Bailey v. Pride Manufacturing Company, LLC et al

Filing 108

MEMORANDUM DECISION AND ORDER Defendants' Motion to Dismiss (Dkt. 38 ) is DENIED. Defendants' Motion for Sanctions (Dkt. 66 ) is DENIED. Plaintiff's Motions to Supplement (Dkt. 77 , 84 ) are GRANTED in part and DENIED in part as stated herein. Plaintiff's Motion to Amend (Dkt. 89 ) is GRANTED. Plaintiff shall file the proposed Amended Complaint on CM/ECF as a separate document entitled "Amended Complaint." Signed by Judge Edward J. Lodge. (jp)

UNITED STATES DISTRICT
FOR THE DISTRICT OF IDAHO

MAURICE BAILEY,

Case No. 1:13-cv-00051-EJL
Plaintiff,

vs.
PRIDE MANUFACTURING COMPANY,
LLC, a limited liability company organized
under the laws of Wisconsin;
SOFTSPIKES, LLC, a limited liability
company organized under the laws of
Delaware; MCMULLIN
LABORATORIES, INC, d/b/a
MCMULLIN LABS, an administratively
dissolved corporation organized under the
laws of Idaho; MICHAEL J.
MCDONAGH, as statutory trustee for
MCMULLIN LABORATORIES, INC;
FARIS W. MCMULLIN, an individual;
INOVIN, INC., an administratively
dissolved corporation organized under the
laws of Idaho; JAMISON ROSS
SPENCER, an individual; JAMES
MCMULLIN, an individual; CADWELL
THERAPEUTICS, INC., a corporation
organized under the laws of Wyoming;
WAYNE H. JONES, an individual; NEW
PHASE DEVELOPMENT, LLC, a limited
liability company organized under the laws
of Idaho; DUANE M. JOHNSON, an
individual; and other as yet unknown John
or Jane Does or unknown entities;

MEMORANDUM DECISION
AND ORDER

Defendants.

1

Before the Court in the above entitled matter are the Defendant=s Motion to
Dismiss pursuant to Rule 12(b)(6) and Motion for Sanctions and the Plaintiff=s Motions
to Supplement. The parties have filed their responsive briefing and the matter is ripe for
the Court=s review. Having fully reviewed the record herein, the Court finds that the facts
and legal arguments are adequately presented in the briefs and record. Accordingly, in the
interest of avoiding further delay, and because the Court conclusively finds that the
decisional process would not be significantly aided by oral argument, the Motion shall be
decided on the record before this Court without oral argument.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff Maurice Bailey initiated this action against a number of Defendants
seeking a declaration that he is the owner of certain property. (Dkt. 1.) Specifically,
whether or not an Amended Default Judgment entered in a related bankruptcy proceeding
quiets title to the subject property in Mr. Bailey=s favor. The property in question is a
number of golf cleat patents invented by Faris McMullin.1

1

Pride Defendants refer to these patents as the AGolf Patents@ and Plaintiff calls the patents
contained in the Amended Default Judgment AConcealed Property.@ (Dkt. 38, 49.)

2

The related bankruptcy proceedings involved the case of an entity named ConectL
Corporation (ConectL).2 On January 31, 2007, ConectL filed a Chapter 11 Bankruptcy
Petition (Case No. 07-00137-JDP) which was later converted to a Chapter 7 (Case No.
09-06008-JDP) and a Trustee, Gary L. Rainsdon, was appointed. On January 26, 2009,
the Trustee filed an Adversary Proceeding Complaint against various defendants in that
action including Mr. McMullin and three companies in which he was a majority equity
owner: Anestel Corporation, formerly known as ConectL Test Corporation; Inovin, Inc.,
formerly known as Exact Research, Inc.; and R-Tech Corporation. (Dkt. 1, Ex. A.)3 The
Trustee=s Complaint requested the turning over of certain documents, avoidance of
fraudulent transfers, quiet title, and avoidance of preferences against the defendants as to
sixteen specific patents and various trademarks. The Trustee=s Complaint further alleged:
Other specific and general schemes and artifices of transfers of property or
debts by the Debtor to, or among the defendants, may exist and may be
discovered in the discovery and investigatory process of this adversary
proceeding. The Defendants are placed on notice that the Trustee seeks to
avoid all such transfers and recover all such properties or value of the
transfers for the benefit of the estate even though not specifically identified
or known at this time. Such transfers may include creations of debt,
transfers of cash, cash equivalent, stock or shares, property, intellectual
property, payments made without consideration, obligations incurred for
the benefit of others or any other such transfers to the defendants and/or
John or Jane Does and other unknown Entities for less than reasonable
equivalent value or for the purpose of concealment.
2

ConectL Corporation was previously named Exact Research, Inc and Questec, Inc.

