DEPARTMENT 37 LAW AND MOTION RULINGS
CASE NAME: Larrios v. Freis, et al.
CASE NO.: BC581957
HEARING DATE: 11/18/16
DEPARTMENT: 37
CALENDAR NO.: 7
TRIAL DATE: 12/6/16
NOTICE: OK
SUBJECT: Motion for Summary Judgment or Adjudication of Issues
MOVING PARTY: Defendant Jon H. Freis, a self-represented litigant
OPPOSING PARTY: Plaintiff Jose Felix Cabrera Larrios
COURT?S TENTATIVE RULING
The motion for summary judgment is denied. The motion for summary adjudication is denied. The evidentiary objections are overruled in part and sustained in part, as set forth below. Counsel for Plaintiff to give notice.
STATEMENT OF THE CASE
This action arises out of a $189,593.20 judgment entered in favor of Plaintiff Jose Felix Cabrera Larrios against Defendant National Realty & Management Company, Inc. (NRMC) on August 23, 2010 (Case No. BC401553). As set forth in the complaint, the facts of the case are as follows. Plaintiff alleges that he and other tenants of the premises located at 727 S. Coronado Street in Los Angeles filed suit against NRMC seeking redress for years of living in uninhabitable apartment units. Plaintiff alleges that Defendant Jon H. Freis is the sole shareholder and agent of NRMC, and that Mr. Freis fraudulently transferred NRMC?s assets to avoid paying the judgment and caused NRMC to go out of business. Plaintiff also alleges that Defendant 727 Coronado Street, LLC obstructed Plaintiff?s efforts to satisfy the judgment by claiming a right to the funds in NRMC?s bank account. During the course of a judgment debtor examination, Mr. Freis allegedly testified to facts demonstrating that he is the alter ego of NRMC. Plaintiff subsequently filed this action asserting causes of action for 1) declaratory relief, and 2) enforcement of the judgment against Mr. Freis.
DISCUSSION
I. Legal Standard
The law of summary judgment provides courts ?a mechanism to cut through the parties? pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their dispute.? (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843.) In reviewing a motion for summary judgment, courts employ a three-step analysis: ?(1) identify the issues framed by the pleadings; (2) determine whether the moving party has negated the opponent?s claims; and (3) determine whether the opposition has demonstrated the existence of a triable, material factual issue.? (Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294.) The moving party bears the initial burden of production to make a prima facie showing of the nonexistence of any triable issue, in which case the burden shifts to the opposing party to make a prima facie showing of the existence of a triable issue. (Code Civ. Proc., ? 437c, subd. (p)(2).) To show a triable issue of material fact exists, the opposing party may not rely on the mere allegations or denials of the pleadings, but instead must set forth the specific facts showing that a triable issue exists as to that cause of action or a defense thereto. (Aguilar, at p. 849.) Courts ?liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.? (Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.)
II. Evidentiary Objections
Mr. Freis objects to statements in the declaration of Kevin Hermansen, counsel for Plaintiff. The court rules on the objections as follows:
Overruled: 1, 3, 5-6
Sustained: 2, 4,7
III. Issue 1: Declaratory Relief as to Alter Ego Liability (First Cause of Action)
A primary purpose of this action is to adjudicate the issue of whether Mr. Freis is the alter ego of the now defunct NRMC. To that end, Plaintiff alleges in the first cause of action for declaratory relief that Mr. Freis is NRMC?s alter ego and seeks a judicial declaration that Mr. Freis, in that capacity, should be liable for the judgment entered against NRMC. (Compl. ?? 16, 18, 20.) In moving for summary adjudication of the first cause of action, Mr. Freis contends that Plaintiff cannot establish the first component of the alter ego doctrine?namely, that there is such a unity of interest and ownership between the corporation and individual that the corporation?s separate personality no longer exists. (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538 (Sonora Diamond).) For the reasons set forth below, the court determines that triable issues of material fact remain as to whether NRMC is Mr. Freis? alter ego.
