The Name Game

By: Ovvie Miller

Periodical: Los Angeles Lawyer

Date: February 1995

Alter ego is one of the most widely applied equity doctrines in the law.  Where the facts warrant, courts will disregard the separate legal existence of a corporation and treat it and its shareholders as the same entity.  This exercise in "piercing the corporate veil" is aimed at preventing abuse of the privilege of corporate status.  The alter ego doctrine is invoked to protect the rights of third persons when dealing with a corporation, to avoid fraud, or any other type of inequitable result. 

While it is customary for the alter ego claim to be raised at the complaint stage, it is possible that the identity of another person or his or her status as a controlling party may be learned much later in the litigation, even after the trial is over.  An alter ego case may be proved even at that stage.  Since it is possible that the technical requirements of the alter ego doctrine cannot be met, equitable principles may be applied in circumstances that warrant a remedy.  The equitable estoppel doctrine is emerging to further the aim of fair and just litigation results by allowing litigants to satisfy their claims when they are apparently precluded, enabling resourceful counsel to fasten liability on a party even after the barn door has closed (or was never opened).

The prosecution of an alter ego claim should be devoted to proving two basic propositions:  1) there is such a unity of interest between the corporation and another person or entity that they have no separate existence; and 2) an inequitable result will follow if the corporation alone is held liable for the contract or tort.1  If alter ego is proved, a controlling shareholder, parent corporation, or promoter may be held liable for the acts of the corporation.2

Courts have considered many factors in deciding whether the alter ego concept should apply.  The factual basis for application of the doctrine is determined by the trial court, whose judgment will be upheld on appeal if there is substantial evidence to support it.3  The factors considered by the courts over the years in deciding whether to pierce the corporate veil include:  

• Commingling of funds and other assets, failure to segregate funds of the separate entities, and unauthorized diversion of corporate funds or assets to uses other than the benefit of the corporation.

• An individual's treatment of corporate assets of his or her own.

• The failure to obtain authority to issue or subscribe stock.

• The holding out by an individual that he or she is personally liable for the debts of the corporation.

• The failure to maintain separate and adequate corporate records.

• The identical equitable ownership or control in the two entities.

• The use by both entities of the same office or business location and the employment of the same employees or attorneys or both.

• The failure to capitalize a corporation adequately.

• The use of a corporation as a mere shell, instrumentality, or conduit for a single venture or the business of an individual or another corporation.

• The concealment and misrepresentation of the identity of the responsible ownership, management, and financial interest, or the concealment of personal business activities.

• The disregard of legal formalities and the failure to maintain arm's-length relationships among related entities.

• The use of the corporate entity to produce labor, services, or merchandise for another person or entity.

• The diversion or manipulation of assets from a corporation by or to a stockholder or another person or entity, to the detriment of the creditors.

• Contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability, or use of a corporation as a subterfuge for an illegal transaction.

• The formation and use of a corporation to transfer to it the existing liability of another person or entity.4

The appellate courts have noted that several of these factors are almost always present, but no one factor is deemed to be conclusive upon the judge or jury.5  The plaintiff's lawyer will endeavor to establish the existence of as many of these factors as possible.  Of course, supporting evidence may not be available at the time of trial due to circumstances such as the inability to conduct effective discovery.  However, even if the trial has gone forward, relief on alter ego grounds still may be available.  In certain cases the plaintiff can successfully raise the alter ego claim even after the trial.

Under Code of Civil Procedure Section 187, each court has the power to use all means necessary to effect its jurisdiction -- even means not set out in the code.  Section 187 is the jurisdictional source of the court's authority to amend a judgment to add additional judgment debtors.6 

The premise of this post-trial procedure is that the judgment debtor is simply the alter ego of the nonparty.  Thus, by amending the judgment, the court would not be adding a new party but merely setting forth the correct name of the defendant.7

The first step in the post-judgment proceeding would be for the plaintiff's lawyer to trigger a hearing, by noticed motion or order to show cause, to amend the judgment, for the purpose of adding the target party as a defendant.  The moving papers, including the underlying pleadings and judgment, should be personally served upon the alter ego target.  All discovery techniques would be available to contending parties, including use of a judgment debtor examination.8

The evidence of alter ego liability would be presented at the hearing.  At that time, in addition to presenting facts concerning alter ego, the plaintiff would have the added burden of persuading the court that the alter ego target controlled the pre-judgment litigation.  This burden is an essential ingredient of the post-judgment process.  When the alter ego's control is not proved, there is a significant difference in result.

