Creation Harmony Trading v. Li CA2/4 ( 2021 )

Filed 5/27/21 Creation Harmony Trading v. Li CA2/4
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on
opinions not certified for publication or ordered published, except as specified by rule 8.1115(a). This
opinion has not been certified for publication or ordered published for purposes of rule 8.1115(a).
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION FOUR
CREATION HARMONY B301004
TRADING INC.,
(Los Angeles County
Plaintiff and Respondent, Super. Ct. No. EC068777)
v.
XIAOYU LI,
Defendant and Appellant.
APPEAL from judgment of the Superior Court of Los
Angeles County, Curtis A. Kin, Judge. Reversed in part.
Law Office of Yoon O. Ham, Yoon Ham for Defendant and
Appellant.
Derek Tung for Plaintiff and Respondent.
INTRODUCTION
Plaintiff and respondent Creation Harmony Trading Inc.
(Creation Harmony or plaintiff) entered into a contract with
defendant Whitley International Co., Ltd. (Whitley) (the contract)
stating in part: “Whitley only owes Creation Harmony $100,000
in principal, interest rate will be calculated as 15% annual
interest rate . . . .” Defendant and appellant Xiaoyu Li signed the
contract as “Whitley’s responsible person.” After Whitley
allegedly stopped making payments and failed to return the
principal amount of $100,000, Creation Harmony sued Whitley
and Li for breach of contract, unjust enrichment, and conversion.
After a one-day bench trial, the trial court entered
judgment in favor of Creation Harmony in the amount of $88,750,
holding Whitley and Li jointly and severally liable. Li appeals the
judgment, contending he was not a party to the contract, and
thus the court erred in holding him personally liable. Creation
Harmony counters that substantial evidence supported the trial
court’s judgment based on the alter ego doctrine, a theory not
specifically pled in the complaint. Because there is no substantial
evidence to support an implied alter ego finding, we reverse the
judgment insofar as it awards relief against Li.
FACTUAL AND PROCEDURAL BACKGROUND
The following facts are taken from the Settled Statement
approved by the trial court. (See Cal. Rules of Court, rule 8.137
[summary of superior court proceedings in lieu of a reporter’s
transcript].)
“On December 12, 2014, [p]laintiff and [d]efendants
allegedly signed an agreement regarding defendants owed
plaintiff $330,134 based on automobile purchase [sic]. Defendants
allegedly planned to repay the money within one month based on
the agreement. Plaintiff contends that [d]efendants made several
payments in 2014, 2015, and 2016.
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“On August 2, 2016, [p]laintiff contends that [d]efendants
signed an arrears summary [the contract] which mentioned that
[d]efendants owed [p]laintiff $100,000 with annual interest rate
of 15% (1.25% per month), and the interest should start to count
after July 22, 2016. Defendants allegedly agreed to pay the
principal amount of $100,000 within a year, and defendants paid
9 months interests [sic] until April 22, 2017. However, [p]laintiff
contends that [d]efendants stopped payments since then and
[d]efendants never returned the principal amount of $100,000.
“Plaintiff extended the payment due since April 22, 2017,
however, [p]laintiff contends [d]efendants still failed to make any
further payments. Plaintiff sent certified letters with return
receipts to demand [d]efendants to [sic] return the balance due
with interest on May 1, 2018, but there was no response.”
On June 13, 2018, Creation Harmony filed a complaint
against Whitley and Li for breach of contract, unjust enrichment,
and conversion, seeking damages for failure to pay the money
owed under the contract. The complaint alleged Whitley “is, and
at all times herein mentioned was, a company doing business in
the City of Monterey Park . . . ,” and Li is an officer of Whitley.
At trial, Xeming Bi, President of Creation Harmony,
testified that Li stated he “would be personally liable for the
subject loan given to [Whitley].” He further testified Li signed the
contract and “the reason he could not repay the subject debts was
because someone else [owed] [Li] money, and he would pay
[p]laintiff back once the third-party pays him.” The trial court
overruled defendants’ objections on the grounds of hearsay and
relevance.
Ziming Cheng (identified only as a “non-party to the
instant suit”) testified “he was present when . . . Li stated he
would be personally liable for the subject loan and signed the
contract for the subject debts.”
Creation Harmony offered two exhibits which were
admitted into evidence: the contract and text messages between
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Bi and Li.1 In the text message exchange, Bi stated in part: “That
100,000 was owed starting September 2014.” Li responded: “Yes,
Jason owes me about the same amount of money, he has not paid
back, not even a penny, so let me discuss with him, and ask him
to pay you back directly.” Bi responded: “That is between the two
of you, I only ask the money from you! Because at the time, we
were doing business together, I lent all the money to you.”
