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Cottonwood Centers Inc. v. Klearman

United States District Court, D. Arizona

October 17, 2018

Cottonwood Centers Incorporated, Plaintiff,
John B. Klearman, and Sheryl Klearman, Defendants.


          Cindy K. Jogenson United States District Judge

         Pending before the Court is the Amended Complaint (Doc. 6) and the Cross-Motion for Declaratory Relief (Doc. 22) filed by Plaintiff Cottonwood Centers, Inc. (“Cottonwood”). Also pending before the Court is the Motion to Dismiss and Compel Arbitration, or, Alternatively, Stay the Action (Doc. 14) filed by Defendants John B. Klearman (“Klearman”) and Sheryl Klearman (“the Klearmans”).

         Oral argument was presented to the Court on October 9, 2018.

         Factual and Procedural Background

         Klearman, a registered securities broker in California, provides investment banking and advisory services in middle market M&A transactions. Some of Klearman's business is operated through Corporate Finance Associates (“CFA”), which is an assumed trade name Klearman licenses from a third party.

         In 2008, Cottonwood's Executive Vice President Steven Welch (“Welch”) contacted Klearman to ask him to prepare a proposal regarding Klearman's possible assistance to Cottonwood in the sale of all or a portion of Cottonwood's behavioral healthcare company known as Cottonwood Centers, Cottonwood de Tucson, and Cottonwood Recovery. Klearman was also asked to provide his standard fee agreement and terms and conditions. On September 15, 2008, Klearman sent Welch an email, attaching, among other documents, the Seller's Authorization and Exclusive Fee Agreement (“Agreement”), the Standard Terms and Conditions to CFA Fee Agreements (“Terms and Conditions”), and a proposal for M&A advisory services. Welch proposed changes to the Agreement, but neither Klearman nor Welch mentioned the Terms and Conditions in their negotiations of the terms of the Agreement.[1] On October 10, 2008, Welch signed the Agreement on behalf of Cottonwood and sent it back to Klearman via email. Upon receiving Welch's signature, Klearman countersigned the Agreement.

         Pursuant to the Agreement, Cottonwood engaged Klearman on an exclusive basis “to assist [Cottonwood] and/or its shareholders, principals, subsidiaries, partnerships and other related parties (Affiliates) to accomplish a sale, merger, exchange, capital investment, loan, joint venture or other such transaction involving all or part of the business interest of [Cottonwood], including but not limited to, stock and assets owned directly or indirectly by [Cottonwood] or Affiliates described generally as follows: Cottonwood Centers, Inc. and subsidiaries.” Klearman Decl. ¶ 7, Exhibit D, p. 1 (Doc. 14-2).

         The Agreement provides that Klearman is entitled to receive a commission of “4% of the balance of the total Consideration” of any transaction consummated under the Agreement, and that Cottonwood's “fee obligation to Consultant shall survive this Agreement for Transactions with parties contacted or with whom discussions and/or negotiations were initiated during its term . . . ” Id. at p. 2. The Agreement also states that it “shall remain in effect for fifteen months from [the date of signature] and shall continue thereafter until terminated by either party upon 30 days prior written notice.” Id. The Agreement states that the “attached Standard Terms and Conditions are incorporated into this Agreement.” Id. at p. 2. The copy of the Terms and Conditions provided by the Klearmans provides that it is “incorporated into the client fee agreement[.]” Klearman Decl. at ¶ 9; Exhibit E. The Terms and Conditions includes:

Arbitration: Any controversy, dispute, or claim between the parties relating to this Agreement shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association.

Id. Klearman also asserts that Welch did not complain to Klearman about the arbitration clause or “otherwise question, object to, or in any way attempt to modify or negotiate the Terms and Conditions.” Klearman Supp. Decl., ¶ 3 (Doc. 23-1).

         Cottonwood asserts, however, that the Terms and Conditions is unsigned and incomplete and was not part of the commission agreement. Specifically, Welch asserts that Klearman sent him a number of documents, including a blank form entitled Standard Terms and Conditions to CFA Fee Agreements. The form was blank as to date, governing law, and client initials. Welch asserts the document was not addressed in any subsequent negotiations with Klearman and that Welch did not initial, sign, or otherwise approve of or agree to the form. Welch also asserts that nothing was attached to the document that he did sign (i.e., the Agreement). Welch does not specifically state when he opened the Terms and Conditions email attachment or when he became aware of the provisions included within the Terms and Conditions. Additionally, Cottonwood points out that the copy provided by the Klearmans omits the blank “Client Initials: ____” provision that was included on the form submitted to Cottonwood but not accepted by Cottonwood.[2]

         In early 2018, Cottonwood's assets were acquired by a company called Summit BHC Tucson, LLC (“Summit”). Cottonwood asserts it employed and paid a Scottsdale broker in connection with the Summit sale. The Klearmans assert the principals of Summit were introduced to Cottonwood by Klearman in 2009. Cottonwood asserts Klearman did not introduce Summit to Cottonwood and did not have anything to do with the sale. Cottonwood asserts Klearman learned of the sale after the fact and then made a claim for a commission.

         Cottonwood asserts the 2008 commission agreement was terminated in 2011. In 2011, Cottonwood took its property off the market. Cottonwood asserts it terminated the CFA commission agreement by making a $75, 000 payment to Klearman, who accepted the payment. Welch Decl., Exs. 1 and 1-B (Doc. 22-1). Welch asserts Klearman rendered no further brokerage services to Cottonwood. Welch Decl., ¶ 5 (Doc. 22-1). The Klearmans assert, however, that Klearman has:

devoted considerable time and resources identifying and presenting potential buyers; preparing marketing materials, presentations and other documents describing the transaction; participating in discussions and negotiations with Plaintiff and prospective buyers; bringing several indications and letters of interest; working with Plaintiff's attorneys, accountants and representatives; and otherwise assisting Plaintiff to bring a potential transaction to a close.

Klearman Decl. ¶ 11 (Doc. 14-2). Further, the Klearmans assert Klearman remained in constant communication with Cottonwood, primarily with Welch, regarding his progress. The Klearmans also state neither Cottonwood nor its representatives ever suggested, indicated, or represented to Klearman that Cottonwood was terminating the Agreement or that he was to stop performing services for Cottonwood under it. Id. Indeed, Klearman asserts he continued to introduce prospective clients to Cottonwood, fielded at least one call from a prospective buyer, and researched and presented the concept of a sale to an Employee Stock Ownership Program. Klearman Supp. Decl., ¶ 4 (Doc. 23-1). Further, Klearman asserts that the $75, 000 check was not intended to be a final payment upon termination of the Agreement, but was a progress payment for Klearman to continue work on behalf of Cottonwood. Id. at ¶ 4.

         Pursuant to the Agreement, Klearman claimed his 4% commission on the transaction.[3]Cottonwood refused to ...

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