1. ~, "
Case No.
S222843
IN THE
SUPREME COURT OF CALIFORNIA
STEPHEN M.GAGGERO,
PlaintiffandAppellant,
vs.
KNAPP,PETERSEN & CLARKE;STEVEN RAY GARCIA;
STEPHEN M.HARRIS and ANDRE JARDII~TI,
Defendants andRespondents;
PACIFIC COAST MANAGEMENT,INC.;511 OFW LP;
GINGERBREAD COURT LP;MALIBU BROAD BEACHLP;MARINA
GLENCOE LP;BLU HOUSE LLC;BOARDWALK SUNSET LLC;and
JOSEPHPRASKE as Trustee of
THE GIGAI~TIN TRUST,THE ARENZANO TRUST,
and THE AQUASANTE FOUNDATION
AdditionalJudgmentDebtors andAppellants
After a Decision by the
COURT OF APPEAL,SECOND APPELLATE DISTRICT,DIVISION EIGHT
Case No.B241675
PETITION FOR REVIEW
EDWARD A.HOFFMAN,Bar No.167240
LAW OFFICES OF EDWARD A.HOFFMAN
11755 WILSHIRE BOULEVARD,SUITE 1250
LOS ANGELES,CALIFORNIA 90025
(310)442-3600
eah@hoffinanlaw.com
Attorneyfor AdditionalJudgment
Debtors, andAppellants
Pacific Coast Management,Inc., etal.
DAVID BLAKE CHATFIELD,Bar No.88991
WESTLAKE LAW GROUP
2625 TOWNSGATE RD.,SUITE 330
WESTLAKE VILLAGE,CA 91361
(805)267-1220
davidblakec@yahoo.com
Attorneyfor Plaintiff
andAppellant
Stephen M. Gaggero
2. Case No.
S222843
IN THE
SUPREME COURT OF CALIFORNIA
STEPHEN M.GAGGERO,
Plaint andAppellant,
vs.
KNAPP,PETERSEN & CLARKE;STEVEN RAY GARCIA;
STEPHEN M.HARRIS and ANDRE JARDII~TI,
Defendants andRespondents;
PACIFIC COAST MANAGEMENT,INC.;511 OFW LP;
GINGERBREAD COURT LP;MALIBU BROAD BEACH LP;MARINA
GLENCOE LP;BLU HOUSE LLC;BOARDWALK SUNSET LLC;and
JOSEPH PRASKE as Trustee of
THE GIGAI~TIN TRUST,THE ARENZANO TRUST,
and THE AQUASANTE FOUNDATION
AdditionalJudgmentDebtors andAppellants
After a Decision by the
COURT OF APPEAL,SECOND APPELLATE DISTRICT,DIVISION EIGHT
Case No.B241675
PETITION FOR REVIEW
EDWARD A.HOFFMAN,Bar No. 167240
LAW OFFICES OF EDWARD A.HOFFMAN
11755 WILSHIRE BOULEVARD,SUITE 1250
LOS ANGELES,CALIFORNIA 90025
(310)442-3600
eah@hoffinanlaw.com
Attorneyfor AdditionalJudgment
Debtors, andAppellants
Pacific CoastManagement,Inc., et al.
DAVID BLAKE CHATFIELD,Bar No.88991
WESTLAKE LAW GROUP
2625 TOWNSGATE RD.,SUITE 330
WESTLAKE VILLAGE,CA 91361
(805)267-1220
davidblakec@yahoo.com
AttorneyforPlaintiff
andAppellant
Stephen M. Gaggero
3. TABLE OF CONTENTS
Table ofAuthorities .................................................. iii
Issues Presented ...................................................... 1
Why Review Should Be Granted ......................................... 1
Statement ofthe Case.................................................. 3
A. The Estate Plan ........................................... 3
B. Respondents Serve as Gaggero's Attorneys ..................... 4
C. The Underlying Malpractice Case ............................. 4
D. Post-trial Discovery ........................................ 5
E. The Alter-ego Motion ...................................... 5
F. The Present Appeal ........................................ 6
LegalArgtunent ...................................................... 8
L Review Is Necessary to Resolve a Split ofAuthority over Whether and
When the Assets ofan Irrevocable Trust Are Reachable by the Settlor's
Creditors....................................................... 8
II. Only this Court Can Clarify Whether,and under What Conditions,the
Alter-Ego Doctrine May Apply to Non-Corporate Debts ............... 11
A. The Doctrine Exists to Address a Problem Unique to Corporate
Debtors,So it May Never Apply to the Debts ofan Individual ..... 11
B. Liability in Other Contexts Is Already Governed by Other Rules ... 12
C. This Court Has Never Said the Alter-ego Doctrine Applies
Outside the Context ofOwner and Corporation,butLower
Courts Routinely Invoke it in Other Contexts ................... 13
D. Because Individuals Do NotHave Owners,California Law Says
No One May Be Liable as the Alter Ego ofan Individual Debtor ... 15
4. III. The Court Should Resolve the Conflict Between Cases Which Say
Alter-Ego Status Requires Actual Ownership and Cases Which Say it
Does Not .............................:....................... 15
IV. The Court Should Decide Whether Section 15400 Creates an Evidentiary
Presumption That Trusts Are Revocable............................. 20
V. This Case Presents an Ideal Opportunity for the Courtto Address
These Issues .................................................. 22
Conclusion ......................................................... 23
Certificate ofWord Count ............................................. 25
ProofofService ..................................................... 26pro
5. TABLE OF AUTHORITIES
STATE CASES
Aguilar v. Aguilar
(2008)168 Ca1.App.4th 35 ......................................... 1,9
Automotrizdel Golfo de Calif. S.A. De C.V. v. Resnick,
(1957)47 Cal.2d 792 ............................................... 11
Bay City View,LLC v. SFBay Builders,Inc.,
(2014)2014 WI.,4840438............................................ 20
Crook v. Contreras,
(2002)95 Cal.App.4th 1194, 12 ....................................... 21
Galdjie v. Darwish
(2003)113 Cal.App.4th 1331 ....................................... 3,13
Greenspan v. LADT,LLC
(2011)191 Cal.App.4th 486 ...................................... passim
Kahrs v. County ofLosAngeles
(1938)28 Cal.App.2d 46 ............................................ 22
LasPalmasAssoc. v. LasPalmas Ctr. Assoc.
(1991)235 Cal.App.3d 1220 ...................................... 16, 18
Laycock v. Hammer
(2006)141 Ca1.App.4th 25 ....................................... 1,8,10
Mesler v. Bragg Management Co.
(1985)39 Ca1.3d 290 ............................................... 11
Minifie v. Rowley
(1921)187 Ca1.481 ................................................ 13
Minnesota Mining &Manufacturing Co. v. Superior Court
(1988)206 Ca1.App.3d 1025 ......................................... 18
6. Minton v. Cavaney
(1961)56 Cal.2d 576 ............................................ 15, 18
Mt. Whitney FarmsLLC v. Sandstone Marketing,Inc.
(2014)2014 WL 3827585. .......................................... 21
People v. Avanessian
(1999)76 Cal.App.4th 635 ........................................... 22
PostalInstantPress,Inc. v. Kaswa Corp.
(2008)162 Cal.App.4th 1510 ....................................... 7,13
Riddle v. Leuschner
(1959)51 Cal.2d 574 ......................................... 13, 15, 16
Roman Catholic Archbishop ofSan Francisco v. Superior Court
(1971)15 Ca1.App.3d 405 ........................................... 18
Rowe v. Exline
(2007)153 Ca1.App-4th 1276 ........................................ 18
Schwerin v. Kuhns
(2014)2014 WL 1435898 ........................................... 15
Sonora Diamond Corp. v. Superior Court
(2000)83 Ca1.App.4th 523 ...................................... 8, 14,19
Steinhart v. County ofLosAngeles
(2010)47 Cal.4th 1298,13 ............................................ 1
Title Ins. &Trust Co. v. Duffill
(1923)191 Ca1.629 ................................................ 17
TorreyPinesBank v. Hoffman
(1991)231 Cal.App.3d 308,31 ....................................... 14
Troyk v. Farmers Group,Inc.
(2009)171 Ca1.App.4th 1305 ...................................... 14,16
-iv-
7. Watson v. Commonwealth Ins. Co. ofN.Y.
(1936)8 Cal.2d 61 ................................................. 11
Wood v. Elling Corp
(1977)20 Cal.3d 353 ............................................... 13
Zoran Corp. v. Chen
(2010)185 Cal.App.4th 799 .......................................... 19
FEDERAL CASES
Firstmark Capital Corp. v. HempelFinancial Corp.
(9th Cir.1988)859 F.2d 92 .......................................... 18
In re Schwarzkopf
(9th Cir.2010)626 F.3d 1032 .................................... passim
Neilson v. Union Bank ofCalifornia, N.A.
(2003)290 F.Supp.2d 1101 .......................................... 18
S.E.C. v. Hickey
~9tn Cir. 2003)322F.3d 1123 ......................................... 18
Wady v. ProvidentLife andAccidentIns. Co. ofAmerica
(2002)216 F.Supp.2d 1060 .......................................... 18
Wehlage v. EmpRes Healthcare,Inc.,
(2011)791 F.Supp.2d 774 ........................................... 17
STATE STATUTES
Code ofCivil Procedure section 187 ...................................... 5
Code ofCivil Procedure section 631.8 .................................... 4
Corporations Code section 15903.03 ..................................... 12
Corporations Code section 15904.03 ..................................... 12
Corporations Code section 15904.04 ..................................... 12
-v-
9. ISSUESPRESENTED
1. Probate Code sections 18200 and 19001 say the assets ofan irrevocable
trust are notreachable to satisfy claims againstthe settlor or his estate. May his
creditors obtain trust assets anyway under the alter-ego doctrine?
2. Probate Code section 15400 says a trust is revocable unless it is"expressly
made irrevocable by the trust instrument."Does that statute create a presumption that
a trust is revocable ifthe instrument is not in evidence?
WHY REVIEW SHOULD BE GRANTED
By definition,an asset in an irrevocable trust is one which the settlor has no
right to reclaim.Probate Code sections 18200 and 19001'-~ say a settlor's creditors
have no more right to trust assets than the settlor himself. A settlor loses the right to
reclaim trust assets once the transfer becomes irrevocable.(Steinhart v. County ofLos
Angeles(2010)47 Ca1.4th 1298, 1319-1320.)Section 15403 says an irrevocable trust
may only be breached with the unanimous consent ofits beneficiaries or upon a
finding that its irrevocability is frustrating its purpose. This necessarily means the
settlor cannot breach it unilaterally. Since his creditors have no more right to trust
assets than he does,once he can no longer reach the assets,neither can they. As
Laycock v. Hammer(2006)141 Cal.App.4th 25("Laycocl~')explains,"a settlor's
conduct after an irrevocable trust has been established will not alter the nature ofsuch
a trust."(Id. at p.31;accord Aguilar v. Aguilar(2008)168 Cal.App.4th 35,40.)
Many trillions ofdollars ofassets have been placed into California irrevocable
trusts precisely because neither the settlor nor his creditors can pry them loose,
ensuring both that the assets will reach the trusts' beneficiaries and thatthey will not
be depleted to fend offattempts to breach the trust's irrevocability.
Yet a growing body ofcase law suggests that the alter-ego doctrine gives
creditors a way around the sanctity ofirrevocable trusts based on precisely what
'-Statutes citedin this petition are intheProbate Code unless otherwise
stated.
10. Laycock says can never open the door to such claims —the conduct ofthe settlor after
the trust is created.(See,e.g.,In re Schwarzkopf(9th Cir.2010)626 F.3d 1032,1038-
1040("Schwarzkopf'); Greenspan v. LADT,LLC(2011)191 Ca1.App.4th 486,522
("Greenspan").)The November 7,2014 decision ofthe CourtofAppeal isjustthe
latest in this line ofcases.
