Opinion
NOT TO BE PUBLISHED
Superior Court No. CIV 238173. County of Ventura, Edwin Marvin Osborne, Judge
(Retired judge of the Ventura S.Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.)
Benton, Orr, Duval & Buckingham, Bruce Alan Finck for Plaintiff and Appellant.
Law Offices of Malcolm R. Tator, Malcolm Tator; Orrock, Higson & Kurta and Daniel Higson, for Defendant and Respondent.
PERREN, J.
S. J. Amoroso Construction Co. (Amoroso) sued respondent James Knecht (Knecht) as an individual after a judgment against Knecht Enterprises for breach of contract went unsatisfied. Amoroso appeals from a judgment denying it recovery on its amended complaint in which it sought to pierce the corporate veil and obtain damages from Knecht for negligence, intentional and negligent misrepresentation, and intentional interference with contract. The trial court refused to pierce the corporate veil, found that the tort claims were barred by the statute of limitations, and awarded Knecht $70,000 in attorney fees. We affirm.
STATEMENT OF FACTS AND PROCEDURAL HISTORY
Appellant Amoroso was the general contractor for the Ventura County Juvenile Justice Complex. Amoroso subcontracted Pacific Glass & Mirror (Pacific) to provide glass, glazing and aluminum storefront installation after Pacific submitted a low bid of $333,969 for the work. Respondent Knecht signed the subcontract agreement on November 15, 2001, as president of Pacific. Pacific, along with Pleasant Valley Glass, were fictitious names used by Knecht Enterprises, a closely-held corporation of which Knecht was the president, sole stockholder, licensee and responsible managing officer. Knecht Enterprises was incorporated in 1984 and had been in the business of commercial and residential glass installation since incorporation.
The two other bids submitted were substantially higher--$515,859 and $573,300.
On December 18, 2002, Knecht told Amoroso's project manager that he could no longer continue with the project. On December 19, 2002, Amoroso received a notice of termination of subcontractor, informing Amoroso that Pacific had ceased doing business on October 29, 2002. Amoroso was required to engage another subcontractor to finish the uncompleted work and repair work previously done.
On August 27, 2003, Amoroso sued Knecht Enterprises for breach of contract. On February 2, 2004, a default judgment was entered by the court against Knecht Enterprises in the sum of $213,433.33.
The judgment remained unsatisfied. Amoroso proceeded with a judgment debtor's examination of Knecht in January 2005. During the examination, Amoroso learned that Knecht had surgery to remove a brain tumor in 1990. After the surgery, his memory and ability to concentrate slowly eroded. Knecht said that, prior to terminating the subcontract, he had lost key employees and was considered by his own employees to be incapable of bidding and managing projects. Amoroso also learned that Knecht continued to do business as Pleasant Valley Glass after Pacific had ceased doing business. Knecht testified that he had sold the assets of Knecht Enterprises in Pleasant Valley's name.
Based on this information, Amoroso sued Knecht individually, seeking to pierce the corporate veil or to amend the prior default judgment to add Knecht as a judgment debtor. On December 27, 2005, Amoroso filed its complaint alleging breach of contract by agent and violations of various Business and Professions Code provisions. After several motions to strike, demurrers, and motions for judgment on the pleadings and summary adjudication, Amoroso filed a third amended complaint containing causes of action for removal of corporate veil, negligence, intentional and negligent misrepresentation, and intentional interference with contract. The court overruled Knecht's demurrer and denied a subsequent motion for summary adjudication to the third amended complaint.
The trial court heard the case without a jury. It issued a detailed statement of decision denying Amoroso's request to impose alter ego liability on Knecht and dismissed the tort causes of action as barred by the statute of limitations. The court awarded Knecht costs and attorney fees pursuant to an attorney fee provision in the subcontract.
On appeal, Amoroso asserts the trial court erred in denying its request to impose alter ego liability on Knecht, determining that the statute of limitations barred the tort causes of action, and awarding attorney fees to Knecht. Amoroso also contends the trial court was without jurisdiction to hear and determine Knecht's motion for summary adjudication of the original complaint.
