Lopez v. Escamilla

Filed 6/7/22
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
ALICE LOPEZ, 2d Civ. No. B316800
(Super. Ct. No. 56-2018-
Plaintiff and Appellant, 00511082-CU-EN-VTA)
(Ventura County)
v.
JOSE ESCAMILLA,
Defendant and Respondent.
The creditor of a corporation obtains a default judgment
against the corporation for $157,370. The corporation has no
funds or assets and has been suspended by the Department of
Corporations. The creditor then sues the sole shareholder of the
corporation for $157,370.
Does due process protect the sole shareholder from such an
action? In some cases it does, but not here.
Alice Lopez appeals a summary judgment entered in favor
of defendant Jose Escamilla in her lawsuit for damages against
Escamilla based on his alter ego liability for a $157,370 judgment
against a corporation. We conclude, among other things, that 1)
the trial court erred by granting summary judgment in favor of
the corporation; there are triable issues of fact concerning
Escamilla’s alter ego liability; and (2) Lopez’s civil action does not
violate Escamilla’s right to due process. We reverse.
FACTS
In May 2012, Lopez recovered a judgment for fraud,
negligent misrepresentation, and breach of fiduciary duty against
Magnolia Home Loans, Inc. in the amount of $157,370. (Lopez v.
Escamilla (2020) 48 Cal.App.5th 763, 764.)
In 2018, Lopez filed a complaint for “alter ego liability”
against Escamilla. She alleged that he was the alter ego of
Magnolia Home Loans, Inc. She sought a judgment against him
for $157,370 plus interest.
Escamilla moved for judgment on the pleadings. He
contended that “a complaint in a separate action is not the proper
procedure to obtain” a determination on alter ego liability. He
claimed “adding an alter ego defendant is not a cause of action.”
(Lopez v. Escamilla, supra, 48 Cal.App.4th at p. 765.) The trial
court granted that motion. On appeal, we reversed and held alter
ego liability could be determined by Lopez’s independent civil
action. (Id. at pp. 765-766.)
Lopez moved for summary judgment. Escamilla argued
that because the judgment against the corporation was by
default, he did not have the opportunity to defend the action.
Citing Motores De Mexicali v. Superior Court (1958) 51 Cal.2d
172 (Motores), he contended to hold him responsible for the
corporation’s liability denied him due process.
Lopez claimed that Magnolia Funding, Inc., the subject of a
prior lawsuit that provided the original loan, and Magnolia Home
Loans, Inc. “were the same company”; and that Escamilla was
“the sole owner, officer, and director of each.” “Magnolia Funding
closed when Magnolia Home Loans got up and running.
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Magnolia Home Loans, Inc. then went out of business when it
was sued.” Escamilla received all its remaining cash assets of
$53,000; that Escamilla’s “mere $1,000 capital investment [in the
corporation] cannot serve to shield him” from personal liability as
its alter ego; and that the corporation Escamilla controlled
defaulted, which is an admission of the allegations of her
complaint.
The trial court granted summary judgment. It ruled that
“it would violate Escamilla’s due process rights to hold him liable
for the prior judgment because he was not a party to that earlier
case and no ‘evidence-based’ defense was asserted by the
defendants in that case, plaintiff may not, as a matter of law,
hold Escamilla liable for that judgment.”
DISCUSSION
Summary Judgment on Alter Ego Liability
“Summary judgment provides courts with ‘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.’ ” (San Jose Neurospine v. Aetna Health of California,
Inc. (2020) 45 Cal.App.5th 953, 957.) On appeal, the reviewing
court makes an independent assessment of the correctness of the
trial court’s ruling regarding summary judgment. (Id. at p. 958.)
“ ‘Our task is to determine whether a triable issue of material
fact exists.’ ” (Ibid.) “ ‘[A]ny doubts as to the propriety of
granting a summary judgment motion should be resolved in favor
of the party opposing the motion.’ ” (Ibid.)
Under the alter ego doctrine, the corporate veil may be
lifted to show the corporate form is a fiction and determine who
controls the corporate entity and who is liable for its debts.
“Whether the evidence has established that the corporate veil
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should be ignored is primarily a question of fact . . . .” (Toho-
Towa Co., Ltd. v. Morgan Creek Productions, Inc. (2013) 217
Cal.App.4th 1096, 1108 (Toho-Towa Co.), italics added.)
