Free Motion for Miscellaneous Relief - 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 MOTION TO JOIN BOMANITE CORP. AS A COUNTERDEFENDANT PURSUANT TO RULE 25(C)

Defendant/Counterclaimant, Cohill's Building Specialties, Inc. ("Cohills"), pursuant to Rule 25(c) of the Federal Rules of Civil Procedure, by and through its counsel undersigned, hereby moves this Court for an order joining non-party Bomanite Corporation ("Bomanite") into this action as a Counterdefendant such that any judgment issued by this Court after trial shall be entered against both non-party Bomanite and Plaintiff/Counterdefendant QC Construction Products, LLC (`QC"). The entry of such an order on the eve of trial is warranted because, on October 3, 2006, QC Construction

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disclosed to Cohills for the first time that, on June 1, 2005, Bomanite and QC entered into an Assignment Agreement by which QC purported to assign all of its tangible and intangible assets to Bomanite and Bomanite purported to assume all of QC's liabilities incurred prior to January 1, 2005, such agreement retroactively effective to January 1, 2005. This Motion is supported by the following Memorandum of Points and Authorities. DATED this _5th_ 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. Procedural and Factual Background.

Plaintiff/Counterdefendant QC Construction Products, LLC ("QC") was organized as a Delaware limited liability company on August 24, 1999. See 8/22/05 Statement of Facts in Support of Plaintiff's Motion for Partial Summary Judgment at ¶ 2. Prior to its organization, QC was an unregistered tradename utilized by a wholly-owned, unincorporated division of non-party Bomanite Corporation ("Bomanite"). Id. On or about October 27, 1998, QC - then still a division of Bomanite ­ and Defendant/Counterclaimant Cohills Building Specialties, Inc. ("Cohills") entered into a Letter of Agreement. See Complaint at ¶ 6; 3/21/06 Opinion and Order at 2. On October 15, 2003, QC filed its Complaint in the instant action asserting five claims against Cohills: (1) breach of contract; (2) interference with business relationships and prospective economic advantage; (3) fraud and deceit; (4) unfair competition; and (5) accounting. See generally Complaint. Cohills filed its Answer and Counterclaim on December 1, 2003, thereby asserting against QC claims for breach of contract and intentional interference with prospective contractual relations/business 2 Document 147

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expectancies. See Answer and Counterclaim. On August 19, 2005, QC filed its Motion for Summary Judgment, seeking summary judgment in its favor on its breach of contract claim and against Cohills on Cohills' breach of contract claim. See Plaintiff's Motion for Summary Adjudication. Cohills filed a Motion for Summary Judgment on August 22, 2005, requesting judgment in its favor as to each of QC's claims and Cohills' breach of contract claim. See Defendants'/Counterclaimant's Motion for Summary Judgment. On March 21, 2006, after considering both parties motions and the subsequently filed responses and replies, the Court ordered that QC's Motion for Summary Judgment be denied, and that Cohills' Motion for Summary Judgment be granted in part. See 3/21/06 Opinion and Order at 11. The Court found, in part, that QC breached the Letter of Agreement with Cohills by selling products to third parties in Arizona in violation of Cohills' rights as QC's exclusive distributor in Arizona, and reserved the determination of Cohills' recoverable damages for trial. See generally id. A trial to the Court on the issue of Cohills' damages is set to commence on October 10, 2006. During the morning of October 3, 2006, Russell Ryan, counsel for QC, contacted counsel undersigned by telephone and disclosed that QC had assigned all of its assets to Bomanite, and that Bomanite had assumed all of QC's liabilities on or about December 31, 2004. See Affidavit of William G. Klain attached hereto as Exhibit A at ¶ 2. Mr. Ryan further advised counsel undersigned that Mr. Ryan had first learned of this transaction in or about May, 2006. Id. Mr. Ryan's disclosure to counsel undersigned during this telephone conversation on the morning of October 3, 2006 was the first time that any such transaction between QC and Bomanite had been disclosed to counsel undersigned or Cohills. Id. At approximately 4:00 p.m. on October 3, 2004, upon returning from a hearing in an unrelated matter and a meeting with this Court's courtroom clerk to present her with Cohills' trial exhibits, counsel undersigned received a facsimile from Mr. Ryan. Id. at ¶ 3. A true and correct copy of Mr. Ryan's facsimile is attached hereto as Exhibit B. Mr. Ryan's facsimile consisted of 3 Document 147

