The National Grange of the Order of Patrons of Husbandry v. California State Grange

Filing 185

MEMORANDUM and ORDER signed by Senior Judge William B. Shubb on 3/2/2017 DENYING 176 Plaintiff's MOTION TO ADD JUDGMENT DEBTOR. (Kirksey Smith, K)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 ----oo0oo---- 11 12 13 NATIONAL GRANGE OF THE ORDER OF PATRONS OF HUSBANDRY, Plaintiff, 14 17 MEMORANDUM AND ORDER RE: MOTION TO ADD JUDGMENT DEBTOR v. 15 16 CIV. NO. 2:14-676 WBS DB CALIFORNIA GUILD, formerly doing business as “California State Grange,” Defendant. 18 19 ----oo0oo---- 20 On September 12, 2016, the court ordered defendant 21 22 California Guild (“Guild”) to pay plaintiff National Grange of 23 the Order of Patrons of Husbandry $144,715.70 in attorneys’ fees 24 (“fees order”). 25 Plaintiff now moves to amend the court’s fees order to add Robert 26 McFarland, president of defendant, as a judgment debtor to the 27 order. 28 /// (Sept. 12, 2016 Order (Docket No. 154).) (Pl.’s Mot. (Docket No. 176).) 1 1 I. Factual and Procedural Background 2 Plaintiff brought this action against defendant, a 3 nonprofit corporation, for trademark infringement, false 4 designation of origin, and unfair competition under the Lanham 5 Act. 6 judgment to plaintiff on July 14, 2015, (July 14, 2015 Order 7 (Docket No. 60)), and enjoined defendant “from using marks 8 containing the word ‘Grange’” on September 29, 2015 (“September 9 2015 order”), (Sept. 29, 2015 Order (Docket No. 85)). (Compl. (Docket No. 1).) 10 The court granted summary On April 20, 2016, the court found defendant in 11 “deliberate and willful” violation of the September 2015 order 12 (“April 2016 order”). 13 Pursuant to 15 U.S.C. § 1117(a), the court awarded plaintiff 14 attorneys’ fees incurred from various motions and affidavits it 15 had filed for the purpose of enforcing the September 2015 order.1 16 (See id. at 38-39.) 17 (Apr. 20, 2016 Order (Docket No. 138).) On September 12, 2016, the court determined the amount 18 of fees awarded under the April 2016 order to be $144,715.70. 19 (Sept. 12, 2016 Order at 23.) 20 plaintiff the fees awarded and “file an affidavit with the court 21 confirming payment within fourteen (14) business days.” 22 The court ordered defendant to pay (Id.) On September 19, 2016, McFarland filed a declaration 23 24 25 26 27 28 1 The motions and affidavits are: (1) plaintiff’s motion for further injunctive relief (Docket No. 126); (2) plaintiff’s motion to show cause as to why defendant should not be held in contempt of court (Docket No. 109); and (3) two declarations of Ed Komski, one supporting plaintiff’s contempt motion (Docket No. 109-1), and the other supporting plaintiff’s opposition to a request for stay of the September 2015 order that defendant had filed (Docket No. 99-2). (Apr. 20, 2016 Order at 38-39.) 2 1 stating that defendant “is unable to comply with the [court’s] 2 Fee[s] Order” because “[m]ost of the funds held by [defendant] 3 are subject to a preliminary injunction issued in [a] State Court 4 Action” the parties are involved in. 5 Robert McFarland ¶¶ 2, 4 (Docket No. 155).) 6 good faith,” McFarland provided, with his declaration, bank 7 account records indicating that defendant had access to only 8 $1,535.71 in bank account funds at the time of his declaration. 9 (Id. ¶ 11e.) 10 (Sept. 29, 2016 Decl. of “As a showing of On December 19, 2016, plaintiff deposed McFarland in 11 connection with defendant’s alleged inability to comply with the 12 court’s fees order. 13 McFarland (“McFarland Dep.”) (Docket No. 176-2).) 14 deposition, McFarland testified that defendant’s executive 15 committee voted to pay him $80,000 in July 2016. 16 The payment, according to defendant’s executive committee 17 minutes, was a “severance package” paid to McFarland “in the 18 event the California Guild legal process does not find in 19 [defendant’s] favor and [defendant’s] structure fails.” 