A real estate developer created several limited liability companies to supervise his various construction projects. The developer transferred ownership of the companies to a trust, chose his brother as the trustee, and acted as the "manager" of the companies.
Plaintiff filed suit against two of the companies, alleging a claim for breach of contract, among others. Plaintiff sued the manager on different claims, such as breach of fiduciary duty but not breach of contract. The case was arbitrated. At the time of the arbitration, one of the companies had recently received more than $47 million in property sales. Plaintiff prevailed against the two companies for breach of contract. The manager prevailed on the claims against him. The arbitrator awarded plaintiff $8.45 million against the companies.
The trial court, Judge Robert L. Hess presiding, confirmed the arbitration award and entered judgment accordingly. The companies unsuccessfully appealed. (Greenspan v. LADT, LCC (2010) 185 Cal.App.4th 1413 [111 Cal.Rptr.3d 468] (Greenspan I).)
Meanwhile, the $47 million had dwindled to less than $13,000. The two companies appeared to be judgment proof. Plaintiff commenced proceedings to satisfy the judgment. After conducting judgment debtor examinations, plaintiff filed a motion to amend the judgment to add the manager, the trustee, and two other affiliated companies as judgment debtors, relying on the alter ego doctrine. (See Code Civ. Proc., § 187; undesignated section references are to that code.)
The trial court, Judge Joanne B. O'Donnell presiding, denied the motion. First, the court held it would be inequitable to add the manager as a judgment debtor because he had been a party to the arbitration and had prevailed. Second, the trial court concluded that alter ego principles do not apply in the
We conclude it would not always be inequitable to add as a judgment debtor a party who prevailed in an arbitration. Rather, it would depend on the facts of the case. Here, the manager was not sued for breach of contract and did not prevail on that claim. The judgment is based on a claim to which he was not a party. The addition of the manager as a judgment debtor would not constitute a finding that he breached the companies' contract but would instead serve to remedy his alleged disregard of the companies' separate existence. Second, we determine that although a trust is not subject to the alter ego doctrine because it is not a legal entity, a trustee may be added as a judgment debtor. Last, with two exceptions, the trial court erred in sustaining the objections to plaintiff's evidence. We therefore reverse the order denying the motion to amend the judgment.
The allegations and facts on this appeal are taken from the complaint, the record in the arbitration proceeding, and the papers and exhibits submitted in connection with the motion to amend the judgment.
Barry Shy (Shy) is a real estate developer who worked with Andrew Meieran (Meieran) to renovate the Higgins Building in downtown Los Angeles. For that purpose, they formed a company, LADT LLC (LADT). LADT was jointly owned by (1) LABAR LLC (LABAR), another of Shy's companies, and (2) the Andrew Meieran Family Trust (Meieran Trust or Trust).
In 1998, LADT purchased the Higgins Building and started to convert the dilapidated structure, built in 1910, from an office building into apartments. In 2003, Shy, who managed LADT and LABAR, proposed to convert the Higgins Building into loft-style residential condominiums, with commercial units on the ground floor.
The goal of the Meieran Trust was to develop and operate historic bars. In pursuit of that goal, the trustee, Arnold Greenspan, decided to sell the Trust's interest in LADT to Shy and to acquire commercial space on the ground floor of the Higgins Building, where the Trust would later build the Edison Bar.
Section 6 of the Purchase Agreement addressed LADT's obligations under the agreement, stating: "LADT hereby consents to the terms of this Agreement, including, without limitation, the provisions of . . . Section 4. LADT shall cooperate with the parties hereto and take all actions and execute any agreements and other documents necessary to effectuate the transactions contemplated by this Agreement, including, without limitation, the transactions set forth in . . . Section 4, as necessary." Section 4 stated that LA ABC would indemnify the Trust for any breach of the Purchase Agreement by LA ABC and that the Trust would indemnify LA ABC with respect to any breach by the Trust.
The Purchase Agreement was signed by Greenspan as trustee of the "Seller"—the Meieran Trust—and by Shy as manager of the "Purchaser"—LA ABC. For its part, LADT "acknowledged and agreed . . . to Section 6" of the Purchase Agreement, with Shy signing twice, first as manager of LADT and then individually. Meieran signed the Purchase Agreement as a member of LADT. The agreement did not contain an arbitration provision.
In 1998, Shy had created the BR Shy Irrevocable Trust (Shy Trust) for the benefit of his children. He transferred ownership of LA ABC and LABAR to the trust. As a result of the Purchase Agreement, LA ABC and LABAR became the owners of LADT, and LADT, too, became the property of the Shy Trust. Shy chose his brother, Moti Shai, to serve as the trustee.
During the construction phase of the Higgins Building project, Shy and Meieran had a number of disagreements. They argued about walls that had been moved, trash areas, parking spaces, and storage spaces. In the midst of the squabbling, LA ABC failed to make a payment to the Meieran Trust that was due under the Purchase Agreement.
In an attempt to settle their disputes, Shy and Meieran participated in a mediation on September 26, 2005. The mediation resulted in a handwritten document drafted by the mediator, which Shy and Meieran signed. The document contained a list of 10 items to be provided or completed by LA
On August 10, 2006, Greenspan, as trustee of the Meieran Trust, filed this action against LADT, LA ABC, and Shy (defendants). The complaint alleged as follows.
LA ABC had failed to pay more than $4.2 million of the purchase price for the Meieran Trust's interest in LADT. LA ABC had also interfered with the Trust's use of parking spaces and storage space in the Higgins Building.
The complaint asserted seven causes of action: (1) rescission of the Purchase Agreement, against LA ABC and LADT; (2) breach of the Purchase Agreement, against LA ABC; (3) breach of guaranty, against Shy; (4) breach of fiduciary duty, against Shy; (5) accounting, against all defendants; (6) conversion, against all defendants; and (7) constructive trust, against all defendants.
