Kayne Anderson Private Investors v. Colak

• Decision Date: 16 May 2013
• Docket Number: B239111
• Parties: KAYNE ANDERSON PRIVATE INVESTORS et al., Plaintiffs and Appellants, v. MUSTAFA COLAK, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

KAYNE ANDERSON PRIVATE INVESTORS et al., Plaintiffs and Appellants,

v.MUSTAFA COLAK, Defendant and Respondent.

B239111

COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION TWO

Filed: May 16, 2013

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Los Angeles County

Super. Ct. No. BC462778)

APPEAL from a judgment of the Superior Court of Los Angeles County. Joanne B. O'Donnell, Judge. Affirmed.

Valle Makoff, Jeffrey T. Makoff, Brandon M. Carr; Nagler & Associates, Lawrence Nagler and Charles Avrith for Plaintiffs and Appellants.

Lurie, Zepeda, Schmalz & Hogan, Andrew W. Zepeda and Shawn M. Ogle for Defendant and Respondent.

Plaintiffs and appellants Kayne Anderson Private Investors, L.P., Kayne Anderson Private Investors II, L.P. and Kayne Anderson Private Advisors, L.P. appeal from a judgment entered following the trial court's order sustaining a demurrer without leave to amend filed by defendant and respondent Mustafa Colak (Colak). Appellants sought equitable indemnity, recovery of attorney fees and declaratory relief, alleging that Colak should bear proportionate responsibility for a multi-million dollar arbitration award entered against them. After the demurrer was sustained, the trial court also denied appellants' motion for leave to amend to allege a breach of contract claim against Colak.

We affirm. The trial court properly sustained the demurrer without leave to amend. Appellants failed to state a cause of action for equitable indemnity because they were not mutually liable with Colak for the same injury. They likewise failed to state a claim for tort of another because they incurred attorney fees defending allegations of their own fraud. Finally, their declaratory relief action failed because it was merely derivative of their other claims. The trial court properly exercised its discretion in denying appellants' motion for leave to amend and in construing the motion as an unsupported motion for reconsideration.

FACTUAL AND PROCEDURAL BACKGROUND

The Arbitration.

In 1994, Siamak ("Mack") Katal (Katal) and his wife Ingrid Katal founded Detection Logic, Inc. (Detection Logic), a life safety and security contracting company. Appellants are private equity fund groups that had invested over $35 million in Detection Logic between 2005 and 2008. Colak was Detection Logic's president and chief executive officer in 2007 and 2008.

In 2008, after an accounting firm had conducted an internal audit and issued an opinion that Detection Logic's 2007 financial statements were materially correct and complied with generally accepted accounting principles (GAAP), appellants and Katal initiated efforts to sell the company. Integrated Products and Services, Inc. (IPS) submitted a $150 million bid in October 2008. Because appellants and Katal requiredthat the sale close by the end of 2008, Detection Logic's September 2008 financial statements (September financials) formed the basis for the $140 million purchase price. The parties executed the securities purchase agreement (SPA) for the sale of the company on December 12, 2008.

IPS retained Colak as Detection Logic's president. In connection with the company's sale, Colak executed a contingent payment agreement (Reimbursement Agreement) which entitled him to receive a pro forma percentage—specified as 1.4173 percent in a separate agreement—of the amounts actually received by appellants and Katal under the SPA and correspondingly obligated him to pay back to Detection Logic the same pro forma percentage of any amount that appellants and Katal were required to pay IPS as a result of financial adjustments under the SPA.¹

Following the sale, IPS discovered that the September financials were not materially correct, did not comply with GAAP and overstated Detection Logic's earnings. In accordance with the terms of the SPA, in September 2009 IPS filed a demand for arbitration, seeking damages for breach of warranty and fraud. In August 2010, IPS filed an amended complaint in the arbitration that alleged claims for breach of contract, fraud and unfair competition. Appellants and Katal asserted counterclaims.

