Cracking the Shell Game

Cracking the Shell Game

On Behalf of | Mar 28, 2017 | Business

Creditors: Did you know that you can add an individual as the alter ego of a corporate judgment debtor post-judgment?

This is one of those special get out of jail free rules that can really help a collection attorney collect your judgment. Per California Code of Civil Procedure Section 187 (a statutory section which gives the courts broad power to use all the means necessary to carry jurisdiction into effect), even if you didn’t allege alter ego liability at trial, the individual can be added as the alter ego of the corporate judgment debtor.

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Alter ego is a legal doctrine used by the courts to ignore the corporate status of a group of shareholders, officers and/or directors of a corporation (may also be used for limited liability companies), so that those individuals may be held personally liable for their actions when they have acted fraudulently or unjustly, or whenenforcing the separate corporate status would deprive an innocent victim of redress for an injury cause by the corporate entity. Generally speaking, a corporation is considered to be the alter ego of its shareholders, directors or officers when it is used merely for the transaction of their personal business for which they want immunity from individual liability. A parent corporation is the alter ego of a subsidiary corporation if it controls and directs its activities so that it will have liability for the subsidiary’s wrongful acts. Toho-Towa Co, Ltd. v. Morgan Creek Productions (2013) 217 Cal.App.4th 1096, 1107.

When adding an individual as an alter ego, a creditor does not to file a whole new lawsuit if the individual or individuals you seek to add:

1. controlled the lawsuit in his/her individual capacity or in cooperation with others

2. the new party is the alter ego of the old party

3. the new party has a proprietary interest in the matter

4. the new party had notice of the trial. See, e.g., Hall, Goodhue, Haisley & Barker, Inc. v. Marconi Conf. Center Bd. (1996) 41 Cal.App.4th 1551, 1555.

If these elements can be shown, a collection attorney can file a motion under CCP Section 187 and prove to the Court post-judgment that it is substantively appropriate to amend the judgment to add the individual as a co-judgment debtor. When the individual is, in fact, the alter ego of the corporate judgment debtor, this rule makes perfect sense and may be the only way you can collect that judgment.

In Misik v. D’Arco (2011) 197 Cal. App. 4th 1065, the appellate court cracked the corporate shield, increasing a judgment creditor’s chance of collection. The appellate court held that a trial court, using its general powers under California Code of Civil Procedure Section 187, can amend a judgment via motion to add a judgment debtor who is found to be an alter ego of the business defendant. In Misik, the plaintiff filed a motion to amend the judgment to add a corporate officer, D’Arco, as a co-judgment debtor. Unbeknownst to Misik, he made a loan of money to a shell company owned by D’Arco. After D’Arco’s company defaulted on the loan, Misik sued D’Arco and his company for breach of contract and fraud. Misik did not prevail on the fraud claim against D’Arco and ended up with a judgment against D’Arco’s company only.

Unable to collect against D’Arco’s worthless company, Misik filed a motion to add D’Arco to the judgment based on the alter ego doctrine. Whether the business is an alter ego of an individual is a factual question. First, there must be sufficient unity of interest and ownership between the individual and the business such that their separate personalities no longer exist. Secondly, treating the business as separate will sanction a fraud, promote injustice, or cause an inequitable result. Additionally, the Court may only exercise its authority to impose liability upon an alter ego who had control of the litigation, and was therefore represented. Id., at 1072. The Misik court found D’Arco to be an alter ego of his company. The Court relied on the facts that D’Arco was the only officer and employee of his business, that he made all decisions for the business, and that he even paid some business debts with personal checks. The Misik court further noted that D’Arco participated in and controlled the litigation filed against his company by Misik. Remember, this handy rule is only available in litigation where the judgment debtor participated in the litigation, i.e., not a default judgment case.

The court found that because the alter ego doctrine is premised on the theory that an identity of interest exists between two parties (corporate entity to individual), amending a judgment to add an alter ego does not add a new defendant but instead inserts the correct name of the real defendant. It is clear from this cases that courts are willing to stop the corporate shell game by disregarding the corporate fiction in cases of alter ego. Judgment creditors should explore the use of California Code of Civil Procedure Section 187 to amend their judgments to expose the true debtor hiding behind the shell business.

For more information on alter ego or to discuss collecting a debt owed to you, contact collection attorney Ronald P. Slates today.