On September 22, 2006, defendants filed a petition to compel arbitration and stay the action pending the outcome of arbitration. According to the petition, the Arbitration Agreement required the parties to arbitrate disputes related to the Purchase Agreement. Greenspan filed opposition papers, contending (1) the Meieran Trust was not a party to the Arbitration Agreement because Andrew Meieran—not Greenspan, the trustee—had signed the agreement, and (2) the Arbitration Agreement did not encompass the causes of action in the complaint.
By order dated January 11, 2007, the trial court, Judge Robert L. Hess presiding, found that "the parties have entered into a valid agreement to submit disputes regarding the Higgins Building initially to mediation and thereafter to binding arbitration. [¶] . . . Plaintiff is to initiate mediation, and defendants are to cooperate in that initiation. Should mediation be unsuccessful, the parties are to attempt to agree upon an arbitrator. If the parties are unable to agree, the Court on application will select an arbitrator."
Preliminary proceedings in the arbitration, including conferences and motion hearings, began in March 2007 and continued for several months. At a status conference on March 7, 2007, the parties agreed that the arbitration would be governed by "JAMS Comprehensive Arbitration Rules & Procedures."
"In March 2007, the parties executed an `Agreement[] Concerning Hold Instructions,' which required the arbitrator to decide how to dispose of certain funds belonging to LADT. The funds were generated by LADT's sale of two condominiums in the Higgins Building. At some point, the [Meieran] Trust had recorded a lis pendens against those units, preventing the closing of escrow. The [Meieran] Trust eventually removed the lis pendens, allowing the units to be sold, in exchange for LADT's promise to hold the sales proceeds for disposition by the arbitrator. The agreement concerning hold instructions (Hold Funds Agreement) stated: `Whereas, on or about March 9, 2007, Arnold Greenspan, as Trustee of the Andrew Meieran Family Trust, and Barry Shy, as managing member of LADT LLC, executed Hold Instructions for the seller's net proceeds concerning Units 906 and 1001 of the Higgins Building in order to allow the sales of these Units to be closed.
"`The Undersigned hereby agree that they will execute Mutual Instructions ("Instructions"), on or before April 30, 2007, to Mara Escrow. These Instructions will provide that Mara Escrow will transfer the monies held in its interest bearing account, pursuant to the Hold Instructions, to a joint blocked account designated by the undersigned parties. Said account will be opened by the undersigned parties in an institution that is FDIC insured. The account will be [a] blocked account and the institution will receive instructions that the funds may only be released to a person or entity designated by Judge Wisot in his final award in [the Higgins Building arbitration].
"`The parties hereby waive any right to challenge, in court or otherwise, any order to release these funds as set forth in Judge Wisot's final award.'" (Greenspan I, supra, 185 Cal.App.4th at p. 1427.)
The "Hold Funds Agreement" was signed by Shy as manager of LADT and by Greenspan as trustee of the Meieran Trust.
During the arbitration proceeding, Greenspan learned that LADT had recently received more than $47 million from the sale of condominiums in the Higgins Building.
On June 13, 2008, the arbitrator rendered an "Interim Award." As to the Meieran Trust's claims, the arbitrator found LA ABC liable on the second cause of action, for breach of contract, and awarded the Trust $6,338,566.89 in damages. The Trust failed to prove its other claims. With respect to the issues raised by the Hold Funds Agreement, the arbitrator stated: "The funds in escrow (including any interest earned) are . . . the property of LADT, for distribution under its current operating agreement. However, in an exercise of equitable discretion in fashioning this Award, the arbitrator now directs the funds are to remain in escrow until the award . . . is fully satisfied."
"The Interim Award concluded: `This Award disposes of all substantive issues raised in this arbitration. [The Meieran Trust] is the prevailing party, and entitled . . . to recover attorney fees and costs . . . . [¶] This is an Interim Award, however, because the arbitrator retains jurisdiction in several particulars: [¶] . . . [¶] [(1)] to include within the award attorney fees and costs, including JAMS fees; [¶] [(2)] to reopen the hearing, if requested by [the Trust] . . .; [¶] [(3)] to consider modification of the Disposition of Funds Held in Escrow, or equitable remedies, if any, available against [defendants] other than LA ABC for satisfaction of the award[.] . . . [¶] The parties are directed to submit briefs and declarations on the matters reserved for further consideration pursuant to the [established] schedule[.] [¶] . . . [¶] Unless the arbitrator determines to reopen the hearing, or to schedule further argument based on the submissions, the Final Award will issue no later than August 1, 2008.' . . . On June 16, 2008, JAMS served the Interim Award on the parties." (Greenspan I, supra, 185 Cal.App.4th at p. 1431, italics added & omitted.)
"On June 30, 2008, the [Meieran] Trust submitted a `Request to Reopen Hearing.' The Trust argued that, under section 6 of the Purchase Agreement, LADT was jointly and severally liable for payments owed by LA ABC, including all damages. (See pt. I.A., ante, quoting Purchase Agreement, § 6.) The Trust also relied on the Hold Funds Agreement: `Since LA ABC's only asset was its interest in LADT, it had no funds to make the payments to the [Meieran] Trust. . . . [¶] . . . [¶] . . . [T]he Trust will be forced to pursue LADT to recover the balance owed under the final award. No purpose would be served by having the funds remain in escrow. To the contrary, it is only fair and just that the Arbitrator include in the final award an express order that the funds be released to the [Meieran] Trust as partial satisfaction of the award.'" (Greenspan I, supra, 185 Cal.App.4th at p. 1431.)
