Opinion
NOT TO BE PUBLISHED
Super. Ct. No. CV03300
SIMS, J.This second appeal in a real estate development case raises questions of “piercing the corporate veil” to impose alter ego liability on members and managers of foreign limited liability companies (LLC) formed in another state (Corp. Code, § 17001) -- a matter governed by the laws of the other state pursuant to section 17450. The Arizona LLCs at issue in this appeal are thus governed by the Arizona Limited Liability Act (A.R.S. § 29-601 et seq. (Arizona Act)).
Undesignated statutory references are to the California Corporations Code. Section 17001 defines a foreign LLC as “(1) an entity formed under the [LLC] laws of any state other than this state, or (2) an entity organized under the laws of any foreign country that is (A) an unincorporated association, (B) organized under a statute pursuant to which an association may be formed that affords each of its members limited liability with respect to the liabilities of the entity, and (C) not an entity that is required to be registered or qualified pursuant to [other provisions].” (§ 17001, subd. (q).)
Section 17450 provides in part that “[t]he laws of the state or foreign country under which a foreign [LLC] is organized shall govern its organization and internal affairs and the liability and authority of its managers and members.”
After we affirmed summary judgment of a cross-complaint in the prior appeal (River Rock v. Paik (Apr. 10, 2007, C051650) [nonpub. opn.] (River Rock I)), the trial court awarded the prevailing parties -- cross-defendants Young J. Paik and Sue K. Paik, individually and as trustees of the Young J. Paik Family Trust (the Paiks) -- $801,130 in attorney fees and costs against cross-complainant River Rock Development, LLC (River Rock), an Arizona LLC.
This second appeal challenges an amended judgment adding, as judgment debtors on the fees/costs award, individuals and entities for whom River Rock was an alter ego, some of whom were not named as parties in the litigation. (Code Civ. Proc., § 187; Hall, Goodhue, Haisley & Barker, Inc. v. Marconi Conf. Center Bd. (1996) 41 Cal.App.4th 1551, 1554 [Code Civ. Proc., § 187 authorizes trial court to amend judgment to add additional judgment debtors on alter ego theory].)
Code of Civil Procedure section 187 provides: “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.”
The new judgment debtors (appellants) are:
River Rock’s sole member -- Hesperia Holdings, LLC (Holdings); both River Rock and Holdings were formed in Arizona;
River Rock’s manager -- Hesperia Management, Inc. (Management), a Delaware corporation; and
Management was already named as a defendant in the Rahimians’ lawsuit and was named as a cross-complainant, but appellants say the initial cross-complaint was never served.
Six individuals who are the sole members of Holdings and the sole shareholders of Management -- Thomas Church, William Graham, Michele Church, C. Steven Rorke, Michael Sbrocco, and Michael Walla.
Appellants contend the trial court had no jurisdiction over them, since they were not named as parties to the suit, and their postjudgment addition violated due process. Appellants also contend the trial court misapplied Arizona and California law to “pierce the corporate [LLC] veil” where there was no fraud, and the evidence is insufficient to support the amended judgment.
We shall affirm the amended judgment and award the Paiks attorney fees and costs for this appeal.
FACTUAL AND PROCEDURAL BACKGROUND
The underlying facts, as set forth in our unpublished opinion in the first appeal, are that the Paiks agreed to sell land to a buyer (Smith/Stonegate) for development, with the Paiks to share in the profits. The buyer purportedly assigned its rights to River Rock in a written assignment agreement which deleted a minimum funding requirement without advising the Paiks. Third parties (the Rahimians) sued Smith/Stonegate, River Rock, Management, and the Paiks, claiming the assignment interfered with a partnership agreement the Rahimians had with Smith/Stonegate. River Rock cross-complained against the Paiks (and the Rahimians), claiming the Paiks consented to the assignment yet gave notice of default when River Rock was unable to secure funding for the project (allegedly due to the threat presented by the Rahimians’ claims) and tried to sell its interest. We held (1) there was no valid assignment, because the Paiks’ written consent was required but not obtained, and (2) the Paiks did not waive the written consent requirement by accepting a $210,000 payment toward the contract on behalf of River Rock, since Smith/Stonegate had met prior payment obligations with checks from investors or lenders. We affirmed the summary judgment in favor of the Paiks, as against River Rock.
Thereafter, the trial court awarded the Paiks $717,625 in contractual attorney fees -- because River Rock had sued on an alleged contract containing an attorney fee clause (Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124) -- plus costs for a total award of $801,133.36.
On July 31, 2006, the Paiks filed a motion to amend the judgment to add appellants as judgment debtors under Code of Civil Procedure section 187 (fn. 3, ante). The motion asserted River Rock was the alter ego of appellants, and the Hesperia entities are sham entities. The motion relied on California law regarding alter ego liability.
River Rock filed an opposition, citing mostly California law but arguing Arizona law governs. The opposition’s first page indicated the attorneys were representing not only River Rock, but also, Management and Holdings.
The Paiks’ reply argued California law applied but, in any event, there was no conflict because Arizona and California both recognize the common law alter ego doctrine.
River Rock filed a sur-reply agreeing to have the case decided under California law and a provisional request for a discretionary evidentiary hearing with oral testimony, in the event the court was inclined to grant the motion.
The trial court ordered further limited briefing regarding Arizona law. Appellants withdrew their prior acceptance of California law and asked the court to apply Arizona law.
After considering the substantial documentary evidence (including depositions and declarations) and hearing argument by counsel, but no live testimony, the trial court on March 23, 2007, issued a written order granting the Paik’s motion to amend the judgment to add as judgment debtors: Holdings, Management, Thomas Church, William Graham, Michele Church, Michael Sbrocco, C. Steven Rorke, and Michael Walla.
The trial court said River Rock was “apparently judgment proof,” rendering the Paiks’ award non-recoverable from River Rock. The trial court rejected River Rock’s assertion that imposition of personal liability on appellants would violate sections 17101 and 17158 by imposing liability based solely on being a member or manager of the company. The Paiks sought to impose liability not merely based on membership or management, but rather because the Hesperia entities were shell entities controlled, directed, and operated by the six individuals without regard to a separate existence, and observing the entities as separate entities would sanction fraud or promote injustice.
Corporations Code section 17101 provides in part: “(a) Except as otherwise provided..., no member of a [LLC] shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the [LLC], whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a member of the [LLC]. “(b) A member of a [LLC] shall be subject to liability under the common law governing alter ego liability, and shall also be personally liable under a judgment of a court or for any debt, obligation, or liability of the [LLC], whether that liability or obligation arises in contract, tort, or otherwise, under the same or similar circumstances and to the same extent as a shareholder of a corporation may be personally liable for any debt, obligation, or liability of the corporation....
Corporations Code section 17158 provides, “(a) No person who is a manager [and/or] officer of a [LLC] shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the [LLC], whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a manager [and/or] officer of the [LLC]....”
The trial court found liability under both California and Arizona law. The court said there was no statutory authority under California law for imposition of alter ego liability on a foreign LLC, and therefore the only possible basis for applying the common law doctrine of alter ego liability would be if Arizona law provides for alter ego liability in these circumstances. If Arizona law is unclear, California courts could apply California law if consistent with the state and federal Constitutions. (Evid. Code, § 311, subd. (a).)
