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Will the Real Debtor Please Stand Up? Substituting an Alter-Ego Buyer as the True Judgment Debtor
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Will the Real Debtor Please Stand Up? Substituting an Alter-Ego Buyer as the True Judgment Debtor

Few things frustrate a creditor more than winning a judgment in court and then finding the judgment debtor sold its assets before the creditor could collect.  As often happens, the larger the judgment, the more savvy the players, particularly when the judgment debtor is a commercial entity.  Thus begins the shell game.

In California, at least, the game is not over if the judgment creditor can locate the sold assets and determine who in fact is the buyer or new owner.  If  the creditor finds that the assets were sold to another commercial entity with essentially the same ownership structure as the old judgment debtor, then the creditor may be able to use California Code of Civil Procedure section 187 to substitute the ‘alter-ego’ buyer for the old judgment debtor for purposes of enforcing the judgment.

Section 187 sounds innocuous on first glance, but it actually confers a broad discretion on judges to use any means necessary to carry out the effective administration of justice.

187.  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.

Still not convinced?  Then consider the California Court of Appeal’s decision in Misik v. D’Arco.  The court did not mince words in the introduction of the published opinion:

We hold that Code of Civil Procedure section 187 authorizes a trial court to amend a judgment to add a judgment debtor who is found to be an alter ego of a corporate defendant.   The alter ego doctrine does not require proof of fraud, and can be satisfied by evidence that adherence to the fiction of the separate existence of the corporation would promote injustice. 

Misik v. D’Arco, B224203, California Court of Appeal, Second District, July 27, 2011.

Some of the factors a court may consider in determining whether a company is an alter ego are listed below, but it is important to remember this is a question of fact that may be shown by some or all of these factors, and that this list is not exhaustive: 

  • Whether one individual owns all stock in a corporation;  
  • Use of the same office or business location;  
  • Commingling of funds and other assets of the individual and the corporation;  
  • Whether an individual represents that he is personally liable for debts of the corporation;
  • Identical directors and officers;  
  • Failure to maintain minutes or adequate corporate records;  
  • Disregard of corporate formalities;  
  • Absence of corporate assets and inadequate capitalization;  
  • The use of a corporation as a mere shell, instrumentality or conduit for the business of an individual.

If you are a judgment creditor, don’t throw in the towel just because the judgment debtor has divested itself of assets.  If you can support an alter-ego theory, Section 187 can help level the playing field.

Judgment creditors should consult with an experienced business litigation attorney to find out whether Section 187 can help you collect your judgment.  The attorneys at Glass & Goldberg provide high quality and cost-effective legal services and advice for clients in all aspects of business litigation and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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