A. Alter Ego Doctrine
It is a basic principle of corporate law that corporations have a separate legal existence. Corporations are legal entities ? ?separate and distinct from . . . stockholders, officers and directors, with separate and distinct liabilities and obligations.? ? (Leek v. Cooper (2011) 194 Cal.App.4th 399, 411.) The alter ego doctrine is a rationale for piercing the corporate veil to hold equitable owners accountable for conduct attributable to the corporation. (Sonora Diamond, supra, 83 Cal.App.4th at p. 538.) In this state, the doctrine consists of the following two components: ?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.)
In evaluating a claim of alter ego liability generally, and particularly with respect to the first component of the doctrine, courts consider a number of non-exclusive factors. These include the commingling of funds and other assets of the alleged alter egos; the representation by one that it is liable for the debts of the other; use of the same offices and employees; use of one as a mere shell or conduit for the affairs of the other; inadequate capitalization; disregard of corporate formalities; lack of segregation of corporate records; and identical directors and officers. (Sonora Diamond, supra, 83 Cal.App.4th at pp. 538-539; see also Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 838-840 (Associated Vendors).)
The issue of whether a corporation is the alter ego of its equity owner, and the application of the relevant factors, is necessarily a fact-intensive inquiry. (See Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1284-1285 [issue of alter ego liability is ?peculiarly factual issue?]; Associated Vendors, supra, 210 Cal.App.2d at p. 837 [?determination is primarily one for the trial court and is not a question of law?].)
B. Mr. Freis? Evidence
In this case, there is no dispute Mr. Freis was the sole equity owner of NRMC. (Defendant?s Separate Statement (DSS) 9; Plaintiff?s Responsive Statement (PRS) 9.) By itself, the fact that Mr. Freis was the sole owner of NRMC is not sufficient to support a finding of alter ego liability, but it does support Plaintiff?s theory and would be a critical starting point to any finding that Mr. Freis and NRMC had such a unity of interest and ownership that there was no separate personality between them. However, as Mr. Freis points out, this factor must be considered in context and in connection with the broader circumstances of the relationship between Mr. Freis and his company. (See Mid-Century Ins. Co. v. Gardner (1992) 9 Cal.App.4th 1205, 1213 [?The courts have cautioned against relying too heavily in isolation on the factors of inadequate capitalization or concentration of ownership and control?].)
In contending that he is not the alter ego of NRMC, Mr. Freis relies primarily on his own declaration, where he attests to the circumstances of his relationship with the company. (DSS 1-24, citing Declaration of Jon H. Freis ?? 5-11.) Mr. Freis states that he formed NRMC with a real estate broker named Todd Compton in 2001; that Mr. Freis was the sole shareholder, sole director, and president of NRMC; and that he made a capital contribution of $25,000 in exchange for 5,000 shares of common stock, the only stock ever issued by the company. (Freis Decl. ?? 4, 5, 7.) The capital contribution permitted NRMC to rent office space, hire two or three employees, and begin to grow its client base, and Mr. Freis contends the company was adequately capitalized to conduct its business functions. (Freis Decl. ?? 4, 7.) Mr. Freis states that before he formed NRMC he was a practicing attorney, and that NRMC rented office space on the second floor of the same building where he had his own law office. (Ibid.)
Mr. Freis also addresses his financial relationship with NRMC. He states that NRMC had its own bank accounts; that he never deposited his personal funds into NRMC?s accounts; that he never paid his personal expenses from NRMC?s assets; that he never used NRMC?s assets for non-company purposes; that he never received funds from NRMC and did not draw a salary; that NRMC was never profitable enough to pay him a dividend or distribution; and that NRMC?s only assets was the cash it held in its bank accounts and office equipment, which he never treated as his own. (Freis Decl. ?? 5, 9.) In light of these facts, Mr. Freis contends there was no commingling of assets.
