TOHO-TOWA CO., LTD., Plaintiff and Respondent, v. MORGAN CREEK PRODUCTIONS, INC., Defendant and Appellant.
No. B242095
Second Dist., Div. Five.
July 11, 2013
217 Cal. App. 4th 1096
Glaser Weil Fink Jacobs Howard Avchen & Shapiro, Patricia L. Glaser and Joel N. Klevens for Defendant and Appellant.
Greenberg Glusker Fields Claman & Machtinger and Charles N. Shephard for Plaintiff and Respondent.
OPINION
O‘NEILL, J.*—Morgan Creek Productions, Inc. (MCP), a Delaware corporation with its principal place of business in Los Angeles, appeals the trial court‘s order adding it to a judgment for more than $5.7 million which Toho-Towa Co., Ltd., a Japanese company (Toho-Towa) was awarded against two MCP-affiliated companies, Morgan Creek International B.V., a Netherlands company (B.V.), and Morgan Creek International Ltd., a Bermuda corporation (Ltd.). MCP maintains that the trial court erred in ruling that the three business entities constituted a single business enterprise for purposes of imposing alter ego liability on MCP for the debts of B.V. and Ltd. We conclude that the ruling is supported by substantial evidence. MCP also contends that the trial court abused its discretion in failing to set aside its ruling pursuant to
FACTUAL AND PROCEDURAL BACKGROUND2
In 2005, Toho-Towa negotiated with MCP to acquire Japanese distribution rights to the MCP-produced motion picture The Good Shepherd (Universal
Pursuant to the terms of the distribution agreement, by the end of October 2008, B.V. owed Toho-Towa approximately $4.5 million in connection with expenses it had advanced to distribute the Picture. On October 31, 2008, Toho-Towa submitted its invoice to B.V. requesting payment of this amount. On November 13, 2008, Toho-Towa‘s invoice to B.V. was forwarded to MCP‘s chief financial officer, Gary Stutman. On December 3, 2008, Mr. Stutman advised Toho-Towa by e-mail that he was “speaking with our owner, Mr. Jim Robinson, re the payment date.” The invoice was never paid.
On April 22, 2009, Toho-Towa initiated a JAMS arbitration against B.V. and Ltd., based on B.V.‘s failure to pay the reimbursable costs represented in the October 31, 2008 invoice. MCP‘s in-house counsel, Don Hardison, retained Attorney Alan Gutman to represent B.V. and Ltd. in the arbitration. Mr. Hardison reviewed the pleadings, consulted with Mr. Gutman on strategy, reviewed and approved Mr. Gutman‘s bills, and forwarded them to MCP‘s chief financial officer for payment.
The arbitrator entered a final arbitration award in favor of Toho-Towa against B.V. and Ltd. in the amount of $5,233,386. A three-judge JAMS appellate panel unanimously affirmed the arbitration award. On Toho-Towa‘s motion, the award was confirmed as a judgment on June 23, 2011. With interest and attorneys’ fees, the amount of the judgment was $5,741,536.
Neither B.V. nor Ltd. satisfied the judgment entered against them.
In the fall of 2011, Toho-Towa took examinations under oath, pursuant to
Toho-Towa‘s motion, filed on December 30, 2011, was supported by a memorandum of points and authorities, the declarations of its California counsel Charles Shephard, its Dutch counsel Frederic Verhoeven, its president Hiroyasu Matsuoka, and its employee Yusuke Horiuchi. These declarations form the basis of the evidence presented in support of the motion, the contents of which are discussed below.
MCP filed its opposition to the motion, together with its memorandum of points and authorities, objections to the declarations of Messrs. Shephard, Verhoeven, Matsuoka and Horiuchi, and a request that the court take judicial notice of the fact that MCP is a Delaware corporation, on January 20, 2012. MCP submitted no declarations to counter the evidence provided by Toho-Towa.
On February 3, 2012, the court began the hearing on the motion by announcing its tentative decision to add MCP to the judgment. The court found the following factors relevant to its conclusion that MCP was the alter ego of B.V. and Ltd., based on the declarations Toho-Towa submitted with its motion:3
- The entities were all owned by the same person, James Robinson.
- Mr. Robinson was the only person with authority to resolve the dispute with Toho-Towa.
- Ltd. had no employees and no bank account.
- B.V.‘s financial arrangements were structured so that it never received any money. Rather, all of B.V.‘s licensing income went directly to Ltd.‘s lender.
