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Doty Scott Enterprises, Inc v. Sector 10

January 24, 2013


The opinion of the court was delivered by: Hon. Gonzalo P. Curiel United States District Judge



On October 16, 2009, plaintiff Doty Scott Enterprises, Inc. ("Plaintiff") filed suit against defendant Sector 10, Inc. ("Defendant") and others in the Superior Court of California, County of San Diego.*fn1 In its Complaint, Plaintiff asserted claims for (1) breach of contract, (2) fraud, and (3) breach of the covenant of good faith and fair dealing, requesting damages and specific performance. (ECF No. 1.) On November 19, 2009, Defendant answered the Complaint, asserting, among other defenses, that "Plaintiffs claims are barred because they are subject to mandatory arbitration." (ECF No. 1.) On the same day, Defendant removed the action to this Court, alleging diversity jurisdiction. (ECF No. 1.)

Plaintiff alleges that, on or about November 13, 2007, Plaintiff and Defendant entered into a financial advisory services agreement, whereby Plaintiff was to provide certain accounting review and consulting services in connection with Defendant's public filings with the Securities and Exchange Commission relating to certain convertible notes that Defendant issued to third parties. Defendant was to pay Plaintiff $8,750 for services rendered prior to entering the agreement. In addition, Defendant was to pay, at the time of entering the agreement, a $2,500 retainer and all other fees due and owing as of November 30, 2007. In the alternative, Defendant was to issue a promissory note for the full amount due and owing as of the date the parties entered into the agreement. Pursuant to the agreement, Defendants agreed to engage Plaintiff for a minimum of one year of quarterly updates relating to the convertible notes.

The agreement contains a "Binding Arbitration" provision that states in relevant part: Upon the demand of either party, any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity thereof, or that arises out of the relationship of the parties shall be resolved by mandatory binding arbitration in San Diego, California. If despite demand, an action is commenced or prosecuted in any court, the party demanding arbitration may bring any action in any court of competent jurisdiction to compel arbitration of such matters.

Plaintiff alleges it performed its services under the agreement and that Defendant benefitted thereby, in that Defendant continues to use and rely on the SEC filings that Plaintiff prepared for Defendant.

Plaintiff alleges that, on or about November 30, 2007, Plaintiff delivered to Defendant invoices totaling $16,346 for work done under their agreement, but that Defendant failed to issue any payment. Plaintiff alleges that, as such, the outstanding balance was automatically converted under the terms of the promissory note.

Plaintiff alleges that, according to the terms of the promissory note, the entire balance has been due since December 30, 2007, and that, because no payment has been made, the promissory note is in default.

Plaintiff further alleges that, in July 2009, it sent a conversion demand, demanding that -- pursuant to the promissory note -- the outstanding balance of the note (then totaling $20,775.76, including interest) be converted into 3,462,626 free-trading and unrestricted shares of Defendant's common stock. Plaintiff alleges that, as of the date it filed its Complaint, the value of the conversion shares was valued at $1,038,787 per Bloomberg, LP's valuation of Defendant's stock at $0.30 a share.

Plaintiff alleges that, following delivery of the invoices in November 2007, Defendant ceased contact with Plaintiff. This action ensued.

After removal to this Court, this case proceeded in due course. No dispositive pretrial motions were filed, and the parties have conducted no discovery, (see ECF No. 23). On August 26, 2011, Judge Hayes held a pretrial conference, setting the matter for a jury trial on January 24, 2012. Thereafter, the trial date was vacated, Defendant's counsel of record withdrew, Defendant retained new counsel, and no other significant action occurred until August 24, 2012, when Judge Hayes set a pretrial conference for September 14, 2012. That pretrial conference was converted to a status hearing, in which Judge Hayes requested that the issue of arbitration be briefed by November 15, 2012, setting an additional status hearing for December 7, 2012. Thereafter, Judge Hayes transferred the case to this Court, and Defendant filed the instant Motion to Compel Arbitration and Stay Action. (ECF Nos. 64, 65.) Plaintiff filed an opposition to the Motion to Compel, (ECF No. 68), and Defendant filed a reply, (ECF No. 69).


I. Legal Standard

The FAA requires the enforcement of arbitration contracts. See 9 U.S.C.A. ยง 1 et seq. More ...

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