California

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT DIVISION TWO

E035005

2004.CA.0008132

September 15, 2004

CAL PAC ASSOCIATES, INC. ET AL., PLAINTIFFS AND APPELLANTS,
v.
COUSSOULIS DEVELOPMENT COMPANY ET AL. DEFENDANTS AND RESPONDENTS.

APPEAL from the Superior Court of San Bernardino County. Frank Gafkowski, Jr., Judge. (Retired judge of the Los Angeles Municipal Court assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.) Affirmed. (Super.Ct.No. SCV 68735)

Mundell, Odlum & Haws and William P. Tooke for Plaintiffs and Appellants.

Varner, Saleson & Brandt and Kristen Robinson Olsen for Defendants and Respondents.

The opinion of the court was delivered by: Gaut, J.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

OPINION

1. Introduction

Plaintiff Cal Pac Associates, Inc., and its president, Mozafar Behzad appeal from an order of the trial court granting defendants' motion to add Behzad as a judgment debtor in defendants' judgment for attorney's fees against Cal Pac.

Behzad contends he is not the alter ego of Cal Pac. We hold the trial court did not abuse its discretion in so finding and affirm the judgment.

2. Factual and Procedural Background

In 1989, defendants, represented by Cal Pac, sold real property for $4.5 million, including a promissory note for $2.8 million. Defendants paid Cal Pac a broker's commission of $225,000 cash and a $90,000 promissory note, the payment of which was conditioned upon the buyers ultimately paying the $2.8 million promissory note. Behzad was also a president of one of the buyers. After the buyers defaulted in 1999, defendants repurchased the property at trustee's sale.

In July 2000, Cal Pac filed a complaint against defendants to recover the unpaid $90,000. As the sole officer, shareholder, and director of Cal Pac, Behzad controlled the litigation. After granting summary judgment in favor of defendants, the trial court granted attorney's fees to defendants and entered judgment in their favor in the amount of $37,208. In a previous appeal, this court affirmed the grant of summary judgment.

In April 2003, defendants moved to amend the judgment to add Mozafar Behzad as a judgment debtor and the alter ego of Cal Pac. In support of their motion, defendants submitted evidence that Cal Pac was formed in 1984 and Behzad was Cal Pac's only shareholder. Cal Pac had no employees or assets, except about $200 deposited in September 2002. Its corporate address has been the offices of BEK Consulting Engineers, Inc., of which Behzad was president, and Behzad's residence. Cal Pac did not prepare annual financial statements or maintain accounting records. Between January 2000 and March 2003, the balance in Cal Pac's bank account ranged between $490,000 in April 2000 and negative $29.82 in March 2002. In July 2000, when the instant lawsuit was filed, the balance was between $87,860.39 and $99,274.37. After March 2001, the balance was always less than $1,000.

In opposition, Behzad maintained that Cal Pac has followed all corporate formalities and that defendants should have required a personal guaranty from Behzad if they wanted him to be responsible for Cal Pac's corporate liabilities.

In its statement of decision, the court found Behzad had deposited personal checks in Cal Pac's account after commencing this lawsuit. Furthermore, there was an intermingling of funds between BEK and Cal Pac. The court held: "The commingling of funds, unity of addresses, single director/officer/shareholder - Behzad, and absolute lack of any independence of Cal Pac, support a finding of an alter ego. Behzad's claim that because he filed the paperwork and held yearly meetings for his corporation do not make it a true corporation [sic]. Actions speak louder than documents. Cal Pac does not truly have a separate identity, purpose or address, and for all intents and purposes, has not done so for years. Moreover, the free use of Cal Pac's account by Behzad and his other corporation, BEK, without explanation, ledgers, books or other receipts to explain the basis for deposits and draws on the account adds to the conclusion that the corporation is no more than a shell for Behzad's dealings, and an effort to avoid liability by under-funding the entity.

"The use of the corporation as a mere shell or instrumentality for the conduct or affairs of another entity shown by the failure to maintain arm's length transactions between the plaintiff and his corporation reflects an abuse of the corporate privilege and produces an inequitable result in this case." To avoid an inequitable result, the court allowed the judgment to be amended to add Behzad as Cal Pac's alter ego.

3. Discussion

In cases where, as here, the facts are disputed, the standard of review in determining alter ego liability is whether the trial court abused its discretion and whether substantial evidence supports the trial court's decision. (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1248; Mid-Century Ins. Co. v. Gardner (1992) 9 Cal.App.4th 1205, 1209, 1212, 1213; Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 535.)

The Sonora Diamond case offers a thorough review of the law of alter ego liability: "Ordinarily, a corporation is regarded as a legal entity, separate and distinct from its stockholders, officers and directors, with separate and distinct liabilities and obligations. [Citations.] A corporate identity may be disregarded-the `corporate veil' pierced-where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation. [Citation.] Under the alter ego doctrine, then, when the corporate form is used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation's acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners. [Citations.] The alter ego doctrine prevents individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. (Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 842.)

"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. (Automotriz etc. De California v. Resnick (1957) 47 Cal.2d 792, 796; [citations.]) `Among the factors to be considered in applying the doctrine are commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other.' [Citations.] Other factors which have been described in the case law include inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers. [Citations.] No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied. [Citation.] Alter ego is an extreme remedy, sparingly used. [Citation.]" (Sonora Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at pp. 538-539.)

Here the record supports the first prong of the test for the existence of an alter ego relationship. As recognized by the trial court, there is shown "a unity of interest and ownership" between Cal Pac and Behzad in that their separate personalities do not in reality exist.

The sticky wicket is the second prong involving an inequitable result. It is not sufficiently inequitable that defendants may not recover on their attorney's fees judgment unless Cal Pac is disregarded: ". . . 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 corporate form. Difficulty in enforcing a judgment or collecting a debt does not satisfy this standard." (Sonora Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at p. 539.)

Something more than mere uncollectability, however, is shown in this case. The evidence reflects that when Cal Pac filed its lawsuit against defendants it had significant assets but it soon reduced its bank balance to a few dollars. If allowed to maintain its corporate status, Cal Pac and, by extension, Behzad would be allowed to immunize themselves from the award of litigation costs obtained when defendants prevailed in the lawsuit Cal Pac and Behzad initiated. Otherwise stated, Cal Pac and Behzad will be using a corporation with no assets, no operating income and no business to conduct litigation risk-free. Cal Pac cannot satisfy a judgment for the defendants' costs or attorney fees; nor would Behzad have to pay those costs and fees. This is surely the kind of "inequitable result" the alter ego doctrine is designed to prevent.

Re reject Cal Pac's argument, based on two non-binding federal cases (Cascade Energy & Metals Corp. (10th Cir. 1990) 896 F.2d 1557, 1576-1578; In re Sims (5th Cir. 1993) 994 F.2d 210, 218-219) that a more stringent rule should operate in contract cases when applying alter ego principles because in contract cases, unlike tort cases, the parties can bargain to allocate the risks. The broker's contract made between the parties 15 years ago is not part of the record so we do not know the terms of the parties' agreement. Furthermore, we agree with defendants that they probably had no reason to anticipate that they would be unsuccessfully sued by Cal Pac for the undeserved balance of its broker's commission, causing defendants to incur litigation expenses, and that, therefore, they should have obtained a personal guaranty from Behzad. Given the particular circumstances of this case, it would be inequitable and not good public policy to permit Behzad to escape liability for conduct he implemented through the shell instrumentality of Cal Pac.

4. Disposition

We affirm the judgment and order defendants as prevailing parties to recover their costs on appeal.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

We concur:

Ramirez, P. J.

McKinster, J.

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