Opinion
A157248
06-12-2020
JOSEPH MIZRACHI and JAL GROUP, L.P., Plaintiffs and Appellants, v. SEYMOUR HOLTZMAN and LAWRENCE ORDOWER, Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (San Mateo County Sup. Ct. No. 17CIV05088)
Plaintiffs Joseph Mizrachi and JAL Group, L.P. (JAL) brought the instant action to enforce an oral agreement between Mizrachi and defendants Seymour Holtzman and Lawrence Ordower to form SJLSJL, LLC (SJL). Mizrachi, Holtzman, and Ordower are not California residents and SJL is not a California company. However, this action was filed in California based on the purchase by SJL in California of a controlling interest in Brentwood Capital, LLC (Brentwood).
Plaintiffs appeal a May 13, 2019 order granting defendants' motions to quash the service of summons for lack of personal jurisdiction. We conclude, based on our independent review, that defendants' contacts with California are not sufficiently related to the complaint's causes of action to permit the court to exercise specific jurisdiction over defendants. Accordingly, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
We set forth only the facts necessary to give context to our resolution of this appeal.
1. Agreements Between the Parties and Florida Court Proceedings
Mizrachi is a Florida resident and holds a 50 percent partnership interest in JAL, a limited partnership (Mizrachi and JAL hereinafter collectively referred to as "Mizrachi Parties"). Holtzman is a Florida resident and Ordower is an Illinois resident.
The complaint avers that, in June 2015, Mizrachi entered into an oral agreement by which Mizrachi, Holtzman, and Ordower would acquire 75% of the membership interests ("Benetti Interests") in Brentwood (hereinafter referred to as the Brentwood contract). Brentwood's sole asset is a 40.65 percent membership interest in another limited liability company formed by JAL (managing member), Brentwood, and other entities to purchase warehouse properties in Colorado and North Carolina. Per the Brentwood contract, Mizrachi, Holtzman, and Ordower would each contribute (individually or through related entities) one-third of the sum necessary to acquire the Benetti Interests, and - after purchase of the Benetti Interests - Mizrachi, Holtzman and Ordower would each hold (individually or through related entities) one-third of the Benetti Interests and the Mizrachi Parties would become the managers of Brentwood.
Thereafter, in September 2015, the Benetti Interests ("Assignors") executed a document assigning their 75% membership interests in Brentwood to a group of initial assignees in whom the Mizrachi Parties had no interest ("Initial Assignees") (hereinafter referred to as "Assignment Agreement"). According to the Mizrachi Parties, the Assignment Agreement, "on its face, reflects the terms" of the Brentwood contract in that it provided, among other things, in section 4.1, subdivision (g), that the Benetti Interests (Assignors) would "[t]ake whatever reasonable actions are necessary, effective upon closing, to have [JAL] designated as the new manager of the [c]ompany," and in section 9.14, the parties agreed that JAL was "deemed to be a third party beneficiary under this Agreement for the purpose of getting the benefit of and the rights to cause the enforcement of Section 4.1(g)." The Assignment Agreement also provided that the Initial Assignees were permitted to transfer their rights to " 'an affiliated entity . . . which . . . may include third party partners' " of the initial assignors. The Assignment Agreement contained a California choice of law provision, which was executed by the assignors and Initial Assignees; and under the heading Acknowledged and Agreed to As to Section 9.4, Mizrachi signed individually, and on behalf of JAL, by "A.F.B. I., Inc., a Delaware corporation," JAL's "general partner."
In June 2016, prior to the closing of the sale of the Benetti Interests and allegedly to effectuate the earlier Brentwood contract, Mizrachi asserts he entered into another oral agreement with Holtzman and Ordower to form SJL, a limited liability company whose purported members or owners are all non-Californians. According to the Mizrachi Parties, the sole purpose of SJL was to acquire all the right, title, and interest in the Benetti Interests from the Initial Assignees, which it did by execution of an agreement between the Initial Assignees and SJL. According to Mizrachi, the SJL operating agreement allegedly provided that Mizrachi, Holtzman and Ordower agreed: (1) to form SJL under Delaware law for the sole purpose of purchasing the Benetti Interests, (2) each member of SJL would hold equal one-third shares in SJL and contribute (individually or through related entities) one-third the purchase price and other amounts necessary to acquire the Benetti Interests, and (3) Holtzman and Ordower would be the managing members of SJL.