Courts look to the totality of circumstances to determine
who actually owns or controls the corporate entity and who is
using it as “a mere shell or conduit” for his or her own personal
interests. (Toho-Towa Co., supra, 217 Cal.App.4th at pp. 1108-
1109.) Factors include “the commingling of funds and assets . . . ,
identical equitable ownership . . . , use of the same offices and
employees, disregard of corporate formalities, identical directors
and officers,” etc. (Id. at p. 1108.) They also include who is
treating “the assets of the corporation as his own.” (Greenspan v.
LADT LLC (2010) 191 Cal.App.4th 486, 512.)
Triable Issues of Fact on Alter Ego Liability
As we noted in our prior decision (Lopez v. Escamilla,
supra, 48 Cal.App.5th at p. 765), Lopez’s complaint alleged facts
showing alter ego liability. “Escamilla does not contest that the
complaint states facts sufficient to support a finding that he is the
alter ego of the corporation.” (Ibid., italics added.)
In response to requests for admissions, Escamilla admitted
that he was Magnolia Home Loan, Inc.’s initial director,
president, secretary, and treasurer. The company had only one
board meeting. Only he signed the company’s checks. He was
the only shareholder, officer, and board member. The company is
a suspended corporation and he still does business at the same
location.
Lopez claimed that a company called Magnolia Funding,
Inc. “procured the relevant loan.” It was doing business as
Magnolia Home Loans, Inc. In requests for admissions,
Escamilla admitted that he incorporated Magnolia Funding, Inc.
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He was its initial director. He was the president, vice president,
secretary, and treasurer. Only he signed the company’s checks.
He was the only shareholder, the only officer, and the only board
member the company had. The evidence showed that both
Magnolia Funding, Inc. and Magnolia Home Loans, Inc. were not
“adequately capitalized.” Each had only $1,000 in total capital
reserves. This meager capitalization supports an inference these
entities were created to avoid the personal liability of an alter
ego. (Automotriz etc. De California v. Resnik (1957) 47 Cal.2d
792, 796-797; Shafford v. Otto Sales Co. (1957) 149 Cal.App.2d
428, 432.)
When Magnolia Funding, Inc. dissolved, Magnolia Home
Loans, Inc. received its remaining physical assets. At the end of
fiscal year 2009, Magnolia Home Loans, Inc. held cash in the
amount of $53,102.92, and all that money was paid to Escamilla.
This is a triable issue of fact concerning Escamilla’s alter ego
liability.
Seeking Alter Ego Liability Post Judgment
Plaintiffs often discover that a judgment against a
corporation cannot be satisfied because the corporation has been
looted, the corporate identity was a fiction, or alter egos who
controlled the corporation possess all its assets. In such cases
courts have long held that alter ego liability applies after the
judgment has been entered against the corporation. (Misik v.
D’Arco (2011) 197 Cal.App.4th 1065, 1075; Alexander v. Abbey of
the Chimes (1980) 104 Cal.App.3d 39, 44-46; Thomson v. L.C.
Roney & Co. (1952) 112 Cal.App.2d 420, 425-426; Mirabito v. San
Francisco Dairy Co. (1935) 8 Cal.App.2d 54, 57.)
5.
Escamilla’s Alleged Due Process Rights
Escamilla relies on Motores, supra, 51 Cal.2d 172, for his
contention that it violates due process to hold him liable as an
alter ego.
In Motores, our Supreme Court held that when plaintiffs
“summarily add” individuals to a previously entered default
judgment against a corporation, those individuals are denied due
process. (Motores, supra, 51 Cal.2d at p. 176, italics added.) This
summary procedure denied defendants “the opportunity to be
heard and to present [their] defenses.” (Ibid.) The mere filing of
a petition to add defendants to a judgment denies defendants the
right to an “evidentiary hearing.” (Wells Fargo Bank, N.A. v.
Weinberg (2014) 227 Cal.App.4th 1, 9.)
Because the alleged alter egos could not fairly litigate their
defenses in that summary procedure, Motores, supra, 51 Cal.2d
172, held there had to be a showing of their connection to that
prior corporate litigation before they could be subject to such
summary postjudgment alter ego liability.
