Court Opinion

ID: 4567481
Source: CourtListenerOpinion
Date Created: 2020-09-21 19:02:16.947825+00
Date Added: 2024-06-11T09:26:28.478971
License: Public Domain

Filed 9/21/20 Carter v. Landa CA4/1
                 NOT TO BE PUBLISHED IN OFFICIAL REPORTS
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                COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                                 DIVISION ONE

                                         STATE OF CALIFORNIA

 JOHN PENN CARTER, APC,                                               D075353
           Plaintiff and Respondent,
           v.                                                         (Super. Ct. No. ECU09474)
 ENRIQUE LANDA et al.,
           Defendants and Appellants.

         APPEAL from a judgment of the Superior Court of Imperial County,
Jeffrey Bruce Jones, Judge. Affirmed.
         Williams Iagmin and Jon R. Williams for Defendants and Appellants.
         Horton, Knox, Carter & Foote, Orlando B. Foote and Margarita
Haugaard for Plaintiff and Respondent.

         Defendant-entrepreneur Enrique Landa hired plaintiff-attorney John
Penn Carter to help him pursue three ambitious water projects. But he never
paid Carter. Having lost the resulting suit brought by the attorney for
recovery of fees, Landa now challenges two aspects of the trial court’s ruling,
notably its use of the alter ego doctrine. We affirm, finding sufficient
evidence to support the result.
              FACTUAL AND PROCEDURAL BACKGROUND
      In 2013, Landa hired Carter, an attorney with expertise in water
rights, to help him pursue three interrelated cross-border water projects.
They had worked together previously in 2006 on a water project that never
materialized. Landa’s vision for the 2013 projects was three-fold. First, he
would secure authorization and financing for two plants—one for wastewater
treatment and one for desalination—that would collectively reduce
dependence on water from the Colorado River in both Northwest Mexico and
the Southwestern United States, leaving conserved river water in the
Tijuana Aqueduct that could then be sold back to public entities in the
United States at a reduced rate. He named each of these components: PURA
for wastewater treatment, Nuevagua for desalination, and Diagua for
conserved river water.
      Carter worked on these projects from 2013 through 2015. Landa, who
often formed multiple LLCs to house his business ventures, was Carter’s
point of contact even as his corporate client changed. In February 2013,
Carter started working under the Diagua name, though it took it took until
June for the two men to sign Carter’s engagement letter, which he redrafted
at Landa’s instruction to name Endol, LLC (Endol) as his client. Landa
signed the letter in his capacity as manager of Endol. About a month later,
Landa informed Carter that the newly formed Nuevagua, LLC (Nuevagua)
would be substituted for Endol as Carter’s client.
      In subsequent months, Carter and Landa discussed a reduction in
Carter’s fees patterned after their 2006 agreement, in which Carter deferred
payment for half of his billable hours in exchange for an equity share in the
water project if it was successful. Although the previously signed
engagement letter did not specify any deferment or contingency fee

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arrangement, subsequent e-mails between Landa and Carter indicate that
their understanding shifted over time. But the two men never explicitly
settled on the amount Carter would defer, or the nature of the benefit he
would receive if the venture was successful. In the meantime, Landa
expressed some sticker shock after seeing Carter’s first invoice. Carter
offered to go over the billing with him, and eventually met with someone on
Landa’s behalf to discuss both the billing and the fee arrangement—but this
never led to any revised agreement.
      By late 2014, it became clear that the Nuevagua project would not gain
the requisite approval Landa was seeking from the Mexican government.
Shortly afterward, Landa also discovered a significant legal barrier to the
Diagua project. He elected to wind the projects down. Despite repeated
requests for payment, Carter had not yet been compensated for any of his
time. In 2016 Carter brought suit against Endol, Nuevagua, and Landa to
recover his fees, pleading express breach of contract and quantum meruit.
Landa dissolved Nuevagua in 2017.
      After a five-day bench trial, the court ruled in Carter’s favor, awarding
him half of his fees, plus interest. It made specific findings that (1) Carter’s
fees were reasonable given his industry connections, (2) Carter and Landa
had an implicit agreement to defer half of Carter’s fees and award him either
a future equity interest in Nuevagua (Carter’s understanding) or a cash
bonus (Landa’s understanding) if the project was successful, and (3) Landa is
the alter ego of Endol and Nuevagua. Applying the alter ego doctrine, the
court held Landa personally liable for the corporate debt incurred for Carter’s
services.

