Judge Peter Wilson, Case 2014-01187712 2022-08-18 Tentative Ruling

Judge: Peter Wilson, Case: 2014-01187712, Date: 2022-08-18 Tentative Ruling

Cross-Defendant Don Wilson Builders (DWB) seeks to amend the judgment against Cross-Complainant Surf N Turf Paradiso (SNTP) to add its principals, Jourdan Groves (Groves) and Michael Ruffner (Ruffner), as SNTP’s alter egos pursuant to CCP § 187.

For the reasons which follow, the motion is GRANTED.

SNTP opposes the Motion on the grounds that Ruffner and Groves were not properly served, and thus, this Court lacks jurisdiction to amend the judgment. SNTP also argues that the affirmative defense of laches and collateral estoppel bar amendment. SNTP contends DWB was well aware of Ruffner and Groves and unreasonably delayed asserting alter ego theories against them and that this Court has already determined that the alter ego doctrine does not apply. Further, SNTP contends there are insufficient facts and evidence to support application of the alter ego doctrine.

Service. In order to amend the judgment against a proposed judgment debtor, the Court must have jurisdiction over the proposed judgment debtor, which is normally acquired through service. (Milrot v. Stamper Medical Corp. (1996) 44 Cal.App.4th 182, 186.)

Here, the Motion was served on Attorneys Bartolotta and Frostrom of the law firm, Thorsnes, Bartolotta & McGuire, LLP (Thorsnes Firm) as counsel for Ruffner, Groves, SNTP and Surf Lagoons, Inc. (Surf Lagoons). ROA 1190, POS. Contrary to SNTP’s arguments and the Frostrom Declaration (ROA 1216, Frostrom Decl., ¶¶3-4), she and the Thorsnes Firm are counsel of record for Ruffner and Groves. See ROA 188, Notice of Association filed 6/17/15. The Notice of Association does not limit the Thorsnes Firm’s representation of Ruffner and Groves in any manner (ibid.) and was filed before the SNTP’s cross-complaint was filed. ROA 257.

Additionally, based on the Court’s records, Ruffner and Groves are still parties in this action. Although Plaintiff’s claims against Ruffner and Groves have been dismissed (ROA 765, Dismissal of First Amended Complaint), the claims against them by Christopher W. Schlegel (Schlegel) and The Financial Corporation’s (TFC) have not been dismissed. ROA 39, Schegel/TFC Cross-Complaint; ROA 121, Ruffner and Groves Answer to Schlegel/TFC’s Cross-Complaint. The Court records do not reflect any dismissal of or judgment on the Schlegel/TFC Cross-Complaint or any dismissal by Schlegel/TFC in favor of Ruffner and Groves. The Court records also do not show any withdrawal / motion to be relieved as counsel for Ruffner or Groves or a substitution of attorney for Ruffner or Groves filed by the Thorsnes Firm.

Therefore, it appears Ruffner and Groves were properly served through their counsel.

Standard for Amending Judgments. CCP § 187 “includes the power to add a judgment debtor where a person or entity is an alter ego of the original judgment debtor. In doing so, the court is amending the judgment to add the real judgment debtor. Ordinarily a corporation, or in this case a limited liability entity, is regarded as a separate legal entity. But where such an entity is used to perpetrate fraud or to accomplish some other wrongful or inequitable purpose, a court may disregard the entity and treat its acts as if done by the persons actually controlling it. In applying the alter ego doctrine, no particular findings are necessary, but the conditions under which a corporate entity should be ignored vary according to the circumstances of each case.” (Butler America, LLC v. Aviation Assurance Company, LLC (2020) 55 Cal.App.5^th 136, 145-146, internal citations omitted.)

“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.’ [Citation.] Thus the corporate form will be disregarded ... only when the ends of justice so require.” (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 301, 216 Cal.Rptr. 443, 702 P.2d 601; see also Estate of Bielec (1972) 8 Cal.3d 213, 219, fn. 5, 104 Cal.Rptr. 516, 502 P.2d 12 [“We may look through a corporation to its alter ego if the preservation of the corporate fiction of a distinct entity would have an inequitable result or promote injustice”].)

(Blizzard Energy, Inc. v. Schaefers (2021) 71 Cal. App. 5th 832, 854, 286 Cal. Rptr. 3d 658, 676, review denied (Feb. 16, 2022).)

Judges are encouraged to be liberal in allowing these amendments to ensure that justice is done. (Misik v D'Arco (2011) 197 Cal.App.4th 1065, 1072–1073.)