20 Mot. Ex. 4, Cal. Guild Executive Committee Minutes (Docket No. 21 176-2).) 22 between McFarland and defendant. 23 Robert McFarland ¶ 1.) 24 (See Pl.’s Mot. Ex. 1, Dep. of Robert At the (Id. at 82.) (Pl.’s As of February 21, 2017, there has been no severance (See Feb. 21, 2017 Decl. of Plaintiff also discovered at the deposition that 25 McFarland has a corporate credit card which defendant covers the 26 charges for. 27 plaintiff, McFarland uses the card to pay for “meals, lodging, 28 entertainment and miscellaneous personal expenses,” and does not (See McFarland Dep. at 50.) 3 According to 1 submit “expense reports” to defendant for such charges. 2 Mot., Mem. (“Pl.’s Mem.”) at 18 (Docket No. 176-1).) 3 (Pl.’s Based on its discoveries, plaintiff now moves to amend 4 the court’s fees order to add McFarland as a judgment debtor to 5 the order on the theory that McFarland is defendant’s alter ego 6 for liability purposes in this action. 7 Motion is brought pursuant to Federal Rule of Civil Procedure 8 69(a) and California Code of Civil Procedure section 187 9 (“section 187”).2 10 II. (Id. at 19.) Plaintiff’s (Id. at 19-20.) Discussion 11 Under Rule 69(a), “federal district courts in 12 California may apply California Code of Civil Procedure section 13 187 ‘to amend a judgment to add additional judgment debtors.’” 14 Directi Internet Sols. Pvt. Ltd. v. Dhillon, No. CIV. 2:12-1045 15 WBS, 2014 WL 3057514, at *1 (E.D. Cal. July 7, 2014) (quoting In 16 re Levander, 180 F.3d 1114, 1121 (9th Cir. 1999)). 17 is premised on the notion that [an] amendment [adding a judgment 18 debtor] ‘is merely inserting the correct name of the real 19 defendant,’ such that adding a party to a judgment after the fact 20 does not present due process concerns.” 21 22 23 24 25 26 27 28 2 “Section 187 Katzir’s Floor & Home Defendant has appealed the court’s fees order to the Ninth Circuit, where the appeal is currently pending. (See Docket No. 160.) While the court does not have jurisdiction to “adjudicate anew the merits” of its fees order while the order is on appeal, it “retains jurisdiction . . . to preserve [the order’s] status quo.” Mayweathers v. Newland, 258 F.3d 930, 935 (9th Cir. 2001). Because a motion to add a judgment debtor based on the alter ego theory merely seeks to “insert[] the correct name of the real defendant” to a judgment, Katzir’s Floor & Home Design, Inc. v., 394 F.3d 1143, 1148 (9th Cir. 2004), plaintiff’s Motion would not alter the merits of the court’s fees order. Accordingly, the court has jurisdiction over plaintiff’s Motion. 4 1 Design, Inc. v., 394 F.3d 1143, 1148 (9th Cir. 2004). 2 “A [section] 187 amendment requires ‘(1) that the new 3 party be the alter ego of the old party and (2) that the new 4 party had controlled the litigation, thereby having had the 5 opportunity to litigate, in order to satisfy due process 6 concerns.’” Id. (quoting Levander, 180 F.3d at 1121). 7 The “alter ego” prong of section 187 requires a showing 8 that: (1) “there is such unity of interest and ownership” between 9 the individual and the corporation “that the separate 10 personalities of the corporation and the individual no longer 11 exist,” and (2) “if the acts [in question] are treated as those 12 of the corporation alone, an inequitable result will follow.” 13 Bank of Montreal v. SK Foods, LLC, 476 B.R. 588, 597 (N.D. Cal. 14 2012). 