Blizzard Energy, Inc. v. Schaefers

Decision Date18 November 2021
Docket Number2d Civil No. B305774
Citation286 Cal.Rptr.3d 658,71 Cal.App.5th 832
Parties BLIZZARD ENERGY, INC., Plaintiff and Respondent, v. Bernd SCHAEFERS et al., Defendants and Appellants.
CourtCalifornia Court of Appeals Court of Appeals

Bernd Schaefers, in propria persona, for Defendant and Appellant.

Tardiff Law Offices and Neil S. Tardiff, for Defendant and Appellant, BKS Cambria.

Rogers, Sheffield & Campbell, John H. Haan, Jr., Santa Barbara, Nathan C. Rogers, for Plaintiff and Respondent.

YEGAN, J.

It all started with the idea of turning old tires into fuel through pyrolysis. Whether this will work is not the issue. It did not work for respondent Blizzard Energy, Inc., which invested in a tire pyrolysis project in Kansas. A Kansas jury returned a $3.825 million fraud judgment in favor of respondent and against appellant Bernd Schaefers (Schaefers). We are not in Kansas anymore. The fraud judgment was entered in California. The instant appeal flows from the California trial court's decision to add a judgment debtor pursuant to the "outside reverse veil piercing" doctrine.

Outside reverse veil piercing differs from traditional veil piercing, which is permitted pursuant to the well-known alter ego doctrine. " ‘The alter ego doctrine prevents individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity ....’ "

( Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 221, 221 Cal.Rptr.3d 847 ( Curci ).) In appropriate circumstances, traditional veil piercing permits a party to pierce the corporate or limited liability company (LLC) veil "so that an individual shareholder [or LLC member] may be held personally liable for claims against the corporation [or LLC]." ( Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1513, 77 Cal.Rptr.3d 96 ( Postal Instant Press ).) "Rather than seeking to hold an individual responsible for the acts of an entity, reverse veil piercing seeks to satisfy the debt of an individual through the assets of an entity of which the individual is an insider." ( Curci , supra , at p. 221, 221 Cal.Rptr.3d 847.) "Outside reverse veil piercing arises when the request for piercing comes from a third party outside the targeted business entity." ( Ibid . )

Here, the targeted entity was BKS Cambria, LLC (BKS Cambria). Schaefers owns a 50 percent interest in the LLC. Schaefers’ wife, Karin Schaefers (wife), owns the other 50 percent. Neither wife nor BKS Cambria was a defendant in the Kansas action. The California trial court found that BKS Cambria is Schaefers’ alter ego. Pursuant to the outside reverse veil-piercing doctrine, the court modified the Kansas judgment to add BKS Cambria as a judgment debtor. Schaefers and BKS Cambria appeal from the order modifying the judgment.1

We agree with respondent that the evidence is sufficient to support the trial court's finding that BKS Cambria is Schaefers’ alter ego. But we reverse and remand for further proceedings so that the trial court may weigh competing equities that bear on the veil-piercing issue. Respondent is entitled to recover the damages awarded by the Kansas judgment, but wife may be an innocent third party who would suffer substantial harm if respondent's recovery is accomplished through the reverse veil piercing of BKS Cambria. Wife has a 50 percent ownership interest in the LLC, but there is no indication that she was involved in the fraud committed against respondent by Schaefers. As we shall explain, she may be an innocent spouse. And she may not be responsible for debts incurred by him after their separation in 1996. (See pp. 672–75, post .) On remand, "the court should weigh the competing equities and grant or deny relief depending on the balance of those equities." ( Kapner v. Meadowlark Ranch Assn. (2004) 116 Cal.App.4th 1182, 1190, 11 Cal.Rptr.3d 138.)

Factual and Procedural Background

Schaefers and wife married in 1981. In March 1996 they signed a separation agreement. In 2001 they formed BKS Cambria and BKS Energy, LLC (BKS Energy), hereafter collectively referred to as "the BKS entities."2 Both LLCs have two members – Schaefers and wife. Each owns a 50 percent interest in the LLCs. Wife lives in New Jersey. In May 2019, she filed a complaint in New Jersey seeking the dissolution of her marriage to Schaefers.

BKS Cambria owns approximately 34 acres of land in Cambria, California. It allegedly purchased the property for $2 million in 2005. Schaefers is the manager of the LLC. He and his son reside on the property, which has been leased to wireless carriers for the use of cell phone towers. In 2014 BKS Cambria sold several leases for approximately $2 million.

In September 2017 a Kansas jury awarded respondent damages of $3.825 million in a fraud action against Schaefers and other defendants. In October 2017 the Kansas judgment was entered in California pursuant to the Sister State Money Judgments Act ( Code Civ. Proc., § 1710.10 et seq. ), hereafter "the Act."3 In a published opinion, we affirmed an order denying Schaefers’ motion to vacate the Kansas judgment. ( Blizzard Energy, Inc. v. Schaefers (2020) 44 Cal.App.5th 295, 257 Cal.Rptr.3d 489.)

