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and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

COURT OF APPEAL OF CALIFORNIA, FOURTH APPELLATE DISTRICT,
DIVISION THREE

December 15, 2004, Filed

NOTICE: [*1] NOT TO BE PUBLISHED IN OFFICIAL REPORTS. CALIFORNIA RULES OF COURT, RULE 977(a), PROHIBIT 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 THIS OPINION HAS NOT BEEN CERTIFIED FOR PUBLICATION OR ORDERED PUBLISHED FOR THE PURPOSES OF RULE 977.

PRIOR HISTORY: Appeal from a judgment of the Superior Court of Orange County, No. 801130. Randell L. Wilkinson, Judge.

DISPOSITION: Affirmed.

COUNSEL: Jeffrey W. Shields for Plaintiff and Appellant.

Law Offices of Constance K. Wigod and Constance K. Wigod for Defendants and Respondents.

JUDGES: SILLS, P. J.; MOORE, J., FYBEL, J. concurred.

OPINIONBY: SILLS

OPINION: Megaplus purchased computer products from Mindware S.A, a wholesaler of information technology products, and resold them to Canara Technologies, Inc., during 1996 and 1997. In the summer of 1997, checks given to Mindware as payment for certain products purchased by Megaplus and shipped to Canara were dishonored for insufficient funds. Mindware was unable to collect from Megaplus, so it filed this complaint against Canara; Rajeev Sharma, owner of Megaplus; and Priti Sharma, owner of Canara. Rajeev Sharma (Mr. Sharma) and Priti [*2] Sharma (Mrs. Sharma) are husband and wife, and Mindware alleged each defendant was the alter ego of the other defendants. The complaint alleged eleven causes of action, including fraud, conspiracy to defraud, conversion, bad faith, common count for goods sold and delivered, claim and delivery, and injunctive and declaratory relief.

The trial court found Mr. Sharma was the alter ego of Megaplus but not of Canara, and neither Mrs. Sharma nor Canara was the alter ego of Megaplus. It awarded compensatory damages against Mr. Sharma in the amount of $ 1,388,350. Mindware appeals from those portions of the judgment in favor of Canara and Mrs. Sharma. We affirm.

FACTS

At trial, Mrs. Sharma testified that when she married Mr. Sharma in 1979, she had "around $ 500,000" from her family. The Sharmas have kept their finances "totally separately" since they were married, filing separate tax returns and keeping separate bank accounts. Each partner's earnings are his or her separate property. They chose not to commingle their property because they "have different philosophies on finance, on various business matters."

Mrs. Sharma formed Canara Technologies in 1993; she capitalized the business [*3] from her separate property and she is the sole shareholder. Canara was initially in the business of trading computer components, and in 1995 Megaplus began buying computer hardware products from it. Megaplus was just one of many customers. In 1996, Canara began buying products from Megaplus.

Mr. Sharma formed Megaplus as an LLC in the United Arab Emirates (UAE) in October 1995; before that time, he operated the business as a sole proprietorship. He was a 49 percent shareholder, and a UAE citizen owned 51 percent as a "technical owner." Mr. Sharma hired Sunil Mehra as general manager of Megaplus, giving him a power of attorney so he could run the day-to-day operations of the business. The business was set up in the UAE because, as a developing economy, its companies could sell computer parts at a lower price.

Mr. Sharma testified he had no ownership interest in Canara, and he never loaned it money. He spent some time at Canara's office in Orange County "basically assisting Megaplus," but he had no involvement in Canara's business decisions. Mrs. Sharma had no ownership interest in Megaplus; she never participated as a director, signed checks on its behalf, or "directed any of the [*4] affairs in Megaplus whatsoever."

Mehra, who worked for Megaplus from October 1994 through July 11, 1997, testified that Mr. Sharma took advantage of the UAE's developing economy status by procuring the computer parts in the Middle East and then selling them at a lower price "through his network in the United States . . . ." At first, Megaplus shipped the computer parts to Rajcomp Technology, a company owned by Mr. Sharma, for trading to its customers. In 1995, Mr. Sharma told Mehra "that he had lost some litigation cases against the federal government and he was barred to continue with Rajcomp, so no longer the company is going to exist so he's transferring the entire assets, stocks, staff, everything is going to be the same but the name is going to be Canara Technology from now onwards."

