Opinion
B154695.
7-11-2003
RAFI KHAN et al., Plaintiffs and Appellants, v. PRIVATE MEDIA GROUP, LTD., Defendant and Respondent.
Foley & Lardner, Saied Kashani for Plaintiffs and Appellants. Stradling Yocca Carlson & Rauth, Richard C. Goodman, Andrea Levitan Reeves, Peter N. Villar for Defendant and Respondent.
The parties to this appeal are embroiled in a dispute over an employment agreement. At trial, the court found that the plaintiff failed to perform the promotional services specified in the employment agreement. This, in turn, excused the defendants duty to compensate the plaintiff. On appeal, the plaintiff challenges the sufficiency of the evidence supporting the trial courts finding of substantial nonperformance. He contends that the
defendant was obligated to compensate him even if he performed no services at all. We affirm the trial courts judgment in favor of the defendant.
FACTS
Appellant Rafi Khan worked as a stockbroker until 1998, when the Securities and Exchange Commission (SEC) brought suit against him for securities fraud and stock manipulation. Since 1998, Khan has worked in investor and public relations (PR). In his PR work, Khan does not sell stock in the companies he represents; rather, he uses his connections with financial institutions to expand interest in his clients stocks.
Khan has known attorney Sam Guzik for at least a decade. At the beginning of 1999, Khan and Guzik discussed the idea of having Khan promote respondent Private Media Group, Ltd. (PMG) in the United States. PMG produces "adult entertainment." In February 1999, PMG became the first adult entertainment company to publicly trade its stock in the United States. Guzik recommended Khans PR services to PMG. Khan met with PMGs president Berth Milton in March 1999 to learn about the company and decide how to write up a PR report to make PMGs stock attractive to American investors.
Khan told Milton and Guzik that he would present PMG to at least two brokers and institutional investors each month, prepare a CD-ROM presentation, put the company into "chat boards" on the Internet, and get the company ready for a "road show" to introduce PMG to investors. Khan announced that his contacts with institutional investors were such that "they would open the doors immediately for us." Khan did not mention that he had problems with the SEC and the Internal Revenue Service.
Khan drafted the one-page employment agreement between the parties (the Agreement) dated March 10, 1999. The Agreement states that PMG will pay for consultancy and advisory work from March 10, 1999, to June 30, 2000: $ 10,000 cash, 10,000 shares of PMG stock, and 150,000 warrants from PMG exercisable at $ 13. The warrants and shares could not be transferred or exercised for one year. The parties agreed that the shares and warrant certificate would be sent to attorney Guzik.
Khans name appears nowhere on the Agreement. Instead, the nominal party to whom PMG is to make payment is appellant Aura (Pvt.) Ltd. (Aura), a Pakistani corporation. Khan told Milton that Aura was Khans own company. It was understood, however, that Khan (not Aura) would perform the PR work for PMG.
Khan testified at trial that Aura is run by his brother-in-law. Aura assigned all of its rights and claims against PMG to Khan.
Aura received the $ 10,000 in cash enumerated in the Agreement. Though Guzik acknowledged receipt of the shares and the warrant certificate he did not produce them for trial and neither party had a copy of the certificate. Guzik did not register the warrants with the SEC. Guzik was unavailable as a witness at the time of trial, so his deposition testimony was read aloud.
Khan took the position at trial that the compensation referred to in the Agreement is not contingent on any performance on his part. Khan did, however, do a few things for PMG. He, Guzik and PMG president Milton met with two Los Angeles stockbrokers in April 1999 to promote PMG. Khan prepared a report on PMG for the financial community, which was released on May 28, 1999. Milton was dissatisfied with Khans report because it was only suitable for investors that Khan knew personally, not to the global community of investors. The release of Khans report coincided with an article about PMG that appeared in Forbes magazine. After Khans report and the Forbes article appeared, the value and trading volume of PMGs stock rose briefly.