Employees of MCP negotiated the foreign licensing deals on behalf of the other Morgan Creek entities. - Brian Robinson, the owner‘s son, sold television rights for the international film library owned by Ltd., even though he was not employed by Ltd. or B.V.
- Don Hardison, MCP‘s general counsel, handled the legal affairs of Ltd. and B.V., including drafting contracts and providing legal consultation, though he was not employed by either of these companies.
- Gary Stutman, MCP‘s chief financial officer, who was not employed by Ltd., provided financial services to Ltd. at least once a month, while MCP‘s in-house accountants routinely prepared Ltd.‘s financial statements.
- MCP had control over the underlying arbitration, by selecting counsel, receiving legal bills, reviewing pleadings, consulting on strategy decisions, and designating one of its own officers as the person most knowledgeable as to why B.V. and Ltd. did not pay the money they owed to Toho-Towa.
In response to the court‘s tentative decision, MCP‘s counsel complained that Toho-Towa did not raise the “single enterprise” theory as a basis for imposing liability on MCP for the debts of B.V. and Ltd. until its reply papers. Consequently, the trial court granted MCP the opportunity to address the sole issue of the single enterprise theory as a basis for alter ego liability. The hearing on the section 187 motion was continued until March 16, 2012.
MCP filed its supplemental brief addressing the single enterprise form of alter ego liability on February 15, 2012. Again, no evidence was submitted in support of MCP‘s position.
On March 13, 2012, Mr. Gutman substituted out as MCP‘s counsel, and its current counsel, Glaser Weil Fink Jacobs Howard Avchen & Shapiro LLP, substituted in. The next day, MCP applied ex parte to continue the hearing on Toho-Towa‘s motion to add a judgment debtor, and to introduce additional evidence. The declaration of Charles L. Bauermann, MCP‘s outside accountant, was submitted in support of the ex parte application. Among the matters to which Mr. Bauermann attested were the capitalization, assets, and financial status of Ltd. at the time the distribution agreement was executed; that the three companies had separate board meetings, different directors and officers,
At the continued hearing on the section 187 motion, held on March 16, 2012, the court summarized the procedural history of this matter, including the ex parte application, and indicated that it had “considered all the papers and supplemental briefs.” The court quoted from Toho-Towa‘s original papers filed with its motion: “‘The evidence is overwhelming that the three Morgan Creek entities are the alter egos of each other and function as a single, unified enterprise under the ownership and control of a single individual, James G. Robinson.‘” The court continued, “Also in the papers on page 7, and I quote, ‘Here, the evidence is overwhelming that the various Morgan Creek entities were part of a single enterprise.’ Thus Morgan Creek‘s claim is not persuasive that it did not know that Toho-Towa‘s alter ego claim was based on a single enterprise theory.” In short, the court concluded that the supplemental briefing was unwarranted, and did not cause the court to change its tentative decision.
From the evidence before it, the trial court concluded that B.V. and Ltd. were corporate shells which existed solely for contracting and asset-holding purposes to shield MCP from liability. Consequently, the court made final “without change” its tentative ruling of February 3 granting Toho-Towa‘s motion to add MCP to its judgment against B.V. and Ltd.
After the trial court granted the section 187 motion, MCP‘s counsel asked for clarification regarding the evidence the court considered in coming to its decision: “Do I correctly understand from the court‘s ruling that the court has declined to review the declaration of Mr. Bauermann that was filed with the ex parte application?” The court responded, “The court‘s reviewed everything, counsel.” The court then reminded counsel that the hearing was not continued in order to allow MCP to reargue the motion, but solely for the purpose of addressing the supplemental matter of the single enterprise theory. MCP‘s counsel inquired, “And by the ‘supplemental matter,’ you mean Mr. Bauermann‘s declaration,” to which the court replied: “No. The supplemental matter was the hearing that the court allowed on the single enterprise because counsel had indicated, and the court allowed supplemental briefing with respect to the issue dealing with the single enterprise.”
On April 16, 2012, MCP filed its motion to be relieved from judgment pursuant to
MCP timely appealed both the order adding it as a judgment debtor, and the order denying its section 473 motion.
