Judge: Michael Small, Case: 23STCV04532, Date: 2023-06-29 Tentative Ruling

Case Number: 23STCV04532    Hearing Date: August 24, 2023    Dept: 57

Plaintiff VXI Global Solutions, LLC (“VXI”) alleges in its Complaint that effective July 12, 2021, it entered into a Master Services Agreement (“MSA”) and Statement of Work (“SOW”) (collectively, “the Agreement”) with Defendant AmeriMark Holdings, LLC (“Holdings”) regarding the outsourcing of certain customer services.  (Complaint ¶¶ 19-20, Exhibits A and B).   VXI further alleges that Defendant AmeriMark Interactive, LLC (“Interactive”) took over Holdings’ payment obligations under the Agreement at some point after October 15, 2021 following the purchase by Interactive of all of Holdings’ equity in three direct mail marketing companies that are listed by name in the Complaint (“the Previously Owned Companies”).  (Id., ¶ 27, 29.)   The Complaint states that, on or about May 6, 2022, VXI received a written notice of termination of the Agreement from “AmeriMark Interactive, LLC (‘AmeriMark’), the successor to AmeriMark Holdings, Inc.,” with an effective date of July 31, 2022.  (Id., ¶¶ 34, 35.)  VXI sued the Defendants to recover what VXI alleges is the outstanding balance owed to VXI under the Agreement of $602,481.70 and to obtain damages as a result of the Defendants’ breach of the Agreement. (Id., ¶¶ 4)

Pending before the Court is Holdings’ demurer to the first cause of action in the complaint, which is for breach of contract against Holdings only, not Interactive.  Holdings contends in the demurrer that that Complaint fails to allege facts sufficient to constitute a cause of action against Holdings and that there is a defect or misjoinder of parties.  The Court disagrees and is overruling the demurrer.

Holdings’ demurrer is predicated on Section 7.7 of the MSA.  Captioned “Assignment,” Section 7.7. provides as follows: “Neither Party may assign any of its rights or delegate any of its duties under this MSA without the prior written consent of the other Party, except that a Party may assign its rights and obligations under this MSA without the approval of the Service Provider [VXI] in the event of the sale or transfer (by merger, purchase or otherwise) of all or substantially all, or control of all or substantially all, of the assets or the business of the Client [Holdings].”  Compl., ¶ 20, Exh. A, § 7.7.)  According to Holdings, the second clause of Section 7.7 (that is, the clause that begins with the word “except”) constitutes a novation whereby VXI  consented up front to substitute as the debtor under the MSA in place of Holdings any entity that acquires all or substantially all of the assets of Holdings.  That novation is triggered here, says Holdings, by dint of the transaction on October 2021 in which Interactive purchased from Holdings all the equity in the Previously Owned Companies.

Whether the second clause of Section 7.7 constitutes a novation as opposed to a mere assignment matters.  A novation would relieve Holdings of its obligation under the MSA.  An assignment would not.    That is true under both Illinois law (which applies per Section 7.6 of the MSA) or California law (which arguably applies under a choice of law analysis, notwithstanding Section 7.6).   The second clause of Section 7.7 may well constitute a novation under both Illinois and California law.   

At the pleading stage, however, the Court cannot conclude that the second clause of Section 7.7 is triggered.  That is because the allegations in the Complaint do not definitively establish that all or substantially all of the assets of Holdings were sold or transferred to Interactive in the transaction involving the Previously Owned Companies -- which is what is necessary to trigger the second sentence of Section 7.7.  All the Complaint alleges is that Interactive acquired from Holdings all of the  equity in the Previously Owned Companies.  In other words, it is possible that Holdings still has other assets, beyond the assets that were embodied in the Previously Owned Companies.   Whether that is the case presumably will be fleshed out in discovery.  Depending on what the evidence adduced in discovery shows, Holdings may have a strong motion for summary adjudication as to the first cause of action in the complaint based on the proposition that the second clause of Section 7.7 constitutes a novation by which VXI consented to the substitution of Interactive in place of Holdings as the debtor under the Agreement. 

Holdings contends in the demurrer that a defect or nonjoinder of parties exists within the meaning of Code of Civil Procedure Section 430.10(d) because Interactive must be named as a Defendant along with Holdings in the first cause of action.  Demurrers on this ground lie only where it appears from the face of the complaint or matters judicially noticed that a third person is a “necessary” or “indispensable” party to the action. (Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2023) ¶ 7:79.)  Based on its position that Interactive was substituted as the debtor under the Agreement through the purported novation in the second clause of Section 7.7, Holdings argues that Interactive is a necessary and indispensable party to the first cause of action for breach of the Agreement without which complete relief cannot be accorded.  However, for the reasons set forth above, the Court has determined that VXI successfully pleaded a cause of action for breach of the Agreement against Holdings in that Holdings’ obligations under the MSA were not definitively terminated by the transaction involving the Previously Owned Companies.  Complete relief on the first cause of action is thus available against Holdings without Interactive.  And Interactive is thus not a necessary or indispensable party to the first cause of action.