TWIN MED v. JPH MANAGEMENT, INC.,

Filed 10/14/09

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION EIGHT

APPEAL from a judgment of the Superior Court of Los Angeles County, Jane Johnson, Judge. Affirmed.

Klee, Tuchin, Bogdanoff & Stern and Matthew C. Heyn for Plaintiff and Respondent.

Narvid Scott and Robert P. Weiss for Defendants and Respondents.

* * * * * *

Respondents JPH Management, Inc., and Jeoung H. Lee (collectively JPH) obtained a judgment against plaintiff Twin Med, Inc. (INC) for costs of suit and successfully moved to amend the judgment to add appellant Twin Med, LLC (LLC) as an additional judgment debtor. LLC appeals from the amended judgment. The trial court found LLC was a mere continuation of the business of INC, the original judgment debtor, under the well established theory articulated in Ray v. Alad Corp. (1977) 19 Cal.3d 22 (Ray) and McClellan v. Northridge Park Townhome Owners Assn. (2001) 89 Cal.App.4th 746 (McClellan).

LLC in essence contends that (1) the trial court abused its discretion in allowing JPH to assert the mere continuation theory for the first time in reply papers, (2) the court abused its discretion in failing to accept a declaration tendered during the hearing and (3) there was no substantial evidence that LLC gave inadequate consideration for INCs assets. We hold that the trial court did not abuse its discretion in considering the mere continuation theory or in not admitting the declaration and that substantial evidence supports the courts finding LLC was a mere continuation of INC. We therefore affirm the amended judgment.

FACTS AND PROCEDURAL HISTORY

1. JPHs Second Amended Judgment for Attorney Fees and Costs

INC filed this action against JPH, a nursing home operator, for breach of contract and common counts alleging JPH had not paid for certain delivered medical supplies. The trial court granted a judgment in favor of JPH in May 2005, from which INC appealed. This court affirmed the judgment in a nonpublished opinion, Twin Med, Inc. v. JPH Management (March 23, 2007, B185842).

Following issuance of the remittitur in May 2007, JPH sought from the trial court an award against INC for attorney fees and costs. In September 2007, the trial court entered a second amended judgment in JPHs favor in the amount of about $62,000.

2. Attempts to Collect on Judgment

After its entry, JPH sought to collect on the second amended judgment. However, INC informed JPH in substance that unless JPH was willing to give a substantial discount on the judgment, Good luck trying to collect . . . .

JPH then attempted to conduct postjudgment discovery, meeting substantial resistance by INC. The discovery ultimately disclosed that nursing homes that formerly had been customers of INC were instead purchasing and paying for medical supplies through LLC rather than INC. JPH obtained assignment orders from the court and had them served upon six nursing home customers of INC. In response, several of the nursing homes hired an attorney, who informed JPH that even though his clients were longtime customers of INC, their current invoices appeared to have been issued by LLC.^[1] The attorney initially indicated to JPH his clients would comply with the assignment orders but later changed this position stating LLC had threatened to withhold nursing home supplies from his clients if payment was withheld. Further investigation by JPH indicated LLC had the same management, the same location, the same supplies and the same business as INC.

Through the discovery, JPH learned INC effectively was out of business and substantially all of its assets and business had been taken over by LLC.

3. Motion to Amend Second Amended Judgment

A. JPHs Motion

JPH moved to add LLC as an additional debtor on the judgment, after abortive attempts to have the matter heard ex parte. JPH contended that the nursing supply business formerly conducted by INC was now being conducted by LLC and argued LLC was the alter ego of INC.

JPH provided evidence that both entities shared the same business address, had the same president or managing member (Steve Rechnitz), shared the same website and used the same facsimile number for their accounting department. The accounting department for LLC used some of the same printed forms showing the business name of the company as INC. Evidence provided the court included a fax sent by LLC to a nursing home customer in which the accounts payable clerk listed her web address on the fax cover sheet as Lily@TwinMedinc.com. (Italics added.)

When TwinMedinc.com was typed into a web browser, that address redirected the user to another website, www.tmedonline.com, which was entitled, TwinMed, Medical Supplies and Services. The Who We Are section on that website stated that Twin Med was Founded in 1998 by Steve and Shlomo Rechnitz. (Italics added.) LLCs website also stated, Since our inception over 14 years ago, TwinMed has prided itself on delivering the highest quality and best value to our customers. (Italics added.) Records derived from the California Secretary of State website showed that INC was formed in December 1997, but LLC was not formed until March 2004, so the website could not have been referring to LLC only.

