Spiska Engineering, Inc. v. SPM Thermo-Shield, Inc. ( 2011 )

#25694-rev & rem-SLZ
2011 S.D. 23IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
* * * *
SPISKA ENGINEERING, INC., Plaintiff and Appellee,
v.
SPM THERMO-SHIELD, INC., Defendant and Appellee,
and
IN THE MATTER OF ARBITRATION
BETWEEN SPISKA ENGINEERING, INC.
and SPM THERMO-SHIELD, INC.,
and
JOSEPH RAVER, Appellant.
* * * *
APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
* * * *
HONORABLE JEFF W. DAVIS
Judge
* * * *
MICHAEL C. LOOS of Attorneys for plaintiff
Clayborne, Loos & Sabers , LLP and appellee Spiska
Rapid City, South Dakota Engineering, Inc.
DENNIS C. WHETZAL Attorney for receiver
Rapid City, South Dakota and appellee SPM
Thermo-Shield, Inc.
BRAD J. LEE of
Beardsley, Jensen & Von Wald, Prof. LLC Attorneys for appellant
Rapid City, South Dakota Joseph Raver.
* * * *
ARGUED ON MARCH 22, 2011
OPINION FILED 05/25/11
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ZINTER, Justice
[¶1.] Plaintiff-Appellee Spiska Engineering, Inc. (Spiska) commenced an
action for breach of contract against Defendant-Appellee SPM Thermo-Shield, Inc.
(Thermo-Shield). Following a number of proceedings and appeals relating to
arbitration of the dispute, an arbitration award was confirmed and Spiska obtained
a money judgment against Thermo-Shield. A receiver was subsequently appointed
to satisfy the judgment by liquidation of Thermo-Shield’s assets. Appellant Joseph
Raver was not a party in these proceedings. However, the receiver mailed Raver a
motion and notice of intent to sell Thermo-Shield’s assets, and Raver objected to the
sale. Following a hearing, the circuit court denied Raver’s objection and approved
the sale. Although injunctive relief was not an issue at that hearing, the receiver
included language in his proposed findings and conclusions permanently enjoining
Raver from competing with Thermo-Shield. The circuit court adopted the receiver’s
proposed injunctive language in its final order. Raver now appeals the award of
injunctive relief. We reverse because we conclude that the circuit court never
acquired in personam jurisdiction to enjoin Raver.
Facts and Procedural History
[¶2.] In 2007, this Court affirmed a circuit court’s confirmation of Spiska’s
arbitration award of $4,999,257 against Thermo-Shield. See Spiska Eng’g, Inc. v.
SPM Thermo-Shield, Inc., 2007 S.D. 31, ¶¶ 1, 5, 730 N.W.2d 638, 641, 642. The
award was based on Thermo-Shield’s wrongful termination of Spiska’s European
contracts involving the use of ceramic coatings. Id. ¶¶ 2, 5. Following confirmation
of the arbitration award, discovery was conducted to enforce the judgment. Raver,
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Thermo-Shield’s sole shareholder, president and CEO, was deposed. Raver
disclosed that he had personally sold certain product formulae and rights to
manufacture and market Thermo-Shield’s products in return for a twenty percent
share in a German corporation. It is undisputed that the product formulae were at
one time (and possibly still are) closely-guarded trade secrets. There is also no
dispute that the product formulae, as well as all rights associated with the products,
belonged to Thermo-Shield rather than Raver. Nevertheless, Spiska never asserted
any kind of personal claim against Raver in this action.
[¶3.] On May 30, 2007, the circuit court appointed a receiver over Thermo-
Shield. The receiver was charged with the duty of identifying, compiling, and
selling Thermo-Shield’s assets to satisfy Spiska’s judgment. The receiver later
identified a purchaser of the assets, negotiated a proposed purchase agreement, and
moved the circuit court for approval of the sale.
[¶4.] On April 12, 2010, the receiver sent Raver and other potentially
interested persons a Motion to Approve Sale and Notice of Hearing. The motion
and notice were sent by U.S. mail. The motion did not assert a claim for injunctive
relief against Raver. The motion and notice simply identified the terms of the
proposal and gave recipients an opportunity to object or waive their right to object
to the sale and disposition of the proceeds. Pursuant to that motion and notice,
Raver filed an objection claiming that the proposed sale failed to allocate a portion
of the proceeds to satisfy a personal loan of $48,659.80 he allegedly made to
Thermo-Shield. Raver appeared through counsel to preserve his objection at the
hearing on the receiver’s motion to approve the sale. At the conclusion of the
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hearing, the circuit court granted the receiver’s motion to sell Thermo-Shield’s
assets. The court awarded no injunctive relief against Raver.