DISCUSSION
I. Alter Ego Liability
A. Standard of Review
In reviewing a finding regarding alter ego liability, we review the trial court's findings under the substantial evidence standard. (Baize v. Eastridge Companies (2006) 142 Cal.App.4th 293, 302.)
Amoroso asserts the trial court erred in refusing to impose alter ego liability on Knecht because substantial evidence supports piercing the corporate veil. We conclude otherwise. In substance, Amoroso is arguing that we should reweigh the evidence and disregard the evidence supporting the judgment. That is not the role of an appellate court. "[T]he power of an appellate court begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted or uncontradicted, which will support the determination, and when two or more inferences can reasonably be deduced from the facts, a reviewing court is without power to substitute its deductions for those of the trial court. If such substantial evidence be found, it is of no consequence that the trial court believing other evidence, or drawing other reasonable inferences, might have reached a contrary conclusion." (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874, italics omitted.)
B. Legal Principles
A corporation is ordinarily regarded as a legal entity, separate and distinct from its shareholders, officers, and directors. (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.) The law, however, may disregard a corporate identity "where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation." (Ibid.)
"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 Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at p. 538.) The circumstances under which a corporate entity may be disregarded vary according to the circumstances of each case, and determination of the inference to be drawn is within the province of the trial court. (Mid-Century Ins. Co. v. Gardner (1992) 9 Cal.App.4th 1205, 1212; Associated Venders, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 836-837.) A party seeking to have a court disregard the defendant's corporate entity has the burden to overcome the presumption of the separate existence of the corporate entity. (Mid-Century, supra, at p. 1212.)
The factors courts consider in determining whether the corporate veil should be pierced include: "the commingling of funds and other assets; the failure to segregate funds of the individual and the corporation; the unauthorized diversion of corporate funds to other than corporate purposes; the treatment by an individual of corporate assets as his own; the failure to seek authority to issue stock or issue stock under existing authorization; the representation by an individual that he is personally liable for corporate debts; the failure to maintain adequate corporate minutes or records; the intermingling of the individual and corporate records; the ownership of all the stock by a single individual or family; the domination or control of the corporation by the stockholders; the use of a single address for the individual and the corporation; the inadequacy of the corporation's capitalization; the use of the corporation as a mere conduit for an individual's business; the concealment of the ownership of the corporation; the disregard of formalities and the failure to maintain arm's-length transactions with the corporation; and the attempts to segregate liabilities to the corporation." (Mid-Century Ins. Co. v. Gardner, supra, 9 Cal.App.4th at p. 1213 & fn. 3.)
Even if some or all of these factors are established, however, piercing the corporate veil also requires a showing that the corporate alter ego acted in bad faith. (See, e.g., Sonora Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at p. 539 ["The 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 corporation form"] see also Crestmar Owners Assn. v. Stapakis (2007)157 Cal.App.4th 1223, 1232; Mid-Century Ins. Co. v. Gardner, supra, 9 Cal.App.4th at p. 1213; Associated Venders, Inc. v. Oakland Meat Co., supra, 210 Cal.App.2d at p. 838.)
C. Substantial Evidence Supports the Trial Court's Decision
Amoroso contends that it has met its burden of establishing alter ego liability because it provided evidence that the corporation was undercapitalized, that Knecht disregarded corporate formalities and commingled personal funds with corporate funds, that Knecht treated Pacific and Pleasant Valley Glass as a single entity, and that Knecht profited from the corporation's demise while its creditors went unpaid.
The trial court rejected each of these contentions. In its statement of decision, the court stated: "Knecht Enterprises was created in 1984. There is no evidence that it was 'a sham corporate entity formed for the purpose of committing fraud or other misdeeds' and there is considerable evidence that it was not formed for any such purpose. Of course, a legitimate corporation can later be looted or otherwise wrongfully transformed into a shell for the purpose of defrauding its creditors, but that does not follow merely from the fact that a corporation becomes unable to pay all its creditors in full, or the corporate shield against investor liability would be illusory.