The Contact TwinMed section on the TwinMed, Medical Supplies and Services website listed LLC at the same address in Sante Fe Springs and at the same fax number as INC.

JPH asserted that INCs transfer to LLC left INC unable to pay its creditors. JPH had unsuccessfully attempted to collect its $62,000 judgment since September 2007, and since then it had attempted to locate assets through discovery. JPH had propounded interrogatories to INC seeking information about the amount and source of INCs monthly revenue. By agreement of counsel, JPH limited the inquiry to the period from September 2007 to the present. INC responded, claiming it did not have any substantial business revenue for the period in question. INC further advised it did not use a bookkeeper during the same period and had no contracts. Responding to a demand for production of documents, INC stated it had no documents to produce other than a bank statement showing a balance of about $300.

C. LLCs Opposition

In opposition to JPHs ex parte application and in its opposition to the motion to add LLC as an additional judgment debtor, LLC asserted it was not the alter ego of INC and it had no identity of interest with INC. LLC attached the declaration of Steve Rechnitz in each instance.

Steve Rechnitz declared he had formed LLC, a Delaware limited liability company, as a direct subsidiary of INC in February 2004. He and his brother, Shlomo, were each 50 percent owners of INC. About the time of LLCs formation, INC transferred most of INCs assets to LLC to facilitate an investment by Bison Capital Structured Equity Partners, LLC (Bison), a third party investor that Steve Rechnitz stated was unassociated with either him or his brother. Bison placed two members on LLCs board of directors, the members of whom included Steve Rechnitz, Shlomo Rechnitz and Jack Rechnitz. Steve Rechnitz declared that in the transaction Bison loaned LLC money in exchange for warrants (rights to purchase interests) in LLC.

According to Steve Rechnitzs declaration, in approximately 2007, INC and Bison transferred all their interests in LLC to Twin Med Acquisition Corp. (acquisition company), a 100 percent subsidiary of Twin Med Holding Corp. (holding company). He declared that about 80 percent of the equity of the holding company was currently owned by a private equity fund unrelated to himself or his brother, and the two indirectly own only 20 percent of the holding companys equity. Steve Rechnitz stated that INC was currently owned solely by him and his brother, and LLC was primarily owned by the private equity fund. He asserted that all of the directors, including himself and his brother, resigned as part of the transfer of equity of LLC to the acquisition company.

Steve Rechnitz denied that LLC was INCs alter ego and asserted INC still existed as a separate entity even though LLC had purchased INCs medical supply business. To the extent that LLC used INCs name on forms sent to customers, he maintained it was not authorized to do so. His declaration asserted that LLC had no control over INC, did not merge with INC and assumed no liabilities under any contracts with JPH. He further declared the transfers were not made to hinder creditors and each exchange was made for reasonably equivalent value. He also stated LLC had not participated in the litigation with JPH and did not yet exist when the litigation was filed.

D. JPHs Reply in Support of Motion

In reply, JPH asserted LLC was a continuation of the business of INC, which had transferred substantially all its assets but none of its liabilities to LLC without any consideration. Specifically, JPH provided evidence to show the LLC and INC used the same management, same address, same facsimile number, same accounting department and the same website and customer list, arguing it was apparent LLC was merely a continuation of INC. Although INC claimed to use an old 2000 address to argue it had a separate place of business, JPH provided evidence that both INC and LLC shared the same address in Sante Fe Springs. The agent for service of process INC listed with the California Secretary of State was a partner of the same law firm appearing on LLCs behalf in opposition to the motion to add LLC as a creditor.

4. Trial Courts Ruling and Amended Judgment

The trial court granted JPHs motion to add LLC as an additional judgment debtor. The court explained its reasoning in a detailed tentative ruling, which was made available to the parties before the hearing.

Initially, the court indicated there is authority to add a judgment debtor if the successor entity is the alter ego of the original judgment debtor. (Code Civ. Proc., 187 (section 187); Hall, Goodhue, Haisley & Barker, Inc. v. Marconi Conf. Center Bd. (1996) 41 Cal.App.4th 1551, 1554-1555 (Hall).) However, the court concluded the alter ego doctrine did not apply because JPH failed to make an adequate showing that LLC and INC are owned by the same persons, finding INC is owned by Shlomo Rechnitz and Steve Rechnitz, whereas LLC is owned by a private equity fund. The court determined that JPH also failed to make an adequate showing that LLC controlled the litigation against INC, such that adding LLC as a judgment debtor would be appropriate under an alter ego theory.

