Tentative Ruling

Judge Pauline Maxwell
Department 6 SB-Anacapa
1100 Anacapa Street P.O. Box 21107 Santa Barbara, CA 93121-1107

CIVIL LAW & MOTION
Ault Chiropractic, LLP vs iCRco, Inc
Case No: 19CV06083
Hearing Date: Wed Jan 22, 2020 9:30

Nature of Proceedings: Vacate Entry of Sister State Judgment

TENTATIVE RULING:

For the reasons set forth herein, the motion of defendant iCRco, Inc., to vacate entry of sister state judgment is denied.

Background:

Dr. Robert Ault (Ault) is a licensed chiropractor since 2007 the owner/ operator of plaintiff Ault Chiropractic, LLC (Ault LLC or plaintiff). (Ault decl., ¶ 2.) Ault LLC operates at two locations, one in Portage County, Ohio, and one in Summit County, Ohio. (Ault decl., ¶ 4.) In the performance of its business, Ault LLC uses medical imaging machines such as the iDR Direct Radiography Devices (iDR) manufactured by defendant iCRco, Inc. (iCRco). (Ault decl., ¶ 5.)

In 2013, iCRco was contacted by a company in Ohio called Lupica Medical Systems (Lupica). (Neushul decl., ¶ 5.) Lupica was in the business of selling x-ray machines and wanted to purchase two imaging systems from iCRco for sale to a customer, Ault LLC. (Ibid.) iCRco sold two imaging systems to Lupica in October 2013, which were then combined with an x-ray generating machine and resold by Lupica to Ault LLC as a pair of x-ray systems. (Ibid.) Lupica and iCRco entered into a sales contract (the Contract), dated September 30, 2013, for the machines. (Neushul decl., ¶ 7 & exhibit A.)

The Contract states that the machines are billed to, and shipped to, Lupica in North Royalton, Ohio, for Ault LLC in Hudson, Ohio. (Neushul decl., exhibit A [the Contract].) The Contract’s standard terms state that “iCRco and Buyer agree that this Agreement will solely be interpreted and enforced in all respects in accordance with the laws of the State of California, USA, without regard to its choice of law principles.” (Contract, Standard Terms, ¶ 18.) The machines are shipped f.o.b. Goleta, California. (Neushul decl., ¶ 5 & Contract, Standard Terms, ¶ 4.) The amount paid to iCRco by Lupica was $44,900. (Neushul decl., ¶ 6.)

On October 1, 2013, Rebecca Ault, on behalf of Ault LLC, entered into an agreement with Lupica for the purchase of two iDRs. (Ault decl., ¶ 6.) The Agreement contained an iDR hardware warranty for one year. (Ault decl., ¶ 7.) On October 31, 2013, the iDRs were installed. (Ault decl., ¶ 8.) Shortly after the iDRs were installed, and within the warranty period, the iDR in the Portage County office began to malfunction. (Ault decl., ¶ 9.)

According to Ault, Ault LLC contacted iCRco regarding various issues with the iDR in the Portage County office since 2014. (Ault decl., ¶¶ 11-13 & exhibit C.) According to iCRco, iCRco’s President and CEO, Stephen Neushul, learned that Ault LLC was claiming that the image device in the unit it purchased from Lupica was defective in December 2017. (Neushul decl., ¶ 12.)

iCRco is a California corporation, formed in 2004, with its principal place of business located in Goleta, California. (Neushul decl., ¶ 2.) iCRco has never maintained an office in any other state, including Ohio. (Ibid.) iCRco sells imaging sensors for use in medical applications that are components incorporated into x-ray machines by third parties that are then sold by the third parties to the end user. (Neushul decl., ¶ 3.) iCRco has no interest in real or personal property in the State of Ohio and never has had any employees in Ohio. (Neushul decl., ¶ 4.)

On September 21, 2016, iCRco filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court. (Neushul decl., ¶ 11.) iCRco obtained a final decree from the bankruptcy court approving the company’s discharge and plan of reorganization on October 11, 2017. (Ibid.; Request for Judicial Notice [RJN], exhibits 2-4.) (Note: The court grants iCRco’s requests for judicial notice of the application filed in this case and of the bankruptcy court records attached to the RJN. (Evid. Code, § 452, subd. (d)(1), (2).))

