               NOTE: Pursuant to Fed. Cir. R. 47.6, this disposition
               is not citable as precedent. It is a public record.


United States Court of Appeals for the Federal Circuit


                                     04-1368


                             APTIX CORPORATION,

                                                   Plaintiff/Counterclaim Defendant,
                                       and

        META SYSTEMS, INC. and MENTOR GRAPHICS CORPORATION,

                                                   Counterclaim Defendants,

                                        v.

                     QUICKTURN DESIGN SYSTEMS, INC.,

                                                   Defendant/Counterclaimant-
                                                   Appellee,

                                        v.

                                 AMR MOHSEN,

                                                   Third Party Claimant-Appellant.

                           _______________________

                            DECIDED: June 21, 2005
                           _______________________



Before NEWMAN, CLEVENGER and GAJARSA, Circuit Judges.

Opinion for the court filed by Circuit Judge GAJARSA.    Dissenting opinion filed by
Circuit Judge NEWMAN.

GAJARSA, Circuit Judge.
      Amr Mohsen ("Mohsen") appeals a decision by the United States District Court

for the Northern District of California issued pursuant to Federal Rules of Civil

Procedure ("FRCP") 69(a) in which the court voided Mohsen's security interest in the

assets of Aptix Corporation as a fraudulent transfer under California law. Aptix Corp. v.

Quickturn Design Sys., Inc., No. C 98-00762 (N.D. Cal. November 5, 2003). Quickturn

Design Systems, Inc. ("Quickturn") filed the underlying motion to enforce the court's

prior judgment awarding Quickturn $4.2 million in attorney fees stemming from a patent

infringement suit filed by Aptix. Id. Because the district court did not commit clear error

in finding that Aptix granted the security interest to Mohsen with the actual intent to

hinder Quickturn's satisfaction of the attorney fees award, we affirm the judgment.

                                   I.     BACKGROUND

      Aptix is a developer of hardware-logic-emulation technology and the owner of

U.S. Patent No. 5,544,069 ("the '069 patent"). Mohsen founded Aptix and at all relevant

times was the majority shareholder, chief executive officer and chairman of the

company. Mohsen is also the only inventor named on the '069 patent.

      Quickturn is one of three primary competitors of Aptix in the hardware-logic-

emulation technology field.    Mentor Graphics Corporation ("Mentor") and its French

subsidiary Meta Systems, Inc. ("Meta") also compete with Aptix. After Quickturn won a

United States patent infringement suit against Mentor and Meta, Aptix entered into an

agreement with Mentor and Meta whereby Aptix licensed the '069 patent and granted

Meta the right to sue to enforce the patent. Mentor agreed to advance Aptix all costs of

prosecuting a patent infringement suit against Quickturn. Aptix and Meta subsequently




04-1368                                  2
filed an infringement suit against Quickturn in the United States District Court for the

Northern District of California.

       On June 14, 2000, the court dismissed the Aptix/Meta complaint as a sanction for

Aptix's having "engaged in a pattern of fraudulent behavior through Amr Mohsen, its

founder, chairman, chief executive officer and lead inventor.      Aptix tried to defraud

defendant and the Court through the alteration and fabrication of evidence, perjury and

the staged theft of evidence." Aptix Corp. v. Quickturn Design Sys., Inc., No. C 98-

00762 (N.D. Cal. September 8, 2000) (summarizing its order of June 14, 2000). In

addition to dismissing the complaint, the court held the '069 patent unenforceable and

found that the case was exceptional such that Quickturn was entitled to attorney fees.

Aptix Corp. v. Quickturn Design Sys., Inc., No. C 98-00762 (N.D. Cal. June 14, 2000).

The June 14, 2000 Order required Aptix and Quickturn to negotiate the amount of the

attorney fees award by July 20, 2000. The parties agreed on a settlement amount of

$4.2 million with Aptix retaining the right to object to certain categories of Quickturn's

attorney fees and costs.

       During the summer of 2000, Aptix was in financial trouble having unsuccessfully

attempted to borrow money, raise equity financing and merge with another company.

