Candice Etz et al vs Barbara Kellner
Case No: 16CV03492
Hearing Date: Fri Jun 07, 2019 9:30

Nature of Proceedings: Motion: Bifurcation

TENTATIVE RULING:

For the reasons set forth herein, the motion of plaintiff Lisa Sands to bifurcate the issue of alter ego liability from the remaining issues of this action is denied.

Background:

On August 10, 2016, plaintiffs Candice Etz, Jennifer Freed, Dorenda Freedman, David Millikin, and Jalyn Wang (collectively, the “Etz plaintiffs”) filed their original complaint in this action against defendants Barbara Kellner, Welterlen-Kellner, Inc., and Paw Asset Management, LLC. (Welterlen-Kellner, Inc., and Paw Asset Management, LLC, are referred to herein as the “entity defendants.”)

On October 13, 2016, plaintiff Lisa Sands filed her original complaint in case number 16CV04593 against the same defendants.

On October 17, 2016, the Etz plaintiffs filed their first amended complaint in this action.

On January 30, 2017, Sands filed her first amended complaint in case number 16CV04593.

On May 12, 2017, the court granted the motion of Sands to consolidate the two actions for discovery and trial.

On March 7, 2018, the Etz plaintiffs requested, and the court ordered, dismissal of their first amended complaint. The effect of this dismissal was to leave only the complaint of Sands for disposition. (Note: Because there is no further purpose to consolidation and to avoid confusing the two actions, it may be appropriate to revoke the consolidation and restore this case to its original case caption and case number. This is a matter for case management outside the context of the instant motion.)

On June 29, 2018, Sands filed her second amended complaint (SAC). The SAC asserts nine causes of action: (1) conversion; (2) fraud; (3) constructive fraud; (4) breach of fiduciary duty; (5) breach of contract; (6) violation of Corporations Code section 25401; (7) unjust enrichment; (8) negligence; and, (9) accounting. The SAC alleges that defendant Kellner is the owner of the entity defendants. (SAC, ¶¶ 2-4.) The SAC also alleges that Kellner is the alter ego of the entity defendants. (SAC, ¶ 48.) All causes of action, except the seventh cause of action, are asserted against all defendants; the seventh cause of action is asserted against Kellner as an individual and as successor in interest to decedent Paul Welterlen. (SAC, p. 15.)

On September 18, 2018, Kellner filed her answer to the SAC, admitting and denying the allegations thereof, and setting forth 21 affirmative defenses.

On October 18, 2018, Sands filed proof of service by publication on the entity defendants.

On November 26, 2018, Sands requested, and the court entered, default against Kellner as successor in interest to the entity defendants.

On December 6, 2018, Sands requested a court judgment by default against Kellner as successor in interest to the entity defendants.

On January 11, 2019, Kellner filed an objection to the request for court judgment. Also on January 11, the court entered its order, on the stipulation of the parties, vacating the entry of default against Kellner as successor in interest to the entity defendants.

On January 17, 2019, Sands requested, and the court entered, default against the entity defendants only.

On April 18, 2019, the court entered its judgment by default against the entity defendants as to all causes of action other than the seventh, awarding compensatory damages in the amount of $200,000, pre-judgment interest in the amount of $110,301.33, and punitive damages in the amount of $400,000.

On May 6, 2019, Sands filed this motion to order bifurcation of the issue of alter-ego liability in order to pierce the corporate veils of the entity defendants “and order that the Judgment is enforceable against Barbara Kellner.” (Motion, p. 3.)

The motion is opposed by Kellner.

Analysis:

The apparent premise of this motion to bifurcate is that if the court first resolves the alter ego issues—that is, determines that Kellner is the alter ego of the entity defendants—then the default judgment against the entity defendants would be enforceable against Kellner personally and so further proceedings would be unnecessary. As explained below, both parties’ arguments regarding the effect of the default judgment are overstated and the underlying premise is incorrect.