On July 14, 2008, defendants submitted a brief in opposition to the request to reopen hearing, addressing the issue of LADT's joint and several liability.
"In a reply brief submitted on July 25, 2008, the [Meieran] Trust emphasized that the arbitrator could grant any remedy or relief that was just and equitable: `Under California law, an arbitrator enjoys the authority to fashion relief that he considers just and fair so long as the remedy may be "rationally derived" from the contract and the breach. [Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th at page] 383. Here, both of the rulings that the [Meieran] Trust seeks are "rationally derived" from the parties' agreements. The Purchase Agreement—which LADT executed—required LADT to "take all actions . . . necessary to effectuate the transactions contemplated by [the] Agreement . . . ." . . . LADT thus had the contractual duty to make the payments due under the Purchase Agreement in the event that LA ABC failed to do so. Therefore, the remedy of holding LADT jointly and severally liable for payments is rationally derived from the Purchase Agreement itself. Likewise, an order directing the disbursement of funds held in escrow to the [Meieran] Trust as partial satisfaction of the award is rationally derived from both the Purchase Agreement
On August 1, 2008, the arbitrator rendered a "Final Award." It "reiterated the terms of the Interim Award virtually verbatim and went on to say: `[The Meieran Trust] has demonstrated by a preponderance of evidence its entitlement to an award for breach of contract against LA ABC. In [the Trust's] request to reopen the hearing, [it] reviews evidence previously presented as the basis for rendering a final award on this cause of action jointly and severally against LA ABC and LADT. As [the Trust] points out, section 6 of the Purchase Agreement sets forth the specific consent of LADT to all terms of the Agreement, and further mandates LADT to "cooperate with the parties hereto and take all actions and execute any agreements and other documents necessary to effectuate the transactions contemplated by this Agreement. . . ."
"`Both sides rely on Advanced Micro Devices, Inc. v. Intel Corp.[, supra,] 9 Cal.4th 362 in arguing whether the award should include LADT and find joint and several liability with LA ABC. Under that case, the arbitrator is authorized, when circumstances warrant, to fix a remedy for breach of contract that is flexible, creative, and based on fairness. "In private arbitrations, the parties have bargained for the relatively free exercise of those faculties. Arbitrators, unless specifically restricted by the agreement to follow legal rules, may base their decision upon broad principles of justice and equity. . . ." . . . Id. at 374-375.
"`The agreement between the parties to this arbitration contains no restriction to "dry law," or legal rules. In the circumstances here, LA ABC has only one asset: its membership in LADT. It is apparently without resources to pay the award for breach of contract. Further, the evidence is clear that Shy has exclusive control over each of his entities, and that he pays little attention to which account is used to make payments on the Purchase Agreement. . . . [T]he arbitrator finds that LADT had a full opportunity and did in fact present its evidence in connection with payments on the Purchase Agreement. [Defendants'] arguments that joint and several liability violate[s] due process rights of another Shy entity, LABAR, or LADT's creditors, [are] rejected. Under the circumstances here, the arbitrator finds the remedy sought by [the Meieran Trust] is rationally derived from the Purchase Agreement and its breach. Joint and several liability with LA ABC simply implements LADT's obligation to effectuate the transactions of the Purchase Agreement.'" (Greenspan I, supra, 185 Cal.App.4th at pp. 1433-1434.) The arbitrator denied the Trust's request to reopen the hearing.
"Regarding the Hold Funds Agreement, the arbitrator found `[t]he parties stipulated the arbitrator is to determine disposition of the proceeds of sale from two units sold, where the proceeds have been held in escrow pending this arbitration. . . . No criteria were presented to guide the arbitrator's determination, but only that the funds are to be released to the person or entity designated by the arbitrator in the final award. Further, [the Meieran Trust] quotes a letter agreement that the parties "waive any right to challenge, in court or otherwise, any order to release these funds as set forth in Judge Wisot's final award." . . . [The Trust's] request for enforcement of that agreement was deferred until the final award. [¶] [The Trust] has not been successful in obtaining rescission of the Purchase Agreement. The funds in escrow (including any interest earned) are . . . the property of LADT. However, in an exercise of equitable discretion in fashioning this Award, and
"In concluding the Final Award, the arbitrator stated: `Arnold Greenspan, as Trustee of the Andrew Meieran Family Trust, is to recover from . . . LA ABC, a California Limited Liability Company, and LADT, LLC, a California Limited Liability Company,
On August 13, 2008, defendants petitioned the trial court to vacate the award. On behalf of the Meieran Trust, Greenspan filed a petition to confirm. On October 16, 2008, the trial court, Judge Robert L. Hess presiding, heard argument on the cross-petitions, granted the petition to confirm, denied the petition to vacate, and entered an order to that effect. Judgment was subsequently entered in favor of Greenspan, as trustee, for $8.8 million based on the arbitration award, interest, costs of suit, and attorney fees. LADT and LA ABC appealed (Greenspan I).
In the earlier appeal, LADT argued the arbitrator had erred in determining it was jointly and severally liable on the breach of contract claim. We rejected that argument, stating: "`Judicial review of [arbitral] remedies . . . looks not to whether the arbitrator correctly interpreted the agreement, but to whether the award is drawn from the agreement as the arbitrator interpreted it or derives from some extrinsic source. . . . [W]here an arbitrator is authorized to determine remedies for contract violations, "courts have no authority to disagree with his honest judgment in that respect. . . . [A]s long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision."' . . .
"`The award will be upheld so long as it was even arguably based on the contract; it may be vacated only if the reviewing court is compelled to infer the award was based on an extrinsic source. . . . In close cases the arbitrator's decision must stand.' . . .
"`The award is rationally related to the breach if it is aimed at compensating for, or alleviating the effects of, the breach.' . . .
