Boustead Securities v. Sunstock CA4/3 ( 2023 )

Filed 7/19/23 Boustead Securities v. Sunstock CA4/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
BOUSTEAD SECURITIES, LLC,
Plaintiff and Respondent, G060952
v. (Super. Ct. No. 30-2020-01155740)
SUNSTOCK, INC., OPINION
Defendant and Appellant.
Appeal from a judgment of the Superior Court of Orange County, David A.
Hoffer, Judge. Affirmed.
Ronald H. Freshman, for Defendant and Appellant.
Berg Law Group, and Eric Berg, for Plaintiff and Respondent.
* * *
Sunstock, Inc. (Sunstock), appeals from a judgment following a bench trial.
The trial court found in favor of Boustead Securities, LLC (Boustead or BSL) on BSL’s
breach of contract claim, except as to damages based on an unconscionable interpretation
of the term “Financing” that would compensate BSL for financial transactions in which
BSL was not involved (“uninvolved transactions”). The court rejected Sunstock’s cross-
claim for breach of fiduciary duty for BSL’s claim for compensation on uninvolved
transactions, finding, among other grounds, that BSL did not make its claim until
preparation for this litigation and thus its conduct was protected under the litigation
privilege.
On appeal, Sunstock contends the court abused its discretion in denying its
motion for a six-month continuance, made six weeks before the trial date. As discussed
below, we conclude Sunstock has not shown good cause for a six-month continuance.
Sunstock also argues BSL breached its fiduciary duty because BSL failed to disclose that
it would not help Sunstock get listed on the NASDAQ exchange and that it would seek
compensation from all investments, even if not from a new investor. As discussed below,
we conclude Sunstock has not established that BSL was liable for any breach. Finally,
Sunstock contends the entire agreement was unenforceable because of BSL’s
unconscionable interpretation of the “Financing” provision. We disagree because the
contractual language and statutory law permitted the trial court to sever or modify the
unconscionable term to render the remaining contractual provisions enforceable, which is
what occurred here. Accordingly, we affirm the judgment.
I
FACTUAL AND PROCEDURAL BACKGROUND
A. Complaint and Answer
On August 18, 2020, BSL filed a complaint against Sunstock for breach of
contract. The complaint alleged that in 2019, Sunstock approached BSL “about acting as
[Sunstock]’s placement agent, on an exclusive basis, with respect to [Sunstock]’s planned
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securities offerings.” Thereafter the parties entered into a “Placement Agent and
Advisory Services Agreement” (Agreement), under which BSL would be entitled to a
“Success Fee” based on Sunstock’s “Equity Financing,” as defined in the Agreement.
The complaint alleged that Equity Financing was achieved, and as part of the Success
Fee, Sunstock issued to BSL “Preferred and Common Stock Warrants” (“the Warrants”).
In June 2020, BSL sent to Sunstock its notice of its intent to exercise the Warrants to
receive free-trading shares in Sunstock. BSL also requested an Opinion Letter from
Sunstock’s counsel pursuant to Rule 144 of the Securities Act of 1933 so BSL could
exercise the Warrants. After not receiving any response from Sunstock, BSL followed up
on its request on July 1, 2020 and July 11, 2020. The complaint alleged that Sunstock’s
failure to act on BSL’s request constituted a breach of the Agreement.
The complaint attached the Agreement, which was signed by Keith Moore,
the CEO of BSL, and Jason Chang, the CEO of Sunstock. The Agreement described the
“Success Fees” as follows: If Sunstock consummates a “Financing,” which is “defined as
a corporate investment or financial investment of/with/into the Company, or if
stock/equity is purchased directly from a shareholder(s) of the Company, in the course of
one or more rounds of investments, . . . BSL shall receive a Success Fees of ten percent
(10%) of the gross proceeds received in the Financing . . . and warrants to purchase ten
percent (10%) of the number of shares issued for the gross proceeds received in the
Financing . . . .” The warrants shall be issued to BSL, and due and payable upon the
closing of each Financing. “The warrants shall be exercisable from the date of issuance
and for a term of five (5) years.” BSL also would be entitled to a fee equal to 10 percent
of the transaction value of “any transaction or series or combination of transactions,
whereby, directly or indirectly, control of or a material interest in the Company or any of
its business. . . .”