Evidence Code section 311 provides: “If the law of... a state other than this state... is applicable and such law cannot be determined, the court may, as the ends of justice require, either: [¶] (a) Apply the law of this state if the court can do so consistently with the Constitution of the United States and the Constitution of this state; or [¶] (b) Dismiss the action without prejudice or, in the case of a reviewing court, remand the case to the trial court with directions to dismiss the action without prejudice.”
The trial court said Arizona law was unclear but would probably allow imposition of alter ego liability under the common law test for “piercing the corporate veil”: (1) there was such a unity of interest, ownership, control and operation between the entity and the individuals that the business form should be disregarded; and (2) observance of the business form would sanction fraud or promote injustice.
The trial court found “River Rock, Hesperia Holdings, and Hesperia Management were empty shells that were used in an improper manner solely in an effort to shield the persons and entities who are the subject of the Paiks’ alter ego assertions from liability despite the fact that adequate capitalization was never undertaken, operational formalities were never followed, and the separateness of the three entities was never maintained. Based on the facts presented in connection with this motion, the court finds that recognizing the separate existence of River Rock Development, LLC, Hesperia Holdings, LLC, and its members, and Hesperia Management, Inc., and its shareholders, would promote a grave injustice and an inequitable result rising to the level of fraud.” The court said, “had River Rock, Hesperia Management, and Hesperia Holdings been properly capitalized and operated within the ordinary and long-established rules for maintaining the separate existence of legally authorized business entities, the unity of identity, ownership, and control that existed might not have justified imposition of alter ego liability.”
The trial court noted some appellants contributed “sweat equity” to the development project but said, “the court has been unable to determine from the evidence before it how or why the activities of any of the six individuals should be attributed to any particular one of the three subject entities. The declaration of Michele Church describes planning and negotiation activities in December 2001 as activities of River Rock..., yet Hesperia Holdings and River Rock were even not [sic] organized as limited liability companies until January 4, 2002.... Based on the evidence before it, th[e] court is hard-pressed to identify a single instance in which River Rock, Hesperia Holdings, or Hesperia Management were ever treated in any meaningful way as separate entities by [appellants].”
The trial court said: “Michele Church also attested that ‘River Rock Development, LLC, did not office with [sic] Hesperia Management, Inc., or Hesperia Holdings, LLC. Although the offices of Thomas Church were listed as the mailing address for our ongoing business activities, each of the principals worked out of their own offices.’ The question presented by this statement is ‘principals’ of what? Similarly, Ms. Church attested, ‘The Month of April was spent meeting with investors. Every Member was instructed to make contact with ‘qualified’ clients that had the financial strength for a project of this magnitude.’ Yet, the only ‘members’ who could meet as described were the individual members of Hesperia Holdings. Nevertheless, Mr. McBride’s declaration asserts in contradictory fashion that ‘Holdings activity was limited to serving as a holding company and a repository for the ownership of the six natural persons who are members of Holdings. It had no direct involvement in the actual events that transpired in regard to the West Sacrament[o] land contract.’ In sum, despite the many pages of argument and ‘evidence’ offered in opposition to the Paiks’ alter ego motion, River Rock has been unable to present a coherent explanation of what identities the six individuals were actually using after River Rock, Hesperia Management, and Hesperia Holdings were formed. The simple answer is that the six principals continued to act in exactly the same manner after River Rock, Hesperia Management, and Hesperia Holdings were formed as they had acted before such entities were formed on paper, thereby thoroughly and completely disregarding the separate existence of such entities.”
The court said, “The Paiks have presented deposition testimony of Thomas Church to the effect that, with the exception of expenses that he and William Graham paid for River Rock, he was unaware of any funds that River Rock possessed which could be used to pay expenses in March 2002 (within months after the three entities were formed on paper). Incredibly, in opposition to the Paik[s’] motion, River Rock asserted, inter alia, that: (1) ‘River Rock’s business activity was funded directly by the members[];’ (2) ‘Capital was provided and funded directly by the members, on behalf of River Rock, on an as needed basis to be accounted for later.’ Presumably this argument is intended to refer to the members of Hesperia Holdings, but the individual members of Hesperia Holdings were not members of River Rock. The only member of River Rock was Hesperia Holdings. Thus, the evidence before the court, including the admissions offered by River Rock, establish that what really occurred during the relevant time periods is that some of River Rock’s business activity was funded directly by the individual members of Hesperia Holdings and the shareholders of Hesperia Management in blatant disregard of the purported separate existence of River Rock, Hesperia Management, and Hesperia Holdings. While River Rock seeks to use this circumstance affirmatively as a defense to the Paiks’ motion, in reality, it is one of many circumstances that warrant piercing the veil and imposing alter ego liability on the individual members of Hesperia Holdings and the shareholders of Hesperia Management.”
The trial court found, “Neither River Rock, nor its sole member, Hesperia Holdings, nor Hesperia Management was ever adequately capitalized. Indeed, there is no credible evidence before the court that any capital was ever paid into River Rock by its sole member Hesperia Holdings, that any capital was ever paid into Hesperia Holdings by its individual members, or that any capital was ever paid into Hesperia Management by its shareholders.”
As to River Rock’s argument that Holdings’ individual members personally guaranteed a $210,000 loan from Herbert and Phillip Graham to River Rock, paid directly to the Paiks on behalf of River Rock, the court said no loan/guarantee documents had been submitted (a point disputed by appellants), but “even assuming that some of the money borrowed ‘on behalf of River Rock’ was later repaid by the individual members of Hesperia Holdings, such repayment fails to establish that either Hesperia Holdings or River Rock was ever properly capitalized.” “The fact that borrowed funds never passed through River Rock, Hesperia Holdings, or Hesperia Management as capital or assets of the limited liability companies before such funds were disbursed to the Paiks shows that River Rock, Hesperia Holdings, and Hesperia Management were not operated as legitimate separate entities. The fact that money purportedly borrowed by River Rock was later repaid by individual members of Hesperia Holdings who claim that their payments constitute capital contributions to River Rock, rather than to Hesperia Holdings, is symptomatic of the utter disregard for the separateness of the three entities that occurred in this case.”
The court said: “No separate bank account for River Rock, Hesperia Holdings, or Hesperia Management was ever opened or funded. When it became necessary to pay minimal ongoing obligations of River Rock, some payments were made from the pre-existing bank account of Greenbull Development, LLC, described by River Rock as a real estate development entity formed by Tom Church, William Graham, Michael Sbrocco, and Michele Church ‘in late 2000/early 2001 [for an Arizona project that fell through].’ In other places, River Rock asserts that business obligations of River Rock were paid by the ‘members’ and thus represented capital contributions to River Rock. However,... River Rock had only one ‘member,’ Hesperia Holdings, and there is no evidence or even a claim that Hesperia Holdings ever paid anything on behalf of River Rock.”
The court said: “In its opposition papers, River Rock asserted that the Greenbull Development bank account was ‘in effect the River Rock account because it represented the continuity of funds we were using to pay for the development business during the years 2001 and 2002.’ Indeed, at oral argument it was actually argued by River Rock that all that should have been done to comply with appropriate [LLC] requirements was to change the name of the account holder on the Greenbull Development bank account to River Rock. That sort of ‘reasoning’ is precisely the problem with River Rock’s opposition. Maintaining the separate existence of a legally authorized entity, whether a corporation or [LLC], involves far more than merely changing names on bank accounts to suit a temporary need for operational funds. Indeed, operating in such a fashion is the epitome of a shell game and an open invitation to later imposition of alter ego liability.”