For example, in Thomson v. L.C. Roney & Co.,9 the plaintiff sued defendant L.C. Roney, Inc., for the recovery of money arising out of certain business transactions.  A judgment was obtained and became final.  As a result of a judgment debtor examination it was revealed that:

1)  A family corporation called Southwestern Development Company owned all of the stock of L.C. Roney, Inc.

2)  An interlocking directorate existed between the two corporations.

3)  The officers were identical.

4)  The president of both corporations was vested with a blanket authorization to take unilateral action that would bind the family corporation.

5)  Large sums of money were supplied to L.C. Roney, Inc. without security and apparently without formal corporate action.

6)  L.C. Roney, Inc. was without the means to pay the plaintiff.

7)  Both corporations had the same attorney who handled the initial phases of the litigation, including the preparation of the answer to the complaint.

As a result of these disclosures the plaintiff instituted an order to show cause proceeding and the trial court ruled that Southwestern Development should be added as a judgment debtor.  The appellate court sustained the action, holding that there was ample support for a finding of alter ego.  It also concluded that the litigation was, in effect, carried through and subsidized by Southwestern Development, which was at all times fully apprised of the plaintiff's claims.

Southwestern Development argued on appeal that prior case law10 was based on a finding of alter ego made at trial, not after trial.  The court responded:

There is nothing in the language or the logic of the . . .  [earlier] decision which would limit its application solely to a situation where the connection between the two corporations is developed in the original trial.  The limitation contended for by appellant would fetter the court's ability to do justice between the parties and award a premium to a litigant's capacity to conceal his real identity.11

The two ingredients -- alter ego and proof of control of the earlier litigation -- were thus present in the Thomson case.  The post-trial order permitting the amendment to the judgment was affirmed.  In other cases, where control would not be shown, a different result was mandated.

In Motores de Mexicali v. Superior Court,12 the plaintiff secured and partially satisfied a judgment against Erbel, Inc. dba BiRite Auto Sales.  The plaintiff later learned that Erbel was under the total control of two individuals, Cowan and Resnick.  Relying on the authority of Mirabito v. San Francisco Dairy Co.13 and Thomson,14 the plaintiff moved to add Cowan and Resnick as Judgment debtors under the judgment.  The appellate court acknowledged a superficial similarity with the cited cases but identified a crucial difference:  "Unlike the corporations added to the judgment in those two cases, Resnick and [Cowan] in no way participated in the defense of the basic action against Erbel, Inc."  The court noted that the individuals did not appear at all in the action (the judgment against the corporation was obtained by default), and the due process considerations precluded adding the individuals as judgment defendants.

The crucial need to show control was also noted in NEC Electronics Inc. v. Hurt.15  In that case, the plaintiff won a default judgment against a corporation for nonpayment of a bill.  The corporation filed a Chapter 11 bankruptcy petition.  The plaintiff then moved under Code of Civil Procedure Section 187 to amend the judgment by naming the corporation's sole shareholder and chief executive officer as an additional judgment debtor.  The trial court found that 1) the executive was the alter ego of the corporation; 2) he had manipulated the corporation's assets to his own advantage and to the detriment of its creditors; 3) he had an opportunity to litigate the underlying action; and 4) he controlled the corporation's defense of the action.  Accordingly, the judge granted the motion. 

While affirming that the executive was the alter ego of the corporation, the appellate court nonetheless reversed.  It determined that there was an insufficient showing that the executive had either a reason to litigate the underlying action or that he controlled the defense of the action.  Under the facts, the court said, the interests of the corporation and the individual were different; thus the individual had no motive to conduct the defense diligently to forestall personal liability.  The executive never was involved in actively defending the action.  To allow the post-judgment amendment under these circumstances, said the appellate court, citing Motores De Mexicali, would violate due process guarantees.

Practitioners who have an opportunity to revive a moribund case (or collection effort) through a post-judgment application of the alter ego doctrine should prepare for the proceeding with these points in mind:  

• The matter is presented to the trial court by filing a post-judgment motion or having an order to show cause issued.

• If relevant, evidence on alter ego offered during the trial is admissible.

• Other evidence outside the trial record is also admissible upon proper notice to the adversary (such as evidence revealed in a judgment debtor examination).

