A client enters into a contract with another business for goods or services and it seems straight forward enough. But alas, as sometimes happens, the deal goes sideways and payment is not made. The client makes the business decision to file suit for damages. They hire competent counsel to aggressively litigate the case and win on summary judgment. Judgment is entered and the client, while thrilled to win has expended considerable sums to get judgment entered, and expects to be paid-now. Tick tock; no payment yet. The time to file an appeal passes. Tick tock; still no payment.
The attorney takes the debtor examination of a person not persona most knowledgeable for the business debtor. During the examination testimony reveals that the judgment debtor named in the judgment is actually interrelated to another businesses entity that was not named or sued in the original lawsuit and of course, that other entity is the one with the deep pocket (i.e., money and assets). What can you do?
If the client happened to retain competent collection counsel, that attorney would immediately recommend filing a motion under California Code of Civil Procedure (“CCP”) Section 187, to amend the judgment to add the other business entity as an alter ego of the judgment debtor. While these motions are not easy to win, with a great collection attorney and the recent holding in Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc. (2013) 217 Cal.App.4th 1096, the client should be on solid ground.
In Toho–Towa, the plaintiff obtained Japanese distribution rights to the motion picture entitled The Good Shepherd.[1] It entered into a contract with a Morgan Creek Productions (“MCP”) related entity formed in the Netherlands whose obligations would be guaranteed by yet a second MCP-related entity. Plaintiff obtained a judgment against the two contracting entities that not surprisingly didn’t pay the $5.7 million dollar judgment. The attorney then took various judgment debtor examinations including an exam of the former chief financial officer of MCP. Counsel for the plaintiff then moved to add MCP as a party to the judgment pursuant to CCP Section 187. The trial court granted the motion, which was reaffirmed by the Court of Appeals.
The ability to amend a judgment to add a defendant, thereby imposing liability on the new defendant without having another trial requires showing that the new party is the alter ego of the old party, and that the new party had controlled the litigation, thereby having had an opportunity to litigate. The second prong is often the hard one to prove. The Court of Appeals found that the motion was supported by substantial evidence that Morgan Creek Productions formed a “single business enterprise” with the foreign entities. The Appellate Court noted that even though the three entities were separate corporations, they were operated with integrated resources in pursuit of a single business purpose, and that MCP dominated the finances, policies and practices of the other two entities. The Second District also noted that all three of the entities were owned by the same person and that much of the work was done by employees of MCP. While the Toho–Towa case is a bit quirky it does provides a great blue print for what types of questions need to be asked during the debtor examination to meet the two prong test under CCP Section 187.
Have you even heard of this movie? A classic example of how a deal can go sideways.