Opinion
G052345
05-16-2017
JANNA JEAN McCONNELL, Plaintiff and Appellant, v. ROBERT H. GREGG II, Defendant; MILLENIUM DENTAL TECHNOLOGY, INC. et al., Respondents.
Law Offices of Levin & Margolin, Elyse R. Margolin; Law Office of Burton Mark Senkfor and Burton Mark Senkfor for Plaintiff and Appellant. No appearance for Defendant. Broedlow Lewis, Jeffrey, Lewis and Kelly Broedlow Dunagan for Respondent Robert H. Gregg DDS, Inc. Enterprise Counsel Group, Benjamin P. Pugh, James S. Azadian and Cory L. Webster for Respondent Millennium Dental Technologies, Inc.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 07D005483) OPINION Appeal from a postjudgment order of the Superior Court of Orange County, Linda Lancet Miller, Judge. Request for judicial notice. Judgment affirmed. Request denied. Law Offices of Levin & Margolin, Elyse R. Margolin; Law Office of Burton Mark Senkfor and Burton Mark Senkfor for Plaintiff and Appellant. No appearance for Defendant. Broedlow Lewis, Jeffrey, Lewis and Kelly Broedlow Dunagan for Respondent Robert H. Gregg DDS, Inc. Enterprise Counsel Group, Benjamin P. Pugh, James S. Azadian and Cory L. Webster for Respondent Millennium Dental Technologies, Inc.
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Plaintiff and appellant Janna Jean McConnell (plaintiff) obtained a judgment for $350,000 in 2011 for attorney fees in the dissolution of marriage action against defendant Robert H. Gregg II (defendant), not a party to this appeal. Unable to collect it, more than three years later plaintiff moved to add two of defendant's business entities, respondents Millennium Dental Technologies, Inc. (Millennium) and Robert H. Gregg DDS, Inc. (DDS; together with Millennium, Corporations), as additional judgment debtors.
Plaintiff appeals from the order denying this motion, arguing the court had discretion to add Corporations to the judgment as additional debtors because absent that addition she will suffer substantial injustice. Plaintiff points to defendant's receipt of significant benefits from Corporations in lieu of salary and dividends, thereby shielding any income from her collection efforts. She claims these inequities and injustice are sufficient to support addition of the Corporations as judgment debtors.
We conclude these are insufficient facts to allow Corporations to be added as additional debtors and affirm the order.
We also deny Millennium's request for judicial notice for the reasons set out below.
FACTS AND PROCEDURAL HISTORY
The facts are taken primarily from those set out in the opening brief, which cites to the motion to add debtors and to the prior opinion in this case, on defendant's appeal from the order awarding attorney fees to plaintiff. (In re Marriage of McConnell & Gregg (Aug. 9, 2012, G045483) [nonpub opn.].) Neither of the respondent's brief contains a statement of facts.
During the marriage of plaintiff and defendant, defendant, a dentist, patented a dental laser and procedure for operating the laser he had developed. He assigned the patents to Millennium, which markets and sells the products.
Defendant controls Millennium, owning with his father, slightly more than 50 percent. Plaintiff owns a 50 percent community property interest in defendant's share. She receives no dividends, salary, benefits of other payments from the company. The court has prohibited her from selling her stock. Defendant is the sole shareholder of and principal dentist for DDS.
According to defendant he works seven days a week, twelve hours a day for Millennium. He is not paid directly for his efforts. Millennium bought a $1.8 million home for him to live in. The mortgage payments are approximately $10,000 per month. Millennium also pays property taxes, maintenance and insurance. The rental agreement sets defendant's rent at $6,175 per month. Defendant has not paid the rent in several years.
Millennium hired a nanny/maid for defendant's family and paid her over $80,000 plus benefits in 2013. It also purchased a car for her use.
Millennium has a nonprofit corporation, Institute for Advanced Laser Dentistry (Institute) to teach classes related to use of the lasers. Defendant is the president and program director of Institute and operates and teaches the classes. Millennium pays Institute for this. Institute does not pay defendant but pays DDS $192,000 annually for those services. DDS pays defendant just over $106,000 per year for both his work for Institute and for his dental services to DDS.
Millennium also pays DDS for prepaid dental care for Millennium's employees. The latest DDS balance sheet showed $1.115 million in such payments.
In 2013 DDS paid $82,000 of defendant's attorney fees. According to DDS's tax returns at that same time defendant owed DDS $757,000 and DDS was not indebted to defendant.
