Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-01852/USCOURTS-casd-3_15-cv-01852-6/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

LEADING MANUFACTURING 

SOLUTIONS, LP,

Plaintiff,

v.

HITCO, LTD., et al.,

Defendants.

Case No.: 15cv1852-LAB (BGS)

ORDER DENYING MOTION TO 

AMEND JUDGMENT; AND

ORDER LIFTING STAY

[DOCKET NUMBER 185.]

At trial, the Court found for Plaintiff Leading Manufacturing Solutions LP 

(“LMS”) and against Defendants jointly and severally, and awarded damages. 

Defendants said they intended to file a motion to make additional findings. They 

have filed that motion, seeking relief from the judgment under Fed. R. Civ. P. 52(b) 

and 59(a)(2) and (e). (Docket no. 185.)

A motion under Rule 52 or 59 is intended to correct manifest errors, or to 

consider newly discovered evidence or new law. Ollier v. Sweetwater Union High 

Sch. Dist., 858 F. Supp. 2d 1093, 1117 (S.D. Cal., 2012), aff’d 768 F.3d 843 (9th

Cir. 2014). A Rule 52 motion is “not intended to serve as a vehicle for a rehearing.” 

Crane-McNab v. Cnty. of Merced, 773 F. Supp. 2d 861, 873 (E.D. Cal., 2011). A 

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Rule 59 motion, similarly, is an extraordinary remedy, to be used sparingly. Kona 

Enters., Inc. v. Estate of Bishop, 229 F.3d 877, 890 (9th Cir. 2000). Although the 

Court recognizes that it has discretion to reconsider its own orders at any time 

before final judgment is entered, see Fed. R. Civ. P. 54(b), reconsideration on a 

party’s motion is appropriate only in limited circumstances such as where the Court 

committed clear error. See Smith v. Clark Cnty. Sch. Dist., 727 F.3d 950, 955 (9th

Cir. 2013).

Defendants’ Arguments

Defendants contend that the Court manifestly misunderstood New York’s 

alter ego law. They argue that the claims were based on a “simple breach of 

contract,” (Mot. at 2:16–18) and that the Court pierced the corporate veil merely to 

make sure that Leading Manufacturing Solutions (“LMS”) could collect on the 

judgment. Continuing their argument that the claims were based on a simple 

breach of contract and nothing more, they argue that the Court could only pierce 

the corporate veil if it found that Smith’s domination of Hitco, Ltd. caused the 

contract breach. Finally, they argue that, however the first two issues are decided, 

Smith’s liability is limited to the amount he siphoned off from the corporations.

Defendants’ arguments are based primarily on a misreading of the Court’s 

findings, and secondarily on a misunderstanding of New York law. 

The Court’s Findings

At the close of trial, the Court announced its findings and verdict from the 

bench, and then issued a written order summarizing, memorializing, and 

supplementing them. (See Docket no. 177 (written findings) (“Findings”) at 1:18–

23.)

The Findings make clear the Court did not pierce the corporate veil merely 

to make sure LMS could collect the money it was owed: 

If LMS’s only recourse is against Hitco, Ltd., Hitco, Ltd.’s debt will 

go unpaid.

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These facts, standing alone do not establish alter ego. 

Businessmen and businesswomen are permitted to incorporate in 

order to escape personal liability. Walkovszky v. Carlton, 18 N.Y.2d 

414, 417 (N.Y. App. 1966). And the mere fact that a plaintiff will 

otherwise remain unpaid does not constitute the kind of injustice that 

warrants a finding of alter ego. William Passalacqua Builders, Inc. v. 

Resnick Developers South, Inc., 933 F.2d 131, 139 (2d Cir. 1991).

(Findings at 5:18–6:8.) The Court also discussed at length both the conditions for 

a finding of alter ego, and factors New York courts consider when determining 

whether the corporate veil should be pierced. (Id., 6:9–7:9.) 

Defendants’ second argument, that the corporate veil could be pierced only 

if the factors leading to a finding of alter ego (e.g., Smith’s domination of Hitco, 

Ltd.) caused the contract breach, is too narrow to be a correct statement of the 

law. They argue that the Court’s decision ignored the New York Court of Appeals’ 

decision in See Morris v. N.Y. State Dep’t of Taxation & Finance, 82 N.Y.2d 135, 

(1993), and suggest that the Court relied on the Second Circuit’s mistaken preMorris standard. But the Court’s decision relies on numerous cases that interpret 

and apply Morris and its progeny, and the only two pre-Morris cases the Findings 

mention (Walkovszky and William Passalacqua) are cited for other issues that 

Morris did not change.

