AMERICAN PATRIOT BRANDS, INC., A NEVADA CORPORATION DOING BUSINESS IN CALIFORNIA, ET AL. VS ELEMENT 7, INC., A DELAWARE CORPORATION DOING BUSINESS IN CALIFORNIA, ET AL.

Tentative Rulings

Case Number: *******9323 Hearing Date: June 30, 2022 Dept: 34

SUBJECT: Defendants’ Motion to Compel Arbitration and Stay Action

Moving Party: Defendants Element 7, LLC; Sigra, LLC; Element 7 American Canyon LLC; PH Investments Group LLC; Element 7 Willits LLC; Element 7 Mendota LLC; E7 Dunsmuir LLC; Element 7 Lemon Grove LLC; Element 7 Eureka LLC; Element 7 Walnut Creek LLC; Element 7 Willows LLC; E7 Napa City LLC; E7 Lompoc LLC; Element 7 SF2 LLC; E7 Salinas LLC; Element 7 San Luis Obispo LLC; Element 7 Hesperia LLC

Resp. Party: Plaintiffs American Patriot Brands, Inc., and GH Group, Inc.

SUBJECT: Motion of Defendant Element 7, LLC to Sever Plaintiff American Patriot Brands, Inc.’s Claims into Separate Action

Moving Party: Defendants Element 7, LLC; Sigra, LLC; Element 7 American Canyon LLC; PH Investments Group LLC; Element 7 Willits LLC; Element 7 Mendota LLC; E7 Dunsmuir LLC; Element 7 Lemon Grove LLC; Element 7 Eureka LLC; Element 7 Walnut Creek LLC; Element 7 Willows LLC; E7 Napa City LLC; E7 Lompoc LLC; Element 7 SF2 LLC; E7 Salinas LLC; Element 7 San Luis Obispo LLC; Element 7 Hesperia LLC

Resp. Party: Plaintiffs American Patriot Brands, Inc., and GH Group, Inc.

Defendants’ Motion to Compel Arbitration and Stay Action is GRANTED.

Defendants Motion to Sever Plaintiffs is GRANTED.

I. BACKGROUND

On March 16, 2022, Plaintiffs American Patriot Brands, Inc., and GH Group filed a complaint against Defendants Element 7, LLC; Sigra, LLC; Element 7 American Canyon LLC; PH Investments Group LLC; Element 7 Willits LLC; Element 7 Mendota LLC; E7 Dunsmuir LLC; Element 7 Lemon Grove LLC; Element 7 Eureka LLC; Element 7 Walnut Creek LLC; Element 7 Willows LLC; E7 Napa City LLC; E7 Lompoc LLC; Element 7 SF2 LLC; E7 Salinas LLC; Element 7 San Luis Obispo LLC; Element 7 Hesperia LLC, alleging the following causes of action:

1. Declaratory Relief (as to Glass House and APB)

2. Breach of Joint Venture (as to APB)

3. Breach of Joint Venture (as to Glass House)

4. Fraud (False Promise Without Intention to Perform as to Glass House)

5. Fraud (Intentional Misrepresentation as to Glass House)

6. Fraudulent Concealment (as to Glass House)

7. Breach of Contract (as to APB)

8. Breach of Contract (as to Glass House)

9. Unlawful Business Practices (as to APB and Glass House) (Cal. Bus. & Prof. Code 17200 et seq.)

On June 3, 2022, Cross Complainant Element 7, LLC filed a cross-complaint against Cross Defendants American Patriot Brants, Inc., (“APB”), Robert Y. Lee (“Lee”), Christopher Herghelegiu (“Herghelegiu”), Brian Pallas (“Pallas”), and J. Bernard Rice (“Rice”) (collectively, “APB Cross-Defendants”) alleging the following causes of action:

1. Breach of Contract

2. Intentional Misrepresentation

3. Fraudulent Concealment

4. Rescission (In the Alternative)

5. Breach of Implied Covenant of Good Faith and Fair Dealing

6. Declaratory Relief

On June 6, 2022, Defendants Element 7, LLC; Sigra, LLC; Element 7 American Canyon LLC; PH Investments Group LLC; Element 7 Willits LLC; Element 7 Mendota LLC; E7 Dunsmuir LLC; Element 7 Lemon Grove LLC; Element 7 Eureka LLC; Element 7 Walnut Creek LLC; Element 7 Willows LLC; E7 Napa City LLC; E7 Lompoc LLC; Element 7 SF2 LLC; E7 Salinas LLC; Element 7 San Luis Obispo LLC; Element 7 Hesperia LLC moved the Court “for an order severing the claims of plaintiff American Patriot Brands, Inc. from those of plaintiff GH Group, Inc. (“Plaintiffs”) into two separate actions: one action adjudicating the claims relating to Element 7’s January 2019 contractual relationship with American Patriot Brands, Inc. and a separate action adjudicating the claims relating to Element 7’s unrelated December 2020 contractual relationship with GH Group, Inc. In bringing this motion, Defendants specifically object to the inclusion of APB as a party in this action and do not waive their right to arbitrate against GH Group.” (Motion to Sever, p. 3:9-15.)

On June 6, 2022, Defendants Element 7, LLC; Sigra, LLC; Element 7 American Canyon LLC; PH Investments Group LLC; Element 7 Willits LLC; Element 7 Mendota LLC; E7 Dunsmuir LLC; Element 7 Lemon Grove LLC; Element 7 Eureka LLC; Element 7 Walnut Creek LLC; Element 7 Willows LLC; E7 Napa City LLC; E7 Lompoc LLC; Element 7 SF2 LLC; E7 Salinas LLC; Element 7 San Luis Obispo LLC; Element 7 Hesperia LLC moved the Court “for an order (a) compelling Plaintiff GH Group, Inc.’s claims against Defendants to arbitration; and (b) immediately staying all further judicial proceedings in this action pending determination of this application and completion of arbitration.” (Motion to Compel Arbitration, p. 3:11-14.)

On June 17, 2022, Plaintiffs American Patriot Brands, Inc., and GH Group, Inc. opposed Defendants’ motion to sever and motion to compel arbitration.

On June 23, 2022, Defendants replied to Plaintiffs oppositions to Defendants’ motion to sever and motion to compel arbitration.

II. ANALYSIS

A. Legal Standard

1. Motion to Compel Arbitration

Code of Civil Procedure section 1281.2 states:

“The court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists, unless it determines that:

(a) The right to compel arbitration has been waived by the petitioner; or

(b) Grounds exist for the revocation of the agreement.

(c) A party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact. For purposes of this section, a pending court action or special proceeding includes an action or proceeding initiated by the party refusing to arbitrate after the petition to compel arbitration has been filed, but on or before the date of the hearing on the petition. This subdivision shall not be applicable to an agreement to arbitrate disputes as to the professional negligence of a health care provider made pursuant to Section 1295.” (CCP 1281.2.)

A proceeding to compel arbitration is in essence a suit in equity to compel specific performance of a contract. (Freeman v. State Farm Mutual Auto Insurance Co. (1975) 14 Cal.3d 473, 479.) Such enforcement may be sought by a party to the arbitration agreement. (CCP 1280(e)(1).) Under both the Federal Arbitration Act and California law, arbitration agreements are valid, irrevocable, and enforceable, except on such grounds that exist at law or equity for voiding a contract. (Winter v. Window Fashions Professions, Inc. (2008) 166 Cal.App.4th 943, 947.) The party moving to compel arbitration must establish the existence of a written arbitration agreement between the parties. (CCP 1281.2.)

The petition to compel arbitration functions as a motion and is to be heard in the manner of a motion, i.e., the facts are to be proven by affidavit or declaration and documentary evidence with oral testimony taken only in the court's discretion. (CCP 1290.2; Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413, 414.) The petition to compel must set forth the provisions of the written agreement and the arbitration clause verbatim, or such provisions must be attached and incorporated by reference. (Cal. Rules of Court, rule 3.1330; see Condee v. Longwood Mgmt. Corp. (2001) 88 Cal.App.4th 215, 218, 219.)

