Estate of McNamara

Filed 4/13/07 Estate of McNamara CA2/5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

APPEAL from an order of the Superior Court of Los Angeles County, Aviva K. Bobb, Judge. Reversed with directions.

Devirian & Shinmoto, and Donald B. Devirian for Defendants and Appellants.

Hicks, Mims & Kaplan, Stewart S. Mims, and Stephen L. Kaplan, for Plaintiff and Respondent.

I. INTRODUCTION

Defendants, Edward W. Cutter and Edward W. Cutter, an Accountancy Corporation, appeal from an order amending two judgments to include them as judgment debtors. The judgments were entered against Fairhaven, a purported nonprofit entity, and amended to include defendants on alter ego grounds. Zoran Vujic, the moving party, is the executor of Alberta Patricia McNamara's estate. We find the executor did not argue and made no evidentiary showing in the trial court that defendants controlled the litigation against Fairhaven and had an opportunity to present a defense. Because the executor failed to meet his burden as the moving party, we reverse the order amending the judgments to include defendants as judgment debtors. We direct the trial court to vacate the amended judgments.

II. BACKGROUND

This is an elder abuse, fiduciary duty breach, deceit, and professional negligence action arising out of an alleged scheme to misappropriate money and property from Ms. McNamara. Mr. Cutter had been Ms. McNamara's accountant. The scheme allegedly operated in part through purported nonprofit entities, including It's Christmas Morning and Fairhaven, which were created and controlled by Mr. Cutter and a co-defendant, Arthur Cole. The executor initiated the elder abuse action on the estate's behalf. The executor also filed a Probate Code section 850 petition for conveyance or transfer of property. The action was settled as to It's Christmas Morning in November 2005. Default judgments for more than $5 million on the elder abuse complaint and more than $2 million on the Probate Code section 850 petition were entered against Fairhaven and Mr. Cole in December 2005.

The executor moved to amend the foregoing default judgments to add defendants as judgment debtors on the ground they were Fairhaven's alter egos. The executor argued, based on documentary evidence, only that defendants were Fairhaven's alter egos. The executor did not in any way address whether defendants had participated in the defense of this matter. The executor did not assert defendants had control of the litigation against Fairhaven sufficient to overcome due process concerns. Nor was any evidence presented that defendants controlled the litigation against Fairhaven.

Defendants did not file any written opposition to the motion. However, Mr. Cutter did appear the hearing in the trial court. He requested a continuance pending this court's decision in a prior appeal. The trial court denied the continuance request and granted the executor's motion to amend the judgment. The April 21, 2006 minute order states: Written response to the motion is not filed. The court finds the motion meritorious and since evidence presented by way of exhibits shows th[at] Edward W. Cutter and Edward W. Cutter, an Accountancy Corporation are alter egos of Fairhaven, if the court does not grant the motion the estate suffers extreme prejudice. The motion is granted. Defendants filed their notice of appeal from the order granting the motion of the Executor to amend the previously entered judgment to add [defendants] on May 8, 2006. Amended judgments on the petition and the complaint were entered on May 26 and June 16, 2006, respectively.

III. DISCUSSION

A California court may use all the means necessary to carry its jurisdiction into effect. (Code Civ. Proc.,^[1] 187.) Section 187 states: When jurisdiction is, by the Constitution or this Code, or by any other statute, conferred on a Court or judicial officer, all the means necessary to carry it into effect are also given; and in the exercise of this jurisdiction, if the course of proceeding be not specifically pointed out by this Code or the statute, any suitable process or mode of proceeding may be adopted which may appear most conformable to the spirit of this code. Section 187 grants the trial court the authority to amend a judgment to add additional judgment debtors on alter ego grounds. (NEC Electronics, Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778; Dow Jones Co. v. Avenel (1984) 151 Cal.App.3d 144, 148.) The underlying theory is that the amendment does not add a new party but merely names the real actor, the original defendant's alter ego. (McClellan v. Northridge Park Townhome Owners Assn. (2001) 89 Cal.App.4th 746, 752; Tokio Marine & Fire Ins. Corp. v. Western Pac. Roofing Corp. (1999) 75 Cal.App.4th 110, 116; Triplett v. Farmers Ins. Exchange (1994) 24 Cal.App.4th 1415, 1420; NEC Electronics, Inc. v. Hurt, supra, 208 Cal.App 3d at p. 778.)

To obtain a section 187 order adding an alter ego as an additional judgment debtor, the moving party must show by a preponderance of the evidence that two requirements are both satisfied. First, the moving party must demonstrate the new judgment debtor is the alter ego of the original defendant. Second, as a due process matter, the moving party must demonstrate the new judgment debtor controlled the litigation. (McClellan v. Northridge Park Townhome Owners Assn., supra, 89 Cal.App.4th at p. 752; Triplett v. Farmers Ins. Exchange, supra, 24 Cal.App.4th at p. 1421.) The Court of Appeal has explained: This 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. [Citations.] Such a procedure is an appropriate and complete method by which to bind new individual defendants where it can be demonstrated that in their capacity as alter ego of the corporation they in fact had control of the previous litigation, and thus were virtually represented in the lawsuit. [Citation.] [Citations.] (McClellan v. Northridge Park Townhome Owners Assn., supra, 89 Cal.App.4th at p. 752; see Dow Jones Co. v. Avenel, supra, 151 Cal.App.3d at pp. 148-149.)

