Unarce v. Staff Builders, Inc.
| Citation | 61 F.3d 912 |
| Decision Date | 13 July 1995 |
| Docket Number | 93-17094,Nos. 93-16984,s. 93-16984 |
| Parties | NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. Teodoro A. UNARCE, Jr., Plaintiff-counter-defendant-Appellant, v. STAFF BUILDERS, INC., Defendant-counter-claimant-Appellee. Teodoro A. UNARCE, Jr., Plaintiff-counter-defendant-Appellee, v. STAFF BUILDERS, INC., a New York corporation; Staff Builders International, Inc., a New York corporation; Staff Builders Services, Inc., a New York corporation, Defendants-counter-claimants-Appellants. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Before: TANG, SCHROEDER, and TROTT, Circuit Judges.
California resident Teodoro A. Unarce, Jr. purchased a franchise from Staff Builders, Inc. ("Staff Builders"), a New York Corporation, to operate a visiting nurse facility in San Jose, California. After 16 months of operation, Unarce and Staff Builders agreed to terminate the franchise, and Unarce signed a release relinquishing any and all claims he may have had against Staff Builders. Both the termination agreement and the release contained a choice-of-law provision designating New York law as the law governing the interpretation and enforcement of the documents.
Subsequently, Unarce brought an action against Staff Builders for claims arising out of the purchase and operation of the franchise. Staff Builders filed a counterclaim for litigation expenses contending Unarce's action breached the covenant not to sue contained in the release. Unarce, in turn, claimed the release and termination agreement were invalid because he signed the documents under economic duress. The district court granted Staff Builders' motion for partial summary judgment after determining that under New York law the release was valid and not a product of economic duress. The district court subsequently denied, however, Staff Builders' claim for attorney's fees.
Both parties timely appeal. Unarce asserts the district court erred by (1) applying New York law to the economic duress analysis; and (2) finding Unarce's execution of the release and termination agreement was voluntary. On its cross appeal, Staff Builders contends the district court ignored controlling law. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291, and we affirm.
Unarce first contends the district court erred by applying New York law to his duress claim. Because jurisdiction over this case is based on diversity, we are required to "apply the conflict-of-law principles of the forum state." S.A. Empresa De Viacao Aerea Rio Grandense v. Boeing Co., 641 F.2d 746, 749 (9th Cir. 1981).
The California Supreme Court recently considered for the first time the enforceability of a contractual choice-of-law provision. Nedlloyd Lines B.V. v. Superior Court, 834 P.2d 1148, 1150 (Cal. 1992). In so doing, the court decided that a choice-of-law provision should be given effect so long as the application of the chosen state's law does not violate the conflict-of-law principles embraced by section 187 of the Restatement (Second) of Conflict of Laws ("Restatement"). Id. at 1151 (quoting section 187(2)).
Section 187 indicates, however, that conflict-of-law principles should not be used to give effect to a choice-of-law provision where the validity of the agreement containing the provision is being challenged. See Restatement Sec. 187 cmt. b (whether consent to the inclusion of a choice-of-law provision was in fact obtained by duress should be "determined by the forum in accordance with its own legal principles"). Thus, when a California court is faced with a challenge to a contract's validity, before the court can apply a choice-of-law provision it must determine whether the agreement containing the clause is invalid under California law. See Restatement Sec. 187 cmt. b, illus. 3 (forum state should first apply its own legal principles to determine whether a contract presented on a "take-it-or-leave" basis is invalid); Bos Material Handling, Inc. v. Crown Controls Corp., 137 Cal. App. 3d 99, 107-08 (Cal. Ct. App. 1982) (same); Gamer v. duPont Glore Forgan, Inc., 65 Cal. App. 3d 280, 285-89 (Cal. Ct. App. 1976) (same).
Here, Unarce claims that Staff Builders presented the termination agreement and release on a "take-it-or-leave it" basis, and that because of economic duress he was forced to accept all proffered terms, including the choice-of-law clause. Under these circumstances, the district court should have applied relevant California law to test the legitimacy of Unarce's economic duress claim before considering the choice-of-law provision in the release.