Li testified he “never verbally stated or agreed to be
personally liable for [Whitley’s] debt” and he “never signed
anything agreeing to be the personal guarantor of [Whitley’s]
debt to [Creation Harmony].” He further testified he could not
pay Creation Harmony “because a third-party did not pay him,
therefore he did not have the money to pay Plaintiff.” Li also
stated he was “doing the car purchasing business both under the
company’s name and his own name.”
The trial court entered judgment in favor of Creation
Harmony on all three of its causes of action. The judgment
provided that Li and Whitley are jointly and severally liable, and
“shall pay back [Creation Harmony’s] principal $88,750.00 as
total damage.” Li appealed from the judgment.
DISCUSSION
Li contends the trial court erred “to the extent it imposed
personal liability against [him].” He argues the trial court erred
as a matter of law because the plain language of the contract
demonstrates he was not a party to it, and, alternatively,
substantial evidence did not support the trial court’s finding of
personal liability. Creation Harmony does not dispute that it and
Whitley are the only parties to the contract. Nor does it argue the
contract is ambiguous regarding Li’s personal liability. Rather,
Creation Harmony’s sole counter argument on appeal is
1 A court certified translator testified to the accuracy of her
translation of the contract and text messages from Chinese to
English.
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substantial evidence supports the trial court’s finding that Li is
the alter ego of Whitley.2
On review for substantial evidence, our inquiry “begins and
ends with the determination as to whether, on the entire record,
there is substantial evidence, contradicted or uncontradicted,
which will support the determination, and when two or more
inferences can reasonably be deduced from the facts, a reviewing
court is without power to substitute its deductions for those of the
trial court.” (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-
874, italics omitted.) “Substantial evidence,” however, is not
“‘synonymous with “any” evidence. It must be reasonable . . . ,
credible, and of solid value . . . .’ [Citation.]” (Kuhn v. Department
of General Services (1994) 22 Cal.App.4th 1627, 1633.) “While
substantial evidence may consist of inferences, such inferences
must be ‘a product of logic and reason’ and ‘must rest on the
evidence’ [Citation]; inferences that are the result of mere
speculation or conjecture cannot support a finding. [Citations].”
(Ibid.)
“Ordinarily, a corporation is regarded as a legal entity,
separate and distinct from its stockholders, officers and directors,
with separate and distinct liabilities and obligations. [Citations.]”
(Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th
523, 538 (Sonora Diamond).) Under the alter ego doctrine,
however, “[a] corporate identity may be disregarded — the
‘corporate veil’ pierced — where an abuse of the corporate
privilege justifies holding the equitable ownership of a
2 Contrary to Creation Harmony’s contention, the record
does not indicate the trial court made an express finding of alter
ego liability. We do, however, apply the doctrine of implied
findings, which requires the appellate court to infer the trial
court made all factual findings necessary to support the
judgment. (Fladeboe v. American Isuzu Motors Inc. (2007) 150
Cal.App.4th 42, 58.) The substantial evidence standard of review
applies to both express and implied findings. (See, e.g., Ermoian
v. Desert Hospital (2007) 152 Cal.App.4th 475, 500-501.)
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corporation liable for the actions of the corporation. [Citation.]”
(Ibid.) “[W]hen the corporate form is used to perpetuate a fraud,
circumvent a statute, or accomplish some other wrongful or
inequitable purpose, the courts will ignore the corporate entity
and deem the corporation’s acts to be those of the persons or
organizations actually controlling the corporation, in most
instances the equitable owners. [Citations.] The alter ego doctrine
prevents individuals or other corporations from misusing the
corporate laws by the device of a sham corporate entity formed
for the purpose of committing fraud or other misdeeds.
[Citation.]” (Ibid.) ”Alter ego is an extreme remedy, sparingly
used. [Citation.]” (Id. at 539.)
“[T]wo conditions must be met before the alter ego doctrine
will be invoked. 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. [Citations.]” (Sonora Diamond, supra, 83
Cal.App.4th at p. 538.) Among the factors to be considered in
applying the doctrine are “the commingling of funds and other
assets; the failure to segregate funds of the individual and the
corporation; the unauthorized diversion of corporate funds to
other than corporate purposes; the treatment by an individual of
corporate assets as his own; . . . the representation by an
individual that he is personally liable for corporate debts; the
failure to maintain adequate corporate minutes or records; the
intermingling of the individual and corporate records; . . . the
concealment of the ownership of the corporation; the disregard of
formalities and the failure to maintain arm’s-length transactions
with the corporation; and the attempts to segregate liabilities to
the corporation. [Citation.]” (Mid-Century Ins Co. v. Gardner
(1992) 9 Cal.App.4th 1205, 1213, fn. 3 (Gardner).) ”No one
characteristic governs, but the courts must look at all the
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circumstances to determine whether the doctrine should be
applied. [Citation.]” (Sonora Diamond, supra, 83 Cal.App.4th at
p. 538.)
