Opinion
NOT TO BE PUBLISHED
Superior Court County of San Luis Obispo Ct. No. CV 02-0872, Barry T. LaBarbera, Judge
Dan Siegel, Dean Royer; Siegel Yee, for Appellants.
Tardiff Law Offices, Neil S. Tardiff. Farmer Ready, Paul F. Ready, for Respondents.
YEGAN, Acting P.J.
Appellants Susan Bradford and Lavona Stanley appeal from a post-judgment order denying their motion to add a nonparty as a judgment debtor based on the theory that Dirk Winter is the alter ego of the judgment debtor, Moonstone Management Corporation. (Code Civ. Proc., § 187; see e.g., NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778.) We affirm.
Facts and Proceedings
In 2004, Bradford and Stanley obtained a $766,584 judgment against Moonstone Management Corporation (Moonstone) and a supervisor (Philip Estrada) for sexual harassment and retaliation. We affirmed the judgment on May 2, 2006, in an unpublished opinion but reduced Stanley's award against the supervisor. (B180328.)
Appellants levied on Moonstone's bank accounts, recovering $263.81 which was applied to the judgment. In March, 2006, appellants were advised the bank accounts were closed.
On August 24, 2006, appellants moved to add Dirk Winter as a judgment debtor based on the theory that he was the alter ego of Moonstone. (Code Civ. Proc., § 187.) Winter was the sole shareholder and officer of Moonstone. The trial court denied the motion without prejudice.
On June 6, 2008, appellants brought a second motion to amend the judgment. Evidence was received that Moonstone was an active California corporation but had no assets. Before the judgment was entered, Moonstone provided management services to hotels and companies owned by Winter. Because the management services were provided at cost, Moonstone's annual net income never exceeded $100,000.
On June 18, 2004, Moonstone's attorney consulted bankruptcy Attorney Peter Susi to determine whether Moonstone should discharge the judgment in bankruptcy. Attorney Susi advised Moonstone to cease doing business.
Acting on Susi's advice, Moonstone wound down its business and sold its assets, primarily office furniture and equipment, for $28,000. The money was used to pay corporate bills. Daniel O'Hare, a certified public accountant, reviewed Moonstone's financial records and opined that the transactions were reasonable and necessary to wind down the business, and that Winter did not personally benefit from the transactions.
The superior court denied the motion to add Winter as a judgment debtor finding, among other things, insufficient evidence to establish a unity of interest between Winter and Moonstone. On review, we determine whether the order is supported by substantial evidence and resolve all conflicts in the evidence in support of the order. (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 535.) We do not reweigh the evidence on appeal. (Estate of Gilkison (1998) 65 Cal.App.4th 1443, 1449.)
Alter Ego Liability
A corporation is ordinarily regarded as a legal entity, separate and distinct from its shareholders, officers, and directors. (Sonora Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at p. 538.) The law, however, may disregard a corporate identity "where an abuse of the corporation privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation. [Citation.]" (Ibid.) Alter ego liability is an extreme remedy to preclude fraud or a wrongful act. (Id., at p. 539.) It may not be used to protect every unsatisfied corporate creditor. (Ibid.) Rather, it affords relief when "some conduct amounting to bad faith makes it inequitable for the corporate owner to hide behind the corporate form." (Ibid.)
Two conditions must be met to find alter ego liability. First, there must be a unity of interest and ownership between the corporation and the individual. (Automotriz etc. De California v. Resnick (1957) 47 Cal.2d 792, 796.) Second, the judgment creditor must show " 'that adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.' " (Thomson v. L. C. Roney & Co. (1952) 112 Cal.App.2d 420 428.)
The trial court correctly found that the first element, i.e., unity of interest, was not established. As sole shareholder and officer of Moonstone, Winter complied with all corporate formalities. There was no evidence that corporate funds were commingled, that Winter used Moonstone as a shell to conduct his personal affairs, or that Winter manipulated assets and liabilities between entities to defraud creditors. The fact that Winter owns all the stock is not in itself sufficient to treat him as the alter ego of Moonstone. (See e.g., Daskew v. Dashew Business Machines (1963) 218 Cal.App.2d 711, 716; Katzir's Floor and Home Design, Inc., v. M-MLS.Com (9th Cir. 2004) 394 F.3d 1143, 1149.)
Although no single factor is dispositive, "[t]he relevant considerations include: the commingling of funds and other assets; the failure to segregate funds of the individual and the corporation; the unauthorized diversion of corporate funds to other than corporate purposes; the treatment by an individual of corporate assets as his own; the failure to seek authority to issue stock or issue stock under existing authorization; the representation by an individual that he is personally liable for corporate debts; the failure to maintain adequate corporate minutes or records; the intermingling of the individual and corporate records; the ownership of all the stock by a single individual or family; the domination or control of the corporation by the stockholders; the use of a single address for the individual and the corporation; the inadequacy of the corporation's capitalization; the use of the corporation as a mere conduit for an individual's business; the concealment of the ownership of the corporation; the disregard of formalities and the failure to maintain arm's-length transactions with the corporation; and the attempts to segregate liabilities to the corporation. [Citation.]" (Mid-Century Ins. Co. v. Gardner (1992) 9 Cal.App.4th 1205, 1213 & fn. 3.)
