Res Judicata Cannot Be Used to Shield Fraudulent Debtor Behavior

In the recent case of Wells Fargo Bank, National Association v. Weinberg, the Court set an important precedent that applies to the amendment of judgments to add individual debtors as alter egos of the corporation:

 

“The doctrine of res judicata1 did not bar the amendment of a judgment to add an alter ego2 as a judgment debtor, even if the issue of alter ego could have been raised earlier, as long as alter ego liability is a separate and distinct claim from the underlying action.”

In Weinberg, Wells Fargo sued attorney Weinberg and his law firm for repayment of $57,000 from a business line of credit.  Only the law firm was adjudged liable, and not Weinberg as an individual on the basis that there was no writing memorializing the guaranty.  Wells Fargo thereafter moved to have the judgment amended to add Weinberg himself as a judgment debtor (alter ego), which was granted by the trial court.  The Court of Appeal affirmed, rejecting Weinberg’s contention that res judicata barred Wells Fargo’s amendment of the judgment because the trial court sustained Weinberg’s demurrer without leave to amend on the issue of the oral guaranty, which thereby determined as a matter of law that Weinberg was not liable for the law corporation’s debts on any theory including alter ego.

 

The Court disagreed that res judicata applied because this doctrine does not operate when Weinberg’s behavior as the corporation’s alter ego was a separate and distinct harm from the law corporation’s breach of contract:

 

“The motion to add Weinberg to the judgment sought a remedy, not for breach of contract, but for Weinberg’s exercise of control over the law corporation that deprived Wells Fargo of the ability to collect the judgment against the law corporation for breach of contract. These are separate and distinct wrongs…”

 

Further, the Court explained that a claim against a defendant based on an alter ego theory is not itself a claim for substantive relief, but rather procedural, i.e., to disregard the corporate entity as a defendant and to hold the alter ego individuals liable on the obligations of the corporation where the corporate form is being used to escape personal liability, sanction a fraud, or promote injustice.  Thus, because Wells Fargo was not seeking new relief but to enforce its judgment, res judicata did not apply.

 

The Court also noted that, in any event, substantial evidence showed that Wells Fargo did not know until 2011 that after dissolving the law corporation in 2009, Weinberg continued doing business as a sole proprietor under the same name, using the same offices, employees, equipment, website, and phone number. The building where the law corporation operated had been owned by Weinberg and his wife since 2003, and the corporation paid for Weinberg’s vehicle.  Additionally, before dissolution, Weinberg disbursed all the corporate assets to family members and himself, including paying over $420,000 to himself and family members.  The Court concluded that the corporation was a mere shell or conduit for Weinberg’s affairs.  So, substantial evidence supported the Court’s finding of alter ego liability, and amendment of the judgment to add Weinberg as a judgment debtor was proper.

 

If you have any questions about this ruling, let us know. At PLP, we are experienced commercial loan and lending attorneys with the practical legal skills and knowledge to assert our clients’ interests or defend them in breach of contract actions and judgment enforcement, and have the expertise to navigate these complex areas of business litigation.

 

 

1The doctrine of res judicata holds that a matter already decided on its merits by a court having competent jurisdiction is not subject to litigation again between the same parties.

 

2A doctrine used by the courts to ignore the corporate status of a group of stockholders, officers, and directors of a corporation in reference totheir limited liability so that they may be held personally liable for their actions,notably when they have acted fraudulently or unjustly.