Judge: Mark A. Young, Case: SC124873, Date: 2023-04-28 Tentative Ruling
Case Number: SC124873 Hearing Date: April 28, 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
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.) Alter ego “is an extreme remedy, sparingly used.” (Sonora Diamond Corp. v. Superior Court
(2000) 83 Cal.App.4th 523, 539.) “ ‘The standards for the application of alter
ego principles are high, and the imposition of [alter ego] liability ... is to
be exercised reluctantly and cautiously.’ ” (Mesler v. Bragg Management Co.
(1985) 39 Cal.3d 290, 306, dis. opn. of Lucas, J.) Further, 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.)
To prevail on the motion, the
judgment creditor must generally 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.) A judgment creditor should establish that the alter ego
controlled the litigation by deposition testimony, declarations from the
judgment creditor, corporate defendant and their attorneys, or testimony from a
debtor examination. (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;
the 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 ("Melamed") moves for an order amending her judgment to name
Data Health Partners, Inc. ("DHP") as an alter ego co-debtor. Melamed
argues that DHP is the alter ego of judgment debtor Parallax Health Sciences,
Inc. and, as such, is jointly liable for Melamed's judgment. Melamed 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 Health Sciences, Inc.
("Parallax") and/or DHP in certain intellectual property listed in
the notice, including certain patents that were held by Parallax. Thus,
Plaintiff seeks to hold a separate entity, DHP, liable for Parallax’s debt.
A court may disregard the corporate
form in order to hold one corporation liable for the debts of another
corporation. (See Las Palmas Associates v. Las Palmas Center Associates
(1991) 235 Cal.App.3d 1220, 1249; Toho-Towa Co., Ltd. v. Morgan Creek
Productions, Inc. (2013) 217 Cal.App.4th 1096, 1106.) “ ‘Usually, a
disregard of the corporate entity is sought in order to fasten liability upon
individual stockholders....’ ” (Las Palmas, supra, 235 Cal.App.3d at
1249.) A court may also disregard the corporate form in order to hold one
corporation liable for the debts of another affiliated corporation when the
latter “ ‘is so organized and controlled, and its affairs are so conducted, as
to make it merely an instrumentality, agency, conduit, or adjunct of another
corporation.’ ” (Id.) “Where there is ‘such domination of finances,
policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own and is but a business conduit for
its principal’, the affiliated corporations may be deemed to be a single
business enterprise, and the corporate veil pierced. ‘Under the “single
business enterprise” doctrine, separate corporations may operate with
integrated resources in pursuit of a single business purpose. The “single-business-enterprise”
theory is an equitable doctrine applied to reflect partnership-type liability
principles when corporations integrate their resources and operations to
achieve a common business purpose.’ ” (Toho-Tawa, supra, 217 Cal.App.4th
at 1107-1108, citations omitted.)
“Factors for the trial court to
consider include the 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, and use of one as a mere shell or conduit for the affairs of the
other. ‘No one characteristic governs, but the courts must look at all the
circumstances to determine whether the doctrine should be applied.’ ” (Id.,
at 1109, citations omitted, quoting Troyk v. Farmers Group, Inc. (2009)
171 Cal.App.4th 1305, 1341–1342.)
Control
Melamed must demonstrate that DHP
had control of, and were virtually represented in, the underlying litigation. Notably, DHP was not created until years
after the stipulated judgment was entered. This would not defeat the motion,
per se. Plaintiff needs to show that the same individuals that effectively
controlled Parallax during this litigation were the individuals who control DHP.