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The Agreement also provided that with respect to BSL’s obligations and
duties, “BSL’s obligations hereunder are on a reasonable best efforts basis only and . . .
the execution of this Agreement does not constitute a commitment by BSL to purchase
any securities and does not ensure the successful placement of any securities or any
portion thereof or the success of BSL with respect to securing any other Financing on
behalf of the Company. BSL will act solely a broker with respect to identifying and
negotiating with potential investors in a Financing (“Investors”).” Furthermore, “BSL is
and will hereafter act as an independent contractor and not as an employee of the
Company and nothing in this Agreement shall be interpreted or construed to create any
employment, partnership, joint venture, or other relationship between BSL and the
Company.” The Agreement contains a merger clause, providing that “[a]ll prior and
contemporaneous conversations, negotiations, possible and alleged agreements,
representations, covenants and warranties concerning the subject matter hereof are
merged herein and shall be of no further force or effect.” It also contained a severability
clause, which provides that “[i]f any provision herein is or should become inconsistent
with any present or future law, rule or regulation . . ., such provision shall be deemed to
be rescinded or modified in accordance with such law, rule or regulation. In all other
respects, this Agreement shall continue to remain in full force and effect.”
On October 13, 2020, Sunstock filed an answer, generally denying the
allegations and raising numerous affirmative defenses.
On March 5, 2021, pursuant to a joint stipulation, Boustead filed a First
Amended Complaint (FAC). The FAC added an allegation that “[i]n addition to the
Success Fee outlined above, [Sunstock] owes [BSL] an additional Success Fee in the
form of an additional 119,451,103 shares of Common Stock Warrant Shares and
$102,598.00 in Cash Commissions. [BSL] has made a demand for these additional
Success Fees to [Sunstock] without success.” (Italics ommited.)
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B. Motion to Continue Trial and Related Matters
On July 21, 2021, approximately six weeks before the trial was scheduled
to begin, Sunstock filed a motion requesting leave to file an amended answer and a cross-
complaint and to continue the trial date. In the motion, Sunstock explained that on June
29, 2021, BSL conducted the deposition of Jason Chang, Sunstock’s CEO. “During this
deposition it was disclosed that Boustead, as financial advisor to Sunstock[,] had made
demands of Sunstock that it not have any attorney review the contracts, and that Boustead
was expecting and suing for commissions on transactions in which Boustead had no
knowledge or involvement with, and for a purchase agreement in which Boustead
deceived Sunstock into believing the shares were for the new investors, when in fact they
were for Boustead.” Specifically, BSL had submitted an exhibit to Chang showing
“several transactions in which Sunstock arranged and engaged in equity financing when
the owner lent his personal funds to the business, or professional contractors were
compensated for services with shares of the company - these transactions were and are
regularly performed by the company and in which Sunstock needed no assistance from
Boustead.” Sunstock asserted that it sought BSL’s assistance to find “potential
investors,” and not for transactions that Sunstock already regularly did without BSL’s
assistance. Sunstock also alleged that BSL pressured it into not having an attorney
review the contract “because it was Boustead’s intent to claim commissions on
transactions that it had nothing to do with,” which Sunstock would have rejected “had an
attorney explained that clause in the contract.” Finally, Sunstock alleged that in
December 2019, BSL sent a stock purchase agreement, which it represented was a
necessary part of the financing arrangement for new investors, when in reality, it was a
stock purchase agreement for BSL.
Sunstock sought leave to amend the answer to add the affirmative defense
of Unclean Hands and Unconscionability based on BSL’s misrepresentations about its
services and its demand that Sunstock not have an attorney review the contract prior to
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signing. Sunstock sought to file a cross-complaint seeking: (1) damages for BSL’s
breaching its fiduciary duty to do no harm to Sunstock; (2) to void the contractual clauses
that allow BSL to demand payments for investors that BSL did not find or engage; and
(3) damages for BSL’s breach of contract and unjust enrichment related to its failure to
find new investors to invest $550,000 when it only found a single investor for $350,000.
In the motion, Sunstock also sought a continuance of the trial date, with all
corresponding deadlines. It noted that trial was currently scheduled for August 30, 2021,
with a discovery cut-off date of July 31, 2021. It argued a continuance was reasonable
because all parties would benefit from additional time for discovery.
On July 27, 2021, Sunstock filed an ex parte application to shorten the time
to be heard on its motion for leave to file a cross-complaint and amend the answer. In the
application, Sunstock stated it was unaware that BSL was claiming compensation for
transactions in which BSL was not involved until BSL presented a spreadsheet as an
exhibit at Chang’s deposition, taken on June 29, 2021, which showed the amounts BSL
believes it was owed on various transactions. At that time, Chang also disclosed to
Sunstock’s counsel that BSL had demanded that Sunstock not have an attorney review
the contract or it would cancel the contract and pending investment from a new investor.
