Opinion
A128073 San Mateo County Super. Ct. No. CIV 477881
08-11-2011
THE CADLE COMPANY II, INC., Plaintiff and Appellant, v. PHILLIP H. BELL, et al., Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
I. INTRODUCTION
This appeal arises out of the third unsuccessful attempt by The Cadle Company II, Inc. (Cadle) to recover on a defaulted bank loan entered against Balew's Fine Jewelers, Inc. (Balew's), a defunct, family-run jewelry business. Cadle has filed five separate appeals, challenging the judgments entered in favor of the defendants and the orders awarding defendants cost of proof fees. (CT [Marilyn SJ] 849; CT [Marilyn COP] 587-588, 594)~ In the instant appeal, Cadle appeals from the judgment entered in favor of Phillip Bell (Phillip) and Harold Bell (Harold) following a bench trial, where Cadle sought damages on behalf of Balew's for Phillip and Harold's alleged failure to observe corporate formalities and to provide an accounting. We affirm.
The underlying litigation involves Marilyn Bell (Marilyn), and her two sons, Phillip Bell (Phillip) and Harold Bell (Harold). We shall refer to the defendants by their first names to avoid confusion. (See In re Marriage of Witherspoon (2007) 155 Cal.App.4th 963, 967, fn. 2 ["We refer to the parties by their first names for clarity and ease of reference, and intend no disrespect."].)
II. BACKGROUND
A. Procedural History
This action arises from a defaulted bank loan. In April 2005, Cadle, a collection agency, sued Balew's and Marilyn (The Cadle Company II, Inc. v. Balew's Fine Jewelers, Inc., et al. (Super. Ct. Santa Clara County, 2005, No. 105CV040095) [Balew's I]), alleging breach of contract and breach of written guaranty of the loan. After dismissing that action on the eve of trial, Cadle filed an identical action against Balew's and Marilyn in November 2006, which also named Phillip as a defendant (The Cadle Company II, Inc. v. Balew's Fine Jewelers, Inc., et al. (Super. Ct. Santa Clara County, 2006, No. 106CV073476) [Balew's II]). Just after the case was ordered to trial, Cadle dismissed its claims against Marilyn and Phillip. Thereafter, Cadle obtained a default judgment against Balew's.
Cadle filed the first amended complaint in the instant action in April 2009, naming Balew's, Marilyn, Phillip, and Harold as defendants (The Cadle Company II, Inc. v. Balew's Fine Jewelers, Inc., et al. (Super. Ct. San Mateo County, 2009, No. CV 477881) [Balew's III]). The complaint alleged, among other things, that the individual defendants, while acting as officers and directors of the corporation, improperly dissipated Balew's assets for personal purposes at the expense of Balew's creditors.
The trial court granted summary adjudication in favor of Marilyn on all of the causes of action against her. The claims against Phillip and Harold proceeded to trial without a jury.
B. Evidence at Trial
1. Phillip
Since the beginning of 2003, Phillip worked as Balew's store manager. Phillip was also a director of Balew's, along with his parents, Marvin and Marilyn Bell. Marvin died in April 2003. From that point on, Phillip and his wife, Sue, tried to keep the business up and running. In April 2003, Balew's defaulted on its Bank of America line of credit. In October 2003, Bank of America sent a default notice to Balew's and later seized $26,000 from its business account to partially satisfy the defaulted loan. Subsequently, Balew's went out of business, and Bank of America assigned the rights to the loan to Cadle.
Despite residing in Grass Valley, Phillip worked five days a week, nine hours a day managing Balew's, which was located in Redwood City. To accomplish this schedule, throughout 2003, Phillip spent only Sundays and Mondays with his wife in Grass Valley, and during the rest of week Phillip stayed with family or friends who lived near Balew's. On average, Phillip received about $5,000 per month, which represented his base salary, plus his draws and bonuses. Due to Balew's outstanding debts, Phillip received his pay in piecemeal fashion.
Beginning in January 2003, Sue began doing the bookkeeping for Balew's, partly from her home in Grass Valley and partly on-site. Sue's duties included overseeing purchase orders, invoices and sales receipts, as well as balancing the books, making out checks and doing ledger sheets. Sue worked for Balew's basically without compensation until July 2003, at which time she was paid a lump sum of $11,000.
