Psm Holding Corp.. v. Nat'l Farm Financial Corp..

Decision Date26 July 2010
Docket NumberCase No. CV 05–08891 MMM (FMOx).
Citation743 F.Supp.2d 1136
CourtU.S. District Court — Central District of California
PartiesPSM HOLDING CORP., a corporation, Plaintiff,v.NATIONAL FARM FINANCIAL CORPORATION, a corporation, Business Alliance Insurance Company, a corporation, and Larry P. Chao, an individual, Defendants.

OPINION TEXT STARTS HERE

Aluyah Imoisili, Linda Dakin–Grimm, Patricia Quilizapa, Milbank Tweed Hadley and McCloy LLP, Los Angeles, CA, Louis A. Pellegrino, Milbank Tweed Hadley and McCloy, New York, NY, for Plaintiff.Barbara Harris Chiang, John N. Dahlberg, William F. Murphy, Dillingham and Murphy LLP, San Francisco, CA, Joseph W. Cotchett, Nancy L. Fineman, Niki B. Okcu, Cotchett Pitre & McCarthy, Burlingame, CA, Robert B. Hutchinson, Hutchinson & Snider, Beverly Hills, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR RESTITUTION AND ATTORNEYS' FEES

MARGARET M. MORROW, District Judge.

I. BACKGROUND

Defendant Larry P. Chao and his wife Julie Chao founded Business Alliance Insurance Company (BAIC) in the 1990s. The Chaos ran BAIC as a family business that provided insurance to small businesses, including small restaurants and grocery stores owned and operated by Asian Americans. BAIC was not profitable for many years after its founding; after the Chaos invested several million dollars and their own labor in the business, however, BAIC became profitable.

In 2005, the Chaos entered into negotiations with PSM Holding Corp. (PSM) to sell of BAIC to PSM for approximately $21.5 million. The parties anticipated that the proposed stock purchase agreement (“SPA”) would be accompanied by a host of ancillary agreements governing future competition, employment, and licensing. Section 14.11 of the SPA stated that the agreement would not become effective until all parties had executed it:

“This Agreement may be executed in any number of counterparts, each of which shall be an original as against any party whose signature appears thereon and all of which together shall constitute one and the same instrument. This Agreement shall become binding when one or more counterparts, hereof individually or taken together, shall bear the signatures of all the parties reflected hereon as signatories.” 1

Larry Chao signed the proposed SPA in September 2005. Discussions concerning an amended, restated SPA continued, however, until November 2005, when PSM ceased negotiations. In December 2005, PSM filed a lawsuit against BAIC, Larry Chao, and National Farm Financial Corporation (National Farm). National Farm was the owner of BAIC when suit was commenced. It, in turn, was owned by a trust created by the Chaos.

PSM's claims ultimately proceeded to trial. At trial, PSM presented expert witnesses who testified to the damages PSM had incurred as a result of its inability to acquire BAIC. PSM's damages experts, Richard Braun and Fred Marziano, performed analyses and provided estimates of PSM's damages. Judge Valerie Fairbank, who tried the case, found that they had employed “acceptable methodologies.” Braun and Marziano testified that PSM's total damages were $59.6 million. Braun identified two categories of damages: BAIC's projected earnings as an independent company not owned by PSM and the pre-tax income that would have been generated due to synergy, increased revenues and decreased expenses had BAIC and PSM consolidated their operations. Using Braun's numbers, and taking a “conservative approach,” Marziano estimated PSM's lost profits for five years were $59,586,517.00. In its briefs to the Ninth Circuit, PSM argued that the jury relied on this testimony in awarding $40 million against defendants on its breach of contract claim and $3 million on its fraud claim.

Following the verdict, Judge Fairbank denied an ex parte application to stay the judgment pending appeal. As a result, on December 5, 2007, National Farm filed a voluntary bankruptcy petition. On January 7, 2008, Larry Chao declared bankruptcy. Defendants persuasively argue that the bankruptcy filings provided significant benefit to BAIC and, by extension, PSM. They assert that, in the absence of the bankruptcies, the California Department of Insurance (“CDI”), would likely have placed BAIC in conservatorship, an action that might have harmed BAIC's policyholders, employees, and the public, and that BAIC's value would have been lost. PSM participated in the bankruptcy proceedings, joining a successful motion to appoint a Chapter 11 trustee for BAIC and successfully requesting that the trustee replace the Chaos as members of the board of directors. On May 28, 2008, PSM moved for relief from the automatic stay so that it could execute the judgment. The bankruptcy court granted this motion on July 25, 2008, and transferred BAIC's shares to PSM. At that time, BAIC was a successful insurance business with $11 million cash on hand, receivables of more than $2.5 million, and stocks and bonds in excess of $16 million.