DISCUSSION
Preliminarily, we must resolve the parties’ disagreement about what evidence is properly before us on this appeal. MCP relies on the declarations of Mr. Bauermann, submitted with its ex parte application, and Messrs. Bauermann and Robinson, submitted in support of the section 473 motion, in its “Statement of Facts” in its opening brief. Toho-Towa contends that, while this evidence was filed in the trial court and considered by that court in ruling on the ex parte application and the section 473 motion, because the trial court denied MCP‘s request to present additional evidence, and the section 473 motion was not heard until after MCP was added to the judgment, MCP may rely on the evidence contained in those declarations only in connection with the appeal of the rulings for which they were submitted. And, according to Toho-Towa, because MCP does not appeal the ruling on the ex parte application, the contents of the Bauermann declaration submitted in support of that application provides no evidence which MCP may use in its arguments on appeal. We agree.
The trial court unequivocally denied MCP‘s request to present additional evidence in connection with Toho-Towa‘s section 187 motion. Thus, Mr. Bauermann‘s declaration was not before the trial court and could not provide a basis for that court‘s ruling. MCP nevertheless argues that, because the Bauermann declaration was filed with the court and is included in the appellant‘s appendix, and the court stated that it had read and considered all papers filed in support of MCP‘s application, it was part of the record below, and may properly be cited by MCP. We reject this argument.
When a trial court rules that a party may not present certain evidence, the party may, of course, cite the evidence to challenge that ruling. In the absence of a challenge to the ruling, however, it should go without saying that the excluded evidence, though part of the “record on appeal” (see
MCP‘s argument with respect to the Bauermann and Robinson declarations submitted in support of its section 473 motion is similarly unavailing. MCP contends that it is entitled to cite to the section 473 declarations not only in connection with the order denying its section 473 motion but also the order adding it as a judgment debtor under
Perhaps the first rule of appellate practice is that a ruling of the trial court may be reversed on appeal only if the trial court erred. A trial court‘s failure to consider evidence not before it (such as Mr. Robinson‘s May 22, 2012 declaration when the court issued its Mar. 16, 2012 order) is not, and cannot be, error.
1. Alter ego liability
The authority of a court to amend a judgment to add a nonparty alter ego as a judgment debtor has long been recognized. (See Mirabito v. San Francisco Dairy Co. (1935) 8 Cal.App.2d 54, 60.) “The ability under
We begin with the alter ego doctrine. “Ordinarily, a corporation is regarded as a legal entity separate and distinct from its stockholders, officers and directors. Under the alter ego doctrine, however, where a corporation is used by an individual or individuals, or by another corporation, to perpetrate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the corporation‘s acts as if they were done by the persons actually controlling the corporation. [Citations.] ...’ [Citation.]” (Robbins v. Blecher (1997) 52 Cal.App.4th 886,
“‘Usually, a disregard of the corporate entity is sought in order to fasten liability upon individual stockholders....‘” (Las Palmas, supra, 235 Cal.App.3d at p. 1249, quoting McLoughlin v. L. Bloom Sons Co., Inc. (1962) 206 Cal.App.2d 848, 851.) One such scenario might be where an individual incorporated her business, thereby immunizing herself from the business‘s debts, but failed to treat the corporation as a separate entity and instead continued to operate the business as a sole proprietorship. Such liability will be found to exist where there is such a unity of interest between a corporation and its shareholder that separateness has ceased, yielding an inequitable result. (9 Witkin, Summary of Cal. Law (10th ed. 2005) Corporations, §§ 9–15, pp. 785–794 (Witkin); Institute of Veterinary Pathology, Inc. v. California Health Laboratories, Inc. (1981) 116 Cal.App.3d 111, 119.) Undercapitalization of the business, commingling of corporate and personal funds, and failure to observe the corporate formalities are examples of business practices that would leave individual shareholders vulnerable to a finding of alter ego liability. (See generally Witkin, supra, Corporations, §§ 9–15, pp. 785–794.)