“[S]ection 187 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, 130 Cal.Rptr.3d 123 (Misik).) The alter-ego doctrine was extended to LLCs by Corporations Code section 17703.04, subdivision (b) [“A member of a limited liability company shall be subject to liability under the common law governing alter ego liability”].

(Blizzard Energy, Inc. v. Schaefers (2021) 71 Cal. App. 5th 832, 846, 286 Cal. Rptr. 3d 658, 669, review denied (Feb. 16, 2022).)

Accordingly, SNTP’s argument that DWB has not applied the correct standard for amending the judgment because SNTP is an LLC instead of a corporation has no merit. As shown by the authorities above, the standard is the same.

To prevail on a motion under CCP § 187, a judgment creditor must show, by a preponderance of the evidence, that: (1) the parties to be added as judgment debtors had control of the litigation and were virtually represented in the 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. (Triyar Hospitality Mgmt., LLC v WSI (II)-HWP, LLC (2020) 57 Cal. App. 5th 636, 641; Highland Springs Conf. & Training Ctr. v City of Banning (2016) 244 Cal. App. 4th 267, 280.

Control of Underlying Litigation

Control of the litigation contemplates some active defense. (NEC Electronics Inc. v. Hurt (1989) 208 Cal. App. 3d 772, 256 Cal. Rptr. 441.) In NEC, because the corporation was planning to file bankruptcy and had presented no defense, the corporation's interests and the alter ego's interests were not the same and there was no defense for the alter ego to control. (Id. at 780.) Whether the alter ego defendant had sufficient control depends on the facts of each case. (Dow Jones Co. v. Avenel (1984) 151 Cal. App. 3d 144, 198 Cal. Rptr. 457; see 6 Witkin, California Proc. (4th ed.), Proceedings Without Trial § 231.)

Throughout this lawsuit, the Thorsnes Firm captioned their papers as representing Groves, Ruffner and SNTP. Ruffner and Groves are the only two members and managers of SNTP and they shared control equally. ROA 1188, Ex. A, Groves Depo. Transcript, at pp. 9:13-11:1; ROA 1188, Ex. B, Ruffner Depo. Transcript, at pp. 8:15-9:9, 11:20-12:25; ROA 1188, Ex. E, Ruffner Decl., ¶2.

Additionally, Ruffner and Groves were active participants throughout the litigation and drove the prosecution of SNTP’s cross-complaint for their own benefit. Groves and Ruffner provided declarations in support of SNTP’s positions throughout this litigation, verified discovery responses, testified on behalf of SNTP, Ruffner was SNTP’s designated its PMK and the damages SNTP sought were based on what Ruffner and Groves believed they would recover. ROA 1188, DeMason Declaration, ¶¶3-7, 11, 14 and Ex. A, Groves Depo. Transcript, at pp. 16:6-17:2, 119:14-20, 134:12-136:8, Ex. B, Ruffner Depo. Transcript, at pp. 134:6-23, 136:17-142:18, Ex. C, Ex. D, Ex. E, and Ex. I.

SNTP does not dispute this evidence but nevertheless argues that Ruffner and Groves did not control the underlying litigation and did not represent their own interests. SNTP does not present any evidence to support its arguments.

The Court finds that DWB has established control by Ruffner and Groves.

Unity of Interest

In determining whether there is a sufficient unity of interest and ownership, the court considers many 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. (Butler America, LLC v Aviation Assur. Co., LLC, supra, 55 Cal.App.5th at 146; Highland Springs Conf. & Training Ctr. v City of Bannon (2016) 244 Cal.App.4th 267, 280–281; Highland Springs Conference & Training Center v. City of Banning (2016) 244 Cal.App.4th 267, 280-281 [factors include (a) the comingling of funds and assets, (b) identical equitable ownership, (c) use of the same offices and employees, (d) disregard of corporate formalities, (e) identical directors and officers and (f) use of one as a shell or conduit for the other's affairs].) Inadequate capitalization of the original judgment debtor is also a factor. No single factor controls: the court must consider all of the circumstances in determining whether it would be equitable to impose alter ego liability. (Butler America, LLC v Aviation Assur. Co., LLC, supra, 55 Cal.App.5th at 146; Highland Springs Conf. & Training Ctr. v City of Bannon, supra, 244 Cal.App.4th at 281.)

