Judge Bruce G. Iwasaki, Case Number: 23STCV08646, Date: 2023-08-29 Tentative Ruling

The action arises out of an underlying judgment involving Labor Code violations against employers, Zabihullah Kator (Kator) and Guardnow, Inc. (Guardnow). In the instant action, Plaintiffs Lakayla Burrell and Justine Notto now seek to enforce this underlying judgment against Defendant Speech Improvement Center, Inc. (Defendant or Speech Improvement Center).

Plaintiffs allege that they previously worked for Kator and Guardnow. On September 13, 2019, Plaintiffs obtained a judgment against Defendant Kator and Guardnow in the sum of $350,162.80 for California Labor Code violations (Underlying Judgment). This Underlying Judgment remains unsatisfied. On October 29, 2020, Kator formed a new business, Defendant Speech Improvement Center. The Complaint seeks to impose liability for this Underlying Judgment on Defendant Speech Improvement Center pursuant to Labor Code section 200.3 by alleging, among other things, that Defendant Speech Improvement Center has substantially the same owners or managers that control the labor relations as the judgment debtor, Guardnow. The Complaint contains a single cause of action for successorship pursuant to Labor Code section 200.3.

On July 26, 2023, Defendant Speech Improvement Center filed a demurrer to the Complaint. Plaintiffs have opposed the demurrer.

Defendant requests judicial notice of various facts and exhibits within the memorandum of points and authorities; no separate request for judicial notice containing the material to be judicially noticed was filed. These requests for judicial notice do not comply with California Rules of Court, rule 3.1306(c) and are denied.

A demurrer for sufficiency tests whether the complaint states a cause of action. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. The defects must be apparent on the face of the pleading or via proper judicial notice. (Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 994.) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Code Civ. Proc., §§ 430.30, 430.70.) At the pleading stage, a plaintiff need only allege ultimate facts sufficient to apprise the defendant of the factual basis for the claim against him. (Semole v. Sansoucie (1972) 28 Cal. App. 3d 714, 721.) A “demurrer does not, however, admit contentions, deductions or conclusions of fact or law alleged in the pleading, or the construction of instruments pleaded, or facts impossible in law.” (S. Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732 [internal citations omitted].)

Defendant demurs to the Complaint on the grounds that Complaint is uncertain, and Plaintiffs cannot state a claim.

As a technical matter, the cause of action for “Successorship per Labor Code section 200.3, subdivision (a),” is mislabeled.

“A successor to a judgment debtor shall be liable for any wages, damages, and penalties owed to any of the judgment debtor's former workforce pursuant to a final judgment, after the time to appeal therefrom has expired and for which no appeal therefrom is pending.”

Labor Code section 200.3 does not impose independent liability as stand-alone cause of action. Rather, this statute is merely a means of imposing liability as to another cause of action, similar to the alter ego doctrine.[1]

In the context of alter ego, a judgment creditor has two options on how to proceed where the creditor discovers post judgment that the judgment debtor has little or no assets and is controlled by a nonparty alter ego: First, the creditor may file a noticed motion to amend the judgment to add a nonparty alter ego as a judgment debtor, or may apply for an order to show cause why the nonparty alter ego should not be joined as a defendant. (See Code Civ. Proc. § 187; Jack Farenbaugh & Son v. Belmont Construction, Inc. (1987) 194 Cal.App.3d 1023, 1027–1029; Misik v. D'Arco (2011) 197 Cal.App.4th 1065, 1074–1075 [failure to allege alter ego in underlying lawsuit does not preclude motion to amend judgment].)

In the alternative, the judgment creditor “may file an independent action on the judgment, alleging that the proposed judgment debtor was an alter ego of an original judgment debtor.” (Highland Springs Conference & Training Center v. City of Banning (2016) 244 Cal.App.4th 267, 288.) Such an action is not referred to as an alter ego claim, but as an “action on the judgment.” (Highland Spring, supra, 244 Cal.App.4th at p. 288.)

Plaintiffs’ claim here is an action on the judgment. The Complaint alleges a judgment was entered as to Plaintiffs’ former employers, Defendant Kato and Guardnow. In the instant action, Plaintiffs now seek to impose liability on that Underlying Judgment on Defendant Speech Improvement Center, Inc. through the successorship liability pursuant to Labor Code section 200.3.

The Court raises this issue solely for the purposes of clarity. Mislabeling is not a basis to sustain a demurrer; it is not important how a claim is labeled or styled, but whether it states a cause of action on any available legal theory. (Duggal v. G.E. Capital Communications Services, Inc. (2000) 81 Cal.App.4th 81, 86.) The Court will now turn to the substantive merits of the demurrer.

Defendant demurs on the grounds that Plaintiffs’ Complaint fails to state a claim and is uncertain.

