Opinion
B326612
09-24-2024
CHRIS HAAS et al., Plaintiffs and Respondents, v. DRIVEN DELIVERIES, INC., et al., Defendants; STEM HOLDINGS, INC., et al., Objectors and Appellants.
Alger Law and Timothy L. Alger for Objector and Appellant Stem Holdings, Inc. The Sheikh Law Firm and Scott A. Sheikh for Objector and Appellant Salvador Villanueva. Workplace Rights Law Group, Gregory D. Wolflick and Theodore S. Khachaturian for Plaintiffs and Respondents.
NOT TO BE PUBLISHED
APPEALS from orders of the Superior Court of Los Angeles County No. 20STCV19564. Monica Bachner, Judge. Affirmed in part and reversed in part.
Alger Law and Timothy L. Alger for Objector and Appellant
Stem Holdings, Inc. The Sheikh Law Firm and Scott A. Sheikh for Objector and Appellant Salvador Villanueva.
Workplace Rights Law Group, Gregory D. Wolflick and Theodore S. Khachaturian for Plaintiffs and Respondents.
ASHMANN-GERST., J.
After plaintiffs and respondents Chris Haas, Carla Baumgartner (Baumgartner), and Eric Steele obtained a judgment in their favor and against their former employer, Driven Deliveries, Inc. (Driven), and corporate officers Brian Hayek (Hayek) and Christian Schenk (collectively defendants), they moved to amend the judgment pursuant to Code of Civil Procedure section 187 to add Stem Holdings, Inc. (Stem), and Salvador Villanueva (Villanueva) as judgment debtors. The trial court granted plaintiffs' motion, and Stem and Villanueva appeal.
All further statutory references are to the Code of Civil Procedure unless otherwise indicated.
Because substantial evidence supports the trial court's finding that Villanueva was and is an alter ego of Driven, we affirm the trial court's order regarding him. However, the evidence does not support the trial court's finding that Stem is subject to successor liability for Driven's indebtedness; accordingly, we reverse the trial court's order regarding Stem.
FACTUAL AND PROCEDURAL BACKGROUND
Underlying litigation and settlement
In May 2020, plaintiffs bought this action against defendants, alleging breach of contract, fraud, and employment-related claims. At some point during the litigation, Baumgartner negotiated the essential terms of a settlement with Driven's president, Villanueva, who represented to Baumgartner that he was in charge of the litigation.
Merger agreement; Form S-4
On or about October 5, 2020, Stem, Stem Driven Acquisition, Inc. (SDA), and Driven entered into a merger agreement that would result in Stem acquiring all of Driven's shares. As explained by Matthew Cohen (Cohen), Stem's chief executive officer, president, and chief financial officer, "[t]he effect of the Merger was as follows: (1) SDA merged into Driven and ceased to exist as a separate entity; (2) Driven was the surviving corporation of the Merger; (3) all of the assets and liabilities of SDA became vested in Driven; (4) Stem . . . became the sole shareholder of Driven; and (5) the former shareholders of Driven received shares of Stem . . . as consideration for the Merger. Driven continued to exist, and Stem . . . was Driven's sole shareholder."
"SDA was organized as a wholly-owned subsidiary of Stem."
At the time of the merger, Hayek was not employed by Stem, "nor was he an officer or director of Stem." Hayek did not become an employee or director of Stem until after the merger closed on December 28, 2021.
On December 28, 2020, Stem filed a Form S-4 (registration statement under the Securities Act of 1933) with the United States Securities and Exchange Commission. Incorporated in the Form S-4 is a prospectus regarding the merger. It explained the terms of the merger between Stem, SDA, and Driven. It also provides, in relevant part: "Following the completion of the Merger, Stem will also assume Driven's outstanding indebtedness." The prospectus also represents that Driven will survive the merger "as a wholly owned subsidiary of Stem."
Hayek signed the document on behalf of Driven. The prospectus indicates that "[u]pon consummation of the Merger," Hayek would become part of Stem's "executive management team" as its "Chief Compliance Officer and Special Projects."
Settlement agreement
Meanwhile, on November 24, 2020, plaintiffs and defendants executed a settlement agreement resolving the employment-related claims. The parties agreed that defendants would pay plaintiffs $774,621 in equal bimonthly payments over a period of 17 months in exchange for plaintiffs' dismissal of their lawsuit.
