Free Reply to Response to Motion - District Court of Arizona - Arizona

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LANG & BAKER, PLC
8767 E. VIA DE COMMERCIO, SUITE 102 SCOTTSDALE, ARIZONA 85258 TELEPHONE (480) 947-1911

KENT A. LANG, #010041 WILLIAM G. KLAIN, #015851 Attorneys for Defendants/Counterclaimant

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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA QC CONSTRUCTION PRODUCTS, LLC, a Delaware limited liability company, ) ) ) Plaintiff, ) ) v. ) ) COHILL'S BUILDING SPECIALTIES, INC., ) and MICHAEL COHILL, ) ) Defendants. ) ________________________________________ ) ) COHILL'S BUILDING SPECIALTIES, INC., an ) Arizona corporation, ) ) Counterclaimant, ) ) v. ) ) QC CONSTRUCTION PRODUCTS, LLC, a ) Delaware limited liability company, ) ) Counterdefendant. ) ________________________________________ ) NO. CV03-1997 PHX ROS REPLY IN SUPPORT OF MOTION TO JOIN BOMANITE AS A COUNTERDEFENDANT PURSUANT TO RULE 25(C)

Defendant/Counterclaimant Cohills Building Specialities, Inc. ("Cohills"), pursuant to this Court's Order dated October 6, 2006, by and through its counsel undersigned, hereby submits the following Reply in support of its Motion to Join Bomanite as a Counterdefendant Pursuant to Rule 25(c). As Rule 25(c) of the Federal Rules of Civil Procedure is directly applicable to this action by virtue of the transfer between Plaintiff/Counterdefendant QC Construction Products, LLC ("QC") and non-party Bomanite Corporation ("Bomanite"), Bomanite has failed to respond to Cohills' Motion, and Case 2:03-cv-01997-ROS Document 153 Filed 10/11/2006 Page 1 of 10

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none of the arguments offered by QC in opposition to the Motion have legal merit, this Court should enter its order joining Bomanite as a party counterdefendant to this action. This Reply is supported by the following memorandum of points and authorities. DATED this _11th_ day of October, 2006. LANG & BAKER, PLC By___/s/ William G. Klain_______________________ Kent A. Lang William G. Klain 8767 E. Via De Commercio, Suite 102 Scottsdale, AZ 85258 (480)947-1911 Attorneys for Defendants/Counterclaimant MEMORANDUM OF POINTS AND AUTHORITIES I. Introduction.

On October 3, 2006, QC disclosed to Cohills that Bomanite and QC had entered into an Assignment Agreement ("the Assignment Agreement") on or about June 1, 2005 retroactive to January 1, 2005, by which QC assigned to Bomanite all of its tangible and intangible assets, and Bomanite expressly assumed all of QC's liabilities as of December 31, 2004. See Motion to Join Bomanite as a Counterdefendant Pursuant to Rule 25(c) ("Motion") at 3-4. Accordingly, Cohills filed the Motion on October 5, 2006, thereby seeking an order of this Court joining Bomanite as a party counterdefendant pursuant to Rule 25(c). See id. On October 6, 2006, this Court entered an Order ordering, in part, Bomanite to file a response to the Motion by October 10, 2006. See Order dated 10/6/06. Cohills caused copies of the Motion, a Notice of Hearing regarding the Motion and this Court's October 6, 2006 Order to be served upon Bomanite, through its statutory agent Russell K. Ryan (also counsel for QC herein), at 12:05 p.m. on October 6, 2006. See Proof of Service attached hereto as Exhibit A. Contrary to this Court's directive set forth in its Order, Bomanite has failed to file any response to the Motion. Rather, on October 10, 2006, QC filed its Opposition to Motion to Join

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Bomanite as a Counterdefendant Pursuant to Rule 25(c)1 ("QC's Response" or "Opposition"). As demonstrated below, Bomanite has consented to a grant of the motion by failing to respond thereto, and QC's arguments have no basis in law. For the reasons set forth in the Motion and below, this Court should enter its Order joining Bomanite as a counterdefendant to this action pursuant to Rule 25(c). II. A. Argument.

Bomanite's Failure to Respond Warrants Granting of the Motion.

