Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—9th Cir.: Dismissal of breach of contract claim on basis of illegality upheld, (Jun 3, 2016)

By Linda O’Brien, J.D., LL.M.

In a breach of contract suit between two investors in a gas station franchise, an agreement to disguise the non-resident status of the one of the investors by purchasing the franchise in the name of only one of the investors was illegal and therefore unenforceable, the U.S. Court of Appeals in San Francisco has held. Thus, the district court’s dismissal of the suit was affirmed (Singh v. Baidwan, June 2, 2016, Per Curiam).

Paul Singh was interested in purchasing an Arco gas station franchise in California from BP, but he did not have permanent residence status—a requirement to purchase the franchise and to obtain a loan. Investor Bhupinder Baidwan agreed to form an LLC, and hold Singh’s shares and fifty percent interest in the gas station in order to assist Singh in buying the franchise. Baidwan also purportedly agreed to transfer the shares and half interest to Singh upon his request.

In October 2013, after learning that Baidwan would not transfer the shares and interest in the gas station, Singh filed suit against Baidwan, alleging breach of contract, among other claims. The district court dismissed Singh’s breach of contract claim on the ground that an illegal contract was unenforceable. Singh appealed.

The district court did not err in dismissing Singh’s breach of contract claim on the basis of illegality, the appellate court determined. Under California law, it is a well-settled rule that illegal contracts will not be enforced. In Asdourian v. Araj, 696 P.2d 95 (1985), the California Supreme Court held that the factor of whether the contract is malum in se or merely malum prohibitum will determine if equitable relief is warranted. Malum in se agreements are absolutely void as opposed to sound public policy or designed to obstruct justice. Malum prohibitum contracts are only voidable, depending on the factual context and public policies involved, the court explained.

According to Singh’s own allegations, the contract between Singh and Baidwan was for the express purpose of evading the requirements of the franchisor and lender. The purpose to defraud the franchisor and lender by misleading them as to who would actually own the gas station made the contract malum in se, and therefore unenforceable, the court concluded.

Dissent. In her dissent, Judge Lefkow noted that, while the transaction had the lawful purpose of obtaining a franchise and loan through false representations, she did not agree that Singh and Baidwan made the representations with the intent to defraud BP. There was no evidence that BP was harmed by the transaction, that there was a default of the loan, or that Singh’s immigration status changed by the time he requested performance. In Lefkow’s view, the district court should have considered whether equity favored any relief to Singh based on the evidence of the case.

The case is No. 14-16287.

Attorneys: Sunita Kapoor (Law Offices of Sunita Kapoor, PC) for Paul Singh. Raymond Willis (Law Offices of Raymond E. Willis) for Bhupinder Baidwan.

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