These two sets ofauthorities are in direct conflict. Either there is a way for
creditors to reach assets in an irrevocable trust or there isn't. Until the law is clear on
this point,Californians will not know how secure their trusts and estate plans against
third-party claims.Probate lawyers will be unable to advise their clients about the
effect ofcreating an irrevocable trust or oftransferring assets into it. Beneficiaries will
have no assurance that assets set aside for their benefit will ever reach them.Creditors
will notknow ifthey can satisfy their claims from trust assets. Trustees will not know
how to defend against a claim by the settlor's creditors. And the courts responsible for
deciding those cases will have to choose between conflicting authorities.
Ifsettlors can now gettheir hands on assets that were once off-limits,then no
trust is safe. Even trusts which could easily defeat such claims at trial will have
powerful incentives to settle in order to preserve assets for their beneficiaries.Ifthis
Court does not intervene now,there is no telling how many irrevocable trusts will fall
or be forced to settle due to the ambiguity in the governing law.Further,ifa settlor's
creditor has no more rightto trust assets than the settlor does,then a rule which lets
creditors claim assets in an irrevocable trust necessarily lets settlors claim them as
well.By definition,ifthe settlor can reclaim those assets,there is no such thing as an
irrevocable trust in this state.
This Courtshould grantreview to resolve the inconsistency between Laycock
and Aguilar on the one hand and Schwarzkopfand Greenspan on the other. Until it
does,there will be no way to know whether or how irrevocable trusts can be breached.
2
11. STATEMENT OF THE CASE
A. The Estate Plan.
Petitioner Stephen Gaggero,a successful real estate developer and investor,
hired attorney Joseph Praske in 1997to create an estate plan which would hold
various properties for the benefit ofhis family.(Trial RT1 602-604; Trial RTS 2720;
CT1 124-125;CT3 411.)~~Praske created several limited partnerships and limited
liability companies as part ofthe plan,including petitioners 511 OFW LP,
Gingerbread CourtLP,Malibu Broad Beach LP,Marina Glencoe LP,Blu House LLC,
and Boardwalk SunsetLLC.(CT2314-319,360-CT3 370.)He also created petitioners
Giganin Trust,Arenzano Trust,and Aquasante Foundation.(CT2 191-193,360-CT3
370.)Praske is the trustee ofeach ofthese trusts.(CT1 166-167;CT2 195;CT3 412.}3
Gaggero transferred one real property to each ofthe LPs and LLCs,and then
transferred his interests in the LPs and LLCsto trusts withinthe estate.(CTl 126,
162-163, 191;CT2 191-193,360-CT3 370.)Separately,he transferred the property
where he lived directly to Giganin,which is a Qualified Personal Residence Trust
within the meaning of26 U.S.C.§2702.(CTl 31;CT2 193-196.)
Each ofthese entities then hired petitioner Pacific Coast Management,Inc.
("PCM")to manage its finances and its real estate holdings.(CT2 187-188,195-196,
~~Therecordinthisappealiscited as"CT"and"RT."Citationsto"Trial
RT"and "JA"refer to the record in a prior appeal in this case, Gaggero v.
Knapp, Petersen, &Clarke, et al., 2nd Dist. No. B207567. Petitioners
respectfully ask the Court to takejudicial notice ofthe briefing, record and
decision in that appeal pursuant to Evidence Code sections 452,subdivision
(d),and 453.
3~Trusts are not legal entities and may only sue ar be sued in the name
ofthetrustee.(Galdjie v. Darwish(2003)113Cal.App.4th 1331,1343-1344.)
Thatis how they were broughtinto this case,and how they have litigated ever
since.This petition refers to each trust by its own namefor the sake ofclarity,
since Praske is trustee ofall three and since he also figures in the narrative as
an individual.
12. 269.)Gaggero hired PCM to manage his finances as well.(CT2252-257; Trial RT4
1836-1839.)
In light ofGaggero's real-estate expertise and his familiarity with the
properties,PCM hired him as an asset manager to oversee the portfolio and to guide
further purchases,sales,or other transactions.(CT1 140;CT2213-215,360.)Praske
accepts Gaggero's recommendations when he agrees thatthey're in the interests ofthe
estate.(CT2214:11-13.)
B. Respondents Serve as Gaggero's Attorneys.
RespondentKnapp,Peterson,&Clarke LLP is a law firm in which respondents
Steven Ray Garcia,Stephen M.Harris,and Andre Jardini are partners. Gaggero hired
them in or around August2000to advise and represent him in various matters.(JA2
521-534;Trial RT2610-615.)They resigned and withdrew their representation in
early 2002.(Trial RT3 908-909,1278-1279,1288-1289; Trial RT84616;Trial RT10
5750.)
C. The Underlying Malpractice Case.
Gaggero broughtthe underlying malpractice case in December 2002.(JA7
1934;CT1 19.)The case was tried without ajuryfrom July 23 to September 10,2007,
when the trial court granted respondents' motion forjudgment under Code ofCivil
Procedure section 631.8.(Trial RT10 5737-5738;JA1 147;JA2366.)The court
entered a defensejudgmenton February 5,2008(JA2421-423)which it amended on
May 19,2008 to add an award of$1,327,674.40 in fees and costs in respondents'
favor.(JA7 1884-1889.)
The Court ofAppeal affirmed both the original and amendedjudgments in full
on May 6,2010.(Gaggero v. Knapp,Petersen, &Clarke,etal.,2nd Dist.No.
B207567.)The trial court subsequently awarded respondents $193,245.90 in fees and
costs for that appeal,along with $320,591.78 in accrued interest,and amended the
judgment accordingly.(CT1 114-116.)
4
13. D. Post-Trial Discovery.
Respondents took Praske's third-party debtor exam on June 5,2009.(CT2357-
CT3 377.)The order to appear named him individually rather than as a representative
ofany entities,and did not seek any documents.(CT2357-358.)During the exam,
respondents questioned Praske about petitioners 511 OFW,Blu House,and
Boardwalk Sunset.His lawyer instructed him notto answer three particular questions,
and he followed that advice.(CT2362,366;CT3 368.)He answered the rest of
respondents' questions.
Respondents served Gaggero with interrogatories and requests for production
in 2001 and later successfully moved to compelfurther responses as to the
interrogatories.(CT2291-306.)There is no evidence ofwhatthe requests asked for or
ofwhether they prompted a motion to compel.
Respondents later served Gaggero with another set ofdocument requests
seeking,inter alia,the trust instruments for Giganin,Arenzano,and Aquasante.(CT2
329-354.)His March 20,2012responses said that he did not have the instruments but
that Praske did.(CT2333-334.)Respondents did not move to compel fiu-ther
responses,and did not subpoena the documents from Praske.(CT1 24;CT3 354.)
E. The Alter-Ego Motion.
On April 10,2012,respondents filed a motion under Code ofCivil Procedure
section 187 to deem the other ten petitioners Gaggero's alter egos and to further
amend thejudgment by naming them additionaljudgment debtors.("AJDs".)(CT1
24-58.)None ofthe AJDs had previously played any part in the case.
Respondents alleged that Gaggero had transferred assets to the estate in the
1990s but neither claimed nor showed he had ever received anything ofvalue from
Aquasante,Arenzano,or any ofthe LPs or LLCs.4~ They twice acknowledged that
4~The papers did say that Gaggero continued to live on the property he
had transferred to Giganin.(CT1 31:24-26.)
14. they were invoking the alter-ego doctrine because afraudulent-transfer claim would
have been untimely.(CT1 29:2-4,42:15-16.)
Respondents did not allege that any ofthe three trusts was revocable,or
acknowledge that revocability was an issue. They neither submitted the trust
instruments as exhibits nor claimed any ofthe petitioners had prevented them from
doing so.
The alter-ego motion was heard and granted on May 29,2012.(RT 28;CT3
540,541-542.)Atthe hearing,the AJDs explained thatthe trusts were irrevocable and
that respondents therefore had to serve their motion on the trust beneficiaries,which
they had not done.(RT 3:14-28.)The court noted that this argumenthad not been
raised in the opposition(RT 4:23-28),mistakenly said Praske had refused to produce
evidence aboutthe trusts in discovery(RT 7:8-15),and said thatthe AJDs had not
shown there were any beneficiaries.(RT 11:14-17.)Respondents said they had
documents in their files thatthey would have brought with them had they known these
issues would arise,and did not claim to lack any such evidence or assign blame for its
absence.(RT 6:10-17.)
The court granted the alter ego motion that same day.(CT3 540-542.)In so
doing,it held the documents'absence against petitioners and said some oftheir key
factual arguments were barred as a result.(CT3 540.)
F. The Present Appeal.
The Court ofAppeal affirmed the alter-ego order in an unpublished decision on
November 7,2014.The opinion said,inter alia,thatthe ownership requirement did
not apply because"this case does not involve an individual and a corporation."(Opn.
18.)It instead said equitable considerationsjustified treating Gaggero as the AJDs'
owner,and that actual ownership is notrequired"in the trust context."(Opn. 18-19.)
The opinion also held thatLaycock's rule is not absolute because that case"did
not involve circumstances where the trustee ofthe trust was the alter ego ofthe settlor.
(Opn.22.)The decision instead relied on Greenspan,which did involve such
D
15. circumstances.(Opn.22-23.)
Rejecting the argument that respondents had failed to prove the trusts were
revocable because they did not produce the trust instruments,the court said section
15400 creates a presumption ofrevocability which petitioners had failed to rebut.
(Opn.23-24.)The opinion said petitioners had prevented respondents from proving
the trusts were revocable,even though respondents had said nothing about
revocability in their motion.(Opn.23-25.)It rejected out ofhand Gaggero's argument
thatthe alter-ego order threatened the integrity ofestate planning in California.(Opn.
25.)The court did not rule at all on the argument that holding the instruments' absence
against petitioners was an improper issue sanction,instead rejecting a related
argument after acknowledging that petitioners had made both.(Opn.25;see RP 5-7.)
The opinion relied heavily on Schwarzkopfand on portions ofGreenspan,
withoutaddressing petitioners'argumentthatthose cases were wrongly decided.
(Gaggero ARB 32-26;AJD ARB 47-59.)
On November 19,several third parties asked the CourtofAppealto publish its
opinion,explaining it had clarified that irrevocable trusts may be liable as alter egos
and had limited the holding ofPostalInstantPress,Inc. v. Kaswa Corp.(2008)162
Ca1.App.4th 1510("PIP")that California law forbids outside reverse piercing ofthe
corporate veil. The court denied that request on November 26.
Gaggero and the AJDsjointly petitioned for rehearing on November 24.The
courtsummarily denied the petition on December 8.
//
//
7
16. LEGAL ARGUMENT
The alter-ego doctrine superficially resembles the law oftrust liability,since
both concern the availability ofother parties' assets to pay an obligor's debt.s~ But
they are different bodies oflaw,which are defined by different statutes and which
govern different situations.
Both the trial court and the Court ofAppealthoroughly conflated these distinct
areas oflaw. They are not alone; many other cases have made similar mistakes. The
laws governing the alter-ego doctrine and trust liability have become tangled,
confused,and contradictory.
I. REVIEW IS NECESSARY TO RESOLVE A SPLIT OF AUTHORITY
OVER WHETHER AND WHEN THE ASSETS OF ANIRREVOCABLE
TRUST ARE REACHABLE BY THE SETTLOR'S CREDITORS.
There are two conflicting lines ofauthority about whether a settlor's creditors
may reach assets he placed into an irrevocable trust.Laycock and Aguilar say those
assets are always offlimits,while Schwarzkopfand Greenspan say they may be
reached via the alter-ego doctrine.b~ The list ofcases on each side ofthe conflict
continues to grow.That ongoing divergence will only end when this Court intervenes.