Most of the day-to-day work promoting PMG —such as responding to buyer inquiries, issuing press releases, sending out packages, and communicating daily with PMG — was performed by another PR company under contract with PMG. The other PR company was able to act as a liaison between corporate clients and investors without Khans assistance.
Between April and June 1999, Milton complained to Khan that there were no meetings with institutional investors. On June 25, 1999, Khan advised PMG that he would be out of the country during the months of July and August. Two weeks later, Khan pleaded guilty to tax evasion, an event that was well-publicized. Shortly afterward, he left for Pakistan. PMG was unable to reach Khan during his two-month stay in Pakistan. When Khan returned, he went on a lengthy "road show" to promote another client in September 1999.
When Milton learned of Khans troubles with the SEC, he was "shocked" and feared that PMGs reputation would be damaged. PMGs directors met and decided that the company had to terminate Khans contract because Khan had not performed and because he failed to disclose his problems with the SEC. PMG hired another PR person in September of 1999. The new promoter was able to set up five to seven meetings per month between PMG and institutional investors.
PMG managed to reach Khan at the beginning of September to inform him of its intent to terminate his contract. Khan had not done anything to increase PMGs stock price or enhance its value on a long-term basis. PMG was damaged by Khans failure to promote its stock vigorously when it first came on the market, because investor interest is greatest when there is a new offering. Khan did not raise any capital for PMG.
On October 7, 1999, PMG formally terminated Khans employment. The termination letter cites the SECs investigation of Khan (and the attendant media attention generated by the investigation) as having an effect on Khans standing and credibility in the securities industry, noting that PMG could not afford even the slightest possibility of becoming enmeshed in criminal investigations or the tarnishing of its reputation. PMG allowed Khan to retain the $ 10,000 cash it had already paid, but advised him that the shares and warrants would be cancelled.
Khan demanded that attorney Guzik turn over the certificates to him, but Guzik would not cooperate. PMG refused to authorize a transfer of the shares to Khan because Khan had not performed his duties under the Agreement. By denying delivery of the stocks and warrants, PMG allegedly deprived Khan of a profit of some $ 3 million, based on the trading price for PMG stock in March 2000, the date when the option for the shares could be exercised.
On October 25, 1999, Khan was sentenced in his tax evasion case. He was placed on three years probation and a six-month home detention with electronic monitoring. In May 2000, the SEC barred Khan from associating with any broker or dealer for a period of five years.
THE PARTIES LAWSUITS
In January 2000, Khan and Aura brought suit against PMG. As amended, Khans pleading alleges that the Agreement unconditionally provides for the payment of cash, stock and warrants to Khan, without any performance contingencies. Khan provided PMG with valuable services. As a result, Khan alleges, the value of PMGs stock rose and its business prospects improved. Khan asserts that PMG breached its contract by failing to deliver the shares and warrants that are his rightful compensation. Khan seeks to impose a constructive trust on the undelivered shares and warrants. Finally, Khan contends that PMG converted to its own use the shares and warrants that belong to him.
PMG cross-complained against Khan and Aura. In its amended pleading, PMG alleges that Khan fraudulently induced PMG to enter the Agreement by representing that he would expand PMGs business and obtain investors by convincing top brokers and institutional investors to purchase PMG stock. Khan also represented that he had a good reputation in the securities industry when, in fact, he had a bad reputation and was under government investigation. Khan failed to perform the contracted-for services, then fled the country after pleading guilty to income tax evasion. PMG asserts causes of action for breach of contract, bad faith, misrepresentation, unjust enrichment, and rescission. PMG also seeks declaratory relief and to impose a constructive trust.
