Opinion
NOT TO BE PUBLISHED
San Diego County Super. Ct. No. 37-2008-00095774-CU-UD-CTL Jay M. Bloom, Judge.
NARES, Acting P. J.
Proceedings in mandate following the grant of a motion for summary adjudication. Petition granted.
In this action for unpaid rent at a commercial property, petitioners June Carlee McGrath and Laurie Carleen McGrath (together, the McGraths), as co-trustees of the McGrath Family Trust, sought to hold Dawn Kearney Davidson and Patrick Kearney (together, the Kearneys) personally liable on an alter ego theory for rent owed by the Kearneys' corporation, Design Line Interiors (DLI). The court granted summary adjudication on the alter ego claims based upon its finding that the McGraths "produced no evidence to show an inequitable result if the acts of [the Kearneys] were treated as those of the corporation alone." The court further found that Patrick Kearney (Patrick) could not be liable under an alter ego theory because he was divorced from Dawn Kearney Davidson (Dawn) in 2005, and there was no evidence he "had any interest in [DLI] after 2005."
In the interest of clarity we refer to the Kearneys individually by their first names. We intend no disrespect.
In this petition, the McGraths assert the court erred in granting summary judgment on their alter ego claims because (1) a triable issue of fact exists on the issue of whether an inequitable result would follow if the corporate veil was not pierced; and (2) the court improperly weighed the evidence in ruling that they had not shown Patrick had no interest in the corporation after 2005.
We conclude the court erred in granting summary adjudication on the McGraths' alter ego claims because the McGraths submitted sufficient evidence to create a triable issue of fact as to whether an inequitable result would occur if the corporate veil was not pierced. We further conclude the McGraths presented sufficient evidence to raise a triable issue of fact as to whether Patrick can be held liable under an alter ego theory despite the Kearneys' divorce in 2005. Accordingly, we grant the McGraths' petition and order the court to vacate its order granting summary adjudication.
FACTUAL AND PROCEDURAL BACKGROUND
A. The Lease
In March 2002 the McGraths entered into a commercial lease with the Kearneys' company, DLI, under which DLI leased 44, 923 square feet of commercial property from the McGraths. The lease was to run for seven years, from August 2002 to 2009. DLI was in the business of designing and furnishing model homes. As a condition of entering into the lease, the Kearneys, as owners and directors of DLI, agreed to personally guarantee DLI's obligations under the lease for the first five years (until August 2007) of the lease.
B. The Instant Action
In October 2008, after DLI fell behind on its lease payments, the McGraths served DLI with a notice to pay rent or quit. When DLI failed to cure that notice by paying the rent or yielding possession, the McGraths filed an unlawful detainer action. Shortly before trial, DLI relinquished possession of the premises. The McGraths then amended their complaint to one seeking past and future rent totaling $633,054.59 and added a cause of action for alter ego liability against the Kearneys.
C. Summary Adjudication Motion
The Kearneys moved for summary adjudication on the McGraths' alter ego claims, arguing that no evidence of alter ego liability existed and that the Kearney's 2005 divorce "place[d] [Mr. Kearney] beyond the reach of any alter ego claim." In support of their motion the Kearneys each supplied declarations disputing the McGraths' alter ego claims.
In her declaration, Dawn stated that DLI was a valid corporation that has always maintained proper records and that she never used its corporate status to further herself personally and had never commingled her personal assets or dealings with those of DLI's. She further stated that she has never authorized the transfer of, and has never witnessed others transfer, corporate assets without adequate consideration. As to Patrick, she stated that he has never been an officer of DLI and that since their divorce five years earlier, he had no involvement with DLI. She further stated she had no knowledge of Patrick improperly withholding funds from DLI for his personal use. Dawn stated that she had never commingled corporate funds with her own and was not using DLI to avoid responsibility for its rent obligations. She blamed the downturn in the housing market and the national economy for DLI's financial problems.
In his declaration, Patrick stated that he had no involvement with DLI whatsoever. He also stated that since his divorce five years previous, he had no involvement with DLI. His only involvement with DLI in the past was serving on the board of directors at one time and executing the personal guarantee on the lease. Similar to Dawn, he denied transferring corporate assets without adequate consideration or commingling corporate assets with his own and asserted he had no knowledge of Dawn doing such things.
