Wednesday, November 12, 2014
C.A. Paves Way for Law Firm to Collect on $1.8 Million Judgment
Div. Eight Rejects Contentions of Multi-Millionaire With Elaborate Scheme to Evade Creditors
By a MetNews Staff Writer
The Court of Appeal for this district has given a boost to the Glendale law firm of Knapp, Petersen & Clarke and some of its principals in their quest to collect an attorney fee award of more than $1.8 million from a man who sued them in 2002 for legal malpractice and lost.
Div. Eight, in an opinion by Justice Elizabeth Grimes, affirmed an order adding alter egos of the plaintiff, real estate investor and developer Stephen M. Gaggero.
Los Angeles Superior Court Judge Robert L. Hess, who presided over the malpractice action and has remained in charge of the case through its span of nearly 12 years, in 2008 had awarded fees to the defendants in the amount of more than $1.2 million. The appeals court in May 2010 affirmed the judgment in an unpublished opinion, and the judgment was amended in December 2010 to reflect costs and fees in connection with the appeal.
In 2012, Hess added as judgment debtor’s entities which he found to be alter egos Gaggero. The judge also declared La Cañada attorney Joseph Praske to be a judgment debtor.
It was Praske who set up Gaggero’s elaborate estate plan, placing each of the entities owned by the client—cumulatively valued in 1998 at between $35 million to $40 million—in one of three trusts. Praske is trustee of the trusts.
Gaggero claims to be judgment-proof.
In her unpublished opinion on Friday, she quoted Hess as saying of Gaggero:
“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. If he wanted cash, it was available at the trustee’s sole discretion—on sufferance, as it were. [¶] If this sounds unusual or unbelievable, the record is clear that [plaintiff] repeatedly used precisely these assertions and arguments to discourage creditors who were seeking to collect moneys he owed them. The stonewall...and the claim of no personal assets that could be liened or attached, were...integral parts of the effort to discourage or defeat creditors.”
Game Not Over
Hess was correct in adding Gaggero’s alter egos as judgment debtors, Grimes said, explaining:
“Additional judgment debtors argue that, because plaintiff transferred his ownership of the entities to the trusts, and he is not the trustee, he has no ownership interest in any of the additional judgment debtors and, ergo, alter ego doctrine cannot apply. They say that defendants repeatedly conceded—by simply describing plaintiff’s transfer of his assets to the entities, and then his transfer of ownership of the entities to the trusts—that plaintiff does not own any of them or their assets, and this ‘binding judicial admission’ is fatal. And so, they think, game over.
“We reject this simplistic, form-over-substance notion, and conclude on the evidence in this case that plaintiff had a sufficient ownership interest to satisfy alter ego doctrine.”
Relying on “practical realities,” Grimes said:
“[I]t is of course true that, on paper, plaintiff owns nothing. On paper, plaintiff depends, for everything in life (except, perhaps, the $3,000 a month he earns for managing a $40-million portfolio of assets), on the generosity of Mr. Praske. But the law is not so unyielding that it cannot take account of practical realities. Plaintiff transferred his ownership of assets worth tens of millions of dollars to entities that exist for the sole purpose of owning his properties, and then transferred his ownership of those entities to the trusts, and appointed Mr. Praske the trustee. So, Mr. Praske has legal title to these entities in his capacity as trustee. But the evidence demonstrated that Mr. Praske is plaintiff’s ‘rubber stamp.’ ”
Going further, she said: “[W]e find the record shows Mr. Praske was the rubber plug on the underside of the piggy banks that plaintiff could remove any time he wanted to spill funds into his own hands at will.”
Grimes added that trust beneficiaries are the “real” owners of trusts, and this equitable ownership by Gaggero is sufficient to permit a trust to be declared his alter ego.
Rule Found Inapplicable
The additional judgment creditors pointed to the principle that an irrevocable trust cannot liable for debts of the settlor. Grimes responded that there’s nothing in the record showing the trusts to be irrevocable, but added that even if they are, “that principle has no pertinence where the trustee is the alter ego of the settlor of the trust.”
The appellants cited a 2008 case that says that a corporation cannot be held liable for debts of its shareholders.
“The facts and governing law in this case are entirely different,” Grimes declared, proceeding to point out:
“Unlike a corporation, a trust is not a legal person which can own property or enter into contracts. Since a trust is not a legal 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.”
The case is Gaggero v. Knapp, Petersen & Clarke, BC286925.
David Blake Chatfield of the Westlake Law Group in Westlake Village represented Gaggero; Westwood attorney Edward A. Hoffman acted for the alter egos; and Randall A. Miller and Steven S. Wang of the Bunker Hill law firm of Miller LLP argued for Knapp, Petersen & Clarke.
Div. Eight filed two separate unpublished opinions by Grimes related to the litigation. Hess’s award to Knapp, Petersen & Clarke of fees and costs in connection with the 2012 proceeding to add judgment debtors was upheld, as well as his order for the appointment of a receiver and assigning to the defendant financial rights of the alter egos.
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