In June 2019, and pursuant to section 187, respondent moved in the California trial court to amend the Kansas judgment to add the BKS entities "as judgment debtors under the reverse piercing doctrine." Respondent claimed that the BKS entities "are the alter egos of Schaefers and that recognition of the privilege of separate existence would promote injustice."

In July 2019 Schaefers filed a voluntary Chapter 11 bankruptcy petition. In September 2019 the bankruptcy court ordered that the trial court "may hear and decide ... the Motion to Amend Judgment to add BKS Cambria, LLC and BKS Energy, LLC as Judgment Debtors without violation of the Automatic Stay in this Chapter 11 case."

In February 2020 the trial court granted respondent's motion. It concluded that "the BKS Entities are the alter egos of Schaefers and that failing to add them to the judgment will create an unjust result." The court amended the judgment to add the BKS entities as judgment debtors. Schaefers and BKS Cambria appealed.

Trial Court's Order Modifying Judgment Is Not Void for Lack of Subject Matter Jurisdiction

In the prior appeal from the order denying Schaefer's motion to vacate entry of the Kansas judgment (B290492), the remittitur issued on April 27, 2020. More than two months before the issuance of the remittitur, the trial court ordered that BKS Cambria be added as a judgment debtor to the Kansas judgment. "Generally the filing of a notice of appeal deprives the trial court of jurisdiction of the cause and vests jurisdiction with the appellate court until the reviewing court issues a remittitur." ( In re Anna S. (2010) 180 Cal.App.4th 1489, 1499, 103 Cal.Rptr.3d 889.)

Appellants contend that, because the order amending the judgment preceded the issuance of the remittitur, the order is void for lack of subject matter jurisdiction. They rely on the automatic stay of section 916, subdivision (a), which provides, "[T]he perfecting of an appeal stays proceedings in the trial court upon the judgment or order appealed from or upon the matters embraced therein or affected thereby, including enforcement of the judgment or order, but the trial court may proceed upon any other matter embraced in the action and not affected by the judgment or order." "[S]ection 916 ... divests the trial court of jurisdiction over the subject matter on appeal—i.e., jurisdiction in its fundamental sense." ( Varian Medical Systems, Inc. v. Delfino (2005) 35 Cal.4th 180, 198, 25 Cal.Rptr.3d 298, 106 P.3d 958 ( Delfino ).)4

Section 916 is inapplicable because it applies only to civil actions. Proceedings under the Act are special proceedings, not civil actions. Section 916 is in part 2 of the Code of Civil Procedure. Our Supreme Court "long ago held that Part 2 of the Code of Civil Procedure extends generally only to civil ‘actions,’ and not to ‘special proceedings.’ " ( Agricultural Labor Relations Bd. v. Tex-Cal Land Management, Inc. (1987) 43 Cal.3d 696, 707, 238 Cal.Rptr. 780, 739 P.2d 140 ( Tex-Cal ).) Unlike section 916, the Act is in part 3 of the Code of Civil Procedure. Part 3 is entitled, "Of Special Proceedings of a Civil Nature."

That the Act is in Part 3 is not determinative of whether a proceeding under the Act is a special proceeding. (See Hyundai Securities Co., Ltd. v. Lee (2013) 215 Cal.App.4th 682, 691-693, 155 Cal.Rptr.3d 678 ( Hyundai Securities ) [California's Uniform Foreign-Country Money Judgment Recognition Act ( §§ 1713 – 1725 ) is subject to procedures applicable to actions, not special proceedings, even though it is in Part 3 of the Code of Civil Procedure].) The determinative issue is whether a proceeding under the Act is a civil action.

"The terms ‘action’ and ‘special proceeding’ have been distinguished loosely in a number of contexts. However, for purposes of applicability of Part 2 of the Code of Civil Procedure, the definitions are those set forth in Code of Civil Procedure sections 22 and 23." ( Tex-Cal , supra , 43 Cal.3d at p. 707, 238 Cal.Rptr. 780, 739 P.2d 140.) Section 22 provides, "An action is an ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense." Section 23 provides, "Every other remedy is a special proceeding." ( § 23.) "As a general rule, a special proceeding is confined to the type of case which was not, under the common law or equity practice, either an action at law or a suit in equity." ( Tide Water Associated Oil Co. v. Superior Court of Los Angeles County (1955) 43 Cal.2d 815, 822, 279 P.2d 35 ( Tide Water ).)

A pre-Act proceeding to enforce a sister state judgment was an action within the meaning of section 22. "Prior to the 1974 enactment of the [Act] ..., [t]he...

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