“Broadly speaking, the courts will disregard the corporate form, or, to use 

accepted terminology, ‘pierce the corporate veil’, whenever necessary ‘to prevent 

fraud or to achieve equity’ ” Morris, 82 N.Y.2d at 140. Generally, all that is required 

is that a defendant dominated the entity, and that domination was used to commit 

a fraud or wrong against the plaintiff. Id. at 140–41. The fraud or wrong does not 

need to be a breach of contract (although, as discussed below, Smith’s domination 

of Hitco, Ltd. led to the breach). And the obligation that would go unpaid unless the 

veil is pierced need not have arisen fraudulently or wrongfully; ordinary business 

obligations will do. See Serio v. Arda Ins. Co., 761 N.Y.S.2d 1, 2 (N.Y. Supreme 

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Ct. 2003) (reinsurer’s corporate veil pierced after shareholder diverted assets to 

another entity he owned, thus “depriv[ing the reinsurer] of the funds needed to 

meet its reinsurance obligations”); Baby Phat Holding Co., LLC v. Kellwood Co., 

997 N.Y.S.2d 67, 70 (N.Y. Supreme Ct. 2014) (explaining that, while fraud would 

satisfy the wrongdoing requirement, “other claims of inequity or malfeasance will 

also suffice”).

For example, it is enough if a defendant used his dominant position to divert

or siphon off corporate assets, leaving creditors unable to collect on obligations, or 

making the entity judgment proof. See Grigsby v. Francabandiero, 58 N.Y.S.3d 

835, 837 (N.Y. Supreme Ct. 2017) (taking “actions calculated to make [an entity] 

judgment-proof by undercapitalizing [it], and dissolving and thereafter diverting the 

assets . . . to a new entity” justified piercing the veil); Baby Phat, 997 N.Y.S.2d at

70 (“Allegations that corporate funds were purposefully diverted to make it 

judgment proof . . . are sufficient to satisfy the pleading requirement of wrongdoing 

which is necessary to pierce the corporate veil on an alter-ego theory . . . .”)

Defendants argue that this principle is limited to situations where the 

judgment was entered before the defendant siphoned off corporate assets, but 

this is unconvincing. New York’s courts appear to make no such distinction, but 

apply the alter ego doctrine even where obligations have not been reduced to 

judgment. For example, Cortlandt Street Recovery Corp. v. Bonderman, 31 N.Y.3d 

30, 50 (2018) dealt with allegations that defendants had created corporations 

which issued notes of indebtedness. Defendants allegedly then distributed the loan 

proceeds to themselves, leaving the corporations unable to pay noteholders. The 

intended future result, the court noted, was that the corporations “would be 

rendered insolvent and unable to pay” the creditors. There, the obligation to pay 

was still in the future at the time the fraud was completed. Other cases also 

recognize future or contingent liabilities as potentially warranting application of the 

doctrine. See, e.g., Grammas v. Lockwood Assocs., LLC, 944 N.Y.S.2d 623, 630 

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(N.Y. Supreme Ct., 2012); Baby Phat, 997 N.Y.S.2d at 70; Serio, 761 N.Y.S.2d at 

2.

The Court found that Smith’s domination of the corporations permitted him 

to do just this. He diverted the corporations’ assets to his own use, having them 

pay his own personal expenses and apparently taking advantage for tax purposes 

of their ongoing losses. Without Smith’s regular cash infusions, the corporations 

would not have remained afloat. He readily made these contributions when he 

believed it would benefit him, but withheld them when he believed it would not. 

(See Findings at 15:25–16:2.) He also treated himself as a favored creditor, 

making sure that the corporations paid debts they owed to him, while leaving other 

creditors (specifically, LMS) out in the cold. For example, during the course of 

litigation, he caused Hitco, Ltd. to issue him promissory notes and then to pay 

those notes by transferring the corporations’ only substantial assets to himself. 

(See id. at 5:13–18; 9:10–15; 11:17–12:19.) He did this, apparently, on his own 

initiative, without having the assets properly valued, without observing corporate 

formalities, and in such a way that favored him at the corporations’ expense.

But even if Defendants were correct that Smith’s domination of the 

corporations had to lead to breach of the contract, that happened here. The Court 

found that Smith made decisions, including those leading up to breach of the 

contract, on the basis of what would serve his own interests, rather than the 

corporations’ best interests. (Findings at 12:20–13:3.)