In April 2003, Phillip hired Wilkerson Company (Wilkerson) to run a sale to raise cash to help Balew's pay down its debts; the sale ended in June 2003. Phillip explained that the goal of the sale was not only to pay off every debt possible, but also to determine whether Balew's could even stay in business. The proceeds of the sale were also used to pay Wilkerson, which was entitled to 20 percent of the overall proceeds, plus a stipend and payment for merchandise that Wilkerson supplied to Balew's. At various times, a Wilkerson representative cosigned the checks written from Balew's Bank of America account. At other times, Phillip would sign a check made out to cash, which would then be cosigned and endorsed by Wilkerson.
In late 2003, Phillip hired Mandell Company (Mandell) to run a final liquidation sale. Due to the Bank of America seizure of funds in Balew's business account, Mandell required Balew's to open an account at a different bank from which the sale proceeds could be processed. Thus, from November 2003 through the store closure on December 31, 2003, proceeds from the Mandell sale were deposited into a new Wells Fargo business account from which Phillip paid Balew's business debts.
In addition, Phillip provided testimony concerning his payments on behalf of Balew's to the taxing authorities; his attempts to liquidate the remainder of the inventory, the proceeds of which he used to pay tax obligations and creditors and to compensate himself for his work; his payments to Balew's finance company; and his payment of some of Balew's debts from his personal bank account.
2. Harold
Harold left the family business in 1989, when he became a teacher. After that time, Harold "never took part in anything that had to do with" the family business. Nevertheless, Balew's corporate records continued to list Harold as an officer and/or director in the company. For example, he was listed as the corporate secretary for 1992, 1994, and 1996. Harold was also included as an officer and/or director for the years 1998 through April of 2001. Harold confirmed that he had signed the corporate minutes from 1992, but thought that someone else had written in his name for the other years.
The minutes from several annual meetings also reflected that Harold was in attendance. Harold, however, testified that other than attending the annual meeting after his father's death in 2003, which he explained was "moral support" for his family, he had not been involved in any of the annual meetings since he became a teacher. Harold explained that as Balew's was a family business "they just left [his] name" on the corporate records, despite the fact that he was not "involved at all" in running Balew's. Harold further clarified that to the extent his name appeared in the corporate records, it was simply an oversight as he "wasn't an active member at all."
C. Statement of Decision
In its written statement of decision pursuant to Code of Civil Procedure section 632, the trial court reiterated its oral ruling issued from the bench, which provides in pertinent part as follows: "The difficult thing for the Court, Mr. Briggs . . . is I don't find any merit to these allegations [by the Plaintiff]. There's nothing here submitted to the Court that the Court finds that either Phillip Bell or, certainly, Harold Bell who wasn't involved in the operation of this business at any stage since 1989, since he commenced his teaching career, there's nothing here to support that there is any misappropriation. [¶] You indicated, I think $91,000.00. Well, the Court heard a significant explanation. It is oral testimony to the large extent records after all this period of time probably don't exist, but I can't say based on what was submitted to this Court today that, in fact, there were inadequate corporate formalities. [¶] And I agree with what Mr. Burch said. This is not a matter of piercing the corporate veil. This is simply not a matter of application of CCP 187. Corporation wasn't even a party, as everyone has agreed. In fact, there's a default judgment against the corporate entity. [¶] So what I'm looking at here is what evidence, even if I disregard . . . [the] statute of limitations, I don't find any evidence here to support these allegations. So, yes, they are primarily based on the testimony of Phillip Bell, and to a certain extent Harold Bell whose involvement was nonexistent after 1989. I accept that testimony, and I have nothing to contradict it. [¶] . . . [¶] So I find based on that there is nothing to support the allegations in any of plaintiff's cause[s] of action." The trial court further iterated that although it accepted defendants' statute of limitations argument, it was not "necessarily the important part of the [c]ourt's analysis." Rather, the court explained that its decision was "based on the evidence and testimony" presented to the court, of which there was "absolutely nothing to support plaintiff's allegations."
After the close of trial Cadle's counsel made an oral motion to add Phillip and Harold as judgment debtors based on an "alter ego" theory, pursuant to Code of Civil Procedure section 187.
III. DISCUSSION
The gist of Cadle's argument on appeal is that Phillip and Harold failed to observe corporate formalities, and failed to provide a proper accounting. Cadle claims the trial court erred in requiring it to "prove the wrong negative," namely that Phillip and Harold did not do anything wrong. As explained below, Cadle has completely failed in any showing of error.