The Kearneys also submitted a declaration from their accountant, John Cooper. In that declaration Cooper stated that he had no knowledge of Dawn or Patrick improperly withholding corporate funds for their personal use, transferring corporate assets without adequate consideration, or commingling corporate funds with their own personal finds.
D. Opposition to Summary Adjudication Motion
In opposition to the Kearneys' motion for summary adjudication, the McGraths submitted evidence that the Kearneys did commingle corporate and personal funds by using corporate funds to make their house payments, pay for their children's tuition and pay their personal income taxes. They also submitted evidence DLI was used to pay personal expenses. By way of example, in 2007 Dawn drew on DLI's line of credit to remodel her personal residence. They also submitted evidence DLI made a payment in 2004 in the amount of $94,769.72 towards a vacation home in Lake Arrowhead. DLI also purchased six automobiles and used them for both personal and business activities without documenting their use or how they were eventually distributed to the Kearneys.
The McGraths also presented evidence DLI was undercapitalized. According to DLI's financial statements, the year prior to signing the lease, DLI had positive retained earnings of $1,217,370. Thereafter, however, from 2002 to 2008 (the years DLI leased the premises from the McGraths) DLI had a negative balance in six of those seven years. During that same period, Dawn drew a cumulative salary of $3,350,000, and took net distributions of $4,447,620, which together exceeded DLI's earnings for that period by more than $2 million. By the end of 2008, DLI's retained earnings were a negative $3,730,325.
The McGraths also submitted evidence of personal loans between DLI and the Kearneys. In 2001 the Kearneys defaulted on a $2 million note they owed the corporation. That note was written off in 2007 by DLI.
The McGraths submitted evidence of Patrick's involvement with DLI, both before and after the Kearneys' divorce. They submitted evidence Patrick received compensation from the company in 2002 and 2006. He benefitted from payments made on their home and vacation property in Lake Arrowhead while they were still community property. He received two DLI automobiles, a Porsche and a Yukon Denali as part of the marriage settlement. He also received one-half of the Lake Arrowhead property and a one-half interest in a note from DLI as part of the marriage settlement agreement.
Despite Patrick's contention he had little involvement with DLI, he was a board member for 15 years and attended numerous meetings. At four of those meetings he approved loans to Dawn totaling over $1.5 million. Although he claimed he never received any monies from DLI, the marital settlement agreement lists a note receivable from DLI as an asset of the estate to be divided equally between him and Dawn. Despite his claim he had no involvement with DLI after his divorce in 2005, he is listed in a document dated December 2006 as a financial advisor for DLI's profit-sharing plan, indicating he may have received distributions from that plan as late as the end of 2006.
E. Court's Ruling
The court granted the Kearneys' motion for summary adjudication, finding the McGraths had "produced no evidence to show an inequitable result if the acts were treated as those of the corporation alone." The court also found that alter ego liability could not be shown as against Patrick because the McGraths had not shown he "had any interest in [DLI] after 2005."
DISCUSSION
I. STANDARDS GOVERNING SUMMARY ADJUDICATION MOTIONS
A defendant moving for summary judgment or summary adjudication bears the burden of persuasion to show either (1) one or more elements of the plaintiff's cause of action cannot be established or (2) there is a complete defense to that cause of action. (Code Civ. Proc., § 437c, subds. (o), (p)(2); Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850-851 (Aguilar); Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 334 (Guz).) When the motion is based on the assertion of an affirmative defense, the defendant has the initial burden to demonstrate that undisputed facts support each element of the affirmative defense. "The defendant must demonstrate that under no hypothesis is there a material factual issue requiring trial. [Citation.] If the defendant does not meet this burden, the motion must be denied. Only if the defendant meets this burden does 'the burden shift[] to plaintiff to show an issue of fact concerning at least one element of the defense.' " (Anderson v. Metalclad Insulation Corp. (1999) 72 Cal.App.4th 284, 289-290.)
On appeal, we independently review the trial court's decision, considering all of the evidence in the supporting and opposing papers, and apply the same standard as did the trial court. (Yanowitz v. L'Oreal USA, Inc. (2005) 36 Cal.4th 1028, 1037; Guz, supra, 24 Cal.4th at p. 334.) We liberally construe the evidence in support of the opposing party, resolving doubts concerning the evidence in its favor (Yanowitz, at p. 1037; Wiener v. Southcoast Childcare Centers, Inc. (2004) 32 Cal.4th 1138, 1142), and assess whether the evidence would, if credited, permit the trier of fact to find in its favor under the applicable legal standards. (Cf. Aguilar, supra, 25 Cal.4th at p. 850.) We do not weigh the evidence and inferences, but merely determine whether a reasonable trier of fact could find in the opposing party's favor, and we must reverse the order granting summary adjudication when there is some evidence that, if believed, would support judgment in its favor. (Alexander v. Codemasters Group Limited (2002) 104 Cal.App.4th 129, 139.)