"... There are some legal or technical aspects which are understandably emphasized, involving... corporate records.... Knecht was unable to produce records such as corporate minutes for the last several years of operation of the corporation.... The absence of records or observance of corporate formalities must be weighed with the other facts of the case in determining whether to disregard the corporate identity.
"... Copies of the corporate tax returns were produced for April 1, 2000 through March 31, 2003 which reveal several years' history of the corporate net operating profits and losses.... It appears that Knecht Enterprises lost $117,444 in Tax Year [TY] 1996 and $53,144 in TY 1997. It was able to make enough profit ($96,801) in TY 1998 to offset about 57 % of the 96-97 losses. It lost $58,614 in TY 1999 and made enough profit ($126,351 on gross sales of $2,295,226) in TY 2000 to offset... over 97 % of the losses over the preceding years. TY 2001 showed another big loss ($164,852 on gross sales of $1,746,748) and TY 2002 with the Juvenile Justice Complex contract finished off the corporation.
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"... Knecht Enterprises did business as two glass businesses. Pacific Glass & Mirror installed commercial windows, and Pleasant Valley Glass (PVG) was a smaller retail shop. Plaintiff argues that Knecht Enterprises was operated with little separation of finances, personnel or operations between the two business operations. It is not necessary to review evidence to support or rebut that argument because it misses the mark. If Knecht Enterprises had sought to avoid liability for corporate operations of either PG&M or PVG, that would be relevant. It has not. They were not corporations, but merely dba's of Knecht Enterprises. The issue is not the separateness of the corporation and its dba's, but of the corporation and its owner....
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"... Like Knecht Enterprises, many corporations have a single individual who is the owner, manager, and holder of the contractor's license as responsible managing officer. While such an owner has the opportunity to run the corporation in a way that would trigger alter ego liability, that circumstance alone does not do so. The opportunity or ability to act is not determinative, but rather the character, nature, and effects of the actions actually taken.
"... A majority of businesses fail in the first two or three years of their operation, often because of undercapitalization. Knecht Enterprises was operated for over 18 years and was quite profitable for many of those years before it failed. It does not appear that it was undercapitalized.
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"... It is always a hardship when a corporation fails and is unable to pay all its creditors in full. That alone is not sufficient to trigger alter ego liability, or the corporate shield against investor liability would be nonexistent....
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"... After 15 or 16 years of operation, Knecht Enterprises encountered serious problems. The owner and manager, James Knecht, tried to save it by putting into the corporation more money of his own and his parents. He did not succeed. In the final analysis and after considering the ultimate requisite conditions, I conclude that this is not an appropriate case for application of the alter ego doctrine to disregard the corporation entity."
The trial court's detailed and well-reasoned opinion sets forth the evidence on which it relied to deny alter ego liability. The evidence is substantial and the court's decision is supported by relevant case law. (See, e.g., Associated Venders, Inc. v. Oakland Meat Co., supra, 210 Cal.App.2d at p. 841 ["Considerable stress is laid by the appellant upon the claim of undercapitalization and its assertion that such appears in the instant case as a matter of law. Appellant has not cited any case in which an appellate court has held that a business was undercapitalized when the court made a contrary finding"].)
The trial court's statement of decision does not expressly address the issue of bad faith. However, the absence of bad faith is amply supported by the record. The corporation was adequately capitalized upon incorporation in 1984. While Knecht may have failed to strictly observe corporate formalities, especially in later years, Amoroso failed to present evidence that Knecht diverted corporate funds to his own purposes, used the corporation's assets as his own, or failed to keep adequate records. To the contrary, the evidence presented showed that Knecht used substantial personal funds to keep the corporation afloat. Substantial evidence supports the conclusion that the demise of the corporation and termination of the subcontract were the result of Knecht's declining mental abilities, not bad faith.
Amoroso has failed to sustain its burden. Substantial evidence supports the trial court's refusal to disregard the separate existence of the corporation and treat Knecht as its alter ego.
II. Statute of Limitations
The trial court found that Amoroso's tort causes of action for negligence, intentional and negligent misrepresentation, and intentional interference with contract were barred by the statute of limitations. The parties agree that the statute of limitations for negligence, negligent misrepresentation, and interference with contract is two years (Code Civ. Proc., § 339, subd. 1) and the statute of limitations for intentional misrepresentation, or fraud, is three years (§ 338, subd. (d)). There also is no dispute that Knecht terminated the contract with Amoroso on December 18, 2002, and that the complaint was filed more than three years after the termination date of the contract.
