FENWICK &WEST, J. David Hadden, Todd R. Gregorian and Christopher S. Lavin; STEPTOE &JOHNSON, Michael J. Baratz and Emma S. Marshak for Movants and Appellants. No appearance for respondents.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. 21VECV00575, Bernie LaForteza, Judge. Reversed.
FENWICK &WEST, J. David Hadden, Todd R. Gregorian and Christopher S. Lavin; STEPTOE &JOHNSON, Michael J. Baratz and Emma S. Marshak for Movants and Appellants.
No appearance for respondents.
Plaintiffs Brilliant Digital Entertainment, Inc. (BDE), Europlay Capital Advisors, LLC (ECA), Claria Innovations, LLC (Claria), and Monto Holdings Pty Ltd. (Monto) filed a collection action against defendant PersonalWeb Technologies, LLC (PersonalWeb). Amazon.com, Inc., Amazon Web Services, Inc., and Twitch Interactive, Inc., moved to intervene under Code of Civil Procedure, section 387, subdivision (d)(1)(B) and (d)(2). The trial court denied the motion, finding Amazon did not establish a sufficient interest in the case to justify mandatory or permissive intervention.
Throughout this opinion, we refer collectively to Amazon.com, Inc., Amazon Web Services, Inc., and Twitch Interactive, Inc., as "Amazon." We refer collectively to BDE, ECA, Claria, and Monto as "plaintiffs." Moreover, we refer collectively to the parties to the underlying action as "respondents."
All further undesignated statutory references are to the Code of Civil Procedure.
Amazon appeals from the order denying its motion to intervene, arguing it satisfied the statutory criteria for both mandatory and permissive intervention. As discussed below, we conclude Amazon is entitled to mandatory intervention under section 387, subdivision (d)(1)(B). We therefore need not address whether it also is entitled to permissive intervention.
Accordingly, we reverse the order denying Amazon's motion to intervene. We do so reluctantly because, as the busy trial judge noted, Amazon failed to cite the key case, Continental Vinyl Products Corp. v. Mead Corp. (1972) 27 Cal.App.3d 543 (Continental Vinyl), to the trial court except in its supplemental brief, and then only in passing. With the additional time afforded us to review the matter, however, we have concluded that Continental Vinyl entitles Amazon to intervene. We remand to the trial court with instructions to enter an order granting Amazon's motion, and to conduct further proceedings consistent with this opinion.
Amazon's motion to augment the record on appeal, filed on July 27, 2022 and corrected on July 29, 2022, is granted. (See Cal. Rules of Court, rule 8.155(a).) In addition, on our own motion, we augmented the record to include Amazon's supplemental brief filed in the trial court on November 12, 2021. (See ibid.)
Beginning in January 2018, PersonalWeb filed 85 patent infringement lawsuits against different Amazon customers in various courts across the country. Shortly thereafter, Amazon intervened in those actions and undertook the defense of its customers. It also filed its own lawsuit against PersonalWeb, seeking an injunction prohibiting further litigation against its customers, and seeking declarations that PersonalWeb's claims are either barred or meritless. In June 2018, these lawsuits were consolidated into a multi-district litigation proceeding (MDL) in the United States District Court for the Northern District of California (Northern District).
By orders entered in March 2019 and February 2020, the Northern District granted summary judgment in Amazon's favor on all of PersonalWeb's claims. Then, by orders entered in October 2020, March 2021, and April 2021, the court awarded Amazon approximately $5.4 million in attorneys' fees and costs under Title 35 United States Code section 285. In so doing, the court found the case was "exceptional" under the statute because PersonalWeb engaged in unreasonable litigation tactics throughout the proceedings. Specifically, it found "th[e] case both lacked 'substantive strength' and was litigated in an 'unreasonable manner[,]'" noting: "(1) PersonalWeb's infringement claims related to [one of Amazon's products] were objectively baseless and not reasonable when brought because they were barred due to a final judgment in a [prior patent infringement suit brought by PersonalWeb against Amazon]; (2) PersonalWeb frequently changed its infringement positions to overcome the hurdle of the day; (3) PersonalWeb unnecessarily prolonged th[e] litigation after claim construction foreclosed its infringement theories; (4) PersonalWeb's conduct and positions regarding the customer[s'] cases were unreasonable; and (5) PersonalWeb submitted declarations that it should have known were not accurate."