II. ALTER EGO LIABILITY
The "single enterprise, " or alter ego doctrine, is an equitable doctrine:
"A corporate identity may be disregarded─the 'corporate veil' pierced─where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation. [Citation.] Under the alter ego doctrine, then, when the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation's acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners. [Citations.] The alter ego doctrine prevents individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds." (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538 (Sonora).)
"In California, two conditions must be met before the alter ego doctrine will be invoked. 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 for the trial court to consider include the commingling of funds and assets of the two entities, identical equitable ownership in the two entities, use of the same offices and employees, disregard of corporate formalities, identical directors and officers, and use of one as a mere shell or conduit for the affairs of the other. (Id. at pp. 538-539.) "No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied." (Id. at p. 539.)
I. ANALYSIS
A. The "Inequitable Result" Prong
The trial court did not find, and the Kearneys do not jointly (we shall discuss Patrick's separate argument his 2005 divorce insulated him from alter ego liability, post), contend on this appeal, that the McGraths have not raised a triable issue of fact on the first prong of the alter ego test─that there is "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." (Sonora, supra, 83 Cal.App.4th at p. 538.) Rather, we are only presented with the question of whether the court erred in finding the McGraths presented no evidence sufficient to raise a triable issue of fact on the second prong of the alter ego test─that an inequitable result would occur if DLI's acts in question were treated as those of the corporation alone. The McGraths assert that the court erred in concluding they presented no evidence on this prong of their alter ego claim because the same evidence demonstrating the "unity of ownership" prong could also demonstrate a triable issue of fact exists as to whether an inequitable result would occur if the acts of the Kearneys were treated as those of DLI alone. The Kearneys in turn argue that the McGraths must show more, that the Kearneys used the corporation "to perpetuate a fraud greater than merely the avoidance of a debt, " and that their actions amounted to "bad faith."
Liberally construing the evidence presented by the McGraths and resolving all doubts in their favor, we conclude that the McGraths have presented sufficient evidence to raise a triable issue of fact on the inequitable result prong of their alter ego claim because evidence that could raise a triable issue of fact on the first prong of the alter ego test can, given the facts of a particular case, also satisfy the "inequitable result" prong.
It is true that the "inequitable result" prong is a separate and distinct element necessary to an alter ego claim. This requires proof of some misconduct, bad faith, fraud, or other wrongful conduct. As the Court of Appeal stated in Sonora, supra, 83 Cal.App.4th at page 539, "[t]he alter ego doctrine does not guard every unsatisfied creditor of a corporation but instead affords protection where some conduct amounting to bad faith makes it inequitable for the corporate owner to hide behind the corporate form. Difficulty in enforcing a judgment or collecting a debt does not satisfy this standard."
However, the alter ego doctrine does not depend on the presence of actual fraud. It is designed to avoid or prevent what would be fraud or injustice, if accomplished. (Wenban Estate, Inc. v. Hewlett (1924) 193 Cal. 675, 697; Elliot v. Occidental Life Ins. Co. (1969) 272 Cal.App.2d 373, 377.) The issue is not whether the corporation's very purpose was to defraud the innocent party, but whether justice or equity can best be accomplished and fraud and unfairness defeated by disregarding the corporate form. (Webber v. Inland Empire Invs. (1999) 74 Cal.App.4th 884, 901; Robbins v. Blecher (1997) 52 Cal.App.4th 886, 892.) Accordingly, where recognition of the corporations' separateness "would result in probable fraud, promote confusion, or serve to accomplish an injustice, the law will strip a corporation of its separate existence." (Thomson v. L.C. Roney & Co. (1952) 112 Cal.App.2d 420, 430 (Thomson.).)
Moreover, that does not mean that courts do not look at factors that also support the first prong of the alter ego doctrine to determine if the alter ego doctrine should be applied. As stated above, "[n]o one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied." (Sonora, supra, 83 Cal.App.4th at p. 538.)