As a result of that spreadsheet and Sunstock’s subsequent investigation, Sunstock sought
to amend its answer to add two new affirmative defenses - Unclean Hands and
Unconscionability - and to assert compulsory cross claims. The application also sought
to continue trial and related discovery dates for six months to “allow the parties time to
conduct further discovery specific to the new affirmative defenses and cross claims.”
Sunstock noted that BSL was notified of the ex parte application, and BSL did not oppose
the application to shorten time, but opposed any motion to continue the trial.
Subsequently, the trial court, on its own motion, continued the hearing on
the ex parte application to August 24, 2021. On August 24, 2021, following arguments,
the trial court denied the application. It ruled that the cross-complaint could be filed on
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that date (August 24), and that any response would be due by August 27, 2021. On
August 26, 2021, BSL filed its answer to the cross-complaint, generally denying the
allegations and raising 19 affirmative defenses.
On August 28, 2021, Sunstock file a petition for a writ of mandate,
requesting this court issue a writ commanding the trial court to vacate its order denying
the continuance, and to continue the trial for six to twelve months. This court summarily
denied the petition.
C. Trial Briefs and Statement of Decision
Before trial, the parties filed trial briefs identifying certain trial issues
related to their respective claims. In BSL’s trial brief, it argued that it was entitled to
compensation under the Agreement for successfully achieving $550,000 in Equity
Financing. In response to Sunstock’s expected argument that BSL was entitled to a
Success Fee only on the $350,000 Equity Financing raised from a new investor and not
the $200,000 contributed by Chang, BSL argued that the Agreement contains “no carve-
out for where that financial investment comes from.” It also asserted that in two filings
with the Securities Exchange Commission (SEC), Sunstock admitted that it owed BSL a
Success Fee on the entire $550,000 Equity Financing.
In its trial brief, Sunstock argued that BSL owed a fiduciary duty to
Sunstock as its investment adviser, and breached that duty by refusing to allow outside
counsel to review the Agreement and misrepresenting that the Agreement would not
apply to uninvolved transactions, via its employee Eli Ansari.
Trial on the complaint and cross-complaint commenced on September 1,
2021. BSL’s CEO Keith Moore and its employee Ansari testified. Sunstock’s CEO
Chang and two defense experts, Mike Lee and Steven Gillings, also testified.
Thereafter, the trial court issued findings and rulings in a written Statement
of Decision. On BSL’s breach of contract claim, the court found that eliminating
Sunstock’s $550,000 in “toxic debt” was a purpose of the Agreement, although it noted
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Chang’s testimony that another purpose of the Agreement was to get Sunstock listed on
the NASDAQ exchange (or “uplisted”). It noted that BSL claimed it was owed a Success
Fee on three categories of “Financing”: (1) the $350,000 raised from a single new
investor; (2) $200,000 that Chang contributed on terms similar to the terms offered to the
new investor; and (3) various Sunstock transactions found in Sunstock’s publicly-
available SEC filings (the uninvolved transactions). As to the uninvolved transactions,
the court found, based on BSL’s CEO Moore’s testimony, that BSL never billed or
charged Sunstock for the uninvolved transactions, but claimed compensation only after
litigation commenced when “in preparation for litigation, [BSL] went back to Sunstock’s
SEC filings to find every other transaction on which it could seek fees.”
In response to BSL’s breach of contract claim, Sunstock contended the
entire Agreement was void and unenforceable because compensating BSL for uninvolved
transactions is unconscionable. The court agreed with Sunstock’s contention that
compensating BSL for uninvolved transactions was “substantively outrageous” and that
BSL employee Ansari should have disclosed that the term “Financing” could include
uninvolved transactions. Having found BSL’s interpretation of “Financing”
unconscionable, the court then addressed the remedy. It rejected Sunstock’s argument
that the entire Agreement should be voided, finding that remedy “Both unfair and
unnecessary. The remedy is unfair because it would deprive Boustead of the fees it
earned through its efforts and expertise. It is unnecessary because . . . Civil Code
§ 1670.5(a) permits the court to ‘so limit the application of any unconscionable clause as
to avoid any unconscionable result.’ Under this authority, the court limits the definition
of “Financing[ ]” for which Boustead is entitled to fees to financings connected in some
way to Boustead’s efforts after the Agreement was executed.”
