2:13-cv-05866

C.D. Cal.

Nov 25, 2013

Moofly Productions, LLC, Plaintiff, v. Sandra Favila, an individual; Estate of Richard C. Corrales; and Does 1 through 10, inclusive, Defendants.

CV 13-5866 RSWL (PJWx)

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

November 25, 2013

Order re: Counter-Claimants’ Motion to Strike Answer Filed on Behalf of Counter-Defendant Get Flipped, Inc. [18]

Before the Court is Defendants and Counter-Claimants’ Sandra Favila (“Favila”), Estate of Richard C. Corrales (“Corrales Estate”) (collectively “Defendants”), and Motion Graphix, Inc.’s (“MGI”) (collectively “Counter-Claimants”) Motion to Strike Answer Filed on Behalf of Counter-Defendant Get Flipped, Inc. [18]. Counter-Defendants Raleigh William Souther (“Souther”), Helena Pasquarella (“Pasquarella”), and Moofly Productions, LLC (“Moofly”) (collectively, the “responding Counter-Defendants”) filed an Opposition on October 29, 2013 [21]. This matter was taken under submission on November 14, 2013 [28]. Having reviewed all papers submitted pertaining to the Motion, and having considered all arguments presented to the Court, the Court NOW FINDS AND RULES AS FOLLOWS:

Counter-Claimants’ Motion to Strike is hereby GRANTED.

I. Background

Plaintiff and Counter-Defendant Moofly is a California LLC. First Amended Compl. (“FAC”) ¶ 1. Counter-Defendants Souther and Pasquarella are the trustees and settlors of Counter-Defendant Kiss of Light Trust (“KOL”). First Amended Cross-Compl. (“FACC”) at ¶ 4-5. Counter-Defendant Get Flipped, Inc. (“GFI”) is a California corporation. Id. ¶ 7.

Plaintiff Moofly is in the business of selling products and services related to lenticular images - three dimensional images. FAC ¶ 10. Moofly alleges that on October 11, 2012 Defendants Favila and Corrales Estate sent a letter to Ayala High School, Moofly’s client, making false and unsubstantiated statements that, inter alia, Moofly was infringing Defendants’ intellectual property and that those who transacted with Moofly were liable to Defendants. Id. at ¶ 11. Moofly further alleges that Defendants have wrongfully contacted Moofly’s clients, prospective clients, and employees in an effort to divert profits and business away from Moofly and to Defendants. Id. at ¶ 13.

Based on this, Plaintiff Moofly brought the current Action in California Superior Court against Defendants for: (1) Intentional Interference with Prospective Economic Advantage; (2) Intentional Interference with Present Contractual Relations; (3) Unfair Competition under Cal. Bus. & Prof. Code § 17200 et seq.; and (4) Unfair Competition under Cal. Bus & Prof. Code § 17000 et seq. Id. at ¶¶ 17-55.

Cross-Complainants, in turn, claim that Richard C. Corrales (“Corrales”) was a Pulitzer Prize winning photographer for the Los Angeles Times who invented lenticular software, which merges two or more photographs into one to allow viewers to see different photographs depending on the angle of observation. FACC ¶¶ 12-13. Cross-Complainants allege that Souther worked with Corrales at the Los Angeles Times as a photo editor and that they founded MGI together, Corrales as the 51% majority shareholder and Souther as the 49% minority shareholder. Id. at ¶ 14. Between August 10, 2001 and September 7, 2003, Corrales, Souther, and MGI obtained various patents, copyrights, and trademarks relating to lenticular software. Id. at ¶¶ 15-20. MGI either obtained the rights directly or was assigned the rights by Corrales. Id. From 2000 to 2007, MGI used these rights in its business. Id. at ¶ 21.

