WFG Nat'l Title Ins. Co. v. Kim

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WFG NATIONAL TITLE INSURANCE COMPANY, Plaintiff and Respondent v. LAURIE KIM, et al., Defendants and Appellants.

B315174

California Court of Appeals, Second District, Seventh Division

January 12, 2023

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Los Angeles County No. BC672513 Mel Red Recana, Judge. Reversed with directions.

Bahar Law Office and Sarvenaz Bahar for Defendants and Appellants.

Wright, Finlay & Zak and Olivier J. Labarre for Plaintiff and Respondent.

SEGAL J.

INTRODUCTION

RNA Financial LLC-a now-insolvent company owned by sisters Laurie and Jamie Kim-purchased a house and obtained a $340,000 loan from Maggie Investments pursuant to a promissory note secured by a deed of trust on the property. Shortly after RNA obtained the loan, the seller rescinded the sale and refunded the purchase price to RNA. RNA, however, did not notify Maggie the sale had been rescinded or pay off the principal owed on the loan. Instead, RNA made interest-only payments on the loan for six years, then stopped making payments when RNA ran out of money. Only then did Maggie learn the seller had rescinded the sale years before.

After Maggie settled a claim against its title insurer, WFG National Title Insurance Company, WFG filed this action in subrogation against RNA and the Kims, asserting causes of action for breach of contract and fraud. WFG alleged that RNA failed to repay the loan and that the Kims, though they did not personally guarantee the loan, were liable for the outstanding debt as alter egos of RNA. RNA did not respond to the complaint, and the trial court entered RNA's default. After a nonjury trial, the court found the Kims were alter egos of RNA and therefore liable for RNA's breach of contract.

The Kims appeal from the judgment, arguing substantial evidence did not support the trial court's finding they were alter egos of RNA. We conclude substantial evidence supported the court's alter ego finding regarding Laurie, who commingled RNA's funds with the funds of other businesses she owned and used RNA's account to pay for personal expenses that had no documented business purpose. We also conclude, however substantial evidence did not support the court's alter ego finding regarding Jamie, who did not participate in the operations of RNA or know about Laurie's actions. We also reject the rest of the Kims' arguments they are not liable as alter egos because RNA is not liable for breach of contract, most of which the Kims forfeited by failing to raise at trial. Therefore, we reverse the judgment and direct the trial court to enter a new judgment against RNA and Laurie but in favor of Jamie.

FACTUAL AND PROCEDURAL BACKGROUND

A. RNA Purchases a House at a Foreclosure Sale and Obtains a Loan

The Kims used RNA to purchase, improve, and resell real property to third parties, a process the Kims refer to as "flipping houses." Laurie was the managing member, president, and secretary, with sole authority to transfer property on behalf of the company.

In August 2009 RNA purchased a house in Pasadena at a foreclosure sale for $488,500 in cash. Soon thereafter, RNA obtained a $340,000 loan from Maggie, evidenced by a promissory note and secured by a deed of trust on the property. The terms of the note required RNA to make monthly, interest-only payments for three years at the annual rate of 12 percent, with a balloon payment of all outstanding principal due at the end of the note's three-year term. The note provided that, if RNA defaulted, interest on the outstanding principal would continue to accrue at the same rate.

B. The Foreclosure Trustee Rescinds the Sale, but RNA Does Not Notify Maggie

A few months after RNA purchased the house, Executive Trustee Services (ETS), the trustee who conducted the foreclosure sale, rescinded the sale and recorded a notice of recission with the Los Angeles County Recorder.^[1] RNA received a refund of the $488,500 purchase price, but did not pay off any principal on the loan or notify Maggie that ETS had rescinded the sale. RNA continued to make interest-only payments on the loan until the three-year term ended. At the end of the term, RNA did not make the required balloon payment, but for three more years continued to make the same monthly payments on the loan, which Maggie accepted.

C. RNA Stops Making Payments, Maggie Tenders a Claim to WFG, and WFG Sues RNA and the Kims

RNA stopped making payments to Maggie after October 2015. In February 2016 Maggie attempted to initiate foreclosure proceedings based on the deed of trust it believed secured the loan, but the trustee advised Maggie the sale to RNA had been rescinded. Maggie tendered a claim to WFG under its title insurance policy on the deed of trust, which WFG settled by paying Maggie $340,000. As part of the settlement, Maggie assigned to WFG all claims arising from the promissory note.