Unlike the facts in Motores, Lopez did not move to
summarily add Escamilla to the judgment. Also, unlike Motores,
this case involves the beginning of a civil action, not a
postjudgment summary proceeding. (Lopez v. Escamilla, supra,
48 Cal.App.5th at p. 765.) Escamilla will have the opportunity to
answer the complaint, engage in discovery, and file pre-trial
motions. Lopez must meet her burden of proof to support her
theory of alter ego liability claims.
In distinguishing Motores, Lopez correctly notes that a
“summary motion to amend a judgment unlike a separate
lawsuit, may not provide an adequate forum” for a defendant to
prove “lack of control” over corporate decisions. The summary
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procedure to “amend a judgment to add a defendant” involves
“imposing liability on the new defendant without trial.” (Triplett
v. Farmers Ins. Exchange (1994) 24 Cal.App.4th 1415, 1421,
italics added.) That is not what happened here.
Lopez also notes that in Motores “there were three alter
egos, such that no one of them individually controlled all
corporate decisions.” But here by contrast only one person made
all the decisions–Escamilla, and, unlike Motores, only he
controlled the litigation decisions of the corporation. Lopez made
a sufficient showing in opposition to summary judgment to
support a reasonable inference that Escamilla was “fully aware of
the progress of the legal proceedings” because of his complete and
exclusive control of the corporation. (Motores, supra, 51 Cal.2d at
p. 175; Toho-Towa Co., supra, 217 Cal.App.4th at p. 1110 [the
alter ego has control of the defense of the action].)
We previously held that Lopez had the right to bring this
postjudgment “independent action” against Escamilla on alter
ego liability grounds. (Lopez v. Escamilla, supra, 48 Cal.App.5th
at p. 764.) Here the trial court ruled on a motion for summary
judgment, not a motion for judgment on the pleadings that was
involved in our prior decision. But to the extent its ultimate
conclusion is that Lopez is barred from bringing this
postjudgment action, that ruling is inconsistent with our prior
decision. (Auto Equity Sales, Inc. v. Superior Court (1962) 57
Cal.2d 450, 455.)
Escamilla reliance on NEC Electronics Inc. v. Hurt (1989)
208 Cal.App.3d 772 (NEC Electronics) is to no avail. Like
Motores, that case was also a summary “motion to amend” the
judgment previously entered against a corporation to add an
officer as an additional judgment debtor. Moreover, there the
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court ruled there was “insufficient evidence to show that [the
officer] controlled the defense of the litigation” that resulted in
the judgment against the corporation. (NEC Electronics, at
p. 781.)
In NEC Electronics, the court noted that the respective
interests of the company and the individual subject to alter ego
liability were not the same. “Because the interests of Ph [the
company] and Hurt [the individual] were different, we cannot say
that Hurt had occasion to conduct the litigation with a diligence
corresponding to the risk of personal liability that was involved
or that Hurt was virtually represented in the lawsuit.” (NEC
Electronics, supra, 208 Cal.App.3d at p. 781, italics added.)
Here, by contrast, Lopez claims the corporation and
Escamilla had the same interests because Escamilla was the
corporation. Because he was the corporation, only he controlled
the company, all its decisions, the litigation, and the decision to
default. (Toho-Towa Co., supra, 217 Cal.App.4th at p. 1110.)
“ ‘Who else was interested in the fate of the corporation? If not
[the alter ego], who else?’ ” (Ibid.) “ ‘Manifestly, [the alter ego]
had control of the defense of the action . . . .’ ” (Ibid.) Unlike
NEC Electronics, here Lopez made a showing in opposition to
summary judgment to support a reasonable inference that
because of his exclusive control of the entity, Escamilla
exclusively controlled the corporate litigation decisions.
Escamilla relies on Wolf Metals Inc. v. Rand Pacific Sales
Inc. (2016) 4 Cal.App.5th 698 (Wolf Metals), another
distinguishable case. There an alleged alter ego did not
participate in the defense of an action against a corporation. A
default judgment was entered against the corporation. The
plaintiff thereafter filed a summary motion to amend the
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judgment (Code Civ. Proc. § 187) to name the alter ego as an
additional judgment debtor. The court ruled the default
judgment could not be amended post judgment. It said the
corporation “offered no defense” to the lawsuit, a default
judgment was entered, and consequently the trial court erred by
applying the summary motion procedure to amend the judgment
to impose alter ego liability. (Wolf Metals, at p. 709.)
