Judge: Michael Shultz, Case: TC022945, Date: 2023-02-02 Tentative Ruling
Case Number: TC022945 Hearing Date: February 2, 2023 Dept: A
TC022945 STI
Demolition, Inc. v. The Bedford Group
[TENTATIVE] ORDER
I.
BACKGROUND
On July 27, 2021, the Court of Appeal for the Second Appellate
District remanded this matter for the trial court to re-evaluate a motion to
amend judgment previously filed by Plaintiff, STI Demolition, Inc., a
construction company. The Court’s file reflects that Plaintiff obtained a
judgment for $108,863.70 against The Bedford Group (Bedford) after a bench
trial. Plaintiff renewed the judgment on August 7, 2020, indicating that
Defendant owed $212,571.58.
On August 6, 2020, the Hon. Maurice A. Leiter, denied Plaintiff’s
motion to amend the judgment to add Charles Quarles (Quarles) as an additional
defendant based on an alter ego theory. Plaintiff appealed the trial court’s
ruling which the Court of Appeal reversed.
II.
ARGUMENTS
A.
Motion filed December 1, 2022
Plaintiff requests an order to add
Quarles as a judgment debtor contending that Defendant Bedford is Quarles’
alter ego. Quarles allegedly diverted $2 million of Bedford’s money to pay
personal debts. Bedford is a shell company with no employees or assets.
B.
Opposition filed January 19, 2023
Quarles argues
that the motion is not supported by substantial evidence establishing that Defendant
Bedford is Quarles’ alter ego. No inequitable result would follow if the Court
denied the request. The trial court previously determined that Bedford’s
payment to Hanmi Bank was for a business debt, not a personal debt. Laches
applies to bar Plaintiff from pursuing this course of action since judgment was
entered in 2011. Plaintiff does not explain the reason for the delay, and
considerable evidence has been lost or destroyed that would have aided Quarles
in refuting Plaintiff’s claims.
C.
Reply filed January 26, 2023
Plaintiff argues it has met all
three elements to establish that Bedford is Quarles’ alter ego. The Court of
Appeal decided that the payment to Hamni bank was a business debt. That issue
is determined. Evidentiary disputes are no longer at issue. The Court of Appeal
reversed the trial court’s order. Quarles fails to address the laches defense.
III.
LEGAL STANDARDS
"The trial court is authorized to amend a judgment to add
judgment debtors. Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 508. The judgment may be amended to add additional judgment debtors on
the ground that a person or entity is the alter ego of the original judgment
debtor. (Ibid.) It is an equitable procedure 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. (Ibid.) The decision
to grant an amendment lies in the sound discretion of the trial court. (Ibid.)
Great liberality is allowed in granting such amendments.” Relentless Air Racing, LLC v. Airborne Turbine Ltd.
Partnership (2013) 222 Cal.App.4th 811, 815.
The moving party must show that “(1) the parties to be added as
judgment debtors had control of the underlying litigation and were
virtually represented in that proceeding; (2) there is such a unity of interest
and ownership that the separate personalities of the entity and the owners no
longer exist; and (3) an inequitable result will follow if the acts are treated
as those of the entity alone." Relentless at 815-816.
IV.
DISCUSSION
On July 27, 2021, the Court of
Appeal issued its opinion in this case reversing the trial court’s denial of
its postjudgment motion to add a party to the judgment pursuant to the alter
ego doctrine. The Court of Appeal concluded that the trial court did not
consider all the factors necessary to determine whether Defendant is Quarles’
alter ego. The Court of Appeal remanded the case to the trial court to "evaluate
the motion to amend the judgment in light of all the circumstances relevant to
alter ego liability. If upon remand, the trial court concludes that the motion
to add the party as an alter ego to the judgment is well-founded, then it must
also consider the judgment debtor's laches defense." S.T.I. Demolition, Inc. v. Quarles (Cal. Ct. App., July 27,
2021, No. B307978) 2021 WL 3163230, at *1.
Quarles
declares the following: He is the former president and chief executive officer
of the Bedford Group (Bedford), a corporation engaged in property development.