Additionally, Mr. Freis contends that NRMC maintained corporate formalities. For instance, he states that ?minutes were held of annual meetings of the shareholders and directors as required by the by-laws of the Company.? (Freis Decl. ? 5.) He also states that while NRMC was in business, ?it maintained its corporate records separately from myself in a separate room and its own file cabinets and files. No company records were ever intermingled with my own personal records. Also, I used my own address for my personal affairs and did not use the same address or telephone number as NRMC.? (Ibid.) With respect to the properties that NRMC managed, NRMC had written management agreements with the property owners, pursuant to which NRMC agreed to provide management services in exchange for five percent of the gross rents collected on a monthly basis. (Freis Decl. ?? 8, 10.) Mr. Freis asserts that NRMC was compensated at a fair market rate for its services regardless of whether he personally had an ownership interest in a particular property or the entity that owned the property, and that there was never any attempt to segregate liabilities to NRMC. (Ibid.)
Mr. Freis states NRMC was not formed for an improper purpose. He did not transfer liabilities to NRMC or form NRMC in order to transfer existing liabilities. (Freis Decl. ? 9.) He also states that NRMC did not have any liabilities except for the judgment that is the subject of this lawsuit. However, he maintains that only NRMC is liable for the judgment because Plaintiff chose to pursue only NRMC. (Ibid.)
Mr. Freis asserts that the underlying action precipitated the winding up of NRMC?s business. (Freis Decl. ?? 9, 11.) He states that NRMC spent the funds it had defending itself in the action filed by Plaintiff and the other tenants, and that once the defense had depleted those funds, NRMC began to wind up its business in 2011, and any remaining funds were used in the ordinary course of business. (Freis Decl. ? 9.) He also states that NRMC?s clients, including the other owners of the 727 S. Coronado property, decided to terminate NRMC?s management agreement, seek professional management, or sell the property. (Freis Decl. ? 11.) Mr. Freis states that the owners of other properties decided to change management companies as well, and that NRMC understood it would not be able to provide services if the judgment were enforced because it would not be possible for NRMC to pay its bills and make payroll. (Ibid.) Thus, in 2011 and 2012, NRMC terminated all remaining agreements and ceased operations. It refunded any funds held in its operating accounts to the clients, as required by the management agreements, and used any remaining cash to satisfy outstanding bills and taxes. Mr. Freis returned to practicing law. (Ibid.)
Finally, Mr. Freis also makes a number of statements that track several of the factors considered by courts in the alter ego analysis. For example, he states that he never told anyone he was personally liable for NRMC?s debts (Freis Decl. ? 6), and that NRMC was not intended to be any kind of ?conduit? for his own personal business (Freis Decl. ? 7).
In sum, Mr. Freis demonstrates that although he was the sole shareholder and director of NRMC, as well as its president, the company generally regarded corporate formalities, was adequately capitalized to maintain its business, and segregated its assets from the personal assets of Mr. Freis, at least with respect to the company?s bank accounts. NRMC entered into contractual arrangements to manage several properties, in which Mr. Freis may have had an ownership interest in the property or the entity owning the property. Any revenue generated from those contracts was kept in NRMC?s operating accounts, which it apparently used to pay its own office rent, employees, and other business expenses. However, it appears that NRMC?s office and equipment was essentially located in the same space as Mr. Freis? law office. In addition, Mr. Freis acknowledges that it was the judgment that led to the decision to terminate NRMC?s business operations.
C. Plaintiff?s Evidence
Assuming Mr. Freis has carried his burden, Plaintiff raises triable issues of material fact that preclude summary adjudication of the first cause of action. When NRMC failed to make any payments on the judgment, Plaintiff and the other tenants obtained a writ of execution and served a rent levy on the tenants of the building, and the sheriff ordered the tenants to pay their rent to the sheriff instead of NRMC. (Plaintiff?s Additional Statement (PAS) 35.) The title holder of the building, Defendant 727 Coronado Street, LLC, of which Mr. Freis is a member and for which he served as legal counsel, then issued a letter to the tenants stating that NRMC had been terminated as the management company and all rent should thereafter be made to the owner. (PAS 36-37.) In light of Mr. Freis? dual role as sole owner of NRMC and partial owner of the limited liability company that owned the property NRMC managed, the circumstances surrounding the termination of NRMC?s management contract raise a triable issue of material fact by suggesting that Mr. Freis may have used NRMC as a shell for his own personal purposes. In ruling on a motion for summary judgment, the court draws all inferences in favor of the party opposing the motion, and Plaintiff is entitled to this inference in this case.