The settlement agreement provides, in relevant part: "The obligations and duties of this Agreement shall be binding upon the Parties, their successors and permitted assigns, and the rights of this Agreement shall inure to the benefit of successors and permitted assigns. For example, in the event there is a merger or purchase of [Driven] by [Stem], this Agreement applies to Stem." The settlement agreement also provides that it could only be amended "by a written instrument signed by all of the Parties." Finally, the agreement provides that if defendants breached the settlement agreement, plaintiffs could request entry of judgment for the balance due.
Hayek signed the settlement agreement, on behalf of Driven and in his individual capacity. There is no indication that he signed the agreement on behalf of Stem. Nevertheless, the parties dispute the import of his signature. According to plaintiffs, they agreed to the terms of the settlement knowing that Hayek was Stem's new chief compliance officer. Specifically, Baumgartner declared that she "knew that the Driven-Stem merger was about to be completed right after we signed the Settlement Agreement and I wanted to make sure we were going to be paid what Defendants promised after the merger. I also knew that . . . Hayek was and still is an officer of both [Driven] and [Stem]. When I signed the settlement agreement, I was also relying on [Hayek's] promise that Stem would also be responsible for making the payment that he and the other Defendants promised." According to Stem, when the settlement agreement was executed on November 30, 2020, Hayek was Driven's chief financial officer; he was not yet employed by Stem. Hayek only became an employee and director of Stem after the merger closed on December 28, 2020.
Defendants made payments on the settlement until November 2021. The settlement checks were mostly written by Villanueva, and the checks were drawn on an account belonging to Budee, Inc., Villanueva's other company. Stem did not make any payments to plaintiffs.
Stem sells Driven to Villanueva; Driven files for bankruptcy
In December 2021, Stem sold Driven to Villanueva. In January 2022, Villanueva listed himself as president, secretary, and treasurer of Driven.
In August 2022, Driven filed a petition for bankruptcy and included in its disclosures the balance owed to plaintiffs.
According to Stem, on February 16, 2024, Driven moved to dismiss the bankruptcy proceedings. A hearing was apparently scheduled for March 12, 2024, but no one has provided us with a status report.
Plaintiffs obtain a stipulated judgment against defendants
Despite Villanueva's assurances that he would "make good" on the settlement payments, he did not do so, forcing plaintiffs to seek and obtain a stipulated judgment against defendants in the amount of $349,876.69.
Motion to amend the judgment
On September 8, 2022, plaintiffs filed a motion to amend the judgment to add Villanueva as a judgment debtor. They argued that Villanueva was Driven's alter ego. Plaintiffs also sought to add Stem as a judgment debtor on the grounds that Stem was a successor to Driven, and that Driven and Hayek agreed that Stem would be part of the judgment once the merger between Stem and Driven was completed.
In support, plaintiffs submitted declarations averring that "[d]efendants agreed in the Settlement Agreement that [Stem] was going to be part of the Judgment in the even[t] that Defendants did not pay what they promised to pay in the agreement."
Oppositions
Stem opposed plaintiffs' motion, arguing that (1) the settlement agreement between plaintiffs and defendants did not bind Stem, and (2) Stem is not a successor corporation subject to Driven's liabilities. Villanueva filed a separate opposition, arguing that he was not Driven's alter ego.
Trial court order
The trial court granted plaintiffs' motion. Regarding Villanueva, the trial court reasoned: "Plaintiffs have shown by a preponderance of the evidence that Villanueva had, at a minimum, notice of the underlying litigation in his capacity as [Driven's] alter ego." In so ruling, the trial court pointed out that (1) Villanueva controlled the underlying litigation, (2) Villanueva wrote most of the settlement checks that had been sent to plaintiffs, (3) many of the settlement checks had been drawn from the account of Villanueva's other company, Budee, Inc., (4) at the end of 2021, Villanueva had acquired all assets and shares of Driven when Stem sold Driven to Villanueva, (5) Villanueva was Driven's president, secretary, and treasurer, and (6) Villanueva had identified himself on a statement of information for the California secretary of state as Driven's chief executive officer, secretary, chief financial officer, and sole director.
Regarding Stem, the trial court requested additional briefing on the question of whether Delaware, Nevada, Florida, and/or California law applied to the merger between Stem and Driven and whether Stem had become Driven's successor-in-liability.
Following its review of the parties' supplemental briefs, the trial court added Stem to the judgment, agreeing with plaintiffs that Stem was Driven's successor in interest and thus liable for Driven's outstanding indebtedness under Florida, Nevada, Delaware, and California law.
Appeals
Stem and Villanueva's separate appeals ensued.
