Opinion
No. B186113
12-12-2006
JERRY LANIER et al., Plaintiffs and Respondents, v. BRUCE JAY et al., Defendants and Appellants.
Blue & Schoor, John A. Blue; Lascher & Lascher and Wendy C. Lascher for Defendants and Appellants. Katten Muchin Rosenman, Steve Cochran, Kristin Holland and Tiffany Hofeldt for Plaintiffs and Respondents.
SUMMARY
In this action for breach of contract, breach of fiduciary duty and constructive fraud, Jerry Lanier claims that Bruce Jay and Jays wholly owned corporation, Investor Partners, Inc., engaged in overreaching in real estate transactions with Lanier and Hollyedge, LLC., a company jointly owned by Lanier and Jay. Lanier and Hollyedge sought legal and equitable remedies against Jay and Investor Partners.
A jury found Jay was not liable to Hollyedge. Although the jury determined Jay engaged in wrongful conduct, it found Lanier suffered no compensable harm. The jury, however, found Investor Partners liable for damages to Lanier and Hollyedge. After the verdict, the trial court addressed the equitable issues. It found Jay breached his fiduciary duties and committed fraud, rescinded the written agreements between the parties, and awarded Lanier and Hollyedge restitutionary relief, prejudgment interest and attorneys fees against Jay and Investor Partners.
We conclude the equitable portion of the judgment must be reversed because the trial courts ruling conflicts with the jurys factual findings, awards improper relief, and treats Jay as Investor Partners alter ego without stating a proper basis for piercing the corporate veil. Consistent with this conclusion, the matter is remanded for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
Jay is a licensed real estate broker and the owner and sole shareholder of Investor Partners, a real estate company. Investor Partners also conducts business as a mortgage company, a real estate brokerage, and a property management company. Lanier is a pediatric dentist and the owner of Pediatric Management Services, Inc. (PMS), a dental office.
Hollyedge and the commercial property.
In 1997, Lanier retained Jay to help him locate and purchase commercial property for a dental office. Jay found property with two buildings, located at 4905 and 4915 Hollywood Boulevard (property). The 4905 building, once operated as a savings and loan, was vacant. The 4915 building still operated as a grocery store.
In mid-March 1998, the owner accepted Laniers offer to purchase the property for $1,680,000. Escrow was set to close in June 1998. Investor Partners arranged financing for the transaction through Highland Federal Bank (Bank). In September 1998, the purchase price was increased to $1.7 million; the closing date was extended seven times. With each extension, Lanier was required to make an additional nonrefundable deposit into escrow.
In October 1998, Jay and Lanier discussed an arrangement whereby Jay would contribute funds in order to close the transaction and take an ownership interest in the property. Attorney Simon Aron was retained to advise Lanier and Jay about structuring the proposed arrangement. By December 17, 1998, Lanier had paid $309,000 in nonrefundable deposits. The deposits would be at risk if the transaction did not close by years end. However, Lanier did not have sufficient funds to make the down payment on the property.
Hollyedge is the entity formed for the purpose of enabling Jay and Lanier to jointly acquire and own the property. Hollyedge is governed by an Operating Agreement (Operating Agreement). At its inception, Lanier was the only member and manager of Hollyedge.
On December 24, 1998, Hollyedge entered into a deed of trust to purchase the property. The deed provided that the property could not be subjected to additional liens. If any encumbrances were made, Hollyedge would be in material default on the deed if the default was not cured. Lanier executed a personal guaranty on the mortgage. On December 29, 1998, Jay wired $229,000 to Aron to complete the transaction. Neither Lanier nor Jay informed the Bank that Jay was the source of the funds. The Bank instead was told that Laniers family was the source. If the Bank had been aware of the source of funds, it likely would have cancelled the deal. Escrow closed December 31, 1998.
On January 5, 1999, Jay and Lanier entered into an Option Agreement to permit Jay to acquire a 50 percent interest in Hollyedge. In mid-January 1999, the Operating Agreement was amended to add Jay as a member and the manager of Hollyedge. Over time, Lanier and Jay each contributed capital in the amount of $350,750 to Hollyedge.
Laniers company, PMS, spent $277,416 to bring the 4905 building into compliance with building codes and convert it to a dental office. Effective January 1999, PMS leased the 4905 building for $10,500 per month, or at $3 per square foot.
