Filed 9/29/20
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
BUTLER AMERICA, LLC, 2d Civ. No. B298696
(Super. Ct. No. 1440003)
Plaintiff and Respondent, (Santa Barbara County)
v.
AVIATION ASSURANCE
COMPANY, LLC, et al.,
Defendants and Appellants.
Alter egos of a judgment debtor appeal an order amending
the judgment to add them as judgment debtors. We affirm. A
judgment debtor with an empty shell is easy to crack.
FACTS
Craig Garrick controls and has an ownership interest in a
number of entities involved in the aviation business. Among the
entities are: Aviation Assurance Company, LLC (AAC); ComAv,
LLC (ComAv); ComAv Asset Management, LLC, formerly known
as Pacific Aviation Group, LLC (PAG); ComAv Technical
Services, LLC, formerly known as Southern California Aviation,
LLC (SCA); and Aviation Finance Services, LLC (AFS)
(collectively “Garrick entities”).
The trial court ordered that Garrick individually and the
Garrick entities be added to a judgment Butler America, LLC
(Butler) has against AFS.
Butler v. AFS
Butler and AFS signed a written contract in which Butler
would provide staffing and payroll services to AFS. Butler paid
AFS’s staff and billed AFS for its services. AFS made partial
payment on Butler’s invoices, but ultimately defaulted on the
agreement, leaving $896,578.40 owing to Butler.
Butler sued AFS to recover the balance owing. In June
2014, the parties entered into a settlement agreement. The
parties contemplated that AFS would receive income by
managing the leasing of jet engines owned by Scaled Composites,
LLC (Scaled Composites contract). Under the terms of the
settlement agreement, AFS would pay Butler the greater of
$10,000 per month or 50 percent of the monthly revenue AFS
received for its management responsibilities to Scaled
Composites, LLC.
The settlement agreement provided that AFS would grant
Butler “a security interest in AFS’s entire revenue and income
interest in the [Scaled Composites contract].” AFS executed a
security agreement as part of the settlement. The security
agreement refers to AFS’s “revenue and income interest” in the
Scaled Composites contract as security for AFS’s performance of
the settlement agreement. The Scaled Composites contract was
attached as an exhibit to the security agreement. The Scaled
Composites contract, however, was between Scaled Composites
and PAG, not AFS.
Paragraph 3.1 of the settlement agreement provides for
mutual releases as follows: “3.1 Subject to Section 3.2 below,
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BUTLER and AFS hereby fully and forever release and discharge
each other and their parents, subsidiaries and all their respective
heirs, attorneys, agents, representatives, affiliates, predecessors,
successors, directors, members, managers, officers, and/or
employees from any and all claims, suits, causes of action,
obligations, damages, liability, costs, fees and expenses, of
whatever kind or nature, in law, equity or otherwise, known or
unknown, contingent or non-contingent, which in any manner
arise from, relate to, or could have been asserted in the Action,
and any other claim that exists between BUTLER and AFS,
whether related to the Action or completely unrelated to the
Action.”
Section 3.2 of the settlement agreement provides that the
releases in section 3.1 shall not apply to “any claim, cause of
action or liability arising from a Party’s breach of this Agreement
or the Security Agreement . . . .”
Finally, the settlement agreement provides for a stipulated
judgment to be entered on breach of the agreement.
AFS made 10 minimum $10,000 monthly payments to
Butler under the settlement agreement, then defaulted. The trial
court entered the stipulated judgment against AFS. The
judgment now totals $1.2 million. Butler has been unable to
collect any of it.
Motion to Add Alter Ego Defendants
AFS was a shell entity. From 2012 it had no substantial
assets and conducted no substantial business activities. From
February 2012 to February 2014, AAC deposited money in AFS’s
bank account that AFS passed through to Butler as partial
payment on Butler’s invoices. AAC also deposited money that
AFS passed through to its attorneys to defend AFS in the Butler
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lawsuit and to pay Butler under the settlement. Garrick claimed
the money AFS received from AAC was a loan. But Garrick
admitted there are no loan documents and he could not identify
the terms of the loan.
AFS did not have any employees who were not also
employees of other Garrick entities. Thus, the money Butler was
paying for AFS staffing was paying for the staffing of other
Garrick entities. Garrick could not identify any transaction that
a Butler-paid AFS employee performed for AFS.
All the Garrick entities had the same office in Victorville.
When asked about communications between AAC and AFS,
Garrick replied that it was silly to ask how he communicated
with himself. Garrick acknowledged there was no written
agreement between PAG and AFS as to what AFS’s role would be
in the Scaled Composite contract or what income AFS would
receive from the contract.
