined that a debtor may not discharge debts obtained by false pretenses, a false representation, or actual fraud.

In interpreting what Congress meant by "actual fraud," the 1st and 7th U.S. Circuit Courts of Appeals have taken the broader view, holding that the exception applies where the debtor deliberately obtains money through a fraudulent-transfer scheme that is actually intended to cheat a creditor.

The 5th U.S. Circuit Court of Appeals in Husky disagreed with this interpretation and adopted the narrower view that the exception applies only where the debtor has made an affirmative false representation to the creditor.

The Supreme Court will resolve this circuit split and decide what, if any, prophylactic measures need to be taken to uphold the equitable spirit of existing laws, and how "actual fraud" should be interpreted to keep wrongdoers from usurping the bankruptcy process for their own personal gain.

As Husky argues, it would be an unkind result to deny recourse to innocent creditors who fall victim to a fraudulent-transfer scheme, and to also allow scheming debtors to manipulate the bankruptcy process as a vehicle for escaping personal liability. But Ritz's perspective is also compelling: it would be equally unjust to declare open season for overzealous creditors to lodge attacks of fraud on honest debtors.

At bottom, this is a case of statutory interpretation. Different rules of construction militate in favor of each party. Did Congress intend "actual fraud" to have meaning above and beyond misrepresentations, which Husky argues are already covered under false pretenses and false representation? Or did Congress envision "actual fraud" to require an affirmative misrepresentation, because as Ritz argues, there is no reference to the words "hinder, delay, or defraud a creditor," commonly used in other fraudulent transfer statutes? The Supreme Court is ready to tackle these and other arguments in examining the history of the "actual fraud" exception against a backdrop of public policy implications.

The outcome of this case promises to be an important one, as the Supreme Court's ruling will provide clarity for creditors and debtors everywhere on an issue that has divided the lower courts. Whose rights will be vindicated? Only time will tell. Either way, creditors and debtors alike have a lot at stake.
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