Unpublished Disposition, 881 F.2d 1083 (9th Cir. 1988)

MEMORANDUM^* 

Denis St. Gelais appeals from a preliminary injunction restraining him from removing, destroying, or altering documents and records, and enjoining him from withdrawing or transfering funds from personal and corporate bank accounts. The injunction was obtained by Bobbie G. Bayless, the court appointed receiver for several judgment debtors. St. Gelais contends that the district court erred in granting the injunction because Bayless failed to demonstrate a likelihood of success on the merits or a possibility of irreparable harm. He also contends that the preliminary injunction is overbroad. We affirm.

BACKGROUND

St. Gelais's father, Jean Marie St. Gelais (Jean Marie), was president of Standard Systems & Technology, Inc. (SST), a company with interests in commercial financing and the oil and gas industry. In October 1986 a Texas state court entered a nine million dollar judgment against Jean Marie, SST, and three other defendants in a civil fraud case. In March 1987 the Texas court appointed Bayless receiver of the assets of Jean Marie, SST, and one other judgment debtor. She was charged with marshalling the assets of the judgment debtors to satisfy the judgment against them.

SST's advertising literature described SST Financial Corp. (SST Financial) as a wholly owned subsidiary. C.R.Vol. I, exhibit G. St. Gelais was identified as its president. SST Financial was engaged in the real estate financing business and its offices were located in Irvine, California. Although St. Gelais used SST Financial letterhead identifying it as a wholly owned subsidiary of "SST, Inc.," id. exhibit 1, he now claims that he has always been SST Financial's sole shareholder.

St. Gelais claims that he "deactivated" SST Financial's real estate operation out of concern that Bayless's activities as receiver would interfere with its business. He then conducted the real estate loan business through Diversified Financial Corp. (Diversified). St. Gelais claims to be Diversified's sole shareholder. Diversified operated out of the same offices SST Financial had occupied, employed the same people previously employed by SST Financial, and continued the same loan transactions initiated by SST Financial.

Bayless claims that her investigation revealed that SST and Jean Marie maintained offices at the same Irvine, California address. On September 4, 1987, she took possession of the Irvine offices. On September 10, 1987, Bayless filed this action in the district court, charging that the defendants, including St. Gelais and Diversified, had received fraudulent transfers of assets from SST. The district court initially denied but later granted Bayless's request for a temporary restraining order. On October 26, 1987, the district court held a hearing on Bayless's request for a preliminary injunction. Her request was supported by her own declaration, the declaration of a Diversified employee, and documentary evidence. The district court granted the preliminary injunction, finding that Bayless would likely succeed on the merits and that irreparable injury would result if the injunction was not granted. The preliminary injunction restrained St. Gelais and Diversified, among others, from removing, destroying, or altering documents and records. The defendants were also enjoined from withdrawing or transfering funds held by financial institutions. A number of financial institutions, which were not parties to the action, were enjoined from allowing transfers or withdrawals in violation of the preliminary injunction.

During this time, judgment debtors SST and Jean Marie filed for bankruptcy in the Oklahoma district court. Bayless was appointed trustee for the bankrupt estates. In November 1987 Diversified also filed for bankruptcy, but the petition was subsequently dismissed. On January 20, 1988, the district court denied St. Gelais and Diversified's motion for reconsideration of the granting of the preliminary injunction. They timely appealed. We have jurisdiction under 28 U.S.C. § 1292(a) (1) (1982).

STANDARD OF REVIEW

"The grant or denial of a preliminary injunction is reviewed to determine if the district court abused its discretion. A district court abuses its discretion if it rests its conclusion on clearly erroneous factual findings or an incorrect legal standard." SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945, 947 (9th Cir. 1985) (citation omitted); see also Sierra On-Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415, 1421 (9th Cir. 1984).

DISCUSSION

"In this circuit, preliminary injunctive relief is available to a party who demonstrates either (1) a combination of probable success and the possibility of irreparable harm, or (2) that serious questions are raised and the balance of hardship tips in its favor." Arcamuzi v. Continental Air Lines, Inc., 819 F.2d 935, 937 (9th Cir. 1987). The district court here relied on the first formulation in granting the preliminary injunction. St. Gelais contends that the district court incorrectly found that Bayless would likely succeed on the merits and that irreparable harm would result if the injunction was not granted. He also contends that the preliminary injunction is overbroad.

The complaint essentially alleges that St. Gelais and Diversified, among others, are acting as the alter egos of the judgment debtors Jean Marie and SST. Under California law, when a corporation is used by an individual or another corporation to perpetrate a fraud or to accomplish a wrongful purpose, the court may disregard the corporate entity and treat the acts as if they were done by the individual or controlling corporation itself. 9 B. Witkin, Summary of California Law, Corporations Sec. 12 at 524 (9th ed. 1989). The alter ego doctrine is invoked when the corporation is "dominated or controlled by the individual or other corporation" and "failure to disregard the [corporate] entity would sanction a fraud or promote injustice." Id. Sec. 13 at 526 (emphasis in original).