Laycock says it is impossible for a settlor to expose the assets in an irrevocable
trust to the claims ofhis creditors,no matter what he does.(Laycock,supra,141
5'Other doctrines share this similarity, including agency, fraudulent
transfer, and respondent superior. They are also distinct from the alter ego
doctrine. (See, e.g., Sonora Diamond Corp. v. Superior Court(2000) 83
Cal.App.4th 523, 540 ["Though we think many courts have failed to
distinguish,accurately or at all, between an agency analysis and an alter ego
analysis, the two concepts are different and must be evaluated
independently."])
6~None ofthese cases says whether there might be other exceptions to
the rule against breaching irrevocable trusts, or why the alter-ego doctrine
should be the only one.
17. Cal.App.4th at p.31;accord Aguilar,supra,168 Cal.App.4th at p.40.)It explains that
this result is consistent with federal tax law,where even"breaches ofthe terms ofa
trust by a settlor will not make the settlor the owner oftrust property[.]"(Id.at p. 31.)
As it also explains,this result is mandated by the Probate Code,since"the only means
ofterminating the irrevocable nature ofa trust" are those setforth in section 15403,
which have nothing to do with the actions ofthe settlor.(Id. at p.30,emphasis added.)
Noting that sections 18200 and 19001 place assets in an irrevocable trust off-
limits to the settlor's creditors,Laycock notes that"by expressly giving settlors'
creditors the rightto reach only the assets ofrevocable trusts,the Legislature ... has
clearly indicated an intention that creditors are to be bound by the terms ofan
irrevocable trustto the same extent settlors, beneficiaries and other claimants are
bound by such an instrument."(Id. at p.31.)Itfurther explains that what matters is
whether the settlor is the asset's legal owner,as opposed to anon-owner who is able
to exercise authority he does not legally have.(Ibid.)
Just four years later,Schwarzkopfmade an irrevocable trust pay the debts ofits
settlor due to his conduct after the trust was created.-'~ Greenspan,which also involved
an irrevocable trust,says that both a trust and its settlor can be the alter egos of
businesses owned within the trust.(Greenspan,supra,191 Ca1.App.4th at pp.517-
522.)8~ It also contains extensive dicta saying thata trust can be liable as the alter ego
ofits settlor.(Id. at pp.518-522.)9
The conflict between these two lines ofauthority could not be more stark. Yet
'-WhileSchwarzkopfmentionedinpassingthatthetrustwasirrevocable
(Id.at p. 1034),it never considered whether thatfact was significant.
$'LikeSchwarzkopf,Greenspan mentionedthetrust'sirrevocabilityjust
once and did not consider whether it mattered.(Id.at p.497.)
9~This part of the opinion is dicta because the original debtors in
Greenspan did not include the settlor. They were a pair ofLLCs which were
owned by other entities owned by the trust.(Id.at pp.496-498.)
18. until the present case,there were no decisions —either published or unpublished —
which cited Laycock and its underlying statutes on the one hand and either
Schwarzkopfor Greenspan on the other. The November 7opinion in this case is the
firstto even acknowledge the possibility ofa conflict,but it says none exists because
Laycock states only a general rule which does notapply where the trustee is the
settlor's alter ego.(Opn.22-23.)
ButLaycock announced an absolute rule,not a general one.Under sections
15403,18200,and 19001,a settlor's creditors can never reach assets in an irrevocable
trust. Nothing in the governing statutes suggests there are any exceptions to this rule.
YetSchwarzkopfand Greenspan remain on the books and continue to be cited without
question.
Secondary sources only add to this confusion,citing Schwarzkopfand
Greenspan for the rule that creditors can breach an irrevocable trust under an alter-ego
theory. Miller and Starr,for example,cite Schwarzkopfwhen explaining that
"[a]lthough a corporation's assets cannot be reached to satisfy the obligations ofan
individual for whom it is an alter ego(sometimes called `reverse piercing'),the assets
ofa similarly utilized trust can be executed upon."(11 Cal.Real Est.(3d ed.)§ 32:27;
see also Cal.Prac.Guide Bankruptcy,¶21:302; 13 Witkin,Summary 10th(2014 supp.)
Trusts,§ 248,p.236;Cal.Civ.Prac.Probate and TrustProceedings § 24:171 [claiming
that section 18200's"general rule can be subject to exceptions,"and citing Greenspan
as such an exception].)
Atthe same time,other secondary sources —and sometimes other sections of
the same sources —endorse Laycock's holding while ignoringSchwarzkopfand
Greenspan.(See,e.g.,60 Cal.Jur.3d Trusts §§ 84, 135 fn.l, 313; 13 Witkin,
Summary 10th(2014 supp.)Trusts,§§203 p.227,260 p.238;Cal.Prac. Guide
Probate ¶2:109.)
There is no telling when,or even if, any appellate decisions or secondary
sources will address the conflict unless this Courtdoes so.It is as ifthe two lines of
10
19. authorities exist independently ofeach other — a state ofaffairs which will continue
until this Court puts a stop to it.
II. ONLY THIS COURT CAN CLARIFY WHETHER,AND UNDER
WHAT CONDITIONS,THE ALTER-EGO DOCTRINE MAY APPLY
TO NON-CORPORATE DEBTS.
A. The Doctrine Exists to Address a Problem Unique to Corporate
Debtors,So it May Never Apply to the Debts ofan Individual.
The alter-ego doctrine arose in the corporate context,to combat a problem
specific to corporations: Owners who treat their corporations as extensions of
themselves but who still invoke the corporations'separateness to evade personal
liability. That problem does not arise in other contexts,so there is no good reason to
apply the solution in other contexts either.
This Courtexplained more than 50 years ago thatthe doctrine exists so courts
can"determin[e]whether individuals dealing through a corporation should be held
personally responsible for the corporate obligations[.]"(Automotrizdel Golfo de
Calif. S.A. De C.V. v. Resnick(1957)47 Cal.2d 792,797,emphasis added.)That is
why alter-ego status requires"such unity ofinterest and ownership thatthe separate
personalities ofthe corporation and the individual no longer exist[.]"(Watson v.
Commonwealth Ins. Co. ofN.Y.(1936)8 Ca1.2d 61,68,emphasis added.)The
doctrine only"arises when a plaintiffcomes into courtclaiming that an opposing party
is using the corporate form unjustly and in derogation ofthe plaintiff's interests.
[Citation]In certain circumstances the court will disregard the corporate entity and
will hold the individualshareholders liable for the actions ofthe corporation[.]"
(Mesler v. Bragg Management Co.(1985)39 Cal.3d 290,301,emphases added.)
These concerns are relevant only where the original obligor is a corporation.
Where,as here,the obligor is an individual,it would make no sense to claim he is
using the form ofan individual human being to work an injustice on his creditors. Yet
that is what a court would have to find in order to properly hold any person or entity
11
20. liable as an individual's alter ego,even assuming the doctrine could apply to non-
corporate obligors.
B. Liability in Other Contexts Is Already Governed By Other Rules.
Another reason notto expand the alter-ego doctrine's scope is that other rules
already govern analogous claims outside the corporate context. The liability of
partnerships for debts oftheir partners is governed by Corporations Code section
16305,while the liability ofpartners for debts ofthe partnership is governed by
Corporations Code section 16307. The liability ofmembersfor the debts ofan LLC,
and ofLLCsfor the debts oftheir members,is governed by Corporations Code section
17703.4.'—°~ The respective liabilities oflimited partnerships and oftheir general and
limited partners are governed by Corporations Code sections 15903.03 [liability of
general partner for debts ofLP],15904.03 [liability ofLP for debts ofgeneral
partner],and 15904.04[liability ofgeneral partner for debts ofLP].'—'~ And as we have
seen,the liability ofirrevocable trusts for the debts oftheir settlars is governed by
Probate Code sections 18200 and 19001,which say there can be no such liability.
Extending the alter-ego doctrine into these contexts would subject non-
corporate obligors and their affiliates to inconsistent and conflicting rules. There is no
good reason to extend the doctrine beyond the context ofcorporation and owner.The
myriad cases which have done so already were all wrongly decided,and there will be
more such cases unless this Court clarifies the law.
'—°The original obligorsin Greenspan were both LLCs,butthecase did
not consider whether the alter-ego doctrine applies to an LLC's debt.
'—'The AJDsexplained in the CourtofAppealthatthere is no evidence
Gaggero has any membership or partnership stake inthe limited partnerships.
or LLCs(AJD AOB 54-60; AJD ARB 68-69.) The opinion rejected this
argumentbecause,"certainly in a courtofequity,"control over an entity held
by a trust amounts to "an ownership interest in trust assets within the
contemplation ofthe alter ego doctrine."(Opn. 19,relying on Greenspan.)
12
21. C. This Court Has Never Said the Alter-Ego Doctrine Applies Outside
the Context ofOwner and Corporation,but Lower Courts
Routinely Invoke it in Other Contexts.
Every time this Court has deemed someone liable as an alter ego,the original
obligor was a corporation and the alter ego was its owner.(See,e.g., Minifre v. Rowley
(1921)187 Cal.481,487-488;Riddle,supra,51 Cal.2d at pp.580-581.)The closest it
has come to approving any other form ofalter-ego liability was in Wood v. Elling
Corp.(1977)20 Cal.3d 353("Elling"), which hinted —butexpressly did not hold —
that in some circumstances a corporation might be liable as the alter ego ofan owner.
(Elling,supra,20 Ca1.3d at pp.365-366.)'- Even there the liability would have shifted
between a corporation and its owner;the direction ofthe shift would have been
different, butthe context would have been the same. Subsequent cases have uniformly
held that California law forbids such outside reverse piercing ofthe corporate veil.
(See,e.g.,PIP,supra,162 Cal.App.4th at pp. 1512-1513, 1518; Greenspan,supra,
12~Elling rejected an alter-ego claim because the corporations were
owned by trusts and not by the settlors directly. The settlors' lack of any
"ownership interest" meantthatthe unity ofinterestand ownership necessary
for alter-ego status was absent. (Elling, supra, 20 Ca1.3d at pp. 364-365,
emphasis in original.) The Court added in dicta that,"[i]n the circumstances
ofthis case, however, we believe that plaintiff should have been given the
opportunityto furtheramend his complaint.Ifit were alleged and proven that
the two trusts in question were themselves alter egos ofthe Wenckes,those
trusts would essentiallydrop outasindependentlegalentities[.]"(Id.atp.365,
emphasis in original.)The opinion expressly declined to say whether the law
would support such a claim.(Id. at pp. 365-366.)It also did not say whether
the trusts were revocable, which matters because only revocable trusts could
"drop out" as described.(Galdjie v. Darwish,supra, 113 Cal.App.4th at p.
1349.)To the extentElling had any bearing on irrevocable trusts when it was
decided in 1977, it was superseded when sections 18200 and 19001 were
enacted in 1986 and 1991,respectively.
13
22. 191 Ca1.App.4th at p.513.)13The doctrine thus may only apply to corporate debts,
which may only be transferred to corporate owners.
Yetthe Courts ofAppeal and the Ninth Circuit have repeatedly said the
doctrine is available in a variety ofother contexts.(See,e.g, Greenspan,supra, 191
Ca1.App.4th at pp.507-514[settlor liable as alter ego ofLLCs owned within
irrevocable trust];Schwarzkopf,supra,6206F.3d at pp. 1038-1039[irrevocable trust
liable as alter ego ofsettlor]; Troyk v. Farmers Group,Inc.(2009)171 Ca1.App.4th
1305, 1341-1342[affiliates with wholly distinct ownership liable as alter egos];
TorreyPinesBank v. Hoffman(1991)231 Ca1.App.3d 308,312-319[settlors
potentially liable as alter egos ofrevocable trust]; cf.Sonora Diamond Corp. v.
