Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_11-cv-01589/USCOURTS-casd-3_11-cv-01589-2/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

GENESIS MERCHANT PARTNERS,

L.P.,

Plaintiff,

CASE NO. 11cv1589 JM(WVG)

ORDER FOLLOWING REMAND;

GRANTING RESCISSION;

v. DENYING RESTITUTION 

NERY’S USA, INC.; JOHN

CATHCART; and COMMERCIAL

TARGA, S.A. DE C.V.,

Defendants.

_______________________________

NERY’S USA, INC.

 Counter-Claimant,

 v.

GENESIS MERCHANT PARTNERS,

L.P.

 Counter-Defendant.

Following remand from the Ninth Circuit, the court addresses the issue of

rescission, considers Genesis Merchant Partners, L.P.’s claim for unjust enrichment,

and grants Nery’s claim for rescission. 

BACKGROUND

The court incorporates its July 26, 2013 Statement of Decision (“SOD”) as if

fully set forth herein, including the definitions of terms. Filed on March 3, 2016, the

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Mandate from the Ninth Circuit vacated the Judgment resulting from the SOD and

remanded the matter for further proceedings.

On March 21, 2016, the court conducted a status conference with the parties and

requested further briefing on the remanded issues. The court provided the parties with

the opportunity to supplement the evidentiary record, consistent with the Ninth

Circuit’s remand order. At the time of oral argument on June 3, 2016, both parties

represented that the court possessed sufficient evidence to resolve the outstanding

issues.

The SOD

On July 26, 2013, the court issued its SOD. With respect to the breach of

contract and rescission claims, the court analyzed the parties’ arguments and evidence

and concluded:

As set forth above, Nascent materially breached the SPA in several

ways, individually and collectively. The breach(es), attributed to Genesis,

excuse Nery’s from performing under the contract. Genesis, therefore, is

not entitled to recover on its breach of contract claim against Nery’s or

Targa. Nery’s is entitled to judgment on Genesis’ contract claim as well

as reasonable attorney fees, as provided by law in defending this claim.

The court also concludes that Nery’s, should it so elect, is entitled

to rescind the SPA agreement upon tender of its Targa shares. Such a

remedy will result in Genesis receiving Targa’s assets. Nery’s is entitled

to restitution of $46,250 from Genesis representing the earlier payments

by Nery’s to Genesis under the SPA as well as recoverable interest and

attorney fees in favor of Nery’s.

The court also found that Nery’s was not unjustly enriched.

The court highlights that the SOD concluded that Nery’s timely sought

rescission. While the court correctly conditioned rescission on Nery’s tendering the

Targa shares at issue, the trial court erred by not clarifying that Nery’s was under the

obligation to elect between the remedy of contract damages or rescission, but not both. 

The court notes that the Judgment entered by the court, prepared and submitted

to the court by Nery’s, does not accurately reflect the findings and conclusions set forth

in the SOD. The Judgment provides as follows:

Following a five-day bench trial in this action between Plaintiff Genesis

Merchant Partners, LP and Defendants Nery’s USA, Inc., Commercial

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Targa, and John Cathcart, the court found that Plaintiff had not met its

burden of proof on the issue of liability for the reasons set forth in the

court’s Statement of Decision Pursuant to Rule 52, entered July 26, 2013.

See Dkt. No. 156. In this order, the court further found that Defendants

are entitled to reasonable attorney’s fees as provided by law.

Accordingly, it is hereby ORDERED, ADJUDGED, and DECREED that

Plaintiff recover nothing with regard to the claims alleged in the

complaint. With the court having ruled in their favor, Defendants may file

a motion for an award of fees and a separate bill. . . . 

(Ct. Dkt. 164). The SOD also found “in favor ofsaid Defendants and each of them and

against Plaintiff[] on all claims. Defendants are to prepare a judgment.”

The Remand

Upon remand, the Ninth Circuit instructed the parties and court that the remedy

for the Nascent breach of the SPA is either (1) disaffirm the contract and collect

damages resulting from the rescission, or (2) affirm the contract and recover damages

for the breach. See Wong v. Stoler, 188 Cal.Rptr.3d 674, 680 ( 2015). The Ninth

Circuit also instructed that “any damages for Nascent’s breach of its contractual duty

to indemnify should be offset against the note.” In the event Nery’s seeks rescission,

the Ninth Circuit also instructed the court to consider whether “Genesis has a claim for

unjust enrichment arising out of Nery’s ownership of Targa before the rescission.” 

