Department 58

Hearing Date: September 10, 2024

Case Name: Eon Reality, Inc. v. Virtual Film School, Inc., et al.

Case No.: 24STCV13744

Matter: Motion to Compel Arbitration

Moving Parties: Defendants Virtual Film School, Inc. and Frank Chindamo

Responding Party: Plaintiff Eon Reality, Inc.

Tentative Ruling: The Motion to Compel Arbitration is granted.

This is a fraud action. Plaintiff Eon Reality, Inc. (Plaintiff) alleges it awarded Defendants Virtual Film School, Inc. (VFS) and Frank Chindamo (Chindamo) a grant called the Grant Guarantee Program Offer (GGPO), to launch extended reality programs. Defendants allegedly represented in their grant application they will enroll 10,000 students, employ more than 50 faculty members, and create 250 lessons of content per year, Plaintiff relied on those representations to give the defendants the GGPO, but those representations turned out to be false. Plaintiff sues VFS and Chindamo for (1) intentional misrepresentation, (2) negligent misrepresentation, (3) unfair business practices pursuant to Business and Professions Code section 17200, and (4) unjust enrichment.

VFS and Chindamo (collectively, “Defendants”) now move to compel that Plaintiff’s claims be arbitrated based on the arbitration clause in the GGPO:

In the event that the Parties cannot reach agreement on a dispute through negotiations, any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof, shall be mediated, or finally settled by arbitration through the low-cost California Lawyers for the Arts, with the arbitrator to be mutually agreed upon by the parties.

(Chindamo Decl.), ¶ 4; Exhibit A, p. 11, Paragraph m(b).)

Defendants argue that Plaintiff’s tort claims arise out of or relate to the GGPO and, therefore, are subject to arbitration.

Defendants further argue that even though Chindamo is not a party to the GGPO, Plaintiff’s claims against that defendant should also be compelled to arbitration based on agency, alter ego, and estoppel doctrines. (Motion, p. 13:3-7.)

In opposition, Plaintiff argues that the entire motion should be denied because “(1) Mr. Chindamo is not a party to the [GPPO] between [Plaintiff and VFS …, and (2) Plaintiff should not be forced to arbitrate its claims with a biased and partial arbitrator.” (Opposition, p. 1:3-6.)

Defendants did not file a reply.

LEGAL STANDARD

Defendants claim, and Plaintiff does not dispute, that the Arbitration Clause is governed by the California Arbitration Act. Under the CAA, “[o]n petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party thereto refuses to arbitrate such controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that: ¶ (a) The right to compel arbitration has been waived by the petitioner; or (b) Grounds exist for the revocation of the agreement.” (Code Civ. Proc., § 1281.2.)

“The petitioner [seeking to compel arbitration] bears the burden of proving the existence of a valid arbitration agreement by a preponderance of the evidence, while a party opposing the petition bears the burden of proving by a preponderance of the evidence any fact necessary to its defense.” (Ruiz v. Moss Bros. Auto Group, Inc. (2014) 232 Cal.App.4th 836, 842 (“Ruiz”).)

DISCUSSION

Plaintiff asserts fraud, UCL, and unjust enrichment claims against the Defendants.

A valid agreement to arbitrate the dispute exists

Under the CAA, “[t]he moving party ‘can meet its initial burden [on a motion to compel arbitration] by attaching to the petition a copy of the arbitration agreement purporting to bear the [opposing party’s] signature.’ [Citation.] Alternatively, the moving party can meet its burden by setting forth the agreement’s provisions in the motion. [Citations.] For this step, ‘it is not necessary to follow the normal procedures of document authentication.’ [Citation.]” (Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165 (Gamboa).)

“If the moving party meets its initial prima facie burden and the opposing party does not dispute the existence of the arbitration agreement, then nothing more is required for the moving party to meet its burden of persuasion.” (Gamboa, supra, 72 Cal.App.5th at p. 165.) “If the moving party meets its initial prima facie burden and the opposing party disputes the agreement, then in the second step, the opposing party bears the burden of producing evidence to challenge the authenticity of the agreement.” (Ibid.) “The opposing party can do this in several ways. For example, the opposing party may testify under oath or declare under penalty of perjury that the party never saw or does not remember seeing the agreement, or that the party never signed or does not remember signing the agreement.” (Ibid.)

