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Motions to Amend and Commercial Collections

While most parties and their attorneys are usually confident they have sued the right party, and can enforce the judgment from that party, sometimes it can be difficult to determine which corporate entity is the correct defendant. Many companies are structured with various subsidiaries, so finding the actual company with the ability to pay can feel like a "shell game."

Imagine suing a party, winning, and then preparing to collect the judgment. Imagine then that the defendant does not pay, claiming it has no assets or it has no officers. More time passes, and the defendant still does not pay. The attorney may take a "debtor's examination," which is similar to a deposition in which the creditor, the prevailing party in court, asks questions of the debtor, the losing party that now owes the judgment, to determine why the defendant does not seem to be the right party. A Subpoena Duces Tecum (meaning 'subpoena for production of evidence') is a court order requiring the person subpoenaed to produce books, documents or other records under his or her control at a specified time/place in a court hearing or a deposition.

If the attorney determines that a related entity or "alter ego" that was not named in the lawsuit is actually the one controlling the litigation and has the "deep pockets" (money and assets), the attorney does not need to retry the entire case against the additional defendant.

Instead, the attorney can file a "motion to amend judgment" under Code of Civil Procedure section 187. This is a general statute that gives a jurisdiction authority to carry out its duties, and this section allows courts to change a judgment for good cause.

Experts explain that "alter ego" is a legal doctrine courts use to circumvent the corporate status of a group of shareholders, directors, or officers of a corporation. Ordinarily, individuals incorporate so they are sheltered from liability. The corporation, but not those individuals personally, may be sued. However the alter ego doctrine allows those individuals to be held personally liable for their actions when they have acted fraudulently or unfairly.

A corporation is the alter ego of its shareholders, directors, or officers when individuals use the corporation to carry out personal business and then seek immunity from liability. A parent corporation may also be the alter ego of a related entity. This happens when the parent corporation controls and directs a subsidiary company's activities so the parent corporation will have liability for the subsidiary's wrongful acts.

It is incredibly convenient and efficient to allow a plaintiff to add a defendant and impose liability on the new defendant without having another trial. However, the showing for such a motion is quite high. The plaintiff must show the new party is the alter ego of the old party, and that the new party controlled the litigation. Two recent cases illustrate what must be shown to successfully amend a judgment under section 187.

In Misik v. D'Arco (2011), the appellate court held that a trial court can amend a judgment via motion to add a judgment debtor who is found to be an alter ego of the business defendant under Code of Civil Procedure section 187. In Misik, the plaintiff filed a motion to amend the judgment to add a corporate officer, D'Arco, as a co-judgment debtor. The plaintiff brought a breach of contract and a fraud claim against D'Arco and his company after making a loan to D'Arco's purportedly fraudulent company. The plaintiff won a judgment against the company only. The plaintiff had trouble collecting against the shell company (D'Arco's company had no assets). The plaintiff then filed a motion to amend the judgment to add D'Arco under the alter ego doctrine. The plaintiff had to prove three factual questions:

  1. The individual and the business are so close in their interest and ownership that their separate personalities no longer exist.
  2. Treating the business as separate will allow a fraud, inequitable result, or promote injustice.
  3. The alter ego had control of the litigation and was therefore represented during the trial.

In Misik, D'Arco was an alter ego because he was the only employee and officer of his business, he made all business decisions, paid some company bills with his personal checks, and participated in and controlled the litigation.

In a more recent case, Toho-Towa Co, Ltd. v. Morgan Creek Productions (2013), plaintiff's attorney successfully amended the judgment to add the proper party to improve the chances of collecting on a $5.7 million judgment.

In that case, the plaintiff obtained Japanese distribution rights to a film, and entered into a contract with a Delaware corporation, Morgan Creek Productions ("MCP"). After the parties agreed, MCP's attorney told plaintiff that Morgan Creek International B.V., a Netherlands company, rather than the U.S.-based Morgan Creek Productions, would grant the distribution rights, while a third entity based in Bermuda, Morgan Creek International Ltd., would guarantee Morgan Creek International B.V.'s obligations to plaintiff.

Plaintiff sued and won a judgment against both international companies, but neither was paying. Plaintiff moved to add MCP to the judgment.

The appellate court found that even though there were separate corporations, the entities operated in an integrated way. MCP dominated the finances, policies and practices of the other two entities. The same person owned all three entities, and the work in those companies was done by employees of MCP. Accordingly, MCP was the alter ego of the other two and could be brought into the judgment and held responsible for it.

For your complex commercial collections matters, please contact our law firm today.

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