Alliance Payment Systems, Inc. v. Walczer

• Decision Date: 25 June 2007
• Docket Number: No. A111425.,A111425.
• Citation: 61 Cal.Rptr.3d 789,152 Cal.App.4th 620
• Court: California Court of Appeals Court of Appeals
• Parties: ALLIANCE PAYMENT SYSTEMS, INC., Plaintiff and Appellant, v. Lisbeth WALCZER et al., Defendants and Appellants.

61 Cal.Rptr.3d 789

152 Cal.App.4th 620

ALLIANCE PAYMENT SYSTEMS, INC., Plaintiff and Appellant, v. Lisbeth WALCZER et al., Defendants and Appellants.

No. A111425.

Court of Appeal, First District, Division 1.

June 25, 2007.

Morgan, Franich, Fredkin & Marsh, Mark B. Fredkin, San Jose, Donn Waslif, Attorneys for Appellant/Plaintiff — Alliance Payment Systems, Inc.

Carr, McClellan, Ingersoll, Thompson & Horn, W. George Wailes, Lori A. Lutzker, Burlingame, Attorneys for Appellants/Defendants — Lisbeth Walczer et al.

MARCHIANO, P.J.

Plaintiff Alliance Payment Systems, Inc., a California corporation (APS), appeals from an order granting a new trial in its action against Lisbeth Walczer and Reliable Processing Solutions (RPS; Walczer and RPS are hereafter referred to collectively as defendants) to collect amounts allegedly owed under a settlement agreement that divided a business. Defendants have filed a protective cross-appeal from the judgment after a bifurcated trial.

In the first phase of the trial, a jury awarded APS damages under two provisions of the settlement agreement: one prohibiting the parties from soliciting each other's customers, and another requiring that the parties each forfeit to the other any revenue they received from the other's customers, regardless of solicitation. In the second phase of the trial, the court found that the revenue forfeiture provision was unenforceable as an illegal restraint of trade, and the court subsequently ordered a new trial because the verdict may have erroneously awarded damages under that provision.

The principal issues presented are whether the settlement provisions are restraints of trade prohibited by Business and Professions Code section 16600, and, if so, whether they are excepted from the prohibition under Business and Professions Code sections 16601 or 16602.¹ We conclude that the provisions are restraints of trade, that the forfeiture of residuals for five years after dissolution, as discussed below, is illegal, but that the antisolicitation covenant is enforceable under section 16602 as a restraint imposed in connection with the dissolution of a partnership, or the disassociation of a partner. We agree with the trial court's determinations, and affirm the new trial order.

I. FACTUAL AND PROCEDURAL BACKGROUND

This lawsuit is part of the fallout from the breakup of the professional and personal relationship between Lisbeth Walczer and Robert Joyce, APS's founder and sole shareholder. Mr. Joyce and Ms. Walczer are merchant service providers in the credit card industry. They solicit merchants to sign up with a third party processor of credit card payments, sell hardware and software to the merchants for credit card transactions, and service the merchants by helping them with supplies, equipment, and payments. Service providers receive commissions known as "residuals" from the third party processor on credit card payments to their merchants.

Joyce operated Crown Card Services (Crown) from 1986 to 1994; Walczer worked for Crown from 1991 to 1994. Thereafter, Walczer worked at First Data Merchant Services (First Data), and Joyce started Chestnut Card Services (Chestnut). Walczer and Joyce began living together in 1997. In 1998, Joyce approached Walczer about leaving First Data; at the time, Chestnut was receiving residuals of $15,000 per month through the third party processor American National Bank (ANB). Joyce proposed, in Walczer's words at trial, that "we would join together and form a new company. We would take Chestnut Card Services and rename it and form a joint venture or partnership, and we would work together. He would work on his side and I would start bringing in business from my side."

Joyce and Walczer signed the following agreement on May 23, 1998:

"Outline/Purpose: Robert Joyce (Bob) and Lisbeth Walczer (Lis) desire to enter into a business venture together. This document outlines their understanding, as evidenced by their signatures, of mutual objectives, responsibilities and compensation.

"The name of Chestnut Card Services, a California corporation 100% owned by Bob, shall be changed to Alliance Payment Systems (APS).

"Office space acceptable to both, of approximately 800-1,000 square feet in size, shall be obtained, somewhere between San Carlos and San Bruno.