In September 2016, SJL's purchase of the Benetti Interests was completed in San Mateo County, California through moneys deposited into the escrow account of the California attorney representing the Benetti Interests (hereinafter referred to as "California closing counsel"). According to Mizrachi, prior to the purchase, he sent his one-share of the purchase price but defendants sent more than their one-third shares of the purchase price to closing counsel for deposit in his attorney escrow account. Consequently, the total sum deposited into the escrow account allegedly exceeded the $3.4 million purchase price and other closing costs, leaving several million dollars in the account after sums were distributed to the Benetti Interests in October 2016.
Following SJL's completed purchase of the Benetti Interests, Mizrachi received a series of emails (October 2016 through early January 2017) allegedly confirming the oral terms of the Brentwood contract and the SJL operating agreement, including references to draft agreements. According to Mizrachi, he signed the last draft of the SJL operating agreement in December 2016, but both Holtzman and Ordower did not sign the agreement. Mizrachi contends Holtzman refused to sign the SJL operating agreement because Mizrachi refused to agree to additional agreements regarding indemnity and arbitration, which Mizrachi claimed were not part of the original or any subsequent oral agreements between him, Holtzman, and Ordower.
According to the Mizrachi Parties, at the end of March 2017 Holtzman and Ordower informed Mizrachi that, since he would not sign the additional proposed agreements, they believed he did not want to be "a partner in SJL or Brentwood." Since that time, Holtzman and Ordower purportedly declared themselves, together with Jackson Koffman, to be sole owners of Brentwood, and that Holtzman and Ordower were the sole members or owners of SJL.
Thereafter, in August 2017, SJL commenced a lawsuit in Florida seeking a declaration that Holtzman and Ordower were the sole members or owners of SJL.
2. California Court Proceedings
In November 2017, and following the filing of SJL's action in Florida, the Mizrachi Parties filed the instant lawsuit against Holtzman and Ordower for conversion, specific performance, breach of contract, breach of covenant of good faith and fair dealing, and breach of fiduciary duty. By this lawsuit, Mizrachi sought to adjudicate the internal dispute as to the membership or ownership of SJL and through that entity Brentwood. After setting forth the background facts of the dispute, the crux of the complaint is averred in paragraph 23:
"[O]n or about March 31, 2017, Holtzman and Ordower informed []Mizrachi and JAL that -- notwithstanding the Mizrachi Parties' more than [$1.3 million] of capital contributions, which were used to fund the acquisition of the Benetti Interests pursuant to the Assignment Agreement -- . . . Mizrachi and JAL purportedly ha[d] no interest in either SJL or Brentwood."
The complaint asserted that the superior court had jurisdiction over the named nonresident defendants because:
"(i) the claims asserted herein are based on wrongful conduct that occurred in connection with the transfer of interests in Brentwood, an entity that maintained a principal place of business in San Mateo County, California; (ii) the closing of the transfer of interests in Brentwood occurred in San Mateo County, California; (iii) the assignment agreement for the transfer of interests in Brentwood included a California choice of law provision; (iv) on information and belief, the assignors of the Brentwood interests resided or maintained
principal places of business in San Mateo County, California at the time of the Brentwood transaction; (v) the Defendants own 2/3 of the interests acquired in the Brentwood transaction; and (vi) in connection with the transfer of interests in Brentwood and the related misconduct alleged herein, each of the Defendants have conducted business or performed acts in California, and have caused effects in California by their acts and omissions elsewhere."
Defendants Holtzman and Ordower filed separate motions to quash service of the summons, arguing the superior court lacked personal jurisdiction over them; these motions were opposed. In its May 13, 2019 written order granting the motions to quash service of summons, the court explained that, despite having had the opportunity to conduct jurisdictional discovery, the Mizrachi Parties had failed to establish that either (1) defendant had purposefully availed himself of forum benefits with respect to the matter in controversy, or (2) that the controversy was related to or arose out of defendants' contacts with California.
While the motions to quash service of summons were pending in this lawsuit, in March 2019 California closing counsel filed an interpleader action in the San Mateo Superior Court to resolve competing claims of Mizrachi, JAL, Holtzman, Ordower, and SJL. California closing counsel deposited with the court several million dollars remaining in escrow after the close of the sale of the Benetti Interests to SJL. Holtzman and Ordower filed motions to quash service of summons based on lack of personal jurisdiction in that action, which has been stayed pending resolution of this appeal. Our decision here should not be read and we express no opinion on defendants' motions to quash service of summons pending in the interpleader action.
The Mizrachi Parties' timely appealed. (Code Civ. Proc. § 904.1, subdivision (a)(3) [appeal may be taken from an order granting motion to quash service of summons]).
Mizrachi and JAL (together) and Holtzman have filed separate requests asking us to take judicial notice of certain records filed in other lawsuits commenced by the parties, which documents were filed after the issuance of the order under review on this appeal. We deny the requests as unnecessary to our resolution of this appeal. (See Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739, 748, fn. 6.)
