Thursday, January 8, 2015

Not So Fast, Partner ...

Danko v. O’Reilly, No. A138784 (D1d2 Dec. 18, 2014)

A lawyer won a big judgment against his former firm, but lost on a nonsuit his individual capacity claims against the lead partner. Before the judgment could be executed upon, however, the partner diverted the all firm’s assets to himself, his family and elsewhere, and then caused the firm to dissolve. It was eventually pushed into bankruptcy. The issue is whether the trial court properly amended the judgment under Code of Civil Procedure § 187 to add the partner as a judgment debtor. The partner contends that the amendment order was barred by the bankruptcy stay, and that, in any event, the amendment was precluded by res judicata or collateral estoppel. The court of appeal rejects each argument.

On the bankruptcy point, in settling with the plaintiff, the firm’s bankruptcy trustee agreed—and a bankruptcy court approved and a federal district court affirmed—that the order amending the judgment would be outside of the stay. Amending the judgment to go after the partner individually was not an action against the bankruptcy estate, so the partner should not be able to avoid collections based on the stay. Even if the stay covered this case during the time in which the judgment was amended—which occurred before the settlement was entered—the bankruptcy court had the authority to retroactively rule that this case was outside of the stay.

As to the preclusion arguments, the issue of whether the partner and firm were alter egos—the key issue in whether the judgment should be amended—had not been litigated in a prior proceeding when the individual capacity claims against the partner were nonsuited. Indeed, the parties expressly agreed to defer any alter ego issues until after the trial. Moreover, the claims were not the same. The original claim alleged the partner alleged that he was individually liable as a principal. The fact that this claim failed did not and should not preclude an amendment of the judgment to hold the partner derivatively liable as an alter ego for the liabilities of the firm, so long as plaintiff could established that the partner and firm shared a unity of ownership and interest and the injustice would result from honoring the corporate form. Which he did.


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