Filed 11/7/14 Gaggero v. Knapp, Petersen & Clarke CA2/8
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
STEPHEN M. GAGGERO et al.,
Plaintiffs and Appellants,
KNAPP, PETERSEN & CLARKE et al.,
Defendants and Respondents.
(Los Angeles County
Super. Ct. No. BC286925)
APPEAL from an order of the Superior Court for the County of Los Angeles. Robert L. Hess, Judge. Affirmed.
Westlake Law Group and David Blake Chatfield for Plaintiff and Appellant Stephen M. Gaggero.
Law Offices of Edward A. Hoffman and Edward A. Hoffman for Appellants Pacific Coast Management, Inc.; 511 OFW LP; Gingerbread Court LP; Malibu Broad Beach LP; Marina Glencoe LP; Blu House LLC; Boardwalk Sunset LLC; and Joseph Praske, as Trustee of the Aquasante Foundation, the Arenzano Trust, and the Giganin Trust.
Miller, Randall A. Miller and Steven S. Wang for Defendants and Respondents.
In May 2010, we affirmed a judgment, including an attorney fee award of more than $1.2 million, against plaintiff Stephen M. Gaggero in a malpractice lawsuit he brought against defendants Knapp, Petersen & Clarke and several of its principals.
Plaintiff did not pay the judgment.
In April 2012, defendants moved to add additional judgment debtors to the judgment. These additional judgment debtors included (a) six entities (four limited partnerships and two limited liability companies) that were owned by plaintiff in 1998, with assets then valued at $35 or $40 million; (b) an entity that managed those assets; and (c) the trustee, Joseph Praske, of three trusts to which plaintiff had transferred his ownership of all the limited partnerships and limited liability companies in 1998. The trial court found all of these were plaintiff’s alter egos, and added as additional judgment debtors the entities and Mr. Praske, in his capacity as trustee of the three trusts that held all the entities to which plaintiff had transferred his entire estate.
The additional judgment debtors and plaintiff appeal from the court’s order, raising many arguments. They contend they cannot be alter egos as a matter of law, because “outside reverse veil-piercing” is a doctrine that applies to them and is forbidden in California. They contend the evidence of alter ego status is insufficient, claiming there is no “unity of interest and ownership” between them and plaintiff. They contend that, even if they were alter egos, defendants did not prove they controlled the litigation.
They contend the trusts are irrevocable (the trust documents are not in evidence), and irrevocable trusts may never be held liable for the debts of their settlors. They contend the trial court’s findings that trustee Praske refused to produce the trust documents was not supported by the evidence (and that plaintiff’s failure to produce them is not attributable to Mr. Praske).
They contend defendants are estopped to claim they are alter egos because defendants allegedly admitted in the underlying litigation that the additional judgment debtors and plaintiff were financially separate.
They contend the trial court invaded the probate court’s exclusive jurisdiction over the internal affairs of the trusts.
They contend the evidence of alter ego status was known to defendants before the original judgment was entered in 2008, and defendants’ failure to act until 2012 waived their alter ego claim.
And, plaintiff contends that affirming the alter ego finding in this case would “threaten the integrity of estate planning in California.”
We find none of these arguments persuasive, and affirm the order granting defendants’ motion to add the additional judgment debtors to the judgment.
This litigation began in 2002, when plaintiff sued defendants for malpractice. Plaintiff lost, and the trial court granted defendants’ motion for attorney fees. We affirmed the judgment in an unpublished opinion in May 2010. (Gaggero v. Knapp, Petersen & Clarke (May 6, 2010, B207567) (Gaggero I).) In December 2010, the judgment was amended to include attorney fees and costs on appeal, plus postjudgment interest, and amounted to more than $1.8 million.
Defendants’ initial efforts to enforce the judgment against plaintiff were predictably fruitless. We say “predictably” because one of the principal issues in the underlying malpractice case involved the tactics plaintiff employed with other judgment creditors. These included the assertion that he had no assets and was judgment-proof. The trial court in the malpractice case described plaintiff’s testimony on the subject this way (a description we found was fully supported by the record): “Between 1995 and 1998, [plaintiff] did extensive ‘estate planning,’ which supposedly resulted in all of his personal assets being transferred to various corporations, trusts and foundations. Supposedly, he retained absolutely no ownership interest in and no control over these assets. Indeed, he testified that he did not even have a checking account. When asked how he paid any bills, [plaintiff] said in substance that he submitted them to the trustee of his trust, who had absolute discretion to pay or not to pay them. If he wanted cash, it was available at the trustee’s sole discretion – on sufferance, as it were. [¶] If this sounds unusual or unbelievable, the record is clear that [plaintiff] repeatedly used precisely these assertions and arguments to discourage creditors who were seeking to collect moneys he owed them. The stonewall . . . and the claim of no personal assets that could be liened or attached, were . . . integral parts of the effort to discourage or defeat creditors.” (See Gaggero I, supra, B207567, pp. 13-14 & fn. 8.)