In making the settlement agreement, AFS disclosed that it
had no assets and provided documentation to support that
disclosure. AFS, however, failed to disclose that it was not a
party to the Scaled Composites contract; that there was no
written agreement as to what income AFS would receive under
the contract; and that from July 2013, when the Scaled
Composites contract was made, through June 2014, when AFS
induced Butler to enter into the settlement agreement, PAG had
received no income from the contract. The trial court found that
the security agreement was illusory.
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DISCUSSION
I.
Release Clause
The release clause in the settlement agreement releases all
subsidiaries, parents, and principals of AFS. Garrick contends he
and the Garrick entities are protected by the settlement
agreement’s release clause. Garrick is wrong for a number of
reasons, any one of which is fatal to his argument.
(a) Express Terms of the Release Clause
The settlement agreement’s release clause, section 3.1,
begins, “Subject to Section 3.2 below . . . .” Section 3.2 provides in
part, “The above releases in Section 3.1 shall not apply to . . . any
claim, cause of action or liability arising from a Party’s breach of
this Agreement . . . .” The stipulated judgment arose directly
from AFS’s breach of the settlement agreement. By the terms of
the settlement agreement, the releases do not apply.
Garrick relegates section 3.2 in his opening brief to a
footnote. He does not cite the text of the section. Instead, he
cryptically states that the exceptions set forth in section 3.2
concern the parties’ obligations under the settlement agreement,
and that only Butler and AFS are parties to the agreement.
From this, he expects us to conclude that the exceptions stated in
section 3.2 apply only to AFS and Butler. But that is not what
section 3.2 says. It says, “The above releases in Section 3.1 shall
not apply . . . .” Nothing in section 3.2 can reasonably be
construed as limited to releases between Butler and AFS.
Garrick’s reliance on In re Mission Ins. Co. (1995) 41
Cal.App.4th 828 is misplaced. There the court stated, ‘“Because
appellants knew they had a claim . . . against respondents, they
had a duty to specifically exclude that claim from the release
5
agreement.”’ (Id. at p. 839, quoting Edwards v. Comstock Ins. Co.
(1988) 205 Cal.App.3d 1164, 1169.) That is exactly what section
3.2 does. It excludes from the release any action to enforce the
settlement agreement.
(b) Breach of Contract
It is undisputed that AFS breached the settlement
agreement. It is a fundamental principle of contract law that a
material breach by one party excuses performance by the
non-breaching party. (Civ. Code, § 1439; Walker v. Harbor
Business Blocks Co. (1919) 181 Cal. 773, 778 [promisor’s failure
to perform releases promisee from performance and justifies
promisee in abandoning the contract].) Here, AFS’s breach of the
settlement agreement terminated the agreement, including the
releases. AFS cannot breach the settlement agreement and also
demand its benefits.
Garrick argues that he and the Garrick entities are not
parties to the settlement agreement. But if Garrick and the
Garrick entities have any standing under the agreement, they
are third party beneficiaries. A third party beneficiary’s rights
are no greater than those of the promisee. (Gietzen v. Covenant
RE Management, Inc. (2019) 40 Cal.App.5th 331, 339-340
(Gietzen).) When AFS’s breach terminated its rights in the
settlement agreement, Garrick and the Garrick entities’ rights
were also terminated.
(c) Merger in the Judgment
When a final judgment is entered, all causes of action
arising from the same obligation are merged into the judgment.
(Diamond Heights Village Assn., Inc. v. Financial Freedom Senior
Funding Corp. (2011) 196 Cal.App.4th 290, 301.) The judgment
6
extinguishes the contractual rights of the parties and substitutes
only such rights as attach to the judgment. (Id. at pp. 301-302.)
Here when the stipulated judgment was entered on the
settlement agreement, it terminated all of AFS’s and its third
party beneficiaries’ rights in the agreement, including the
releases.
Garrick cites Gietzen, supra, 40 Cal.App.5th 331, for the
proposition that the entire contract is not merged into the
judgment. He concludes that under Gietzen only AFS’s rights are
merged into the judgment because the question of additional
debtors was not before the court when the judgment was entered.
Garrick’s reliance on Gietzen is misplaced.
In Gietzen, a shopping center tenant sued its landlord for
breach of a lease covenant to provide adequate parking. The
tenant recovered a money judgment on that cause of action. But
the judgment did not terminate the lease, and the tenant
remained in possession. In attempting to collect on its money
judgment, the tenant was hampered by a lease provision limiting
the landlord’s liability to its interest in the shopping center. The
tenant argued that the provision was not enforceable because the
lease had been terminated by merger in the judgment. That was
not true. The tenant was still in possession, and the parties had
continuing obligations to each other under the lease. We held
only the cause of action that resulted in the judgment was
merged into the judgment. (Gietzen, supra, 40 Cal.App.5th at
p. 337.)
