ORDER FOLLOWING REMAND; GRANTING RESCISSION; DENYING RESTITUTION

JEFFREY T. MILLER, District Judge.

Following remand from the Ninth Circuit, the court addresses the issue of rescission, considers Genesis Merchant Partners, L.P.'s claim for unjust enrichment, and grants Nery's claim for rescission.

BACKGROUND

The court incorporates its July 26, 2013 Statement of Decision ("SOD") as if fully set forth herein, including the definitions of terms. Filed on March 3, 2016, the Mandate from the Ninth Circuit vacated the Judgment resulting from the SOD and remanded the matter for further proceedings.

On March 21, 2016, the court conducted a status conference with the parties and requested further briefing on the remanded issues. The court provided the parties with the opportunity to supplement the evidentiary record, consistent with the Ninth Circuit's remand order. At the time of oral argument on June 3, 2016, both parties represented that the court possessed sufficient evidence to resolve the outstanding issues.

The SOD

On July 26, 2013, the court issued its SOD. With respect to the breach of contract and rescission claims, the court analyzed the parties' arguments and evidence and concluded:

The court also found that Nery's was not unjustly enriched.

The court highlights that the SOD concluded that Nery's timely sought rescission. While the court correctly conditioned rescission on Nery's tendering the Targa shares at issue, the trial court erred by not clarifying that Nery's was under the obligation to elect between the remedy of contract damages or rescission, but not both.

The court notes that the Judgment entered by the court, prepared and submitted to the court by Nery's, does not accurately reflect the findings and conclusions set forth in the SOD. The Judgment provides as follows:

(Ct. Dkt. 164). The SOD also found "in favor of said Defendants and each of them and against Plaintiff[] on all claims. Defendants are to prepare a judgment."

The Remand

Upon remand, the Ninth Circuit instructed the parties and court that the remedy for the Nascent breach of the SPA is either (1) disaffirm the contract and collect damages resulting from the rescission, or (2) affirm the contract and recover damages for the breach. See Wong v. Stoler, 188 Cal.Rptr.3d 674, 680 ( 2015). The Ninth Circuit also instructed that "any damages for Nascent's breach of its contractual duty to indemnify should be offset against the note." In the event Nery's seeks rescission, the Ninth Circuit also instructed the court to consider whether "Genesis has a claim for unjust enrichment arising out of Nery's ownership of Targa before the rescission."

Nery's Election

Nery's elects to rescind the contract. Genesis contends that Nery's late request for rescission, coming six years after completion of the Targa sale, is untimely and no longer an available remedy. Genesis argues that the damages arising from Nascent's breach should be offset against the unpaid balance of Nery's note and a judgment entered in its favor consisting of the balance of the Nery's note after deducting damages, unpaid interest on the note, and attorney's fees and costs. Genesis seeks an award of $2,556,758 in its favor.

As set forth in the SOD, to establish a claim for rescission, the party rescinding the contract must (1) give notice to the other party promptly upon discovery of facts entitling the party to rescind, and (2) return or offer to return any consideration received from the other party under contract. Cal. Civ. Code §§1691(a) and (b). The court found that Nery's provided Genesis with timely notice of rescission; and Genesis did not challenge this factual determination on appeal. Accordingly, the timely notice requirement is satisfied, at least through the entry of the SOD.

The more narrow issue raised by Genesis is whether the remedy of rescission is now available to Nery's. The record reveals that Nery's has never, up until now, made an election between contract damages and rescission. While the SOD determined that Nery's was damaged by Nascent's misrepresentations, the court also concluded that Nery's was entitled to rescission, conditioned upon the tender of Targa stock to Genesis.1 The Judgment does not accurately reflect an award of either contract damages or rescission. Rather, the Judgment provides, in essence, that Genesis failed to meet its burden of proof on the issue of liability and awarded Nery's attorney's fees and costs. The remedy provided for in the Judgment is not a legally available remedy (nor, without election, are the remedies identified in the SOD).

Genesis argues that six years have passed since the commencement of this action and that this passage of time is too long to permit rescission. This argument is not persuasive. Genesis was on notice from the get-go that Nery's was seeking to rescind the SPA with Nascent. The court notes that Nery's provided timely notice of its intent to rescind the SPA on August 19, 2011. (Ct. Dkt. 9). Notably, "the service of a pleading in an action or proceeding that seeks relief based on rescission shall be deemed to be such notice." Cal. Civ. Code §1691. Further, the SOD found that rescission was timely and appropriate about two years and five months after commencement of the action and Genesis fails to explain how the passage of time pending appeal (about three years and four months) alters the court's analysis. Genesis erroneously contends that the passage of six years since the commencement of this action makes "it impossible at this stage to `restore everything of value received under the contract' to Genesis." (Brief re: remand at p.21:5-6). Genesis raises the following rhetorical questions in support of this argument: How does the court account for lost opportunity costs in which Genesis could have improved the business; will the court scrutinize every business decision made by Nery's; how will the court address the "possibility" that Nery's has under invested in Targa and diminished its value; and what if Targa has been looted?2

California law also supports Nery's pursuit of the remedy of rescission. In Glendale Fed. Savings & Loan Assn. v. Marina View Heights Development Co., 66 Cal.App.3d 101 (1977), the Court of Appeals noted that

