Can an Alter Ego Defendant be Added to a Judgment in California?

This issue was the subject of the recent decision in Hacker v. Fabe, where the trial court granted a motion by the Labor Commissioner to amend a judgment to add Ron Hacker as an alter ego judgment debtor.

Hacker appealed and contended there was “virtually no evidence” he commingled his assets or operations with those of the judgment debtor; the original judgment was not renewed during the 10-year limitation period; the doctrine of laches bared the alter ego motion; and the denial of an earlier alter ego motion barred the current motion under res judicata principles.

The appellate court found that Hacker’s arguments lacked merit and affirmed the trial court’s order and judgment.

The litigation began in 2005, when Jacqueline Fabe, an attorney, filed a claim for unpaid wages with the Labor Commissioner against her employer, 1538 Cahuenga Partners, LLC (Cahuenga or the company). Fabe obtained an award of almost $13,000.

A month after Fabe filed her claim, Cahuenga and its principal, Hacker, filed a malpractice suit against Fabe. Fabe filed a retaliation claim with the Commissioner. She prevailed on her retaliation claim, and the Commissioner sued Cahuenga, seeking damages (Fabe’s defense costs) for the illegal retaliation. Fabe also cross-complained in the malpractice suit, seeking indemnity for her legal expenses.

Later, an amended judgment was entered in favor of the Commissioner for more than $297,000, plus interest, and in favor of Fabe for more than $101,000 (to be offset against any recovery by the Commissioner).

For years thereafter, the Commissioner and Fabe sought to enforce the judgment, without success.

In 2020, the Commissioner filed a motion to amend the judgment to add Mr. Hacker as the alter ego of Cahuenga. The motion stated the approaching 10-year anniversary of the judgment prompted the Commissioner to seek to amend that judgment in order to create the possibility of obtaining some justice for Fabe.

The court entered the second revised amended judgment adding Hacker as an alter ego judgment debtor.

The essence of the alter ego doctrine is that justice be done. What the formula comes down to, once shorn of verbiage about control, instrumentality, agency, and corporate entity, is that liability is imposed to reach an equitable result.

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.

Under the alter ego doctrine, then, when the corporate form is used to perpetuate 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.

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.

Factors for the trial court to consider include the commingling of funds and assets of the two entities, identical equitable ownership in the two entities, use of the same offices and employees, disregard of corporate formalities, identical directors and officers, and use of one as a mere shell or conduit for the affairs of the other. No one characteristic governs, but the courts must look at all the circumstances to determine whether the doctrine should be applied.

The court cited Hacker’s complete control over Cahuenga, his control of the litigation, his sharing of attorneys with Cahuenga, his transfer of the company immediately after the judgment, and his destruction of relevant records of assets.

It is reasonable to infer from Hacker’s manipulation of the company and destruction of its records that the separate personalities of the corporation and the shareholder do not in reality exist.

The essence of the alter ego doctrine is that justice be done, and Hacker did show no abuse of discretion in the trial court’s alter ego ruling.

Hacker next argued that the judgment was not renewed within the 10-year renewal period, and so had expired and cannot be enforced. He was mistaken.

A judgment is enforceable “upon entry” and “upon the expiration of 10 years after the date of entry of a money judgment,” the judgment “may not be enforced”.

The Commissioner filed an alter ego motion to amend the judgment before the 10-year renewal period had expired.

Hacker wrongfully contended the 10 years run from the date of the original judgment.

When an amended judgment is entered, the 10-year period within which the judgment must be enforced or renewed commences upon the date of entry of the amended or modified judgment.

If, in light of the lapse of time and other relevant circumstances, a court concludes that a party’s failure to assert a right has caused prejudice to an adverse party, the court may apply the equitable defense of laches to bar further assertion of the right.

For purposes of laches, a defendant has been prejudiced by a delay when the defendant has changed his position in a way that would not have occurred if the plaintiff had not delayed.

Hackers unsupported assertions did not establish either unreasonable delay or prejudice.

LESSONS:

1.         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.

2.         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.

3.         Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone.

4.         The essence of the alter ego doctrine is that justice be done.