Court Opinion

ID: 210262
Source: CourtListenerOpinion
Date Created: 2011-03-13 08:05:28+00
Date Added: 2024-06-11T17:28:00.491479
License: Public Domain

NOTE: This disposition is nonprecedential.

  United States Court of Appeals for the Federal Circuit

                                         2007-1162

                                SYSTEMS DIVISION, INC.,

                                                        Plaintiff-Appellee,

                                              v.

                    TEKNEK ELECTRONICS, LTD. and TEKNEK, LLC,

                                                        Defendants,

                                             and

                        SHEILA HAMILTON, JONATHAN KENNETT,
                             and TEKNEK HOLDINGS, LTD.,

                                                        Defendants-Appellants.

       Edward F. O’Connor, O’Connor Christensen & McLaughlin, LLP, of Irvine,
California, argued for plaintiff-appellee.

      Harvey R. Friedman, Greenberg Glusker Fields Claman & Machtinger LLP, of Los
Angeles, California, argued for defendants-appellants. Of counsel was Richard E. Neff.

Appealed from: United States District Court for the Central District of California

Judge David O. Carter
                         NOTE: This disposition is nonprecedential.

 United States Court of Appeals for the Federal Circuit

                                     2007-1162

                             SYSTEMS DIVISION, INC.,

                                                           Plaintiff-Appellee,

                                          v.

                 TEKNEK ELECTRONICS, LTD. and TEKNEK, LLC,

                                                           Defendants,

                                         and

                     SHEILA HAMILTON, JONATHAN KENNET,

                           and TEKNEK HOLDINGS, LTD.,

                                                           Defendants-Appellants.

                         ____________________________

                          DECIDED: October 26, 2007
                         ____________________________

Before MICHEL, Chief Judge, NEWMAN and MOORE, Circuit Judges.

MOORE, Circuit Judge.

      Sheila Hamilton, Jonathan Kennett, and Teknek Holdings, Ltd. (collectively,

Joined Defendants) appeal from a January 3, 2007 order granting Systems Division,

Inc.’s (SDI) motions to add them as parties to the 2004 verdict and judgment of

infringement entered for SDI against Teknek Electronics, Ltd. and Teknek LLC

(collectively, Original Defendants). SDI sought to add Kennett, Hamilton, and Teknek

Holdings to the infringement judgment on the theory that they fraudulently transferred

assets from the Original Defendants to themselves, thereby bankrupting or rendering

the Original Defendants insolvent, to prevent SDI’s collection of its $3.7 million
judgment. The district court granted the joinder, finding the Joined Defendants were the

alter egos of the Original Defendants. The court also determined that Teknek Holdings

could be joined as a successor-in-interest to the Original Defendants.      Finally, the

district court denied the Joined Defendants’ request to dismiss under the theory of

forum non conveniens in favor of Scotland. We affirm the district court judgment on

alter ego grounds and find that it did not abuse its discretion in refusing to apply the

doctrine of forum non conveniens.

                                       BACKGROUND

      SDI sued the Original Defendants 1 for infringement of three patents covering

“clean machines” in February 2000 in the United States District Court for the Central

District of California. Two months after SDI filed its infringement suit, Kennett and

Hamilton created a new entity, Teknek Holdings, in Scotland. 2

      While the infringement litigation between SDI and the Original Defendants was

moving forward, Kennett and Hamilton were moving assets from those entities to

Teknek Holdings, which was not a party to the ongoing infringement suit. After Teknek

Holdings’ creation, Teknek Electronics became a wholly-owned subsidiary of Teknek

Holdings and paid “dividends” and transferred assets to its parent company.        One

dividend payment of approximately £3.5 million occurred in 2003, shortly after a

summary judgment granted for the defendants was reversed in favor of the plaintiffs.
      1
             Teknek Electronics is a Scottish company. Prior to becoming a wholly
owned subsidiary of Teknek Holdings, Teknek Electronics was solely owned by Kennett
and Hamilton. Kennett owned 85% and Hamilton owned 15% of Teknek Electronics.
Teknek LLC is an Illinois company formed to sell products of Teknek Electronics in the
United States. Similarly, Kennett owns 85% and Hamilton owns 15% of Teknek LLC.
       2
             As with Teknek Electronics and Teknek LLC, Kennett and Hamilton are
the sole owners and directors of Teknek Holdings. Kennett owns 85% and Hamilton
owns 15% of Teknek Holdings. There are no presidents or vice presidents, nor is there
evidence of other corporate officers.