Here, Plaintiff does not deny the existence of the Arbitration Clause, does not deny its claims against VFS are covered by the Arbitration Clause, and does deny that its claims against VFS claims should be compelled arbitration. On the contrary, “Plaintiff admits that Plaintiff and VFS are parties to [the] arbitration agreement ….” (Opposition, p. 4:28.)

Defendant Chindamo may invoke the arbitration agreement.

Plaintiff argues that its claims against Chindamo should not be compelled to arbitration for the following reasons. First, an “identity of interest” between the nonsignatory and signatory is not an exception to the rule that a nonsignatory cannot invoke an arbitration agreement. (Opposition, p. 3:2-9.) Second, Plaintiff is not suing Chindamo under an alter-ego or piercing the corporate veil theory (instead, Plaintiff is suing the defendant in his individual capacity) and, therefore, Defendants are reading words into Plaintiff’s Complaint that do not exist. (Opposition, p. 3:10-22.) Finally, the doctrine of equitable estoppel is inapplicable because Plaintiff’s claims against Chindamo are based on representations that he made before Plaintiff and VFS entered the GGPO and, therefore, those claims cannot be inextricably intertwined with the GGPO. (Opposition, pp. 3:23-4:13.)

“[S]ubject to limited exceptions, only parties to an arbitration contract may enforce it or be required to arbitrate.” (Nguyen v. Tran (2007) 157 Cal.App.4th 1032, 1036 (Nguyen).)

“Exceptions in which an arbitration agreement may be enforced by or against nonsignatories include … when a nonsignatory and one of the parties to the agreement have a preexisting agency relationship that makes it equitable to impose the duty to arbitrate on either of them.” (Nguyen, supra, 157 Cal.App.4th at pp. 1036–1037.)

A non-signatory seeking to compel arbitration “bears the burden to establish he or she is a party to the arbitration agreement/provision covering the dispute.” (Jones v. Jacobson (2011) 195 Cal.App.4th 1, 15.)

Here, the Court finds that Chindamo has met its burden of establishing he is a party to the Arbitration Clause based on preexisting agency relationship between him and VFS. Indeed, the Complaint alleges that “Chindamo is the president, chief executive officer, and chief financial officer of VFS.” (Compl., ¶ 3.) Chindamo attests to the same in his declaration. (Motion, Chindamo Decl., ¶ 2 [testifying that he is the Founder, President, and current CEO of VFS].) The Complaint also alleges that Chindamo “acted independently, or in the alternative, acted as the agent, representative, partner, …, or employee of one or more of the remaining defendants, and in doing the things alleged herein, acted within the course and scope of such agency, representation, … and employment”].) (Compl., ¶ 5 [emphasis added]; Chindamo Decl., ¶ 3 [testifying that he submitted the grant application in his capacity as VFS’s president and on behalf of VFS].) Those allegations suffice to permit Chindamo to be treated as a party to the arbitration agreement. (RN Solution, Inc. v. Catholic Healthcare West (2008) 165 Cal.App.4th 1511, 1520 (RN Solution) [holding that a company’s president/CEO was bound by the arbitration agreement in the recruitment agreement as an agent-employee of her corporation].)

Chindamo may also enforce arbitration as the alter ego of VFS, based on Plaintiff’s pleading. An “[a]lter ego theory posits that the individual defendants are inseparable from the corporation and in legal effect are the corporation.” (D.N. & E. Walter & Co. v. Zuckerman (1931) 214 Cal. 418, 420 [alter ego theory requires that the corporation and individual should be considered as one] ). The corporate form is disregarded and the entity is considered an association of individuals.” (Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1284 (Rowe).) Here, contrary to Plaintiff’s argument that it has not alleged an “alter ego” theory, the Complaint states that each defendant “acted … as the … alter ego … of one or more of the remaining defendants, and in doing the things alleged herein, acted within the course and scope of such … alter ego ….” (Compl., ¶ 5.) The Court of Appeal has held that a nonsignatory can compel an arbitration agreement against a signatory-plaintiff if the plaintiff has alleged that the nonsignatory is an alter ego of a signatory. (RN Solution, supra, 165 Cal.App.4th at p. 1519 [noting that “[t]he appellate court [in Rowe, supra] held that the individual defendants, although nonsignatories to the arbitration agreement, could enforce the arbitration agreement against [the plaintiff] because of his allegation that the corporation was an alter ego of these individuals”].)

