Alter Ego Is Hard To Prove Against Limited Partners


By: Ovvie Miller

Periodical: Los Angeles Daily Journal

Date: August 1997

On a proper showing, a court will ignore a corporation's separate legal existence and treat it and its shareholders as one.  In what is known as piercing the corporate veil, the court focuses on preventing an abuse of the privilege of corporate status.  The alter ego doctrine is intended to protect third parties from fraud or other inequitable results when dealing with a corporation.

In deciding whether to apply the alter ego doctrine, courts consider such factors as the individual's treating corporate assets as his own, commingling funds and failing to capitalize the corporation adequately.  See, e.g., Associated Vendors Inc. v. Oakland Meat Co., 20 Cal.App.2d 825, 838-40 (1962).

Courts have relied on Code of Civil Procedure Section 187 to support a post-judgment amendment to add an additional judgment debtor where alter ego is proved and the added defendant controlled the prejudgment litigation.  See, e.g., Dow Jones Co. v. Avenel, 151 Cal.App.3d 144, 148 (1984). In certain cases in which alter ego wasn't proved but equity was warranted, courts have invoked an estoppel doctrine to find the subject party liable.  See Carr v. Barnabey's Hotel Corp., 23 Cal.App.4th 14 (1994).

A recent 1st District Court of Appeal case held that the limitations on liability established for limited partners in the Corporations Code preclude any alter ego finding.  Gruendl v. Oewel Partnership Inc., 55 Cal.App.4th 654 (1997).

Charles Oewel was the sole shareholder of Oewel Partnership Inc.  OPI was the general partner of Oewel Partners Limited, a limited partnership.  OPL's sole limited partner was Oewel.  He set up the entities for the purpose of real estate development and management.

Stuart Gruendl was an OPI officer and an OPL development manager.  He had interests in several limited partnerships that Oewel created to hold title to various projects.  Gruendl knew that Oewel was the sole shareholder of OPI and that OPI was the general partner of OPL.  Both entities suffered financial reversals.  After receiving some commission payments, Gruendl resigned.  He was then informed that he was not owed any more money.

Gruendl sued.  The jury returned a verdict in his favor.  When OPI and OPL failed to pay the judgment because of insufficient assets, Gruendl moved to add Oewel as an individual defendant and judgment debtor on an alter ego theory.  The court granted the motion to amend and found that Oewel was the alter ego of both OPI and OPL.  Although timely requested, the court issued no statement of decision on the subject.

The appellate court reversed as a matter of law the trial court's determination that Oewel was the alter ego of OPL.  The opinion first referred to Corporations Code Section 15632(a), which states: "A limited partner is not liable for any obligation of a limited partnership unless named as a general partner in the certificate or, in addition to the exercise of the rights and powers of a limited partner, the limited partner participates in the control of the business.  If a limited partner participates in the control of the business without being named as a general partner, that partner may be held liable as a general partner only to persons who transact business with the limited partnership with actual knowledge of that partner's participation in control and with a reasonable belief, based upon the limited partner's conduct, that the partner is a general partner at the time of the transaction."

The court also referred to Corporations Code Section 15632(b) (1), which provides that a limited partner may not be deemed to participate in control of the business merely because he is an officer, director or shareholder of a corporate general partner or because he acts as a surety for either the limited partnership or for a general partner, guarantees a debt for the partnership or lends money to the limited partnership or a general partner.

The court declared that Oewel could not be deemed to have participated in control of OPL merely because he exercised his duties as president of OPI or because he may have acted as a surety for, or lent money to, OPL.  The court held that the trial court erred when it ignored both OPL's status as a limited partnership and the statutory limitations on Oewel's individual liability for OPL's debts.

Because the trial court didn't render a statement of decision, the court could not evaluate the rulings concerning alter ego as to the corporate defendant and Oewel's claim that Gruendl was estopped from asserting alter ego.  It therefore remanded the matter with directions that the trial court issue a statement of decision and render a new judgment.

After Gruendl, clearly, it will be difficult to sustain an alter ego claim in a limited-partnership context.  However, many such claims involve commercial transactions with unrelated third parties.  It is in those cases that concealment and misrepresentation of the identity of the responsible ownership and management often occur.  A limited partner may participate in control of the limited partnership and the third-party claimant may have a reasonable belief that he is dealing with a general partner.

While Gruendl has limited the prospects of success, it appears that in certain cases an alter ego claim involving a limited partnership may still be successful.

Ovvie Miller, a partner in Beverly Hills' Rosenfeld, Meyer & Susman, LLP, specializes in family law and occasionally handles 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.

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