Opinion ID: 510625
Heading Depth: 3
Heading Rank: 2

Heading: Individual Liability for Corporate Debt

Text: 18 The legal services were performed for Aqualec, Inc. Plaintiff, however, argued below that Ethridge was the alter ego of Aqualec and could be held individually liable for Aqualec's debts. In discussing the doctrine of alter ego, the California Supreme Court has held that 19 [t]here is no litmus test to determine when the corporate veil will be pierced; rather the result will depend on the circumstances of each particular case. There are, nevertheless, two general requirements: (1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow. 20 Mesler v. Bragg Management Co., 39 Cal.3d 290, 702 P.2d 601, 606, 216 Cal.Rptr. 443, 448 (1985). 21 In its reply memorandum in support of its motion for summary judgment, plaintiff cited excerpts of Ethridge's deposition supporting the allegation that the corporate veil should be pierced. The requisite unity of interest and ownership in Ethridge's exertion of control over Aqualec is evidenced by several facts. Ethridge had absolute authority to act on Aqualec's behalf and was one of five members of Aqualec's board of directors. Ethridge owned twenty percent of the corporation's stock and his wife owned ten percent. In addition, Ethridge does not receive any compensation for his services as president of the corporation. The undercapitalization of the corporation is easily illustrated. Aqualec has no assets and most of its capitalization came from Ethridge. Further evidence that Ethridge should be held individually liable for Aqualec's debt is that Ethridge personally guaranteed a loan extended to the corporation which was used partially to pay for the litigation expenses of the original lawsuit, that Ethridge is now being sued for collection of the loans he personally guaranteed, and that until recently, Ethridge was paying the interest on the Aqualec loan personally. Moreover, there is no written agreement with respect to the monies expended by Ethridge with respect to the loan executed between Ethridge and Aqualec. Additionally, the checks made out to plaintiff for payment of legal services were drawn on Ethridge's personal account. 22 The unity of interest required under California law does not require a demonstration of complete ownership. California considers a host of factors relevant to finding a unity of interest. See Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal.App.2d 825, 832-34, 26 Cal.Rptr. 806, 813-15 (1962). One highly relevant factor in determining a unity of interest is undercapitalization. Id. at 833, 26 Cal.Rptr. at 814. In fact, the California Supreme Court has held that undercapitalization alone will justify piercing the corporate veil. See Minton v. Cavaney, 56 Cal.2d 576, 364 P.2d 473, 15 Cal.Rptr. 641 (1961). In this case, Aqualec's undercapitalization is clear. In addition, Ethridge failed to treat Aqualec as a separate entity. He guaranteed loans for the corporation, and paid some of its bills from his own bank account. These facts, together with his control over the activities of the corporation, are more than enough evidence to support a finding of a unity of interests. 23 Based upon the foregoing, sufficient evidence exists to warrant a finding that there is no genuine issue of material fact as to whether there is such a unity of interest and ownership that the separate personalities of the individual and the corporation no longer exist. 24 If Ethridge were allowed to escape liability for his actions, an inequitable result would follow. Thus, both prongs of the test for alter ego were satisfied. See United States v. Healthwin-Midtown Convalescent Hospital and Rehabilitation Center Inc., 511 F.Supp. 416, 420 (C.D.Cal.1981), aff'd, 685 F.2d 448 (9th Cir.1982). Accordingly, we find that plaintiff sufficiently met its burden under Fed.R.Civ.P. 56(c) as to the alter ego theory. 25 In addition to arguing that plaintiff did not meet its burden under Rule 56(c), defendants argue that the trial judge should have searched and considered the verified pleadings, affidavits, declarations, depositions, answers to interrogatories, and admissions on file in resolving the motion for summary judgment. A party opposing summary judgment has its burden expressly spelled out in Fed.R.Civ.P. 56(e) which provides, in pertinent part, that 26 [w]hen a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response, by affidavits or otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If he does not so respond, summary judgment, if appropriate, shall be entered against him. 27 Most recently, the proposition that a nonmoving party may not rely on its pleadings to defeat an appropriately supported summary judgment motion was stated by the United States Supreme Court in Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In Celotex, the Supreme Court reaffirmed the basic proposition that a party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrates the absence of a genuine issue of material fact. Id. at 323, 106 S.Ct. at 2553. Once the initial responsibility has been met, the burden shifts to the nonmoving party to oppose the motion by showing specific facts, pursuant to Fed.R.Civ.P. 56(e), which establish a genuine issue for trial. As clearly stated in the Celotex opinion, Rule 56(e) permits a proper summary judgment motion to be opposed by any of the kinds of evidentiary materials listed in Rule 56(c), except the mere pleadings themselves.... Id. at 324, 106 S.Ct. at 2554. 