Opinion
Case No.: CV 16-00663-GHK(AGRx)
2020-06-24
RENO-TAHOE SPECIALTY, INC., Plaintiff, v. MUNGCHI, INC., et al., Defendants.
Lawrence C. Ecoff, Ecoff Campain and Tilles LLP, Beverly Hills, CA, for Defendants.
Lawrence C. Ecoff, Ecoff Campain and Tilles LLP, Beverly Hills, CA, for Defendants.
ORDER DENYING JUDGMENT CREDITOR'S MOTION TO ADD MC CREW, LTD. AS A JUDGMENT DEBTOR [Dkt. 118]
CORMAC J. CARNEY, CHIEF UNITED STATES DISTRICT JUDGE
I. INTRODUCTION
Plaintiff Reno-Tahoe Specialty, Inc. brought a copyright infringement action against Defendant Mungchi, Inc. ("Mungchi") in the United States District Court for the District of Nevada. Plaintiff obtained a judgment against Mungchi for damages in December 2014 and another judgment for attorney's fees and costs in March 2015. (Dkt. 8; Dkt. 9.) Both judgments were registered in this action on February 26, 2016. (See id. ) The total judgment against Mungchi is $364,360.88. (See id. ) The rights, title, ownership, and interest in the judgment were transferred and assigned multiple times before being transferred and assigned to Assignee and Judgment Creditor Michael Chang ("Chang"). (See Dkt. 31 [Acknowledgement of Assignment of Judgment].)
Mungchi has dissolved, and the judgment remains unpaid. The Court denied several motions from Chang to amend the judgment to add Ricky Noh ("Noh"), the owner of Mungchi, as a judgment debtor based on the theory that Noh is the alter ego of Mungchi. (See Dkt. 47 [denying Chang's first motion]; Dkt. 83 [denying Chang's renewed motion]; Dkt. 88 [denying Chang's ex parte application to reconsider]; Dkt. 96 [denying Chang's second ex parte application to reconsider].) On December 13, 2019, the Ninth Circuit affirmed the denial of Chang's request to add Noh as a judgment debtor. (Dkt. 116.)
Before the Court is Chang's renewed Motion to add MC Crew, Ltd. ("MC Crew"), a company that is currently owned by Noh, as a judgment debtor based on the theory that MC Crew is the mere continuation of Mungchi. (Dkt. 118 [hereinafter, "Mot."].) For the following reasons, the Motion is DENIED WITHOUT PREJUDICE .
This motion was previously denied without prejudice because the Court was divested of jurisdiction by Chang's appeal that was pending at the time. (Dkt. 111.)
Having read and considered the papers presented by the parties, the Court finds this matter appropriate for disposition without a hearing. See Fed. R. Civ. P. 78 ; Local Rule 7-15. Accordingly, the hearing set for June 29, 2020, at 1:30 p.m. is hereby vacated and off calendar.
II. BACKGROUND
Mungchi closed its operations at the end of 2014. (Dkt. 119-1 [Declaration of Ricky Noh, hereinafter "Noh Decl."] ¶ 5.) The instant dispute concerns whether Mungchi transferred its assets to MC Crew to avoid paying the judgment. (See Mot.; Dkt. 119 [MC Crew's Opposition].) A summary of the relevant factual background and disputed issues follows.
A. Formation and Ownership of MC Crew
Like Mungchi, MC Crew is involved in the wholesale fashion industry. (See Noh Decl. ¶ 2.) MC Crew was formed in 2014 by Noh's colleague, Taek Yoon ("Yoon"), who had 100% ownership at the time. (See Dkt. 118-5 [Ex. 5 to Mot., 3/2/17 Deposition of Noh in Cueva, et al. v. Noh, et al. , Case No. BC648711 (L.A. Superior Court), hereinafter "3/2/17 Noh Depo."] at 132–33, 138.) Noh served as secretary and helped with sales. (Id. at 138.) Yoon also worked for Mungchi. (Dkt. 118-7 [Ex. 40 to Mot., 3/20/18 Judgment Debtor Examination of Noh, hereinafter "3/20/18 Noh Exam."] at 167.) Noh stated that he needed to have Yoon for the formation of MC Crew because of issues with customers not wanting to accept orders from Mungchi. (3/2/17 Noh Depo. at 146–48.) Noh believed that Walgreens was one of the customers that said they would like to stop buying from Mungchi. (3/20/18 Noh Exam. at 188.)
