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.

Wage-and-Hour Double Dip Rejected

Castillo v. Glenair, Inc., No. B278239 (D2d2 Apr. 16, 2018) 

Plaintiffs here are temps. They brought a wage-and-hour class action against their Temp Service and got a settlement. Now, they want to bring another class action against the Company they were tempted out. They allege the same claims, for the same work done, during the same time frame, based on a theory is that the Company was a joint employer with or alter ego or agent of the Service. But the court put the kybosh on that. 

Under Plaintiffs own theory, the Service and the Company were in a privy relationship. The privity means a judgment* against the Service is a judgment against the Company, which means claim preclusion bars this case. Or alternatively, Plaintiffs also claimed the Company acted as the Service’s agent. Since the release in the settlement released Service’s “agents,” it also released the claims against the Company.

Affirmed.

*Under Rule of Court 3.769(h), a class action settlement must be entered as a judgment.

I See Alter Egos...

Benaroya v. Willis, No. B281761 (D2d4 May 17, 2018)

Bruce Willis has some kind of deal with a production company. They get into a dispute. Like pretty much every Hollywood deal nowadays, the agreement calls for JAMS arbitration.

Willis isn’t getting paid his due. So Willis and ProdCo go to JAMS and start arbitrating. At some point, however, Willis likely figures out that even if we wins, ProdCo—a one-man operation—can’t or won’t pay up. So Willis asks the arbitrator to amend his demand to bring in ProCo’s owner/operator under an alter ego theory. The arbitrator agrees. Ultimately, the arbitrator finds ProdCo liable to Willis for 5 million bucks, and that ProdMan is, in fact, ProdCo’s alter ego. That makes ProdMan joint and several on the judgment. The trial court confirms the award.

The issue on appeal is that ProdMan isn’t a signatory to the contract. Which normally means he can’t be required to arbitrate at all. There is an exception to that rule, however, if the non-signatory is the alter ego of someone who signed the contract. But that doesn’t solve the problem here, because now the alter ego question is baked into the threshold question of whether ProdMan can even be required to arbitrate. And absent ProdMan’s consent, only a court, not an arbitrator, is allowed to make that call. Which means the arbitrator exceeded his authority and thus that the award against ProdMan needs to be vacated.

Reversed.

Victorious Non-Alter Ego Gets 1717 Fees

Burkhalter Kessler Clement & George LLP v. Hamilton, No. G054337 (D4d3 Jan. 8, 2018)

P sues D for breach of contract. P also sues AE on the same contract, on the theory that AE is D’s alter ego. The P/D contract has an attorney’s fee clause. P wins as to D on breach, but fails to prove that AE is D’s alter ego. 

Q: Who recovers fees?

A: P gets them against D, but AE gets them against P.

One of the upshots of Civil Code § 1717 is that if you try to enforce a contract with a fee provision in it against a nonparty (like an alleged alter ego) that party gets fees under the contract if it wins. That’s the case even if plaintiff wins on liability against the principal defendant, but fails to prove the nonparty is bound. Nothing in § 1717 prevents there from being two different prevailing parties on a claim by claim basis.
 
Reversed.

Abbott and Costello Do Wage and Hour

Turman v. Superior Court, No. G0511871 (D4d3 Nov. 19, 2017)

In a case where corporate structure is at issue, it’s mighty confusing when there’s a real live person named “Parent.” Arthur J. Parent, that is. Mr. Parent is the sole stockholder of A.J Parent, Inc. (Which for fun we’ll call the Parent Company.) He also owns a company called Koji’s, which was in the restaurant business, but is now bankrupt.

Reverse Veil Piercing for Alternative Entities

Curci Inv., LLC v. Baldwin, No. G052764 (D4d3 Aug. 10, 2017)

As we’ve discussed (on one occasion at very great length), under California law, a creditor can “pierce the corporate veil” of a corporate debtor to get at the assets of its “alter ego” owners. The creditor can do so when the company and the owners share a unity of ownership and interest and when the ends of justice require ignoring the separation between the company and the owners. 

