Department 58

Hearing Date: October 17, 2024

Case Name: Creasun Entertainment USA, Inc. v. Helfant, et al.

Case No.: 24STCV03380

Motion: Motion to Compel Arbitration

Moving Party: Defendants Michael Helfant and Loeb & Loeb LLP

Responding Party: Plaintiff Creasun Entertainment USA, Inc.

Tentative Ruling: The Court grants the Motion to Compel Arbitration

Background

This is a legal malpractice action. On February 8, 2024, Plaintiff Creasun Entertainment USA, Inc. (“Plaintiff”) filed a Complaint against Defendants Michael Helfant (“Helfant”) and Loeb & Loeb LLP (“Loeb”) (collectively, “Defendants”), alleging the legal services rendered to Plaintiff for a film project fell below the standard of care and were performed in breach of Defendants’ professional and ethical obligations to Plaintiff.

On May 7, 2024, Defendants filed the instant Motion to Compel Arbitration pursuant to an Engagement Letter, which Shanghai Creasun Media Culture Corporation Ltd., entered into with Loeb. On June 3, 2024, Plaintiff filed an Opposition. On June 11, 2024, Defendants filed a Reply.

Request for Judicial Notice

Defendants’ request for judicial notice of Exhibits 1-5 attached to the declaration of Emma Tehrani and depositions transcripts from Case No. 20STCV35479 are granted.

Evidentiary Objections

Defendants’ objections to the declaration of Timothy McGonigle are overruled.

Defendants’ objections to the declaration of Minglu Ma are sustained as to Nos. 3, 5, and 6, and overruled as to Nos.1, 2, 3, 4, and 7.

Plaintiff’s objections to the declaration of Emma Tehrani are overruled.

Legal Standard

Code of Civil Procedure section 1281.2 authorizes the court to order arbitration of a case if it finds the parties agreed to arbitrate that dispute “and that a party to the agreement refuses to arbitrate that controversy.” Arbitration agreements should be liberally interpreted and ordered unless the agreement clearly does not apply to the dispute in question. (Weeks v. Crow (1980) 113 Cal.App.3d 350, 353; Segal v. Silberstein (2007) 156 Cal.App.4th 627, 633.) “ ‘Doubts as to whether an arbitration clause applies to a particular dispute are to be resolved in favor of sending the parties to arbitration. The court should order them to arbitrate unless it is clear that the arbitration clause cannot be interpreted to cover the dispute.’ ” (California Correctional Peace Officers Assn. v. State¿(2006) 142 Cal.App.4th 198, 205.)

Discussion

Existence of a Valid Agreement

The party moving to compel arbitration has the initial burden to (1) affirmatively admit and allege the existence of a written arbitration agreement, and (2) prove the existence of that agreement by a preponderance of the evidence. (Rosenthal v. Great W. Fin. Sec. Corp, 14 Cal. 4th 394, 413.) Once this is met, the burden shifts to the responding party to prove that the agreement is unenforceable by a preponderance of the evidence. (Ibid.)

In establishing the existence of an agreement to arbitrate, it is sufficient for defendant to provide a copy of the arbitration agreement or state the paragraph verbatim. (Baker v. Italian Maple Holdings, LLC, 13 Cal.App.5th 1152, 1160 (2017); Cal. Rules of Court, Rule 3.1330.)

Here, Defendants have produced an Engagement Letter dated October 31, 2017, which contains an arbitration clause. (Tan Decl., ¶8, Ex. 1.) Miss Minglu Ma, Chairman of the Board of Shanghai Creasun Media Culture Corporation Ltd. (“Shanghai Creasun”) entered into an attorney-client relationship with Defendants on the behalf of Shanghai Creasun via the Engagement Letter related to the “Groove Tails” film project. (Id.)

The Engagement Letter includes the following arbitration clause:

“11. Arbitration and Costs.

