Rejuvi Laboratory, Inc.

• Court: United States Bankruptcy Court, N.D. California
• Decided: December 9, 2019
• Docket: 18-31069
• Status: Unknown

Opinion

EDWARD J. EMMONS, CLERK of □□ NO S. Sf □ NORTHERN DISTRICT OF CALIFORNIA | ae F aS □□ □ □□□□ 1 Signed and Filed: December 9, 2019 □□□□□□ run, Mund, 4 DENNISMONTALL U.S. Bankruptcy Judge 5 6 7 8 UNITED STATES BANKRUPTCY COURT 9 NORTHERN DISTRICT OF CALIFORNIA 10 1 In re: ) Bankruptcy Case ) No. 18-31069-DM 2 Rejuvi Laboratory, Inc., ) ) Chapter 11 13 ) 14 Debtor.

E 15 ) 16 || MEMORANDUM DECISION REGARDING JURISDICTION OF THE AUSTRALIAN COURT AND DENYING MOTION TO AMEND CLAIM Introduction 18 19 Creditor Maria Corso (“Creditor”) filed a motion to amend her proof of claim on July 50 17, 2019. Debtor disputed whether a court in Australia had jurisdiction to enter a default judgment in favor of Creditor. The parties filed further oppositions and replies, and both

matters came on for hearing on September 12, 2019. Following that hearing, the parties 53 submitted additional briefing regarding the issues. For the reasons that follow, the court

concludes that the Australian court did have personal jurisdiction over Creditor’s cause of

action, and that Creditor may not amend her proof of claim. 36 This court has jurisdiction over these contested matters pursuant to 28 U.S.C. 88 157(b) and 1334(b). 27 28

1 Background 2 Creditor filed a proof of claim in this bankruptcy case based upon a default judgment 3 (the “Judgment”) entered in her favor in the District Court of South Australia against Debtor 4 Rejuvi Laboratory, Inc., on June 17, 2016. The Judgment awards damages for injuries Creditor 5 suffered after using Debtor’s product. 6 Creditor first used the product in 2007 to remove tattoos after a local clinician 7 recommended the product and gave Creditor a flyer regarding the tattoo removal treatment. 8 After Creditor suffered injury from the product, she filed suit in the Australian court, which 9 awarded her $1.2 million AUD and subsequently awarded her $51,853 in interest and $120,183 10 in legal expenses, resulting in a final amount of $1,192,545.01 per the amended order entered 11 on August 19, 2016. In October of 2016, Creditor filed suit against Debtor in the Northern 12 District of California (case no. 16-cv-05604-MMC) and then in 2017, filed a motion for 13 summary judgment to have the Judgment recognized. Debtor opposed this recognition, and 14 simultaneously filed an application to set aside the Judgment in the Australian court. The case 15 was then put on hold until the Australian court denied the application in June of 2018, after 16 which Debtor filed this bankruptcy. 17 The Judgment awards damages for physical harm such as burns, scars, nerve damage, 18 and a cystic nephroma that developed in Creditor’s left kidney. At the time the cystic 19 nephroma, a tumor, had not been diagnosed as malignant, and the Australian court awarded 20 some damages on the small chance that the tumor became malignant.1 In January 2018, 21 Creditor’s doctor determined that the tumor had grown and recommended removal of the 22 kidney. On January 30, 2018, the kidney was removed entirely. 23 Debtor filed this bankruptcy in September 2018 and Creditor filed her first proof of 24 claim to enforce the Judgment on January 9, 2019 as Claim 7-1. 25 26 27