Melamed presents some evidence
regarding control and ownership of DHP. Ms. Bucci testified at her deposition
that DHP is a private Delaware company consisting of herself, Paul Arena and
Ted Withrow. (Bucci Depo. at 27:1-4.) The Court supposes that these individuals
are the principal officers of DHP. Bucci testified that DHP was created to
expand and monetize the subject intellectual property and assets of Parallax. (Id.
at 27:9-16.) Bucci signed for DHP as the buyer in the purchase agreement
between Parallax and DHP. (Vivoli Decl., Ex. 3.) Bucci testified that Withrow
is “supposed” to be active at DHP, but she doesn’t know what he and Paul do
generally for DHP. (Bucci Depo. at 65.) On the whole, this is not compelling
evidence of complete domination and control by the Parallax parties.
Melamed highlights that DHP's has
ownership which "mirrors" that of Parallax. (Bucci Depo., at
41:21-42:1.) Indeed, DHP’s shareholders mirror Parallax’s shareholders because,
as a part of the subject asset purchase agreement, all shareholders in Parallax
received shares in DHP. However, Melamed does not explain to what extent the
Parallax shareholders now own or control DHP. Parallax points out that exhibit
C to the Purchase Agreement shows 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. The exhibit also states that 50% of the shares in DHP are reserved
for the Initial Equity Financers and the founders. There is no information
regarding who such individuals are, such as Arena, Withrow or Bucci.
As to Parallax, Paul Arena was the
“longtime” CEO. (Vivoli Decl., ¶ 2.) Bucci apparently still has some
involvement in Parallax as an officer and board member. Arena also identified
Ted Withrow as someone with the power to negotiate asset purchase agreements
(e.g., his and Michael Redmond’s deal with Proeventa). (Arena Depo. at
15:12-14.) Melamed claims that Withrow has been the actual decisionmaker for
Parallax, but cites no substantive evidence supporting this contention. (See
Suppl. Vivoli Decl., ¶ 3 [counsel’s contention lacks foundation and personal
knowledge].)
In addition, there are several
individuals on the record exercising control over Parallax that go unexplained
and appear unrelated to DHP. For instance, Nathanial Bradley caused Parallax to
sell back to him a remote patient monitoring patent that Parallax had previously
acquired from Mr. Bradley's own company. (Bucci Depo., at 23:21- 26 24:12.)
There is no indication that he controls DHP (though he is likely a
shareholder). Bucci testified that other individuals were on the board of
Parallax during the pendency of this suit, complicating Melamed’s control
arguments. Bucci testified that after Paul Arena left (following the SEC
settlement) Bradley, Jorn Gorlach, John Ogden and herself were board members,
and it was “a bit contentious.” (Id. at 39.) Further, Sonia Choi and Bradley were
“in charge” of the company, including handling cash, bank accounts, payroll and
negotiations with lenders. (Id.) Bucci then testified that the shareholders
took back control from Choi and Bradley, which included majority shareholders
Ted Withrow, Paul Arena, and Bucci herself, as well as “investors across the
board.” (Id. at 40.) The shareholders removed Bradley and Gorlach, and added
David Stark. (Id. at 41.)
Considering the totality of the
record, there is insufficient evidence regarding the control of both Parallax
and DHP. Melamed highlights that Bucci testified that DHP is herself, Paul
Arena and Ted Withrow, and that those individuals were generally involved in
Parallax. However, JC does not present competent or substantial evidence that
these were the same people controlling “all aspects of this litigation from the
date it was filed in August of 2015” as counsel contends. (Supp. Vivoli Decl.,
¶ 3.) The above evidence does not strongly suggest that Parallax or DHP was
dominated and controlled by Bucci, Arena and Withrow.
In order to prevail, Melamed needs
to cite the Court to some admissible evidence that demonstrates that some
combination of these individuals were exercising control of Parallax. The
current record is muddled or insufficient to establish the requisite level of
control. At best, Melamed presents evidence showing a shared ownership between
the entities via an asset purchase agreement, and that the two entities share some
officers. The level of control and domination by such officers is not
established. Simply put, Melamed does not present evidence that DHP is entirely
controlled by the same people which controlled Parallax during this litigation.
Thus, the Court is not inclined to find that due process was met here so that
the Court can amend the judgment.
