California courts have long recognized that a judgment creditor who has prevailed against a corporation should not be left holding an empty bag simply because the real wrongdoer operated behind a corporate shell. Thus, after obtaining a judgment against a corporation, a plaintiff may move in the original action to amend the judgment to add the corporation’s alter ego as an additional debtor. Courts have characterized this as 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.” Highland Springs Conference & Training Center v. City of Banning, 244 Cal.App.4th 267, 288 (2016). The judgment creditor must show: (1) the parties to be added as judgment debtors had control of the underlying litigation and were virtually represented in that proceeding; (2) there is such a unity of interest and ownership that the separate personalities of the entity and the owners no longer exist; and (3) an inequitable result will follow if the acts are treated as those of the entity alone. Id. at 280.
But what happens when the underlying judgment was obtained by default? Unfortunately, that question has generated a body of California authority that recently has become more complicated.
The Default Judgment Problem
Consider Motores De Mexicali v. Superior Court, 51 Cal.2d 172 (1958). There, the plaintiff obtained a default judgment against a corporation, then moved to summarily add three individuals as judgment debtors on alter ego grounds. Ultimately, the Supreme Court decided that summarily adding individuals to a default judgment “without allowing them to litigate any questions beyond their relation to the allegedly alter ego corporation would patently violate” the constitutional guarantee of due process under the Fourteenth Amendment. Id. at 176.
The issue popped up again in NEC Electronics, Inc. v. Hurt, 208 Cal.App.3d 772, 780 (1989). In that case, the corporation initially defended the action, but following a period of escalating financial hardship it abandoned the case and informed plaintiff that it would not appear at trial. The trial took place in the absence of the defendant, and judgment was entered in plaintiff’s favor. Shortly thereafter, the corporation filed for Chapter 11 Bankruptcy. The plaintiff filed a motion pursuant to CCP Section 187 to amend the judgment to name defendant’s owner, Porter Hurt, alleging that the corporation was his alter ego. The trial court granted the motion.
Consistent with Motores, however, the Court of Appeal reversed because the defendant did not appear at trial and did not make any attempt to defend the lawsuit. The court reasoned that the corporation and Hurt’s interests were not the same; the corporation allowed the matter to proceed uncontested because it planned to file for bankruptcy. This strategy insulated the corporation from liability, but it deprived Hurt of an opportunity to defend himself on the merits. Id. at 780. The court also found there was insufficient evidence to show that Hurt controlled the defense of the litigation because “[t]here was no defense for Hurt to control.” Id. at 781.
The reasoning of Motores and NEC Electronics was applied again in Wolf Metals Inc. v. Rand Pacific Sales Inc., 4 Cal.App.5th 698 (2016). There, the trial court entered a default judgment against a corporation and later granted a motion to amend to add the sole shareholder as a judgment debtor, and a successor corporation. The Court of Appeal reversed as to the shareholder. Id. at 708-09. Because the corporation had “offered no defense” in the underlying action, the court held that the summary section 187 procedure was unavailable, regardless of the alter ego’s control over the corporation. Id.
Thus, over the course of fifty years, the rule was simple: Section 187 is not available if the judgment was acquired by default.
Lopez v. Escamilla: A Distinction that Raises New Questions
Enter Lopez v. Escamilla, which gave rise to a new way for plaintiffs to enforcing a default judgment against alter egos.
Alice Lopez recovered a default judgment for fraud, negligent misrepresentation, and breach of fiduciary duty against Magnolia Home Loans, Inc. Lopez v. Escamilla, 48 Cal.App.5th 763, 764 (2020). She then filed a separate civil action against Jose Escamilla, requesting that he be found the alter ego of Magnolia. Id. at 765. Escamilla moved for judgment on the pleadings, contending that the only procedure for naming a person an alter ego is by motion in the original action, and that adding an alter ego defendant is not a valid cause of action. Id. But the Court of Appeal disagreed, stating that “[i]t does not matter whether the petition alleging Escamilla is an alter ego of the corporation is labeled a complaint or a motion, or whether the petition is assigned a case number different from the underlying action.” Id.
The trial court then granted summary judgment for Escamilla, concluding it would violate due process to hold him responsible for the Magnolia’s liability when he was not a party to the original lawsuit, and no “evidence based” defense was asserted by the defendants in that case. Lopez v. Escamilla, 79 Cal.App.5th 646, 649-50 (2022). The case then returned to the Court of Appeal, which reversed again. The court held that there was a triable issue of fact concerning Escamilla’s alter ego liability. Id. at 651. Further, and more significantly, the court distinguished Motores and its progeny: “Lopez did not move to summarily add Escamilla to the judgment . . . . Escamilla will have the opportunity to answer the complaint, engage in discovery, and file pre-trial motions. Lopez must meet her burden of proof to support her theory of alter ego liability claims.” Id. at 652.
The Court of Appeal reasoned that the “ultimate issue was not how the case was defended, but who in the corporation ‘controlled the litigation leading to the judgment’ against the corporation.” Id. at 654. “The sole alter ego who owns the company and makes all corporate decisions may decide that, instead of providing a defense to a meritorious lawsuit, the corporation should incur a default judgment to insulate himself from liability and to save himself from spending money on a frivolous defense. By doing so, he ‘controlled the litigation leading to the judgment’ against the corporation and he is liable as an alter ego.” Id.
The Tension Between Lopez and Longstanding Precedent
Alas, the distinction between “summary” and “full” proceedings is not always as clean as Lopez suggests. Motores foreclosed the use of the summary amendment procedure when the judgment was obtained by default because it denied the alter ego the chance to litigate “any questions beyond their relation to the allegedly alter ego corporation.” But the very thing that Motores was protecting — the right to contest the underlying merits of the judgment — was not available to the defendant in Lopez, either. In the new lawsuit, Escamilla could litigate his alter ego status, but not the underlying default judgment against the corporation, which was res judicata. In other words, Escamilla could not re-litigate whether the corporation owed the money. The “full opportunity to defend” that Lopez celebrates is thus narrower than it appears: the alleged alter ego gets to defend on alter ego grounds only, not on the merits.
Furthermore, the Motores and NEC courts were concerned that an alter ego’s interests may be at odds with a corporate defendant. The corporation may rationally choose to allow a default judgment to enter because it plans to file for bankruptcy anyway — as was the case in NEC. But that strategy deprives the alter ego of an ability to defend themself on the merits. The court reasoned that the alter ego should not lose their due process right to defend themself because the corporation — which is actually a party to the lawsuit — opts to allow a default judgment to enter against it.
Lopez drew the opposite conclusion. The court reasoned that, if the person controlling a corporation decides to allow a default judgment to enter to “insulate himself,” then they cannot be heard to complain that they have been denied due process. Lopez, 79 Cal.App.5th at 654.
The Practical Implications
Lopez has significant practical consequences for judgment creditors and alleged alter egos alike.
For creditors, Lopez confirms that a corporate default does not permanently foreclose recovery from the person who was truly responsible. Even if a summary Section 187 motion is unavailable under cases like Motores, NEC, and Wolf Metals, the independent action route remains open. Creditors should be aware, however, that this path requires a new lawsuit, potentially including a costly trial.
For alleged alter egos, Lopez narrows the tactical value of engineering a corporate default. Merely ensuring that the corporation does not appear may not provide shelter if you are the sole owner and controller of that corporation, since a court may well infer that you chose the default strategically.
For the courts, Lopez leaves open the question of whether the independent action route is always available as an alternative to Section 187, or whether there are circumstances where Motores’ due process concerns would apply even to a separately-filed complaint. The opinion does not fully grapple with that question, but future litigants and courts presumably will.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.
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