C.A. 2nd

The Second Appellate District affirmed a judgment. The court held that breach of fiduciary duty claims against former corporate officers could not survive where neither the corporation nor its trustee in bankruptcy provided one year’s notice of a claim as lawfully required under the terms of the officers’ employment contracts.

Stephen Lehman, Eric Weiss, and Daniel Yukelson were executive officers and directors of the direct marketing company e4L, Inc. Under the terms of their respective employment agreements, if the executive or the corporation had “any claim” against the other, the claiming party had to present the claim in writing to the other party within one year of the date the claiming party knew or should have known about the facts giving rise to the claim. Otherwise, the claim was forever barred.

e4L went into bankruptcy. In late 2005, the bankruptcy trustee filed suit against the three executives for breach of fiduciary duty. Almost two years later, the executives moved to compel arbitration, alleging that they had not waived the right to arbitrate under the Federal Arbitration Act because they were unaware of or forgot about the contractual right to compel arbitration contained in their employment agreements.

The trial court granted the motions to compel, but the court of appeal determined that Lehman and Weiss had waived their right to arbitration by engaging in pretrial discovery. Yukelson had not done so and thus had not waived his right to arbitration.

On remand, the trustee declined to arbitrate with Yukelson, resulting in his dismissal. The trial court subsequently entered judgment in favor of Lehman and Weiss on summary judgment on the basis of the one-year notice provision.

The trustee appealed, contending that the one-year notice provision was unreasonable and thus invalid.

The court of appeal affirmed, holding that the contractual notice provision was lawful and that Lehman and Weiss never received timely notice.

The court of appeal observed that, because the one-year notice provision had the same effect as a statute of limitations, the parties correctly addressed its validity by disputing whether the limitations period could be lawfully shortened by contract. In that regard, except as restricted by statute, California courts grant contracting parties substantial freedom to modify the length of the statute of limitations.

Here, the one-year notice provision stated that the claiming party had to give written notice of the claim to the other party within one year of the date the claiming party knew or should have known of the facts giving rise to the claim. The provision contained language adopting the delayed discovery rule, making it valid under governing California case authority. The court emphasized that, contrary to the trustee’s argument, a contractual notice provision is enforceable with respect to a claim against a professional or skilled expert as long as the provision incorporates the delayed discovery rule.

The court rejected the trustee’s argument that a one-year notice provision could not be included in an employment agreement, as opposed to some other type of contract. There were simply no grounds for adopting that position.

Nor, the court said, did the executives have to make a showing of prejudice to enforce the one-year notice provision. The case authority relied upon by the trustee for that assertion was inapposite.

Finally, the trustee was bound by the contractual notice period to the same extent as e4L. Accordingly, she could not avoid the period on the theory that she was unaware of it until over three years after she was appointed. The court noted the irony of the trustee’s position, since she had argued that the executives’ delay in seeking arbitration was not excused by the their’ ignorance of the arbitration provision in their employment agreements. Here, the trustee delayed for years before seeking e4L’s corporate records. Her ignorance of the one-year notice provision could not excuse her failure to comply with it.

Absent any disputed issues of material fact about whether e4L gave the executives one year’s notice of the breach of fiduciary duty claim, the trial court properly granted summary judgment in the defendants’ favor.