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In a case alleging that corporate shareholders were liable for breach of contract because the corporation was a mere alter ego, the California Court of Appeal held that the shareholders could enforce the corporation's arbitration agreement even though the shareholders were not parties to the agreement.
In Rowe v. Exline, No. A116463, 2007 WL 2181517 (Cal. Ct. App. July 31, 2007), Rowe entered into a settlement agreement with Initiatek, a corporation in which Exline and Trahan were shareholders and officers. The agreement was signed by Rowe as an individual and by Exline and Trahan as officers of Initiatek.
Exline and Trahan later dissolved Initiatek and distributed its assets to the shareholders. Because of the dissolution, Initiatek failed to satisfy its payment obligations under the settlement agreement. After dissolution, Initiatek was reincorporated, but still failed to pay the full amount of the settlement.
Rowe subsequently sued Initiatek, Exline, and Trahan, alleging breach of contract by Initiatek and alleging that Exline and Trahan were liable on the theory that Initiatek was merely their alter ego. Rowe also brought (1) a claim for failure to provide notice of Initiatek's dissolution as required by statute and (2) derivative actions on behalf of Initiatek against Exline and Trahan.
All the defendants moved to compel arbitration. The trial court denied the motion, holding that only the claims against Initiatek were subject to the arbitration agreement because the arbitration agreement applied only to claims against Initiatek, not to claims against Exline and Trahan as individuals.
On appeal, the Court reversed the trial court and held that all of the claims were subject to the arbitration agreement. While noting the lack of any California case law on the issue, the Court held that a nonsignatory may enforce a corporation's arbitration agreement where the corporation is alleged to be the nonsignatory's alter ego. The Court reached this holding by analogy to the rule that a signatory's agent may enforce an arbitration agreement. In accordance with this holding, the Court ruled that the arbitration agreement applied to the breach of contract claim against Exline and Trahan.
As to the remaining claims, the Court relied on the doctrine of equitable estoppel in holding that those claims were also subject to arbitration. Specifically, the Court reasoned that it would be inequitable for Rowe to allege that Exline and Trahan were unified with Initiatek to a degree that each individual could be personally liable for damages under the contract, yet adopt an inconsistent position that those individuals were separate from the corporation and thus unable to enforce the corporation's arbitration agreement.
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