Id. at 137; Papenfus v. Webb Prod. Co., 48 Cal.App.2d 631, 633 (1941) ("[W]here a party makes a mistake in election of remedies, he is not estopped by his abortive election from subsequently resorting to and pursuing a remedy to which he was really entitled."); Restatement (Second) of Contracts, § 378 cmt. C (1981) (The election of remedies doctrine "applies only where a party pursues a remedy that he actually has. A party is not precluded from pursing other remedies by the fact that he has made a mistaken attempt to obtain a remedy that is not available to him, even if his original choice has been relied on by the other party."); Far West Federal Bank, S.B. v. Office of Thrift Supervision-Director, 119 F.3d 1358 (9th Cir. 1997). Applying the reasoning of Glendale, Nery's is entitled to rescission because the remedy provided for in the Judgment does not accurately reflect the remedies identified in the SOD and the SOD failed to make clear that the remedies identified therein were subject to the doctrine of election of remedies.

In sum, the court concludes that rescission is a timely, fair, and equitable remedy provided that Genesis be compensated for unjust enrichment, if any, arising out of Nery's ownership of Targa before election of the remedy of rescission. Accordingly, the court orders the following:

1) Nery's shall deposit the stock certificates with the Clerk of Court to be forwarded to Genesis;

2) Genesis shall deposit $585,961.07 with the Clerk of Court, consisting of the monies paid by Nery's on the underlying note ($46,250) and the attorney's fees and costs previously awarded pursuant to the SPA ($539,711.07).

3) The parties are instructed to meet and confer to arrange for the transfer of the monies and stock certificates identified above. The transfers of monies and the Targa stock shall occur within 60 days from the date of entry of this order; and

4) Nery's shall continue to operate Targa in good faith and in the ordinary course of business until the parties fulfill their mutual obligations identified herein.

Unjust Enrichment

The elements of an unjust enrichment claim are the "receipt of a benefit and [the] unjust retention of the benefit at the expense of another." Lectrodryer v. SeoulBank, 77 Cal.App.4th 723, 726 (2000). Unjust enrichment "is synonymous with restitution." Melchior v. New Line Production, Inc., 106 Cal.App. 779, 793 (2003). Restitution must be supported by the evidence and be consistent with the purpose of restoring to the plaintiff the benefit acquired by the other party. See Colgan v. Leatherman Tool Group, Inc., 135 Cal.App.4th 663, 694-700, fn. 22 (2006).

Here, Genesis fails to meet its evidentiary burden to show that Nery's has been unjustly enriched. Genesis simply fails to identify any evidence to show that Nery's has unjustly retained any benefit related to its operation of Targa. Rather, the focus of Genesis is on the amount of interest it would have earned under the SPA. Using a 10% simple interest rate on the face value of the note ($1.85 million), Genesis concludes that it is entitled to contract interest payments, after offset for the amount paid by Nery's on the note ($46,250), in the amount of $1,110,000. This is an incomplete measure of restitution damages.

While there is no doubt that Nery's benefitted by not paying interest on the note, the issue is whether the non-payment of interest is an unjust or unfair benefit. Genesis contends that it is impossible to determine restitution damages by raising the following rhetorical questions: How does the court account for lost opportunity costs in which Genesis could have improved the business; will the court scrutinize every business decision made by Nery's during its operation of Targa; how will the court address the "possibility" that Nery's has under invested in Targa thereby diminishing its value; and what if Targa has been looted? This speculative and rhetorical exercise is one-sided and misses the mark. One could also speculate that the value of Targa, an on-going concern for many years, has substantially more value than when it was assumed by Nery's as a debt-ridden and practically moribund business due to prior mismanagement and hidden liabilities. Indeed, Nery's could pose the question: "Haven't we made a silk purse out of a sow's ear?" But these inquiries would have also missed the mark.

Any restitution analysis must account for any "unfair" benefit retained by Nery's. To reasonably determine this benefit, there must be some showing of the original fair market value of Targa (without the material misrepresentations made by Nascent), the impact of Nery's operating Targa on diminished capital because of the material misrepresentations, and the current fair market value of Targa.3 Other evidentiary factors influencing the value of Targa include the "sweat labor" of Nery's in growing and operating the business and the economic value to Nery's by not making payments under the note. In short, the evidentiary record submitted by Genesis is insufficient to make a reliable determination on the amount of the unfair economic benefit, if any, that inured to Nery's.4 Accordingly, the court declines to award restitution damages to Genesis.

In sum, the court grants Nery's claim for rescission and orders the following:

1) Nery's shall deposit the stock certificates with the Clerk of Court to be forwarded to Genesis;

2) Genesis shall deposit $585,961.07 with the Clerk of Court, consisting of the monies paid by Nery's on the underlying note ($46,250) and the attorney's fees and costs previously awarded pursuant to the SPA ($539,711.07).

3) The parties are instructed to meet and confer to arrange for the transfer of the monies and stock certificates identified above. The transfers of monies and the Targa stock shall occur within 60 days from the date of entry of this order; and

4) Nery's shall continue to operate Targa in good faith and in the ordinary course of business until the parties fulfill their mutual obligations identified herein.

IT IS SO ORDERED.