1. Preliminary Motions
Both sides filed motions during the briefing of this appeal.
The additional judgment debtors ask us to take judicial notice of several documents filed in the trial court in this case after the notice of appeal: the August 6, 2012 third amended judgment; the trial court’s November 5, 2012 order authorizing the receiver appointed in this case (the subject of a separate appeal by additional judgment debtors) to approve and facilitate a financing transaction arranged by four of the additional judgment debtors; and defendants’ December 3, 2012 notice of satisfaction of the judgment. These documents are relevant, they say, to show they paid the judgment, were prejudiced by the order adding them as judgment debtors, and their payment did not waive their right to seek relief in this court. None of these points is at issue in this appeal. While there is nothing controversial about the documents, they are not relevant to any matter at issue in this appeal, and there is no point in judicially noticing them.
Defendants ask us to dismiss plaintiff’s appeal on the ground he lacks standing to prosecute it. They say he has not been injured by the order adding judgment debtors, because he says he is completely separate from them. We see no point in expending judicial resources on interesting theoretical issues, or on plaintiff’s many arguments about why he is nevertheless aggrieved by the order. Moreover, there is no substantial difference in the issues plaintiff and the additional judgment debtors raise on appeal, all of which we must consider in any event. And, given our disposition of this appeal, plaintiff is, as a practical matter, very much aggrieved by the order.
2. General Principles on Adding Debtors to the Judgment
Code of Civil Procedure 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 (NEC Electronics).) “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.” (Ibid.)
The Supreme Court tells us that the alter ego doctrine “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).) Mesler instructs that 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.” (Id. at p. 300.) 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.’ [Citation.]” (Ibid.)
Mesler explained the alter ego doctrine as follows: “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.’ [Citation.]” (Mesler, supra, 39 Cal.3d at p. 301 [holding that a parent corporation’s liability as alter ego of its subsidiary corporation continued after settlement with the subsidiary; “[t]o hold otherwise would be to defeat the policy of promoting justice that lies behind the alter ego doctrine”].)
Alter ego liability may be applied to a trustee. (Greenspan v. LADT LLC (2010) 191 Cal.App.4th 486, 522 (Greenspan) [if the trustee is the alter ego of an individual, then the individual “may be considered the owner of the [trust’s] assets for purposes of satisfying the judgment”; “ ‘[t]rustees are real persons . . . and, as a conceptual matter, it’s entirely reasonable to ask whether a trustee is the alter ego of a defendant who made a transfer into [the] trust’ ”; “ ‘[a]lter-ego doctrine can therefore provide a viable legal theory for creditors vis-à-vis trustees’ ”]; cf. Wood v. Elling Corp. (1977) 20 Cal.3d 353, 365-366 [allegations that corporate defendants were alter egos of individual defendants were barred by statute of limitations on fraudulent conveyance cause of action, but plaintiff should have been allowed to amend his complaint, because “[i]f it were alleged and proven that the two trusts in question [which owned the corporate defendants] were themselves alter egos of the [individuals], those trusts would essentially drop out as independent legal entities”].)
“ ‘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.” ’ [Citation.]” (Greenspan, supra, 191 Cal.App.4th at p. 508.) Where, as here, facts are in dispute, we review the trial court’s fact findings for substantial evidence. (NEC Electronics, supra, 208 Cal.App.3d at p. 777.)
3. Issues Raised by the Additional Judgment Debtors
We turn to the specific contentions the additional judgment debtors raise on appeal, discussing first the several bases on which they claim they may not be added to the judgment as a matter of law.
“Reverse piercing” of the corporate veil (a red herring)
Additional judgment debtors contend they may not be added to the judgment because “reverse piercing” of the corporate veil is “forbidden by California law.” They rely on one opinion, Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1512-1513 (Postal Instant Press) to argue that, while traditional alter ego doctrine allows an individual shareholder to be held liable for claims against a corporation, it does not allow a corporation to be held liable for claims against an individual shareholder. Postal Instant Press rejected the “variant of the alter ego doctrine, called third party or ‘outside’ reverse piercing of the corporate veil,” and held that “a third party creditor may not pierce the corporate veil to reach corporate assets to satisfy a shareholder’s personal liability.” (Id. at p. 1513.)