SNTP was formed to develop, operate and manage a wave pool, miniature golf, and restaurant within the Vista Hermosa Sports Park in the City of San Clemente, California but could not raise sufficient funds from investors for project development. ROA 1186, Caskey Decl., ¶¶2-3; ROA 1094, NOR re MSJ. SNTP was underfunded and used in Ruffner and Groves’ scheme to defraud investors. ROA 1186, Caskey Decl., ¶¶2,4; ROA 1188, Ex. K, Ex. A, Groves Depo. Transcript, at pp. 201:9-202:7, 203:20-204:25, 205:7-13 and Ex. 21, Ex. B, Ruffner Depo. Transcript, at pp. 55:15-58:4 and Ex. 25-26; ROA 139, FAC. As discussed, Ruffner and Groves were the only members and managers of SNTP. And during their depositions, when asked about the damages SNTP was entitled to, Ruffner and Groves testified about the recovery of their personal damages that they would have incurred as owners in SNTP and Surf Lagoons, which are purportedly two different wholly-owned companies. ROA 1188, Ex. B, Ruffner Depo. Transcript, at pp. 136:17-139:16; Ex. A, Groves Depo. Transcript, at pp. 135:14-136:5, 189:15-190:7, 190:25-191:23. Given that SNTP was used as a device to defraud investors, which neither Ruffner or Groves disputed, an inference can be made that the funds obtained were used for their own personal benefit.

Although SNTP argues a limited liability company is not held to the same standards of corporate formalities and that DWB’s evidence is insufficient, SNTP does not present any contrary evidence. Indeed, SNTP concedes the absence of corporate formalities, but fails to show how that absence assists Ruffner and Groves here.

Based on the undercapitalization of SNTP, its use as a vehicle through which Ruffner and Groves defrauded investors for their own benefit, and Ruffner and Groves’ control over SNTP, the Court finds there is sufficient evidence to show unity of interest.

Fraud / Inequitable Result

“The test for this requirement is that if the acts are treated as those of the corporation alone, it will produce an unjust or inequitable result.” (Misik, supra, 197 Cal.App.4th at 1073.) “[T]he prerequisite of ‘inequitable result’ must coexist with the other requirement of unity of interest and ownership.” (Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 842.) “Difficulty in enforcing a judgment does not alone satisfy this element.” (Leek v. Cooper (2011) 194 Cal.App.4th 399, 418.) “‘In almost every instance where a plaintiff has attempted to invoke the doctrine he is an unsatisfied creditor. The purpose of the doctrine is not to protect every unsatisfied creditor, but rather to afford him protection, where some conduct amounting to bad faith makes it inequitable, under the applicable rule above cited, for the equitable owner of a corporation to hide behind its corporate veil.’” (Mid-Century Ins. Co. v. Gardner (1992) 9 Cal.App.4th 1205, 1213.)

SNTP argues it is not a suspended entity and that it is currently in good standing. ROA 1218, Ex. A. SNTP also contends that DWB’s arguments amount to nothing more than “whining” that it will not be able to collect on its judgment if it is not amended.

DWB has shown more than that it is “whining” because it will not get paid. Ruffner and Groves played central roles in this action and the prosecution of SNTP’s lawsuit against DWB. Ruffner and Groves pursued this action for their own benefit without having evidence to support SNTP’s claims. ROA 907, 8/15/2019 MO; ROA 1094, NOR re MSJ. Ruffner and Groves also exercised control over SNTP and had a unity of interest with SNTP. And although SNTP may currently be in good standing, DWB presents evidence it was a suspended company just a few months ago (ROA 1188, Ex. H) and was previously undercapitalized. Given these facts, the Court agrees with DWB that it would be inequitable to permit Ruffner and Groves to hide behind an entity that they used to perpetrate a fraud on their investors, as well as to litigate claims without cause. (See Danko v. O'Reilly (2014) 232 Cal. App. 4th 732, 743-44, 751-52; Misik v. D'Arco (2011) 197 Cal. App. 4th 1065, 1073-74.)

Laches. There is no statute of limitations on a CCP § 187 motion and such a motion may be made at any time so that the judgment will properly designate the real defendants. It is error not to apply the alter ego doctrine based solely on unreasonable delay or lack of diligence in asserting the alter ego claim. (Highland Springs Conf. & Training Ctr. v. City of Banning (2016) 244 Cal.App.4th 267, 273, 282, 286-287; Lopez v. Escamilla (2020) 48 Cal.App.5th 763, 766 [adding an alter ego defendant may be done at any time, whether during the first 10 years following entry of a money judgment or after the judgment has been renewed].) Thus, laches does not apply merely because DWB waited until 7 years before asserting alter ego theories against Ruffner and Groves.

