Alter Ego… What Is It?

Alter Ego… What Is It?

On Behalf of | Jul 8, 2016 | Business

Chances are you have heard the term ‘alter ego’. In legal terms, finding alter ego gives the court cause to pierce the corporate veil and hold individual shareholders personally liable for debts of the corporation. For a creditor with an outstanding judgment, alter ego is where the court finds that 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 personally liable for debts of the corporation.

Generally, to pierce the corporate veil, the creditor must prove two things: (1) there is a “unity of interest and ownership” between the corporation and its owner, and (2) it would be unfair if the acts in question are treated as those of the corporation alone. The test is easy to state, but courts have found it difficult to apply. Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal App 3d 1220. Thus, while the test is consistently stated, most cases have avoided formulas and tests and relied instead on the discretion of the trial court.

California courts have developed 17 factors they consider when determining whether this two-part test is met. Morrison Knudsen v. Hancock (1998) 69 Cal.App.4th 223, 249-250, which an experienced collection attorney can discuss with you in detail. It is within the trial court’s discretion to consider the presence or absence of any of these factors or other relevant circumstances. Arnold v Browne (1972) 27 Cal App 3d 386. As the court in Associated Vendors Inc. vs. Oakland Meat Company (1962) 20 Cal.App.2nd 825, pointed out, the doctrine of alter ego is not to protect every unsatisfied creditor, but rather to afford him protection, where some conduct amounting to bad faith makes it inequitable for the owner of a corporation to hide behind its corporate veil.

Alter ego can also be used to find that a corporation lacks a separate identity from its parent company or subsidiary. This is an incredibly useful tool for a collection attorney trying to collect your judgment. The question is: How do you find sufficient evidence to get a court to apply alter ego?

Additionally, the doctrine of alter ego can be used both pre and post judgment. In a pre-judgment situation, alter ego should be alleged in the complaint from the get go if the facts warrant because there is nothing worse than obtaining a judgment against an entity, only to find that the entity has no assets to collect upon. In addition, alter ego can be used post-judgment. For example, California Code of Civil Procedure Section 187 allows a judgment creditor to file a noticed motion to amend the judgment to add a nonparty alter ego or successor as a judgment debtor. See generally, Farenbaugh & Son v. Belmont Const., Inc. (1987) 194 Cal. App. 3d 1023, 1027. In order to see that justice is done, great liberality is encouraged in the allowance of amendments brought pursuant to Code of Civil Procedure section 187. Greenspan v. LADT LLC (2010) 191 Cal.App.4th 486, 508.

Let’s take a look at a recent case (SCC Acquisitions v. Superior Court of Orange (2016 4th Appellate District – G050546) that applies the fundamentals of alter ego in connection with post-judgment collection efforts. In SCC, 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 essentially objected and refused to produce any documents, stating that the demands sought documents of third parties and that the documents were protected by the right of privacy. Western moved to compel production. The trial court granted the motion relating specifically 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.” SCC appealed, arguing that the trial court lacked statutory authority to grant the motion to compel because section 708.030 does not authorize a judgment creditor to compel production of a third party’s documents.

The Appellate Court, however, found otherwise, holding that Section 708.030, subdivision (a) is unambiguous. In plain terms, 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.” (Ibid.) Second, the document requested must have “information to aid in enforcement of the money judgment.” (Ibid.) 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.

Although SCC argued that such a reading of section 708.030 permits a judgment creditor to obtain indirectly from the judgment debtor documents which it could not obtain directly from the third party (because post-judgment discovery to a third party is very limited under CCP Section 708.120), the Court noted that there is a difference between discovery about a third party and discovery from a third party.

Finally, with respect to production of documents relating to the names and addresses of current and former, officers, directors and shareholders, that SCC sought to withhold on the basis of right to privacy, 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 has 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 given the past relationship that led to the judgment, which should be culled to create a detailed inspection demand.

Contact collection attorney Ronald P. Slates today to discuss your collection matter.