On March 22, 2018, Ault LLC filed its action against iCRco in Ohio (the Ohio Action). (Neushul decl., ¶ 13 & exhibit C [Ault Chiropractic, LLC, v. iCRCo, Inc., Portage County, Ohio Court of Common Pleas, case No. 2018CV00249].) (Note: Exhibits C and D as indicated in the declaration of Stephen Neushul have been transposed in the filed copy of that declaration.) The complaint in the Ohio Action sets forth causes of action for breach of express warranty, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, breach of contract, and unjust enrichment. (Ibid.) The complaint was served on iCRco’s agent for service of process in California. (Neushul decl., ¶ 13.) Because of iCRco’s then-recent emergence from bankruptcy and its financial situation, iCRco did not defend itself in the Ohio Action. (Neushul decl., ¶ 14.)

Ault LLC obtained a default judgment against iCRco in the principal amount of $76,301.68. (Neushul decl., ¶ 14; RJN, exhibit 1.) On November 14, 2019, Ault LLC filed its application for entry of judgment on sister-state judgment. On November 18, 2019, the court entered its judgment in this proceeding on that sister-state judgment in the amount of $84,093.48, including accrued interest and filing fee.

On December 19, 2019, iCRco filed this motion to vacate the entry of the sister-state judgment. iCRco argues that the Ohio judgment is void because the Ohio court did not have personal jurisdiction over iCRco and because iCRco’s bankruptcy discharged Ault LLC’s claim. Ault LLC opposes the motion.

Analysis:

“A judgment entered pursuant to this chapter may be vacated on any ground which would be a defense to an action in this state on the sister state judgment, including the ground that the amount of interest accrued on the sister state judgment and included in the judgment entered pursuant to this chapter is incorrect.” (Code Civ. Proc., § 1710.40, subd. (a).)

“Any court of this state or the United States, or any court of general jurisdiction in any other state or nation, or any judge of such a court, acting as such, is presumed to have acted in the lawful exercise of its jurisdiction. This presumption applies only when the act of the court or judge is under collateral attack.” (Evid. Code, § 666.) A motion to vacate entry of sister state judgment is a collateral attack. Thus, “[t]he party moving under section 1710.40 to set aside the sister state judgment has ‘the burden to show by a preponderance of the evidence why it was entitled to relief. [Citation.]’ [Citation.]” (Conseco Marketing, LLC v. IFA & Ins. Services, Inc. (2013) 221 Cal.App.4th 831, 841.)

(1) Personal Jurisdiction

“ ‘Lack of jurisdiction in its most fundamental or strict sense means an entire absence of power to hear or determine the case, an absence of authority over the subject matter or the parties.’ [Citation.] When a court lacks jurisdiction in a fundamental sense, an ensuing judgment is void, and ‘thus vulnerable to direct or collateral attack at any time.’ [Citation.]” (People v. American Contractors Indemnity Co. (2004) 33 Cal.4th 653, 660.)

“The determination whether an Ohio court has personal jurisdiction over an out-of-state defendant requires a two-step inquiry. First, the court must determine whether the defendant’s conduct falls within Ohio’s long-arm statute or the applicable civil rule. [Citation.] If it does, then the court must consider whether the assertion of jurisdiction over the nonresident defendant would deprive the defendant of due process of law under the Fourteenth Amendment to the United States Constitution.”(Fraley v. Estate of Oeding (Ohio 2014) 6 N.E.3d 9, 13-14 [138 Ohio St.3d 250, 2014-Ohio-452].)

Ohio’s long-arm statute provides in relevant part: “A court may exercise personal jurisdiction over a person who acts directly or by an agent, as to a cause of action arising from the person’s:

“(1) Transacting any business in this state;

“(2) Contracting to supply services or goods in this state; [¶] … [¶]

“(5) Causing injury in this state to any person by breach of warranty expressly or impliedly made in the sale of goods outside this state when he might reasonably have expected such person to use, consume, or be affected by the goods in this state, provided that he also regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered in this state….” (Ohio Rev. Code Ann. § 2307.382(A)(1), (2), (5) (West 2020).)

“It is clear that R.C. 2307.382(A)(1) and Civ.R. 4.3(A)(1) are very broadly worded and permit jurisdiction over nonresident defendants who are transacting any business in Ohio. ‘Transact,’ as defined by Black’s Law Dictionary (5 Ed.1979) 1341, “ … means to prosecute negotiations; to carry on business; to have dealings …. The word embraces in its meaning the carrying on or prosecution of business negotiations but it is a broader term than the word “contract” and may involve business negotiations which have been either wholly or partly brought to a conclusion ….’ [Citation.]” (Kentucky Oaks Mall Co. v. Mitchell’s Formal Wear, Inc. (Ohio 1990) 559 N.E.2d 477, 480 [53 Ohio St.3d 73], emphasis in original.)

