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Zamora v. Lehman

June 29, 2010


APPEAL from an order and a judgment of the Superior Court of Los Angeles County, William F. Highberger and Mary H. Strobel, Judges. Affirmed in part and reversed in part with directions. (Los Angeles County Super. Ct. No. BC344804).

The opinion of the court was delivered by: Mallano, P. J.


A trustee in bankruptcy filed this action against three former officers of a defunct company, alleging breach of fiduciary duty. Two of the officers engaged in discovery; the third attempted to settle the action as to himself only. Four months before trial, defendants remembered that their employment agreements contained an arbitration provision. They moved to compel arbitration. In opposition, the trustee argued defendants had waived the right to arbitrate by delay in bringing the motions and by engaging in discovery not available under the arbitration provision.

The trial court granted the motions, stating that because defendants had forgotten about the arbitration provision, they had not relinquished a known right. Further, the trial court found that the same amount of discovery would have been allowed by an arbitrator. After the ruling, the trustee claimed she lacked the funds to arbitrate the case and declined to initiate arbitration. As a consequence, the trial court entered a judgment of dismissal with prejudice. The trustee appealed.

The trustee contends defendants waived the right to arbitrate notwithstanding that they forgot about the arbitration provision. Defendants argue a waiver requires the relinquishment of a known right and point out the motions to compel arbitration were brought shortly after their attorneys first learned about the arbitration provision.

We conclude a waiver of the right to arbitrate does not require the relinquishment of a known right under the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1-16) or the California Arbitration Act (CAA) (Code Civ. Proc., §§ 1280-1294.2; undesignated section references are to that code). And as provided by the rules adopted in the arbitration provision, the parties were not entitled to any discovery in an arbitration proceeding. Accordingly, the two defendants who conducted discovery in the trial court waived arbitration because they acted inconsistently with the right to arbitrate. As to them, the order compelling arbitration and the judgment dismissing the action are reversed. But the remaining defendant, who sought to settle the case, did not act inconsistently with the right to arbitrate. As to him, the order and judgment are affirmed.


The allegations and facts in this case are taken from the complaint and the papers submitted on the motion to compel arbitration.

A. Complaint

The original complaint was filed on December 19, 2005. A first amended complaint (complaint) was filed on May 4, 2006. It alleged as follows.

e4L, Inc. (e4L), was a direct marketing company that promoted a wide variety of products via television, radio, and the Internet. Each week, e4L broadcast more than 3,000 half-hour television programs, commonly known as infomercials, around the world. The infomercials reached 100 percent of the "television homes" in the United States and 370 million "television households" in more than 70 countries worldwide.

Stephen C. Lehman was the chairman and chief executive officer of e4L. Eric R. Weiss was the vice-chairman and chief operating officer. Daniel M. Yukelson was the chief financial officer. All three were directors.

"The directors controlled and dominated e4L for their own personal benefit by issuing misleading press releases announcing that e4L (1) had raised $22 million 'when the money was in fact required to repay investments' and (2) had retained Donaldson, Luftkin & Jennerette as financial consultants. The directors also caused or allowed e4L to engage in improper billing procedures. They did not disclose any of these acts.

"The directors caused one of e4L's subsidiaries to enter into a loan and security agreement under which the subsidiary obtained a $20 million 'credit facility' in exchange for a promise to maintain a minimum net worth of $11.7 million. The directors caused or permitted the subsidiary's net worth to fall below $11.7 million. As a result, the subsidiary defaulted under the agreement.

"e4L acquired a 50 percent interest in (BuyItNow), a leading Internet retailer featuring a large selection of brand name products and specialty items. The directors transferred more than $6.5 million from BuyItNow to e4L 'with no invoices [or] management committee consent,' commingled the two companies' funds, failed to hold proper board meetings, '[f]ail[ed] to obtain unanimous board consent on several corporate transactions including stock issuances,' advertised products for BuyItNow 'as seen on TV' when e4L could not fulfill the orders in a timely manner, caused e4L to show a $1.1 million accounts receivable from BuyItNow without providing any accounting or billing information to BuyItNow, and improperly billed BuyItNow 'to manipulate e4L's EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).' These actions diminished e4L's investment in BuyItNow, exposed e4L to substantial liability, and harmed its reputation and creditworthiness.