This tactic continued unabated with respect to defendants’ judgment, and in April 2012, defendants sought to add the “various corporations, trusts and foundations” to the judgment as additional judgment debtors. Below, we describe the creation of what the parties call plaintiff’s “estate plan”; the evidence defendants submitted in support of their motion to amend the judgment to add additional judgment debtors; and the trial court’s ruling.
The “Estate Plan”
In 1997, plaintiff, a real estate investor and developer, hired Mr. Praske to create and implement an estate plan. At the time, the net value of the assets in plaintiff’s estate (according to Mr. Praske) was approximately $30 million. (Plaintiff testified the gross fair market value of his properties was $35 to $40 million, and that “every asset, up to the time I met Joe Praske, was owned 100 percent by me, either by virtue of the membership interest, the shares, or the direct title to the property.”)
The estate plan Mr. Praske designed was structured so that each real property plaintiff owned was transferred by grant deed to a limited liability company or limited partnership. These entities are four limited partnerships (511 OFW LP; Gingerbread Court LP; Malibu Broad Beach LP and Marina Glencoe LP); and two limited liability companies (Blu House LLC and Boardwalk Sunset LLC). As the entities themselves say, each of them was created “to own a distinct piece of [plaintiff’s] real property.” Plaintiff “would be the sole member of the limited liability company, and then would transfer that membership interest to a trust.” Two trusts (the Aquasante Foundation and the Arenzano Trust) were created to hold the limited liability companies and limited partnerships. A third trust (the Giganin Trust) was created as a qualified personal residence trust, and ownership of plaintiff’s principal residence (a 1,500-acre property with several buildings on it) was in the name of that trust. According to Mr. Praske, the Giganin Trust is an irrevocable trust with substantial estate tax benefits, and gives the taxpayer (plaintiff) the right to reside at the property.
Mr. Praske is the trustee of the three trusts.1 In June 2005, he testified the beneficiaries of the Aquasante Foundation and the Arenzano Trust were the same, namely, “a class of beneficiaries” comprised of “[a]ny member of the Gaggero family.” Mr. Praske said that plaintiff was “a potential beneficiary” of the trusts, and that “[b]eing a potential beneficiary means that it is up to the trustee to decide each year among the class of beneficiaries who will be – who will receive distributable income.” (Plaintiff also testified that he was “in a class of beneficiaries” of the Arenzano Trust.)
Mr. Praske had the sole and absolute authority to decide “which beneficiaries would receive anything from the trust.” By 2005, the value of the “total estate” – the three trusts – had substantially increased, by “[a]t least 30 to 40 percent,” since it was funded in 1998.
Mr. Praske and plaintiff have testified or given sworn statements that the trusts are irrevocable. As mentioned before, the trust documents are not in evidence, despite defendants’ extensive attempts to discover them, as described more fully below.
Mr. Praske could not remember whether he had ever distributed cash to plaintiff from any of the trusts.
How the “Estate Plan” Works
Mr. Praske, in his capacity as trustee, appointed plaintiff manager of the assets for the entire estate plan. Plaintiff testified in 2005 that he was the asset manager for the three trusts and for all of the entities owned by them. Plaintiff’s duties included “[b]uying and selling, financing, trading, everything.” His services included “[a]ll of the tasks that go along with property management as well as all of the aspects of the asset management, such as refinancing, dealing with tax issues, insurance issues, making decisions to buy, sell, buy or sell the asset, to improve the asset, overseeing any improvements to the asset, financing, designing some ultimate disposition of the asset.”
PCM, an additional judgment debtor, is the management company for the assets held by the trusts. PCM paid plaintiff $3,000 a month (as of 2001), plus the use of a company vehicle, for his services managing the assets of the additional judgment debtors. Plaintiff testified he was a managing director of PCM. According to plaintiff, PCM “manages my estate, entities, and assets.” Further, PCM “[m]anaged assets, companies, me, my life, my family’s life, trust, foundation, things of that nature.” Plaintiff testified that “[c]hecks were written by PCM,” but “I paid for it, I give PCM the money. PCM writes the checks. They write checks for me. [¶] They pay my utilities. They pay my credit card, they pay for my dogs’ vet bills. I mean PCM manages my life. They are a management company for me personally and for other things.”