During the pendency of the appeal in this case, Larry Chao, Julie Chao, and their son Derrick Chao, continued to work at BAIC. They contend they did so because they were committed to their employees, shareholders, and the public. Despite the negative public perception that the verdict and the bankruptcies could have generated, the company had more than $30 million in assets when it was transferred to PSM on October 1, 2008.

On June 18, 2009, the Ninth Circuit reversed Judge Fairbank's ruling. The court concluded that “the district court [had] erred by allowing the jury to interpret the contract, because the relevant provision was unambiguous and evaluation of extrinsic evidence was unnecessary and inappropriate under California law. The provision at issue required that all parties sign the agreement before it became binding. Several signature lines were left blank. We therefore hold that the parties did not form a valid contract.” PSM Holding Corp. v. National Farm Financial Corp., 339 Fed.Appx. 693, 695 (9th Cir.2009) (Unpub. Disp.).

II. DISCUSSION
A. Legal Standard Governing Restitution Following Reversal

“The right to recover what one has lost by the enforcement by a judgment subsequently reversed is well established. And, while the subject of the controversy and the parties are before the court, it has jurisdiction to enforce restitution and so far as possible to correct what has been wrongfully done.” Baltimore & Ohio Railroad Co. v. United States, 279 U.S. 781, 786, 49 S.Ct. 492, 73 L.Ed. 954 (1929) (citing Northwestern Fuel Co. v. Brock, 139 U.S. 216, 220, 11 S.Ct. 523, 35 L.Ed. 151 (1891) (We are of opinion that the proceeding to enforce the restitution in the cases mentioned is under the control of the court, and that all needed inquiry can be had to guide its judgment in a summary proceeding, upon motion of the parties)). See also United States v. Morgan, 307 U.S. 183, 197, 59 S.Ct. 795, 83 L.Ed. 1211 (1939) (“What has been given or paid under the compulsion of a judgment the court will restore when its judgment has been set aside and justice requires restitution”); Atlantic Coast Line Railroad Co. v. Florida, 295 U.S. 301, 309, 55 S.Ct. 713, 79 L.Ed. 1451 (1935) ([W]hat has been lost to a litigant under compulsion of a judgment shall be restored thereafter, in the event of a reversal by the litigants opposed to him, the beneficiaries of the error”); Caldwell v. Puget Sound Electrical Apprenticeship and Training Trust, 824 F.2d 765, 767 (9th Cir.1987) (“Well established principles of restitution permit a court, after being reversed, to order restitution”); 2 Hinchman v. Ripinsky, 202 F. 625, 627 (9th Cir.1913) (“As it respects the restitution awarded by the District Court, that was a relief very properly granted, under the condition of the record at that time. The decree of the trial court stood reversed and annulled, and the appellant was entitled to have that returned to him which was taken away by an erroneous judgment,” citing Northwestern Fuel, 139 U.S. at 220, 11 S.Ct. 523).

As defendants correctly note, PSM was not required to execute on the judgment pending appeal and took a risk in doing so. See Strong v. Laubach, 443 F.3d 1297, 1300 (10th Cir.2006) (“By executing on their judgment and receiving the [the property] during the pendency of the appeal, the [plaintiff] assumed the risk that [it] might have to repay the money if [defendants] prevailed on appeal”).

As the Restatement (First) of Restitution states:

“A person who has conferred a benefit upon another in compliance with a judgment, or whose property has been taken thereunder, is entitled to restitution if the judgment is reversed or set aside, unless restitution would be inequitable or the parties contract that payment is to be final; if the judgment is modified, there is a right to restitution of the excess.” Restatement (First) of Restitution § 74 (1937).

This rule is consistent with the draft Restatement (Third) of Restitution and Unjust Enrichment:

“A transfer or taking of property, in compliance with or otherwise in consequence of a judgment that is subsequently reversed or avoided, gives the disadvantaged party a claim in restitution to the extent necessary to avoid unjust enrichment.” Restatement (Third) of Restitution & Unjust Enrichment § 18 (T.D. No. 1, 2001).3

In Stockton Theatres, Inc. v. Palermo, 121 Cal.App.2d 616, 264 P.2d 74 (1953), a group of Japanese nationals had been leasing and operating a theater in Stockton, California. After the abrogation of a treaty between the United States and Japan, which followed the commencement of the war between the countries, the owner of the theater property sought to invalidate the lease on the ground that the abrogation of the treaty had terminated the lease. The trial court declared the lease void in 1945, finding that it violated California law governing the ownership and leasing of property by aliens ineligible for citizenship. The theater owner then commenced a successful unlawful detainer...

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