Aptix, slip op. at 3.   On July 25, 2000, Aptix and Mohsen entered into a security

agreement whereby Aptix granted Mohsen a security interest in all of its assets in

exchange for certain loan funds. Prior to July 2000, Mohsen had loaned at least $2

million to Aptix on an unsecured basis. Aptix, slip op. at 2. Pursuant to the security

agreement, Mohsen loaned Aptix at least $9.7 million between July 2000 and

September 2003. In that same time frame, Mohsen received nineteen installments on




04-1368                                 3
the debt totaling approximately $1.5 million. Aptix used the money from Mohsen to

maintain its operations by paying employees, vendors and other creditors. Aptix, slip

op. at 3.

       On July 27, 2000, Aptix filed an objection to certain categories of Quickturn's

attorney fees and costs. On August 10, 2000, Quickturn made its last filing on the

issues surrounding the judgment by submitting a response to Aptix's objection. It was

not until August 16, 2000, that Mohsen perfected his security interest by filing a UCC

financing statement. On September 8, 2000, the court overruled Aptix's objections,

awarded Quickturn the entire amount of attorney fees sought and entered final

judgment in the case.

       Aptix appealed to this court and we affirmed in part and vacated in part the

district court's judgment. Aptix, 269 F.3d at 1378. The court affirmed the dismissal of

Aptix's complaint, the finding of exceptional case and the award of attorney fees, but

vacated the finding that the '069 patent was unenforceable.       The unenforceability

determination was vacated on the ground that Aptix's forgery of documents related to

the date of conception and scope of the claims was litigation misconduct and not

inequitable conduct before the PTO. Id. at 1377.

       After the judgment was affirmed on appeal, Quickturn collected on the proceeds

of a $2 million supersedeas bond posted by Aptix.       On July 16, 2002, Aptix and

Quickturn entered into a payment agreement whereby Aptix agreed to make monthly

payments on the remainder of the judgment starting January 2, 2003.           No such

payments were made and on February 18, 2003, Quickturn established a judgment lien

on Aptix's assets pursuant to California law.




04-1368                                  4
       On May 27, 2003 Quickturn levied on certain of Aptix's assets, creating an

execution lien thereon, and the assets were delivered to the U.S. Marshal. Mohsen

then made a third party claim to the assets based on his security interest executed in

July 2000.    Believing the security interest to be a fraudulent scheme to prevent

Quickturn from recovering its award, Quickturn filed a motion to enforce judgment

pursuant to FRCP 69(a). After an evidentiary hearing, the district court entered an order

finding that Aptix had granted the security interest to Mohsen with "actual intent . . . to

hinder or delay satisfaction of the judgment due its creditor."      Aptix, slip op. at 5.

Accordingly, the court voided Mohsen's security interest as a fraudulent transfer under

California Civil Code § 3439.04(a). Id. at 6.

       Mohsen appeals the court's order voiding his security interest. The appeal was

originally filed with the Ninth Circuit but transferred here at Mohsen's request. This

court has jurisdiction pursuant to 28 U.S.C. § 1295(a)(1).

                                      II.       DISCUSSION

       This court reviews "nonpatent issues according to the law of the regional circuit

where appeals from the district court would normally lie." Univ. of Colo. Found., Inc. v.

Am. Cyanamid Co., 342 F.3d 1298, 1305 (Fed. Cir. 2003).               The district court's

determination that Aptix granted the security interest to Mohsen with the intent to hinder

or delay Quickturn's satisfaction of the judgment was a finding of fact that the Ninth

Circuit reviews for clear error. In re Woodfield, 978 F.2d 516, 518 (9th Cir. 1992).

       The district court applied California's fraudulent transfer statute in determining

that the security interest granted to Mohsen should be voided. That statute reads:

       (a) A transfer made or obligation incurred by a debtor is fraudulent as to a
       creditor, whether the creditor's claim arose before or after the transfer was



04-1368                                     5
       made or the obligation was incurred, if the debtor made the transfer or
       incurred the obligation as follows:

       (1) With actual intent to hinder, delay, or defraud any creditor of the
       debtor.
       (2) Without receiving a reasonably equivalent value in exchange for the
       transfer or obligation, and the debtor either:

              (A) 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 business or transaction .

              (B) 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 became due.

Cal. Civ. Code § 3439.04(a). Section 3439.04 has been construed to mean that a

transfer is fraudulent if the provisions of either subdivision (a)(1) regarding actual intent

or subdivision (a)(2) regarding the circumstances of the transfer have been satisfied.

