Court Opinion

ID: 9538996
Source: CourtListenerOpinion
Date Created: 2023-08-07 07:45:12.605087+00
Date Added: 2024-06-11T14:58:22.249011
License: Public Domain

LUCAS, J.
I respectfully dissent. The settlement reached between Wesley Mesler and Bragg Crane Services, Inc. (Bragg Crane) resulting in Mesler’s dismissal with prejudice of his action against Bragg Crane must preclude Mesler from continuing against Bragg Management Company (Bragg Management) on an alter ego theory. Using a confusing meld of incompatible and inapplicable principles, the majority concludes that the corporate veil may be pierced, and one entity deemed the “alter ego” of another for purposes of liability, while simultaneously concluding that the same veil remains intact when considering the effects of a settlement.
This inconsistency appears to be engendered in part by my colleagues’ extensive reliance on cases involving principal-agent relationships and vicarious liability. However, plaintiff’s action here rested on neither theory. Mesler asserted instead that the two corporate Bragg entities were so overlapping and identical that in the context of this action the corporate veil must be ignored and the two treated as one entity.
Incorporation is specifically utilized to limit liability. When abused, the corporate structure may be ignored, but “The standards for the application of alter ego principles are high, and the imposition of liability notwithstanding the corporate shield is to be exercised reluctantly and cautiously.” (1 Fletcher, Cyclopedia Corporations (perm. ed. 1983) § 41.10 at p. 397, fn. omitted [hereinafter Fletcher].) As an exception to the usual insulation from liability which incorporation provides to its shareholders, care is required before “alter ego” is found applicable.
The majority indulges in frequent analogies to and reliance upon cases involving agency relationships. “The traditional concept of agency refers *307to a special legal relationship between separate legal persons as a result of which the acts of one are attributed to the other with attendant legal consequences.” (Blumberg, The Law of Corporate Groups (1983) § 1.02.2, at p. 21, fn. omitted, italics added [hereinafter Blumberg].) This special relationship and its concomitant rights and liabilities may be statutorily prescribed: “An agent represents his principal for all purposes within the scope of his actual or ostensible authority, and all the rights and liabilities which would accrue to the agent from transactions within such limit, if they had been entered into on his own account, accrue to the principal.” (Civ. Code, § 2330.) The principal’s vicarious liability for the acts of his agent extends only to the limits of the agency and to acts “committed by such agent in and as part of the transaction of” the business of the agency, but not to any other acts unless authorized or ratified by the principal. (Id., §§ 2338, 2339.)
When liability is imposed based on agency relationships, the separate legal identity of two or more defendants is acknowledged, but liability nonetheless is imputed under specified conditions. Normally, under general legal principles, a corporation is not the agent of its shareholders, nor is a corporate subsidiary automatically considered an agent of a parent corporation. (Blumberg, supra, § 1.02.2 at pp. 21-22.) When, rather than an agency relationship, alter ego is asserted, the goal is to ignore the identity of the corporation and to withhold the separate recognition to which, prima facie, it would otherwise be entitled. The corporate veil is pierced to establish that two facially separate legal entities are in fact one and should be treated as such. In other words, “[u]nder the [alter ego] doctrine, the court merely disregards the corporate entity and holds the individual responsible for his acts knowingly and intentionally done in the name of the corporation. [1] .... A corporation may be the alter ego of another corporation and where this occurs the distinct corporate entity will be disregarded and the two corporations will be treated as one.” (Fletcher, supra, § 41.10 at pp. 397-398, fns. omitted.)
With this background in mind, I turn to the majority’s opinion here. Undoubtedly, a finding that one corporation is alter ego of another for the purpose of a particular action does not mean that the corporate veil will be breached as to all suits or creditors for all purposes. However, the majority utilizes this rule in a unique way: it permits reliance on a finding of alter ego for one part of analyzing a transaction, but adheres to corporate separateness for consideration of the exact same transaction. The contradictory pull thus created permeates my colleagues’ opinion.
For example, the majority first observes that a finding of alter ego does not mean “It is not that a corporation will be held liable for the acts of *308another corporation because there is really only one corporation.” (Ante, p. 301.) This disclaimer however is directly contrary to the generally accepted characterization of the effect of such a finding: “When a case calls for an exception to the entity view, courts usually construct a common identity for the parent and subsidiary corporations, thereby treating them as one.” (Blumberg, supra, § 1.02.1 at p. 9; see also 1A Ballantine & Sterling, Cal. Corporation Laws (4th ed. 1984) § 295, at p. 14-32 [hereinafter Ballantine] [courts applying alter ego theory “treat the body of shareholders and the corporation as procedurally synonomous rather than as separate juristic entities”].) In fact, it is because in essence there is functionally but one entity that alter ego is appropriate in a given situation.
The majority opinion then pictures a hole drilled in the “wall of limited liability erected by the corporate form” and concludes that “When it is claimed that a parent corporation should be liable because it is the alter ego of its subsidiary, equity commands that the corporate wall be breached. Yet the wall remains: the parent is liable through the acts of the subsidiary, but as a separate entity.” (Ante, p. 301, italics added.) This confuses the separate legal identity of corporation and shareholder and the difference between agency and alter ego relationships. The opinion continues: “A judgment obtained against a corporation and its alter ego is enforceable against both separately. Thus, when the plaintiff settles with only the subsidiary, the parent’s liability continues.” (Ibid.) There is an unwarranted leap of logic to the conclusion that the parent remains liable which apparently arises out of an assumption of continuing individual legal identity even when liability is based solely on a claim of alter ego identification. Part of the problem may also arise out of my colleagues’ reliance on the parent-subsidiary relationship; however, not every alter ego situation arises from corporate connections and the rule established here will affect individual shareholders as well.