Chindamo’s motion may also be granted on grounds of equitable estoppel. Under the doctrine of equitable estoppel in “both federal and California decisional authority, 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.” (Boucher v. Alliance Title Co., Inc. (2005) 127 Cal.App.4th 262, 271.) “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.” (Id. at p. 272.) “[I]f a plaintiff relies on the terms of an agreement to assert his or her claims against a nonsignatory defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement. In other words, a signatory to an agreement with an arbitration clause cannot ‘“‘have it both ways’”’; the signatory ‘cannot, on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a non-signatory.’” (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 220 (Goldman).)

There are two common scenarios in which the causes of action are “intimately founded in and intertwined” with the underlying contract obligations: “‘The first occurs when “adjudication of the disputes between the signatory and nonsignatory parties would require interpretation, and probably enforcement, of the specific terms and conditions of the underlying contract” [citation]—in other words, when the plaintiffs “‘must rely on the terms of the written agreement in asserting their claims.’” [Citation]. The second factual scenario warranting equitable estoppel occurs when the signatory raises allegations of “not merely parallel or similar, but substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract.’ [Citation.]” (Goldman, supra, 173 Cal.App.4th at p. 220.)

Here, the second scenario is met; the Complaint repeatedly alleges that Chindamo’s conduct was interdependent and concerted with VFS’s conduct. (See Compl., ¶ 5 [“defendants, VFS, Chindamo. . . acted as the agent, representative, partner, co-conspirator, alter ego, successor-in-interest, assignee, or employee of one or more of the remaining defendants, and in doing the things alleged herein, acted within the course and scope of such agency, representation, conspiracy, alter ego, and employment. Plaintiff alleges on information and belief that directors, officers, or employees in management positions with discretionary authority acting on behalf of each defendant has ratified and approved the acts of the remaining defendants”]; id. ¶ 10 [“In the Grant Application submitted by Chindamo and Defendants, each guaranteed that Defendants would enroll ten thousand (10,000) students after two (2) years, that Defendants would employ more than fifty (50) faculty members/year, and Defendants would create more than two- hundred fifty (250) lessons of content/year”]; id. ¶ 33 [“Defendants engaged in unlawful, unfair, and/or fraudulent conduct within the meaning of the Business and Professions Code section 17200, et seq”]; id. ¶ 38 [“It would be inequitable for Defendants to retain the benefits Plaintiff provided Defendants”].)

Plaintiff’s argument that its claims cannot be compelled to arbitration because they concern pre-contract conduct is unpersuasive.

It is true that Plaintiff’s fraud claims arise from the grant application, which occurred before the parties entered the GGPO, and, consequently, the arbitration clause.

However, “California law distinguishes between fraud in the ‘execution’ or ‘inception’ of a contract and fraud in the ‘inducement’ of a contract. In brief, in the former case ‘“the fraud goes to the inception or execution of the agreement, so that the promisor is deceived as to the nature of his act, and actually does not know what he is signing, or does not intend to enter into a contract at all, mutual assent is lacking, and [the contract] is void. In such a case it may be disregarded without the necessity of rescission.”’ [Citation.] Fraud in the inducement, by contrast, occurs when ‘“the promisor knows what he is signing but his consent is induced by fraud, mutual assent is present and a contract is formed, which, by reason of the fraud, is voidable. In order to escape from its obligations the aggrieved party must rescind....”’ [Citation.]” (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 415 (Rosenthal) [italics in original].)

“[C]laims of fraud in the execution of the entire agreement are not arbitrable under either state or federal law. If the entire contract is void ab initio because of fraud, the parties have not agreed to arbitrate any controversy; under that circumstance, … [case law] does not require a court to order arbitration.” (Rosenthal, supra, 14 Cal.4th at p. 416.)

On the other hand, “fraud in the inducement relating to other contractual terms does not render the arbitration agreement unenforceable, even when it might justify rescission of the contract as a whole. By entering into the arbitration agreement, the parties established their intent that disputes coming within the agreement’s scope be determined by an arbitrator rather than a court; this contractual intent must be respected even with regard to claims of fraud in the inducement of the contract generally.” (Rosenthal, supra, 14 Cal.4th at p. 416.)

Here, the Complaint alleges fraud in the inducement. (See Compl., ¶ 28 [“Defendants intended for Plaintiff to rely on the representations in order for Plaintiff to approve VFS’ Grant Application for the Grant Guarantee Program and enter into the GGP Agreement with VFS; id. ¶ 29 [“Plaintiff reasonably relied on Defendants’ representations in approving VFS’ Grant

Application for the Grant Guarantee Program and entering into the GGP Agreement with VFS”].)