A. Waiver and Burden on Appeal
The first and most fundamental principle of appellate review is that a judgment is presumed to be correct on appeal, "and a party attacking the judgment, or any part of it, must affirmatively demonstrate prejudicial error. [Citation.]" (People v. Garza (2005) 35 Cal.4th 866, 881.) " 'This is not only a general principle of appellate practice but an ingredient of the constitutional doctrine of reversible error.' [Citations.]" (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.) In addition, it is well settled that " '[a] party who challenges the sufficiency of the evidence to support a particular finding must summarize the evidence on that point, favorable and unfavorable, and show how and why it is insufficient. [Citation.]' [Citation.]" (Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 409, italics omitted.) "[A]n attack on the evidence without a fair statement of the evidence is entitled to no consideration when it is apparent that a substantial amount of evidence was received on behalf of the respondent. [Citation.] Thus, appellants who challenge the decision of the trial court based upon the absence of substantial evidence to support it ' "are required to set forth in their brief all the material evidence on the point and not merely their own evidence. Unless this is done the error is deemed waived." [Citations.]' [Citation.]" (Nwosu v. Uba (2004) 122 Cal.App.4th 1229, 1246, italics omitted.)
In this case, Cadle wholly failed to set forth or summarize all of the material evidence, ignoring virtually all of the evidence supporting the judgment. Consequently, we could treat Cadle's challenge to the sufficiency of the evidence as having been waived (Nwosu v. Uba, supra, 122 Cal.App.4th at p. 1246), and our inquiry would be at an end. Although we would be justified in summarily dismissing Cadle's claims, we nevertheless address them below, having found them to be utterly without merit.
B. Standard of Review
Upon review of the express and implied findings of fact made by the trial in its statement of decision, we consider whether substantial evidence supports such findings. (Ermoian v. Desert Hospital (2007) 152 Cal.App.4th 475, 501.) When considering a challenge to the sufficiency of the evidence, we begin with the " 'presumption that the record contains evidence to sustain every finding of fact.' [Citations.]" (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881.) "[W]e must consider all of the evidence in the light most favorable to the prevailing party, accept as true all the evidence and reasonable inferences therefrom that tend to establish the correctness of the trial court's findings and decision, and resolve every conflict in favor of the judgment. [Citation.] 'It is not our task to weigh conflicts and disputes in the evidence; that is the province of the trier of fact. Our authority begins and ends with a determination as to whether, on the entire record, there is any substantial evidence, contradicted or uncontradicted, in support of the judgment.' [Citation.]" (Baxter Healthcare Corp. v. Denton (2004) 120 Cal.App.4th 333, 369.)
C. Substantial Evidence Supports the Judgment
Cadle argues there is evidence demonstrating that Phillip and Harold failed to maintain proper books and records, and failed to observe corporate formalities to maintain the separateness of Balew's. However, the test on appeal is not whether evidence would have supported a finding in favor of the party who lost in the trial court, but whether there is evidence supporting the judgment that was actually entered. (Foreman & Clark Corp. v. Fallon, supra, 3 Cal.3d 875 at p. 881.)
The trial court here undertook a complete evaluation of the factual record before it. Phillip introduced evidence that Balew's had complied adequately with corporate formalities and had maintained separate corporate finances that were not commingled with his personal finances. Phillip also provided extensive testimony and documents showing how Balew's income and assets were spent in 2003. Additionally, Harold testified that although his name remained on various corporate records he had no involvement with the corporation since 1989, when he began his teaching career. The court found this evidence credible. It is the trier of fact's exclusive province to assess the credibility of witnesses, resolve conflicts, and weigh the evidence. (People v. Sanchez (2003) 113 Cal.App.4th 325, 330.) This the trial court did, resolving these issues adversely to Cadle.
Presuming in support of the judgment the existence of every fact that reasonably could be deduced from the evidence, there was substantial evidence to support the trial court's determination that corporate separateness was adequately maintained, and a sufficient accounting as to Balew's assets was provided. (See In re Sylvester C. (2006) 137 Cal.App.4th 601, 605.)
By reason of this holding, we do not address whether the trial court erred in determining that Cadle's claims were also barred by the statute of limitations.
