Trustee May Be Added to Judgment as Alter Ego

Friday, December 31, 2010

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Trustee May Be Added to Judgment as Alter Ego—C.A.

By KENNETH OFGANG, Staff Writer

Assets held in trust may be reached by a judgment creditor who can show that the trustee is the debtor’s alter ego, the Court of Appeal for this district ruled yesterday.

Div. One said Los Angeles Superior Court Judge Joanne O’Donnell erred in denying a motion to add an individual, a trustee, and two limited liability companies as additional debtors subject to a judgment of more than $8 million.

Presiding Justice Robert Mallano, writing for the panel, said “the trial court incorrectly decided virtually every issue in this case,” in part by ruling that a trustee cannot be added to a judgment as an alter ego under Code of Civil Procedure Sec. 187.

“[W]e determine that although a trust is not subject to the alter ego doctrine because it is not a legal entity, a trustee may be added as a judgment debtor,” Mallano explained.

The ruling arises from a long-running dispute between developers Barry Shy and Andrew Meieran over the renovation of the Higgins Building in downtown Los Angeles. The 1910 edifice, which once housed the Los Angeles office of Clarence Darrow, is located next to the older Wilcox Building, where the offices and production facilities of the MetNews are located.

The then-dilapidated Higgins Building was sold in 1998 to LADT LLC, a company formed by Shy and Meieran to convert the building into housing units.

Partners Split

When Shy proposed to convert the building into loft-style condominiums, Meieran—whose interests include construction of bars in historic buildings (he recently bought the iconic Clifton’s Brookside cafeteria a few blocks from the Higgins Building)—agreed to sell his family’s share of LADT to Shy and acquire commercial space in the ground floor of the Higgins building for what ultimately became the Edison bar.

The pair became embroiled in a series of disputes regarding the building, as well as another downtown property.

A 2005 mediation concerning the Higgins property resulted in an agreement that LA ABC, the entity formed by Shy to manage the Higgins Building after the Meieran interests in the residential part were sold, would make or pay for certain repairs to the commercial area retained by Meieran, in full satisfaction of Meieran’s claims.

The agreement further provided that any dispute arising under the agreement would be referred to mediation, and, if necessary, to binding arbitration.

The Meieran trustee, Arnold Greenspan, eventually sued LADT, LA ABC, and Shy, alleging that more than $4.2 million was still owed on the purchase price for the building, and that LA ABC had interfered with Meieran’s use of parking and storage spaces.

A Los Angeles Superior Court judge ordered the claims arbitrated under the previous agreement, and retired Los Angeles Superior Court Judge Keith Wisot was eventually chosen as the arbitrator.

Wisot ruled two years ago that LADT and LA ABC were jointly and severally liable for breach of contract, but rejected the Meieran trust’s other claims, including claims against Shy for breach of guaranty, breach of fiduciary duty, and conversion.

He awarded $8,449,299.40 in compensatory damages, interest, attorney fees, and costs. Judgment confirming the award, in the amount of $8.8 million including interest accruing between the date of the award and the date of judgment, was entered in August 2008 and was affirmed in a prior appeal.

Money Dwindles

In attempting to collect the judgment, the trustee learned that less than $13,000 remained of the $47 million collected from the sale of Higgins condominiums.

In August of last year, the plaintiff moved to add Shy; Moti Shai; Harpro, LLC; and 6th St. Loft, LLC to the judgment, claiming they were the alter egos of LA ABC and LADT. Shai, who is Shy’s brother, was named in his capacity as trustee of the BR Shy Irrevocable Trust, to which Shy had transferred ownership of LA ABC and LADT.

O’Donnell denied the motion.

With respect to Barry Shy, she concluded that because he was a prevailing party in the arbitration, he could not be made a judgment debtor. With respect to the Shy Trust, she concluded that there was no authority to apply the alter ego doctrine to a trust.

The trial judge was wrong as to both, Mallano said.

There is no automatic rule that a party prevailing in arbitration cannot be added to the judgment, he explained. “Rather, it would depend on the facts of the case,” he said.

In this instance, there was nothing inequitable about adding Shy to the judgment, because the award was based on the contract claim, to which Shy was not a party, Mallano said. That Shy successfully defended other claims did not establish that he was not the alter ego of the entities held liable for breach of contract, the jurist reasoned.

With respect to Shai, the trustee, Mallano concluded that “the alter ego doctrine may apply to a trustee but not a trust,” noting that Court of Appeal cases in California and elsewhere have held to that effect.

“If Moti Shai is the alter ego of Barry Shy, then Barry may be considered the owner of the Shy Trust’s assets for purposes of satisfying the judgment,” the presiding justice wrote.

The case is Greenspan v. LADT, LLC, B222539.