The opinion of the court was delivered by: Chin, District Judge.
In this diversity case, plaintiff Conopco, Inc. ("Conopco")
sues defendants Roll International Corporation ("Roll") and
Paramount Farms, Inc. ("Paramount") for breach of contract and
unjust enrichment. Defendants move to dismiss the complaint
pursuant to Fed.R.Civ.P. 12(b)(6), contending that this action is
barred by California statutory law and Conopco's failure to
arbitrate. Alternatively, defendants move to dismiss or stay this
action in deference to a pending California action.
The California Code of Civil Procedure contains a compulsory
counterclaim rule: a defendant in an action must file a
counterclaim (or "cross-complaint") asserting any cause of action
"related" to plaintiff's claim. If the defendant fails to do so,
the claim is waived and the defendant may not assert the claim in
a new action.
Here, Conopco failed to file a cross-complaint for a related
claim in the California proceedings. It seeks to circumvent the
California rule by filing the claim here in this action, and
argues that the California rule does not apply because no final
judgment has been entered in the California proceeding. The
California rule does not, however, require a final judgment, and
thus Conopco's interpretation of the rule must be rejected. The
motion to dismiss is granted. Conopco's remedy is to seek relief
in the California proceedings. I do not reach defendants'
On June 28, 1995, Conopco entered into a purchase agreement
(the "Purchase Agreement") with Roll pursuant to which Conopco
agreed to transfer certain assets used in the operation of
Conopco's Sunkist brand "fruit roll" snack business to a newly
formed California limited liability company, ninety-nine percent
owned by Conopco and one percent owned by Roll. (Compl. ¶¶ 7-8;
Purchase Agreement, annexed to Compl. as Ex. A). One of the
assets to be transferred was the fruit roll inventory (the
"Inventory"). The Purchase Agreement further contemplated that on
the closing date, Conopco would transfer its interest in the new
company to Roll, and that Paramount would assume certain of
Roll's rights and liabilities, including Roll's right to the
Inventory. (Compl. ¶¶ 8-9). The closing occurred on or about July
28, 1995. (Compl. ¶ 9).
Conopco and Roll used the book value of the Inventory on
December 31, 1994, $3,060,000, in calculating the purchase price.
Because the actual book value of the Inventory on the date of the
closing was likely to be different from the December 31, 1994
figure used in the initial calculation, Conopco and Roll agreed
to adjust the purchase price after the closing date to reflect
the change in book value. That provision, section 2.5 of the
Purchase Agreement entitled "Post-Closing Inventory Adjustment,"
is at issue here.
Pursuant to section 2.5, within thirty days after the closing
date, Conopco was to deliver to Roll a statement of the book
value of the Inventory reflecting a physical count of the
Inventory conducted by Conopco on the closing date (the "Closing
Date Inventory Statement"). (Purchase Agreement § 2.5(a)). Roll
then had thirty days to notify Conopco in writing of any
objections to the calculation; if Roll failed to do so, the
Closing Date Inventory Statement would become final and binding.
(Purchase Agreement § 2.5(b)). If Roll objected, however, and the
parties were unable to come to an agreement within thirty days,
section 2.5 provided that the dispute would be submitted to an
arbitrator for a "final and binding" decision (Purchase Agreement
§ 2.5(b)). The parties had ten days from the final determination
of the Inventory's book value to compensate for any shortfall or
excess. (Purchase Agreement § 2.5(c)).
B. The Inventory Dispute and the Parties' Negotiations
On September 7, 1995, Conopco delivered a Closing Date
Inventory Statement to Roll, stating that the book value of the
Inventory transferred as of the closing date was $5,512,634.
(Compl. ¶ 11). Hence, Conopco contended that it was entitled to
an adjustment of $2,452,634,*fn1 the amount by which the claimed
closing date Inventory exceeded the December 31, 1994 Inventory
figure. Roll objected to the statement and the parties "mutually
extended the applicable time periods to facilitate settlement
negotiations." (Compl. ¶ 14). These negotiations continued into
early 1997. (Compl. ¶ 15). Plaintiff contends that it was not
until "early 1998," after it attempted further discussions with
defendants regarding the Closing Date Inventory Statement, that
defendants notified plaintiff that they would not arbitrate or
settle the claim (the "Inventory Adjustment claim"). (Compl. ¶¶
16-17). It is undisputed that the parties never submitted the
claim to an arbitrator. It is also undisputed that Roll never
paid Conopco any portion of the $2,452,634 Conopco claims it is
owed pursuant to section 2.5 of the Purchase Agreement.
C. The California State Court Action
In December 1996, apparently in the midst of these
negotiations, defendants Roll and Paramount sued Conopco and its
parent company, Unilever United States, Inc. ("Unilever"), in
California state court alleging that Conopco and Unilever
breached representations and warranties contained in the Purchase
Agreement and defrauded Roll and Paramount "by falsely inflating
the Fruit Roll sales figures and falsely understating the
expenses for the periods prior to the sale." (Def. Mem. at 2;
see California Compl., annexed to the Affidavit of Lawrence B.
Gutcho ("Gutcho Aff.") as Ex. B). Conopco did not raise its
Inventory Adjustment claim in its answer to the California
complaint. Nor did Conopco assert the claim as a cross-complaint
in the California action. (Gutcho Aff., Exs. D, E). Instead,
Conopco waited until May 1998 to raise the issue when it moved in
the California action to compel arbitration of the Inventory
Adjustment claim or for leave to file a cross-complaint. (Compl.
¶ 18; Gutcho Aff., Ex. E).
In June 1998, the California Superior Court denied both prongs
of the motion. (Compl. ¶ 19). Conopco appealed. On September 23,
1998, the California Court of Appeal denied Conopco's petition
for a writ, effectively declining to hear the appeal of the
cross-complaint ruling until after a final judgment in the
California action. On December 15, 1998, the same appellate court
denied Conopco's interlocutory appeal on its request to ...