C.A. Upholds Adding Lawyer to Ex-Employee's Judgment
Firm's Bankruptcy Did Not Stay Motion to Hold Individual Member Liable, Panel Says
A San Francisco Superior Court judge did not abuse his discretion by adding the former head of a San Francisco lawyer as a judgment debtor after the original defendant, the firm itself, was forced into involuntary bankruptcy, the First District Court of Appeal has ruled.
Div. Two Thursday ordered publication of its Nov. 25 opinion in favor of attorney Michael Danko, who sued O'Reilly & Collins for breach of contract after his "professional parting" with Terry O'Reilly in 2009. The two had practiced together for 14 years, primarily at O'Reilly & Collins, where Danko's contract called for him to be paid a salary plus 50 percent of fees generated by his work, plus a discretionary bonus.
A jury awarded him $2.4 million in damages against the firm, but declined to find O'Reilly personally liable. He later joined with other creditors in forcing the firm into involuntary bankruptcy, and moved to have the court add O'Reilly individually as a judgment debtor on an alter ego theory.
O'Reilly, he said, had turned the firm into his "personal bank account," draining it of resources in order to pay his personal expenses and transferring assets to various third parties as well.
Danko said in his motion:
"The jury found that, when he terminated Danko, O'Reilly knew that the firm owed Danko more than $2 million. Nonetheless, at every opportunity O'Reilly drew out as personal distributions all the firm's available funds without reserving any amounts to satisfy the debt he knew was owed to Danko. When O'Reilly reached the limits on the checks he could write to himself, O'Reilly began writing checks to others for his personal benefit, dropping the pretense that the sums were earned as 'salary.' Thus, in a concerted effort to wring from the firm every last dollar, he wrote firm checks to others to: build and furnish for him and his wife a luxury ranch in Idaho; buy expensive vintage cars here and abroad in furtherance of his racing hobby; buy fine wine, entertainment systems, and clothes; pay taxes and insurance on his home in San Francisco; fly around on private jets, take ski vacations, and travel to rugby matches; pay for vacations and shopping sprees for his current spouse; and fund his personal trust, and retirement accounts, and pay the living expenses of various family members."
By the time the firm lost the underlying suit, Danko added, O'Reilly "had largely gutted it" and had subsequently transferred its cases to other lawyers without compensation and had transferred "the few odd assets" remaining to an entity called Credit Management Association, or CMA.
O'Reilly responded that Danko had created his own problems by trying to collect his judgment, thereby preventing the firm from remaining viable, and claimed that CMA was going to distribute assets to Danko and other creditors.
Superior Court Judge Marla Miller, since elevated to the Court of Appeal, said the motion should be granted because O'Reilly commingled funds, transferred money to family members for no business reason, made huge loans, deferred-interest loans with the firm's money, and otherwise acted for his own benefit and that of his family to the detriment of the firm and its creditors.
After the judgment was amended, the trustee for the firm's bankruptcy estate filed a notice of his appointment in the trial court. The bankruptcy judge later approved a partial settlement agreement in the bankruptcy proceedings, explicitly recognizing that Danko could enforce the amended judgment.
Justice James Richman, writing for the Court of Appeal, rejected the contention that the automatic stay of proceedings against the firm precluded the trial court from acting on Danko's motion.
"O'Reilly is seeking to vindicate the dignity of the bankruptcy court's order. Although the bankruptcy court might initially have been sympathetic to this view when it denied Danko's motion to hold that the amended judgment was outside the stay, the court ultimately came to the opposite conclusion. The trustee did not seek to void the amended judgment, but, on the contrary, treated it as legitimate by including it in the settlement. The bankruptcy court agreed, not only when it approved the settlement, but also when it denied O'Reilly's motion to declare the amended judgment to be void. "
Richman also rejected O'Reilly's argument that because the jury found him not liable, principles of res judicata and collateral estoppel barred the judge from adding him to the judgment on post-trial motion. The argument fails because the motion is not a relitigation of issues decided in a prior proceeding, but is part of the original proceeding, and involves an issue not previously determined, alter ego, Richman said.
The case is Danko v. O'Reilly, 14 S.O.S. 5807.