For the first time, Defendants argue that, if some of LMS’s injury is not 

attributable to Smith’s domination of the corporations, it should be apportioned. 

For example, if Smith’s domination caused only a part of LMS’s damages and 

resulted in only a part of the judgment being uncollectible, they contend, he is only 

liable for that portion. This issue was not tried (see Final Pretrial Order, Docket no. 

169, at 2:11—6:14), and while financial evidence in general was presented, no 

evidence on this point was presented. This issue was waived, and is not properly 

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raised in a Rule 52 motion. See Rockwell Int’l Corp. v. United States, 549 U.S. 

457, 474 (2007) (citation omitted) (noting that claims, issues, defenses, and 

theories of damages not included in the pretrial order are waived); Crane-McNab, 

773 F. Supp. 2d at 877 (holding that a Rule 52(b) motion may not be used to raise 

arguments for the first time that could reasonably have been raised earlier in the 

litigation).

But even if Defendants had not waived this issue, they would not prevail. 

Smith diverted corporate assets over the course of years and dominated the two 

entities at all relevant times. His domination of Hitco, Ltd. also led directly to the 

breach. (See Findings at 15:27–16:2.) Because his domination of the corporations 

caused LMS’s damages, apportionment under the partial-causation theory 

Defendants now raise is inappropriate.

Defendants’ motion to make additional findings and amend the judgment 

(Docket no. 185) is DENIED.

Stay of Judgment

During the pendency of Defendants’ Rule 52(b) motion, the Court stayed 

judgment, contingent on their posting an acceptable bond. 

Plaintiff has filed an ex parte motion to register judgment, citing 28 U.S.C. 

§ 1963. It seeks the Court’s leave to register judgment in this case in the Eastern 

District of New York and the Southern District of Florida. In their opposition, 

Defendants conceded that they deliberately failed to post a bond as ordered. (See

Docket nos. 199 (order); and 201 at 2:27–3:2.) Their reasoning, which is rather 

difficult to follow, appears to rest on the mistaken view that they were ordered to 

obtain a bond that would pay the full judgment regardless of the outcome of the 

case. (See Docket no. 201 at 2:24–27 (“[T]he Court, in crafting its bond 

requirements, decided that even if Mr. Smith is found not liable for the Judgment 

on the theory of alter-ego . . . he nonetheless will be ‘on the hook’ to pay Plaintiff.”) 

This is a misreading of the Court’s order. 

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The purpose of a supersedeas bond under Fed. R. Civ. P. 62(b) is to secure 

an appellee from the “risk of a later uncollectible judgment and compensates him 

for delay in the entry of the final judgment” that may result from the stay. NLRB v. 

Westphal, 859 F.2d 818, 819 (9th Cir. 1988). A bond that might or might not protect 

LMS’s judgment would not fulfill this purpose. The Court did not dictate what the 

bond had to say, only that it had to guarantee that LMS would be paid whatever it 

ultimately recovered. Otherwise, the Court would not stay the judgment. See Am. 

Mfrs. Mut. Ins. Co. v. Am. Broadcasting-Paramount Theatres, Inc., 87 S. Ct. 1, 3 

(1966) (Harlan, J.) (appellant’s right to a stay pending appeal is contingent on 

posting a bond); Hardesty v. Sacramento Metropolitan Air Quality Mgt. Dist., 2019 

WL 2715616 (E.D. Cal., June 28, 2019) (noting that stays of judgment unsecured 

by supersedeas bonds are reserved for unusual circumstances). 

The problem with the bond Defendants selected and posted is that it would 

cover the judgment only in the event that Plaintiff prevailed completely on all issues

and against all three Defendants; even a small modification in the Court’s 

judgment, or a change that did not affect the amount of the award would relieve 

the bond’s issuer of any obligation to pay. Defendants are within their rights not to 

post a bond that satisfies Rule 62(b)’s purposes, but having made this election 

they are also not entitled to a stay. The stay is ORDERED LIFTED, and LMS may 

seek to enforce the judgment. 

The existing injunction, requiring Smith to hold the patents and not transfer 

or encumber them, remains in place until Defendants pay the entire judgment, or 

until Smith is released from his obligation by this Court or another court. (See

Findings at 18:7–9.)

/ / /

/ / /

/ / /

/ / /

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This order does not prevent a court from ordering Smith to sell, transfer, or 

encumber the patents in order to enforce the judgment in this case.

IT IS SO ORDERED.

Dated: August 9, 2019

Hon. Larry Alan Burns

Chief United States District Judge

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