Unity
of Interest Factors
Melamed presents an incomplete
picture of DHP’s assets, which would be necessary for the Court come to any
conclusions about its unity of interest regrading the companies’ finances. Thus,
Melamed does not present any commingling of funds of the two entities. Neither
does Melamed present any disregard of corporate formalities. The two companies
have separate addresses, though both used post office boxes and virtual
mailboxes. (Bucci Depo., at 67.) They also use separate bank accounts.
Some factors do support unity of
interest. For instance, as discussed above, there is some evidence suggesting a
substantial overlap in equitable ownership of the two entities. Further, Melamed
establishes that the two entities have used the same offices. However, the
current record is weak on this point. It certainly does not support a finding
that they used “identical’ directors and officers.
Melamed’s strongest point is that
Parallax is inadequately capitalized. Arena made clear it held the only substantial
assets of Parallax, which was the intellectual property it later transferred to
DHP. (See Arena Depo. at 14-15.) Arena testified that Parallax doesn’t “have
any real property or liens on any real property. We don't hold any vehicle
titles. Nobody owes us any money that is collectable. We don't have any notes
outstanding of people to us.” Furthermore, Arena testified that there are no
assets available or held by Parallax that are available to answer the debt at this
time. Moreover, “the only thing that [Parallax has] are some interests on some
intellectual property.” The testimony goes on as follows:
Q:
Patents?
A:
Yeah. Patents and trademarks, but they're mostly held outside of the company,
we just have a license to them.
Q:
And are you referring to the Proeventa -- Proeventa patents?
A:
Yeah. Proeventa, Qualcomm, Acacia Biosciences.
Q:
And you're saying that those are held outside the company?
A:
Correct.
Q:
Meaning that Parallax has a right or a license in those patents, but they're
not owned by Parallax?
A:
Correct.
Q:
Was that done on purpose?
A:
That was done prior to my getting involved with the company, so I can't tell
you what the motivation was.
(Arena
Depo. at 14:2-15:5.) Bucci concurs that
Parallax does not “own any assets at all.” (Bucci Depo. at 55.)
On the one hand, the asset purchase
agreement itself could be considered as evidence that the officers and
shareholders of Parallax used DHP as a mere conduit for their own affairs. If
the promissory note truly is valueless because DHP has no intention of paying
it back by its maturity date, then the shareholders and directors of Parallax
unfairly saddled the debt to Parallax and avoided paying this judgment. On the
other hand, this argument is somewhat speculative. Of note, the promissory note is secured by
the IP itself. Melamed contends that the Court should find that the IP is
valueless, given Parallax’s inability to market the IP over the last decade –
yet through this motion, Melamed is seeking to take control over that same “valueless”
IP.
The issue is that Melamed does not
substantiate the contention that DHP’s promissory note to Parallax is akin to a
gift with no real value received. Melamed submits no evidence demonstrating
that DHP would 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 suspicion alone is not enough to impose alter ego
liability.
Accordingly,
the Court is not inclined to find that DHP is an alter ego or single-business-enterprise
with Parallax.
Inequitable
Result
As noted, there is a real risk of an
inequitable result in this matter. As discussed infra, Parallax is
undercapitalized and has no assets. This is due, in part, to the asset purchase
agreement with DHP. However, the Court notes
that even if DHP is not held as an alter ego, Plaintiff has other remedies.
Plaintiff is currently prosecuting a civil action against Parallax regrading
the allegedly fraudulent transfers that form the basis of this motion.
Receivership
In any event, without a finding of
an alter ego, the Court would not find that an inequitable result would occur,
or order a receivership regarding the IPs. Furthermore, as already noted, Melamed
also undermines her own argument regarding the value of the subject IPs. Melamed
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 Melamed seeks to transfer before the Court would be inclined
to order a receivership.
Accordingly, Melamed’s motion is DENIED.