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                                 DISCUSSION
      On appeal, Landa challenges the court’s decision on two grounds,
claiming the alter ego finding is unsupported by the evidence and that
Carter’s pursuit of an equity interest in Nuevagua was an ethical violation
that should bar his recovery of any fees. We are unpersuaded by either
contention. As we explain, there was sufficient evidence to support the
court’s application of the alter ego doctrine, and the specific ethical violations
Landa hypothesizes never materialized in this case. We accordingly affirm
the trial court’s decision.
1.    Alter Ego
      Corporations are generally respected as legally distinct entities,
separate from those who control and benefit from them. (Communist Party v.
522 Valencia, Inc. (1995) 35 Cal.App.4th 980, 993 (Communist Party).) But
when necessary to uphold “justice and equity” and avoid “fraud and
unfairness,” their separate existence can be set aside by application of the
alter ego doctrine. (Kohn v. Kohn (1950) 95 Cal.App.2d 708, 718.) Whether
this remedy at equity is appropriate in any given circumstance is a factual
determination that falls within the purview of the trial court. (H.A.S. Loan
Service v. McColgan (1943) 21 Cal.2d 518, 523; Stark v. Coker (1942) 20
Cal.2d 839, 846.) In recognition of this, appellate courts have abstained from
prescriptive guidance and adhere instead to general principles. (Associated
Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 837 (Associated
Vendors).) Two elements “must be found to exist before the corporate
existence will be disregarded,” namely (1) “such unity of interest and
ownership that the separate personalities of the corporation and the
individual no longer exist,” and (2) “an inequitable result” would flow from

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upholding the separation. (Ibid.; Automotriz del Golfo De California S.A. de
C.V. v. Resnick (1957) 47 Cal.2d 792, 796 (Automotriz).)
      California courts consider numerous factors in deciding whether
disregard of a corporation’s separate existence is merited. (See Associated
Vendors, supra, 210 Cal.App.2d at pp. 838–840 [providing an overview of the
various factors].) Failure to observe corporate formalities, such as
commingling of funds and failure to invest sufficient capital to make a
corporation solvent are often invoked as grounds for a finding of alter ego.
(See Riddle v. Leuschner (1959) 51 Cal.2d 574, 581‒582; Goldberg v.
Engelberg (1931) 34 Cal.App.2d 10, 13; Stark v. Coker (1942) 20 Cal.2d 839,
846‒848; Minton v. Cavaney (1961) 56 Cal.2d 576, 578‒580; Automotriz,
supra, 47 Cal.2d 792.) A corporation’s control and domination by one
individual is another factor tending to show unity of interest. (D.N. &
E. Walter & Co. v. Zuckerman (1931) 214 Cal. 418, 420.) While no one factor
is dispositive, undercapitalization is an important consideration. (See Zoran
Corp. v. Chen (2010) 185 Cal.App.4th 799, 812; Associated Vendors, supra,
210 Cal.App.2d 825; Auer v. Frank (1964) 227 Cal.App.2d 396, 409;
Automotriz, at p. 797, quoting from Ballantine on Corporations (rev. ed.
1946), at pp. 302‒303 [“If the capital is illusory or trifling compared with the
business to be done and the risks of loss, this is a ground for denying the
separate entity privilege”]; Shapoff v. Scull (1990) 222 Cal.App.3d 1457, 1470
[“The requirements of the [alter ego] doctrine may be met where, as here, the
corporation is undercapitalized in light of its prospective liabilities.”].)
      There are only a few general boundaries governing the second element
of an inequitable result. Plaintiff cannot satisfy this element merely by
demonstrating it is an unsatisfied debtor. But it need not prove actual fraud
either. (Gordon v. Aztec Brewing Co. (1949) 33 Cal.2d 514, 523; Sonora

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Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 539; Misik v.
D’Arco (2011) 197 Cal.App.4th 1065, 1074.) The key question is whether the
plaintiff has shown that an injustice would be accomplished absent the
court’s use of alter ego. When after considering these factors, a trial court is
satisfied that the protections of the corporate form should be disregarded, we
will not overturn such a decision unless it is unsupported by substantial
evidence. (Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39, 46‒
47.)
       Landa claims there was insufficient evidence to demonstrate his unity
of interest with the LLCs and that no injustice could flow from adhering to
the corporate form because Carter is no more than an unsatisfied debtor of a
defunct corporate entity. But in advancing these arguments, Landa
mischaracterizes both the record and the trial court’s findings. The trial
court concluded that Landa controlled both corporate entities and left
Nuevagua, which inherited Endol’s obligations, undercapitalized. The facts
supporting these findings were robust and, as we explain, they are enough to
sustain the court’s use of the alter ego doctrine.
       In commenting on Landa’s control of the LLCs, the court noted they
were organized by Landa “in a byzantine fashion, with entities as the
managing members of other entities, which then became managing members
of yet other entities” and that “Landa was the decision-maker for his ersatz
corporations.” These conclusions find support in the record, particularly
Landa’s own testimony. He described his practice of creating LLCs to house
his business pursuits and using other preexisting LLCs or family trusts as
members, effectively keeping each project separate and insulating him from
personal liability. For each of his 15 to 20 LLCs, he testified that he is
“usually the managing member of the managing member.”