3

There were other named defendants in the ConectL bankruptcy not listed here.

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(Dkt. 1, Ex. A at & 29.) Ultimately, on October 25, 2009, an Amended Default
Judgment was entered against all defendants in the Adversary Proceeding which quieted
title to patents and trademarks as specifically identified therein as well as avoidance of
any and all claims of interest or ownership in and to patents, royalties, foreign patents,
copyrights, trademarks, and license agreements by the listed corporations to those listed
patents and trademarks. (Dkt. 1, Ex. B at && 2, 3.) The Amended Default Judgment
placed ownership of those properties in the bankruptcy estate of ConectL. On April 22,
2010, the Trustee assigned to Mr. Bailey all of the patents and judgments held by the
bankruptcy estate of ConectL including those contained in the Amended Default
Judgment. (Dkt. 1, Ex. C.)
Mr. Bailey filed an Adversary Proceeding in the United States Bankruptcy Court
in this District (Case No. 12-06020-JDP) against these Defendants claiming the property
at issue is owned by Mr. Bailey pursuant to the Amended Default Judgment. The
Bankruptcy Court concluded that it lacked subject matter jurisdiction and the case was
dismissed. Accordingly, Mr. Bailey then filed his Complaint in this matter pursuant to the
Declaratory Judgment Act, 28 U.S.C. '' 2201-2202 and Title 11 of the Bankruptcy Code
raising the same claim.
Defendants Pride Manufacturing Company, LLC and Softspikes, LLC
(collectively referred to as Pride Defendants) manufacture golf equipment, including golf

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cleats that Mr. McMullin invented. Pride Defendants argue the golf cleats invented by
Mr. McMullin were invented independent from his work for ConectL and the patents are
separate and apart from those that are the subject of the Amended Default Judgment in
the ConectL bankruptcy. Essentially, that the golf cleat patents are not a part of the
ConectL bankruptcy estate. The Pride Defendants have now filed the instant Motion to
Dismiss. (Dkt. 38.) The Pride Defendants have also filed a related Motion for Rule 11
Sanctions and Mr. Bailey has filed Motions to Supplement. (Dkt. 66, 77, 84.) These
Motions are ripe for the Court=s consideration and the Court finds as follows.
DISCUSSION
1.

Motions to Supplement
Plaintiff filed two Motions to Supplement. (Dkt. 77, 84.) The materials sought to

be supplemented relate to the Motion to Dismiss and Motion for Sanctions filed by the
Pride Defendants. Plaintiff asserts the materials were not available to the Plaintiff until
after the Motion to Dismiss had been filed and briefed. The Pride Defendants oppose the
Motions to Supplement arguing the Motion to Dismiss should be based upon the
sufficiency of the Complaint alone, the materials are extraneous and largely irrelevant
and prejudicial to the Pride Defendants, and the supplemental materials amount to a
motion to amend the Complaint. (Dkt. 85.) The Pride Defendants further argue the

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materials raise new facts and theories for recovery after the briefing on the Motions was
completed.
The Court has reviewed the parties briefing concerning the requested
supplementation and denies the Motions to Supplement as to their consideration on the
Motion to Dismiss. The question on the Motion to Dismiss concerns the sufficiency of
the pleadings and, therefore, the supplemental materials are not relevant to that Motion.
As to the Motion for Sanctions, however, the Court finds the supplemental material is
appropriate for its consideration and will consider the same as to that Motion.
2.

Motion to Dismiss
The Pride Defendants have filed the instant Motion to Dismiss asserting several

reasons why the Complaint should be dismissed including that the principles of
preclusion does not apply and that the Amended Default Judgment is void, vague, and
lacks subject matter jurisdiction. (Dkt. 38.) Plaintiff counters that the Motion should be
denied because, taking the allegations to be true, the Complaint states plausible claims for
relief. Specifically, that the Amended Default Judgment made the property the Pride
Defendants claim ownership of part of the bankruptcy estate that was assigned to
Plaintiff.