Chang's evidence concerning the formation of MC Crew consists of testimony from the judgment debtor examination of Noh in this action and deposition testimony of Noh and Yoon in a state court action.
At the time of its formation, Noh gave Yoon clothes and an unspecified amount of money. (3/2/17 Noh Depo. at 134, 146–47.) Yoon struggled to run MC Crew and it was on the verge of closing, which led Noh take ownership of MC Crew in late 2015. (Id. at 135–36, 138.) As of 2017, Noh owned 100% of MC Crew. (Id. at 133.) By April 2017, Yoon was no longer employed by MC Crew. (Dkt. 118-5 [Ex. 7 to Mot., Deposition of Taek Yoon in Cueva ] at 131.) MC Crew submits declarations from Noh and Yoon, which explain that Yoon started MC Crew with his wife, and then Yoon sold 50% of MC Crew to Noh in September 2015 and the remaining 50% to Noh in 2016. (See Noh Decl. ¶¶ 7–10; Dkt. 119-2 [Declaration of Taek Yoon, hereinafter "Yoon Decl."] ¶¶ 3–10.)
Chang requests an evidentiary hearing so that the Court can consider the credibility of Noh and Yoon. (Mot. at ii.) Because the Court's decision does not rely on the declarations of Noh and Yoon, no evidentiary hearing is necessary.
According to records filed with the California Secretary of State, in January 2014 and January 2015, Yoon was listed as the sole officer and director of MC Crew. (Yoon Decl. ¶¶ 5–6, Ex. 1–2 [Statements of Information].) In December 2015, Yoon and Noh were both listed as officers and directors of MC Crew. (Noh Decl. ¶ 10, Ex. 3 [Statement of Information].) In June 2017, Noh was listed as the sole officer and director of MC Crew. (Dkt. 118-7 [Ex. 41 to Mot., Statement of Information].)
B. Alleged Connections Between Mungchi and MC Crew
Chang makes several assertions concerning the connections between Mungchi and MC Crew. First, he contends that Mungchi transferred its customer Walgreens to MC Crew. In support, he submits a declaration from a Walgreen's paralegal stating that, based on her review of records, Walgreens considered Mungchi to be the same vendor as MC Crew, and Mungchi had changed to MC Crew in Walgreens’ accounts. (Dkt. 118-1 [Declaration of Caitlin Layton] ¶¶ 3–4.) Chang also submits a declaration from Jason Engel, a certified public accountant, who determined that Mungchi's customer Walgreens was transferred to MC Crew, and thus Mungchi's goodwill was transferred to MC Crew. (Dkt. 118-3 [Declaration of Jason Engel, hereinafter "Engel Decl."] ¶ 10.) Engel's declaration cites only the paralegal's declaration as support for his opinion. (See id. ) Chang also submits an invoice that MC Crew submitted to Walgreens and a spreadsheet summary of Walgreens’ purchases from Mungchi and MC Crew, with pricing information redacted. (See Dkt. 118-5 [Ex. 8 to Mot., Declaration of Caitlin Layton, Invoices, and Summary].)
MC Crew makes a number of evidentiary objections to the exhibits submitted in support of Chang's Motion. (Dkt. 119-3 [Objections to Declaration of Chad Biggins]; Dkt. 119-4 [Objections to Declaration of Jason Engel]; Dkt. 119-5 [Objections to Declaration of Caitlin Layton].) Many of these are well taken. But since this evidence does not alter the outcome, MC Crew's objections are OVERRULED AS MOOT .
Chang also asserts that Mungchi's vendors were transferred to MC Crew. He submits checks from Mungchi and MC Crew to the same vendors in support. (Dkt. 118-7 [Ex. 36 to Mot., Mungchi Checks]; Dkt. 118-7, [Ex. 37 to Mot., MC Crew Checks].) Engel also opines, based on a review of these checks, that Mungchi's vendors and goodwill were transferred to MC Crew. (Engel Decl. ¶ 11.)
