In a published opinion filed January 26, 2016, the Court of Appeal for the Fourth Appellate District (Division 2) reversed a trial court’s order denying CEQA plaintiffs’ motion to amend judgments entered four (4) years earlier to add a previously unnamed corporate entity so that it would be liable on award of over $1 million in attorneys’ fees entered under CCP § 1021.5. Highland Springs Conference And Training Center v. City of Banning (SCC Acquisitions, Inc., et al., Real Parties in Interest) (4th Dist., Div. 2, 2016) _____ Cal.App.4th _____, 2016 WL 308841.
Plaintiffs had successfully challenged the City of Banning’s certification of an EIR for the 1,500-acre Black Bench real estate development project. Their November 2006 writ petitions named “SCC/Black Bench, LLC (SCC/BB) dba Sun Cal Companies” as the only real party in interest. SCC/BB appealed the April 2008 judgments, but then (apparently as a result of severe financial distress, having spent $14 million on the project) defaulted on two purchase money loans, had its appeal dismissed for failure to deposit record preparation costs, and ultimately lost the project property to foreclosure by the end of 2008. Neither it nor the City filed any opposition to plaintiffs’ motion to recover attorneys’ fees under Code of Civil Procedure section § 1021.5 solely from SCC/BB. In fact, City joined the motion pursuant to a settlement agreement it made with plaintiffs whereby it could be reimbursed for certain fees and costs it had paid them, in the event they prevailed. Unsurprisingly, the trial court granted plaintiffs’ unopposed motion for fees–and it did so in a big way, collectively awarding them $1,081,545.97 in attorneys’ fees.
Four years later, plaintiffs moved to amend the judgments to add “SCC Acquisitions, Inc.” as an additional judgment debtor under Code of Civil Procedure (CCP) § 187, claiming it was the “alter ego” of the by-then-defunct and dissolved SCC/BB. After extensive briefing, three hearings, and numerous rounds of evidentiary submissions, the trial court denied the motion to amend “on the sole basis that plaintiffs failed act with due diligence in bringing the motion[,]” relying on Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39, 47-48 (“Alexander”). It reasoned plaintiffs knew (or reasonably should have known) of the alleged alter ego relationship long before they moved to amend, but also indicated the equities favored plaintiffs and it “likely” would have granted the motion if filed earlier.
In reversing the trial court’s order and remanding for further proceedings consistent with its opinion, the Court of Appeal made the following points:
- “[T]he question of whether plaintiffs unreasonably delayed in filing the motion to amend is irrelevant to the merits of plaintiffs’ alter ego claim against SCCA. It is only relevant to whether plaintiffs’ alter ego claim was barred by the equitable, affirmative defense of laches. … [T]he claim is not barred by laches because SCCA failed to present sufficient evidence that it was prejudiced by plaintiffs’ delay in filing the motion, even if the delay was unreasonable.”
- Code of Civil Procedure § 187 “grants every court the power and authority to carry its jurisdiction into effect[,]” “includes the authority to amend a judgment to add an alter ego of an original judgment debtor” to make it “liable on the judgment[,]” and “contemplates amending a judgment by noticed motion.” Amending a judgment to add an original judgment debtor’s alter ego is an equitable procedure based on the theory that a new defendant is not being added, but the real defendant’s correct name is merely being inserted.
- A judgment creditor’s burden is to show by a preponderance of the evidence that (1) the added parties controlled and were virtually represented in the underlying proceeding, (2) a unity of interest and ownership exists such that the entity and its owners no longer have separate personalities, and (3) treating the acts as those of the entity alone will produce an inequitable result. (Citing Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership (2013) 222 Cal.App.4th 811, 815-816.)
- Factors relevant to finding “sufficient unity of interest and ownership” include commingling of funds/assets, identical equitable ownership, use of the same offices/employees, disregard of corporate formalities, identical directors/officers, use of one entity as a “shell,” and inadequate capitalization of the original judgment debtor.
- Determining whether to impose alter ego liability is a case-specific matter, based on considerations of justice and equity. The decision on the motion to amend is within the trial court’s sound discretion and will not be disturbed on appeal unless it lacks a legal basis or is unsupported by substantial evidence.
- The party asserting the equitable, affirmative defense of “laches bears the burden of production and proof on each element of the defense.” The defense “requires a showing of both an unreasonable delay by the plaintiff … plus either acquiescence in the act about which plaintiff complains or prejudice to the defendant resulting from the delay.” (Citations and internal quotes omitted.)
- Prejudice is never presumed, but defendant must affirmatively demonstrate it to carry its burdens in proving laches.
Applying the above principles, the Court of Appeal concluded the trial court erred in denying the motion based solely on plaintiffs’ delay because “SCCA presented insufficient evidence that it was prejudiced by plaintiffs’ delay in moving to amend the judgments to add [it] as an additional judgment debtor.” The Court explained: “Though it may seem fair and reasonable to presume prejudice based solely on a party’s unreasonable delay in asserting a right, particularly when, as here, the relevant facts were known to or should have been discovered by the party asserting the right, prejudice simply may not be presumed based solely on an unreasonable delay in asserting the right.” SCCA’s general assertions of prejudice – without specifics or supporting evidence, such as a showing of lost evidence or witnesses – were insufficient to carry its burden. The Court further rejected the contrary reasoning of Alexander and the argument that any statute of limitations applied to bar the equitable procedure of a CCP § 187 motion to amend; finally, it rejected plaintiffs’ argument that laches could not be raised as a defense to such a motion.
The Court of Appeal’s holding appears to be a rather narrow one, based on the trial court’s denial of the motion solely on the ground of unreasonable delay, and the decision is accordingly focused on the elements of and burdens of proof associated with the equitable defense of laches. One wonders whether the plaintiffs/appellants, having unreasonably delayed four years to move to join an additional entity as a party liable for a million-dollar judgment, will also assert that entity is liable for hundreds of thousands of dollars in post-judgment interest that “accrued” during this period. In any event, this case serves as a cautionary tale for real parties in interest who find themselves on the losing end of a CEQA case and facing a CCP § 1021.5 motion for substantial attorneys’ fees. Such real parties should think twice before intentionally failing to oppose such a motion based solely on the belief that they are “judgment proof.” Even if such entities are financially “tapped out,” if they are closely affiliated with other solvent entities that might be pursued as “alter egos,” the “default” option is dangerous and may not ultimately be the best one.