In January 2005, Corrales and Souther had disagreements over their respective roles in the company. Id. at ¶ 22. Counter-Claimants allege that in June 2005, Souther began doing business exploiting MGI’s copyrights and trademarks under the name “Get Flipped,” even though MGI owned the trademark for “Get Flipped.” Id. at ¶ 23. Souther also registered a copyright for a website entitled “Get Flipped!.” Id. at ¶ 24. Corrales died in 2005 and his sister, Favila, was appointed the executrix of his estate. Id. at ¶ 25. In February 2006, Souther decided to dissolve MGI and to transfer its assets to his new company, Get Flipped, Inc. Id. at ¶ 26. In March, 2006, Souther and Pasquarella founded Get Flipped, Inc. and, later that year, caused Get Flipped, Inc. to file registrations for two trademarks already held by MGI: “Flip Zone” and “Get Flipped.” Id. at ¶¶ 29-31. In 2006, Souther caused MGI to abandon its patent applications with the USPTO. Id. at ¶ 28. In February 2007, Souther purported to have MGI sell all of its assets, including MGI’s intellectual property, to Get Flipped, Inc. for no consideration and without the consent of its majority shareholder. Id. at ¶ 32. In March 2007, Souther caused Get Flipped, Inc. to register the assignment of MGI’s various copyrights and trademarks in Get Flipped, Inc.’s name. Id. at ¶ 33. Souther then purported to dissolve MGI. Id. at ¶ 34.

On October 30, 2007, the Corrales Estate brought a lawsuit in California state court, case number BC379462, against Souther and Get Flipped, Inc., which resulted in a judgment for the Corrales Estate against Souther and Get Flipped, Inc. (the “Souther/Corrales Judgment”). Id. at ¶¶ 37-38. The Souther/Corrales Judgment included, among other things, an award of all software code, trademarks, copyrights, and patents related to the software from Souther and Get Flipped, Inc. to the Corrales Estate. Id. at ¶ 40. Counter-Claimants further allege that to date, neither Souther nor Get Flipped, Inc. has complied with any of the judgment terms and Souther has explicitly stated his intent to not cooperate with the terms of the judgment. Id. at ¶¶ 42-44. Instead, Souther and Pasquarella established a new website and began doing business under the name “3DCheeze” through their newly formed entity, Plaintiff Moofly. Id. at ¶¶ 45-50. Counter-Claimants allege that to date, Souther and Pasquarella have continued to use MGI’s intellectual property even though those properties belong to the Corrales Estate. Id. at ¶¶ 51-52.

Based on this, Counter-Claimants filed a Counter-Complaint against Counter-Defendants in California State Court for: (1) Fraudulent Transfer; (2) Conversion; (3) Federal Copyright Infringement; (4) Federal Trademark Infringement; (5) Unfair Competition under the Lanham Act, Cal. Bus. & Prof. Code § 17200 et seq. and the common law; (6) Fraudulent Transfer; (7) Unjust Enrichment; and (8) for Preliminary and Permanent Injunctions. Id. at ¶¶ 56-111. Counter-Claimants then proceeded to remove this Action on August 12, 2013 [1].

II. Legal Standard

Under Federal Rule of Civil Procedure 12(f), the Court may, by motion or on its own initiative, strike “an insufficient defense or any redundant, immaterial, impertinent or scandalous” matters from the pleadings. The purpose of Rule 12(f) is “to avoid the expenditure of time and money that must arise from litigating spurious issues by disposing of those issues prior to trial.” Whittlestone, Inc. v. Handi-Craft Co., 618 F.3d 970, 973 (9th Cir. 2010) (quoting Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993)).

The grounds for a motion to strike must appear on the face of the pleading under attack. See SEC v. Sands, 902 F. Supp. 1149, 1165 (C.D. Cal. 1995). In addition, the Court must view the pleading under attack in the light more favorable to the pleader when ruling upon a motion to strike. In re 2TheMart.com, Inc. Sec. Litig., 114 F. Supp. 2d 955, 965 (C.D. Cal. 2000) (citing California v. United States, 512 F. Supp. 36, 39 (N.D. Cal. 1981)). As a rule, motions to strike are regarded with disfavor because striking is such a drastic remedy; as a result, such motions are infrequently granted. Freeman v. ABC Legal Servs., Inc., 877 F. Supp. 2d 919, 923 (N.D. Cal. 2012).