6

A motion to dismiss made pursuant to Federal Rule of Civil Procedure 12(b)(6)
tests the sufficiency of a party=s claim for relief. When considering such a motion, the
Court=s inquiry is whether the allegations in a pleading are sufficient under applicable
pleading standards. Federal Rule of Civil Procedure 8(a) sets forth minimum pleading
rules, requiring only a Ashort and plain statement of the claim showing that the pleader is
entitled to relief.@ Fed. R. Civ. P. 8(a)(2).
A motion to dismiss will only be granted if the complaint fails to allege Aenough
facts to state a claim to relief that is plausible on its face.@ Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007). AA claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged. The plausibility standard is not akin to a >probability
requirement,= but it asks for more than a sheer possibility that a defendant has acted
unlawfully.@ Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citations omitted). Although
Awe must take all of the factual allegations in the complaint as true, we are not bound to
accept as true a legal conclusion couched as a factual allegation.@ Id. at 1949-50; see also
Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008).
Therefore, Aconclusory allegations of law and unwarranted inferences are insufficient to
defeat a motion to dismiss for failure to state a claim.@ Caviness v. Horizon Comm.
Learning Cent., Inc., 590 F.3d 806, 811-12 (9th Cir. 2010) (citation omitted).

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The Complaint in this case contains one claim seeking declaratory relief
interpreting the Amended Default Judgment to quiet title in the ConectL bankruptcy
estate as to particular property relating, mainly, to patents for golf cleats. (Dkt. 1 at 1213.) The Complaint points both to the Declaratory Judgment Act, 28 U.S.C. ' 2201-2202,
and Title 11 of the United States Bankruptcy Code '' 542, 544, 548, 550 and Idaho Code
'' 55-906, 913, and 914. (Dkt. 1 at & 1.)
The Declaratory Judgment Act provides that A[i]n a case or actual controversy ...
any court of the United States ... may declare the rights and other legal relations of any
interested party.@ 28 U.S.C. ' 2201(a). Under the Declaratory Judgment Act, Athe
question in each case is whether the facts alleged, under all the circumstances, show that
there is a substantial controversy, between parties having adverse legal interests, of
sufficient immediacy and reality to warrant the issuance of a declaratory judgment.@
Maryland Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941). The Aactual
controversy@ requirement is the same as the Acase or controversy@ requirement of Article
III of the United States Constitution. Am. States Ins. Co. v. Kearns, 15 F.3d 142, 143 (9th
Cir.1993). Thus, a cause of action for declaratory judgment under the Declaratory
Judgment Act requires that both the plaintiff and the defendants be interested parties. 28
U.S.C. ' 2201. The remedy is discretionary in nature and a district court may Astay or to
dismiss an action seeking a declaratory judgment before trial or after all arguments have
drawn to a close.@ Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995).
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The Pride Defendants delineate seven independent reasons why the Amended
Default Judgment is not preclusive against them and, therefore, the Complaint should be
dismissed. (Dkt. 38 at 2.) The Pride Defendants assert the Plaintiff=s ownership claim
over the property at issue is precluded because the property was not included in the
ConectL bankruptcy estate. (Dkt. 38 at 14) (ASimply stated, nothing in Trustee=s
Complaint or the Default Judgment has anything to do with the Pride Defendants or the
Golf Patents.@) The Plaintiff counters that the Amended Default Judgment was broad
enough to encompass the property that the Pride Defendants claim to own. Plaintiff
maintains that the Amended Default Judgment did quiet title to the property at issue even
though it was not expressly listed because the adversary proceeding defendants concealed
the property from the Bankruptcy Court. (Dkt. 49 at 3.) The Pride Defendants dispute this
allegation arguing the Amended Default Judgment listed specific patents and trademarks
that were totally unrelated to those claimed by the Pride Defendants.
The Court finds that at this stage the Complaint states a plausible claim for
declaratory relief that the subject property in question was made a part of the ConectL
bankruptcy estate in the Amended Default Judgment. The Complaint contains several
allegations that several of the defendants in the ConectL bankruptcy case were hiding
assets and transferring property. The Complaint goes on to allege the Trustee in that case
was seeking to avoid all such transfers and recover all such properties or value for the
benefit of the ConectL bankruptcy estate. (Dkt. 1 at & 36.) As a result, the Complaint
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states, the transfers of the property at issue in this case were avoided by the Amended
Default Judgment with all rights and interests thereto quieted in the Trustee. (Dkt. 1 at &
45, 46.) Taking these allegations as true, the Court finds the Plaintiff has stated a
plausible claim that the Amended Default Judgment may have avoided any transfers of
the property or assets that occurred at the time period in question among the many
entities and individuals. Further, the parties here are in actual controversy as the Pride
Defendants claim they have rightful ownership over the property contrary to the
Plaintiff=s claim of ownership arising by virtue of his assignment of the property in the
ConectL bankruptcy estate.
The language of the Amended Default Judgment expressly avoids interests in and
quiets title to the patents and trademarks as listed therein Arelated to but not limited to@
(Dkt. 1, Ex. B.) The Pride Defendants argue the property at issue here, golf cleat patents,
are unrelated to the electrical cord patents and trademarks that were the subject of the
Amended Default Judgment. That determination is a question that must be made on a
later motion. The question on this Motion to Dismiss goes to the sufficiency of the
pleadings and the Complaint here has alleged facts that, if true, state plausible claims for
declaratory relief.
The Pride Defendants argue preclusion does not apply here because they were
neither parties nor in privy to any parties in the ConectL bankruptcy case and because the