The arbitration was conducted in October 2010. In a July 2011 award, the arbitrator determined that Detection Logic misrepresented its financial position and thereby breached the SPA and engaged in an unfair business practice. He expressly found that Katal lacked credibility and that Colak was credible, despite appellants' and Katal's efforts to discredit his testimony. The arbitrator further determined that appellants did not engage in fraud, finding that they offered evidence they "reasonably relied on the Company's senior management and accounting department with respect to the September Financials" and there was no evidence they participated in creating or knew of the manipulated financial statements. Nonetheless, it found they were liable forDetection Logic's breach pursuant to section 10.1(a)(i) of the SPA, which provided that each seller, including appellants, "shall be jointly and severally liable for 'any breach of any warranty or the inaccuracy of any representation of the Company contained in this Agreement.'" On the basis of its establishing multiple breaches of the SPA, the arbitrator awarded IPS over $33 million, payable by appellants and Katal jointly and severally.

Complaint and Demurrer.

In June 2011, appellants filed their original complaint against Colak and others, alleging causes of action for comparative equitable indemnity, contribution, tort of another and declaratory relief. Colak demurred, and appellants filed a first amended complaint before the matter was heard. Alleging the same four causes of action, the operative complaint sought equitable indemnity and reimbursement of attorney fees from Colak to the extent that appellants' liability to IPS in connection with the sale of Detection Logic was caused by Colak's conduct.² They alleged that Colak knowingly participated in the fraud and misconduct committed by Katal. They specifically alleged that "Colak's alleged fraud is detailed in the sworn testimony he gave in the JAMS Arbitration and includes testimony and documents that he alleges shows he personally manipulated financial data, provided information he knew was incorrect to Detection Logic's financial personnel charged with making disclosures to IPS and signed the SPA (which included financial misrepresentations and warranties)."

Colak again demurred, asserting that appellants failed to allege facts sufficient to state a cause of action. More specifically, he argued that equitable indemnity was unavailable because he and appellants were not joint tortfeasors, the "tort of another" doctrine did not apply where appellants defended themselves against allegations involving their own tortious conduct and declaratory relief was duplicative of their other claims. In support of his demurrer, he sought judicial notice of the arbitration award, the second amended complaint in the arbitration and the SPA.

Appellants opposed the demurrer. At the conclusion of their opposition, they requested leave to amend and further indicated they intended to add claims to their complaint seeking Colak's payment under the Reimbursement Agreement. They attached exhibits showing that they had previously demanded payment of Colak's pro forma percentage under the Reimbursement Agreement, calculated as approximately $340,000.

At the conclusion of a December 5, 2011 hearing, the trial court sustained the demurrer without leave to amend for the reasons outlined in its tentative ruling. It determined that because appellants had been held liable only under the SPA, no indemnity claim arose because they were not joint tortfeasors with Colak. The trial court further determined that attorney fees under the "tort of another" theory could not be recovered by exonerated parties who incurred fees in defending themselves from a codefendant found liable. Finally, it found that appellants' declaratory relief claim was insufficient, as it was wholly derivative of the other claims.

Motion for Leave to Amend.

Though they did not submit it to the trial court at the time of the hearing, appellants filed a motion for leave to file a second amended complaint on the same day. They sought to add a cause of action for breach of contract and sought recovery of Colak's pro forma percentage under the Reimbursement Agreement. Colak opposed the motion, characterizing it as an unsupported motion for reconsideration and arguing that the only reason appellants had not included the breach of contract claim in their original pleading was because it would have undermined their indemnity claim. In reply, appellants argued that the contract and indemnity claims were unrelated, and the only reason they delayed in asserting breach of contract was to allow time for Colak to comply with their demand for performance.

Following a January 11, 2012 hearing, the trial court denied the motion. It agreed with Colak that the breach of contract claim could and should have been alleged originally, issuing a minute order which provided in part: "[P]laintiffs chose in both the original complaint and the first amended complaint not to allege breach of contractagainst Colak, choosing instead to put all their eggs in the one basket of their equitable indemnity theory of recovery. This is not, therefore, a case where plaintiffs only recently discovered their breach of contract claim against Colak; they have known of it from the beginning and elected, for strategic reasons, not to allege it. When the court sustained Colak's demurrer to the first amended complaint without leave to amend, plaintiffs' strategy failed." Also...