The court said: “The Michele Church and Michael Walla Declarations, among others, serve to highlight why the Paiks’ alter ego motion should be granted. Both declarations repetitively identify the business activities of the Arizona ‘principals’ who participated in the Greenbull and River Rock development activities. River Rock argues that the ‘six principals’ purportedly made contributions of capital to pay River Rock’s ‘ongoing bills’ yet as River Rock admits (and even tries to use as a defense) none of those six ‘principals’ was a member of River Rock. The only member of River Rock was Hesperia Holdings. In other words, in its own opposition papers describing the activities of the ‘Arizona principals,’ River Rock has consistently ignored the separate existence of Hesperia Holdings and simply treated the six ‘Arizona principals’ as the persons funding and conducting the business of River Rock.”
Appellants objected to “joint and several” liability in the Paiks’ proposed amended judgment.
On May 9, 2007, the trial court entered the “AMENDED JUDGMENT,” in favor of the Paiks and against River Rock, Holdings, Management, Thomas Church, Michele Church, William Graham, Michael Sbrocco, C. Steven Rorke, and Michael Walla, jointly and severally, in the amount of $801,133.36, payable to the Paiks for costs of suit and attorney fees.
On May 22, 2007, appellants filed a notice of appeal from the order on the motion to amend the judgment, which we shall liberally construe (Cal. Rules of Court, rule 8.100(a)(2) (Cal. Rules)) as an appeal from the “AMENDED JUDGMENT” entered on May 9, 2007.
On May 31, 2007, appellants filed a motion for “reconsideration” under Code of Civil Procedure section 1008. The trial court did not rule on the motion. On August 29, 2007, appellants filed an amended notice of appeal from the order to amend the judgment and the amended judgment.
Since we construe the May 22 notice of appeal as a timely appeal from the May 9 judgment, we reject the Paiks’ argument that the appeal is untimely based on the August 29 notice of appeal.
DISCUSSION
I. Choice of Law
As indicated, section 17450 (fn. 2, ante) says, “The laws of the state... under which a foreign [LLC] is organized shall govern its organization and internal affairs and the liability and authority of its managers and members.”
Thus, Arizona law governs the issue of liability of River Rock’s managers and members.
Appellants argue we must follow the law of Arizona not only as to substantive matters but also as to procedural matters. However, even assuming for the sake of argument that Arizona law governs procedural matters in this appeal, we shall see that appellants fail to show grounds for reversal. Additionally, we are mindful that “[a]s the forum, California ‘can only apply its own law’ [citation]. When the forum undertakes to resolve a choice-of-law problem presented to it by the litigants, it does not choose between foreign law and its own law, but selects the appropriate rule of decision for the forum to apply as its law to the case before it. [Citation.]” (Hurtado v. Superior Court (1974) 11 Cal.3d 574, 581.)
II. Standard of Review
Appellants say we must apply the standard of review which would be applied in Arizona, but they cite no Arizona authority whatsoever as to what that standard would be.
By failing to cite Arizona authority, appellants have forfeited the point under both Arizona and California rules of court. (Arizona Rules of Civil Appellate Procedure (Arizona Rules), rule 13(a) [appellate brief must contain argument “with citations to the authorities, statutes and parts of the record relied on”]; State v. Carver (1989) 160 Ariz. 167, 175 [771 P.2d 1382, 1390] [Ariz. Supreme Court: failure to cite legal authority in an appellate brief usually constitutes abandonment of the contention]; Cal. rule 8.204(a) [brief must support each point by argument and, if possible, citation of authority]; Badie v. Bank of America (1998) 67 Cal.App.4th 779, 784-785 [failure may constitute forfeiture].)
In any event, under both California and Arizona law, appellate courts review legal questions de novo (Kearney v. Salomon Smith Barney, Inc. (2006) 39 Cal.4th 95, 107-108; Southwest Transmission Co-op, Inc. v. Arizona Corp. Com’n (2006) 213 Ariz. 427, 430 [142 P.3d 1240, 1243]) and factual matters regarding alter ego liability under a substantial evidence standard (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1248 (Las Palmas); Standage v. Standage (1985) 147 Ariz. 473, 476 [711 P.2d 612, 615] [Ariz. Court of Appeals] (Standage); Chapman v. Field (1979) 124 Ariz. 100 [602 P.2d 481, 483] [Ariz. Supreme Court] (Chapman).)
Whether the evidence establishes that the corporate veil should be ignored is primarily a question of fact which should not be disturbed when supported by substantial evidence. (Standage, supra, 711 P.2d at p. 615]; Las Palmas, supra, 235 Cal.App.3d at p. 1248.)
III. Jurisdiction/Due Process
Appellants present a variety of issues under a heading that “THE COURT HAD NO JURISDICTION OVER THE SIX INDIVIDUALS AND TWO ENTITIES. AT A MINIMUM, REFUSAL OF THE COURT TO GRANT AN EVIDENTIARY HEARING DENIED DUE PROCESS.” They fail to show grounds for reversal.
A. Addition of Parties
Appellants make a throwaway argument that Arizona law has no procedural provision similar to California Code of Civil Procedure 187 (fn. 3, ante), and no Arizona court has ever allowed a judgment to be amended to add as judgment debtors individuals or entities who were not parties to the underlying action. Appellants claim, without citation of apposite authority, that the trial court had no jurisdiction over them.
Under Code of Civil Procedure section 187, judgments are often amended to add additional judgment debtors on the ground that the person or entity is the alter ego of the original judgment debtor. (NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778.) It is an equitable proceeding 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. (Ibid.) The procedure is appropriate where it can be demonstrated that the new defendants in their alter ego capacity had control of the previous litigation and thus were virtually represented in the lawsuit. (Ibid.)
This argument is forfeited for failure to cite any supporting authority. (Ariz. rule 13; State v. Carver, supra, 771 P.2d at p. 1390]; Cal. rule 8.204(a); Badie v. Bank of America, supra, 67 Cal.App.4th at pp. 784-785.)
Appellants argue in their reply brief that they cannot cite authority that does not exist, and the absence of Arizona case law must mean that Arizona courts prohibit postjudgment addition of judgment debtors. However, the absence of authority does not constitute an affirmative rule of law, and appellants cite no authority for such a conclusion. In any event, Arizona does allow late addition of parties -- a point which appellants fail to acknowledge.
Thus, Arizona rule 21 states: “Misjoinder of parties is not ground for dismissal of an action. Parties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just. Any claim against a party may be severed and proceeded with separately.”
We are aware that an Arizona Court of Appeals said Arizona rule 21 does not allow postjudgment addition of party defendants, because the rule implicitly requires that joinder be accomplished within the requirements of due process, and in that case due process was not satisfied. (Spudnuts, Inc. v. Lane (1984) 139 Ariz. 35, 36 [676 P.2d 669, 670] [Ariz. Court of Appeals: After plaintiff’s judgment for breach of contract was affirmed on appeal, trial court erred in adding defendant’s wife as additional party defendant, where she was never served and her liability was never adjudicated].) On the other hand, the Arizona Court of Appeals in Oyakawa v. Gillett (1993) 175 Ariz. 226 [854 P.2d 1212] gave full faith and credit to a California defamation judgment against a husband and wife, where the California court added the wife as judgment debtor after entry of judgment, even though Arizona law allows Arizona courts to disregard another state’s judgment if a defendant’s due process rights were violated.
