Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of San Diego County No. 678581, Richard E. L. Strauss and Janis Sammartino, Judges.
BENKE, Acting P. J.
In this case the defendant judgment debtor has employed a number of devices by which he has attempted to avoid payment of a $600,000 default judgment which was originally entered in 1995. In an effort to enforce its judgment, the trial court has, among other matters, appointed a post-judgment receiver. The receiver discovered the defendant owns and controls two corporations which came into existence some years after entry of the default judgment. The receiver also discovered defendant had transferred four parcels of real property to one of the corporations without receiving any consideration, personally guaranteed a loan one of the corporations and received substantial amounts from corporate accounts. In this context the court did not abuse its discretion in also making the corporations defendants and judgment debtors under Code of Civil Procedure section 187.
All further statutory references are to the Code of Civil Procedure unless otherwise specified.
SUMMARY
This is the third time the trial court's judgment and its efforts to enforce the judgment have been before us on appeal. In D047317 (filed March 14, 2007) we affirmed a series of orders leaving in place a renewed judgment in favor plaintiff and respondent William H. McWethy, Jr., and expanding the powers of the receiver. In D0048831 (filed November 30, 2007) we affirmed an order denying defendant and appellant Ahed Elansari's motion for relief from the judgment.
McWethy obtained the judgment after filing a complaint in 1994 against Elansari with respect to Elansari's operation of a restaurant at a hotel McWethy owned. Initially, Elansari was represented by counsel, who filed an answer and cross-complaint. However, counsel for Elansari substituted out of the case in January 1995. Thereafter, Elansari failed to respond to discovery which McWethy propounded, failed to respond to motions to compel and failed to respond to McWethy's motion for terminating sanctions. As a result of these lapses, the trial court struck Elansari's answer and entered Elansari's default.
At a prove-up hearing, the trial court awarded McWethy a total of $556,914.23 in damages. The amount awarded included not only rent due under the terms of the lease, but also substantial damages for the loss of business at the hotel due to Elansari's failure to provide hotel guests with adequate food service. In addition to damages, the trial court awarded McWethy $21,623 in attorney fees, $37,594 in prejudgment interest and $850 in costs. Accordingly, on October 3, 1995, the trial court entered a total judgment of $616,980 against Elansari.
In 1998 Elansari moved to set aside the default and default judgment. He argued his counsel had failed to give him actual notice of McWethy's discovery requests. The trial court denied Elansari's motion.
In July 1998 the trial court amended the judgment to include as judgment debtors more than a dozen aliases Elansari was known to use.
In 1999 the trial court appointed a receiver. The order appointing the receiver stated in pertinent part: "[T]he Receiver is initially hereby appointed for the sole purpose of locating assets and records of the Judgment Debtors, and reporting thereon."
In March 2005 McWethy filed an application to renew his judgment which, with accrued interest, amounted to $1.2 million. McWethy also moved for an order permitting the receiver to seize the books and records of defendants and appellants Village Green, Inc. (Village Green), and Unique Home Galleria, Inc. (Unique Home). According to the receiver, Elansari was the actual owner of both corporations. Under the provisions of section 683.170, Elansari moved to vacate the renewal. Elansari argued the judgment exceeded the amounts prayed for in the complaint and improperly awarded McWethy duplicate damages. The trial court denied Elansari's motion and granted McWethy's motion for an order expanding the receiver's powers. We affirmed the trial court's order in D047317.
Thereafter, with the assistance of trial court orders the receiver obtained financial records for Village Green and Unique Home. Relying on those records, and records obtained from the secretary of state's office, McWethy moved to add Village Green and Unique Home as defendants on the judgment. In support of his motion, McWethy submitted a report from the receiver, in which, based on his review of the records, the receiver concluded that Elansari owns 100 percent of the equity stock of Village Green and Unique Home and that he has used these corporations, their financial affairs and their assets as his personal property, without any apparent regard for their separate and distinct legal existence. With respect to Village Green, the receiver stated he had discovered that Elansari had acquired ownership of four adjoining parcels by way of an unrecorded land sale and that Elansari had transferred his rights under the contract to Village Green without receiving consideration for the transfer. In addition the receiver discovered Elansari had personally guaranteed a $3.75 million loan Village Green had received and that substantial amounts of money had been paid to Elansari from the accounts of both corporations for purposes unrelated to the businesses of the corporations.