15 ownership” between an individual and a corporation, the court is 16 instructed to consider “a long list of factors,” such as: (1) 17 whether the individual “commingl[ed his] funds and . . . assets” 18 with those of the corporation’s, (2) whether the individual 19 “treat[ed] the assets of the corporation as his own,” (3) whether 20 the corporation “fail[ed] to maintain minutes or adequate 21 corporate records,” (4) whether the individual “dominat[ed] and 22 control[led]” the corporation, (5) whether the corporation is 23 “undercapitalize[ed],” (6) whether the parties “disregard[ed 24 ]legal formalities and . . . fail[ed] to maintain [an] arm’s 25 length relationship[],” and (7) whether there is a “diversion of 26 assets from [the] corporation” to the individual “to the 27 detriment of creditors.” 28 In deciding whether there is a “unity of interest and Id. at 597-98. Plaintiff focuses on three factors in particular: 5 1 “disregard of corporate formalities,” “commingling of assets,” 2 and “inadequate capitalization.” 3 (Pl.’s Mem. at 25-26.) Plaintiff argues that defendant’s payment of $80,000 to 4 McFarland was authorized without any true regard for corporate 5 formalities because the vote of the executive committee to pay 6 him that money was “orchestrat[ed].” 7 not offered any evidence indicating that defendant’s executive 8 committee and its oversight over defendant’s affairs are a sham. 9 Plaintiff also argues that McFarland’s disregard for corporate (Id. at 26.) Plaintiff has 10 formalities is evidenced by his ability to use defendant’s credit 11 card for personal expenses without submitting expense reports. 12 (Id.) 13 that the executive committee reviews McFarland’s expenses “every 14 quarter,” including his “use of the Guild credit card,” and has 15 “never known [McFarland] to use the Guild’s [funds] for . . . 16 personal [purposes].” 17 Decl.”) ¶¶ 4-5 (Docket No. 179-1); Decl. of Cheri Bunker (“Bunker 18 Decl.”) ¶¶ 6-8 (Docket No. 179-2).) 19 Defendant has submitted affidavits, however, testifying (Decl. of Kathleen Bergeron (“Bergeron Plaintiff next argues that McFarland’s commingling of 20 his assets with those of defendant’s is evidenced by defendant’s 21 payment of $80,000 to McFarland. 22 its argument about corporate formalities, plaintiff’s argument 23 about commingling of assets depends on the unsupported assumption 24 that defendant’s executive committee exercises no real power in 25 limiting McFarland’s access to Guild funds. 26 (Pl.’s Mem. at 25-26.) As with Plaintiff lastly argues that defendant is inadequately 27 capitalized to comply with the court’s fees order because 28 McFarland has divested defendant of its funds. 6 (See id. at 25.) 1 That defendant is inadequately capitalized, however, does not 2 mean that McFarland is singularly responsible for its lack of 3 capital. 4 unsupported assumption that McFarland exercises unilateral 5 control over defendant’s funds. 6 Again, plaintiff’s argument here depends on the Even assuming that defendant and McFarland are engaging 7 in fraud by depleting defendant’s assets to avoid complying with 8 the court’s fees order, the evidence does not support a finding 9 that McFarland is singularly responsible for such fraud such that 10 the court may impose alter ego liability upon him.3 11 Because plaintiff has not offered evidence sufficient 12 to show that McFarland disregarded defendant’s corporate 13 formalities, commingled his assets with those of defendant’s, or 14 unilaterally divested defendant of its funds, plaintiff has 15 failed to satisfy the “alter ego” prong of section 187. 16 Even if the court were to assume that McFarland is the 17 alter ego of defendant, plaintiff has also not shown that 18 McFarland “controlled the litigation” in this matter such that 19 adding him as a judgment debtor to the court’s fees order would 20 not present “due process concerns.” 