28 1 After some discussion of whether the cystic nephroma would reach malignancy, the Judgment states, “[h]aving regard to my earlier finding some allowance must be made for treatment of the 1 Personal Jurisdiction 2 As a preliminary matter, Debtor objected to Creditor’s declaration related to personal 3 jurisdiction (dkt. #141) for hearsay and some mischaracterizations. Debtor first objects to a 4 portion of the declaration in which Creditor makes statements regarding what was said to her by 5 the clinician performing the tattoo removal. See dkt. #148. Creditor’s declaration states that the 6 clinician told Creditor she had experience using the product, had received training, and that she 7 assured Creditor the product was safe. See dkt. #141-6, ¶ 5-6. The court is not convinced that 8 these statements were offered for the truth of the matter (that the clinician had experience, that 9 the product was safe). See Federal Rule of Evidence 801(c)(2). The court notes the 10 mischaracterizations and will give the evidence the weight it is due. 11 Debtor moves for a determination that the Australian court lacked personal jurisdiction 12 over Debtor and consequently, the Judgment is void. Creditor argues that Debtor established 13 enough contact with South Australia (and Australia in general) for that court to have personal 14 jurisdiction. 15 In order for the Australian court to have specific personal jurisdiction over Debtor, 16 Debtor must have established sufficient contact with the state of South Australia. California’s 17 long-arm statute has the same due process requirements as federal law, which requires that a 18 defendant have ‘minimum contacts’ with the state such that an exercise of personal jurisdiction 19 does not ‘offend traditional notions of fair play and substantial justice.’ See Int’l Shoe Co. v. 20 State of Wash., 326 U.S. (1945). The test for minimum contacts adopted by the Ninth Circuit 21 is: 22 “1) The non-resident defendant must purposefully direct his activities or 23 consummate some transaction with the forum, or resident thereof; or perform some act by which he purposefully avails himself of the privilege of conducting 24 activities in the forum, thereby invoking the benefits and protections of its laws; 2) the claim must be one which arises out of or relates to the defendant's forum- 25 related activities; and 3) the exercise of jurisdiction must comport with fair play and substantial justice, 26 i.e. it must be reasonable.” 27 DFSB Kollective Co. v. Bourne, 897 F.Supp.2d 871, 879 (N.D. Cal. 2012) (citing 28 Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 802 (9th Cir. 2004)). For prong (1), courts in this circuit tend to apply the standard of ‘purposeful direction’ in tort cases, which 1 consists of actions taking place outside the forum that are directed at the forum. 2 Schwarzenegger, 374 F.3d at 802. This can include the distribution of goods originating 3 elsewhere. Id. at 803. 4 Schwarzenggar put forth a three-part test to evaluate purposeful direction, taken from 5 Calder v. Jones, 465 U.S. 783, 804 (1984): (1) the defendant committed an intentional act, 6 (2) expressly aimed at the forum state, (3) causing harm that the defendant knows is likely to be 7 suffered in the forum state. Schwarzenegger, 374 F.3d at 803. 8 The facts demonstrate that Debtor directed its product to South Australia. Debtor states 9 that it develops and produces a variety of products with Dr. Cheng as the President. (Cheng 10 Declaration, dkt. #136). It employs 6-9 people with gross sales of $1.2-1.4 million out of a 11 facility in South San Francisco, where all products are manufactured, packaged, and shipped. 12 Id. Debtor makes limited online sales directly to consumers and some spas/salons in America 13 but: “Generally speaking, however, [Debtor] does not sell to the general public, and the only 14 direct sales are in the United States. [Debtor] sells its products internationally, primarily 15 through a network of distributors.” (Debtor’s Brief, p. 5). Debtor typically enters into 16 agreements whereby it grants a distributor exclusive rights in their respective region, then fills 17 orders and locally transports the products. After that, the distributors have control. Debtor 18 entered into one such agreement with an Australian distributor located in Queensland now 19 named Arias Holdings Pty. Ltd. (“Arias”) and gave it exclusive rights in Australia to distribute 20 products. Arias began importing Debtor’s products in 2006 and handled everything after the 21 product left South San Francisco. Title to the products passed from Debtor to Arias when the 22 products left Debtor’s control. Total sales were about $22-23,000 a year. Exhibit D (dkt. #136) 23 of Dr. Cheng’s declaration also indicates that the Australian Institute of Permanent Makeup was 24 the exclusive trainer and appointed agent/distributor of the tattoo removal products and training, 25 which contract was made with “Rejuvi Australia” (which was apparently how Arias represented 26 itself). Dr. Cheng also went to Australia twice to provide seminars about the products, to 27 Brisbane, Sydney (twice), and Melbourne. The clinician who treated Creditor with the tattoo 28 removal product told Creditor she had been to one of the seminars. She assured Creditor that 1 the product was safe, and gave her a flyer about Debtor, which has Debtor’s South San 2 Francisco address on it (dkt. #141, Ex. 2). 