Bedford was involved in the construction of a 91-unit condominium complex on
real property located in Oakland (Oakland property). On February 3, 2006, Hanmi
Bank (Lender) entered into a construction agreement with Thomas Berkley Square
Housing, LLC (Berkley Square), the Bedford Group, Quarles, and his wife, Jo Ann
Quarles, to extend a loan to Berkley Square for construction of the Oakland
Property. Quarles signed a Commercial Guaranty agreeing to pay the Lender’s
loan. See Decl of Charles Quarles.
The commercial
guaranty was secured by Quarles’ personal residence located on Kenway Avenue in
Los Angeles (Kenway). Berkley Square defaulted on the loan, and the Oakland
Property was sold at a trustee’s sale, however a deficiency remained on the
outstanding indebtedness. The Lender sued Quarles among others for breach of
the Commercial Guaranty and filed a notice of default and election to sell
Kenway. Quarles ultimately settled with the Lender for $1 million which Quarles
was able to pay with litigation proceeds obtained in a lawsuit against the
insurance carrier for the Oakland Property. That payment to Hanmi Bank was incurred for a
business purpose, namely Bedford’s default on the loan with Hanmi Bank.
A.
The first element to support
application of the alter ego doctrine is established.
The Court of Appeal determined
that the first element was met establishing that Quarles had control of the
underlying litigation against Bedford. S.T.I. Demolition, Inc at *4.
In determining whether the second element was established (unity of interest
and ownership), the Court of Appeal determined that the trial court erred in
considering only whether the $1 million payment from Quarles to the Lender
constituted commingling of business and personal funds. S.T.I. Demolition, Inc. at *5.
The appellate court concluded that there was substantial evidence to support
the finding that the payment to the lender was a payment for a Bedford debt and
not a debt personal to Quarles. Id. However, the trial court
erroneously relied on a single transaction.
B.
Plaintiff has established a unity
of interest between Bedford and Quarles.
In determining whether there is a
unity of interest between Bedford and Quarles, the court considers the totality
of numerous factors, including “the commingling of funds and assets of the
two entities, identical equitable ownership in the two entities, use of the
same offices and employees, disregard of corporate formalities, identical directors
and officers, and use of one as a mere shell or conduit for the affairs of the
other. [Citation.]” Troyk v. Farmers Group, Inc (2009) 171 Cal.App.4th
1305, 1342. Inadequate capitalization of the original judgment debtor is
another factor. Zoran Corp. v. Chen (2010) 185 Cal. App. 4th 799,
811-812. [reciting ‘long list’ of inexhaustive factors]. No single factor
governs; courts must consider all of the circumstances of the case in
determining whether it would be equitable to impose alter ego liability. Troyk,
supra, at 1342. Alter ego ‘is an extreme
remedy, sparingly used.’ Highland Springs Conference & Training Center v. City of
Banning (2016) 244 Cal.App.4th 267, 280–281.
Plaintiff relies on the Declaration of John P. Ward, previously
submitted and filed on June 3, 2020, in support of the motion. He is an
attorney and custodian of the books and records for Plaintiff’s counsel,
Attlesey |Storm, LLP. Id., ¶ 2. He conducted the debtor examination of
Quarles on September 26, 2019. Id., ¶ 3. He submits his contemporaneous
notes of the proceeding and attests to facts admitted by Quarles at the
judgment debtor examination. Id., ¶ 4, Ex. 11.
The Court of Appeal noted the
circumstances proffered by Plaintiff to establish unity of interest; however,
the appellate court did not express an opinion on “how the trial court should
rule on the unity of interest element of the alter ego analysis." S.T.I. Demolition, Inc. at
*6, fn. 4.
Quarles objected to the
Declaration of Attorney Ward on grounds of lack of personal knowledge,
foundation, and hearsay. The objections are overruled. Attorney Ward took
Quarles’s debtor’s examination and recounts multiple statements made by
Quarles. Decl. Ward, ¶¶ 6–13, 17. Quarles was the president and CEO of Bedford,
and therefore, his statements constitute authorized party admissions. Any oral
or written statement made by Quarles is admissible against him under the
hearsay exception for party admissions. Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 523–524. Attorney Ward’s contemporaneous handwritten notes taken during
the examination are also admissible under Evidence Code, section 1241. He also
relied on his notes to refresh his recollection, and therefore, his testimony
is admissible under Evidence Code, § 1237.