Here, in contrast to Gietzen, when AFS breached the
settlement agreement, Butler had no further obligation to AFS.
The settlement agreement was terminated and merged into the
judgment. Gietzen does not stand for the proposition that third
7
party beneficiaries are not merged in a judgment against the
promisee. In fact, Gietzen makes it clear that the rights of third
party beneficiaries cannot be greater than those of the promisee.
(Gietzen, supra, 40 Cal.App.5th at pp. 339-340.)
(d) Fraud
The trial court found that in entering into the settlement
agreement, AFS failed to disclose that AFS was not a party to the
Scaled Composites contract; that AFS had no written agreement
with PAG as to what role AFS would have in the contract or what
income AFS would receive under the contract; and that from the
time PAG executed the contract in July 2013 through June 2014
when AFS induced Butler to enter into the settlement agreement,
PAG had received no income from the contract. The court
concluded that “AFS’s pledge of the Scaled Composites monies
was essentially illusory.”
Garrick argues the trial court’s findings are not supported
by substantial evidence. His argument is based on a view of the
evidence most favorable to himself. But that is not how we view
the evidence. On appeal, all conflicts in the evidence are resolved
in favor of the respondent and all reasonable inferences are
indulged in to uphold the findings of the trial court. (Associated
Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825,
835.)
The elements of a cause of action for fraudulent
concealment are: (1) concealment of a material fact; (2) by a
defendant with a duty to disclose; (3) the defendant intended to
defraud by failing to disclose; (4) plaintiff was unaware of the fact
and would not have acted as it did had it known the fact; and (5)
damages. (Hambrick v. Healthcare Partners Medical Group, Inc.
(2015) 238 Cal.App.4th 124, 162.) A release obtained through
8
fraud is invalid. (M.G. Chamberlain & Co. v. Simpson (1959) 173
Cal.App.2d 263, 276.)
Garrick argues that Butler knew AFS was not a party to
the Scaled Composites contract. He points out that the contract
was attached as an exhibit to the security agreement. But one
need not be a direct party to a contract to have an interest in it.
Both the settlement agreement and the security agreement
represented that AFS had a “revenue and income interest” in the
contract, and that AFS would pay Butler from its “management
responsibilities” under the contract. But the facts were that AFS
had no income interest in the contract, or for that matter, no
interest of any kind, and AFS had no management
responsibilities in the contract from which to derive income. In
addition, at the time the settlement agreement was signed, the
Scaled Composites contract was moribund if not dead. There was
no chance AFS would ever receive income from the Scaled
Composites contract. AFS knew the facts, but failed to disclose
them. The entire transaction reeks of fraud on AFS’s part.
AFS argues the trial court abused its discretion in
considering Butler’s fraud allegation because Butler raised the
matter for the first time in its reply papers. But the record shows
that Butler raised the matter in its initial moving papers.
Moreover, Garrick’s counsel commented on Butler’s claim of
fraud at the hearing on the motion, but raised no objection or
requested the opportunity to respond. Garrick has forfeited the
issue on appeal. (See Wiley v. Southern Pacific Transportation
Co. (1990) 220 Cal.App.3d 177, 188 [failure to object to a
procedural defect forfeited defect on appeal].)
Garrick claims that Butler cannot rescind the agreement
for fraud and retain the $100,000 paid to it by AFS. But Butler is
9
not rescinding the settlement agreement; it is enforcing it.
Butler can avoid a release induced by fraud without rescinding
the agreement. (Gajanich v. Gregory (1931) 116 Cal.App. 622,
631 [a release may be attacked for fraud that induced the release
and no decree of rescission is necessary].)
Garrick’s reliance on Village Northridge Homeowners Assn.
v. State Farm Fire & Casualty Co. (2010) 50 Cal.4th 913, is
misplaced. There the court concluded that “a release of a
disputed claim . . . does not permit a party to elect the remedy of
a suit for damages [for fraud] when the release itself bars that
option.” (Id. at pp. 917-918.) But here the release does not bar
that option. Section 3.2 expressly provides that the release does
not cover actions to enforce the settlement agreement.
II.
Evidence of Alter Egos
Garrick contends the trial court erred in finding that
Garrick and the Garrick entities are the alter egos of AFS.
Code of Civil Procedure section 187 (section 187) provides:
“When jurisdiction is, by the Constitution or this Code, or by any
other statute, conferred on a Court or judicial officer, 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.”