On April 27, 2021, plaintiffs filed the underlying action against PersonalWeb. Their verified complaint alleged PersonalWeb executed separate promissory notes to each of them, under which "all principal advances and interest thereon are payable immediately on demand by [each plaintiff], or if no such demand is made, in full on December 31, 2022[.]" The notes were secured by separate agreements granting each plaintiff "a security interest in all of [PersonalWeb's] personal property and collateral[.]"
Plaintiffs alleged that at an unspecified time "prior to the institution of [the underlying] action[,]" each of them "demanded payment in full from [PersonalWeb]." They alleged PersonalWeb "defaulted under each . . . note by refusing to pay each [p]laintiff in full, as demanded." Thus, they alleged the following sums were due and payable by PersonalWeb: at least $2,871,948 with $2,719,228 in interest to BDE; at least $532,622 with $552,588 in interest to ECA; at least $274,700 with $325,205 in interest to Claria; and at least $10,020,609 with $2,637,523 in interest to Monto. Among other remedies, plaintiffs sought appointment of a receiver to take possession of the collateral securing their notes (i.e., all of PersonalWeb's assets) and "preserve it, manage it, collect it, and liquidate it for proper distribution . . . to [p]laintiffs."
On May 3, 2021, plaintiffs filed an ex parte application for immediate appointment of a receiver and for a preliminary injunction in aid of the receiver. That same date, Michael Weiss, the President of PersonalWeb, submitted a declaration of nonopposition to plaintiffs' application. In his declaration, Weiss stated: (1) PersonalWeb owes plaintiffs more than $19 million, which it cannot pay; and (2) "[p]laintiffs and [PersonalWeb] have agreed the best course of action with respect to the collateral is for the [r]eceiver immediately to take possession of the collateral securing the loan obligations of [PersonalWeb] owed to [p]laintiffs."
A week later, the trial court granted plaintiffs' application and appointed their chosen entity as receiver over PersonalWeb. Then, on May 20, 2021, respondents stipulated to entry of a preliminary injunction in aid of the receiver, which the court issued on June 1, 2021. While the receivership was pending, the preliminary injunction barred PersonalWeb from transferring its assets, and stayed its "judgment holders[ ] and other persons seeking to establish or enforce any claim, debt, right, lien, or interest against . . . PersonalWeb" from "[c]ommencing, prosecuting, continuing, or enforcing any suit, judgment, lien, levy, or proceeding against . . . PersonalWeb[.]"
In July 2021, the Northern District entered an amended judgment in favor of Amazon and against PersonalWeb in the MDL, which incorporated the final amount of attorneys' fees and costs awarded to Amazon.
On August 10, 2021, Amazon filed a motion for leave to intervene in this case under section 387, subdivision (d)(1) and (d)(2). Through its proposed complaint-in-intervention, Amazon sought enforcement of its judgment, equitable subordination of plaintiffs' claims to the PersonalWeb estate, and an order for an accounting.
Nine days later, plaintiffs filed a statement of nonopposition to Amazon's motion. PersonalWeb did not respond to the motion.
On August 27, 2021, respondents stipulated to entry of judgment in favor of plaintiffs and against PersonalWeb. In so doing, respondents agreed that the appointment of the receiver nominated by plaintiffs and "[t]he provisions of the preliminary injunction in support of the [r]eceiver . . . entered . . . on June 1, 2021, . . . shall continue in full force and effect post [j]udgment until [the trial court] settles the [r]eceiver's final report and accounting."
With the trial court's permission, Amazon filed a supplemental brief in support of its motion for leave to intervene on November 12, 2021. At a hearing held five days later, the court denied the motion on the ground that Amazon did not "show a sufficient interest[ ] to justify . . . granting intervention." At the same hearing, Amazon asked the trial court to stay the proceedings in the underlying action, but the court denied the request. Subsequently, on December 13, 2021, Amazon filed a motion for a stay pursuant to section 916. The record reflects the trial court has not ruled on this motion.
Amazon filed a timely notice of appeal on January 4, 2022. Ten days later, Amazon filed a petition seeking a writ of supersedeas directing the trial court to stay the underlying action pending resolution of its appeal. The petition was denied on February 17, 2022.
I. Governing Principles and Standard of Review
"An intervention takes place when a non-party, deemed an intervenor, becomes a party to an action or proceeding between other persons by doing any of the following: [¶] . . . [¶] (3) Demanding anything adverse to both a plaintiff and a defendant." (§ 387, subd. (b)(3).)