Other evidence supports the inference. For instance, Plaintiff shows that Mr. Freis was on both sides of the transaction with respect to other properties managed by NRMC. Certain management agreements between NRMC and the properties it managed were signed by Mr. Freis on behalf of the entity hiring NRMC. (PAS 34.) Similarly, although Mr. Freis states that NRMC abided all corporate formalities, Plaintiff points out that as sole director of NRMC, Mr. Freis was able to ratify the company?s business at annual meetings without discussion. (PAS 33.) Plaintiff also presents NRMC?s tax returns, which show that for several years the company took deductions for items that may have benefitted Mr. Freis? law office. (PAS 35.) Collectively, these facts support the inference Mr. Freis may have used NRMC as a shell for his own personal affairs, an inference to which Plaintiff is entitled on this motion.
Plaintiff also relies on the testimony of Mr. Freis during the debtor?s examination that followed the entry of judgment in the underlying action. Mr. Freis testified that NRMC held the rents collected from the buildings it managed, and he acknowledged that the funds were not kept in a trust account, although they should have been. (PRS 1-2.) Mr. Freis also testified that he shared some of NRMC?s office equipment and retained the equipment once the company ceased operations. (PRS 1, 3-4, 8, 13, 17-18.) The equipment was located in the same general office space as Mr. Freis? law office and are still there. (Ibid.) Similarly, Mr. Freis? secretary, Ayanna Robinson, worked for both NRMC and the law office, preparing documents and answering the phones for both. (PRS 3-4, 11, 13, 17-18.) Thus, it appears Mr. Freis used the same office, equipment, and at least one employee for his own law office, and there are factual issues as to whether NRMC?s assets were segregated or used by Mr. Freis for personal reasons. Additionally, Mr. Freis acknowledges that formalities were not followed to the extent NRMC?s bank accounts were not designated as trust accounts.
In sum, application of the alter ego doctrine is inherently fact intensive, and based on the record triable issues of material fact remain as to whether there was such a unity of interest and ownership between NRMC and Mr. Freis such that the corporation no longer had a separate personality.
D. Mr. Freis? Reply
In the reply brief, Mr. Freis contends for the first time that Plaintiff has failed to satisfy the second component of the alter ego doctrine because he has not shown fraud or injustice. (Reply 6-8.) However, by raising this point for the first time in the reply, Mr. Freis has effectively denied Plaintiff the opportunity to respond to the argument. (See Balboa Ins. Co. v. Aguirre (1983) 149 Cal.App.3d 1002, 1010 [?points raised in a reply brief for the first time will not be considered unless good cause is shown for the failure to present them before?]).
In any event, as Plaintiff points out, in certain circumstances the fact that the judgment debtor is insolvent is sufficient to satisfy the second component of the alter ego doctrine. (See, e.g., Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership (2013) 222 Cal.App.4th 811, 813.) The plaintiff is not required to prove that the defendant acted with a wrongful intent in conducting the affairs of an alter ego, only that an inequitable result will follow from treating the alter ego?s assets as separate. (Id. at p. 816.) Here, NRMC is insolvent at least in part because of Mr. Freis? decision to terminate NRMC?s contracts following entry of the underlying judgment. These circumstances raise a disputed factual issue, i.e., that Mr. Freis may have used the separate personality of NRMC for illegitimate reasons. (See Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 510-511 [? ? ?As the separate personality of the corporation is a statutory privilege, it must be used for legitimate business purposes and must not be perverted. When it is abused it will be disregarded and the corporation looked at as a collection or association of individuals, so that the corporation will be liable for acts of the stockholders or the stockholders liable for acts done in the name of the corporation.? ? ?] (Greenspan).)