The authority provided to courts by section 187 includes
the power to add a judgment debtor where a person or entity is
an alter ego of the original judgment debtor. (Dow Jones Co. v.
Avenel (1984) 151 Cal.App.3d 144, 148.) In doing so, the court is
amending the judgment to add the real judgment debtor. (Id. at
10
p. 149.) Ordinarily a corporation, or in this case a limited
liability entity, is regarded as a separate legal entity. (Toho-
Towa Co., Ltd. v. Morgan Creek Productions, Inc. (2013) 217
Cal.App.4th 1096, 1106.) But where such an entity is used to
perpetrate fraud or to accomplish some other wrongful or
inequitable purpose, a court may disregard the entity and treat
its acts as if done by the persons actually controlling it. (Ibid.)
In applying the alter ego doctrine, no particular findings are
necessary, but the conditions under which a corporate entity
should be ignored vary according to the circumstances of each
case. (Id. at p. 1108.)
Factors for the court to consider include identical equitable
ownership, comingling of funds, use of the same offices, disregard
of formalities, and use of one entity as a mere shell for the affairs
of another. (Toho-Towa Co., Ltd. v. Morgan Creek Productions,
Inc., supra, 217 Cal.App.4th at pp. 1108-1109.) An important
factor in determining alter ego liability is that a corporate entity
is so undercapitalized that it is likely to have no sufficient assets
to meet its debts. (Automotriz del Golfo de California S. A. de C.
V. v. Resnick (1957) 47 Cal.2d 792, 796-797.)
In addition to showing a unity of ownership, the moving
party must show an inequitable result will follow if the acts are
treated as those of the entity alone. (Relentless Air Racing, LLC
v. Airborne Turbine Ltd. Partnership (2013) 222 Cal.App.4th 811,
815.) The decision to grant an amendment to add additional
judgment debtors is reviewed for an abuse of discretion. (Ibid.)
In arguing that the trial court’s findings are not supported
by substantial evidence, Garrick again presents a view of the
evidence most favorable to himself. But we view the evidence in
a light most favorable to the judgment or order. (Associated
11
Vendors, Inc. v. Oakland Meat Co., supra, 210 Cal.App.2d at
p. 835.)
Here, Garrick owned and controlled all the Garrick entities.
They had the same office and shared employees. Garrick used
the money Butler paid to staff AFS to pay the employees of the
other Garrick entities. The money AFS paid to Butler, as well as
the money AFS paid for its defense of Butler’s lawsuit, came from
another Garrick entity. Garrick characterized the payments as
loans, but the trial court did not find his testimony credible. He
could not produce loan documents. Garrick did not observe the
formalities required for keeping the entities separate. He
dismissed the need for formal notice of a transaction between
entities as giving notice to himself.
Most importantly, AFS was nothing but a shell. It had no
substantial business activity and no income with which to pay its
debts. The trial court could reasonably conclude its only function
was to act as a screen for Garrick and the Garrick entities to hide
behind to avoid paying Butler. The court’s decision to amend the
judgment is supported by overwhelming evidence.
Garrick argues the trial court improperly considered
pre-release conduct. He relies on the authority that the release
bars claims based on events occurring prior to the date of the
release. (Citing Villacres v. ABM Industries, Inc. (2010) 189
Cal.App.4th 562, 589.) But Garrick’s authority concerns claims
that give rise to a cause of action. Amending the judgment is not
a cause of action. It simply adds the true judgment debtors. In
any event, pursuant to section 3.2 of the settlement agreement,
the release does not apply. In addition, the release was procured
by fraud.
12
Garrick argues there is no evidence that an equitable result
will follow if the acts of AFS are treated as those of AFS alone.
But it would be an inequitable result to preclude Butler from
collecting its judgment by treating AFS as a separate entity.
(Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership,
supra, 222 Cal.App.4th at p. 816.)
III.
Estoppel
Garrick contends Butler is equitably estopped from denying
the separate existence of AFS and the Garrick entities.
The elements of equitable estoppel are: (1) the party to be
estopped must be apprised of the facts; (2) he must intend that
his conduct shall be acted upon, or must so act that the party
asserting estoppel had the right to believe that it was so
intended; (3) the party asserting the estoppel must be ignorant of
the true state of facts; and (4) he must rely on the conduct to his
prejudice. (Hopkins v. Kedzierski (2014) 225 Cal.App.4th 736,
756.)