Pursuant to LRCiv 7.2(i), "if the opposing party does not serve and file the required answering memoranda, . . . , such non-compliance may be deemed a consent to the . . . granting of the motion and the Court may dispose of the motion summarily." In the instant matter, this Court ordered Bomanite to file a response to the Motion by October 10, 2006. See 10/6/06 Order. Cohills served Bomanite with a copy of the Order, the Motion and a Notice of Hearing on October 6, 2006. See Exhibit A. Notwithstanding the same, Bomanite failed to file any answering memoranda as required by this Court's Order and LRCiv 7.2(i). Instead, QC filed its Opposition to the Motion on October 10, 2006. In light of such circumstances and given that the Motion seeks no relief whatsoever as to QC but rather requests that Bomanite be made a party counterdefendant to this action, this Court should summarily grant the Motion by summary disposition as authorized by LRCiv 7.2(i). B. Jurisdictional and Venue Considerations are Inapplicable to Rule 25(c) Joinder.

QC devotes nearly two pages of its Opposition to arguing that this Court lacks personal jurisdiction over Bomanite and the District of Arizona is not a proper venue for a suit against Bomanite. See QC's Response at 4-5. Ignoring QC's lack of standing to challenge this Court's jurisdiction over Bomanite or appropriateness of venue as this action relates to Bomanite, QC's

Curiously, QC opposes the Motion when doing so runs directly contrary to its interests. A grant of the Motion would impose liability for QC's breach of contract upon Bomanite and QC, whereas a denial of the Motion will leave QC solely liable for any award made in favor of Cohills after trial. Moreover, Cohills questions QC's standing to challenge this Court's personal jurisdiction over Bomanite. Case 2:03-cv-01997-ROS 3 Document 153 Filed 10/11/2006 Page 3 of 10

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arguments are contrary to existing law. Neither venue nor in personam jurisdiction are affected by joinder under Rule 25. As stated by the First Circuit Court of Appeals, "once in personam jurisdiction has been found over the original party, it exists over the substituted party despite its lack of contacts with the forum if the substituted party had an opportunity to challenge its joinder or substitution." Explosives Corp. of America v. Garlam Enterprises Corp., 817 F.2d 894, 906 (1st Cir. 1987); see also Minnesota Mining & Mfg. Co. v. Eco Chem, Inc., 757 F.2d 1256, 1262-63 (Fed. Cir. 1985) citing Bersch v. Canterbury, 18 F.R.D. 23, 27 (S.D. Cal. 1955) ("The courts that have considered the problem [of in personam jurisdiction in the context of Rule 25(c)] have uniformly held `that if in personam jurisdiction has been previously acquired of the original party, then the in personam jurisdiction continues over the substituted party.'"); Herrera v. Singh, 118 F.Supp.2d 1120, 1123 (E.D. Wash. 2000) ("Regardless of how a transferee is joined, personal jurisdiction exists over it."). Thus, as indicated by Professor Moore in his treatise on federal practice: Personal jurisdiction continues over the substituted party as a successor in interest if jurisdiction has been acquired over the original party, provided the substituted party is properly served with notice of the motion and has an opportunity to be heard on the matter. 6 JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE ("MOORE'S") § 25.33[2] (3d ed. 2006). Similarly, "[v]enue relates to the institution of the suit, and once properly established is not affected by the joinder or substitution of a party." MOORE'S at § 25.33[3]. Professors Wright, Miller and Kane agree with the substance of Professor Moore's summary. See 7C CHARLES ALAN WRIGHT,
ET AL., FEDERAL PRACTICE AND PROCEDURE CIVIL 2d

("WRIGHT AND MILLER") § 1958 at 559-560

("personal jurisdiction and venue will be extended over the successors; it is not necessary to reestablish those requirements."). In the instant matter, QC subjected itself to the personal jurisdiction of this Court by filing this action in the District of Arizona. See Complaint. QC likewise pled that venue of this action is proper in the District of Arizona. See id. at ¶ 5. Rule 25(c) provides that "[s]ervice of the motion [to join 4 Document 153