The opinion in Postal Instant Press includes a thorough analysis of cases from California, federal and other state courts discussing “outside reverse piercing of the corporate veil,” both cases accepting, and others rejecting that theory of alter ego. The Postal Instant Press opinion rejected it as “a radical and problematic change in standard alter ego law.” (Postal Instant Press, supra, 162 Cal.App.4th at p. 1521.) The opinion explains outside reverse piercing of the corporate veil creates unanticipated exposure for innocent investors and secured and unsecured creditors who relied on the impregnability of the corporate form; and that other remedies are available to the creditor of an individual shareholder, such as enforcing the judgment against the shareholder’s assets, including his shares in the corporation. (Id. at p. 1524.)
We find these are sound principles, consonant with Mesler’s directive to look to “the circumstances of each particular case.” (Mesler, supra, 39 Cal.3d at p. 300.) In Postal Instant Press, the corporation at issue had other shareholders, the plaintiff failed to show that innocent creditors would be adequately protected, and the plaintiff admittedly did not pursue other available legal remedies because it was “simply more expedient” to add the corporation as a judgment debtor. (Postal Instant Press, supra, 162 Cal.App.4th at pp. 1524, 1523.) In other words, the equities of the case did not justify disregarding the corporate form.
The facts and governing law in this case are entirely different. The additional judgment debtors are Mr. Praske, as the trustee of three trusts plaintiff created for the sole purpose of holding his assets, and the entities plaintiff transferred into the trusts which comprise the trust assets. Unlike a corporation, a trust is not a legal person which can own property or enter into contracts. Since a trust is not a legal entity, it cannot sue or be sued. A trust is a relationship by which one person holds legal title for the benefit of another person. (Greenspan, supra, 191 Cal.App.4th at p. 521.)
We find neither the holding nor the reasoning of Postal Instant Press govern whether the additional judgment debtors were properly found to be alter egos of plaintiff for the reasons set forth more fully below.
The ownership issue
Additional judgment debtors argue that, because plaintiff transferred his ownership of the entities to the trusts, and he is not the trustee, he has no ownership interest in any of the additional judgment debtors and, ergo, alter ego doctrine cannot apply. They say that defendants repeatedly conceded – by simply describing plaintiff’s transfer of his assets to the entities, and then his transfer of ownership of the entities to the trusts – that plaintiff does not own any of them or their assets, and this “binding judicial admission” is fatal. And so, they think, game over.
We reject this simplistic, form-over-substance notion, and conclude on the evidence in this case that plaintiff had a sufficient ownership interest to satisfy alter ego doctrine.
Ownership in the trust context
Additional judgment debtors correctly point out that the cases uniformly say that one of the “two general requirements” for disregarding the corporate form is “ ‘that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist . . . .’ [Citation.]” (Mesler, supra, 39 Cal.3d at p. 300.) They further point out that one Ninth Circuit case has said that “ownership of stock is an absolute requirement for an alter ego finding.” (SEC v. Hickey (9th Cir. 2003) 322 F.3d 1123, 1129, id. at p. 1130.)
But this case does not involve an individual and a corporation. It involves trusts. There are no stock owners of a trust. It should go without saying that cases are not authority for propositions they have not considered. (And, as many cases have noted, “[b]ecause it is founded on equitable principles, application of the alter ego [doctrine] ‘is not made to depend upon prior decisions involving factual situations which appear to be similar,’ ” and “ ‘ “the conditions under which a corporate entity may be disregarded vary according to the circumstances of each case.” ’ [Citations.]” (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1248.)
