Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_15-cv-00132/USCOURTS-caed-2_15-cv-00132-0/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1332 Diversity-(Citizenship)

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

DKS, INC.,

Plaintiff,

v.

CORPORATE BUSINESS 

SOLUTIONS, INC.; OLIVER 

SINTOBIN; AND T.J. ELISON,

Defendants.

No. 2:15-cv-00132-MCE-DAD

MEMORANDUM AND ORDER

Plaintiff DKS, Inc. (“Plaintiff”) alleges multiple causes of action against Defendants 

Corporate Business Solutions, Inc. (“CBS”), Oliver Sintobin, and T.J. Elison (collectively,

“Defendants”). Pending before the Court is Defendants’ Motion to Compel Arbitration 

and Dismiss or Alternatively Stay Proceedings Pending Arbitration (ECF No. 11).

1 For 

the reasons set forth below, Defendants’ Motion is DENIED.2

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 1 Plaintiff has asked the Court to take judicial notice of an online article that purports to 

demonstrate that Defendants are involved in a complex nation-wide scheme of defrauding businesses. 

ECF No. 16. Defendants dispute the merits of this online article. ECF No. 25. The Court did not consider 

the article in its analysis of this matter, and Plaintiff’s request for judicial notice (ECF No. 16) is therefore 

DENIED as moot. 

2 Because oral argument would not have been of material assistance, the Court ordered this 

matter submitted on the briefs. E.D. Cal. Local R. 230(g). 

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BACKGROUND3

Plaintiff is a plumbing subcontractor located in Sacramento, California. In 

December 2013, CBS’s representative called Plaintiff and asked whether Plaintiff would 

be interested in engaging CBS’s services to reduce Plaintiff’s mounting debt and 

increase its dwindling profits. DKS agreed to meet with a CBS sales representative. On 

or about January 3, 2014, Craig Karr, a CBS sales representative, visited Plaintiff’s office 

to discuss CBS’s proposals and perform a “free business analysis.” Additional meetings 

between Plaintiff and CBS took place on January 6 and 7, 2014. At these meetings, 

CBS represented that it intended to control Plaintiff’s expenses and increase cash flow 

to save the company from insolvency. CBS indicated that it had the staff necessary to 

accomplish these tasks and would work closely with Plaintiff to develop and execute the 

financial plans. CBS also declared that all of its employees were bonded to the extent of 

$2 million for the protection of Plaintiff. 

On January 8, 2014, a small team of CBS employees, including Elison and 

Sintobin, arrived at Plaintiff’s office. This team presented a “Value Enhancement Plan” 

(“VEP”) to Plaintiff the following day. The VEP reiterated the goals that CBS’s sales 

representative had previously discussed. CBS represented that these goals would be 

achieved by CBS staff including a forensic bookkeeper, a business consultant, a tax 

consultant, and others. CBS would charge $350 per hour, travel and lodging expenses,

and a per diem. CBS would also require weekly billing with payment due on receipt of 

the invoice. 

The VEP was memorialized in a two-page consulting agreement (the 

“Agreement”). Above the signature line was an arbitration clause that provided: “Client 

and CBS expressly agree all disputes of any kind between the parties arising out of or in 

connection with this Agreement shall be submitted to binding arbitration which would be 

administered by the American Arbitration Association.” Decl. of Richard N. Belcher, Ex. 

 3 The following facts are taken, sometimes verbatim, from Plaintiff’s Complaint (ECF No. 1). 

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A, ECF No. 11-1, at 2. The parties signed the Agreement and CBS sent Sintobin to 

begin work as a business consultant. CBS insisted that Sintobin be immediately 

installed as Plaintiff’s chief financial officer so that he would have authority over all of 

Plaintiff’s accounting. 

In February 2014, in an effort to increase Plaintiff’s sales numbers, Sintobin met 

with the general contractor of a contract on which Plaintiff was bidding. At that meeting, 

Sintobin represented to the general contractor’s executive vice president that Plaintiff 

had secured a $168,000 loan and was no longer struggling with cash flow. Based 

largely on this information, the general contractor accepted Plaintiff’s bid on the project. 

Sintobin’s statements were false—Plaintiff had not secured any loan. Upon learning that 

Sintobin’s representations where false, the general contractor removed Plaintiff from that 

and many other contracts, which resulted in losses of profits and costs already incurred. 