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Also, Teknek Electronics transferred all of its manufacturing equipment to Teknek

Holdings. Teknek Electronics additionally transferred its building to Teknek Holdings in

May 2003, effective December 2003. A second dividend payment of approximately

£1.5 million then occurred in 2004, shortly before the jury verdict. There is no indication

that Teknek Electronics received any compensation in return for the assets it transferred

to Teknek Holdings.

       At the same time, Kennett and Hamilton were also moving assets from Teknek

LLC to Teknek Holdings while the infringement suit was proceeding in California.

Teknek LLC did not become a subsidiary of Teknek Holdings, but in 2004, it “sold” all of

its assets to Teknek Holdings, including the Teknek trademark. There is no evidence to

suggest that Teknek LLC received any compensation for the assets that it transferred to

Teknek Holdings.

       In July 2004, a jury returned a verdict in favor of SDI, and found that the Original

Defendants willfully infringed.    SDI was awarded $3.7 million in damages and

prejudgment interest. On May 26, 2005, Teknek Electronics filed an insolvency petition

in the United Kingdom as it was drastically undercapitalized with current assets of

£5,365. On July 12, 2005, Teknek LLC filed a Chapter 7 bankruptcy petition, disclosing

$73.22 in total assets and total liabilities of approximately $3.8 million. Over 99% of

Teknek LLC’s liabilities belong to SDI as a $3.7 million judgment creditor.

       After realizing that almost all of the assets of the Original Defendants had been

moved to Teknek Holdings over the course of the infringement litigation and that the

Original Defendants now had no assets to satisfy the judgment, SDI filed two motions to

add Teknek Holdings, and Kennett and Hamilton in their individual capacity, to the

2007-1162                                   3
infringement judgment.    The district court granted SDI’s motions to add the Joined

Defendants to the November 2004 judgment.

                                           ANALYSIS

                                     I. Alter Ego Theory

      Although the Joined Defendants were not parties to the underlying infringement

litigation, they can be attached as parties to the judgment after the fact under California

law. Federal Rule of Civil Procedure 69(a) permits judgment creditors in California

federal courts to use enforcement methods consistent with California state practice and

procedures. California Code of Civil Procedure § 187 allows amendment of the patent

infringement judgment to add a non-party judgment debtor if SDI proves that (1) the

joined defendants are the alter egos of Teknek LLC and/or Teknek Electronics, and (2)

the joined defendants controlled the underlying infringement “litigation, thereby having

an opportunity to litigate in order to satisfy due process concerns.” In re Levander, 80

F.3d 1114, 1121 (9th Cir. 1999); Katzir’s Floor & Home Design v. M-MLS.com, 394 F.3d

1143, 1146-47 (9th Cir. 2004).       Section 187 is premised on the notion that the

amendment adding additional parties to a judgment after the fact is “for the purpose of

inserting the correct name of the real defendant, such that adding a party to a judgment

after the fact does not present due process concerns.” Katzir’s, 394 F.3d at 1148

(internal citation omitted); NEC Elecs., Inc. v. Porter Hunt, 208 Cal. App. 3d 772, 778

(1989) (“This is an equitable procedure based on the theory that the court is not

amending the judgment to add a new defendant but is merely inserting the correct name

of the real defendant.”). Under Ninth Circuit law, we review for clear error the district

court’s determination that a party is properly added to a previous judgment.          See

Katzir’s, 394 F.3d at 1148.

2007-1162                                   4
       Alter ego is a doctrinal basis for disregarding the corporate entity and is invoked

where recognition of the corporate form would work an injustice to a third party. Id. at

1149. There are two general requirements for disregarding the corporate entity: there

must be “such unity of interest and ownership that the separate personalities of the

corporation and the individual no longer exist,” and it must be demonstrated that “if the

acts are treated as those of the corporation alone, an inequitable result will follow.”

Automotriz De California v. Resnick, 47 Cal. 2d 792, 796 (1957) (cited in NEC, 208 Cal.

App. 3d at 777). It is also appropriate where fraud or other exceptional circumstances

merit piercing the corporate veil. Dole Foods Co. v. Patrickson, 538 U.S. 468, 475

(2003).

       Even though a party would not normally be subject to personal jurisdiction in a

particular forum, courts may exercise personal jurisdiction over an individual or

corporation that is an alter ego or successor of a corporation that would be subject to

personal jurisdiction in that court. See, e.g., Flynt Distrib. Co. v. Harvey, 734 F.2d 1389,

1393 (9th Cir. 1984) (finding a prima facie case of alter ego-based jurisdiction over

individuals who were alter egos of the contract signatories and of the corporations and

partnerships). The question we are presented with in this case is whether the district

court clearly erred in joining Teknek Holdings, Kennet, and Hamilton as alter egos of

Teknek LLC and Teknek Electronics under § 187.

