Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County No. GIN056513, William S. Dato, Judge.
NARES, Acting P. J.
This action arises out of a dispute between plaintiff Richard Schultz and Frontline Specialists, Inc. (Specialists). Defendant Loretta Bradshaw was the sole shareholder of Specialists. Following trial, Schultz obtained a judgment against Specialists in the amount of $174,028.40. However, Specialists never satisfied that judgment.
Bradshaw created a new business entity called Frontline Partners, Inc. (Partners). After learning of the new company, Schultz filed this action against Partners, as the successor-in-interest to Specialists, and against Bradshaw individually. Partners defaulted and the matter proceeded to trial only against Bradshaw in her individual capacity. At trial, Schultz asserted Bradshaw was individually liable for the judgment against Specialists because (1) she was the alter ego of Specialists and Partners; (2) she committed fraud by concealing her creation of Partners at a point in time when it could have been joined as a defendant in the original action; and (3) distributions Bradshaw took from Specialists and Partners were fraudulent transfers within the meaning of the Uniform Fraudulent Transfer Act (Civ. Code, § 3439 et seq.) (UFTA).
The court found in Schultz's favor, finding (1) Partners was the successor to Specialists and therefore liable for Specialist's debt; and (2) distributions taken by Bradshaw from Specialists and Partners were fraudulent, making her individually liable for that debt, which amounted to $217,520.28.
On appeal, Bradshaw asserts the court erred in holding her personally liable for Specialists's debt because in finding Partners was the successor of Specialists (1) it "erred in applying the default judgment to hold that [Partners] was a successor entity"; (2) there is no substantial evidence Partners was the successor to Specialists; and (3) it "never found Partners to be a successor entity [to Specialists]." We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
A. Lawsuit Against Specialists
Specialists provided consulting services to technology companies, assisting in placing sales representatives in electronics stores such as Circuit City. Bradshaw was the sole shareholder of Specialists. A dispute arose between Specialists and Schultz over an alleged commission owed to Schultz.
Specialists filed a complaint against Schultz, and Schultz responded with a cross-complaint. Specialists later dismissed its complaint, leaving only Schultz's cross-complaint to be litigated.
At her deposition taken during that action, Bradshaw revealed that she was dissolving Specialists. However, she did not reveal that she was also creating a new entity, Partners, to carry on some of the same business activities. Further, she made no provision in the dissolution of Partners to reserve assets sufficient to pay any judgment Schultz might obtain in that lawsuit.
The matter proceeded to trial and Schultz obtained a judgment against Specialists in the amount of $174,028.40. Because Specialists had no assets, the judgment was never satisfied.
B. The Instant Action
Schultz thereafter discovered the creation of Bradshaw's new entity, Partners. Schultz filed this action against Partners, alleging it was the successor-in-interest to Specialists. Schulz alleged that Partners was a mere continuance of Specialists that engaged in the same business and that Partners was formed to avoid the judgment against Specialists. The complaint further alleged that Specialists transferred its assets to Partners to avoid the debt to Schultz. The complaint was also asserted against Bradshaw as an individual.
Partners defaulted, and the matter proceeded to trial solely against Bradshaw in her individual capacity.
At trial, Schultz presented three theories for liability against Bradshaw: (1) that Bradshaw was the alter ego of Partners; (2) that Bradshaw committed fraud by concealing her creation of Partners; and (3) that Sub-S corporate distributions Bradshaw took from both Specialists and Partners were fraudulent transfers within the meaning of the UFTA.
Evidence was presented at trial that Bradshaw dissolved Specialists and then formed a new corporation, Partners, that largely carried on the same business. Partners continued to perform services for one of Specialists's larger accounts, Sanyo Fisher Company, after Specialists was dissolved. Sanyo's last monthly payment to Specialists was in April 2006, and the first to Partners, in the same amount, was made the next month. Partner's only other client at the time was Hownet, a business opportunity of Specialists that then became a client of Partners.
After its formation, Partners negotiated new contracts with these clients, and it was capitalized with funds obtained from the new companies. Partners continued to use the same independent contractors, Wendy Smith and John Tamura, that Specialists had used. Partners paid credit card debts of Specialists by routing distributions through Bradshaw. Bradshaw was the sole shareholder of Partners.
