WALCZAK v PROLONG, 9955227
U.S. 9th Circuit Court of Appeals
WALCZAK v PROLONG
9955227
MICHAEL WALCZAK, DR.; SHIRLEY J.BAKER; RODNEY BARNES; BRIANBROOKS; JANE BROOKS; WILMABROOKS; LOUIS REEDY; FLORENCEBROWN; GEORGE T. FEIEREISEN;TERRY MASON; JANIS MASON;HARRY M. OLSON, JR.; IVANSCHULTZ; DOROTHY SCHULTZ, onBehalf of Themselves and allOther Shareholders of EPLProlong, Inc.,Plaintiffs-Appellees,No. 99-55227v.D.C. No.EPL PROLONG, INC., dba ProlongCV-98-02103-TJWInternational, dba Prolong SuperOPINIONLubricants; PROLONGINTERNATIONAL CORPORATION, fkaGiguere Industries, Inc.; PROLONGSUPER LUBRICANTS, INC., fkaCorporate Development, Inc.;ELTON ALDERMAN; TOM KUBOTA;TIM BILLSTEIN; MICHAEL DAVIS;MELANIE A. MCCAFFERY; NICHOLASM. ROSER; GARY C. WYKIDAL,Personally and in their Capacitiesas Officers, Attorneys, andShareholders of EPL Prolong, Inc.,14205dba Prolong International, ProlongSuper Lubricants, Inc., andProlong International Corp., andall other Prolong AffiliatedCompanies,Defendants-Appellants,andTHE ESTATE OF EDWIN C. AULD,JR., RAYMOND PRATT; LOIS M.MILLER,Defendants.
Appeal from the United States District Courtfor the Southern District of CaliforniaThomas J. Whelan, District Judge, PresidingArgued and SubmittedNovember 2, 1999--Pasadena, CaliforniaFiled December 3, 1999Before: Myron H. Bright,1 Stephen Reinhardt, andStephen S. Trott, Circuit Judges.Opinion by Judge TrottSUMMARY The summary, which does not constitute a part of the opinion of the court, is copyrighted C 1999 by West Group.
_____________________________Business Law/Litigation and ProcedureThe court of appeals affirmed an order of the district court.The court held that in a shareholder derivative action, a dis-trict court may issue a preliminary injunction prohibiting cor-porate defendants and their principals from completing anagreement to exchange stock and liquidate one of them.As owner of the patent for "Prolong Super Lubricant"(PSL), appellant EPL Prolong, Inc. entered into a licenseagreement with appellant Prolong Super Lubricants, Inc.(PSLI) in 1993. EPL Prolong granted PSLI the exclusive rightto use the PSL patent; PSLI paid EPL Prolong $100,000 andguaranteed EPL Prolong a cash royalty of the gross sales gen-erated by the use of the patent or the tradename "Prolong."Minority shareholders of EPL Prolong, including appelleeMichael Walczak, were not notified of the license agreement.At the time of the 1993 license agreement, appellants EltonAlderman, Edwin Auld, and Michael Davis were directors,officers, and significant shareholders of EPL Prolong. Shortlyafter the agreement, Alderman and Auld surrendered theirEPL Prolong shares, acquired an equal ownership in PSLI,and became directors and officers of PSLI. Although Davisremained a director and officer of EPL Prolong, he alsobecame an officer, director, and significant shareholder ofPSLI.To take PSLI public without an initial public offering, thecorporation's directors negotiated an agreement with GiguereIndustries, a shell entity whose stock could be traded publicly.Giguere was renamed, becoming appellant Prolong Interna-tional Company; Prolong International acquired all of theshares of PSLI. In exchange, Prolong International grantedPSLI shareholders stock in Prolong International. The resultwas that PSLI became a wholly owned subsidiary of ProlongInternational.In 1998, EPL Prolong and Prolong International enteredinto an agreement by which Prolong International wouldacquire most of EPL Prolong's assets and liabilities; ProlongInternational would transfer to EPL Prolong about three mil-lion shares of Prolong International common stock; EPL Pro-long would be liquidated and dissolved; EPL Prolong woulddistribute its assets, including the shares in Prolong Interna-tional stock, to its shareholders; and each EPL Prolong share-holder would receive about one share of Prolong Internationalcommon stock for every two shares of EPL Prolong commonstock.To proceed with the 1998 agreement, EPL Prolong neededthe approval of a majority of the shareholders of its commonstock. EPL Prolong advised the minority shareholders of theagreement, that EPL Prolong's directors had approved it, andthat they were ready to go forward with it. Walczak and otherminority shareholders learned about some of EPL Prolong'sprior dealings, including the 1993 license agreement withPSLI.Walczak filed a class-action shareholder derivative suitagainst EPL Prolong, PSLI, Prolong International, and variousindividuals. The complaint alleged causes of action for racke-teering, fraudulent conveyance, and breach of fiduciary duty.Walczak's fraudulent conveyance claim, based on the Uni-form Fraudulent