Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_05-cv-00687/USCOURTS-casd-3_05-cv-00687-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 15:1692 Fair Debt Collection Act

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1 05-CV-0687 W (CAB) 

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

JAMES MCDONALD, on behalf of himself

and others similarly situated,

Civil No. 05-CV-0687 W (CAB)

Plaintiff, REPORT AND RECOMMENDATION RE

PLAINTIFF’S MOTION FOR LEAVE TO

FILE SECOND AMENDED CLASS

ACTION COMPLAINT FOR DAMAGES

AND DECLARATORY RELIEF

[Doc. # 30]

v.

BONDED COLLECTORS, LLC,

Defendant.

I. INTRODUCTION 

This case arises out of Defendant’s allegedly abusive debt collection practices. Plaintiff

seeks leave to file a Second Amended Complaint to add a new Defendant. The only currently

named Defendant opposes the motion. For the reasons that follow, the undersigned Magistrate

Judge recommends that Plaintiff’s motion be GRANTED. 

II. FACTS

Plaintiff James McDonald (“Plaintiff” or “McDonald”) incurred financial obligations to

Sears. (First Amended Complaint (“FAC”), ¶ 16). Plaintiff fell behind on his payments. (Id., ¶

18). The debt was assigned to Defendant Bonded Collectors, LLC (“Defendant” or “Bonded

Collectors”). (Id., ¶ 19). Plaintiff received a debt collection letter from Defendant. (Id., ¶¶ 21-

24). Plaintiff alleges that the letter did not comply with the notice requirements under California

law, and therefore also violated the federal Fair Debt Collection Practices Act. (Id., ¶¶ 22-23). 

The class allegations include all persons with addresses in the state of California, who received a

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2 05-CV-0687 W (CAB) 

similar letter from Defendant. (Id., ¶¶ 25-26). 

In the course of discovery, Plaintiff found out that Bonded Collectors had ceased its

operations and had no net worth. (Pl.’s P. & A. in Sup. of Mot. for Leave to Amend, 3:3-6; Def.’s

P. & A. in Opp. to Pl.’s Mot., 2:2-3). Plaintiff then discovered that Bonded Collectors had been

formed by a different entity, Pinnacle Credit Services, LLC (“Pinnacle”). Pinnacle owns 100% of

the interest in Bonded Collectors. Plaintiff was allowed to conduct discovery with regard to

Pinnacle’s relationship to Bonded Collectors. Plaintiff now alleges that he has discovered facts

showing that Pinnacle is an alter ego of Bonded Collectors. McDonald seeks leave to add

Pinnacle as a Defendant.

III. LEGAL STANDARD

“Rule 15(a) declares that leave to amend ‘shall be freely given when justice so requires’;

this mandate is to be heeded.” Foman v. Davis, 371 U.S. 178, 182 (1962). “[T]his policy is to be

applied with extreme liberality.” Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079

(9th Cir. 1990). Courts, however, need not grant leave to amend where the amendment: (1)

prejudices the opposing party; (2) is sought in bad faith; (3) produces an undue delay in litigation;

or (4) is futile. See AmerisourceBergen Corp. v. Dialysist West, Inc. 445 F.3d 1132, 1136 (9th Cir.

2006). Absent prejudice, or a “strong showing” of the other of the above factors, “there exists a

presumption under Rule 15(a) in favor of granting leave to amend.” Eminence Capital, LLC v.

Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (per curiam) (emphasis original). 

IV. DISCUSSION

Plaintiff’s motion should be granted. Contrary to Defendant’s position, the proposed

amendment does not appear so futile as to counteract the usual liberality in granting leave to

amend. “[A] proposed amendment is futile only if no set of facts can be proved under the

amendment to the pleadings that would constitute a valid and sufficient claim or defense.” Miller

v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988) (citations omitted); see also Gompper v.

VISX, Inc., 298 F.3d 893, 898 (9th Cir. 2002) (an amendment is futile when the plaintiff cannot

show an element of a claim). 

Defendant argues that as a separate entity, Pinnacle cannot be held responsible for the acts

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3 05-CV-0687 W (CAB) 

of Bonded Collectors because the facts do not support alter ego liability. “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. A corporate identity may be

disregarded--the ‘corporate veil’ pierced--where an abuse of the corporate privilege justifies

holding the equitable ownership of a corporation liable for the actions of the corporation.” Sonora

Diamond Corp. v. Superior Court, 83 Cal. App. 4th 523, 538 (2000) (internal citations omitted). 