Even so, the trial court ruled a judgment can be amended to name a successor corporation that has been created as a mere continuation of an insolvent corporation. In addition to language from Ray, supra, 19 Cal.3d 22, the court quoted Division Three of this court to the effect that [i]f a corporation organizes another corporation with practically the same shareholders and directors, transfers all the assets but does not pay all the first corporations debts, and continues to carry on the same business, the separate entities may be disregarded and the new corporation held liable for the obligations of the old. [Citations.] (McClellan, supra, 89 Cal.App.4th at p. 753.) The trial court below noted, while there are new entities which have been set up, the declaration of Steve Rechnitz admits that [INC] transferred most of its assets to [LLC] and implies that [INC] no longer operates a medical supply business. The court found [a]ll indicia presented by [JPH] indicates [LLC] is merely a successor company.^[2]

In a written order, the trial court amended the judgment to add LLC as a judgment debtor and expressly found that LLC is the continuation of [INC], and, as such, [LLC] was virtually represented in the underlying matter. This appeal ensued.

CONTENTIONS

On appeal, LLC contends (1) the trial court erred in allowing JPH to raise a totally new theory of liability in its reply brief and failing to rule on the admission of a declaration of Steve Rechnitz proffered in rebuttal at the hearing, and (2) no substantial evidence supports the trial courts finding that LLC was the mere continuation of INC.

STANDARD OF REVIEW

In reviewing a trial court order amending the judgment to name an additional judgment debtor, we consider whether the trial courts findings are supported by substantial evidence. (McClellan, supra, 89 Cal.App.4th at pp. 751-752.) Because a trial court has inherent power, independent of statute, to exercise control over all proceedings relating to the litigation before it, we review the trial courts consideration or exclusion of new issues or evidence for abuse of discretion. (See Weiss v. Chevron, USA, Inc. (1988) 204 Cal.App.3d 1094, 1098-1099.) We will not disturb the exercise of discretion on appeal unless an abuse of discretion is clearly shown. (Id. at p. 1099.)

DISCUSSION

Section 187 permits a court, in appropriate cases, to amend a judgment to add additional judgment debtors.^[3] (Hall, supra, 41 Cal.App.4th at pp. 1554-1555; Dow Jones Co. v. Avenel (1984) 151 Cal.App.3d 144, 148.) The general rule is that a court has authority to amend its judgment at any time in order that the judgment will properly designate the real defendants. (Avenel, supra, at p. 149.) Judgments typically are amended to add additional judgment debtors on the ground that a person or entity is the alter ego of the original judgment debtor (Hall, supra, at p. 1555) or that the person or entity is a successor corporation (McClellan, supra, 89 Cal. App.4th at p. 753).

Our Supreme Court has explained that the rule ordinarily applied to the determination of whether a corporation that has purchased the principal assets of another corporation assumes the others liabilities is that the purchaser does not assume the sellers liabilities unless (1) there is an express or implied agreement of assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is a mere continuation of the seller, or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the sellers debts. (Ray, supra, 19 Cal.3d at p. 28, italics added; see also McClellan, supra, 89 Cal.App.4th at pp. 753 -754.) With respect to the third ground for liability, the court said, California decisions holding that a corporation acquiring the assets of another corporation is the latters mere continuation and therefore liable for its debts have imposed such liability only upon a showing of one or both of the following factual elements: (1) no adequate consideration was given for the predecessor corporations assets and made available for meeting the claims of its unsecured creditors; (2) one or more persons were officers, directors, or stockholders of both corporations. (Ray, supra, 19 Cal.3d at p. 29, italics added.)

The trial court must determine successor liability based on the totality of the unique circumstances and apply considerations of fairness and equity. (CenterPoint Energy, Inc. v. Superior Court (2007) 157 Cal.App.4th 1101, 1122.)

1. The Trial Court Properly Considered the Continuation Theory

LLC contends it was prejudicial error for the trial court to allow JPH to raise a totally new theory of liability in its reply brief and in failing to rule on the admission of a declaration purportedly by Steve Rechnitz offered at the hearing in rebuttal. We find no such abuse of discretion, as we agree with JPH that the facts and case law on the continuation theory had been raised in the moving papers and supplemental memorandum. Further, the court did not abuse its discretion in not allowing the last-minute declaration.

A. LLCs Notice of Continuation Theory

The mere continuation theory was not newly presented in the reply papers. JPHs memorandum of points and authorities attached to the original ex parte application filed on July 14, 2008, which the court later deemed a notice of motion, argued that certain nursing home customers formerly did business with INC and presently did business with LLC and that INC and LLC are viewed as the same nursing supply company with the same accounting department and fax number, and that [LLC] is for all intents and purposes the successor entity who took over the nursing supply business of [INC].

