United States District Court, N.D. California
MEMORANDUM OF DECISION ON EQUITABLE CLAIMS FOR RELIEF
Re: Dkt. Nos. 226, 227
HOWARD R. LLOYD, Magistrate Judge.
Following a jury verdict in favor of plaintiff on its claims for intentional misrepresentation, negligent misrepresentation, conversion, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and breach of contract, plaintiff now moves the court to find in its favor on its two equitable claims of rescission and constructive trust. Dkt. No. 226 (Motion). Defendant opposes. Dkt. No. 227 (Opp'n). For the reasons explained below, the court finds in plaintiff's favor on the rescission claim and in defendant's favor on the constructive trust remedy.
Plaintiff Viasphere International, Inc. ("Viasphere") sued its former employee, director, and shareholder, defendant Aram Vardanyan ("Vardanyan") alleging eight claims. The basis for Viasphere's complaint was that Vardanyan did not work full time for Viasphere as he had promised, and misappropriated company funds and resources for his own use. See Dkt. No. 15 (First Amended Complaint).
Specifically, Viasphere entered into two Stock Option Agreements with Vardanyan, and Vardanyan agreed to purchase 1, 713, 000 shares of Viasphere common stock at a price of $0.001 per share, for a total of $1, 713.00. FAC at ¶¶ 7-8. The Stock Option Agreements were contingent on Vardanyan being a "full time employee, " and Vardanyan was appointed General Director of the Viasphere Technopark, a commercial development located in Armenia. Id. at ¶¶ 10-11.
While employed by Viasphere, Vardanyan allegedly worked on his own company, Barva, Ltd., which conflicted with his duties towards Viasphere, used Viasphere "employees, materials, and resources" to build a personal residence, engaged in self-dealing with family members, and various other transgressions. FAC at ¶ 18.
After a two-week trial, a jury returned a verdict in favor of Viasphere on all six counts, including finding that the statute of limitations on Viasphere's claims had not run. The jury awarded compensatory damages of $72, 500 and punitive damages of $1, 001, 713.
Viasphere now seeks entry of judgment on its two remaining equitable claims, rescission and constructive trust.
II. CLAIM FOR RESCISSION
Plaintiff seeks to rescind the Stock Option Agreements in exchange for returning the purchase price of $1, 713 to defendant. Defendant's argument in opposition to granting judgment on the claim for rescission is that it conflicts with the jury's verdict on the breach of contract claim.
When one party has been injured by a breach of contract and she either lacks the ability or the desire to keep the contract alive, she can choose between two different remedies. She can treat the contract as rescinded and recover damages resulting from the rescission. Or she can treat the contract as repudiated by the other party and recover damages to which she would have been entitled had the other party not breached the contract or prevented her performance. An action for rescission is based on the disaffirmance of the contract and an action for damages for breach of contract is based on its affirmance. An action for rescission and an action for breach of contract are alternative remedies. The election of one bars recovery under the other.
Akin v. Certain Underwriters At Lloyd's London, 140 Cal.App.4th 291, 296 (2006) (internal citations omitted).
Although defendant is correct that plaintiff cannot recover both breach of contract damages and rescind the contract, plaintiff is entitled to elect his remedy at any time prior to judgment. See May v. Watt, 822 F.2d 896, 900-01 (9th Cir. 1987) ("[Plaintiff] has not waived his right to seek quantum meruit recovery by electing to submit a contract damage theory to the jury... he was not required to make an election between the relevant contract theories he advocated (breach of contract and rescission) prior to a jury verdict." (citing North Am. Graphite Corp. v. Allan, 184 F.2d 387, 389 (D.C. Cir. 1950)); see also Dopp v. HTP Corp., 947 F.2d 506, 515 (1st Cir. 1991) ("Generally, an election between inconsistent remedies is made after a verdict is entered but prior to the entry of judgment." (internal quotation and citation omitted)).
As the Restatement (Second) of Contracts notes, if defendant can show a material reliance on plaintiff's supposed election for breach of contract, plaintiff may be estopped from electing rescission. § 378 (Election Among Remedies) ("If a party has more than one remedy under the rules stated in this Chapter, his manifestation of a choice of one of them by bringing suit or otherwise is not a bar to another remedy unless the remedies are inconsistent and the other party materially changes his ...