“In California, two 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.” Id. (citing Automotriz etc. De California v. Resnick, 47 Cal.2d 792, 796

(1957)). The determination regarding whether the corporate veil should be pierced is made upon

consideration of a number of factors, including inadequate capitalization, identical equitable

ownership in the two entities, use of the same offices and employees, disregard of corporate

formalities, use of one company as a mere shell or conduit for the affairs of the other, etc. See id at

538-539. “No one characteristic governs, but the courts must look at all the circumstances to

determine whether the doctrine should be applied.” Id. The sole ownership and control of one

corporation by another does not automatically create alter ego liability. Katzir’s Floor and Home

Design, Inc. v. M-MLS.com, 394 F.3d 1143, 1149 (9th Cir. 2004). “Alter ego is an extreme

remedy, sparingly used.” Sonora, 83 Cal. App. 4th at 539. 

Defendant argues that the only fact Plaintiff has discovered in support of its alter ego

theory is that Pinnacle was the sole shareholder of Bonded Collectors and allegedly wielded

substantial influence over the subsidiary. (Def.’s P. & A. in Opp. to Pl.’s Mot., 3:2-6). According

to Defendant, Plaintiff has no ground to claim that treating the acts of Bonded Collectors

separately from those of Pinnacle would bring about an inequitable result. (See id., 2:26-3:1

(“there must be conduct amounting to bad faith or fraud to justify a finding of liability based upon

alter ego.”)). 

The alleged lack of evidence does not establish the futility of the amendment at this point

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In addition, the proposed Second Amended Complaint alleges theories of liability other than alter

ego, such as respondeat superior and conspiracy. 

4 05-CV-0687 W (CAB) 

in the litigation. Where the plaintiff offers to provide “additional evidence” that would add

“necessary details” to an amended complaint and such offer is made in good faith, leave to amend

should be granted. See Eminence, 316 F.3d at 1053. The Ninth Circuit has “repeatedly stressed”

that courts must remain guided by “the underlying purpose of Rule 15 ... to facilitate decision on

the merits, rather than on the pleadings or technicalities.” Lopez v. Smith, 203 F.3d 1122, 1127

(2000) (citation omitted). Plaintiff claims that the documents produced by Pinnacle show that

Pinnacle, a debt collecting company with substantial assets, formed Bonded Collectors as an

undercapitalized shell corporation to avoid liability. In particular, Plaintiff represents to have

learned the following facts: Bonded Collectors accepted Pinnacle’s offer of purchase for $1,000

shortly after Bonded Collectors was formed; Bonded Collectors could not refer any collection

account to litigation without Pinnacle’s consent; Bonded Collectors was supposed to carry a

$1,000,000 insurance policy to cover possible claims against it, including violations of state and

federal collection laws; Pinnacle passed through accounts purchased, and Bonded Collectors

collected on the accounts. (Pl.’s P. & A. in Sup. of Mot. for Leave to Amend, 4:10-25). Therefore

it appears that Plaintiff may prove a set of facts in support of its claim. Miller, 845 F.2d at 214. 

Further, the present motion was filed well in advance of the November 27, 2006 discovery cut-off. 

It is therefore not at all unlikely that Plaintiff may discover more of the needed evidence in support

of its theory.1 

Defendant does not argue the presence of such factors as prejudice, undue delay, bad faith,

or dilatory motive. It does not appear that the proposed amendment would be prejudicial to the

current Defendant or Pinnacle. Plaintiff moved to amend relatively early in litigation, and

Pinnacle has already produced some responses to Plaintiff’s discovery requests. Pinnacle will

therefore have an opportunity to build a defense. Amending the pleadings at this stage of the

action would not cause undue delay. Defendant has not shown bad faith or dilatory motive on

Plaintiff’s part, other than arguing that the amendment would be futile. 

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Finally, Plaintiff has only once amended its Complaint before. Based on the above,

Bonded Collectors has not overcome the presumption in favor of allowing leave to amend. 

Accordingly, Plaintiff’s motion should be granted. 

V. CONCLUSION AND RECOMMENDATION

The undersigned Magistrate Judge recommends that Plaintiff’s Motion for Leave to File

Second Amended Complaint be GRANTED. This Report and Recommendation of the

undersigned Magistrate Judge is submitted to the United States District Judge assigned to this

case, pursuant to 28 U.S.C. § 636 (b)(1). 

IT IS HEREBY ORDERED that no later than October 2, 2006, any party to this action

may file written objections with the Court and serve a copy on all parties. The document should

be captioned “Objections to Report and Recommendation.” 

IT IS FURTHER ORDERED that any reply to the objections shall be filed with the

Court and served on all parties within 10 days of being served with the objections. 

IT IS SO ORDERED.

DATED: September 18, 2006

HON. CATHY ANN BENCIVENGO

United States Magistrate Judge

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