The adjacent 4915 building was in a dilapidated condition. It had no air conditioning or bathroom facilities, and the plumbing and electricity were substandard. At close of escrow, the market occupying the building paid rent of $2,500 per month. Effective January 1999, Investor Partners leased the building at a monthly rate of $3,500, or at $0.51 per square foot. Without informing Lanier, Jay increased the markets monthly rent from $2,500 to $6,000, paid directly to Investor Partners. The market vacated the premises during 1999. Contrary to the terms of the lease, Investor Partners made minor repairs to the building at Hollyedges expense. The repairs included removal of walk-in freezers and installation of a gate. After the market vacated the premises, the building was used for storage. In March 2001, the 4915 building was subleased briefly to an adult day care center. Although the adult day care center never moved into the building, it paid Investor Partners $12,000 per month. Jay never disclosed to Lanier that he received the $193,348 in revenue from the buildings subtenants. In addition, without informing Lanier and in violation of Investor Partners lease with Hollyedge, Jay rented out billboard space on the building, for which Investor Partners received $7,600. Investor Partners retained the signage revenue.
During this period, Jay served as manager of Hollyedge, and Investor Partners acted as the property manager. Hollyedge paid Jay and Investor Partners $57,000 in management fees.
The Los Hermosos residence.
In October 1999, Lanier made an offer to purchase an $800,000 residence on Los Hermosos Way in Los Feliz (Los Hermosos). Lanier claims Jay showed him the residence and suggested he purchase it. When Lanier indicated he could not afford the home, Jay suggested taking the funds out of Hollyedge. Jay, however, claims Lanier sought his help in locating a house, and not until late May 2000 — three weeks before the scheduled close of escrow — did Lanier tell Jay he was unable to generate the down payment for the purchase of Los Hermosos.
To assist Lanier in making the down payment, Jay structured two loans from Investor Partners to Hollyedge. Investor Partners delivered $207,500 to Hollyedge, from which Jay and Lanier each received $103,750. Investor Partners recorded two deeds of trust on the residence for a total principal amount of $ 244,117. Five-year, interest-only loans were made at a 15 percent interest rate with a 15-point commission. A balloon payment of $244,117 (including $36,777 in points) was due in June 2005. Lanier used his portion of the funds to close escrow on the residence. As part of the transaction, Hollyedge and Investor Partners entered into security agreements for the two loans, granting Investor Partners a security interest in the property in violation of the deed on the property. Representing Hollyedge, Lanier and Jay, Aron prepared the documents for this transaction. Lanier received a conflict of interest disclosure and waiver statement, dated May 31, 2000, simultaneously with his receipt of the Investor Partners loan documents, signed on May 30, 2000. Escrow on the residence closed on June 2, 2000.
Representing both buyer and seller in the transaction, Jay received commissions of $48,000 and $12,800 for his services as the real estate and mortgage broker on the Los Hermosos transaction. Interest on the loans made to Hollyedge was $3,051 per month. In June 2000, Laniers rent on the commercial property was increased to $12,600 per month and Investor Partners rent was raised to $4,200 to cover the loan payments.
Jay was also due a commission of $36,777 in points when the second and third trust deeds were paid in full. Because of this litigation, those loans have not been paid and Jay has not received this fee.
Attorneys fee provisions are contained in the Option Agreement of the leases on the 4905 and 4915 buildings, and in the second and third trust deeds on the property.
The jury trial and posttrial proceedings.
As an individual and on behalf of Hollyedge, Lanier filed this action against Jay and Investor Partners alleging breach of contract, breach of fiduciary duty and constructive fraud, and seeking damages and equitable remedies. Jay cross-complained for dissolution of Hollyedge and for indemnification.
A jury trial was conducted. Experts Mark Schuerman and Alan Wallace testified on behalf of Lanier and Hollyedge that, as to Lanier, the terms of the Investor Partners loans were exorbitant and grossly unfair.
Schuerman opined that Jay breached his fiduciary duties by failing to secure a loan at a lower rate, placing Hollyedge at risk of default by taking out additional trust deeds without disclosure to the Bank, and failing to disclose on the residential loan application that a portion of the down payment was borrowed from Investor Partners. Schuerman also testified that the terms of the loans made by Investor Partners to Hollyedge were objectively unfair. According to Schuerman, Jay was aware of Hollyedges ability to repay the loans and the terms were disproportionate to the borrowers high quality and the readily available security.