28 Similarly, in Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986), the Supreme Court again noted that Rule 56(e) provi[des] that a party opposing a properly supported motion for summary judgment 'may not rest upon the mere allegations or denials of his pleading, but ... must set forth specific facts showing that there is a genuine issue for trial.'  Id. at 248, 106 S.Ct. at 2510 (citation omitted). 29 Thus, defendants' argument that the Second Amended Counterclaim should have been considered by the trial judge as evidence of the existence of a genuine issue of material fact is deficient as a matter of law. Recent Supreme Court decisions firmly establish that pleadings are insufficient when an opposing party must carry its burden under Rule 56(e). In the absence of specific facts, as opposed to allegations, showing the existence of a genuine issue for trial, a properly supported summary judgment motion should be granted. 30 The defendants against whom summary judgment was entered made no showing of specific facts in their opposition to the summary judgment. Indeed, despite the fact that the movant's reply memorandum indicated that defendants had failed to properly support their opposition, despite a local rule requiring the opposing party to list all issues of material fact along with references to the record supporting the existence of those facts, and despite a tentative ruling by the trial judge expressly indicating that defendants' opposition to the summary judgment motion was insufficient, defendants did not show, with specific facts, the existence of a genuine issue for trial. At best, the conclusory nature of defendants' pleadings merely framed the ultimate issues of the lawsuit and did not establish the existence of genuine fact issues. Radobenko v. Automated Equipment Corp., 520 F.2d 540, 543 (9th Cir.1975). 31 This issue has been addressed by the First Circuit in Stepanischen v. Merchants Despatch Transportation Corp., 722 F.2d 922 (1st Cir.1983). The First Circuit found that a trial judge had a duty to sift through depositions to determine whether there was a genuine issue for trial, even in the absence of the nonmoving party's reference to pertinent deposition excerpts. However, the court noted that the trial judge could be, and indeed should be, limited by the promulgation of a local rule. Id. at 931. 32 Plaintiff's brief correctly asserts that the Central District of California, the district of origin for this case, has such a local rule. Local Rule 7.14.3 states that [i]n determining any motion for summary judgment, the Court will assume that the material facts as claimed and adequately supported by the moving party are admitted to exist without controversy except to the extent that such material facts are (a) included in the 'Statement of Genuine Issues' and (b) controverted by declaration or other written evidence filed in opposition to the motion. Plaintiff argues that this rule put defendants on notice that they were not to assume that the court would search through a voluminous record in the hope of locating and identifying facts that might dispute plaintiff's specific factual showing. We agree. We hold that when a local rule such as United States District Court--Central District of California Rule 7.14.3 has been promulgated, it serves as adequate notice to nonmoving parties that if a genuine issue exists for trial, they must identify that issue and support it with evidentiary materials, without the assistance of the district court judge. 33 In this case, defendants were put on notice by plaintiff, eleven months before the summary judgment motion was ruled upon, that its memorandum in opposition to the motion for summary judgment was legally insufficient because of the lack of evidentiary support. The trial judge, in her tentative ruling, highlighted for defendants the flaws in their opposition. Moreover, a pertinent local rule expressly indicated that the defendants had an affirmative burden to list genuine issues with appropriate record citations in order to withstand the motion for summary judgment. Defendants, in the face of all these warnings that summary judgment would be granted unless they adequately supported their opposition to the plaintiff's motion, neglected to cite the court to a single evidentiary fact. Accordingly, we hold that summary judgment was appropriate and affirm the district court. 1 B. Imposition of Sanctions 2 34 Imposition of sanctions under Rule 37 is reviewed for an abuse of discretion and absent a definite and firm conviction that the district court made a clear error of judgment, we will not reverse. United States v. National Medical Enterprises, Inc., 792 F.2d 906, 910 (9th Cir.1986). 35 Rule 37 sanctions are subject to certain limitations in that they must be just, and they must specifically be related to the particular claim that was at issue in the order to provide discovery. Id. (citations omitted). A sanction is just if the trial court considered the relevant factors and if the severity of the sanction is warranted by the conduct involved. Id. 1. Default Judgment 36 Default was entered against defendants and later set aside several times by the district court. As a condition for setting aside these defaults, the district court ordered payment of plaintiff's attorneys' fees and required that defendants completely and promptly respond to all discovery and obey the federal and local rules. 