Opinion
G058376
08-18-2021
BLANCA OLAVARRIA, Plaintiff and Appellant, v. JOE FODERA et. al., Defendants and Respondents.
Ko Legal and Kimberly Lind; Amezcua-Moll & Associates and Rosemary Amezcua-Moll, for Plaintiff and Appellant. Law Office of Joel W. Baruch, Corey A. Hall and Joel W. Baruch, for Defendants and Respondents.
NOT TO BE PUBLISHED
Appeal from a judgment of the Superior Court of Orange County, No. 30-2015-00788837 Gregory H. Lewis, Judge. Affirmed.
Ko Legal and Kimberly Lind; Amezcua-Moll & Associates and Rosemary Amezcua-Moll, for Plaintiff and Appellant.
Law Office of Joel W. Baruch, Corey A. Hall and Joel W. Baruch, for Defendants and Respondents.
OPINION
GOETHALS, J.
Blanca Olavarria sued Nick's Ristorante & Pizzeria, LLC, dba Nick's Pizza Ristorante (“Nick's” or “the LLC”), along with Joe Fodera, Elisa Fodera and Nick Fodera. As detailed below, she ultimately alleged 17 causes of action arising out of her employment with Nick's. The individual defendants won summary adjudication rulings on all causes of action arising out of the Labor Code that required a defendant's status to be that of an “employer, ” leaving the LLC to defend against those claims on its own since it was the only remaining defendant as to those causes of action.
However, because Nick's was a suspended corporation, it was precluded from defending itself in the trial court on the merits; the court later entered a default judgment against it as to each cause of action. Olavarria then moved to deem the individual defendants either the alter ego of the LLC, or its successor. The trial court denied this motion. A jury found in favor of the individual defendants on the remaining causes of action which alleged harassment, intentional infliction of emotional distress and assault.
Olavarria now appeals from the trial court's denial of her alter ego/successor motion. For the reasons set forth below, we affirm the trial court's ruling.
FACTS
Olavarria's second amended complaint included 17 causes of action, including unlawful retaliation, discrimination, wrongful termination, assault, harassment, and intentional infliction of emotional distress. She also alleged causes of action seeking unpaid wages, unpaid overtime, failure to provide meal and rest breaks, as well as other violations of the Labor Code.
In December 2016, all defendants answered the second amended complaint and in April 2017, each of them moved for summary adjudication of various causes of action. The individual defendants moved for summary adjudication of the first and second causes of action for unlawful retaliation, the third cause of action for discrimination, the fourth cause of action for wrongful termination, the eighth cause of action for failure to prevent harassment, the ninth through sixteenth causes of action for various wage violations, and the 17th cause of action for unfair competition, arguing that none of those causes of action stated a valid claim against any defendant other than the employer. Additionally, all defendants, including Nick's, moved for summary adjudication of the third cause of action for discrimination, the sixth cause of action for intentional infliction of emotional distress, the seventh cause of action for hostile work environment, the eighth cause of action for failure to prevent harassment, and the ninth and tenth causes of action for unpaid wages, arguing Olavarria could not prevail for other reasons.
Only the fifth cause of action for assault was not challenged in the summary adjudication motion.
The court granted the individual defendants' motion as to the first though fourth, the sixth, and the ninth through 17th causes of action. That ruling left intact the fifth cause of action for assault, and the seventh cause of action for hostile work environment intact against the individuals.
In its response, Olavarria noted Nick's was a suspended corporation and therefore lacked standing to move for summary adjudication or otherwise defend the lawsuit. In reply, defendants filed a declaration from the tax preparer for Nick and Elisa Fodera who had prepared the tax returns for the LLC from 2009 through 2011, explaining how the suspension came about.
The tax preparer stated that in 2011, pursuant to Nick and Elisa Fodera's instructions, he closed the LLC down, and began filing the restaurant's taxes in the form of a “sole proprietorship” on the Foderas's personal tax returns. He consequently filed a “short year” return for the LLC, covering the first nine months of 2011, and marked it as “FINAL.” He submitted that return to the Secretary of State's office, along with a form “Certificate of Cancellation.” For the remainder of 2011, and going forward, the LLC's taxes were fully paid as part of Nick and Elisa's personal tax returns.