"`[A]rbitrators, unless expressly restricted by the agreement of the parties, enjoy the authority to fashion relief they consider just and fair under the circumstances existing at the time of arbitration, so long as the remedy may be rationally derived from the contract and the breach.' . . .
"As pertinent here, JAMS Rule 24(c) provides: `[T]he Arbitrator shall be guided by the rules of law and equity that the Arbitrator deems to be most appropriate. The Arbitrator may grant any remedy or relief that is just and equitable and within the scope of the Parties' agreement . . . .' This type of rule `has been described as "a broad grant of authority to fashion remedies". . . and as giving the arbitrator "broad scope" in choice of relief.' . . .
"`. . . "Arbitrators have broad discretion in fashioning a remedy for the injustice which is found to have occurred." . . . "[A]n arbitration panel may grant equitable relief that a Court could not."' . . . `Equitable relief is by its nature flexible . . . .' . . .
"LADT contends the arbitrator's finding of joint and several liability was not rationally related to the Purchase Agreement. Assuming that such `liability' is a `remedy' for purposes of Advanced Micro Devices, Inc. v. Intel Corp., supra, 9 Cal.4th 362, we disagree.
"The arbitrator interpreted section 6 of the Purchase Agreement in deciding that LADT was jointly and severally liable for breach of that agreement. Section 6 provided: `LADT hereby consents to the terms of this Agreement,
"The arbitrator relied on LADT's obligations under section 6 of the Purchase Agreement in concluding that LADT was liable for LA ABC's failure to pay the full purchase price to the [Meieran] Trust. In essence, the arbitrator found that, under section 6, LADT had to assist LA ABC by indemnifying the Trust for LA ABC's breach of the Purchase Agreement.
"We therefore conclude the arbitrator's finding of joint and several liability was rationally related to the Purchase Agreement. It was not derived from an extrinsic source. And because the arbitrator's award of damages consisted of the unpaid portion of the purchase price, plus interest, the remedy was rationally related to the breach." (Greenspan I, supra, 185 Cal.App.4th at pp. 1447-1449, citations omitted.)
LADT also asserted that "the arbitrator's finding of joint and several liability rested, at least in part, on alter ego principles." (Greenspan I, supra, 185 Cal.App.4th at p. 1444.) We responded: "That may well be. . . . Nevertheless, any dispute about alter ego liability was . . . arbitrable. JAMS Rule 24(c) states: `In determining the merits of the dispute the Arbitrator shall be guided by the rules of law and equity agreed upon by the Parties. In the absence of such agreement, the Arbitrator shall be guided by the rules of law and equity that the Arbitrator deems to be most appropriate . . . .' . . . Neither the Purchase Agreement nor the Arbitration Agreement prescribed the rules of law or equity to be applied, leaving it to the arbitrator to choose the applicable rules.
"`The essence of the alter ego doctrine is that justice be done. "What the formula comes down to, once shorn of verbiage about control, instrumentality, agency, and corporate entity, is that liability is imposed to reach an equitable result."'" (Greenspan I, supra, 185 Cal.App.4th at p. 1444, first & second italics added, citation omitted.)
Ultimately, we concluded the trial court had properly entered judgment on the arbitration award in favor of Greenspan. (Greenspan I, supra, 185 Cal.App.4th at p. 1461.)
Pursuant to the Hold Funds Agreement and other efforts to satisfy the judgment, Greenspan initially recovered around $1.1 million, leaving over $7.7 million to be collected.
To satisfy the remaining portion of the judgment, Greenspan engaged in judgment debtor discovery by (1) taking the depositions of Barry Shy, Moti Shai (the trustee of the Shy Trust), two bank representatives, and an employee of LADT; (2) serving form interrogatories on Shy, LADT, and LA ABC; and (3) subpoenaing bank records.
On August 28, 2009, Greenspan filed a motion to amend the judgment to add as judgment debtors Barry Shy, Moti Shai (as trustee of the Shy Trust), and two of Shy's companies, Harpro LLC (Harpro) and 6th St. Loft LLC (6th St. Loft) (collectively Shy parties). Greenspan submitted 39 exhibits with his moving papers. The Shy parties filed opposition. With the exception of Moti Shai, the Shy parties filed objections to 30 of Greenspan's 39 exhibits.
The motion was heard on February 5, 2010. The trial court, Judge Joanne B. O'Donnell presiding, issued a written tentative ruling denying the motion. After argument, the trial court adopted the tentative ruling as its final ruling. As a preliminary matter, the ruling addressed the objections to Greenspan's evidence, tersely stating: "No. 28 is overruled; all others are sustained. . . ." The objections were not mentioned or discussed during argument. As to adding Moti Shai as a judgment debtor in his capacity as trustee of the Shy Trust, the ruling said: "[T]he argument that Barry Shy acted on behalf of the [Shy] Trust, such that the [Shy] Trust must have alter ego liability for the judgment debtors that Barry Shy controls, is unsupported by any authority." With regard to adding Barry Shy to the judgment, the trial court concluded it could not "amend a judgment by inserting the name of a person or entity who had been a defendant to the underlying action and who was found not liable in that action. . . . [N]otwithstanding that [Greenspan] apparently did not argue the alter ego theory at the arbitration, it is undisputed that [he] had the opportunity to do so, both during the arbitration ([he] could have requested leave to amend) and after [the arbitration] was concluded. [Greenspan] will not be permitted to use an equitable doctrine to amend a judgment to name a party that [he] could have and should have litigated against as an alter ego in the underlying litigation." Finally, the court ruled that Greenspan had failed to "establish a sufficient unity of interest between LA ABC and LADT, on the one hand, and 6th St. Loft and Harpro, on the other hand." In addition, 6th St. Loft and Harpro did not have "the requisite control of the previous litigation and were [not] virtually represented in the litigation." "[T]here [was] no evidence that [Barry] Shy was considering the other entities while in control of the underlying litigation."