Chang next offers a copy of a check from Mungchi to MC Crew for $123,018, dated November 13, 2014. (Dkt. 118-7 [Ex. 32 to Mot., BBCN Bank printout] at 4.) In their declarations, both Noh and Yoon state they have reviewed this check and it was payment to MC Crew for the sale of merchandise, as well as printing and embroidery services. (Noh Decl. ¶ 13; Yoon Decl. ¶ 11.) Noh also states that Mungchi regularly contracted with MC Crew for services. (Noh Decl. ¶ 4.) Chang questions these claims and submits Mungchi's 2013 general ledger, which shows no payments to MC Crew, and Mungchi's 2014 general ledger, which reflects only one payment to MC Crew—the November payment. (See Dkt. 120-9 [Ex. 49 to Reply, Mungchi 2013 General Ledger]; Dkt. 120-10 [Ex. 50 to Reply, Mungchi 2014 General Ledger].)
Chang contends that Mungchi transferred its trademark "Pro Be" to MC Crew and submits excerpts from Noh's judgment debtor's examination in support. Pro Be is a trademark that Mungchi used. (11/15/17 Noh Depo. at 76.) In 2017, Noh represented that MC Crew had recently used the Pro Be trademark without making any payments to Mungchi. (Id. at 82.) However, in Noh's declaration, he clarifies that Pro Be was originally registered to Mungchi, but the trademark expired in 2014. (Noh Decl. ¶ 13 [citing Ex. 6 to his declaration, a printout from the United States Patent and Trademark Office].) Noh then applied to register Pro Be in December 2016 and subsequently authorized MC Crew to use the trade name in 2017. (Noh Decl. ¶¶ 14–15 [citing Ex. 5 to his declaration, another printout from the United States Patent and Trademark Office].)
Chang also claims that MC Crew has used the same phone number, same P.O. Box, and same lawyers as Mungchi. (See Dkt. 118-7) [Ex. 41 to Mot., MC Crew Article of Incorporation]; Dkt. 118-7 [Ex. 42 to Mot., Mungchi Bank Record]; Dkt. 120-8 ( [Ex. 46 to Reply, Bank Documents for MC Crew and Mungchi]; Dkt. 118-4 [Declaration of Chad Biggins] ¶ 21.) Additionally, when MC Crew first started doing business, it operated out of the same location where Mungchi had been operating. (3/20/18 Noh Exam. at 223, 225.) Finally, Chang asserts that Mungchi and MC Crew have similar incomes and submits Mungchi's income tax returns and a draft income statement from MC Crew in support. (See Dkt. 118-7 [Ex. 38 to Mot., MC Crew Draft Income Statement]; Dkt. 118-6 [Ex. 16 to Mot., 2012 Mungchi Tax Return]; Dkt. 118-6 [Ex. 17 to Mot., 2013 Mungchi Tax Return]; Dkt. 118-6 [Ex. 18 to Mot., 2014 Mungchi Tax Return]; Dkt. 118-6 [Ex. 19 to Mot., 2015 Mungchi Tax Return].)
MC Crew responds that Mungchi did not transfer any of its inventory, machinery, or other assets to MC Crew. (See Noh Decl. ¶ 5.) According to Noh's declaration, when Mungchi closed its operations, it sold a majority of its inventory and machinery to Cotton Legen Activewear, Inc. and Gravity Source Activewear, Inc. (Id. ¶ 6.) The remaining inventory and machinery were discarded because there was no resale value. (Id. )
III. LEGAL STANDARD
Federal Rule of Civil Procedure 69(a) "empowers federal courts to rely on state law to add judgment-debtors." In re Levander , 180 F.3d 1114, 1120–21 (9th Cir. 1999) ; see also Fed. R. Civ. P. 69(a). Under California Code of Civil Procedure § 187, federal courts in California have "the authority to amend a judgment to add additional judgment debtors." NEC Elecs. Inc. v. Hurt , 208 Cal. App. 3d 772, 778, 256 Cal.Rptr. 441 (1989) ; see also In re Levander , 180 F.3d at 1121 (approving of the use of section 187 to add judgment debtors in federal court). The moving party bears the burden of proof by a preponderance of the evidence. Wollersheim v. Church of Scientology , 69 Cal. App. 4th 1012, 1018, 81 Cal.Rptr.2d 896 (1999). The decision to modify the judgment is consigned to the trial court's discretion. Wolf Metals Inc. v. Rand Pac. Sales, Inc. , 4 Cal. App. 5th 698, 703, 209 Cal.Rptr.3d 198 (2016).