Annod Corp. v. Hamilton & Samuels, 100 Cal. App. 4th 1286, 1294 (2002); see also

Mejia v. Reed, 31 Cal. 4th 657, 664 (2003) (treating current subdivisions (a)(1) and

(a)(2) as separate criteria for finding a fraudulent transfer).

       The court relied on subdivision (a)(1) of § 3439.04 in finding that Aptix made the

transfer to Mohsen with the actual intent to hinder or defraud Quickturn. Aptix, slip op.

at 5. In so finding, the district court identified three "badges of fraud" that supported an

inference of fraudulent intent. At the time the court issued its order, the badges of fraud

were not statutory, but appeared in the Legislative Committee commentary to

§ 3439.04. In 2004, the California legislature added subsection (b) to § 3439.04 which

codified the following nonexclusive list of the badges of fraud:

       (b) In determining actual intent under paragraph (1) of subdivision (a),
       consideration may be given, among other factors, to any or all of the
       following:




04-1368                                    6
       (1) Whether the transfer or obligation was to an insider.
       (2) Whether the debtor retained possession or control of the property
       transferred after the transfer.
       (3) Whether the transfer or obligation was disclosed or concealed.
       (4) Whether before the transfer was made or obligation was incurred, the
       debtor had been sued or threatened with suit.
       (5) Whether the transfer was of substantially all the debtor's assets.
       (6) Whether the debtor absconded.
       (7) Whether the debtor removed or concealed assets.
       (8) Whether the value of the consideration received by the debtor was
       reasonably equivalent to the value of the asset transferred or the amount
       of the obligation incurred.
       (9) Whether the debtor was insolvent or became insolvent shortly after the
       transfer was made or the obligation was incurred.
       (10) Whether the transfer occurred shortly before or shortly after a
       substantial debt was incurred.
       (11) Whether the debtor transferred the essential assets of the business to
       a lienholder who transferred the assets to an insider of the debtor.

Cal. Civ. Code § 3439.04(b). The three badges of fraud relied on by the district court

now appear as items (1), (4) and (9) on the codified list. The district court determined

that while Aptix was insolvent it granted a security interest to an insider and that that

transfer occurred just before a substantial judgment was to be entered against Aptix.

Aptix, slip op. at 5.

       Before the district court, Mohsen argued that he should not be punished for

simply lending money to Aptix so that it could continue as a going concern. The district

court rejected this argument finding that Aptix and Mohsen had

       an arrangement by which Dr. Mohsen lends Aptix money, which Aptix
       uses to pay employee salaries and essential creditors in an effort to keep
       functioning. . . . Dr. Mohsen receives money back from Aptix on demand.
       . . . This setup allows. . . Aptix to pay unsecured creditors as it sees fit,
       while effectively avoiding its obligations toward a judgment creditor that
       holds a judgment lien."

Id. Thus, the district court concluded that the arrangement was "not as innocent as Dr.

Mohsen suggests." Id.




04-1368                                  7
       On appeal, Mohsen takes issue with both the district court's factual findings and

the legal principles it applied. Mohsen's factual challenge is fundamentally a reassertion

of the argument rejected by the trial judge, namely that the granting of the security

interest to Mohsen was intended to benefit not defraud creditors by keeping Aptix

operational. Borrowing a concept from bankruptcy cases, Mohsen argues that the on-

going operation of Aptix was a "legitimate supervening purpose" such that the

confluence of three badges of fraud was insufficient to establish actual intent to defraud.

       Mohsen's reliance on the concept of a "legitimate supervening purpose" is

misplaced. The concept is typically applied in bankruptcy cases where courts have held

that in assessing whether a transfer constitutes a fraudulent conveyance under 11

U.S.C. § 548(a)(1), the confluence of several badges of fraud can establish "conclusive

evidence of actual intent to defraud, absent 'significantly clear' evidence of a legitimate

supervening purpose." In re Acequia, Inc., 34 F.3d 800, 806 (9th Cir. 1994) (quoting

Max Sugarman Funeral Home Inc. v. A.D.B. Investors, 926 F.2d 1248, 1255 (1st Cir.