• The target party is not permitted to use the hearing as a means of attacking the basis of the judgment or to obtain a new trial.

• In addition to the indicia of alter ego, there must be evidence that the target party controlled the prior litigation.

The final question that the plaintiff's lawyer must ask is whether anything can be done if alter ego cannot be proved, either at trial or post-judgment.  The developing case law provides a possibility.  In certain instances a plaintiff has an additional chance to impose liability on a party who would otherwise be immune from exposure.  That chance rests on what the target party knew and how it acted during the underlying litigation.

In Mayberry v. Coca Cola Bottling Co.,16 the plaintiff claimed damages caused by drinking a bottle of contaminated Coca-Cola.  The beverage had been bottled by Coca Cola Bottling Company of Sacramento, a partnership.  The partnership building also housed another business entity -- Coca Cola Bottling Company of Sacramento, Ltd., a corporation.  The corporation supplied syrup but did no bottling.  The three persons in the partnership were also officers or directors of the corporation.  The general manager of the corporation also served as assistant general manager of the partnership.  The complaint mistakenly named the corporation instead of the partnership that did the bottling, and the general manager of the corporation was served.

The corporation filed an answer that included an affirmative defense alleging the plaintiff's contributory negligence.  Counsel for the corporation took the plaintiff's deposition.  Both sides filed pretrial statements.  The defendant's statement listed several issues, none of which raised the plaintiff's mistake in identifying the defendant.  The fictitious defendants were dismissed at pretrial.

The case went to trial and it was only then that the error in suing the wrong defendant emerged.  The plaintiff's motion to substitute the partnership for the corporation was granted.  The motion of the corporate defendant for a nonsuit was also granted.  The partnership thereafter filed a demurrer, which set up the one-year negligence statute of limitations, and the court sustained the demurrer without leave to amend.  The plaintiff then appealed from the judgment of dismissal.

The appellate court differentiated Mayberry from matters where an impermissible effort is made after the statute of limitations has run to replace a party.  Here, the court said, an amendment of the complaint to correct a misnomer is permitted by Code of Civil Procedure Section 473:

The plaintiff intended to sue the firm which had bottled the beverage and was responsible for the alleged contamination.  The participation of dual entities in an integrated production enterprise, the relationship between the corporate name and the well-known Coca-Cola product, the substantial identity of the persons involved in both firms -- these circumstances were sources of excusable neglect on plaintiff's part and of awareness on the part of the real tortfeasor.17

The appellate court also pointed to the acts and omissions of the corporate defendant that perpetuated the plaintiff's error -- namely its affirmative defense contained in the answer, the taking of the plaintiff's deposition, and its omission of the identity issue from its pretrial statement.  The court viewed these tactics as injurious to the plaintiff and warranting the desired relief.  The court concluded that the facts showed a harmless misnaming of parties, which precludes application of the statute of limitations. 

The Mayberry case supplied the precedent that was used a generation later in a similar situation.  In Cuadros v. Superior Court,18 the appellate court granted the plaintiff's petition for a writ of mandate after the trial court denied her motion to amend her personal injury complaint.  The appellate court determined that the defendants' conduct prevented them from using the statute of limitations to bar a Code of Civil Procedure Section 473 motion to amend the complaint.  (The plaintiff had named Budget, Inc. and Budget Rent-a-Car of Santa Monica instead of Budget Rent-a-Car of Westwood.)

The record showed that for more than three years the defendants had conducted themselves as if they were properly named defendants.  They answered the complaint, engaged in settlement negotiations, settled the property damage portion of the claim, and pursued discovery.  The parties stipulated to binding arbitration and to the dismissal of the Doe defendants.

In the arbitration, the defendants revealed for the first time that the vehicle involved was owned by Budget Rent-a-Car of Westwood.  The arbitrator then entered judgment in favor of Budget, Inc. and Budget Santa Monica, which prompted the plaintiff to move to vacate the arbitration award.  The trial court granted the motion to vacate but denied the Code of Civil Procedure Section 473 motion to amend the complaint to bring in Budget Westwood as a defendant.  The trial court's reasoning was that the statute of limitations barred the claim.