JPHs original memorandum quoted from a portion of Economy Refining & Service Co. v. Royal Nat. Bank of New York (1971) 20 Cal.App.3d 434, 439, stating: Transfers of all of the assets of a person or corporation in straitened circumstances, without fair consideration, to a corporation having substantially the same ownership, by which the just claims of creditors are defeated, are of such fraudulent nature that the new corporation may be held to the debt of the old. In opposing JPHs ex parte application, LLC admitted that it had received through INCs attorney JPHs papers relying on Economy Refining.^[4]

JPHs subsequent supplemental memorandum papers additionally cited and quoted the relevant portion of the Ray case. The supplemental papers were served and filed on LLC and INC on July 16, 2008, two weeks before the hearing on the motion.

LLC raised the same objection before the trial court. During the July 30, 2008 hearing, LLC complained that the issue of lack of consideration had only been raised in the reply papers. Counsel for INC joined in the objection. JPH maintained the issue was rife throughout the original and supplemental motion papers, which also cited the case law setting forth the concept. The trial court obviously agreed with JPH, and exercised its sound discretion in finding the issue was not newly raised. Because JPH cited the factual bases and governing legal authority from the inception, LLC had adequate notice of the continuation theory.

2. There Was No Abuse of Discretion in Rejecting the Late Declaration

At the July 30, 2008 hearing, LLC asserted that JPH had failed to meet its burden of showing a lack of consideration conceding JPH maybe showed a continuation, but not a lack of consideration. Counsel for LLC informed the trial court he had spoken with the principal of [INC] the previous evening and the principal (presumably Steve Rechnitz) had prepared a declaration in response to JPHs reply memorandum. Counsel told the court he did not wish to file the declaration without permission because it would be a late filing, but if youre willing to read it now, Im happy to provide both counsel a copy and submit it for the courts consideration.^[5]

LLCs counsel argued that even without the declaration . . .  theres really been no showing of lack of consideration, no showing of insolvency, and no showing of substantially the same ownership or management between the two entities . . . . (Italics added.)

The court indicated it had not had an opportunity to list every fact in the tentative ruling but noted, among other facts: INC only had $300 in its bank account; INC was an operating business before the transaction and no longer [is] an operating business; Steve Rechnitz was the primary mover in both entities; LLC had the same customers and was doing the same business as INC; and LLC was at the same address, had the same e-mail and website and had everything the same as INC.

Later during the hearing, counsel for LLC conceded that INC currently had only $300 in its bank account, but stated, that doesnt say what other assets that [INC] may or may not have. [] And it certainly doesnt say whats happened in the four and a half years since . . . [LLC] acquired the assets of [INC]. He asserted INC had acquired a lot of cash and other consideration for the transfer . . . . Counsel for LLC further conceded, theres a lot of evidence on the continuation point, and thats because [LLC] did acquire the business. I will state that on the record.

After more argument and colloquy, counsel for INC argued against the motion on INCs behalf and told the court, I would like to see the declaration admitted so there is evidence before the court of the consideration paid. Still later in the hearing, counsel for INC stated, I sincerely wish the court would look at this declaration and accept it.

Because the continuation issue was rampant throughout the proceedings and LLC had prior notice of the issue, we cannot conclude the trial court erred in failing to accept the late-proffered declaration. Steve Rechnitz already had provided two declarations to the court, and there was no showing a third declaration would be helpful. Moreover, LLC makes no showing the failure to accept the declaration was prejudicial. Neither LLC nor INC took steps to obtain a ruling on their requests from the trial court, and neither party preserved the issue for appeal by making an offer of proof or by lodging the proposed declaration with the court. As noted in footnote 5, ante, the declaration also apparently contradicted other statements that Steve Rechnitz had previously made under oath.

3. Substantial Evidence Supports the Continuation Finding

We also find substantial evidence to support the trial courts finding that LLC was merely the continuation of INC.

The trial court had before it evidence from which it could reasonably be inferred that little or no consideration had been given for the transfer of assets from INC to LLC, other than the issuance of ownership interest. Steve Rechnitz admitted that he and a brother owned 100 percent of the stock of INC in 2004, when LLC was formed. From his declaration, the trial court could infer that INC made a capital contribution of its assets to LLC at that time, in exchange for which INC acquired 100 percent of the ownership interests in LLC. The transaction of spinning off the assets of INC to a new entity purportedly was undertaken for facilitating a loan to the business, but both entities at that time were owned solely by the Rechnitz brothers. Steve Rechnitz was the president of INC and he and his brother were on LLCs board of directors; Steve Rechnitz was also the manager of LLC. LLC was formed in February 2004, a few months after this case was filed by INC and at approximately the same time JPH filed its answer in this action.