Mehra testified by June 1997, Megaplus "had a very healthy credit limit with Mindware . . . ." Megaplus would give Mindware a postdated check for an order. "[Mindware] would in turn supply the goods to a freight forwarder in the free zone. We would send the goods via the freight forwarder . . . [or Mindware would] send it themselves by air shipment accompanying Mega Plus' invoice to Canara Technology. [*5] And the recipient would be Mr. Rajeev Sharma there, and all the documentation [sent] to Canara Technology and Rajeev Sharma . . . ." The money to cover the postdated checks "was wire transferred to the Mega Plus account from Canara Technology." About 90 percent of the products bought by Megaplus went to Canara.

In June 1997, Megaplus placed five orders with Mindware, giving it five post-dated checks totaling $ 1,419,550. The bank refused to honor the checks due to insufficient funds. Mr. Sharma asked Mehra to "buy a few days," and shortly thereafter Mr. Sharma "cut off our total communication. He would - the five hours became 10 minutes, 10 minutes became five minutes, and five minutes became no minutes." At some point, Mr. Sharma told Mehra to "leave for India for a week" because "I'm going to need some more time to wire transfer these moneys to you so it would be better that you not be available." n1

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n1 There was obviously some tension between Mr. Sharma and Mehra. Mr. Sharma submitted a declaration in support of a motion for summary judgment stating he was merely a passive investor in MegaPlus and that Mehra handled all the details of the business. Mr. Sharma claimed to know nothing about the dishonored checks to Mindware and accused Mehra and the accountant of "removing funds from the Megaplus account for their own uses and fleeing the United Arab Emirates."

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The parties stipulated that "the entire case will rest on the alter ego issue. . . . If . . . there is no alter ego, then the case is all over. And if . . . there is alter ego, then [the court] will go on to decide damages." The parties also requested a statement of decision.

The trial court issued a statement of decision, to which Mindware did not object. The court found that "Mr. Sharma primarily utilized Megaplus to funnel cheaply priced computer goods from the middle east to his wife's company in the United States. . . . Megaplus was really just an undercapitalized extension of Mr. Sharma's person." But the court found no credible evidence to support a finding that Mr. Sharma was the alter ego for Canara. "The evidence shows that Mr. Sharma had no ownership interest in Canara. Mrs. Sharma owned all the stock and had started Canara years before the relationship between Megaplus and Mindware was formed. . . . The court finds insufficient credible evidence of Mr. Sharma's control over Canara to find that Canara was an extension of his person. At most Mr. Sharma appears to have been allowed to use Canara's offices to facilitate the transactions wherein he arranged for the purchase, [*7] shipment and payment of Mindware's products, through Megaplus."

The court also found "insufficient credible evidence" to establish a community property interest for Mr. Sharma in Canara. "The evidence didn't really address the issue of community property and the question of Mr. Sharma's possible community property interest in Canara was only mentioned in passing in argument."

The court found Mrs. Sharma had "no ownership interest in Megaplus and that she had nothing to do with running Megaplus." Thus, the first element of alter ego, i.e., "a unity of interest and ownership that the separate personalities . . . no longer exist," was not present. For the same reason, the court found that Canara was not the alter ego of Megaplus. "Canara had no ownership in Megaplus or had such a unity of interest with Megaplus that a finding of alter ego would be appropriate"

DISCUSSION

Mindware argues the trial court should have found that Mrs. Sharma and Canara were the alter egos of Megaplus and that Mr. Sharma was the alter ego of Canara. Preliminarily, we note that Mindware did not appeal from the judgment against Mr. Sharma; thus, it cannot ascribe error to the trial court's findings either [*8] for or against him.

A corporation is generally treated as a separate legal entity liable for its own debts and other obligations. However, "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." (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.) There are two prongs to the doctrine of alter ego: "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." (Ibid.) Courts will apply the doctrine only in extreme cases, after looking at the totality of the circumstances. (Ibid.)

