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California Appellate Court Allows Equitable Procedure for Judgment Creditor to Add New Judgment Debtors When Original Debtor is Judgment-Proof

file4291240514900.jpgRecovering monetary damages is the ultimate goal of most business and commercial lawsuits, with one party seeking compensation from the other for some wrongful act. Even if a plaintiff is able to obtain a judgment for damages, it does not guarantee that the defendant will actually pay. California law gives a plaintiff, now known as a judgment creditor, certain rights to seize assets from a judgment debtor, but what happens if a judgment debtor has nothing to seize? This type of debtor is called “judgment proof.” A judgment creditor may still be able to collect through an equitable procedure that adds individual directors or officers to the original judgment as new debtors. A California appellate court recently described how it could be inequitable to deny a judgment creditor the ability to use this procedure. Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, 2d Civil No. B244612, slip op. (Cal. App. 2d., Dec. 31, 2013).

The plaintiff, Relentless Air Racing (“Relentless”), sued Airborne Turbide Ltd. Partnership (“Airborne”) over a contract dispute. After Relentless prevailed at trial, the court awarded it close to $181,000 in damages and attorney’s fees. It was unable to recover the judgment from the insolvent Airborne, so it moved the court to add two individuals and two corporations as judgment debtors. The two individuals were Airborne’s sole limited partners, and they were the sole officers and directors of the two corporations. One of the corporations was Airborne’s general partner. Relentless alleged that Airborne and the two corporations were merely alter egos of the two individuals.

Corporations and other business entities are viewed as separate legal entities from their owners, directors, and officers. This generally means than an individual director or officer is not liable for judgments entered against the business entity. In some situations, however, a court may “pierce the corporate veil” and hold directors or officers liable for corporate debt. One of these scenarios might occur when an individual uses a business entity as an “alter ego,” meaning that the business entity has no significant purpose other than the individual’s interests.

The trial court in the present case concluded that Airborne and the two corporations were alter egos of the two individuals. It noted the location of the businesses in the individuals’ home and the free flow of money between the individuals and the business, and it cited the fact that they were the business entities’ “sole officers, members, shareholders, owners, and operators.” It denied Relentless’ motion, however, finding that treating Airborne as a separate entity was not unjust or inequitable to Relentless.

The appellate court disagreed and reversed the order. It described the three-pronged test used to determine whether to add individuals as judgment debtors: the proposed judgment debtors must have “had control of the underlying litigation” and “virtual represent[ation] in that proceeding;” the business entity must be an alter ego of its owners; and treating the business entity as the sole judgment debtor must result in “an inequitable result” for the judgment creditor. Greenspan v. LADT LLC, 191 Cal.App.4th 486, 509-11 (Cal. App. 2nd 2010). If a judgment creditor can prove the first two prongs of the test, the court held, it would be inequitable as a matter of law to prevent collection against the additional judgment debtors.

If you or your business has a dispute over a contract or other business matter, or you need to collect a judgment or other debt, you need the assistance of a skilled business and commercial lawyer. James G. Schwartz has represented businesses in the Bay Area since 1976. To schedule a free and confidential consultation to see how we can assist you, please contact us today online or at (925) 463-1073.

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