       The district court found that Kennett and Hamilton fraudulently transferred the

Original Defendants’ assets to Teknek Holdings, resulting in the Original Defendants’

bankruptcy and insolvency, and preventing SDI’s recovery of the $3.7 million

infringement judgment. Specifically, the district court found that under California Civil

2007-1162                                    5
Code § 3439.04(a) and (b), the series of asset transfers from Teknek LLC and Teknek

Electronics to Teknek Holdings were carried out with the clear intent to defraud SDI.

      The district court considered the evidence regarding the timing of the transfers,

Kennett and Hamilton’s control of all three companies and ownership interests in the

same percentages (Kennett at 85%, Hamilton at 15%), and their personal actions in

effecting the transfers.   The asset transfers orchestrated by Kennett and Hamilton

started after the infringement suit was filed and continued throughout the trial that

resulted in the $3.7 million judgment against the Original Defendants. This systematic

transfer of virtually off of the assets from Teknek Electronics (where Kennett and

Hamilton acted as the only officers and directors) and from Teknek LLC (where Kennett

and Hamilton acted as the president and vice president) to the newly-created Teknek

Holdings (where Kennett and Hamilton were the only owners and directors) left the

Original Defendants undercapitalized and insolvent with a year, depriving SDI of its

ability to collect its $3.7 million judgment. The district court found no evidence that

either of the Original Defendants received anything in return for the asset transfers or

that there was any consideration from Teknek Holdings. It noted that although there is

no evidence of commingling of funds or shared bank accounts, there is ample evidence

that Kennett and Hamilton fraudulently transferred assets from the Original Defendants

to Teknek Holdings. Given such unity of interest and ownership, the district court found

that the separate personalities of Teknek LLC and Teknek Electronics on the one hand

and Teknek Holdings and Kennett and Hamilton on the other hand no longer exist.

Further, it found that these transfers were made with the actual intent to defraud SDI as

its creditor under California Civil Code § 3439.04, and the observance of the fiction of

2007-1162                                   6
separate existence despite these fraudulent transfers would, under the circumstances,

sanction a fraud or promote injustice.

       The Joined Defendants point to the lack of evidence of commingled funds or

shared accounts to support their assertions on appeal that they are not alter egos of the

Original Defendants. However, the factors relevant to whether there is unity of and

identity of interest include inadequate capitalization and whether there are shared

employees. Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal. App. 2d 825, 837

(1962). “There is no required magic number of factors that must be met in order for

alter ego liability to be imposed.” Fru-Con Constr. Corp. v. Sacramento Mun. Util. Dist.,

No. S-05-583, 2007 WL 2384841, *8 (9th Cir. Aug. 17, 2007).                But the Joined

Defendants do not dispute the district court’s findings with respect to the effect of the

asset transfers on the undercapitalization of the Original Defendants.        Nor do they

dispute the identity of ownership and control that Kennett and Hamilton exercised over

both the Original Defendants and Teknek Holdings. The Joined Defendants have not

demonstrated that the district court clearly erred in finding that they are the alter ego of

the Original Defendants.

       The district court also found that the Joined Defendants had a sufficient

opportunity to litigate in order to satisfy due process concerns. The Joined Defendants

assert that if they had been sued in the original proceeding, “the case would have been

defended differently, and the jury may have hesitated to award damages against

individuals as opposed to faceless corporations.” While Kennett and Hamilton did not

participate in the litigation in their personal capacity, they were the sole stockholders,

directors, and officers of the Original Defendants. It is difficult to imagine who else

2007-1162                                    7
could have controlled the underlying litigation, and Kennett and Hamilton do not provide

any evidence otherwise.

      Additionally, the Joined Defendants fail to indicate how their interests were not

adequately or effectively represented in the underlying litigation, which is the ultimate

question when determining whether due process prohibits application of an existing

judgment to parties that did not officially participate in the underlying liability

determination. See Dow Jones Co. v. Avenel, 151 Cal. App. 3d 144, 150 (1984) (“While

appellants, themselves, technically were not given the opportunity to convince the trial

court that material issues of fact did exist because they were not then named parties,

they were able to do so through the vehicle of [named parties].”); Jack Farenbaugh &

Son v. Belmont Constr., Inc., 194 Cal. App. 3d 1023, 1031 (1987) (emphasizing that

newly added judgment debtor “was not a passive participant by any manner of means in

the original trial” and thus “satisfie[d] the elements of fair trial as required by due

process”). The Joined Defendants do not assert with much particularity any defect in

the Original Defendants’ infringement defense efforts.      Here, the corporate entities

Teknek Electronics and Teknek LLC fully defended their corporate interests and

owners’ interests throughout the underlying suit.