Here, it is of course true that, on paper, plaintiff owns nothing. On paper, plaintiff depends, for everything in life (except, perhaps, the $3,000 a month he earns for managing a $40-million portfolio of assets), on the generosity of Mr. Praske. But the law is not so unyielding that it cannot take account of practical realities. Plaintiff transferred his ownership of assets worth tens of millions of dollars to entities that exist for the sole purpose of owning his properties, and then transferred his ownership of those entities to the trusts, and appointed Mr. Praske the trustee. So, Mr. Praske has legal title to these entities in his capacity as trustee. But the evidence demonstrated that Mr. Praske is plaintiff’s “rubber stamp.” Moreover, under general principles of trust law, “trust beneficiaries hold ‘an equitable estate or beneficial interest in’ property held in trust and are ‘ “regarded as the real owner[s] of [that] property.” ’ [Citation.]” (Steinhart v. County of Los Angeles (2010) 47 Cal.4th 1298, 1319; see In re Schwartzkopf (9th Cir. 2010) 626 F.3d 1032, 1039 [under California law, “equitable ownership in a trust is sufficient to meet the ownership requirement for purposes of alter ego liability”].)
Substantial evidence of ownership
Substantial evidence supported the trial court’s alter ego findings. Like the trial court, we do not believe that Mr. Praske has any actual authority to decide what to do with the assets held by the trusts. It is plaintiff who exercises that authority. Plaintiff’s testimony in the Yura litigation showed that he treated the trusts like his own personal piggy banks. The trial court described Mr. Praske as plaintiff’s “rubber stamp.” Extending the piggy bank analogy, we find the record shows Mr. Praske was the rubber plug on the underside of the piggy banks that plaintiff could remove any time he wanted to spill funds into his own hands at will.
Plaintiff plainly said that he could get funds from his trust to buy the property, and then either put the property into the “estate plan” or keep it in his own name. Since Mr. Praske said yes, “like I always do,” to providing funds from the trust to purchase property that plaintiff could keep in his own name, it seems quite clear that plaintiff (who is, Mr. Praske admits, “a potential beneficiary” of the trusts) not only controls the trusts (and the entities owned by the trusts) but also – and certainly in a court of equity – has an ownership interest in trust assets within the contemplation of alter ego doctrine. (See Greenspan, supra, 191 Cal.App.4th at p. 518 [if the trustee is the alter ego of an individual, then the individual “may be considered the owner of the [trust’s] assets for purposes of satisfying the judgment”].) So it is here.
Other alter ego requirements and supporting evidence
Additional judgment debtors also contend that the evidence was insufficient to establish the required unity of interest and ownership. They rely on Misik v. D’Arco (2011) 197 Cal.App.4th 1065 (Misik), where the court listed some of the “many factors to be considered” in determining whether there is sufficient unity of interest and ownership that “the separate personalities of the individual and the corporation no longer exist . . . .” (Id. at p. 1073.) Additional judgment debtors observe that no evidence was offered on most of the factors that Misik lists (such as commingling of funds, failure to maintain records, inadequate capitalization, and so on).
But the question is not what factors were not present, but what circumstances were present to establish the required unity of interest and ownership. As Misik also observes, “[t]his list of factors is not exhaustive”; the enumerated factors “may be considered with others under the particular circumstances of each case”; and no single factor is determinative. (Misik, supra, 197 Cal.App.4th at p. 1073.) Instead, “ ‘ “a court must examine all the circumstances to determine whether to apply the doctrine.” ’ [Citation.]” (Ibid.)
That is just what the trial court did: it examined all the circumstances. Most of the laundry list of factors recited in Misik did not apply to the arrangements plaintiff and Mr. Praske implemented in this case. Others did: the ownership factor already considered, and the use of the trusts and the entities “as a mere shell, instrumentality or conduit for the business of an individual.” (Misik, supra, 197 Cal.App.4th at p. 1073.) We have recited the established facts at length in parts 1 and 2 of the facts, ante, and will not repeat them here. Plainly the evidence was sufficient for the trial court to conclude that “under the particular circumstances” (ibid.) plaintiff and additional judgment debtors were “one and the same.”
Additional judgment debtors complain that defendants did not present evidence specific to any of them, “treated all ten of them as a single unit” and did not prove “any facts specific to any of the individual trusts, LLCs or LPs.” That is because plaintiff and Mr. Praske devised a single enterprise – which they conveniently denominate an “estate plan” – controlled by plaintiff to his own ends, one of which was to place his personal assets beyond the reach of legitimate creditors.