IV. DISCUSSION
Under California law, courts may amend a judgment to add a successor corporation if that successor corporation is the "mere continuation" of the original judgment debtor. Katzir's Floor & Home Design, Inc. v. M-MLS.com , 394 F.3d 1143, 1150 (9th Cir. 2004). Although a corporation that purchases all the assets of another corporation is generally not liable for the former corporation's liabilities, the purchasing corporation may be liable if it is "a mere continuation of the selling corporation." Id. ; see also Wolf Metals , 4 Cal. App. 5th at 709, 209 Cal.Rptr.3d 198 (noting that "corporations cannot escape liability by a mere change of name or shift of assets when and where it is shown that the new corporation is, in reality, but a continuation of the old," particularly where "actual fraud or the rights of creditors are involved") (quoting Cleveland v. Johnson , 209 Cal. App. 4th 1315, 1327, 147 Cal.Rptr.3d 772 (2012) ).
"To be a mere continuation, California courts require evidence of one or both of the following factual elements: (1) a lack of adequate consideration for acquisition of the former corporation's assets to be made available to creditors, or (2) one or more persons were officers, directors, or shareholders of both corporations." Katzir's Floor , 394 F.3d at 1150. Although these factors are presented in the disjunctive, "[i]nadequate consideration is an ‘essential ingredient’ to a finding that one entity is a mere continuation of another." Id. at 1150 (quoting Maloney v. Am. Pharm. Co. , 207 Cal. App. 3d 282, 289, 255 Cal.Rptr. 1 (1988) ). Courts have held that common officers and shareholders alone are insufficient to establish a mere continuation. See Mitsui O.S.K. Lines, Ltd. v. Seamaster Logistics, Inc. , 2013 WL 3786618, at *5–6 (N.D. Cal. July 18, 2013) (noting that "several courts have held that inadequate consideration is an essential ingredient or a crucial factor in assessing successor liability" and collecting cases); see also Franklin v. USX Corp. , 87 Cal. App. 4th 615, 625–27, 105 Cal.Rptr.2d 11 (2001) (characterizing the payment of inadequate cash consideration as a "crucial factor" and finding that it must be present to impose successor liability under a mere continuation theory).
The judgment debtor must also have transferred its principal assets to justify finding that the transferee corporation is a mere continuation of the original judgment debtor. See Davis v. Chase Bank U.S.A., N.A. , 2010 WL 7919098, at *4 (C.D. Cal. Nov. 15, 2010) ("As the Ninth Circuit has held, the ‘mere continuation’ inquiry is only relevant where one corporation acquires ‘all of the assets of another corporation.’ ") (quoting Katzir's Floor , 394 F.3d at 1150 ); see also Maloney , 207 Cal. App. 3d at 288, 255 Cal.Rptr. 1 (refusing to impose successor liability where the new corporation obtained only 10% of the old corporation's total assets). "[T]here must be a causal relationship between a successor's acquisition of assets (i.e., inadequate consideration), and the predecessor's creditors’ inability to get paid." Sunnyside Dev. Co., LLC v. Opsys Ltd. , 2007 WL 2462142, at *10 (N.D. Cal. Aug. 29, 2007) (quoting Katzir's Floor , 394 F.3d at 1151 ).
Chang's Motion fails because he has not proved by a preponderance of the evidence that Mungchi transferred its principal assets to MC Crew. Chang heavily relies on the assertion that Mungchi transferred its customers, and thus goodwill, to MC Crew. Although Chang refers to "customers," he points to only one—Walgreens. (See Mot. at ii, 5; Dkt. 120 [Reply] at 2.) Chang describes Walgreens as a significant customer of Mungchi but offers no evidence to show that Walgreens's business was such that it would constitute Mungchi's principal assets. Nor does Chang provide any valuation for what he characterizes as Mungchi's goodwill. Accordingly, even if the Court were to conclude that Mungchi transferred its customer Walgreens to MC Crew, Chang's evidence falls short of establishing that Walgreens’ business constitutes Mungchi's principal assets.
