The “alter ego” doctrine has been a frequent topic of posts on the Money and Dirt and LLC Jungle blogs. (See here, here, here, here, here, and here.)
Normally, a court will treat a business entity and its liabilities as separate and distinct from its owners. The alter ego doctrine allows the corporate veil to be pierced, and results in holding the owners liable for the entity’s obligations.
Alter ego can be raised in three different ways: (1) suing the alter ego directly in the original case; (2) moving to amend a judgment against the entity to include the alleged alter ego owner; or (3) pursuing a second, separate action after obtaining a judgment against the entity.
If a plaintiff pursues the first method (suing the alter ego directly in the original case) and loses, is that result binding and conclusive? Not always. An opinion recently filed by California’s Third Appellate District — Angel Lynn Realty, Inc. v. George — addresses the issue.
Facts: plaintiff obtains judgment against entity but loses on alter ego claim against entity’s owner; plaintiff later files motion to amend judgment to add alter ego
Plaintiff Angel Lynn Realty, Inc. (“ALR”) filed a lawsuit against Real Estate Portfolio Management, LLC (“REPM”) and its owner Steve George. ALR alleged that REPM breached a partnership agreement with ALR and also breached fiduciary duties owed to ALR. The complaint also alleged that George was REPM’s alter ego and should therefore be liable along with REPM.
After a bench trial, the court ruled that REPM breached the partnership agreement and its fiduciary duties, and found that ALR was entitled to almost $1 million in damages and prejudgment interest. However, the court ruled that ALR failed to prove its alter ego allegations against George. The court entered judgment.
REPM did not pay the judgment. During collection efforts, ALR conducted a debtor’s examination of George and his wife — REPM’s sole members. According to ALR, the debtor’s examination showed “that after the judgment was entered, George fraudulently drained REPM of all of its assets in order to prevent ALR from satisfying its judgment.”
ALR filed a motion to amend the judgment under Code of Civil Procedure section 187, arguing that post-judgment events revealed “immense fraud” perpetrated by George to avoid paying the judgment, which justified adding George to the judgment as REPM’s alter ego.
Trial court: motion denied; prior judgment has collateral estoppel effect
The trial court denied ALR’s motion.
The court held that the doctrine of collateral estoppel applied and “barred ALR from relitigating the alter ego issue because that issue had been adjudicated and decided at trial and judgment had been entered finding George was not the alter ego of REPM.”
The court acknowledged that the collateral estoppel doctrine would not necessarily bar ALR from bringing a new action against George based on facts occurring after the judgment was entered, but could not do so “in this case” through a motion to amend the judgment.
ALR appealed.
Court of Appeal: reversed; judgment does not preclude motion to amend based on new facts
The Court of Appeal reversed.
The court ruled that the collateral estoppel doctrine — which normally operates to bar the relitigation of issues previously adjudicated — “does not bar a later claim if new facts or changed circumstances have occurred since the prior decision.” The doctrine was never intended to apply where “the facts have materially changed or new facts have occurred which may have altered the legal rights or relations of the litigants.” A judgment’s estoppel effect “extends only to the facts in issue as they existed at the time the prior judgment was rendered.”
The issue of alter ego liability “is not static and can change over time.”
As to whether ALR’s motion showed sufficient new facts to justify application of the alter ego doctrine, the court remanded the case to the trial court to decide that question on the merits.
Lesson
A trial court’s judgment holding that a plaintiff failed to prove alter ego does not necessarily prevent a later motion to amend the judgment based on new facts showing alter ego liability.
[View source.]