Wallace testified Jay breached his fiduciary duties by failing to independently analyze Laniers financial ability to purchase either the Los Hermosos residence or the commercial property, not disclosing to the Bank that his own funds were financing part of the purchase price, acting as broker and lender in the transaction, failing to locate other funding sources, not signing a loan guarantee, and becoming a half owner. Wallace opined that PMS overpaid rents on the commercial property by approximately $342,000, while Investor Partners rent was underpaid by about $358,000. Wallace also calculated that, after adjustments for rent, Lanier had contributed $1.844 million to Hollyedge, while Jay had withdrawn $107,960. According to Wallace, the consequences of Jays breaches were severe: Lanier had aspired to sole ownership of the commercial property and the residence. Instead, Jay became a half owner of each.
Defense expert Alan Herd discerned no evidence of bad faith or unfair terms with respect to the transaction. According to Herd, Jay "saved the deal" for Lanier, and nothing was wrong with Lanier solely guaranteeing the Bank loan. If Jays role in the transaction had been disclosed, the Bank would have delayed the close of escrow or cancelled the deal, causing a forfeiture of Laniers deposit. Herd testified that a 15 percent interest rate and a 15-point commission on the Los Hermosos transaction were reasonable, and an institutional lender conceivably would have charged more and taken longer to approve the transaction. Like Schuerman and Wallace, Herd had not heard of a transaction similar to Investor Partners loans to Hollyedge, in which a lender who owned the borrowing entity also received a portion of the loan proceeds. According to Herd, a mortgage or real estate broker ordinarily should not lend a client funds to close a transaction and then obtain a security interest with an encumbrance which violates the terms of a deed of trust.
Another defense expert was Cort Kloke, a "hard money lender." Kloke said the interest rate on the Investor Partners loans was "right in the middle" of the range charged by lenders. According to Kloke, he "might have charged a higher interest rate than 15 points had [he] had this loan request."
The jury returned the following general verdicts:
§ In favor of Jay and against Hollyedge.
§ In favor of Lanier and against Jay, an individual, but awarding no damages.
§ In favor of Hollyedge and against Investor Partners, awarding damages of $50,077 ($14,100 + $36,677).
The jurys arithmetic was incorrect.
§ In favor of Lanier and against Investor Partners, awarding damages of $62,330 ($49,530 + $12,800).
§ Answering "no" whether it found, by clear and convincing evidence, that either Investor Partners or Jay engaged in constructive fraud or breach of fiduciary duty with malice, fraud or oppression.
Following the jury verdict, the parties litigated the equitable issues of rescission, constructive trust and restitution, as well as the issues relating to Jays cross-claims for indemnification and dissolution. The trial court found Jay committed fraud and ordered rescission of (1) the Option Agreement; (2) the amendment to the Operating Agreement granting Jay membership in Hollyedge; (3) the leases and amendments for the 4905 and 4915 buildings; and (4) all contracts by which Investor Partners made loans to Hollyedge. After deducting the amount of the jurys award, the court ordered Jay and Investor Partners to pay $59,510 in restitution to Lanier for undisclosed subtenant rental revenues received by Jay, as well as $292,223 in restitution to Hollyedge for rental overpayments made by Lanier. Judgment also was in favor of Lanier and Hollyedge on the cross-complaint.
Jay and Investor Partners requested a statement of decision. Lanier and Hollyedge submitted a proposed judgment and statement of decision, to which Jay and Investor Partners objected. The objections were sustained. Lanier and Hollyedge submitted a revised statement of decision, to which Jay and Investor Partners also objected. This time, the objections were overruled.
Lanier and Hollyedge then moved for contractual attorneys fees and prejudgment interest. The motion was granted, and Jay and Investor Partners were ordered to pay approximately $ 709,000 in attorneys fees and $36,000 in litigation costs. From the adverse judgment, Jay and Investor Partners appealed.
DISCUSSION
1. The trial courts rescission orders must be reversed.
Jay and Investor Partners contend that rescinding the Option Agreement and its amendments, the leases and the loan transactions was erroneous for two reasons. First, the ruling conflicts with the jurys determination that Jay committed no actionable wrong against Hollyedge. Second, although Jay engaged in wrongful conduct as against Lanier, Lanier suffered no resulting financial harm. We agree. The portion of the judgment relating to the equitable issues must be reversed and the matter remanded to the trial court for further consideration.