"Bob will continue to maintain his home office at 816 Lakeshore Drive and will divide his time as needed between both offices. Lis will resign from her position with FDMS and will devote 100% of her business activities to APS effective July 1, 1998.

"This joint venture will initially be 100% funded by existing company funds and those of Bob's. Bob will be responsible for the rent, furniture, utilities and all other expenses, including but not limited to industry assessments and fees, purchase of inventory, forms, advertising, recruiting and shipping expenses.

"The stock of APS will initially be owned 100% by Bob. He will draw no compensation from the joint venture. Lis will draw funds as needed for ordinary living expenses, not to exceed $5,000 per month until such time as the r[es]idual revenue generated by merchant accounts obtained by her and other sales revenue exceeds that amount. It shall be her objective, through her activities, to generate as much new business for the company as possible in order to contribute to corporate profits so that the income does not ever exceed the outgo.

"Bob will continue to operate and attempt to grow his portion of the business submitted to American National Bank for an indefinite period in order to generate sufficient cash flow for the joint venture. Lis will be fully responsible for all sales and service functions. Bob and Lis will consult each other on all business activities and no decisions shall be made without the approval of the other.

"At such time as Lis personally and the efforts [of] sales personnel hired by her and for which she is responsible, begin to contribute to corporate profits, her percentage of ownership shall increase accordingly. At the end of every quarter the residual revenue stream shall be reviewed and a percentage of ownership for Lis will be determined by the percentage of revenue generated by her as a percentage of the total, without regard for expenses, which shall be maintained in an ordinary manner and agreed upon by both Bob and Lis. At such time as the residual revenue generated by Lis reaches the amount of $15,000 per month she shall become a 50% vested shareholder in APS, be assigned the corporate title of Vice President and be entitled to all of the benefits thereof. It is at this point that all company activities and funds shall be combined without regard to personal achievements and responsibilities. Bob's home office will be closed, Lis will [be] authorized to sign on the corporate checking account and ongoing compensation for each shall be determined.

"In the event of non-performance of this joint venture by either Bob or Lis, the damaged party shall be entitled to compensation for all out of pocket expenses accrued. No provision is made for time and labor."

APS contracted with NOVA Information Systems, Inc. (Nova) in June 1998 to process new accounts, and Walczer brought in John Gallups and Charles Malley in 1999 as sales representatives. Malley, who had worked with Walczer at First Data, testified that when Walczer called him about joining APS, she told him that she and Joyce were partners in the business. Joyce testified that he continued to service his ANB accounts, and that the ANB side of the business "remained fairly stagnate" from 1998 to 2000, while the Nova side grew thanks mainly to Walczer's efforts.

Joyce acknowledged that, by October 1999, Walczer was bringing in residuals of more than $15,000 per month, and had thereby satisfied the condition for obtaining 50 percent ownership of APS under their May 1998 agreement. Joyce told Walczer that he considered her a 50 percent owner, and he said at trial that, as far as he was concerned at that point, she "could have taken whatever she wanted" in compensation from the business. However, he did not give her any stock in APS because of tax considerations and concerns relating to his divorce proceeding.

At Walczer's request, Joyce wrote and signed the following letter, dated October 30, 1999:

"To Whom It May Concern:

"I, Robert V. Joyce, being of reasonably sound mind, do hereby state the following information with regard to the proper distribution of the assets and liabilities of Alliance Payment Systems, hereinafter referred to as `APS,' in the event of my death.

"At the present time, I am listed as the only stockholder and corporate officer of APS. In June of 1998, the name of Chestnut Card Services was changed to Alliance Payment Systems and a partnership between Lisbeth Walczer and me was created. In due course, this partnership will become officially sealed with the appropriate redistribution of stock, at which time Lisbeth shall receive 50% of the shares outstanding. This is my intention.

"Lisbeth presently performs her corporate functions with the title of Vice President and as of October 25 was added to the corporate checking account maintained with Washington Mutual Bank. The purpose herein is to advise those who may be concerned about such matters that I hereby bequeath the 50% portion of APS that I will retain once the transfer has been made official, to Lisbeth, thereby giving her full and complete control and administration of the affairs of APS."

Joyce and Walczer's relationship soured in 2000, and they moved into separate residences. Walczer said that, before they separated, he wrote her letters saying that "he would rather be my lover than my business partner," but she "had debated and ... decided that that was not a good way to go." Walczer said that she proposed "that we should separate the business at the end of 2000," and Joyce agreed.

Walczer ran the business on her own in 2001, using a bank account...