Hambrecht & Quist Venture Partners v. American Medical Internat., Inc.

• Decision Date: 05 October 1995
• Docket Number: No. B088866,B088866
• Citation: 38 Cal.App.4th 1532,46 Cal.Rptr.2d 33
• Court: California Court of Appeals Court of Appeals
• Parties: , 95 Cal. Daily Op. Serv. 7901, 95 Daily Journal D.A.R. 13,500 HAMBRECHT & QUIST VENTURE PARTNERS et al., Plaintiffs and Appellants, v. AMERICAN MEDICAL INTERNATIONAL, INC., Defendant and Respondent.

Page 33

46 Cal.Rptr.2d 33

38 Cal.App.4th 1532, 95 Cal. Daily Op. Serv. 7901,

95 Daily Journal D.A.R. 13,500

HAMBRECHT & QUIST VENTURE PARTNERS et al., Plaintiffs and Appellants, v. AMERICAN MEDICAL INTERNATIONAL, INC., Defendant and Respondent.

No. B088866.

Court of Appeal, Second District, Division 1, California.

Oct. 5, 1995.

Certified for Partial Publication ^*

Rehearing Denied Nov. 14, 1995.

Review Denied Jan. 24, 1996.

[38 Cal.App.4th 1535] Draper & Pherson, Douglas S. Draper, Woodland Hills, Cripe & Graham and Gary E. Cripe, Upland, for Plaintiffs and Appellants.

Jones, Day, Reavis & Pogue, Dean B. Allison, David J. DiMeglio and Christine A. Samsel, Los Angeles, for Defendant and Respondent.

[38 Cal.App.4th 1536] MASTERSON, Associate Justice.

This appeal raises the question of whether a standard choice-of-law provision (which states that a contract shall be governed by the "laws" of a particular jurisdiction) incorporates the statutes of limitations of the chosen state. We hold that it does and further conclude that the choice-of-law provision in this case requires the application of a foreign statute of limitations which is shorter than the otherwise applicable California statute of limitations.

BACKGROUND

In October 1992, plaintiffs ¹ filed their original complaint in superior court against American Medical International, Inc. ("AMI") and others, ² alleging various causes of action arising out of plaintiffs' purchase of stock in a leveraged buyout of a company affiliated with AMI. Defendants removed the action to federal district court and challenged the sufficiency of the allegations. The district court's ruling resulted in the filing of a first amended complaint and a remand of the action to superior court.

The first amended complaint alleged as follows. AMI is a Delaware corporation with its principal place of business in Los Angeles County. It is a private hospital and health care company. In or about 1976, AMI formed Professional Hospital Services, Inc. ("PHS Services") to develop and operate automated financial management systems for all of AMI's domestic hospitals. In 1978, AMI began selling these systems to non-AMI hospitals. AMI owned all of the stock in PHS Services through its wholly owned subsidiary, AMI Information Systems Group, Inc. ("AMI Systems"). AMI formed Professional Healthcare Systems Holding Corporation ("PHS Holding"), a Delaware corporation, so that PHS Holding could acquire PHS Services from AMI Systems. To accomplish that acquisition, PHS Services was first acquired by a wholly owned subsidiary of PHS Holding, Professional Healthcare Systems Acquisition Corporation ("PHS Acquisition"). The name of PHS Services was then changed to Professional Healthcare Systems, Inc. ("PHS"), and PHS [38 Cal.App.4th 1537] Acquisition was merged into PHS. PHS is a Delaware corporation with its principal place of business in Los Angeles County.

In connection with the leveraged buyout, PHS Holding entered into a purchase agreement with AMI and AMI Systems in which the latter companies agreed to sell the business of PHS Services to PHS Acquisition for $35 million. The purchase price was to be financed in part by the sale of preferred stock in PHS Holding to certain investors, including plaintiffs. To solicit investors, AMI distributed a private placement memorandum, which, according to plaintiffs, contained material misrepresentations concerning

the business, financial condition, and economic prospects of PHS Holding and PHS. In reliance on those misrepresentations, plaintiffs executed stock purchase agreements in November 1987 (the "November agreements") to buy stock in PHS Holding. Plaintiffs did not discover the falsity of the misrepresentations until in or about March 1989

The first amended complaint contained five causes of action. The first cause of action, for fraud, sought to rescind the November agreements with PHS Holding. AMI's liability on that claim was based on the allegation that PHS Holding was its alter ego. The second cause of action, also asserted against AMI on an alter ego theory, sought rescission of the November agreements due to a mistake of fact or law. The third and fourth causes of action sought to rescind the November agreements based upon an undisclosed relationship of principal and agent between AMI and other defendants. The fifth cause of action alleged a conspiracy to defraud plaintiffs in connection with their purchase of stock.