For example, in Jack Farenbaugh & Son v. Belmont Construction, Inc. (1987) 194 Cal.App.3d 1023, the plaintiff obtained judgment against the named defendant corporation, and thereafter discovered that it had no assets and its shareholder was engaged in the same business using a different name. (Id. at p. 1027.) The principals of the judgment debtor corporation caused the company to go out of business and both shareholders took the assets, purportedly to pay outstanding debts. (Id. at p. 1033.) The judgment creditor brought a motion to add one of the principals as a judgment debtor, which the trial court granted. In upholding the decision of the trial court, the Court of Appeal stated, "By Appellant's causing [the judgment debtor] to go out of business and disbursing all of its monies and other assets to pay others, and not including respondent, [the judgment debtor] was left as a hollow shell without means to satisfy existing and potential creditors; when viewed with the other evidence presented, the evidence was more than sufficient for the trier of fact to find both unity of interest and ownership as well as an inequitable result if the alter ego doctrine were not applied." (Id. at p. 1034.)
In Dow Jones Company, Inc. v. Avenel (1984) 151 Cal.App.3d 144, the judgment creditor sought to add an individual and another corporation as judgment debtors after judgment was entered in favor of the plaintiff. The trial court found that both the individual and the other corporation were the alter ego of the named defendant, and the Court of Appeal affirmed that decision. In doing so, the Court of Appeal found that (1) the individual was the 100 percent shareholder, president and chief executive officer of the defendant, and the 100 percent shareholder, chief executive officer and only director of the other corporation; (2) two years prior to incurring the indebtedness, the original defendant had acquired substantial real property, which the individual used as his personal residence; (3) the real property was conveyed to the individual; (4) the individual paid no rent for the use of the real property; (5) the original defendant conveyed all of its furniture, fixtures and equipment to the other corporation for an unsecured promissory note; (6) the original defendant paid the other corporation $115,000 over a two-year period; (7) the individual received $70,500 from the original defendant; and (8) the accounts receivable of the original defendant showed debts from the other corporation during the time of the indebtedness to the other plaintiff in excess of $150,000. (Id. at pp. 146-147). Based upon these facts, the Court of Appeal concluded that upholding the separate existence of the judgment debtor "would sanction a fraud and promote an injustice." (Id. at p. 147).
In Schoenberg v. Romike Properties (1967) 251 Cal.App.2d 154, the evidence showed that one of the judgment debtors, a corporation, had no fixed assets; the president of the corporation withdrew money for his personal use; he lent and borrowed money from the corporation; the corporation owed the president money, which loan was paid after judgment was entered; and there were numerous payments by the corporation for personal debts of the president and his wife (e.g., expenses incurred in connection with two yachts owned by the president and his wife, payments for drugs, clothing, shrubs for the personal residence, personal insurance, groceries, etc.). The Court of Appeal, in upholding the decision of the trial court adding the president and his wife as additional judgment debtors, stated that imposition of the alter ego doctrine was supported by "use of corporate funds by [the president of the judgment debtor corporation] as if they were his own." (Id. at p. 167.)
In Thomson, supra, 112 Cal.App.2d 420, a judgment was entered against the defendant corporation. The plaintiff then examined an officer of the judgment debtor corporation. This examination revealed that the judgment debtor and another corporation had the same officers and directors and that the judgment debtor had transferred all of its assets to the other company which was doing business under the fictitious name of the judgment debtor. The trial court added the other company as a judgment debtor, and the Court of Appeal affirmed that decision. (Id. at pp. 422-425.) In upholding the trial court's decision, the Court of Appeal stated, "Where injustice would result from a strict adherence to the doctrine of separate corporate existence, a court will look behind the corporate structure to determine the identity of the party who should be charged with a corporation's liability. [Citation.] Since the separate personality of a corporation is but a statutory privilege it must not be employed as a cloak for the evasion of obligations.... 'It is enough if the recognition of the two entities as separate would result in an injustice. [Citation.] Here confusion would be promoted and an unjust result would be accomplished if the maintenance of the two entities controlled by the same persons and having an identical name were permitted to frustrate a meritorious claim.' " (Id. at p. 427, italics added.) In response to the appellant's argument that there was no showing the transfer of assets from one corporation to another had a fraudulent purpose, the Court of Appeal stated, "It is unnecessary to decide whether this type of transaction or conduct constituted an actual or constructive fraud on plaintiff since an alter ego relationship may exist independent of fraudulent purpose. Where the recognition of the separate character of the entities would result in probable fraud, promote confusion or serve to accomplish an injustice, the law will strip a corporation of its separate existence." (Id. at p. 430, some italics added.)