THE TRIAL COURTS JUDGMENT
Trial was by the court. The court found that: (1) Khan was hired "for consultancy and advisory work" from March 1999 to June 2000; (2) Khans work encompassed "all aspects of corporate public relations strategy; advising on preparation of video, slide and CD presentations; arranging meetings with financial institutions and retail brokers; . . ."; (3) the "essence" of the Agreement was that Khan would arrange meetings for PMG with financial institutions and brokers; (4) for this work Khan was to be paid $ 10,000 in cash, plus 10,000 shares of PMG stock and 150,000 warrants exercisable at $ 13; (5) Khan was expected —but failed— to arrange at least two meetings per month with various investors; (6) Khan failed to prepare news releases, videos, slides or a corporate relation strategy; (7) there is no proof that Khans May 28 report on PMG generated stock sales; (8) Khan "disappeared" in July and August 1999 and PMG was unable to reach him; (9) there was substantial nonperformance of the Agreement by Khan; (10) PMG was justified in terminating Khan and its performance was excused; (11) the $ 10,000 Khan received amounted to the reasonable value of his services; (12) allowing Khan to have the shares and the warrants would unjustly enrich Khan, therefore the certificates had to be returned to PMG.
The court gave judgment to PMG on the complaint, except that Khan was allowed to keep the $ 10,000 he received, as compensation in quantum meruit. The court largely ruled against PMG on its cross-complaint, other than finding that PMG was entitled to the return of its stock and warrants.
DISCUSSION
1. Khans Substantial Nonperformance of the Agreement
The trial court found that Khan substantially failed to perform his duties under the Agreement. The issue of substantial performance is primarily a factual question. (Posner v. Grunwald-Marx, Inc. (1961) 56 Cal.2d 169, 186-187, 14 Cal. Rptr. 297, 363 P.2d 313; Cline v. Yamaga (1979) 97 Cal. App. 3d 239, 248, 158 Cal. Rptr. 598; 1st Olympic Corp. v. Hawryluk (1960) 185 Cal. App. 2d 832, 836, 8 Cal. Rptr. 728.) In reviewing the trial courts factual determinations, an appellate court is limited to seeing whether there is any substantial evidence, contradicted or uncontradicted, that supports the trial courts finding of a failure to perform. (1st Olympic Corp. v. Hawryluk ,supra, at pp. 836-837.) When the language of the parties contract is susceptible of more than one meaning, the trial court may consider parol evidence to ascertain the intent of the parties. (Code Civ. Proc., § 1856, subds. (b), (g); Barham v. Barham (1949) 33 Cal.2d 416, 422, 202 P.2d 289; Denver D. Darling, Inc. v. Controlled Environments Construction, Inc. (2001) 89 Cal.App.4th 1221, 1234-1236.) If the trial court considers parol evidence to ascertain the contracting parties intent, the appellate court is bound by the trial courts adoption of a reasonable interpretation. (Asso. Lathing etc. Co. v. Louis C. Dunn, Inc. (1955) 135 Cal. App. 2d 40, 48, 286 P.2d 825.)
Khan argues that the evidence does not support the trial courts finding of substantial nonperformance of the Agreement. The Agreement drafted by Khan states that his work will "include all aspects of corporate public relation strategy; advising on preparation of video, slide and CD presentations; arranging meetings with financial institutions and retail brokers; generally expanding the companys following and shareholders; advice on various and miscellaneous corporate investment banking matters such as acquisitions and capital raisings if needed."
The evidence adduced at trial supports the trial courts finding that the "essence" of the Agreement was that Khan would arrange meetings between PMG and financial institutions and brokers. Khans trial testimony confirms that arranging such meetings was the essence of the Agreement. Milton testified that "the main thing was to present the company for institutional investors."
The Agreement does not specify how many broker and financial institution meetings the parties contemplated; however, Guzik testified, without objection, that the parties intended for Khan to have PMG meet two money managers and brokers each month. Guziks testimony is relevant to show the parties intent because he participated in the negotiation of the Agreement and knew the extent of the services Khan offered to PMG.
