Husbands, Wives, and Reverse Outside Piercing

Blizzard Energy, Inc. v. Schaefers, No. B305774 (D2d6 Nov. 18, 2021)

Husband got hit with a $3.825 million fraud judgment in Kansas. The creditor domesticated the judgment in California. Then, while Husband was appealing the domestication, Creditor successfully moved under Code of Civil Procedure § 187 to add as a judgment creditor an LLC partially owned by Husband, which owns some commercial property in San Luis Obispo County. This is an appeal of that order. 

There's a threshold issue about whether the trial court had jurisdiction to amend the judgment because the appeal of the domestication was pending. (It was affirmed shortly thereafter.) Generally, the filing of a notice of appeal divests the trial court of jurisdiction and stays all proceedings, including enforcement of a judgment, under § 916. But § 916 is in Part 2 of the Code—“On Civil Actions.” Courts have held that the stay provisions in Part 2 only apply to ordinary civil actions, not to special proceedings of a civil nature—most of which are set out in Part 3.

The domestication of a sister state money judgment is governed by the Sister State Money Judgment Act, § 1710.10, which is in Part 3. That said, codification into Part 3 is not necessarily dispositive of whether something is an “action.” But because domestication of a judgment under the Act is a ministerial procedure that doesn’t bear any of the hallmarks of an ordinary civil action, the Court here finds that it is, in fact, a special proceeding. So the stay of trial court proceedings under § 916 did not apply.

On to the merits.

A thing about LLCs is that you generally can’t execute on LLC membership interests to collect on a judgment. (The theory is that doing so would make the creditor an involuntary partner of the other members.) The best you can get is something called a charging order, which creates a lien on any of the LLC’s distributions to the judgment debtor. Of course, if the judgment debtor controls the LLC, the debtor can just cause it not to make distributions. A lien on nothing isn’t worth much. Then the creditor can spend years trying to ensure that the debtor isn’t secretly leaking money out of the LLC, like by selling it stuff in non-arms length transactions. Little to wonder that hiding assets in LLCs is a popular collections avoidance strategy.

So creditor here tries a different move known as “outside reverse piercing,” which is a species of alter ego that, while not recognized in many jurisdictions, is recognized in California. In regular alter ego, you go up the chain and make the owner of an entity judgment debtor a co-debtor. In reverse outside piercing, you go down the chain to get at the assets of an entity owned by the debtor. But the test—requiring a unity of ownership and interest and fraud or injustice from upholding corporate separateness—is basically the same.

The Court here holds that both elements of the test were satisfied and the factual particulars aren’t that important.

But what gets tricky is that Husband isn’t the sole member of the LLC. He and Wife own it 50/50. In a slightly odd and not well explained twist, however, they came to own it about five years after they legally separated, which was itself more than 25 years ago. So although they are still married—Wife didn’t institute divorce proceedings till 2019—their membership interests are not community property. 

That means Wife could be completely innocent and have her legit interest in the LLC impaired if it were added as a judgment debtor. (Wife claims that she and Husband don’t really interact and that the cash thrown off by the LLC is retirement income.) The trial court, which thought everything was community property, did not consider any of that. So the case needed to be remanded to the trial court for a hearing on whether it would be inequitable to Wife’s interest to add the LLC as a debtor.

Reversed and remanded.

Fees, Form, and Substance

MSY Trading Inc. v. Seleen Automotive, Inc. No G057093 (D4d3 Jun 26, 2020)
 
Oversimplifying a little here, but the salient facts basically are: Plaintiffs won a breach of contract claim, which included an award of contractual attorneys’ fees. Original Defendant failed to pay. Plaintiffs then filed a separate collections suit against CEO, claiming that he was the alter ego of Original Defendant and thus liable on the judgment.

