Kashani v. Tsann Kuen China Enterprise Co.

• Citation: 118 Cal.App.4th 531,13 Cal.Rptr.3d 174
• Decision Date: 11 May 2004
• Docket Number: No. B166041.,B166041.
• Court: California Court of Appeals
• Parties: Mir Kazem KASHANI et al., Plaintiffs and Appellants, v. TSANN KUEN CHINA ENTERPRISE CO., LTD., et al., Defendants and Respondents.

13 Cal.Rptr.3d 174

118 Cal.App.4th 531

Mir Kazem KASHANI et al., Plaintiffs and Appellants, v. TSANN KUEN CHINA ENTERPRISE CO., LTD., et al., Defendants and Respondents.

No. B166041.

Court of Appeal, Second District, Division 5.

May 11, 2004.

Saied Kashani for Plaintiffs and Appellants.

Sheppard, Mullin, Richter & Hampton, Jeffrey J. Parker and Zareh Jaltorossian, Los Angeles, for Defendants and Respondents.

MOSK, J.

Plaintiffs Mir Kazem Kashani, Manoutcher G. Nikfarjam, and Shantia Hassanshahi (collectively plaintiffs) allege in their second amended complaint that they and defendant Tsann Kuen China Enterprise Co., Ltd., a Chinese corporation that is the parent corporation or owner of the other named defendants (collectively defendants), executed a written agreement whereby plaintiffs would establish an Iranian corporation in Iran to build a plant in Iran for manufacturing defendants' computer products to be sold in Iran and elsewhere and would provide defendants with 18 percent of the shares of the corporation. Plaintiffs further allege that in reliance on this agreement they expended monies on the project, began setting up the plant, and obtained necessary cooperation from the Government of Iran. According to plaintiffs, defendants ceased doing business in the computer industry, in whole or in part, and decided not to proceed with the agreement. Plaintiffs filed an action for breach of contract seeking their expenditures and anticipated lost profits as damages for breach of the agreement. On appeal, plaintiffs waived their right to seek recovery for their out-of-pocket expenses.

The trial court granted defendants' motion for summary judgment on the ground that the alleged agreement is unenforceable as illegal and against public policy in that it violates United States presidential executive orders and implementing regulations, both of which prohibit, without a license, any "United States person" from engaging in any transaction, either directly or indirectly, that deals in or relates to the exportation, sale or supply of goods, technology or services to Iran or the Government of Iran or any investment in or financing of such transactions.

In affirming the summary judgment, we hold that plaintiffs legally cannot establish their claim because the agreement upon which plaintiffs' claim is based is illegal and against public policy. We also hold that neither the presidential executive orders nor the regulations implementing the orders should be interpreted to preclude defendants from prevailing on their affirmative defense of illegality.

FACTUAL AND PROCEDURAL BACKGROUND¹

Plaintiffs² are residents and citizens of the United States. Defendants Tsann Kuen China Enterprise Co., Ltd. and Tsann Kuen Shanghai Enterprise Co., Ltd. are Chinese corporations doing business in China and elsewhere; defendant Tsann Kuen USA, Inc. is a California corporation with its principal place of business in California; defendant Tsann Kuen Enterprise Co., Ltd. is a Taiwanese corporation with offices in California and elsewhere; defendant Eupa International Corp. is a Nevada corporation with its principal place of business in California; defendant Tsann Kuen Enterprise Co., Ltd. owns directly or indirectly the other defendant companies; and the defendant companies use the names "Tsann Kuen" or "Eupa" or variations of those names.

Defendants manufactured computer products and desired to sell notebook computers in Iran, but the high import duties were an impediment. The Islamic Republic of Iran (Iran or Government of Iran) established a "free trade zone" (known as the "Kish Free Trade Zone") in which goods manufactured in that zone received preferential import duty treatment even if the goods utilized some components manufactured outside Iran. According to plaintiffs, they and defendants agreed to establish an Iranian corporation to manufacture notebook computers in the free trade zone and to sell that product in Iran and in neighboring countries. The initial capital of the corporation was to be U.S.$7 million. Under the agreement, defendants would supply necessary resources, including rights for the design, manufacturing, assembling, and sale of its products; arrange for equipment for the Iranian facility; create research and development at the facility; and train plaintiffs' engineers and workers to manufacture the computers at the facility. Defendants were to receive 18 percent of the stock of the corporation ("as long as the agreement between the parties is valid"), while plaintiffs would form the corporation and establish the facility in Iran. As plaintiffs were to transfer to defendants 18 percent of stock of the corporation, at least initially, plaintiffs would necessarily have had all of the outstanding stock of the corporation and have been the controlling shareholders of that entity. Plaintiffs allege that the parties reduced their agreement to writing in a November 28, 2000 "Letter of Intent" (agreement) that provided that the writing was to be binding.³ Plaintiffs personally planned to manage the company, which was to manufacture and sell the products in Iran and elsewhere. It appears that the Iranian government was involved in the project, for there is correspondence reporting meetings with Iranian government officials. Plaintiffs introduced in evidence an internal memorandum of defendants stating, "[s]ince computers on the Iranian market are now very expensive and heavily taxed, and Americans are not allowed in but they want American technology, they are taking a roundabout route."