The workings of the “estate plan” are illustrated by testimony Mr. Praske, plaintiff, and plaintiff’s accountant gave in June and July 2005 in the Yura litigation. (This was a lawsuit plaintiff brought alleging failure to close on a real estate transaction. (See Gaggero I, supra, B207567, p. 5, fn. 2.)) Mr. Praske testified he had conferred with plaintiff about the availability of resources to purchase the property in question in the Yura litigation, which plaintiff wanted to purchase. At this conference, plaintiff “was just confirming my commitment of the estate to purchase that property . . . .” Mr. Praske was then asked, “What did you say to [plaintiff]?” and he responded, “I said, like I always do, I say yes.”
Plaintiff also testified in the Yura case. He was questioned about whether he had funds available (and from what sources) for the transaction. He said: “[P]art of the funds might have come from my trust or all of the funds could have come from my trust. [¶] . . . [¶] . . . [T]he funds would have come from me, if that’s what you’re asking. I mean, you’re asking where I would have got the funds or would they be coming from me? [¶] . . . [¶] . . . It would have come from me into the escrow. But are you asking where I would have got them from? . . . [¶] . . . [¶] . . . At all times I commanded the resources to purchase this all cash or with a mortgage. And if there happened to be a 1031 exchange opportunity available, I would have exchanged into it with one of the entities that were owned by my trust.” Plaintiff was asked, “[O]n and after January 1 of 2000 to the present date, have you commanded and do you command the resources necessary to close this transaction pursuant to the terms of the purchase agreement,” and he answered, “Yes.” At another point he testified, “Mr. Praske and myself always had the ability to . . . pull cash directly out of the trust.”
Plaintiff also testified about what would happen once the property was purchased in his name. After the close of escrow, “I would have options at that point. . . . I would have the option, just like I did when I created – when I funded the trust with my asset, when I took my assets and created my trust, my personal trust. [¶] I could take this asset in my name, transfer it to an entity, a limited liability company, a limited partnership, a general partnership, or a corporation, and then have one of the trusts or the foundation subsume – if that’s the right word – that entity into the estate plan, just like I did the other properties in 1997 and 1998; or I could just keep the property in my name.”
James Walters, a certified public accountant who took over plaintiff’s tax work in 1984 or 1985, testified that since 1988, plaintiff had been involved in 10 real estate purchase transactions. He met with plaintiff on all of those transactions, “to strategize as to tax planning and also strategize as to the estate planning, and actually to strategize as to which entities [plaintiff] managed would at times take ownership of the properties.” During those meetings, decisions were made on those issues, and plaintiff made those decisions. Mr. Praske’s role was “[a]dvice.” Mr. Walters was asked, “And once [plaintiff] made the decision, was the decision – those decisions implemented?” He answered, “Absolutely.” Mr. Walters specifically testified that plaintiff made the decision on “what entity would take title for these 10 various properties,” and that plaintiff “command[ed] the resources necessary to purchase each of those properties.” Mr. Walters continued: “They all flow – the actual gains on these properties always flow through [plaintiff’s] tax return, through the trusts and all the other entities.”
After the judgment in the malpractice case, defendants conducted various forms of postjudgment discovery. On June 8, 2009, defendants took the third party debtor examination of Mr. Praske, “concerning property of the judgment debtor in [his] possession or control . . . .”
Mr. Praske was represented by plaintiff’s attorney, David Chatfield.
Mr. Praske testified that plaintiff had no ownership interest in 511 OFW (an additional judgment debtor), and Mr. Chatfield instructed him not to answer any further questions about its operations on the basis of its “privacy rights and trade secrets” and irrelevance to the subject matter of the examination.
Mr. Praske further testified plaintiff had no ownership interest in additional judgment debtors Gingerbread Court LP, Blu House LLC, Boardwalk Sunset LLC, Malibu Broad Beach LP, and Marina Glencoe LP. He was instructed not to answer, on attorney-client privilege grounds, questions as to what plaintiff received in 1997 or 1998 in exchange for transferring his ownership in various properties to Gingerbread Court LP, Blu House LLC, and Boardwalk Sunset LLC. He did not recall whether plaintiff received any compensation for transferring property to Malibu Broad Beach LP, and testified plaintiff received compensation in exchange for transferring property to Marina Glencoe LP, but refused to describe it on counsel’s instructions.
Mr. Praske testified that plaintiff has never received money or any assets from the Arenzano Trust. Mr. Praske testified the Arenzano Trust was an irrevocable, discretionary trust created under the laws of Anguilla, and plaintiff “has no right whatsoever to any property in the possession or control of the trust.” He did not recall whether the Arenzano Trust had ever made any distributions to any of plaintiff’s family members.