3 In its own words, the majority of Debtor’s business involves creating products and then 4 using third-party distributors in other countries. Its very business model directs activities to 5 international forums, and this particular arrangement with Arias directed those activities to all 6 of Australia. The fact that it used a distributor does not help Debtor. See College Source, Inc. 7 v. Academy One, Inc., 653 F.3d 1066, 1068 (9th Cir. 2011) (“we attribute no jurisdictional 8 significance to the fact that employees of AcademyOne’s contractor performed the relevant 9 work on AcademyOne’s behalf.”). 10 Prongs 1 and 2 of the purposeful direction test are satisfied by these facts. The 11 intentional act is Debtor’s contracting with a distributor in Australia and creating products for 12 distribution in Australia. For prong 2, the intentional act must have been expressly aimed at 13 Australia, and this analysis depends largely on the specific type of tort at issue. See 14 Schwarzenegger, 374 F.2d at 807. Debtor intentionally targeted Australia by contracting with 15 Arias, and furthered that intention by teaching seminars on the products in Australia to promote 16 use of their products and teach practitioners how to administer the products. Debtor’s name is 17 listed on flyers distributed to prospective clients. Stepping back, the big picture is that Debtor 18 used distributors but was ultimately marketing its own product and attempting to successfully 19 pierce foreign markets with its products. Unlike the products liability cases cited by Debtor, 20 here Debtor did not merely know that its products would reach Australia, instead, it intended 21 this result and contracted with Arias for that very purpose. 22 Prong 3 of the purposeful direction test is also easily satisfied here, because the harm 23 caused—complications from using the product—are foreseeable where the tattoo removal 24 product was distributed, promoted, and used. 25 As for the remaining factors for the broader minimum contacts test, these are also easily 26 satisfied. It is clear that Creditor’s injury and subsequent claim would result from Debtor’s 27 contract with Arias, which enabled Arias to distribute this product in all regions of Australia. In 28 addition, it is further reasonable to allow this litigation because Debtor, and Debtor alone, created the product which harmed Creditor. This product is wholly, not just in part, responsible 1 for her injuries. To find otherwise would conflict with fair play as it would allow a company 2 like Debtor—who mostly contracts with international distributors and does not sell to the 3 general public—to transfer liability to third parties ad infinitum. By Debtor’s logic, it will 4 never be liable for its products malfunctioning outside of California, despite mostly doing 5 business outside of California. Contracting with a third party to distribute the product does not 6 eliminate Debtor’s responsibility for the product itself. 7 Debtor repeatedly differentiates between South Australia and Australia and iterates that 8 there is no evidence of contact with South Australia. Debtor’s logic invites the result that it 9 may have established enough contact with Australia as a whole, but not its parts. This is not a 10 reasonable result. Debtor contracted with Arias to distribute its products in all of Australia, 11 irrespective of region. This, combined with subsequent contact, establishes that Debtor 12 expressly aimed its product to each region in Australia. 13 Consequently, the court in Australia did have personal jurisdiction over Debtor and the 14 Judgment stands. 15 Amending the Proof of Claim 16 Creditor also seeks to amend her proof of claim to include additional damages for loss 17 of her kidney in 2018. Debtor argues that she may not now include additional damages. 18 Debtor argues that amendment is precluded due to res judicata2 because the Judgment 19 has already been entered as to damages flowing from Debtor’s conduct, and thus any 20 amendment would be futile. Res judicata requires an identity of claims, a final judgment on the 21 merits, and privity. Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg'l Planning Agency, 322 F.3d 22 1064, 1077 (9th Cir. 2003). There is no dispute as to privity of the parties or whether the 23 Judgment is final, so the court will focus on the first factor. 24 Creditor seeks to add damages for loss of a kidney due to a tumor generated by Debtor’s 25 product. On June 16, 2016, the District Court of South Australia issued the Judgment awarding 26 Creditor damages flowing from use of Debtor’s tattoo removal product. The Judgment 27 28 2 The court notes that this use of res judicata is referred to in modern times as claim preclusion. See Paine v. Griffin et al. (In re Paine), 283 B.R. 33, 38 (9th Cir. BAP 2002). As the parties 1 acknowledges that Creditor had been diagnosed with a cystic nephroma at that time, and while 2 it was a benign tumor, the court noted that there was a 5-10% chance of malignancy and that 3 Creditor would require ongoing monitoring of her kidney. When assessing damages, the court 4 found that Debtor’s product was the cause of the cystic nephroma and then, in a subsection 5 titled “Future medical expenses,” awarded a general allowance of $10,000 AUD for its 6 treatment. Now, Creditor seeks to recover for the malignancy, and consequent removal, of her 7 kidney. An identity of claims requires that two suits arise from the same ‘transactional nucleus 8 of facts.’ Id. at 1078. Here, the transactional nucleus of facts is that Creditor used Debtor’s 9 product and was damaged by it. Creditor argues that the claims are not identical because a 10 latent injury that is later manifested is a claim distinct from any prior claims from the same 11 injury. For this proposition, Creditor cites to case law that deals almost exclusively with 12 whether late-discovered tort injuries violated the relevant statute of limitations. See e.g. Pooshs 13 v. Philip Morris USA, Inc., 51 Cal. 4th 788 (2011) (where the California Supreme Court held 14 that an earlier discovered tobacco-related disease did not trigger the statute of limitations for a 15 lawsuit based on a latent disease arising from the same tobacco use).3 The simple distinction 16 here is that a judgment has been rendered in favor of Creditor for the injury. The Judgment 17 plainly includes damages for the (then) remote possibility of the tumor becoming malignant: it 18 awards $10,000 in the event that the 5-10% chance of malignancy was realized. The court is 19 sympathetic to Creditor’s plight but cannot undo the Judgment as this claim has been provided 20 for. 21 Further, if Creditor were correct in asserting that the claim for a lost kidney is not 22 identical and that it gives rise to a distinct claim, then Creditor is now arguing for inclusion of a 23 24 3 Creditor cites to one case that dealt with res judicata, a case from Wisconsin in which a 25 plaintiff’s prior suit had been dismissed with prejudice. Sopha v. Owens–Corning Fiberglas, 230 Wis. 2d 212, 216-17 (1999). This case is not particularly helpful here, where there is a 26 judgment in favor of Creditor, but the court notes that the Wisconsin court stated “[o]rdinarily, 27 a subsequent injury resulting from a tortfeasor’s conduct does not give rise to a new cause of action for the purposes of claim preclusion. The Restatement (Second) of Judgments explains: 28 “It is immaterial that in trying the first action he [the claimant] was not in possession of enough information about the damages, past or prospective, or that the damages turned out to be 1 late-filed claim rather than a claim amendment. This is subject to the standard articulated by 2 the Ninth Circuit in California Dep’t of Health Servs. v. Jensen (In re Jensen), 995 F.2d 925 3 (9th Cir. 1993). There, the court iterated that a claim in bankruptcy arises when it is fairly 4 contemplated. Id. at 930. Here, Creditor knew of the damage to her kidney by at least January 5 of 2018, when her doctor recommended removal (dkt. #124-1, ¶ 15-23). As Creditor had 6 sufficient knowledge of the claim for almost a year prior to filing her proof of claim, the claim 7 was fairly contemplated at that time and thus cannot be included now as a late claim. 8 As a result, the court concludes that amendment would be futile due to principles of res 9 judicata, thus Creditor may not amend her proof of claim. 10 The court will issue a concurrent order consistent with this memorandum decision. A 11 status conference is set for January 23, 2020 at 11:30 a.m. to discuss next steps in this case. 12 *** END OF MEMORANDUM *** 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 COURT SERVICE LIST 2 3 4 5 6 7 8 9 10 11 12 13

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