Arbitration/Nonsignatories/Third Party Beneficiaries: Financial Advisor of Corporation Can’t Compel Arbitration With Corporation’s Creditors on Third-Party Beneficiary Theory

 

Corporate Creditors Would Have Benefited Alright If Advisor Had Successfully Obtained Financing for Corporation -- But Benefit Alone Does Not a Third-Party Beneficiary Make

     One exception to the rule that a nonsignatory cannot be compelled to arbitrate a dispute is when the nonsignatory is a third-party beneficiary of the contract containing the arbitration agreement. Crowley Maritime Corp. v. Boston Old Colony Ins. Co., 158 Cal.App.4^th 1061, 1069 (2008). A financial advisor tried to avail himself of that exception to compel arbitration with secured creditors of a corporation who sued him for allegedly fraudulent misrepresentations made to induce the creditors to forbear from foreclosing on their security. The refinancing efforts did not succeed, and the corporation became bankrupt. Defendant Kann, the financial advisor, argued the nonsignatory creditors were third-party beneficiaries of the contract between him and the corporation who could be compelled to arbitrate. The trial court disagreed, and denied the financial advisor’s motion. The financial advisor appealed. Epitech, Inc. v. Kann, B230197 (2^nd Dist. Div. 3 April 16, 2012) (for publication) (Croskey, J.).

     The Court of Appeal also disagreed with Kann’s third-party beneficiary argument. For the creditors to qualify as creditor beneficiaries, Kann’s performance of the contract to obtain refinancing would have had to satisfy the corporation’s preexisting obligation to the creditors. But Kann did not contract to pay the creditors any money, or even to obtain financing; he only agreed to perform certain acts “geared toward possibly obtaining financing.” The corporation’s “only obligation to the secured creditors was to repay them, which Kann simply did not contract do do.” The mere fact that the corporate creditors might benefit by a successful refinancing was not enough to make them intended beneficiaries of the financial advisor’s contract with the corporation. Therefore, the order denying arbitration was affirmed.

     Third-party beneficiary analysis can be tricky. This case resulted in an opinion certified for publication.