Defendants served plaintiff with postjudgment special interrogatories (set one) on April 25, 2011. On June 21, 2011, plaintiff filed responses to defendants’ first set of production requests. (The interrogatories and production requests themselves are not in the record.) No documents were produced. Plaintiff’s response to the production requests included objections that defendants’ request was “not reasonably limited to trust documents reflecting Gaggero’s present interest as the beneficiary of a trust and therefore are not relevant to judgment enforcement . . . .” Plaintiff also objected that the request invaded his privacy rights and those of third parties, and responded that he “has no attachable interest as a beneficiary of any trust.”
On August 9, 2011, defendants filed a motion to compel, and on October 5, 2011, the court held a hearing on defendants’ motion to compel further responses to interrogatories. The court granted the motion “in its entirety”; ordered “[c]omplete, verified, supplemental responses, without further objection,” to specified interrogatories, to be served by October 24, 2011; and imposed monetary sanctions of $2,000 on plaintiff and his counsel.2
On January 31, 2012, defendants filed a request for production of documents (set two). The production requests asked, among other things, for documents relating to the trusts. On March 20, 2012, plaintiff responded, but produced no documents. He objected on a host of grounds, and repeatedly responded that he had no documents responsive to the requests in his possession or control. Among his objections were that requests for documents “relating to assets transferred, sold or liquidated over a decade ago are clearly irrelevant to this judgment enforcement and will not be produced by plaintiff.”
On April 30, 2012 (a few weeks after defendants filed their motion to amend the judgment to add judgment debtors), plaintiff filed supplemental responses to defendants’ document requests. Again he produced no documents related to the trusts or his “estate plan,” and objected on multiple grounds, including lack of relevance, privacy rights, attorney-client privilege and attorney work-product doctrines. He repeatedly stated he had no trust documents responsive to the requests in his possession or control, and repeatedly stated that the trusts were irrevocable; he had no control or interest in them; they were set up over 13 or 14 years ago, well before defendants’ judgment; and trust documents “are believed by plaintiff to be in the possession and control of the attorney and Trustee, Joseph J. Praske . . . .”
The Motion to Amend the Judgment
On April 10, 2012, defendants filed their motion to amend the judgment to add the three trusts and their assets, seven separate entities, as additional judgment debtors, presenting the facts we have recited. Plaintiff opposed the motion, as did the additional judgment debtors, who made “a special appearance” to oppose the motion.
Counsel David Esquibias represented the seven entities and Mr. Praske in opposing defendants’ motion. They argued (as did plaintiff) that the court had no authority to add them to the judgment because California law forbids “outside reverse piercing”; there was no evidence they were alter egos of plaintiff; they did not control the litigation between plaintiff and defendants; plaintiff did not represent their interests during any stage of the litigation; and judicial and collateral estoppel precluded defendants from claiming they were alter egos because at trial the court “ruled that [plaintiff] and the Entities were separate and that [plaintiff] had no authority to represent them [(the entities)], as [defendants] argued at trial.”
The trial court granted defendants’ motion at a hearing on May 29, 2012. At that hearing, counsel David Esquibias, who filed the opposition on behalf of the seven entities named in defendants’ motion, stated he also represented Mr. Praske, as trustee for the three trusts that hold title to the seven entities. After the court indicated the motion appeared to have merit and solicited argument, Mr. Esquibias asserted previously unmentioned arguments, that the trusts were irrevocable; the probate court had exclusive jurisdiction over trust matters under Probate Code section 17000; the Probate Code requires that notice of defendants’ motion be given “to the vested current income and principal and remainder beneficiaries of these trusts”; no such notice had been provided; and under section 18200, the assets of an irrevocable trust are not available to the settlor’s creditors.3
The court asked Mr. Esquibias if there was “a reason why, if this is a meritorious argument, it was not included in the opposition.” Mr. Esquibias responded that he was “specially appearing for the purpose of arguing jurisdiction and notice,” and that “I have no explanation as to why it wasn’t in the opposition. I am late to this party.” (No doubt, the trial court found this to be as strange a response as we do, since Mr. Esquibias himself submitted the written opposition two weeks previously, denominating it a “notice of special appearance to oppose and opposition” to defendants’ motion.)
When asked why he held back the arguments, counsel said “[i]t was not designed to ambush the moving party,” and perhaps the matter could be continued for briefing. The court said, “This is the time and place for the hearing on this motion,” and then asked if there was evidence in support of counsel’s assertions that the trusts were “irrevocable and subject to this that and the other.” Counsel admitted there was nothing “other than their [defendants’] own statements in their pleadings which are considered admissions that the trusts are irrevocable.”
