Case Number: EC060908 Hearing Date: May 16, 2014 Dept: A

Farsighted Enterprise v Goodwill Windows

OSC RE PRELIMINARY INJUNCTION

Calendar: 5
Case No: EC060908
Date: 5/16/14

MP: Plaintiff, Farsighted Enterprises, Inc.
RP: Defendant, Goodwill Windows and Doors, Inc., Goody Windows and Doors, Inc.,
Xiaoyue Lu, and Jun Zhao Lu

RELIEF REQUESTED:
Preliminary Injunction barring Defendants from disposing of or transferring corporate assets.

DISCUSSION:
This case arises from the Plaintiff’s claim that the Defendants are engaged in fraudulent transfers to thwart the Plaintiff’s ability to enforce a judgment. Trial is set for August 11, 2014.

The Plaintiffs appeared on February 20, 2014 with an ex parte application for a temporary restraining order and to set an OSC regarding a preliminary injunction to bar the Defendants from disposing of or transferring corporate assets. The Court issued the requested temporary restraining order and the OSC regarding the preliminary injunction was set for March 12, 2014. The hearing was then continued to April 4, 2014.

At the hearing on April 4, 2014, the Defendant stated that it had filed an appeal of the March 7, 2014 order granting the Cross-Defendants’ anti-SLAPP motion. The Court continued the hearing and directed counsel to brief any issue regarding a stay.
An appeal is perfected when a party files a notice of appeal. Weisenburg v. Molina (1976) 58 Cal. App. 3d 478, 485. Under CCP section 916, the perfecting of an appeal creates a stay that divests the Court of subject matter jurisdiction over any matter embraced in or affected by the appeal during the pendency of that appeal. Varian Medical Systems, Inc. v. Delfino (2005) 35 Cal. 4th 180, 196-197. The effect of the appeal is to remove the subject matter of the order from the jurisdiction of the lower Court and the Court is without power to proceed further as to any matter embraced therein until the appeal is determined. Id.
Here, the appeal of the March 7, 2014 order embraces the subject matter of the issues in the Cross-Complaint because the Court’s order struck the pleadings. Accordingly, the Court is without power to proceed with regards to the issues in the Cross-Complaint.
However, this hearing concerns the Plaintiff’s request for a preliminary injunction. This request arises from the Plaintiff’s cause of action for fraudulent transfer in the Complaint. Since it does not arise from the Cross-Complaint, the stay does not apply to the Plaintiff’s application for a preliminary injunction.

The Plaintiff seeks a preliminary injunction barring the Defendant from selling or transferring “corporate assets or proceeds thereof”. The requested injunction is unenforceable and the entire application will be denied because it does not identify a specific asset, which is required for the injunction to be enforceable.
Under California law, one cannot be in contempt for a violation of an order, unless there is a valid and enforceable order at the time the acts alleged to be in contempt of court are committed. McLaughlin v. Superior Court (1954) 128 Cal.App.2d 62, 65. Any ambiguity in a decree or order must be resolved in favor of an alleged contemnor. Butler v. Superior Court (1960) 178 Cal.App.2d 763, 765.
An injunction must be drafted with a reasonably adequate description of the conduct which is prohibited, in language giving fair notice to the defendant of the consequence of disobedience. In re Berry (1968) 68 Cal. 2d 137, 156. A directive drafted “in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application, violates the first essential of due process of law.” Id. A valid judgment of contempt cannot be based upon such a directive. Id. “The judicial contempt power is a potent weapon. When it is founded upon a decree too vague to be understood, it can be a deadly one.” Id.

Here, the Plaintiff’s requested injunction seeks to enjoin the Defendants from disposing of or transferring “corporate assets or proceeds thereof”. This phrase is so vague that it could prevent the transfer of pencils, screwdrivers, paper, or petty cash. It could prevent the Defendants from paying per diem, mileage, or bonuses to its employees. It could prevent the Defendants from selling its own goods. It could even prevent the Defendants from paying their attorneys because this would be a transfer of “corporate assets or proceeds thereof”.
There is no legal authority for a preliminary injunction that applies broadly to “corporate assets”. Instead, the proper provisional remedy is to seek a writ of attachment because CCP section 487.010 authorizes the Court to issue a writ of attachment on “all corporate property”, when the defendant is a corporation. Under Civil Code section 3439.07, the Plaintiffs may obtain an attachment on transferred assets and obtain a lien on the property pending the trial.
In the alternative, the Plaintiff must identify a specific item of personal property or parcel of real property of the Defendants and offer evidence to demonstrate that that an injunction is necessary to bar the Defendants from selling or transferring the identified property, e.g., facts demonstrating that an injunction is necessary to prevent the transfer of that specific asset. The pending motion does not do this.