In 2017 WFG filed this action against RNA and the Kims, asserting causes of action for fraud and breach of contract. WFG alleged RNA breached the loan agreement "by failing to repay the sums due under the Promissory Note." WFG alleged the Kims were liable for breach of contract as alter egos of RNA because they did not maintain adequate capital in the company to satisfy its debts and withdrew funds from the company's bank accounts for their personal use. WFG further alleged the Kims concealed from Maggie that ETS rescinded the sale.

D. WFG and the Kims Go to Trial

RNA did not respond to the complaint, and the trial court entered its default. The Kims, however, did respond and went to trial on WFG's causes of action against them.

At trial Laurie testified that RNA had only one bank account and that she was the only person who had a checkbook or debit card for the account. WFG introduced into evidence RNA's bank records from April 2012 (a few months before the end of the original three-year loan term) to September 2015. During that period RNA generally had less than $50,000 in its account, and often as little as several thousand dollars or even a few hundred dollars. RNA received two large deposits during those years: one for $100,000 from a company Laurie admitted she owned, and another for $153,000. After receiving each deposit, RNA almost immediately paid a third party for either the same or nearly the same amount. RNA received a handful of smaller deposits from companies Laurie also admitted she owned, but otherwise received little income.

The bank records reflected that RNA made numerous, recurring purchases at department stores, clothing stores (including children's clothing stores), restaurants, and cosmetic stores, plus occasional purchases at, for example, sporting goods stores, bookstores, and for children's "school lunch programs." Laurie stipulated she made all the purchases. She testified that the purchases at restaurants were during meetings with "potential investors" and that the purchases at department stores and shops were "marketing expenses" to "build . . . relationship[s]" and "get more business." Laurie admitted, however, she never documented what she purchased or to whom she gave any of the items. She also could not recall the purpose of several purchases, other than to say they "could" have been for networking events.

WFG presented little evidence Jamie participated in RNA's operations. The parties stipulated that "[a]t all relevant times" Jamie had no knowledge of the Pasadena property, the loan from Maggie, or the recission. Between April 2012 and September 2015, RNA's records reflected three deposits, totaling $3,000, from an account jointly held by Laurie and Jamie. During that same period RNA made one $30,000 payment to Jamie. Jamie testified Laurie performed all of RNA's business operations.

E. The Court Rules for WFG

The trial court ruled in favor of WFG on its breach of contract cause of action against RNA and against WFG on its fraud cause of action. The court, in a statement of decision, found RNA "breached its contractual obligations to Maggie . . . by failing to repay the principal amount of the Loan when due, by defaulting on the interest-only payments, and by failing to disclose the existence of the Recission to Maggie." The court further found that each of the Kims was liable for the breach under the alter ego doctrine. The court found that Laurie "had complete control" over RNA's account; that Laurie "routinely used her own funds to finance RNA's business operations, through cash infusions"; and that RNA's bank statements "reflect[ed] numerous personal expenses . . . that had nothing to do with the real estate business of RNA ...." The court stated that, "[a]lthough the Kims testified that some of the expenses . . . were incurred for business reasons," the Kims "failed to present evidence that the bulk of the transactions . . . were not incurred for personal reasons." The court's only specific findings regarding Jamie were that Jamie performed "numerous administrative tasks for RNA over the years, including signing checks and executing all of the various Secretary of State filings for RNA," and that Jamie received the $30,000 payment from RNA.

The court entered judgment in favor of WFG and against RNA and the Kims, jointly and severally, in the amount of $556,853.20, consisting of $340,000 in principal that RNA owed on the loan, plus $216,853 in interest that had accrued since November 2015, when RNA stopped making payments. The Kims timely appealed from the judgment.

DISCUSSION

A. Standard of Review

On appeal from a judgment based on a statement of decision following a court trial, we "review questions of law de novo and we review the trial court's findings of fact under the substantial evidence standard." (Gajanan Inc. v. City and County of San...