The tax preparer later discovered that, although the final tax return for the LLC was received by the Franchise Tax Board, there was no record the Secretary of State had received the cancellation certificate. He also stated that the Franchise Tax Board was “assisting [him] in filing [an] Application for Certificate of Revivor, ” to reinstate Nick's to active status.
In February 2018, seven months after the tax preparer's declaration was filed, defendants unsuccessfully sought to continue the trial “to clear up the paperwork with the Secretary of State.”
The court denied Nick's motion for summary adjudication since it was a suspended corporation and thus lacked standing to defend itself nder Corporations Code section 17701.05.
In connection with the commencement of trial, Olavarria's counsel informed the court she would be dismissing her second cause of action (one of two alleging retaliation), along with the third cause of action alleging unlawful discrimination and the seventh cause of action alleging hostile work environment.
The individual defendants later asked the court to set aside the order granting their summary adjudication motions, arguing the motions had been based on their mistaken belief the LLC was in good standing, and their absence from the case unfairly left the LLC as the sole defendant which now had no ability to defend itself on the merits. Olavarria opposed the motion and the court denied it.
Olavarria argued in a trial brief that the individual defendants should be declared alter egos of the suspended LLC. The trial court agreed to later consider the issue at a hearing.
Olavarria's opening brief omits any mention of her filing a formal motion seeking a declaration of alter ego status.
In June 2018, Olavarria filed a motion to bifurcate the trial, requesting that the court first determine the “threshold” matters of the LLC's default liability and the related claim of alter ego liability, before proceeding on the remaining issues in a trial before a jury. The court granted the bifurcation.
In July 2018, the trial court denied Olavarria's request to declare the individual defendants the alter egos of the LLC. The court's ruling did not address the factual merits of the claim. Instead, the court based its denial entirely on a legal requirement-that due process prohibits a finding of alter ego in litigation unless the alleged alter ego had the opportunity to control the litigation on behalf of the entity. The court reasoned that where, as here, the entity's default had been entered as a consequence of a tax suspension, that due process requirement was not satisfied.
In July 2018, the court also conducted a default prove-up hearing against Nick's, the suspended LLC. Following the default prove-up and the court's rejection of alter ego liability, Olavarria moved for an order that the individual defendants were liable for any judgment against the LLC on the ground they were its “successors.” Specifically, she argued the individual defendants should be added to a judgment entered against the LLC “when they are a mere continuation of the defaulted entity as a matter of law.” (Bold and initial capitalization omitted.) In the alternative, Olavarria sought leave to amend the second amended complaint to restore the individual defendants as defendants in the causes of action disposed of in their summary adjudication motion.
Olavarria's attempt to reinstate the individual defendants as defendants in these causes of action was based on Turman v. Superior Court (2017) 17 Cal.App.5th 969, which held that the sole shareholder of a corporation that employed the plaintiff could separately qualify as an “employer” under Industrial Welfare Commission Wage Order No. 5-2001. On appeal, she does not challenge the court's refusal to reinstate the individual defendants as defendants in those causes of action.
The court denied that motion, once again reasoning that labeling the individual defendants the successors of the corporation, after its liability had been established by default, would violate due process.
Olavarria's remaining claims against the individual defendants were then tried to a jury, which rendered a verdict in favor of each defendant. The court thereafter entered a judgment incorporating both the default liability established against Nick's and the defense verdict in favor of the individual defendants.
As to Nick's, the judgment states it is liable on 14 separate causes of action alleged by Olavarria, including retaliation, discrimination, wrongful termination, failure to prevent harassment, unpaid wages and overtime, failure to provide meal and rest breaks, failure to provide accurate, itemized wage statements, waiting time penalties, and other Labor Code violations. It awards Olavarria a total of $225,000 in damages against Nick's-$125,000 in special damages and $100,000 in general damages-but does not apportion those damages among the causes of action.