[¶5.] Although no claim for injunctive relief had been sought or awarded at
the hearing, language awarding injunctive relief appeared in the receiver’s proposed
findings of fact, conclusions of law, and order approving the sale. Raver timely
objected to that language arguing that procedurally, injunctive relief had not been
“addressed in the [receiver’s] motion, briefed by any party, [or] addressed at the
hearing.” Raver contended that it would be an injustice to grant the proposed
injunction “without taking any evidence, and with no record, establishing that the
[assets at issue] constitute[d] a trade secret or a protectable right of Thermo-
Shield.” Raver objected substantively on the ground that there had been “no
determination [as to which of the] information constitute[d] trade secrets or
information gleaned from a confidential relationship,” that he had “no intention of
using Thermo-Shield[’s] formula in any manner that would prejudice the potential
buyer’s rights,” and that “the language in the proposal amount[ed] to a permanent
covenant not to compete against Raver that span[ned] the entire world.” Raver
finally raised the issue of a lack of in personam jurisdiction. Raver noted that the
proposed findings and conclusions sought “to limit Joe Raver when he is not even a
party to this lawsuit.” Raver pointed out that if there was concern that he had
“done, or is doing, something that [was] prejudicing . . . rights [in the assets, a]
petition [should be filed with] the appropriate court for relief[.]”1
1. The transcripts of the hearing on the request to sell assets and the hearing on
the objections to the proposed findings, conclusions and order are not
(continued . . .)
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[¶6.] The circuit court overruled Raver’s objections and adopted the
receiver’s proposed findings, conclusions, and order. One part of the order provided:
“. . . Mr. Raver may not obtain an ownership interest in, or serve in a management
capacity with any company that manufactures ceramic coatings or paint products[,]
which in any way competes with SPM Thermo-Shield, Inc. or any successor to its
assets.” Raver appeals this provision alleging that the circuit court did not have in
personam jurisdiction to grant injunctive relief. Raver also contends that the terms
of the injunction are unreasonable and an unlawful restraint of trade in violation of
SDCL 53-9-8.
Decision
[¶7.] We begin by considering the circuit court’s in personam jurisdiction to
grant the permanent injunction. Issues regarding a court’s jurisdiction are
questions of law that are reviewable de novo. Grajczyk v. Tasca, 2006 S.D. 55, ¶ 8,
717 N.W.2d 624, 627.
[¶8.] “The consistent constitutional rule has been that a court has no power
to adjudicate a personal claim or obligation unless it has jurisdiction over the
person of the defendant.” Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S.
100, 110, 89 S. Ct. 1562, 1569, 23 L. Ed. 2d 129 (1969). “Without a proper basis for
[personal] jurisdiction, or in the absence of proper service of process, [a court] has no
power to render any judgment against the defendant’s person or property unless the
defendant has consented to jurisdiction or waived the lack of process.” SEC v. Ross,
________________________
(. . . continued)
included in the record on appeal. Consequently, our review is restricted to
the written documents filed in connection with both hearings.
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504 F.3d 1130, 1138-39 (9th Cir. 2007) (considering a receiver’s unsuccessful
attempt to exercise jurisdiction over money held by a nonparty who had allegedly
violated securities laws but had not been personally served or named in a summons
and complaint).
[¶9.] In this case there is no dispute that Raver was not designated as a
party. Furthermore, although the receiver mailed Raver a copy of the notice of
hearing on the motion for approval of the sale, that mailing was not sufficient to
commence an action against Raver. See SDCL 15-6-3 (“A civil action is commenced
as provided in §§ 15-2-30 and 15-2-31.”); SDCL 15-2-30 (“An action is commenced as
to each defendant when the summons is served on him[.]”); SDCL 15-6-4(d)(8)
(providing that a summons shall be served by delivering a copy to the defendant
personally). Therefore, the circuit court did not acquire in personam jurisdiction to
adjudicate a personal claim against Raver in this breach of contract action between
Spiska and Thermo-Shield. See Marin v. Titus, 23 S.D. 553, 122 N.W. 596, 596-97
(1909) (stating that a circuit court acquires jurisdiction through the proper service
of a summons).
[¶10.] Appellees, however, argue that Raver waived any objection to personal
jurisdiction and insufficient service of process. They first contend that Raver
waived those objections by failing to file a motion to dismiss. Personal jurisdiction
and insufficiency of service of process are defenses that may be waived.
Grajczyk, 2006 S.D. 55, ¶ 9, 717 N.W.2d at 627. “SDCL 15-6-12(h)(1) provides that
the defenses are waived if they are not included in a motion under the
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circumstances provided in SDCL 15-6-12(g) or in a responsive pleading[.]” Id. 2 But
Raver made no Rule 12 motion that would have required the inclusion of a motion
to dismiss for lack of personal jurisdiction and service of process under the
circumstances described in SDCL 15-6-12(g). 3 Furthermore, no party filed any
“pleading” against Raver to which a responsive pleading was permitted. See SDCL
15-6-7(a) and 15-6-12(a) (enumerating the pleadings and responsive pleadings
permitted under the Rules of Civil Procedure). The issue of injunctive relief was
only raised in proposed findings of fact and conclusions of law after the hearing.