But what about when the owners are the debtors? Can a creditor use veil piercing in a downward direction to get at the assets of a company owned by a debtor? This is generally called “reverse piercing” and one California court rejected it, at least for corporations. Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App. 4th 1510 (2008). The court there reasoned that ordinary creditors’ remedies permit creditors to seize shares of corporate stock directly from the debtor. So the creditor does that, and then assumes whatever position the debtor had vis-a-vis the company. Viz., it gets dividends, votes at meetings, has the right to initiate derivative litigation, and can presumably sell the stock to someone else. Maintaining that separation protects other innocent stockholders from an attack on corporate assets due to the malfeasance of some other stockholder.

But here, the company is an LLC, and very closely held one at that. It’s 99 percent owned by debtor and 1 percent by his wife. That, in the court’s view, is a crucial difference, because creditors’ remedies don’t permit seizure of an LLC member’s equity in the entity. The best a creditor can get is a charging order redirecting any distributions out of the LLC to the creditor. But if the LLC is still owned and controlled by the debtor, the debtor can avoid the charging order by simply causing the LLC to stop making distributions. 

That’s what happened here. Debtors’ LLC paid out $178 million in the six years before the judgment. But since the $7.2 million judgment in this case issued, no distributions have been made. (Presumably the debtors aren’t having too hard of a time living off their $178 mil.)

The court here finds the corporate/LLC distinction significant in way that can make reverse piercing equitable for LLCs in a way it is not for corporations. The court isn’t saying that the veil should be reverse pierced in this case, just that it can be. So it reverses and remands for the trial court to conduct a full blown alter ego analysis.

Reversed.

Vex Ain't a Family Affair

Hupp v. Solera Oak Valley Greens Assoc., No. E065766 (Jun. 23, 2017) 

Son has been previously declared a vexatious litigant. But the operative complaint in this case—about a completely stupid anti-pit bull HOA covenant—isn’t brought by Son. It was filed by Mother, although she’s also pro se. Defendants nonetheless filed an ex parte application seeking dismissal under Code of Civil Procedure § 391.7(c), on the grounds that pre-filing permission was not obtained. The trial court granted the application and dismissed the case.

Generally, being a vexatious litigant is a personal disability that applies only to the litigant’s bringing his own claims as a pro se. That gets extended a little—like in the recent Kinney v. Clark case—where the vexatious litigant is using an attorney as a sockpuppet to litigate on his own behalf. It could also apply if the plaintiff were some kind of alter ego of the vexatious litigant. But none of these apply, as least as to Mother’s claims brought to enforce her own rights. (Although the “puppet” doctrine did apply to a few claims that Mother was bringing to enforce Son’s rights.) So the trial court erred by striking Mother’s claims under § 391.7.

Reversed.

Refurber Madness.

Strasner v. Touchstone Wireless Repair & Logistics, LP, No. D068865 (D4d1 Nov. 4, 2016)

Plaintiff—a California native living at the time in NYC—returned a cell phone to a T-Mobile store in New York. In the process of refurbing the phone, an employee of the Refurber found some apparently sensitive pictures of Plaintiff on the phone and posted them to her Facebook wall. Plaintiff sued T-Mobile, four companies related to the refurbing, and those companies’ parent for invasion of privacy and related torts. Refurbers moved to quash service of lack of personal jurisdiction, which the trial court granted.

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.

Alter Ego Doctrine Is Not a Recipe to End-Around MICRA

Gopal v. Kaiser Foundation Health Plan, No. B259808 (D2d1 Jun. 23, 2016)

The court here upholds a granted summary judgment motion where an insurance plan was dismissed from a med-mal case due to lack of evidence that it was the alter ego of the principal defendants. Plaintiffs claimed a “single-enterprise” theory. I.e., that the various defendants, even if not in a clean vertical relationship, seriously abused the corporate form to perpetrate a fraud or accomplish an inequitable result. Plaintiffs didn’t show that here. Instead, they were using the alter ego theory to end around MICRA’s limitation on med-mal damages against heath care providers. The court notes that MICRA’s limits are not an “injustice” that can or should be remedied by ignoring the corporate form. They are, instead, a public policy determination by the California legislature, which courts must honor.

Affirmed.

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.

We're All Alter Egos Now

Relentless Air Racing, LLC v. Airborne Turbine, LP, No. B244612 (D2d6 Dec. 31, 2013)

This last case of 2013 is a doozy. On a motion to amend a judgment to add additional judgment debtors, the court of appeal reverses the trial court to hold that the owners of a defendant limited partnership hit with a significant judgment are the alter egos of the LP as a matter of law. In doing so, it potentially significantly expands the scope of alter ego liability in California.