DISCUSSION
I. Substantial evidence supports the trial court's finding that Villanueva is Driven's alter ego
A. Relevant law
Section 187 authorizes a trial court to amend a judgment to add judgment debtors. (NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778.) "[T]he general rule is that 'a court may amend its judgment at any time so that the judgment will properly designate the real defendants.' [Citation.]" (Dow Jones Co. v. Avenel (1984) 151 Cal.App.3d 144, 149.) "In order to see that justice is done, great liberality is encouraged in the allowance of amendments brought pursuant to Code of Civil Procedure section 187." (Misik v. D'Arco (2011) 197 Cal.App.4th 1065, 1073.)
Section 187 and the alter ego doctrine often go hand-inhand. "The authority of a court to amend a judgment to add a nonparty alter ego as a judgment debtor has long been recognized." (Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc. (2013) 217 Cal.App.4th 1096, 1106.) "Judgments are often amended to add additional judgment debtors on the grounds that a person or entity is the alter ego of the original judgment debtor." (NEC Electronics Inc. v. Hurt, supra, 208 Cal.App.3d at p. 778.)
The alter ego doctrine traditionally "arises when a plaintiff comes into court claiming that an opposing party is using the corporate form unjustly and in derogation of the plaintiff's interests." (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300 (Mesler).) There is "no litmus test to determine when the corporate veil will be pierced; rather the result will depend on the circumstances of each particular case." (Ibid.) There are "two general requirements: '(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.' [Citation.] And 'only a difference in wording is used in stating the same concept where the entity sought to be held liable is another corporation instead of an individual.'" (Ibid.)
"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.'" (Mesler, supra, 39 Cal.3d at p. 301.)
To prevail on a motion to amend under section 187, the judgment creditor must show, by a preponderance of the evidence, that: (1) there is such a unity of interest and ownership that the separate personalities of the defendant and purported alter ego no longer exist; (2) the party to be added as a judgment debtor had control of the underlying litigation and was virtually represented in that proceeding; and (3) an inequitable result will follow if the acts are treated as those of the defendant alone. (Highland Springs Conference &Training Center v. City of Banning (2016) 244 Cal.App.4th 267, 280.)
"'The decision to grant an amendment . . . lies in the sound discretion of the trial court. "The greatest liberality is to be encouraged in the allowance of such amendments in order to see that justice is done."'" (Greenspan v. LADT LLC (2010) 191 Cal.App.4th 486, 508.) We review the trial court's fact findings on alter ego for substantial evidence. (Wells Fargo Bank, N.A. v. Weinberg (2014) 227 Cal.App.4th 1, 8.)
B. Analysis
Applying these legal principles, we conclude that the trial court did not err. Ample evidence supports the trial court's determination that Driven was Villanueva's alter ego. Villanueva controlled the entire litigation of this lawsuit for defendants. He was Driven's president while the lawsuit was pending. He-not Hayek or Schenk-negotiated the basic terms of the settlement with Baumgartner.
Following execution of the settlement agreement, Villanueva wrote the majority of the settlement checks, which were drawn from the account of his other marijuana company, Budee, Inc.
Furthermore, at the end of 2021, he acquired all assets and shares of Driven when Stem sold Driven to him. In fact, on December 22, 2021, Driven filed an annual or amended list and state business license application, declaring Villanueva to be Driven's president, secretary, and treasurer. One month later, on January 28, 2022, Villanueva filed a statement of information with the California secretary of state, listing himself as Driven's president, secretary, and treasurer.
Finally, in late 2021 or early 2022, Villanueva assured Baumgartner that he would "make good" on the settlement payments.
Taken together, this evidence amply supports the trial court's finding that Villanueva was and is Driven's alter ego. It would be inequitable not to amend the judgment to add Villanueva as a judgment debtor.
II. The trial court erred in adding Stem as a judgment debtor
A. Standards of review
As set forth above, "in reviewing a trial court's order amending a judgment by naming an additional judgment debtor, an appellate court must consider whether the trial court's findings are supported by substantial evidence. [Citation.]" (McClellan v. Northridge Park Townhome Owners Assn. (2001) 89 Cal.App.4th 746, 751-752.) "The courts have defined substantial evidence to be evidence of ponderable legal significance, evidence that is reasonable, credible and of solid value. [Citations.] . . . Speculation or conjecture alone is not substantial evidence." (Minnegren v. Nozar (2016) 4 Cal.App.5th 500, 507.)