In addition to improperly granting rescission, the court awarded equitable relief in favor of Lanier and against Investor Partners, despite Laniers failure to seek such relief against Investor Partners, and without making findings to justify blurring the distinction between Jay and Investor Partners. Finally, Lanier and Hollyedge were awarded "restitution" to which they are not entitled. The restitution included Jays $350,000 capital investment in Hollyedge, the Investor Partners loan proceeds that Lanier applied toward the purchase of the Los Hermosos residence, and $292,233 in rent overpaid to Hollyedge, but not to Investor Partners or Jay.
a. The jurys factual findings.
On behalf of himself and Hollyedge, Lanier claimed Jay breached his fiduciary duty and committed constructive fraud. Lanier and Hollyedge also claimed Jay breached his duties as manager of Hollyedge by failing to properly oversee and manage Hollyedges business, committed Hollyedge to transactions in which his interests conflicted with Hollyedge and which benefited him and Investor Partners at Hollyedges expense, and failed to disclose to Hollyedge or Lanier the revenue he kept for himself. Finally, Hollyedge sued Investor Partners for breach of its lease of the 4915 building on the ground Investor Partners allowed signage on the building without Hollyedges prior written consent, failed to account for signage revenue, and charged Hollyedge for tenant improvements. Lanier asserted no individual claim against Investor Partners.
Although all the claims were tried to the jury, the jury was instructed on the breach of contract claims, but not on the breach of fiduciary duty or constructive fraud claims. The jury simply was asked to render general verdicts. As a consequence, parsing the verdicts and ascertaining the bases for the jurys determinations are difficult. Nevertheless, on appeal ` "[a] verdict should be interpreted so as to uphold it and to give it the effect intended by the jury, as well as one consistent with the law and the evidence. " (All-West Design, Inc. v. Boozer (1986) 183 Cal.App.3d 1212, 1223, quoting 7 Witkin, Cal. Procedure (3d ed. 1985) Trial, § 343, p. 343.) Moreover, "where several counts are tried, a general verdict will be sustained if any one count is supported by substantial evidence and is unaffected by error." (Tavaglione v. Billings (1993) 4 Cal.4th 1150, 1156-1157.)
Respondents submitted proposed jury instructions related to these claims before trial, and tried to submit additional instructions after the jury began deliberating. The instructions were refused. It was error for the trial court to refuse respondents requests for instructions on the elements of these claims and the components of damages for these torts. (Phillips v. G. L. Truman Excavation Co. (1961) 55 Cal.2d 801, 807 [Refusal to give an instruction on a theory which is supported by substantial evidence is prejudicial error]; Barrett v. Bank of America (1986) 183 Cal.App.3d 1362, 1369.) However, respondents failed to address the matter in a motion for new trial, or on appeal. The issue is now deemed waived. No party takes issue with the jurys verdicts
Constructive fraud is a "unique species" of fraud applicable only to fiduciary or confidential relationships. Under constructive fraud, a fiduciary is liable to the principal for breach of fiduciary duties, even if the fiduciarys conduct is not actually fraudulent. (Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 562; Civ. Code, § 1573.) A fiduciary relationship exists between a real estate broker and his principal. (See Sierra Pacific Industries v. Carter (1980) 104 Cal.App.3d 579; Ford v. Cournale (1973) 36 Cal.App.3d 173, 180.) "[B]reach of a fiduciary duty usually constitutes constructive fraud." (Salahutdin v. Valley of California, Inc., supra, 24 Cal.App.4th at p. 563.) The necessary elements of the claim include the existence of a fiduciary relationship, breach, and damages proximately caused by the breach. (Schauer v. Mandarin Gems of Cal., Inc. (2005) 125 Cal.App.4th 949, 960.) When breach of fiduciary duty or constructive fraud is alleged, the law presumes reliance. (Estate of Gump (1991) 1 Cal.App.4th 582, 601.) Nevertheless, a plaintiff must still establish prejudice, consisting of injury and damages. (Ibid.)
Indeed, actual damages are an essential element of the breach of contract, breach of fiduciary duty and constructive fraud causes of action. The imposition of liability for breach of fiduciary duty or constructive fraud requires proof of prejudice, that is, resulting injury and damages. (Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1086 [an essential element of breach of fiduciary duty or constructive fraud claims is resulting damages]; Tyler v. Childrens Home Society (1994) 29 Cal.App.4th 511, 548; Civ. Code, § 1573.) The imposition of liability for breach of contract requires an unexcused failure to perform contractual duties and resulting damages. (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1388.) In Laniers claims against Jay, the jury found Lanier demonstrated unspecified wrongful conduct, but did not establish actual harm. On the claims Hollyedge asserted against him, Jay was exonerated. Thus, as against Jay, the verdicts reveal that Lanier and Hollyedge failed to prove the essential element of financial harm.
b. The trial courts ruling conflicts with the jurys findings of fact.