On the limited record before us, we cannot conclude there
was substantial evidence to support an implied finding of alter
ego. An alter ego theory of liability was not pled in the complaint,
and there is nothing before this court that would support an
implied finding given the scarce testimonial and documentary
evidence, and the detailed findings required to establish alter ego
liability. Creation Harmony contends, without citation to the
record, that Li failed to segregate his own funds from Whitley’s,
and treated the assets of the corporation as his own. But the
evidence on this point is limited to: (1) Li’s statement that he
could not pay Creation Harmony because a third party did not
pay him, and therefore he did not have the money to pay
Creation Harmony; (2) Li did his car purchasing business both
under the company’s name (Whitley) and his own name; and (3) a
text message exchange between Li and Bi in which Li agreed he
owed Bi money and stated “Jason owes me about the same
amount of money, he has not paid back, not even a penny, so let
me discuss with him, and ask him to pay you back directly.” We
cannot infer from this evidence a disregard of corporate form or
commingling of assets. The fact Li was owed money, and that
money was going to be used to meet his company’s financial
obligations, does not support the application of the alter ego
doctrine. (See, e.g., Sonora Diamond, supra, 83 Cal.App.4th at p.
539 [parent company’s contribution of funds to assist subsidiary
in meeting financial obligations does not render parent liable for
subsidiary’s obligations].) Moreover, the record is silent regarding
whether Li maintained separate company and personal bank
accounts, or whether Li used corporate assets to pay personal
expenses. Thus, without more, the facts that Li operated a car
purchasing business under both a company name and a personal
name, and that Li told Bi he would ask a third party to pay Bi
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directly, do not warrant an inference of commingling of assets.
(See Kuhn, supra, 22 Cal.App.4th at p. 1633 [“inferences that are
the result of mere speculation or conjecture cannot support a
finding. [Citations.]”].)
Next, Creation Harmony argues that a unity of interest
was shown by Li’s purported oral promise to guarantee the
contract. It is true that one factor in finding a unity of interest is
a shareholder’s representation that he or she will
be personally liable for corporate debts. (Gardner, supra, 9
Cal.App.4th at p. 1213, fn. 3.) But even if the testimony is
credited, there is no indication that Li’s representation applied to
any other debt of the company. Instead, the testimony possibly
demonstrated Li breached a separate oral contract to personally
guarantee the contract between Creation Harmony and Whitley.
Creation Harmony did not, however, allege breach of the
purported oral contract in its complaint; it failed to argue the
point in its brief on appeal and, in any event, did not raise this
claim at trial according to the Settled Statement. We therefore
deem this argument forfeited. (Ochoa v. Pacific Gas & Electric
Co. (1998) 61 Cal.App.4th 1480, 1488, fn. 3 [arguments not raised
in the trial court are forfeited on appeal].)
Moreover, even if Creation Harmony could demonstrate a
unity of interest between Whitley and Li, it failed to proffer any
evidence in support of the second requirement, i.e., an
inequitable result. “Difficulty in enforcing a judgment does not
alone satisfy this element. [Citation.] There also must be some
conduct amounting to bad faith that makes it inequitable for [the
individual] to hide behind the corporate form. [Citation.].” (Leek
v. Cooper (2011) 194 Cal.App.4th 399, 418; see also Gardner,
supra, 9 Cal.App.4th at p. 1213 [“The purpose of the doctrine is
not to protect every unsatisfied creditor, but rather to afford him
protection, where some conduct amounting to bad faith makes it
inequitable, . . . for the equitable owner of a corporation to hide
behind its corporate veil. [Citation.]” (Italics in original).] Here,
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Creation Harmony neither pled bad faith in the complaint (such
as allegations of diverting assets of the corporation to avoid
paying creditors), nor proffered evidence at trial that Li used the
corporate form for any fraudulent or deceptive purpose.
Accordingly, the record contains insufficient evidence to support
an implied finding that Li was the alter ego of Whitley.
DISPOSITION
The judgment is reversed insofar as it awards relief against
Li, individually. Li is awarded his costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
CURREY, J.
We concur:
MANELLA, P.J.
WILLHITE, J.
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