Superior Court(2000)83 Cal.App.4th 523,538-540[holding that doctrine does not
apply to relationship between principal and agent].)A recent unpublished case,which
found a triable issue offact under Greenspan and Schwarzkopfas to whether a
beneficiary was the real owner ofassets in a revocable trust"under the theory ofalter
ego," went so far as to say"the evidence suggested[the original obligor]was
effectively the alter ego ofherself."(Schwerin v. Kuhns(2014)2014 WL 1435898,
*6.)That a court would entertain the idea a person could be her own alter ego shows
just how dire the need for this Court's authoritative guidance has become.
None ofthose cases considered whether the doctrine is limited to corporations
and their owners,and none has offered any reason why it should apply in any other
context. They simply presume that it does and proceed from there,just as the Court of
Appeal did in the present case.
13~That is onereason whythe AJDscannot be liable as Gaggero's alter
egos.Sinceanindividual'sliabilitycannotbetransferred eventoacorporation
that he owns,it necessarily can't be transferred to a corporation he does not
own. There is no reason to treat anon-corporate entity he doesn't own any
differently.
14
23. D. Because Individuals Do NotHave Owners,California Law Says No
One May Be Liable as the Alter Ego ofan IndividualDebtor.
Even ifthe alter-ego doctrine could shift liability from anon-corporate obligor
to its owners,it could not apply to individuals.Individuals have no owners,so there is
no way a purported alter ego ofan individual could satisfy the ownership requirement.
A carollary ofthe ownership requirement is thus that nobody may ever be liable as the
alter ego ofan individual under California law.
III. THE COURT SHOULD RESOLVE THE CONFLICT BETWEEN
CASES WHICH SAY ALTER-EGO STATUS REQUIRES ACTUAL
OWNERSHIP AND CASES WHICH SAYIT DOES NOT.
This Court has repeatedly held that only actual ownership can satisfy the"unity
ofinterest and ownership"requirement.It first announced this rule in Riddle v.
Leuschner(1959)51 Ca1.2d 574("Riddle"). The original obligors in that case were a
pair ofcorporations that were managed by family members who treated the assets of
both corporations as their own.(Id. at p.576.)The plaintiffs claimed that several of
the family members were liable as alter egos,including some who owned stock and
some who did not.(Id.at pp.576-577.)This Court held that only owners could be the
corporation's alter egos and that non-owners who were equally culpable court not
because,without ownership,"there was not such unity of`interest and ownership'...
thatthe separate personalities ofthe corporations and the individual no longer
existed[.]"(Id. at p.580.)
The Court reiterated this rule in Minton v. Cavaney(1961)56 Cal.2d 576
("Minton"),which held,inter alia,thatRiddle's ownership requirement can be
satisfied with equity rather than stock. Unfortunately,it referred to owners ofequity as
"equitable owners."(Id. at p.579,580.)As we shall see,this phrasing is often misread
as describing an alternative to actual ownership rather than aform ofactual
15
24. ownership,thus turning Riddle's and Minton's holdings on their heads.14~
In a development this Court has yet to consider,LasPalmasAssoc. v. Las
Palmas Ctr. Assoc.(1991)235 Cal.App.3d 1220("LasPalmas")said the ownership
requirement does not mean that either the obligor or the alter ego must own the other,
and that it is enough ifboth share common ownership.(Id. at pp. 1249-1250.)This is
known as the single-enterprise rule,and it applies only"between sister companies."
(Id. at p. 1249.)Notably,it does not dispense with the required ownership connection
between the alter ego and the obligor; it instead says common ownership can be
enough where the owner treats the obligor and the alter ego as a single entity.
More recently,though,intermediate courts have insisted that alter-ego status
does not require ownership at all. As these holdings build on one another over time,
the doctrine's supposed scope has grown far beyond whatRiddle and Minton allowed.
To take but one example,Troyk v. Farmers Group,supra,held that Farmers
Underwriters Association(FGI),one ofits subsidiaries,and Farmers Insurance
Exchange(FIE)were alter egos under the single-enterprise rule even though FGI was
a corporation owned by its shareholders while FIE was an exchange owned by its
insureds.15~(Troyk,supra, 171 Cal.App.4th at p. 1315.)FGI performed administrative
services for FIE and was FIE's attorney-in-fact.(Id. at p. 1315, 1332.)The court
deemed them alter egos even though neither owned the other and even though they did
not share common ownership.(Id. at pp. 1341-1342.)While it invoked LasPalmas's
explanation that"under the single enterprise rule,liability can be found between sister
companies," it inserted the phrase"or affiliated"in brackets after the word "sister".
(Ibid.,attributing to LasPalmas,supra,235 Cal.App.3d at p. 1249,a holding that the
14~That is what happened here, when the Court ofAppeal affirmed on
the ground that "equitable ownership in a trust is sufficient to meet the
ownershiprequirementforpurposesofalteregoliability[.]"(Opn.19,quoting
Schwarzkopf,supra,626 F.3d at p. 1039.)
'—S~Ins. Code §§ 1280,et seq.
16
25. rule applies to "sister[or affiliated]companies.")Troykthus claimed not only that
mere affiliates can be alter egos,butthatthis had already been the law for 18 years. It
did not cite any ofthe cases in which this Court held otherwise. And its departure
from precedent was pushed even further by Wehlage v. EmpRes Healthcare, Inc.
(2011)791 F.Supp.2d 774,782,which misquoted Troyk's statementthat the single-
enterprise rule applies"between sister ar affiliated companies"by omitting the
brackets Troyk had placed around"or affiliated."(Id. at p. 782.)It thus removed any
hintthatthe clause is not part ofthe alter-ego rule.
Both Troyk and Welhage remain on the books,inviting future cases to build on
their errors.Indeed,that has already happened. Troyk helped set the stage for
Schwazkopf,which cited it for the premise that alter-ego status does notrequire
ownership at all.(Schwarzkopf,supra,626 F.3d at p. 1039[incorrectly claiming Troyk
treated one alter ego as"the equitable owner"ofthe other].)
ButSchwarzkopf,which overlooked Riddle completely,did more thanjust
ignore the ownership requirement.It insisted no such requirement had ever been
announced,either by this Court or by the Courts ofAppeal.In the Ninth Circuit's
words,"[n]o California case explicitly addresses the question" ofwhether"legal
ownership is an absolute requirementfor alter ego liability."(Schwarzkopf,supra,620
6F.3d at p. 1038.)Then,based on Minton's language about"equitable owners"and on
similar language in both Troyk and TorreyPines,it said "California case law suggests
that equitable ownership is sufficient"for alter-ego status even without actual
ownership.(Id. at pp. 1038-1039.)'-6'
These errors have continued to accumulate over time. Greenspan,which found
'-6~The legal owner ofassets in an irrevocable trust is the trustee,while
the equitable owners are the beneficiaries.(Title Ins. &Trust Co. v. Duffill
(1923) 191 Cal. 629,647-648.) The settlor in Schwarzkopffilled neither of
those roles,but the court still deemed him the equitable owner and held that
this wasenough to makethetrusthis alterego.(Schwarzkopf,supra,626F.3d
at pp. 1035, 1039.)
17
26. support in Schwarzkopf,likewise focused on"equitable ownership"rather than actual
ownership while ignoring this Court's holdings about actual ownership completely.
(Greenspan ,supra, 191 Ca1.App.4th at p.513.)What mightotherwise have been seen
as an aberrant ruling by a federal court was thus brought squarely back into California
law by yet another case that failed to cite Riddle.
But while Riddle is the definitive case on this point,it has been nearly forgotten
by the courts. Only two published decisions under California law have cited it in the
pasttwenty years.(Rowe v. Exline(2007)153 Cal.App.4th 1276, 1284;S.E.C. v.
Hickey(9`h Cir.2003)322F.3d 1123,1129-1130["Riddle ... establish[es]that an
individual must own at least a portion ofa corporation before an alter ego relationship
is deemed to exist under California law"].)Only four others cited it in the twenty
years before that,and only three ofthose citations concerned the ownership
requirement.(LasPalmas,supra, 235 Ca1.App.3d at p. 1249["Riddle stands for the
proposition that it would be unfair to impose personal liability on an individual for
corporate conduct unless he had an ownership interest in the company"];Minnesota
Mining &Manufacturing Co. v. Superior Court(1988)206 Cal.App.3d 1025,1028;
Firstmark Capital Corp. v. HempelFinancial Corp.(9th Cir.1988)859F.2d 92,94-
95.)
Courts have forgotten Minton's language aboutownership even more
completely than Riddle's,though they sometimes cite the case for other reasons. Aside
from the Ninth Circuit's misreading in Schwarzkopf,it was last cited in a published
case under California law almost44 years ago in Roman Catholic Archbishop ofSan
Francisco v. Superior Court(1971)15 Cal.App.3d 405,411,which also mistakenly
said the alter-ego doctrine required only equitable ownership.'—'~ And Elling's language
'—'Roman CatholicArchbishop'scitationtoMinton wasquotedin Wady
v. Provident Life and Accident Ins. Co. ofAmerica(2002)216 F.Supp.2d
1060,1066and again inNeilson v. Union BankofCalifornia,N.A.(2003)290
(continued...)
18
27. aboutthe ownership requirement has never been cited in any published cases.It's as if
this Court's pronouncements have vanished from memory,supplanted by lower-court
cases like Schwarzkopfand Greenspan which directly contradictthem. Cases which
ignore the ownership requirement are multiplying even as citations to the controlling
cases dwindle.Because Schwarzkopfaffirmatively says there are no contrary
decisions from this Court,that discrepancy is only going to grow unless the Court
intervenes.
The result has been widespread confusion about whether and how the
ownership requirement applies,and a slew ofcontradictory decisions which do not
even acknowledge that a contradiction exists.(See,e.g.,Schwarzkopf,supra;
Greenspan,supra; Zoran Corp. v. Chen(2010)185 Ca1.App.4th 799,811-815
[finding triable issue ofmaterial fact re alter-ego status based on evidence that alleged
alter-ego merely controlled the obligor];Sonora Diamond Corp. v. Superior Court,
supra,83 Cal.App.4th at pp.538-540[reversing alter-ego ruling on the facts while
saying doctrine applies to"the persons or organizations actually controlling the
corporation,in most instances the equitable owners"].)
Not one published case which cites Greenspan also cites Riddle,and only two
unpublished decisions besides the one in this case cite them both.One ofthose
decisions mentioned Riddle only for an unrelated point while doing exactly what
Riddle forbids: holding both a spouse who owned shares ofand a spouse who did not
liable as a corporation's alter egos because the extent oftheir control made both of
them "equitable owners."(Bay Ciry View,LLC v. SFBay Builders,Inc.(2014)2014
WL 4840438,*5.)'—g'
'—'(...continued)
F.Supp.2d 1101,1115.Along withSchwarzkopf,those are the only cases that
have cited this part ofMinton even indirectly since 1971.
'—g~The other acknowledges Riddle's ownership requirement without
(continued...)
19
28. Here again,secondary sources are as confused as the case law.Miller and Starr,
for example,describe Schwarzkopfas"applying California law and rejecting the
contention that alter ego liability cannot be imposed unless the individual is the legal
owner ofthe entity whose separate existence is to be pierced; equitable ownership
maybe sufficient to support afinding ofalter ego."(See,e.g., 11 Cal.Real Est.(3d
ed.)§32:27fn.9.)
Like the Schwarzkopfand Greenspan courts before it,the Court ofAppeal in
this case deemed ownership unnecessary,holding that an equitable interest in a trust is
equivalent to ownership —notonly ofa trust, but also ofbusinesses it owns —for
purposes ofthe alter-ego doctrine.(Opn. 18-19.)It ignored Riddle and Minton
completely. This was not an isolated occurrence. Courts will continue to treat
ownership as ifit is no longer required for alter-ego status unless this Courtreaffirms
that Riddle is still good law.