The trial court ordered rescission of Option Agreement and amendments on the ground that Jay personally, and through his company Investor Partners, engaged in deals that were unfair to Lanier and Hollyedge, because they financially overextended Lanier and permitted Jay to profit at the expense of Lanier and Hollyedge. The courts ruling is inconsistent with the jurys finding that neither Hollyedge nor Lanier suffered compensable harm as a result of Jays conduct. The court therefore erred in imposing liability and damages.
Lanier and Hollyedge insist the trial court was not bound by the jury verdicts because the jurys equitable findings are merely advisory in nature and the court must conduct an independent review and draw its own conclusions. (See A-C Co. v. Security Nat. Bank (1985) 173 Cal.App.3d 462; Ruiz v. Ruiz (1980) 104 Cal.App.3d 374, 378.) This rule pertains in equity cases such as Ruiz and A-C Co, which involved deed cancellation and promissory estoppel. This case, however, is distinguishable. It is an action at law in which Lanier and Hollyedge sought both legal and equitable relief on tort and contract claims. The legal issues were submitted to the jury, leaving equitable remedies and cross-claims for posttrial resolution. "Where (as here) there are equitable and legal remedies sought in the same action, the parties are entitled to have a jury determine the legal issues . . . ." (American Motorists Ins. Co. v. Superior Court (1998) 68 Cal.App.4th 864, 871.) While a court can accept or reject a jurys advisory findings on equitable issues, the courts ruling cannot conflict with the jurys factual findings on legal issues. (See Hill v. City of Long Beach (1995) 33 Cal.App.4th 1684, 1687 [court must defer to jurys factual findings if there is any substantial evidence to support the findings].) The courts decision directly conflicts with the jurys finding that Jay committed no tort as to Hollyedge, caused no financial harm to Lanier, and committed no fraud.
(1) Rescission of the Option Agreement was not warranted.
The trial court found that, when Lanier was preparing to purchase the property on his own, Jay failed to assess Laniers financial ability to complete that transaction. As a result, Lanier stood to lose significant nonrefundable deposits. Jay then convinced Lanier to permit him to contribute funds to complete the deal, and to eventually become his partner in Hollyedge by virtue of the Option Agreement. In exchange, Jay promised to apply his real estate expertise to manage and develop the property so that Lanier would eventually pay little or no rent. The court further determined Jay provided the additional funds for the down payment without disclosing his participation to the Bank, and permitted Lanier alone to execute a personal guaranty. These findings are supported by the evidence. However, the jury also found Lanier suffered no financial loss as a result of Jays deception. While Jay and Lanier deceived the Bank, the deception did not harm Lanier. Jay and Investor Partners correctly note that "[d]eception which does not cause loss is not a fraud in the legal sense." (Hill v. Wrather (1958) 158 Cal.App.2d 818, 825.) Fraud that does not cause injury warrants neither damages nor rescission. (Cutler v. Bowen (1935) 10 Cal.App.2d 31, 36; Darrow v. Houlihan (1928) 205 Cal. 771, 774-775.) Not only was Lanier not damaged by Jays conduct, he readily participated in a deception by which he profited. He obtained property in December 1998 for $ 1.7 million which, by May 2005, had increased in value to at least $3.8 million. Rescission of the Option Agreement therefore was not warranted.
(2) Rescission of the leases was not warranted.
The trial court found that lease rates on the 4905 and 4915 buildings were not based on fair market values. The rate paid by Laniers company was grossly above market, while that rate paid by Investor Partners was well below market. The court also found that, from the outset and working through Investor Partners, Jay sublet the 4915 building without informing Lanier or Hollyedge about receiving a higher rental rate than that paid by Investor Partners. In addition, Jay, through Investor Partners, received but failed to disclose the signage revenue to Lanier or Hollyedge and used Hollyedge monies to fund improvements to the 4915 building, placing his own interests as manager above those of Lanier or Hollyedge. As a result, the court rescinded the leases on the 4905 and 4915 buildings. This was error.