Finally, additional judgment debtors say the other alter ego requirement – that adherence to the fiction of separate existence would “sanction a fraud or promote injustice” (Misik, supra, 197 Cal.App.4th at p. 1073) – is not met either. The facts we have related patently demonstrate otherwise.
Control of the litigation
Some authorities tell us that adding a judgment debtor to a judgment requires both that the additional judgment debtor be an alter ego of the original judgment debtor and “that the new party had controlled the litigation, thereby having had the opportunity to litigate, in order to satisfy due process concerns.” (Triplett v. Farmers Ins. Exchange (1994) 24 Cal.App.4th 1415, 1421 (Triplett).) “[T]he due process concern raised when new parties are named after judgment is to determine not only alter ego status but also whether there was sufficient control over the underlying litigation to permit the opportunity to contest the underlying judgment.” (Ibid.)
Seizing on this principle, additional judgment debtors point to the trial court’s express finding that it was plaintiff who controlled the underlying litigation. They say this finding necessarily means that they did not control the litigation, and therefore cannot be added to the judgment.
While due process considerations are distinct from alter ego findings, under the circumstances here there are no due process considerations that prevent amending the judgment. This is not a case where the interests of the individual defendant in the underlying litigation were different from those of the alter egos. Plaintiff fought tooth and nail to prevent the attorney fee award against him (and, perforce, to prevent any part of the assets he had transferred to his alter egos from being used to satisfy his judgment creditors). As was the case with the real estate developer in Greenspan who transferred his limited liability companies to a trust he managed, plaintiff’s interests were the same as his trusts and the entities they hold; if at any point plaintiff wanted to protect the funds of a particular entity, he could make a transfer to another entity. In reality, plaintiff was the head of a single enterprise and controlled the litigation on behalf of all of them. (Cf. Greenspan, supra, 191 Cal.App.4th at p. 510 [real estate developer who transferred ownership of limited liability companies to a trust he managed viewed all the entities as a single enterprise, so he did not consider their “distinct” interests “because, as far as he was concerned, their interests were identical to his own”].)
The irrevocability claim
Additional judgment debtors contend that, as a matter of law, the trustee may not be added to the judgment because the trusts are irrevocable, and the assets of an irrevocable trust can never be reached by the settlor’s creditors. We do not agree, for multiple reasons, including absence of the trust documents from the record. (See pt. 3.f., post.) But even if the trusts were irrevocable, that principle has no pertinence where the trustee is the alter ego of the settlor of the trust.
First, we do not agree with additional judgment debtors that Laycock v. Hammer (2006) 141 Cal.App.4th 25 (Laycock) is controlling here. In Laycock, the court held that, once the settlor of an irrevocable trust transferred an insurance policy to the trust, “he no longer had any ownership interest in the policy and it was not subject to the claims of his creditors.” (Id. at p. 27.) The court cited Probate Code provisions4 and said “[t]here are no cases that permit the settlor of a trust to make an irrevocable trust revocable by way of conduct after the trust has been established” (id. at p. 30), and “a settlor’s conduct after an irrevocable trust has been established will not alter the nature of such a trust.” (Id. at p. 31.)
Laycock did not involve circumstances where the trustee of the trust was the alter ego of the settlor (and, as additional judgment debtors themselves have pointed out, cases are not authority for points they did not consider). Greenspan, on the other hand, did involve circumstances where the trustee of a trust was the alter ego of the settlor, and the trust in that case was an irrevocable trust, created by the settlor for the benefit of his children. (Greenspan, supra, 191 Cal.App.4th at p. 497.) The court held the plaintiff “properly sought to add . . . the trustee of the . . . Trust, as a judgment debtor” (id. at p. 518), and that if the trustee is the alter ego of an individual who made a transfer into the trust, then the individual “may be considered the owner of the [trust’s] assets for purposes of satisfying the judgment.” (Ibid.; see In re Schwartzkopf, supra, 626 F.3d at p. 1040 [holding that an irrevocable trust (id. at p. 1034) was an individual’s alter ego].)
