Judge: Joseph Lipner, Case: BC506921, Date: 2023-09-19 Tentative Ruling

Case Number: BC506921    Hearing Date: November 28, 2023    Dept: 72

SUPERIOR COURT OF CALIFORNIA

COUNTY OF LOS ANGELES

DEPARTMENT 72

TENTATIVE RULING

Defendant Gary P. Downs (“Downs”) seeks to amend the March 16, 2022 judgment against Plaintiff William Rice (“Rice”) to include Triton Community Development, LLC (“Triton”) and TCD Development Services, LLC (“TCD”).

The Court GRANTS Downs’s motion to amend the judgment.

Background

Rice filed this action on April 25, 2013. This action eventually proceeded to a bench trial from August 30, 2021 to September 13, 2021. The operative complaint at the time was the First Amended Complaint (“FAC”), filed by Rice and two of Rice’s business entities on June 12, 2017 against Downs, Kristoffer J. Kaufmann, and Nixon Peabody LLP (“Nixon”). Judgment was entered against Rice and in favor of Downs and Nixon on March 16, 2022.

Rice filed a Notice of Appeal in the Second District on July 6, 2022.

On October 22, 2022, the Court awarded Downs $119,653.95 in statutory costs. On November 2, 2022, the Court awarded Downs $3,950,714.83 in contractual attorney’s fees.

Rice’s appeal was dismissed on January 6, 2023.

Kaufman, who prevailed against Rice in 19STCP04088 (the “Kaufman Case”) on September 17, 2020, obtained an order similar to the one sought here on February 5, 2021, which added Triton and TCD as judgment debtors.

Downs filed this motion on August 3, 2023 and served it on Rice’s counsel, Michelle J. Correll. Rice was also served directly in his capacity as a representative of Triton and TCD.

Rice filed a response to the motion contending that, because Correll does not represent Triton or TCD in this action, neither Triton nor TCD have been served with the moving papers. Downs filed a reply contending that Triton and TCD were validly served through Rice on the basis that he is the principal and controls both companies.

No opposition was filed by Triton or TCD.

Request for Judicial Notice

The Court grants Downs’s requests for judicial notice.

Legal Standard

Code of Civil Procedure section 187 (section 187) empowers the court to “use all the means necessary” to carry its jurisdiction into effect. This section “authorizes a trial court to amend a judgment to add a judgment debtor who is found to be an alter ego of a corporate defendant.” (Misik v. D'Arco (2011) 197 Cal.App.4th 1065, 1069.)  “The decision to grant an amendment in such circumstances lies in the sound discretion of the trial court.” (Carr v. Barnabey's Hotel Corp. (1994) 23 Cal.App.4th 14, 20.) “The greatest liberality is to be encouraged in the allowance of such amendments in order to see that justice is done.” (Carman v. Athearn (1947) 77 Cal.App.2d 585, 594.) 

In order that the alter-ego rule be satisfied, a plaintiff must show: (a) “a sufficient unity of interest and ownership between the corporation and the individual”; and (b) that “treating the acts as those of the corporation alone will sanction a fraud, promote injustice, or cause an inequitable result.” (Misik, supra, 197 Cal.App.4th at p. 1072.) Beyond these requirements, it is proper that the trial court’s criteria for evaluating such an amendment vary with the circumstances, as such determinations are “particularly within the province of the trial Court.” (Id. at pp. 1071-1072.) “The essence of the alter ego doctrine is that justice be done. What the formula comes down to … is that liability is imposed to reach an equitable result.” (Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 505.)

Due process “guarantees that any person against whom a claim is asserted in a judicial proceeding shall have the opportunity to be heard and to present his defenses.” (Motores De Mexicali v. Superior Court (1958) 51 Cal.2d 172, 176.) Therefore, to add alter ego defendants as judgment debtors, a plaintiff must show that, in the defendants’ capacities as alter egos, they controlled the original party and were virtually represented in that proceeding. (Greenspan, supra, 191 Cal.App.4th at p. 508.)

The relief afforded under section 187 is limited to naming ‘new’ defendants to satisfy a prior judgment, but this limitation is specific to a cause of action. (Greenspan, supra, 191 Cal.App.4th at pp. 507-508.) In other words, a plaintiff can name as a judgment debtor a defendant who was party to the same action as where the plaintiff obtained his money judgment, so long as the claim supporting the money judgment was not also brought against the judgment debtor. (Ibid.)