A court may also disregard the corporate form in order to hold one corporation liable for the debts of another affiliated corporation when the latter “‘“is so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation.“‘” (Las Palmas, supra, 235 Cal.App.3d at p. 1249, italics omitted, quoting McLoughlin v. L. Bloom Sons Co., Inc., supra, 206 Cal.App.2d at p. 851.) Thus, where there is “such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal” (1 Fletcher, Cyclopedia of the Law of Corporations, § 43), the affiliated corporations may be deemed to be a single business enterprise, and the corporate veil pierced. “Under the ‘single business enterprise’ doctrine,
In California, common principles apply regardless of whether the alleged alter ego is based on piercing the corporate veil to attach liability to a shareholder or to hold a corporation liable as part of a single enterprise.4 In both cases, “[t]he law as to whether courts will pierce the corporate veil is easy to state but difficult to apply.” (Talbot v. Fresno-Pacific Corp. (1960) 181 Cal.App.2d 425, 432.) Because it is founded on equitable principles, application of the alter ego “is not made to depend upon 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 each case.‘” (McLoughlin v. L. Bloom Sons Co., Inc., supra, 206 Cal.App.2d [at p.] 853 . . . ; see Stark v. Coker (1942) 20 Cal.2d 839, 846; Jack Farenbaugh & Son v. Belmont Construction, Inc. (1987) 194 Cal.App.3d 1023, 1033.) 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. (Jack Farenbaugh & Son v. Belmont Construction, Inc., supra, at p. 1032.)” (Las Palmas, supra, 235 Cal.App.3d at p. 1248.)
“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
Appellant maintains that “almost none” of the factors relevant to the single enterprise theory of alter ego analysis are present in this case. There is substantial evidence for the trial court‘s finding that MCP, B.V. and Ltd. were part of a single business enterprise: The entities were all owned by the same person, who was the sole decision maker for all of the Morgan Creek entities; the three entities exploited the same assets; the “work” of B.V. and Ltd. was performed by the employees of MCP, so that Brian Robinson negotiated distribution deals on behalf of, Don Hardison provided legal services to, and Gary Stutman provided financial services to, B.V. and Ltd., though not employed by them; and although B.V. entered into contracts which required that monetary payments be made to them, no money was remitted, but rather was transferred directly to Ltd.‘s lender. This evidence supports the trial court‘s conclusion that the Morgan Creek entities, though formed as separate corporations, were operated with integrated resources in pursuit of a single business purpose, and that MCP so dominated the finances, policies and practices of B.V. and Ltd. that the latter had no separate “mind, will or existence” of their own, but were merely conduits through which MCP conducted its business.
There is also substantial evidence for the court‘s conclusion that it would be inequitable to uphold B.V.‘s separate existence under the circumstances of this case. Toho-Towa negotiated the distribution rights to the Picture with MCP. When that negotiation was concluded, MCP told Toho-Towa that the contract would actually be with B.V., not MCP, because this was how MCP conducted its distribution business. MCP assured Toho-Towa that there would be sufficient assets to pay Toho-Towa any monies due under the agreement. Toho-Towa was not told and did not know that B.V.‘s financial operations were structured by MCP in such a way that it never received any money from its licensees, and thus would not have funds to meet its payment obligations under the agreement. In sum, it would be inequitable to permit MCP, the alter ego of B.V., to shift liability to B.V. after ensuring that B.V. would have no funds to pay its debts.5 These factors combined fulfill the requirements for the use of the single enterprise doctrine to disregard the corporate form in this case.
The cited cases do not support MCP‘s position. In NEC Electronics Inc. v. Hurt, supra, 208 Cal.App.3d 772, after answering the complaint, the defendant “let the matter proceed uncontested.” (Id. at p. 780.) The defendant “did not appear at trial and did not make any attempt to defend the NEC lawsuit.” (Ibid.) In effect, the matter proceeded as if it were a default. Similarly, in Katzir‘s Floor & Home Design, Inc. v. M-MLS.com, supra, 394 F.3d 1143, the matter did proceed as a default, with no defense being provided in the underlying case. (Id. at p. 1147.)
Such was not the situation here. Toho-Towa‘s arbitration claims were contested: B.V. and Ltd. filed a responsive pleading, participated in discovery, opposed summary judgment, and pursued a JAMS appeal. Not only was a defense provided, but it was provided courtesy of MCP, which retained counsel, consulted with counsel on strategy, supervised the arbitration, and paid the legal fees. These facts amount to substantial evidence that MCP controlled the underlying litigation. As Toho-Towa observes, quoting from a similar case: “There was no showing below, and there is not the slightest suggestion in the briefs of appellants, that anyone, other than [the alter ego], had control of the litigation. Who else had authority to employ attorneys and provide for the expense? Who else was interested in the fate of the corporation? If not [the alter ego], who else? Appellants do not say. Manifestly, [the alter ego] had control of the defense of the action by [the primary defendant].” (Schoenberg v. Romike Properties (1967) 251 Cal.App.2d 154, 168.)
