The opinion of the court was delivered by: Honorable Larry Alan Burns United States District Judge
ORDER RE: MOTION FOR LEAVE TO JUDGMENT, AND MOTION FOR LEAVE TO SEEK ADDITIONAL DISCOVERY [Dkt. Nos. 64, 75, 97] FILE THIRD AMENDED COMPLAINT, MOTION FOR SUMMARY
Pending before the Court are three related motions: Plaintiff's motion for leave to file a third amended complaint ("Motion to Amend"), Defendant's motion for summary judgment ("MSJ"), and Plaintiff's motion for leave to seek additional discovery ("Discovery Motion"). The Discovery Motion asks, among other things, that in the interests of judicial economy, the MSJ be considered only after the Court rules on Plaintiff's Motion to Amend and on the Discovery Motion. The motions are all fully briefed, however, and the Court is prepared to rule on all three at this time.
While the Court finds it expedient to consider the motions together, the parties were required to brief each one completely, see Civ. Loc. Rule 7.1(f)(1) (requiring each motion to be supported by a brief); thus, the Court need not cross-reference the pleadings or borrow arguments or evidence from the briefing on one set of motions in order to make its rulings on another. See, e.g., Forsberg v. Pacific N.W. Bell Tel. Co., 840 F.2d 1409, 1418 (9th Cir. 1988) ("The district judge is not required to comb the record to find some reason to deny a motion for summary judgment.").
In its motion to amend, Plaintiff seeks to add Teresa Tsao and Home, ETC, Inc. ("Home") as Defendants, to abandon its breach of contract claim; to add claims against Teresa Tsao under an alter ego theory; and to add a claim against Home for fraudulent transfer under the Texas Uniform Fraudulent Transfer Act ("UFTA"), Tex. Bus. & Comm. Code §§ 24.001 et seq.
Under Fed. R. Civ. P. 15(a), Plaintiff must obtain leave before amending its complaint, but the Court is directed to grant leave freely when justice so requires. As a matter of policy, Rule 15 is to be applied liberally in favor of amendment, but the Court need not grant leave where the amendment "(1) prejudices the opposing party; (2) is sought in bad faith; (3) produces an undue delay in litigation; or (4) is futile." AmerisourceBergen Corp. v. Dialysist West, Inc., 465 F.3d 946, 951 (9th Cir. 2006) (citations omitted).
Plaintiff, citing Adorno v. Crowely Towing & Transportation Co., 443 F.3d 122, 126 (1st Cir. 2006), argues the issue of futility is to be resolved solely on the basis of allegations using the same standard as for a motion under Fed. R. Civ. P. 12(b)(6). Even assuming Plaintiff has correctly and completely stated the law in the First Circuit, this Circuit has held "futility includes the inevitability of a claim's defeat on summary judgment." Johnson v. Am. Airlines, Inc., 834 F.2d 721, 724 (9th Cir. 1987) (citation omitted).
Plaintiff's request to abandon its breach of contract claim is unopposed, and is GRANTED.
As discussed below, the Court will grant Defendants' motion for summary judgment on Plaintiff's claims against Home. Plaintiff has failed to produce adequate evidence to support its argument that the Court should disregard Home's corporate form. However, because the Court has discretion to grant leave to amend following a grant of summary judgment, Ferris v. Santa Clara County, 891 F.2d 715, 718--19 (9th Cir. 1989) (citation omitted), the Court will consider whether Plaintiff should be permitted to amend its complaint to add allegations in support of this argument.
The evidence Plaintiff cites is essentially the same as that discussed in the Court's analysis of the MSJ. Because the evidence will not support a finding that the corporate form should be disregarded, the Court finds permitting Plaintiff to amend its FAC to add these allegations would be futile.
C. Adding Teresa Tsao as a Defendant
Plaintiff's theory is that Lotus International's ("Lotus") and Home's corporate form should be disregarded and Teresa Tsao should be held liable for their wrongdoing. As discussed below, claims against Home are being dismissed.
Plaintiff points to evidence, in the form of corporate filings, showing Teresa Tsao was the sole owner of Lotus. (Mot. to Amend at 9:22--27.) Although this evidence is controverted, a jury could reasonably find Ms. Tsao was Lotus' owner. Plaintiff also alleges on July 7, 2006, Lotus' corporate status was forfeited because it had inadequate assets to satisfy obligations. (Id. at 10:9--11.) This was two years after Lotus ceased doing business. Plaintiff alleges "Home does not have financial records that establish w[h]ere it obtained its assets for capitalization." (Id. at 10:17--19.) Plaintiff also alleges Lotus tranferred assets to Home, of which Ms. Tsao was also a shareholder. (Id. at 10:5--10.)
