When you have a judgment against a shell entity, you can amend the judgment to name the sole shareholder or member. That is called piercing the corporate veil. Until a few years ago, it didn’t work in reverse: if you have a judgment against a judgment-proof business owner, you can’t add the entity as a judgment-debtor. (Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1513, 77 Cal.Rptr.3d 96 (Postal Instant Press).) Except in 2017 in Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 221 (Curci), the same appellate court said you could do that — that is, at least if you were dealing with an LLC. (Curci did not apply to corporations.)
But what if the LLC has innocent members? It wouldn’t be fair to innocent LLC members to add the LLC to a judgment because of whatever some other member did. That is the issue that came up in Blizzard Energy, Inc. v. Schaefers (D2d6 Nov. 18, 2021 no. B305774) 71 Cal.App.5th 823. And the court answered the question by holding: Yes, the LLC may be liable for the judgment, but no, we can’t offer any suggestions how it could be done consistent with an innocent member’s rights. The court remanded for the trial court to think about that.
When you have a judgment against a shell entity, you can amend the judgment to name the sole shareholder or member. That is called piercing the corporate veil. Until a few years ago, it didn’t work in reverse: if you have a judgment against a judgment-proof business owner, you can’t add the entity as a judgment-debtor. (Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1513, 77 Cal.Rptr.3d 96 (Postal Instant Press).) Except in 2017 in Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 221 (Curci), the same appellate court said you could do that — that is, at least if you were dealing with an LLC. (Curci did not apply to corporations.)
But what if the LLC has innocent members? It wouldn’t be fair to innocent LLC members to add the LLC to a judgment because of whatever some other member did. That is the issue that came up in Blizzard Energy, Inc. v. Schaefers (D2d6 Nov. 18, 2021 no. B305774) 71 Cal.App.5th 823. And the court answered the question by holding: Yes, the LLC may be liable for the judgment, but no, we can’t offer any suggestions how it could be done consistent with an innocent member’s rights. The court remanded fo r the trial court to think about that.
The judgment in Blizzard Energy was entered in Kansas, for fraud totaling $3.825 million. But the Kansas member is a member-manager of an LLC that owns property in Cambria in California. The Kansas defendant domesticated the judgment in California and moved under Code of Civil Procedure section 187 to name the LLC as an additional debtor.
The Pending Appeal Did Not Stay the Trial Court from Special Proceedings Under the Judgment Enforcements Act:
The appellant first argued that, as the underlying judgment was on appeal, the appellate stay deprived the trial court of jurisdiction to hear the motion to amend the judgment under section 187. The court disagreed: “Section 916 is inapplicable because it applies only to civil actions. Proceedings under the Act are special proceedings, not civil actions.”
A Judgment Creditor May Use Outside Reverse Veil Piercing to Add an LLC Debtor:
Under statute, the only remedy available to reach a judgment-debtor’s LLC interest is a charging order. (Corp. Code, § 17705.03, subd. (a).) And in 2008, the Fourth District Court of Appeal, Division Three, confirmed in Postal Instant Press, supra, 162 Cal.App.4th 1510, that “a third party creditor may not [reverse] pierce the corporate veil to reach corporate assets to satisfy a shareholder's personal liability.’ ”
But in 2017, the same Court of Appeal published Curci, supra, 14 Cal.App.5th 214, which allowed reverse veil piercing against LLCs.
But in Curci, there were no innocent third party members. The LLC in Curci was held 99% by the husband debtor, and 1% by the wife debtor. Here in Blizzard Energy, by contrast, the LLC was held 50% by the husband debtor, and 50% by a 75-year-old separated wife with no apparent connection to the underlying lawsuit. So the Court of Appeal reversed the trial court’s finding of alter ego and remanded for further proceedings to determine what to do about the wife.
What should the trial court consider when it comes to the wife? Here is all the guidance the appellate court provides: “The court must “weigh the equities to ‘ “ ‘accomplish ultimate justice.’ ” ’ ” (Hartford Casualty Ins. Co. v. Travelers Indemnity Co. (2003) 110 Cal.App.4th 710, 724, 2 Cal.Rptr.3d 18.)” On remand, “the court should weigh the competing equities and grant or deny relief depending on the balance of those equities.”
I take it that means: if the wife is found to be truly an innocent third party, alter ego must fail.
Recall that, once the LLC becomes a judgment-debtor, its assets may be seized, and it would be exposed to the extreme remedy of receivership. There is likely no practicable way an innocent member’s interests can be protected as against these measures. So the practical holding of Blizzard Energy seems to be: Yes, you may add an LLC as a judgment-debtor under Code of Civil Procedure section 187, but only if the LLC involves no innocent members.
Tim Kowal helps trial attorneys and clients win their cases and avoid error on appeal. He co-hosts the Cal. Appellate Law Podcast at www.CALPodcast.com, and publishes a newsletter of appellate tips for trial attorneys at www.tvalaw.com/articles. His appellate practice covers all of California's appellate districts and throughout the Ninth Circuit, with appellate attorneys in offices in Orange County and Monterey County. Contact Tim at tkowal@tvalaw.com or (714) 641-1232.
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