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correspondence to counsel undersigned and Kent Lang of counsel undersigned's firm, and various attachments thereto including, but not limited to, an Assignment Agreement effective June 1, 2005 retroactive to January 1, 2005 (the "Assignment Agreement") which apparently facilitated the transaction described by Mr. Ryan to counsel undersigned during the morning telephone conversation. Counsel undersigned's receipt of Mr. Ryan's facsimile represented the first time the Assignment Agreement was disclosed to counsel undersigned or Cohills. Exhibit A at ¶ 3. The Assignment Agreement states, in relevant part, as follows: Bomanite, being the sole member of QC, believes it is in the best interests of QC to assign all of its assets (tangible or intangible) and all of its liabilities to Bomanite and have Bomanite assume all of its liabilities as of December 31, 2004 and market and sell QC products through Bomanite Corporation and no longer market and sell products through QC Construction Products, LLC, thereby ceasing operations as a limited liability company; . . . . * * * *

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1. Assignment. QC hereby assigns, pledges and transfers to Bomanite all of its right, title and interest in all of QC's assets, both tangible and intangible, wherever they may be found, in exchange for the assumption of QC's liabilities as of December 31, 2004. 2. Assumption of Liability. Bomanite hereby assumes all of QC's liabilities, obligations and duties as of December 31, 2004, but will not assume and does not assume any liabilities, obligations or duties incurred on or after January 1, 2005, at which time QC will cease business operations. Exhibit B at 7-8. In light of these circumstances and for the reasons set forth below, ohills and Cohill request this Court to enter its order joining non-party Bomanite into this action as a Counterdefendant such that any judgment issued by this Court after trial shall be entered against both non-party Bomanite and QC. II. A. Argument.

Standards Applicable to Rule 25(c) Motions.

In situations where a transfer or assignment affects the capacity of a party to sue or be sued 4 Document 147

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during the pendency of litigation, Rule 25(c), Fed.R.Civ.P., provides the court with power to substitute and/or join parties in an action. United States ex rel. Acme Granite & Tile Co. v. F.D. Rich Co., 437 F.2d 549, 552 (9th Cir. 1970); Elca Enterprises, Inc. v. Sisco Equipment Rental & Sales, Inc., 53 F.3d 186, 191 (8th Cir. 1995). In its entirety, Rule 25(c) reads as follows: Transfer of Interest. In case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party. Service of the motion shall be made as provided in subdivision (a) of this rule. This rule "`is not designed to create new relationships among parties to a suit but is designed to allow the action to continue unabated when an interest in the lawsuit changes hands.'" In re Bernal, 207 F.3d 595, 598 (9th Cir. 2000) (quoting Collateral Control Corp. v. Deal (In re Covington Grain Co., Inc.), 638 F.2d 1362, 1364 (5th Cir. 1981)); see also Elca Enterprises, Inc., 53 F.3d at 191. Motions for joinder or substitution of a party under Rule 25(c) are addressed to the trial court's sound discretion. In re Bernal, 207 F.3d at 598; F.D. Rich Co., 437 F.2d at 552; Dodd v. Pioche Mines Consolidated, Inc., 308 F.2d 673, 674 (9th Cir. 1962). Since this rule is "wholly permissive there is no time limit on moving to substitute under its provisions." 5 CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE ("WRIGHT AND MILLER") § 1958 (2d ed.1994) at 561. Moreover, a "motion for substitution may be made by any party." Id. The trial court "is free, if it wishes, to retain the transferor as a party and to order that the transferee be made an additional party." Id. at 559. Absent the trial court having "such a power of substitution, valuable property rights involved in litigation could simply disappear," which "would be at odds with both common sense and state law." F.D. Rich Co., 437 F.2d at 552. From that standpoint, Rule 25(c) is meant to address, and cope with, the practical issues that arise when an interest in a lawsuit is transferred post-inception. In re Bernal, 207 F.3d at 598. B. Pursuant to California Law, Interests in this Litigation Were Transferred to Bomanite upon Execution of the Assignment Agreement.

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Situations where corporations transfer or assign their assets and liabilities during the course of ongoing litigation fall within transfer of interest contemplated by Rule 25(c). See In re Bernal, 207 F.3d at 598-599; Virgo v. Riviera Beach Associates, Ltd., 30 F.3d 1350, 1358 (11th Cir. 1994); R.J. Enstrom Corporation v. Interceptor Corporation, 555 F.2d 277, 281­82 (10th Cir. 1977). However, Rule 25(c) does not "substantively determine what actions survive the transfer of an interest; rather, it provides substitution procedures for an action that does survive." Elca Enterprises, Inc., 53 F.3d at 191 (citing Hilbrands v. Far East Trading Co., Inc., 509 F.2d 1321, 1323 (9th Cir. 1975). Thus, the extent to which a corporation's transfer of its assets and liabilities during a lawsuit affects the action is governed by state law. Virgo v. Riviera Beach Associates, Ltd., 30 F.3d at 1358. Once it is determined that the "substantive law allows the action to continue against the dissolved corporation or against those to whom its assets have been transferred, Rule 25(c) becomes applicable." WRIGHT
AND.MILLER, supra,

§ 1958 at 554 (citing F.D. Rich Co., 437 F.2d 549).

