Opinion
E044331
8-29-2008
SHANGHAI MINGUANG INTERNATIONAL GROUP CO., LTD., Plaintiff and Respondent, v. JAMES YANG, Defendant and Appellant.
Law Offices of Sam X.J. Wu and Steven W. Hashimoto for Defendant and Appellant. Law Offices of Michael S. Magnuson and Michael S. Magnuson for Plaintiff and Respondent.
Not to be Published
Defendant James Yang (Yang) appeals an order amending the judgment to add Yang as a judgment debtor under the alter ego doctrine. This action arises out of a lawsuit brought by plaintiff Shanghai Minguang International Group Co., Ltd. (plaintiff) against two corporations, J.M. William Co. Inc. (J.M.) and Hongmei International Co. (Hongmei). Yang was the sole shareholder, director, officer and president of J.M. and Hongmei (the corporations). Default judgment was entered against the corporations for failing to pay plaintiff for the purchase of over a million dollars in textile products.
Yang contends that because he was not a named party in the action and was added as a judgment debtor after entry of judgment, he was deprived of his due process right to participate meaningfully in litigating the matter. Yang also contends there was insufficient evidence to support the trial courts finding that he was the alter ego of the corporations.
We conclude Yang had an opportunity to participate meaningfully in litigating this matter and there was overwhelming evidence Yang was the alter ego of the corporations. It would be inequitable not to hold Yang accountable for the debt the corporations incurred purchasing goods from plaintiff. The judgment is affirmed.
1. Facts and Procedural Background
From May 2000 through May 2005, the corporations purchased from plaintiff floor coverings, bed linens and other related products. The corporations purchases amounted to over a million dollars in products. The corporations failed to pay for any of the products.
In January 2006, plaintiff filed a complaint against the corporations, seeking to recover payment for the products. Yang was not named as a party to the action.
In March 2006, plaintiff served the corporations with a summons and complaint by personally serving its agent for service of process, Yang. On May 5, 2006, the court entered defaults against the corporations due to the corporations failure to answer the complaint.
On June 29, 2006, the corporations filed a motion to vacate the defaults. Yang provided a supporting declaration acknowledging he was familiar with the contentions, facts, and files in the case, and that his wife, Alice Yang, had told him she received the summons and complaint while he was out of the state on a business trip. Normally, he was responsible for receiving such papers since he was an officer and agent for service of process for both corporations. Since Yang was not expecting to be served with the summons and complaint he did not tell his wife they might be delivered when he was gone.
Yang explained in his declaration that Alice is from China and is not fluent in English. She therefore did not understand the importance of the summons and complaint and put the documents aside. Yang was unaware the summons and complaint had been served until April 2, 2006, when he returned from his business trip and Alice told him someone had delivered documents but she did not know what they were or where she put them. Yang looked for the documents but could not find them. On May 2, 2006, Yang went on another business trip. Alice did not find the summons and complaint until after default was entered on May 5, 2006. On May 17, 2006, after Yang returned and Alice had found the documents, Yang contacted attorney Sam Wu for the purpose of vacating the default and defending the case.
Plaintiff opposed the corporations motion to vacate the default on the grounds the corporations failed to show excusable neglect and could not appear in court because the corporations were suspended. According to Secretary of State records, Hongmei was incorporated in 1991 and J.M. was incorporated in 1993. As of June 16, 2006, both corporations were suspended. J.M. was suspended in 1995. The date of Hongmeis suspension was not provided.
In response, Yang stated in a declaration attached to the corporations reply brief that within 12 days of finding the summons and complaint, he consulted Wu for the purpose of vacating the default and defending the case. Yang claimed he was unaware that the corporations had been suspended. If he had known, he would have had their corporate status reinstated. Yang further stated that he would take all reasonable and necessary steps to have the corporate status reinstated if it was determined that the corporations were actually suspended.
On July 25, 2006, the trial court heard and denied without prejudice the corporations motion to vacate default on the ground the corporations were suspended and thus could not appear in court.
Thereafter no steps were taken to reinstate the corporations corporate status. As a consequence, on October 16, 2006, the court entered a default judgment against the corporations. Plaintiff was awarded $1,006,457.64 in damages, plus interest and costs.
