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Spiska Engineering, Inc v. Spm Thermo-Shield

May 25, 2011



The opinion of the court was delivered by: 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, 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 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[.]"*fn1

[¶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.


[¶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 , 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.


, 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 circumstances provided in SDCL 15-6-12(g) or in a responsive pleading[.]" Id .*fn2 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).*fn3 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 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.

[ΒΆ12.] 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 ...

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