One reason why the law has departed so radically from this Court's prior
holdings is that the Court has not examined the nature or scope ofalter-ego liability
since 1977.It has neither approved nor disapproved appellate decisions which differ
from Riddle or Minton,giving little reason for lower courts to question any ofthe
subsequent cases. Case law has gone far astray while this Court's attention was
focused elsewhere.It is high time for the Courtto revisit the alter-ego doctrine and
rein in the expansion ofliability the lower courts have allowed.
IV. THE COURT SHOULD DECIDE WHETHER SECTION 15400
CREATES AN EVIDENTIARYPRESUMPTION THAT TRUSTS ARE
REVOCABLE.
The AJDs argued on appeal that,as the parties seeking reliefin the trial court,
respondents bore the burden ofproving the trusts were revocable.(AJD AOB 45-46;
'—g~(...continued)
mentioning the contrary holding in Greenspan.(Mt. Whitney Farms LLC v.
Sandstone Marketing,Inc.(2014)2014 WL 3827585,*5.)
20
29. AJD ARB 10-11.}Because the only way to tell ifa trust is revocable is by examining
the trust instrument(Crook v. Contreras(2002)95 Ca1.App.4th 1194,1206),
respondents had to introduce those instruments in order to carry their burden ofproof.
They neither introduced the instruments nor claimed that they had been prevented
from doing so. Accordingly,there was no substantial evidence the trusts were
revocable and no groundsfor a court to treatthem as ifthey were.
The Court ofAppeal rejected this argument,holding that section 15400 creates
a presumption ofrevocability and that it was thus petitioners who had to introduce the
instruments in order to overcome the presumption.(Opn.23.)'-9~
A statute only creates an evidentiary presumption ifit says"that a fact or group
offacts is prima facie evidence ofanother fact[.]"(Evid. Code §602.)Section 15400
contains no such language.20~ It is sometimes labeled"presumption ofrevocability"in
printed form,but that label was created by publishers and is not part ofthe statute.
This Court has never said whatsignificance,ifany,such labels have when
interpreting a statute. Some appellate decisions have deemed them irrelevant.(See,
19~The court also said the documents were absent'`despite defendants'
extensive attempts to discover them." (Opn. 5.} But the record shows
respondents had asked for the documents only once. (CT1 53:24-54:2.)
Gaggero objected and did not produce them.(CT2 329-354; CT3 468-495.)
Thereisnoevidencerespondentseven metandconferredabouthisobjections,
let alone that they brought a motion to compel,that the motion was granted,
that anyone failed to comply with it, that there was a subsequent motion for
issue sanctions,or that this second motion was granted. And while the court
acknowledged the AJDs had argued that ruling against them on this basis
improperly imposed both evidentiary and issue sanctions(AJD AOB 22-26),
the opinion addressed only the argument about evidentiary sanctions.(Opn.
25.)Petitioners pointed this out on rehearing,to no avail.(RP 5-7.)
20~Section 15400 says, in pertinent part,"Unless a trust is expressly
madeirrevocable bythetrustinstrument,the trust isrevocable bythe settlor."
A court which does not know whether"a trust is expressly made irrevocable
bythe trustinstrument"thus cannotknow how the statute applies to thattrust.
21
30. e.g.,People v. Avanessian(1999)76 Ca1.App.4th 635,641-642;Kahrs v. County of
LosAngeles(1938)28 Ca1.App.2d 46,49.)Butthe decision in the present appeal
shows that the message has not gotten out.
Instead ofan evidentiary presumption,section 15400 creates a presumption of
law —"a legal assumption that a court is required to make ifcertainfacts are
establishedand no contradictory evidence is produced."(Black's Law Dictionary(9th
ed.2009),emphasis added.)
No published decision has held that section 15400 creates an evidentiary
presumption that trusts are revocable. More generally,though,there appear to be no
published California cases which explain the difference between evidentiary and legal
presumptions,or how to apply them.The distinction is simple:legal presumptions say
what courts may presume in thepresence ofspecified types ofsupporting evidence,
while evidentiary presumptions say whatthey may presume in the absence ofsuch
evidence. The Court should fill this void so that other courts are notled astray.
V. THIS CASEPRESENTS ANIDEAL OPPORTUNITY FOR THE
COURT TO ADDRESS THESE ISSUES.
Petitioners' case raises all ofthese issues in ways that make it an ideal vehicle
for review.The briefing in the CourtofAppeal was uncommonly detailed and
extensive,so this Courtis not likely to see another case any time soon which
examined the issues in similar depth.Further,because the AJDs were all added to the
judgmentlong after the trial had ended,they were never deemed liable for their own
conduct. There is no need to figure out whether any oftheir arguments are distinct
from the alter-ego finding,as would often be true where alter egos were part ofa case
from the beginning.
Finally,because respondents offered essentially no evidence that was specific
to any ofthe particular AJDs(see Opn.20[acknowledging the lack of"evidence
specific to any of'the AJDs but excusing its absence because the AJDs were part ofa
22
31. single enterprise`'],the Court ofAppeal's decision was notfact-specific and hinged
instead on its understanding ofthe law. The arguments raised in this petition likewise
do not hinge on details about the facts,so the Court will not need to wrestle with the
case's factual or procedural minutiae.
It is hard to imagine any ofthese issues being presented more cleanly in
another case. The Courtshould seize this opportunity to resolve the growing conflicts
petitioners have identified.
CONCLUSION
The law governing trust liability in this state is a mess.The law governing
alter-ego liability is even worse. Where the two intersect,the cases and secondary
authorities are hopelessly confused. Only this Court can resolve the confusion. Given
the scale ofthese problems and the frequency with which they arise — afrequency
which will grow dramatically ifthe alter-ego doctrine is as broad as the Courtof
Appeal held —the Court should intervene now.
Ifassets in an irrevocable trust are not vulnerable,the Court should disapprove
Schwarzkopfand the relevant portion ofGreenspan before they cause even more
confusion than they already have. And ifthe assets are vulnerable after all,the Court
should say so before even more settlors rely to their detriment on the supposed
protections ofan irrevocable trust.
Individuals,trustees,and business entities need to know whether they are at
risk ofbeing deemed someone else's alter ego and how to avoid such liability.
Creditors need to know whether they can assert alter-ego claims against various types
ofdebtors,and whatthey need to prove in order to prevail. Courts need to know how
to resolve such claims when they arise. Nobody is well-served by leaving the current
ambiguities in place.
~'~The court did not explain how it concluded that they are a single
enterprise without evidence about how each operated.
23
32. Far the fc~rcgoing reaso~as,petitit~ners res~ectfull~• urge the Court to ~rai~t
review and re~~erse the Court cif1~ppeal'sjud~,zr~ent.
Dated:December 37,2014 Res~ectfuliy submitted,
LAVV{)FFICES(3F El~'4~'ARD A.IIC3F~I~~IAN
f
`.~~^` ~f~~ ,~ ~~
Edti~~ard A.Hc~ffii~an
1
Attorneys for Fetitianers Pacific past
Management,Inc. ~1I OFVI~ L.P.,Gin~,erl~xead
Court L.F., Malibu Braadl~each,I_..P., Marizia
Glc~~cae I...P., Blu Haase L.I,.C.,Board~~~alk St~rlset
L..L.C.,Jt~s~ph Praske as Trustee for Giganin Trust,
Arenzano Tnist,and Aquasante Four~datior~
WE,STLAI~E LA~i'GROUP
Dav d Bl~k Chatfield
Attarneys ft~r Petitio~3er Sieph~~~ M.Gaggera
24
33. CERTIFICATE f~►F ~V~RD COUNT
{CaI.R~1es ofCourt,rile 8.504(dj{1))
I'h~ teYt cifthis Briefconsists of7,bi6 words as ctiunted by the C'vrel
Vt~or~3Perfect versicm 1fi {also kr~c~~x-n as WordPerfect X6)u-c~rd-~rt~cessing scjfti~~are
u~iih which it eras t~~ritten.
~3ATED:December 17,2014 Respectfull~~ submitted,
E ~~ard t1.Hoffman
Lave Offices atEdward A.Haffinan
Attorney forP~titic~~l~rs Pacific Coast
Management,Inc.,S1l {)~'W L.P..
Gingerbread CourtL.P.,1VI~lib~u
Rx•oadbeach,L.P.,Marina Gle;ncc~e L.P.,Blu
HouseI,.L.C.,F3c~ardv~raik Sunset L.L.C.,
Joseph Praske as T'7~ustee fir Ciiganin Trust,
4renzanc~ Trust,anti Ac~uasante Foundation
25
35. Piled 1 1/7/14
NOT TO BEPUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court,rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified forpublication or ordered published,except as specified by rule 8.1115(b). This opinion has not been certified for publicationor ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
COURT OF APPEAL —SECOND DIST.
DIVISION EIGHT
~OV ~7, ~{}~4
STEPHEN M.GAGGERO et al., B241675 JOSEPH A. LANE,Clerk
Sinn Lui Depuri Clerk
Plaintiffs and Appellants, (Los Angeles County
Super. Ct.No.BC286925)
v.
KNAPP,PETERSEN & CLARKE et al.,
Defendants and Respondents.
APPEAL from an order ofthe Superior Courtfor the County ofLos Angeles.
Robert L.Hess,Judge. Affirmed.
Westlake Law Group and David Blake Chatfield for Plaintiffand Appellant
Stephen M.Gaggero.
Law Offices ofEdward A.Hoffman and Edward A.Hoffman for Appellants
Pacific Coast Management,Inc.;511 OFW LP;Gingerbread.CourtLP;Malibu Broad
Beach LP;Marina Glencoe LP;Blu House LLC;Boardwalk Sunset LLC;and Joseph
Praske,as Trustee ofthe Aquasante Foundation,the Arenzano Trust,and the Giganin
Trust.
Miller,Randall A. Miller and Steven S. Wang for Defendants and Respondents.
36. SUMMARY
In May 2010,we affirmed ajudgment,including an attorney fee award ofmore
than $1.2 million,against plaintiffStephen M.Gaggero in a malpractice lawsuit he
brought against defendants Knapp,Petersen &Clarke and several ofits principals.
Plaintiffdid not pay thejudgment.
In April 2012,defendants moved to add additionaljudgment debtorsto the
judgment. These additionaljudgment debtors included(a)six entities(four limited
partnerships and two limited liability companies)that were owned by plaintiffin 1998,
with assets then valued at$35 or $40 million;(b)an entity that managed those assets;and
(c)the trustee,Joseph Praske,ofthree trusts to which plaintiffhad transferred his
ownership ofall the limited partnerships and limited liability companies in 1998. The
trial courtfound all ofthese were plaintiffls alter egos,and added.as additionaljudgment
debtors the entities and Mr.Praske,in his capacity as trustee ofthe three trusts that held
all the entities to which plaintiffhad transferred his entire estate.
The additionaljudgment debtors and plaintiffappealfrom the court's order,
raising many arguments. They contend they cannot be alter egos as a matter oflaw,
because"outside reverse veil-piercing"is a doctrine that applies to them and is forbidden
in California. They contend the evidence ofalter ego status is insufficient,claiming there
is no"unity ofinterest and ownership"between them and plaintiff. They contend that,
even ifthey were alter egos,defendants did not prove they controlled the litigation.
They contend the trusts are irrevocable(the trust documents are not in evidence),
and irrevocable trusts may never be held liable for the debts oftheir settlors. They
contend the trial court's findings that trustee Praske refused to produce the trust
documents was not supported by the evidence(and that plaintiff's failure to produce them
is not attributable to Mr.Praske).
