Butler America Inc vs Aviation Finance Services LLC
Case No: 1440003
Hearing Date: Fri May 24, 2019 9:30

Nature of Proceedings: Motion Amend Judgment

TENTATIVE RULING: The motion to amend the judgment against Aviation Finance Services, LLC to add Aviation Assurance Company, LLC, ComAv, LLC, ComAv Asset Management, LLC (fka Pacific Aviation Group, LLC), ComAv Technical Services, LLC (fka Southern California Aviation, LLC), and Craig Garrick as judgment debtors based on the alter ego doctrine is granted.

BACKGROUND:

Judgment creditor Butler America, LLC (fka Butler America, Inc.) (“Butler”) provides personnel services to engineering, technology, aeronautical companies. Butler supplies the personnel as temporary employees, pays their wages, and then invoices the client for the cost of the services. Judgment debtor Aviation Finance Services, LLC (“AFS”) purchases aircraft engines and other spare parts and then leases those parts to aircraft owners. Proposed judgment debtor ComAv Asset Management, LLC (“CAM”) (fka Pacific Aviation Group, LLC) manages the sales of aircraft parts on behalf of third-party owners, usually on a consignment basis. Proposed judgment debtor ComAv Technical Services, LLC (“CTS”) (fka Southern California Aviation, LLC) provides maintenance and repairs for aircraft and aircraft components. Proposed judgment debtor ComAv, LLC (“ComAv”) is the holding company for CAM and CTS. Proposed judgment debtor Aviation Assurance Company, LLC (“AAC”) is the holding company for AFS and the former holding company for the predecessors to CAM and CTS. Proposed judgment debtor Craig Garrick (“Garrick”) is the Chief Executive Officer of ComAv, CAM, and CTS, and the President and Manager of AAC.

Starting in early 2012, Butler began providing staffing services to AFS pursuant to a written services agreement. Butler supplied AFS with employment personnel and then invoiced AFS for the employees’ salaries and related expenses. Butler provided staffing services to AFS for approximately 18 months, until June of 2013, but almost immediately the invoice balances began to accumulate and AFS ultimately defaulted on its payments, leaving an outstanding balance of approximately $895,000.00. Butler and AFS met and attempted to resolve the outstanding debt, but were unable to reach a resolution and on February 13, 2014, Butler filed its complaint against AFS for breach of contract and open book account. On June 12, 2014, Butler and AFS agreed to a settlement of the action and signed a stipulated settlement agreement and judgment that called for AFS to pay the entire outstanding balance, plus interest, with a minimum payment of $10,000.00 per month. AFS made ten payments of $10,000.00 for ten consecutive months, but then defaulted on the settlement agreement. On May 6, 2015, Butler filed the stipulated judgment with the court.

Butler now seeks to amend the judgment against AFS by adding AAC, ComAv, CAM, CST, and Garrick as judgment debtors. Butler contends that the proposed judgment debtors are the alter egos of AFS and are liable for the debt. The proposed judgment debtors oppose the motion.

ANALYSIS:

Code of Civil Procedure Section 187 grants to every court the power to use “all the means necessary” to carry its jurisdiction into effect. Under section 187, the court has the authority to amend a judgment to impose liability on the alter ego of a judgment debtor even though the alter ego was not a party to the action. Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39, 44; see also, Toho-Towa Company, Ltd. v. Morgan Creek Productions, Inc. (2013) 217 Cal.App.4th 1096, 1106 (“The authority of a court to amend a judgment to add a nonparty alter ego as a judgment debtor has long been recognized.”). The alter ego doctrine is an equitable procedure and is based on the theory that the court is not amending the judgment to add a new defendant, but is merely inserting the correct name of the real defendant and judgment debtor. Mirabito v. San Francisco Dairy Company (1935) 8 Cal.App.2d 54, 57.