"Mandatory intervention is governed by . . . section 387 subdivision (d)(1)-which 'should be liberally construed in favor of intervention.' [Citation.]" (Crestwood Behavioral Health, Inc. v. Lacy (2021) 70 Cal.App.5th 560, 572 (Crestwood).) "[T]o establish mandatory intervention under subdivision (d)(1)(B), [the proposed intervenor] must show (1) '"an interest relating to the property [or] transaction which is the subject of the action"' [citation]; (2) 'he or she "is so situated that the disposition of the action may as a practical matter impair or impede"' his or her '"ability to protect that interest"' [citation]; and (3) he or she is not '"adequately represented by the existing parties"' [citation]." (Id. at pp. 572-573, fn. omitted.) "In assessing these requirements, we may take guidance from federal law[ ]" because section 387, subdivision (d)(1) "'is in substance an exact counterpart to rule 24(a) of the Federal Rules of Civil Procedure[.]'" (Edwards v. Heartland Payment Systems, Inc. (2018) 29 Cal.App.5th 725, 732.)
". . . 'California cases are not settled on whether we review the denial of a request for mandatory intervention pursuant to . . . section 387 de novo or for abuse of discretion.' [Citations.] Nor are federal cases. [Citations.]" (Crestwood, supra, 70 Cal.App.5th at pp. 573-574.) We need not decide which standard to apply, however, because reversal is required under either, as discussed below.
As noted above, the trial court denied Amazon's motion to intervene solely on the ground that Amazon "d[id] not show a sufficient interest[ ] in the current litigation to justify . . . intervention." In so doing, the court correctly observed that, under California law, a creditor does not have a sufficiently direct interest in an action to justify mandatory or permissive intervention unless: (1) the creditor shows he or she has a lien or attachment on the debtor's assets, and that those assets are the subject of the action in which intervention is sought; or (2) the creditor shows the case falls within the exception recognized in Continental Vinyl, supra, 27 Cal.App.3d 543.
Applying these principles, the trial court found "Amazon has . . . not [shown] that it has a lien or attachment upon any asset which is the subject of and might be disposed by the relevant litigation." Subsequently, the court stated Amazon failed to demonstrate intervention was warranted under Continental Vinyl because Amazon "d[id] not even take the time in its motion to state or show it qualifies for [the Continental Vinyl] exception . . . given the facts of this case."
In challenging the trial court's denial of its intervention motion, Amazon does not take issue with the court's statement of the governing law. Nor does it dispute that it did not have a lien or attachment on PersonalWeb's assets when it sought leave to intervene. Instead, Amazon appears to contend the trial court misapplied the law to the undisputed facts in this case, and maintains it satisfied the three-part test for mandatory intervention. We address its arguments on each part of the test in turn below.
A. Whether Amazon Has an Interest in the Property which is the Subject of the Action
"To intervene as a matter of right, [the movant] must establish an 'interest' . . . that is direct, non-contingent, substantial[,] and legally protectable [citation] ...." (Dilks v.
Aloha Airlines, Inc. (9th Cir. 1981) 642 F.2d 1155, 1156-1157 (Dilks).) In Continental Vinyl, the appellate court noted that "[a]n interest is consequential and thus insufficient for intervention when the action in which intervention is sought does not directly affect it although the results of the action may indirectly benefit or harm its owner. Thus an unsecured creditor of a defendant who will be rendered unable to pay the debt if he loses a lawsuit is held to only have a consequential interest not justifying intervention in the litigation. [Citation.]" (Continental Vinyl, supra, 27 Cal.App.3d at p. 550.) The court, however, also recognized the following exception to this rule: "What would otherwise be a consequential interest not justifying intervention may become a direct interest permitting it when bad faith of a party to the litigation, the assertion by all parties to the litigation of claims adverse to the party seeking to intervene, collusion, impossibility of asserting a position that should be presented in the litigation, or similar circumstances render strict definition of direct interest likely to result in injustice." (Id. at p. 551.)
Amazon contends the Continental Vinyl exception applies here because respondents colluded to use this collection action to prevent Amazon from collecting on its judgment against PersonalWeb. It argues their collusion will result in injustice because, under the receivership, PersonalWeb's beneficial owners will be able to avoid paying Amazon its attorneys' fees and costs while still maintaining control over its assets and funding additional patent litigation against Amazon and/or its customers. As discussed below, we agree with Amazon and conclude that, under Continental Vinyl, it has asserted an adequate interest in the case to justify intervention.