The appellate court compared the case to Mayberry:

Here, as in Mayberry, the named defendants and the defendant which should have been named have strikingly similar names.  And each, regardless of its official title, refers to itself as either 'Budget' or 'Budget Rent-a-Car,' or both.  Further, the evidence reveals that Kurt L. Hiete was the owner and/or an officer of Budget Westwood, Budget Brentwood, and Budget Santa Monica, that each of these entities used the address of 2422 Wilshire Boulevard, Santa Monica, and that each was involved in the car rental business.19

The appellate court observed that defense counsel's pre-arbitration notice that he intended to introduce evidence about ownership of the car at the hearing did nothing to correct earlier impressions:

In our opinion . . . [the lawyer] did too little too late.  Although the notice may have suggested to petitioner's counsel that the identity issue would be raised at the arbitration, it did nothing to erase the misconception under which petitioner's counsel had been laboring for over three years, i.e., that the defendants who answered the complaint, engaged in settlement negotiations, settled a portion of the claim, diligently pursued discovery, participated in an arbitration, and stipulated to the dismissal of Doe defendants and to binding arbitration, possessed an ownership interest in the vehicle.20

The court noted that plaintiff's counsel could have used discovery or other means to determine from the Department of Motor Vehicles who owned the car.  Still, the court added, it was entirely reasonable for counsel to include he had named the proper parties based on the acts and statements of the defendants.  While stating that it was not imposing an affirmative duty upon defendants to disclose the plaintiff's error, it added that neither would it permit the defendants' lawyer to willfully mask the error from the plaintiff.  The court was satisfied that the real tortfeasor was aware of the plaintiff's error, and it viewed the defendants' conduct as sources of excusable mistake on the plaintiff's part.  The court considered the equities as being overwhelmingly in the plaintiff's favor and indicated that it was more concerned with balancing the equities than with highlighting the negligence of plaintiff's counsel.  It thereupon issued a preemptory writ of mandate to permit the filing of the amendment.

Carr v. Barnabey's Hotel Corp.21 represents the most recent example of a court supplying another equitable remedy where alter ego is not found.  Cathy Carr brought a suit alleging sex discrimination, pregnancy discrimination, and related claims against Barnabey's Hotel Corporation and Ken Whitty, her former supervisor at the hotel.  Barnabey's Hotel Corporation answered the complaint and raised several affirmative defenses.  It conducted discovery, obtained summary adjudication on an issue, and defended the case at trial.  The jury returned a verdict against both Barnabey's Hotel Corporation and Whitty.

At a later trial on punitive damages, Stephen Post testified that 1) he was employed as controller of Barnabey's Hotel by "Peppercorn Ltd. #9," a California limited partnership; 2) Barnabey's Hotel Corporation had stopped doing business in 1983; 3) the corporation had no assets and no source of income; and 4) it had never held title to the hotel.

After trial, Carr brought a motion to amend the complaint (or, alternatively, the judgment) to add Peppercorn Ltd. #9 and Peter Post, the owner of the hotel, as defendants.  The trial court denied the motion as to Post but ordered Peppercorn added:

The lawsuit was tried on the merits, treating Barnabey's as plaintiff's de jure employer when in fact legally it was only [a] de facto employer.  Peppercorn was Barnabey's principal in the situation involving plaintiff and for all intents and purposes participated fully in the trial on the merits.22

The appellate court upheld the trial court's ruling as within the authority granted by Code of Civil Procedure Section 187 (citing NEC Electronics Inc.) and as a matter of the sound discretion exercised by the trial court in the clear interests of justice.

The appellate court referred to the interlocking ownership and management of the hotel corporation and the partnership.  It then went further:

It is not too much to say that Peppercorn's conduct approached a fraud on the court.  Carr sued the right party under the wrong name, a fact which must have been clear to the defense from the inception of the litigation.  Yet, nothing was said about the mistake in any deposition, motion, or other proceeding.  Barnabey's Hotel Corporation never sought to exonerate itself on the basis that it was not Carr's employer.  Moreover, the defense opposed Carr's pretrial motion to file an amended complaint which included an alter ego allegation, and at best sat by silently when, at the pretrial conference, the court dismissed the Doe defendants.  this conduct was not rewarded in the trial court and will not be rewarded on appeal.