A party to a contract is entitled to recessionary relief if his "consent . . . was given by mistake, or obtained through duress, menace, fraud or undue influence, exercised by . . . the party as to whom he rescinds . . . ." (Civ. Code, § 1689, subd. (b)(1).) The record reflects no mistake with respect to the subleases themselves. On behalf of PMS and Investor Partners, Lanier and Jay specifically modified the leases to permit subletting without Hollyedges prior written consent. Lanier, who was manager of Hollyedge, negotiated PMS lease rate in meetings with Jay and Aron. Lanier acknowledged he paid more rent because he had more at stake than Jay. Moreover, the jury specifically found no "clear and convincing evidence that [Jay or Investor Partners] engaged in constructive fraud or breach of fiduciary duty with malice, fraud or oppression." The trial courts subsequent finding that Jay "committed fraud in the. . . negotiation and implementation of the leases . . ." is inconsistent with the jurys factual determination. A courts ruling may not conflict with factual findings on pivotal legal issues determined by the jury. (See Hill v. City of Long Beach, supra, 33 Cal.App.4th at p. 1687.)
(3) Rescission of the loans was unwarranted.
The trial court ordered the rescission of two loans made by Investor Partners to Hollyedge because Jay failed to adequately analyze Laniers financial ability to purchase the Los Hermosos residence, and "[t]he more credible expert testimony is that these loans were unnecessary, and that the terms were exorbitant and unfair to [Lanier] and [Hollyedge]." According to the court, Jay also placed the loans on the property without the Banks consent, which constituted a default under the Banks loan.
Jay and Investor Partners earned significant commissions for their brokerage and loan procurement services on this transaction. However, Lanier presented no evidence that he could have received the same services at a lower cost and still have acquired the residence. In addition, the loan terms were disclosed to Lanier. He was informed that, by structuring the transaction as contemplated, the Bank loan was placed at risk of default. Lanier undertook that risk and proceeded to close escrow. The jurys award to Hollyedge is partially comprised of commissions Lanier paid to Jay for his services as mortgage broker on the residence, as well as $36,677 in as-yet unpaid commissions on second and third trust deeds. The jurys award adequately compensates Lanier and Hollyedge for any usurious fees they charged on the Los Hermosos transaction. It found no more was owed. As offensive as Jays conduct may have appeared, the jury found neither Hollyedge nor Lanier suffered any financial harm as a result of Jays actions. Rescission was thus not warranted on this or any other contract.
The jury knew the Los Hermosos residence was sold, but did not know the price. Anyone familiar with the robust residential real estate market in Southern California at the time would understand that Lanier likely earned a substantial profit on the 2004 sale of a home purchased in 2000 for $800,000 in the desirable Los Feliz area.
2. The trial courts restitution order contravenes the jurys finding on damages and provides an undeserved windfall.
The trial court may not contravene the jurys verdict and make inconsistent findings regarding damages. When a jury returns a general verdict, the trial court may not assume that the jury ignored any element of damages. (Crowe v. Sacks (1955) 44 Cal.2d 590, 597.) During argument, Lanier and Hollyedge asked the jury to award as damages the amount PMS overpaid in rent and the amount Investor Partners underpaid in rent. The jury returned a verdict awarding only $ 112,407, which does not appear attributable to rental over or underpayments, apart from the small signage revenue. The courts additional $292,223 award in favor of Hollyedge, explained as the amount of rent PMS overpaid less the jurys award, contravenes the jurys determination that Jay never harmed Hollyedge and that Hollyedge was not owed more than $ 112,407. Moreover, any rent overpaid by PMS went to Hollyedge, not to Jay or Investor Partners, and no basis exists for ordering Jay and Investor Partners to restore the amount.
Mathematical error aside, Lanier asserts the $62,330 award in favor of Lanier and against Investor Partners is comprised of $49,530 (Jays underpayment of interest on Investor Partners loans to Hollyedge) plus $12,800 (Jays mortgage broker commissions on the Los Hermosos transaction). Hollyedges $ 50,077 award against Investor Partners is comprised of $14,100 (unpaid signage revenue and wrongful repairs to the 4915 building) plus $36,677 (commissions on Investor Partners loans to Hollyedge).
That the trial court subtracted the jurys award from its equitable award also undercuts respondents argument that the court considered the jury verdicts merely advisory, a statement the court unfortunately failed to make.