They contend defendants are estopped to claim they are alter egos because
defendants allegedly admitted in the underlying litigation thatthe additionaljudgment
debtors and plaintiffwere financially separate.
2
37. They contend the trial courtinvaded the probate court's exclusivejurisdiction over
the internal affairs ofthe trusts.
They contend the evidence ofalter ego status was lcnowrn to defendants before the
originaljudgment was entered in ?008,and defendants'failure to act until 2012 waived
their alter ego claim.
And,plaintiffcontends that affirming the alter ego finding in this case would
"threaten the integrity ofestate planning in California."
We find none ofthese arguments persuasive.and affirm the order granting
defendants' motion to add the additionaljudgment debtors to thejudgment.
FACTS
This litigation began in 2002,when plaintiffsued defendants for malpractice.
Plaintifflost,and the trial court granted.defendants' motion for attorney fees. We
affirmed thejudgmentin an unpublished opinion in May 2010. (Gagge~•o v. Knapp,
Pete~•sen &Clarke(May 6,2010,B207567)(Gaggero ~.) In December 2010,the
judgment was amended to include attorney fees and costs on appeal,plus postjudgment
interest,and amounted to more than $1.8 million.
Defendants'initial efforts to enforce thejudgment against plaintiff were
predictably fruitless. We say"predictably'because one ofthe principal issues in the
underlying malpractice case involved the tactics plaintiffemployed with otherjudgment
creditors. These included the assertion that he had no assets and wasjudgment-proof.
The trial court in the malpractice case described plaintiff's testimony on the
subjectthis way(a description we found. was fully supported by the record): "Between
1.995 and 1998,[plaintiff]did extensive `estate planning,' which supposedly resulted in
al] ofhis personal assets being transferred to various corporations,trusts and foundations.
Supposedly,he retained absolutely no ownership interest in and no control over these
assets. Indeed,he testified that he did not even have a checking account. When asked
how he paid any bills,[plaintiff) said in substance that he submitted them to the trustee of
his trust, who had absolute discretion to pay or not to pay them. Ifhe wanted cash,it was
available at the trustee's sole discretion — on sufferance,as it were. [¶] Ifthis sounds
38. unusual or unbelievable,the record is clear that[plaintiff)repeatedly used precisely these
assertions and argumentsto discourage creditors who were seeking to collect moneys he
owed them. The stonewall...and the claim ofno personal assets that could be liened or
attached,were...integral parts ofthe effort to discourage or defeat creditors." (See
Gaggero I, supra, B207567,pp. 13-14&fn. 8.)
This tactic continued unabated with respect to defendants'judgment,and in April
2012,defendants soughtto add the"various corporations,trusts and foundations"to the
judgment as additionaljudgment debtors. Below,we describe the creation ofwhatthe
parties call plaintiff's"estate plan";the evidence defendants submitted in support oftheir
motion to amend thejudgmentto add additionaljudgment debtors;and the trial court's
ruling.
1. The"Estate Plan"
In 1997,plaintiff,a real estate investor and developer,hired Mr.Praske to create
and implement an estate plan. Atthe time,the net value ofthe assets in plaintiff's estate
(according to Mr.Praske)was approximately $30 million. (Plaintifftestified the gross
fair market value ofhis properties was $35 to $40 million,and that"every asset,up to the
time I met Joe Praske, was owned 100 percent by me,either by virtue ofthe membership
interest,the shares,or the direct title to the property.'')
The estate plan Mr.Praske designed was structured so that each real property
plaintiffowned was transferred by grant deed to a limited liability company or limited
partnership. These entities are four limited.partnerships(511 OFW LP;Gingerbread
Court LP; Malibu Broad Beach LP and Marina Glencoe LP);and.two limited liability
companies(Blu House LLC and Boardwalk Sunset LLC). As the entities themselves say,
each ofthem was created "to own.a distinct piece of[plaintiffs]real property." Plaintiff
"would be the sole member ofthe limited liability company,and then would transfer that
membership interest to atrust." Two trusts(the Aquasante Foundation and the Arenzano
Trust)were created to hold the limited liability companies and limited partnerships.
A third trust(the Giganin Trust)was created as a qualified personal residence trust,and
ownership ofplaintiff's principal residence(a 1,500-acre property with several buildings
L!
39. on it)was in the name ofthat trust. According to Mr.Praske,the Giganin Trust is an
irrevocable trust with substantial estate tax benefits,and gives the taxpayer(plaintiff the
rightto reside atthe property.
Mr.Praske is the trustee ofthe three trusts. In June 2005,he testified the
beneficiaries ofthe Aquasante Foundation and the Arenzano Trust were the same,
namely,"a class ofbeneficiaries"comprised of"[a]ny member ofthe Gaggero family."
Mr.Praske said that plaintiffwas"a potential beneficiary"ofthe trusts,and that"[b]eing
a potential beneficiary meansthat it is up to the trustee to decide each year among the
class ofbeneficiaries who will be —who will receive distributableincome." (Plaintiff
also testified that he was"in a class ofbeneficiaries"ofthe Arenzano Trust.)
Mr.Praske had the sole and absolute authority to decide"which beneficiaries
would receive anything from the trust." By 2005,the value ofthe"total estate" —the
three trusts —had substantially increased,by"[a]t least 30to 40 percent,'" since it was
funded in 1998.
Mr.Praske and plaintiffhave testified or given sworn statements that the trusts are
irrevocable. As mentioned before,the trust documents are not in evidence,despite
defendants'extensive attempts to discover them,as described more fully below.
Mr.Praske could notremember whether he had ever distributed cash to plaintiff
from any ofthe trusts.
2. How the"Estate Plan" Works
Mr.Praske,in his capacity as trustee,appointed plaintiffmanager ofthe assets for
the entire estate plan. Plaintifftestified in 2005 that he wasthe asset manager for the
Mr.Praske is also the president,secretary and director ofPacific Coast
Management,Inc.(PCM),the corporation that managesthe assets,and the general
partner oftwo ofthefour limited partnerships. According to plaintiff, Mr.Praske"was
the trustee or managing member or majority membership owner or limited liability — or
limited partnership with the 100 percent ownership ofall ofthose various entities,i.e.,
limited liability companies,limited partnerships,or trusts thatformed general
partnerships." Mr.Praske"had control over the ownership entities ofeach ofthe entities
thatthey were a part of,"and."had control over all ofthe entities in the estate plan that he
created."
5
40. three trusts and for all ofthe entities owned by them. Plaintiff's duties included.
"[b]uying and selling,financing,trading,everything." His services included "[a]ll ofthe
tasks that go along with property managementas well as all ofthe aspects ofthe asset
management,such as refinancing,dealing with tax issues,insurance issues,making
decisions to buy,sell, buy or sell the asset,to improve the asset,overseeing any
improvements to the asset,financing,designing some ultimate disposition ofthe asset."
PCM,an additionaljudgment debtor,isthe management companyfor the assets
held bythe trusts. PCM paid plaintiff$3,000 a month(as of2001),plus the use ofa
company vehicle,for his services managing the assets ofthe additionaljudgment debtors.
Plaintifftestified he was a managing director ofPCM. According to plaintiff,PCM
"manages my estate,entities,and assets." Further,PCM "[m]anaged assets,companies,
me,mylife, myfanuly's life,trust,foundation,things ofthat nature." Plaintifftestified
that"[c)hecks were written by PCM,"but"I paid for it,I give PCM the money. PCM
writes the checks. They write checks for me. [¶] They pay my utilities. They pay my
credit card,they pay for my dogs'vet bills. I meanPCM manages my life. They are a
managementcompany for me personally and for other things."
The workings ofthe"estate plan"are illustrated by testimony Mr.Praske,
plaintiff,and plaintiff's accountant gave in June and July 2005 in the Yura litigation.
(This was a lawsuit plaintiffbrought alleging failure to close on a real estate transaction.
(See Gaggero I, supra, B207567,p.5,fn.2.)) Mr.Praske testified he had conferred with
plaintiffabout the availability ofresourcesto purchase the property in question in the
Yura litigation, which plaintiffwanted to purchase. Atthis conference,plaintiff"wasjust
confirming my commitment ofthe estate to purchase that property...." Mr.Praske was
then asked,"What did you say to[plaintiffs?"and he responded,"I said,like I always do,
I say yes."
Plaintiffalso testified in the Yura case. He was questioned about whether he had
funds available(and from what sources)for the transaction. He said: "[P]artofthe funds
might have come from my trust or all ofthe funds could have comefrom my trust.
[¶] ... [¶] ... [T]he funds would have comefrom me,ifthat's what you're asking. I
C
41. mean,you're asking where I would have gotthe funds or would they be coming from
me? [¶] ... [¶] ... It would have come from me into the escrow. But are you asking
where I would have got them from?... [¶] ... [¶] ... At all times I commanded the
resources to purchase this all cash or with a mortgage. And ifthere happened to be a
1.031 exchange opportunity available,I would have exchanged into it with one ofthe
entities that were ov~~ned by my trust." Plaintiffwas asked,"[O]n and after January 1 of
2000to the present date,have you commanded and do you command the resources
necessary to close this transaction pursuantto the terms ofthe purchase agreement,"and
he answered,"Yes." At another point he testified,"Mr.Praske and myselfalways had
the ability to ...pull cash directly out ofthe trust."
Plaintiffalso testifed about what would happen once the property was purchased
in his name. After the close ofescrow,"I would have options at that point.... I would
have the option,just like I did ~~hen I created — when I funded the trust with my asset,
when I took my assets and created my trust, my personal trust. [¶] I could take this asset
in my name,transfer it to an entity,a linuted liability company,a limited partnership,a
general partnership,or a corporation,and then have one ofthe trusts or the foundation
subsume — ifthat's the right word —that entity into the estate plan,just like I did the other
properties in 1997 and 1998;or I couldjust keep the property in my name."
James Walters,a certified public accountant who took over plaintiff's tax work in
1984 or 1985,testified that since 1988,plaintiffhad been involved in 10 real estate
purchase transactions. He met with plaintiffon all ofthose transactions,"to strategize as
to tax planning and also strategize as to the estate planning,and actually to strategize as
to which entities [plaintiff) managed would at times take ownership ofthe properties."
During those meetings,decisions were made on those issues,and plaintiffmade those
decisions. Mr.Praske's role was`[a]dvice." Mr. Walters was asked,"And once
[plaintiffs made the decision,was the decision —those decisions implemented?" He
answered,"Absolutely." Mr. Walters specifically testified that plaintiffmade the
decision on `'what entity would take title for these 10 various properties,"and that
plaintiff"command[ed)the resources necessary to purchase each ofthose properties."
7
42. Mr. Walters continued: "They all flow —the actual gains on these properties always flow
through [plaintiffs]t~ return,through the trusts and all the other entities."
3. Postjudgment Discovery
After thejudgment in the malpractice case,defendants conducted various forms of
postjudgment discovery. On June 8,2009,defendants took the third party debtor
examination ofMr.Praske,"concerning property ofthejudgment debtor in [his]
possession or control...."
Mr.Praske was represented by plaintiff's attorney,David Chatfield.
Mr.Praske testified that plaintiffhad no ownership interest in 511 OFW(an
additionaljudgment debtor),and Mr.Chatfield instructed him notto answer any further
questions about its operations on the basis ofits"privacy rights and trade secrets"and
irrelevance to the subject matter ofthe examination.
Mr.Praske further testified plaintiffhad no ownership interest in additional
judgment debtors Gingerbread Court LP,Blu House LLC,Boardwalk Sunset LLC,
Malibu Broad Beach LP,and Marina Glencoe LP. He was instructed not to answer,on
attorney-client privilege grounds,questions as to what plaintiffreceived in 1997 or 1998
in exchange for transferring his ownership in various properties to Gingerbread Court LP,
Blu House LLC,and Boardwalk Sunset LLC. He did not recall whether plaintiff
received any compensation for transferring property to Malibu Broad Beach LP,and
testified plaintiffreceived compensation in exchange for transferring property to Marina
Glencoe LP,but refused to describe it on counsel's instructions.