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after a transfer of interest] shall be made as provided for in subdivision (a) of this Rule." Rule 25(a), in turn, requires that the motion and a notice of hearing be served on non-parties in the manner set forth in Rule 4. Consistent with the provisions of Rule 25(a) and (c), Cohills cause the Motion, a Notice of Hearing and this Court's October 6, 2006 Order to be personally served upon Bomanite through its statutory agent on October 6, 2006. See Exhibit A. Such service having been accomplished and this Court having afforded Bomanite with an opportunity to be heard in connection therewith, QC's assertions that this Court lacks jurisdiction over Bomanite and is an improper venue for this action as it relates to Bomanite are without any legal merit. See Explosives, supra at 906; Minnesota Mining, supra at 1262-63; Herrera, supra at 1123; MOORE'S at § 25.33[2] and [3]; WRIGHT AND MILLER § 1958 at 559-560. Accordingly, QC's venue and jurisdictional arguments pose no bar to the joinder of Bomanite as a counterdefendant in this action pursuant to Rule 25(c). C. Cohills's Motion Does Not Seek to Establish a Fraudulent Transfer, but Simply that a Transfer Occurred Within the Meaning of Rule 25(c).

Demonstrating its failure to comprehend Cohills' Motion, QC attempts to characterize the same as an effort to establish a fraudulent transfer between QC and Bomanite. See QC's Response at 3 and 5-6. Significantly, QC's Response contains no discussion whatsoever of Rule 25(c) or the applicability of this Rule to the matter at hand. QC's efforts to recast the Motion are misdirected. Cohills takes no position, at the present time, as to whether the transfer between QC and Bomanite was fraudulent under California's Uniform Fraudulent Transfer Act. However, whether the transfer was fraudulent as to Cohills is irrelevant to the Motion and issues arising thereunder presented to this Court for consideration. Rather, the Motion simply seeks to establish that a "transfer of interest" occurred within the meaning of Rule 25(c) such that Bomanite should be joined as a counterdefendant to this action. Rule 25(c) applies in instances of "transfers of interest" made while litigation is pending. MOORE'S at § 25.31[3]. The types of transfers to which Rule 25(c) pertains include "transfers of all 5 Document 153

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the assets of a business to another entity," "transfers in which one corporation ceases to exist and another entity has taken over its rights and obligations," and "assignment[s] of contract rights or other legal rights." Id. at § 23.31[1]. "A `transfer of interest' in a corporate context occurs when one corporation becomes the successor to another by merger or other acquisition of the interest the original corporate party has in the lawsuit." Luxliner P.L. Export Co. v. RDI/Luxliner, Inc., 13 F.3d 69, 71 (3rd Cir. 1993). Thus, where causes of action of a corporation were assigned to the executors of its sole shareholder's estate upon liquidation of the corporation, the procedure to be followed was that set forth in Rule 25(c). Froning's, Inc. v. Johnston Feed Service, Inc., 568 F.2d 108, 110 (8th Cir. 1978) (likewise ordering, pursuant to agreement of counsel, that the "successors of interest of the dissolved corporation should be liable for any counterclaim recovery."). Rule 25(c) likewise has been held applicable when a corporation transferred to a trustee a claim at issue. United States ex rel Jahn v. Jones Coal Co., 368 F.2D 217, 218 (6th Cir. 1966). In the instant action, QC and Bomanite entered into an agreement, while this litigation was pending, pursuant to which QC assigned to Bomanite all of its tangible and intangible assets, and Bomanite expressly assumed all of QC's liabilities as of December 31, 2004. See Motion at Exhibit B. Rule 25 does not require that the "transfer of interest" be fraudulent, and QC's assertions that the transfer was supported by adequate consideration and not made to hinder, defraud or delay Cohills have no bearing upon the analysis to be conducted by this Court in exercising its discretion under the Rule. The only reason Cohills referred to California's Uniform Fraudulent Transfer Act in the Motion was in order to establish that QC's liability to Cohills under Cohills' tort claim arose prior to entry into the Assignment Agreement by QC and Bomanite such that this liability was assumed by Bomanite.2 See Motion at 8. D. Bomanite Assumed QC's Liability for Breach of Contract.

Given this Court's finding that Cohills' tort claim is barred by the economic loss rule, Bomanite's assumption of QC's liability under this claim is of no practical consequence at the present time. See 3/21/06 Opinion and Order at 11. Case 2:03-cv-01997-ROS 6 Document 153 Filed 10/11/2006 Page 6 of 10