Spudnuts does not bar addition of appellants as judgment debtors in our case, because Spudnuts prohibited joinder of a party defendant whose liability had not been adjudicated, whereas in our case (1) appellants were aligned with cross-complainant River Rock, and thus were in the position of plaintiffs, rather than defendants, with respect to the cross-complaint at issue in this appeal; and (2) appellants participated in adjudication of the cross-complaint and the motion to amend the judgment.
Indeed, it was the individual appellants who hired the lawyers to represent River Rock in its cross-complaint against the Paiks. Thomas Church’s declaration acknowledged he was still repaying money he borrowed “to pay Nebeker [a lawyer hired to handle the cross-complaint against the Paiks] to represent us when we had that firm as our counsel.” Church also said, “the principals of the River Rock and Hesperia entities remain liable for repayment of those costs [advanced by the lawyers who later took the case on a contingency basis] in the event no recovery is achieved.” At the hearing in the trial court, appellants’ lawyer, Attorney Treon, said, “he [the Paiks’ attorney] says that we conceded in our response that these six individuals and two entities were virtually represented in connection with the underlying litigation. The only part of what we actually said which is that, you know, we’re not running away from the fact that I’m their lawyer and I’ve been their lawyer and I don’t declare to dispose of all their declarations, and it’s all what is it [sic]. What we have said is that it’s unfair... [that the Paiks did not give earlier notice that] they were going to subsequently try to pierce the corporate veil.”
Appellants complain the trial court made no finding whether the individuals had an opportunity to litigate the underlying claim. We disagree. The trial court found the entities were always empty shells that were controlled and directed by the individuals.
Additionally, appellants fully litigated the issue of alter ego liability in the extensive proceedings on the Paiks’ motion to amend the judgment, which consumed three months and produced volumes of evidence, including deposition testimony and declarations of appellants and their attorneys. Appellants acknowledge the attorney represented them once the motion to amend the judgment was filed.
We accordingly reject appellants’ argument that the trial court lacked jurisdiction to amend the judgment to add them as judgment debtors.
B. Due Process -- No Live Testimony
Appellants argue their due process rights were violated by the lack of live testimony. Although the trial court did not expressly rule on their request for a hearing with live testimony, the court did ask appellants’ counsel at the hearing, “what is it that would be presented in that hearing that hasn’t been thoroughly explored already?” The answer was a reiteration of the documentary evidence.
The hearing was electronically recorded but not officially transcribed. The parties stipulated to the later preparation of the transcript as an agreed statement in lieu of reporter’s transcript.
On appeal, appellants again fail to identify any need for oral testimony and fail to cite any authority requiring a hearing. When they asked for the hearing, they acknowledged the court had discretion under California law whether to conduct a hearing with live testimony. (Cal. rule 3.1306; People v. Superior Court (Zamudio) (2000) 23 Cal.4th 183, 201.) Additionally, in both Arizona and California, a judgment will not be reversed on appeal on the ground that the trial court improperly excluded evidence, unless appellants made an offer of proof in the trial court as to what additional evidence they wanted to adduce (Evid. Code, § 354; Ariz. Rules of Evidence, rule 103) and show error resulting in prejudice. (Cal. Const., art. 6, § 13; Code Civ. Proc., § 475; Ariz. Rules of Civ. Proc., rule 61; Creach v. Angulo (1997) 189 Ariz. 212, 214-215 [941 P.2d 224, 226-227] [Ariz. Supreme Court].)
Appellants fail to show any due process violation. They cite Cravens, Dargan & Co. v. Superior Court (1987) 153 Ariz. 474 [737 P.2d 1373] (Ariz. Supreme Court), but there a money judgment was entered against the defendant without notice or opportunity to be heard. Here, appellants had notice and opportunity to be heard.
Moreover, appellants fail to address the fact that Cravens, as with other authority cited by appellants (International Shoe Co. v. Washington (1945) 326 U.S. 310), involved due process rights of defendants who did not choose to participate in the litigation. Here, appellants stand in the posture of plaintiffs (cross-complainants on the cross-complaint) because their alter ego, River Rock, filed the cross-complaint against the Paiks. Although River Rock was already named as a defendant by the Rahimians, River Rock and the Paiks had aligned interests as codefendants. The adversarial litigation between River Rock and the Paiks was initiated by River Rock’s filing of the cross-complaint against the Paiks.
Appellants cite Parklane Hosiery Co., Inc. v. Shore (1979) 439 U.S. 322 at page 327, footnote 7, a collateral estoppel case which said it violates due process for a judgment to be binding on someone who was not a party or in privity with a party and therefore had no opportunity to be heard. Parklane is thus inapposite (and in any event appellants fail to show they were not in privity with River Rock).
We conclude appellants fail to show any due process violation or reversible error regarding an evidentiary hearing.
C. Joint and Several Liability
Under the heading that the court lacked jurisdiction and violated due process, appellants argue the trial court erred in imposing “joint and several liability” on them. Besides failing to present this under its own heading or subheading, appellants cite no legal authority whatsoever on the issue of joint and several liability. They have therefore forfeited the issue. (Ariz. rule 13; State v. Carver, supra, 771 P.2d at p. 1390]; Cal. rule 8.204(a); Badie v. Bank of America, supra, 67 Cal.App.4th at pp. 784-785.) We accordingly disregard appellants’ extensive factual discussion in their reply hoping to show that one of them did not have very much to do with River Rock.
We conclude appellants fail to show any ground for reversal of the judgment with respect to procedural matters.
IV. Piercing Veil of Arizona LLCs
As we shall explain, neither the Arizona nor the California LLC statutes abrogate application of the common law doctrine of piercing the corporate veil as applied to LLCs.
A. The Common Law Doctrine
As applied in both Arizona and California, the common law alter ego doctrine “pierces the corporate veil” to fix personal liability on individuals behind a business entity, where (1) there is such unity of interest and ownership that separate personalities of owners and corporation do not exist, and (2) observance of the corporate form would sanction a fraud or promote injustice. (Gatecliff v. Great Republic Life Ins. Co. (1991) 170 Ariz. 34 [821 P.2d 725] [Ariz. Supreme Court] (Gatecliff); Employer’s Liability Assurance Corp. v. Lunt (1957) 82 Ariz. 320 [313 P.2d 393] [Ariz. Supreme Court] (Employer’s Liability); Las Palmas, supra, 235 Cal.App.3d at p. 1248.) Alter ego liability is founded on equitable principles, and therefore its application does not depend upon prior decisions involving factual situations which appear to be similar. (Las Palmas, supra, 235 Cal.App.3d at p. 1248.)
“Because society recognizes the benefits of allowing persons and organizations to limit their business risks through incorporation, sound public policy dictates that imposition of alter ego liability be approached with caution. (Cascade Energy and Metals Corp. v. Banks ([10th Cir.] 1990) 896 F.2d 1557, 1576.) Nevertheless, it would be unjust to permit those who control companies to treat them as a single or unitary enterprise and then assert their corporate separateness in order to commit frauds and other misdeeds with impunity.” (Las Palmas, supra, 235 Cal.App.3d at p. 1249.)
B. No Unqualified Immunity
Appellants argue the Arizona Act (A.R.S. § 29-601 et seq.) insulates them completely from alter ego liability. We disagree.
The Arizona Act, which took effect in 1992, authorized the creation of LLCs in Arizona. (A.R.S. § 29-631 [one or more persons may form LLC by signing and filing with the corporation commission an original copy of the articles of organization]; S.B. 1084, 40th Leg., 2d Reg. Sess., ch. 113, § 2, 1992 Ariz. Sess. Laws 394; Polashek, Limited Liability Company Act (1994) 26 Ariz. State Law Journal, 323, 326.)
