Insufficient showing of third-party beneficiary status to compel arbitration of claim of nonsignatory to arbitration agreement
In Epitech, Inc., v. Kann (filed April 16, 2012) 2012 DJDAR 4768), defendant Kann filed a petition to compel arbitration after a corporation's short term creditors brought suit against defendant, a financial advisor the corporation had retained to assist it in getting long-term financing to pay its short-term debts. Suit followed the corporation going bankrupt. Kann claimed the creditors were third-party beneficiaries of his financial advice contract with the corporation, which contained an arbitration clause. The Los Angeles Superior Court denied the petition; that order was affirmed by the Court of Appeal, Second Appellate District, Division Three.
Kann and the corporation signed an engagement letter that included an arbitration clause for any dispute arising out of the letter agreement or any issue concerning breach, termination, enforcement, interpretation or validity of it. The creditors allege that when the financing that Kann was to assist the corporation with failed to materialize, Kann induced the creditors to forbear on foreclosing upon their interests by assuring that financing was forthcoming. Their lawsuit does not allege breach of contract, rather that Kann committed fraud, negligent misrepresentation and concealment.
In his petition, Kann claimed he was being sued because of the way he performed his contract with the corporation and that plaintiffs were third-party creditor beneficiaries to the services Kann was to perform under the contract. The appellate court held the creditors were not, as a matter of law, third-party beneficiaries of Kann's agreement with the corporation, thus the denial of the petition was affirmed.