D. Cadle Offers No Legal Support for Its Contentions
On appeal, Cadle has failed to provide not only a thorough and balanced analysis of the evidence, but also a meaningful legal argument. With respect to its derivative claim, Cadle has not cited to any authority to support its core argument, viz., that proof of missing financial and corporate records demonstrate that Phillip and Harold are liable for Balew's debt. Although Cadle asserts it is the law "that persons running a corporation are personally liable for its debts if they cannot provide the required documents to support their actions as to corporate assets," the authority it cites says no such thing.After merely string-citing to these marginally relevant authorities, Cadle leaps, without analysis, to the following conclusion: "Pursuant to the above law, [Phillip] and [Harold] . . . are personally liable to [Cadle] for their failure to see that [Balew's] debt to the [b]ank, and thus to [Cadle], was paid before they expended the assets of [Balew's] on whatever they liked, without any accounting thereof." We need conduct no further analysis to conclude that this argument is bereft of both legal and factual support.
Cadle cites the following "controlling law": (1) Corporations Code section 316, subdivision (a) [provides that directors and officers who make distributions to shareholders contrary to certain statutory provisions are liable to the corporation for benefit of its shareholders and creditors for such sums]; (2) Corporations Code section 309, subdivision (a) [directors must perform their duties in good faith, in the best interests of the corporation, including "reasonable inquiry as an ordinarily prudent person" would act]; (3) Corporations Code section 501 [distributions to shareholders prohibited if corporation unable to meet its liabilities]; (4) Credit Managers Assn. v. Superior Court (1975) 51 Cal.App.3d 352, 360 [directors are "trustees of the stockholders and indirectly for the creditors"]; (5) Corporations Code section 316, subdivision (c) [creditors may bring an action in the name of the corporation to enforce liability for improper payments to shareholders]; (6) National Auto & Cas. Ins. Co. v. Payne (1968) 261 Cal.App.2d 403, 412 [directors may not abdicate their authority by delegating management powers to others and cannot thus avoid the responsibilities under the statutes]; (7) Professional Hockey Corp. v. World Hockey Assn. (1983) 143 Cal.App.3d 410, 414 [directors have a fiduciary duty, "including the duties of obedience, diligence and loyalty"]; (8) GAB Business Services, Inc. v. Lindsey & Newsom Claim Services, Inc. (2000) 83 Cal.App.4th 409, 420-421 and Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 179 [an officer who participates in management of a corporation is a fiduciary of the corporation]; and (9) Am.Jur.2d Corporation section 1460, page 445 [a person who is both an officer and a director may be held to standards that apply to a fiduciary].
The law does forbid distribution of dividends or return of capital to shareholders in derogation of the rights of creditors or others (Corp. Code, § 316, subd. (a); Zinn v. Bright (1970) 9 Cal.App.3d 188, 191-192), but that is not what Cadle has alleged here, and there is no evidence in the record to support such a theory.
Equally specious is Cadle's reliance on trust law, governed by a separate statutory scheme, to bolster its position that Phillip failed in his duty, as an officer and director, to provide a proper accounting. Although officers and directors of a corporation have certain fiduciary duties (see, e.g., Corp. Code § 309), Cadle provides no authority even remotely suggesting that the accounting provided by Phillip at trial would be insufficient either as a matter of law or as a matter of fact. Rather, it merely string-cites to a list of inapposite authority that fails to adhere to proper citation format. By reason of this complete failure to provide the court with a well-reasoned and cogent legal argument, supported by applicable authority (see In re Marriage of Falcone & Fyke (2008) 164 Cal.App.4th 814, 830), we do not consider further Cadle's claim of improper accounting.
Of the cites we were able to verify, Cadle references the following: (1) Smith v. Blodget (1921) 187 Cal. 235, 242 [person may be held to account where there is "a fiduciary relation between the parties and the facts are peculiarly within the knowledge of one."]; (2) 3 Scott and Ascher on Trusts (5th ed.) § 17.4, p. 1186 [trustee under a duty to keep clear and accurate accounts]; (3) Blackmon v. Hale (1970) 1 Cal.3d 548, 560 [trustees " 'under an obligation to render to beneficiaries a full account of all their dealings with trust property . . . .' "]; (4) Bone v. Hayes (1908) 154 Cal. 759, 766 [in event of negligent failure of trustee to render full account "all presumptions will be against the trustee upon a settlement"]; and (5) Purdy v. Johnson (1917) 174 Cal. 521, 531 [good faith of trustee cannot avoid "consequences of . . . neglect"].