III. Discussion

A. Motion to Strike

Under Federal Rule of Civil Procedure 17(b)(2), the “[c]apacity to sue or to be sued is determined” for corporations “by the law under which [the corporation] is organized.” Fed. R. Civ. P. 17(b)(2). Counter-Defendant GFI is registered under California law - as a result, California law applies. FACC ¶ 7.

Under California Revenue & Tax Code § 23301 and California Corporations Code § 2205, a suspended corporation cannot prosecute or defend an action in California court. Crestmar Owners Ass’n v. Stapakis, 157 Cal. App. 4th 1223, 1230 (2007); Timberline, Inc. v. Jaisinghani, 54 Cal. App. 4th 1361, 1365 (1997). In other words, a suspended California corporation may not participate in any litigation activities. Palm Valley Homeowners Ass’n v. Design MTC, 85 Cal. App. 4th 553, 560-61 (2000).

Counter-Claimants and the responding Counter-Defendants agree that Counter-Defendant GFI is suspended. See Mot. 3:11-12; Opp’n 3:5-6. The responding Counter-Defendants’ primary argument is that because the Souther/Corrales Judgment imposed a constructive trust on Counter-Defendant GFI’s assets, GFI’s ownership is currently ambiguous and in dispute.¹ Opp’n 3:14-21.

Counter-Defendants are correct in that leniency is routinely given in situations where the corporation’s suspended status “only comes to light during litigation.” Timberline, 54 Cal. App. 4th at 1366. In such situations, the routine practice is to “permit a short continuance to enable the suspended corporation to effect reinstatement.” Id. This is so because “[t]he suspension statutes are not intended to be punitive;” rather, they are intended “to motivate delinquent corporations to pay back taxes or file missing statements.” Cadle Co. v. World Wide Hospitality Furniture, Inc., 144 Cal. App. 4th 504, 512 (2006) (citations omitted). Thus, “[l]eniency permits a delinquent corporation to secure a revivor, even at the time of the hearing, at the request of the corporation or on the trial court’s own motion.” Id. (citations omitted).

The Court finds, however, that even assuming that a constructive trust was imposed on Defendant GFI’s assets, such a constructive trust would not include ownership of the GFI entity. No fair reading of the Souther/Corrales Judgment would remotely suggest that the constructive trust awarded the Corrales Estate ownership of Counter-Defendant GFI - the Souther/Corrales Judgment does not, for example, despite an exhaustive listing of assets, specify any ownership interest in Counter-Defendant GFI. See Dkt. #2, Ex. 1, p.2.

Furthermore, there is, of course, a critical and crucial distinction between the property and assets (or the “capital stock”) of a corporation and the shares of a corporation. The capital stock of a corporation means “not the shares of which the nominal capital is composed, but the actual capital–i.e., assets–with which the corporation carries on its corporate business.” Schulte v. Boulevard Gardens Land Co., 164 Cal. 464, 468 (1913). In contrast, the “shares” of a corporation are “the units into which the proprietary interests in a corporation are divided in the articles.” Cal. Corp. Code § 184. In other words, “shares are the interest that the shareholder has in the corporation.” 9 Witkin, Summary 10th (2005) Corporations, § 123, p. 898 (citing Kohl v. Lilienthal, 81 Cal. 378, 385 (1889)). The difference between owning the assets and owning the shares of a corporation is a fundamental - and basic - legal concept.

In other words, this is not a case like Design Data Corp. v. Unigate Enter., where the court stayed the case as to two suspended-corporation defendants. No. 12-cv-04131-WHO, 2013 U.S. Dist. LEXIS 132161 (N.D. Cal. Sep. 12, 2013). In that case, the plaintiff filed a motion to strike the answers of two suspended-corporation defendants. Id. at *2. The other defendants opposed the motion, but specified that they believed one of the suspended corporations had been dissolved earlier and that the other, while suspended, currently had an application pending to revive its corporate status. Id. at *2-3. The other defendants requested a stay until they could revive one suspended-corporation defendant and determine why the other had not yet been legally dissolved. Id. at *3. The court granted the stay for two reasons: first, the court noted that these defendants did not assert an affirmative corporate right or privilege with knowledge that the corporate status had been suspended and, second, because a default would likely be set aside once the suspended-corporation defendants’ statuses were resolved. Id. at *4-6.