Regarding liability to third parties, section 29-651 of the Arizona Act states: “Except as provided in this chapter, a member, manager, employee, officer or agent of a [LLC] is not liable, solely by reason of being a member, manager, employee, officer or agent, for the debts, obligations and liabilities of the [LLC] whether arising in contract or tort, under a judgment, decree or order of a court or otherwise.” (Italics added.)
Section 29-656 of the Arizona Act says, “A member of a [LLC], solely by reason of being a member, is not a proper party to proceedings by or against a [LLC] unless the object is to enforce a member’s right against or liability to the [LLC] or except as provided in this chapter.” (Italics added.)
Section 29-854 of the Arizona Act says in part, “The rule that statutes in derogation of the common law are to be strictly construed does not apply to this chapter.”
Section 29-856 of the Arizona Act says, “In any case not provided for in this chapter, the rules of law and equity, including the law merchant, govern.”
No Arizona court has published an opinion construing the liability provisions of the Arizona Act or deciding the effect of the Arizona Act on Arizona’s preexisting rule allowing imposition of alter ego liability under the common law rule of piercing the corporate veil. A party seeking to impose alter ego liability “must prove both (1) unity of control and (2) that observance of the corporate form would sanction a fraud or promote injustice. [Citations.]” (Gatecliff, supra, 821 P.2d at p. 728].)
The question is whether the Arizona Act prohibits common law alter ego liability for LLC members and managers. Although we find no definitive answer under authoritative Arizona precedent, we think the answer is “no.”
The Arizona Act says nothing about alter ego liability and qualifies the immunity it gives to LLC members and managers by saying they are not liable “solely by reason of being” members and managers. This leaves an opening for liability.
Appellants suggest the Arizona statute cannot be held to authorize alter ego liability, because it does not contain express authority such as that found in the California statute -- section 17101, subdivision (b) -- which states, “A member of a [LLC] shall be subject to liability under the common law governing alter ego liability....” However, the failure to use express language does not compel a conclusion that the opposite was intended.
Where statutory language is ambiguous, Arizona courts will look to the legislative history. (Lincoln v. Holt (2007) 215 Ariz. 21, 25-26 [156 P.3d 438, 442-443] [Court of Appeals]; Vega v. Morris (1995) 183 Ariz. 526, 530 [905 P.2d 535, 539] [Court of Appeals].)
The legislation, as originally introduced in the Arizona Senate in 1992 (S.B. 1084), provided for unqualified immunity in sections 29-651 and 29-656, but the Senate’s Committee on Commerce and Labor (CCL) added the word “solely” to section 29-651 and added the words “solely by reason of being a member” to section 29-656. The goal of these amendments was to clarify that LLC members enjoy no greater immunity from liability than corporate officers or directors. (Polashek, Limited Liability Company Act, supra, 26 Ariz. State L.J. at pp. 337-338, citing Limited Liability Company Act: Tape of Hearing on S.B. 1084 Before the Senate Committee on Commerce and Labor, 40th Leg., 2d Reg. Sess. (Feb. 12, 1992) (on file with the Secretary of the Senate) (statement of Patrice Krause, Legislative Research Analyst).)
As indicated, section 29-651 of the Arizona Act states: “Except as provided in this chapter, a member, manager, employee, officer or agent of a [LLC] is not liable, solely by reason of being a member, manager, employee, officer or agent, for the debts, obligations and liabilities of the [LLC] whether arising in contract or tort, under a judgment, decree or order of a court or otherwise.” (Italics added.)
Section 29-656 of the Arizona Act says, “A member of a [LLC], solely by reason of being a member, is not a proper party to proceedings by or against a [LLC] unless the object is to enforce a member’s right against or liability to the [LLC] or except as provided in this chapter.”
When the Arizona Act was enacted in 1992, Arizona courts recognized applicability of common law alter ego liability to pierce the corporate veil. Thus, in the 1991 Gatecliff case, the Arizona Supreme Court held that factual questions precluded summary judgment as to whether a parent corporation could be held liable under an alter ego theory for acts of its subsidiary where the individuality of the subsidiary had ceased. (Gatecliff, supra, 821 P.2d at p. 728.)
Appellants claim Arizona courts no longer allow piercing of the corporate veil. They cite an Arizona practice guide which said, “the common law concept of ‘piercing the corporate veil’ no longer exists in Arizona. [¶]... By the early 1990s, the notion that an Arizona court would enable a plaintiff to recover damages from a shareholder for the obligations of a corporation was effectively dead in judicial circles.” ([Terence] Thompson et. al., 6 Ariz. Prac., Corporate Practice (2008-2009 ed.) [Ch. 5 - Corporations] § 5.8.)
First, we note this statement about corporations in the practice guide is not authoritative, particularly since it conflicts with a different part of the same practice guide, written by different lawyers, which says regarding LLCs: “The Arizona statutes do not expressly impose liability on members under an alter-ego or ‘piercing the veil theory.’ It is reasonable to anticipate, however, that a court would apply these theories to impose personal liability on the members of an LLC in appropriate circumstances. Presumably, the court would apply rules analogous to those applied to corporations and their shareholders in these circumstances.” (6 Ariz. Prac., Corporate Practice, [Ch. 12 - LLCs] § 12.62.) Appellants characterize this statement, which cites no supporting authority, as speculation.
Second, insofar as the practice guide (§ 5.8) said the common law concept of piercing the corporate veil no longer exists in Arizona, that section of the practice guide was addressing an Arizona corporations statute enacted in 1994 (A.R.S. § 10-622; Ariz. Laws 1994, Ch. 223, § 4, eff. Jan. 1, 1996) -- i.e., after the Legislature’s 1992 expression of intent not to afford blanket immunity to LLC members. (6 Ariz. Prac., Corporate Practice, supra, § 5.8.) The 1994 corporations statute says a “shareholder of a corporation is not personally liable for the acts or debts of the corporation.” (A.R.S. § 10-622.) The practice guide observed a prior statute said shareholders had no obligation “with respect to” their shares (Former A.R.S. § 10-025), but “[o]ddly, litigators and Arizona courts apparently remained unaware of the statutory enactment.” (6 Ariz. Prac., Corporate Practice, § 5.8.)
We find no Arizona judicial opinion holding that the 1994 statute abrogates alter ego liability, and we note Arizona courts continue to mention the doctrine of piercing the corporate veil as if it still exists, even after enactment of the 1994 statute. Thus, in Taeger v. Catholic Family and Community Services (1999) 196 Ariz. 285, 297 [995 P.2d 721, 733], the Court of Appeals held that adoptive parents who sued a Catholic adoption agency and Catholic Diocese, alleging the agency was the alter ego of the diocese, failed to establish grounds for imposition of liability against the diocese on an alter ego theory. “Our supreme court has held that the second prong of the alter-ego analysis is satisfied if observance of the corporate form would sanction a fraud or promote injustice, if observing the form would allow the corporation to confuse the plaintiffs, frustrate their efforts to protect their rights, and allow the responsible party to evade liability.” (Id. at p. 735, [concluding the facts did not meet the test and citing Gatecliff, supra, 821 P.2d 725].)