Barry Shy contends he cannot be added as a judgment debtor because he was a party to the arbitration and prevailed. But he fails to understand that the judgment is based on the claim that LA ABC and LADT breached the Purchase Agreement. Shy was not a party to that claim and did not prevail on it. To add him as a judgment debtor would be based, not on a finding he breached the agreement, but on his control of the Shy Trust and its companies to such an extent that his failure to satisfy the judgment would promote injustice. Nor was Greenspan under any obligation to pursue Shy as an alter ego in the arbitration given that he did not suspect Shy controlled a unitary enterprise consisting of the Shy Trust and the limited liability companies. Further, at the time of the arbitration, LADT had just received more than $47 million from condominium sales in the Higgins Building—more than enough to satisfy the judgment on the arbitration award of $8.8 million.
The Shy Trust maintains, as did the trial court, that no authority supports the application of alter ego principles in the trust context. That is incorrect. Under prevailing authority, Moti Shai, as trustee of the Shy Trust, may be added as a judgment debtor to provide creditors with access to the trust's assets.
6th St. Loft and Harpro argue there was insufficient evidence to establish they were alter egos of Shy's other companies, LADT and LA ABC. That may have been a consequence of the trial court's erroneous exclusion of most of Greenspan's evidence. In addition, if the evidence shows that Shy dominated the Shy Trust and its companies and that he disregarded their separate existence, he would not be expected—though the trial court thought differently—to "consider[] the other entities[, 6th St. Loft and Harpro,] while in control of the underlying litigation." Rather, he would have been considering a single enterprise, not its component parts.
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
The Shy parties contend that a judgment entered on an arbitration award should not be subject to amendment under section 187 because an arbitrator loses jurisdiction to amend an award after it is confirmed. (See Law Offices of David S. Karton v. Segreto (2009) 176 Cal.App.4th 1, 10 [97 Cal.Rptr.3d 329]; §§ 1286, 1286.4, 1286.6, 1286.8.) We disagree for two reasons.
First, the judgment in this case is governed by section 1287.4, which provides: "If an [arbitration] award is confirmed, judgment shall be entered in conformity therewith. The judgment so entered has the same force and effect as, and is subject to all the provisions of law relating to, a judgment in a civil action . . .; and it may be enforced like any other judgment of the court in which it is entered . . . ." (Italics added.)
Second, the differential treatment urged by the Shy parties—applying section 187 to court judgments but not to arbitration judgments—would improperly favor the enforcement of court decisions over arbitration awards, raising serious questions about the statute's validity under the Federal
". . . [W]hen a court disregards the corporate entity, it does not dissolve the corporation. `It is often said that the court will disregard the "fiction" of the corporate entity, or will "pierce the corporate veil." Some writers have criticized this statement, contending that the corporate entity is not a fiction, and that the doctrine merely limits the exercise of the corporate privilege to prevent its abuse.' . . .
"Because society recognizes the benefits of allowing persons and organizations to limit their business risks through incorporation, sound public policy dictates that imposition of alter ego liability be approached with caution. . . . Nevertheless, it would be unjust to permit those who control companies to treat them as a single or unitary enterprise and then assert their corporate separateness in order to commit frauds and other misdeeds with impunity. . . .
This case does not involve outside reverse piercing. Greenspan seeks to add judgment debtors to satisfy the debt of two companies, LA ABC and LADT. He does not argue that, under the alter ego doctrine, the Shy Trust or any of the Shy entities is liable for the debt of an individual shareholder.
The trial court declined to add Shy as a judgment debtor on the ground he had been a party to the arbitration and had prevailed. The court went on to say that Greenspan could and should have pursued his alter ego theory against Shy in the arbitration.
The trial court's ruling sounds similar to the application of res judicata or collateral estoppel. Yet the Shy parties state on appeal that the ruling does not rest on either one. Nor do the Shy parties contend that either doctrine applies here.
Nevertheless, we cannot think of a principled basis for the trial court's ruling other than some kind of equitable rule that, at a minimum, borrows concepts from res judicata or collateral estoppel. We therefore explain why those doctrines are irrelevant in this case.
Although the Shy parties disavow any reliance on res judicata or collateral estoppel in supporting the rule adopted by the trial court, their appellate brief
As we explained in our prior opinion, the arbitrator based his finding of joint and several liability on a provision in the Purchase Agreement (section 6) that "`implements LADT's obligation to effectuate the transactions of the Purchase Agreement.'" (Greenspan I, supra, 185 Cal.App.4th at p. 1434, italics added.) In other words, the arbitrator determined that section 6 of the Purchase Agreement, together with principles of fairness and equity, obligated LADT to fulfill LA ABC's contractual promises. (Greenspan I, at pp. 1433-1434, 1448-1449.) But that did not stop LADT from arguing in the prior appeal that the arbitrator had improperly applied the alter ego doctrine in making his joint and several liability finding. (Id. at p. 1444.) We took no position on whether the arbitrator had applied alter ego principles but assumed he had for purposes of the appeal and then addressed LADT's alter ego arguments. (Id. at pp. 1444-1445.)
In fact, at no point during the arbitration did Greenspan mention "alter ego," much less argue the doctrine applied. Nor did the arbitrator refer to the doctrine in the interim or final arbitration awards. And in ruling on the motion to amend the judgment below, the trial court observed that Greenspan "apparently did not argue the alter ego theory at the arbitration." Thus, in denying the motion to amend, the trial court did not base its decision on the arbitrator's resolution of any alter ego allegations.