The evidence presented at trial also showed that Bradshaw took Sub-S distributions from Specialists in the amount of $9,753.81 and from Partners in the amount of $207,766.47, for a total of $217,520.28.
Following a court trial, the court found Bradshaw liable upon Schultz's fraudulent conveyance claim: "[B]y December 2005 when she decided to dissolve [Specialists] and create [Partners], Bradshaw knew full well the nature and potential extent of the debt owed by [Specialists] to Schultz. It is also clear that when Bradshaw took shareholder distributions from [Specialists] and [Partners] in 2006 and 2007, she knew that neither corporation had sufficient assets to satisfy that debt. Because Bradshaw knew or reasonably should have known that the remaining corporate assets were inadequate, the transfers became 'fraudulent' for the purposes of the UFTA and the distributions are subject to recapture by Schultz in order to satisfy judgments he has against [Specialists] and [Partners]."
The court also rejected Bradshaw's contention that the fraudulent conveyance claim could not be applied as against Partners: "[T]he court finds that a reasonable person in Bradshaw's position should have known a judgment creditor of [Specialists] might have a claim against [Partners] as a successor entity. Indeed, the fact that Bradshaw did not advise Schultz of her decision to continue to do business under the name [Partners] supports this inference. Moreover, the evidence is clear that [Partners] never had sufficient assets to satisfy the Schultz judgment."
The court found the amount of the prior judgment against Specialists, plus interest, was $238,396.40. The court then found that because the amount of the improper distributions from Specialists and Partners, plus interest, was $242,686.18, Bradshaw was liable for the full amount of the prior judgment.
Bradshaw brought a motion for new trial, asserting that the court erred in finding that Partners was a successor entity to Specialists, and therefore the court should reduce the judgment by the amount of distributions she took from that entity. She asserted that the court could not use the default against Partners as an admission against her that Partners was the successor of Specialists.
The court denied the motion for new trial, finding that "[i]t was not necessary for the Court to find that [Partners] was a successor entity. [¶] The Court's rationale was based on the fact that Bradshaw took distributions from both [Specialists] and [Partners] at a time when she reasonably should have known or anticipated that the corporations would incur debts or obligations they would be unable to pay. Specifically as to [Partners], the Court found that Bradshaw should have anticipated that a creditor of [Specialists] could reasonably seek to assert a claim against [Partners] as a successor entity. Knowing that such a claim could reasonably be asserted, Bradshaw was obligated to provide for payment of the claim if it turned out to be valid. This she concededly failed to do, and she is therefore personally liable for the default judgment against [Partners], which determined the issue of successor liability adverse to that corporation."
This timely appeal follows.
DISCUSSION
I. STANDING TO APPEAL
Schultz asserts that Bradshaw has no standing to appeal the determination that Partners was the successor entity of Specialists because only Partners can appeal this determination. This contention is unavailing.
To have standing to appeal, "a person generally must be both a party of record and sufficiently 'aggrieved' by the judgment or order." (Marsh v. Mountain Zephyr, Inc. (1996) 43 Cal.App.4th 289, 295.)
Here, Bradshaw is a party sufficiently "aggrieved" by the judgment so as to have standing to appeal. The court ordered her to pay to Schultz money she took from Specialists and Partners in order to satisfy Schultz's judgment obtained in the original action against Specialists. Although Partners, against whom a judgment was obtained by default, has not appealed, a determination that Partners was a successor entity of Specialists is intertwined with the court's finding that Bradshaw was personally liable under the UFTA. " '[Where] the part [of a judgment] appealed from is so interwoven and connected with the remainder, ... that the appeal from a part of it... involves a consideration of the whole, ' " we have jurisdiction to review the entire judgment. (Estate of McDill (1975) 14 Cal.3d 831, 840.)
II. SUCCESSOR LIABILITY OF PARTNERS
A. Standard of Review
We review a court's decision that an entity is a successor to another under the substantial evidence standard of review. (McClellan v. Northridge Park Townhome Owners Ass'n (2001) 89 Cal.App.4th 746, 751-752 (McClellan).)