      This case is readily distinguishable from Nelson v. Adams USA, Inc., 529 U.S.

460 (2000). In Nelson, the Supreme Court held that adding a third party officer or

owner as a defendant to a judgment against his corporation, without the benefit of

answering the complaint against him personally or litigating his own defenses, is a

violation of that person's due process rights.      Id. at 465-68.   However, the Court

emphasized that a key predicate of its holding was that the third party in that case,

2007-1162                                   8
Nelson, was a distinct legal entity from the named defendant, Ohio Cellular Products

Corporation ("OCP"):

               The Federal Circuit did not conclude that these factors would
               have justified imposing liability on Nelson by piercing the
               corporate veil, and [plaintiff], for its part, has disavowed
               reliance on a veil-piercing theory. . . . One-person
               corporations are authorized by law and should not lightly be
               labeled sham.

Id. at 470-71.     There, while OCP's due process rights were respected, Nelson's

individual and separate due process rights were not. This is fundamentally different

from the instant case where—based on extensive factual findings of fraud and other

factors beyond simply unity of ownership or participation in, and control of, the

litigation—the corporate veil was pierced, and the Joined Defendants were held to be

alter egos of the Original Defendants. Their due process rights are thus identical to

those of the Original Defendants. The Supreme Court in Nelson recognized this precise

distinction.

       The exercise of jurisdiction over an alter ego is compatible with due process

because a corporation and its alter ego are the same entity—thus, the jurisdictional

contacts of one are the jurisdictional contacts of the other for purposes of the

International Shoe due process analysis. Patin v. Thoroughbred Power Boats, Inc., 294

F.3d 640, 653 & n.18 (5th Cir. 2002) (noting that “federal courts have consistently

acknowledged that it is compatible with due process for a court to exercise personal

jurisdiction over an individual or a corporation that would not ordinarily be subject to

personal jurisdiction in that court when the individual or corporation is an alter ego or

successor of a corporation that would be subject to personal jurisdiction in that court”);

see also Howard v. Everex Sys., Inc., 228 F.3d 1057, 1069 n.17 (9th Cir. 2000)

2007-1162                                   9
(“Although jurisdiction over a subsidiary does not automatically provide jurisdiction over

a parent . . . where the parent totally controls the actions of the subsidiary so that the

subsidiary is the mere alter ego of the parent, jurisdiction is appropriate over the parent

as well.”); Minnesota Mining & Mfg. Co. v. Eco Chem Inc., 757 F.2d 1256, 1265 (Fed.

Cir. 1985) (finding that the exercise of personal jurisdiction over a successor corporation

with no ties to the forum state was appropriate when the successor corporation was a

“mere continuation” of the predecessor corporation and exercise of personal jurisdiction

would have been appropriate over the predecessor). The district court did not clearly

err in determining that the Joined Defendants’ procedural due process interests were

satisfied in this case.

                               II. Forum Non Conveniens

       The Joined Defendants argue in the alternative that, even if they are subject to

personal jurisdiction in California, the district court should have declined to add them to

the Original Defendants’ judgment on the basis of forum non conveniens.

       A party seeking to dismiss based on forum non conveniens bears the burden of

showing that there is an adequate alternative forum, and that the balance of private and

public interest factors favor dismissal. Dole, 303 F.3d at 1118. Under Ninth Circuit law,

we review the district court’s decision whether to apply the doctrine of forum non

conveniens for abuse of discretion. See Harris Rutsky & Co. Ins. Servs., Inc. v. Bell &

Clements Ltd., 328 F.3d 1122, 1136 (9th Cir. 2003). Given the procedural posture of

this case and this court’s determination that the Joined Defendants were properly added

to the verdict and judgment, we find that the district court did not abuse its discretion.

       None of the Joined Defendants’ arguments support the idea that it would be in

anyone’s private or public interest to jettison the untold hours of work already invested

2007-1162                                    10
in this case in California on the basis that the Original Defendants rendered themselves

judgment proof by transferring the majority of their assets in the United States to the

Joined Defendants in Scotland. Private interest factors, such as witness convenience

and access to evidence, are not relevant at this point because trial proceedings have

already concluded and judgment has already been entered. Public interest factors also

favor California as a forum for enforcing the district court’s judgment against the Joined

Defendants. A United States district court has great interest in applying its own law to

enforce its prior judgments, especially when assets are fraudulently transferred

overseas to avoid those judgments. Accordingly, the district court’s decision is affirmed.

2007-1162                                  11