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November 16, 1999


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' alternative motion.


A. The Contract

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. ΒΆ 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 ...

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