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Cleveland v. Internet Specialties West

February 11, 2009


APPEAL from a judgment of the Superior Court for the County of Los Angeles. James A. Kaddo, Judge. Reversed and remanded. (Los Angeles County Super. Ct. No. LC073219).

The opinion of the court was delivered by: O'neill, J.*fn2



Kenneth Cleveland and William Bickley sued several defendants in December 2005, asserting claims of breach of contract and fraud, among others, in connection with a $75,000 investment made pursuant to the terms of a February 1995 agreement. The defendants sought summary judgment on statute of limitations grounds, asserting, among other things, that under the discovery rule for accrual of causes of action, the statutes of limitations began to run in 1996 or 1997, because plaintiffs were then on notice of their injury. The trial court agreed, finding all statutes of limitations began to run by mid-1996, at the latest. We conclude the trial court erred in granting summary judgment, as the question whether and when a reasonably prudent person would have suspected his injury and some wrongful cause was for the trier of fact to decide.


From 1993 to October 1995, Kenneth Cleveland was the accountant for Interactive Strategies, Inc. (ISI), a company that provided technical equipment and facilitated services in the adult telephone entertainment industry. ISI's officers and shareholders were Robert Johnson, J. Edward Hastings and Brian Spitler. Early in 1995, one of ISI's officers told Cleveland that ISI was starting a new stand-alone division of ISI known as The Central Connection, in which Cleveland might be interested in investing. The Central Connection business was to operate as an internet service provider offering dialup Internet connections to its customers. Cleveland and a friend, William Bickley (collectively, Cleveland), agreed to invest $75,000 in the project. Cleveland drafted a memorandum to ISI summarizing the agreement between ISI and Cleveland, which both parties signed, and the $75,000 was provided to ISI on February 9, 1995. The terms of the agreement between ISI and Cleveland were:

* Cleveland would provide $75,000 of capital "to be used by [ISI] to develop and implement a program to allow access to the InterNet information network."

* All expenditures of the capital provided were to be at ISI's sole discretion, so long as they were related to the InterNet project.

* Net cash receipts of the project were defined as gross receipts from the sale of InterNet software packages or InterNet access fees, "less all applicable expenses directly related to the InterNet project."

* Cleveland was to receive 100% of the net cash receipts from the InterNet project "until all capital invested by [Cleveland] has been recouped. At that time [Cleveland] shall be paid 5% of gross receipts from the InterNet project."

ISI recorded The Central Connection as a fictitious business name on February 17, 1995. Cleveland's understanding was that The Central Connection division would become a separate corporation.

In June or July 1995, Johnson asked Cleveland to cover losses being incurred by The Central Connection, which needed more capital, but Cleveland said he wasn't going to do so until he received some more information.

In July 1995, Cleveland received a copy of a resignation letter from Kristina Nolan, an ISI employee with a "series of grievances," the final of which was a critical performance report. Nolan had been employed for five months, and was working on the Central Connection project. In the course of her two-page resignation letter, she complained about, among other things, "a lack of objectives and deadlines for the Central Connection project," and the fact that critiques of her work "should not have come for the first time as a response to the heightened financial crisis of the project as specifically caused by the project's investor, Kenny Cleveland, pulling out his funds . . . ." (The latter did not happen.) Nolan stated she resigned because she "[did] not wish to work for a company whose administration neglects projects to the point of financial disaster . . . ."

In September 1995, Cleveland met with Hastings, who subsequently wrote a memo to Cleveland dated September 18, 1995, with an update on The Central Connection. Hastings enclosed a profit and loss statement for The Central Connection showing revenues of $4,500 per month against operational costs of $10,000 per month, and a summary report showing expenses through August 1995 of $43,000 (exclusive of rent and utilities); Hastings observed that this would continue for several months and the overall expenses would exceed $75,000. Hastings also indicated that repayment of Cleveland's investment "can only come from the Central Connection." After a fax from Cleveland, Hastings sent a memo to Cleveland on September 19, ...

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