Daily Archives: May 22, 2020

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Adding Alter Ego Defendants to a Judgment

The alter ego doctrine is one of the few ways to pierce the corporate veil and impose liability against the principles of a corporate entity with limited liability, e.g. corporations, LLCs, LLPs, etc. If proven, an alter ego of a defendant is liable to the same extent as the defendant. In many cases, allegations of alter ego are litigated in the same complaint against the primary defendant. A plaintiff may also obtain a judgment against a defendant, and then later in the same case file a motion under Code of Civil Procedure section 187 to amend the judgment and add the defendant’s alter ego.

In Lopez v. Escamilla, (2020) 48 Cal.App.5th 763, plaintiff obtained a judgment against a corporation and then filed a separate action to amend the judgment to add the corporation’s alter ego. The trial court dismissed the action, believing that adding an alter ego defendant must be done by motion in the original action. The Court of Appeal reversed and found either a motion or a separate action may be serve as the vehicle to add an alter ego defendant.

The court in Jara held that, while “the alleged payment of excessive compensation did have the potential of damaging the business,” the plaintiff stated an individual cause of action against the majority shareholders because he alleged the payment of executive compensation “was a device to distribute a disproportionate share of the profits to the two officer shareholders during a period of business success.” (Jara, supra, 121 Cal.App.4th at p. 1258.) … Unlike the plaintiff in Jara, Leonard did not allege Michael and Joseph retained a disproportionate share of the Sage Automotive Group’s value; he alleged Michael and Joseph destroyed the value of the businesses for all of the shareholders (and members and partners). The court awarded Leonard damages based on the overall diminution in value of the Sage Automotive Group, not the difference in value between Leonard’s shares in the Group and those of Michael and Joseph. (Schrage, supra, 69 Cal.App.5th at pp. 156-156.)

The court further held that a separate action to add a defendant to the judgment was not barred by the statute of limitations on the underlying claim.

The allegations in Leonard’s first amended complaint, the basis and calculation of Leonard’s damages at trial, and the court’s findings show that the gravamen of Leonard’s action was injury to the Sage Automotive Group and the “whole body of its stock and property” and that Leonard sought to, and ultimately did, recover damages for injuries to the entities. … Indeed, Leonard’s primary complaint was that his brothers’ mismanagement (including by driving him out of the Sage Automotive Group) squandered the Sage Automotive Group’s assets and ultimately led to its demise. That is a derivative claim.

If the same objective may be obtained with either a motion or a separate action, which one is better? Proceeding with a Section 187 motion in the same action is likely quicker, avoids further filing fees, and will probably be heard by the same judge already familiar with the case. On the other hand, a separate lawsuit may afford a better opportunity to take discovery and will likely provide more protections against the possibility of a hasty, erroneous decision than in the summary motion proceeding. Further, since a separate complaint to add an alter ego defendant would be an “action at law” on the judgment, the defendant may not be able to assert the same equitable defenses available in Section 187 motions. (See Highland Springs Conference & Training Center v. City of Banning (2016) 244 Cal.App.4th 267, 288 [“An action on a judgment is an action at law, and the defense of laches may not be raised in actions at law, including an action on a judgment.”].)