Chang's other attempts to show a transfer of assets similarly fail. MC Crew's alleged use of the trademark Pro Be, which was previously used by Mungchi, does not demonstrate a mere continuation. Chang fails to offer any evidence as to the value of the trademark and has not established that it was one of Mungchi's principal assets. Further, Chang's evidence shows only that MC Crew used the trademark "recently" in 2017, which undermines any claim that the trademark was directly transferred from Mungchi to MC Crew. See Uni-Splendor Corp. v. Remington Designs, LLC , 2018 WL 6252444, at *5 (C.D. Cal. Oct. 23, 2018) ("A successor corporation may be deemed a ‘mere continuation’ only where there is ‘a direct sale of assets from the predecessor corporation to the successor corporation.’ ") (quoting Katzir's Floor , 394 F.3d at 1151 ).
Chang also fails to show that the November 2014 payment is a transfer of Mungchi's principal assets to MC Crew. To start, Chang provides no evidence that the payment of $123,018 was for an improper purpose. Further, Chang fails to establish that $123,018 constitutes Mungchi's principal assets. Similarly, Chang's other assertions that MC Crew used the same phone number, address, lawyers, or vendors as Mungchi lack sufficient detail to demonstrate that MC Crew was operating the identical business as Mungchi, and, regardless, are not sufficient on their own to establish mere continuation. Cf. Wolf Metals , 4 Cal. App. 5th at 709–10, 209 Cal.Rptr.3d 198 (finding mere continuation where the successor corporation acquired the predecessor corporation's remaining assets, in addition to evidence that the successor corporation was operating the identical business in the same location).
Because Chang has failed to prove that Mungchi transferred its principal assets to MC Crew, the Court does not reach Chang's argument that inadequacy of consideration is not required but notes his argument likely fails. See, e.g., Garcia v. New Albertson's, Inc. , 2014 WL 4978434, at *12 (C.D. Cal. Oct. 3, 2014) (rejecting a similar argument based on the same line of cases relied on by Chang); Mitsui O.S.K. Lines , 2013 WL 3786618, at *6 (same).
Finally, Chang's Motion is not saved by his arguments concerning Noh's common ownership of Mungchi and MC Crew. While Chang cites to Noh's deposition testimony about needing Yoon to start MC Crew, Chang's assertion that Noh used Yoon as a front to hide his ownership of MC Crew is largely speculation. (See Mot. at 8.) Regardless, even if Chang could prove a continuity of ownership, he has still failed to prove that MC Crew is the mere continuation of Mungchi because he has failed to establish the essential ingredient—that Mungchi's principal assets were transferred to MC Crew for inadequate consideration. See Directi Internet Sols. Pvt. Ltd. v. Dhillon , 2014 WL 3057514, at *3 (E.D. Cal. July 7, 2014) (finding no successor liability, even though there was evidence that the successor corporation was essentially the predecessor corporation operating under a different name because there was no evidence the successor corporation paid inadequate consideration for the predecessor's assets).
Ultimately, the Court's decision to amend a judgment pursuant to California Code of Civil Procedure § 187 is an equitable one, committed to the Court's discretion. See Wolf Metals , 4 Cal. App. 5th at 703, 209 Cal.Rptr.3d 198. The equities here do not justify amending the judgment to add MC Crew as a judgment debtor because Chang has failed to show that Mungchi transferred its principal assets to MC Crew. This is not a technicality but a failure to establish a fundamental element necessary for adding a judgment debtor under a mere continuation theory. See Garcia , 2014 WL 4978434, at *12 ("[I]n cases constituting the functional but not technical equivalent of a corporation transferring all or substantially all of its assets to another corporation, courts will not allow technicalities to effect inequitable results."). Should Chang believe he can show that Mungchi transferred its principal assets to MC Crew, he can renew his motion to amend the judgment to add MC Crew as judgment debtor.
V. CONCLUSION
For the foregoing reasons, Chang's Motion to add MC Crew as a Judgment Debtor is DENIED WITHOUT PREJUDICE .