CEO prevailed on the alter ego issue. He then sought fees under the underlying contract and Civil Code § 1717. There’s no question he would have been entitled to those fees on an estoppel theory were he a prevailing defendant in the underlying contract action. Viz., if you sue a non-signatory enforce a contract, you are bound to the fee clause in that contract if you lose. But Plaintiffs argue that since this is a collections case, not an action on the contract, CEO can’t get fees, because Code of Civil Procedure § 685.040 makes fee recovery in a collections case a one-way right inuring only to the creditor. 

The Court of Appeal rejects that proposition. As the Court explains, there are three different ways to pop an alter ego with a judgment: Sue him in the original suit, add him to the judgement after the fact with a motion for leave to amend under Code of Civil Procedure § 187, or file a new lawsuit. These have procedural differences, but substantively, they are all the same. That being the case, the same logic that binds a plaintiff who tries to make an alter ego liable under a contract to the fee provision in it, applies when the other two procedures are used. So CEO was entitled to recover his fees in the alter ego case.

Affirmed.

Alter Ego Gotcha Fails on Appeal

Lopez v. Escamilla, No. B300439 (D2d6 May 4, 2020)

Plaintiff got a money judgment against an entity that turns out to have been severely undercapitalized. She wants to add the company’s owner as an alter ego judgment debtor. She does so by filing a new action. The new defendant, however, argued that was improper. He claimed by the creditor was required bring a motion to add an alter ego defendant under Code of Civil Procedure § 187 in the case in which the judgment was rendered. The trial court agreed and dismissed the case.

The Court of Appeal disagrees. Citing the maxim that the law values substance over form, Civil Code § 3528, the court holds that a § 187 motion is sufficient, not necessary. The alleged alter ego can also be sued in a separate action. Moreover, because the purpose of an alter ego amendment is to substitute the true debtor and not to re-litigate the claim, the applicable statute of limitations is the ten-year limit on enforcing a judgment, not the statute of limitations that governed the underlying liability. 

Reversed.

A Hot Mess of Preclusion

F.E.V. v. City of Anaheim, No. G052460 (D4d3 Sept. 19, 2017)

This is a civil rights case over a police shooting with a complicated procedural history. Plaintiff first filed in federal court, bringing a § 1983 claim as well as several pendant state claims. The district court granted summary judgment for Defendants on the § 1983 and declined ongoing supplemental jurisdiction over the state claims under 28 U.S.C. § 1367(c). A three judge 9th Circuit panel upheld the district court’s opinion on appeal. Plaintiff sought review en banc.

In the meantime, plaintiff refiled his state claims in state court. But since they were premised on the same factual scenario as the federal claims and governed by similar standards, the superior court found that the state claims were barred by the collateral estoppel effect of the federal judgment, even though the appeals were not final. (Federal preclusion applies from the entry of judgment, even when appeals are pending.) The Court of Appeal affirmed the dismissal.

But then the 9th Circuit granted review en banc and eventually reversed its the panel decision and the district court as well. Cert was eventually denied.

So plaintiffs filed a new state court case and moved to have the prior judgment vacated. The superior court denied the motion and the Court of Appeal denied a writ. The superior court then dismissed the new case, on res judicata grounds—the prior dismissal barred the new case, even though the preclusion that served as the basis of that case’s dismissal would no longer apply. Plaintiff appealed.

Plaintiff first argues that the en banc opinion automatically wipes out the first state court judgment. But that’s not consistent with the law. Under § 16 of the Restatement of Judgments—which is generally followed in California—when a judgement in case #2 is based on a judgment in case #1, the vacation of judgment #1 does not automatically nullify judgment #2. Instead, it subjects judgment #2 to being set aside through a procedurally appropriate vehicle. 

Nor can Plaintiff collaterally attack or obtain equitable relief from the earlier state court judgment. Restatement § 73 suggests that it is appropriate to give relief from a second judgment when it is based on an earlier judgment that is substantively vacated. That’s a grounds for relief from judgment that is specially enumerated in Federal Rule of Civil Procedure 60(b)(5). But for weird historical reasons, California does not have a clean Rule 60(b) analog.  