As for collateral estoppel, the arbitrator made these relevant findings: "`LA ABC has only one asset: its membership in LADT. It is apparently without resources to pay the award for breach of contract. Further, the evidence is clear that Shy has exclusive control over each of his entities, and
The trial court also commented that Greenspan could and should have litigated Barry Shy's alter ego status in the arbitration. But under res judicata principles, as we now explain, he had no obligation to do so. When Greenspan filed the complaint, he had no reason to believe that the alter ego doctrine might apply to Shy. Although Greenspan had a concern about LA ABC's ability to satisfy a judgment, the arbitrator put that concern to rest by finding LADT jointly and severally liable on the contract claim based on equitable principles and the language in the Purchase Agreement (§ 6). During the arbitration, Greenspan knew LADT had recently received over $47 million on condominium sales in the Higgins Building. As trustee of the Meieran Trust, he was awarded $8.45 million in the arbitration. Thus, prior to the completion of the arbitration, Greenspan had no practical reason or legal obligation to pursue Shy on an alter ego theory.
We must also keep in mind that section 187 applies only if the parties to be added as judgment debtors had control of the underlying litigation and were virtually represented. (See Hall, Goodhue, Haisley & Barker, Inc. v. Marconi Conf. Center Bd., supra, 41 Cal.App.4th at p. 1555.) By definition, then, section 187 mandates that at least one alter ego individual or entity be a party to the earlier litigation. Here, Greenspan seeks to prove that Moti Shai, 6th St. Loft, and Harpro controlled the arbitration and were virtually represented through the individual who allegedly dominated them and directed the litigation on behalf of defendants: Barry Shy. Consequently, Shy's status as a party to the arbitration furthered the purpose of section 187 by meeting the control and virtual representation requirements as to the proposed judgment debtors.
Nor does public policy support the trial court's ruling. An arbitration or civil suit is intended to determine liability and damages on specified causes of action, not to resolve hypothetical problems the plaintiff might face in collecting on a judgment. In this case, Greenspan had no reason to name the Shy parties as defendants in the original suit. As a result, the discovery concerning alter ego issues, in the form of judgment debtor proceedings, occurred after the judgment was obtained. (See Jogani v. Jogani (2006) 141 Cal.App.4th 158, 172-174 [45 Cal.Rptr.3d 792] [discussing judgment debtor discovery]; Ahart, Cal. Practice Guide: Enforcing Judgments and Debts (The Rutter Group 2010) ¶¶ 6:1270 to 6:1335.1, pp. 6G-1 to 6G-22 (rev. # 1, 2007-2010) [same].) But under the trial court's reasoning, the plaintiff in every corporate contract case would be encouraged—regardless of the circumstances—to sue not only the corporation but also its owners and affiliated companies and then engage in pretrial discovery in an attempt to establish alter ego liability. This would promote a fishing expedition into alter ego evidence before the plaintiff obtained a favorable judgment, if any. Thus, it may be prudent for a plaintiff to sue only the corporation. Should problems later arise in satisfying a judgment against the corporation, the plaintiff may resort to appropriate postjudgment proceedings (§§ 708.110-708.205), including section 187's procedure for adding judgment debtors. Of course, if before filing suit, the plaintiff reasonably believes that an alter ego relationship exists among various individuals and companies, the complaint should probably include alter ego allegations and name the alleged alter egos as defendants. (Cf. Allied Fire Protection v. Diede Construction, Inc., supra, 127 Cal.App.4th at p. 155.) In the present case, however, when the complaint was filed, Greenspan had no reason to suspect the existence of an alter ego relationship among Shy, the trustee, and the limited liability companies.
In denying the motion to add the trustee of the Shy Trust as a judgment debtor, the trial court remarked that no authority supported applying the alter ego doctrine in the trust context. In his opening brief on appeal, Greenspan states that, although there is no authority on point, courts should not distinguish between the domination of a corporation and the domination of a trust. For their part, the Shy parties, also without citation to authority, argue that the alter ego doctrine is limited to corporations. Based on a trio of California cases as well as out-of-state authority, we conclude the alter ego doctrine may apply to a trustee but not a trust.
In Wood v. Elling Corp. (1977) 20 Cal.3d 353 [142 Cal.Rptr. 696, 572 P.2d 755], the plaintiff brought suit against Walter and Cathryn Wencke, alleging the Wenckes had defaulted on a promissory note, had fraudulently transferred real property to two corporations, and had conveyed ownership of the corporations to two trusts created for the benefit of their children. The Wenckes were the trustees of the trusts. The plaintiff asserted that the corporations and the trusts were the alter egos of the Wenckes. (Id. at pp. 363-364.) The trial court sustained a demurrer to the complaint on the ground that the suit was barred by the statute of limitations, reasoning that the Wenckes had no ownership interest in the corporations. The Supreme Court agreed that the suit was time-barred but nevertheless reversed and remanded, stating: "In the circumstances of this case, . . . we believe that plaintiff should have been given the opportunity to further amend his complaint. If it were alleged and proven that the two trusts in question were themselves alter egos of the Wenckes, those trusts would essentially drop out as independent legal entities and the general allegations relating to interest and ownership [of the real property] would find support in . . . specific allegations presently appearing in the complaint." (Id. at p. 365.)
In Torrey Pines Bank v. Hoffman (1991) 231 Cal.App.3d 308 [282 Cal.Rptr. 354], the bank made a construction loan to a family trust for the purpose of building an apartment complex on undeveloped property owned by the trustees as individuals. The Hoffmans, a married couple, were the settlors of the trust and also served as its trustees and beneficiaries during their lifetimes with their issue as the ultimate beneficiaries. The trust document authorized the Hoffmans, as trustees, to bind the trust estate and to borrow money secured by trust property.