Transfer Act (UFTA), alleged that under the1993 license agreement, EPL Prolong's assets were trans-ferred for less than market value for the purpose of benefitingthe directors and officers of EPL Prolong and PSLI.Walczak moved for a preliminary injunction.The district court determined that Walczak had demon-strated a strong likelihood of success on the merits of hisUFTA claim. In the court's view, the evidence suggested thatat the time of the 1993 license agreement, EPL Prolong andPSLI intended to defraud the minority shareholders. The courtstressed that the minority shareholders were not notified orconsulted about the agreement.The district court also determined that Walczak had showna strong likelihood of success on his claim for breach of fidu-ciary duty, i.e., that he was likely to prove that the 1993license agreement was an improper "interested directortransaction." The court also concluded that Walczak demon-strated the possibility of irreparable injury by proving that thedefendants had engaged in a pattern of improperly dispersingand transferring assets, which was likely to frustrate hisattempt to collect a judgment. Accordingly, the court issueda preliminary injunction in favor of Walczak, and ordered theplaintiffs to post a $100,000 security bond.The preliminary injunction prohibited the defendants fromeither completing the 1998 agreement, or liquidating EPLProlong. In Grupo Mexicano de Desarrollo, S.A. v. AllianceBond Fund, Inc., 119 S. Ct. 1961 (1999), the Supreme Courtheld that in the case of an unsecured creditor, a district courtdoes not have authority to issue a preliminary injunction thateffects a "freeze" of the debtor's assets.Seeking summary reversal, the defendants contended onappeal that Grupo Mexicano precluded the district court'sorder issuing the preliminary injunction.[1] The injunction in this case was distinguishable from theinjunction at issue in Grupo Mexicano. [2] The injunction inthis case did not order a "freeze" on any of the appellants'assets. Instead, the injunction merely restrained the appellantsfrom either completing the 1998 agreement or liquidatingEPL Prolong. Moreover, except for EPL Prolong, the injunc-tion did not affect the other appellants' assets in any way. [3]The injunction appropriately preserved the status quo and pre-vented the irreparable loss of rights before judgment.[4] The standard for a preliminary injunction balances theplaintiff's likelihood of success against the relative hardshipto the parties. To obtain a preliminary injunction, Walczakwas required to demonstrate either a likelihood of success onthe merits and the possibility of irreparable injury; or that seri-ous questions going to the merits were raised and the balanceof hardships tipped sharply in its favor. These alternativesrepresent extremes in a continuum, rather than two separatetests.[5] Walczak's breach-of-fiduciary-duty claim was gov-erned by S 310 of the California Corporations Code, whichprovides that a contract or transaction between a corporationand one or more of its directors (interested director transac-tion) is not necessarily invalid, even if the director's personalinterest was not disclosed, and the transaction was notapproved or ratified by a majority of the disinterested boardmembers or shareholders. A court can uphold the transactionif the party asserting its validity sustains the burden of prov-ing that it was just and reasonable as to the corporation at thetime it was authorized, approved, or ratified.[6] The district court did not abuse its discretion in issuingthe preliminary injunction because the factual findings onwhich the court based its decision were not clearly erroneous.The court considered extensive evidence before making thefactual findings, and found that the 1993 license agreementwas inherently unfair and that the appellants engaged in a pat-tern of improperly dispersing and transferring assets.[7] In finding that the appellants engaged in a pattern ofimproperly dispersing and transferring corporate assets, thecourt considered deposition testimony and documents evi-dencing the appellants' involvement in several transactionsbetween 1993 and 1998, which resulted in corporate assettransfers and allegedly fraudulent stock swaps. [8] The courtappropriately concluded that, with respect to the breach-of-fiduciary-duty claim, Walczak demonstrated a likelihood ofsuccess on the merits and the possibility of irreparable harm.[9] Fed. R. Civ. P. 65(c) grants district courts wide discre-tion in setting the amount of a security bond. [10] The districtcourt did not abuse its discretion in requiring Walczak to posta $100,000 bond.
