Procedural Posture of Prior and Later Proceedings Was Determinative.
One of the leading attorney’s fees cases in California under Civil Code section 1717 is Reynolds Metals Co. v. Alperson, 25 Cal.3d 124, 129 (1979), where the California Supreme Court found that two individual shareholders claimed to be the alter egos of a bankrupt corporation were entitled to contractual attorney’s fees when they prevailed under circumstances where there was a note with a fees clause between losing plaintiff and bankrupt corporation.
However, does the situation change depending on the procedural posture of the alter ego/successor liability attempts to pierce?
You betcha, said Acting Presiding Justice Bedsworth as the author of a 3-0 opinion in Comerica Bank v. Reid, Case No. G042929 (4th Dist., Div. 3 Mar. 15, 2012) (unpublished).
What happened here is that bank obtained judgment against failed company on a defaulted-upon loan and against shareholders/guarantors in 2003. Then, following judgment debtor examinations, bank sued former shareholders for alter ego liability, fraudulent transfer of funds in a Schwab account, conversion, and fraudulent transfer of a trust deed on two shareholders’ house. The trial court found two of the shareholders to be alter egos of the failed business and also found they had made fraudulent transfers and converted money from the Schwab account/fraudulently transferred the trust deed on their home. However, the trial court denied the winning shareholder’s motion to obtain attorney’s fees against the bank for losing the alter ego claim against him.
This result was affirmed on appeal, although the judgment for fraudulent transfer on the trust deed claim and for alter ego liability was reversed. Reason for not overturning the fee denial? The peculiar procedural posture of the whole dispute.
Winning shareholder on the alter ego claim at trial claimed Reynolds Metals applied. Normally, that would be true, acknowledged the appellate panel. However, bank did not sue this shareholder as an alter ego in the action resulting in the 2003 judgment; rather, it sought to enforce the judgment based on post-activities. Because the prior operative agreements with fees clauses were merged into and extinguished by the earlier judgment, there was nothing more to contractually enforce inclusive of the fee clauses. (Hambrose Reserve, Ltd. v. Faitz, 9 Cal.App.4th 129, 130-132 (1992).)
BLOG UNDERVIEW–It will be interesting to see if creditors abstain from bringing alter ego claims during a main case, but wait until after judgment and then seek to add a nonparty judgment debtor as an alter ego through an amended judgment procedure or through a separate action in order to avoid fee exposure had they lost alter ego claims in the main trial.