The court then addressed the three categories of financings on which BSL
was claiming damages. As to the $350,000 financing, the court found that Sunstock
conceded that if the Agreement was enforceable, it was liable for the Success Fee on this
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amount. As to the $200,000 financing contributed by Sunstock’s CEO Chang, the court
credited Ansari’s testimony that “had Chang not invested, Boustead would have found
another investor to bridge the gap between the $350,000 Boustead obtained and the
$550,000 toxic debt.” Additionally, Sunstock admitted liability on the entire $550,000
amount in a SEC filing. Thus, BSL was entitled to a Success Fee on the $200,000
amount. Finally, as to the uninvolved transactions, the court ruled that BSL was not
entitled to any Success Fee, based on its prior ruling rejecting BSL’s interpretation of the
term “Financing.”
As to Sunstock’s cross claims, the court rejected the claims for void
contract and unjust enrichment because its prior rulings excluding compensation for
uninvolved transactions resolved those causes of action. It rejected the breach of contract
claim based on BSL’s failure to raise $550,000 from new investors only, because “the
Agreement contained no such requirement.”
Finally, on the breach of fiduciary duty claim, the court declined to find
whether BSL owed Sunstock a fiduciary duty. However, even if BSL had such a duty,
the court concluded that Sunstock failed to show BSL was liable for any breach of a
fiduciary duty. The court noted that Sunstock alleged BSL breached its fiduciary duty in
three ways. First, BSL demanded Sunstock not have a legal professional review the
contract. The court rejected this factual allegation, discrediting Chang’s testimony that
“Ansari told him not to have the Agreement reviewed by counsel,” and crediting Ansari’s
trial testimony that no such conversation took place.
Second, Sunstock claimed that seeking fees on the $200,000 investment by
Chang constituted a breach. The court rejected this contention, ruling that BSL did not
breach its duty by requesting fees to which it was entitled.
Finally, Sunstock argued that BSL breached its duty when it sought fees for
the uninvolved transactions. The court found that BSL did not claim these fees “until the
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parties ceased working together under the Agreement. The claim for fees for other
transactions is Boustead’s litigation position and is, thus, privileged. Civil Code § 47.”
On November 24, 2021, judgment was entered in favor of BSL on its
breach of contract claim and against Sunstock in the amount of $260,308.00 in damages.
On Sunstock’s cross claims, the court found for BSL and ordered that Sunstock take
nothing. Sunstock timely appealed from the judgment.
II
DISCUSSION
Sunstock contends the judgment should be reversed for three reasons.
First, Sunstock claims the trial court abused its discretion in denying Sunstock’s request
for a continuance of trial. Second, Sunstock contends the court erred in finding BSL was
not liable for any breach of a fiduciary duty. Finally, Sunstock contends the entire
Agreement should be voided because of BSL’s unconscionable interpretation of the term
“Financing.” We address each contention in turn.
A. Motion to Continue Trial and Related Dates
“The decision to grant or deny a continuance is committed to the sound
discretion of the trial court. [Citation.] The trial court’s exercise of that discretion will be
upheld if it is based on a reasoned judgment and complies with legal principles and
policies appropriate to the case before the court. [Citation.] A reviewing court may not
disturb the exercise of discretion by a trial court in the absence of a clear abuse thereof
appearing in the record.” (Forthmann v. Boyer (2002) 97 Cal.App.4th 977, 984–985.)
Rule 3.1332 of the California Rules of Court (rule 3.1332) provides that
“the dates assigned for a trial are firm” and “continuances of trials are disfavored.”
Nevertheless, a trial court may grant a continuance on, and only on, an affirmative
showing of good cause. Relevant examples of good cause include: “A party’s excused
inability to obtain essential testimony, documents, or other material evidence despite
diligent efforts”; and “A significant, unanticipated changed in the status of the case as a
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result of which the case is not ready for trial.” (Cal. Rules of Court, rule 3.1332,
subd. (c)(6)-(7).) In ruling on a continuance motion, the court must consider all the facts
and circumstances that are relevant to the determination, including: “ The proximity of
the trial date; . . . The length of the continuance requested; . . . Whether all parties have
stipulated to a continuance; . . . Any other fact or circumstance relevant to the fair
determination of the motion or application.” (Cal. Rules of Court, rule 3.1332, subd. (d).)