1991)).   Once multiple indicia of fraud are established, the burden shifts to the

transferee to prove that there was a "legitimate supervening purpose" for the transfer at

issue. Id. There is no bright line test for what constitutes a legitimate supervening

purpose; the issue is simply whether the presumption of fraud has been adequately

rebutted. See In re Bateman, 646 F.2d 1220, 1223 n. 4 (8th Cir. 1981) ("The burden

which shifts now upon a showing of reasonable grounds is not a burden of going

forward with the evidence requiring the bankrupt to explain away natural inferences, but

a burden of proving that he has not committed the objectionable acts with which he has




04-1368                                  8
been charged." (quoting Shainman v. Shear's of Affton, Inc., 387 F.2d 33, 37 (8th Cir.

1967)).

       Here, Mohsen attempts to rebut the presumption of fraudulent intent by focusing

on the reason that Aptix needed to borrow money from Mohsen, i.e. it could not obtain

funding elsewhere, and its ultimate use of the money, i.e. to pay employees and other

creditors. Although Mohsen's argument may explain why Aptix entered into the loan

arrangement with Mohsen, it does not explain why it was necessary for Aptix to grant

Mohsen a security interest in substantially all of its assets when Mohsen had never

required such an interest for his past loans. It also does not address the district court's

express finding that the arrangement was not as innocuous or well-intentioned as

Mohsen suggests. Mohsen failed to rebut the circumstantial inference arising from the

badges of fraud and, therefore, it was not clear error for the district court to conclude

that Aptix granted the security interest with the actual intent to defraud Quickturn.

       Mohsen's legal arguments are also without merit. First, he argues that California

law protects the right of debtors to "pay one creditor in preference to another, or . . . give

to one creditor security for the payment of his demand in preference to another." Cal.

Civ. Code § 3432. Mohsen fails to recognize, however, that the section of the California

Civil Code on which he relies does not insulate debtors who make transfers with the

intent to defraud creditors not party to the transaction.    Kemp v. Lynch, 8 Cal. 2d 457,

460-61 (1937) (a transfer that appears to be a lawful preference, but which is made with

a fraudulent intent will be vitiated); Roberts v. Burr, 135 Cal. 156, 159 (1901) (stating

that a debtor may pay one creditor in preference to another in the absence of fraud).




04-1368                                   9
       Similarly, Mohsen argues that Aptix did not have the requisite fraudulent intent

because it entered into the security agreement in order to benefit some of its creditors.

This argument reads § 3439.04(a)(1) as if it requires that the debtor intend to defraud all

of its creditors, whereas the language actually used in the statute mandates only that

the debtor act with the actual intent to "defraud any creditor" (emphasis added).

       Finally, Mohsen asserts a defense under Cal. Civ. Code § 3439.08(a), which

states that a "transfer or an obligation is not voidable under subdivision (a) of Section

3439.04, against a person who took in good faith and for a reasonably equivalent value

or against any subsequent transferee or obligee." Mohsen argues that the security

interest should not be voided because Aptix engaged in the security agreement in a

good faith effort to stay in business and the amount of money loaned to Aptix exceeded

the value of the security granted in return. This argument fails for two reasons. First, it

appears that Mohsen did not invoke § 3439.08(a) in the proceedings before the district

court and he is therefore prevented from raising the statutory defense for the first time

on appeal. Singleton v. Wulff, 428 U.S. 106, 120 (1976); United States v. Carlson, 900

F.2d 1346, 1349 (9th Cir. 1990).      Even if this argument were properly before us,

Mohsen only identifies evidence tending to show Aptix's good faith in entering into the

transaction and points to no evidence showing that Mohsen himself acted in good faith

as required by the statute. Cal. Civ. Code § 3439.08(a). Mohsen's heavy reliance on

the California case Annod Corp. v. Hamilton & Samuels, 100 Cal. App. 4th 1286 (2002)

does not address the flaws in his argument.