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As indicated in the Motion, under California law, "[t]he liability of the corporation to respond in damages for any failure to perform the covenants contained in its contract [is] necessarily created or incurred by execution of the contract, notwithstanding that no right of action could accrue until a breach." GMS Properties, Inc. v. Superior Court of Fresno County, 219 Cal.App.2d 407, 414, 33 Cal. Rptr. 163 (Cal. Dist. Ct. App.1963). The contract out of which Cohill's breach of contract counterclaim arises was entered into between the parties on or about October 27, 1998. See Complaint at ¶ 6. Thus, QC's liability for any breach of the contract it might commit was "created or incurred" on or about October 27, 1998. See GMS Properties, supra at 414. By the Assignment Agreement, Bomanite agreed to assume "all of QC's liabilities, obligations and duties as of December 31, 2004, but . . . not . . . any liabilities, obligations or duties incurred on or after January 1, 2005, at which time QC will cease business operations." Motion at Exhibit B at 8 (emphasis added). QC's liability to Cohills under Cohill's breach of contract counterclaim having been "created or incurred" as of October 27, 1998, Bomanite necessarily assumed such liability pursuant to the express language of the Assignment Agreement. See GMS Properties, supra at 414. QC attempts to avoid the adverse consequence this assumption necessarily will have on Bomanite in the instant action by relying upon the Affidavit of Matthew Stegemiller, Chairman of the Board of Director of both QC and Bomanite, wherein Mr. Stegemiller conveniently explains that the Assignment Agreement was not intended to effectuate any assumption by Bomanite of "contingent liabilities or any liabilities that occurred after December 31, 2004." See QC Response at 8; Affidavit of Matthew Stegemiller at ¶ 2. Despite Mr. Stegemiller's assertion and QC's protestations, this Court does not have to interpret the Assignment Agreement "expansively" in order to find that Bomanite assumed QC's breach of contract liability. The Assignment Agreement unambiguously provides that Bomanite assumed "all of QC's liabilities, obligations and duties as of December 31, 2004." Motion at Exhibit B at 8 (emphasis added). No provision of the Assignment Agreement carves out contingent liabilities, as argued by QC and Mr. Stegemiller, and such an interpretation would directly conflict with the word "all" used to modify QC's liabilities in the Agreement. Accordingly, this Court should 7 Document 153

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reject QC's and Mr. Stegemiller's interpretation of the Agreement and find that Bomanite assumed QC's liability to Cohills for breach of contract. E. QC Concealed its Insolvency from Cohills and this Court.

By his Affidavit, QC's counsel avows that he had no knowledge of the transfer between Bomanite and QC until the summer of 2006. See Affidavit of Russell K. Ryan at ¶ 2. Providing Mr. Ryan with the benefit of the doubt, such in no manner excuses QC from misrepresenting to this Court its financial condition in connection with Cohills' Motion for Security for Costs and persisting in pursuing summary judgment in its name on claims it had assigned to Bomanite. See Motion at 7. As a direct result of QC's concealment, this Court denied Cohills' Motion for Security for Costs, founding its ruling upon its understandably mistaken belief that QC was "fully solvent." See 7/11/05 Order at 4. Indeed, QC was insolvent some seven months earlier (having a negative net worth of $708,278.00) and ceased its business operations one month earlier. See Motion at Exhibit B at 5-6. At no time did QC dispel this Court of the factual fallacy underlying this Court's July 11, 2005 Order. Consequently, some three years and thousands of dollars of costs and attorneys' fees into this suit, Cohills is without any security for its costs. III. Conclusion.

For the foregoing reasons and those set forth in the Motion, Cohills requests this Court to enter an order joining Bomanite as a counterdefendant in this action. DATED this _11th_ day of October, 2006. LANG & BAKER, PLC By____/s/ William G. Klain________________ Kent A. Lang William G. Klain 8767 E. Via De Commercio, Suite 102 Scottsdale, AZ 85258 Attorneys for Defendants/Counterclaimant Original of the foregoing filed this 11th_ day of October, 2006, with: United States District Court Case 2:03-cv-01997-ROS 8 Document 153 Filed 10/11/2006 Page 8 of 10

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For the District of Arizona ...

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Copy of the foregoing mailed and faxed this _11th_ day of October, 2006, to: Russell K. Ryan, Esquire Motschiedler Michaelides & Wishon LLP 1690 West Shaw Avenue; Suite 200 Fresno, California 93711 Attorneys for Plaintiff/Counterdefendant Bomanite Corporation Russell K. Ryan, Its Statutory Agent Motschiedler Michaelides & Wishon LLP 1690 West Shaw Avenue; Suite 200 Fresno, California 93711 By:___/s/ Susan M. Harl________

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