_____________________________COUNSEL Neil Goteiner (Argued), San Francisco, California, and Jef-frey L. Garland, Law Offices of Jeffrey L. Garland (On theBriefs), for the defendants-appellants.Timothy A. Shimko (Argued), Timothy A. Shimko & Asso-ciates, Cleveland, Ohio, and Bruce Corbett, Corbett & Steel-man, Irvine, California, for the plaintiffs-appellees.
_____________________________OPINION TROTT, Circuit Judge:EPL Prolong, Inc., et al. (collectively "Appellants") appealan order of the district court granting a preliminary injunctionin favor of appellee Michael Walczak ("Walczak"), an EPLProlong, Inc. minority shareholder who is the representativein a class action shareholder derivative suit. Appellants arguethat the Supreme Court's recent decision in Grupo Mexicanode Desarrollo, S.A. v. Alliance Bond Fund, Inc., 119 S. Ct.1961 (1999), warrants summary reversal of the district court'spreliminary injunction. Alternatively, Appellants contend thatthe district court erred in granting the preliminary injunctionbecause Walczak failed to demonstrate: (1) a threat of irrepa-rable injury; or (2) a likelihood of success on the merits. Wehave jurisdiction pursuant to 28 U.S.C. S 1292(a)(1), and weaffirm the district court's order issuing a preliminary injunc-tion.IBackgroundEPL Prolong, Inc. ("EPL Prolong"), a California corpora-tion, owns the patent for "Prolong Super Lubricant" ("PSLPatent"), which is a high performance metal lubricant used inautomobiles as an additive to motor oil. In 1993, EPL Prolongentered into a license agreement ("1993 License Agreement")with Prolong Super Lubricants, Inc., f/k/a Corporate Develop-ment, Inc. ("PSLI"), a shell corporation with no current opera-tions. Pursuant to the 1993 License Agreement, EPL Prolonggranted PSLI the exclusive right to use the PSL Patent. Inexchange, PSLI paid EPL Prolong an initial fee of $100,000and guaranteed EPL Prolong a cash royalty of 3.5% of thegross sales generated by use of the PSL Patent or the trade-name "Prolong." At the time, EPL Prolong's minority share-holders were not notified of the 1993 License Agreement.When EPL Prolong entered into the 1993 License Agree-ment with PSLI, Elton Alderman, Edwin C. Auld, Jr., andMichael R. Davis were all directors, officers, and significantshareholders of EPL Prolong. Shortly thereafter, however,Alderman and Auld surrendered their shares in EPL Prolong,acquired an equal ownership interest in PSLI, and becamedirectors and officers of PSLI. Although Davis remained adirector and officer of EPL Prolong, he also became an offi-cer, director, and significant shareholder of PSLI.In 1995, the directors of PSLI aspired to take the corpora-tion public without engaging in an initial public offering. Toaccomplish this goal, PSLI negotiated an agreement withGiguere Industries ("Giguere"), a shell corporation whosestock could be traded publicly. Pursuant to this agreement,Giguere, which was renamed Prolong International Company("Prolong International"), acquired all of the shares of PSLIand, in exchange, granted the PSLI shareholders stock in Pro-long International. As a result of this transaction, PSLIbecame a wholly-owned subsidiary of Prolong International.In February 1998, EPL Prolong and Prolong Internationalentered into an agreement ("1998 Agreement"). The terms ofthe 1998 Agreement were as follows: (1) Prolong International would purchase substan- tially all of the assets and certain of the liabili- ties of EPL Prolong; (2) Prolong International would issue and deliver to EPL Prolong approximately three million shares of Prolong International common stock; (3) EPL Prolong would be liquidated and dis- solved; (4) Upon dissolution, EPL Prolong would distrib- ute all of its assets, including the shares of Pro- long International common stock, to its shareholders; and (5) Each shareholder of EPL Prolong would be entitled to receive approximately (1) share of Prolong International common stock for every (2) shares of EPL Prolong common stock.In order to proceed with this transaction, EPL Prolong neededthe approval of a majority of the shareholders of its commonstock.In August 1998, a series of events gave rise to the currentlawsuit between EPL Prolong's minority shareholders andAppellants. First, EPL Prolong advised its minority share-holders, which included Walczak and the other members ofthe class in the current suit, of its plans to consummate the1998 Agreement. Second, EPL Prolong informed the minorityshareholders that EPL Prolong's Board of