E. Trial Court Did Not Err in Refusing to Add Phillip and Harold as Judgment Debtors
Cadle argues that the trial court erred in denying its cursory oral motion—made in passing at the close of evidence—pursuant to Code of Civil Procedure section 187 to impose alter ego liability on Phillip and Harold. This argument, too, is without merit.
Code of Civil Procedure section 187 provides as follows: "When jurisdiction is, by the constitution or this code, or by any other statute, conferred on a court or judicial officer, all the means necessary to carry it into effect are also given; and in the exercise of this jurisdiction, if the course of proceeding be not specifically pointed out by this code or the statute, any suitable process or mode of proceeding may be adopted which may appear most conformable to the spirit of this code."
Ordinarily, a judgment against a corporation may be amended to add as a judgment debtor a nonparty alter ego who controlled the underlying litigation and whose interests were virtually represented in the litigation. (Hall, Goodhue, Haisley & Barker, Inc. v. Marconi Conf. Center Bd. (1996) 41 Cal.App.4th 1551, 1555; Code Civ. Proc., § 187.) "This is an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. [Citations.]" (NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778 (NEC).)"Alternatively, a party may bring a wholly separate action against an individual shareholder on an alter ego theory to enforce a prior judgment against the corporation." (Brenelli Amedeo, S.P.A. v. Bakara Furniture, Inc. (1994) 29 Cal.App.4th 1828, 1840 (Brenelli).)Cadle chose this latter alternative and sued Phillip and Harold on an implied alter ego theory, alleging that they are liable for Balew's judgment debt because they failed to follow corporate formalities and engaged in unauthorized transactions. Wholly apart from the fact that Cadle failed to demonstrate such claims, this attempt to hold Phillip and Harold liable for Balew's debts is procedurally defective.
The complaint in Balew's III does not explicitly reference alter ego liability.
In the instant action (Balew's III)there is no judgment against the corporation, thus, a fortiori, there is nothing to amend. To the extent that Cadle seeks to add Phillip and Harold to the default judgment in Balew's II, the application exceeds the scope of Code of Civil Procedure section 187 because the corporation's liability was not actually litigated. (See NEC, supra, 208 Cal.App.3d at p. 779.) Long ago, the California Supreme Court established in Motores De Mexicali v. Superior Court (1958) 51 Cal.2d 172, 175-176 (Motores)that a default judgment cannot be amended to add parties because the new judgment debtors "in no way participated in the defense," and it would violate due process to summarily add new judgment debtors "without allowing them to litigate any questions beyond their relation to the allegedly alter ego corporation . . . ."
It is undisputed that Harold was not even named as a defendant in Balew's II, thus, he was "under no duty to appear and defend personally in that action . . . ." (Motores, supra, 51 Cal.2d at p. 176.) And, although Phillip was personally named in Balew's II, (and was alleged to be Balew's alter ego) it is undisputed that the action against him was dismissed on the eve of trial and that the default judgment was entered without Balew's liability for breach of contract being litigated. Thus, the Balew's II default judgment cannot be enforced against a purported alter ego without first litigating the corporation's underlying liability for breach of contract. For the same due process concerns that preclude courts from amending default judgments to add alter ego nonparties, Cadle's separate action must allow Phillip and Harold to litigate more than the question of their purported alter ego relationship to the corporation. (Cf. Motores, supra, 51 Cal.2d at p. 176.) Before Phillip and Harold can be held liable for the Balew's II judgment, Cadle would have to prove that Balew's was liable for breach of contract.
In this third lawsuit (Balew's III), Cadle's complaint does not raise any allegations of breach of contract against the corporation or against Phillip and Harold. Moreover, although Balew's is named as a defendant, there are no causes of action against the corporation. Rather, Cadle purports to seek relief on the corporation's behalf by bringing derivative causes of action against Phillip and Harold for their own conduct. There is, therefore, no basis for adding Phillip and Howard as judgment debtors on the Balew's II judgment.
IV. DISPOSITION
The judgment is affirmed. Phillip and Harold are entitled to recover their costs on appeal.
RIVERA, J. We concur:
RUVOLO, P.J.
REARDON, J.