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.
