Judgments and Jurisdiction

WV 23 Jumpstart v. Mynarcik, No. C095046 (D3 Nov. 21, 2022)

This is a weird opinion, in that it is deciding collections-related issues in a context where collections―at least collections in California―don’t appear to be a viable option.

Back in 2010, Creditor won a $1.4 million judgment against three individuals and a company. Shortly thereafter, it domesticated the judgment in California, where some of the defendants apparently had assets. Creditor ultimately settled with two of the individuals. And the company went Chapter 7. But there was still about a million bucks uncollected, with interest accruing, and the third Debtor to collect against. 

Unlike California judgments, which last ten years, Nevada judgments only last six. So when, slightly less than ten years after the California domestication, Creditor assigned the judgment to Plaintiff, the time to renew the underlying Nevada judgment in Nevada had already run.  

It appears, however, that Debtor doesn’t have any assets in California, only in Nevada. So to get around the expiration of the Nevada judgment, Plaintiff timely renewed the California judgment and then went back to Nevada to re-domesticate it. Debtor moved in Nevada to quash the judgment, claiming it was invalid. The Nevada court stayed the case pending a ruling from the California court on the judgment’s validity under California law. Debtor then argued to the California court that the renewed judgment was invalid because there was no personal jurisdiction over him in California to enter the original domesticated judgment. The trial court agreed. Plaintiff appealed.

The Court of Appeal reverses. In a basic sense, the idea that a court needs personal jurisdiction over a judgment debtor to domesticate a judgment doesn’t make sense. Collections is basically in rem. You domesticate a judgment because there are assets in the jurisdiction to be levied against. But if some separate minimum contacts style test is the rule, a judgment debtor could render itself collection proof just by moving its assets to a state with which it has no contacts.

The Court points out that nothing in the Sister State Money Judgments Act requires personal jurisdiction to domesticate a judgment. Indeed, the process is essentially ministerial. You attach the judgment to a form and the clerk stamps it as enforceable in California. While the Act permits challenges based on jurisdictional defects in the underlying merits judgment, it does not layer on any requirements beyond those.

Nor are any of the due process concerns from which personal jurisdiction requirements arise implicated. There is no dispute that the Nevada court that actually adjudicated the claim had personal jurisdiction over Debtor. He had notice and an opportunity to be heard in a court in a jurisdiction where he had contacts that bore a substantial relationship to the claims. There was thus no need for a separate jurisdictional analysis to justify out-of-state collections, which, after all are guaranteed under the Full Faith and Credit clause of the federal constitution.

There is, however, a different concern that is suggested, but not raised in the opinion. As I said, reading between the lines, there doesn’t appear to be any evidence that Debtor has assets in California to collect against. So can a creditor renew a domesticated Nevada money judgment in California, which can’t actually be enforced in California, in order revive an otherwise lapsed judgment in Nevada, to be enforced there? That seems a little squirrelly. But it's a Nevada problem, not a California one.

Reversed.

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.