Village Green and Unique Home opposed the motion on the grounds the corporations had been created in 2003 and 2004 and that in any event the shares of both corporations had been transferred to third parties.
The trial court granted McWethy's motion. In particular, the trial court found the receiver's report "highly credible and persuasive, while the evidence and arguments presented by [Village Green] and [Unique Home] insufficient to overcome Plaintiff's showing. For example, highly persuasive to the Court was the opposing parties' failure to demonstrate, or even state, that they were bona fide purchasers without notice of the claims [McWethy] has in connection with this litigation."
Village Green and Unique Home Galleria filed a timely notice of appeal from the trial court's order.
DISCUSSION
I
The trial court's order is appealable as an order entered following judgment. (§ 904.1, subd. (a)(2).) On appeal we review contentions with respect to the sufficiency of the evidence under the usual deferential standard (see NEC Electronics Inc. v. Hurt, supra, 208 Cal.App.3d at p. 777) and we review questions of law de novo. (See Lopez v. Imperial County Sheriff's Office (2008) 165 Cal.App.4th 1, 4.)
II
The record amply supports the trial court's apparent conclusion Elansari owns and controls the corporations. In this regard, we note undisputed bank documents and tax returns which state Elansari owns 100 percent of Village Green, a personal guarantee he provided to creditors of Village Green, and his withdrawal of substantial sums from both corporations.
III
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." Within the breadth of section 187, courts have found the power to add defendant judgment debtors. (NEC Electronics Inc. v. Hurt, supra, 208 Cal.App.3d at p. 778.) "Section 187 grants to every court the power to use all means to carry its jurisdiction into effect, even if those processes are not set out in the code. [Citation.]... [¶] Utilizing section 187, judgments are typically 'amended to add additional judgment debtors on the grounds that a person or entity is the alter ego of the original judgment debtor. [Citations.] This 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. [Citations.] 'Such a procedure is an appropriate and complete method by which to bind new individual defendants where it can be demonstrated that in their capacity as alter ego of the corporation they in fact had control of the previous litigation, and thus were virtually represented in the lawsuit.'' [Citations.]' " (McClellan v. Northridge Park Townhome Owners Assn. (2001) 89 Cal.App.4th 746, 752 (McClellan), quoting NEC Electronics Inc. v. Hurt, supra, 208 Cal.App.3d at p. 778.)
However, because of fairness and due process concerns, our courts have used section 187 as a means of adding a post-judgment defendant in limited circumstances. In Motores De Mexicali v. Superior Court (1958) 51 Cal.2d 172, 175-176 (Motores), the plaintiff served a corporate defendant and no response was entered on behalf of the corporate defendant. Although the corporate defendant's default and a default judgment were entered, the trial court declined to add three individuals as defendant judgment debtors notwithstanding proof the plaintiff offered that they controlled the corporation. The Supreme Court upheld the trial court's rulings. The court found there had been no defense on the merits which could be attributed to the three individuals. Under those conditions, the court determined due process prevented addition of the defendants, who had never been served and for whom no defense had been entered on the merits either directly or indirectly by virtue of their relationship to a party who had appeared. (Id. at pp. 175-176.) In NEC Electronics Inc. v. Hurt the corporate defendant's failure to appear and defend the underlying action on the merits, as well as a divergence of interests between the corporation and one of its shareholders, prevented use of section 187 as a means of naming the shareholder as a postjudgment defendant. (NEC Electronics, Inc. v. Hurt, supra, 208 Cal.App.3d at pp. 778-779.) "[I]n Motores, where the judgment was obtained by default, the court stressed that the alter ego's interests were not represented in the underlying action and also emphasized that adding them as additional judgment debtors would violate due process. We believe that Motores should control the result here. [The corporation] did not appear at trial and did not make any attempt to defend the NEC lawsuit. As a consequence, we do not believe that [the shareholder's] interests were represented in the underlying action." (Id. at p. 780.)
The fairness and due process concerns which arise when section 187 is employed, appeared again more recently in two cases which reached somewhat different results on somewhat similar factual records: McClellan, supra, 89 Cal.App.4th at page 752, and Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1520 (Postal Instant Press).