It is also apparent that Barnabey's and Peppercorn are not as separate and distinct as appellants would have it.  Throughout the trial, the parties referred to the hotel, and Carr's employer, as "Barnabey's," or "Barnabey's Hotel."  Timothy Post, the Peppercorn general partner who made the decision to fire Carr, testified as general manager of Barnabey's Hotel.  Stephen Post, another Peppercorn general partner, testified that "the hotel" had gross receipts of $4.8 to $5 million a year.  When questioned about houses owned by the hotel, he testified that "[w]e have had them for several years," and when asked, "Who owns these houses?" answered, "The hotel does, Peppercorn."  He testified about the history and assets of Barnabey's Hotel Corporation from his personal knowledge.  Pete Post, Stephen and Timothy's father, was referred to throughout the trial as the "owner of the hotel," and Mary Kay Post, another Barnabey's Hotel Corporation officer, was referred to as "the owner's mother."  Timothy, Stephen, Pete, and Mary Kay Post were involved in Carr's employment.

  
The same lawyer represented Barnabey's Hotel Corporation and Peppercorn.  Although the record does not tell us who paid for the defense, we know that Barnabey's Hotel Corporation, in whose name the defense was conducted, had no assets.  Notably, the defense which was most obviously available to Barnabey's Hotel Corporation, that it was a stranger to the action, was never raised.  Instead, the case was fully defended, on the merits, based on the defenses available to the entity which employed Carr and Whitty and owned and operated the hotel.  There was no injustice, but rather manifest equity, in the court's ruling.23

Having thus roundly excoriated the defendants, the appellate court nonetheless agreed with their contention that plaintiffs had not presented sufficient evidence to prove that Peppercorn was an alter ego of Barnabey's Hotel Corporation.  A sufficient number of the elements needed to establish alter ego were clearly felt to be lacking.  This finding did not change the result, however, because the appellate court found the relationship between Peppercorn and Barnabey's to be so close that the equitable principles underlying alter ego liability were relevant to its determination.  It found the facts similar to those in Mayberry and Cuadros and noted with approval the views expressed in those cases on excusable mistake, awareness on the part of the true tortfeaser, and equitable estoppel.  The court quoted the following passage from Cuadros:

"The doctrine of equitable estoppel affirms that a defendant may not by his statements or conduct lull the plaintiff into a false sense of security resulting in inaction.  [Citations.]  The determination of whether a defendant's conduct is sufficient to invoke the doctrine is a factual question entrusted to the trial court's discretion.  [Citation.]  The issue is whether, viewing the evidence and all the inferences therefrom in the light most favorable to [the judgment] there was substantial evidence upon which the court could reasonably have found as it did."24

The Carr court then drew its conclusions based squarely on the precedents:

Here, as in Cuadros . . . the named defendants conducted themselves as though they were the proper defendants, then sought to use Carr's mistake to shield the entity which should have been named.  Appellants argue that there is no evidence that they concealed the true identity of the hotel's owner from Carr, and that by examining her own W-2 forms, which were after a certain time issued by Peppercorn, she could have discovered the true owner.  A similar argument was raised in Cuadros, where the plaintiff could have discovered the car's true owner through a DMV inquiry.  "[I]t was entirely reasonable, under the circumstances of this case, for [plaintiff's] counsel to have relied on the acts and statements of defendants in concluding that he had named the proper parties.  Moreover, we are more concerned with balancing the equities than with highlighting the negligence of . . . counsel.  When all the circumstances are considered, the equities overwhelmingly favor" affirming the trial court on this issue. . . .  

 
Here, too, the equities overwhelmingly favor affirmance.  The ruling allowing an amendment resulted in no prejudice to Peppercorn.  A reversal of that ruling would work an injustice, and we decline to make such an order.25

The Carr case indicates clearly and unequivocally that the inability to prove an alter ego case at any stage of a proceeding will not necessarily preclude relief against a proper party.  It may be that the facts presented in Carr are unusual.  The predecessor cases suggest, however, that circumstances where the equitable estoppel doctrine may be applied will not be so rare.

Ovvie Miller, a partner in the Beverly Hills firm of Rosenfeld, Meyer & Susman, specializes in family law and handles occasional civil litigation.

Our Litigation Department specializes in civil litigation at all levels of the judiciary, and has wide-ranging experience in litigating business, commercial and entertainment-industry related matters. We have extensive experience in accounting and partnership, antitrust, and securities and corporate litigation. Additional areas of emphasis include copyright and intellectual property, real estate and products liability litigation as well as in the appellate practice.

Rosenfeld, Meyer & Susman was founded in 1957.  The Firm’s areas of expertise include: Labor and Employment Law, Litigation, Corporate, Entertainment, Trusts and Estates, Taxation, Family Law, Insurance Coverage and Defense, Real Estate and Employee Benefits.

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