Zucaro v. Venable

Background

Raymond Zucaro and Santiago Cuneo sued Robert Venable for unjust enrichment and quantum meruit, seeking funds held in escrow after a 2015 settlement involving the parties and their former business partner, David Hinman. The settlement agreement provided that the funds would be allocated among the parties in a manner they mutually agreed to in writing. The parties could not agree on an allocation, leaving roughly $1.12 million in escrow.

Venable later initiated arbitration asserting claims including breach of contract, breach of the implied covenant of good faith, promissory estoppel, and fraud. Zucaro and Cuneo filed counterclaims, including breach of fiduciary duty, breach of contract, and breach of the implied covenant of good faith and fair dealing. They argued that the funds should be divided according to ownership interests in SW Asset Management, LLC, with most of the funds going to Zucaro.

After a three-day hearing, the arbitrator rejected each side’s claims. The arbitrator concluded that the settlement provision requiring the parties to agree in writing on an allocation was either an enforceable agreement to negotiate or an unenforceable agreement to agree. Under either interpretation, the arbitrator held that neither a court nor an arbitrator could impose a particular allocation. A California Superior Court entered judgment in conformity with the final arbitration award on January 2, 2018.

The parties later entered an escrow agreement under which Citibank would hold the money and release it only after receiving joint written instructions signed by the parties. The agreement stated that, for purposes of the escrow agreement and division of the funds, no agreement then governed the allocation. It also stated that the escrow agreement did not change the content or effectiveness of the arbitration judgment and award.

Motion to Dismiss and Claim Preclusion

Venable moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. He argued that claim preclusion barred the lawsuit. Claim preclusion is a rule that prevents parties from relitigating the same legal dispute after they had a full and fair opportunity to litigate it and a final judgment was entered.

The court applied California preclusion law because the arbitration judgment was entered by a California court and the arbitration applied California law. Under that law, claim preclusion applies when a later case involves the same cause of action, the same parties or parties legally connected to them, and a final judgment on the merits in the earlier case.

The court explained that California uses a “primary rights” approach. Under that approach, the key question is not whether the later claims use different legal labels, but whether both proceedings concern the same right, duty, wrongful conduct, and harm. The court found that the arbitration counterclaims and the current claims involved the same primary right: Plaintiffs’ claimed right to receive a substantial allocation of the escrowed funds. Both proceedings alleged that Venable wrongfully obstructed allocation of the funds or demanded more than his fair share, and both sought an order awarding Zucaro a specific allocation.

The court therefore held that the different labels—unjust enrichment and quantum meruit in the current case, versus contract, fiduciary-duty, and related claims in the arbitration—did not avoid claim preclusion. The claims concerned the same parties, the same alleged harm, and the same funds after a final judgment.

Effect of the Escrow Agreement

Plaintiffs argued that the later escrow agreement changed their legal relationship and made claim preclusion inapplicable. The court acknowledged that claim preclusion does not prevent a later case when material new facts or changed conditions alter the parties’ legal rights. But it found no such change here.

The court compared the settlement agreement and the escrow agreement. Both required all parties to sign written instructions before the funds could be distributed. The court concluded that the escrow agreement provided a mechanism for holding the money but did not create a new basis for allocating it. The arbitrator’s conclusion that no court or arbitrator could impose an allocation therefore remained applicable.

The court also rejected Plaintiffs’ argument that the escrow agreement released them from the arbitration decision. The agreement expressly reaffirmed the effectiveness of the arbitration judgment and award. Its statement that no agreement governed allocation was limited to the escrow agreement and did not affect the arbitration proceedings or the California judgment. The court further stated that the escrow agreement could not validly amend the settlement agreement because it was not signed by all parties to that agreement.

Leave to Amend and Disposition

The court held that Plaintiffs’ unjust-enrichment and quantum-meruit claims were barred by claim preclusion and dismissed them without prejudice. The court granted Plaintiffs leave to amend solely to plead facts showing that the settlement agreement was an enforceable agreement to negotiate and that the parties had completed that duty before filing the lawsuit. The court noted that the complaint did not allege that Plaintiffs made good-faith efforts to negotiate after the arbitration.

The motion to dismiss was granted. Plaintiffs had thirty days to file an amended complaint. If they did not do so, and did not show good cause for the failure, the court stated that it would dismiss the action with prejudice.