Plaintiffs allege that in reliance on the agreement, they invested time and money to carry out their obligations, including creating an Iranian corporation known as "Notebook International Ltd." Plaintiffs contend that they did not, and were not going to, supply or sell from the United States any computer or software materials or technology. Initially, plaintiffs operated Notebook International Ltd. out of California, and they began to arrange for financing either from a Pakistani investor or an Iranian bank, but defendants "decided to pull out of the computer industry entirely or in relevant part [and] decided not to proceed with the November 28, 2001 [sic] contract." Defendant Tsann Kuen China (Shanghai) Enterprise Co., Ltd. conceded it ceased manufacturing computers in 2001. Thus, according to plaintiffs, defendants breached the agreement by terminating it without cause, thereby causing plaintiffs damages in the amounts plaintiffs expended and lost profits.

Plaintiffs asserted only a cause of action for breach of the agreement and not one for quantum meruit. Defendants moved for summary judgment on the ground that the agreement was illegal and contrary to public policy because it violated Executive Orders Nos. 13059, 62 Federal Register 44531 (Aug. 19, 1997) and 12959, 60 Federal Register 24757 (May 6, 1995) (Orders) and the implementing regulations (31 C.F.R. 560.101-560.418) (2000) (Regulations).⁴ Those Orders and Regulations prohibit any United States person from engaging in any transaction, directly or indirectly, relating to the exportation, reexportation, sale, or supply of goods, technology, or services to Iran or the Government of Iran. The Orders were authorized by, inter alia, the International Emergency Economic Powers Act (50 U.S.C. § 1701 et seq. (IEEPA)), which act provides for civil and criminal penalties for violations of orders promulgated pursuant to that statute. (50 U.S.C. § 1705.)

Defendants contend that California law renders the agreement unenforceable because the agreement has an illegal object and is contrary to law. (Civ.Code, §§ 1441, 1550, 1596, 1598, 1608, 1667, 1668.) Plaintiffs counter that the agreement was legal where executed and where it was to be performed and was capable of being performed in a legal manner; that defendants did not meet their burden to show that a license could not have been obtained from the United States Office of Foreign Asset Control (OFAC) authorizing (even retroactively) the agreement; that the Orders are not intended to confer a private benefit or right of action or defense on a party; and that to the extent the Orders might cover the transaction involved, they are unconstitutionally vague.

The trial court granted defendants' motion for summary judgment and entered judgment. Plaintiffs appealed.

DISCUSSION

1. Standard of Review

Summary judgment is granted when a moving party establishes the right to the entry of judgment as a matter of law. (Code Civ. Proc., § 437c subd. (c).) "The purpose of the law of summary judgment is to provide courts with a mechanism to cut through the parties' pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their dispute." (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843, 107 Cal.Rptr.2d 841, 24 P.3d 493.)

A defendant moving for summary judgment meets its burden of showing that there is no merit to a cause of action if that party has shown that one or more elements of the cause of action cannot be established or that there is a complete defense to that cause of action. (Code Civ. Proc., § 437c, subd. (p)(2).) Once the defendant has made such a showing, the burden shifts to the plaintiff to show that a triable issue of one or more material facts exists as to that cause of action or as to a defense to the cause of action. (Aguilar v. Atlantic Richfield Co., supra, 25 Cal.4th at p. 849, 107 Cal.Rptr.2d 841, 24 P.3d 493.) If the plaintiff does not make such a showing, summary judgment in favor of the defendant is appropriate. To obtain a summary judgment, "all that the defendant need do is to show that the plaintiff cannot establish at least one element of the cause of action.... [T]he defendant need not himself conclusively negate any such element...." (Id. at p. 853, 107 Cal.Rptr.2d 841, 24 P.3d 493.)

On appeal from a summary judgment, an appellate court makes "an...