The trial court found that the cases cited by appellants "all address prejudgment conduct of the alter ego that lends itself to the conclusion that there was no distinction between the individual and corporation. In this instance, Winter decided to dissipate assets of the defendant entity and the responsibility for those assets was assumed by other entities he controlled. To the extent the case law justifies the amendment with the view that [appellants] are simply substituting the true defendant, there is no prejudgment conduct to establish that fact."
With respect to the second element, i.e., bad faith misconduct or resulting injustice, the trial court correctly found that Moonstone's insolvency was not enough to impose alter ego liability. (See e.g., Sonora Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at p. 539.) The second element of " 'inequitable result' must coexist with the other requirement of unity of interest and ownership, which the trial court has found not to exist in this case." (Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 842.)
Unreasonable Delay
The trial court reasonably concluded that appellants' delay in seeking leave to amend the judgment was an important factor. (See Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39, 48 [plaintiff must act with due diligence].) "[T]he amendment may be denied if the judgment creditor was aware of the alter ego relationship before the judgment was entered. [Citation.]" (Ahart, Cal. Practice Guide, Enforcing Judgments and Debts (The Rutter Group 2008) ¶ 6:1573, p. 6G-77.)
Winter was named as a defendant in the complaint but dropped from the action when appellants filed an amended complaint. The amended complaint, which sought damages only against Moonstone and the supervisor (Estrada), had the procedural effect of dismissing Winter. (See e.g., Kuperman v. Great Republic Life Ins. Co. (1987) 195 Cal.App.3d 943, 947.)
Control of Litigation
The trial court found that "the dismissal of Winter as an individual would naturally leave a person in Winter's position to reasonably believe that only corporate liability remained." This finding defeats the argument that Winter controlled the litigation. Where " 'the claim of individual liability is made at some later stage in the action, the judgment can be made individually binding on a person associated with the corporation only if the individual to be charged, personally or through a representative, had control of the litigation and occasion to conduct it with a diligence corresponding to the risk of personal liability that was involved.' [Citation.]" (NEC Electronics Inc. v. Hurt,supra, 208 Cal.App.3d at pp. 778-779; emphasis added.)
After Winter was dismissed from the action, Winter believed that his personal assets were not at risk. This was communicated to appellants who were advised that Moonstone had limited assets. Before the second phase of trial on punitive damages, the trial court granted a motion precluding appellants from inquiring into the finances and assets of Winter.
As a service company, Moonstone handled large sums of money ($7.483 million in 2003) that belonged to other companies. Attorney Susi declared that "the money Moonstone Management Company held for payroll, payroll taxes and operating expenses of its client hotel companies was in reality the property of the companies that Moonstone Management Corporation serviced... Moonstone Management Corporation had a fiduciary duty to protect this money from being exposed to Moonstone Management Corporation's financial liabilities. In my opinion, the best option was for Moonstone Management Corporation to cease doing business which Moonstone Management Corporation decided to do."
Attorney Susi monitored the winding down of Moonstone's business and reviewed the transactions "to assure Mr. Winter and Moonstone Management Corporation staff that all transactions post verdict were consistent with its obligation to creditors. I advised Moonstone Management Corporation that it could liquidate its assets for fair market value so long as all proceeds were deposited in Moonstone Management Corporation accounts and used to pay legitimate business expenses and debts."
Appellants made no showing that the post-judgment transactions were a fraud on creditors or grounds for alter ego relief. The trial court found no evidence that Winter "commingled his funds with [Moonstone], paid personal expenses through corporate accounts, eschewed corporate procedures, or otherwise blurred the distinction between his interests and those of [Moonstone]." Nor is there evidence that Winter personally benefited in the transactions to wind down Moonstone.
It is well settled that alter ego liability is an extreme remedy and sparingly used. (Sonora v. Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at p. 538.) Here the trial court denied not one, but two motions to amend the judgment. There was no abuse of discretion.
We reject Winter's argument that the first order denying leave to amend the judgment estops appellants or is grounds for dismissing the appeal. The first motion was denied without prejudice to permit discovery of how the Moonstone service contracts were transferred to other companies.
Difficulty in enforcing a judgment or collecting a debt is not grounds for granting alter ego relief. (Ibid.) "Even if the sole shareholder is entitled to all the corporation's profits, and dominated and controlled the corporation, that fact is insufficient by itself to make the shareholder personally liable.' [Citation.]" (Katzir's Floor and Home Design v. M-MLS.Com, supra, 394 F.3d at p. 1149.)
The judgment (order denying motion to add Winter as an additional judgment debtor) is affirmed. Winter is awarded costs on appeal.
We concur: COFFEE, J., PERREN, J.