This action arises from the sale of iDRs from iCRco in California to Lupica in Ohio for use by Ault LLC in Ohio. The Contract between iCRco and Lupica states: “This Standard Terms and Conditions of sale are made part of the purchase order or other written agreement (the ‘Order’) between the party specified in the Order, including any further end user or party responsible for payment thereunder (individually or collectively, ‘Buyer’) and iCRco, Inc. (‘iCRco’) for Buyer’s purchase of products (‘Products’) from iCRco.” (Contract, Standard Terms, ¶ 1.) Thus, the plaintiff is a “Buyer” as defined by the Contract.

The evidence presented in support of the motion to vacate is limited. The declaration of its president addresses a number of specifics related to the lack of a physical presence of iCRco in Ohio by office, property, or employees. (Neushul decl., ¶¶ 2, 4.) The information provided regarding the specific transaction is stated as follows: “In 2013, iCRco was contacted by a company in Ohio called Lupica Medical Systems (‘Lupica’). Lupica was in the business of selling x-ray machines and wanted to purchase two imaging systems from iCRco for sale to a customer. Accordingly, iCRCo sold two imaging systems to Lupica in October 2013. The machines were sold FOB Goleta, California, with Lupica taking ownership and responsibility from our location in California. Both of those machines were then combined with an x-ray generating machine and resold by Lupica to Ault Chiropractic (‘Ault’) as a pair of x-ray systems.” (Neushul decl., ¶ 5.) “The total amount paid to iCRco by Lupica was $44,900. For two devices. Of that amount, the iDR sensor (the part Ault ultimately claimed was defective), accounted for $16,550. To put that in perspective, in 2013 iCRco had approximately $18 million in total sales.” (Neushul decl., ¶ 6.) Under the broad standards of Ohio’s interpretation of its long-arm statute, the transaction that is the subject of the Ohio Action arises out of “transacting any business” in Ohio.

The second step of Ohio’s personal jurisdiction analysis is whether the exercise of personal jurisdiction satisfies federal due process standards. “Ohio’s long-arm statute is not coterminous with due process. [Citation.] Therefore, although Ohio’s long-arm statute confers personal jurisdiction over [the defendant], an Ohio court cannot exercise personal jurisdiction over [the defendant] if doing so would violate his constitutional right to due process.” (Kauffman Racing Equip., L.L.C. v. Roberts (Ohio 2010) 930 N.E.2d 784, 792 [126 Ohio St.3d 81, 2010-Ohio-2551] (Kauffman).) This due process analysis is the familiar analysis of International Shoe Co. v. Washington (1945) 326 U.S. 310 [66 S.Ct. 154, 90 L.Ed. 95] and its progeny.

“Personal jurisdiction can be either general or specific, depending upon the nature of the contacts that the defendant has with the forum state. [Citation.] ‘General jurisdiction is proper only where “a defendant’s contacts with the forum state are of such a continuous and systematic nature that the state may exercise personal jurisdiction over the defendant even if the action is unrelated to the defendant’s contacts with the state.” ’ [Citation.]” (Kauffman, supra, 930 N.E.2d at p. 792.) “Specific jurisdiction applies when ‘a State exercises personal jurisdiction over a defendant in a suit arising out of or related to the defendant’s contacts with the forum.’ [Citation.]” (Ibid.) California’s analysis is the same. (See, e.g., Jayone Foods, Inc. v. Aekyung Industrial Co. Ltd. (2019) 31 Cal.App.5th 543, 552–553.)

iCRco provides argument and evidence as to general personal jurisdiction, but iCRco does not meaningfully address specific personal jurisdiction, which is the type of personal jurisdiction most applicable here. “Specific jurisdiction is very different. In order for a state court to exercise specific jurisdiction, ‘the suit’ must ‘aris[e] out of or relat[e] to the defendant’s contacts with the forum.’ [Citations.] In other words, there must be ‘an affiliation between the forum and the underlying controversy, principally, [an] activity or an occurrence that takes place in the forum State and is therefore subject to the State’s regulation.’ [Citation.] For this reason, ‘specific jurisdiction is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction.’ [Citation.]” (Bristol-Myers Squibb Co. v. Superior Court (2017) 582 U.S. __ [137 S.Ct. 1773, 1780, 198 L.Ed.2d 395] (Bristol-Myers).)