In 2014, DDS again paid attorney fees on behalf of defendant. It also paid other expenses, including, for example, approximately $8,400 annually for private school tuition for defendant's son.
In 2007 plaintiff filed the dissolution action. In 2009 a judgment as to status only was entered. In 2010 plaintiff filed a motion to compel defendant to pay her attorney fees and was awarded a judgment for $300,000 in attorney fees and $50,000 in costs.
Plaintiff conducted two judgment debtor examinations but has only been able to collect $88.
When plaintiff was unsuccessful in collecting the fees, she filed a motion to add Corporations as additional judgment debtors. She relied on the facts set out above, claiming it was inequitable and substantially unjust for defendant to shield his income from her in the Corporations. She claimed her lawyers could not continue litigating the action without being paid. At the time the motion was filed, according to plaintiff attorneys for both parties have generally done the same amount of work but defendant has paid his lawyers about $750,000 while her attorneys have been paid less than $190,000.
The court denied the motion, finding Corporations were not the "real defendant[s]" to be added, as required by case law.
The court had previously found there was nothing improper about Millennium paying defendant as it did and there was no breach of fiduciary duty. There was a judgment dismissing Millennium from the action on that basis, including a finding it was not defendant's alter ego.
Moreover, neither Corporation had had the ability to litigate their liability for attorney fees since they are not parties to the family law action. Further, all the cases require something more than just an unsatisfied judgment. And DDS is not the real obligor of defendant in the attorney fees order.
The court stated that although it "seems very inequitable and offensive" defendant has control of a substantial amount of money, that does not mean DDS should be liable for the attorney fees where the court found defendant had the ability to pay those fees.
REQUEST FOR JUDICIAL NOTICE
Millennium filed a request for judicial notice of a judgment in the dissolution action entered after this appeal was filed.
On appeal the record is normally limited to documents that were before the trial court. (Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 444, fn. 3.) This is especially true when the documents evidence events that occurred after the trial court proceedings. There are no exceptional circumstances that would justify our considering these documents. (Ibid.)
Further, Giannuzzi v. State of California (1993) 17 Cal.App.4th 462, 464, footnote 2, on which Millennium relies, does not support its claim we may take judicial notice of the judgment entered after the appeal was filed. In Giannuzzi, the court augmented the record with the judgment after an appeal was prematurely filed from an order sustaining a demurrer.
In addition, Millennium seeks to offer the judgment in opposition to tangential arguments that are not relevant to our decision. We deny the request.
DISCUSSION
1. Applicable Law
Pursuant to Code of Civil Procedure section 187 (section 187), "'the trial court has jurisdiction to modify a judgment to add additional judgment debtors.'" (Wolf Metals Inc. v. Rand Pacific Sales Inc. (2016) 4 Cal.App.5th 698, 703, fn. omitted.) Granting or denying a motion to add a debtor lies within the discretion of the court. (Ibid.)
Section 187 states: "When jurisdiction is, by the Constitution or this Code, or by any other statute, conferred on a Court or judicial officer, all the means necessary to carry it into effect are also given; and in the exercise of this jurisdiction, if the course of proceeding be not specifically pointed out by this Code or the statute, any suitable process or mode of proceeding may be adopted which may appear most conformable to the spirit of this code."
Generally, when a party is added to a judgment under section 187 it is a corporate debtor's alter ego. (Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership (2013) 222 Cal.App.4th 811, 815.) Such addition "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.) Addition of an alter ego is limited to a nonparty who actually controlled the underlying action. 2. Substantial Injustice Alone Does Not Warrant Adding the Corporations as Judgment Debtors.
Plaintiff disclaims any reliance on an alter ego theory. Instead, she contends, "even if all the formal elements necessary to establish alter ego liability are not present, an unnamed party may be included as a judgment debtor if 'the equities overwhelmingly favor' the amendment and it is necessary to prevent an injustice." (Carolina Casualty Ins. Co. v. L.M. Ross Law Group, LLP (2012) 212 Cal.App.4th 1181, 1188-1189, fn. omitted (Carolina).) But in cases allowing addition of a defendant on that basis, there was some reason beyond mere injustice.
One such reason is where a party commits a fraud on the court. For example, in Carolina, the defendant law firm litigated the action at trial. When it lost, it then claimed it had been dissolved before suit was filed and refused to pay the judgment. The court noted a lawyer from the firm participated in the trial, defended against the action, and settled the case. (Carolina, supra, 212 Cal.App.4th at p. 1192.) The court also found the lawyer "unfairly" led the plaintiff and the court to believe the defendant law firm was the only proper party. (Id. at p. 1194.) Thus, it allowed plaintiff to add the lawyer as an additional party.