Nery’s Election

Nery’s elects to rescind the contract. Genesis contends that Nery’s late request

for rescission, coming six years after completion of the Targa sale, is untimely and no

longer an available remedy. Genesis argues that the damages arising from Nascent’s

breach should be offset against the unpaid balance of Nery’s note and a judgment

entered in its favor consisting of the balance of the Nery’s note after deducting

damages, unpaid interest on the note, and attorney’s fees and costs. Genesis seeks an

award of $2,556,758 in its favor.

As set forth in the SOD, to establish a claim for rescission, the party rescinding

the contract must (1) give notice to the other party promptly upon discovery of facts

entitling the party to rescind, and (2) return or offer to return any consideration

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received from the other party under contract. Cal. Civ. Code §§1691(a) and (b). The

court found that Nery’s provided Genesis with timely notice of rescission; and Genesis

did not challenge this factual determination on appeal. Accordingly, the timely notice

requirement is satisfied, at least through the entry of the SOD.

The more narrow issue raised by Genesis is whether the remedy of rescission is

now available to Nery’s. The record reveals that Nery’s has never, up until now, made

an election between contract damages and rescission. While the SOD determined that

Nery’s was damaged by Nascent’s misrepresentations, the court also concluded that

Nery’s was entitled to rescission, conditioned upon the tender of Targa stock to

Genesis. The Judgment does not accurately reflect an award of either contract 1

damages or rescission. Rather, the Judgment provides, in essence, that Genesis failed

to meet its burden of proof on the issue of liability and awarded Nery’s attorney’s fees

and costs. The remedy provided for in the Judgment is not a legally available remedy

(nor, without election, are the remedies identified in the SOD).

Genesis argues thatsix years have passed since the commencement ofthis action

and that this passage of time is too long to permit rescission. This argument is not

persuasive. Genesis was on notice from the get-go that Nery’s was seeking to rescind

the SPA with Nascent. The court notes that Nery’s provided timely notice of its intent

to rescind the SPA on August 19, 2011. (Ct. Dkt. 9). Notably, “the service of a

pleading in an action or proceeding that seeks relief based on rescission shall be

deemed to be such notice.” Cal. Civ. Code §1691. Further, the SOD found that

rescission was timely and appropriate about two years and five months after

commencement of the action and Genesis fails to explain how the passage of time

pending appeal (about three years and four months) altersthe court’s analysis. Genesis

erroneously contends that the passage of six years since the commencement of this

action makes “it impossible at this stage to ‘restore everything of value received under

The court highlights that neither the parties nor the court raised the issue of 1

election of remedies prior to issuance of the SOD.

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the contract’ to Genesis.” (Brief re: remand at p.21:5-6). Genesis raises the following

rhetorical questions in support of this argument: How does the court account for lost

opportunity costs in which Genesis could have improved the business; will the court

scrutinize every business decision made by Nery’s; how will the court address the

“possibility” that Nery’s has under invested in Targa and diminished its value; and

what if Targa has been looted? 

2

California law also supports Nery’s pursuit of the remedy of rescission. In

Glendale Fed. Savings & Loan Assn. v. Marina View Heights Development Co., 66

Cal.App.3d 101 (1977), the Court of Appeals noted that

the doctrine of election of remedies is applicable only where the remedy

initially pursued is a real remedy available to the plaintiff. If plaintiff is

mistaken and attempts to avail himself of a remedy to which he is not

legally entitled, he is not thereby precluded from pursuing the alternative

remedy.

Id. at 137; Papenfus v. Webb Prod. Co., 48 Cal.App.2d 631, 633 (1941) (“[W]here a

party makes a mistake in election of remedies, he is not estopped by his abortive

election from subsequently resorting to and pursuing a remedy to which he was really

entitled.”); Restatement (Second) of Contracts, §378 cmt. C (1981) (The election of

remedies doctrine “applies only where a party pursues a remedy that he actually has. 

A party is not precluded from pursing other remedies by the fact that he has made a

mistaken attempt to obtain a remedy that is not available to him, even if his original

choice has been relied on by the other party.”); Far West Federal Bank, S.B. v. Office

of Thrift Supervision-Director, 119 F.3d 1358 (9th Cir. 1997). Applying the reasoning

of Glendale, Nery’s is entitled to rescission because the remedy provided for in the

Judgment does not accurately reflect the remedies identified in the SOD and the SOD

failed to make clear that the remedies identified therein were subject to the doctrine of

election of remedies. 

In sum, the court concludes thatrescission is a timely, fair, and equitable remedy

The court notes that these rhetorical statements are better addressed in context

2

of Genesis’s claim for unjust enrichment. 