After entry of judgment, plaintiff subpoenaed Yang, as the corporations president, to appear for a creditors examination and produce documents on December 12, 2006. At the hearing, Yang testified but did not produce any documents.
In May 2007, plaintiff filed a motion to amend the judgment to add Yang as a judgment debtor on the ground he was the alter ego of the corporations. In support of the motion, plaintiffs attorney, Michael Magnuson provided a declaration summarizing Yangs testimony given at the creditors examination, since the proceedings were not recorded.
According to Magnusons declaration, Yang testified to the following: The corporations did not have any assets or bank accounts; neither corporation was operating; Yang formed J.M. in 1993; Yang was the sole shareholder, officer, and director of J.M.; Yang contributed $20,000 to capitalize J.M. in exchange for 100 percent of J.M.s stock; Yang did not have any corporate or financial documents for the corporations; he did not have any income tax returns for the corporations; Yang did not know where J.M. had a bank account or the name of the bank; Yang did not recall the name of the bank where his personal bank account is located; Yang did not have any documents reflecting communications between the corporations and plaintiff; Yang was at all times the sole individual acting on behalf of the corporations during their dealings with plaintiff; and when Yang purchased the products from plaintiff, Yang did not have the money to pay for the goods; Yang had intended to pay plaintiff for the products once he resold them to customers; and Yang did not repay plaintiff because his customers did not pay the full amount owed for the products.
Yang, represented by Wu, the same attorney who had represented the corporations, filed opposition to the motion to amend judgment. Yang provided a declaration stating he had been president of the corporations from their inception until they ceased operation and were suspended by the state. Upon learning default was entered against the corporations, Yang retained Wu to file a motion to vacate the defaults. After the court denied the motion because of the corporations suspended status, no attempt was made to reinstate corporate status or litigate the matter further because the corporations had ceased operations. Yang did not personally participate any further in the litigation because he was not named as a party nor a party to the underlying contract.
Yang further stated in his declaration that many of Magnusons statements in his declaration were untrue. Yang claimed he did not state at the creditors examination that the corporations did not have any assets or a bank account; that he was the sole shareholder, officer, and director; that the corporations were capitalized with $20,000 contributed by Yang for 100 percent of the corporations stock; that Yang was the sole individual acting on behalf of the corporations in their dealings with plaintiff; or that Yang did not have money to pay for the plaintiffs products when he purchased them.
Yang claimed he could not state at the creditors examination the location of the corporations bank accounts because the accounts were closed awhile ago. Yang objected on relevancy grounds to identifying the bank where he held his personal account. Yang stated he was unable to produce any corporate documents at the creditors examination because he did not have custody or control of the documents. He believed the documents had been lost or destroyed during relocation of the corporations.
Wu also provided a declaration stating that he was told not to litigate the lawsuit further on behalf of the corporations because they had ceased operations. Wu stated that Yang testified at the creditors hearing that the corporations assets were lost over the years and the corporations bank accounts were closed after the corporations ceased operations. Wu asserted that Yang was not the sole shareholder, officer, and director of the corporations. Yangs wife was also an officer and director. Also, in addition to the initial $20,000 in capitalization, Yang contributed additional funds to the corporations as needed. Wu claimed that not only Yang dealt with plaintiff. His wife and other employees of the corporations also acted on behalf of the corporations in dealing with plaintiff. Wus declaration contained additional statements consistent with those contained in Yangs supporting declaration.
Attached to plaintiffs reply brief, plaintiff provided a California Secretary of State printout showing that J.M. was incorporated in 1993 and suspended in 1995. The printout also stated that Yang was listed as the corporations registered agent and Yang was the sole officer and director of J.M.
On July 26, 2007, the trial court granted plaintiffs motion to amend the judgment to add Yang as a judgment debtor, and entered the order on August 7, 2007.