Garrick does not rely on the traditional elements of
estoppel in his opening brief. Instead he cites Communist Party
v. 522 Valencia, Inc. (1995) 35 Cal.App.4th 980 (Communist
Party). In that case, the Communist Party claimed it is the alter
ego of two corporations and requested the trial court to impose a
constructive trust in the Communist Party’s favor on the
corporations’ assets. In reversing the trial court’s order imposing
a constructive trust, the Court of Appeal said, “[A]lter ego is used
to prevent a corporation from using its statutory separate
corporate form as a shield from liability only where to recognize
its corporate status would defeat the rights and equities of third
parties; it is not a doctrine that allows the persons who actually
13
control the corporation to disregard the corporate form.” (Id. at.
p. 994.)
Far from assisting Garrick, Communist Party affirms that
third parties such as Butler are not estopped from attacking the
corporate status to prevent the defeat of their rights and equities.
It is the persons who control the corporation who are estopped to
deny the corporate status.
Garrick’s reluctance to rely on the elements of estoppel is
understandable in light of his inability to qualify under those
elements. Garrick argues, contrary to the trial court’s findings,
that Butler was aware of all the pertinent facts prior to entering
into the settlement agreement. Assuming for the sake of
argument that is so, Garrick cannot satisfy two other elements.
The party asserting estoppel must be ignorant of the true
state of facts and must show prejudice. Garrick was not ignorant
of the true state of facts. He was well aware of all the facts. Nor
can he show prejudice from Butler’s reliance on the corporate
form. To the contrary, Garrick used the corporate form to his
advantage and to the prejudice of Butler.
Garrick cites Highland Springs Conference & Training
Center v. City of Banning (2016) 244 Cal.App.4th 267, 285, for the
proposition that prejudice is not required where the plaintiff
acquiesced in the actions complained of. He claims Butler
acquiesced in treating AFS as a separate entity when it elected to
limit its security agreement to AFS’s interest in the Scaled
Composites contract. But nowhere in the settlement agreement,
the security agreement, or stipulated judgment does it state that
Butler’s remedies are limited to AFS’s interest in the Scaled
Composites contract. In fact, AFS had no interest in the Scaled
14
Composites contract. The security interest was illusory and a
vehicle Garrick used to perpetrate a fraud on Butler.
Equitable estoppel is a creature of equity. The foundation
of equity is good conscience. (DeGarmo v. Goldman (1942) 19
Cal.2d 755, 764.) Equity will not aid one who acts
unconscionably. (Ibid.)
Here Garrick breached the agreement to pay Butler;
fraudulently induced Butler into entering into a settlement
agreement; breached the settlement agreement; and is hiding
behind a shell entity to avoid a lawful debt. Garrick now seeks
the aid of equity to prevent Butler from collecting on its
judgment. Garrick’s conduct is unconscionable. Equity will not
aid him.
IV.
Precedent
Garrick contends affirmance of the trial court’s ruling
would set a dangerous precedent.
Garrick argues that other investors and creditors of the
Garrick entities have relied on the separate existence of those
entities. He also claims the creditors relied on the settlement
agreement and release in making business decisions. The
creditors have had no opportunity to be heard.
But the same can be said anytime alter ego liability is
imposed. Liability that might appear to be confined to one entity
is imposed on other persons or entities. It is a risk unsecured
creditors take. The existence of the settlement agreement and
release changes nothing. Creditors know or should know that the
settlement agreement, like any other contract, can be breached,
possibly resulting in alter ego liability.
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To accept Garrick’s argument would result in the end of
alter ego liability. That would harm creditors even more than its
imposition. It would further encourage dishonest business
owners to establish shell entities to avoid liability for lawful debt.
The cases on which Garrick relies involve the treatment of
creditors in bankruptcy. (Chemical Bank New York Trust Co. v.
Kheel (2d Cir. 1966) 369 F.2d 845, 848; Leslie v. Mihranian (In re
Mihranian) (9th Cir. 2019) 937 F.3d 1214, 1215-1218.) Garrick is
not in bankruptcy. The cases are not relevant here.
Garrick’s expression of concern for his creditors is belied in
light of his conduct toward Butler. The authority of the trial
court to add alter egos as judgment debtors has long been
recognized. (Toho-Towa Co., Ltd. v. Morgan Creek Productions,
Inc., supra, 217 Cal.App.4th at p. 1106.) Not affirming it here
would set a dangerous precedent.
DISPOSITION
The judgment (order) is affirmed. Costs on appeal are
awarded to respondent.
CERTIFIED FOR PUBLICATION.
GILBERT, P. J.
We concur:
YEGAN, J.
PERREN, J.
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Donna D. Geck, Judge
Superior Court County of Santa Barbara
______________________________
Buchalter, Robert M. Dato and Joseph M. Welch for
Defendants and Appellants.
Chora Young, Paul P. Young, Joseph Chora and
Armen Manasserian for Plaintiff and Respondent.