10

Amended Default Judgment is too vague to serve as the basis for preclusion. (Dkt. 38.)
The Pride Defendants further argue default judgments in this circuit are not given
collateral estoppel effect. (Dkt. 38 at 9) (citing In re Gottheiner, 703 F.2d 1136, 1140 (9th
Cir. 1983)).4 The question in this case, however, is not whether the Amended Default
Judgment has preclusive effect over the Pride Defendants= ownership of certain patents
and trademarks. Instead, the question raised in this action is who owns the property at
issue or, stated differently, what property was owned by the ConectL bankruptcy estate
and later assigned to Plaintiff.
The Pride Defendants also argue the Amended Default Judgment is void because
prior to it being entered, Mr. McMullin filed his own Chapter 7 Bankruptcy which
triggered the automatic stay as to Mr. McMullin when the Amended Default Judgment
was entered. (Dkt. 38 at 12.) This argument may have some traction if, in his Chapter 7
Bankruptcy, Mr. McMullin claimed the same property interests in the patents at issue in
this case. Whether that is the case is a question that cannot be resolved on this Motion to
Dismiss at this stage of the proceeding. Whether Mr. McMullin=s Chapter 7 Bankruptcy

4

In Gottheiner, the Ninth Circuit recognized that one prerequisite to collateral estoppel is that the
disputed issue must have been actually litigated in the prior proceeding. Id. Issue preclusion may apply to
default judgments where the defaulted party actively participated in the litigation or had a reasonable
opportunity to defend himself on the merits but declined to do so. In re Daily, 47 F.3d 365, 368 (9th Cir.
1995) (quotations and citations omitted). Again, the question here is not one of preclusion.

11

did apply to the same property and the stay was in effect at the time the Amended Default
Judgment was entered are questions that must be determined on a later motion.
Based on the foregoing, the Court denies the Pride Defendant=s Motion to Dismiss.
3.

Motion for Sanctions
The Pride Defendants have filed a Motion for Sanctions asserting the Plaintiff=s

Complaint is Acompletely meritless and lacks any factual or legal basis.@ (Dkt. 66 at 2.)
As such, they seek Rule 11 sanctions in the form of costs and fees incurred in preparing
and prosecuting their Motion to Dismiss and supporting papers and briefs.
Rule 11 states that in presenting to the court a pleading, written motion, or other
paperCwhether by signing, filing, submitting, or later advocating itCan attorney certifies
that Ait is not being presented for any improper purpose, such as to harass, cause
unnecessary delay, or needlessly increase the cost of litigation@ and that Athe factual
contentions have evidentiary support or, if specifically so identified, will likely have
evidentiary support after a reasonable opportunity for further investigation or discovery.@
Fed. R. Civ. P. 11(b)(1) & (3).
In general, if the court determines that Rule 11(b) has been violated, the court may
impose an appropriate sanction. See Fed. R. Civ. P. 11(c)(1). Sanctions under Rule 11
Amust be limited to what suffices to deter repetition of the conduct or comparable conduct

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by others similarly situated@ and may include (1) nonmonetary directives; (2) an order to
pay a penalty into court; or (3) if imposed on motion and warranted for effective
deterrence, an order directing payment to the movant of part or all of the reasonable
attorney=s fees and other expenses directly resulting from the violation. Fed. R. Civ. P.
11(c)(4).
For the reasons stated above in the Court=s ruling on the Motion to Dismiss,
Plaintiff=s Complaint states a plausible claim for relief and, as such, is not meritless or
frivolous. The Motion for Sanctions is denied.
4.