The case was tried in the spring of 2005, and JPH obtained a judgment against INC in June 2005. INC appealed JPHs judgment in September 2005, and we affirmed the judgment in March 2007. The clerk of this court issued the remittitur in May 2007. According to Steve Rechnitzs declarations, about June 2007, i.e., after the remittitur issued in this case, INC and the equity firm transferred all of their interests in LLC to an acquisition company that, according to the Secretary of States website, had no corporate existence until January 2008.

LLC and INC had the same president/managing member, Steve Rechnitz, and this element alone, according to Ray, would suffice for liability under the continuation theory. (Ray, supra, 19 Cal.3d at p. 29.) But that was not the sole consideration in the trial courts findings. LLC and INC also shared the same business address, used the same Internet e-mail address, shared the same website and used the same fax number for their accounting departments. LLC served prior long-term customers of INC. INC had virtually no records showing it was doing business, it admitted it had no substantial business revenue, and it had only about $300 in the bank. LLC sent customers invoices and other documents that contained the name of INC or a combination of their names, such as Twin Med Inc., LLC. The agent for service of process of INC is a partner of the same law firm that represents LLC.

At the hearing, counsel for INC admitted to the court that most of the assets of INC were transferred to LLC. Although he also asserted LLC is a corporation in good standing, he evaded the courts inquiry whether INC was still a going business.^[6] As with the trial in this case that produced the original judgment, the determination of the continuation issue relied heavily on credibility, and the trial court obviously concluded the evidence presented by JPH was credible, but LLCs protestations were not.

It was the totality of all the evidence before it that persuaded the trial court that LLC was merely the continuation of INC and that no adequate consideration was given for the transfer of most of the assets of INC to LLC. The court did not err in reaching this conclusion.

DISPOSITION

The second amended judgment, including LLC as an additional judgment debtor, is affirmed. JPH is to recover costs on appeal.

FLIER, Acting P. J.

We concur:

BIGELOW, J.

MOHR, J.^*

^[1] The attorney produced documents submitted to us under seal that suggest the nursing homes formerly did business with INC but presently were doing business with LLC.

^[2] At the hearing, the court explained: what I think is really telling is that even the employees at Twin Med []Inc.[] . . . are confused as to what this company is. Its clearly a continuation of the same business . . . . [] . . . I just dont think you can build a corporate structure to go forward and not meet your financial obligations and the debts.

^[3] Section 187 provides: When jurisdiction is . . . conferred on a Court . . . , all the means necessary to carry it into effect are also given; and in the exercise of this jurisdiction, if the course of proceeding be not specifically pointed out by this Code or the statute, any suitable process or mode of proceeding may be adopted which may appear most conformable to the spirit of this code.

^[4] LLC stated, [JPH] served their moving papers on . . . the attorney for [INC]. . . . [INCs attorney] forwarded the papers to the attorney for [LLC] on the afternoon of July 14, 2008.

^[5] Both parties seem to agree the proffered declaration was a declaration of Steve Rechnitz. JPH asserts the proffered declaration contradicts statements contained in Steve Rechnitzs earlier declaration filed in opposition to the motion. LLC failed to make an offer of proof of the declarations contents and did not seek to lodge the declaration with the court. In its opening brief, LLC asserts that [t]hrough a series of other transfers in June 2007, an unrelated third party investor obtained an eighty percent interest in [LLC] for several million dollars . . . . At that time, [INC] transferred most, but not all of its assets to [LLC] in exchange for $6,000,000.00. However, as JPH argues in the respondents brief, Steve Rechnitz had already filed declarations under oath stating that INC had transferred its assets to LLC in 2004 ‑‑ years before the third party purportedly came forward with million[s]. The purported declaration therefore appears to have contradicted the declarants prior sworn statements.

^[6] During the hearing, the court questioned counsel for INC, saying, So its [INC] still a going business, is that what youre telling me? Counsel replied, [INC] is a corporation in good standing. The court inquired, Is it still a going business? Counsel responded, It does some business. Yes, it does. The court asked, What kind of business does it do? Counsel for INC equivocated, saying, It has some customers. It has some ‑‑ I dont want to testify . . . ; but my understanding is, it does some business in the medical supply field. It does ‑‑ its been in good standing for the last ‑‑ since it was formed.

                     Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

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