In sum, substantial evidence supports the trial court‘s order adding MCP to Toho-Towa‘s judgment against B.V. and Ltd.
2. Denial of motion to set aside the judgment
MCP contends that the trial court abused its discretion in denying its section 473 motion.
MCP based its section 473 motion on two separate grounds: Its attorney‘s mistake of law, and its attorney‘s excusable neglect.
With respect to the former ground for relief: “It is well settled that relief may be granted for mistake of law by a party‘s attorney. (See 8 Witkin, [Cal. Procedure,] supra, § 150, p. 551.) An honest mistake of law is a valid ground for relief where a problem is complex and debatable. (A & S Air Conditioning v. John J. Moore Co. (1960) 184 Cal.App.2d 617, 620.) The issue of which mistake of law constitutes excusable neglect presents a question of fact. The determining factors are the reasonableness of the misconception and the justifiability of lack of determination of the correct law. (Fidelity Fed. Sav. & Loan Assn. v. Long (1959) 175 Cal.App.2d 149, 154.)” (Brochtrup v. Intep (1987) 190 Cal.App.3d 323, 329.)
MCP described the mistake of law as follows: “MCP‘s prior counsel, Alan Gutman, found no authority that expressly stated that MCP‘s Opposition to Petitioner‘s Motion to add MCP as a judgment debtor as an alter ego of [Ltd.] and [B.V.] required admission of evidence by MCP.6 Mr. Gutman‘s mistaken understanding of this complex and debatable issue of law . . . caused Mr. Gutman to neglect to investigate facts to support MCP‘s Opposition. . . . [] Instead, Mr. Gutman incorrectly presumed that, because Petitioner bore the burden of proving alter ego liability, MCP did not need to introduce evidence of its own to rebut Petitioner‘s evidence. Mr. Gutman also mistakenly failed to appreciate that MCP‘s failure to introduce evidence of its own could lead the Court to infer that no helpful evidence existed. As a result of Mr. Gutman‘s good faith belief that MCP did not bear the burden of rebutting Petitioner‘s evidence, MCP did not introduce evidence in support of its Opposition.”7 In sum, the motion argued that MCP‘s counsel did not know
Alternatively, MCP argued that its failure to introduce “compelling evidence to show that it is not the alter ego of [Ltd.] or [B.V.], . . . [e]vidence, which was available to MCP, but which Mr. Gutman mistakenly failed to obtain and offer into evidence. . .” constituted excusable neglect under
“‘A party who seeks relief under section 473 on the basis of mistake or inadvertence of counsel must demonstrate that such mistake, inadvertence, or general neglect was excusable because the negligence of the attorney is imputed to his client and may not be offered by the latter as a basis for relief.’ (Generale Bank Nederland v. Eyes of the Beholder Ltd. (1998) 61 Cal.App.4th 1384, 1399.) In determining whether the attorney‘s mistake or inadvertence was excusable, ‘the court inquires whether “a reasonably prudent person under the same or similar circumstances” might have made the same error.’ [] (Bettencourt v. Los Rios Community College Dist. (1986) 42 Cal.3d 270, 276, italics added.) In other words, the discretionary relief provision of section 473 only permits relief from attorney error ‘fairly imputable to the client, i.e., mistakes anyone could have made.’ (Garcia v. Hejmadi (1997) 58 Cal.App.4th 674, 682.) ‘Conduct falling below the professional standard of care, such as failure to timely object or to properly advance an argument, is not therefore excusable. To hold otherwise would be to eliminate the express statutory requirement of excusability and effectively eviscerate the concept of attorney malpractice.’ (Ibid.)” (Zamora v. Clayborn Contracting Group, Inc. (2002) 28 Cal.4th 249, 258; see Garcia v. Hejmadi, supra, 58 Cal.App.4th at p. 683.) The failure to introduce readily available, compelling evidence which supports the client‘s position that it is not the alter ego of a sister corporation with a $5.7 million outstanding judgment is not a mistake that a reasonably prudent person in the same circumstances might have made but rather conduct falling below the professional standard of care. Consequently, the trial court acted within its discretion in denying MCP‘s section 473 motion based on its attorney‘s excusable neglect.
The judgment is affirmed.
Mosk, Acting P. J., and Kriegler, J., concurred.