Therefore, Raver had no SDCL 15-6-12(h)(1) obligation to file a Rule 12 motion or
responsive pleading asserting insufficiency of service and lack of personal
jurisdiction. Moreover, upon receiving the proposed findings and conclusions first
asserting a claim for injunctive relief, Raver timely filed written objections
asserting that the proposals were improper because he was not a party in this
2. SDCL 15-6-12(h)(1) provides:
A defense of lack of jurisdiction over the person, insufficiency of
process, or insufficiency of service of process is waived (A) if
omitted from a motion . . . described in § 15-6-12(g), or (B) if it
is neither made by motion under § 15-6-12 nor included in a
responsive pleading or an amendment thereof permitted by §
15-6-15(a) to be made as a matter of course.
3. SDCL 15-6-12(g) provides:
A party who makes a motion under § 15-6-12 may join with it any
other motions herein provided for and then available to him. If a party
makes a motion under § 15-6-12 but omits therefrom any defense or
objection then available to him which § 15-6-12 permits to be raised by
motion, he shall not thereafter make a motion based on the defense or
objection so omitted, except a motion as provided in subdivision 15-6-
12(h)(2) on any of the grounds there stated.
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action. We conclude that Raver did not waive his personal jurisdiction defenses by
failing to move to dismiss.
[¶11.] Appellees also contend that Raver waived these defenses by filing an
objection to the sale and appearing before the court on that objection. In
determining whether an appearance constitutes submission to in personam
jurisdiction, we look to the relief requested and “the real question is whether there
is a submission to the power of the court or an active invocation of its power on
nonjurisdictional matters.” Grajczyk, 2006 S.D. 55, ¶ 12, 717 N.W.2d at 628.
[¶12.] At the time Raver appeared on his objection to the sale, there were no
nonjurisdictional issues remaining before the circuit court other than the sale of
Thermo-Shield’s assets. No claim for injunctive relief had been asserted. Further,
Raver’s appearance on his objection was not a voluntary submission to the court’s
power to litigate a personal claim against him. He appeared only because he had
been given notice by mail that he risked loss of the right to object to the sale of
Thermo-Shield’s assets unless he filed an objection. Finally, no claim for injunctive
relief was ever litigated. The claim for injunctive relief first arose after the hearing
when the receiver proposed findings and conclusions relating to the sale. Under
these circumstances, it was not foreseeable that Raver’s objection to the sale could
constitute consent to personal jurisdiction to litigate a claim that Raver should be
enjoined for violating the Trade Secrets Act. We conclude Raver cannot be deemed
to have submitted to or invoked the court’s power to litigate any issue other than
the receiver’s disposition of Thermo-Shield’s assets.
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[¶13.] Thermo-Shield and Spiska mistakenly rely on Robinson v. Glover, 60
S.D. 270, 244 N.W. 322 (S.D. 1932); Matter of J.W.W., 334 N.W.2d 513 (S.D. 1983);
and In re: Guardianship and Conservatorship of Miles, 2003 S.D. 34, 660 N.W.2d
233. In Robinson and J.W.W., the plaintiff had actually commenced an action
against the party contesting jurisdiction. See Robinson, 244 N.W. at 323
(referencing the underlying appeal of Robinson v. Glover, 59 S.D. 332, 239 N.W. 848(1931), which reflected that an action seeking the relief requested had been
commenced); J.W.W., 334 N.W.2d at 515 (involving a case where a summons and
complaint seeking termination of parental rights had been served by publication).
Because those were cases in which an action had been properly commenced, it was
foreseeable that the responding parties would waive jurisdictional defenses by
voluntarily appearing.
[¶14.] Miles is also inapposite. In Miles, a trust beneficiary’s guardian and
conservator filed an annual accounting, and a nonresident trustee filed a “special
appearance” to object to the accounting. 2003 S.D. 34, ¶¶ 6-8, 660 N.W.2d at 235.
The circuit court approved the accounting and also ordered the conservator to make
a demand on the trustee for funds beyond the income that the South Dakota
beneficiary normally received. Id. ¶ 8. Notwithstanding the special appearance, we
held that the circuit court had personal jurisdiction over the trustee to order such
payments because the trustee voluntarily appeared, testified concerning trust
matters, negotiated payment of trust funds to the trustee, requested the court to act
on other matters regarding the trust, sent interrogatories to the guardian, and
litigated payment of funds in his trustee capacity. Id. ¶¶ 40-41, 45. In contrast,
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Raver did not invoke the powers of the court for any purpose other than to respond
to the receiver’s request for objections to the proposed sale. Raver’s limited
response was not analogous to the voluntary invocation of numerous court powers
in Miles.