By executing this engagement agreement you agree that if any dispute (other than disputes concerning the fees owed to us) between you and the firm arises out of this engagement agreement, our relationship with you or our performance of any current or future legal services, whether those services are the subject of this particular engagement letter or otherwise, that dispute will be resolved solely by binding arbitration in Los Angeles, California, before one arbitrator (to be designated through JAMS) and pursuant to the Comprehensive Arbitration Rules and Procedures (as then in effect) of JAMS. The disputes subject to binding arbitration will include, without limitation, disputes regarding or alleging negligence, malpractice, breach of fiduciary duty, fraud or any claim based upon a statute, as well as any dispute as to the arbitrability of any such claims. The arbitrator’s award will be final and binding, and judgment thereon may be entered in any court of competent jurisdiction. Arbitration will be the sole means of resolving any such disputes, and both parties waive their rights to resolve disputes by jury trial or other court proceedings. (Italics added.)

. . . .

The parties acknowledge that this engagement agreement is a contract involving interstate commerce and that, notwithstanding the general choice of law provision in paragraph 12, this arbitration provision will be interpreted under the Federal Arbitration Act.”

As a preliminary matter, the Court notes the parties do not dispute the Engagement Letter contains an agreement to arbitrate certain claims arising from the attorney-client relationship between Defendants and Shanghai Creasun. However, Defendants move for an order compelling Plaintiff Creasun Entertainment USA, Inc.to arbitrate its legal malpractice and breach of fiduciary duty claims. Plaintiff asserts it is a nonsignatory of the Engagement Letter. Therefore, the threshold issue is whether Plaintiff, a nonsignatory to the Engagement Letter can be compelled to arbitrate its claims against Defendants.

“Generally speaking, one must be a party to an arbitration agreement to be bound by it or invoke it.” (Westra v. Marcus & Millichap Real Estate Investment Brokerage Co., Inc. (2005) 129 Cal.App.4th 759, 763.) Nevertheless, “[t]here are exceptions to the general rule that a nonsignatory to an agreement cannot be compelled to arbitrate and cannot invoke an agreement to arbitrate, without being a party to the arbitration agreement.” (JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222, 1236–1237.) These exceptions are: “ ‘(a) incorporation by reference; (b) assumption; (c) agency; (d) veil-piercing or alter ego; (e) estoppel; and (f) third-party beneficiary’ [citations].” (Benaroya v. Willis (2018) 23 Cal.App.5th 462, 469.) For purposes of this motion, the Court will focus on estoppel, agency, and third-party beneficiary as those are the three exceptions Defendants argue support compelling Plaintiff to arbitrate its claims.

1. Equitable Estoppel

Under the doctrine of equitable estoppel, “a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are ‘intimately founded in and intertwined’ with the underlying contract obligations. [Citations].” (JSM Tuscany, LLC, supra, 93 Cal.App.4th 1237 (emphasis added).) “By relying on contract terms in a claim against a nonsignatory defendant, even if not exclusively, a plaintiff may be equitably estopped from repudiating the arbitration clause contained in that agreement. [Citations].” (Id.) “The rule applies to prevent parties from trifling with their contractual obligations. [Citations].” (Id.)

Here, Plaintiff has sued Michael Helfant and the law firm, Loeb & Loeb LLP for legal malpractice and breach of fiduciary duty. The Complaint alleges “Plaintiff retained Defendants to represent its interests in the negotiation and documentation of a film financing deal in which Plaintiff was to provide the financing for [the film production called “Kung Fury 2”].” (Compl., ¶¶6-7.) As such, Defendants argue these claims arise out of and rely on the rights and responsibilities of the parties created by the Engagement Letter. Although the Complaint does not mention the Engagement Letter, Defendants have provided the retainer invoice for $25,000.00, titled “RETAINER PER ENGAGEMENT LETTER” that is addressed to Plaintiff and confirmation that Plaintiff paid the retainer fee. (Tan Decl., ¶13, Ex. 4.)

Plaintiff contends the Engagement Letter limited Defendants’ scope of services to providing legal representation to Shanghai Creasun, not any of its parent, subsidiary, related, affiliated or associated person or entity. This argument fails for two reasons: (1) the Engagement Letter “scope of services” limited Defendants’ “initial responsibilities” to such restriction not further or future legal services and (2) as shown above, Plaintiff’s claims are intimately founded in and intertwined with the obligations set forth in the Engagement Letter.

