Wolf Metals Inc. v. Rand Pacific Sales Inc.Wolf Metals Inc. v. Rand Pacific Sales Inc.
- Reporters:
- , ,
- Before:
- Manella, Epstein, Collins
MANELLA, J.—In the underlying action, the trial court entered a default judgment in favor of respondent Wolf Metals Inc., on its complaint against Rand Pacific Sales Inc. (RPS). Following efforts to enforce the judgment, Wolf Metals requested that the judgment be amended to name appellants Donald Koh and South Gate Steel, Inc. (SGS), as additional judgment debtors. The trial court granted the request, concluding that Koh was RPS‘s alter ego and that SGS was RPS‘s successor corporation. On appeal, Koh and SGS challenge the amendment to the default judgment. We conclude that pursuant to our Supreme Court‘s decision in Motores de Mexicali v. Superior Court (1958) 51 Cal.2d 172 [331 P.2d 1] (Motores), the default judgment could not be amended to add Koh as an alter ego to the judgment. We further conclude that the judgment was properly amended to add SGS as a corporate successor. Accordingly, we reverse the amended judgment in part and affirm it in part.
RELEVANT FACTUAL AND PROCEDURAL BACKGROUND
Wolf Metals‘s complaint, filed December 23, 2009, asserted claims for open book account, account stated, and breach of contract against RPS. The complaint alleged that from March 2008 to August 2009, Wolf Metals sold sheet metal to RPS pursuant to an oral agreement. The complaint further alleged that RPS owed Wolf Metals the sum of $292,055.93, which RPS had failed to pay despite Wolf Metals‘s demand. In February 2010, RPS answered the complaint.
In June 2010, RPS filed a petition for chapter 7 bankruptcy protection (
In September 2011, upon notice by Wolf Metals that the bankruptcy proceeding had closed without a discharge, the trial court authorized Wolf Metals to resume litigation of its claims against RPS. After RPS‘s counsel
RPS did not satisfy the judgment. In December 2012, in an effort to enforce the judgment, Wolf Metals arranged for a judgment debtor examination of Koh and his wife, who is RPS‘s secretary and treasurer. After initially refusing to answer questions, they were examined and excused. Later, when Wolf Metals propounded discovery seeking RPS‘s records, Koh replied that he had none, stating that all such documents had been transferred to the bankruptcy trustee or discarded. In September 2014, Wolf Metals filed motions to compel responses to its postjudgment special interrogatories and request for the production of documents. The trial court granted the motions and issued an award of sanctions against RPS totaling $1,245. In January 2015, Wolf Metals conducted a second judgment debtor examination of Koh.
Following that examination, Wolf Metals filed a motion under
DISCUSSION
Koh and SGS contend the trial court erred in amending the default judgment to include them as judgment debtors. For the reasons discussed below, we agree that under controlling authority Koh was improperly named a judgment debtor on an “alter ego” theory, but conclude that SGS was properly named as a judgment debtor as RPS‘s successor corporation.
Under
1. Addition of Judgment Debtor as Alter Ego
Modification of a judgment may be proper when the newly named defendant is an existing defendant‘s alter ego. (McClellan, supra, 89 Cal.App.4th at pp. 752–757.) “Under the alter ego doctrine, . . . when the corporate form is used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation‘s acts to be those of the persons . . . actually controlling the corporation, in most instances the equitable owners. [Citations.] The alter ego doctrine prevents individuals . . . from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. [Citation.]” (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538 [99 Cal.Rptr.2d 824].)
In the case of default judgments, the application of the alter ego doctrine is subject to a limitation arising from considerations of due process. Under
The due process-related requirement was first recognized by our Supreme Court in Motores, supra, 51 Cal.2d 172. There, three individuals
In NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 775–781 [256 Cal.Rptr. 441] (NEC Electronics), the appellate court reached a similar conclusion, even though the pertinent judgment arose from the corporate defendant‘s failure to litigate its defenses at trial, rather than from a default. When the plaintiff sued the corporation for nonpayment of purchased goods, the corporation filed a general denial. (Id. at p. 775.) Prior to trial, the corporation‘s chief executive officer—who was also its sole shareholder—discussed the corporation‘s potential bankruptcy and reorganization with the plaintiff. (Ibid.) Shortly before trial, the corporation gave notice that it would not appear. (Id. at pp. 775–776.) After the plaintiff presented its evidence at trial, a judgment was entered in its favor against the corporation, which filed a bankruptcy petition. (Id. at p. 776.) Later, after the bankruptcy proceeding closed, the trial court granted the plaintiff‘s petition to add the corporation‘s chief executive officer as a judgment debtor, reasoning that he knew of the lawsuit and was involved in the corporation‘s decisions regarding it. (Ibid.) Relying on Motores, the appellate court reversed, concluding that the chief executive officer neither shared the corporation‘s interests nor controlled its defense. (Id. at pp. 780–781.) The court remarked: “There was no defense for [him] to control. After [the corporation] filed its general denial, no further proceedings were conducted.” (Id. at p. 781.)
