ZF Micro Devices, Inc. v. TAT Capital Partners, Ltd.

5 Cal.App.5th 69

209 Cal.Rptr.3d 442

ZF MICRO DEVICES, INC. et al., Plaintiffs and Appellants,

v.TAT CAPITAL PARTNERS, LTD., et al., Defendants and Respondents.

H040776

Court of Appeal, Sixth District, California.

Filed November 3, 2016

As Modified November 30, 2016

Jeffrey A. Berger, Berger Law Offices, Scott J. Spolin, C. Brent Parker, Santa Monica, Spolin Cohen Mainzer, for Plaintiffs and Appellants.

Joseph Nicholas Demko, Matthew Scott Kenefick, San Francisco, Jeffer, Mangels, Butler & Marmaro LLP, for Defendants and Respondents.

WALSH, J.^*

This is the third chapter of Silicon Valley litigation spanning more than 14 years involving a microchip company, ZF Micro Devices, Inc. (ZF Devices), and its successor, ZF Micro Solutions, Inc. (ZF Solutions).¹ The successor company sued National Semiconductor Corporation (NSC)—ZF Devices' foundry—and obtained a $20 million settlement in 2004. Afterwards, venture capital firms that had invested in ZF Devices, including TAT Capital Partners, Ltd. (TAT), sued ZF Solutions and others for fraudulent transfer of the NSC settlement proceeds. The investors prevailed at trial in 2010 and this court affirmed the judgment on appeal.

In the instant third lawsuit, the ZF Entities alleged in a complaint that Mark Putney, a TAT representative who was a ZF Devices board member, breached fiduciary duties owed to ZF Devices. The ZF Entities also alleged in a separate cross-complaint—originally filed in the second lawsuit but later severed and consolidated in this third suit—that TAT breached its fiduciary duties to ZF Devices. This third lawsuit went to trial in December 2013. TAT and Putney prevailed, and the ZF Entities appealed.

At trial, TAT argued that ZF's claim (accruing in February 2002) was barred by the applicable four-year statute of limitations because ZF's cross-complaint was not filed until March 2009. ZF contended that the cross-complaint was timely because the statute of limitations was tolled by the filing of TAT's lawsuit in February 2005. TAT replied that this tolling doctrine applied only to compulsory cross-complaints; because the ZF cross-complaint was permissive (unrelated to the claims alleged in TAT's complaint), its filing did not relate back to the date the complaint was filed. The trial court, acknowledging that authors of major California treatises had expressed conflicting views on the subject and aptly recognizing the issue was “ripe for appeal,” held the tolling doctrine applied only to compulsory cross-complaints. Because the court also found that ZF's cross-complaint was permissive, it allowed TAT to submit its statute of limitations defense at trial. The jury found that ZF's cross-complaint was time-barred.

We agree that ZF's cross-complaint was permissive but conclude the tolling doctrine applies to both permissive and compulsory cross-complaints. Although more recent intermediate appellate court decisions have suggested the tolling doctrine applies only to related (compulsory) cross-complaints, there is controlling Supreme Court authority from 1922 and 1946 that the tolling doctrine applies to the defendant's related and unrelated cross-claims against the plaintiff.

Because the tolling doctrine applied to ZF's permissive cross-complaint, its filing related back to the date TAT filed its complaint (February 2005). The cross-complaint having been timely filed, the court erred in submitting TAT's statute of limitations defense to the jury. Accordingly, we will reverse the judgment entered on ZF's cross-complaint against TAT and remand to the court below for further proceedings.²

PROCEDURAL BACKGROUND³

I. Introduction

Given the factual and procedural complexity concerning this matter, we provide a brief summary at the outset.

David Feldman founded ZF Devices in July 1995. He was at all times its chief executive officer. ZF Devices was in the business of designing and selling embedded microchips. The company contracted in 1999 with NSC to design and manufacture ZF Devices' “ZFx86” microchip.

TAT is a Swiss private equity firm that invests in startup high technology companies. Between 1997 and 1999, TAT infused ZF Devices with significant capital by investing approximately $9.8 million into the company which resulted in TAT holding 21.7 percent of the outstanding shares of ZF Devices. TAT held a seat on the board of directors of ZF Devices, and TAT's representatives on the board were Thomas Egolf and, later, Mark Putney. Putney resigned from the board in November 2001.

Sands Brothers Venture Capital L.L.C. (Sands Venture) and SB New Paradigm Associates LLC (SB) were additional investors of ZF Devices; collectively, Sands Venture and SB (hereafter, collectively, Sands) owned 10.4 percent of ZF Devices' stock. Sands' representative on ZF Devices' board of directors was Gary Kennedy, who resigned that position in November 2001.