Moreover, “[d]irect-benefit estoppel involve[s] non-signatories who, during the life of the contract, have embraced the contract despite their non-signatory status but then, during litigation, attempt to repudiate the arbitration clause in the contract. [Citations].” (Noble Drilling Services, Inc. v. Certex USA, Inc. (5th Cir. 2010) 620 F.3d 469, 473; see also Knight et al., Cal. Prac. Guide Alt. Disp. Res. (The Rutter Group 2023) Ch. 5-F, ¶5:266.14.) “A non-signatory can ‘embrace’ a contract containing an arbitration clause in two ways: (1) by knowingly seeking and obtaining “direct benefits” from that contract; or (2) by seeking to enforce the terms of that contract or asserting claims that must be determined by reference to that contract.” (Id.) As previously discussed, Plaintiff sought and received legal services from Defendants pursuant to the Engagement Letter as evidenced by the retainer invoice. (Tan Decl., ¶¶12-13, Ex. 4; Mot. at 15:27-16:1-2.) Ms. Ma sought Defendants’ legal representation on behalf of Plaintiff for the Kung Fury 2 project. (Opp’n at 6:24-25.) Lastly, Plaintiff’s Complaint asserts claims of malpractice and breach of fiduciary duty, which must be determined by reference to the Engagement Letter because the attorney-client relationship between the parties was formed via payment of the retainer per the Engagement Letter.

Accordingly, equitable estoppel permits Defendants to enforce the arbitration clause in the Engagement Letter against Plaintiff.

2. Agency Principles

Next, Defendants assert that arbitration must be ordered under agency principles.

“A nonsignatory to an agreement to arbitrate may be required to arbitrate, and may invoke arbitration against a party, if a preexisting confidential relationship, such as an agency relationship between the nonsignatory and one of the parties to the arbitration agreement, makes it equitable to impose the duty to arbitrate upon the nonsignatory.” (Westra v. Marcus & Millichap Real Estate Investment Brokerage Co., Inc. (2005) 129 Cal.App.4th 759, 765; see also Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1285.) “Courts look to traditional principles of contract and agency law to determine whether a nonsignatory is bound by an arbitration agreement signed by its principal or agent.” (Cohen v. TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840, 860.) “Ostensible authority exists to the extent that ‘a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess’ such authority.” (Id.)

Defendants contend Ms. Ma, as the Chairman of the Board of Shanghai Creasun and Plaintiff, represented to them that Plaintiff was Shanghai Creasun’s United States operating entity, i.e., an agent of Shanghai Creasun. (Helfant Decl., ¶2.) Defendants further argue that Plaintiff acted as the agent or instrumentality of Shanghai Creasun because its actions throughout Defendants’ legal representation were directed and accomplished by Ms. Ma in her capacity as Chairman of the Board for both Plaintiff and Shanghai Creasun. (Id. at ¶¶8-11, Exs. 4-6.) Further, Shanghai Creasun’s employees were directly involved in Plaintiff’s negotiation of the Term Sheet for the Kung Fury 2 project, which was consistent with Ms. Ma’s representation that Plaintiff was Shanghai Creasun’s United States operating entity. (Id. at ¶¶2, 7, Ex. 3.) Additionally, Defendants argue Ms. Ma represented to them that she needed the Shanghai Creasun’s board of directors to approve the final version of the Term Sheet. (Id. at ¶5, Ex. 1.)

Plaintiff admits Ms. Ma is its principal and the principal of Shanghai Creasun. (Ma Decl., ¶¶7, 11, 13; Opp’n at 4:24-25, 7:2-3.) Plaintiff also admits it sought out Defendants’ legal services for the Kung Fury 2 film project and Ms. Ma told Attorney Junzi Tan to re-draft the invoice to be directed to Plaintiff. (Opp’n at 7:20-27.) Plaintiff does not contest the veracity of the email communications submitted by Defendants, which show that: (1) Ms. Ma signed her signature as a Chairman of the Board of Plaintiff and Shanghai Creasun, (2) Shanghai Creasun’s employees were involved in the negotiation process for the Kung Fury 2 project, and (3) Ms. Ma represented to Defendants the Shanghai Creasun’s board needed to approve the final Term Sheet for the Kung fury 2 project. Defendants have demonstrated that Ms. Ma, on behalf of Shanghai Creasun, caused Defendants to believe an agency relationship existed between Shanghai Creasun and Plaintiff such that compelling Plaintiff to arbitrate would be equitable.

