This is one of the inflection points at which our legal system buckles.\u00a0 It can be inordinately difficult to enforce a judgment.\u00a0 Here, the court held that it was proper to amend the judgment to add the trustee as a judgment debtor.\u00a0 With a twist, because the trustee was the manager of the limited liability companies against which the judgment was entered, such that the liability was based on an alter ego theory.<\/p>\n
Let\u2019s consider the court\u2019s analysis.\u00a0 The court held that Barry Shy could be added as judgment debtor based on \u201chis control of the Shy Trust and its companies to such an extent that his failure to satisfy the judgment would promote injustice.\u201d<\/p>\n
The court employed a well-known procedure, stating that \u201cAmendment of a judgment to add an alter ego is an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant.\u201d<\/p>\n
Now, I have trouble understanding why equity should intervene, because the claim seeks substantive legal relief.\u00a0 The cavalier use of this procedure does not promote justice, especially when the defendants were known to the plaintiff during the trial on the merits.\u00a0 Still, court held that \u201csuch a procedure is an appropriate and complete method by which to bind new defendants where it can be demonstrated that in their capacity as alter ego of the corporation they in fact had control of the previous litigation, and thus were virtually represented in the lawsuit.\u201d<\/p>\n
The trustee was the manager of the limited liability companies against which judgment was entered.\u00a0 His liability arose, as a factual matter, from his management of the limited liability companies, not from his acts as trustee (manager) of the trusts.\u00a0 This then is a leap, albeit a small one.\u00a0 With our modern statutory schemes for limited liability companies, we have made it difficult to enforce judgments placed against an LLC<\/a>.<\/p>\n Stated the court, \u201cwe conclude the alter ego doctrine may apply to a trustee but not a trust . . . Courts often speak of the alter ego doctrine as if it applied to a trust as an entity.\u00a0 But a distinction must be made between a trust and a trustee. The general rule that a trust is a relationship is universally recognized by U.S. cases and statutes, and is consistent with the prevailing norms of the entire common-law world. The fundamental nature of this relationship is that one person holds legal title for the benefit of another person.\u00a0 Thus, in actuality, a trust is not a legal person which can own property or enter into contracts.\u201d<\/p>\n That is a rock-solid statement of the law, correct on all points.\u00a0 “Because a trust is not an entity, it’s impossible for a trust to be anybody’s alter ego. That’s because alter ego theory, which is simply one of the grounds to \u2018pierce the corporate veil,’ is inescapably linked to the notion that one person or entity exercises undue control over another person or entity.\u00a0 However, a trust’s status as a non-entity logically precludes a trust from being an alter ego.”<\/p>\n The court is still right on the money.\u00a0 \u201cUnlike a corporation, a trust is not a legal entity. Legal title to property owned by a trust is held by the trustee.\u00a0 A trust is simply a collection of assets and liabilities. As such, it has no capacity to sue or be sued, or to defend an action.\u201d<\/p>\n But now we enter a hazy area.\u00a0 Generally, a claim against the trustee must be connected to a claim connected with the management and operation of trust assets.\u00a0 Stated differently, the personal liability of a trustee for his wrongdoing does not enable a judgment creditor to reach trust assets.\u00a0 Such protection of trust assets is tied to the fundamental notion that a trust is a relationship, whereby the trustee holds title to the trust assets for benefit of the cestui que trust<\/a>.<\/p>\n The court\u2019s next step is not on such firm grounding.\u00a0 “The proper procedure for one who wishes to ensure that trust property will be available to satisfy a judgment is to sue the trustee in his or her representative capacity.”\u00a0 True, but the court seeks to hold the trustee liable for debts owed by a trust asset.\u00a0 How do we cross this bridge?<\/p>\n In a single leap.\u00a0 \u201cIn the present case, Greenspan properly sought to add Moti Shai, the trustee of the Shy Trust, as a judgment debtor.\u00a0 If Moti Shai is the alter ego of Barry Shy, then Barry may be considered the owner of the Shy Trust’s assets for purposes of satisfying the judgment.\u201d<\/p>\n This result means that the court is disregarding two layers \u2013 the limited liability company (on alter ego grounds) and the trust.\u00a0 I propose that the trust should be disregarded on a more fundamental basis \u2013 an estate planning trust has no legal effect until the death of the settlor.\u00a0 If the trust is revocable by the trustor, it should always be ignored by the court.\u00a0 If the trust is irrevocable, then we enter the familiar area of the fraudulent transfer.\u00a0 In other words, the court reached the right result, but there\u2019s an easier way to connect the dots.<\/p>\n![\"Austria\"](\"http:\/\/fresnoattorneyblog.com\/wp-content\/uploads\/2011\/03\/Austria.jpg\" "\\"Fresno")
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