       In Annod, the court applied § 3439.08 to find that a law firm had not engaged in a

fraudulent transaction when it executed partnership draws pursuant to a pre-existing




04-1368                                 10
partnership agreement rather than pay an outstanding judgment for unpaid rent. 100

Cal. App. 4th at 1293-94.     Mohsen makes much of the court's conclusion that the

partners had received the draws in good faith in part because "if the draws were not

paid, none of the former partners would have continued working and generating

revenue for the struggling law practice." Id. at 1293. Mohsen asserts that under Annod

transactions engaged in with the purpose of keeping a struggling business afloat cannot

constitute fraudulent transactions.       In making this assertion, Mohsen ignores the

extensive additional evidence relied on by the court as the complete basis for finding

that the partners acted in good faith.          Id. at 1296 (focusing on evidence that the

payments made were substantially less than previous draws, represented undermarket

values for the services performed, and were consistent with the partner's significant

efforts to increase funds available to creditors).         Annod does not stand for the

proposition that a transfer made to enable an enterprise to stay in business cannot

constitute a fraudulent transaction. Contrary to Mohsen's assertions, the district court

did not err as a matter of law in determining that Aptix's grant of a security interest to

Mohsen was a voidable transaction under California law.

                                  III.         CONCLUSION

      For the foregoing reasons, we affirm the decision of the district court voiding as a

fraudulent transfer the security interest Aptix granted to Mohsen.

                                         IV.     COSTS

      No costs.




04-1368                                    11
             NOTE: Pursuant to Fed. Cir. R. 47.6, this disposition
              is not citable as precedent. It is a public record.

United States Court of Appeals for the Federal Circuit

                                         04-1368


                                APTIX CORPORATION,

                                         Plaintiff/Counterclaim Defendant,

                                           and

         META SYSTEMS, INC. and MENTOR GRAPHICS CORPORATION,

                                         Counterclaim Defendants,

                                            v.

                        QUICKTURN DESIGN SYSTEMS, INC.,

                                         Defendant/Counterclaimant-Appellee,

                                            v.

                                    AMR MOHSEN,

                                         Third Party Claimant-Appellant.



NEWMAN, Circuit Judge, dissenting.



      I respectfully dissent. Dr. Mohsen loaned over nine million dollars to the

company he had founded and operated, secured by the assets of the company. My

colleagues hold that the purpose of making the secured loan was to defraud future

creditors, based on two undisputed facts: that Dr. Mohsen expected an adverse

attorney fee award in favor of Quickturn, and that his previous smaller loans to his
company were unsecured. I cannot agree that the requirement of security for the larger

loans establishes fraudulent intent.

       The district court found that the facts established an intent by Aptix to prefer Dr.

Mohsen as a creditor over Quickturn, and thus to "hinder or delay" the satisfaction of

Quickturn's future judgment in terms of California Code §3439.04 (a transfer is

fraudulent if made with "actual intent to hinder, delay, or defraud any creditor"). See

Aptix Corp. v. Quickturn Design Sys., Inc., No. C 98-00762 (N.D. Cal. Sep. 8, 2000).

However, California law also establishes that "a preference, is not for that reason a

transfer made to 'hinder, delay or defraud.'" Wyzard v. Goller, 23 Cal. App. 4th 1183,

1191 (1994). The Wyzard court explained that "it has been the rule for over 400 years,

since the Statute of Elizabeth in 1571," that a transfer which establishes a preference is

not thereby fraudulent. Id. at 1190 (citing 13 Eliz., ch. 5 (1571)); see United States Fid.

& Guar. Co. v. Postel, 64 Cal. App. 2d 567, 572 (1944) ("nor does the fact that such

preference hinders or delays other creditors in the collection of their claims render it

void, nor the fact that the preferred creditor had knowledge that such consequence

would follow the preference").

       This rule is codified in California Code §3432, which states that "A debtor may

pay one creditor in preference to another, or may give to one creditor security for the

payment of his demand in preference to another." California precedent reaffirms that

the preference itself does not establish wrongful fraudulent conduct. Wyzard, 23 Cal.

App. 4th at 1190; see Annod Corp. v. Hamilton & Samuels, 100 Cal. App. 4th 1286,

1299 (2002) (observing that the fraudulent conveyance statute employs "the language

of deliberate wrongful conduct") (emphasis in original).