Two requirements must be met to invoke the alter ego doctrine. First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and shareholder do not really exist. Sonora Diamond Corporation v. Superior Court (2000) 83 Cal.App.4th 523, 538. Second, it must be shown that an inequitable result will follow if the acts in question are treated as those of the corporation alone. Ibid. Among the factors to be considered in applying the alter ego doctrine are the commingling of funds and other assets of the two entities, the holding out of one entity as being liable for the debts of the other, identical equitable ownership in the two entities, and use of one entity as a mere shell or conduit for the affairs of the other. Roman Catholic Archbishop v. Superior Court (1971) 15 Cal.App.3d 405, 406. Other factors include inadequate capitalization, lack of segregation of corporate records, and identical directors and officers. Tomaselli v. Transamerica Ins. Company (1994) 25 Cal.App.4th 1269, 1285. No one factor governs as the courts look to all of the circumstances to determine whether the doctrine should be applied. Talbot v. Fresno-Pacific Corporation (1960) 181 Cal.App.2d 425, 432.

The alter ego doctrine was successfully invoked in Wells Fargo Bank, N.A. v. Weinberg (2014) 227 Cal.App.4th 1. There, plaintiff bank obtained a judgment for $57,075.51 against a corporation after the company failed to repay its business line of credit. The bank later learned that the owner of the corporation was the corporation’s alter ego and had drained the assets of the company before dissolving it. On discovering this, the bank filed a motion to add the owner as a judgment debtor. The trial court granted the motion and the court of appeal affirmed, holding that there was such a unity of interest between the corporation and its owner that to treat them as separate would be unfair to the bank. Id., at 9.

In this case, Butler seeks to amend its judgment against AFS by adding AAC, ComAv, CAM, CST, and Garrick as judgment debtors pursuant to the alter ego doctrine. Butler contends that AFS is not a legitimate company, but a mere shell for its holding company, AAC, the related companies, CAM and CST, their holding company, ComAv, and the equitable owner of all of these companies, Garrick, and that to treat AFS as a separate entity would be unfair to Butler. Butler alleges that AFS had no actual business operations from 2012-2014, during the time that it contracted with Butler for staffing services, that AAC funded all of AFS’s payments to Butler under the services agreement, that AAC funded AFS’s defense of the underling breach of contract action, that AFS induced Butler to settle the litigation by concealing that it had no real operations or income, that AAC funded AFS’s settlement payments to Butler by depositing money into AFS’s checking account, and that AAC subsequently halted the settlement payments for its own economic reasons.

The underlying settlement agreement required AFS to pay Butler $886,578.40, plus 5% interest per annum, on a monthly installment plan. The agreement provided:

“Each month, a payment shall be made which is equal to the greater of Ten Thousand Dollars ($10,000.00) per month or fifty percent (50%) of the monthly revenue AFS receives from its lease management responsibilities for Scaled Composites, LLC of up to eight PW 4056 jet engines. The first payment shall be made on June 1, 2014, and continuing for 48 months until May 1, 2018, when the entire unpaid balance, including accrued interest, will be due and payable.”

(Olson Dec., ¶14, Ex. B, Section 2.a.)

AFS made ten installment payments of $10,000.00 to Butler for a total payment of $100,000.00, but then defaulted on the settlement agreement in April 2015. (Olson Dec., ¶¶ 15, 17, Ex. D.) Butler thereafter filed the stipulation for entry of judgment with the court and on May 6, 2015, the court entered the stipulation as a judgment. (Olson Dec., ¶19, Ex. E.) The judgment remains unsatisfied and AFS currently owes the sum of $974,622.87, including accrued interest. (Olson Dec., ¶21.)

AFS was founded in 2006 with the primary purpose of buying, selling, and leasing aircraft, engines, and spare parts. (Garrick Dec., ¶13.) AAC is the current holding company and majority owner of AFS and the former holding company for Pacific Aviation Group, LLC, the predecessor to CAM, and for Southern California Aviation, LLC, the predecessor to CTS. (Garrick Dec., ¶¶ 11, 13.) CAM was originally formed in 1999 and manages the sales of aircraft parts on behalf of third-party owners, usually on a consignment basis. (Garrick Dec., ¶9.) CTS was likewise formed in 1999 and is a FAA licensed aircraft maintenance and repair facility. (Garrick Dec., ¶7.) ComAv is the holding company for CAM and CTS. (Garrick Dec., ¶5.) Garrick is the controlling member and Chief Executive Officer of AFS, ComAv, CAM, and CTS, and the President and Manager of AAC. (Garrick Dec., ¶2.)