Mr. Esquibias said, “We will provide a copy of the trust documents to counsel upon notice to the beneficiaries,” and the court inquired, “How would they know who the beneficiaries are?” The court continued: “[Y]ou are asserting a series of things which find no evidentiary support and the reason they have no evidentiary support . . . is that you have, as I understand it, you or Mr. Gaggero have precluded the other side from access to the very information that you claim is necessary for them to give notice.”
Mr. Esquibias responded that he “ha[d] a resolution.” He said he was “new to this case” and stated: “I will make sure that opposing counsel has a copy of the trust documents, so that she can apprise the situation herself. She can give notice.” Counsel said he was not present at the depositions (apparently referring to Mr. Praske’s third party debtor examination, at which plaintiff’s lawyer, Mr. Chatfield, represented Mr. Praske), “but I will tell the court now, and opposing counsel, I now represent Mr. Praske in his capacity as trustee of these trusts, and we intend to completely and fully cooperate with the requests for the documentation. [¶] There is no reason why it should not be disclosed.”
The court asked if there was a reason why counsel did not have the trust documents at the hearing, and counsel said he had them, but his notes were on the documents. He stated his intention “to be fair and clear and transparent,” and asked for an order that the documents not be made public, to which the court responded that counsel could have applied for a protective order in a timely fashion. The court further stated that Mr. Praske, “during these preceding times,” had not had independent counsel: “He has used Mr. Gaggero as [sic] counsel, which suggests to me – certainly leads to an inference, that the positions taken were coordinated positions.” The court concluded that this “[s]mells like more delay.”
Mr. Esquibias said the delay would be short, and went on to renege on his earlier statement that “we intend to completely and fully cooperate with the requests for the documentation.” He said: “We would only want to provide information that is either agreed upon between myself and opposing counsel or if we could not come to some type of agreement, whatever this court would determine to be relevant.”
The court declined to allow further delay. The court concluded that “these persons and entities are alter egos of Mr. Gaggero and clearly, clearly, it would be inequitable not to pierce the veil – not to get [at] these entities which are his alter ego. Since he has this substantial judgment against him, and he has attempted to use these devices to put his assets beyond the reach of legitimate creditors, and we have had a full and fair opportunity to litigate this. [¶] . . . [¶] I know at the moment there is . . . zero evidence in the record to support the position that there is a plethora of – I don’t know who these people are. [¶] And in fact, I do know that Mr. Praske was extraordinarily vague when he was questioned at trial about the identities of these . . . supposed beneficiaries. [¶] You know, the decision was made long ago to keep the trust documents out of the hands of the defense, and now to try and invoke the terms of it, you know, without giving it to the other side. . . . [T]his is a situation where these issues have been percolating for a long time, and there is a fundamental unfairness to making [defendants] jump through all these hoops to collect the judgment and saying no, no you can’t have x, y, and z, and then coming in at the last minute making arguments not set forth in the pleadings [based] on evidence, not before the court and saying Judge give us a do over. [¶] There is a fundamental unfairness to that.”
On the evidence of alter ego status, the court observed: “[T]he exhibits attached to the motion contain testimony of both Mr. Gaggero and Mr. Praske showing that the only interest of the specially appearing parties is to protect 100 percent of Mr. Gaggero’s assets, both personal and business. Praske is the only trustee of the trust and foundation involved in the motion. He is one of only two officers in PCM. PCM pays everything at Gaggero’s wishes without resistance or hesitance. Praske is also the registered agent for service of process at each of the business entities. [Defendants’] evidence shows that Mr. Gaggero’s own accountant testified under penalty of perjury that the gains and losses for the assets and the estate plan, ultimately flow through Mr. Gaggero’s tax returns, which is more evidence of alter ego status. [¶] Gaggero controlled the litigation. He did so by the way of the financial assets of the specially appearing parties. Their interests are aligned with Mr. Gaggero. Without them – without Mr. Gaggero they wouldn’t even exist. Mr. Praske testified that the sole purpose of the existence of the specially appearing parties is to hold Mr. Gaggero’s assets. They are one and the same. That is the bottom line.”
The court rejected Mr. Chatfield’s contention that Mr. Praske’s testimony was that “Mr. Gaggero makes the recommendation, and he [(Mr. Praske)] makes the decision,” concluding that “Mr. Praske is for all intents and purposes a rubber stamp.”
The court’s order granting defendants’ motion was signed and entered the same day. On June 1, 2012, plaintiff’s attorney filed a notice of appeal on behalf of plaintiff and the additional judgment debtors.