The complaint also alleges that pursuant to a conspiracy among the defendants, the judgment debtors fraudulently transferred assets to the other defendants. "A transfer ... by a debtor is fraudulent as to a creditor" if it is made with an "actual intent to hinder, delay, or defraud any creditor of the debtor." Cal.Civ.Code Sec. 3439.04 (West Supp.1989). In evaluating the debtor's intent, factors that support an inference of fraudulent intent include whether: the transfer was to an insider (including a close family member); the debtor retained control of the property after the transfer; the debtor removed or concealed assets; the debtor became insolvent shortly after the transfer was made; or the transfer occurred shortly before or after a substantial debt was incurred. Id. legislative committee comment; see also Neumeyer v. Crown Funding Corp., 56 Cal. App. 3d 178, 183, 128 Cal. Rptr. 366, 369 (1976) (evidence of actual intent to defraud "must of necessity consist of inferences drawn from the circumstances surrounding the transaction and the relationship and interests of the parties").

Bayless's declaration in support of her request for a preliminary injunction identifies the many corporations connected with Jean Marie, his girlfriend Eva Johnson, Johnson's nephew Sam Fentie, and St. Gelais. Bayless states that she received mail addressed to Jean Marie and SST indicating that SST was the lessee of the Irvine, California office. She states that about the time she was appointed receiver of the judgment debtors' assets, St. Gelais moved 30 boxes of SST and SST Financial corporate records into storage. Attached to her declaration is a photocopy of a receipt from a moving and storage company, dated February 27, 1987, for the pickup and storage of file boxes. C.R.Vol. I, exhibit I. She also attaches a receipt dated February 26, 1987, for the purchase of 30 file boxes. Id. exhibit H. On both receipts, SST Financial is listed as the customer.

Bayless's declaration also states that about that same time, SST Financial ceased operations and Diversified began operations. She attaches a note written by St. Gelais's secretary which says "change all account names to DFC--open new accounts if necessary." Id. exhibit J. She also attaches a check drawn on Diversified's account paying a bill of SST Financial. Id. exhibit K (SST Financial's Dun & Bradstreet account). Other exhibits show that Diversified checks were used to pay the bills of "SST, Inc." and "SST." Id. exhibits L and M. Diversified checks were also used to pay phone bills for Eva Johnson, id. exhibit P, and other corporations purportedly owned or controlled by Jean Marie and SST, id. exhibits N and O. Diversified checks were used to pay auto insurance premiums for other corporations connected with the judgment debtors, id. exhibit Q, and the insured drivers are shown to be St. Gelais, his wife, Jean Marie, Eva Johnson, and her nephew, Fentie, id. exhibit R.

Bayless attaches several letters from Diversified to various businesses regarding its "name change." See id. exhibits U ("RE: Diversified Financial Corporation Name Change"); V (identifying SST Financial as "a division of Diversified"); and W (Diversified identified as the "acting company" for EDEN Corporation, purportedly a wholly owned subsidiary of SST). Bayless also attaches an agreement in which SST Financial purportedly assigned an ongoing transaction to Diversified because SST Financial lacked the capacity to complete the transaction. Id. exhibit Z. Finally, she attaches a letter from St. Gelais to a business contact, stating that Diversified "is the successor to SST Financial Corporation," and that the "people associated with SST Financial Corporation are now the same group involved with Diversified." Id. exhibit 4.

Bayless also submits the declaration of a former Diversified employee, Rebecca Lawrence. Id. Lawrence Declaration. Lawrence states that she began working for SST Financial in March 1987. Her paychecks were initially issued by SST Financial. She was told to call Eva Johnson regarding matters normally handled by an office manager. On one occasion Lawrence phoned Jean Marie on a matter regarding a client. Shortly after she began work at SST Financial, a marshal delivered legal papers to the office and St. Gelais explained to Lawrence that his father and SST were involved in litigation. Shortly thereafter she observed other employees boxing up SST and SST Financial records which were then shipped to storage. She then began receiving paychecks from Diversified. She claims, however, that her duties remained the same and that she continued to work on the same transactions. The office employees remained the same. St. Gelais explained to her that SST Financial had been dissolved because of the litigation. After the change, Lawrence was still advised to contact Eva Johnson regarding certain office matters. Lawrence observed various communications between the office and Jean Marie and Johnson in Florida. She noticed that packages of documents were sent from the office to Johnson almost daily.

St. Gelais contends that the district court abused its discretion in concluding that Bayless would likely succeed on the merits and that irreparable harm would result if the preliminary injunction did not issue. St. Gelais also contends that the preliminary injunction is overbroad because it prevents him from conducting routine personal matters and it has ruined the business of his corporation, Diversified. He asks this court to cure the overbreadth by limiting the preliminary injunction to cover only the accounts of the judgment debtors.

Under these facts the district court did not abuse its discretion in concluding that Bayless would likely succeed on the merits and that irreparable harm would result if the preliminary injunction did not issue. The evidence supports the conclusion that SST Financial and Diversified are the alter egos of the judgment debtors Jean Marie and SST. St. Gelais was actively involved in his father's businesses. SST's advertising literature identified St. Gelais as the president of SST Financial, a wholly owned subsidiary of SST. Shortly after the nine million dollar judgment was entered against Jean Marie and SST, Diversified, under St. Gelais's direction, assumed control of SST Financial's operations. Diversified funds were used to pay business and personal expenses relating to Jean Marie and SST. The personal relationship of the parties and the evidence in this case suggests that St. Gelais is involved in an attempt to defraud the judgment creditors of Jean Marie and SST. As the judgment debtors' receiver, Bayless may be entitled to records and assets held by St. Gelais and Diversified. The preliminary injunction is necessary to prevent the transfer or concealment of these records and assets. Furthermore, in light of the evidence of fraudulent conduct in this case we conclude that the preliminary injunction is not overbroad.

CONCLUSION

The district court's order granting the preliminary injunction is AFFIRMED.