04-1368                                      2
       Although the panel majority is correct that an intent to prefer one creditor over

another does not preclude the existence of a wrongful intent, it is clear from the district

court's opinion that its inference was based solely on its belief that it was fraudulent for

Aptix to prefer Dr. Mohsen by entering into a secured loan instead of an unsecured

loan. The district court described as "not as innocent as Dr. Mohsen suggests" the

"setup" whereby "Dr. Mohsen lends Aptix money, which Aptix uses to pay employee

salaries and essential creditors in an effort to keep functioning." Aptix, slip op. at 5. I

point out that there is a large space between absence of innocence, and deliberate

fraud. Undoubtedly all concerned knew that a secured creditor has priority over

unsecured creditors. That does not establish an intent to defraud the unsecured

creditors. See Wyzard, 23 Cal. App. 4th at 1190.

       Precedent illustrates instances of fraudulent intent. In Kemp v. Lynch, 8 Cal. 2d

457, 460-61 (1937) an ostensibly lawful preference made with "the understanding that it

shall be a mere simulated transfer" was fraudulent. See also Bank of Cal. v. Virtue &

Scheck, Inc., 140 Cal. App. 3d 1026, 1039 (1983) (collecting cases) ("California courts

have consistently treated a secret reservation in the grantor as potent evidence of

fraud"). Unlike Kemp, here there was no simulated transfer, but regular monthly loans

to meet payroll and other operating obligations. The facts of this case are more

analogous to those of Wyzard, in which a secured loan was taken in order to pay an

existing debt when it became known that an adverse judgment was imminent; the court

held that there was no fraud in a transfer made "with recognition that the transfer will

effectively prevent another creditor from collecting on his debt." Wyzard, 23 Cal. App.

4th at 1189-90 (concluding that the facts did not raise a triable issue of fact as to fraud,


04-1368                                       3
notwithstanding the existence of three factors of fraud); see also Annod Corp., 100 Cal.

App. 4th at 1299 (no triable issue of fact, despite three factors of fraud).

       Aptix granted Dr. Mohsen a security interest; the money was needed and used

for legitimate business purposes. The panel majority states that this "does not explain

why it was necessary for Aptix to grant Mohsen a security interest" when "Mohsen had

never required such an interest for his past loans." Maj. op. at 9. It is surely not

fraudulent to obtain security for a loan of over nine million dollars, whatever the

relationship between the lender and the recipient. Knowledge of a potential adverse

judgment does not establish fraudulent intent when making a loan to meanwhile keep

the company alive and operating. See Wyzard, 23 Cal. App. 4th at 1189 (a transfer in

anticipation of liability, "with recognition that the transfer will effectively prevent another

creditor from collecting on his debt," is not fraudulent).

       The security interest here at issue was only to the amount of the loan. See

§3439.04(b) (requiring that debtor not receive a "reasonably equivalent value in

exchange for the transfer or obligation" in order to establish "constructive fraud"). The

fact that the security was limited to the value of the loan is also relevant under

subdivision (a), the subdivision under which the court found fraud, as in §3439.04(a)(8)

(a "factor" in determining fraudulent intent is "[w]hether the value of the consideration

received by the debtor was reasonably equivalent to the value of the asset transferred

or the amount of the obligation incurred"). See Annod, 100 Cal. App. 4th at 1298 (in

"considering the enumerated 'badges of fraud' the 'court should evaluate all the relevant

circumstances involving a challenged transfer' and 'may appropriately take into account

all indicia negativing as well as those suggesting fraud'") (quoting Legis. Com. com.,


04-1368                                        4
12A West's Ann. Civ. Code foll. §3439.04, p. 290 (1997)). These provisions of the

California Code hinge the determination of fraud on whether the exchange was for

equivalent value, a fact here undisputed.

      My colleagues have thus lapsed into error, in holding that the making of a

secured loan instead of an unsecured loan in anticipation of an adverse judgment

establishes deliberate wrongful conduct. Waschek v. Dep't of Motor Vehicles, 59 Cal.

App. 4th 640, 647 (1997) ("inferences [of fraudulent intent] must be reasonably

deducible from the evidence, and not such as are derived from speculation, conjecture,

imagination, or guesswork"). The moneys obtained and the security interest granted for

the loan were routine business practice. The secured nine million dollars here loaned

provided essential funds to pay employees, vendors, and creditors. The facts of record

do not establish fraud under California statute and precedent. I respectfully dissent

from the panel majority's contrary holding.




04-1368                                       5