Mr.Praske testified that plaintiffhas never received money or any assetsfrom the
Arenzano Trust. Mr.Praske testified the Arenzano Trust was an irrevocable,
discretionary trust created under the laws ofAnguilla,and plaintiff"has no right
whatsoever to any propei-ry in the possession or control ofthe trust." He did not recall
whetherthe Arenzano Trust.had ever made any distributions to any ofplaintiff's family
members.
Defendants served plaintiffwith postjudgment special interrogataries(set one)on
Apri125,2011. On June 21,2011,plaintifffiled responses to defendants" first set of
43. production requests. (The interrogatories and production requests themselves are not in
the record.) No documents were produced. Plaintiffs response to the production
requests included objections that defendants'request was"not reasonably limited to trust
documents reflecting Gaggero's present interest as the beneficiary ofa trustand therefore
are not relevanttojudgmentenforcement...." Plaintiffalso objected thatthe request
invaded his privacy rights and those ofthird parties,and responded that he"has no
attachable interest as a beneficiary ofany trust."
On August9,2011,defendantsfiled a motion to compel,and on October 5,2011,
the court held a hearing on defendants' motion to compel further responses to
interrogatories. The court granted the motion"in its entirety";ordered "[c]omplete,
verified,supplemental responses,withoutfurther objection,"to specified interrogatories,
to be served by October24,2011;and imposed monetary sanctions of$2.000 on plaintiff
and his counsel.2
On January 31,2012,defendants filed a requestfor production ofdocuments(set
two). The production requests asked,among other things,for documents relating to the
trusts. On March 20,2012,plaintiffresponded,but produced no documents. He objected
on a host ofgrounds,and repeatedly responded that he had no documents responsive to
the requests in his possession or control. Among his objections were that requestsfor
documents"relating to assets transferred,sold or liquidated over a decade ago are clearly
irrelevantto thisjudgment enforcement and will not be produced by plaintiff."
On April 30,2012(afew weeks after defendants filed their motion to amend.the
judgmentto addjudgment debtors),plaintifffiled supplemental responses to defendants'
document requests. Again he produced no documents related to the trusts or his"estate
plan,"and objected on multiple grounds,including lack ofrelevance,privacy rights,
attorney-client privilege and attorney work-product doctrines. He repeatedly stated he
2 Plaintiffappealed from the order,and a year later,on October 3,2012,this court
dismissed the appeal(case No.B236834)on the court's own motion as having been taken
from a nonappealable order.
D
44. had no trust documents responsive to the requests in his possession or control,and
repeatedly stated that the trusts were irrevocable;he had no control or interestin them;
they were set up over 13 or 14 years ago,well.before defendants'judgment;and trust
documents'`are believed by plaintiffto be in the possession and control ofthe attorney
and Trustee,Joseph J. Praske...."
4. The Motion to Amend the Judgment
On April 10,2012,defendants filed their motion to amend thejudgmentto add the
three trusts and their assets,seven separate entities,as additionaljudgment debtors,
presenting the facts we have recited. Plaintiffopposed.the motion,as did the additional
judgment debtors,who made"a special appearance"to oppose the motion.
Counsel David Esquibias represented the seven entities and Mr.Praske in
opposing defendants' motion. They argued(as did plaintiffl thatthe court had.no
authority to add them to thejudgment because California law forbids"outside reverse
piercing";there was no evidence they were alter egos ofplaintiff;they did not control the
litigation between plaintiffand defendants;plaintiffdid notrepresent their interests
during any stage ofthe litigation;andjudicial and collateral estoppel precluded
defendantsfrom claiming they were alter egos because at trial the court"ruled that
[plaintiff)and the Entities were separate and that[plaintiff)had no authority to represent
them [(the entities)],as[defendants]argued at trial."
The trial court granted defendants' motion at a hearing on May 29,2012. Atthat
hearing,counsel David Esquibias,who filed the opposition on behalfofthe seven entities
named in defendants' motion,stated he also represented Mr.Praske,as trustee for the
three trusts that hold title to the seven entities. After the court indicated the motion
appeared to have merit and solicited argument,Mr.Esquibias asserted previously
unmentioned arguments,thatthe trusts were irrevocable;the probate court had exclusive
jurisdiction overtrust matters underProbate Code section 17000;the Probate Code
requires that notice ofdefendants' motion be given"to the vested currentincome and
principal and remainder beneficiaries ofthese trusts";no such notice had been provided;
10
45. and under section 18200,the assets ofan irrevocable trust are notavailable to the settlor's
creditors.3
The court asked Mr.Esquibias ifthere was"a reason why,ifthis is a meritorious
argument,it was notincluded in the opposition." Mr.Esquibias responded that he was
"specially appearing for the purpose ofarguingjurisdiction and notice,"and that"I have
no explanation as to why it wasn't in the opposition. I am late to this party."(No doubt,
the trial courtfound this to be as strange a response as we do,since Mr.Esquibias himself
submitted the written opposition two weeks previously,denominating it a"notice of
special appearance to oppose and opposition"to defendants' motion.)
When asked why he held back the arguments,counsel said "[i]t was not designed
to ambush the moving party,"and perhaps the matter could be continued for briefing.
The court said,"This is the time and place for the hearing on this motion,"and then asked
ifthere was evidence in support ofcounsel's assertions thatthe trusts were"irrevocable
and subjectto this that and the other." Counsel admitted there was nothing"other than
their[defendants']own statements in their pleadings which are considered admissions
thatthe trusts are irrevocable."
Mr.Esquibias said,"We will provide a copy ofthe trust documents to counsel
upon notice to the beneficiaries,"and the court inquired,"How would they know who the
beneficiaries are?" The court continued: "[Y]ou are asserting a series ofthings which
find no evidentiary support and the reason they have no evidentiary support...is that
you have,asI understand.it, you or Mr.Gaggero have precluded the other side from
access to the very information that you claim is necessary for them to give notice."
Mr.Esquibias responded that he"ha[d]aresolution." He said he was"new to this
case"and stated: "I will make sure that opposing counsel has a copy ofthe trust
documents,so that she can apprise the situation herself. She can give notice." Counsel
said he was not present atthe depositions(apparently referring to Mr.Praske's third party
3 Probate Code section 18200 states: "Ifthe settlor retains the powerto revoke the
trustin whole or in part,the trust property is subjectto the claims ofcreditors ofthe
settlor to the extent ofthe power ofrevocation during the lifetime ofthe settlor."
11
46. debtor examination,at which plaintiff's lawyer,Mr.Chatfield,represented.Mr.Praske),
"butI will tell the court now,and opposing counsel,I now represent Mr.Praske in his
capacity as trustee ofthese trusts,and we intend to completely and fully cooperate with
the requests for the documentation. [¶] There is no reason why it should not be
disclosed."
The courtasked ifthere was a reason why counsel did not have the trust
documents atthe hearing,and counsel said he had them,buthis notes were on the
documents. He stated his intention"to be fair and clear and transparent,"and asked for
an order thatthe documents not be made public,to which the court responded that
counselcould have applied for a protective order in atimely fashion. The courtfurther
stated that Mr.Praske,"during these preceding times,"had not had independent counsel:
"He has used Mr.Gaggero as[sic]counsel,which suggests to me —certainlyleads to an
inference,thatthe positions taken were coordinated positions." The court concluded that
this"[s]mells like more delay."
Mr.Esquibias said the delay would be short,and went on to renege on his earlier
statementthat"we intend to completely and fully cooperate with the requestsfor the
documentation.'' He said: "We would only want to provide information that is either
agreed upon between myselfand opposing counsel or ifwe could not come to some type
ofagreement,whatever this court would determine to be relevant."
The court declined to allow further delay. The court concluded that"these persons
and entities are alter egos ofMr.Gaggero and clearly,clearly,it would be inequitable not
to pierce the veil —notto get[at]these entities which are his alter ego. Since he has this
substantialjudgment against him,and he has attempted to use these devices to put his
assets beyond the reach oflegitimate creditors,and we have had a full and fair
opportunity to litigate this. [¶] ... [¶] I know at the momentthere is...zero evidence
in the record to support the position thatthere is a plethora of— I don'tknow who these
people are. [¶] And in fact,I do know that Mr.Praske was extraordinarily vague when
he was questioned at trial aboutthe identities ofthese...supposed beneficiaries. [¶]
You know,the decision was made long ago to keep the trust documents out ofthe hands
12
47. ofthe defense,and now to try and invoke the terms ofit, you know,without giving it to
the other side.... [T]his is a situation where these issues have been percolating for a
long time,and there is a fundamental unfairness to making[defendants]jump through.all
these hoops to collect thejudgment and saying no,no you can't have x, y,and z,and then
coming in at the last minute making arguments not set forth in the pleadings[based]on
evidence,not before the court and saying Judge give us a do over. [~] There is a
fundamental unfairness to that."
On the evidence ofalter ego status,the court observed: "[T]he exhibits attached to
the motion contain testimony ofboth Mr. Gaggero and Mr.Praske showing that the only
interest ofthe specially appearing parties is to protect 100 percent ofMr.Gaggero's
assets,both personal and business. Praske is the only trustee ofthe trust and foundation
involved in the motion. He is one ofonly two officers in PCM. PCM pays everything at
Gaggero's wishes without resistance or hesitance. Praske is also the registered agent for
service ofprocess at each ofthe business entities. [Defendants']evidence shows that
Mr.Gaggero's o~vn accountant testified under penalty ofperjury that the gains and losses
for the assets and the estate plan,ultimately flow through Mr.Gaggero's tax returns,
which is more evidence ofalter ego status. [¶] Gaggero controlled the litigation. He did
so by the way ofthe financial assets ofthe specially appearing parties. Their interests are
aligned with Mr.Gaggero. Withoutthem —without Mr.Gaggero they wouldn't even
exist. Mr.Praske testified that the sole purpose ofthe existence ofthe specially
appearing parties is to hold Mr.Gaggero's assets. They are one and the same. That is the
bottom line."
The courtrejected Mr. Chatfield's contention that Mr.Praske's testimony was that
"Mr.Gaggero makes the recommendation,and he[(Mr.Praske)]makes the decision,"
concluding that"Mr.Praske is for all intents and purposes a rubber stamp."
The court's order granting defendants' motion was signed and entered the same
day. On June 1,2012,plaintiffs attorney filed a notice ofappeal on behalfofplaintiff
and the additionaljudgment debtors.
13
48. DISCUSSION
1. Preliminary Motions
Both sides filed motions during the briefing ofthis appeal.
The additionaljudgment debtors ask us to takejudicial.notice ofseveral
documentsfiled in the trial courtin this case after the notice ofappeal: the August6,
20]2third amendedjudgment;the trial court's November 5,2012 order authorizing the
receiver appointed in this case(the subject ofa separate appeal by additionaljudgment
debtors)to approve and facilitate afinancing transaction arranged by four ofthe
additionaljudgment debtors;and defendants'December 3,2012 notice ofsatisfaction of
thejudgment. These documents are relevant,they say,to show they paid thejudgment,
were prejudiced by the order adding them asjudgment debtors,and their payment did not
waive their rightto seek reliefin this court. None ofthese points is at issue in this
appeal. While there is nothing controversial about the documents,they are notrelevantto
any matter atissue in this appeal,and there is no pointinjudicially noticing them.