Plaintiff also argues that Defendant Helfant cannot invoke the arbitration clause because he was not a party to the Engagement Letter. Defendants admit former attorney Steven Saltzman was counsel who represented Shanghai Creasun in the “Groove Tails” project. Nevertheless, Defendants argue Defendant Helfant is entitled to invoke the arbitration agreement because the allegations against him concern his conduct as an agent and employee of Defendant Loeb, who is a signatory to the Engagement Letter. The Court agrees.

In Thomas v. Westlake (2012) 204 Cal.App.4th 605, the court held “a plaintiff’s allegations of an agency relationship among defendants is sufficient to allow the alleged agents to invoke the benefit of an arbitration agreement executed by their principal even though the agents are not parties to the agreement.” (Id. at pp. 614-615 [allegation that defendants acted as agents of one another sufficient to allow alleged agent/nonsignatory to compel arbitration]; see also Dryer v. Los Angeles Rams, 40 Cal.3d 406, 418 (1985).)

Therefore, agency principles apply to allow Defendants to enforce the arbitration clause in the Engagement Letter against Plaintiff.

3. Third-Party Beneficiary

Finally, Defendants argue Plaintiff is required to arbitrate its claims as a third-party beneficiary of the Engagement Letter.

“A third party beneficiary is someone who may enforce a contract because the contract is made expressly for his benefit. [Citation.] The test for determining whether a contract was made for the benefit of a third person is whether an intent to benefit a third person appears from the terms of the contract. [Citation.] The mere fact that a contract results in benefits to a third party does not render that party a third party beneficiary. [Citation]” (Montemayor v. Ford Motor Co. (2023) 92 Cal.App.5th 958, 973 [internal quotation marks and brackets omitted].)

“In Goonewardene [v. ADP, LLC (2019) 6 Cal.5th 817, 830], the Supreme Court held that in considering third party beneficiary contract claims, a court should ‘carefully examine[ ] the express provisions of the contract at issue, as well as all of the relevant circumstances under which the contract was agreed to, in order to determine not only (1) whether the third party would in fact benefit from the contract, but also (2) whether a motivating purpose of the contracting parties was to provide a benefit to the third party, and (3) whether permitting a third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.’ [Citation] ‘All three elements must be satisfied to permit the third party action to go forward.’ ” (Montemayor, supra, 92 Cal.App.5th 973.)

Defendants argue that during the execution of the Engagement Letter, Ms. Ma expressed intent to use Shanghai Creasun’s U.S. entity to enter into the “Groove Tails” Term Sheet, thus drafts of the Term Sheet contained a placeholder for “the U.S. subsidiary of Shanghai Creasun Media Culture Stock Corporation – to be named[.]” (Tan Decl., ¶¶10-11, Exs. 2-3.) Plaintiff acknowledges the draft of the “Groove Tails” Term Sheet contained such language, but contends the draft was not signed because Michael Becker was supposed to possibly bring in an additional American company. (Opp’n at 6:15-23.)

The final version of the Engagement Letter executed and signed by the parties states, “Our initial responsibilities on your behalf will be to advise you (as opposed to any parent, subsidiary, related, affiliated or associated person or entity of you, or any of your or their respective officers, directors, investors, agents, partners or employees) in connection with your equity financing of the animated feature film currently entitled “Groove Tails”, as well as other matters which we may agree from time to time. Thereafter, we will perform such further legal services for you as you and we may agree upon from time to time. All further legal services will be governed by the terms of this letter.” (Tan Decl., ¶8, Ex 1 at p. 15 (Italics added).) Neither party contests “you” or “your” refers to Shanghai Creasun. On the face of the Engagement Letter, Defendants agreed to perform further legal services for Shanghai Creasun as agreed upon by the parties, which a reasonable person could infer includes drafting the “Groove Tails” Term Sheet to contain the language cited above. On the other hand, Defendants only provide the draft Term Sheet, not the finalized Term Sheet. They thus fail to demonstrate Plaintiff was intended to benefit from the Engagement Letter as a third-party.

Nonetheless, Defendants have met their burden proving the existence of a valid binding agreement to arbitrate between Defendants and Plaintiff based on the doctrine of equitable estoppel, and principles of agency.

Conclusion

The Court grants Defendants’ Motion to Compel Arbitration. The Court stays this action pursuant to California Code of Civil Procedure, section 1281.4 pending arbitration.