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Hong v. CJ CGV America Holdings, Inc.

California Court of Appeal, Second District, Fifth Division

December 18, 2013

Augustine HONG et al., Plaintiffs and Respondents,
CJ CGV AMERICA HOLDINGS, INC. et al., Defendants and Appellants.


APPEAL from an order of the Superior Court of Los Angeles County, Michael L. Stern, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC487990).

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[166 Cal.Rptr.3d 101] Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, Ekwan R. Rhow and David I. Hurwitz, Los Angeles; Quinn Emmanuel, Urquhart & Sullivan, LLP and Daniel H. Bromberg, Redwood Shores, for Defendants and Appellants.

Browne George Ross, Eric M. George, Benjamin D. Scheibe and Lauren Woodland, Los Angeles, for Plaintiffs and Respondents.



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Defendants, CJ CGV America Holdings, Incorporated (CJ CGV America), Joon Hwan Choi, Theodore Kim and Sang Heum Cho, appeal from an order

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denying their motion to compel arbitration. Plaintiffs, Augustine Hong [1], Michael Hong and Nae Young Chung, sued defendants for fiduciary duty breach. Defendants moved to compel plaintiffs to arbitrate pursuant to an arbitration clause in a stock purchase agreement. Plaintiffs opposed the motion, arguing, among other things, defendants waived the right to arbitrate by their conduct in this case and filing a second suit against Augustine. The trial court rejected defendants' argument the waiver by litigation conduct defense should have been decided by an arbitrator. The motion to compel arbitration was denied.

In the published portion of this opinion, we discuss defendants' contention that the issue of waiver by litigation conduct should have been decided by an arbitrator, not the trial court. California statutory and decisional authority recognizes the issue of waiver by litigation conduct is ordinarily resolved by the trial court, not an arbitrator. (Code Civ. Proc., § 1281.2; Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 982, 64 Cal.Rptr.2d 843, 938 P.2d 903.) But defendants assert as [166 Cal.Rptr.3d 102] this case is subject to the Federal Arbitration Act, the waiver by litigation conduct issue should have been decided by the arbitrator. Defendants rely on the following language appearing in Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 84, 123 S.Ct. 588, 154 L.Ed.2d 491 ( Howsam ): " So, too, the presumption is that the arbitrator should decide ‘ allegation[s] of waiver, delay, or a like defense to arbitrability.’ Moses H. Cone Memorial Hospital [ (1983) 460 U.S. 1,] 24-25[103 S.Ct. 927, 74 L.Ed.2d 765]." Based upon the near-unanimous analysis of federal and state courts, we conclude the foregoing language in Howsam does not apply here. The trial court correctly ruled it, rather than an arbitrator, should decide the merits of the waiver by litigation conduct defense to arbitration asserted by plaintiffs. We affirm the order denying the motion to compel arbitration.


A. The Second Amended Complaint

Plaintiffs filed their original complaint on July 9, 2012 against: CJ CGV America, Mnet Media Corporation (Mnet); CJ Corporation; CJ E & M Corporation; Mi-Kyung Lee; Joon Hwan Choi; Mr. Kim; and Mr. Cho. On August 29, 2012, plaintiffs filed their first amended complaint. On September

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19, 2012, defendants filed a demurrer to the first amended complaint. Defendants argued plaintiffs could not proceed with a direct lawsuit. The demurrer was sustained on October 19, 2012 with leave to amend. On October 29, 2012, plaintiffs filed their second amended complaint, the operative pleading, as a derivative lawsuit.

According to the second amended complaint, plaintiffs are shareholders of ImaginAsian Entertainment, Incorporated (ImaginAsian). Mr. Chung and Mr. Hong are common shareholders and Augustine is one of the largest common shareholders. Plaintiffs are residents of New Jersey. ImaginAsian is a multi-media company operating as a broadcast television network in many markets in the United States, catering to Asian-American and South Asian-American culture and entertainment. ImaginAsian is a corporation existing under Delaware law.

Korean conglomerate CJ Corporation expressed an interest in investing in ImaginAsian. CJ CGV America and Mnet are affiliates of CJ Corporation. CJ CGV America is a corporation existing under California law. On August 14, 2009, plaintiffs, Mnet and CJ CGV America entered into a contract. The August 14, 2009 stock arrangement is entitled, " ImaginAsian Entertainment, Inc. Series A Preferred Stock Purchase Agreement" (purchase agreement). The stock purchase agreement contains the arbitration clause at issue in this appeal. Mnet and CJ CGV America received preferred stock. As a result, Mnet and CJ CGV America secured a slight majority interest in ImaginAsian. Plaintiffs became minority shareholders. Mnet and CJ CGV America secured the authority to select three of the five directors of ImaginAsian. Mr. Choi, who is a corporate officer, and Mr. Kim are two of the directors. Mr. Choi, Mr. Kim and Mr. Cho are residents of California. For a two-year period, Mnet and CJ CGV America were given the ability to make additional investments in ImaginAsian under certain terms and conditions which they exercised. Plaintiffs were offered the ability to purchase additional shares, but did not, further reducing their percentage ownership interest.