To prove laches, SNTP must show both (a) unreasonable delay and (b) either acquiescence in the act about which plaintiff complains or prejudice to defendant resulting from the delay. (Highland Springs Conference & Training Ctr. v. City of Banning (2016) 244 Cal.App.4th 267, 282, 288.) The party asserting laches bears the burden of production and proof on each element. Prejudice is never presumed, but must be affirmatively demonstrated by defendant. (Highland Springs Conference & Training Ctr. v. City of Banning, supra, 244 Cal.App.4th at 282-283 [trial court erred in denying motion to amend filed four years after most recent postjudgment attorney fee award order and nearly six years after commencement of action without sufficient evidence of prejudice]; but see Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39, 48-49 [motion to amend not granted where creditor waited seven years after judgment to file motion (prejudice presumed)].)

SNTP has not satisfied this test and presents no evidence or argument that it will be prejudiced by any delay.

Collateral Estoppel. Issue preclusion “prohibits the relitigation of issues argued and decided in a previous case even if the second suit raises a different cause of action. [Citation.] Under issue preclusion, the prior judgment conclusively resolves an issue actually litigated and determined in the first action.” (DKN Holdings, LLC v. Faerber (2015) 61 Cal.4th at 813, 824, 189 Cal.Rptr.3d 809, 352 P.3d 378; accord, Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797, 108 Cal.Rptr.3d 806, 230 P.3d 342.) The doctrine applies “(1) after final adjudication (2) of an identical issue (3) actually litigated and necessarily decided in the first suit and (4) asserted against one who was a party in the first suit or one in privity with that party.” (DKN Holdings, at p. 825, 189 Cal.Rptr.3d 809, 352 P.3d 378.) The doctrine differs from claim preclusion in that it operates as a conclusive determination of issues; it does not bar a cause of action. (Ibid.) Also, unlike claim preclusion, “issue preclusion can be invoked by one not a party to the first proceeding” (id. at p. 826, 108 Cal.Rptr.3d 806, 230 P.3d 342) and “operates ‘as a shield against one who was a party to the prior action to prevent’ that party from relitigating an issue already settled in the previous case” (id. at p. 827, 108 Cal.Rptr.3d 806, 230 P.3d 342).

SNTP has not shown that the elements for application of issue preclusion [or collateral estoppel] applies here. While the Court previously sustained Ruffner and Groves’ demurrer to the Complaint, the Court did so on the grounds that “each cause of action fails to state sufficient facts to support a viable cause of action and is uncertain.” ROA 126, 2/12/2015 MO. The Court’s 2/12/2015 Minute Order makes no mention of the alter ego allegations and there is nothing in the Court’s ruling that indicates it is based on the insufficiency of the alter ego allegations. Indeed, the First Amended Complaint contains alter ego allegations against Ruffner and Groves (ROA 139, FAC, ¶¶21-26), to which Ruffner and Groves did not subsequently demurrer. ROA 168, Answer. As such, there is no final adjudication on the issue of alter ego, nor was the issue of alter ego necessarily decided. In any event, a determination, in the context of a demurrer, as to the sufficiency of a pleading, in no manner amounts to a determination as to the validity of a properly pled alter ego claim.

Additionally, DWB was not a party to the action at the time of the demurrer to the Complaint. DWB did not make its first appearance in this action until filing its answer to SNTP’s cross-complaint on September 24, 2014. ROA 386. SNTP has not demonstrated DWB was in privity with any of the Plaintiffs in this action.

Further, other courts have found that claim preclusion or issue preclusion do not bar the amendment of a judgment to add a new party. (Wells Fargo Bank, N.A. v. Weinberg (2014) 227 Cal. App. 4th 1, 7–8, 173 Cal. Rptr. 3d 113, 118; Hennessey's Tavern, Inc. v. American Air Filter Co. (1988) 204 Cal.App.3d 1351, 1359, 251 Cal.Rptr. 859.)

Even if DWB could have pursued a theory of alter ego earlier, there is no bar to doing so after judgment. (Wells Fargo Bank, N.A. v. Weinberg, supra, 227 Cal. App. 4^th at 7; Danko v. O'Reilly (2014) 232 Cal. App. 4th 732, 750-752, 181 Cal. Rptr. 3d 304, 318-319 [alter ego issue expressly reserved for after jury phase of trial and not encompassed in original judgment].)

The Motion is GRANTED.

DWB is ordered to give notice.