Directors, as wellas a majority of the shareholders, had approved the 1998Agreement and, therefore, EPL Prolong was prepared to pro-ceed with the transaction. Finally, Walczak and the otherminority shareholders learned about some of EPL Prolong'sprior dealings, such as the 1993 License Agreement withPSLI.In response to this information, Walczak filed a class actionshareholder derivative suit against EPL Prolong, PSLI, Pro-long International, board members of EPL Prolong, and vari-ous other individuals in federal district court on November 17,1998. Among other things, Walczak's complaint allegedRICO violations, fraudulent conveyance, and breach of fidu-ciary duty.On November 20, 1998, Walczak filed a motion for a tem-porary restraining order ("TRO") and a preliminary injunc-tion, seeking to prevent the consummation of the 1998Agreement. Walczak alleged that as creditors of EPL Prolong,the plaintiffs would suffer irreparable harm if the proposedtransaction was completed. Specifically, Walczak argued thatcompletion of the transaction contemplated by the 1998Agreement would result in EPL Prolong's dissolution, therebymaking it impossible for the plaintiffs to collect debts or judg-ments from EPL Prolong. On November 25, 1998, the districtcourt granted the motion for the TRO and issued an "Orderto Show Cause as against all defendants as to why a prelimi-nary injunction should not be granted."After considering the parties' arguments, the evidence, andthe relevant law, the district court granted Walczak's motionfor a preliminary injunction. The court concluded that, withregard to the fraudulent conveyance and breach of fiduciaryduty claims, Walczak had demonstrated a threat of irreparableharm and a likelihood of success on the merits. The courttherefore granted Walczak's motion for a preliminary injunc-tion and ordered the plaintiffs to post a security bond in theamount of $100,000. Appellants appeal.IIAppellants' Motion for Summary ReversalPursuant to Ninth Circuit Rule 3-6,2 Appellants have fileda motion for summary reversal based on the Supreme Court'srecent decision in Grupo Mexicano. Appellants argue thatGrupo Mexicano compels this court to summarily reverse thedistrict court order because Grupo Mexicano held that a dis-trict court does not have the power to grant the type of prelim-inary injunction that the court issued in this case. Walczak, onthe other hand, argues that Grupo Mexicano is distinguishablefrom the case at bar and, therefore, contends that we shoulddeny Appellants' motion. We agree with Walczak.In Grupo Mexicano, plaintiff Alliance Bond Fund, Inc.("Alliance"), who had purchased unsecured notes from defen-dant Grupo Mexicano de Desarrollo, S.A. ("GMD"), suedGMD for breach of contract, alleging that GMD had defaultedon its obligation under the notes. Grupo Mexicano, 119 S. Ct.at 1964-65. In addition to damages, Alliance sought a prelimi-nary injunction to restrain GMD from dissipating its assets,specifically GMD's guaranteed notes ("Toll Road Notes"),which the Mexican government had issued to GMD pursuantto the "Toll Road Rescue Program." Id. The district courtgranted the preliminary injunction in favor of Alliance, theSecond Circuit affirmed, and the Supreme Court granted cer-tiorari. Id. at 1965.In a five-to-four decision, the Supreme Court reversed theSecond Circuit and held that "the district court had no author-ity to issue a preliminary injunction preventing[the defen-dants] from disposing of their assets pending adjudication of[the plaintiff's] contract claim for money damages." Id. at1975. In reaching this conclusion, the Court relied on the"well-established rule" that an unsecured creditor seekinglegal remedies cannot obtain a preliminary injunction thatfreezes a debtor's assets in order to ensure the availability offunds to satisfy a future judgment. Id. at 1968. The majorityconcluded, therefore, that because such a remedy was histori-cally unavailable from a court of equity, the district courtexceeded its authority in granting the preliminary injunction.Id.In this case, Appellants argue that the holding of GrupoMexicano applies to the injunction granted in favor of Wal-czak because, similar to the injunction in Grupo Mexicano,the district court granted the preliminary injunction "to protecta legal damages remedy." In granting the preliminary injunc-tion, the district court stated: [P]laintiffs have demonstrated that the defendant's assets would be dissipated and no relief would be otherwise available if the injunction were not issued and EPL was dissolved as a corporate entity . . . . By granting a preliminary injunction, the plaintiffs will be protected from the possible further dilution that has consistently effected [sic] EPL's pool of assets in the past . . . . Even where the ultimate relief sought is money damages, federal courts have found equitable injunctions appropriate where it has been shown that the defendant intended to frustrate any judgment on the merits by transferring assets.It is true that the district court's motivation for granting thepreliminary injunction was its concern that dissolution of EPLProlong would preclude Walczak from collecting on a futurejudgment.