Here, while this matter was pending before the Court, QC assigned to Bomanite all of its assets and Bomanite assumed all of QC's liabilities as of December 31, 2004, pursuant an Assignment Agreement expressly governed by California law. See Exhibit B at 8-9. Consequently, California law governs the extent to which this transfer affects the instant litigation. 1. Effect of QC's Assignment of all its Assets to Bomanite.

It is well settled California law that a chose in action, like any other property, constitutes a portion of a corporation's assets. Nielsen v. Gillespie, 257 P. 500 (Cal. 1929). By transferring the entirety of its tangible and intangible assets to Bomanite on June 1, 2005, QC effectively transferred to Bomanite any and all of its claims in the instant action which were legally assignable. By its Complaint herein, QC asserted the following five claims for relief against Cohills: (1) breach of contract; (2) interference with business relationships and prospective economic advantage; (3) fraud and deceit; (4) unfair competition; and (5) accounting. Cohills acknowledges that the three commercial torts complained of by QC may or may not have been properly assignable by QC to 6 Document 147

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Bomanite under California law. However, California law allows for the assignment of claims arising out of contract. See CAL.CIVIL CODE § 954; Reichert v. General Ins. Co. of America, 68 Cal. 2d 822, 834, 442 P.2d 377, 383 (Cal. 1968) (It is manifest that the first five causes of action having arisen out of contract were rights of action which plaintiff could have transferred."); Cutler v. Kuster, 288 P. 795 796, 797 (Cal.App. 1930) ("The right to recover money for the breach of a contract to purchase property may be assigned.") Although QC's claims ­ including its claim against Cohills for breach of contract ­ were disposed of by this Court's March 21, 2006 Opinion and Order, QC's interest in its breach of contract claim had been transferred, pursuant to California law, from QC to Bomanite approximately ten months prior thereto, such transfer effective fourteen months prior to this Court's Opinion and Order. See Exhibit B at 7-9; 3/21/06 Opinion and Order. Cohills is at a loss to understand how QC could persist with prosecuting its breach of contract claim against Cohills through the time of this Court's March 21, 2006 Opinion and Order, when Bomanite obtained the rights to such cause of action ­ and became the real party in interest therein ­ upon execution of the Assignment Agreement on June 1, 2005. Further worthy of note is the fact that, by its March 24, 2005 Memorandum in Opposition to Motion for Security for Costs, QC represented to this Court as follows: [T]here is no evidence that suggests that [QC] cannot pay costs should it not prevail in this action. . . . Bomanite (which includes QC) has substantial assets and are established businesses that are successful in the industry and have a significant market presence. Moreover, [QC] has ongoing business activities in Arizona and continues to sell its products in the State of Arizona through Border Products. * * * * Consequently, there is no basis to suggest that there is a need for [QC] to post security because of [QC's] financial condition. Memorandum in Opposition to Motion for Security for Costs at 3-4. However, the documents delivered by Mr. Ryan to counsel undersigned reveal that, as of December 31, 2004 QC, had a negative net worth of $708,278.00 and QC ceased its operation on June 1, 2005. See Exhibit B at 5-6. Moreover, by acquiring QC's breach of contract claim, Bomanite acquired one of the claims 7 Document 147

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exposing QC to liability for Cohills' attorneys' fees and costs pursuant to A.R.S. §§ 12-341 and 12341.01. Accordingly, by receiving QC's assets by assignment, Bomanite immediately became an interested party in this lawsuit and continues to be such a party. 2. Effect of Bomanite's Assumption of all of QC's Liabilities Arising Prior to December 31, 2004.