Plaintiff offers sufficient
evidence to show a unity of interest between Quarles and Bedford and that
Quarles uses Bedford as a conduit for his other affairs: Quarles owns 100% of
Bedford’s shares; Bedford has no employees, yet it is an active corporation
pursuant to the California Secretary of State’s Records and maintains an active
website. Ward Decl., ¶ 8, and RJN Ex. 1 and 10, filed 6/3/20. All of Bedford’s books and records have been
destroyed. Ward decl, ¶ 10. Thus, there is no evidence that Bedford maintains
corporate formalities.
Quarles continues to conduct his
business as a real estate consultant in his individual capacity from Bedford’s
office and admits that Bedford is essentially “defunct.” Ward Decl. ¶ 6. He
continues to use Bedford’s email addresses. Id. ¶ 7, Ex. 12. Quarles
sold all of Bedford’s assets in 2012, and it currently does not own any assets or
bank accounts, although Bedford obtained a $17 million arbitration award
against Zurich Insurance. Id., ¶ 10-11. This is evidence of inadequate
capitalization.
Plaintiff has established the
second element of a unity of interest between Quarles and Bedford, based on the
totality of all of the foregoing circumstances.
C. Plaintiff
has established that an inequitable result will follow if Bedford and Quarles
were treated as separate entities.
The evidence supports a finding
that Quarles continues to maintain Bedford as an active corporation with inadequate
capitalization and maintains and uses its office for non-Bedford business. Given
the unity of interest between the two, it would be inequitable as a matter of
law to preclude Plaintiff from collecting its judgment by treating Bedford as a
separate entity. Relentless Air Racing, LLC v. Airborne Turbine Ltd.
Partnership (2013) 222 Cal.App.4th 811, 816
D. Quarles
has not demonstrated that the principle of laches bars Plaintiff from amending
the judgment.
Laches is an equitable defense based
on the principle that “those who neglect their rights may be barred from
obtaining relief in equity.“ Golden Gate Water Ski Club v. County of Contra Costa (2008)
165 Cal.App.4th 249, 263.
The defense requires an unreasonable delay “plus
either acquiescence in the act about which the plaintiff complains or prejudice
to the defendant resulting from the delay.” Id. It a question of fact
for the trial court, but may be decided as a matter of law if the facts are
undisputed. Id.
Quarles
contends that the judgment at issue was entered in 2011, and Plaintiff did not
give any reason for the unreasonable delay. Plaintiff filed the first motion on
June 3, 2020, twelve years since judgment was entered. Quarles contends he will
suffer substantial prejudice since all records of Bedford have been destroyed,
and its accountant died.
The party asserting laches bears
the burden of proof. Id. Quarles cites only the passage of time as being
“unreasonable.” Quarles has not met his burden of proving laches should apply.
Plaintiff conducted Quarles’ debtor examination on September 26, 2019, and
filed its first motion to amend judgment on June 3, 2020. Ward Decl, ¶ 3. This does not demonstrate that Plaintiff “sat
on its rights.” Moreover, while Bedford no longer has employees, it remains an
active corporation, as previously discussed. It was not unreasonable for
Plaintiff to continue to pursue judgment against Bedford, especially since
Quarles admitted that he continues to maintain Bedford’s website “because I
hope that business may be revived again someday.” Quarles decl ¶ 19.
The court issued its ruling on
August 6, 2020, denying Plaintiff’s motion. Plaintiff filed its notice of
appeal on September 29, 2020, and the Court of Appeal issued its ruling on July
27, 2021. The time for the appeal process does not amount to unreasonable
delay.
Quarles contends he will suffer
substantial prejudice because he no longer has records to refute Plaintiff’s
claims. However, the lack of records resulted from Bedford’s failure to
maintain its own records when its custodian and accountant died in 2016. Ward
declaration ¶ 10.
V.
CONCLUSION
Based on the foregoing,
Plaintiff’s Motion to Amend Judgment is GRANTED.