Motion to Amend
Plaintiff has also filed a Motion to Amend Complaint asking that the original

Complaint be amended to include additional patents which, Plaintiff alleges, fall within
the scope of the underlying Amended Default Judgment. Specifically, the patents
concerning the golf cleats and any foreign counterparts thereto which are the subject of
the Pride Defendant=s Motion to Dismiss. (Dkt. 89.) The Pride Defendant=s oppose the
Motion arguing the proposed amendments adding additional patents suffer from the same
defects as those in the original Complaint and, therefore, any amendment is futile. (Dkt.
98.)

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Federal Rule of Civil Procedure 15(a) provides that, once a responsive pleading
has been served, a party may amend its pleading Aonly with the opposing party=s written
consent or the court=s leave. The court should freely give leave when justice so requires.@
Fed. R. Civ. P. 15(a)(2). The Ninth Circuit Court of Appeals recognizes that Athe
underlying purpose of Rule 15 [is] to facilitate [a] decision on the merits, rather than on
the pleadings or technicalities,@ and, therefore, ARule 15=s policy of favoring amendments
to pleadings should be applied with extreme liberality.@ Chudacoff v. University Med.
Cent. of Southern Nev., 649 F.3d 1143, 1152 (9th Cir. 2011) (quoting United States v.
Webb, 655 F.2d 977, 979 (9th Cir. 1981)).
The decision whether to grant or deny a motion to amend pursuant to Rule 15(a)
rests in the sole discretion of the trial court. The four factors that are commonly used to
determine the propriety of a motion for leave to amend are: 1) undue delay, bad faith or
dilatory motive on the part of the movant; 2) repeated failure to cure deficiencies by
amendments previously allowed; 3) undue prejudice to the opposing party by virtue of
allowance of the amendment; and 4) futility of amendment. C.F. ex rel. Farnan v.
Capistrano Unified Sch. Dist., 654 F.3d 975, 985 n. 5 (9th Cir. 2011) (quoting Foman v.
Davis, 371 U.S. 178, 182 (1962)).
However, A[t]hese factors . . . are not of equal weight in that delay, by itself, is
insufficient to justify denial of leave to amend.@ Webb, 655 F.2d at 979 (AThe mere fact
that an amendment is offered late in the case is . . . not enough to bar it.@); Bowles v.

14

Beade, 198 F.3d 752, 758 (9th Cir. 1999). AOnly where prejudice is shown or the movant
acts in bad faith are courts protecting the judicial system or other litigants when they
deny leave to amend a pleading.@ Webb, 655 F.2d at 980 (citation omitted). The Ninth
Circuit has held that although all these factors are relevant to consider when ruling on a
motion for leave to amend, the Acrucial factor is the resulting prejudice to the opposing
party.@ Howey v. United States, 481 F.2d 1187, 1189 (9th Cir. 1973). Indeed, prejudice is
the touchstone of the inquiry under Rule 15(a). Eminence Capital, LLC v. Aspeon, Inc.,
316 F.3d 1048, 1052 (9th Cir. 2003). Ultimately, A[u]nless undue prejudice to the
opposing party will result, a trial judge should ordinarily permit a party to amend its
complaint.@ Howey, 481 F.2d at 1190.
The Court finds the request to amend the Complaint in this action is well taken.
The proposed amendments to the Complaint add additional specificity to the claims
alleged. Further, allowing such amendment is not prejudicial to the Defendants in this
action because, as the Pride Defendants have pointed out, the Plaintiff Ais not proposing
new causes of action,@ Anot adding a single additional allegation,@ Anot introducing any
new legal theories,@ but merely Aproposing more of the same.@ (Dkt. 98 at 4.) As such, the
Court will grant the Motion to Amend the Complaint and direct Plaintiff to file the
proposed Amended Complaint in the Electronic Docket of this Case as a separate
document entitled AAmended Complaint.@

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ORDER
NOW THEREFORE IT IS HEREBY ORDERED as follows:
1)

Defendants= Motion to Dismiss (Dkt. 38) is DENIED.

2)

Defendants= Motion for Sanctions (Dkt. 66) is DENIED.

3)

Plaintiff=s Motions to Supplement (Dkt. 77, 84) are GRANTED in part
and DENIED in part as stated herein.

4)

Plaintiff=s Motion to Amend (Dkt. 89) is GRANTED. Plaintiff shall file the
proposed Amended Complaint on CM/ECF as a separate document entitled
AAmended Complaint.@

DATED: January 7, 2014

_________________________
Edward J. Lodge
United States District Judge

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