The restitutionary order also fails to account for Jays initial capital investment of $350,000 in Hollyedge or $103,750 in loan proceeds distributed to Lanier when he purchased the Los Hermosos residence. Giving Lanier and Hollyedge full ownership of the property and allowing them to retain Jays capital contribution and avoid payment of the loan invested in the Los Hermosos residence unjustly enriches Lanier and Hollyedge, and punishes Jay and Investor Partners and subjects them to a forfeiture. The jury rejected Laniers and Hollyedges claim for punitive damages. A contrary trial court finding in the guise of an equitable ruling imposing punitive sanctions is tantamount to a violation of due process. It is not, as Lanier and Hollyedge assert, merely an "adjust[ment of] the equities." Civil Code section 1691, subdivision (b) requires a rescinding party to "[r]estore to the other party everything of value which he has received from him under the contract." Lanier and Hollyedge would be unjustly enriched if permitted to retain Jays capital account and avoid repaying the Investor Partners loan.
Reversal and remand is required to permit the trial court to consider whether alternative relief is warranted in accordance with the views expressed in this opinion and consistent with the jurys factual determinations reflected in the verdicts. (See Civ. Code, § 1692 ["If in an action or proceeding a party seeks relief based upon rescission and the court determines that the contract has not been rescinded, the court may grant any party to the action any other relief to which he may be entitled under the circumstances"].)
3. The trial court improperly treated Jay as Investor Partners alter ego.
The equitable portion of the judgment also requires reversal because the trial court failed to distinguish between the acts of Jay and Investor Partners, and treated Jay as the alter ego of the corporation without articulating a basis to justify piercing the corporate veil.
The jury found Jay owed nothing to Lanier or Hollyedge. Notwithstanding that determination, the judgment requires Jay and Investor Partners to make restitution and pay damages, costs and attorneys fees, for a total award of over $1 million, plus interest. The court clearly applied the alter ego doctrine to make Jay and Investor Partners liable for one anothers debts.
A corporation is regarded as an independent legal entity, separate and distinct from its officers, directors and shareholders. (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.) A corporate entity may be disregarded only when "an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation." (Ibid.) However, the alter ego remedy "is an extreme remedy, sparingly used" to preclude fraud or a wrongful act. (Id. at p. 539.) It does not protect every unsatisfied corporate creditor. Rather, it affords protection when "some conduct amounting to bad faith makes it inequitable for the corporate owner to hide behind the corporate form." (Ibid.) Factors supporting the application of the alter ego doctrine include commingling of assets; holding oneself out as liable for anothers debts; sharing directors, officers and employees; using a shell or conduit; inadequate capitalization; and disregarding corporate formalities. (Ibid.) No single factor controls; several must exist before alter ego liability will be imposed. (Ibid; Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 840.) The doctrine will be applied when a finding is made that "(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow." (Automotriz etc. De California v. Resnick (1957) 47 Cal.2d 792, 796.)
Lanier and Hollyedge neither alleged alter ego nor asserted it as a basis for equitable relief at trial. In objecting to proposed statements of decisions, Jay and Investor Partners repeatedly sought an explanation for imposing liability against Jay after the jury had exonerated him. The filed statement of decision contains no findings on this point. Absent a finding of "alter ego," Jays sole ownership and control of Investor Partners standing alone does not provide a legitimate basis for requiring him to pay an award for which Investor Partners was found responsible. (Silverman v. Superior Court (1988) 203 Cal.App.3d 145, 152.) With respect to Investor Partners, the record reflects no evidence of inadequate capitalization, commingling of assets, disregard of corporate formalities, or other factors to justify imposition of alter ego liability.
Accordingly, the judgment against Jay as an individual must be reversed.
Our conclusion renders it unnecessary to address the parties arguments regarding the awards of prejudgment interest on the equitable portion of the judgment and the attorney fee award. Those portions of the judgment are vacated. The trial court shall revisit those matters once proceedings on remand on the equitable issues conclude.
DISPOSITION
The portions of the judgment relating to the June 27, 2005 ruling on the parties equitable claims and the September 8, 2005 ruling granting Laniers motion for attorneys fees and prejudgment interest are reversed. The matter is remanded for further proceedings consistent with the jurys verdicts and this opinion. In all other respects, the judgment is affirmed. Each side is to bear its own costs of appeal.
We concur:
COOPER, P. J.
FLIER, J.