“Where a forum seeks to assert specific jurisdiction over an out-of-state defendant who has not consented to suit there, this ‘fair warning’ requirement is satisfied if the defendant has ‘purposefully directed’ his activities at residents of the forum [citation] and the litigation results from alleged injuries that ‘arise out of or relate to’ those activities, [citation]. (Burger King Corp. v. Rudzewicz (1985) 471 U.S. 462, 472–473 [105 S.Ct. 2174, 85 L.Ed.2d 528], fn. omitted.) “[W]ith respect to interstate contractual obligations, we have emphasized that parties who ‘reach out beyond one state and create continuing relationships and obligations with citizens of another state’ are subject to regulation and sanctions in the other State for the consequences of their activities.” (Id. at p. 473.) “Once it has been decided that a defendant purposefully established minimum contacts within the forum State, these contacts may be considered in light of other factors to determine whether the assertion of personal jurisdiction would comport with ‘fair play and substantial justice.’ [Citation.]” (Id. at p. 476.)

iCRco does not engage in direct-to-consumer sales as a normal practice. (Neushul decl., ¶ 3.) Instead, iCRco sells its devices to third parties who incorporate the devices into x-ray machines which are then sold by those third parties to the end user. (Ibid.) In the email exchange from November 2017 between iCRco and Ault LLC discussing shipping to and from iCRco for repair, iCRco refers to on-site repairs being handled (apparently unsuccessfully) by “the dealer.” (Ault decl., ¶ 11 & exhibit C.) A reasonable inference from this evidence is that iCRco does business in Ohio through its dealer there. The sale and continuing repair obligation of iCRco for an Ohio end user does not appear by this evidence to be a unique, unexpected, or extraordinary transaction with an Ohio resident. iCRco does not provide any evidence that this transaction with an Ohio resident was unique, unexpected, or extraordinary; iCRco does not provide any evidence as to the scope of its extra-California activities in marketing, sales, or other transactions. The stronger inference from this evidence is that the specific transaction giving rise to the Ohio Action was iCRco’s purposeful direction of iCRco’s activities to Ohio resulting in this transaction.

iCRco has not shown that the assertion of personal jurisdiction in Ohio would not comport with traditional notions of “fair play and substantial justice.” The only evidence provided in support of this factor in addition to the previously discussed evidence of the sale is that iCRco was in a dire financial situation and could not defend itself in a distant forum. (Neushul decl., ¶ 14.) Litigation is always in some sense a financial burden. No evidence is presented that litigation in Ohio would be more burdensome than litigation in any other place, including places where iCRco may regularly do business.

As the Sixth Circuit Court of Appeals summarized: “If, as here, a nonresident defendant transacts business by negotiating and executing a contract via telephone calls and letters to an Ohio resident, then the defendant has purposefully availed himself of the forum by creating a continuing obligation in Ohio. [Citations.] Furthermore, if the cause of action is for breach of that contract, as it is here, then the cause of action naturally arises from the defendant’s activities in Ohio. [Citations.] Finally, when we find that a defendant … purposefully availed himself of the forum and that the cause of action arose directly from that contact, we presume the specific assertion of personal jurisdiction was proper. [Citations.] In light of this precedent, we have no doubt that the … assertion of jurisdiction over [the defendant] was fundamentally fair and constitutional.” (Cole v. Mileti (6th Cir. 1998) 133 F.3d 433, 436.)

iCRco has not met its burden to show that it is entitled to relief under Code of Civil Procedure section 1710.40 on the grounds that the Ohio court lacked personal jurisdiction over it and that the judgment is therefore void.

(2) Bankruptcy

As an alternative basis for the invalidity of the Ohio judgment, iCRco asserts that its bankruptcy discharge invalidated Ault LLC’s claim.

“Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan–

“(A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title, whether or not–

“(i) a proof of the claim based on such debt is filed or deemed filed under section 501 of this title;

“(ii) such claim is allowed under section 502 of this title; or

“(iii) the holder of such claim has accepted the plan ….” (11 U.S.C. § 1141(d)(1)(A).)

There is no essential factual dispute that Ault LLC’s claims arising from breach of warranty accrued prior to the confirmation of iCRco’s bankruptcy reorganization plan. Although section 1141 on its face applies to discharge claims that arose before the plan confirmation, courts have limited the application of section 1141 in situations where the absence of notice to a debtor-claimant violates that debtor-claimant’s due process rights.

In Flores v. Kmart Corp. (2012) 202 Cal.App.4th 1316 (Flores), the plaintiff filed an action against the defendant asserting claims arising out of plaintiff’s exposure to asbestos in 1989 while performing construction work in a store operated by the defendant. (Id. at p. 1319.) In January 2002, the defendant filed a chapter 11 bankruptcy petition. (Ibid.) In April 2003, the bankruptcy court confirmed defendant’s reorganization plan, and purported to discharge all known and unknown claims against the defendant. (Ibid.) The defendant demurred to the plaintiff’s complaint on the grounds of bankruptcy discharge, seeking judicial notice of the bankruptcy reorganization plan. (Ibid.) There was no evidence that plaintiff or his family had any notice of the bankruptcy proceedings. (Ibid.) The trial court sustained the demurrer without leave to amend. (Id. at p. 1324.)

