Alter ego…what is it? In Latin it means the second I (i.e., a second self). And if you a creditor and have an outstanding judgment, you should familiarize yourself with the legal doctrine of alter ego. Legally speaking, an alter ego is where the court finds a corporation lacks a separate identity from an individual or corporate shareholder, resulting in injustice to the corporation’s creditors. Finding alter ego gives the court cause to pierce the corporate veil and hold individual shareholders of the debtor coproration personally liable for debts of the corporation. Alter ego can also be used to find that a corporation lacks a separate identity from its parent company or subsidiary. It is also used under motion for adding a jugdment debtor to an existing judgment (under Code of Covil Procedure section 187).
In a recent case, SCC Acquisitions v. Superior Court of Orange (2016 4th Appellate District – G050546), Judgment Creditor Western Albuquerque Land Holdings, LLC (Western) made a demand for production of documents on SCC pursuant to California Code of Civil Procedure Section 708.030. Although SCC produced over 217 pages of documents, it declined to produce documents relating to five specific requests that sought:
(1) documents showing the name and address of each business in which each SCC current or former officers, directors and/or shareholders now has an interest in; (2) all documents concerning assets owned by any entities that are or were a subsidiary or affiliate of SCC;
(3) bank and brokerage records of any entities that are or were subsidiaries or affiliates of SCC;
(4) all financial records of any entities that are or were a subsidiary or affiliate of SCC; and,
(5) the names of any current or former subsidiaries or affiliates of SCC that filed bankruptcy or were in receivership.
To each of these requests, SCC objected, refused to produce any documents and stated that the demands sought documents of third parties and therefore were protected by the right of privacy. Western moved to compel production. The trial court granted the motion to compel as it related to the demands that asked for documents concerning SCC’s “current or former officers, shareholders, and/or directors,” and the demands which asked for documents concerning entities that are or were a SCC “subsidiary or affiliate” or SCC “subsidiaries or affiliates.”
The Court found that the law on the matter is unambiguous. Simply speaking, it places but two limitations on the scope of requests for production of documents. First, the document requested must be “in the possession, custody, or control of the party on whom the demand is made.” Second, the document requested must have “information to aid in enforcement of the money judgment.” If the document requested is “in the possession, custody, or control of the party on whom the demand is made” and has “information to aid in enforcement of the money judgment,” then the document is subject to discovery under section 708.030, regardless whether the document relates to the judgment debtor or to third parties.
Finally, with respect to production of documents relating to the names and addresses of current and former, officers, directors and shareholders, the Court noted that the constitutional right of privacy does not provide absolute protection but may yield in the furtherance of compelling state interests. (People v. Wharton (1991) 53 Cal.3d 522, 563.) Here, Western had a right to discover facts about the nature and location of assets to make that judgment more than a scrap of paper. The information sought by Western’s discovery is financial in nature and a protective order could be issued, if necessary, to safeguard privacy rights of third parties.
In sum, as a judgment creditor, make sure to work with your collection attorney to develop comprehensive inspection demands that could help you assert alter ego, if it turns out the judgment debtor has systematically transferred assets. The judgment creditor typically has a wealth of information about the judgment debtor that should be culled to create a detailed inspection demand.
For more information on how to defend yourself against or how to assert an alter ego claim, contact Los Angeles collections attorney Ronald P. Slates today.