The following is a case update written by Everett L. Green, an attorney with the U.S. Department of Justice, Office of the United States Trustee, analyzing a recent decision of interest:
In Butler America LLC v. Aviation Assurance Co., 55 Cal. App. 5th. 136 (2020), a California appellate court affirmed an order adding alter egos to a judgment against a shell entity.
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Butler America, LLC (“Butler”) entered into a written contract to provide staffing and payroll services to Aviation Finance Services, LC (“AFS”). AFS was part of several entities owned and controlled by Craig Garrick (“Garrick Entities”). Neither Garrick nor the Garrick Entities were parties to the contract between AFS and Butler.
After AFS failed to pay, Butler filed suit. Butler settled the litigation based on AFS’ promises to repay Butler with future income that AFS would receive under a contract with another Garrick Entity. AFS executed a security agreement and a stipulated judgment in favor of Butler in the event AFS breached the settlement agreement.
AFS eventually defaulted and the trial court entered the stipulated judgment. Discovering that it was unable to collect any portion of the $1.2 million judgment, Butler moved to amend the judgment under California Code of Civil Procedure Section 187 to add Garrick and the Garrick Entities as judgment debtors because they were alter egos of AFS. The trial court granted the motion and Garrick and the Garrick Entities appealed.
On appeal, Garrick and the Garrick Entities argued, among other things, that the holding that they were alter egos of AFS was not supported by substantial evidence.
The appellate court disagreed, finding that AFS was nothing but a shell. It had no substantial assets or business activity, shared employees with other Garrick entities, and did not have any sources of income. In fact, any funds AFS held originated from the Garrick Entities, including the funds to defend AFS in Butler’s litigation and to pay Butler under the settlement agreement.
The appellate court also held that AFS’s representations in the settlement agreement were fraudulent. AFS failed to disclose that it was not a party to the contract that formed the basis of the settlement agreement and therefore had no legal right to income from the contract.
Garrick and the Garrick Entities next argued the release provisions in the settlement agreement barred Butler from adding Garrick and the Garrick entities as judgment debtors. Garrick relied on authority that a release bars claims based on events occurring prior to the date of the release.
The appellate court rejected this argument, concluding that Garrick’s cases were distinguishable because the release provision in the settlement agreement was procured by fraud. The appellate court also held that amending a judgment is not a cause of action – it simply adds the true defendant to the judgment. Because an inequitable result would follow if Butler was precluded from collecting its judgement, the appellate court affirmed the trial court’s order.
A party’s right to amend a judgment to add a judgment debtor 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 “ McClellan v. Northridge Park Townhome Owners Assn., 89 Cal. App. 4th 746, 752 (Cal. Ct. App. 2001).
Curiously, no statute of limitations applies to a motion to amend a judgment to add a judgment debtor. Highland Springs Conference & Training Ctr. v. City of Banning, 244 Cal. App. 4th 267, 287, 199 Cal. Rptr. 3d 226, 241 (2016). A party may find that they are exposed to litigation long after the statute of limitations have run.
In order to prevail in a motion to add judgment debtors, a party must show, among other things, that an inequitable result will follow if the acts are treated as those of the entity alone.
The trial court’s order was consistent with precedent finding that alter egos, whether entities or individuals, are one and the same and treating them separately deprives a party of its right to satisfy a judgment thereby creating an inequitable result. See e.g., Relentless Air Racing, LLC v. Airborne Turbine Ltd. P’ship, 222 Cal. App. 4th 811, 816 (2013).
For a discussion of additional topics involving judgment debtors see Post-Judgment Examination of Non-Debtor Third Party May Delve Into Alter Ego and Fraudulent Transfer Issues, Despite Narrow Wording of Statute. [Yolanda’s, Inc. vs. Kahl & Goveia Commercial Real Estate (Cal.App.).] 2017-19 Comm. Fin. News. NL 38 and Even Though Trust Cannot Be Liable As Alter Ego Because It Is Not a Legal Entity, Trustee of Trust May Be Added As Judgment Debtor to Enable Judgment Creditor to Reach Trust Assets. [Greenspan v. LADT, LLC, (Cal. App.).], 2011 Comm. Fin. News. 3.
These materials were written by Everett L. Green, an attorney with the U.S. Department of Justice, Office of the United States Trustee, who is a member of the ad hoc group and a member of the Business Law Section’s Executive Committee. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal., Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.