Similarly, by expressly assuming all of QC's liabilities arising prior to December 31, 2004, Bomanite was again transferred an interest in this lawsuit under California law. By its Answer and Counterclaim, Cohills asserted causes of action against QC for breach of contract and intentional interference with prospective contractual relations and/or business expectancies. See Answer and Counterclaim. These claims are liabilities of QC arising prior to December 31, 2004, which QC purported to transfer to Bomanite by the Assignment. Pursuant to California law, upon entering a contract a corporation immediately incurs "`a liability for any breach of the contract which it might commit.'" GMS Properties, Inc. v. Superior Court of the State of California, 219 Cal.App.2d 407, 414 (1963) (quoting Coulter Dry Goods Co. v. Wentworth, 153 P. 939 (Cal. 1915)). Additionally, for purposes of California's Uniform Fraudulent Conveyance Act, "a tort claimant before judgment is rendered a `creditor' within the meaning of Civil Code section 3439.01." In re Blanco, 86 Cal.App.3d 826, 832 (1978). Cal. Civil Code § 3439.01 defines a "creditor" as a person who has a claim, and defines a claim as "a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. CAL. CIVIL CODE §§ 3439.01(b) and (c) (emphasis added). Accordingly, each of Cohills' claims for breach of contract and intentional interference with prospective contractual relations constituted liabilities of QC arising prior to December 31, 2004. Further, California follows the general principle that: [W]here one corporation sells or transfers all of its assets to another corporation, the 8 Document 147

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latter is not liable for the debts and liabilities of the former unless (1) the purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape liability for debts. Franklin v. USX Corp., 87 Cal.App.4th 615, 621 (2001). See also Beatrice Co. v. State Board of Equalization, 863 P.2d 683 (Cal. 1993) (quoting Ray v. Alad Corp., 560 P.2d 3, 7 (Cal. 1977). Because Bomanite expressly assumed "all of QC's liabilities, obligations and duties as of December 31, 2004," the first of the foregoing exceptions is applicable and Bomanite is liable for QC's liabilities, obligations and duties. As Cohills' claims for breach of contract and intentional interference with prospective contractual relations constituted liabilities of QC as of the time of the Assignment Agreement, Bomanite assumed liability for these claims upon the execution of the Assignment Agreement and interests in this litigation were transferred by QC to Bomanite. Finally, as QC's sole member (see Exhibit B at 6), Bomanite cannot claim to have been unaware of the instant litigation or Cohill's assertion of claims against QC herein. C. Application of Rule 25(C) to the Instant Matter.

As set forth above, the substantive law of the state of California provides that, via the Assignment Agreement, Bomanite has been assigned and/or transferred interests in this lawsuit after its inception, rendering Rule 25(c) applicable for purposes of adding Bomanite as a party to this litigation. Upon a determination that Rule 25(c) applies, it is within the District Court's discretion to order any of the following: (1) that action be continued by or against the original party; (2) that the transferee be joined in the action with the original party; or (3) that the transferee be substituted for the original party. Hilbrands , 509 F.2d at 1323; Automated Information Processing, Inc. v. Genesys Solutions Group, Inc., 164 F.R.D. 1, 3 (E.D.N.Y. 1995); Federal Deposit Insurance Corp. v. Tisch, 89 F.R.D. 446, 448 (E.D.N.Y. 1981). Here, the extent of the interests in this lawsuit transferred and/or assigned by QC to Bomanite necessitate that this Court's sound discretion be employed to join Bomanite as a party 9 Document 147

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counterdefendant to this action. Most significantly, Bomanite has assumed full liability for Cohills' claims asserted herein. Because liability has previously been decided and all that remains for decision is the extent of Cohills' damages, Cohills will necessarily be forced to collect from Bomanite any judgment awarded. Conversely, should this Court decline to join Bomanite as a party, Cohills will be relegated to attempting to collect from Bomanite on a judgment entered against only QC. This potential for post-judgment procedural morass can be avoided now by joining Bomanite as a party hereto and making any judgment rendered herein effective against both Bomanite and QC. While substitution of Bomanite for QC as provided by Rule 25(c) would also accomplish the foregoing, the fact that the Assignment was disclosed to Cohills only a week before trial makes it a less equitable alternative. At this point Cohills is understandably uncertain as to the exact relationship between QC and Bomanite and the intricacies of the transaction effectuated by the Assignment Agreement. Allowing QC to be replaced by Bomanite at this hour conceivably could have negative consequences on Cohills which cannot be ascertained at the present time. Thus, Cohills urges this Court to exercise its discretion under Rule 25(c) to join Bomanite as a party counterdefendant hereto rather than simply substituting Bomanite in QC's stead. III. Conclusion.

For the foregoing reasons, Cohills requests this Court to enter an order pursuant to rule 25(c) joining non-party Bomanite into this action as a Counterdefendant such that any judgment issued by this Court after trial shall be entered against both non-party Bomanite and QC. DATED this _5th_ 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 10 Document 147

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Attorneys for Defendants/Counterclaimant ... Original of the foregoing filed this _5th_ day of October, 2006, with: United States District Court For the District of Arizona Copy of the foregoing mailed and faxed this _5th_ 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 By:____/s/ Susan M. Harl_________

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