Khan substantially failed in his essential duties under the Agreement. He arranged no meetings at all with institutional investors, which was the "essence" or "main thing" of the Agreement. Khan arranged only two meetings with brokers between March and September 1999. PMG was harmed by Khans failure to vigorously promote its stock when it first came on the market because investor interest is greatest when there is a new offering. PMG was unable to reach Khan in July and August 1999, during which time Khan made no arrangements for PMG to meet potential investors. After hiring a replacement for Khan in September 1999, PMG was able to meet five to seven institutional investors each month through its new promoter.
To fulfill the most minimal requirements of the Agreement, Khan had to introduce PMG to at least 12 brokers and financial institutions between March and September 1999. Khans performance fell far short of this minimum. The trial court was justified in finding that Khan failed to perform the "essence" of the Agreement by neglecting to introduce PMG to an adequate number of potential investors.
Apart from failing to perform the essential aspect of the Agreement, Khan also failed to perform in other respects. The trial court found that Khan failed to prepare news releases, videos, slides or a corporate relations strategy. During his deposition and at trial, Khan was unable to identify what, if anything, he contributed to PMGs press releases. Another PR firm under contract with PMG performed the day-to-day work of promoting PMG, including the production of press releases. There is no evidence that Khan assisted in the production of any videos, slides, or CD, or advised PMG how to prepare these marketing devices.
Khan drafted a 15-point plan in March, shortly after the Agreement was entered, but the trial court did not find that this single memorandum was sufficient. The Agreement called for Khan to handle "all aspects of corporate public relations strategy." Preparing one memorandum without a follow-through does not satisfy Khans duty to handle "all aspects" of PMGs PR, and it scarcely justifies the millions of dollars in compensation that Khan seeks to recover from PMG.
Khan prepared a report on PMG (sometimes referred to as a "Rafi-gram") that was released on May 28, 1999. The trial court found no proof that the "Rafi-gram" generated stock sales. The courts finding is supported by substantial evidence. At the same time that the "Rafi-gram" was released, an article about PMG appeared in Forbes magazine. Milton recalled that the Forbes article "hit the streets" on May 28. Under the circumstances, it is not evident whether the spike in PMGs stock price and trading volume had anything to do with Khan, or whether it was attributable to Forbes. As it was, Khans report was turned in to PMG weeks later than scheduled. Had Khans report been released earlier, rather than the same day as the Forbes article, it might have been discernible whether Khan had an effect on the market.
The trial court found that Khan "disappeared" during July and August, thereby failing to perform his duties for PMG during this period. Khan characterizes his departure as a "pre-approved vacation." The evidence suggests otherwise. Khan notified PMG on June 25 that he was leaving, then he promptly left the country for the next two months. By no stretch of imagination did Khans unilateral announcement of his imminent departure transform his absence into a "pre-approved" vacation. PMG was unable to reach Khan during his absence, leaving PMG without a PR representative at a time when PMG most needed to capitalize on the newness of its stock offering.
Khan challenges the trial courts finding that PMG was entitled to terminate him five months into a fifteen-month employment contract. Khan reasons that the termination occurred "before the time for performance had arrived." The Agreement states that Khan will provide PR services "from March 10, 1999 to June 30, 2000." (Italics added.) The time for performance arrived on March 10, 1999, not at some unspecified date in the future to be determined at Khans whim. This is especially true where the future for Khans services looked bleak, given his July 1999 guilty plea to tax evasion followed by his October 1999 sentence to six months of home detention. It is difficult to see how Khan could go on a "road show" with PMG, or meet with financial institutions and brokers around the country when he was confined to his home.
2. Correlation Between Khans Performance and PMG Warrants and Shares
Khan argues that the warrants and shares listed in the Agreement are irrevocable and that his right to them is not contingent upon his performance of the duties listed in the Agreement. The trial court determined that Khan would be unjustly enriched if allowed to have the warrants and shares after failing to perform his contractual duties. Khan responds that the trial court erred as a matter of law because the Agreement gives him the indisputable right to the warrants and shares, even if he failed to perform and his employment was validly terminated. He characterizes the millions of dollars in shares as a "signing bonus."
