Moofly Productions, LLC v. Sandra Favila, 2:13-cv-05866

Background

Moofly Productions, LLC sued Favila, the Corrales Estate, and others in California state court alleging intentional interference and unfair competition related to lenticular-image business communications with Moofly’s clients. Moofly removed the case to federal court after counterclaims were filed.
Counter-Claimants (Favila, the Corrales Estate, and Motion Graphix, Inc.) asserted that Get Flipped, Inc. (GFI) and Souther misappropriated Motion Graphix’s (MGI) lenticular software and intellectual property, and that a prior California judgment (Souther/Corrales Judgment) awarded MGI’s related software, trademarks, copyrights, and patents to the Corrales Estate.
GFI is a California corporation that is currently suspended under California law; all parties agreed GFI’s corporate status is suspended.
Counter-Claimants moved to strike GFI’s answer under Fed. R. Civ. P. 12(f) on the ground that a suspended California corporation cannot participate in litigation; they also moved for entry of default against GFI and sought sanctions in reply.
Counter-Defendants argued (1) that a constructive trust from the Souther/Corrales Judgment rendered GFI’s ownership ambiguous and (2) implicitly opposed striking GFI’s answer; they did not show steps taken to revive GFI.
The court concluded the Souther/Corrales Judgment did not transfer ownership of the GFI entity itself, distinguished corporate assets from corporate shares, struck GFI’s answer, entered default against GFI, and denied sanctions.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether a suspended California corporation (GFI) may litigate	GFI cannot defend because California law bars suspended corporations from prosecuting or defending actions	GFI’s ownership/status is ambiguous due to a constructive trust from the Souther/Corrales Judgment, so leniency/reinstatement should be allowed	Court: GFI’s suspended status precludes participation; strike answer granted
Whether the Souther/Corrales Judgment conferred ownership of GFI to Corrales Estate	N/A (Counter-Claimants rely on judgment to assert rights in assets)	Judgment imposed a constructive trust making GFI ownership contested	Court: Judgment did not vest ownership of GFI; constructive trust did not transfer the corporate entity
Whether default should be entered against GFI after answer is stricken	Entry of default is appropriate because GFI failed to defend after its answer was stricken	Implicit: default should not be entered until any reinstatement/ownership dispute resolved	Court: Default entered against GFI
Whether sanctions are warranted against Counter-Defendants/counsel	Sought in reply but not brought by separate motion or with specified grounds	Opposed; no clear basis shown by Counter-Claimants	Court: Denied sanctions for failure to meet Rule 11 or §1927 standards

Key Cases Cited

Whittlestone, Inc. v. Handi-Craft Co., 618 F.3d 970 (9th Cir. 2010) (purpose of Rule 12(f) is to avoid litigation over spurious issues)
Fantasy, Inc. v. Fogerty, 984 F.2d 1524 (9th Cir. 1993) (motions to strike are disfavored because they are a drastic remedy)
Crestmar Owners Ass’n v. Stapakis, 157 Cal. App. 4th 1223 (Cal. Ct. App. 2007) (a suspended corporation cannot prosecute or defend an action)
Timberline, Inc. v. Jaisignhani, 54 Cal. App. 4th 1361 (Cal. Ct. App. 1997) (courts may grant continuance to permit reinstatement when suspension comes to light during litigation)
Cadle Co. v. World Wide Hospitality Furniture, Inc., 144 Cal. App. 4th 504 (Cal. Ct. App. 2006) (suspension statutes aim to motivate compliance, not punish; leniency may be appropriate)
Schulte v. Boulevard Gardens Land Co., 164 Cal. 464 (Cal. 1913) (distinction between corporate assets/capital and shares/ownership interests)
New Alaska Dev. Corp. v. Guetschow, 869 F.2d 1298 (9th Cir. 1989) (§1927 sanctions require subjective bad faith)