“ ‘Under the alter ego doctrine, … when the corporate form is used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation’s acts to be those of the persons … actually controlling the corporation, in most instances the equitable owners. [Citations.] The alter ego doctrine prevents individuals … from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. [Citation.]’ [Citation.]” (Wolf Metals Inc. v. Rand Pacific Sales, Inc. (2016) 4 Cal.App.5th 698, 703.)

As argued by Kellner and conceded by Sands, the default judgment cannot be amended to add Kellner as an alter-ego defendant to that default judgment. “In the case of default judgments, the application of the alter ego doctrine is subject to a limitation arising from considerations of due process. Under Code of Civil Procedure section 187, ‘to amend a judgment to add a defendant, thereby imposing liability on the new defendant without trial, requires both (1) that the new party be the alter ego of the old party and (2) that the new party … controlled the litigation, thereby having had the opportunity to litigate, in order to satisfy due process concerns. The due process considerations are in addition to, not in lieu of, the threshold alter ego issues.’ [Citation.]” (Wolf Metals Inc. v. Rand Pacific Sales, Inc., supra, 4 Cal.App.5th at p. 703.) Thus, the California Supreme Court held in Motores De Mexicali, S. A. v. Superior Court (1958) 51 Cal.2d 172, 176 (Motores), that it was a violation of the defendants’ due process rights to amend a default judgment to add alter-ego defendants “without allowing them to litigate any questions beyond their relation to the allegedly alter ego corporation ….” The Motores court so held notwithstanding the argument that the alter ego defendants could and should have intervened in the action brought solely against the corporation. (Ibid.)

The “opportunity to litigate” element of the alter ego analysis is closely related to the rule that defaults are not binding on co-defendants. “ ‘ “It is an established principle of law that admissions implied from the default of one defendant ordinarily are not binding upon a codefendant who, by answering, expressly denies and places in issue the truth of the allegations thus admitted by the absent party.” ’ ” [Citations] [¶] It makes no logical difference whether the nondefaulting codefendant was originally named as a defendant or joined the action … by subsequent intervention. A party’s default does not bind nondefaulting codefendants, even when the basis for the action against the codefendants is vicarious liability arising from the acts of the defaulting defendant. Thus, [for example,] an insurer intervening in an action to pursue its own interests after its insured has defaulted is not required to move to vacate the insured’s default as to itself; the insured’s default simply has no effect on the insurer.” (Western Heritage Ins. Co. v. Superior Court (2011) 199 Cal.App.4th 1196, 1211, fns. omitted.)

A corollary to this rule ordinarily precludes default judgments where joint liability is asserted against multiple defendants and a non-defaulting defendant’s defense may defeat liability as to all defendants: “The rule is definitely established that where there are two or more defendants and the liability of one is dependent upon that of the other the default of one of them does not preclude his having the benefit of his codefendants establishing, after a contested hearing, the non-existence of the controlling fact; in such case the defaulting defendant is entitled to have judgment in his favor along with the successful contesting defendant.” (Adams Manufacturing & Engineering Co. v. Coast Centerless Grinding Co. (1960) 184 Cal.App.2d 649, 655.)

Putting these principles together, Sands cannot accomplish her stated purpose of applying the default judgment to Kellner by a determination that Kellner is the alter ego of the entity defendants. Sands argues that Kellner could have answered on behalf of the entity defendants and, because she did not, Kellner should be bound to the default judgment. Initially, the court notes that Kellner has submitted no evidence in support of this motion to support the factual premise that Kellner was able to respond on behalf of these entities. (Note: Apart from a lack of evidence of authority, other filings with the court have suggested the entity defendants lack corporate capacity so that Kellner could not legally respond on behalf of these entities. (See, e.g., Rev. & Tax. Code, §§ 23301, 19719, subd. (a).)) Nonetheless, assuming Kellner was able to respond on behalf of the entity defendants, Kellner was under no obligation to do so. As the court explained in Motores, Kellner’s failure to act on behalf of the entity defendants does not affect Kellner’s individual due process rights to defend the merits to the extent that Sands seeks to hold Kellner individually liable for the liability of the entity defendants. As the above authorities demonstrate, Kellner is not bound to any default determination against the entity defendants upon the mere finding of alter ego. Kellner must be provided the opportunity to defend against the merits of those claims.