“[I]n the absence of indication of contrary intent, and where the arbitration clause is reasonably susceptible of such an interpretation, claims of fraud in the inducement of the contract (as distinguished from claims of fraud directed to the arbitration clause itself) will be deemed subject to arbitration.” (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 323; Rosenthal, supra, 14 Cal.4th at p. 416 [“[i]n the absence of a contrary agreement, parties to a predispute arbitration agreement are presumed to have intended arbitration of controversies, including allegations of fraud in the inducement of the contract generally, that may allow rescission or reformation of the contract or part of it”].)

Here, Plaintiff has not pointed to any language in the GGPO that shows the parties intended to exclude fraud in the inducement claims from the Arbitration Clause. Therefore, in the absence of that contrary intent and in light of the fact that the Arbitration Clause can be read to encompass the fraud claims since it covers “any dispute, controversy or claim arising out of or relating to [the GGPO], … [including the] validity thereof …,” the fraud claims are subject to arbitration. The Court also finds that the UCL and unjust enrichment claims fall within the scope of the Arbitration Clause.

Therefore, Chindamo has established his right to compel arbitration of Plaintiff’s claims.

For those reasons, the Court finds that the Defendants have proven the existence of a valid agreement to arbitrate Plaintiff’s claims.

There are no grounds to revoke the arbitration clause on the belief that the arbitrator will be biased.

Having determined the existence of a written agreement to arbitrate a controversy, the CAA requires the Court to compel arbitration unless the Court “determines that: ¶ (a) The right to compel arbitration has been waived by the petitioner; or (b) Grounds exist for the revocation of the agreement.” (Code Civ. Proc., § 1281.2.)

Here, Plaintiff argues that the Arbitration Clause should not be enforced because, in a previous arbitration proceeding, the California Lawyers for the Arts and its arbitrator were biased against Plaintiff.

“Actual bias is not listed as a basis for vacating an arbitration award under Code of Civil Procedure section 1286.2, but subdivision (a)(6) does require a court to vacate an arbitration award if the arbitrator (A) failed to disclose a ground for disqualification or (B) was subject to disqualification. If an arbitrator is actually biased, he or she is subject to disqualification, and the failure to disqualify requires vacating an award under subdivision (a)(6)(B) of section 1286.2.” (Baxter v. Bock (2016) 247 Cal.App.4th 775, 789, fn. 7.)

Here, however, there is no pending motion to vacate an arbitration award because no arbitration award has been issued. In addition, Plaintiff has not cited (and the Court has not found) any law that would allow the Court to disqualify an arbitrator that has not even been selected, participated in an arbitration proceeding, or issued an award.

To the extent Plaintiff is arguing that the Arbitration Clause is unconscionable with regard to the selection of arbitrators, that argument is unpersuasive. The Arbitration Clause says that the dispute will be decided in “arbitration through the low-cost California Lawyers for the Arts, with the arbitrator to be mutually agreed upon by the parties.” (Motion, Exhibit A – a copy of the GGPO, p. 11, Paragraph m(b) [emphasis added].) That clause negates substantive unconscionability. (See OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 126 [“The burden of proving unconscionability rests upon the party asserting it”]; Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 [“‘[U]nconscionability has both a “procedural” and a “substantive” element,’ the former focusing on ‘oppression’ or ‘surprise’ due to unequal bargaining power, the latter on ‘overly harsh’ or ‘one-sided’ results” (citations omitted)]; Torrecillas v. Fitness International, LLC (2020) 52 Cal.App.5th 485, 492 [“As a matter of general contract law, California courts require both procedural and substantive unconscionability to invalidate a contract”]; Carmona v. Lincoln Millennium Car Wash, Inc. 226 Cal.App.4th at 74, 85.) [“‘Substantive unconscionability pertains to the fairness of an agreement’s actual terms and to assessments of whether they are overly harsh or one-sided. [Citations.] A contract term is not substantively unconscionable when it merely gives one side a greater benefit; rather, the term must be “so one-sided as to ‘shock the conscience’”’”].)

Plaintiff has failed to meet its burden of showing that the Arbitration Clause is unenforceable. Defendant’s motion to compel arbitration is granted. Proceedings in this court are stayed pending completion of the arbitration.