DISCUSSION
1. Applicable Law
Under Code of Civil Procedure section 410.10, our courts are authorized "to exercise jurisdiction on any basis not inconsistent with the Constitution of the United States or the Constitution of California. 'The Due Process Clause of the Fourteenth Amendment constrains a State's authority to bind a nonresident defendant to a judgment of its courts. [Citation.] Although a nonresident's physical presence within the territorial jurisdiction of the court is not required, the nonresident generally must have "certain minimum contacts . . . such that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice.' " ' " (Halyard Health, Inc. v. Kimberly-Clark Corp. (2019) 43 Cal.App.5th 1062, 1069 (Halyard Health), quoting in part Walden v. Fiore (2014) 571 U.S. 277, 283; International Shoe Co. v. Washington (1945) 326 U.S. 310, 316; Milliken v. Meyer (1940) 311 U.S. 457, 463.)
The issue here is one of specific jurisdiction. "A court may exercise specific jurisdiction over a nonresident defendant only if: (1) 'the defendant has purposefully availed himself or herself of the forum benefits'; (2) 'the controversy is related to or 'arises out of "[t]he defendant's contacts with the forum" '; and (3) ' "the assertion of personal jurisdiction would [be reasonable] in that it would comport with 'fair play and substantial justice.' " ' " (Pavlovich v. Superior Court (2002) 29 Cal.4th 262, 292, quoting in part Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 446-447 (Vons Companies); Burger King Corp. v. Rudzewicz (1985) 471 U.S. 462, 472-473 (Burger King); Helicopteros Nacionales de Colombia, S.A. v. Hall (1984) 466 U.S. 408, 414.) As the high court has clarified concerning the second factor, that " 'the suit' must 'aris[e] out of or relat[e] to the defendant's contacts with the forum', there must be 'an affiliation between the forum and the underlying controversy, principally, [an] activity or an occurrence that takes place in the forum State and is therefore subject to the State's regulation.' [Citation.] For this reason, 'specific jurisdiction is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction.' " (Bristol-Myers Squibb Co. v. Superior Court (2017) ___ U.S. ___ [137 S. Ct. 1773, 1780], quoting in part Daimler AG v. Bauman (2014) 571 U.S. 117, 127; Goodyear Dunlop Tires Operations, S.A. v. Brown (2011) 564 U.S. 915, 919.)
"The question whether [specific] jurisdiction exists depends on the particular facts of each case and cannot be decided by applying a mechanical test or a precise formula. [Citation.]" (Pennsylvania Health & Life Ins. Guaranty Assn. v. Superior Court (1994) 22 Cal.App.4th 477, 481.) "[I]n other words, there must be 'a connection between the forum and the specific claims at issue.' [Citation.] That is easier said than applied because personal jurisdiction does not turn on ' "mechanical" tests' [citation] and there is room for reasonable disagreement about what it means for one thing to arise out of or relate to another." (Halyard Health, supra, 43 Cal.App.5th at p. 1069, quoting in part Burger King, supra, 471 U.S. at p. 478.)
"When a defendant moves to quash service of process on jurisdictional grounds, the plaintiff has the initial burden of demonstrating facts justifying the exercise of jurisdiction. [Citation.] Once facts showing minimum contacts with the forum state are established, however, it becomes the defendant's burden to demonstrate that the exercise of jurisdiction would be unreasonable. [Citation.] When there is conflicting evidence, the trial court's factual determinations are not disturbed on appeal if supported by substantial evidence. [Citation.] When no conflict in the evidence exists, however, the question of jurisdiction is purely one of law and the reviewing court engages in an independent review of the record. [Citation.]" (Vons Companies, supra, 14 Cal.4th at p. 449.)
2. Mizrachi Parties' Claims
The Mizrachi Parties argue defendants are subject to specific jurisdiction because (1) defendants purposefully availed themselves of the benefits of California by their conduct in the purchase of the Benetti Interests (including placing excess funds in a California escrow account) and (2) there was a substantial nexus between the claims in this lawsuit and defendants' California activities directed at the acquisition of a controlling share of Brentwood from its California owners. We see no merit to these arguments.
We find Halyard Health, supra, 43 Cal.App.5th 1062, to be the case most analogous to the circumstances of this case, and dispositive. In Halyard Health, the court was asked to consider whether an indemnification dispute between two non-California entities was sufficiently related to California for this state to exercise personal jurisdiction. (43 Cal.App.5th at p. 1064.) When the defendant Delaware corporation, Kimberly-Clark, spun-off its healthcare division to create plaintiff Halyard Health (a Delaware corporation), the parties entered into a distribution agreement in which Halyard Health agreed to indemnify Kimberly-Clark for any liability resulting from many pending litigation matters, including a recently filed class action concerning surgical gowns sold by Kimberly-Clark in California (hereinafter California class action). (Ibid.)