2. Due Process Right to Participate in Litigation
Yang contends he was deprived of his due process right to participate in litigation and present a defense in this action. Citing Motores de Mexicali v. Superior Court (1958) 51 Cal.2d 172, 176 (Motores) and NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778 (NEC), Yang argues that adding him as a judgment debtor violated his due process rights because he was under no duty to appear and defend himself in the action since there was no claim against him personally. Yang also claims he did not control the corporations defense or have an opportunity to defend the corporations or himself and therefore could not be added as the corporations alter ego.
Section 187 of the Code of Civil Procedure grants to every court the power to use all means to carry its jurisdiction into effect, even if those means are not set out in the code. (Fairfield v. Superior Court (1966) 246 Cal.App.2d 113, 120.) Under section 187, the court has the authority to amend a judgment to add additional judgment debtors. (Dow Jones Co. v. Avenel (1984) 151 Cal.App.3d 144, 148.) "Judgments are often amended to add additional judgment debtors on the grounds that a person or entity is the alter ego of the original judgment debtor. [Citations.] 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.] `Such a procedure is an appropriate and complete method by which to bind new individual defendants where it can be demonstrated that in their capacity as alter ego of the corporation they in fact had control of the previous litigation, and thus were virtually represented in the lawsuit. [Citation.] In other words, `[i]f 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, supra, 208 Cal.App.3d at pp. 778-779.)
In Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39 (Alexander), which is factually similar to the instant case, the trial court amended the judgment to add Alexander as an alter ego judgment debtor. He had not been named in the complaint or in the original judgment. On appeal, the Alexander court affirmed, concluding there was sufficient evidence that Alexander, as sole stockholder, controlled the litigation. In addition, the court concluded there was unity of interest and there would be an inequitable result if the alter ego doctrine was not applied.
The court in Alexander noted that: "[I]n both Mirabito [v. San Francisco Dairy Co. (1935) 8 Cal.App.2d 54] and Thomson [v. L. C. Roney & Co. (1952) 112 Cal.App.2d 420] the alter egos had subsidized the defense of the named defendants and had been effectively present throughout the litigation, whereas in Motores the individuals whose names had been added to the final judgment had in no way participated in the defense of the basic action against the defendant. . . . [¶] Thus, it is now settled that ". . . the authority of the court will be exercised to impose liability under a judgment upon the alter ego who has had control of the litigation." (Alexander, supra, 104 Cal.App.3d at p. 45.)
In Alexander the court concluded evidence of the following circumstances was sufficient to establish that Alexander controlled the litigation between the defendant corporation and the plaintiff: The attorney representing the corporation at trial testified he primarily dealt with Alexander during the litigation; Alexander was kept fully advised of the litigation; Alexander was an attorney; Alexander was completely familiar with all of the issues being tried and documents used in the litigation; the litigation proceedings were scheduled at times convenient to Alexander; and Alexander participated in the litigation as the corporations chief operating officer and lawyer. (Alexander, supra, 104 Cal.App.3d at p. 46.)
In the instant case, although the matter did not go to trial, this was due to Yangs decision not to reinstate the suspended corporations so that they could appear in court, set aside the default, and present a defense. When Yang became aware of the litigation, after being served with the lawsuit as agent for service of process, he immediately retained an attorney to represent the corporations for the purpose of vacating entry of default. There is evidence that Wu apprised Yang fully of the proceedings thereafter. There is also evidence that Yang participated in the litigation as the president and sole officer, shareholder, and director of the corporations. He was also agent for service of process and retained Wu to represent the corporations.
While in this case the matter was not tried, there is ample evidence that this was because Yang, who was in control of the litigation, determined that there was no point litigating the matter once the court ruled the corporations could not appear in court until their corporate status was reinstated. Yang made a strategic decision not to reinstate the corporations and present a defense. Yang stated in his declaration supporting the corporations opposition to plaintiffs motion to amend the judgment that no efforts were undertaken to reinstate the corporations corporate status or to defend the corporations because the corporations had ceased operations.
Yang argues that his involvement in the case was postjudgment and therefore he did not have a meaningful opportunity to participate in and control the litigation. We disagree. Yang became involved in the litigation before judgment was entered. As agent for service of process for both corporations, he was served with the summons and complaint in March 2006. Yang claims that default was entered on May 5, 2006, because when he was served, he was out of the country and his wife lost the documents.