The present situation exists because the court permitted the default judgment prior to resolution of the claims against Kellner (including the alter ego claims) by an adversarial proceeding. In retrospect, this was improvident. The decision to allow such a default judgment was facilitated by the lack of opposition by Kellner to a judgment limited to the entity defendants. On the one hand, Kellner could reasonably take the position that a default judgment against the entity defendants is irrelevant to her because, as discussed above, she would not be bound by any such default judgment and because she asserts no stake in the litigation as against the entity defendants. On the other hand, Kellner argues in opposition here that the fact of the default judgment against the entity defendant precludes any further claim of alter ego against her. This argument is based upon the concept that no claims remain against the entity defendants as a result of the judgment and so there is no alter ego claim left to litigate.

Kellner’s argument appears as an argument of merger, namely, that Sands’s claims against the entity defendants merged into the default judgment and now cannot be asserted against Kellner personally. “The doctrine of merger is an aspect of res judicata. [Citation.] ‘Under that aspect a claim presented and reduced to judgment merges with the judgment and is thereby superseded. [Citation.] The claimant’s remedy thereafter is to enforce the judgment; he may not reassert the claim.’ [Citation.]” (Diamond Heights Village Assn., Inc. v. Financial Freedom Senior Funding Corp. (2011) 196 Cal.App.4th 290, 301.)

The flaw in this argument is that alter ego is not a “claim” that merges into the judgment. “A claim against a defendant, based on the alter ego theory, is not itself a claim for substantive relief, e.g., breach of contract or to set aside a fraudulent conveyance, but rather, procedural, i.e., to disregard the corporate entity as a distinct defendant and to hold the alter ego individuals liable on the obligations of the corporation where the corporate form is being used by the individuals to escape personal liability, sanction a fraud, or promote injustice.” (Hennessey’s Tavern, Inc. v. American Air Filter Co. (1988) 204 Cal.App.3d 1351, 1359; see also Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 517 [alter ego issues frequently arise only after attempting to enforce the judgment].) Consequently, the fact that a default judgment was entered as to the entity defendants does not preclude Sands from asserting alter ego liability as part of the contested issues asserted against Kellner.

In summary, as between Sands and Kellner, the default judgment against the entity defendants is essentially a distraction. The default judgment may not be enforced against Kellner by the expedient of merely finding true the alter ego allegations without an adversarial resolution of the underlying liability against the entity defendants. At the same time, the default judgment does not preclude Sands from pursuing liability of Kellner as the alter ego of the entity defendants by litigating all of the issues in an adversarial proceeding. In both cases, the default judgment is irrelevant to the disposition of the merits as between Sands and Kellner.

“The court may, when the convenience of witnesses, the ends of justice, or the economy and efficiency of handling the litigation would be promoted thereby, on motion of a party, after notice and hearing, make an order, no later than the close of pretrial conference in cases in which such pretrial conference is to be held, or, in other cases, no later than 30 days before the trial date, that the trial of any issue or any part thereof shall precede the trial of any other issue or any part thereof in the case, except for special defenses which may be tried first pursuant to Sections 597 and 597.5.” (Code Civ. Proc., § 598.)

As this motion is presented, Sands argues that judicial economy exists in trying the alter ego issues first because Sands asserts that resolution of the alter ego issues would thereby resolve the claims against Kellner. As the above discussion demonstrates, resolution of the alter ego issues would not resolve the claims against Kellner. It may or may not be true that, when all issues are considered in the case between Sands and Kellner, the alter ego issues may be more efficiently tried separately from the remaining issues (by being tried either first or last). However, there is no showing in this motion of judicial economy by bifurcation apart from the legal argument, rejected by the court, that resolution of the alter ego issues would be dispositive. The motion to bifurcate will therefore be denied without prejudice.