21 22 23 24 25 26 27 28 3 A more appropriate remedy for defendant and McFarland’s alleged actions would appear to be an action under the Uniform Fraudulent Transfer Act (“UFTA”), Cal. Civ. Code §§ 3439 et seq., which prohibits “transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim,” Arch Ins. Co. v. Sierra Equip. Rental, Inc., No. 2:12-CV-00617 KJM, 2015 WL 1814316, at *4 (E.D. Cal. Apr. 21, 2015). Under the UFTA, a “broad” set of remedies is available, including “[a]voidance of the [fraudulent] transfer or obligation to the extent necessary to satisfy the creditor’s claim,” Cal. Civ. Code § 3439.07(a)(1), and imposition of tort liability on individuals who conspire to violate the UFTA, see Arch Ins. Co., 2015 WL 1814316, at *5. 7 1 To satisfy the “due process” requirement of section 2 187, plaintiff must show that McFarland “had control of the 3 litigation” in this matter and “occasion to conduct [such 4 litigation] with a diligence corresponding to the risk of 5 personal liability that was involved.” 6 Design, 394 F.3d at 1150; see also Bank of Montreal, 476 B.R. at 7 597 (placing burden of proof with respect to section 187 motion 8 on “judgment-creditor”). 9 to overcome due process objections . . . usually includ[es] the Katzir’s Floor & Home “Control of the litigation sufficient 10 financing of the litigation, the hiring of attorneys, and control 11 over the course of the litigation.” 12 at 601 (quoting NEC Elecs. Inc. v. Hurt, 208 Cal. App. 3d 772, 13 778-79 (6th Dist. 1989)). 14 Bank of Montreal, 476 B.R. The evidence before the court does not indicate that 15 McFarland “had control of the litigation” in this matter. 16 According to affidavits submitted by defendant, “all major 17 litigation decisions” involving the Guild are subject to “a vote 18 of the Guild’s Executive Committee,” which retains “overs[ight 19 over] all the litigation between the Guild, National Grange and, 20 California State Grange.” 21 Edwards (“Edwards Decl.”) ¶ 8 (Docket No. 179-7); see also 22 Bergeron Decl. ¶ 3 (corroborating Bunker and Edwards 23 declarations).) 24 McFarland, pays defendant’s attorneys’ fees. 25 ¶ 7 (noting that “the expenses [of] continuing litigation between 26 the Guild [and] National Grange” are creating “financial 27 restrictions [on] the Guild”).) 28 plaintiff (“Saxton affidavit”) shows that decisions regarding how (Bunker Decl. ¶¶ 3, 6; Decl. of David One affidavit indicates that defendant, not (See Edwards Decl. Another affidavit submitted by 8 1 much money to set aside for defendant’s litigation expenses are 2 subject to executive committee vote. 3 of Jan Saxton (“Saxton Decl.”) ¶¶ 11-13 (recounting executive 4 committee discussion and vote on how much money to set aside for 5 “Grange” litigation) (Docket No. 182-1).) 6 indicate that McFarland did not “ha[ve] control of the 7 litigation” in this matter. 8 (Pl.’s Reply Ex. A, Decl. These affidavits Plaintiff cites previous affidavits submitted by 9 McFarland reciting the boilerplate language that he is “President 10 and an authorized representative of Defendant” and has “personal 11 knowledge of . . . facts” he testifies to on defendant’s behalf 12 as evidence that McFarland controlled the litigation in this 13 matter. 14 114-1, 132-8, and 155).) 15 authorized representative of Defendant” and has “personal 16 knowledge” of defendant’s affairs does not mean that he controls 17 defendant’s litigation decisions. 18 he is “the primary contact person” for defendant with respect to 19 this litigation, he “consulted the Executive Committee” prior to 20 “every major litigation decision” and the committee “vote[d] on 21 [such] issue(s).” 22 22.) 