Yang states in his declaration supporting the corporations motion to vacate default that within 12 days of finding the summons and complaint, he consulted with attorney Wu, retained for the purpose of vacating the default and defending the case. Yang further stated in his declaration: "I will take all reasonable and necessary steps to have the corporate status reinstated if it is determined that the two corporations have in fact being [sic] suspended."
This indicates Yang had knowledge of and control over the litigation before judgment was entered. He intentionally did not take necessary steps to reinstate the corporations corporate status; and refile the motion. He also did not attempt to intervene as an interested party based on his status as a sole shareholder, director, officer, and president of the corporations; and he did not request the court to stay entry of default judgment until reinstatement of the corporations corporate status.
Yang argues that because he had no risk of personal liability, he was not required to intervene. (NEC, supra, 208 Cal.App.3d at pp. 780-781.) This is not entirely true. As sole shareholder, officer, director, and president of the corporations, which were undercapitalized and in debt to plaintiff for over $1 million, there was substantial risk of Yang being held liable as the alter ego of the corporations, which Yang knew had no assets and had ceased to exist.
This case is distinguishable from Motores and NEC because Yang was aware of and controlled the litigation prior to entry of judgment against the corporations and participated in the defense of the action before default judgment was entered. In NEC the court stated that "`Control of the litigation sufficient to overcome due process objections may consist of a combination of factors, usually including the financing of the litigation, the hiring of attorneys, and control over the course of the litigation. [Citation.] Clearly, some active defense of the underlying claim is contemplated. [Citation.]" (NEC, supra, 208 Cal.App.3d at p. 781.)
Under these circumstances, in which Yang had the opportunity to present his own defense and controlled the corporations defense but chose not to do so, Yang was not deprived of his due process right to participate in litigation and present his defense in this action.
Furthermore, nothing in the record shows that, had Yang presented his own defense, he could have produced a scintilla of evidence that would have in any way affected the outcome in this case. (NEC, supra, 208 Cal.App.3d at p. 780, Mirabito v. San Francisco Dairy Co., supra, 8 Cal.App.2d at p. 60.)
3. Alter Ego Liability
Yang contends there was insufficient evidence to support the trial courts finding that he was the alter ego of the corporations. Specifically, he argues there was no evidence the corporations were undercapitalized when they contracted with plaintiff in 2000 and thereafter for the purchase of goods. In addition, Yang was not a party to the contract, he did not personally guarantee performance of the corporate obligations, and there was no evidence Yang engaged in any fraud or other wrongdoing. In addition, he claims there is no evidence as to the capitalization or undercapitalization of Hongmei.
Amending a judgment to add an alter ego judgment debtor "`"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. . . ."" (Hall, Goodhue, Haisley & Barker, Inc. v. Marconi Conf. Center Bd. (1996) 41 Cal.App.4th 1551, 1555, quoting Carr v. Barnabeys Hotel Corp. (1994) 23 Cal.App.4th 14, 21-22.)
A claim that a corporation is the alter ego of an individual arises when the separate existence of the corporation would be inequitable, such as when "the opposing party is using the corporate form unjustly and in derogation of the plaintiffs interests" (Lebastchi v. Superior Court (1995) 33 Cal.App.4th 1465, 1470) or when a corporation is used by an individual "to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose." (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538 (Sonora).)
Under such circumstances, "the courts will ignore the corporate entity and deem the corporations acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners." (Sonora, supra, 83 Cal.App.4th at p. 538.) "`[T]he issue is not whether the corporate entity should be disregarded for all purposes, nor whether its very purpose was to defraud the plaintiff. Rather, the issue is "whether in the particular case presented and for the purpose of such case justice and equity can best be accomplished and fraud and unfairness defeated by a disregard of the distinct entity of the corporate form."" (Lebastchi v. Superior Court, supra, 33 Cal.App.4th at p. 1470, quoting 9 Witkin, Summary of Cal. Law (9th ed. 1989) Corporations, § 12, pp. 524-525, citing Kohn v. Kohn (1950) 95 Cal.App.2d 708, 718.)