[¶15.] This case is more analogous to Ross, 504 F.3d 1130. In that case, the
SEC commenced a civil enforcement action against Alpha Telecom for violations of
federal securities statutes. Id. at 1133. A receiver was appointed to preserve and
manage Alpha Telecom’s assets. Id. The receiver subsequently filed a motion to
disgorge commissions on sales of unregistered securities made by Alpha Telecom’s
sales agents. Id. at 1133-34. However, the receiver did not commence an action
against the agents or personally serve them with the motion. The receiver merely
sent the nonparty agents a notice of hearing by first-class mail. Id. at 1135. The
district court found that it had jurisdiction over the agents because disgorgement
related to receivership matters pertaining to the company’s assets, and the court
entered judgment ordering disgorgement from individual nonparty agents. Id. at
1136. The agents appealed alleging a lack of personal jurisdiction and insufficiency
of proper service of process. Id. at 1137.
[¶16.] The Ninth Circuit reversed noting that “service of process is the means
by which a court asserts its jurisdiction over the person.” Id. at 1138. The court
concluded that in personam jurisdiction could not be obtained by merely naming the
agents in a motion. Id. at 1140-41. The court further concluded that there was no
jurisdiction because the receiver “never filed a complaint and never named [the
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agents] as a party. In other words, [there was no jurisdiction because] the Receiver
never commenced an action against [the agents.]” Id. at 1140.
[¶17.] The court also rejected the argument that jurisdiction existed because
the agents were exercising rights over receivership assets as nominal defendants. 4
Id. at 1141-42. Although a “mere custodian” of assets may only be entitled to simple
notice and an opportunity to be heard, a person alleged to be dealing with
receivership assets as a result of that person’s violation of law “must be treated as
any other defendant and afforded process of law.” Id. at 1142. The court explained
that the Constitution does not permit a receiver to use a “nominal defendant
designation to deprive one whose only plausible basis for liability is a violation of
[an act] of either his right to full and formal service of process or his right to fully
litigate the question of his own liability under the [act allegedly violated].” Id.Similarly, the Constitution does not permit a receiver to use his ancillary power
over assets where the case involves more than the mere “determination of who is
entitled to possession of the funds.” Id. at 1144. Because that receiver was seeking
an adjudication of the agents’ personal liability, “full in personam jurisdiction” was
required. Id.
4. “A nominal defendant is not a real party in interest because he ‘has no
legitimate claim to the disputed property.’ ” Id. at 1141 (quoting S.E.C. v.
Colello, 139 F.3d 674, 676 (9th Cir. 1998)). See also SEC v. Cherif, 933 F.2d
403, 414 (7th Cir. 1991) (stating that a nominal defendant “holds the subject
matter of the litigation in a subordinate or possessory capacity as to which
there is no dispute” and is not a real party in interest because “he has no
interest in the subject matter litigated”).
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[¶18.] In this case Spiska and the receiver’s basis for injunctive relief is their
contention that Raver violated South Dakota’s Trade Secrets Act. 5 However, like
Ross, neither Spiska nor the receiver commenced an action or served Raver with a
pleading alleging that violation of law and requesting that relief. Furthermore,
because the issue of injunctive relief was never raised until after the hearing, Raver
was never given an opportunity to litigate whether he improperly appropriated
trade secrets within the meaning of the Trade Secrets Act. Raver was certainly
never afforded an opportunity to litigate Spiska and the receiver’s current claims
that the injunction was warranted because the formulae at issue were trade secrets,
an injunction was necessary to eliminate commercial advantage, an injunction was
warranted under the inevitable disclosure doctrine, and the length and terms of the
injunction were reasonable.
[¶19.] Under these circumstances, we conclude that the circuit court never
acquired in personam jurisdiction to grant injunctive relief against Raver. Because
we reverse that portion of the judgment granting injunctive relief, we need not
consider Raver’s alternative contentions that the terms of the injunction were
unreasonable and an unlawful restraint of trade.
[¶20.] Reversed and remanded for further proceedings consistent with this
opinion.
5. Spiska and the receiver cite SDCL 37-29-2(a) (allowing an injunction for
actual or threatened misappropriation of trade secrets and for an additional
reasonable period of time after a trade secret has ceased in order to eliminate
commercial advantage) and SDCL 37-29-2(c) (allowing affirmative action by
court order to protect trade secrets).
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[¶21.] GILBERTSON, Chief Justice, and KONENKAMP, MEIERHENRY,
and SEVERSON, Justices, concur.
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