Opinion ID: 179769
Heading Depth: 3
Heading Rank: 2

Heading: The Grove Trust

Text: Goodrich also argues that Michaels is an equitable owner of the Grove Trust and that equitable ownership is sufficient to confer alter ego liability. The Debtors respond that the Grove Trust is not Michaels's alter ego because he is not its legal owner, and that allowing alter ego liability would constitute reverse piercingthat is, pierc[ing] the corporate veil to reach corporate assets to satisfy a shareholder's personal liabilitywhich the California Court of Appeal has prohibited in the corporate context. Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App.4th 1510, 77 Cal.Rptr.3d 96, 97 (2008). In determining whether alter ego liability applies, we apply the law of the forum state. Towe Antique Ford Found. v. I.R.S., 999 F.2d 1387, 1391 (9th Cir.1993). Under California law, the Grove Trust is Michaels's alter ego. California recognizes alter ego liability where two conditions are met: First, where there is such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased; and, second, where adherence to the fiction of the separate existence of the corporation would ... sanction a fraud or promote injustice. Wood v. Elling Corp., 20 Cal.3d 353, 142 Cal.Rptr. 696, 572 P.2d 755, 761 n. 9 (1977). Factors suggesting an alter ego relationship include [c]ommingling of funds and other assets [and] failure to segregate funds of the separate entities ...; the treatment by an individual of the assets of the corporation as his own ...; the disregard of legal formalities and the failure to maintain arm's length relationships among related entities ...; [and] the diversion [of assets from a corporation by or to a] stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets ... between entities so as to concentrate the assets in one and the liabilities in another. Associated Vendors, Inc. v. Oakland Meat Co., Inc., 210 Cal.App.2d 825, 26 Cal.Rptr. 806, 813-15 (1962) (citations omitted). California courts have applied the alter ego doctrine to trusts. See, e.g., Torrey Pines Bank v. Hoffman, 231 Cal.App.3d 308, 282 Cal.Rptr. 354, 359 (1991) (holding guarantors of a family trust liable for the trust's debts under an alter ego theory). We first address the Debtors' reverse piercing argument. As they correctly note, the California Court of Appeal held in Postal Instant Press, Inc. that a third party creditor may not pierce the corporate veil to reach corporate assets to satisfy a shareholder's personal liability. 77 Cal.Rptr.3d at 97. We must follow the decision of the intermediate appellate courts of the state unless there is convincing evidence that the highest court of the state would decide differently. Owen By and Through Owen v. United States, 713 F.2d 1461, 1464 (9th Cir.1983) (citations and internal quotation marks omitted). In the context of trusts, however, the California Supreme Court has allowed alter ego claims where a trust is alleged to be a debtor's alter ego. Thus, in Wood v. Elling Corp ., the California Supreme Court gave leave to amend a complaint to assert alter ego claims, concluding, If it were alleged and proven that the two trusts in question were themselves alter egos of the [defendants], those trusts would essentially drop out as independent legal entities. 572 P.2d at 762. In the absence of further guidance from California courts, therefore, we cannot extend the prohibition on reverse piercing to the trust context. Second, we address the Debtors' contention that legal ownership is an absolute requirement for alter ego liability. No California case explicitly addresses the question, but in Hickey the Ninth Circuit interpreted California law as implying that ownership is a prerequisite. 322 F.3d at 1128-29. Hickey addressed the ownership requirement in the corporate context, concluding that stock ownership is a requirement for the imposition of alter ego liability. Id. In so concluding, however, Hickey cited with approval Firstmark Capital Corp. v. Hempel Financial Corp., an earlier Ninth Circuit opinion applying California law and holding that a wife's community property interest in [her husband's] stock holdings ... is sufficient to satisfy the ownership requirement. 859 F.2d 92, 94 (9th Cir.1988). Hickey therefore did not foreclose the possibility that equitable ownership might be sufficient in some contexts. California case law suggests that equitable ownership is sufficient. The California Supreme Court has noted that an individual's expectation that he would receive shares of a corporation supports an inference that he was an equitable owner and justifies imposition of alter ego liability. Minton v. Cavaney, 56 Cal.2d 576, 15 Cal. Rptr. 641, 364 P.2d 473, 475 (1961). And in Troyk v. Farmers Group, Inc., the California Court of Appeal imposed alter ego liability on a managing agent and attorney-in-fact although it did not own the interinsurance exchange at issue. 171 Cal. App.4th 1305, 90 Cal.Rptr.3d 589, 620 (2009). Legal ownership was not necessary because, although [a]n insurance exchange is `owned' by the subscribers, ... given that the subscribers are required to appoint the attorney-in-fact as managerial agent, the `ownership' element of the alter ego doctrine is not applicable in this context. Id. at 620 n. 27 (citation and internal quotation marks omitted). In essence, the managing agent was the equitable owner. See also Sonora Diamond Corp. v. Superior Court, 83 Cal.App.4th 523, 99 Cal.Rptr.2d 824, 836 (2000) (where the alter ego doctrine applies, 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). In the context of trusts, moreover, equitable interest is traditionally sufficient to confer ownership rights. Thus, under California law, trust beneficiaries hold an equitable interest in trust property and are `regarded as the real owner[s] of [that] property.' Steinhart v. County of L.A., 47 Cal.4th 1298, 104 Cal.Rptr.3d 195, 223 P.3d 57, 72 (2010) (alterations in original; citation omitted); see also 76 Am. Jur.2d Trusts § 258 (2010) (the creation of a trust places legal title in the trustee and equitable title in the beneficiary; courts will enforce a beneficiary's equitable interest). We conclude that, under California law, equitable ownership in a trust is sufficient to meet the ownership requirement for purposes of alter ego liability. Here, Michaels is an equitable owner of the Grove Trust because he acted as owner of the trust and its assets. See In re Marriage of Dick, 15 Cal.App.4th 144, 18 Cal.Rptr.2d at 752-53 (inferring from husband's use of assets not in his name that, notwithstanding his absence of legal title, husband controlled ownership of [the assets] through the fiction of a trust). Having used his own assets and a corporation that the bankruptcy court termed nothing but a shell to acquire the Grove Lots, Michaels continued to act as owner of the trust assets and as trustee; Briones, the named trustee, had no role nor took any action ... other than to write checks as demanded by Michaels. Michaels also acted as a beneficiary of the Grove Trust, which purchased a home where he lived rent-free, paid maintenance expenses for another home where he lived, again rent-free, and paid Michaels at least $105,000 in unexplained fees. The trusts also paid for a wedding, at Michaels's request, and for a life insurance policy with an unknown beneficiary. Those facts suggest that Michaels is an equitable owner of the Grove Trust. Given that Michaels's equitable ownership is sufficient to meet the ownership requirement, the bankruptcy court did not clearly err in finding an alter ego relationship. See Towe Antique Ford Found., 999 F.2d at 1391 (alter ego determinations are typically findings of fact reviewed for clear error). As the bankruptcy court found, Michaels dominated and controlled all decisions of the Grove Trust. He also received payments from the trusts without documentation and to avoid a creditor and diverted assets to the detriment of his creditors, using his assets to acquire the Grove Lots at a time when he was insolvent. Given that the bankruptcy court called the acquisition of the Grove Lots a fraud on the creditors of the Debtors, failure to find alter ego liability would sanction a fraud or promote injustice. The bankruptcy court did not err in finding that the Grove Trust is Michaels's alter ego.