In its motion, Butler contends that AFS is a mere shell entity and that its separateness as a company should be ignored because (1) it conducted no meaningful business operations during the relevant time period from 2012-2014, (2) it was severely undercapitalized, (3) it had no corporate assets, and (4) it only served as a conduit through which AAC and its affiliates funneled money to Butler. In post-judgment discovery, AFS testified that its role was to provide capital financing for the acquisition and leasing of aircraft assets, yet it was able to identify only one leasing transaction, with Silver Sky Aviation, that it entered into from 2007-2014. (Manasserian Dec., ¶14.h., Ex. I, pp. 21; ¶48.g., Ex. M, pp. 42-43, 46-47, 52, 58-63, 92-94.) AFS’s checking account statements for its only bank account from 2013-2015 reflect only nominal month-end balances. (Chora Dec., ¶9.a., Ex. A, pp. 1-53.) Moreover, all of AFS’s payments to Butler under the staffing services agreement were funded by AAC, and after AFS and Butler executed the settlement agreement, all ten of AFS’s $10,000.00 settlement payments to Butler, from June 2014, through March 2015, were funded by AAC. (Chora Dec., ¶9.a., Ex. A, pp. 1-53; Manasserian Dec., ¶¶ 23-26, Ex. D, pp. 3-12, Exs. E, J, p. 102.)

AAC claims that each of these transfers was meant to be a “loan,” which AFS was to repay, though AFS never actually repaid any of the funds because it ceased operations in 2015. (Manasserian Dec., ¶27, Ex. J, pp. 60-61, 73-74, 77-79, 82-83; Garrick Dec., ¶50.) However, AAC has admitted that it had no written agreement with AFS for repayment of the loans. (Manasserian Dec., ¶29, Ex. J, pp. 74, 77-79, 82-83.) AAC has further admitted that it cannot identify any of the terms of the purported loans. (Manasserian Dec., ¶30, Ex. J, pp. 74, 77-79.) Finally, AAC has admitted that it occasionally commingled its assets with those of AFS:

“This is the best evidence [of transfers] you got. Wells Fargo taking $19,000 out the AAC account and putting it in AFS. Best evidence you have.”

(Manasserian Dec., ¶31, Ex. J, p. 78.)

Undercapitalization and commingling of assets are classic alter ego factors. In Automotriz Del Golfo De California S.A. De C.V. v. Resnick (1957) 47 Cal.2d 792, 797, the California Supreme Court stated:

“If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of the law that shareholders should in good faith put at the risk of the business unencumbered capital reasonably adequate for its prospective liabilities. If the capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege.”

Several other factors support application of the alter ego doctrine in this case. First, there is a unity of interest and ownership between the companies. AAC is the sole owner of AFS. Garrick claims that AAC only owns 94% of AFS and a group of 17 individuals own 6% (Garrick Dec., ¶13), but this assertion is contradicted by AFS’s Operating Agreement, which states that AAC owns 100% of AFS. (Manasserian Dec., ¶12.f., Ex. I, pp. 3, 16.) Further, before there can be any change in ownership, AFS must amend its Operating Agreement and Garrick has testified that AFS never amended the agreement. (Manasserian Dec., ¶48.a., Ex. M, p. 14.) Second, there is a unity of officers and directors. Specifically, Garrick is the equitable owner, Chief Executive Officer, Manager, and/or President of AAC, AFS, CAM, CTS, and ComAv. (Garrick Dec., ¶¶ 2, 5, 6, 7, 9, 11.) Third, AFS shared Butler-staffed employees with AAC, CAM (Pacific Aviation Group, LLC), and other Garrick-controlled entities, including Sandra Reese, Corey Cloward, Donald Culbertson, Kimberly Snyder, Eldon Thomas, and Scott Tucker. (Manasserian Dec., ¶55.c., Ex. M, pp. 135-138, 144, 148-151.)