Sunstock contends the trial court abused its discretion in denying its
request for a continuance because “[t]here was good cause for continuing the trial for six
months, to allow the parties to engage in discovery as to the cross claims and affirmative
defenses,” which denied Sunstock “the opportunity or right to defend against the 19 new
affirmative defenses as well as fully develop [its] cross claims.” We conclude Sunstock
has not shown good cause because it has not shown that it lacked any “essential”
evidence to present its cross claims or rebut BSL’s affirmative defenses. Nor did the
cross claims and affirmative defenses preclude trial. The cross claims arose from BSL’s
claim for compensation for uninvolved transactions. The term “Financing” was at issue
when BSL filed its complaint. Chang and Ansari both testified at trial on the negotiations
leading to the Agreement, including the purpose of the Agreement and whether BSL
disclosed the term “Financing” would include uninvolved transactions. Based on the trial
evidence, the court was able to provide reasoned rulings on the cross claims.
Additionally, the continuance motion was brought weeks before trial, and it sought a
lengthy six-month continuance. More important, BSL, the party who had to defend
against the newly added cross claims, did not agree to a continuance. On this record,
Sunstock has not shown that the trial court abused its discretion in denying its request for
a six-month continuance.
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B. Breach of Fiduciary Duty Claim
Sunstock next argues that BSL owed a fiduciary duty to Sunstock because
BSL entered into a contractual relationship to provide advisory services to Sunstock.
Sunstock further argues that BSL breached that duty by: (1) preparing and executing the
“predatory contract” which compensated BSL for placements and not for helping
Sunstock get uplisted; and (2) failing to fully disclose that it expected fees on Chang’s
$200,000 investment.
We need not determine whether BSL owed a fiduciary duty to Sunstock
because we conclude that Sunstock has not shown that the undisputed evidence
demonstrated that BSL breached such duty. As the trial court found, a purpose of the
Agreement included retiring a $550,000 toxic debt. That purpose is reflected in the
express language of the Agreement, which obligates BSL to use its “best efforts” in
“identifying and negotiating with potential new investors in a Financing (“investors”).”
Thus, regardless whether there was another purpose to the Agreement, BSL was entitled
to fees for its efforts relating to raising $550,000.
As to BSL’s failure to disclose it would seek compensation for Chang’s
$200,000 investment, Sunstock does not explain how the failure damaged Sunstock. If
BSL should have disclosed before Chang contributed the financing and Chang would not
have made the investment based on the disclosure, BSL would have located another new
investor to invest the $200,000. Sunstock would remain liable for the $200,000
investment. In sum, Sunstock has not shown BSL was liable for any breach of a
fiduciary duty.
C. Unconscionability
Sunstock further contends the trial court erred in not finding the entire
contract unenforceable because of the unconscionable interpretation of the term
“Financing” to include uninvolved transactions and Chang’s $200,000 investment. We
reject the argument that compensating BSL for Chang’s $200,000 investment is
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unconscionable because as discussed above, BSL would have secured that investment
from a new investor, absent Chang. As for uninvolved transactions, the trial court
properly limited the damages to exclude the unconscionable effect of BSL’s
interpretation of the term “Financing.” The severability clause in the Agreement and
Civil Code section 1670.5(a) authorizes the court’s discretionary action to enforce the
Agreement in a limited manner. (See Civ. Code, § 1670.5(a) [“If the court as a matter of
law finds the contract or any clause of the contract to have been unconscionable at the
time it was made the court may refuse to enforce the contract, or it may enforce the
remainder of the contract without the unconscionable clause, or it may so limit the
application of any unconscionable clause as to avoid any unconscionable result.”].)
Finally, Sunstock contends the court erred “in not recognizing the predatory
commission rate was unconscionable.” However, on appeal, Sunstock does not present
record citations suggesting that this contention was made below. (See Woodward Park
Homeowners Assn., Inc. v. City of Fresno (2007) 150 Cal.App.4th 683, 712 [“As a
general rule, an appellate court will not review an issue that was not raised by some
proper method by a party in the trial court.”].) Moreover, although Sunstock cites an
Investopedia article stating that the “general rate is typically 2 to 2.5%,” Sunstock does
not explain why that rate should apply in this case. We thus decline to review the
argument. (See Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 852
[“When an appellant fails to raise a point, or asserts it but fails to support it with reasoned
argument and citations to authority, we treat the point as waived”].)
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III
DISPOSITION
The judgment is affirmed. Respondent BSL is entitled to its costs on
appeal.
DELANEY, J.
WE CONCUR:
O’LEARY, P.J.
MOORE, J.
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