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, and here, for example.)

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.  In California, to successfully invoke the alter ego doctrine a plaintiff must show: (1) such a unity of interest and ownership between the entity and its owners that the separate personalities of the entity and owners do not in reality exist; and (2) there would be an inequitable result if the acts in question are treated as those of the entity alone.

The vast majority of cases exploring alter ego liability focus on private business entities, including corporations, LLCs, and partnerships.  However, in a case recently published by California’s Second Appellate District — Cam-Carson, LLC v. Carson Reclamation Authority — the court addressed a claim by a commercial real estate developer asserting that public agencies were alter egos of one another.

Facts: development agreements go sideways; developer sues city and its reclamation authority

Based on the facts alleged in the complaint:

The property at issue was an undeveloped site in Carson, California.  The site had been operated as a landfill in the 1950s until its closure in 1965, after which it sat vacant.  The site had substantial soil and groundwater contamination requiring environmental remediation before it could be developed, and was governed by a State remedial action plan.

The City formed the Carson Reclamation Authority (CRA), a joint powers authority, for the sole purpose of acquiring the property and overseeing the environmental remediation.  After the CRA dissolved in 2012 in accordance with state law, the city formed the successor agency to the CRA, which assumed the CRA’s obligations, including the obligation to fund the remediation work.

Cam-Carson, LLC was a joint venture comprised of commercial real estate developers.  In 2018, Cam-Carson entered into a series of interconnected development agreements with the City and CRA envisioning the development of a retail mall.  Under the agreements, the CRA was required to construct the remedial systems at its sole cost.  The parties acknowledged development would be financially infeasible without remediation, and the CRA had “substantial funds to do so.”  The CRA represented it had over $75 million in funds, and the remediation would cost under $27 million.

The CRA was also obligated to construct other improvements (roadways and utilities) that were prerequisites to building out the project’s infrastructure.  Some of those improvements were subject to advances of funds from Cam-Carson.  But the CRA was prohibited from using those advances to fund any of the remediation work.

Cam-Carson sued the government agencies.  The complaint alleged gross mismanagement and concealment by the agencies, causing damages of more than $80 million in connection with the project.  The CRA had spent all the funds available for the remediation without completing the remediation work, and developed a “huge deficit.”  The City and CRA used Cam-Carson’s advances on remediation work in breach of the agreements.  Even the City Attorney acknowledged that there was a “total and utter failure” in the management of the project occurring on the CRA’s watch.  The complaint also alleged that the agencies were aware of the enormous funding shortfall they created as early as February 2019, but concealed that shortfall from Cam-Carson and continued inducing Cam-Carson to advance additional funds even though the agencies knew they could not complete their remediation obligations.

The complaint also asserted “alter ego” liability, alleging that the agencies failed to: (1) observe appropriate formalities; (2) maintain separate records; (3) properly demarcate between when individuals were acting for one agency as opposed to another; (4) properly memorialize meetings between the agencies; or (probably most importantly) (5) properly capitalize the CRA.  The complaint further alleged that in light of the City’s extensive managerial and administrative control over the CRA and Successor Agency, their commingling of resources and operations, and their common goal of operating exclusively for the benefit of the City, the agencies constituted a “single enterprise.”

Trial court: demurrer granted; public agencies can’t be alter egos

The agencies filed a demurrer, which tests the legal sufficiency of the allegations assuming all facts alleged are true.

The trial court sustained the demurrer without leave to amend and dismissed the case, ruling “there are insufficient allegations for alter ego liability.”

Cam-Carson appealed.

Court of Appeal: reversed; alter ego can apply to public agencies

The Court of Appeal reversed the trial court’s order, holding the alter ego doctrine may be applied to a government entity in a case where the facts justify an equitable finding of liability, and the complaint’s allegations of alter ego were sufficient.

The court first observed that government entities “regularly engage in commercial activities with the private sector, and a government entity may create another government entity to perform certain activities for the purpose of avoiding liability in the creating entity, just as in the private sector.”

The court also noted that the alter ego doctrine has been applied to prevent an inequitable result in cases where private business entities are “operated with integrated resources in pursuit of a single business purpose, and one of them so dominated the finances, policies and practices of the other that the latter had no separate mind, will or existence of its own but was merely a conduit through which the former conducted its business.”

Against that backdrop, the court held:

We are unable to see why the same principle should not apply to government entities, if comparable facts are established. It is the ‘unity of interest’ that is significant, and indistinguishable from ownership in any practical way, when public entities are involved.

Lesson

Under the holding of the Cam-Carson, LLC opinion, the alter ego doctrine can be applied in claims against public agencies.

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