The bank issued a commitment letter, requiring the Hoffmans to provide personal guaranties to back the loan. At the time of signing the loan papers,
The construction project did not go as planned. Structural cracks developed, an easement problem arose, and the apartments were difficult to rent due to noise and a lack of air-conditioning. Eventually, the Hoffmans, as trustees, defaulted on the loan. The bank completed a nonjudicial foreclosure and filed suit against the Hoffmans, as guarantors, to recover the deficiency. The trial court entered judgment for the Hoffmans, finding they "were the alter egos of the trustees and principal obligors." (Torrey Pines Bank v. Hoffman, supra, 231 Cal.App.3d at p. 316.) The trial court concluded that "[because] the bank had proceeded under its power of sale clause to nonjudicially foreclose on the property, `it [was] barred from pursuing a deficiency judgment against the Hoffmans . . . .'" (Ibid.)
The Court of Appeal affirmed, stating: "[T]hese guarantors, as persons who created, administered, and benefited from the trust, were the alter ego of the trustees as principal obligors." (Torrey Pines Bank v. Hoffman, supra, 231 Cal.App.3d at p. 316.) "It is well established that where a principal obligor purports to take on additional liability as a guarantor, nothing is added to the primary obligation . . . . The correct inquiry . . . is whether the purported debtor is anything other than an instrumentality used by the individuals who guaranteed the debtor's obligation, and whether such instrumentality actually removed the individuals from their status and obligations as debtors. . . . Put another way, are the supposed guarantors[, the Hoffmans,] nothing more than the principal obligors[, the trustees,] under another name?" (Id. at pp. 319-320, citations omitted.) "The evidence of this transaction as a whole demonstrates substantial identity between the individual guarantors and the debtor trustees. The bank was presented with substantially the same financial information for both the family trust and the individual guarantors as an inducement to make the loan. It had a copy of the family trust (the borrower) naming the Hoffmans, the settlors, as their own trustees and beneficiaries (along with their children). Although the guaranties were signed by the Hoffmans as individuals, the bank was well aware of their trust capacities, and should have been aware of the rules regarding the purpose, usefulness, and limitations on the inter vivos trust device." (Id. at p. 320.) "These trustees
In Morley v. Malouf (1948) 88 Cal.App.2d 680 [200 P.2d 159], a real estate investor, Ben Marks, created a trust, naming himself the "manager," transferring deeds of trust to a "trustee," and designating a third individual as a "beneficiary." Without the trustee's consent, Marks transferred all of the trust's assets to third parties. The trustee later sued Marks for conversion but was unsuccessful. The trial court found, and we affirmed, that Marks had used the trust to market his real estate interests and that the trust was his alter ego. As a consequence, Marks had bound the trustee and the trust when he subsequently conveyed the assets to third parties. (Id. at pp. 687-691.)
As we explained: "The silence of the [trustee] upon the subject of knowledge or ratification of the acts of Marks assumes additional significance upon a review of the entire series of transactions. From the inception of the project, [Ben] Marks represented the . . . Trust. On behalf of the `trust' he executed documents of far-reaching importance, without objection by the `trustee' or `beneficiary.' It was not until more than four years after the execution by Marks of the instrument [conveying the trust's assets to the third parties] that the [trustee] sought to recover the value of whatever Marks may have surrendered by that document. . . . [¶] We are convinced from an examination of the record that the trial court was amply justified in concluding that [the trust] was but the alter ego of Ben Marks; that this fact was known to all parties, and that therefore his authority to execute the `forfeiture' instrument . . . cannot in this court be questioned." (Morley v. Malouf, supra, 88 Cal.App.2d at pp. 690-691; see Bogert & Hess, The Law of Trusts and Trustees (3d ed. 2007) § 46, p. 511, fn. 26 [discussing Morley].)
Courts in other jurisdictions also apply the alter ego doctrine to reach trust assets. "It is well settled that if an entity is the `alter ego' of an individual, the assets of the entity may be determined to be the assets of the individual so that an injured individual may reach those assets to satisfy a claim. That is, the individual's creditors may reach property which ostensibly belongs to a third entity if that entity is the alter ego of the individual. . . . If an entity is so managed and controlled by an individual as to constitute a sole proprietorship, the entity is the alter ego of the individual. Although the doctrine is most often applied with regard to corporations, it also applies to trusts." (In re
In short, "[t]he concept of personal liability for the obligations of an entity considered to be an alter ego of an individual is frequently employed in relation to corporations. . . . We see no reason why the alter ego concept should not have the same effect in the case of a trust." (Vaughn v. Sexton (8th Cir. 1992) 975 F.2d 498, 504, citations omitted.)
Although the Shy Trust did not object to Greenspan's evidence, the other Shy parties filed objections to 30 of Greenspan's 39 exhibits.
The trial court's cryptic ruling on the objections—"No. 28 is overruled; all others are sustained . . ."—is the type of ruling condemned in Nazir v. United Airlines, Inc. (2009) 178 Cal.App.4th 243, 249-257 and footnote 7 [100 Cal.Rptr.3d 296], where the Court of Appeal said, "This is hardly a ruling, as it could not provide any meaningful basis for review" (id. at p. 255). Here, there were multiple objections to most exhibits. Lacking any guidance from the trial court, we must consider every objection to an exhibit, no matter how seemingly frivolous, to decide if any has merit.
Similarly, an objection to the use of copies in lieu of originals was also improperly sustained. (See Evid. Code, §§ 1521, 1550, 1562.)
The objecting parties also assert that Greenspan did not serve them with notice of third party depositions and a subpoena duces tecum. But even a cursory glance at the record shows that Greenspan served proper notice on the opposing parties' counsel by mail.