Mindware first contends the trial court misapplied the alter ego doctrine by focusing solely on stock ownership as an indication of [*9] the first prong, i.e., unity of interest between an individual and a corporation. It correctly points out that courts have found a unity of interest with individuals who do not own any stock in the subject corporation. In Goldsmith v. Tub-O-Wash (1962) 199 Cal. App. 2d 132, 18 Cal. Rptr. 446, the court found a father liable under the alter ego doctrine for a breach of contract by the corporation, where all the stock was owned by his daughter and son-in-law. The father had paid for the stock and ran its affairs. In Goldberg v. Engelberg (1939) 34 Cal. App. 2d 10, the defendant was found to have a unity of ownership and interest in a corporation, even though all the stock was held by his sister, three daughters, and a son-in-law, because he actually ran the corporation. (See also, Minton v. Cavaney (1961) 56 Cal.2d 576, 15 Cal. Rptr. 641; Claremont Press Pub. Co. v. Barksdale (1960) 187 Cal. App. 2d 813, 10 Cal. Rptr. 214.)

Furthermore, the courts have found that one corporation can be the alter ego of another even though the former holds no stock in the latter. Where the two corporations operate as one enterprise, [*10] being controlled by the same person or family, the courts have treated them as engaged in a single business. (H.A.S. Loan Service v. McColgan (1943) 21 Cal.2d 518.) "It would be unjust to permit those who control companies to treat them as a single or unitary enterprise and then assert their corporate separateness in order to commit frauds and other misdeeds with impunity. . . . [P] . . . In effect what happens is that the court, for sufficient reason, has determined that though there are two or more personalities, there is but one enterprise; and that this enterprise has been so handled that it should respond, as a whole, for the debts of certain component elements of it." (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal. App. 3d 1220, 1250, internal quotations omitted.)

Here, however, the trial court did not rely exclusively on the lack of stock ownership to find that neither Mrs. Sharma nor Canara was the alter ego of Megaplus; rather, it relied on their lack of control over Megaplus. In its statement of decision, the court found Mrs. Sharma "had nothing to do with running Megaplus," and "the credible evidence does not [*11] support a finding that Canara controlled Megaplus or had such a unity of interest with Megaplus that a finding of alter ego would be appropriate."

Thus, the trial court applied the correct legal standard.

Mindware next contends the unity of interest and ownership test for alter ego can be satisfied by a spouse's community property interest in the business or stock owned by the other spouse. (Firstmark Capital Corp. v. Hempel Financial Corp. (9th Cir. 1988) 859 F.2d 92, 94-95.) Mindware argues the trial court erroneously required it to show that Canara and Megaplus were community property, when the burden of proof should have been on the Sharmas to establish their character as separate property.

"Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property." (Fam. Code, § 760.) Separate property of a married person includes: "(1) all property owned by the person before marriage[;] (2) all property acquired by the person after marriage by gift, bequest, devise, or descent[;] (3) the rents, issues, and profits [*12] of the property described in this section." (Fam. Code, § 770, subd. (a).) Section 760 creates a rebuttable presumption that "property acquired during marriage by either spouse other than by gift or inheritance is community property unless traceable to a separate property source. [Citation.] This is a rebuttable presumption affecting the burden of proof; hence it can be overcome by the party contesting community property status. [Citation.] Since this general community property presumption is not a title presumption, virtually any credible evidence may be used to overcome it, including tracing the asset to a separate property source, showing an agreement or clear understanding between parties regarding ownership status . . . ." (In re Marriage of Haines (1995) 33 Cal.App.4th 277, 289-290.) n2

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n2 At oral argument, counsel for respondents attempted to dismiss the community property presumption as one that applies only during property division in a dissolution of marriage. (Dorn v. Solomon (1997) 57 Cal.App.4th 650, 652.) Counsel refers to Family Code section 2581, however, not section 760, which governs the characterization of property during marriage.

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Here, the statement of decision refers to "insufficient credible evidence . . . to convince the court that [a community property] interest has been established," which Mindware argues was an erroneous application of the burden of proof. But Mindware failed to bring this defect in the statement of decision to the trial court's attention, requiring us to infer that the trial court made the necessary findings to support its determination.