Discussion

Alter Ego Doctrine

As discussed above, Kaufman, who prevailed against Rice in the Kaufman Case on September 17, 2020, obtained an order similar to the one sought here on February 5, 2021, which added Triton and TCD as judgment debtors. The court adjudged that Triton and TCD were alter egos of Rice.

Downs argues that the court’s finding in that case collaterally estops Triton and TCD from denying that they are alter egos of Rice here.

California courts permit a third party to assert offensive issue preclusion under certain circumstances. (Bernhard v. Bank of America Nat. Trust & Savings Ass'n (1942) 19 Cal.2d 807, 813.) Courts have broad discretion to determine whin offensive issue preclusion should be applied. (Parklane Hosiery Co., Inc. v. Shore (1979) 439 U.S. 322, 331.) However, offensive issue preclusion risks creating unfairness where a party adopts a “wait and see” attitude in hopes that another party obtains a judgment that it can then use, or if the estopped party has a greater incentive or ability to litigate in the subsequent case than in the earlier one. (Id. at pp. 329-330.) Thus, “where a plaintiff could easily have joined in the earlier action or where, either for the reasons discussed above or for other reasons, the application of offensive estoppel would be unfair to a defendant, a trial judge should not allow the use of offensive collateral estoppel.” (Id. at p. 331.)

Here, the court records show that Rice did in fact vigorously litigate both cases. Furthermore, Downs did not and could not have adopted a “wait and see” strategy as to the Kaufman Case before filing this action, because Downs’ participation in this action is as a defendant sued by Rice. For these reasons, it would not be unfair to grant issue preclusion and conclude that Triton and TCD are alter egos of Rice.

Furthermore, TCD is an alter-ego of Triton. TCD is owned entirely by Triton. They do the same work, have the same office address, and use the same bank account and books. TCD allows Triton to use TCD’s assets for Triton’s benefit. Rice himself stated that he does not see TCD and Triton as separate entities. (Request for Judicial Notice, Exh. Q at p.165:25-166:16; 167:1-169:10; 169:17-171:23; 178:23-179:2.) The court’s analysis in the Kaufman Case adequately addresses why injustice would result from their treatment as separate entities, and the Court sees no reason for it to be relitigated here.

Reverse Veil Piercing

Under the doctrine of traditional veil-piercing, a legal entity’s owner can be held responsible for the entity’s obligations when it serves as an alter ego for the owner. (Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 221. Reverse veil piercing functions in the opposite directions: where it applies, a legal entity can be held liable for the obligations of its owner, typically to satisfy the owner’s debts. (Id. at p. 221.) When the request for piercing comes from a third party outside the targeted entity, this is referred to as outside reverse veil piercing. (Ibid.)

California courts do not allow outside reverse veil piercing for corporations. (Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1519.)

However, California appellate courts have more recently distinguished Postal Instant Press, explaining that reverse veil piercing is sometimes permissible against an LLC due to its different nature. (Curci Investments, supra, 14 Cal.App.5th at p. 222.) An LLC with only one member, for example, has no innocent shareholders who would be hurt by reverse veil piercing, as is often the case with corporations. (Id. at pp. 222-223.) Furthermore, a creditor cannot seize membership of an LLC in the way that a creditor may seize shares under normal judgment collection procedures, thus making it more difficult to actually obtain the underlying assets. (Id. at p. 223.) Further, although the legal remedies of conversion and fraudulent transfer are sometimes available, reverse veil piercing acts as a gap-filling doctrine for when they are not. (Ibid.)

Here, both TCD and Triton are LLCs. Rice has been Triton’s only member. (Request for Judicial Notice, Exh. Q at p. 143:17-22.) Furthermore, as discussed above, TCD is an alter-ego for Triton. These facts are even stronger than in Curci Investments, where the judgment debtor was a ninety-nine percent owner of the LLC in question with the remaining 1 percent owned by his wife. (Curci Investments, supra, 14 Cal.App.5th at p. 222.) Under these circumstances, it cannot be said that unfairness would result from allowing outside reverse veil piercing. The Court thus determines that reverse veil piercing is appropriate and grants the motion to add TCD and Triton as judgment debtors.

Service

As set forth above, the Court determines that Triton and TCD are both alter egos of Rice. Rice is Triton’s only owner and Triton is TCD’s only owner. Furthermore, Rice is Triton’s only employee. (Request for Judicial Notice, Exh. Q at p. 144:13-15.) Thus, service on Rice as a representative for Triton and TCD effected service on Triton and TCD.