Judge Gary Y. Tanaka, Case YC072813 2023-05-17 Tentative Ruling

LOS ANGELES SUPERIOR COURT – SOUTHWEST DISTRICT

Honorable Gary Y. Tanaka Wednesday, May 17, 2023

Department B Calendar No. 9

1. Carlos Esqueda, et al.’s Motion to Amend Judgment to Add Third Party and Non-Party Alter Ego Debtors

Carlos Esqueda, et al.’s Motion to Amend Judgment to Add Third Party and Non-Party Alter Ego Debtors is granted, in part.

Plaintiffs filed this action on April 16, 2018. This is an action related to alleged construction defects from services provided by Defendants to Plaintiffs on a home improvement project. The matter proceeded to arbitration and Plaintiffs prevailed at arbitration. The arbitration award was confirmed, and judgment was entered on December 10, 2020.

Plaintiffs’ request for judicial notice is granted pursuant to Evidence Code sections 452(c)(d) and (h).

A court has inherent power to use “all the means necessary” to carry its jurisdiction into effect. CCP § 187. This inherent authority includes amending a judgment against a corporation to add a nonparty alter ego as a judgment debtor. Hall, Goodhue, Haisley & Barker, Inc. v. Marconi Conference Ctr. Board (1996) 41 Cal.App.4th 1551, 1554-55. The reasoning is based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. “Such a procedure is … appropriate … where it can be demonstrated that [newly proposed debtors] in their capacity as alter ego of the corporation … in fact had control of the previous litigation, and thus were virtually represented in the lawsuit.” NEC Electronics, Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778.

“In California, two conditions must be met before the alter ego doctrine will be invoked. First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.” Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.

Among the factors to be considered in applying the alter ego doctrine are commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other. See Id. at 538-539. Other factors include inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers. See Id. at 539. No one characteristic governs. The courts must look at the totality of the circumstances to determine whether the doctrine should be applied. See Id.

“The decision to grant an amendment in such circumstances lies in the sound discretion of the trial court. ‘The greatest liberality is to be encouraged in the allowance of such amendments in order to see that justice is done.’” Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 508.

In addition to adding a new party as a judgment debtor on an alter ego theory, the party may be named as a judgment debtor on a theory that it is merely a successor corporation acting as a mere continuation of the debtor. “It is well settled that when a corporation is used by an individual or individuals, or by another corporation, to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the acts as if they were done by the individuals themselves or by the controlling corporation ... the court will disregard the 'fiction' of corporate entity[.]” McClellan v. Northridge Park Townhome Owners Ass'n, Inc. (2001) 89 Cal.App.4th 746, 752–753.

“[I]f a corporation organizes another corporation with practically the same shareholders and directors, transfers all the assets but does not pay all the first corporation's debts, and continues to carry on the same business, the separate entities may be disregarded and the new corporation held liable for the obligations of the old. . . . The general rule is 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.” Id. at 753. “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. Especially is this well settled when actual fraud or the rights of creditors are involved, under which circumstances the courts uniformly hold the new corporation liable for the debts of the former corporation.” Id. at 753-54.

Plaintiffs move to amend the judgment to add the alleged alter egos of, and successors to, Defendant and Judgment Debtor Creation Builders, Inc. (“CBI”) as additional judgment debtors as follows: Lior Ben-Nun (“Ben-Nun”) and Udi Reuven Gannot (“Gannot”) as the alter egos of CBI, and business entities DH Enterprises & Consulting, Inc. (“DH”), NRG Builders, Inc. (“NRG”), Royal Pavers and Remodeling, Inc. (“Royal”), and Best Remodeling, Inc. (“Best”) as the successors of CBI.

Plaintiffs submitted sufficient evidence to support a finding that Lior Ben-Nun and Udi Reuven Gannot were the alter egos of CBI, and that DH Enterprises & Consulting, Inc., NRG Builders, Inc., Royal Pavers and Remodeling, Inc., and Best Remodeling, Inc. are the successors of CBI.

The Court will not repeat in detail the substantial evidence that was uncovered by Plaintiffs during the post-judgment discovery process to support the current order sought by Plaintiffs. However, the Court notes that the evidence that was submitted was substantial. In addition, much of the evidence was in the form of financial documents prepared by an accounting firm and not the parties themselves. In fact, the accounting firm was the former firm previously retained by CBI. The parties can refer to the moving papers and all attached exhibits for the complete record of the evidence. The Court will only highlight the important findings which support the propriety of Plaintiffs’ arguments.