DISCUSSION
1. Applicable Law and Standard of Review
Code of Civil Procedure section 187 (section 187) authorizes a court to amend a judgment to add an additional judgment debtor to a judgment. (NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778 (NEC Electronics).) This can be done based on alleged alter ego status, or alleged successor status. (McClellan v. Northridge Park Townhome Owners Assn. (2001) 89 Cal.App.4th 746, 752-753 (McClellan).) Section 187 contemplates amending a judgment by noticed motion. (Wells Fargo Bank, N.A. v. Weinberg (2014) 227 Cal.App.4th 1, 9 (Wells Fargo). The burden of proof is on the party seeking the order to add a judgment debtor, to prove by a preponderance of the evidence that the amendment is justified. (Highland Springs Conference & Training Center v. City of Banning (2016) 244 Cal.App.4th 267, 280.) The court is not required to hold an evidentiary hearing on a motion to amend a judgment, but may rule on the motion based solely on declarations and other written evidence. (Wells Fargo, supra, 227 Cal.App.4th at p. 9 .)
To add a judgment debtor on an alter ego theory, the moving party must demonstrate “(1) the parties to be added as judgment debtors had control of the underlying litigation and were virtually represented in that proceeding; (2) there is such a unity of interest and ownership that the separate personalities of the entity and the owners no longer exist; and (3) an inequitable result will follow if the acts are treated as those of the entity alone.” (Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership (2013) 222 Cal.App.4th 811, 815-816.)
In determining whether there is a unity of existence between an entity and a third party sought to be added to the judgment, the court must consider multiple factors, including “[c]ommingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses; the treatment by an individual of the assets of the corporation as his own; the failure to obtain authority to issue stock or to subscribe to or issue the same; the holding out by an individual that he is personally liable for the debts of the corporation; the failure to maintain minutes or adequate corporate records, and the confusion of the records of the separate entities; the identical equitable ownership in the two entities; the identification of the equitable owners thereof with the domination and control of the two entities; identification of the directors and officers of the two entities in the responsible supervision and management; sole ownership of all of the stock in a corporation by one individual or the members of a family; the use of the same office or business location; the employment of the same employees and/or attorney; the failure to adequately capitalize a corporation; and the total absence of corporate assets and undercapitalization.” (Associated Vendors, Inc. v. Oakland Meat Co., Inc. (1962) 210 Cal.App.2d 825, 838 839 (internal citations omitted).)
In the case of successor liability, the test is whether the alleged successor is the “mere continuation” of the judgment debtor. (Ray v. Alad Corp. (1977) 19 Cal.3d 22, 29) Generally, that status is established by proving the successor entity acquired the assets of the judgment debtor without adequate consideration, and that one or more persons were officers, directors, or stockholders of both corporations. (McClellan, supra, 89 Cal.App.4th at p. 754, fn. 4.)
Where the moving party makes a sufficient factual showing to warrant the addition of a judgment debtor, the decision to modify the judgment is consigned to the trial court's discretion. (Carolina Casualty Ins. Co. v. L.M. Ross Law Group, LLP (2012) 212 Cal.App.4th 1181, 1189; Greenspan v. LADT LLC (2010) 191 Cal.App.4th 486, 508.) To the extent the exercise of that discretion relies on factual findings, we review those findings for the existence of substantial evidence. (NEC Electronics, supra, 208 Cal.App.3d at p. 777.)
2. Alter Ego Liability
The trial court denied Olavarria's request to declare all three individual defendants the alter egos of Nick's, finding that such a declaration would violate due process when the judgment in question was established by default. As the court pointed out, the LLC lost it right “‘to take any further affirmative steps in the litigation'” when its default was entered, and thus “the individual defendant[s] lacked control to justify naming them as alter egos of Defendant Nick's Ristorante and Pizzeria, LLC.”
This rule was established in Motores De Mexicali, S.A. v. Superior Court (1958) 51 Cal.2d 172, in which our Supreme Court concluded the fact the judgment had been entered against a corporation “strictly by default” distinguished the case from others that had allowed additional judgment debtors to be added by postjudgment motion. As the court explained, “an amendment to the judgment here to include [additional debtors] would constitute a denial of due process of law. (U.S. Const., 14th Amend.) That constitutional provision guarantees that any person against whom a claim is asserted in a judicial proceeding shall have the opportunity to be heard and to present his defenses. [Citations.] To summarily add [additional debtors] to the judgment heretofore running only against [defendant], without allowing them to litigate any questions beyond their relation to the allegedly alter ego corporation would patently violate this constitutional safeguard.” (Id. at p. 176.)