A statement of decision provides a means by which an appellant can avoid the usual appellate court presumption that "[a] judgment or order of a lower court is . . . correct on appeal, and all intendments and presumptions are indulged in favor of its correctness." (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133, 275 Cal. Rptr. 797.) To do so, however, the appellant must have stated its objection to the statement of decision before the trial court. "[Code of Civil Procedure section 634] declares that if omissions or ambiguities in the statement are timely brought to the trial court's attention, the appellate court will not imply findings in favor of the prevailing party. The clear implication [*14] of this provision, of course, is that if a party does not bring such deficiencies to the trial court's attention, that party waives the right to claim on appeal that the statement was deficient in these regards, and hence the appellate court will imply findings to support the judgment." (Id. at pp. 1133-1134.)

Mindware did not inform the trial court that its statement of decision suggested the misapplication of the burden of proof on the issue of community property. Accordingly, we must presume the trial court found the Sharmas rebutted the presumption that their corporations were community property and Mindware failed to convince the court otherwise.

Mindware next argues there is insufficient evidence to support the trial court's determination that the ownership and unity of interest prong of the alter ego test was not met as to Mrs. Sharma and Canara vis-a-vis Megaplus. Our review of the record is governed by the familiar substantial evidence test: "As we have repeatedly stated, we do not reweigh evidence or reassess the credibility of witnesses. [Citation.] We have no power to judge of the effect or value of the evidence, to weigh the evidence, to consider [*15] the credibility of the witnesses, or to resolve conflicts in the evidence or in the reasonable inferences that may be drawn therefrom. [Citation.] When, as here, the evidence gives rise to conflicting reasonable inferences, one of which supports the findings of the trial court, the trial court's finding is conclusive on appeal. [Citation.]" (Johnson v. Pratt & Whitney Canada, Inc. (1994) 28 Cal.App.4th 613, 622-623, internal quotations omitted.)

Mindware points to evidence showing that the Canara account was used from time to time to pay the Sharma's personal expenses. It also points to evidence that communications from Megaplus to Canara were often addressed to Mr. Sharma, not Mrs. Sharma. But there is no evidence that either Mrs. Sharma or Canara controlled Megaplus so that their personalities became as one, the critical factor in the application of alter ego.

Likewise, Mindware points to evidence supporting the conclusion that Canara and Megaplus were operated as a single enterprise. It cites Canara's answers to Mindware's requests for admission, in which Canara admitted that the "CANARA DEFENDANTS" (defined as Canara, Mr. Sharma and Mrs. Sharma collectively) [*16] "received the SUBJECT GOODS from Megaplus[,] [P] . . . [P] sold the SUBJECT GOODS after obtaining them from Megaplus[,] [P] [and] received valuable consideration for the sale of the SUBJECT GOODS." It also cites Mehra's testimony that Mr. Sharma controlled both Megaplus and Canara and that Megaplus made no profit on the goods it sold to Canara.

The trial court acknowledged "Mr. Sharma primarily utilized Megaplus to funnel cheaply priced computer goods from the middle east to his wife's company in the United States." And it found Mr. Sharma "controlled the purchase of Mindware goods by Megaplus and their delivery to Canara," thus making it inequitable to shield him from the acts of Megaplus. But it believed Mr. and Mrs. Sharma's testimony that neither of them controlled both Megaplus and Canara. Because there was no common control between the two corporations, the trial court found that equity did not require the extension of the alter ego doctrine to Canara.

The application of the alter ego doctrine is an equitable remedy, dependent on the circumstances of each case. "Because it is founded on equitable principle, application of the alter ego 'is not made to depend upon [*17] prior decisions involving factual situations which appear to be similar. . . . It is the general rule that the conditions under which a corporate entity may be disregarded vary according to the circumstances of the each case. [Citations.] Whether the evidence has established that the corporate veil should be ignored is primarily a question of fact which should not be disturbed when supported by substantial evidence." (Las Palmas Associates v. Las Palmas Center Associates, supra, 235 Cal. App. 3d at p. 1248.)

Mindware argues the evidence shows a common intent between and among Mrs. Sharma, Canara, Mr. Sharma, and Megaplus, thus establishing a conspiracy. But the parties stipulated the case would stand or fall on the issue of alter ego. The court made no findings on the issue of conspiracy, and it is not before us.

DISPOSITION

The judgment is affirmed. Respondents are entitled to costs on appeal.

SILLS, P. J.

WE CONCUR:

MOORE, J.

FYBEL, J.

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