To decide a petition to compel arbitration, trial courts must first decide whether an enforceable arbitration agreement exists between the parties, and then determine whether the claims are covered within the agreement’s scope. (Omar v. Ralphs Grocer Co. (2004) 118 Cal.App.4th 955, 961.)

2. Motion to Sever

“(a) All persons may join in one action as plaintiffs if:

(1) They assert any right to relief jointly, severally, or in the alternative, in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all these persons will arise in the action; or

(2) They have a claim, right, or interest adverse to the defendant in the property or controversy which is the subject of the action.

“(b) It is not necessary that each plaintiff be interested as to every cause of action or as to all relief prayed for. Judgment may be given for one or more of the plaintiffs according to their respective right to relief.” (CCP 378.)

“The party against whom a complaint or cross-complaint has been filed may object, by demurrer or answer as provided in Section 430.30, to the pleading on any one or more of the following grounds: ... (d) There is a defect or misjoinder of parties.” (CCP 430.10(d).)

B. Discussion

1. Motion to Compel Arbitration

GH Group and Element 7 agreed to a Merger and Exchange Agreement and a License Development Consulting Agreement as of February 23, 2021. (DiVito Decl., 4, Exs. A, B.) Both Agreements contained arbitration provisions that include delegation clauses, so that arbitrators would decide threshold arbitrability questions before they decide a claim’s merits. (DiVito Decl., Ex. A 9.17, Ex. B 12.12.) “When the parties' contract delegates the arbitrability question to an arbitrator, the courts must respect the parties' decision as embodied in the contract.” (Henry Schein, Inc. v. Archer and White Sales, Inc. (2019) 139 S.Ct. 524, 531.)

Plaintiffs argue under CCP 1281.2(c) that the parties should not be compelled to arbitrate because (1) GH Group and APB are parties in this lawsuit (Opposition to Arbitration, p. 8:1-20.); (2) APB and GH Group’s claims arise from “a clear series of fraudulent transactions involving Defendants and their successive buyers,” (Opposition to Arbitration, p. 9:7.); and (3) that a possibility of conflicting rulings on common issues of law or fact may emerge from GH Group’s arbitration and APB’s lawsuit (Opposition to Arbitration, p. 10:26—11:14.). Element 7 argues that Plaintiffs fail to satisfy the pending court action condition to apply CCP 1281.2(c), and that Plaintiffs fail to satisfy their burden to prove each of the exceptions’ three requirements. (Reply to Opposition to Arbitration, p. 8:5-28; 9:4-9.)

The Court finds that GH Group and Element 7 are compelled to arbitrate their claims, and any arbitrability concerns under both the Merger and Exchange Agreement and the License Development Consulting Agreement between the parties. Further, the APB claims do not present the Court with a pending court action because APB’s claims were filed on March 16, 2022, after the February 3, 2022 hearing date on Element 7’s initial motion to compel GH Group to arbitrate its claims. (Reply to Opposition to Arbitration, p. 8:5-20.)

2. Motion to Sever

The Court finds that APB is not a party to the February 23, 2021 Merger and Exchange Agreement or the License Development Consulting Agreement between GH Group and Element 7. (DiVito Decl., 4, Exs. A, B.) Further, Plaintiffs’ Complaint shows that APB and GH Group entered into separate contracts involving different terms with Element 7 that required separate negotiations. (Motion to Sever, p. 10:5-17; Complaint, 20-33, 37-63, Exs. 1, 2.)

Plaintiffs argue that their claims arise under the same transactions or occurrences because of their allegation that the same licenses were sold to successive buyers. (Opposition to Sever, p. 10:14-21.) However, GH Group received notice of the prior contract between Element 7 and APB, and negotiated a materially different contract with Element 7, including arbitration provisions in their Element 7 contracts. (Reply to Opposition to Sever, p. 9:12-22.)

The Court finds that APB and GH Group’s claims do not arise from the same transaction or occurrence. Joinder of Plaintiffs in the present case is therefore not necessary. The Court exercises its discretion to sever the action.

III. CONCLUSION

Defendants’ Motion to Compel Arbitration and Stay Action is GRANTED.

Defendants Motion to Sever Plaintiffs is GRANTED.