California does permit the equitable setting aside of a judgment—whether by motion filed in the original case or by filing a separate equitable action. But the grounds for that are very narrow. To vacate, a judgment needs to be facially void or the product of extrinsic fraud. While extrinsic fraud can be hard to define, there’s no way that the 9th Circuit’s en banc order turned the judgment in the first state case into a product of extrinsic fraud. So none of California’s procedural vehicles to set aside a judgment that was based on an earlier judgment that was reversed apply to the circumstances presented here.

At this point, the Court of Appeal is pretty boxed in. Because the judgment in the first case is final—indeed, affirmed on appeal—there isn’t any state law procedure to let plaintiff out from under that judgment. That’s the case even though the result is indisputably wrong, based as it is on the collateral estoppel effect of a judgment that was subsequently overturned.

So the court uses the only tool left. There’s an exception to res judicata when recognizing the effect of the first judgment would work a manifest injustice. An exception that is mostly recognized in cases that say that it doesn’t apply. But given the “highly unusual, even extraordinary” circumstances of the case, the court finds that the exception applies here. The essential concerns motivating preclusion doctrines aren’t present here. Indeed, applying preclusion runs contrary to the idea that cases deserve to be decided on the merits. And since the only merits decision in this case that informed the preclusion rulings was overturned as wrongly decided, the court declines to recognize the preclusive effect of the first judgment.

Reversed.

FWIW, I suppose there is a second option, but not in this court. The federal case is going back to the district court for trial. Given that there’s now a federal claim for the state claims to be pendent to, plaintiff could add the state claims back there, and they should relate back to the federal claim for staute of limitations purposes, since they are all based on the same conduct. But I get why the court here sees the need to step in to avoid an injustice.

Nedlloyd Eats Jury Trial Waiver

Rincon Realty LLC v. CP II Rincon Towers, Inc., No. A138463 (Jan. 31, 2017)

In a very large real estate deal involving a luxury building in SF’s rapidly developing Rincon Hill ’hood, the contract picks New York law as broadly as a contract can express an intent to do that. It also contains a jury trial waiver. It does, not, however, lay a mandatory venue in NY. (Or at least the parties never argued it did.) And that is a fatal fact.

Control, Default, and Alter Ego.

Wolf Metals v. Rand Pac. Sales Inc., No. B264002 (D2d4 Oct. 25, 2016)

Plaintiff is trying to enforce a default judgment. After a lack of success, it moves to add two new judgment creditors, one on the grounds that he was the alter ego of the debtor and the other because it was the debtor’s successor corporation. The trial court granted the request as to both, but the Court of Appeal reverses as to the alleged alter ego.

A Declaration Is a Declaration

Hearn Pac. Corp. v. Second Generation Roofing, Inc., No. A142203 (D1d2 May 2, 2016)

As the court tells it, this case “involves a civil procedure game of cat-and-mouse like none we have before encountered.”

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.

Affirmed.

Holding the Line on Alter Ego

Wells Fargo Bank, NA v. Weinberg, No. E057011 (D4d2 June 18, 2014)

Wells got a judgment against a solo practice law firm. Afterwards, it successfully moved under Code of Civil Procedure § 187 to add the lawyer to the judgment as an alter ego of the judgment debtor firm. The court here affirms. For good reason. It looks like, post-judgment, the lawyer sucked the firm’s accounts dry and engaged in some dodgy “loan” accounting while continuing his practice under his own name. Unfortunately, the court relies principally on Greenspan v. LADT LLC, 191 Cal. App. 4th 486 (2011), which—as I have previously discussed—contains some unfortunately loose language about the “fraud or injustice” prong of the alter ego analysis. Indeed, here, the court doesn’t really discuss that element at all. It seems clear from the evidence that the standard would have been satisfied anyway by way of the lawyer’s deliberate undercapitalization of the firm in light of the pending judgment. But the failure to cite the element of the test is a little concerning.

Affirmed.