Case Name: Investment Grade Loan v. Brugnara
Case No.: 20041CV020232

The motion by Suerte Holdings, LLC, as assignee of the Judgment Creditor Investment Grade Loans, Inc. (“IGL”) to add a corporate judgment debtor based on the theory that the corporation was the alter ego of individual judgment debtors is DENIED, for the reasons expressed below.

Amending a judgment to add alter ego judgment debtors “is an equitable procedure 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.” (NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778, citing Code Civ. Proc., § 187.) Plaintiff has presented no facts to support an argument that Brugnara VI is the true defendant here, only that it allegedly holds property belonging to the judgment debtors. Nothing establishes that Brugnara VI was a true or proper defendant on the claims based on the note and guaranties.

The Court may not add a judgment debtor to a judgment entered by default, when that party was not originally named or served, had no notice of individual claims against it, and did not have an opportunity to respond to the original complaint before judgment was entered. Such a procedure violates due process. (Motores de Mexicali, S.A. v. Superior Court of Los Angeles County (1958) 51 Cal.2d 172 (Motores); and NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772 (NEC).) In Motores, the Supreme Court concluded that amending the judgment to add additional judgment debtors on an alter ego theory would unconstitutionally deprive those parties of due process. (Motores, supra, 51 Cal.2d at pp. 175-176.)
Moreover, the type of outside “reverse” piercing of the corporate veil that IGL seeks has been rejected, as plaintiffs have alternate remedies available where the shareholder in question is already a judgment debtor. (See Postal Instant Press v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1521-1523.) The Postal Instant Press court specifically rejected the use of “outside” or “third party” reverse piercing, particularly in a postjudgment motion to amend the judgment, as follows:

“The true issue that outside reverse piercing seeks to address is not the misuse of the corporate form to shield the shareholder from personal liability. Rather, the issue addressed by outside reverse piercing is the shareholder’s transfer of personal assets to the corporation to shield the assets from collection by a creditor of the shareholder. In other words, outside reverse piercing seeks to protect the judgment creditor from the shareholder’s fraudulent transfer of assets to the corporation. But, … conversion and fraudulent conveyance already afford judgment creditors protection in that situation. Outside reverse piercing, accomplished by the expedient means of a postjudgment motion, is an unacceptable shortcut to pursue those remedies.”
(Postal Instant Press, supra, 162 Cal.App.4th at 1523.)

The cases that IGL now cites to support its argument that corporations can be sued as an alter ego of an individual shareholder are all cases in which the corporation was sued directly as an alter ego, either in the original proceeding against the individual, or in a subsequent action following entry of judgment. None were cases in which the creditor sought to amend the judgment to add a corporate alter ego defendant.

Not only did the court in Postal Instant Press reject outright the concept of outside reverse piercing, the court also suggested limitations on the use of such a procedure that directly applies to the facts of this case. IGL has misquoted the language of Postal Instant Press to argue that there are no concerns for “unsecured” creditors in this case, to justify grant of this motion. Instead, it is clear that the Postal Instant Press court was concerned about “innocent” creditors.
“Even if we were to accept outside reverse piercing, we would reverse because PIP failed to meet the requirements for its application…. PIP failed to show that innocent creditors would be adequately protected. Amendment of a judgment to add an alter ego is an equitable procedure (Carr v. Barnabey’s Hotel Corp. (1994) 23 Cal.App.4th 14, 21, 28 Cal.Rptr.2d 127), and before applying outside reverse piercing, ‘the availability of alternative, adequate remedies must be considered by the trial court’ (In re Phillips, supra, 139 P.3d at p. 647). PIP failed to establish its legal remedies were inadequate…”
(Postal Instant Press, supra, 162 Cal.App.4th at 1524.)

IGL has now disclosed in the reply memorandum that a creditor of Brugnara Properties, VI has filed a quiet title action. That creditor was not served with the papers supporting this motion. The Court finds the language and holding of Postal Instant Press to be persuasive. IGL has failed to establish that reverse outside piercing is a viable legal theory that it can be utilized to amend a judgment, that other remedies are inadequate, that innocent creditors would be protected, or that the equities weigh in favor of granting the motion to amend the judgment. The motion is DENIED.