First, Defendant Speech Improvement Center argues that Labor Code section 200.3 was not in effect at the time of the Underlying Judgment and, because the statute does not apply retroactively, Plaintiffs cannot rely on this statute to impose liability on Defendant.

“(a) A successor to a judgment debtor shall be liable for any wages, damages, and penalties owed to any of the judgment debtor’s former workforce pursuant to a final judgment, after the time to appeal therefrom has expired and for which no appeal therefrom is pending. Successorship is established upon meeting any of the following criteria:

(1) Uses substantially the same facilities or substantially the same workforce to offer substantially the same services as the judgment debtor. This factor does not apply to employers who maintain the same workforce pursuant to Chapter 4.5 (commencing with Section 1060) of Part 3.

(2) Has substantially the same owners or managers that control the labor relations as the judgment debtor.

(3) Employs as a managing agent any person who directly controlled the wages, hours, or working conditions of the affected workforce of the judgment debtor. The term managing agent has the same meaning as in subdivision (b) of Section 3294 of the Civil Code.

(4) Operates a business in the same industry and the business has an owner, partner, officer, or director who is an immediate family member of any owner, partner, officer, or director of the judgment debtor.

(b) This section shall not be construed to limit other means of establishing successor liability for wages, damages, and penalties.”

It is undisputed that Labor Code section 200.3 did not go into effect until January 1, 2021. Further, as alleged in the Complaint, the judgment in the underlying action against Defendant Kator and Guardnow was entered before this effective date – on September 13, 2019. (Compl., ¶ 10.) Based on the foregoing, Defendant takes the position that Plaintiffs’ attempt to apply Labor Code section 200.3 to the Underlying Judgment would be an improper retroactive application of the statute.

“California courts comply with the legal principle that unless there is an ‘express retroactivity provision, a statute will not be applied retroactively unless it is very clear from extrinsic sources that the Legislature ... must have intended a retroactive application.’” (Myers v. Philip Morris Companies, Inc. (2002) 28 Cal.4th 828, 841.) Numerous general statutory provisions are considered to codify or relate to this general rule. (Evangelatos v. Superior Court (1988) 44 Cal.3d 1188, 1207–1208; Code Civ. Proc. § 3 [“[n]o part of [this code] is retroactive, unless expressly so declared.”]; Lab Code § 4 [“No action or proceeding commenced before this code takes effect, and no right accrued, is affected by the provisions of this code, but all procedure thereafter taken therein shall conform to the provisions of this code so far as possible.”].)

Here, there is no express retroactive language incorporated in the statute to demonstrate Legislative intent that the statute was intended to be applied retroactively. (Cf. Civ. Code § 1646.5 [“This section applies to contracts, agreements, and undertakings entered into before, on or after its effective date; it shall be fully retroactive”]; Gov. Code § 9355.8 [“This section shall have retroactive application, as well as prospective application”].)[2] However, the Court need not determine whether the Legislature intended retroactive application of this statute because the statute is not being applied to Defendant retroactively.

As noted above, Labor Code section 200.3 went into effect on January 1, 2021. Defendant argues that the judgement, however, was entered earlier, on September 13, 2019. (Compl., ¶ 10.) Importantly, however, Defendant concedes that Judgment was not final until January 12, 2023. (Dem. ¶ 7; see also Compl., ¶ 14.)[3] Thus, Labor Code section 200.3 went in effect while the underlying action was still pending, i.e., not final.

The pending nature of the Plaintiffs’ underlying case is important for two reasons.

First, Labor Code section 200.3 could not have been raised at the time Plaintiffs’ Underlying Judgment was entered: “A successor to a judgment debtor shall be liable for any wages, damages, and penalties owed to any of the judgment debtor’s former workforce pursuant to a final judgment, after the time to appeal therefrom has expired and for which no appeal therefrom is pending.” (Lab. Code § 2003, subd. (a) [emphasis added].)

Any attempt to bring a claim for successor liability prior to the entry of a final judgment would have been premature. As explained in case law, “[t]he plain language of § 200.3(a) makes successor liability contingent on the conclusion of all opportunities to appeal. (Nasiri v. T.A.G. Security Protective Services, Inc. (9th Cir., July 11, 2023, No. 21-16543) 2023 WL 4449197, at *2; Nasiri v. T.A.G. Security Protective Services Inc. (N.D. Cal., Sept. 16, 2021, No. 18-CV-01170-NC) 2021 WL 4221624, at *4.) Therefore, the crucial fact to the Court’s retroactivity analysis is that, when the Underlying Judgment was made final in 2023, the Labor Code section 200.3 was in effect.

Secondly, the statute appears to function as procedural rule as opposed to a substantive rule.

