Katzir’s Floor and Home Design, Inc., v. M-MLS.com

Katzir’s Floor and Home Design, Inc., v. M-MLS.com

M-MLS, Inc., a Canadian corporation wholly owned by Peter Sommer, sold an end matcher machine (a woodworking machine) to Katzir’s Floor for $ 87,200 in an “as is” condition. According to Katzir’s Floor, the machine never worked properly. Katzir’s Floor sued M-MLS, Inc. in California state court on July 29, 1999, seeking special damages of not less than $ 87,200, as well as general, incidental, consequential, and punitive damages. The action was removed to federal court on the basis of diversity.

M-MLS, Inc. initially answered and defended the lawsuit. Faced with financial difficulties, M-MLS, Inc. borrowed $ 50,000 from its former accountant, Elliott Fromstein, on August 28, 2000, giving Fromstein a secured interest in all of M-MLS, Inc.’s assets. M-MLS, Inc. discharged its attorneys in December 2000 and ceased defending the lawsuit. Default was entered against M-MLS, Inc. on March 9, 2001, for failing to secure new counsel, and a default judgment of $ 1,638,884 was entered on June 18, 2001, based on an affidavit submitted by Katzir’s Floor’s owner relating the lost sales Katzir’s Floor suffered from its inability to meet orders requiring use of the machine.
Meanwhile, M-MLS, Inc. failed to make payments to Fromstein, and Fromstein initiated private involuntary receivership proceedings under Canadian law in June 2001. As provided under Canadian law, Fromstein appointed Sklar Receivers and Consultants, Inc. (Sklar) as the receiver. Sklar received three appraisals on M-MLS, Inc.’s assets that ranged between $ 11,000 and $ 14,000. The appraised assets included office furniture, machine brochures, and computers, but did not value any intangible assets, including a website used by M-MLS, Inc.

On July 9, 2001, Sklar sold all of the assets of M-MLS, Inc. to Scamper Enterprises, Inc., a separate corporation wholly owned by Sommer’s wife, for $ 25,000. The proceeds, less a $ 5,000 receivership fee retained by Sklar, were paid to Fromstein as the secured creditor. The receiver’s bill of sale to Scamper included the right to use the name “M-MLS” and all company software, telephone numbers, and intellectual property associated with the name M-MLS. Katzir’s Floor was given notice and was aware of the receivership proceedings in Canada but did not challenge the valuation or the sale to Scamper of all of M-MLS, Inc.’s assets.

Around the time that M-MLS, Inc. discharged its attorneys in December 2000, Sommer formed another Canadian corporation called M-MLS.com, an online brokerage company for new and used woodworking machinery. After Scamper bought the assets of M-MLS, Inc., Scamper allowed M-MLS.com to use the M-MLS website that Scamper had acquired as part of the receiver’s sale.

In May 2002, Katzir’s Floor moved to modify the federal court default judgment to reflect the true names of the debtor by adding Sommer as an individual and M-MLS.com. The district court granted the motion on the bases that Sommer was the alter ego of M-MLS, Inc. and M-MLS.com was the successor corporation of M-MLS, Inc. Accordingly, the court entered an amended judgment on December 19, 2002. Sommer and M-MLS.com filed a notice of appeal from the December 19, 2002, order on January 10, 2003. They also filed a Rule 60(b) motion and a motion on March 10, 2003, challenging the underlying default judgment as it applied to them. The district court denied the motions, and Sommer and M-MLS.com appealed that order on April 21, 2003. Reversed. [Mr. Horwitz represented Respondent Katzir]