For the proposition that piercing the corporate veil was “effectively dead” by the early 1990’s, the Practice Guide (§ 5.8) cited an article by a lawyer in a lawyers’ magazine -- Bonnett, Arizona’s Eviscerated Alter Ego Doctrine (Nov. 1989) Ariz. Atty. pp. 23-28.) However, Bonnett’s ultimate view was that Arizona courts embrace an alter ego doctrine that permits disregard of the corporate form, but only when recognition of the corporate form would shield fraud. (Id. at p. 27.) We shall discuss the fraud issue post.
Thus, we see no authoritative Arizona source that would prohibit application in LLC cases of the common law doctrine of piercing the corporate veil.
A comprehensive review of liability under state LLC laws, conducted in the Wake Forest Law Review, said, “Statutes using ‘solely’ seem clearly to provide only a limited insulation for LLC participants.... [¶]... [¶]... Perhaps the ‘solely’ leaves room for direct liability based on personal action.... More likely, the use of ‘solely’ leaves room for other grounds based on traditional common law corporate principles for piercing the veil where the court decides that the limited liability form is being misused by the participants.” ([Robert] Thompson, The Limits Of Liability In The New Limited Liability Entities (1997) 32 Wake Forest L. Rev. 1, 15-17, 19-20.) Thompson included in this category both Arizona and California statutes, though he observed Arizona affords more insulation because it insulates not only members but also managers of LLCs. (Id. at pp. 15-16.)
Appellants argue the Arizona Act must be interpreted to foreclose common law alter ego liability, because section 29-854 says, “The rule that statutes in derogation of the common law are to be strictly construed does not apply to this chapter.”
However, we have concluded the statutes are not in derogation of the common law of piercing the corporate veil. Moreover, section 29-856 of the Arizona Act says, “In any case not provided for in this chapter, the rules of law and equity, including the law merchant, govern.” Alter ego liability based on piercing the corporate veil is an equitable principle. (Las Palmas, supra, 235 Cal.App.3d at p. 1248.)
We conclude Arizona courts would recognize alter ego liability against members and managers of LLCs.
Regarding managers, appellants say Holdings’ members cannot be held liable for Management’s actions, because section 29-654 of the Arizona Act states in part, “(B) If the articles of organization of a [LLC] provide that management is vested in one or more managers: [¶] 1. A member is not an agent of the [LLC] for the purpose of its business solely by reason of being a member except to the extent that authority has been delegated to the member by the sole manager or managers or by the provisions of an operating agreement.” However, as the trial court found, the individual appellants created the entities as empty shells. Thus, liability is not being predicated solely on LLC membership, and the Arizona Act, section 29-654 does not bar liability.
Appellants argue that, even under California law, Management cannot be liable absent a finding that it committed a tort or a crime. They cite section 17158 (fn. 6, ante), which says LLC managers are not personally liable “solely by reason of being a manager,” and People v. Pacific Landmark, LLC (2005) 129 Cal.App.4th 1203 at page 1213, which held this statute “does not preclude holding managers liable for their participation in wrongful conduct when acting on behalf of the company.” However, Pacific Landmark upheld application of alter ego liability, finding nothing indicating the California Legislature intended to confer more protections for LLC managers than for corporate officers. (Id. at p. 1216.)
We conclude Arizona law recognizes alter ego liability of LLC members and managers.
C. Fraud or Injustice
Appellants argue that, even if common law alter ego liability survived enactment of the Arizona Act, Arizona requires actual fraud -- or something so close to fraud as to be indistinguishable from fraud. We disagree.
In the 1991 Gatecliff case, an insured sued a Washington insurance company for cancellation of a health insurance policy. The defendant, Great Republic Life Insurance Company, a Washington corporation (GRW), asserted that plaintiff’s policy had been issued by defendant’s subsidiary, Great Republic Life Insurance Company in California (GRC), which operated separately and apart from GRW. (Gatecliff, supra, 821 P.2d at p. 727.) The trial court granted summary judgment in favor of GRW, and the Court of Appeals affirmed on the ground that the plaintiff failed to show triable factual issues regarding the “unity of control” prong of alter ego liability and did not reach the “fraud or injustice” prong. (Id. at p. 728.) The Arizona Supreme Court reversed, noting among other things that the two companies were not careful to distinguish themselves in their day-to-day operations, and their correspondence with the insured used the same name, sometimes with a California address, other times with a Washington address, without indication that they were two companies rather than one company with offices in two states. (Ibid.) After describing the factual dispute about unity of control, the Supreme Court went on to say that the interrelationship between the two corporations there at issue “may promote fraud or injustice and thereby satisfy the second prong of the alter ego standard. Observance of the corporate form in this case could deny plaintiffs recovery from the party responsible for cancelling their insurance policy.... [O]bservance of the corporate form could permit the two corporations to confuse plaintiffs and frustrate their efforts to protect their rights before suit, while allowing the party responsible for the cancellation to evade liability after suit.” (Id. at p. 729.) Gatecliff did not require actual fraud.
Appellants suggest Gatecliff, supra, 821 P.2d 725, is inapposite because it was an “instrumentality” case involving a parent and subsidiary corporations, not an individual stockholder. However, Gatecliff expressly addressed each theory (alter ego and instrumentality) separately under separate headings. (Id. at pp. 728-730.)
Appellants cite Arizona cases which mentioned the absence of evidence of fraud in declining to pierce the corporate veil. However, they do not require fraud as a prerequisite to piercing the corporate veil. Thus, for example, in Butler v. American Asphalt & Contracting Co. (1975) 25 Ariz.App. 26 [540 P.2d 757], the purchaser of a controlling interest in a corporation brought suit claiming the sale was fraudulent and seeking to recover (from the corporation and stockholder) a loan he made to the corporation. After holding the sale was not fraudulent, the Arizona Court of Appeals recognized the alter ego doctrine but held it inapplicable on the facts. (Id. at p. 761.) The stockholder who had treated the corporation as his alter ego was not personally liable for the purchaser’s loan to the corporation, where the loan was made after the purchaser had assumed control of the corporation and was or should have been cognizant of all facts relating to the stockholder’s past treatment of the corporation. (Ibid.) Butler said the plaintiff could not rely on the defendant’s representations about corporate assets after the plaintiff himself assumed control of the corporation and was or should have been cognizant of the true assets. (Ibid.) Since any reliance was unreasonable, the plaintiff could not meet one of the elements of actual fraud “which are requisite in Arizona. [Citations.]” (Ibid.) However, none of the cited authorities involved alter egos or corporate veils; they merely stand for the proposition that reasonable reliance is a required element of actual fraud, not that actual fraud is required to pierce the corporate veil.
In Youngren v. Rezzonico (1975) 25 Ariz. App. 304 [543 P.2d 142], a seller sued a corporate president (who was the sole shareholder) to recover on a promissory note received as payment for a horse. (Id. at pp. 144-146.) Although the defendant signed the note as president of the corporation, the Court of Appeals held the evidence justified setting aside the corporate entity and holding the president personally liable. (Ibid.) Appellants claim the Youngren court found the defendant had engaged in unjust acts “amounting to fraud,” because the court said the trial court and jury could have found “that it would amount to an injustice or an unjust act to allow Youngren to escape payment of the note by hiding behind the corporate entity. At the time the horse was delivered to the corporation, Youngren knew the corporation was in a bad financial condition and was unable to pay the purchase price. At the time the corporation went bankrupt Youngren personally paid off some of the corporate debts but refused to pay the note. The fact finders in this case could find that Youngren purchased the horse, knowing the corporation was on the verge of bankruptcy, with no intention of paying the note.” (Id. at p. 146.)