Second, the record is insufficient to conclude the trusts were irrevocable anyway. As Laycock tells us, California courts considering the issue “have looked to the express terms of the trust instrument in determining whether a trust is revocable or irrevocable.” (Laycock, supra, 141 Cal.App.4th at p. 30.) The trust instruments are not in the record, and that is because plaintiff and Mr. Praske have not produced them. (See part 3.f., post.) This likewise disposes of the assertion that defendants had to prove the trusts were revocable and did not meet that burden. Probate Code section 15400 provides that “[u]nless a trust is expressly made irrevocable by the trust instrument, the trust is revocable by the settlor.” Even if defendants were required to produce proof of revocability (and Greenspan supports the conclusion the issue is irrelevant), it was plaintiff and Mr. Praske who eliminated the possibility of doing so.
The failure to produce trust documents
In a related argument, additional judgment debtors assert that the trial court erroneously found, without evidentiary support, that they “had committed misconduct” by refusing to produce the trust instruments or identify the beneficiaries of the trusts during postjudgment discovery. (We note parenthetically that the references by additional judgment debtors to Mr. Praske’s “misconduct,” “purported misdeeds” and “wrongful” withholding of evidence are strictly their own characterizations, not those of the trial court.) Additional judgment debtors say the alter ego decision “rests entirely” on this finding, and that the trial court was wrong, because Mr. Praske himself never refused, and indeed was never asked, to turn over the disputed documents.
This argument ignores the evidence. It ignores plaintiff’s response to the production requests (objecting on grounds of a constitutional right to privacy as well as attorney-client privilege and attorney work product). It ignores the evidence that Mr. Praske “always” said yes to plaintiff. It ignores the evidence that plaintiff’s counsel represented Mr. Praske at his third party debtor examination. It ignores the evidence that Mr. Praske followed plaintiff’s counsel’s instructions not to answer questions about the operations of the entities to which plaintiff had transferred his properties (except to say plaintiff did not now own them). And it ignores the fact that at the hearing, Mr. Praske’s own counsel, after first saying that Mr. Praske intended “to completely and fully cooperate with the requests for the documentation,” said, “I know in my mind what information they need,” and that he would only provide information either agreed upon between counsel or “whatever this court would determine to be relevant.” (As the court observed, this was “a contingent offer” and “of limited scope.”)
In other words, we find apt the trial court’s description of plaintiff and Mr. Praske as being “joined at the hip,” whose “positions taken were coordinated positions.” We find no error in the trial court’s inference that Mr. Praske had effectively “refused” to produce the trust documents, with the result that the record was devoid of evidentiary support for the claims counsel made – belatedly and with no excuse – at the hearing.
Additional judgment debtors further contend their due process rights were violated because they “had no notice that they would need to rebut a claim that Praske had withheld documents,” having “only learned of the accusation at the hearing,” and “[a] ruling that is entered without notice to the affected parties is void.” (In a similar vein, they claim the court’s “refusal to let [them] produce the trust documents before penalizing them” was “reversible per se” and violated their constitutional right to a fair hearing.)
These are baseless contentions. Additional judgment debtors are the ones who generated the issue in the first place, by raising last-minute claims about the trusts that they failed to raise in their opposition papers. The only reason they “had no notice” was that they gave none. (Defendants’ counsel pointed out at the hearing that Mr. Praske testified these were offshore trusts, never filed with any United States court, with “independent confidentiality provisions” and “had we [(the defendants)] any idea this would be an argument they would raise we would have pulled excerpts from the debtor examination to address that.”) These claimed “structural” errors, purportedly “reversible per se,” are neither. They are arguably as far from due process violations as it is possible to get.
Next, additional judgment debtors characterize the court’s ruling as “an evidentiary and/or issue sanction for discovery abuses,” and then tell us all the reasons why such a discovery sanction is improper. The short answer to these claims is that the court did not impose an evidentiary sanction. The court refused to continue the hearing, concluding it would be fundamentally unfair to do so in light of the history of the litigation. And the trial court did not “presume” that plaintiff and additional judgment debtors were “one and the same”; the court found they were “one and the same” based on the evidence we have described at length. The court’s refusal to continue the hearing was within the trial court’s sound discretion, and we see no basis upon which to find any error.