Such is not the case here. First, Counter-Defendants have not indicated what steps, if any, they have taken to revive Counter-Defendant GFI, or if they intend to do so. To the extent that Counter-Defendants are taking the position that Counter-Defendant GFI’s ownership is ambiguous and contested, such a position is entirely without merit given the plain language of the Souther/Corrales Judgment and the legal distinction between corporate assets and shares.

Second, even assuming, arguendo, that Counter-Defendants are correct in that Counter-Claimants are the current owners of Counter-Defendant GFI, that would still not supply a reason to deny this Motion. Not only have Counter-Claimants not indicated any desire to revive Counter-Defendant GFI, but such a situation would still not supply good cause for setting aside a default. Indeed, if Counter-Claimants in fact did own GFI, it would be nonsensical for Counter-Claimants to seek entry of default against, to set aside a default as to Counter-Defendant GFI, or to try to collect from their own corporation.

As a suspended corporation, Counter-Defendant GFI cannot, and could not, participate in this litigation. As a result, its Answer is, on its face, legally insufficient. It is therefore appropriate for this Court to strike Counter-Defendant GFI’s Answer. Moreover, the Court finds that the responding Counter-Defendants have failed to provide any coherent reason to deny Counter-Claimants’ Motion. As a result, the Court GRANTS Counter-Claimants’ Motion to Strike Answer on Behalf of Counterclaim Defendant Get Flipped, Inc. [18].

B. Request for Entry of Default

Counter-Claimants also request that this Court enter default against Counter-Defendant GFI. Mot. 6:16-20.

Pursuant to Federal Rule of Civil Procedure 55(a), “[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise,” default may be entered. Fed. R. Civ. P. 55(a). A Defendant must file a responsive pleading within 21 days after being served with the summons and Complaint. Fed. R. Civ. P. 12(a)(1)(A). As this Court has stricken Counter-Defendant GFI’s Answer, it also enters default against Counter-Defendant GFI.

Accordingly, the Court GRANTS Counter-Claimants’ request for this Court to enter default against Counter-Defendant GFI.

C. Request for Sanctions

Counter-Claimants include in their Reply a request for sanctions against Counter-Defendants and Counter-Defendants’ counsel. Reply 6:18-7:3. To the extent that Counter-Claimants seek sanctions against Counter-Defendants, they have failed to specify the grounds under which sanctions are warranted. To the extent that Counter-Claimants are seeking sanctions pursuant to Federal Rule of Civil Procedure 11, that Rule requires that a “motion for sanctions [] be made separately from any other motion and [] describe the specific conduct that allegedly violates Rule 11(b).” Fed. R. Civ. P. 11(c). To the extent that Counter-Claimants seek sanctions under 28 U.S.C. § 1927 for vexatious or unreasonable multiplication of the proceedings, such sanctions “must be supported by a finding of subjective bad faith.” New Alaska Dev. Corp. v. Guetschow, 869 F.2d 1298, 1306 (9th Cir. 1989).

As a result, the Court hereby DENIES Counter-Claimants’ request for sanctions.

IV. Conclusion

For the foregoing reasons, the Court hereby GRANTS Counter-Claimants’ Motion to Strike Answer Filed on Behalf of Counterclaim Defendant Get Flipped, Inc. [18]. The Court hereby ORDERS that the Answer filed on behalf of Counter-Defendant GFI be stricken from the record. The Court also ORDERS that the Clerk shall enter default against Counter-Defendant GFI.

IT IS SO ORDERED.

DATED: November 25, 2013

HONORABLE RONALD S.W. LEW

Senior U.S. District Judge

Notes

Counter-Defendants allude to pleadings in state court and correspondence between Counter-Claimants and Counter-Defendants where Counter-Claimants allegedly take differing positions on their ownership of Counter-Defendant GFI. See Opp’n 3:14-21. The Court notes, however, that Counter-Defendants fail to produce or specify the allegedly inconsistent pleadings and correspondences.

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