B. Analysis
Bradshaw does not directly challenge the court's finding that the distributions she took from Specialists and Partners were fraudulent transfers under the UFTA. Rather, she asserts the court erred in imposing liability upon her personally because (1) it relied upon the default judgment against Partners to find it was the successor to Specialists; and (2) there is no evidence sufficient to find Partners was the successor to Specialists. We need not address Bradshaw's first contention because there is ample evidence in the record to support a finding that Partners was a successor entity.
Generally a default judgment admits the well-pleaded allegations of a complaint. (6 Witkin, Cal. Procedure (5th ed. 2008) Proceedings Without Trial, § 176, pp. 618-619.) However, admissions resulting from the default of one defendant " 'ordinarily are not binding upon a codefendant who, by answering, expressly denies and places in issue the truth of the allegations thus admitted by the absent party.' " (Taylor v. Socony Mobil Oil Co. (1966) 242 Cal.App.2d 832, 834.)
"[A] successor company has liability for a predecessor's actions if (1) the successor expressly or impliedly agrees to assume the subject liabilities..., (2) the transaction amounts to a consolidation or merger of the successor and the predecessor, (3) the successor is a mere continuation of the predecessor, or (4) the transfer of assets to the successor is for the fraudulent purpose of escaping liability for the predecessor's debts." (CenterPoint Energy, Inc. v. Superior Court (2007) 157 Cal.App.4th 1101, 1120; see also Ray v. Alad Corp. (1977) 19 Cal.3d 22, 28.)
" '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.' " (McClellan, supra, 89 Cal.App.4th at p. 754, italics added by McClellan.)
In McClellan, supra, 89 Cal.App.4th 746, the plaintiff contractor was awarded damages in an arbitration to enforce a construction contract with a homeowners association. After the trial court confirmed the award and entered judgment, the association formed a new corporation, and later filed bankruptcy for the old corporation. The new homeowners association consisted of the same homeowners, collected the same revenues, had the same board, the same management company, and presided over the same condominiums as the predecessor. The trial court granted the plaintiff's motion to amend the judgment to name the new association as an additional judgment debtor on the ground that it was the successor corporation to the original entity.
The Court of Appeal affirmed, holding here was no difference between the two associations except a name change. Thus, the new entity was a mere continuation of the former, and the trial court properly imposed successor liability on that entity for the former entity's debt to the plaintiff. (McClellan, supra, 89 Cal.App.4th at p. 753.)
Here, the court found that Bradshaw fraudulently conveyed assets of Specialists and Partners to herself in an attempt to avoid the judgment of Schultz against Specialists. The evidence showed that Partners was a mere continuation of Specialists, engaging in essentially the same business, and servicing clients of Specialists. Bradshaw was the sole shareholder of both Specialists and Partners. Thus, substantial evidence supports the conclusion that Partners was a successor to Specialists because (1) Partners is a mere continuation of Specialists, and (2) the formation of Partners was for the fraudulent purpose of escaping liability for Specialist's debt. (CenterPoint Energy, Inc. v. Superior Court, supra. 157 Cal.App.4th at p. 1120.)
Bradshaw asserts that Partners cannot be deemed the successor of Specialists because no physical assets of Specialists were transferred to the new entity. These items, such as furniture and other office equipment, were placed in storage and were thereafter liquidated by the storage company. However, Specialists had other assets, such as its contracts with clients and the expectation of income from those contracts that were transferred to Partners. She capitalized Partners with income from those clients. Thus, there was evidence of a transfer of assets from Specialists to Partners so as to support a finding that Partners was the successor to Specialists.
Moreover, it is of no moment that the court ultimately found, in denying Bradshaw's motion for new trial, that it need not determine if Partners was a successor entity to Specialists to impose liability on Bradshaw for her fraudulent transfers. An appealed judgment correct on any theory will be affirmed, even though the trial court's reasoning may have been erroneous. That is, we do not review the reasons for the trial court's decision. (J.B. Aguerre, Inc v. American Guarantee & Liability Ins. Co. (1997) 59 Cal.App.4th 6, 15-16.)
DISPOSITION
The judgment is affirmed. Schultz shall recover his costs on appeal.
WE CONCUR: O'ROURKE, J., IRION, J.