Likewise in Carr v. Barnabey's Hotel Corp. (1994) 23 Cal.App.4th 14 (Carr), the named defendant, the alleged owner of the hotel, litigated the case on the merits. In the punitive damages part of the trial the defendant disclosed it had never owned the hotel, but the hotel, which had stopped doing business several years earlier, was actually owned by a partnership. The court found the partnership had known of the error and by not revealing it had engaged in conduct "approach[ing] a fraud on the court." (Id. at p. 20.)
The Carr court amended the judgment to name the partnership, although there was no evidence the partnership was the alter ego of the named defendant. It explained "'the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant.'" (Carr, supra, 23 Cal.App.4th at p. 21.) The court held it would not be equitable to allow the named defendant to act as though it was the proper party and then seek to take advantage of the plaintiff's error to protect the true defendant. (Id. at pp. 22-23.)
Finally, in In re Levander (1999 9th Cir.) 180 F.3d 1114 the court found there was a fraud on the court when the judgment debtor in bankruptcy transferred all its assets to a partnership and amended the judgment to add the partnership as a debtor. The partnership, comprised of all the same people as the judgment debtor, had controlled the litigation (id. at p. 1123), and although not all of the alter ego requirements were met, the spirit of allowing addition of a judgment debtor on that basis was fulfilled and the "'real defendant'" was added (id. at p. 1122).
Another reason for adding a judgment debtor is that the added party is a successor company. In McClellan v. Northridge Park Townhome Owners Assn. (2001) 89 Cal.App.4th 746 (McClellan), a creditor was allowed to add a successor corporation as a judgment debtor where there was substantial evidence the successor was merely a continuation of the original corporation. (Id. at pp. 753-755.)
These cases controvert plaintiff's argument the court erred when it denied the motion because Corporations were not the "'real'" or "'true'" parties. In short, there is an insufficient relationship between Corporations and plaintiff to justify adding them as judgment debtors.
Plaintiff claims Corporations would be properly added as judgment debtors to prevent substantial injustice, i.e., payment of large benefits to defendant by Corporations in lieu of salary or dividends, making it impossible for her to collect her attorney fees award from him. She points to McClellan, supra, 89 Cal.App.4th 746, which states that the section 187 language, "'any suitable process or mode of proceeding,'" allows a debtor to be added based on "any of several theories." (Id. at pp. 754, 755.) But as stated above, in McClellan the new debtor was added as a successor corporation, a "mere continuation" of the debtor corporation. (Id. at p. 756.) Such is not the case here.
Plaintiff highlights cases which state "the greatest liberality is to be encouraged" in allowing amendments to a judgment to add debtors. But none of them is comparable to the case here. Wells Fargo Bank, N.A. v. Weinberg (2014) 227 Cal.App.4th 1, 6 and Misik v. D'Arco (2011) 197 Cal.App.4th 1065,1075 were both based on an alter ego theory. And, as discussed above, Carolina, supra, 212 Cal.App.4th 1181, 1190, 1192 and Carr, supra, 23 Cal.App.4th 14, 22-23 involved a fraud on the court.
Plaintiff argues adding a judgment debtor under section 187 is not limited to any fact patterns on which prior cases are based. Rather, the court should focus on accomplishing justice to enforce a judgment. But adding a judgment debtor every time there is an injustice is too broad an interpretation of the statute. There has to be some additional reason why a new defendant should be added.
That plaintiff's attorney has not been paid is not sufficient. Nor is it sufficient that Millennium has paid for defendant's housing, nanny, and other personal expenses for defendant. The court has already ruled there was nothing untoward about these payments. Nor do the benefits DDS provides to defendant justify its addition to the judgment.
Language in section 187 allowing court to use "'all means necessary'" does not give the court carte blanche to add debtors just because a judgment has not been satisfied.
Finally, Family Code section 721, subdivision (b), subjecting spouses to the rules governing fiduciary relationships, is inapt on the question of whether Corporations should be added as judgment debtors. Pointing to her community property ownership in Millennium shares, plaintiff argues it is a breach of defendant's fiduciary duties for him to receive substantial benefits from Millennium without her consent. Even assuming without deciding defendant is breaching his fiduciary duties, this is defendant's conduct, not Millennium's. This conduct may be the subject of a different action but presumably it would be against defendant and does not provide a basis for adding Millennium as an additional judgment debtor. 3. Due Process
Corporations contend adding them as judgment debtors would violate their due process rights. DDS argues it was denied the opportunity to defend against its alleged liability for the debt. It asserts its opposition to the motion to amend was an inadequate vehicle to oppose the underlying substantive issue, i.e., it was not allowed to put on evidence or cross-examine witnesses.