Plaintiff's theory is that Ms. Tsao formed Home in order to avoid paying creditors (Mot. to Amend. at 11:4--6), and that both Lotus and Home were her alter ego. (Id. at 11:10--27.) Plaintiff cites Texas law in support of this theory arguing Lotus was dominated by a sole stockholder and inadequately capitalized, and the dominant shareholder preferenced herself as a creditor in violation of her duty to an insolvent corporation. (Id. at 11:10--17 (citing Tigrett v. Pointer, 580 S.W.2d 375, 381--87 (1979)).)
As outlined in the discussion of the Texas Uniform Fraudulent Transfer Act claim below, the assets alleged to have been transferred were minimal, consisting of used computer servers, a telephone number, customer lists, and Lotus' 2005 catalogs. As discussed in that section, Plaintiff's allegations do not even make clear that all of these were assets owned by Lotus. Furthermore, even assuming these were all assets with some value to Lotus, there is no suggestion a transfer from Lotus to Home effected any fraud. There is no allegation any of these assets were being hidden or that they could have been used to satisfy creditors.
As discussed below, the Court applies federal common law, although it looks to state law for guidance as well. Under federal or state common law standards, disregarding the corporate form is an extraordinary remedy that will not be resorted to unless it is necessary to do so to prevent an injustice or avoid sanctioning a fraud. See, e.g., Kirno Hill Corp. v. Holt, 618 F.2d 982, 985 (2d Cir. 1980) (setting forth standard under federal common law); Tigrett, 580 S.W.2d at 381--82 (setting forth standard under Texas law); Flynt Distributing Company, Inc. v. Harvey, 734 F.2d 1389, 1392 (9th Cir. 1984) (setting forth standard under California law). Even accepting the allegations as true, Plaintiff cannot show the Court would be sanctioning fraud or injustice by recognizing Lotus' corporate form.
For these reasons, leave to add Teresa Tsao as a Defendant and to add claims against her is DENIED.
Plaintiff wishes to add UFTA claims based on its allegations that Home took ownership in certain of Lotus' assets, specifically, computer servers, a telephone number, customer lists, and Lotus' 2005 catalogs. (Motion to Amend, at 8:22--25.) Plaintiff's theory is that, because Home was using these things and because Defendants have no written records it paid any money for these assets, Home must be a fraudulent transferee.
This Court previously addressed this question. In its order of June 23, 2006, the Court denied Plaintiff's requests to add a new fraudulent transfer claim, finding no evidence to support an allegation of fraudulent intent. (Order of June 23, 2006 at 6:3--4.) Defendants correctly point out this portion of the Motion to Amend is actually a request for reconsideration of that order, but as a motion for reconsideration it is late and not in compliance with Civil Local Rule 7(1)(I) and the Court's standing order, ¶ 4(j). (Mem. in Opp'n to Motion to Amend, at 14:9--15:2.) As such, the motion will be denied on that ground.
Even if the Court considered this portion of the Motion to Amend, however, it would be denied as futile. Plaintiff's argument is that because Defendants have no written records showing assets were transferred from Lotus to Home, assets were therefore transferred fraudulently, without payment of reasonable value. (Motion to Amend at 8:21--26.) As discussed below in the Court's analysis of the MSJ, Defendants contend Lotus transferred its assets to Rimol HK Co. in satisfaction of its debts.
Defendants further contend Home leased Lotus' former quarters and was permitted to use Lotus' former telephone number and, as an interim measure, the same computer servers. Plaintiff neither alleges nor presents evidence Lotus owned the computer servers it used or that its telephone number was an "asset" as defined by the UFTA. Tex. Bus. & Comm. Code, § 24.002 (defining "asset" as property of a debtor). Nor has Plaintiff made any credible argument or presented any evidence for the proposition that the transfer of assets such as a defunct company's product catalogs would be evidenced by a written record. Among the alleged assets, the only one providing any support for this claim is the customer list. However, Defendants contend Lotus maintained no secret customer list, and support this argument with evidence customers were known to Lotus' independent sales representatives, many of whom later worked for Home. (Mem. in Opp'n to Mot. to Amend, at 8:14--16 (citing Decl. of Alex Tsao, filed May 25, 2007, ¶ 31).)
Plaintiff relies on the provision in Tex. Bus. & Comm. Code § 24.005(a)(2) that a creditor may have remedies under the UFTA if a transfer is made "without receiving a reasonably equivalent value in exchange for the transfer or obligation . . . ."
As noted in the Court's order of June 23, 2006, Plaintiff was not able to cite any evidence then to show fraudulent transfer, and the new allegations and evidence provide no additional support. The Court ...