23 affidavits does not show that McFarland controlled the litigation 24 in this matter.4 25 26 27 28 (See Pl.’s Mem. at 22 (citing Docket Nos. 78-1, 105-1, That McFarland is “President and an McFarland testifies that while (Feb. 21, 2017 Decl. of Robert McFarland ¶ Thus, plaintiff’s citation to McFarland’s previous 4 Plaintiff cites In re Levander, 180 F.3d 1114 (9th Cir. 1999) and Jack Farenbaugh & Son v. Belmont Constr., Inc., 194 Cal. App. 3d 1023 (2d Dist. 1987) for the proposition that it need only show that McFarland “was an active participant in this litigation” to satisfy section 187’s “control” requirement. (Pl.’s Reply at 7-8 (Docket No. 182).) Neither case stands for 9 1 Plaintiff also cites affidavits submitted by its 2 members testifying that McFarland “is personally and uniquely 3 responsible for the bad faith and deliberate intentional actions 4 that resulted in” the court’s fees order as evidence that 5 McFarland controlled the litigation that led to the order. 6 Pl.’s Mem. at 22-23 (citing Docket Nos. 68-1, 75-1, 83-1, 99-2, 7 and 109-1).) 8 uniquely responsible for the bad faith and deliberate intentional 9 actions that resulted in” the court’s fees order also does not (See That McFarland may have been “personally and 10 mean that he controlled the litigation that led to the order. 11 would be consistent for the court to find that McFarland engaged 12 in bad faith actions on defendant’s behalf, but that the 13 litigation resulting from such actions was controlled by 14 defendant’s executive committee, as the evidence here indicates. 15 (See Bunker Decl. ¶¶ 3, 6; Edwards Decl. ¶ 8; Bergeron Decl. ¶ 3; 16 Saxton Decl. ¶¶ 11-13.) 17 “is personally and uniquely responsible for [defendant’s] bad 18 faith and deliberate intentional actions” is also unavailing. 19 20 It Thus, plaintiff’s claim that McFarland Lastly, plaintiff suggests that defendant’s executive committee is merely a front for McFarland’s control of the 21 22 23 24 25 26 27 28 that proposition. In Levander, the Ninth Circuit found that a partnership controlled the litigation of a corporation “because the same group of individuals comprised the Partnership and the Corporation.” Levander, 180 F.3d at 1123. In Jack Farenbaugh, a California appellate court found that the president of a corporation controlled the litigation of the corporation because “he [gave] instructions to [the corporation’s] attorney as to what he wanted done,” apparently without any interference from other members of the corporation. Jack Farenbaugh, 194 Cal. App. 3d at 82. Thus, in both Levander and Jack Farenbaugh, the presiding court found more than mere participation in litigation, but participation as to indicate control of litigation. 10 1 litigation in this matter. 2 committee, according to plaintiff, “orchestrat[es ]corporate 3 formalities to paper over” McFarland’s decisions, and in fact 4 exercises no real power over defendant’s affairs. 5 stated in the “alter ego” analysis of this Order, plaintiff has 6 not offered any evidence to support the claim that the executive 7 committee is merely a front for McFarland. 8 Saxton affidavit corroborates defendant’s claim that the 9 executive committee meets, actively discusses, and votes on Guild (See Pl.’s Mem. at 26.) The (Id.) As Contrarily, the 10 matters, including litigation matters. 11 13 (recounting executive committee discussion and vote on how 12 much money to set aside for “Grange” litigation).) 13 evidence showing that defendant’s executive committee is a mere 14 front for McFarland, the court cannot find that McFarland 15 controlled the litigation in this matter such that adding him as 16 a judgment debtor to the court’s fees order would comport with 17 due process. 18 (See Saxton Decl. ¶¶ 11- Without any See Bank of Montreal, 476 B.R. at 597. Because plaintiff has failed to satisfy both the “alter 19 ego” and “control[ of] litigation” prongs of section 187, the 20 court must deny plaintiff’s Motion. 21 IT IS THEREFORE ORDERED that plaintiff’s Motion to 22 amend the court’s September 12, 2016 order to add McFarland as a 23 judgment debtor to the order be, and the same hereby is, DENIED. 24 Dated: March 2, 2017 25 26 27 28 11

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