After this two-year period elapsed, Mnet and CJ CGV America indicated an intent to invest additional monies into ImaginAsian. But the offer was at a per share price below what plaintiffs believed [166 Cal.Rptr.3d 103] was the actual value of ImaginAsian. Defendants' intended price would be set by ImaginAsian's directors' board, which CJ Corporation, Mnet and CJ CGV America controlled. ImaginAsian retained an unidentified valuation firm to assess its value. However, defendants sought to influence the valuation firm to make a low value that would favor them. The low valuation would be at the expense of plaintiffs and other common stock shareholders.

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The second amended complaint alleges defendants had a fiduciary duty to engage fairly with the minority shareholders. Plaintiffs allege: defendants valued ImaginAsian at an artificially low price; this would allow defendants to acquire a larger ownership interest; defendants forced ImaginAsian to devote an increasing percentage of its programming to Korean language programs; and this programming would benefit defendants. ImaginAsian's stated mission was to serve all Asian-American groups and Americans interested in Asian culture and entertainment. Plaintiffs asserted these fiduciary duty breaches cost ImaginAsian over $9.8 million.

B. Defendants' Motion To Require Plaintiff To Furnish Bond

On November 9, 2012, 11 days after the second amended complaint was filed, defendants moved to require plaintiffs to furnish a bond pursuant to Corporations Code section 800. Defendants argued there was no reasonable possibility plaintiffs' lawsuit would benefit ImaginAsian or its shareholders. Defendants asserted without a new influx of funds, they were forced to take a $12 million loan. Defendants maintained they complied with the programming and licensing agreement (" licensing agreement" ) regarding the amount of Korean language programming. Defendants requested that plaintiffs be required to post a $50,000 bond to cover the probable litigation expenses in the defense of the action. Defendants relied upon two declarations. The first declaration was executed by David I. Hurwitz, counsel for defendants. Mr. Hurwitz indicated he had been extensively involved in shareholder derivative litigation for over 20 years in various state and federal courts. Mr. Hurwitz indicated the fees which would be incurred by defendants " in connection with this action" would exceed $50,000. Mr. Hurwitz declared that defendants had successfully demurred to the first amended complaint and anticipated demurring to the second amended complaint as well.

In addition, Mr. Hurwitz described the extensive discovery that had occurred since the filing of the complaint: " Defendants have had to respond to Plaintiffs' request for production of documents and electronically stored information, including more than sixty separate requests to CJ CGV alone, and are in the midst of document collection efforts, and CJ CGV has responded to Plaintiffs' First Set of Special Interrogatories." In addition, Mr. Hurwitz declared, " Plaintiffs have noticed the deposition of one of the individual defendants, Theodore Kim, and given the number of parties and issues, the cost of preparing for, taking and defending the depositions alone would exceed fifty thousand dollars." Finally, Mr. Hurwitz further described

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both the past and anticipated litigation, " Counsel for co-defendants (who reside[s] in China) has already filed a successful motion to quash service on behalf of its clients. If the plaintiffs make further attempts at service and the Court finds that the Korean resident defendants are properly in the action, that would significantly increase the cost of litigation. [¶] ... Should the Second Amended Complaint survive a demurrer, Defendants would move for summary judgment and/or [166 Cal.Rptr.3d 104] summary adjudication, all of which could increase the amount of defense costs well beyond the statutory maximum, not to mention the aggregate expense if the action was tried."

The second declaration was filed by Sang Heum Cho, the chief operating officer of ImaginAsian. Much of the declaration relates to the merits of the litigation. However, one part of Mr. Cho's declaration relates to a separate agreement between the parties. Mr. Cho explained, " Concurrently with the Stock Purchase Agreement, ImaginAsian, entered into a Programming and Graphics License Agreement with Mnet for a total of 1,545 hours of Korean language programming to be delivered to ImaginAsian on a weekly basis over the license period." The licensing agreement, which contains no arbitration clause, was negotiated and signed by Augustine.

On January 2, 2013, plaintiffs filed their opposition. Plaintiffs argued increased Korean programming would negatively affect ImaginAsian's outside interests. ImaginAsian's outside interests had advocated programming made in the United States by Asian Americans. Plaintiffs asserted ImaginAsian's programming was 80 to 90 percent Korean programming. Increased Korean programming also negatively affected distribution because foreign language channels were not offered to as many subscribers. Plaintiffs contended defendants attempted to seize a larger ownership interest at an unfair price and wanted to enjoin any future offering. Plaintiffs filed three declarations discussing the litigation's merits totaling 28 pages plus 94 pages of written exhibits.

On January 8, 2013, defendants filed their reply. Defendants argued they had increased subscribers and revenue and invested considerable resources for Asian-American programming. Defendants asserted they never made the offering to any shareholders. On January 15, 2013, the trial court denied defendants' motion to require the posting of a bond. ...

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