2. Addition of Judgment Debtor As Successor Corporation
Modification of a judgment may also be proper under the “successor corporation” theory. (McClellan, supra, 89 Cal.App.4th at pp. 753, 754–756, italics omitted.) According to that theory, when a corporation sells or transfers
In view of the nexus between a corporation and a second corporation constituting its ‘“mere continuation,“’ when a judgment is entered against the former due to a failure to present a defense, the judgment may be modified to name the latter as an additional judgment debtor without contravening due process. (McClellan, supra, 89 Cal.App.4th at pp. 754, fn. 4 & 754–757.) In McClellan, a corporation hired a contractor to repair its condominium complex. (Id. at p. 749.) After the corporation did not pay for the services, the contractor initiated an arbitration proceeding against it. (Ibid.) When the corporation failed to appear at the arbitration, the arbitrator issued a default award, and the contractor filed a petition for a judgment confirming the award. (Ibid.) Shortly before that judgment was entered, the corporation‘s board of directors caused the creation of a new corporation and transferred the condominium complex to it. (Id. at p. 750.) Later, the trial court granted the contractor‘s request to modify the judgment to include the new corporation as a judgment debtor, finding that it was the original corporation‘s successor. (Id. at p. 751.)
Affirming, the appellate court concluded that the new corporation was the original corporation‘s “mere continuation.” (McClellan, supra, 89 Cal.App.4th at pp. 755–756.) In so concluding, the court observed that both corporations shared the same board, which had transferred the condominium complex in contravention of the applicable covenants, conditions, and restrictions, and never dissolved the original corporation. (McClellan, supra, 89 Cal.App.4th at pp. 755–756.) The court rejected a contention under NEC Electronics that the new corporation lacked the opportunity to litigate in the underlying action, stating: “[The new corporation] was a mere continuation of the [original corporation] under a different name. Therefore, [the new corporation] cannot be heard to complain that because it did not exist at the time the arbitration award was entered, its interests were not represented in the underlying action.” (Id. at p. 757.)
At the January 2015 judgment debtor examination, Koh testified as RPS‘s president. According to Koh, RPS‘s board of directors consisted of Koh and his wife, who also served as RPS‘s secretary and treasurer. The sole shareholder was a Koh family trust. RPS engaged in “[s]teel purchase and sales,” that is, it bought steel coil from suppliers, including Wolf Metals, cut the coil, and then sold it as a finished product. RPS always conducted its operations at a single location, and had 10 to 20 employees.
Koh also operated SGS. As with RPS, Koh‘s wife acted as SGS‘s secretary and treasurer. While RPS was active, SGS supplied steel to RPS and cut the steel for RPS. Koh denied that SGS engaged in the same business as RPS.
In the course of RPS‘s operations, Koh and RPS made loans to each other. At some point, RPS secured a loan from Koh, and discharged the loan by transferring equipment valued at $29,000 to him. According to Koh, no document expressly established the existence of the loan. He further testified that he had no records for RPS because they had been discarded or transferred to the bankruptcy trustee.
In 2010, upon initiating bankruptcy proceedings, RPS stopped doing business and sold its remaining inventory. During the proceedings, SGS asserted an unsuccessful claim for $11,458 as an unsecured creditor.
After the bankruptcy closed, RPS never resumed operations. Koh described its current status as ‘“[n]othing“’ because it had filed no tax returns for several years. He further stated that because RPS had been “thrown away,” SGS had taken possession of RPS‘s remaining furniture and other items, which he described as “abandoned.” When asked whether SGS employed any of RPS‘s employees, Koh replied, “Yes.” Koh testified that RPS would neither satisfy the judgment nor pay the sanctions owed to Wolf Metals, stating that RPS was “no longer there” and that he was “not [RPS] anymore.”