We begin our analysis by identifying the property that is the subject of the underlying action. As noted above, plaintiffs initiated this case based on PersonalWeb's failure to satisfy its demand for repayment of more than $19 million in loans, which were secured by interests in all of PersonalWeb's assets. PersonalWeb has conceded it is in default and cannot repay the money owed. It therefore agreed to establishment of the receivership to facilitate the liquidation and distribution of its assets to plaintiffs to satisfy their demand for repayment. Accordingly, the property at issue in this case is the PersonalWeb estate.
Amazon holds a judgment against PersonalWeb, which includes an award of approximately $5.4 million in attorneys' fees and costs based on the Northern District's finding that PersonalWeb engaged in unreasonable litigation tactics throughout the MDL. Upon its enforcement of the judgment, payment would be made from the PersonalWeb estate. Amazon therefore has an interest in the property at issue in the underlying action. The dispositive question then is whether the Continental Vinyl exception applies to establish Amazon has a direct, as opposed to a consequential, interest to justify intervention. (See Dilks, supra, 642 F.2d at pp. 1156-1157; see also Continental Vinyl, supra, 27 Cal.App.3d at p. 551.)
On this issue, Amazon's proposed complaint-in-intervention alleges "[p]laintiffs are insiders of PersonalWeb, such that the ultimate beneficial owner of PersonalWeb is the same as the ultimate beneficial owner of [p]laintiffs." In support, Amazon alleges, and has submitted evidence showing, the following overlaps in ownership and management between plaintiffs and PersonalWeb: (1) when PersonalWeb was formed, Claria was its sole member and had governing authority over it; (2) Monto currently owns 20% of PersonalWeb; (3) Kevin Bermeister, the Non-Executive Chairman of PersonalWeb, founded BDE; and (4) Bermeister's cousin, Mark Dyne, founded ECA, and has served as chairman for BDE.
In light of the allegations above, and the series of events following entry of judgment in the MDL, Amazon's proposed complaint-in-intervention alleges respondents colluded to thwart Amazon's ability to collect on its judgment by initiating the underlying action. Specifically, Amazon alleges that plaintiffs demanded repayment sometime in March 2021, well before the loans' maturity date of December 31, 2022, in response to the Northern District's March 2021 order awarding Amazon its attorneys' fees and costs. According to Amazon, PersonalWeb "coordinated the early demand on the loans-anticipating the subsequent default, because PersonalWeb's assets were not sufficient to pay the full amount due immediately-and the subsequent [r]eceivership[.]" Subsequently, Amazon alleges, "PersonalWeb consented to the appointment of the [r]eceiver . . . to avoid the judgment owed to Amazon by keeping [its] assets under the umbrella of the same beneficial owner."
The filings in the underlying action and the events following its initiation support Amazon's allegations of collusion. As noted above, plaintiffs' verified complaint does not specify when they made their demands for repayment. Instead, it vaguely alleges they each "demanded payment in full . . . prior to the institution of this action." Given that their complaint was filed on April 26, 2021, and identifies the amounts due as of March 31, 2021, the complaint is consistent with Amazon's allegations regarding the timing of plaintiffs' demands, and why they made them at that time (i.e., to initiate a lawsuit seeking a receivership, which would prohibit Amazon from collecting on its judgment until after PersonalWeb's assets had been distributed to other entities controlled by the same beneficial owners).
A week after filing their complaint, plaintiffs filed their ex parte application for an order appointing a receiver and a preliminary injunction in aid of the receiver. Then, on very same day, Weiss submitted his declaration of non-opposition on PersonalWeb's behalf, which consented to appointment of plaintiffs' selected receiver for purposes of facilitating the distribution of PersonalWeb's assets to plaintiffs. His declaration was apparently filed by plaintiffs' counsel, as their names and contact information are listed on the top of the caption page. Less than three weeks later, respondents stipulated to entry of a preliminary injunction, which precluded PersonalWeb from transferring any of its assets, and prohibited any person or entity from enforcing a judgment entered against it, while the receivership was pending. Then, in late-August of 2021, just four months after the underlying action was initiated, respondents stipulated to entry of judgment in favor of plaintiffs and against PersonalWeb, which would keep the receivership and the preliminary injunction in place through the final settlement of the PersonalWeb estate.
Despite demanding repayment of loans totaling approximately $19 million in March 2021, the record reflects plaintiffs sought to lend an additional $1 million to PersonalWeb in November 2021. The sole purpose of the loan is to fund ongoing patent litigation against Amazon and its affiliated entities. The additional loan is secured by "receiver's certificates," which have priority over all other liens, encumbrances, and claims against the PersonalWeb estate, such as Amazon's judgment.