We reject appellants’ characterization of Youngren as requiring a finding of something amounting to fraud. Although the appellate court observed fraud may be found where a person makes a promise without present intention to perform, the jury in its special verdict expressly found there was no fraudulent conduct, and that special verdict was not overturned. (Youngren, supra, 543 P.2d at pp. 144-145.) Moreover, Youngren said, “The term injustice or unjust act as used in the Arizona cases is not easy to define. Injustice falls within the realm of equity, and has been interpreted as: [¶] ‘Equity is reluctant to permit a wrong to be suffered without remedy. It seeks to do justice and is not bound by strict common law rules or the absence of precedents. It looks to the substance rather than form. It will not sanction an unconscionable result merely because it may have been brought about by means which simulate legality. And once rightfully possessed of a case it will not relinquish it short of doing complete justice.’ [Citation.]” (Id. at p. 144.)
We conclude “injustice” is not a redundancy but means something less than actionable fraud.
River Rock cites the 1989 magazine article -- Bonnett, Arizona’s Eviscerated Alter Ego Doctrine, supra, (Nov. 1989) Arizona Attorney at pages 23 to 28 -- which asserted the “injustice” prong is no longer viable independent of fraud. The magazine article relied primarily on a decision of the United States Bankruptcy Appellate Panel of the Ninth Circuit in In re Nash (1986) 60 B.R. 27 -- a decision which affirmed a trial court’s holding that a lien was valid under Arizona law. The bankruptcy appellate panel rejected a junior creditor’s appeal which argued the lien was invalid since it was based on a note which was invalid because the identities of the two parties had totally merged, rendering any contract between them a nullity. The bankruptcy panel said that fraud must be found in order to pierce the corporate veil, and the trial court’s finding that there was no fraudulent intent was not clearly erroneous. The panel said: “The Dissent relies heavily on dicta by several Arizona courts that in the absence of a finding of fraud, injustice may also be a factor in disregarding corporate form. [Citations.] Not every court has mentioned injustice as a factor in piercing the corporate veil. [Citations.] However, virtually every court has noted that there is a great reluctance under Arizona law to disregard corporate form. [Citation.] A careful examination of Arizona case law reveals that no modern Arizona court has ever pierced the corporate veil unless it found that fraud existed. A better statement of the test actually used in practice by Arizona courts is that fraud, or injustice amounting to fraud, must be found to exist. The Dissent uses the ‘injustice’ dicta to create new Arizona law in the guise of following established law.” (Nash, supra, 60 B.R. 27, 30.)
However, after Nash and the 1989 magazine article, the Arizona Supreme Court continued to use the “fraud or injustice” language, as in the 1991 Gatecliff case we have already discussed.
We conclude the Arizona test for alter ego liability in this case is: (1) there is such unity of interest and ownership that separate personalities of owners and corporation do not exist, and (2) observance of the corporate form would sanction a fraud or promote injustice.
We observe the same test would apply to a California LLC in California. “While generally members of a [LLC] are not personally liable for judgments, debts, obligations, or liabilities of the company ‘solely by reason of being a member’ ([] § 17101, subd. (a)), they are subject to liability under the same circumstances and to the same extent as corporate shareholders under common law principles governing alter ego liability....” (People v. Pacific Landmark, supra, 129 Cal.App.4th at p. 1212.)
V. Substantial Evidence
Appellants argue no substantial evidence supports the judgment. We disagree.
In reviewing this claim, we determine whether there is any substantial evidence, even if contradicted, which will support the judgment, and evidence is substantial if it is reasonable in nature, credible, and of solid value. (Las Palmas, supra, 235 Cal.App.3d at p. 1239; Moore v. Title Ins. Co. of Minnesota (Ariz.App. 1985) 148 Ariz. 408, 413 [714 P.2d 1303, 1308] [Court of Appeals].)
A. Forfeiture Re: Exclusion of Evidence
In a footnote, appellants claim the trial court erred in excluding evidence -- a portion of a declaration discussing settlement negotiations -- which appellants want to use for a purpose other than disclosing settlement matters. We decline to consider the point, which appellants have failed to present properly under a separate heading and failed to establish as prejudicial error. (Cal. Const., art. 6, § 13; Code Civ. Proc., § 475; Ariz. Rules of Civ. Proc., rules 13, 61; Heavenly Valley v. El Dorado County Bd. of Equalization (2000) 84 Cal.App.4th 1323, 1346.)
B. First Alter Ego Prong -- Unity of Control/Etc.
Appellants claim the evidence demonstrates they provided the LLCs with adequate capital to operate the business, created an entity of substance rather than just paper, maintained proper books and records, and routinely observed the separateness of the entities. However, the test on appeal is not whether evidence would have supported a judgment 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 (1971) 3 Cal.3d 875, 881.) Although the Paiks argue appellants have forfeited the substantial evidence claim by failing to acknowledge evidence supporting the judgment (ibid.), we shall address the merits and conclude appellants fail to show grounds for reversal.
“Arizona decisions have identified the following considerations, among others, as material to this issue [unity of control]: common officers or directors; payment of salaries and other expenses of subsidiary by parent (or of corporation by shareholders); failure to maintain formalities of separate corporate existence; similarity of corporate logos; plaintiff’s lack of knowledge of separate corporate existence; owners’ making of interest-free loans to corporation; maintaining of corporate financial records; commingling of personal and corporate funds; diversion of corporate property for shareholders’ personal use; observance of formalities of corporate meetings; intermixing of shareholders’ actions with those of corporation; and filing of corporate income tax returns....” (Deutsche Credit Corp. v. Case Power & Equipment Co. (1994) 179 Ariz. 155, 160 [876 P.2d 1190, 1195] [showing that individuals were sole shareholders, directors and officers of both companies was insufficient to justify treating the two corporations and the individuals as a single entity].)
Appellants claim Arizona law gives “more latitude” and does not pierce the veil for mere operational informalities, particularly in a start-up venture. However, the cited cases do not depart from the law we have already stated, and the trial court did not pierce the veil for mere operational informalities, but for a totality of conduct rendering the LLCs empty shells.
Substantial evidence supports the trial court’s finding of unity of interest, ownership and control. Thus, the six individual appellants had been working together as a group to develop property in Arizona, assertedly through an entity called Greenbull Development, LLC. Thomas Church created Management in November 2001, to serve as manager of an Arizona project called Rancho de Destinado. The six individuals were the only shareholders of Management. When the Arizona project failed, the six individuals looked around for another project and found Smith/Stonegate, with whom they negotiated for an assignment of the Paik contract in December 2001. The individuals did not form River Rock or Holdings until January 4, 2002. The individuals were the sole members of Holdings. Holdings was the sole member of River Rock, and Management was the manager of River Rock. The individuals formed River Rock for the sole purpose of the Stonegate project.
The individuals did not even establish bank accounts for the entities. They used the checking account of an unrelated entity, Greenbull Development, to pay incidental expenses associated with the Stonegate project, and the individuals paid some minimal expenses.
The individuals never established an office for River Rock or the Hesperia entities, instead working on the Stonegate project from their individual offices. They held no formal meetings, instead making decisions informally.
Although the entire Stonegate project (of which the Paiks’ land was a part) was a $220 million project, and appellants knew before forming River Rock and Holdings that the projected amount to fund the first year’s development activities was over $9 million, none of appellants paid for their interest in Holdings or Management, and no capital was ever paid into River Rock. The three entities had no assets and no other business operations.