Two conditions must be met to invoke the alter ego doctrine: "First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone." (Sonora, supra, 83 Cal.App.4th at p. 538.)
Factors supporting a finding that these two conditions exist include: "`commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other. [Citations.] Other factors which have been described in the case law include inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers. [Citations.] No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied. [Citation.] Alter ego is an extreme remedy, sparingly used. [Citation.]" (Sonora, supra, 83 Cal.App.4th at pp. 538-539.) The plaintiff creditor bears the burden of pleading and establishing alter ego liability. (Minifie v. Rowley (1921) 187 Cal. 481, 488.)
Here, plaintiff established most of these factors existed. According to Magnusons declaration, Yang testified at the creditors examination that he was the sole shareholder, officer, and director of J.M; Yang contributed $20,000 to capitalize J.M. in exchange for 100 percent of J.M.s stock; Yang was at all times the sole individual acting on behalf of the corporations during their dealings with plaintiff; Yang did not have the money to pay for the goods purchased from plaintiff at the time of the purchases; Yang intended to pay plaintiff for the products once he resold them to customers; and Yang did not repay plaintiff because Yangs customers did not pay the full amount they owed for purchasing the products.
There was also evidence that Yang was sole shareholder, officer, director and president of both corporations; he disregarded corporate formalities by not keeping any corporate or financial documents; and Yang comingled the corporations and his personal funds and assets. A reasonable inference can be made from the evidence that Yang was using the corporations "as a mere shell or conduit for" his own business enterprise (Sonora, supra, 83 Cal.App.4th at p. 539), and therefore it would be inequitable not to hold Yang liable for the corporations debt when Yang used the suspended, undercapitalized corporations as a shell for purchasing over a million dollars in products from plaintiff without paying plaintiff a cent, knowing the corporations did not have any assets to pay for the goods.
Plaintiff sufficiently established Yangs unity of interest and ownership in the corporations and that it would be inequitable not to hold Yang liable for the corporations debts. Furthermore, Yang failed to provide any evidence refuting this. He did not produce any corporate or personal documents. Even though Yang was the sole officer, director, shareholder, and president of the corporations, according to Magnusons declaration, Yang testified at the creditors examination that he did not have any corporate or financial documents for the corporations; he did not have any income tax returns for the corporations; Yang did not know where J.M. had a bank account or the name of the bank; he did not recall the name of the bank where his personal bank account was located; and Yang did not have any documents reflecting communications between the corporations and plaintiff.
While Yang submitted a declaration claiming he did not make some of the statements attributed to him in Magnusons declaration, we must give deference to Magnusons version of Yangs testimony at the creditors examination since there is no reporters transcript of the proceedings. When addressing a challenge to the sufficiency of the evidence supporting a conviction, this court "must examine the whole record in the light most favorable to the judgment to determine whether it discloses substantial evidence — evidence that is reasonable, credible and of solid value — such that a reasonable trier of fact could find the defendant guilty beyond a reasonable doubt. [Citation.] The appellate court presumes in support of the judgment the existence of every fact the trier could reasonably deduce from the evidence. [Citations.] The same standard applies when the conviction rests primarily on circumstantial evidence. [Citation.] (People v. Kraft (2000) 23 Cal.4th 978, 1053.)
Applying this deferential evidentiary standard, we conclude there was overwhelming evidence supporting the trial courts finding that Yang was the alter ego of the corporations. Even though Yang was not a signatory to the purchase contract or guarantor, there was evidence he purchased goods from plaintiff through the corporations, knowing there was no money to pay for the goods. He used the suspended corporations to carry out his own entrepreneurial objectives no doubt in hope of selling the goods at a profit and then paying back plaintiff, while assuming he was protected from personal liability in the event he did not succeed in his enterprise. Under such circumstances, it would be inequitable and not good public policy to permit Yang to escape liability for conduct he undertook through the shell instrumentality of the corporations.
4. Disposition
The judgment is affirmed. Plaintiff is awarded its costs on appeal.
We concur:
Hollenhorst, Acting P. J.
King, J. --------------- Notes: Unless otherwise noted, all statutory references are to the Code of Civil Procedure.