Walczak, Dr. v. EPL Prolong, Inc.
| Decision Date | 03 December 1999 |
| Docket Number | No. 99-55227,99-55227 |
| Citation | 198 F.3d 725 |
| Parties | (9th Cir. 1999) MICHAEL WALCZAK, DR.; SHIRLEY J. BAKER; RODNEY BARNES; BRIAN BROOKS; JANE BROOKS; WILMA BROOKS; LOUIS REEDY; FLORENCE BROWN; GEORGE T. FEIEREISEN; TERRY MASON; JANIS MASON; HARRY M. OLSON, JR.; IVAN SCHULTZ; DOROTHY SCHULTZ, on Behalf of Themselves and all Other Shareholders of EPL Prolong, Inc., Plaintiffs-Appellees, v. EPL PROLONG, INC., dba Prolong International, dba Prolong Super Lubricants; PROLONG INTERNATIONAL CORPORATION, fka Giguere Industries, Inc.; PROLONG SUPER LUBRICANTS, INC., fka Corporate Development, Inc.; ELTON ALDERMAN; TOM KUBOTA; TIM BILLSTEIN; MICHAEL DAVIS; MELANIE A. MCCAFFERY; NICHOLAS M. ROSER; GARY C. WYKIDAL, Personally and in their Capacities as Officers, Attorneys, and Shareholders of EPL Prolong, Inc., dba Prolong International, Prolong Super Lubricants, Inc., and Prolong International Corp., and all other Prolong Affiliated Companies, Defendants-Appellants, and THE ESTATE OF EDWIN C. AULD, JR., RAYMOND PRATT; LOIS M. MILLER, Defendants |
| Court | U.S. Court of Appeals — Ninth Circuit |
COUNSEL: Neil Goteiner (Argued), San Francisco, California, and Jeffrey L. Garland, Law Offices of Jeffrey L. Garland (On the Briefs), for the defendants-appellants.
Timothy A. Shimko (Argued), Timothy A. Shimko & Associates, Cleveland, Ohio, and Bruce Corbett, Corbett & Steelman, Irvine, California, for the plaintiffs-appellees.
Appeal from the United States District Court for the Southern District of California
Before: Myron H. Bright,1 Stephen Reinhardt, and Stephen S. Trott, Circuit Judges.
EPL Prolong, Inc., et al. (collectively "Appellants") appeal an order of the district court granting a preliminary injunction in favor of appellee Michael Walczak ("Walczak"), an EPL Prolong, Inc. minority shareholder who is the representative in a class action shareholder derivative suit. Appellants argue that the Supreme Court's recent decision in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 119 S. Ct. 1961 (1999), warrants summary reversal of the district court's preliminary injunction. Alternatively, Appellants contend that the district court erred in granting the preliminary injunction because Walczak failed to demonstrate: (1) a threat of irreparable injury; or (2) a likelihood of success on the merits. We have jurisdiction pursuant to 28 U.S.C. S 1292(a)(1), and we affirm the district court's order issuing a preliminary injunction.
EPL Prolong, Inc. ("EPL Prolong"), a California corporation, owns the patent for "Prolong Super Lubricant" ("PSL Patent"), which is a high performance metal lubricant used in automobiles as an additive to motor oil. In 1993, EPL Prolong entered into a license agreement ("1993 License Agreement") with Prolong Super Lubricants, Inc., f/k/a Corporate Development, Inc. ("PSLI"), a shell corporation with no current operations. Pursuant to the 1993 License Agreement, EPL Prolong granted PSLI the exclusive right to use the PSL Patent. In exchange, PSLI paid EPL Prolong an initial fee of $100,000 and guaranteed EPL Prolong a cash royalty of 3.5% of the gross sales generated by use of the PSL Patent or the tradename "Prolong." At the time, EPL Prolong's minority shareholders were not notified of the 1993 License Agreement.
When EPL Prolong entered into the 1993 License Agreement with PSLI, Elton Alderman, Edwin C. Auld, Jr., and Michael R. Davis were all directors, officers, and significant shareholders of EPL Prolong. Shortly thereafter, however, Alderman and Auld surrendered their shares in EPL Prolong, acquired an equal ownership interest in PSLI, and became directors and officers of PSLI. Although Davis remained a director and officer of EPL Prolong, he also became an officer, director, and significant shareholder of PSLI.
In 1995, the directors of PSLI aspired to take the corporation public without engaging in an initial public offering. To accomplish this goal, PSLI negotiated an agreement with Giguere Industries ("Giguere"), a shell corporation whose stock could be traded publicly. Pursuant to this agreement, Giguere, which was renamed Prolong International Company ("Prolong International"), acquired all of the shares of PSLI and, in exchange, granted the PSLI shareholders stock in Prolong International. As a result of this transaction, PSLI became a wholly-owned subsidiary of Prolong International.