Bragg Management’s status as the parent of Bragg Crane is insignificant once alter ego principles apply. The parent-subsidiary relationship per se is irrelevant except to the extent it bears on the original determination of whether alter ego is appropriate. If, as Mesler asserts, the two corporations are alter egos, they should be treated as one single entity. Once this is understood, it becomes difficult to understand how the majority can hold that the settlement here does not bar further action against Bragg Management. If an action is settled with John Doe, the plaintiff cannot proceed against him as J. Doe for further and separate damages. Nonetheless, that is precisely the effect of the majority’s reasoning here.
The United States District Court in Fuls v. Shastina Properties, Inc. (N.D.Cal. 1978) 448 F.Supp. 983, clearly understood that an alter ego *309finding must be consistently applied. As it explained, “Where the alter ego doctrine applies, . . . the two corporations are treated as one for purposes of determining liability. It follows that where the one corporation is released from liability, so too is the other.” (P. 989.) This state of affairs arises, of course, because under the alter ego theory urged by Mesler, Bragg Management can only be liable if Bragg Crane is liable but only because the two entities are viewed as indivisible. (See M/V American Queen v. San Diego Marine Const. (9th Cir. 1983) 708 F.2d 1483, 1490.)
If Mesler had first sued Bragg Crane, settled and judgment had thereupon been entered in Bragg Crane’s favor, Mesler would have been estopped from proceeding further against Bragg Management except to the extent that it might have sought to collect from it any unsatisfied portion of the judgment. Plaintiffs often move postjudgment to amend a judgment in their favor to add a previously unnamed person or entity as a defendant on the ground that it or he is the alter ego of an originally denominated defendant. (See Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39, 44-46 [163 Cal.Rptr. 377]; Code Civ. Proc., § 187.) However, such amendment is not permitted in the absence of a showing of due diligence on the part of the plaintiff, and of participation in the defense of the underlying action by the claimed alter ego. (Minton v. Cavaney (1961) 56 Cal.2d 576, 581 [15 Cal.Rptr. 641, 364 P.2d 473]; Alexander, supra, at pp. 47-48; Ballantine, supra, § 299.04 at pp. 14.45-14.46 [factors considered in permitting amendment of judgment to include new defendant].) Such restrictions are necessary to protect the newly named entity’s constitutional rights. (See Motores de Mexicali v. Superior Court (1958) 51 Cal.2d 172, 176 [331 P.2d 1].)
The postjudgment use of alter ego doctrine can serve only to obtain collection based on already established liability. Moreover, its availability serves to counter the majority’s claims about unsuspecting plaintiffs improvidently settling with an apparently “undercapitalized” corporation. A plaintiff may settle for full value and seek to collect not only from that corporation but also from any alter ego. Plaintiffs must, as noted, exercise due diligence but this encourages careful and timely investigation of claims and possible defendants. A plaintiff may also expressly reserve the right to seek further recovery from an alter ego when the question of the relationship between defendants remains unsettled. (See, e.g., Meyer v. Stern (D.Colo. 1984) 599 F.Supp. 295, 298.) A plaintiff thus may settle and obtain speedy recovery without foreclosing his options as to other potential sources of recovery.
Plaintiff here did not expressly reserve any rights in his settlement. Instead, Mesler’s claim against Bragg Management was based on the assertion *310that it was in fact the alter ego (not the parent or shareholder or superior or principal) of Bragg Crane, and the corporate walls dividing the two entities therefore were illusory. Mesler obviously knew long before his settlement with Bragg Crane of the existence and purported synonymity of Bragg Management, and in fact his motion to amend to add Bragg Management as an alter ego was the original subject of this appeal. It was only during the pendency of the appeal that Mesler settled with Bragg Crane, who, he had been alleging, was the same entity as Bragg Management. It is in this context that Mesler’s invocation of Code of Civil Procedure section 877 must be rejected.
Section 877 provides in relevant part that where a release, dismissal or covenant not to sue is given to one defendant, “It shall not discharge any other tortfeasor from liability unless its terms so provide . . . .” (Italics added.) It does not apply here because, under the theory of liability urged by Mesler, Bragg Management is not another tortfeasor but rather it is merely the alias of the tortfeasor with whom Mesler has already reached agreement. The analysis of section 877 by the majority is simply irrelevant.
The basic harm in the majority opinion is the potential erosion it may cause in the concept of limited liability created by use of the corporate form. Incorporation creates defined legal obligations and relationships between corporation and shareholder (corporate or individual). These relationships are distinct from those created in an agency or vicarious liability situation. The majority unfortunately blurs the line.
In summary, my colleagues may well have put the lie to Shakespeare’s maxim:
“What’s in a name: That which we call a rose
By any other name would smell as sweet.”
(Romeo and Juliet, Act II, sc. 2.)
I would dismiss the appeal as moot.
Grodin, J., concurred.