The exhibits were relevant to show the relationship among LA ABC, LADT, and the Shy parties and to establish Barry Shy's disregard of their separate existence. One exhibit, the final arbitration award, was relevant to the issues raised by the trial court's ruling that Barry Shy could not be added as a judgment debtor because he had prevailed in the arbitration. The trial court properly took judicial notice of the arbitration award. (See Evid. Code, § 452, subd. (d).)
Greenspan lodged the pertinent deposition transcripts with the trial court five business days before the hearing on the motion to amend the judgment. The Shy parties contend that was too late. Not so. First, the Shy parties cite no authority requiring that the transcripts be lodged at all, much less by a certain date. (Cf. Cal. Rules of Court, rule 3.1116(b) [obligating party to submit only "relevant pages of the transcript"]; § 2025.480, subd. (d) [discovery motion to compel answer to question asked at deposition requires lodging
The trial court did not err in sustaining two of the objections. First, a memorandum to Barry Shy from a law firm, discussing LADT's finances, was not subject to a hearsay exception cited by Greenspan. Second, Shy's prearbitration brief was not relevant in establishing any facts. The brief was mere argument, not evidence. (See Grant-Burton v. Covenant Care, Inc. (2002) 99 Cal.App.4th 1361, 1378-1379 [122 Cal.Rptr.2d 204].)
Trial court error is prejudicial, warranting reversal, if in the absence of the error, the appealing party would have probably obtained a more favorable result. (See Cal. Const., art. VI, § 13; Code Civ. Proc., § 475; Evid. Code,
Assuming for the sake of argument that the trial court properly ruled on the evidentiary objections, the court's rejection of Greenspan's legal contentions (see pt. IIC. & D., ante) would necessitate a reversal to permit the court to evaluate the evidence under the correct legal standards.
But the trial court's erroneous evidentiary rulings leave no doubt about the disposition on appeal. Some of the excluded evidence includes the following. Shy is the manager of LADT, controls its bank accounts, and, in effect, runs its finances. LADT never maintained minutes.
As the manager of LA ABC, Shy is not sure if that company ever maintained "books" or "records," but if it did, the documents would be at his home. LA ABC never had any employees and never prepared a financial statement. Shy does not know if LA ABC ever had a bank account or paid any of its own bills. LA ABC's "payments" to the Meieran Trust under the Purchase Agreement were made by LADT.
The trustee of the Shy Trust is Barry's brother, Moti Shai. Although the Shy Trust owns LADT, LA ABC, and LABAR, Barry Shy, not Moti Shai, "make[s] most of the important decisions" for those companies. Barry Shy "sometime[s]" consults with the trustee, but "the trustee know[s] . . . the policy and intent, and go[es] in line with what . . . I'm doing."
On May 9, 2005, Barry Shy signed a check transferring $3,475,000 from LADT's bank account to the Shy Trust. He was not sure if the payment was a "reimbursement" or "distribution." The Shy Trust had advanced millions of dollars to LADT. Barry testified the May 9, 2005 transaction could have been approved by himself, Moti, or both. It follows that, on occasion, Barry alone made financial decisions for the trust. (See Farrell v. Paulus (1944) 309 Mich. 441 [15 N.W.2d 700, 704] ["`As a general rule transactions between members of a family must be closely scrutinized when the rights of creditors are involved and when such transactions are accompanied by . . . badges of fraud[, such as an intent to hinder, delay, or defraud creditors,] a full explanation of the conveyance is required when it is challenged by an unsatisfied creditor . . . .'"].)
Barry Shy is also the manager of 6th St. Loft and Harpro. Both are owned by the Shy Trust. Harpro's business address is Shy's home address.
In 2003, according to an accounting summary prepared by Shy, he deposited $179,000 in checks into LADT's account, indicating they were
When Greenspan learned that LADT's $47 million in receipts on condominium sales had fallen to less than $13,000, he pursued judgment debtor proceedings to investigate LADT's expenditures and transfers. Greenspan learned that in March and April 2005, Shy made two transfers from LADT's accounts totaling $9 million, but, at his deposition, Shy could not explain where the funds went. With respect to other transactions, bank records and the testimony of a California National Bank representative revealed that Shy transferred over $2 million from LADT's bank accounts to his personal accounts: $1.25 million to open a certificate of deposit and a $1 million debit with "Barry" written beside it.
Bank representatives also testified Shy transferred millions from LADT's account to Harpro's account. While LADT was created to renovate the Higgins Building in downtown Los Angeles, Harpro operated a small shopping center in Van Nuys.
On another occasion, LADT transferred $3.02 million to a third party (Bolour Trust #2), supposedly on behalf of 6th St. Loft, but Shy characterized the transaction as funds "paid to BR Shy Trust as a distribution."
Although the foregoing evidence was not considered by the trial court, we note that other pertinent evidence was admitted. For instance, Shy admitted he would put money into and take money out of LADT accounts for personal use by writing a check to himself and would, from time to time, reconcile the amounts. And at Moti Shai's deposition as trustee of the Shy Trust, Moti answered "I don't know" to a series of questions concerning whether the trust had an accountant, whether it kept any type of financial ledger reflecting money received, whether it received any funds from LADT, whether anyone other than the trustee had written a check on the trust's behalf, and whether the trust had paid anyone for working. Barry never told Moti he was sending money from LADT to the Shy Trust.
In sum, the trial court incorrectly decided virtually every issue in this case, save the sustaining of two objections and taking judicial notice of some court documents. As a result, the trial court misapplied section 187 and the alter ego doctrine and considered very little of Greenspan's admissible evidence. The prejudicial result is patent. We therefore reverse the order denying the motion to amend the judgment.
The order is reversed. Appellant is entitled to costs on appeal.
Rothschild, J., and Johnson, J., concurred.