Undercapitalization cannot be proved merely by showing the corporation is now insolvent, but if insolvency occurs soon after incorporation it may be a primary indicator of undercapitalization. (Norris Chemical Co. v. Ingram (Ariz.App. 1984) 679 P.2d 567, 571.) Here, the three business entities were always insolvent.
A $210,000 payment due on the Stonegate project was paid by a check from William Graham directly to the Paiks on behalf of River Rock, without regard to any business formalities of River Rock or the other entities. Appellants claim this $210,000 as proof of adequate capitalization and further claim the trial court erred in saying there was no evidence the six individuals personally guaranteed a $210,000 loan from the Grahams. However, even assuming the six individuals personally guaranteed the loan, the $210,000 amount was trivial, considering that another $9 million was due within the first year or so, and the project was worth $220 million. Undercapitalization may be found where the capital is illusory or trifling compared to the business to be done. (Automotriz Del Golfo de California S.A. de C.V. v. Resnick (1957) 47 Cal.2d 792, 796.) The Paiks’ expert opined, “Even with [appellants’] claim of $244,000 of capital for River Rock [as of] February 25, 2002, which represents funds which had already been fully expended [the $210,000 payment plus incidental expenses paid by the individuals for travel expenses, etc.], River Rock did not possess the capitalization adequate for its prospective liabilities, or capital adequate for the ‘business to be done.’” (Footnote omitted.)
That appellants’ evidence gave a conflicting assessment does not matter on substantial evidence review.
The assignment agreement with Stonegate required River Rock to pay at least $1,985,000 in the first year as acquisition costs alone, not taking into account the costs of development activities. River Rock had to pay the balance of the purchase price to the Paiks by December 1, 2002, or pay the Paiks $1 million by November 1, 2002, to extend the closing date an additional six months. In addition to the Paiks’ property, there were other properties available in February and March 2002 to be part of the project, but River Rock was unable to make those payments, totaling $710,000.
Additionally, the individuals, not River Rock or the Hesperia entities, hired and paid various attorneys to pursue their cross-complaint against the Paiks.
Appellants argue there was no need to fund the three entities until the Paiks accepted the assignment and, until then, River Rock, Holdings and Management were merely “entities in waiting.” They thus claim the entities did not need to be capitalized until the end of February 2002. However, the entities were never adequately capitalized. Appellants argue the Rahimians’ threats to sue, which began in early March 2002, relieved River Rock and the Hesperia entities from having to be capitalized. However, appellants cite no authority for this proposition. Appellants argue we should count as capital the Graham family’s commitment to invest $12 million in the project (even though it was never paid), because the Grahams believed themselves obligated to pay it and withheld it only because of the threat of litigation by the Rahimians. Again, appellants cite no authority that third party claims relieve LLCs from maintaining a separate existence. Moreover, it is one thing to “believe” oneself obligated and quite another thing to meet that obligation. It is also disingenuous for appellants to claim the money was certain, given that they had Smith/Stonegate delete the minimum funding requirement of $4 million to $12 million from the assignment agreement, without advising the Paiks that they had done so.
We conclude substantial evidence supports the trial court’s finding of unity of interest, ownership, and control sufficient to make River Rock, Holdings and Management the alter egos of the six individual appellants.
C. Second Alter Ego Prong -- Fraud or Injustice
We need not decide whether there was substantial evidence of actionable fraud, because there was substantial evidence that denial of alter ego liability would promote injustice.
The trial court found appellants intentionally created empty shells and used them in an improper manner to subject the Paiks to unfounded litigation.
The evidence clearly shows River Rock, Holdings and Management were empty shells. Additionally, as we found in River Rock I, River Rock and Smith/Stonegate amended the purported assignment of the Paik contract to delete a minimum funding requirement that would have protected the Paiks, without telling the Paiks about the deletion. Instead, River Rock submitted to the Paiks the original document which still included the funding requirement. We observed in River Rock I (slip opn. pp. 27-28) that when River Rock sent a copy of the amended assignment to the Paiks, “River Rock chose to notify the Paiks of the amendments by a FAX ‘[f]or your files’ (attaching a copy of the assignment closing agreement which referenced the amendments without describing their contents) rather than make a point of presenting the amendments at the meeting that same day; and (2) River Rock made no apparent attempt to clarify the matter when the Paiks’ attorney wrote the February 20, 2002, letter saying the Paiks agreed to consent to the (original) assignment agreement....”
Appellants offer no evidence of a benign reason for the concealment.
Appellants argue the Paiks could have investigated River Rock’s finances, and the Paiks fail to show any reasonable reliance to establish fraud. Nevertheless, we have explained actionable fraud is not required to impose alter ego liability. The concealment of the amendment deleting the funding requirement supports an inference of an intent to defraud, which is a factor properly considered in determining whether observance of the LLC form as separate entities would work an injustice.
Thus, the injustice here is not merely that the Paiks are unable to recover from a judgment-proof judgment debtor. The injustice is that appellants’ conduct subjected the Paiks to the aggravation of being embroiled in litigation.
Appellants quote from our opinion in River Rock I that the Paiks initially treated River Rock as assignee, and it seemed clear that all parties treated the assignment as a fait accompli. Nevertheless, we went on to say in River Rock I, that the parties’ conduct was not controlling, because all parties at all times knew they were bound by written instruments, and it was those instruments which determined the legal import, and the written instruments required the Paiks’ written consent to assignment, and the Paiks never gave written consent, and thus there was no valid assignment.
Appellants argue here that, although the written instruments governed the legality of the assignment, in this equitable proceeding, it should be taken into consideration that the Paiks did not assert the defense of the assignment’s invalidity until their answer to the third amended cross-complaint. Appellants claim that, had the Paiks denied the assignment earlier rather than holding a “slam dunk defense” in reserve, the cross-complaint against the Paiks would never have occurred. Appellants thus blame the Paiks for most of the attorney fees they incurred in this litigation. Appellants even claim the Paiks deliberately ran up their own attorney fees for selfish purposes. However, appellants cite no evidence supporting even an inference that this accusation is true or that they would not have filed the cross-complaint. We disregard the parties’ dispute as to whether appellants, by referring to the Paiks’ case as a “slam dunk,” are admitting the cross-complaint was frivolous.
None of appellants’ arguments establishes grounds for reversal. We do not reweigh the equities (nor do we mean to suggest we would reach a different result if we could). The trial court’s determination will not be disturbed when supported by substantial evidence. (Standage, supra, 711 P.2d at p. 615; Las Palmas, supra, 235 Cal.App.3d at p. 1248.)
Appellants fail to show a lack of substantial evidence or any judicial error warranting reversal of the judgment.
VI. Attorney Fees and Costs on Appeal
Citing Villinger/Nicholls Development Co. v. Meleyco (1995) 31 Cal.App.4th 321 at page 328, the Paiks ask for an award of their attorney fees and costs for this appeal, in an amount to be determined by the trial court. Appellants make no reply on this issue. It appears the Arizona Rules of Civil Appellate Procedure, rule 21, would have the amount determined by the appellate court. In the absence of any party’s invocation of the Arizona rule on this point, we award the Paiks attorney fees and costs for this appeal, in an amount to be determined by the trial court.
DISPOSITION
The amended judgment is affirmed. Respondents shall recover their attorney fees and costs for this appeal, in an amount to be determined by the trial court. (Cal. Rules of Court, rule 8.278(a)(1).)
We concur: SCOTLAND, P. J., BUTZ, J.