For these reasons, the motion is denied as to Issue 1.
IV. Issue 2: Enforcement or Amendment of Judgment (Second Cause of Action)
In the second cause of action, Plaintiff seeks to enforce the underlying judgment against Mr. Freis on the ground that he is the alter ego of NRMC. (Compl. ?? 23-25.) The parties agree that the second cause of action is essentially one to amend the underlying judgment to add Mr. Freis as an additional judgment debtor. Such a procedure is permitted by Code of Civil Procedure section 187, which authorizes the trial court to ?amend its judgment at any time so that the judgment will properly designate the real defendants. . . . Judgments may be amended to add additional judgment debtors on the ground that a person or entity is the alter ego of the original judgment debtor. . . . Amendment of a judgment to add an alter ego is an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. . . . Such a procedure is an appropriate and complete method by which to bind new . . . defendants where it can be demonstrated that in their capacity as alter ego of the corporation they in fact had control of the previous litigation, and thus were virtually represented in the lawsuit.? (Greenspan, supra, 191 Cal.App.4th at p. 508, internal quotations omitted.)
It is undisputed that Plaintiff considered adding Mr. Freis as a doe defendant in the underlying action but elected not to do so. (DSS 25; PRS 25.) Thus, Plaintiffs knew of Mr. Freis? role and could have, but did not, add him to the litigation several years ago. Mr. Freis contends that, as a result, he did not invest any personal resources into the defense of the underlying case because there was no risk of personal liability. (Freis Decl. ? 3.) In other words, Mr. Freis contends that he relied on Plaintiffs? failure to follow through on naming him as a defendant to his detriment. He concludes that to amend the judgment at this point to add him as a judgment debtor would violate his constitutional right to due process. (See Motores De Mexicali, S.A. v. Superior Court (1958) 51 Cal.2d 172, 176 [?To summarily add Resnick and the Cowans to the judgment heretofore running only against Erbel, Inc., without allowing them to litigate any questions beyond their relation to the allegedly alter ego corporation would patently violate this constitutional safeguard?].)
Mr. Freis is correct that the procedure of amending a judgment to add a judgment debtor raises due process concerns. (See Nelson v. Adams USA, Inc. (2000) 529 U.S. 460, 470-471.) The issue is whether Mr. Freis, as the alter ego of NRMC, had such control over the underlying litigation that he was ?virtually represented? in the lawsuit. (Greenspan, supra, 191 Cal.App.4th at p. 508; NEC Electronics, Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778 [? ?Such a procedure is an appropriate and complete method by which to bind new individual defendants where it can be demonstrated that in their capacity as alter ego of the corporation they in fact had control of the previous litigation, and thus were virtually represented in the lawsuit? ?].) Mr. Freis maintains that he was not ?virtually represented? in the underlying lawsuit because there was no risk of personal liability. (DSS 26.) However, as Plaintiff notes, Mr. Freis was the sole attorney of record during the entirety of the case before trial; Mr. Freis co-counseled the jury trial; and Mr. Freis took the witness stand for the defense. (PRS 26.) Plaintiff contends that Mr. Freis aggressively defended the case, presented numerous exhibits, called three witnesses, objected at every opportunity to the tenants? exhibits and questions, and presented every item of evidence he could have in defense. Plaintiff maintains that naming Mr. Freis as an individual defendant would not have changed the results of the trial. (Ibid.) In sum, the parties present diverging accounting of the proceedings in the underlying action, and in light of the fact that triable issues remain as to Mr. Freis? alter ego liability, the court cannot say as a matter of law that the was not ?virtually represented? simply because he was not named as an individual defendant.
For these reasons, the motion is denied as to Issue 2.