[1] As Walczak contends in his opposition to Appellants'motion for summary reversal, the injunction in this case isdistinguishable from the injunction at issue in GrupoMexicano. In Grupo Mexicano, the district court granted apreliminary injunction that restrained GMD from "dissipating,transferring, conveying, encumbering or otherwise distribut-ing or affecting the [plaintiff's] right to, interest in, title to orright to receive or retain, any of the [Toll Road Notes]." Id.,119 S. Ct. at 1965. The majority opinion makes clear that theCourt interpreted this language to mean that the district courtordered a "freeze" on GMD's assets. Id. at 1970 (stating that"[W]e would not be inclined to believe that it is merely aquestion of procedure whether a person's unencumberedassets can be frozen by general-creditor claimants before theirclaims have been vindicated by judgment."); id. at 1974 n.11(stating that Alliance sought to freeze GMD's assets to satisfyits anticipated judgment). Accordingly, Grupo Mexicano heldthat, in the case of an unsecured creditor, a district court iswithout authority to issue a preliminary injunction that effectsa "freeze" on the debtor's assets.[2] Here, the district court's injunction did not order a"freeze" on any of Appellants' assets. The district court'sorder provided: Plaintiffs' request for a preliminary injunction is hereby granted. It is ordered that all defendants, their agents, assigns, officers and representatives are hereby enjoined from consummating the exchange of the planned "two for one" stock swap of EPL Pro- long Inc. for Prolong International Corp. stock, and from liquidating EPL Prolong Inc. or its patent rights in any fashion until further notice from this court or until a final judgment on the merits is reached in this litigation as to all parties.Thus, unlike the injunction at issue in Grupo Mexicano, thisinjunction does not completely prohibit Appellants from tak-ing any action with regard to their assets. Instead, the injunc-tion merely restrains Appellants from either completing the1998 Agreement or liquidating EPL Prolong. Moreover, asWalczak argues, except for EPL Prolong, the injunction doesnot affect the other Appellants' assets in any way.[3] We hold that the injunction in this case is distinguish-able from the injunction in Grupo Mexicano. Here, the effectof the preliminary injunction was not to "freeze " Appellants'assets. Rather, the injunction appropriately preserved the sta-tus quo and prevented the irreparable loss of rights beforejudgment. See Barahona-Gomez v. Reno, 167 F.3d 1228,1234 (9th Cir. 1999). Accordingly, we deny Appellants'motion for summary reversal.IIIThe District Court's Issuance of a PreliminaryInjunctionA. Standard of ReviewWe subject a district court's order regarding preliminaryinjunctive relief only to "limited review." FTC v. AffordableMedia, 179 F.3d 1228, 1233 (9th Cir. 1999). Review of anorder granting or denying a preliminary injunction is muchmore limited than review of an order involving a permanentinjunction, where all conclusions of law are freely reviewable.Sports Form, Inc. v. United Press Int'l, Inc., 686 F.2d 750,752 (9th Cir. 1982).We review a district court's decision regarding a prelimi-nary injunction for an abuse of discretion. Bay Area AddictionResearch & Treatment, Inc. v. City of Antioch, 179 F.3d 725,730 (9th Cir. 1999). In issuing a preliminary injunction, a dis-trict court abuses its discretion by basing its decision on eitheran erroneous legal standard or clearly erroneous factual find-ings. Affordable Media, 179 F.3d at 1233. A district court'sdecision is based on an erroneous legal standard if: (1) thecourt did not employ the appropriate legal standards that gov-ern the issuance of a preliminary injunction; or (2) in applyingthe appropriate standards, the court misapprehended the lawwith respect to the underlying issues in the litigation. SportsForm, 686 F.2d at 752. On the other hand, a district court'sdecision is based on clearly erroneous factual findings if "thereviewing court on the entire evidence is left with the definiteand firm conviction that a mistake has been committed."United States v. United States Gypsum Co.,
333 U.S. 364