On appeal in Flores, the court addressed the issue of whether the bankruptcy order could discharge the plaintiff’s claims consistent with the plaintiff’s due process rights. (Flores, supra, 202 Cal.App.4th at p. 1326.) The Flores court first acknowledged the statutory provisions that “[o]nce a reorganization plan is confirmed, all of the debtor’s debts that arose before the confirmation date are discharged.” (Ibid.) “[P]rior to the plan confirmation hearing, a debtor is statutorily and by rule entitled to notice of the contemplated discharge. [Citation.] But the notice must also comply with Fourteenth Amendment due process requirements.” (Id. at p. 1329.) The Flores court first distinguished United Student Aid Funds, Inc. v. Espinosa (2010) 559 U.S. 260 [130 S.Ct. 1367, 176 L.Ed.2d 158], in which the United States Supreme Court held that there was no due process violation under the facts of that case because the affected party had actual notice of the reorganization plan prior to the hearing where it was approved. (Flores, at p. 1330.) Under the facts of Flores, there was no evidence of the plaintiff’s actual notice of the reorganization plan. (Ibid.)

The defendant in Flores argued that notice published in the New York Times, USA Today, and The Wall Street Journal was sufficient. (Flores, supra, 202 Cal.App.4th at p. 1330.) The Flores court disagreed: “If a creditor’s identity is known or reasonably ascertainable, service by publication does not comply with the Fourteenth Amendment due process clause notice requirement—actual notice is constitutionally required. [Citations.] Further, if a creditor’s identity is unknown or cannot be ascertained with reasonable diligence, publication can suffice. [Citations.] And publication can comply with the Fourteenth Amendment due process notice requirement if a claim is merely conjectural.” (Ibid.) The Flores court held that there were no facts presented in the demurrer that the plaintiff’s identity was ascertainable so as to require actual notice. The demurrer was therefore improperly sustained because the court could not conclusively determine, over the plaintiff’s due process objection, that the discharge complied with due process and hence was effective. (Id. at p. 1331.) The dismissal based upon the demurrer was therefore reversed. (Id. at p. 1332.)

In the instant matter, there is no factual dispute that Ault LLC was not given timely actual notice of the iCRco bankruptcy proceedings. (Ault decl., ¶ 16; iCRco reply, p. 6 [arguing plaintiff was not a known creditor and not entitled to notice].) There is a factual dispute as to whether Ault LLC’s claim was reasonably ascertainable so as to require such notice. The evidence presented on this point supports the proposition that Ault LLC was a known creditor entitled to notice. Ault LLC affirmatively states that iCRco was aware of Ault LLC’s claims from Ault LLC’s repeated contacts with iCRco from at least as early as 2014. (Ault decl., ¶¶ 11-13, 17.) In support of this, Ault LLC includes an exhibit of emails which, as noted by iCRco, date from November 2017, a time after the discharge. (Ault decl., exhibit C.)

In response, iCRco argues that Ault LLC’s statements are not credible. iCRco also provides the declaration of Neushul stating that he learned in December 2017 that Ault LLC was claiming that the imaging device was defective. (Neushul decl., ¶ 12.) The evidence presented by iCRco on this issue is underwhelming. There is no evidence that Ault LLC’s claim was not apparent from iCRco records. The lack of knowledge of the CEO, at least in the absence of an explanation of the CEO’s involvement in such claims, is not probative of whether iCRco did, or could reasonably identify Ault LLC as a claimant entitled to notice of the bankruptcy proceedings. There is also no evidence or argument presented that iCRco attempted to provide notice by publication to address conjectoral claims. Given iCRco’s limited showing (see Evid. Code, § 412) and Ault LLC’s affirmative evidence, the stronger inference is that iCRco has sufficient information to reasonably identify Ault LLC as a claimant entitled to notice. Similar to the result in Flores, the evidence presented here does not show that the bankruptcy discharge can, consistent with due process, operate to bar Ault LLC’s claim.

As noted above, iCRco has the burden in this motion to show entitlement to relief. iCRco has failed to meet that burden on the alternative basis that the judgment of the Ohio court is void.

Accordingly, iCRco’s motion to vacate the sister state judgment will be denied.