Khans arguments are untenable. Khan claims he "understood" the shares and warrants were issued "in return for his bare agreement" to provide services. The law does not countenance undisclosed unilateral understandings that large sums of money will be paid for merely putting a signature on a services contract. A contracting party cannot reasonably expect that his compensation has no correlation to actual performance of the contracted-for services. If Khan understood that payment was unrelated to performance, this had to be explicitly spelled out in the Agreement. As the Agreement does not explicitly state that Khan has no duty to perform, any uncertainty in its terms must be construed against Khan, who drafted it. (Civ. Code, § 1654: any uncertainty in a contract is "interpreted most strongly against the party who caused the uncertainty to exist.") There is no evidence supporting Khans contention that the parties mutually intended the shares to be a gratuitous signing bonus.
Khan suggests that language contained in the warrants might support his position; however, the warrants were not offered at trial because Khan failed to obtain a discovery order from the court to ensure production of the warrants. The trial court ignored Khans request for a presumption that the warrants were drafted in his favor. It was Khans obligation to secure a ruling from the trial court on any evidentiary disputes, and his failure to insist on a ruling with respect to the language in the warrants waives the issue on appeal. (Mikels v. Rager (1991) 232 Cal. App. 3d 334, 349, fn. 2, 284 Cal. Rptr. 87; McRay v. Winter (1953) 118 Cal. App. 2d 800, 804, 258 P.2d 872.)
"Under the law of restitution, an individual may be required to make restitution if he is unjustly enriched at the expense of another. [Citation.] A person is enriched if he receives a benefit at anothers expense. [Citation.] The term `benefit `denotes any form of advantage." (Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 51, 924 P.2d 996.) What PMG seeks in this case is the restoration of its shares and warrants, which were issued in Khans name and are held by Guzik. (See Lauriedale Associates, Ltd. v. Wilson (1992) 7 Cal.App.4th 1439, 1448: restitution includes "the restoration or giving back of something to its rightful owner . . . .") Restitution is an obligation imposed in equity. (City of Vernon v. Southern California Edison Co. (1961) 191 Cal. App. 2d 378, 393, 12 Cal. Rptr. 701.)
The trial court did not abuse its discretion by exercising its equitable powers in this case. PMG performed its part of the bargain, paying Khan $ 10,000 in cash and issuing the shares and warrants specified in the Agreement. Khan did not perform his part of the bargain, making only the most rudimentary efforts rather than providing the complete PR services required by the Agreement. It would be inequitable to oblige PMG to make full compensation for insubstantial performance. Khan would indeed be unjustly enriched if allowed to keep the shares and warrants issued by PMG.
Khan argues that the warrants are options, which cannot be revoked by the issuer. A warrant is an option to purchase the shares of a corporation at a specified price and for a specified period of time. (Robert Half Internat., Inc. v. Franchise Tax Bd. (1998) 66 Cal.App.4th 1020, 1022, fn. 1.) "An option is a unilateral contract `by which the owner of property invests another with the exclusive right to purchase it at a stipulated price within a limited or reasonable time without imposing any obligation upon the party to whom it is given . . . ." (Allen v. Smith (2002) 94 Cal.App.4th 1270, 1279.)
The Agreement in this case is not a unilateral contract. Rather, it is a bilateral contract that requires payment by PMG in return for performance of certain enumerated services by Khan. In other words, there is a mutuality of obligation. Khan failed to perform, thereby excusing PMGs performance and nullifying the Agreement. When the Agreement was nullified by nonperformance, all payments and benefits called for by the Agreement were nullified. The money Khan ended up receiving was in quantum meruit, not a payment under the Agreement. Because this was a bilateral contract with obligations imposed on the party to whom the warrants were promised, the compensation contemplated by the Agreement (including the warrants) evaporated when Khan failed to perform.
DISPOSITION
The judgment is affirmed.
We concur: NOTT, J., and ASHMANN-GERST, J.