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provided that Genesis be compensated for unjust enrichment, if any, arising out of

Nery’s ownership of Targa before election of the remedy of rescission. Accordingly,

the court orders the following:

1) Nery’s shall deposit the stock certificates with the Clerk of Court to be

forwarded to Genesis;

2) Genesis shall deposit $585,961.07 with the Clerk of Court, consisting of the

monies paid by Nery’s on the underlying note ($46,250) and the attorney’s fees and

costs previously awarded pursuant to the SPA ($539,711.07). 

3) The parties are instructed to meet and confer to arrange for the transfer of the

monies and stock certificates identified above. The transfers of monies and the Targa

stock shall occur within 60 days from the date of entry of this order; and

4) Nery’s shall continue to operate Targa in good faith and in the ordinary

course of business until the parties fulfill their mutual obligations identified herein.

Unjust Enrichment 

The elements of an unjust enrichment claimare the “receipt of a benefit and [the]

unjust retention of the benefit at the expense of another.” Lectrodryer v. SeoulBank,

77 Cal.App.4th 723, 726 (2000). Unjust enrichment “issynonymous with restitution.” 

Melchior v. New Line Production, Inc., 106 Cal.App. 779, 793 (2003). Restitution

must be supported by the evidence and be consistent with the purpose of restoring to

the plaintiff the benefit acquired by the other party. See Colgan v. Leatherman Tool

Group, Inc., 135 Cal.App.4th 663, 694–700, fn. 22 (2006). 

Here, Genesis fails to meet its evidentiary burden to show that Nery’s has been

unjustly enriched. Genesis simply fails to identify any evidence to show that Nery’s

has unjustly retained any benefit related to its operation of Targa. Rather, the focus of

Genesisis on the amount of interest it would have earned under the SPA. Using a 10%

simple interest rate on the face value of the note ($1.85 million), Genesis concludes

that it is entitled to contract interest payments, after offset for the amount paid by

Nery’s on the note ($46,250), in the amount of $1,110,000. This is an incomplete

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measure of restitution damages.

While there is no doubt that Nery’s benefitted by not paying interest on the note,

the issue is whether the non-payment of interest is an unjust or unfair benefit. Genesis

contendsthat it isimpossible to determine restitution damages by raising the following

rhetorical questions: How does the court account for lost opportunity costs in which

Genesis could have improved the business; will the court scrutinize every business

decision made by Nery’s during its operation of Targa; how will the court address the

“possibility” that Nery’s has under invested in Targa thereby diminishing its value; and

what if Targa has been looted? This speculative and rhetorical exercise is one-sided

and misses the mark. One could also speculate that the value of Targa, an on-going

concern for many years, has substantially more value than when it was assumed by

Nery’s as a debt-ridden and practically moribund business due to prior mismanagement

and hidden liabilities. Indeed, Nery’s could pose the question: “Haven’t we made a silk

purse out of a sow’s ear?” But these inquiries would have also missed the mark.

Any restitution analysis must account for any “unfair” benefit retained by Nery’s. 

To reasonably determine this benefit, there must be some showing of the original fair

market value of Targa (without the material misrepresentations made by Nascent), the

impact of Nery’s operating Targa on diminished capital because of the material

misrepresentations, and the current fair market value of Targa. Other evidentiary 3

factors influencing the value of Targa include the “sweat labor” of Nery’s in growing

and operating the business and the economic value to Nery’s by not making payments

under the note. In short, the evidentiary record submitted by Genesis is insufficient to

make a reliable determination on the amount of the unfair economic benefit, if any, that

As set forth in the SOD, the sale price of Targa was materially overstated in 3

light of the undisclosed liabilities of Targa. Further, Nery’s working capital was

diminished on account of the undisclosed liabilities and constrained Nery’s ability to

operate and expand Targa. 

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inured to Nery’s. Accordingly, the court declines to award restitution damages to 4

Genesis.

In sum, the court grants Nery’s claim for rescission and orders the following:

1) Nery”s shall deposit the stock certificates with the Clerk of Court to be

forwarded to Genesis;

2) Genesis shall deposit $585,961.07 with the Clerk of Court, consisting of the

monies paid by Nery’s on the underlying note ($46,250) and the attorney’s fees and

costs previously awarded pursuant to the SPA ($539,711.07). 

3) The parties are instructed to meet and confer to arrange for the transfer of the

monies and stock certificates identified above. The transfers of monies and the Targa

stock shall occur within 60 days from the date of entry of this order; and

4) Nery’s shall continue to operate Targa in good faith and in the ordinary

course of business until the parties fulfill their mutual obligations identified herein.

IT IS SO ORDERED.

DATED: June 30, 2016

 Hon. Jeffrey T. Miller

 United States District Judge

cc: All parties

The court highlights that it afforded the parties an opportunity for further 4

briefing and the submission of additional evidentiary materials. At the time of oral

argument, both parties represented that the evidentiary record and briefing were

complete.

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