The proposed judgment debtors argue that the release Butler signed on June 12, 2014 as part of the settlement agreement bars any claims Butler now seeks to assert against any of AFS’s related companies, officers, or directors under an alter ego theory. The release provides:

“BUTLER and AFS hereby fully and forever release and discharge each other and their parents, subsidiaries, and all their respective heirs, attorneys, agents, representatives, affiliates, predecessors, successors, directors, members, managers, officers, and/or employees from any and all claims, suits, causes of action, obligations, damages, liabilities, costs, fees and expenses, of whatever kind or nature, in law, equity or otherwise, known or unknown, contingent or non-contingent, which in any manner arise from, relate to, or could have been asserted in the Action, and any other claim that exists between BUTLER and AFS, whether related to the Action or completely unrelated to the Action.”

(Garrick Dec., ¶39, Ex. 15, pp. 2-3.)

AFS, however, materially breached the settlement agreement by defaulting on its payments, effectively extinguishing both the settlement and the release. Under the merger doctrine, once a judgment is entered, the judgment defines and establishes the rights and obligations between the parties. “[W]hen a final judgment is entered, all causes of action arising from the same obligation are merged into the judgment and all alternative remedies to enforce that obligation [are] extinguished by the judgment granting those remedies. . . . In other words, the judgment extinguishes the contractual rights and remedies previously extant, substituting in their place only such rights as attach to [the] judgment.” Diamond Heights Village Association, Inc. v. Financial Freedom Senior Funding Corporation (2011) 196 Cal.App.4th 290, 302, citing O’Neil v. General Security Corporation (1992) 4 Cal.App.4th 587, 602. Here, any contractual rights and obligations under the settlement agreement and release were extinguished by the judgment entered on May 6, 2015. The judgment, and the judgment alone, defines the relationship between the parties.

The proposed judgment debtors repeatedly stress that Butler was fully aware during the settlement negotiations that ALS’s sole source of income for repaying its outstanding debt would be monies derived from its engine leasing contracts with a company called Scaled Composites, LLC. AFS proposed allocating 50% of the Scaled Composites income (approximately $75,000.00 per month) to Butler over time in repayment of its debt. (Garrick Dec., ¶27, Ex. 8.) During the negotiations, AFS also provided Butler with all of its financials, including checking account statements, balance sheets, income statements, and tax returns, which clearly showed that AFS had significant liabilities and only limited assets. (Garrick Dec., ¶30, Ex. 10.) Unfortunately, following the settlement, Scaled Composites cancelled the engine leasing agreements, cutting off AFS’s anticipated income. (Garrick Dec., ¶45, Ex. 18.)

Butler claims, however, that AFS misrepresented and concealed material facts during the settlement discussions regarding its contract with Scaled Composites. In particular, AFS failed to disclose that AFS was not a party to the engine leasing agreement, which was between Scaled Composites and CAM (Pacific Aviation Group, LLC). (Olson Dec., ¶9.) AFS further failed to disclose that AFS had no written agreement with CAM as to what AFS’s role would be or what income AFS would receive under the Scaled Composite contract. (Olson Dec., ¶10.) AFS further failed to disclose that CAM had not made any income from the Scaled Composite contract from July 2013, when CAM’s predecessor executed the contract, through June 2014, when AFS induced Butler to execute the settlement agreement. (Olson Dec., ¶13.) Knowledge of AFS’s purported finances, therefore, does not preclude a finding of alter ego. AFS’s pledge of the Scaled Composites monies was essentially illusory.

Based on the foregoing, the court will grant Butler’s motion to amend its judgment against AFS to add AAC, ComAv, CAM, CST, and Garrick as judgment debtors. The two requirements for application of the alter ego doctrine have been met. First, the court finds that there is such a unity of interest and ownership between AFS and the proposed judgment debtors that their separate personalities do not in fact exist. Second, the court finds that if AFS’s outstanding debt to Butler is treated as that of AFS alone, an inequitable result would follow.