Alter ego liability is again the flavor of the day. (See here for a list of all prior “alter ego” related posts.)
As previously covered, the alter ego doctrine allows a court to disregard a corporate entity (including LLCs) and hold the individual owners liable for claims against the entity. Alter ego generally requires proof of: (1) a unity of interest and ownership such that the separate personalities of the entity and individual do not exist, and (2) an unjust or inequitable result if the corporate entity is not disregarded.
In a case recently published by California’s Second District Court of Appeal — Hacker v. Fabe (publication order here)– the court’s alter ego analysis shows that no single factor is determinative. Instead, the court will review all of the facts closely and weigh the equities of the case in making an alter ego determination.
Facts: LLC liable for employment claim; LLC manager renders the LLC insolvent
The litigation between the parties started almost two decades ago in 2005, when Jacqueline Fabe (an attorney) filed a claim for unpaid wages with the Labor Commissioner against her employer, 1538 Cahuenga Partners, LLC. Fabe obtained an award of almost $13,000.
A month after Fabe filed her claim, Cahuenga and its manager, Ron Hacker, filed a malpractice suit against Fabe. Fabe filed a retaliation claim with the Commissioner, as well as a cross-complaint against Cahuenga seeking indemnity for her legal expenses. Fabe prevailed on her retaliation claim. The Commissioner then sued Cahuenga seeking damages (Fabe’s defense costs) for the illegal retaliation. The lawsuits were consolidated, and Fabe and the Commissioner prevailed on all their claims. Later, an amended judgment was entered against Cahuenga in the amount of nearly $300,000.
As stated by the court’s opinion: “For years thereafter, the Commissioner and Ms. Fabe sought to enforce the judgment, without success.”
Hacker resigned as manager of Cahuenga soon after the initial judgment was entered against the company, and Benjamin Schneider was appointed manager. During the debtor’s examination of Schneider, he testified that he searched for company records but found nothing other than a document relating to a bank account, which had been closed. He had asked Hacker for additional bank account records from before the account was closed, but received nothing. He testified that Cahuenga had no money, and no one received any money or assets from Cahuenga since he became the manager. He knew nothing about what happened to the initial capital contributions of the members of Cahuenga.
Hacker refused to comply with debtor examination notices, filing an unsuccessful motion for a protective order, and then an unsuccessful appeal of that ruling. The trial court observed that: “This case just has a history of hardball resistance to reasonable requests to enforce the judgment. .. What I see is parties … saying we are not going to comply. We don’t care what you say. Forget it.”
When Hacker finally appeared for his debtor examination, he claimed to not be able to recall many things. He also admitted that documents relating to Cahuenga’s earnings from 2005 to 2010 were in his possession and control “at some point in time” and that he had destroyed them.
At the debtor’s examination of Tanya Bogorad (an employee of Cahuenga at the time of the underlying litigation), Bogorad testified that she worked for Hacker since 1997, and still worked for him at the present, through various entities over the years. Cahuenga was her technical employer until around the time of the Fabe judgment, when the company was “transferred” from Hacker to Schneider. She testified: “That’s what I was told, that the company transferred. He sold it or just give him — it was a gift. That’s what I don’t know, but it was transferred to [Schneider].”
In 2020, the Commissioner filed a motion to amend the judgment to add Hacker as the alter ego of Cahuenga.
Trial Court: motion to amend judgment to add Hacker as alter ego granted
The trial court granted the motion, and denied Hacker’s motion for reconsideration. The court found substantial evidence that there was a unity of interest because Hacker exercised complete control over Cahuenga, controlled the underlying litigation, shared attorneys between himself and the company, transferred Cahuenga assets to himself, transferred control of the remaining assets to Schneider, and destroyed relevant records relating to Cahuenga’s assets.
Court of Appeal: affirmed; Hacker liable as alter ego
The Court of Appeal affirmed.
The court began by describing the essence of the alter ego doctrine: “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.” While many factors can be analyzed, “no single factor is determinative.”
Several factors supported the trial court’s ruling, including Hacker’s “complete control over Cahuenga, his control of the litigation, his sharing of attorneys with Cahuenga, his transfer of the company to Mr. Schneider (immediately after the judgment), and his destruction of relevant records of assets.” The court also cited the fact that Bogorad received paychecks from Cahuenga until Hacker transferred the company to Schneider, following which “she continued to work for Mr. Hacker under the auspices of another company.”
While “inability to collect on a judgment” is not enough, alone, to support an alter ego finding, the court found that there was plenty of “conduct amounting to bad faith.” Under those circumstances, allowing Hacker to hide behind the corporate shell of Cahuenga “would be an inequitable result.”
As confirmed by the Hacker opinion, no single factor is determinative in a court’s alter ego analysis. All facts and the equities of the case will be considered. More often than not, the general stench of bad faith conduct accompanies an alter ego finding.