Plaintiffs sought the injunction under the Fraudulent Transfer Act, which is enacted at 3439 to 3439.12. Under section 3439.07, in an action for relief against a fraudulent transfer, a creditor may obtain:

1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim.
2) An attachment or other provisional remedy against the asset transferred or its proceeds;
3) An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or its proceeds.
4) Appointment of a receiver to take charge of the asset transferred or its proceeds.
(italics added for emphasis).

Section 3439.07 authorizes remedies with regards to assets that have been transferred or to the proceeds of the assets. It does not authorize a preemptive injunction to bar the transfer of an asset.
Here, the Plaintiffs do not seek an injunction with regards to an asset that has been transferred. Instead, the Plaintiffs seek an injunction as a preemptive remedy, i.e., an injunction to prevent the transfer. There is no authority in section 3934.07 for such an injunction.

The Court continued the hearing to April 4, 2014 and granted leave to the Plaintiff to file a supplemental brief. On March 21, 2014, the Plaintiff filed a supplemental brief. A review of the brief reveals that it the Plaintiff did not address the defects identified above.
The Plaintiff argues that it now corrects its application to seek only an injunction of assets already transferred by the Defendants. The Plaintiff states that it now seeks to prohibit the Defendant from transferring business goodwill, manufacturing equipment, and accounts receivables.
Civil Code section 3439.07 authorizes remedies only with regards to assets that have already been transferred in order to maintain the status quo. It authorizes the Court to issue an injunction barring a transferee from making a further transfer of the asset. It authorizes the Court to issue an injunction barring a debtor from directing a third party to make a further disposition of the asset, e.g., to prevent the debtor from directing a transferee to sell asset. It authorizes the Court to issue an injunction barring the debtor from disposing of proceeds obtained from a transfer to a third party. It applies to “further disposition” of assets and does not authorize an injunction against the debtor to prevent the transfer of assets before the debtor has made a transfer.
Further, section 3439.07 does not authorize a broad, blunderbuss-like injunction that could apply to anyone who has ever received an asset from the Defendants. Instead, the Plaintiff must do the following:

1) identify a specific piece of property;
2) identify the party with possession or title to the property; and
3) request an injunction to prevent the party with possession or title from transferring the identified piece of property.

The Plaintiff identifies Good Fit Windows and Doors, Inc. and Good Sunshine, Inc. as transferees. The Plaintiff offers no evidence to identify any specific pieces of property that were transferred to either of these parties.
Instead, the Plaintiff has filed a proposed order that bars Good Fit Windows and Doors, Inc. and Good Sunshine, Inc. from making further transfers of the following:

1) business goodwill, which is identified as business names, telephone numbers, web addresses, email addresses, lease agreements, advertising and marketing contracts, and customer contracts;
2) durable equipment and machinery, which is stationary equipment and machinery having an expected useful life exceeding two years and weighing over 200 pounds; and
3) accounts receivable from the manufacture, production, or sale of windows.

There is no evidence that the Defendant has transferred any business goodwill, durable equipment and machinery, or accounts receivable to Good Fit Windows and Doors, Inc. and Good Sunshine, Inc. The Plaintiff has not provided any evidence regarding the value of these assets so that the Court may determine the appropriate undertaking to order the Plaintiff to file, as required under CCP section 529 (“On granting an injunction, the court or judge must require an undertaking on the part of the applicant ….” Since the Plaintiff has not provided sufficient evidence to support its application, the Plaintiff has not met the burden of proof needed to obtain the provisional remedy of a preliminary injunction.

Therefore, the Court will deny the Plaintiffs’ motion because the Plaintiffs did not meet their burden of proof. If the Plaintiff continues to seek a preliminary injunction, the Court directs the Plaintiff to re-file a noticed motion that includes the following:

1) evidence that identifies a specific item of property that has been transferred from the Defendant to a third party;
2) evidence that demonstrates that the transfer is a fraudulent transfer, e.g., the Defendant made the transfer with the intent to avoid a debt; and
3) evidence of the value of the specific item of property for the purpose of setting the amount of the undertaking required to obtain the preliminary injunction.

Plaintiff may file a motion that seeks a valid Court order for an injunction to bar the further transfer of specific, identified property that has already been transferred.

In the alternative, plaintiff may amend to plead the alter ego doctrine and add the parties to whom the transfers are made as named Defendants in the pending case. This would reduce the problem of attempting to administer an injunction that poses complex and difficult issues with enforcement.

RULING:
DENY Plaintiffs’ motion for a preliminary injunction.