As to the alter ego theory, the evidence is sufficient to show alter ego liability. First, Gannot transferred substantial assets of CBI to the other business entities noted above immediately prior to the entry of judgment in this action. Second, both Gannot and Ben-Nun treated CBI assets as essentially personal assets and accounts and commingled funds. CBI purportedly utilized a non-active third director and officer simply to use his general contractor license while he engaged in no tasks or role as an officer or director. Plaintiffs have met their burden of proof, by a preponderance of the evidence standard, to establish that the alleged alter egos should be added as a judgment debtor. Wollersheim v. Church of Scientology (1999) 69 Cal.App.4th 1012, 1014.

As to the successor liability theory, the evidence is also significant. Gannot and Ben-Nun transferred CBI assets to DH shortly before the judgment. In addition, CBI transferred assets to NRG shortly before the entry of the arbitration award. While these assets were disguised as business expenses, a viewing of the accounting records reveal that these transfers instead resembled transfers of assets to avoid a pending judgment. Royal also received significant assets without any corresponding consideration. Best purportedly received “consulting fees.” However, these fees appear to be designed to transfer further assets.

The Court notes that Udi Reuven Gannot, DH Enterprises & Consulting, Inc., NRG Builders, Inc., and Royal Pavers and Remodeling, Inc. failed to file any written opposition. These third parties failed to controvert any of the substantial evidence and arguments that were submitted against them.

Ben-Nun, and Best Remodeling, Inc. did file an opposition, albeit late. These opposing parties attempt to frame themselves as further victims of schemes perpetrated by Gannot. The Court will not speculate on the personal relationships between these parties. However, it is clear from the evidence submitted by Plaintiffs, that these parties benefitted or actively intended to attempt to benefit from these same schemes to which they now claim to be victims. Opposing parties do not substantially dispute the content of the extensive financial evidence submitted by Plaintiffs. Opposing parties do not dispute or contend, for example, that they did not commingle funds or obtain substantial transferred funds from CBI. Instead, opposing parties seem to concentrate on alleged wrongful acts of the other proposed judgment debtors immediately prior to and after the winding down of CBI. If opposing parties believe that they were damaged by wrongful conduct of the other proposed judgment debtors, it would be incumbent upon them to pursue those alleged remedies separately. However, the acts demonstrated by moving parties herein of significant commingling and transferring of assets to and from the various entities and individuals support the order that is sought against the opposing parties.

Therefore, Plaintiffs’ Motion to Amend Judgment to Add Third Party and Non-Party Alter Ego Debtors is granted.

Plaintiffs’ request for attorneys’ fees is denied without prejudice subject to a properly noticed separate motion for attorneys’ fees.

“The judgment creditor is entitled to the reasonable and necessary costs of enforcing a judgment. Attorney's fees incurred in enforcing a judgment are not included in costs collectible under this title unless otherwise provided by law. Attorney's fees incurred in enforcing a judgment are included as costs collectible under this title if the underlying judgment includes an award of attorney's fees to the judgment creditor pursuant to subparagraph (A) of paragraph (10) of subdivision (a) of Section 1033.5.”

“(a) The judgment creditor may claim costs authorized by Section 685.040 by noticed motion. The motion shall be made before the judgment is satisfied in full, but not later than two years after the costs have been incurred. The costs claimed under this section may include, but are not limited to, costs that may be claimed under Section 685.070 and costs incurred but not approved by the court or referee in a proceeding under Chapter 6 (commencing with Section 708.010) of Division 2.

(b) The notice of motion shall describe the costs claimed, shall state their amount, and shall be supported by an affidavit of a person who has knowledge of the facts stating that to the person's best knowledge and belief the costs are correct, are reasonable and necessary, and have not been satisfied. The notice of motion shall be served on the judgment debtor. Service shall be made personally or by mail.

(c) The court shall make an order allowing or disallowing the costs to the extent justified under the circumstances of the case.”

Thus, the requested attorneys’ fees must be sought by a separately noticed motion.