All further statutory references are to the Code of Civil Procedure unless otherwise stated.
Amoroso contends that the tort claims were timely filed pursuant to the discovery rule in section 338, subdivision (d), and the relation back doctrine.
A. The Discovery Rule
"Under the statute of limitations, a plaintiff must bring a cause of action within the limitations period applicable thereto after accrual of the cause of action. [Citations.] [¶] The general rule for defining the accrual of a cause of action sets the date as the time 'when, under the substantive law, the wrongful act is done, ' or the wrongful result occurs, and the consequent 'liability arises....'... [¶] An exception to the general rule for defining the accrual of a cause of action... is the discovery rule. [Citation.] It may be expressed by the Legislature or implied by the courts. [Citation.] It postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action. [Citations.]" (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 397.)
A plaintiff discovers a cause of action when he or she at least suspects a factual basis, as opposed to a legal theory, for its elements. (Norgart v. Upjohn Co., supra, 21 Cal.4th at p. 397.) In other words, the plaintiff discovers the cause of action when he or she at least suspects that someone has done something wrong to him or her. (Ibid.) "[A] 'suspicion' of one or more of the elements of a cause of action, 'coupled with a knowledge' of the others, 'will commence the [applicable] limitations period.'" (Id. at p. 398, fn. 3.)
Our Supreme Court discussed the discovery provisions in section 338, subdivision (d) in the context of a cause of action for fraud in Hobart v. Hobart Estate Co. (1945) 26 Cal.2d 412, 437-439. The court stated: "'... It is only where the party defrauded should plainly have discovered the fraud except for his own inexcusable inattention that he will be charged with a discovery in advance of actual knowledge on his part.' It follows that plaintiff is not barred because the means of discovery were available at an earlier date provided he has shown that he was not put on inquiry by any circumstances known to him or his agents at any time prior to the commencement of the three-year period...." (Id. at p. 439.)
We review the trial court's finding on the accrual of a cause of action for substantial evidence. (Institoris v. City of Los Angeles (1989) 210 Cal.App.3d 10, 17.) Under the substantial evidence standard of review, the trial court's resolution of a disputed factual issue must be affirmed so long as it is supported by substantial evidence. (Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624, 632.)
Amoroso contends the statute of limitations does not bar its tort claims because it did not have knowledge of Knecht's tortious conduct until it conducted the debtor's examination in January 2005. The trial court rejected this argument on the ground that Amoroso was put on inquiry notice of Knecht's problems at least by December 18, 2002, if not earlier, when it started issuing two-party checks. The evidence supports this finding. Since at least August 2002, Amoroso had been paying for materials by joint check agreements under which it issued checks payable jointly to PG&M and certain suppliers. Amoroso cites Post Bros. Constr. Co. v. Yoder (1977) 20 Cal.3d 1, 5-6, for the proposition that the use of joint checks is well established by custom and practice in the construction industry. However, nothing in the record shows that Amoroso issued joint checks prior to August 2002.
On appeal, we view the evidence and the inferences to be drawn therefrom in the light most favorable to respondent. (McBride v. California Bd. of Accountancy (2005) 130 Cal.App.4th 518, 535.) Accordingly, we conclude that substantial evidence supports the findings of the trial court that the tort claims were time barred.
B. The Relation Back Doctrine
An amended complaint relates back to the filing of the original complaint and thus avoids the bar of the statute of limitations if recovery is sought in both pleadings on the same general set of facts, seeks relief for the same injuries, and refers to the same instrumentality. (Norgart v. Upjohn Co., supra, 21 Cal.4th at pp. 408-409.)
Amoroso asserts the trial court erred in finding its tort claims are time barred because its original complaint, alleging a single cause of action for breach of contract by agent, contained allegations of tortious conduct that are substantially similar to those in the third amended complaint.