"The directors caused or permitted e4L and its subsidiaries to inflate e4L's earnings and net worth artificially by charging customers' credit cards multiple times for a single purchase and by charging customers' credit cards for merchandise e4L did not have in stock. In so doing, the directors violated the 'chargeback' limits of the credit card company.

"e4L attempted to sell its Asian subsidiaries but that effort failed when the directors allowed the subsidiaries to fall significantly off their operating budgets.

"Eventually, e4L lost its ability to fill and ship orders. The directors caused or permitted e4L to sell and transfer its computers to employees for nominal sums." (Lehman v. Superior Court (2006) 145 Cal.App.4th 109, 113-114.)

On or about March 5, 2001, e4L filed for bankruptcy protection under chapter 11 of the Bankruptcy Code (11 U.S.C. § 1101 et seq.). On or about September 4, 2002, the chapter 11 proceeding was converted to a chapter 7 liquidation (11 U.S.C. § 701 et seq.).

Nancy Hoffmeier Zamora, an attorney, was appointed the chapter 7 trustee of e4L's bankruptcy estate.

As noted, on December 19, 2005, Zamora, as trustee, filed this action against Lehman, Weiss, and Yukelson, alleging a cause of action for breach of fiduciary duty.

B. Procedural History

Lehman and Weiss took one approach to the case -- engage in discovery. Yukelson took another -- attempt to settle.

1. Lehman and Weiss

On June 6, 2006, Lehman and Weiss filed a demurrer to the complaint, contending the action was barred by a three-year statute of limitations (§ 359). Zamora argued that a four-year limitations period applied (§ 343). The trial court, Judge William F. Highberger, agreed with Zamora and overruled the demurrer on July 18, 2006. The trial court stayed the action for one month to allow Lehman and Weiss to petition this court for relief. They filed a petition for a writ of mandate. We issued an order to show cause. After briefing and argument, we concluded the trial court had properly applied the four-year statute of limitations and, on November 28, 2006, denied the petition (Lehman v. Superior Court, supra, 145 Cal.App.4th 109).

Meanwhile, Lehman and Weiss had served Zamora with a set of form interrogatories and a set of 236 special interrogatories. The two sets of interrogatories sought the identification of every person, document, and fact supporting the allegations in the complaint. Lehman and Weiss also served Zamora with a document demand. She produced over 60,000 documents.

On January 8, 2007, Lehman and Weiss filed a joint answer, generally denying the allegations of the complaint and setting forth 14 affirmative defenses. (See § 431.30, subd. (d).) The answer did not mention arbitration. On the same day, Lehman and Weiss served a cross-complaint on Yukelson, alleging a claim for indemnity.

On June 1, 2007, Lehman and Weiss served Zamora with a "Notice of Deposition of Person Most Knowledgeable [of] the Estate of e4L, Inc." The notice, consisting of 25 pages, listed 159 subjects of inquiry and demanded that the deponent produce all documents on those subjects. The list tracked the allegations of the complaint. In response to the notice, Zamora moved for a protective order, asserting that because e4L was an inactive company, defendants should use special interrogatories in lieu of a deposition. Lehman and Weiss brought a motion to compel the deposition. The trial court granted the motion to compel, denied the motion for a protective order, and imposed sanctions on Zamora in the amount of $2,000. The deposition was set to commence on or before October 5, 2007. Yukelson's attorney, who was attempting to settle the case, requested that the other parties, including Zamora, excuse him from attending the deposition and allow him to question the witness later if a settlement was not reached. They declined the request.

On October 4, 2007, Adrian Stern, a paid consultant and certified public accountant, appeared as the witness at the deposition. The attorneys for Lehman and Weiss questioned Stern but did not finish. The deposition resumed on October 29, 2007. The session began with questions by Yukelson's attorney, who finished in two hours. Counsel for ...

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