Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Cal. App.: No error in amending judgment to include trustees, (Feb 26, 2014)

By Peter Reap, J.D., LL.M.

A California state trial court did not err in amending a judgment obtained against BP gasoline station franchisee Kamal Azari individually by adding Kamal Azari and Pari Azari—in their capacity as trustees for their family trust—as judgment debtors, a California appellate court has decided (BP West Coast Products LLC v. Azari, February 24, 2014, Needham, H.). Further, the Azari’s contention that the amended judgment was void was without merit. Thus, the ruling of the trial court was affirmed.

Background. Kamal Azari (Azari) and respondent BP West Coast Products LLC (BP) were parties to certain franchise agreements by which Azari operated a gasoline station and convenience store. BP also loaned Azari $525,000 pursuant to two written loan agreements; Azari signed promissory notes that were secured by a deed of trust on the station property.

In February 2010, BP filed a lawsuit against Azari to recover $82,593.85 for unpaid gasoline deliveries, royalties, advertising, and maintenance charges under the franchise agreements, $249,861 for outstanding loan payments, and prejudgment interest, costs, and attorney fees. BP also sought $123,284.29 in liquidated damages in connection with Azari’s termination of his franchise. Azari filed a cross-complaint and amended cross-complaint, asserting claims for breach of contract, among others.

The trial court issued its tentative decision in August 2011. The court ordered judgment in favor of BP and against Azari on all causes of action alleged in BP’s complaint and Azari’s operative cross-complaint. Judgment was entered against Azari in the sum of $648,703.20. Not long after judgment had been entered against him, Azari finally disclosed that his assets were held in the family trust, and he had no funds to pay the judgment.

BP’s attorney received a letter from Azari’s business consultant, Robert L. Smith, dated November 25, 2011 (Smith Letter). The letter, written on Azari’s behalf, advised BP that Azari and his wife had transferred to their family trust—later identified as “The Kamal and Pari Azari 2003 Living Trust, dated 5-15-03” (Azari Trust)—all of the Azaris’ personal assets, including the station property that was the subject of BP’s foreclosure claim. The letter proposed a settlement of the judgment against Azari based on the potential sale of the station property that belonged to the Azari Trust. The Smith Letter also represented that Azari now had an approximate net worth of just about $6,300, but the Azari Trust had net assets of approximately $6.4 million.

In correspondence to BP’s counsel dated January 11, 2012 (January e-mail), Azari claimed that the trial evidence of his substantial personal assets reflected a misrepresentation to the court by his lawyer. On January 27, 2012, after receiving the Azari’s January e-mail, BP filed a motion to amend the judgment by adding “Kamal and Pari Azari, [in their capacity] as Trustees of the Kamal and Pari Azari 2003 Living Trust dated 5-15-03” as judgment debtors.

The trial court issued its written order on March 23, 2012, granting BP’s motion and ordering that the judgment be amended to include “Kamal Azari and Pari Azari, as Trustees of the Kamal and Pari Azari 2003 Living Trust dated 5-15-03,” as judgment debtors.

BP proceeded to attempt enforcement of the amended judgment, recording abstracts of judgment and obtaining a writ of sale for the station property. In January 2013 after notice, the station property was sold at a foreclosure sale to an Azari “employee or associate” for just $100. Azari then acted to protect the other assets of the Azari Trust from enforcement.

Amendment of Judgment

Under the authority of Code of Civil Procedure section 187 (section 187), a court may amend a judgment at any time so that it designates the true defendants. For example, the alter ego of an original judgment debtor may be added as an additional judgment debtor, the court observed. Furthermore, even if the requirements for an alter ego finding cannot be established, a judgment may be amended under section 187 to add a new judgment debtor where necessary to prevent injustice.

Substantial evidence of alter ego. The question in the trial court was whether the proposed judgment debtors (Azari and his wife, as trustees of the Azari Trust) were the alter ego of the original judgment debtor (Azari); if so, Azari could be considered the owner of the Azari Trust’s assets for purposes of satisfying the judgment, and the trust’s trustees could rightfully be named as judgment debtors.

Substantial evidence supported the conclusion that Azari and his wife, as trustees of the Azari Trust, were the alter ego of Azari at all relevant times, the appellate court determined. Azari, as an individual, was of course the same human being who held the position of trustee of the Azari Trust. Moreover, there was a unity of interest between Azari individually and the Azaris as trustees, such that they were indistinguishable for all intents and purposes.

Substantial evidence also showed that Azari exercised control over the trust assets as trustees would, with the trustees’ consent. He and his wife created the Azari Trust, transferred all their assets to the trust (including the station property that was the subject of the litigation), and appointed themselves trustees. By virtue of their role as trustees, Azari and his wife held title to the assets that they had transferred into the trust and continued to control those assets. Azari’s control over trust assets—and his willingness to use trust assets for his personal benefit—continued despite the Azaris’ show of making the trust “irrevocable.”

Moreover, throughout the litigation with BP, Azari zealously protected the trust assets as a trustee would, even when contrary to his interests as an individual, according to the court. For example, knowing that title to the station property was held not by Azari but by the Azari Trust trustees, Azari could have sought dismissal of the foreclosure claim against him. Instead, he withheld the fact that he did not hold title to the property.

The evidence was overwhelming that Azari, and Azari and his wife as trustees of the Azari Trust, were alter egos: Azari controlled the litigation against BP, representing and defending the interests of the Azari Trust; and he also controlled the trust assets, proposing to use them for his own benefit. The trial court did not abuse its discretion in amending the judgment based on an alter ego theory, the appellate court reasoned.

Substantial evidence of overwhelming equities. Even if the alter ego theory were not applied, the trial court’s amendment of the judgment would be appropriate in equity to avoid injustice, the court held. Here, it was within the court’s discretion to amend the judgment to include the trust (technically, the Azaris as trustees) because the trust (and the Azaris as trustees), not Azari as an individual, was actually controlling the litigation, and Azari failed to disclose that he had no assets.

The amended judgment is not void. The Azaris contended they were trustees when BP commenced the litigation against Azari in February 2010, but by the time the judgment was amended, they had appointed Integrated Capital Management (ICM) as trustee in their stead. They argued that the amended judgment is void because the trustees (ICM or the Azaris in their capacity as trustees) were not served with a summons or with the motion papers on BP’s motion to amend. The Azaris were incorrect, the court held.

Section 187 does not require that the party being added to the judgment have its own day in court to defend against the plaintiff’s claims. Instead, it is sufficient if the proposed judgment debtors (Azaris as trustees) were in effect identical to the original judgment debtor (Azari), the action was fully and fairly tried, and nothing appeared in the record to show that the proposed judgment debtor could have produced evidence that would have affected the results of the litigation.

Furthermore, there was no significance to the fact that BP’s motion to amend was not served on the Azaris as trustees, or on ICM, based on the record, the court decided. There was no indication whatsoever that the Azari Trust or its trustees did not receive meaningful notice and opportunity to be heard in regard to BP’s motion to amend the judgment.

The case is No. A135829.

Attorneys: Kurt Vandercook Osenbaugh (Alston & Bird LLP) for BP West Coast Products LLC. Cameron James Hoyler (King & Spalding LLP) for Chevron USA Inc. Robert L. Anderson for Kamal Y. Azari.

Companies: BP West Coast Products LLC; Chevron USA Inc.

Cases: FranchisingDistribution CaliforniaNews