Plaintiff maintains no evidentiary hearing is required, citing Highland Springs Conference & Training Center v. City of Banning (2016) 244 Cal.App.4th 267, 280. But that case was based on an alter ego theory, where the court explained it was not adding a new party but was "'"merely inserting the correct name of the real defendant."'" (Ibid.)
To satisfy due process, the potential new judgment debtor must have been "involved with and controlled, to one degree or another, the defense presented by the original defendant. Without control, considerations of due process preclude the addition of a party after the judgment is a fait accompli." (Oyakawa v. Gillett (1992) 8 Cal.App.4th 628, 632.) "[W]here no claim was made against the new party personally and the new party did not participate in the defense of the action or have any duty to appear and personally defend in that action, the new party cannot be added as a judgment debtor by a postjudgment amendment." (Ibid.)
In an attempt to controvert Oyakawa and other cases Corporations cite that require the potential added debtors to control the defense, plaintiff merely states control is not a requirement in "many of the cases" allowing addition of debtors under section 187. If it is required, plaintiff continues, it was sufficiently shown because the motion was not decided by default.
But that is not the point. Defendant litigated the dissolution action, including the attorney fees dispute, on his own behalf. The Corporations had nothing to do with either. The mere fact defendant controls Corporations does not mean those parties litigated the dissolution action on their own behalf.
We also reject plaintiff's contention that when defendant defended agasint the attorney fees motion he had the Corporations' interests in mind. There is no evidence to this effect.
Corporations were not represented during the dissolution action or the attorney fees motion and thus due process prevents their addition as judgment debtors. 4. Reverse Piercing of the Corporate Veil and Other Claims
Corporations contend plaintiff is relying on the doctrine of reverse piercing of the corporate veil, or reverse alter ego, which is not a viable legal theory. Reverse alter ego seeks to hold a corporation liable for a shareholder's debts. (Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1513.) In Postal Instant Press we held a corporate debtor could not be added to a judgment against a shareholder. (Id. at pp. 1512-1513.) Plaintiff claims that is not the theory of her argument, calling it a red herring. As such, and on the basis of the other issues we discuss above, we need not address this issue.
In addition, we need not consider any other arguments because they are either not relevant or not necessary to our decision.
DISPOSITION
The order is affirmed. The request for judicial notice is denied. Millennium and DDS are entitled to their respective costs on appeal.
THOMPSON, J. WE CONCUR: BEDSWORTH, ACTING P. J. ARONSON, J. Bedsworth, Acting P.J., Concurring:
I am unable to find legal error in the majority opinion. I write separately to address the inequities of this dissolution (the case's caption could just as easily been the more descriptive In re Marriage of McConnell and Gregg) - now going into its second decade. In particular, I want to emphasize what we do not decide.
Family Code section 290 has not been litigated in this appeal. Family Code section 290 provides a number of means by which a litigant in McConnell's position might try to collect on a large pendente lite attorney fee order. The statute provides: "A judgment or order made or entered pursuant to this code may be enforced by the court by execution, the appointment of a receiver, or contempt, or by any other order as the court in its discretion determines from time to time to be necessary." (Italics added.)
The record before us includes no indication McConnell has tried either contempt or receivership in order to collect the fee order, so we have no occasion to address the adequacy of those remedies. Nor do we have occasion to address possible other remedies inherent in Family Code section 290, including whether Gregg should be subject to issue sanctions as to the value of the community interests in MDT and DDS in the event this case ever does come to trial.
Moreover, we do not decide any issue as to whether a constructive trust on MDT or DDS might be a proper remedy (see Cabral v. Soares (2007) 157 Cal.App. 4th 1234, 1240-1243) or whether any of the remedies that creditors have against third parties who happen to be holding a debtor's property are appropriate. (See generally Evans v. Paye (1995) 32 Cal.App.4th 265.)
All we decide today is that McConnell's attempt to add Gregg's two corporations to the pendente lite fee order at issue under section 187 of the Code of Civil Procedure does not work under the facts of this record. By not paying that order, Gregg has effectively deprived McConnell of her right to be equally represented in this litigation. (See Alan S. v. Superior Court (2009) 172 Cal.App.4th 238, 252.) While I can regret that result, I cannot dissent from the majority's analysis, so I am reduced to an elegiac concurrence.
BEDSWORTH, ACTING P. J.