That said, to the extent we are called upon to interpret any agreements, we utilize ordinary rules of contract interpretation. (See, e.g., Supervalu, Inc. v. Wexford Underwriting Managers, Inc. (2009) 175 Cal.App.4th 64, 72-73.) And, it is well-settled, that we review questions of law, including questions of statutory interpretation, de novo. (North American Title Co., Inc. v. Gugasyan (2021) 73 Cal.App.5th 380, 390.)
B. Relevant law
"Modification of a judgment may . . . be proper under the 'successor corporation' theory. [Citation.] According to that theory, when a corporation sells or transfers all of its assets to another corporation constituting its '"mere continuation,"' the latter is also liable for the former's debts and liabilities. [Citation.]" (Wolf Metals Inc. v. Rand Pacific Sales Inc. (2016) 4 Cal.App.5th 698, 704-705.)
"The usual rule of successor liability, as stated in Ray v. Alad Corp. (1977) 19 Cal.3d 22, 28 [136 Cal.Rptr. 574, 560 P.2d 3], is that 'a corporation purchasing the principal assets of another corporation assumes the other's liabilities' only if '(1) there is an express or implied agreement of assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is a mere continuation of the seller, or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller's debts.'" (Maloney v. American Pharmaceutical Co. (1988) 207 Cal.App.3d 282, 287; see also Franklin v. USX Corp. (2001) 87 Cal.App.4th 615, 621.) The law in Florida, Delaware, and Nevada is similar. (Laboratory Corp. of America v. Professional Recovery Network (Fla. Dist. Ct. App. 2002) 813 So.2d 266, 269; Elmer v. Tenneco Resins, Inc. (D. Del. 1988) 698 F.Supp. 535, 540; Village Builders 96, L.P. v. U.S. Laboratories, Inc. (2005) 121 Nev. 261, 268.)
"[S]uccessor liability, like alter ego and similar principles, is an equitable doctrine. As with other equitable doctrines, 'it is appropriate to examine successor liability issues on their own unique facts' and '[c]onsiderations of fairness and equity apply.' [Citation.]" (Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1330.)
C. Analysis
We conclude that the trial court erred in finding Stem to be an additional judgment debtor as a successor to Driven. Stem is not subject to successor liability because it did not purchase Driven's principal assets. Rather, as set forth above, the merger transaction amounted to Stem only acquiring all of Driven's shares-but Driven survived the transaction.
Furthermore, as Stem correctly argues on appeal, the settlement agreement between Driven and plaintiffs cannot bind Stem, a nonparty. (BRE DDR BR Whittwood CA LLC v. Farmers &Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1003.) There is no evidence that Stem agreed to be bound by the settlement agreement reached between plaintiffs and defendants.
Urging us to conclude otherwise, plaintiffs point us to Stem's statement in the Form S-4 that "[f]ollowing the completion of the Merger, Stem will also assume Driven's outstanding net indebtedness." Admittedly, this statement is problematic. But while there may be civil liability for filing a false S-4 statement (Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582, 1592), plaintiffs direct us to no legal authority to support its contention that a statement in a Form S-4 gives rise to successor liability and there is no evidence that supports plaintiffs' contention that Stem otherwise agreed to successor liability for the indebtedness to plaintiffs as part of the merger transaction.
We reject Stem's contention that this statement was a mere "scrivener's error." As plaintiffs rightly point out in their respondents' brief, Stem offered no evidence to support this bald assertion.
Finally, plaintiffs argue that they relied upon Hayek's "promise that Stem would also be responsible for making the payment that he and the other Defendants promised." But plaintiffs have not explained how Hayek had the authority- express or ostensible-to make a promise on Stem's behalf. While Baumgartner avers in her declaration that Hayek "was and still is an officer of both" Driven and Stem, her statement is belied by Cohen's testimony that Hayek "was not an employee, nor officer or director of Stem" at the time the parties settled. And his testimony is far more credible than Baumgartner's apparent belief regarding Hayek's employment given the timeline of transactions in this case and the fact that there is no indication in the settlement agreement that Hayek was signing on behalf of Stem.
In their respondents' brief, plaintiffs assert that they knew about the proposed merger between Driven and Stem, which is why they "made sure to state in the Settlement Agreement that in the event of a merger between Driven and Stem, [Stem] would be bound by the Settlement and would be named on the Judgment." But there is no indication that plaintiffs made sure that Stem knew it would be bound by the settlement.
DISPOSITION
The order is affirmed as to Villanueva and order as to Stem is reversed. Parties to bear their own costs on appeal.
We concur: LUI, P. J., CHAVEZ J.