Likewise in this case, the McGraths presented sufficient evidence to create a triable issue of fact on the issue of whether recognition of DLI as a separate entity would cause an inequitable result. The fact the company showed positive earning before entering into the lease, but thereafter operated with negative earnings for six of the seven years of the lease period could demonstrate an intent by the Kearneys to avoid their contractual obligations, and use of the corporate form to fund personal obligations. This is also supported by the evidence the Kearneys withdrew more than $7 million from the corporation during this time frame, leaving it with a negative balance and unable to meet its contractual obligations. The McGraths submitted evidence the Kearneys commingled personal and corporate funds, using corporate money to pay their mortgage on their residence, their childrens' tuition, a remodeling of Dawn's residence, and for their vacation residence in Lake Arrowhead. Evidence was presented that Dawn took loans from the corporation, one of which was for over $2 million and which she wrote off in 2007. All of this evidence created at least a triable issue of fact that the corporate entity DLI should be disregarded in order to avoid an inequitable result. "Even where no fraud on creditors can be shown, the corporate entity may be disregarded if its recognition would permit individuals to evade ordinary contractual obligations." (9 Witkin, Summary of Cal. Law (10th ed. 2005) Corporations, § 12, p. 790; Kohn v. Kohn (1950) 95 Cal.App.2d 708, 717-718 [alter ego finding proper where husband used corporation to evade payments to wife under marital settlement agreement].)
A triable issue of fact also exists on the inequitable result prong because the Kearneys' intent, i.e., whether they intended to use the corporation to fund their personal debts and obligations and/or as a vehicle to avoid their contractual obligations, is not particularly amenable to summary adjudication. (Code Civ. Proc., § 437c, subd. (e) ["summary judgment may be denied... where a material fact is an individual's state of mind, or lack thereof, and that fact is sought to be established solely by the individual's affirmation thereof."]; KOVR-TV, Inc. v. Superior Court (1995) 31 Cal.App.4th 1023, 1031; Meighan v. Shore (1995) 34 Cal.App.4th 1025, 1046.) Further, as stated, ante, determining alter ego liability is an intensely factual inquiry, depending upon all the circumstances of the particular case. (Sonora, supra, 83 Cal.App.4th at p. 538.) We are also guided by the rule that on a summary adjudication motion, it is enough for the plaintiff to create a triable issue of fact if there is some evidence that, if believed, would support a judgment in its favor. (Alexander v. Codemasters Group Limited, supra, 104 Cal.App.4th at p. 139.)
We conclude the court erred when it granted summary adjudication on the McGraths' alter ego claim on the basis they presented no evidence that recognition of the corporation's separate existence would cause an inequitable result. The McGrath's evidence, liberally construed, was sufficient to raise a triable issue of fact on this element.
C. Liability of Patrick Kearney
The court found Patrick was not liable on the McGraths' alter ego claim because they had not shown he had any interest in the corporation after 2005. We conclude that this finding was also erroneous because the McGraths presented sufficient evidence to create a triable issue of fact as to whether Patrick abused the privilege both before and after his divorce from Dawn in 2005.
First, the fact Patrick had an interest in the corporation after 2005 is shown by the fact he personally guaranteed DLI's obligations under the lease until 2007. Further, as part of the divorce, Patrick received DLI assets, two vehicles owned by the corporation. He also received as part of the marital settlement agreement a one-half interest in a note from DLI. There is evidence Patrick may have received a distribution from DLI's profit-sharing plan in 2006.
Further, the court's ruling ignores the benefits Patrick received before the divorce by virtue of his and Dawn's use of corporate monies to fund personal obligations and from which he received a personal benefit. It also ignores evidence of his role in approving actions as a director of the corporation that caused it to become insolvent. This evidence creates a triable issue of fact as to whether his role with regard to DLI both before and after his divorce in 2005 was sufficient, in equity, to hold him personally liable for DLI's lease obligations to the McGraths.
DISPOSITION
Let a writ of mandate issue directing the superior court to vacate its order dated November 30, 2009, granting summary adjudication and issue a new order consistent with this opinion. The stay order issued January 19, 2010, is vacated. Petitioners shall recover their costs on this petition.
WE CONCUR: McDONALD, J.O'ROURKE, J.