Escamilla contends he did not know about the lawsuit
against his company. But the trial court did not reach that issue
because it ruled, as a matter of law, “[t]he fact that Escamilla
may have had actual or constructive notice of the action and that
he had the opportunity to control whether a defense was advanced
or not in the prior case are irrelevant.” (Italics added.) In so
ruling, the trial court erred. Escamilla’s control over that
litigation is relevant. (Minton v. Cavaney (1961) 56 Cal.2d 576,
581.)
The trial court also assumed a dispositive issue was the
lack of a defense by the corporation in response to the lawsuit
against it. But the ultimate issue was not how the case was
defended, but who in the corporation “controlled the litigation
leading to the judgment” against the corporation. (Minton v.
Cavaney, supra, 56 Cal.2d 576, 581; Toho-Towa Co., supra, 217
Cal.App.4th at p. 1110; Alexander v. Abbey of the Chimes, supra,
104 Cal.App.3d at p. 45 [“[I]t is now settled that ‘. . . the authority
of the court will be exercised to impose liability under a judgment
upon the alter ego who has had control of the litigation’ ”].) The
one who controls the litigation decisions may decide to defend a
lawsuit or make an “ ‘intentional strategic’ ” decision to default.
(Jerry’s Shell v. Equilon Enterprises, LLC (2005) 134 Cal.App.4th
1058, 1073.)
9.
The sole alter ego who owns the company and makes all
corporate decisions may decide that, instead of providing a
defense to a meritorious lawsuit, the corporation should incur a
default judgment to insulate himself from liability and to save
himself from spending money on a frivolous defense. By doing so,
he “controlled the litigation leading to the judgment” against the
corporation and he is liable as an alter ego. (Minton v. Cavaney,
supra, 56 Cal.2d at p. 581.) At this stage we do not decide
whether Escamilla directed a tactical default, only whether there
are triable issues of fact.
Lopez made a showing to support reasonable inferences
that the above scenario occurred. Escamilla exclusively owned
and controlled the corporation and made all its decisions,
including its litigation decisions. His claim of lack of knowledge
is disputed and may be challenged on credibility grounds.
“Surely every chief executive officer of a corporation is cognizant
of claims asserted against the corporation.” (NEC Electronics,
supra, 208 Cal.App.3d at p. 781.)
Lopez claimed, despite Escamilla’s denial, there are facts
showing the decision to allow a default judgment against the
corporation was strategic. It placed liability for fraud on the shell
company, instead of Escamilla, and that was exclusively for his
benefit. There was no defense to Lopez’s lawsuit for fraud. The
company was an under-capitalized shell. It was not a legitimate
independent business; it was a suspended corporation and it went
out of business when Lopez filed suit. Escamilla took all the cash
from that business thereby making it judgment proof. The
default of the corporation paved the path for the judgment,
blocking Lopez’s path to satisfy the judgment. This could show
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Escamilla’s pervasive control over both the entry of judgment and
the ability to prevent its enforcement.
Lopez also claims that there is additional evidence that
Escamilla deliberately calculated all his actions to defeat her
rights because in response to a request for admissions he
admitted that he is still is doing “business at the same location as
Magnolia Home Loans, Inc. did business.” (Italics added.) (Wells
Fargo Bank, N.A. v. Weinberg, supra, 227 Cal.App.4th at p. 9.)
Lopez claimed the facts she presented showed the “failure to
impose alter ego liability sanctions a fraud and promotes
injustice.” (Capitalization and underscoring omitted.) Proof of
these facts at trial may lead to alter ego liability. (Alexander v.
Abbey of the Chimes, supra, 104 Cal.App.3d at p. 45.)
DISPOSITION
The judgment and order granting summary judgment are
reversed. Costs on appeal are awarded to appellant.
CERTIFIED FOR PUBLICATION.
GILBERT, P. J.
We concur:
YEGAN, J.
TANGEMAN, J.
11.
Mark S. Borrell, Judge
Superior Court County of Ventura
______________________________
Law Offices of Malcolm R. Tator and Malcolm Tator for
Plaintiff and Appellant.
Richard W. Tentler for Defendant and Respondent.
12.