, 395(1948). Thus, we will reverse the district court's issuance ofa preliminary injunction in favor of Walczak only if the dis-trict court based its decision on an erroneous legal standard orclearly erroneous findings of fact. See Affordable Media, 179F.3d at 1233.B. Merits[4] The standard for a preliminary injunction balances theplaintiff's likelihood of success against the relative hardshipto the parties. Sun Microsystems, Inc. v. Microsoft Corp., No.99-15046, 1999 WL 635783, at *3 (9th Cir. Aug. 23, 1999).To obtain a preliminary injunction, Walczak was required todemonstrate either: (1) a likelihood of success on the meritsand the possibility of irreparable injury; or (2) that seriousquestions going to the merits were raised and the balance ofhardships tips sharply in its favor. See id. These two alterna-tives represent "extremes of a single continuum, " rather thantwo separate tests. Id. (quoting Sega Enters. v. Accolade, Inc.,977 F.2d 1510, 1517 (9th Cir. 1992)). Thus, the greater therelative hardship to Walczak, the less probability of successmust be shown. See National Ctr. for Immigrants Rights v.INS, 743 F.2d 1365, 1369 (9th Cir. 1984).In granting Walczak's motion for a preliminary injunction,the district court concluded that, with respect to the claims forfraudulent conveyance and breach of fiduciary duty, the plain-tiff demonstrated: (1) a strong likelihood of success on themerits; and (2) the possibility of irreparable harm. On appeal,Appellants argue that the district court abused its discretion inreaching this conclusion. 1. Fraudulent Conveyance ClaimWalczak's claim for fraudulent conveyance, which is gov-erned by the Uniform Fraudulent Transfer Act ("UFTA"),3 isbased on the 1993 License Agreement between EPL Prolongand PSLI. Walczak alleges that, pursuant to the 1993 LicenseAgreement, EPL Prolong's assets were transferred for lessthan market value in order to benefit the directors and officersof EPL Prolong and PSLI.The district court determined that Walczak demonstrated astrong likelihood of success on the merits with respect to theUFTA claim. According to the court, the evidence suggestedthat at the time EPL Prolong and PSLI entered into the 1993License Agreement, they intended to defraud the minorityshareholders. To support this conclusion, the court empha-sized the fact that the minority shareholders were not notifiedor consulted about the 1993 License Agreement.On appeal, however, Appellants argue that the district courterred in granting the preliminary injunction based on Wal-czak's UFTA claim. According to Appellants, Walczak can-not state an UFTA claim because he is merely a shareholderand, therefore, is not a "creditor" under UFTA. For purposesof UFTA, the California Civil Code defines a "creditor" as "aperson who has a claim." Cal. Civ. Code S 3439.01(c) (West1997). Furthermore, "claim" is defined as "a right to payment,whether or not the right is reduced to judgment, liquidated,unliquidated, fixed, contingent, matured, unmatured, disputed,undisputed, legal, equitable, secured, or unsecured." Id.S 3439.01(b). Thus, under UFTA a "creditor" is "a personwho has a right to payment." As such, Appellants argue thatWalczak is not a "creditor" under UFTA because shareholdersdo not have a right to payment, but instead merely hold anownership interest in the corporation.It is unclear from the language of the statute whether ashareholder, such as Walczak, is a "creditor" under UFTA.Moreover, we did not find any California cases interpretingUFTA's definition of "creditor," or discussing whether share-holders qualify as "creditors" under UFTA. However, weneed not decide this issue because, as discussed below, wehold that the district court properly issued the preliminaryinjunction based on Walczak's breach of fiduciary duty claim. 