In February 1998, EPL Prolong and Prolong International entered into an agreement ("1998 Agreement"). The terms of the 1998 Agreement were as follows:
(1) Prolong International would purchase substan tially all of the assets and certain of the liabili ties of EPL Prolong (2) Prolong International would issue and deliver to EPL Prolong approximately three million shares of Prolong International common stock;
(3) EPL Prolong would be liquidated and dis solved;
(4) Upon dissolution, EPL Prolong would distrib ute all of its assets, including the shares of Pro long International common stock, to its shareholders; and
(5) Each shareholder of EPL Prolong would be entitled to receive approximately (1) share of Prolong International common stock for every (2) shares of EPL Prolong common stock.
In order to proceed with this transaction, EPL Prolong needed the approval of a majority of the shareholders of its common stock.
In August 1998, a series of events gave rise to the current lawsuit between EPL Prolong's minority shareholders and Appellants. First, EPL Prolong advised its minority shareholders, which included Walczak and the other members of the class in the current suit, of its plans to consummate the 1998 Agreement. Second, EPL Prolong informed the minority shareholders that EPL Prolong's Board of Directors, as well as a majority of the shareholders, had approved the 1998 Agreement and, therefore, EPL Prolong was prepared to proceed with the transaction. Finally, Walczak and the other minority shareholders learned about some of EPL Prolong's prior dealings, such as the 1993 License Agreement with PSLI.
In response to this information, Walczak filed a class action shareholder derivative suit against EPL Prolong, PSLI, Prolong International, board members of EPL Prolong, and various other individuals in federal district court on November 17, 1998. Among other things, Walczak's complaint alleged RICO violations, fraudulent conveyance, and breach of fiduciary duty.
On November 20, 1998, Walczak filed a motion for a temporary restraining order ("TRO") and a preliminary injunction, seeking to prevent the consummation of the 1998 Agreement. Walczak alleged that as creditors of EPL Prolong, the plaintiffs would suffer irreparable harm if the proposed transaction was completed. Specifically, Walczak argued that completion of the transaction contemplated by the 1998 Agreement would result in EPL Prolong's dissolution, thereby making it impossible for the plaintiffs to collect debts or judgments from EPL Prolong. On November 25, 1998, the district court granted the motion for the TRO and issued an "Order to Show Cause as against all defendants as to why a preliminary injunction should not be granted."
After considering the parties' arguments, the evidence, and the relevant law, the district court granted Walczak's motion for a preliminary injunction. The court concluded that, with regard to the fraudulent conveyance and breach of fiduciary duty claims, Walczak had demonstrated a threat of irreparable harm and a likelihood of success on the merits. The court therefore granted Walczak's motion for a preliminary injunction and ordered the plaintiffs to post a security bond in the amount of $100,000. Appellants appeal.
Pursuant to Ninth Circuit Rule 3-6,2 Appellants have filed a motion for summary reversal based on the Supreme Court's recent decision in Grupo Mexicano. Appellants argue that Grupo Mexicano compels this court to summarily reverse the district court order because Grupo Mexicano held that a district court does not have the power to grant the type of preliminary injunction that the court issued in this case. Walczak, on the other hand, argues that Grupo Mexicano is distinguishable from the case at bar and, therefore, contends that we should deny Appellants' motion. We agree with Walczak.
In Grupo Mexicano, plaintiff Alliance Bond Fund, Inc. ("Alliance"), who had purchased unsecured notes from defendant Grupo Mexicano de Desarrollo, S.A. ("GMD"), sued GMD for breach of contract, alleging that GMD had defaulted on its obligation under the notes. Grupo Mexicano, 119 S. Ct. at 1964-65. In addition to damages, Alliance sought a preliminary injunction to restrain GMD from dissipating its assets, specifically GMD's guaranteed notes ("Toll Road Notes"), which the Mexican government had issued to GMD pursuant to the "Toll Road Rescue Program." Id. The district court granted the preliminary injunction in favor of Alliance, the Second Circuit affirmed, and the Supreme Court granted certiorari. Id. at 1965.
In a five-to-four decision, the Supreme Court reversed the Second Circuit and held that "the district court had no authority to issue a preliminary injunction preventing[the defendants] from disposing of their assets pending adjudication of [the plaintiff's] contract claim for money damages." Id. at 1975. In reaching this conclusion, the Court relied on the "well-established rule" that an unsecured creditor seeking legal remedies cannot obtain a preliminary injunction that freezes a debtor's assets in order to ensure the availability of funds to satisfy a future judgment. Id. at 1968. The majority concluded, therefore, that because such a remedy was historically unavailable from a court of equity, the district court exceeded its authority in granting the preliminary injunction. Id.
In this case, Appellants argue that the holding of Grupo Mexicano...
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