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Business Law

How the Alter Ego Doctrine Can Help You Add Additional Debtors To Your Judgment

After obtaining a judgment against a corporate defendant, a plaintiff can seek to amend the judgment to add an individual shareholder, or other entity, as an additional judgment debtor predicated upon showing that the additional shareholder was the alter ego of the original corporate debtor and controlled the initial litigation. CCP §187, See Jack Farenbaugh & Son v. Belmont Construction, Inc. (1987) 194 Cal. App. 3d 1023, 1029-1031, 240 Cal. Rptr. 78; Dow Jones Co. v. Avenel (1984) 151 Cal. App. 3d 144, 148-151, 198 Cal. Rptr. 457; Schoenberg v. Romike Properties (1967) 251 Cal. App. 2d 154, 168, 59 Cal. Rptr. 359; Mirabito v. San Francisco Dairy Co. (1935) 8 Cal. App. 2d 54, 57-60, 47 P.2d 530.

Two factors must be present before the corporate debtor’s entity may be disregarded: (1) there must exist such a unity of interest and ownership that the separate personalities of the corporation debtor and the individual, no longer exist, and (2) that if the corporate debtor’s entity is not disregarded, an inequitable result will follow. Mesler v. Bragg Management Co. (1985) 39 Cal. 3d 290, 300, 216 Cal. Rptr. 443, 702 P.2d 601; Automotriz Del Golfo De Cal. v. Resnick (1957) 47 Cal. 2d 792, 796, 306 P.2d 1; NEC Electronics Inc. v. Hurt (1989) 208 Cal. App. 3d 772, 777, 256 Cal. Rptr. 441.

At the hearing on plaintiff’s application to amend the judgment, plaintiff may offer extrinsic evidence to show: (1) the relationship between the corporation debtor and the individual, or entity, to be added as an additional debtor, and (2) the facts demonstrating that the person, or entity, was the corporation debtor’s alter ego. Belmont Construction, Inc., 194 Cal. App. 3d 1023, 1029-1032; Thomson v. L. C. Roney & Co. (1952) 112 Cal. App. 2d 420, 426-427, 246 P.2d 1017.

The court could look at the following seventeen (16) factors to determine if the alter ego doctrine should apply: (1) the commingling or diversion of the corporate debtor’s funds and assets, (2) the individual’s treatment of the corporate debtor’s assets as his/her own, (3) failure of the corporate debtor to issue stock, (4) the individual’s representations that he/she is personally liable for the corporate debtor’s debts, (5) the corporate debtor’s failure to maintain adequate corporate records, (6) the identical equitable ownership in the two entities, (7) the two entities share identical equitable owners who dominate and control each entity, (8) the two entities have identical directors and officers who supervise and manage each entity, (9) the corporate debtor was inadequately capitalized for its intended purpose, (10) the corporate debtor was used as a mere shell, instrumentality, or conduit for a single venture or the business of an individual or another corporation, (11) the concealment and misrepresentation of the corporate debtor’s ownership, management and financial interest, (12) the corporate debtor’s failure to maintain legal formalities and arm’s length relationships with related entities, (13) the use of the corporate debtor to procure labor, services or merchandise for another person or entity, (14) the diversion of the corporate debtor’s assets to the detriment of its creditors, (15) the intent to avoid performance by use of the corporate debtor as a subterfuge for illegal transactions, and (16) the formation of the corporate debtor for the purpose of transferring to it the existing liabilities of another. Arnold v. Browne (1972) 27 Cal. App. 3d 386, 394-395, 103 Cal. Rptr. 775; Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal. App. 2d 825, 838-840, 26 Cal. Rptr. 806).

The alter ego doctrine applies to tort claims, as well as, contractual claims and even to claims resolved by way of settlements. Minton v. Cavaney (1961) 56 Cal. 2d 576, 580, 15 Cal. Rptr. 641, 364 P.2d 473; Mesler v. Bragg Management Co. (1985) 39 Cal. 3d 290, 304–306, 216 Cal. Rptr. 443, 702 P.2d 601.

The purpose of the alter ego doctrine is not to protect every unsatisfied creditor but to prevent the equitable owners of the corporation from engaging in bad faith conduct and, thereafter, attempting to hide behind the corporation’s corporate veil to avoid their creditors.

This e-bulletin was prepared by Reza Gharakhani, Esq., of Rostow & Auster LLP in Century City, California, gharakhani@rostow.com.

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