Judge Mark A. Young, Case SC124873 2023-04-05 Tentative Ruling

Judge: Mark A. Young, Case: SC124873, Date: 2023-04-05 Tentative Ruling

Case Number: SC124873 Hearing Date: April 5, 2023 Dept: M

CASE NAME: Melamed v. Parallax Health Sciences, Inc., et al.

CASE NO.: SC124873

MOTION: Motion to Amend Judgment and Add Judgment Debtor

HEARING DATE: 4/6/2023

BACKGROUND

This is a post judgment matter. In the underlying dispute, Melamed sold his company’s, RoxSan's, assets to Parallax in exchange for a promissory note for $20,500,000. (Melamed Decl., ¶ 2.) Parallax paid Melamed nothing towards satisfaction of the Note, and instead wrongfully terminated Melamed's employment with RoxSan, despite her continued employment being part of the Asset Purchase Agreement. Parallax ran RoxSan into the ground while this case was pending. (¶ 3.) Following this litigation, Parallax defrauded Melamed into signing a Settlement Agreement backed up by a stipulated judgment for $20,000,000. Parallax then claimed it was prevented from performing its end of the settlement because of the Covid-19 pandemic. This Court entered the stipulated judgment in favor of Melamed on August 14, 2020.

Legal Standard

The Court may amend a judgment to add an alter ego of an original judgment debtor, and thereby make the additional judgment debtor liable on the judgment. (CCP § 187; Highland Springs Conference & Training Center v. City of Banning¿(2016) 244 Cal.App.4th 267, 280.) To prevail on the motion, the judgment creditor must show, by a preponderance of the evidence, that: “(1) the parties to be added as judgment debtors had control of the underlying litigation and were virtually represented in that proceeding; (2) there is such a unity of interest and ownership that the separate personalities of the entity and the owners no longer exist; and (3) an inequitable result will follow if the acts are treated as those of the entity alone.” (Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership (2013) 222 Cal.App.4th 811, 815–816.) The court is not required to hold an evidentiary hearing on a motion to amend a judgment, but may rule on the motion based solely on declarations and other written evidence. (Wells Fargo Bank, N.A. v. Weinberg¿(2014) 227 Cal.App.4th 1, 9.)

A judgment creditor should establish by a preponderance of the evidence that the alter ego controlled the litigation (e.g., by deposition testimony, declarations from the judgment creditor, corporate defendant and their attorneys, or testimony from a debtor examination). (See Wollersheim v. Church of Scientology Int'l (1999) 69 Cal.App.4th 1012, 1017.) The amendment may be denied if the interests of the alter ego and judgment debtor are not the same, i.e., there must be such “unity of interest” between the alter ego and judgment debtor as to ensure that the alter ego's interests were represented in the underlying litigation. (Relentless Air Racing, supra, 222 Cal.App.4th at 816.) In determining whether there is a sufficient unity of interest and ownership, the court considers many factors, such as: commingling of funds and assets of the two entities; identical equitable ownership in the two entities; use of the same offices and employees; disregard of corporate formalities; identical directors and officers; use of one as a mere shell or conduit for the affairs of the other; or inadequate capitalization of the original judgment debtor. (Highland Springs, supra, 244 Cal.App.4th at 280-281.) No single factor governs—courts must consider all of the circumstances of the case in determining whether it would be equitable to impose alter ego liability.

An inequitable result is shown as a matter of law where the judgment debtor is insolvent due to the actions of an alter ego; proof of wrongful intent is not required. (See Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc.¿(2013) 217 Cal.App.4th 1096, 1109 [inequitable to allow alter ego to shift liability to separate entity where judgment creditor originally negotiated contract with alter ego and alter ego structured financial operations to ensure entity would have no funds to pay debts].)

Analysis

Plaintiff/Judgment Creditor Shahla Melamed (hereinafter, “Judgment Creditor” or “JC”) moves for an order amending her judgment to name Data Health Partners, Inc. ("DHP") as an alter ego co-debtor. JC argues that DHP is the alter ego of judgment debtor Parallax Health Sciences, Inc. (“Parallax”) and, as such, is jointly liable for Melamed's judgment. JC also moves for an Order assigning to her all the right, title and/or interest, along with any future right to payment held by Parallax and/or DHP in certain intellectual property listed in the notice, including certain patents that were held by Parallax.

JC argues that Parallax transferred it “only” valuable asset to DHP for “no consideration” and for the sole purpose of allowing Parallax 's owners to monetize the intellectual property that was held by Parallax, which could not raise further capital due to settlement agreements with the SEC.

The Court is not persuaded that DHP is an alter ego of Parallax, or that the subject asset purchase agreement was for no consideration. First, JC does not show that Parallax’s only valuable asset was/is the cited intellectual property as she contends. The deposition record shows that DHP purchased “some” of Parallax’s intellectual property (“IP”), but not all of it. (Bucci Depo., at 26-28.) Other IP was terminated and other IP was acquired by a third party. (Id.) JC only cites deposition testimony that Parallax owns no other “patents,” as opposed to assets. (Bucci Depo. at 48:9-11.) JC does not direct the Court to any evidence showing that Parallax has no other assets.

JC does cite testimony that Parallax’s and its subsidiary’s bank account are zeroed out, but also reveals that Parallax has other income and assets. Notably, the record gets cut off when Bucci starts discussing Parallax’s other finances and recent payments made in 2021-2022. (Bucci Depo. at 49.) The Court would require further evidence demonstrating that Parallax has no other assets before it could conclude that Parallax’s sale was designed to avoid JC’s judgment in this matter. Without such evidence, the Court would not be inclined to hold a separate entity liable for Parallax’s debts, since no inequity would result. Simply put, JC needs to demonstrate that they cannot recover from Parallax directly in order for alter ego liability to be equitable in this matter. On this record, the Court cannot determine that this is the case.

JC also does not substantiate their contention that DHP’s promissory note to Parallax is akin to a gift with no real value received. (Vivoldi Decl., Ex. 3.) JC submits no evidence showing that DHP is inadequately capitalized or would otherwise not be able to pay Parallax under the terms of the promissory note. Thus, this promissory note is presumably valuable, and will eventually yield payments. While the Court does find it suspicious that the note matches the judgment here, this fact alone is not enough to impose alter ego liability.

The Court is also not persuaded that a unity of interest exists between DHP and Parallax, such that due process is met. JC presents no information on Parallax’s (or its principals’) control over DHP. JC only presents evidence showing a shared ownership interest between the entities via an asset purchase agreement, and that the two entities share some officers. JC does not present evidence that DHP is entirely controlled by the same principals which controlled Parallax during this litigation. Parallax points out that Exhibit C to the Purchase Agreement demonstrates only 45% ownership by the Parallax shareholders. Even if every shareholder in Parallax got shares in DHP through the asset transfer, this does not show that DHP’s ownership is identical to Parallax, or that DHP is entirely controlled by Parallax’s directors or officers.

Furthermore, the fact that Paul Arena was barred from serving as an officer from a publicly traded company does not, by itself, suggest that his involvement in DHP is illegal or inequitable.

Without a finding of an alter ego, the Court would not order a receivership regarding the IPs. JC also undermines her own argument regarding the value of the subject IPs. JC simultaneously argues that the IPs are worth $20 million, and worth substantially less than $20 million. Further evidence is required regarding the value of the IPs JC seeks to transfer before the Court would be inclined to order a receivership.

Accordingly, JC’s motions are DENIED with prejudice.