AMI demurred to the first amended complaint. The trial court overruled the demurrer as to the first four causes of action but sustained it as to the fifth cause of action (for conspiracy) without leave to amend. After filing an answer and engaging in discovery, AMI moved for summary adjudication on the first two causes of action, arguing that plaintiffs were estopped from asserting an alter ego theory since they had treated PHS Holding as a valid, separate corporate entity. The court granted the motion.

In May 1994, plaintiffs obtained leave to file a second amended complaint, which realleged the first four causes of action and added two new claims against AMI. A new fifth cause of action, for breach of contract, alleged that in August 1987, PHS Holding had entered into an "Agreement to Purchase Stock" (the August agreement) with AMI and AMI Systems. That agreement stated in part: "The Seller [AMI] and [AMI Systems] agree that the representations, warranties and covenants of the Seller and [38 Cal.App.4th 1538] [AMI Systems] are hereby expressly made for the benefit of existing and future stockholders (including shareholders of preferred stock) of the Buyer [PHS Holding] and such shareholders are third-party beneficiaries to this Agreement." Plaintiffs alleged that AMI breached the August agreement by misrepresenting the business, financial condition, and economic prospects of PHS Holding and PHS.

A new sixth cause of action, for declaratory relief, sought to establish plaintiffs' right to indemnification from AMI based on an indemnity provision in the August agreement. Plaintiffs alleged that the August agreement obligated AMI (1) to indemnify them for losses incurred in purchasing PHS Holding stock and (2) to satisfy any judgment they might recover against PHS Holding. The August agreement, which was attached to the second amended complaint as an exhibit, also stated: "The transactions contemplated by and the provisions of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware."

After filing the second amended complaint, plaintiffs stipulated to dismiss the third and fourth causes of action therein without prejudice, leaving only the fifth and sixth causes of action to be adjudicated. AMI demurred to those remaining claims on the ground that they were barred by Delaware's three-year statute of limitations for breach of contract, made applicable by the August agreement's choice-of-law provision. ³ The trial court agreed and sustained the demurrer without leave to amend.

Judgment was entered in AMI's favor in September 1994. Plaintiffs filed a timely appeal.

DISCUSSION

Plaintiffs contend that the trial court erred in construing the choice-of-law provision to require the application of the Delaware statute of limitations to the fifth and sixth causes of action. In the alternative, they argue that

even if the choice-of-law clause incorporated the Delaware statute of limitations, the California statute of limitations should nevertheless be applied. We disagree with these contentions and affirm the judgment

A. Applicability of Delaware Statute of Limitations

Because the trial court applied the Delaware statute of limitations at the pleading stage, sustaining AMI's demurrer without leave to amend, "we [38 Cal.App.4th 1539] are guided by long-settled rules. We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. We also consider matter which may be judicially noticed. Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. The burden of proving such reasonable possibility is squarely on the plaintiff." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58, citations and internal quotation marks omitted.) A complaint fails to state a cause of action where the dates alleged therein establish that the claim is barred by the statute of limitations. (Anderson v. McNally (1957) 150 Cal.App.2d 778, 783-784, 310 P.2d 975.)

In reviewing the trial court's ruling that the fifth and sixth causes of action are time-barred, we first consider whether the choice-of-law provision incorporates Delaware's statutes of limitations. Finding that it does, we then consider whether the provision is enforceable in this case.

1. Scope of the Choice-of-Law Provision

The August agreement stated that it "shall be governed by and construed in accordance with the laws of the State of Delaware." We must therefore determine whether the "laws" of Delaware include that state's statutes of limitations. ⁴

"The words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed." (Civ.Code, § 1644.) "Technical words are to be interpreted as usually understood by persons in the profession or business to which they relate, unless clearly [38 Cal.App.4th 1540...