Following the entry of an award of punitive damages against Kimberly-Clark in the California class action, Halyard Health filed a lawsuit in California seeking a declaratory judgment that it (Halyard Health) did not have to provide indemnity for the punitive damages award because " 'California law and public policy prohibit indemnification for punitive damages' " and the " 'rules of contract construction under both California and Delaware law require particularly clear, explicit, and unmistakable language before imposing on one party an obligation to indemnify the other for the wrongful acts of the indemnitee.' " (43 Cal.App.5th at p. 1067.) The day after Halyard Health filed its California action, Kimberly-Clark filed a "mirror-image complaint" in Delaware seeking a declaratory judgment that Halyard Health must indemnify it for all damages including punitive damages, that Halyard Health had anticipatorily breached the distribution agreement, and that Halyard Health should be estopped from asserting it was not required to indemnify Kimberly-Clark for all damages. (Ibid.)
Following a stay of the Delaware declaratory relief action, the California trial court considered Kimberly-Clark's motion to quash service of summons for lack of personal jurisdiction. (43 Cal.App.5th at p. 1068.) It granted the motion because " 'there is no connection between the forum and the specific claim at issue, and thus, it is irrelevant that [Kimberly-Clark] sold "millions" of surgical gowns in California and earned "millions" in sales revenues' [and it was] unimportant that Halyard [Health] 'partly seeks a declaration of its obligation to indemnify [Kimberly-Clark] for punitive damages awarded in [the California class action]' . . . 'because [the] class action by California plaintiffs [ ] for torts arising from the sale of [Kimberly-Clark's] surgical gowns in California] is distinct from the present indemnity action.' " (Ibid.)
The trial court's ruling was upheld on appeal, with the Halyard Health court finding that California could not exercise specific jurisdiction over Kimberly-Clark because, in pertinent part, (1) its California "gown sales" were not "sufficiently connected to the gist of this declaratory relief action, namely, the meaning and enforceability of the Distribution Agreement," and (2) "listing the California action in the Distribution Agreement as one among a number of others to be indemnified d[id] not suffice to make the agreement 'California-directed' in any meaningful sense." (43 Cal.App.5th at p. 1069.)
In so ruling, the Halyard Health court made a number of observations pertinent to our case. Specifically, the court rejected Halyard Health's argument that the indemnity litigation "arises out of or relates to Kimberly-Clark's conduct in California" because "if Kimberly-Clark had never sold gowns in California, there would be no California judgment to indemnify." (43 Cal.App.5th at p. 1072). The court found that "[t]he suggestion that this 'but for' causal link provides the nexus required for personal jurisdiction, however, represents a 'mechanical' approach at odds with our obligation to consider 'the quality and nature of [forum contacts] in relation to the fair and orderly administration of the laws which it was the purpose of the due process clause to insure.' [Citations.] [¶] This case is not primarily about Kimberly-Clark's representation to California consumers. [Citation.] It is about how two non-California corporate entities intended to (or were legally permitted to) allocate risk associated with various pending and contemplated lawsuits as they parted ways. That a judgment was entered in California in favor of certain third parties (the [class action] plaintiffs), and that this judgment conceivably could have played some role (along with litigation in other jurisdictions in which assumed actions were pending) in prompting Kimberly-Clark [sic] to seek a declaration regarding its indemnification obligations, does not establish the requisite connection between this forum and the specific claims at issue in this suit. [Citation.]" (Id. at pp. 1072-1073.)
The Halyard Health court further noted that the "sales of surgical gowns in California did not create the indemnification relationship between it and Halyard [Health]. A separate-act - the two non-California companies' execution of the Distribution Agreement in Texas - created that relationship. [¶] The bottom line is that Kimberly-Clark's gown sales in California are insufficiently connected to the specific claim in this lawsuit, namely whether the Distribution Agreement's indemnity obligation is enforceable. Personal jurisdiction therefore may not be had insofar as Halyard [Health] relies on the gown sales as the relevant purposeful availment." (Id. at p. 1075.)