Thus, “[t]he ability under section 187 to amend a judgment to add a defendant, thereby imposing liability on the new defendant without trial, requires both (1) that the new party be the alter ego of the old party and (2) that the new party had controlled the litigation, thereby having had the opportunity to litigate, in order to satisfy due process concerns. The due process considerations are in addition to, not in lieu of, the threshold alter ego issues.” (Triplett v. Farmers Ins. Exchange (1994) 24 Cal.App.4th 1415, 1421.)
Despite the trial court's analysis and ruling, Olavarria fails to directly address the cases holding that a default judgment cannot be amended to add additional judgment debtors pursuant to section 187. Instead, she relies on Toho Towa Co., Ltd. v. Morgan Creek Productions, Inc. (2013) 217 Cal.App.4th 1096 (Toho Towa), in which the appellate court upheld the trial court's finding that three ostensibly separate corporations were actually a single unified enterprise. According to Olavarria, Toho Towa is factually comparable to this case. We disagree. As the trial court pointed out in its ruling, Toho Towa did not involve a default judgment, and thus provides no authority for amending this judgment.
In Toho-Towa, although the two original corporate defendants had no assets or employees, they were actively defended in a contractual arbitration which they lost on the merits. (Toho Towa, supra, 217 Cal.App.4th at p. 1101, 1102.) It was in the course of efforts to enforce that judgment that the judgment creditor learned the two judgment debtors were solely owned by a single person, who also owned a third corporation, Morgan Creek Partners. The intertwined corporate structure was set up so that all money flowed to Morgan Creek Partners, while the two other entities operated as shells to avoid liability. It was the corporations' joint owner who had directed the litigation against the two judgment debtors and made all litigation decisions in the case. (Id. at pp. 1102-1103.) Based on that evidence, the plaintiff successfully sought to add Morgan Creek Partners as a judgment debtor on the theory that in reality all three entities comprised a single enterprise. Toho Tawa neither addresses nor undermines the trial court's rejection of her alter ego claim on due process grounds.
Olavarria also challenges the trial court's ruling by arguing the individual defendants participated extensively in this litigation, both before and after the LLC's default was declared. However, none of that litigation resolved the merits of Olavarria's claims against the LLC. The fact that the individuals successfully defended other causes of action that Olavarria alleged against them in their individual capacities does not change the fact they were unable to participate in a defense of the LLC's distinct liability arising out of other causes of action alleged against it.
Olavarria's suggestion that the individual defendants were responsible for their own inability to defend the LLC-because they ostensibly made a “strategic decision” to move for summary adjudication and thus leave the LLC to defend certain causes of action alone-is unavailing. The LLC's inability to defend itself on the merits of Olavarria's claims was the result of its tax suspension; it did not involve a strategic decision made by the individual defendants. It was Olavarria, not the individual defendants, who chose to raise that issue in response to the LLC's motion for summary adjudication. Finally, when the individual defendants later sought to reverse the summary adjudication ruling that had removed them from the case as individuals-because they wished to mount a defense on the merits of those claims in which the LLC was the sole remaining defendant-Olavarria opposed their motion. Thus, it was Olavarria, not the individual defendants, who sought to have the LLC's liability established by default.
In any event, as Olavarria acknowledges, we have found no case which holds that the due process barrier to adding additional debtors to a default judgment might be cured by establishing those additional debtors bore some responsibility for the corporation's failure to defend on the merits. To the contrary, in Wolf Metals, Inc. v. Rand Pacific Sales, Inc. (2016) 4 Cal.App.5th 698 (Wolf Metals), the appellate court reversed an order adding an individual as a judgment debtor on an alter ego theory, even though the corporation's default had been entered as a sanction arising out of the its refusal to comply with discovery obligations. Similarly, in NEC Electronics, supra, 208 Cal.App.3d at p. 775, the corporation filed a general denial but later voluntarily chose not to appear at trial. The fact that the corporation's decision not to appear was voluntary, and presumably decided with the knowledge of its alleged alter ego, did not cure the due process problem. As these cases reflect, it is the alleged alter ego's inability to defend the corporation on the merits, rather than the cause of that inability, that creates the issue.