In McClellan the plaintiff was a contractor who performed substantial work for a homeowners association which did business as a corporation. The homeowners association failed to pay the contractor, the contractor compelled arbitration and the homeowners association made a counterclaim. The homeowners association then failed to appear at the arbitration and the contractor recovered a $141,000 default arbitration award which he reduced to a judgment. In response to the judgment, the board of the homeowners association placed the original association in bankruptcy and created a second corporation which then operated as the homeowners association. In response to these maneuvers, the contractor moved to add the second corporation as a defendant under section 187. The trial court granted the motion and on appeal the Court of Appeal affirmed: " '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.' " (McClellan, supra, 89 Cal.App.4th at p. 756.) In reaching the conclusion the second corporation was a mere continuation of the first, the court noted that the first corporation served as the homeowners association for the same condominium complex and its membership consisted of the same unit owners. In addition, the board of the second corporation was the same as the board of the first corporation and both corporations derived their income from homeowners dues assessed to the unit owners.
In contrast to the result reached in McClellan, in Postal Instant Press a franchisor obtained a judgment against one of its franchisees. When the franchisor attempted to collect on its judgment, it discovered that the franchisee had transferred all the assets of the franchise to a corporation he had created, the corporation had merged with another corporation and the merged corporation had in turn sold the assets to a third party. The franchisor successfully moved in the trial court for an order adding the corporation as an additional defendant. In reversing the trial court's order, the Court of Appeal found that in general it was improper for a corporation to be held directly liable for debts of one of its shareholders. The court noted that such outside "reverse piercing" threatens both the rights of other shareholders but also the willingness of lenders to provide credit to entities operating in the corporate form: " 'the prospect of losing out to an individual shareholder's creditors will unsettle the expectations of corporate creditors who understand their loans to be secured—expressly or otherwise—by corporate assets. Corporate creditors are likely to insist on being compensated for the increased risk of default posed by outside reverse-piercing claims, which will reduce the effectiveness of the corporate form as a means of raising credit.' " (Postal Instant Press, supra, 162 Cal.App.4th at pp. 1520-1521.)
In Postal Instant Press the court also noted that the power to add a defendant as an alter ego of a named defendant is an equitable procedure. (162 Cal.App.4th at p. 1524.) Thus before using this broad equitable remedy, " 'the availability of alternative, adequate remedies must be considered by the trial court.' " (Ibid.) Accordingly, the court found that in addition to the problems posed by reverse outside piercing, reversal was required because the record did not disclose whether the trial court had considered the adequacy of the franchisor's legal remedies, including the suitability of a fraudulent conveyance action.
Plainly, in some respects, the holdings and rationales in McClellan and Postal Instant Press conflict. Arguably, the corporation established by the franchisee in Postal Instant Press and to which he transferred the assets of the business, should have been treated in the same manner as the second corporation in McClellan. In both cases, the corporations the plaintiff sought to add as defendants continued the business of the initial judgment debtor and might be fairly held responsible for the debts of their predecessors. On the other hand, in both cases addition of the corporations as defendants posed some level of unfair risk to other shareholders and actual or potential creditors of the respective corporations.
In our view, notwithstanding the factual similarities and divergent results, the holdings and rationales of McClellan and Postal Instant Press of the two cases can nonetheless be reconciled. What we take from both cases, as well as Motores, is the overall requirement that in considering whether to employ section 187 to add a defendant, courts should consider the extent to which the target corporation embodies the interests of the judgment debtor, whether innocent third parties may be unfairly impacted and whether other legal remedies are adequate to protect the legitimate rights of the plaintiff. Unlike the circumstances which arose in McClellan, where it was clear that both corporations represented precisely the same ownership interests, in Postal Instant Press, the record suggested not only that the judgment debtor no longer had a substantial interest in the corporation but that a number of third parties might be unfairly impacted.
Here, we conclude that the trial court acted properly in employing section 187. First, as we have noted, the record shows in a fairly convincing way that the corporations are in fact owned by Elansari and thus imposition of liability on the corporations would not unfairly impact the rights of any other shareholders. We also note that in fact creditors of the corporations appeared to have looked to Elansari as being ultimately responsible for the debts of the corporation; thus there is little risk they will be unfairly prejudiced by imposing his debts on the corporation he controlled. Finally, we note that McWethy has been attempting to satisfy his judgment for more than a decade and, because of Elansari's evasive behavior, McWethy has been required to go to extraordinary lengths in doing so. In that unique historical context, the efficiency of proceeding under section 187 was warranted notwithstanding the availability of other remedies.
Order affirmed.
WE CONCUR: O'ROURKE, J., IRION, J.