                                        6
      A more detailed review of the evidence shows the companies were
organized like nesting dolls, with Landa’s hand at the helm: Endol is owned
by the DEFA trust, which is a family trust Landa controls as trustee. Endol
also owns the idea of Diagua, which Landa never incorporated as its own
LLC but nonetheless controls through his role as the manager of Endol.
Nuevagua is managed by Endol and owned by four other trusts, three of
which Landa controls as trustee with his children as the named beneficiaries.
Landa counters that he is not enmeshed with Endol or Nuevagua since he is
not the beneficiary of any of the family trusts that control the entities, and he
does not personally own Endol or Nuevagua. While this is technically true,
his actual, personal control of the entities through the layers of separation
belies his position.
      That Landa was the decision maker behind his enterprises is again
demonstrated by his testimony that Carter worked as a “consultant to the
project being directed by me” and that “I always direct my consultants on
what to do and when.” Their e-mail correspondence, submitted to the court,
illustrates the same point. Although he sometimes referred to himself
through layers of insulation, the substance of Landa’s testimony was that he
made the decisions about the water projects and controlled how they
advanced. There was pronounced evidence that Landa indeed controlled the
corporations. In further assessing Landa’s unity of interest with the LLCs,
the court found it significant that Landa “unilaterally changed the client
several times mid-representation,” inferring from this casual treatment of the
corporate client that both men recognized Landa was ultimately responsible
for Carter’s fees. Given Landa’s clear control of the arrangement and the
apparent irrelevance of the identity of Carter’s corporate client at any given
time, this finding is supported.

                                        7
      As to undercapitalization, the court cited Nuevagua’s dissolution and
reliance on a loan (which was never repaid) from either Landa or a Landa-
controlled entity to pay its debts. Landa testified that he did not recall
Nuevagua making any money, and he provided no evidence that the LLC
received capital contributions of any kind. Nevertheless, Nuevagua’s balance
sheet shows it incurred over one hundred thousand dollars in costs for
various professional services. Apart from Carter’s fees, its outstanding debts
were paid with (what appear to be) no-interest loans from Landa.
      Some of Landa’s testimony about the funding for the LLCs seems
contradictory. He said that he has never personally paid the debts of his
LLCs or used funds from his family trusts to finance his business ideas, but
also that his LLCs obtained loans made by different sources, such as himself
or one of the trusts. He apparently uses the term “loan” liberally; at least in
the case of Nuevagua, there was never repayment. Given the evidence that
Nuevagua incurred substantial debts but had no capital from either member
contributions or profits, the court was justified in concluding the company
was undercapitalized. And although Landa insists “[t]here was no evidence
presented at trial that Endol, Nuevagua, and Landa failed to abide corporate
formalities, keep separate books, or otherwise commingled funds among
those entities or between Landa and those entities,” the evidence that Landa
gave cash infusions to his debt-riddled LLCs, dipping into both the trusts he
controlled and his personal funds, is comingling of funds and a disregard of
corporate formalities. That he kept separate books and sometimes called
these transfers “loans” does not change the reality that Landa’s corporations
incurred debts in pursuit of his business ventures and, when he deemed it
appropriate, he paid those debts out of other funds he controlled. Alter ego,
which peers beyond the labels used and “elevates substance over form,” is

                                        8
tailored precisely for cases such as this. (Atempa v. Pedrazzani (2018) 27
Cal.App.5th 809, 824.)
      Turning to the second element required for application of the alter ego
doctrine, Landa challenges the court’s determination that an injustice would
result from adhering to the corporation’s separate status. He insists the case
amounts to no more than a billing dispute with an unsatisfied debtor,
conditions which alone cannot justify piercing the corporate veil. (Sonora
Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 539.) We agree
with Sonora that “[t]he alter ego doctrine does not guard every unsatisfied
creditor of a corporation,” nor does “[d]ifficulty in enforcing a judgment or
collecting a debt” amount to the injustice the doctrine contemplates. (Ibid.)
However, only unsatisfied debtors bring these suits and courts do find
occasion to pierce the corporate veil. As such, we take Sonoro’s reasoning to
mean that an unsatisfied debt is a necessary but not sufficient condition to
justify the use of alter ego.
      Ultimately this principle does not aid Landa, who cannot show the
court’s decision was unsupported by the evidence. He attempts to by alleging
the court could not rationally find that an injustice would flow from
adherence to the corporate form and also that Carter’s billing was
unreasonable. He says the latter is an ostensible finding we should intuit
from the court’s decision to award Carter only half of his fees: “Ironically, the
trial court would agree with Landa – that Carter’s fees should not be paid ‘as
billed’ – when it slashed Carter’s claimed billings of $97,147.87 in half and
found that only $48,573.94 of those charges could be awarded. [] In doing so,
the trial court echoed and validated Landa’s concerns about the amount of
Carter’s billings.”