37 In Hawaii Carpenters' Trust Funds v. Stone, 794 F.2d 508, 512 (9th Cir.1986), we observed that this circuit has not ruled whether a district court has authority to condition the setting aside of a default upon payment of attorneys' fees and costs under Fed.R.Civ.P. 55(c). We did not need to reach the issue of whether conditions for setting aside default may be imposed because we were able to construe the district court's imposition of an impossible condition as the denial of relief from default. Id. at 513. Since we have not done so previously, we must rule upon this issue today. In discussing the conditioning of defaults, we have noted that other circuits have held that Fed.R.Civ.P. 60(b) allows district courts to impose such conditions on relief from judgment of default. Id. at 512, referring to Wokan v. Alladin International, Inc., 485 F.2d 1232, 1234 (3d Cir.1973); Thorpe v. Thorpe, 364 F.2d 692, 694 (D.C.Cir.1966). 38 By conditioning the setting aside of a default, any prejudice suffered by the non-defaulting party as a result of the default and the subsequent reopening of the litigation can be rectified. 10 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure Sec. 2700, p. 538 (1983). According to Wright, Miller & Kane, the most common type of prejudice is the additional expense caused by the delay, the hearing on the Rule 55(c) motion, and the introduction of new issues. Courts have eased these burdens by requiring the defaulting party to provide a bond to pay costs, to pay court costs, or to cover the expenses of the appeal. Id. The use of imposing conditions can serve to promote the positive purposes of the default procedures without subjecting either litigant to their drastic consequences. Id. at 539. 39 In Thorpe, it was noted that the philosophy of modern federal procedure favors trials on the merits, and default judgments should generally be set aside where the moving party acts with reasonable promptness, alleges a meritorious defense to the action, and where the default has not been willful. Thorpe, 364 F.2d at 694. Moreover, reasonable conditions may be imposed in granting a motion to vacate a default judgment. Id. The condition most commonly imposed is that the defendant reimburse the plaintiff for costs incurred because of the default. Id. In some cases, it may also be appropriate for the defendant to be required to post bond to secure the amount of the default judgment pending a trial on the merits. Id. 40 By setting aside the default with conditions, the district court judge in the instant case was attempting to facilitate discovery and was protecting the non-defaulting party by not requiring the plaintiff to pay for its costs. We find this behavior appropriate and not an abuse of discretion. Accordingly, we now hold that it is appropriate to condition setting aside a default upon the payment of a sanction. 41 Before granting the default judgment against defendants, the district court properly considered the effect prior court orders had upon defendants' behavior. The court observed that it had lifted three entries of default, imposed four orders for money sanctions against Ethridge for failure to comply with discovery requests and court orders, and held numerous hearings on motions to comply with discovery requests. Yet defendants failed to follow the May 1, 1985 Court Order and did not submit fully responsive answers to plaintiff's Request Number 8, failed to produce or specifically identify the particular documents requested in plaintiff's Request Numbers 3, 4, 5, and 8, and failed without justification to formulate their portion of a discovery motion stipulation according to Local Rule 7.15. After a review of the record, we agree that defendants have followed a deliberate, willful, studied course of frustrating plaintiff's attempts at discovery, complicating proceedings, and ignoring court orders. 42 Based upon this behavior, the district court's imposition of the ultimate sanction under Fed.R.Civ.P. 37(b)(2)(C) of entering default judgment on plaintiff's First Amended Complaint against defendants is justified. As the trial court recognized, a default judgment should be entered only in extreme circumstances. Independent Productions Corp. v. Loew's, Inc., 283 F.2d 730, 733 (2d Cir.1960). The district court gave defendants many opportunities to avoid this sanction, but its orders had no effect on defendants' behavior. Defendants continued to act in willful or deliberate disregard of discovery rules and court orders. As we stated in G-K Properties v. Redevelopment Agency, 577 F.2d 645, 647 (9th Cir.1978): 43 Litigants who are willful in halting the discovery process act in opposition to the authority of the court and cause impermissible prejudice to their opponents. It is even more important to note, in this era of crowded dockets, that they also deprive other litigants of an opportunity to use the courts as a serious dispute-settlement mechanism. 44 This type of behavior will not be condoned. Accordingly, we affirm the district court's default judgment. 45 2. Dismissal of Second Amended Counterclaim with Prejudice 46 The dismissal of an action with prejudice is also available as a sanction under Fed.R.Civ.P. 37(b)(2)(C). Since we have determined that defendants acted willfully or in bad faith in failing to comply with discovery rules and court orders or in flagrant disregard of those rules or orders, we find that the district court did not abuse its discretion in dismissing the Second Amended Counterclaim with prejudice. G-K Properties, 577 F.2d at 647. 47