Sintobin also falsely inflated Plaintiff’s sales by billing Plaintiff’s contracts for work 

not yet completed. This was the only way for Sintobin to meet his published monthly 

sales target. The result, however, was that the budget for some projects was depleted 

before work even began, creating the appearance of profit but leaving no budget to pay 

for the necessary equipment and labor. By the summer of 2014, Sintobin had committed 

Plaintiff to over $7 million in contracts but left no capital available to complete the jobs. 

Sintobin ordered Plaintiff to stop paying certain loans, characterizing them as 

predatory and possibly illegal. CBS and Ellison assured Plaintiff that the loans would be 

refinanced and urged Plaintiff to retain RWI Business Services to restructure Plaintiff’s 

debt and refinance the loans. However, Sintobin soon ordered Plaintiff to take out 

another loan that was identical to the ones he had called predatory. Sintobin also 

directed Plaintiff’s principals to take out personal loans to cover expenses. 

In July 2014, Sintobin suggested that he should be employed directly by Plaintiff 

as chief financial officer with a salary of $250,000, which is the amount he earned at 

CBS. Plaintiff declined because it could not afford such an arrangement, but Sintobin 

met privately with Plaintiff’s payroll company and represented that he was now a 

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principal with a salary of $250,000. Given that Sintobin had been acting as chief 

financial officer, the payroll company complied. As a result of this action, Plaintiff was 

not able to afford to pay its employees. 

Even while Plaintiff was struggling to find enough cash to fund the work on inprogress projects, Defendants continued to write themselves checks to pay for their 

“consulting services.” Many of these checks were post-dated, and subsequent to 

Plaintiff’s termination of Defendants’ services, Plaintiff canceled payment on the checks. 

This led to CBS instituting an arbitration action against Plaintiff on September 23, 2014

for the amount covered in the post-dated checks. See Decl. of Richard N. Belcher, ECF 

No. 7-1, ¶ 9. 

On January 16, 2015, Plaintiff filed this action alleging multiple causes of action 

against Defendants, including fraud in the inception, common law fraud, negligent 

misrepresentation, professional negligence, breach of fiduciary duty, constructive fraud, 

aiding and abetting breach of fiduciary duty, intentional and negligent interference with 

contractual relationship, intentional and negligent interference with prospective economic 

advantage, conversion, and deceptive business practices. On May 4, 2015, Defendants 

filed the pending Motion to Compel Arbitration pursuant to the arbitration clause included 

in the Agreement the parties signed. 

STANDARD

“A written provision in . . . a contract evidencing a transaction involving commerce 

to settle by arbitration a controversy thereafter arising out of such contract or transaction 

. . . shall be valid . . . and enforceable, save upon such grounds as exist at law or in 

equity for the revocation of any contract.” Federal Arbitration Act, 9 U.S.C. § 2; accord

Cal. Code of Civ. Proc. § 1281. When a demand by one party for the other party to 

submit to arbitration has been refused, the aggrieved party may petition a United States 

district court to order the matter to arbitration. 9 U.S.C. § 4. 

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A district court should not exercise discretion when deciding whether to compel 

arbitration when a lawful agreement has been signed. Dean Witter Reynolds, Inc. v. 

Byrd, 470 U.S. 213, 218 (1985). The court must enforce an agreement to arbitrate, 

absent a ground for revocation of the contractual agreement. Id. However, the validity 

of an agreement containing an arbitration clause must be determined by a court before 

the matter is sent to an arbitrator. See Moseley v. Elec. & Missile Facilities, 374 U.S. 

167, 171 (1963) (“it seems clear that the issue of fraud should first be adjudicated before 

the rights of the parties under the subcontracts can be determined”). “To allow [the 

question of the validity of a contract] to be determined by arbitrators would be to that 

extent to enforce the arbitration agreement . . . .” Id. at 172 (Warren, C.J., concurring).

“When determining whether the parties agreed to arbitrate a certain matter (including 

arbitrability), courts generally should apply ordinary state-law principles that govern the 

formation of contracts.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944

(1995).

ANALYSIS

Defendants seek to enforce the arbitration clause in the Agreement. In response, 

Plaintiff contends that Defendants never intended to fulfill their end of the bargain and 

that the contract is therefore void because of fraud in the inception of the Agreement. , 

Plaintiff further argues that even if the arbitration agreement were enforceable, its 

causes of action are far outside the scope of the arbitration clause. Plaintiff also argues 

that the contract is void due to unconscionability. Because the Court finds that there 

was fraud in the inception and that the causes of action fall outside the scope of the 

arbitration clause, analysis of Plaintiff’s unconscionability argument is not necessary. 