As a matter of due process, such an amendment is not allowed absent a showing of participation in the defense of the underlying litigation. (Motores De Mexicali v. Superior Court (1958) 51 Cal.2d 172, 175-176; Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 309.) In Motores, the Supreme Court held it would constitute a denial of due process under the Fourteenth Amendment to the United States Constitution to amend a default judgment to include nonparties who had not participated in the defense of the action against the corporation alleged to be their alter ego. The Supreme Court explained: [O]ne fundamental distinction compels the conclusion that such a procedure is inappropriate here. . . .  [The nonparties] in no way participated in the defense of the basic action against [the corporation]. [They] did not have attorneys subsidized by them appearing and defending the action against the corporation now alleged to be their alter ego. Instead, the judgment was entered against [the corporation] strictly by default. . . .    [] Further, the same facts . . . also indicate that an amendment to the judgment here to include [the nonparties] would constitute a denial of due process of law. (U.S. Const., 14 Amend.) That constitutional provision guarantees that any person against whom a claim is asserted in a judicial proceeding shall have the opportunity to be heard and to present his defenses. [Citations.] To summarily add [the nonparties] to the judgment heretofore running only against [the corporation] without allowing them to litigate any questions beyond their relation to the allegedly alter ego corporation would patently violate this constitutional safeguard. (Motores De Mexicali v. Superior Court, supra, 51 Cal.2d at pp. 175-176, orig. italics.) What constitutes sufficient control turns on the facts of each case. (See e.g., Minton v. Cavaney (1961) 56 Cal.2d 576, 581; Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39, 46; Mirabito v. San Francisco Dairy Co. (1935) 8 Cal.App.2d 54, 59-60.) The Court of Appeal has noted: Control of the litigation sufficient to overcome due process objections may consist of a combination of factors, usually including the financing of the litigation, the hiring of attorneys, and control over the course of the litigation. (1A Ballantine & Sterling, Cal. Corporation Laws (4th ed.)  299.04, pp. 14-45-14-46, fn. omitted.) Clearly, some active defense of the underlying claim is contemplated. (Minton v. Cavaney[, supra,] 56 Cal.2d [at p.] 581.) (NEC Electronics, Inc. v. Hurt, supra, 208 Cal.App.3d at p. 781.) This appeal is governed by the substantial evidence standard of review. (McClellan v. Northridge Park Townhome Owners Assn., supra, 89 Cal.App.4th at pp. 751 -752; NEC Electronics, Inc. v. Hurt, supra, 208 Cal.App.3d at p. 777; Dow Jones Co. v. Avenel, supra, 151 Cal.App.3d at p. 151.)

Here, the executor did not argue and made no attempt to show by reference to the evidence, and the trial court did not find, that defendants had control of and were represented in the litigation against Fairhaven sufficiently to overcome the foregoing due process concerns. The executor asserted only that defendants were Fairhaven's alter egos. As discussed above, this is only the first of two requirements for amending the judgment. In other words, the executor did not meet his burden on the motion. That defendants failed to oppose the motion did not relieve the executor from his burden to establish, by a preponderance of the evidence, that defendants were virtually represented in the litigation against Fairhaven. (McClellan v. Northridge Park Townhome Owners Assn., supra, 89 Cal.App.4th at p. 752; NEC Electronics, Inc. v. Hurt, supra, 208 Cal.App.3d at p. 778.) Notwithstanding their nonopposition, defendants may assert insufficiency of the evidence on appeal. (Tahoe National Bank v. Phillips (1971) 4 Cal.3d 11, 23, fn. 17; In re Gregory A. (2005) 126 Cal.App.4th 1554, 1560.)

We do not construe the trial court's order as resting on defendants failure to oppose the motion. At the hearing, the trial court ruled: [T]he court having received no written response, [finds] the motion meritorious. And in addition on its merit, the court grants the motion since evidence was presented to the court by way of exhibits showing that Cutter and Cutter, Inc., are alter egos of Fairhaven, which was created by Mr. Cutter. The trial court could not grant the motion due to nonopposition unless the executor first met his burden on the amendment request. (See Rubenstein v. Rubenstein (2000) 81 Cal.App.4th 1131, 1142-1143; Kulesa v. Castleberry (1996) 47 Cal.App.4th 103, 112-113.)

IV. DISPOSITION

The order amending the judgments to include defendants, Edward W. Cutter and Edward W. Cutter, an Accountancy Corporation, as judgment debtors on alter ego grounds is reversed. The trial court is directed on remand to vacate the May 26, 2006 and June 16, 2006 judgments entered thereon. Defendants are to recover their costs on appeal from Zoran Vujic, as executor of the estate of Alberta Patricia McNamara.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

TURNER, P. J.

We concur:

ARMSTRONG, J.

KRIEGLER, J.

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^[1] All future statutory references are to the Code of Civil Procedure except where otherwise noted.