The breach of contract action pled in the original complaint was subject to a four-year statute of limitations. (§ 337.) The contract cause of action was timely because Amoroso filed its complaint less than four years after termination of the contract. Unlike contract claims, tort claims are subject to a three-year statute of limitations. (§ 338.) For the relation back doctrine to be applicable, the tort claims must have been timely asserted in the original complaint. Here, Amoroso's original complaint was filed more than three years after termination of the contract when the tort causes of action accrued. (Hawkins v. Pacific Coast Bldg. Products, Inc. (2004) 124 Cal.App.4th 1497, 1502-1503; see also Alexander v. Bames (1942) 54 Cal.App.2d 387, 392 [if the original complaint defectively states a cause of action, it may be amended after the running of the statute of limitations as long as the cause of action stated in the amended pleading was not barred when the original complaint was filed].)
Amoroso's assertion of error concerning the trial court's grant of Knecht's motion for summary adjudication with leave to amend after it denied his motion for judgment on the pleadings has not been properly presented for review: Amoroso has not cited any relevant case law supporting this argument (see Spitler v. Children's Institute International (1992) 11 Cal.App.4th 432, 442 [court will not consider issue on appeal unless supported by argument and authority]) and has not indicated how it has been prejudiced by the trial court's action. (See Kristovich v. Crail (1971) 18 Cal.App.3d 589, 591 [appellant not entitled to raise errors which do not injuriously affect him].)
III. Attorney Fee Award
Amoroso asserts the trial court erred in awarding Knecht attorney fees because he was not a party to the contract, he is not entitled to attorney fees for defending against the tort claims, and Knecht has unclean hands. We review a determination of the legal basis for an award of attorney fees de novo as a question of law. (Dell Merk, Inc. v. Franzia (2005) 132 Cal.App.4th 443, 450.)
Attorney fees are awardable as costs when authorized by contract. (§ 1033, subd. (a)(10).) The contract between Amoroso and Knecht Enterprises contains the following attorney fee provision: "[T]he prevailing party in arbitration or litigation shall be awarded their attorney and consulting fees and other costs as the trier of fact deems equitable under the circumstances." The subcontract also contains an indemnification clause requiring Knecht Enterprises to indemnify and hold harmless Amoroso "against all actions, including litigation and arbitration proceedings... and including attorney and consultant fees (hereinafter 'claims') arising out of or resulting from SUBCONTRACTOR'S: (1) presence at the project site; (2) performance under the Contract Documents; or (3) failure of performance of the Contract Documents."
Although the indemnification clause purports to give only Amoroso the right to an award of attorney fees, Civil Code section 1717, subdivision (a), makes that right reciprocal: "In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs."
Amoroso cites only one case to support its arguments--Kendall-Jackson Winery, Ltd. v. Superior Court (1999) 76 Cal.App.4th 970. Kendall-Jackson holds that unclean hands may be raised in defense of a malicious prosecution action. (Id. at p. 978.) It has no application here. (Ibid.)
Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 129, defeats the assertion that a non-signatory party to a contract is precluded from obtaining attorney fees under an attorney fees clause in a contract. Santisas v. Goodin (1998) 17 Cal.4th 599, 608, defeats Amoroso's contention that Knecht is not entitled to attorney fees for defending against the tort causes of action. Santisas held that where, as here, an attorney fee provision embraces all claims arising out of a breach of contract, the provision encompasses both contract and tort claims.
In its reply brief, Amoroso makes a new argument that Knecht is not entitled to attorney fees because the subcontract did not comply with Civil Code sections 1550 and 1565. The court will not review a claim made for the first time in a reply brief. (People v. Lewis (2008) 43 Cal.4th 415, 536, fn. 30.) Amoroso also incorporates by reference other arguments made in a brief it filed in the trial court. These arguments, too, are not properly raised. "'[I]t is well settled that the Court of Appeal does not permit incorporation by reference of documents filed in the trial court....'" (McGuan v. Endovascular Technologies, Inc. (2010) 182 Cal.App.4th 974, 987.)
The judgment is affirmed. Respondent shall recover costs on appeal.
We concur: GILBERT, P.J., YEGAN, J.