The Halyard Health court rejected the argument that Kimberly-Clark's execution of a " 'California-directed' Distribution Agreement supports personal jurisdiction in this state." (43 Cal.App.5th at p. 1076.) "[N]either Kimberly-Clark nor Halyard [Health] are California corporations. The Distribution Agreement was negotiated and executed entirely in Texas, not California in any part. Kimberly-Clark did request that [the California class action] be included among the 27 expressly assumed actions in the Distribution Agreement, but nothing suggests Kimberly-Clark was then aware (two days after the complaint was filed) that the [California class action] was more likely than any other to prompt Halyard [Health] to dispute its indemnification obligations. And the parties' choice-of-law selection . . . reflects a deliberate affiliation with Delaware - Kimberly-Clark and Halyard [Health's] state of incorporation - not California." (Id. at p. 1076.)
The Halyard Health court further stated that, "considering the 'prior negotiations and contemplated further consequences, along with the terms of the contract and the parties' actual course of dealing' [citation], the pertinent aspect of the Distribution Agreement is best described as indemnity-directed, not California-directed. That is, Kimberly-Clark wanted assurance that liability arising from the acts of its former health care division would be compensated wherever it might arise (other than as specified in the list of excluded actions) and there was no particular focus on California over any other litigation forum. The parties' agreement to define the universe of required indemnity so broadly does not create jurisdiction to determine the meaning and enforceability of the Distribution Agreement everywhere around the world that liability might be had and indemnity required. To the contrary, the constitutionally required minimum contacts between the forum and the litigation must be present, and - as to this specific dispute - such contacts with California are lacking." (Id. at pp. 1076-1077.)
While the precise factual circumstances in Halyard Health are distinguishable from those in this case, the general circumstances are the same and the court's analysis supports our conclusion that the Mizrachi Parties have failed to meet their burden of demonstrating that defendants are subject to specific jurisdiction.
According to the Mizrachi Parties, defendants purposefully availed themselves of the California forum by using California resources to obtain a benefit in California: the acquisition of a controlling share of Brentwood, including their depositing excess funds into the escrow account of the California closing counsel who handled the sale of the Benetti Interests, and, at the very least, this lawsuit is related to defendants' contacts with California. Relying on Professional Travel Inc. v. Kalish & Rice Inc. (1988) 199 Cal.App.3d 762 (Professional Travel), the Mizrachi Parties contend it would be " 'unthinkable that issues' " arising from defendants' activities to purchase the Benetti Interests could not be litigated in California because at a minimum defendants' "overfunding of the California escrow 'set in motion events [that] gave rise to' " this lawsuit. We see no merit to these arguments.
In Professional Travel, supra, 199 Cal.App.3d 762, the plaintiff was a Georgia corporation which had deposited funds in a California bank and brought suit against two non-California entities which had filed an attachment, levied, and taken funds from the California bank account that allegedly belonged to the plaintiff. (Id. at pp. 764-765.) Unlike Professional Travel, this lawsuit does not seek the return of any funds deposited in the escrow account of the California closing counsel who handled the sale of the Benetti Interests to SJL; it also does not seek any relief against the Benetti Interests under the Assignment Agreement. Rather, as the complaint alleges, by the time this lawsuit was filed SJL owned the Benetti Interests in Brentwood. The lawsuit is limited to the resolution of an internal dispute regarding the enforceability of a purported oral agreement regarding the membership or ownership of SJL, a limited liability company whose purported members or owners are all non-Californians. While the Mizrachi Parties allege SJL was formed to purchase the Benetti Interests in Brentwood, the purchase did not create the contractual relationship between Mizrachi and defendants-the contractual relationship was formed by the purported separate oral agreement to be members or owners of SJL.
See Footnote 1, ante. --------
Thus, we conclude this lawsuit, by which the Mizrachi Parties seek to enforce an oral agreement between Mizrachi and defendants concerning the membership and ownership of SJL, is not "California-directed in any meaningful sense." (Halyard Health, supra, 43 Cal.App.5th at p. 1076.) The fact that defendants' activities in acquiring Brentwood through SJL may have prompted this litigation "does not establish the requisite connection between this forum and the specific claims at issue in this suit." (Id. at p. 1073.) "The bottom line" is that defendants' activities in the purchase of the Benetti Interests through SJL are not sufficiently "connected to the specific claim in this lawsuit, namely," whether Mizrachi is entitled to membership or ownership in SJL (Id. at p. 1075), to support the exercise of specific jurisdiction over defendants.
Because the Mizrachi Parties have not demonstrated facts showing defendants' minimum contacts with California so as to justify an exercise of specific jurisdiction in this lawsuit, we do not reach their argument regarding defendants' burden to prove that California's assertion of specific jurisdiction would be unreasonable.
DISPOSITION
The May 13, 2019 order is affirmed. Defendants are awarded costs on appeal.
/s/_________
Petrou, J. WE CONCUR: /s/_________
Fujisaki, Acting P.J. /s/_________
Jackson, J.