In Rich & Whillock, Inc. v. Ashton Dev., Inc., 157 Cal. App. 3d 1154 (Cal. Ct. App. 1984), the California Court of Appeal stated the standard for evaluating an asserted economic duress claim: "[T]he doctrine now may come into play upon the doing of a wrongful act which is sufficiently coercive to cause a reasonably prudent person faced with no reasonable alternative to succumb to the perpetrator's pressure." Id. at 1158. Thus, under California law, Unarce must establish (1) that a wrongful act by Staff Builders caused Unarce to sign the release; and (2) that Unarce had no reasonable alternative but to execute the agreement.
Wrongful acts for purposes of the economic duress doctrine include (1) the assertion of a claim known to be false, or (2) a bad faith threat to breach a contract or to withhold a payment. Id. at 1159. In contrast, Unarce contends the wrongful conduct in this case consisted of Staff Builders' threat to withdraw its termination offer. Unarce suggests that Staff Builders was under an obligation to terminate the franchise because Staff Builders' alleged misrepresentations in inducing the franchise purchase caused Unarce to suffer continuing financial harm.
A threat to withdraw a termination offer is not, however, among those acts recognized as "wrongful" in Rich & Whillock. In the absence of a legal duty to terminate the franchise agreement, we cannot conclude that Staff Builders' threat to withdraw the offer was a wrongful act. See Sheehan v. Atlanta Int'l Ins. Co., 812 F.2d 465, 469 (9th Cir. 1987) (). And we are unable to locate any relevant California authority supporting Unarce's contention that an allegation of wrongful conduct involving the franchise purchase imposes a duty upon the franchiser to make an irrevocable offer to extinguish the franchise agreement. Indeed, this court recently considered and rejected an argument comparable to the one Unarce now advances. See Gruver v. Midas Int'l Corp., 925 F.2d 280 (9th Cir. 1991) 1. On facts similar to the present case, we refused to transform the plaintiffs' allegations of fraudulent behavior involving the franchise purchase into a wrongful act under the economic duress analysis. Id. at 282.
In Gruver we concluded that where "the alleged misrepresentations did not involve the termination agreements" but instead "involve[] the original franchise agreements ... they are not wrongful acts for the purpose of the economic duress analysis." Id. Our decision was grounded on the common sense observation that if allegations involving the franchise purchase "could be sufficient for economic duress, one could never enter into an enforceable release of a claim for allegedly tortious conduct which caused another party financial distress." Id. For similar reasons, we decline the invitation to erect a rule that could potentially invalidate a negotiated release agreement anytime a financially distressed franchisee alleges the franchise purchase was fraudulently induced. See Sheehan, 812 F.2d at 469 (). Because we reject Unarce's contention that Staff Builders was under a duty to terminate the franchise agreement, we also reject Unarce's contention that Staff Builders' threat to withdraw the termination offer was wrongful conduct within the meaning of Rich & Whillock.
This case might be different if Staff Builders had acknowledged the merits of Unarce's claims, but traded on Unarce's financial weakness to force an unfair settlement agreement. Cf. Rich & Whillock, 157 Cal. App. 3d at 1159 (). But like the plaintiffs in Gruver, Unarce has "presented no evidence that [Staff Builders] acknowledged the merit of [Unarce's] alleged damages, yet in bad faith refused to settle these claims for that amount." Gruver, 925 F.2d at 282 (distinguishing Rich & Whillock).
Accordingly, we conclude that Unarce has failed to demonstrate that Staff Builders' acts were wrongful for purposes of an economic duress...
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...it applied such law. See Restatement (Second) of Conflicts of Laws § 187 cmt. b, illus. 3; see also Unarce v. Staff Builders, Inc., 61 F.3d 912 (9th Cir.1995) (unpublished opinion). [¶ 39.] I submit Dunes did not overcome its burden of proving the clause invalid by merely alleging fraud and......