In sum, as set forth above, the record before us supports Amazon's allegations that respondents colluded to pursue the underlying action to preclude Amazon from collecting on its judgment against PersonalWeb. Specifically, the record supports Amazon's theory that respondents used the case to quickly funnel all of PersonalWeb's assets into a receivership following Amazon's victory in the MDL. By doing so, respondents insulated all of PersonalWeb's assets, including additional money loaned to PersonalWeb to fund further patent litigation against Amazon and its affiliates, from Amazon's judgment while still ensuring PersonalWeb's beneficial owners maintained control over the PersonalWeb assets.
We agree with Amazon that respondents' collusion is "likely to result in injustice." (Continental Vinyl, supra, 27 Cal.App.3d at p. 551.) If allowed to use the collection action as intended, PersonalWeb avoids the consequences of its improper litigation conduct in the MDL by not having to pay Amazon its attorneys' fees and costs as ordered. Further, PersonalWeb will be able to continue pursuing further patent litigation against Amazon's customers, and require Amazon to continue defending against that litigation while depriving Amazon of the ability to obtain meaningful relief for PersonalWeb's future use of unreasonable litigation tactics.
Accordingly, we conclude Amazon has shown the Continental Vinyl exception applies on the unique facts of this case, and established a direct interest in the property at issue in the underlying action. (Cf. Continental Vinyl, supra, 27 Cal.App.3d at p. 553 [appellants' proposed complaints-in-intervention and declarations in support of intervention motion failed to establish special circumstances converting a consequential interest into a direct one because they did not contain any allegations of bad faith by the existing parties].) Thus, Amazon has satisfied the first part of the test governing mandatory intervention under section 387, subdivision (d)(1)(B).
B. Whether Disposition of the Action Will Impede Amazon's Ability to Protect its Interest
Amazon contends it satisfied the second part of the three-part test for mandatory intervention because the receivership will dispose of the entire PersonalWeb estate before Amazon will be able to enforce and collect on its judgment. We agree.
As discussed above, PersonalWeb agreed to the receivership, noting it lacked sufficient assets to satisfy plaintiffs' demands for repayment of more than $19 million in loans. The receiver has been tasked with managing the PersonalWeb estate and facilitating its liquidation and ultimate distribution to plaintiffs to meet their demands. While the receiver does so, PersonalWeb may not transfer any of its assets, and Amazon is stayed from initiating an action to enforce its judgment against PersonalWeb.
Accordingly, Amazon has shown that by the time it is able to enforce its judgment, PersonalWeb will likely have no assets from which to pay Amazon its court-awarded attorneys' fees and costs. Amazon has therefore demonstrated the disposition of the underlying action may, as a practical matter, "impede [its] ability to protect [its] interest" in seeking payment of its judgment from the PersonalWeb estate. (§ 387, subd. (d)(1)(B).)
C. Whether Amazon's Interest is Adequately Represented by the Existing Parties
Lastly, we conclude Amazon has satisfied the third part of the test for mandatory intervention set forth in section 387, subdivision (d)(1)(B). As discussed in detail above, Amazon has alleged respondents colluded to use the underlying action to quickly establish a receivership over PersonalWeb, transfer all of its assets to plaintiffs, and preclude Amazon from enforcing its judgment until after the transfer is complete. Through its proposed complaint-in-intervention, however, Amazon seeks to assert the doctrine of equitable subordination, and establish its claims to the PersonalWeb estate deserve priority over plaintiffs' claims.
Under these circumstances, we conclude Amazon and respondents clearly have conflicting interests in the outcome of this case. Consequently, Amazon has shown it will not be "adequately represented by one or more of the existing parties." (§ 387, subd. (d)(1)(B); see also Hodge v. Kirkpatrick Development, Inc. (2005) 130 Cal.App.4th 540, 555 [movant's interests were not adequately represented in the underlying action where "the conflict between [the plaintiffs'] and [the movant's] interests in the outcome of the . . . lawsuit [was] palpable and real"].)
For the reasons discussed above, we conclude Amazon has shown it is entitled to mandatory intervention under section 387, subdivision (d)(1)(B). In light of this conclusion, we need not address whether Amazon is entitled to permissive intervention under section 387, subdivision (d)(2).
The order denying Amazon's motion to intervene is reversed. The case is remanded to the trial court with instructions to (1) enter an order granting the motion to intervene and (2) conduct further proceedings consistent with this opinion.
We concur: MANELLA, P.J. COLLINS, J.