Again, the Court relies on legal doctrines similar in form and function to analyze this issue. With respect to the alter ego doctrine, case law explains that “[a] claim against a defendant, based on the alter ego theory, is not itself a claim for substantive relief, e.g., breach of contract ..., but rather, procedural, i.e., to disregard the corporate entity as a distinct defendant and to hold the alter ego individuals liable on the obligations of the corporation where the corporate form is being used by the individuals to escape personal liability, sanction a fraud, or promote injustice.” (Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 516 [emphasis added].) Similarly, courts have held that the “statute of limitations is procedural; it affects the remedy only, not the substantive right or obligation.” (Nelson v. Flintkote Co. (1985) 172 Cal.App.3d 727, 733; Talei v. Pan American World Airways (1982) 132 Cal.App.3d 904, 909 [“Limitations periods represent a public policy about the privilege to litigate; they relate to matters of procedure, not to substantial rights”].)

Based on the foregoing legal authority, Labor Code section 200.3 must also be treated as a procedural rule, and “a procedural rule . . . is not subject to the general rule that statutes should not be retroactive.” (Nelson v. Flintkote Co., supra, 172 Cal.App.3d at p. 733; Republic Corp. v. Superior Court (1984) 160 Cal.App.3d 1253, 1257.)

Instead, “[a] statute which is procedural in nature may be given effect as to pending and future litigation even if the event underlying the cause of action occurred before the statute took effect.” (Pacific Coast Medical Enterprises v. Department of Benefit Payments (1983) 140 Cal.App.3d 197, 204.) Stated another way, “ ‘[a] lawsuit is governed by a change in procedural rules made during its pendency, and the suit is pending until its final determination on appeal.’ ” (Republic Corp. v. Superior Court, supra, 160 Cal.App.3d at p. 1257.)

Therefore, for this additional reason, the Court also finds that Labor Code section 200.3 is applicable to Plaintiffs’ claim because it took effect before a final determination on appeal.[4]

Finally, Defendant argues the Complaint is uncertain because it does not allege any facts supporting an employment relationship between Plaintiffs and Defendant Speech Improvement Center, and the Complaint also fails to allege when Plaintiffs’ employment relationship ended with Guardnow. Defendant’s argument is not well-taken; these allegations are not material to Defendant’s liability under Labor Code section 200.3. Pursuant to Labor Code section 200.3, subdivision (a)(3), successorship liability is established when the successor “employs as a managing agent any person who directly controlled the wages, hours, or working conditions of the affected workforce of the judgment debtor.” Here, Plaintiffs have alleged that Kator, as a managing agent, controlled these aspects for both GuardNow and Defendant Speech Improvement Center. The Complaint is not uncertain.

The demurrer is overruled. Defendants shall serve and file their Answer on or before September 19, 2023.

[1] The alter ego doctrine “is not itself a claim for substantive relief, e.g., breach of contract or to set aside a fraudulent conveyance, but rather, procedural, i.e., to disregard the corporate entity as a distinct defendant and to hold the alter ego individuals liable on the obligations of the corporation where the corporate form is being used by the individuals to escape personal liability, sanction a fraud, or promote injustice.” (Hennessey's Tavern, Inc. v. American Air Filter Co. (1988) 204 Cal.App.3d 1351, 1358–1359; Leek v. Cooper (2011) 194 Cal.App.4th 399, 418–419; see generally 15 Cal.Jur.3d (2023) Corporations, § 22 [“Under California law, there is no such thing as a substantive alter-ego claim”].)

[2] Despite this absence of an express legislative declaration, retroactive operation may be “inferred . . . from the words of the statute taken by themselves and in connection with the subject matter, and the occasion of the enactment . . ..” (Estate of Frees (1921) 187 Cal. 150, 156; People v. Brown (2012) 54 Cal.4th 314, 319; Fox v. Alexis (1985) 38 Cal.3d 621, 629 [“An express declaration that the Legislature intended the law to be applied retroactively is not necessarily required.”].)

[3] The Court may separately take judicial notice of the file in LASC Case No. LC104968. (Evid. Code § 452, subd. (d).)

[4] Further, Plaintiff argues that, even without application of Labor Code section 200.3, the Complaint states a claim through the common-law doctrine of successor liability. Successor liability, like alter ego liability, is an equitable doctrine. The doctrine, which allows a creditor to recover judgment from the successor corporation of a judgment debtor is founded on the general rule that “ ‘where one corporation sells or transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the former unless (1) the purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape liability for debts. [Citations .]’ [Citations.]” (McClellan v. Northridge Park Townhome Owners Ass'n, Inc. (2001) 89 Cal.App.4th 746, 753.) Successor liability is permitted because “corporations cannot escape liability by a mere change of name or a shift of assets when and where it is shown that the new corporation is, in reality, but a continuation of the old.” (McClellan v. Northridge Park Townhome Owners Ass'n, Inc., supra, 89 Cal.App.4th at 754.) “Thus, where the successor corporation is a mere continuation and hence liable for the acts of its predecessor, the liability of the new corporation may be enforced in an independent action, ...” (Id.)