Defending Phony Alter Ego Allegations in Real Estate Litigation

Author: David Kahn

Guest Editor: Robert Bernstein

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February 11, 2020 3:22pm

Frequently in real estate/premises liability litigation the plaintiff will allege the corporate entity holding title to the property in question is acting as the “alter ego” of an individual corporate representative, in an effort to hold the representative personally jointly and severally liable for any judgment against the corporation. This is commonly referred to as “piercing the corporate veil.” Typically, the allegations will be completely “manufactured” and alleged based on “information and belief” with no good faith basis in fact whatsoever. Defending these allegations requires a three-pronged attack, including raising the appropriate affirmative defenses, conducting appropriate discovery, and filing a dispositive motion.

Alter Ego Allegations

California courts are notoriously liberal in removing corporate distinctions notwithstanding the internal affairs doctrine followed in most states, which applies the law of the state of incorporation to alter ego claims. See (Oncology Therapeutics Network Connection v. Virginia hematology Oncology PLLC 2006 WL 334562, not reported in F. Supp. 2d). Alter ego allegations will typically include a combination of the following charges: The corporate agent was the sole owner of the corporation (including limited liability corporations); the corporate agent dominated and controlled the corporation; the corporate agent co-mingled personal funds with the corporation; the corporation lacked sufficient assets to pay its debts and liabilities; and the corporate agent used the corporation as a shield to engage in tortious activity. Additional allegations may also include employment of the same employees or attorneys by both the corporation and the corporate agent, use of the same office or business location, failure to maintain adequate corporate records, and ownership of stock invested in only one individual or family member.

Affirmative Defenses

The key affirmative defense to alter ego allegations is found in California Corporations Code, Section 317. This section generally provides for corporate indemnification of corporate agents, such as officers, directors and employees, who are parties to threatened or pending litigation against the corporation. A finding that the corporation in question was acting as an alter ego effectively extinguishes this indemnification. Additional affirmative defenses may also apply depending on the underlying tort alleged against the corporation and the specific alter ego allegations.

Discovery

Written discovery, including contention interrogatories, should be propounded on the party making the alter ego allegations, typically the plaintiff. The interrogatories should ask the alleging party to state all facts, witnesses and documents which support the alter ego allegations. The goal is to obtain discovery responses which are utterly devoid of facts, to use in support of a potential dispositive motion. See (Union Bank v. The Superior Court Of Los Angeles County [Demetry] (1995)31 Cal. App. 4th 573). A deposition of the person most knowledgeable from the party making the alter ego allegations can accomplish the same goal, assuming the witness cannot provide competent testimony to support the alter ego allegations.

Dispositive Motion

Phony alter ego allegations may be disposed of either by a motion for summary judgment or adjudication of issues, or by a motion for sanctions pursuant to California Code of Civil Procedure, Section 128.7.

A. Summary Judgment or Adjudication of Issues

A motion for summary judgment, which disposes of an entire case, or summary adjudication of issues, which disposes of one or more issues or causes of action, is authorized by California Code of Civil Procedure, Section 437c. The most effective way to dispose of phony alter ego allegations is to summarily adjudicate the entire action against the corporation, however, in many instances this may not be possible, because the existence of disputed “issues of material fact.”

Alternatively, depending on how the alter ego allegations are plead in the complaint or cross-complaint, a motion for summary adjudication may be proper. If the alter ego allegations are raised as a separate cause of action, for example Declaratory Relief, a motion for summary adjudication may be appropriate. In the alternative, if the alter ego allegations are made in connection with the underlying tort or contract claim, subdivision (s) of 437c, which allows for summary adjudication of a legal issue, may be useful provided the parties stipulate to having the issue heard and obtain an order of the court authorizing the motion based on judicial economy.

An important consideration in determining whether to bring a summary adjudication motion is the potential for opening the door to unwanted financial discovery of a defendant, such as accounting and tax records. Such discovery can be extremely burdensome and invasive. Another consideration in bringing a motion for summary adjudication is the burden of proof requirement. In order to make a prima facia showing sufficient to shift the burden to the party making the alter ego allegations, California case law requires more than a supporting declaration denying the allegations. See (Krantz v. BT Visual Images, LLC (2001) 89 Cal. App. 4th 164, 173). This is where the discovery discussed above comes into play. Responses to written discovery requests which are devoid of supporting facts and evidence, and presumably similar deposition testimony from the party making the alter allegations, is necessary to successfully dispose of alter ego allegations by summary proceedings.

B. Motion For Sanctions Pursuant To 128.7

Another approach to dealing with phony alter ego allegations is to file a motion for sanctions against the filing attorney pursuant to California Code of Civil Procedure, Section 128.7. As set forth in Section 128.7(b) an attorney who presents a pleading to the court is certifying, among other things, that the allegations and factual contentions have evidentiary support or are likely to have evidentiary support after a reasonable opportunity for discovery. Section 128.7 authorizes a motion for sanctions against the attorney/law firm who filed a complaint without an evidentiary basis to support the factual allegations therein.

The statute has a built-in twenty-one (21) day safe harbor, meaning the motion must be served on the other party but not filed with the court until the safe harbor period has elapsed. The intent is to encourage the party who filed the frivolous complaint to withdraw or correct the challenged contention or allegation. The court has broad discretion in ruling on such a motion to impose sanctions, which could include reimbursing defendant’s attorney fees or dismissal of the action, claim, allegation as supported by case law authority. See (Peake v. Underwood (2014) 227 Cal. App. 4th 428.  It should also be noted that a party filing a frivolous 128.7 motion for sanctions to harass, cause delay or increase litigation expense may itself be subject to sanctions. (128.7(h)).

Conclusion

As set forth above, there are several ways to defend phony alter ego allegations. The first step is to raise appropriate affirmative defenses. The next step depends on the specific circumstances of the case. A motion for summary adjudication requires consideration of the defendant client’s appetite for responding to potentially invasive and burdensome discovery and developing factually devoid evidence from the plaintiff.  In most instances a motion for sanctions pursuant to 128.7 is the most efficient means of dealing with the allegation, because it does not require the defendant to prove a negative and because it places significant pressure on the plaintiff to decide if the alter ego allegations are worth pursuing in the absence of supporting evidence.

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