2. Breach of Fiduciary Duty Claim[5] Walczak alleges that Appellants breached their fidu-ciary duty by entering into the 1993 License Agreement thattransferred the PSL patent to PSLI. Walczak's breach of fidu-ciary duty claim is governed by section 310 of the CaliforniaCorporations Code ("Section 310"), which provides that acontract or transaction between a corporation and one or moreof its directors ("Interested Director Transaction") is not nec-essarily invalid. Cal. Corp. Code S 310 (West 1990). Section310 states that even if the director's personal interest was notdisclosed and the transaction was not approved or ratified bya majority of the disinterested board members or sharehold-ers, the transaction can still be valid. Id. Specifically, a courtcan uphold the Interested Director Transaction if "the partyasserting the validity of the . . . transaction sustains the burdenof proving that the contract or transaction was just and reason-able as to the corporation at the time it was authorized,approved or ratified." Id. S 310(a)(3).4After reviewing the evidence, the district court held that,with respect to the breach of fiduciary duty claim, Walczakdemonstrated a strong likelihood of success on the merits andthe possibility of irreparable injury. According to the court,Walczak demonstrated that he likely would succeed in prov-ing that the 1993 License Agreement was an improper Inter-ested Director Transaction by presenting evidence that theagreement lacked inherent fairness. Moreover, the court con-cluded that Walczak demonstrated the possibility of irrepara-ble injury by proving that Appellants had engaged in a patternof improperly dispersing of and transferring assets, whichlikely would frustrate Walczak's attempt to collect a judg-ment. Accordingly, the court issued the preliminary injunctionin favor of Walczak.On appeal, Appellants do not challenge the legal standardthat the district court applied in granting the preliminaryinjunction. Rather, they argue that we should reverse becausethe factual findings on which the district court rested its deci-sion to grant the preliminary injunction are clearly erroneous.First, Appellants contend that the district court misunderstoodthe terms of the 1993 License Agreement and, therefore, erredin finding that the 1993 License Agreement was inherentlyunfair. Appellants explain that, contrary to the district court'sunderstanding, the 1993 License Agreement entitled EPL Pro-long to 3.5% of the gross revenues generated by PSLI's useof the PSL Patent, not 3.5% of the royalties. Furthermore,Appellants submit that the 1993 License Agreement was fairbecause PSLI assumed all marketing and production costs,which allowed EPL Prolong to cease operations and collectthe royalty without incurring any operating costs. Second,Appellants argue that the court's finding that Appellantsengaged in a pattern of improperly dispersing of and transfer-ring assets is clearly erroneous because there was no evidenceto support such a finding.As discussed above, a district court's decision regarding apreliminary injunction is reviewed for an abuse of discretion.Bay Area Addiction, 179 F.3d at 730. Thus, such a decisionwill not be reversed simply because we would have arrived ata different result if we had applied the law to the facts of thecase. Sports Form, 686 F.2d at 752. In this case, the districtcourt applied the appropriate legal standard and, therefore, wewill reverse only if the court based its conclusions on clearlyerroneous factual findings. See Affordable Media , 179 F.3d at1233; Sports Form, 686 F.2d at 752.[6] After reviewing the record, we hold that the districtcourt did not abuse its discretion in issuing the preliminaryinjunction because the factual findings upon which the courtbased its decision are not clearly erroneous. The district courtconsidered extensive evidence before making these factualfindings. In fact, the court stated in its order that it consideredover 420 pages of deposition testimony, over 100 supportingand related exhibits, multiple rounds of pleadings, opposi-tions, and replies, and extensive oral argument. Based on thisevidence, the court found that the 1993 License Agreementwas inherently unfair and that Appellants engaged in a patternof improperly dispersing of and transferring assets.[7] First, in finding that the 1993 License Agreement wasinherently unfair, the court relied on evidence that Appellantsentered into the 1993 License Agreement without notifyingthe minority shareholders, seeking their approval, or request-ing ratification. In addition, the court found that the terms ofthe 1993 License Agreement were unfair because PSLI paidonly $100,000 in exchange for the right to use the PSL Patentand the tradename "Prolong." In particular, the court relied onthe deposition testimony of defendants Alderman and Davisto find that, pursuant to the 1993 License Agreement, PSLIcontrolled 96.5% of the total sales generated by use of thePSL Patent, which likely exceeded over $30 million in 1997,while EPL Prolong retained a mere 3.5% of the total sales.Contrary to Appellants' claims, therefore, it seems that thedistrict court did not clearly err in its finding regarding theterms of the 1993 License Agreement.