Following the January 2015 judgment debtor examination, Wolf Metals filed its motion to amend the default judgment, contending that Koh and SGS were RPS‘s alter egos and that SGS was a mere continuation of RPS. In addition to Koh‘s testimony at the January 2015 examination, Wolf Metals submitted evidence that SGS was engaged in the same business as RPS at its former location, and that Koh was the agent for service of both entities. Wolf Metals‘s showing included photos of RPS‘s building in 2007 and photos of the same building in 2014, which then served as SGS‘s business location. In 2007, the building‘s front sign displayed RPS‘s name, two phone numbers, and the following description of its services: “Specialist on narrow cut slit
Appellants’ opposition neither disputed Wolf Metals‘s evidentiary showing nor offered new evidence. In addition to contending that the proposed amendments were improper under Motores and NEC Electronics, appellants argued that Wolf Metals failed to act with due diligence in seeking the amendments.
In granting the motion to amend the default judgment, the trial court found that Koh and SGS were RPS‘s alter egos and that SGS was RPS‘s successor. The court rejected appellants’ contention that Wolf Metals had failed to act with due diligence, stating that RPS did not respond to the postjudgment discovery propounded by Wolf Metals, which “learned of the extent to which . . . [SGS] stepped into the shoes of [RPS] at the January 2015 debtor‘s examination.”
C. Analysis
As explained below, we conclude (1) that under Motores, Koh was improperly added as a judgment debtor on an “alter ego” theory, and (2) that SGS was properly added as a judgment debtor as a mere continuation of RPS.
1. No Discharge in the Bankruptcy Proceeding
At the threshold, we examine appellants’ contention that the trial court‘s ruling contravenes a determination by the bankruptcy trustee and the bankruptcy court. Appellants rely on the bankruptcy trustee‘s final report prior to the closing of the bankruptcy proceeding, which states: “I have made a diligent inquiry into the financial affairs of the debtor . . . [RPS.] . . . [T]here is no property available for distribution from the estate over and above that exempted by law. . . . I hereby certify that the estate of the above-named debtor(s) has been fully administered. . . . Claims scheduled to be discharged without payment. . . . : $286,469.47.” Notwithstanding the entry in the bankruptcy court‘s docket reflecting that the proceeding closed with “no discharge,” appellants argue that the trustee‘s report establishes the existence of a ruling that Wolf Metals‘s claims against RPS were “to be discharged without payment.” (Underscoring omitted.)
Appellants’ contention fails, as no such ruling is available in a chapter 7 bankruptcy proceeding.
As such a proceeding also does not dissolve a corporation—which must be accomplished under state procedures—corporate debts and liabilities survive the closing of the bankruptcy proceeding. (N.L.R.B. v. Better Bldg. Supply Corp., supra, 837 F.2d at p. 379.) For that reason, responsibility for those debts and liabilities may be imposed on other parties under “alter ego” and “successor corporation” theories. (Id. at pp. 379–380; In re Goodman (2d Cir. 1989) 873 F.2d 598, 602.) Accordingly, the bankruptcy proceeding did not preclude the amendment of the judgment to include appellants as judgment debtors.3
2. Judgment Improperly Amended Under Alter Ego Theory
We turn to appellants’ contention that the judgment was erroneously amended to include Koh as a judgment debtor on the basis of an alter ego theory. That amendment was improper under Motores, which involved facts materially identical to those presented here. Like the defendant corporation in Motores, RPS offered no evidence-based defense in the underlying action, and the judgment against RPS was entered by default.4 Although Koh dominated RPS and knew of Wolf Metals‘s suit against RPS, his circumstances do not differ from the individuals who dominated the defendant corporation in Motores. Because Motores held that the latter individuals were
The decisions upon which Wolf Metals relies are distinguishable, as in each case, the original corporate defendant presented an evidence-based defense prior to the amendment of the judgment. (Schoenberg v. Romike Properties (1967) 251 Cal.App.2d 154, 166–167 [59 Cal.Rptr. 359] [judgment properly amended to include defendant corporation‘s shareholders and officers following jury trial]; Farenbaugh & Son v. Belmont Construction, Inc. (1987) 194 Cal.App.3d 1023, 1026–1031 [240 Cal.Rptr. 78] [judgment properly amended to include defendant corporation‘s president following bench trial]; Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc. (2013) 217 Cal.App.4th 1096, 1110 [159 Cal.Rptr.3d 469] [arbitration-based judgment against two corporations properly amended to include additional corporation as judgment debtor, as arbitration was contested].) As explained above, RPS offered no defense to Wolf Metals‘s suit, and the judgment against it was entered by default. Accordingly, the trial court erred in amending the default judgment to include appellants as judgment debtors on the basis of an “alter ego” theory.