On February 28, 2002, Kennedy—who had provided a $1 million secured bridge loan to ZF Devices in 2001 on which the company later defaulted—foreclosed on the assets of ZF Devices. This marked the end of ZF Devices' operations. At or about the same time, Feldman formed ZF Solutions for the purpose of acquiring ZF Devices' assets. Feldman and his sister, Marsha Armstrong, lent ZF Solutions approximately $400,000 for it to acquire from Kennedy the assets of ZF Devices he had obtained by foreclosing on his loan. Included among the assets ZF Solutions acquired was ZF Devices' microchip production agreement with NSC.

II. The NSC Lawsuit

On April 25, 2002, ZF Solutions sued NSC for damages, as Santa Clara County Superior Court case number 102CV807339 (the NSC lawsuit). The lawsuit was based upon claims that, among other things, NSC failed to produce ZF Devices' “ZFx86” microchips as agreed under their contract. While the case was ongoing, NSC contended that ZF Solutions had no standing to assert tort claims against NSC because those claims belonged to the shareholders of ZF Devices. In responding to this contention, Feldman produced a document entitled “Assignment of Assets,” purporting to assign ZF Devices' intellectual property, including any claims against NSC, from ZF Devices to ZF Solutions; the document bore no date of signature but reflected March 1, 2002, as its effective date. NSC challenged the legal effectiveness of the assignment. In April 2004—while the NSC lawsuit was still pending and the issue of ZF Solutions' standing was still outstanding—Feldman solicited and obtained TAT's execution of an April 2004 “Consent Agreement” (discussed, post ).

The case proceeded to trial, and a jury awarded ZF Solutions damages of $29 million. The trial judge vacated the verdict, but the case was later settled in or about December 2004 for $20 million.

III. The TAT Lawsuit

On February 14, 2005, two ZF Devices investors, TAT and Sands Venture, brought suit against the ZF Entities and Feldman, as Santa Clara County Superior Court case number CV035531 (the TAT lawsuit). TAT and Sands Venture alleged jointly claims for dissolution of ZF Devices, breach of fiduciary duty (against Feldman), fraudulent transfer, and for an accounting. Two separate complaints were later filed by TAT and Sands. A number of individuals who were ZF Solutions shareholders (including Feldman and his sister, Armstrong), identified collectively as the “transferee defendants,” were named in the separate complaints.

Generally speaking, TAT's and Sands' claims arose out of their respective contentions that, as ZF Devices shareholders, they were entitled to receive pro rata distributions of the proceeds of the $20 million settlement of the NSC lawsuit. TAT and Sands based their claims substantially upon the April 2004 “Consent Agreement,” which had been solicited by Feldman in response to NSC's assertion during the NSC lawsuit that ZF Solutions had no standing to assert ZF Devices' tort claims. Under the Consent Agreement, TAT and Sands ratified after-the-fact Feldman's transfer of ZF Devices' legal rights against NSC to ZF Solutions. TAT and Sands claimed that, in exchange for signing the Consent Agreement, they were promised that, as ZF Devices shareholders, they would receive pro-rata distributions of any recovery obtained in the NSC lawsuit. TAT and Sands alleged that ZF Solutions breached the Consent Agreement by distributing all net NSC lawsuit settlement proceeds to itself and to the transferee defendants (ZF Solutions' shareholders). TAT and Sands alleged further that the disposition of the settlement proceeds constituted a fraudulent transfer of assets.

On March 11, 2009, the court granted ZF's motion for leave to file a cross-complaint against TAT. ZF filed that cross-complaint on March 18, 2009 (the ZF cross-complaint) alleging that TAT (through its partners and agents, Egolf and Putney), as TAT's designated members of ZF Devices' board of directors, breached fiduciary duties owed to the ZF Entities.

The TAT lawsuit was tried in late 2009–early 2010. The trial judge considered various pretrial matters, including TAT's motion to sever the ZF cross-complaint. On December 21, 2009, the court granted that motion, ordering the ZF cross-complaint severed and consolidated with another pending Superior Court action that had been filed by the ZF Entities against TAT, Putney, and Egolf, namely, the instant case (case number 109CV134970; hereafter, the ZF lawsuit).

The TAT lawsuit proceeded to a three-phase trial. In the first phase, the court found that there were contracts that existed between TAT and ZF Solutions and Sands and ZF Solutions, and that they were sufficiently definite to be enforceable. In the second phase, a jury found in favor of TAT and Sands on their respective breach of contract claims, and it awarded damages to them. In the third phase, after hearing additional testimony, the court found in favor of TAT and Sands on their fraudulent transfer claims against the transferring defendants. A judgment was entered that included awards of damages (including interest) of $4,460,447 to...