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A. The Contract is Void Because of Fraud in the Inception

Courts distinguish between fraud in the “inducement” and fraud in the “inception” 

of a contract.4 Fraud in the inducement of a contract occurs when “the promisor knows 

what he is signing but his consent is induced by fraud, mutual assent is present and a 

contract is formed, which, by reason of the fraud is voidable.” Rosenthal v. Great W. Fin. 

Sec. Corp., 14 Cal. 4th 394, 415 (1996) (internal citations omitted). For a party to avoid 

any of an agreement’s obligations, it must rescind the contract. Id. With fraud in the 

inception, on the other hand, “the fraud goes to the inception or execution of the 

agreement, so that the promisor is deceived as to the nature of his act and actually does 

not know what he is signing, or does not intend to enter into a contract at all.” Id. In this 

circumstance, the promisor is not manifesting mutual assent to the agreement and the 

contract is void, therefore not requiring an aggrieved party to rescind the contract. Duick 

v. Toyota Motor Sales, U.S.A., Inc., 198 Cal. App. 4th 1316, 1321 (2011). The issue of 

fraud, properly raised by the plaintiff, “must be initially determined by a court.” Ford v. 

Shearson Lehman American Express, Inc., 180 Cal. App. 3d 1011, 1022 (1986).

Defendants argue that, at most, the facts of this case can be construed as fraud in 

the inducement. The Court agrees that it appears from the facts that Plaintiff was 

persuaded to enter into the contract based on the promises made by CBS 

representatives, indicating some fraud in the inducement. However, for the reasons 

discussed below, the Court finds that Plaintiff adequately alleged fraud in the inception. 

Defendants first argue that contrary to most fraud in the inception cases, Plaintiff 

voluntarily signed the Agreement after having sufficient time to read the document and

consult with an attorney. There is no dispute that Plaintiff read and understood the 

contents of the proposed Agreement and subsequently signed the contract freely. “The 

central disputed question is whether plaintiffs could justifiably rely on [the defendant’s] 

misrepresentations without themselves ascertaining the nature of the documents they 

 4 Fraud in the inception is also referred to as fraud in the “execution” or “factum.” The Court will 

refer to the doctrine as “fraud in the inception” for the sake of clarity and consistency. 

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signed.” Rosenthal, 14 Cal. 4th at 419. 

It appears to the Court that Plaintiff was not negligent for relying on Defendants’

assurances and being unaware of the true nature of the agreement it signed. See

Duick, 198 Cal. App. 4th at 1318-20 (finding fraud in the inception where the plaintiff 

believed she was agreeing to a personality test, but was actually agreeing to be pranked 

by the defendant’s marketing representatives). In Duick, the Court of Appeal found that 

although the plaintiff indicated her agreement to the “Terms and Conditions” freely, she

could not have known the true nature of what the defendant proposed to do. Id. at 1321. 

Similarly, Plaintiff had no way of knowing what it was agreeing to when it signed 

the Agreement. Plaintiff believed it was entering into an arrangement with a business 

consulting company that would increase Plaintiff’s profits. Defendants’ promises and 

terms coincided with this understanding, but Defendants’ true intentions and subsequent 

actions revealed a different intention. Cf. Ford, 180 Cal. App. 3d 1011 (finding fraud 

where plaintiff was not aware that in signing the agreements that authorized the 

defendant to exercise complete control over his assets he was actually facilitating the 

defendant’s quest to unjustly enrich himself at the plaintiff’s expense). 

Defendants next argue that this case is distinct from other fraud in the inception 

cases in which the plaintiffs knowingly entered into a contract because many of those 

cases involved a fiduciary relationship between the victim of the fraud and the 

perpetrator. In Ford, for instance, the plaintiff was defrauded by his financial advisor who 

had the plaintiff sign a contract granting him complete access to the plaintiff’s assets. 

180 Cal. App. 3d at 1025. The advisor used his position to benefit from the plaintiff’s 

assets without the plaintiff truly knowing what he was signing. Id. at 1025-26. Similar 

facts were at issue in a number of cases involving Dean Witter Reynolds, in which the

plaintiffs signed contracts unknowingly giving Dean Witter Reynolds complete control 

over their securities investments. See, e.g. Rice v. Dean Witter Reynolds, Inc., 235 Cal. 