3. Judgment Properly Amended With Respect to SGS Under “Successor Corporation” Theory
We reach the contrary conclusion regarding the amendment relating to SGS based on the “successor corporation” theory. Under that theory, ‘“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. Especially is this well settled when actual fraud or the rights of creditors are involved, under which circumstances the courts uniformly hold the new corporation liable for the debts of the former corporation.“’ (Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1327 [147 Cal.Rptr.3d 772] (Cleveland), quoting Blank v. Olcovich Shoe Corp. (1937) 20 Cal.App.2d 456, 461 [67 P.2d 376].) The application of the theory presents ‘“equitable issues to be examined ‘on their own unique facts . . . .‘“’ (Cleveland, supra, 209 Cal.App.4th at p. 1330, quoting CenterPoint Energy, Inc. v. Superior Court (2007) 157 Cal.App.4th 1101, 1122 [69 Cal.Rptr.3d 202].)
Here, the evidence establishes that although SGS‘s creation predated RPS‘s bankruptcy proceeding, SGS merely continued RPS‘s business operations
Appellants contend the trial court violated SGS‘s due process rights in amending the default judgment because SGS‘s interests differed from RPS‘s interests in the underlying action, and it lacked control over RPS‘s defense. In our view, that contention fails in light of McClellan, which concluded that when a judgment is entered against a corporation due to its failure to litigate a defense, due process is not contravened by the amendment of the judgment to include a corporation that is the defendant‘s mere continuation. (McClellan, supra, 89 Cal.App.4th at pp. 756–757.)
In a related contention, appellants suggest that there was no evidence that SGS paid inadequate consideration for the assets it received from RPS. Inadequacy of consideration, however, is not required for the application of the “successor corporation” theory. (Cleveland, supra, 209 Cal.App.4th at pp. 1332, 1333–1334.) Furthermore, the record discloses evidence sufficient to establish that factor. Following RPS‘s bankruptcy proceeding, SGS simply took possession of RPS‘s remaining furniture and other items. In addition, prior to the bankruptcy proceeding, Koh secured equipment from RPS valued at $29,000, a sum that exceeds the $11,458 claim that SGS asserted in the proceeding. Koh provided no document establishing the existence of the purported loan underlying the transfer of the equipment. As the record shows that contrary to Koh‘s testimony, SGS operated in a manner identical to RPS at RPS‘s business location, the trial court reasonably could have concluded that Koh‘s purported acquisition of the equipment was, in fact, a consideration-free transfer of equipment to SGS.
Pointing to McIntire v. Superior Court (1975) 52 Cal.App.3d 717 [125 Cal.Rptr. 379], appellants contend the trial court erred in determining that Wolf Metals exercised due diligence in seeking the amendment relating to SGS. In McIntire, following the dismissal of fictitious defendants and the
We reject that contention, as nothing suggests that prior to Koh‘s January 2015 judgment debtor examination, Wolf Metals knew, or should have known, that SGS was a mere continuation of RPS. The records from the bankruptcy proceedings show only that SGS identified itself as an unsecured creditor of RPS. Although Wolf Metals conducted a judgment debtor examination of Koh and his wife in December 2012, the record does not disclose their testimony. As the trial court observed, RPS otherwise failed to respond to Wolf Metals‘s postjudgment discovery prior to the January 2015 judgment debtor examination, which alerted Wolf Metals to SGS‘s close relationship to RPS. The trial court thus reasonably rejected appellants’ contention that Wolf Metals failed to act with due diligence. In sum, SGS was properly named as a judgment debtor on a successor corporation theory.
DISPOSITION
The amended judgment is reversed insofar as it names Koh as a defendant, and is affirmed in all other respects. The parties are to bear their own costs on appeal.
Epstein, P. J., and Collins, J., concurred.