[8] Second, in finding that Appellants engaged in a patternof improperly dispersing of and transferring corporate assets,the court considered deposition testimony and documents evi-dencing Appellants' involvement in several transactionsbetween 1993 and 1998, which resulted in corporate assettransfers and allegedly fraudulent stock swaps.Based on the record, we hold that the district court's find-ings that the 1993 License Agreement was inherently unfairand that Appellants improperly dispersed of and transferredcorporate assets are not clearly erroneous. The district courtappropriately concluded that, with respect to the breach offiduciary duty claim, Walczak demonstrated a likelihood ofsuccess on the merits and the possibility of irreparable harm.Accordingly, we affirm the district court's decision to issue apreliminary injunction in favor of Walczak. 3. Security BondFinally, Appellants argue that the district court erred byrequiring Walczak to post a bond of only $100,000. Appel-lants contend that, if they are enjoined from completing the1998 Agreement as planned, they will lose substantial reve-nue and will risk a tax liability of approximately $2 million.Appellants argue, therefore, that $100,000 will not adequatelycompensate them for being wrongfully enjoined.[9] Federal Rule of Civil Procedure 65(c) grants districtcourts wide discretion in setting the amount of a securitybond. Fed. R. Civ. P. 65(c); Doctor's Assocs., Inc. v. Distajo,107 F.3d 126, 136 (9th Cir. 1997). Thus, we review the dis-trict court's decision as to the amount of a security bond foran abuse of discretion. See Barahona-Gomez, 167 F.3d at1237.Before setting the amount of the security bond, the districtcourt in this case considered both parties' evidence regardingthe potential financial ramifications of issuing a preliminaryinjunction. Specifically, the court considered the declarationsof John Burke, an economist, and Gary Wykidal, an attorneyand EPL Prolong board member. While Burke opined that theissuance of a preliminary injunction would not cause any sub-stantial economic harm to Appellants, Wykidal stated that apreliminary injunction would subject Appellants to the risk ofa $2 million tax liability.The district judge's findings demonstrate that he discred-ited Wykidal's declaration with respect to the potential taxliability. The district court noted in its order that Appellantsessentially control the majority of voting shares of both EPLProlong and Prolong International. As such, the courtexplained, Appellants easily can rescind the 1998 Agreement,thereby avoiding these potential financial difficulties.[10] Based on the record, we hold that the district court didnot abuse its discretion in requiring Walczak to post a bondin the amount of $100,000 and, therefore, we affirm.AFFIRMED.
___________________________FOOTNOTES 1 The Honorable Myron H. Bright, Senior United States Circuit Judgefor the Eighth Circuit, sitting by designation.2 Rule 3-6 provides, in relevant part, that: "At any time prior to the com-pletion of briefing in a civil appeal if the court determines: (a) that . . . anintervening court decision . . . requires reversal or vacation of the judg-ment or order appealed from or remand for additional proceedings . . . thecourt may, after affording the parties an opportunity to show cause, issuean appropriate dispositive order." Ninth Cir. R. 3-6 (1999).3 UFTA provides that:A transfer made or obligation incurred by a debtor is fraudulent as toa creditor, whether the creditor's claim arose before or after the transferwas made or the obligation was incurred, if the debtor made the transferor incurred the obligation as follows: (a) With actual intent to hinder, delay, or defraud any creditor of the debtor. (b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the busi- ness or transaction; or (2) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they become due.Cal. Civ. Code S 3439.04 (West 1997).4 Section 310(a)(3) addresses the situation where the authorization,approval, or ratification was based on a vote by the interested director.Sammis v. Stafford, 56 Cal. Rptr. 2d 589, 594 (Ct. App. 1996).