Defendants ask us to dismiss plaintiffs appeal on the ground he lacks standing to
prosecute it. They say he has not been injured by the order addingjudgment debtors,
because he says he is completely separatefrom them. We see no pointin expending
judicial resources on interesting theoretical issues,or on plaintiff's many arguments about
why he is nevertheless aggrieved by the order. Moreover,there is no substantial
difference in the issues plaintiffand the additionaljudgment debtors raise on appeal,all
ofwhich we must consider in any event. And,given our disposition ofthis appeal,
plaintiffis,as a practical matter,very much aggrieved.by the order.
2. GeneralPrinciples on Adding Debtors to the Judgment
Code ofCivil.Procedure section 187 authorizes a trial courtto amend ajudgment
to addjudgment debtors. (NECElectronicsInc. v. Hurt(1989)208 Ca1.App.3d 772,778
(NECElectronics).) "Judgments are often.amended to add additionaljudgment debtors
on the grounds that a person or entity is the alter ego ofthe originaljudgment debtor."
(Ibid.)
14
49. The Supreme Courttells us that the alter ego doctrine "arises when a plaintiff
comes into court claiming that an opposing party is using the corporate form unjustly and
in derogation ofthe plaintiff's interests." (Mesle~~ v. BNagg Management Co.(1985)
39 Ca1.3d 290,300(Mesler).) Mesler instructs that there is"no litmus testto determine
when the corporate veil will. be pierced;rather the result will depend on the circumstances
ofeach particular case." (Id. at p.300.) There are"two genera]requirements: `(1)that
there be such unity ofinterest and ownership thatthe separate personalities ofthe
corporation and the individual no longer exist and(2)that,ifthe acts are treated as those
ofthe corporation alone,an inequitable result will follow.' [Citation.] And `only a
difference in wording is used in stating the same concept where the entity sought to be
held liable is another corporation instead ofan individual.' [Citation.]" (Ibid.)
Mesler explained the alter ego doctrine asfollows: "The essence ofthe alter ego
doctrine is thatjustice be done. `Whatthe formula comes down to,once shorn of
verbiage about control,instrumentality,agency,and corporate entity,is that liability is
imposed to reach an equitable result.' [Citation.]" (Mesler,supra,39 Ca1.3d at p.301
[holding that a parent corporation's liability as alter ego ofits subsidiary corporation
continued after settlement with the subsidiary;"[t]o hold otherwise would be to defeat the
policy ofpromotingjustice that lies behind the alter ego doctrine"].)
Alter ego liability may be applied to a trustee. (Greenspan v. LADTLLC(2010)
191 Ca1.App.4th 486,522(Greenspan)[ifthe trustee is the alter ego ofan individual,
then the individual"may be considered the owner ofthe[trust's] assets for purposes of
satisfying thejudgment';"`[t]rustees are real persons...and,as a conceptual matter,
it's entirely reasonable to ask whether a trustee is the alter ego ofa defendant who made a
transfer into[the]trust'";"`[a]lter-ego doctrine can.therefore provide a viable legal.
theory for creditors vis-a-vis trustees'"];c£ Wood v. Elling Corp.(1977)20 Cal.3d 353,
365-366[allegations that corporate defendants v~~ere alter egos ofindividual defendants
were barred by statute oflimitations on fraudulent conveyance cause ofaction,but
plaintiffshould have been allowed to amend his complaint,because "[i]fit were alleged
and proven that the two trusts in question[which owned the corporate defendants]were
15
50. themselves alter egos ofthe [individuals],those trusts would essentially drop out as
independent legal entities"].)
"`The decision to grant an amendment...lies in the sound discretion ofthe trial
court. "The greatest liberality is to be encouraged in the allowance ofsuch amendments
in order to see thatjustice is done."'[Citation.]" (Greenspan,supra, 191 Cal.App.4th at
p. 508.) Where,as here,facts are in dispute, we review the trial court's factfindings for
substantial evidence. (NECElectronics', supra, 208 Cal.App.3d at p. 777.)
3. Issues Raised by the Additional Judgment Debtors
We turn to the specific contentions the additionaljudgment debtors raise on
appeal,discussing first the several bases on which they claim they may not be added to
thejudgment as a matter oflaw.
a. "Reverse piercing" ofthe corporate veil(a red herring)
Additionaljudgment debtors contend they may not be added to thejudgment
because "reverse piercing"ofthe corporate veil is"forbidden by California law." They
rely on one opinion,PostalInstantPress,Inc. v. KasN~a Corp.(2008)162 Ca1.App.4th
1S10, 1512-1513(PostalInstantPress)to argue that, while traditional alter ego doctrine
allows an individual shareholder to be held liable for claims against a corparation,it does
not allow a corporation to be held liable for claims against an individual shareholder.
PostalInstantPress rejected the"variant ofthe alter ego doctrine,called third party or
`outside'reverse piercing ofthe corporate veil," and held that"a third party creditor may
not pierce the corporate veil to reach corporate assets to satisfy a shareholder's personal
liability." (Id. at p. 1513.)
The opinion in PostalInstantPress includes a thorough analysis ofcasesfrom
California,federal.and other state courts discussing"outside reverse piercing ofthe
corporate veil," both cases accepting,and others rejecting that theory ofalter ego. The
PostalInstantPress opinion rejected it as"a radical.and problematic change in standard
alter ego law." (PostalInstantPress,supra, 162 Ca1.App.4th at p. 1521.) The opinion
explains outside reverse piercing ofthe corporate veil creates unanticipated exposure for
innocent investors and secured and unsecured creditors who relied on the impregnability
51. ofthe corporate form;and that other remedies are available to the creditor ofan
individual shareholder,such as enforcing thejudgmentagainstthe shareholder's assets,
including his sharesin the corporation. (Id.atp. 1524.)
We find these are sound principles,consonant with Mesler's directive to look to
"the circumstances ofeach particular case." (Mesler,supra,39 Ca1.3d at p.300.) In
PostalInstantPress,the corporation atissue had other shareholders,the plaintifffailed to
show that innocent creditors would be adequately protected,and the plaintiffadmittedly
did not pursue other available legal remedies because it was"simply more expedient"to
add the corporation as ajudgment debtor. (PostalInstantPress,.supra, 162 Ca1.App.4th
at pp. 1524,1523.) In other words,the equities ofthe case did notjustify disregarding
the corporate form.
The facts and governing law in this case are entirely different. The additional
judgment debtors are Mr.Praske,as the trustee ofthree tz-usts plaintiffcreated for the sole
purpose ofholding his assets,and the entities plaintifftransferred into the trusts which
comprise the trust assets. Unlike a corporation,a trust is not a legal person which can
own property or enter into contracts. Since a trust is not alegal entity,it cannot sue or be
sued. A trust is a relationship by which one person holds legal title for the benefit of
another person. (Greenspan,supra,191 Ca1.App.4th at p.521.)
Wefind neither the holding nor the reasoning ofPostalInstantPress govern
whether the additionaljudgment debtors were properly found to be alter egos ofplaintiff
for the reasons setforth more fully below.
b. The ownership issue
Additionaljudgment debtors argue that,because plaintifftransferred his
ownership ofthe entities to the trusts,and he is notthe trustee,he has no ownership
interestin any ofthe additionaljudgment debtors and,ergo,alter ego doctrine cannot
apply. They say that defendants repeatedly conceded — by simply describing plaintiff's
transfer ofhis assets to the entities,and then his transfer ofownership ofthe entities to
the trusts —that plaintiffdoes not own any ofthem or their assets,aild this"binding
judicial admission"isfatal. And so,they think,game over.
17
52. We reject this simplistic,form-over-substance notion,and conclude on the
evidence in this case that plaintiffhad a sufficient ownership interest to satisfy alter ego
doctrine.
i. Ownership in the trust context
Additionaljudgmentdebtors correctly point outthatthe cases uniformly say that
one ofthe"two general requirements"for disregarding the corporate form is"`that there
be such unity ofinterest and ownership thatthe separate personalities ofthe corporation
and the individual no longer exist....' [Citation.]" (Mesler,supra, 39 Ca1.3d at p.300.)
They further point out that one Ninth Circuit case has said that"ownership ofstock is an
absolute requirementfor an alter ego finding." (SEC v. Hickey(9th Cir.2003)322 F.3d
1123, 1]29,id. at p. 1130.)
But this case does not involve an individual and a corporation. It involves trusts.
There are no stock owners ofa trust. It should go without saying that cases are not
authority for propositions they have not considered. (And,as many cases have noted,
"[b]ecause it is founded on equitable principles,application ofthe alter ego[doctrine]`is
not made to depend upon prior decisions involving factual situations which appear to be
similar,''" and"`"the conditions under which a corporate entity may be disregarded vary
according to the circumstances ofeach case."'[Citations.]'' (LasPalmasAssociates v.
LasPalmas Center Associates(1991)235 Ca1.App.3d 1220,1248.)
Here,it is ofcourse true that,on paper,plaintiffowns nothing. On paper,plaintiff
depends,for everything in life(except,perhaps,the $3,000 a month he earns for
managing a $40-million portfolio ofassets),on the generosity ofMr.Praske. Butthe law
is not so unyielding thatit cannottake account ofpractical realities. Plaintifftransferred
his ownership ofassets worth tens ofmillions ofdollars to entities that existfor the sole
purpose ofowning his properties,and then transferred his ownership ofthose entities to
the trusts,and appointed Mr.Praske the trustee. So,Mr.Praske has legal title to these
entities in his capacity as trustee. Butthe evidence demonstrated that Mr.Praske is
plaintiff's"rubber stamp." Moreover,under general principles oftrustlaw,"trust
beneficiaries hold `an equitable estate or beneficial interest in'property held in trust and
18
53. are `"regarded as the real owners]of[that]property."'[Citation.]" (Steinlzart v.
County ofLosAngeles(2010}47 Ca1.4th 1298,1319;see In ~~e Schwartzko~f(9th Cir.
2010)626 F.3d 1032,1039[under California law,"equitable ownership in a trust is
sufficient to meetthe ownership requirement for purposes ofalter ego liability"].)
ii. Substantial evidence ofownership
Substantial evidence supported the trial court's alter ego findings. Like the trial
court, we do not believe that Mr.Praske has any actual authority to decide what to do
with the assets held by the trusts. Itis plauitiffwho exercises that authority. Plaintiff's
testimony in the Yura litigation showed thathe treated the trusts like his own personal
piggy banks. The trial court described Mr.Praske as plaintiff's"rubber stamp."
Extending the piggy bank analogy, we find the record shows Mr.Praske was the rubber
plug on the underside ofthe piggy banks that plaintiffcould remove any time he wanted
to spill funds into his own hands at will.
Plaintiffplainly said that he could getfunds from his trust to buy the property,and
then either putthe property into the"estate plan"or keep it in his own name. Since
Mr.Praske said yes,"like I always do,"to providingfundsfrom the trust to purchase
property that plaintiffcould keep in his own name,it seems quite clear that plaintiff(who
is, Mr.Praske admits,"a potential beneficiary"ofthe trusts)not only controls the trusts
(and the entities owned by the trusts)but also —and certainly in a court ofequity —has an
ownership interest in trust assets within the contemplation ofalter ego doctrine. (See
Greenspan, sup~~a, 191 Cal.App.4th at p.518[ifthe trustee is the alter ego ofan
individual,then the individual"may be considered.the owner ofthe [trust's]assets for
purposes ofsatisfying thejudgment").) So it is here.
c. Other alter ego requirements and supporting evidence
Additionaljudgment debtors also contend that the evidence was insufficient to
establish the required unity ofinterest and ownership. They rely on Misik v. D'Arco
(2011)197 Ca1.App.4th 1065(Misik), where the courtlisted some ofthe"manyfactors to
be considered"in deterniining whether there is sufficient unity ofinterest and ownership
that"the separate personalities ofthe individual and the corporation no longer exist...."
19