Because the LLC's liability was established by a default judgment, we find no error in the trial court's denial of Olavarria's request that it declare the individual defendants its alter egos.
3. Successor Liability
Olavarria's motion for an order adding the individual defendants to the judgment as successors to the LLC was also denied on due process grounds. Once again, the court concluded the individual defendants could not be added as defendants by motion because they had not been afforded the opportunity to contest liability.
However, as Olavarria points out, case law suggests that if one corporation is established to be the “mere continuation” of an earlier corporate judgment debtor, based on evidence demonstrating it obtained all the assets of the earlier corporation without adequate consideration being paid, and that it is being run by the same people, then the name on of the second corporation may be added to the judgment without violating due process. (McClellan, supra, 89 Cal.App.4th at p. 757; see Wolf Metals, supra, 4 Cal.App.5th at p. 705 [citing McClellan].)
McClellan involved a condominium homeowners' association that voted to cease operations in the wake of judgment entered against it, after first forming a new corporation “to collect dues, manage the property, and otherwise act as the same homeowners association, only under a different name.” (McClellan, supra, 89 Cal.App.4th at p. 750.) The new corporation was formed specifically to take over the business and assets of the old one. It had no separate existence, and thus no separate due process rights.
The same cannot be said here. Even assuming an individual could, in theory, be tagged with corporate successor liability, Olavarria has made no showing that any of these individuals could qualify as a “mere continuation” of the LLC. These defendants are three separate individuals, and Olavarria has failed to distinguish among them or establish the distinct roles that any of them played in the apparently defunct LLC. Her treatment of them as a single, undifferentiated party seems to us a concession that she has failed to make a sufficient showing against any of them individually.
Olavarria fails to address that point, and we found no cases in which an individual was found liable on a corporate successor theory. In Cleveland v Johnson (2012) 209 Cal.App.4th 1315, 1328 the court concluded that corporate successor liability can be established as between an unincorporated business and a corporation. But in that case, the successor was the corporation which took over the assets of the unincorporated business and thus corporate successor liability was still imposed on a distinct corporate entity.
Olavarria has likewise offered no evidence to demonstrate what assets were owned by the LLC when it ceased to operate-apparently as early as 2011-and what happened to those assets. It was her burden to establish, by a preponderance of the evidence, that the grounds for successor liability exist; that would necessarily include establishing the LLC's assets were transferred to the alleged successor for inadequate consideration. She has failed to address that point.
Finally, Olavarria relies on newly enacted Labor Code § 200.3 (effective January 1, 2021) as an additional means of establishing successor liability. Although the statute was not argued before the trial court, Olavarria asks us to consider its effect on her claim of successor liability.
On January 21, 2021, Olavarria's counsel submitted a letter raising this statute as “new authority” relevant to whether the individual defendants are successors to Nick's.
We conclude her request is premature. By its terms, the statute establishes the liability of a judgment debtor's successor for any wages, damages, and penalties owed to any of the judgment debtor's former workforce pursuant to a final judgment, specifying that a “final” judgment means the time for appeal from the judgment has passed and no appeal is pending. It also specifies the particular criteria to be used in determining qualification as a successor for purposes of any liability established under the statute.
In this case, there was only one judgment entered, resolving Olavarria's causes of action against both the LLC and the individual defendants. Her challenge to the trial court's prejudgment order denying her motion to declare the individual defendants alter egos or successors of the LLC arises out of that judgment. Her notice of appeal specifies it challenges both the default judgment against the LLC and the judgment against the individuals. Consequently, the judgment against the LLC will not be final until after this appeal is resolved and a remittitur issues.
Once that occurs, Olavarria will have the opportunity to file a noticed motion demonstrating that one or more of the individual defendants (or other appropriate party) qualifies as a successor to her employer under the terms of that statute.
DISPOSITION
The judgment is affirmed. Respondents are entitled to their costs on appeal.
WE CONCUR: O'LEARY, P. J., BEDSWORTH, J.