Court Opinion

ID: 4116201
Source: CourtListenerOpinion
Date Created: 2017-01-17 21:01:20.847826+00
Date Added: 2024-06-11T14:49:19.142608
License: Public Domain

FILED
                            NOT FOR PUBLICATION
                                                                            JAN 17 2017
                    UNITED STATES COURT OF APPEALS                      MOLLY C. DWYER, CLERK
                                                                          U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

DKS, INC.,                                       No.    15-16589

              Plaintiff-Appellee,
 v.                                              D.C. No. 2:15-cv-00132-MCE-
                                                 DAD
CORPORATE BUSINESS SOLUTIONS,
INC.,
                                                 MEMORANDUM*
              Defendant-Appellant,
and

OLIVER SINTOBIN; T. J. ELISON,

              Defendants.

                    Appeal from the United States District Court
                        for the Eastern District of California
              Morrison C. England, Junior, District Judge, Presiding

                      Argued and submitted October 21, 2016
                              San Francisco, California

      *
        This disposition is not appropriate for publication and is not precedent except
as provided by Ninth Circuit Rule 36-3.
      **
        The Honorable James Alan Soto, United States District Judge for the District
of Arizona, sitting by designation.
Before: HAWKINS and CALLAHAN, Circuit Judges, and SOTO,** District Judge.

      Corporate Business Solutions (CBS) appeals the district court’s order

denying a motion to compel arbitration. We have jurisdiction under 9 U.S.C. § 16,

and we affirm.

      “We review the denial of a motion to compel arbitration de novo.

Underlying factual findings are reviewed for clear error, while the interpretation

and meaning of contract provisions are reviewed de novo.” Nguyen v. Barnes &

Noble, Inc., 763 F.3d 1171, 1175 (9th Cir. 2014) (internal quotations and citations

omitted). CBS primarily argues that the district court misapplied the doctrine of

“fraud in the inception” to invalidate the agreement containing the arbitration

provision. We disagree.

      In California, a contract is void—and any arbitration provision therein is

unenforceable—if the party resisting arbitration can “show that the fraud went to

the inception or execution of the agreement, so that the promisor did not

voluntarily assent to any part of the purported contract of which the arbitration

clause is a part.” Rice v. Dean Witter Reynolds, Inc., 235 Cal. App. 3d 1016, 1023

(1991), overruled on another ground by Rosenthal v. Great W. Fin. Secs. Corp., 14
Cal. 4th 394 (1996). Fraud in the inception may exist even if both parties had

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“ample opportunity to read the [contract] in [its] entirety,” because the party

drafting the terms and conditions of a contract may do so “in such a way as not to

apprise” the other party of its intentions. Duick v. Toyota Motor Sales, U.S.A.,

Inc., 198 Cal. App. 4th 1316, 1323 (2011).

      Assuming that the allegations in the complaint are true, as we must do at this

stage of the litigation, “a reasonable reader in [DKS, Inc.’s (DKS)] position would

not have known that [it] was signing up to be the target of” CBS’s alleged scheme.

Id. at 1319. That alleged scheme included but was not limited to: funneling funds

from DKS to CBS; forging financial documents to secure additional funding that

could be funneled to DKS’s projects to pay the hourly bills run up by CBS

employees; securing additional loans to pay those hourly bills; destroying DKS’s

relationship with clients and creditors; and fraudulently representing to DKS’s

payroll company that a CBS employee had been hired as an executive and

subsequently receiving paychecks for that phantom position. Nothing in the

boilerplate contract signed by the parties could have put DKS on reasonable notice

that it was subjecting itself to such activity; therefore, the contract was void at its

inception. In sum, the complaint contains over thirty paragraphs of specific actions

that CBS employees undertook to enrich their business at DKS’s expense. If true,

these acts substantiate DKS’s claim that there was never a meeting of the minds

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despite both parties having signed the contract.1

      AFFIRMED.2

      1
         The specificity of these pleadings mitigates against CBS’s concerns that this
ruling could open the door to artful pleadings by plaintiffs to avoid arbitration.
Additionally, district courts regularly scrutinize complaints to ensure allegations are
sufficiently plausible to give rise to a reasonable inference that plaintiffs are entitled
to relief, thereby preventing plaintiffs from making bare allegations of “fraud in the
inception” to escape motions to compel arbitration. See, e.g., Ashcroft v. Iqbal, 556
U.S. 662, 677–78 (2009).
      2
        Because we find that the contract was void at its inception, we need not
address whether DKS’s claims fall within the arbitration provision’s scope.
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                                                                             FILED
DKS, Inc. v. Corporate Business Solutions, Inc., 15-16589
                                                                              JAN 17 2017
                                                                          MOLLY C. DWYER, CLERK
                                                                            U.S. COURT OF APPEALS

HAWKINS, Senior Circuit Judge, dissenting:

      I respectfully dissent from the decision of my colleagues. Although I agree that

California’s claim of “fraud in the inception” is a form of fraud in the execution that

could render an arbitration agreement unenforceable, this case does not present such

a claim.

      California courts explain that in a case of fraud in the inception “the promisor

is deceived as to the very nature of his act, and actually does not know what he is

signing, or does not intend to enter into a contract at all” such that mutual assent is

lacking. Rosenthal v. Great W. Fin. Sec. Corp., 14 Cal. 4th 394, 415 (1996). A claim

of fraud in the inception arises when “without any negligence on his part, a signer

attaches his signature to a paper assuming it to be a paper of a different character.”

Id. at 420. Examples of such cases include a plaintiff who believed she was signing

a contract to loan money, but the contract in fact authorized the defendant to sell

plaintiff’s stock, Rice v. Dean Witter Reynolds, Inc., 235 Cal. App. 3d 1016 (1991),

overruled in part on other grounds by Rosenthal, 14 Cal. 4th at 407; and a plaintiff

who believed she was entering a contract to take a personality evaluation, but the

contract instead provided that the plaintiff agreed to participate in an online marketing
campaign “prank,” Duick v. Toyota Motor Sales, U.S.A., Inc., 198 Cal. App. 4th 1316,

1321 (2011).

      Far from alleging facts analogous to these California cases, DKS’s complaint

alleges that (1) it was fraudulently induced into the Consulting Agreement, and (2)

CBS and its employees acted tortiously in their performance of the agreement.

Although DKS alleges that the entire consulting arrangement was part of a fraudulent

scheme, California distinguishes cases involving a “grand scheme” of fraud from

cases involving fraud in the inception. See Rosenthal, 14 Cal. 4th at 418–19. Because

DKS does not specifically allege that the arbitration provision itself was fraudulently

induced, all claims falling within its scope are for the arbitrator. See Prima Paint

Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04 (1967).

      Nor am I persuaded by DKS’s alternative argument that the claims asserted in

the complaint fall outside the arbitration provision’s scope. Although the parties have

indicated that the claims in the complaint have changed in some respects over the

course of litigation, at least some of the claims in the complaint before us are subject

to arbitration. For example, the complaint asserts a claim of professional negligence

predicated on allegations that CBS breached duties owed to DKS as a result of the

professional (consulting) services that “DKS engaged them to perform.” Certainly,

                                           2
that claim constitutes a “dispute[] of any kind between [DKS and CBS] arising out of

or in connection with [the Consulting] Agreement.”

      Therefore, I would remand for the district court to compel arbitration on all

remaining claims that fall within the arbitration provision’s scope.

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