LLC Lacks Standing to Appeal Judgment Against its “Alter Ego” Owner
Many prior posts have addressed the “alter ego” doctrine, under which a business entity’s owner can be held personally liable for the entity’s debts. This is also known as “piercing the corporate veil.”
How far can the logic of the alter ego doctrine be extended? In one opinion recently issued by California’s Fourth Appellate District — Kirkeby v. Crosby Clinic, LLC — the court addressed a creative argument that an LLC should have standing to appeal from a judgment entered against the LLC’s “alter ego” owner. While the opinion is unpublished and therefore not binding precedent, it still provides a useful (and, in this case, entertaining) guidepost.
Facts: LLC’s “alter ego” owner engages in a storm of misconduct
The facts of this case were a doozy:
Glenn and Anastasia Kirkeby decided to start a drug and alcohol abuse rehabilitation facility in 2002. They had recently met Lawrence Burns, who claimed to be a licensed attorney and experienced business manager. Burns told them he would help them operate the rehab business.
The Kirkebys purchased two residential properties in Escondido to be used in operating the rehab business. The Kirkebys and Burns agreed that Burns would manage the business, with the Kirkebys assisting in the day-to-day operations. The Kirkebys and Burns apparently formed an LLC — MHCD — which operated the business and leased the property from the Kirkebys’ trust.
According to claims filed by both the Kirkebys and MHCD against Burns, his wife Anne Kahn, and several of Burns’ entities, Burns misappropriated funds, assets, business opportunities, and real estate through his management of the rehab center — including the wrongful transfer of title to the Escondido properties. The complaint also alleged that Burns was the “alter ego” of several entities that he managed, including The Crosby Clinic, LLC.
Trial court: Judgment against LLC owner; LLC tries to appeal
At some point, the parties entered into stipulations, later reduced to court orders, prohibiting the further transfer or encumbrance of the properties (title to which at that time was held by Burns’ LLC) while the litigation proceeded. Burns promptly violated the stipulation by encumbering one property with a $200,000 loan and then conveying title from his LLC to himself as trustee of a trust. The trial court issued an order finding Burns in contempt for violating the stipulated order, and ordered Burns to reconvey the property back to his LLC, which was a defendant in the lawsuit.
Burns failed to comply with the order. The trial court granted the Kirkebys’ motion for sanctions and struck several of Burns’ pleadings. After Burns still failed to transfer the property back to the LLC, the court granted the Kirkebys’ and MHCD’s motion to have a court-appointed elisor sign a Quitclaim Deed transferring the property back to the LLC. The Quitclaim Deed issued that day.
Meanwhile, Burns completed the divorce from his wife Anne Kahn. The marital Settlement Agreement between them provided that, subject to approval by the court in the Kirkeby lawsuit, title to one of the rehab properties would be transferred to Kahn. Just three months after the court-mandated Quitclaim Deed had returned the property to the LLC, Burns — without obtaining court approval — transferred the property again from his LLC to Kahn.
Eventually, the case made it to trial, with Burns’ liability and “alter ego” status already established by way of terminating sanctions for his prior violations of court orders, and the issue of damages to be determined. The court issued an order concluding that “the evidence regarding intentional transfer of assets, sometimes in direct contravention of existing court orders, was abundant” and awarded the Kirkebys treble damages against Burns in an amount totaling over $9 million. The court also rejected Kahn’s claim to ownership of the rehab property and ordered Kahn to reconvey the property. The court’s findings were reduced to judgment.
After the judgment was entered, Burns’ LLC filed a motion to vacate an earlier ruling by the trial court addressing the court’s entry of default and sanctions against Burns, contending that Burns had been “deprived of due process.” The court denied the motion.
The LLC — not Burns — appealed. Among other arguments, the LLC contended that the judgment was “void as it relates to Burns.”
Court of Appeal: LLC has no standing
The Court of Appeal affirmed the trial court’s ruling, agreeing with the Kirkebys that the LLC lacked standing to appeal the judgment against Burns.
The court recited the fundamental rule of appellate standing — i.e., that “an appellant must show prejudicial error affecting his or her interest.” This is also know as the “aggrieved party” requirement. “An appellant cannot urge errors which affect only another party who does not appeal.” The court observed that the LLC argued on appeal that the judgment was void as to Burns, but failed to show what impact the allegedly invalid judgment had on the LLC.
The court rejected the LLC’s argument that the trial court’s alter ego finding provided the LLC with appellate standing, noting that only Burns had participated in the damages trial and the damage award was solely against him. The court found that the LLC’s argument was an attempt to “put the cart before the horse to establish its standing.” The court also noted that the issue of reverse veil piercing — i.e., whether the judgment against Burns could be satisfied by piercing the LLC’s corporate veil to reach its assets — was not before the court.
Takeaway
Under the unpublished Kirkeby opinion, a finding that an LLC owner is the alter ego of the LLC does not necessarily give the LLC standing to appeal from a judgment against the owner.