App. 3d 1016 (1991); Strotz v. Dean Witter Reynolds, Inc., 223 Cal. App. 3d 208 (1990). 

However, those cases do not require a fiduciary relationship between the victim and 

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perpetrator of the fraud to maintain a fraud in the inception claim. While the fiduciary 

relationship present in those cases led to more trust and reliance on the part of the 

plaintiffs, the fact that the plaintiffs were unaware of the true nature of what they were 

signing was the ultimate determining factor. Here, CBS’s actions indicate that its 

intentions were drastically different from what was presented in the contract.

Defendants promised to send a number of staff members to Plaintiff’s offices to 

assist in the financial overhaul. Plaintiff expected a forensic bookkeeper, a business 

consultant, a tax consultant, a chief financial officer, a project manager, an onsite senior 

business consultant, and an offsite business consultant, among others. Defendants sent 

only Sintobin. Not sending the promised personnel is a clear indication that Defendants 

never intended to provide the services it promised. 

Instead of providing the agreed upon consulting services, Defendants 

manufactured an increase in cash flow that was designed to provide assets to pay the 

consulting fees but would ultimately only harm Plaintiff. First, Defendants falsified 

documents and lied to contractors in order to secure bids for Plaintiff. Then Defendants 

billed contractors on behalf of Plaintiff for work that had not been completed and use that 

money to pay themselves. Unfortunately, when the time came to actually do the work 

that had been billed by Defendants, there was no capital available to fund the labor. 

This is not a consulting attempt gone wrong; this is intentional behavior on the part of

Defendants to benefit themselves at the expense of Plaintiff. This is behavior that 

Plaintiff could not have predicted and assented to when it entered into the short, form 

contract for consulting services. 

As Plaintiff was unaware of CBS’s true intentions, it was not able to give honest 

assent to the contract. The contract, and the arbitration agreement contained therein, is 

therefore void. 

B. Plaintiff’s Claims are Outside the Scope of the Arbitration Clause

Even if the contract was valid, Defendant’s actions fall outside the scope of the 

arbitration clause. The arbitration clause in the contract that the parties signed reads, 

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“Client and CBS expressly agree all disputes of any kind between the parties arising out 

of or in connection with this Agreement shall be submitted to binding arbitration which 

would be administered by the American Arbitration Association.” ECF No. 7-1

(emphasis added). 

Defendants characterize this suit as one resulting from an unfortunate result of 

legitimate consulting, and state that the claims are therefore governed by the arbitration 

clause in the Agreement. However, Plaintiff does not bring this action against 

Defendants for the failure to perform the services promised. Rather, the causes of 

action are for the damage incurred by Plaintiff as a result of Defendants’ extracontractual actions. Plaintiff seeks reparation for the damage caused by the increase in 

debt, loss of cash flow, and loss of significant business all resulting from Defendants’ 

actions that had nothing to do with the promises outlined in the parties’ contract. For 

instance, Defendants were not providing business consulting services when Sintobin lied 

to a contractor to secure a job. Nor were they performing on the contract when Sintobin 

forced his way onto the payroll as chief financial officer. 

Because the causes of action alleged in the Complaint do not “arise out of” and 

are not “in connection with” the consulting contract, Plaintiff is not bound by the 

arbitration clause. 

CONCLUSION

For the reasons set forth above, Defendants’ Motion to Compel Arbitration and 

Dismiss or Alternatively Stay Proceedings pending Arbitration (ECF No. 11) is DENIED.

Subsequent to the briefing on Defendants’ Motion, Plaintiff notified the Court that 

Sintobin has filed bankruptcy proceedings in the United States Bankruptcy Court for the 

Northern District of Texas. ECF No. 29. That proceeding instituted an automatic stay on 

all proceedings against Sintobin. Plaintiff has filed an Expedited Motion for Relief from 

the Stay in the bankruptcy action. Until the Bankruptcy Court in Texas issues a decision 

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on whether this matter can proceed as to Sintobin, this case is STAYED. Once the 

Bankruptcy Court issues its decision, the parties are required to notify the Court within 

seven (7) days.

IT IS SO ORDERED. 

Dated: July 30, 2015

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