                                        9
      But even a cursory read of the trial court’s statement of decision shows
that Landa mischaracterizes its decision and its rationale. The court
explicitly found Carter’s hourly fee rate was “reasonable due to Carter’s
contacts in the Colorado River water bureaucracy” and that “[t]he time [he]
recorded and billed . . . was reasonable for the tasks performed.” It awarded
Carter half of his billed fees not because it thought his rate or hours
unreasonable, but because it found Landa and Carter had an agreement that
Carter would defer half of his fees for some future benefit contingent on the
success of the water projects. As such, the court awarded Carter all of the
fees to which it deemed he was entitled under their agreement. This
supports, rather than undermines, the court’s application of the alter ego
doctrine.
      We find further support for the trial court’s decision in Claremont Press
Pub. Co. v. Barksdale (1960) 187 Cal.App.2d 813, which bears some
significant resemblance to this case. In Claremont, the defendant’s short-
lived corporation housed his weekly newspaper venture. (Id. at p. 815.) The
only capital invested in the company was $500, whereas it accumulated
regular debt from printing services. (Ibid.) When the defendant sold his
interest in the company, it owed over $7,000 to the printer and collapsed the
following year. (Id. at p. 816.) The trial court held him liable for the debt to
the printer, primarily due to his unity of interest with the company and the
irresponsible degree of undercapitalization. (Id. at p. 817.) In upholding this
use of alter ego, the appellate court specified these findings were enough to
support the second element of the doctrine: “All that is required is a showing
that it would be unjust to persist in recognition of the separate entity of the
corporation [citations]. To recognize the separate entity of the corporation
here would permit defendant and [his business partner] to secure for their

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venture the benefit of plaintiff’s printing services without liability therefor.
This is enough to meet the test.” (Ibid.)
      The same principle applies here. To permit Landa to secure Carter’s
professional services for his venture without incurring any liability once he
dissolved a failed business that he both controlled and undercapitalized is
enough to support application of the alter ego doctrine if the trial court so
determines. (See Minton v. Cavaney (1961) 56 Cal.2d 576, 580 [upholding the
use of alter ego where the defendant was functionally an equitable owner of
the company and made “no attempt to provide adequate capitalization”];
Automotriz, supra, 47 Cal.2d at p. 798 [affirming alter ego based on
inadequate capitalization and the failure to issue stock].)
      The trial court possesses broad discretion to decide whether an
inequitable result would flow from adherence to the corporate form in the
context of the case. “The issue is not so much whether the corporate entity
should be disregarded for all purposes or whether its very purpose was to
defraud the innocent party, as it is whether in the particular case presented,
justice and equity can best be accomplished and fraud and unfairness
defeated by disregarding the distinct entity of the corporate form.”
(Communist Party, supra, 35 Cal.App.4th at p. 993.)
      Straying further afield, Landa perplexingly argues that Carter cannot
plead alter ego against him because Carter operates his law practice as a
professional corporation. He cites to Communist Party, supra, 35
Cal.App.4th at pp. 993‒994 for the proposition that “persons who themselves
control a corporation or who have used the corporate form of doing business
for their benefit, may be estopped to deny a corporation’s separate legal
existence.” Having reviewed the case, we find it clear that the court was
referring to the doctrine’s proper use in protecting the rights of third parties.

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A corporation cannot raise the theory of alter ego on its own behalf to gain a
legal advantage or eschew some duty. (Communist Party, at pp. 993‒994.) It
is not relevant that Carter uses a corporate entity to represent his business.
      In a final salvo, Landa asserts it was unreasonable for the trial court to
infer that both men understood Landa would be responsible for his fees. He
says Carter, a sophisticated actor, should have demanded a personal
guaranty from Landa if that was his expectation. What Carter could have
done if he were more attentive to the pitfalls of his arrangement with Landa
does not, however, change the evidence in support of the trial court’s findings.
At most, Landa presents another way to interpret the conflict. But our
inquiry resolves when we determine, as we have here, that there was
“substantial evidence, contradicted or uncontradicted, [to] support the
conclusion reached by the trial judge.” (Associated Vendors, supra, 210
Cal.App.2d at p. 835.)
2.    Conflict of Interest
      Although Carter and Landa never agreed to the precise terms of
Carter’s fee deferment and future benefit, Landa casts Carter as so ethically
compromised by the process that he should recover no fees whatsoever for his
services. As Landa characterizes it, by pursuing an equity share in
Nuevagua as compensation Carter created a conflict of interest that
permeated the entire relationship with his client, which then incentivized
him to overbill so as to later justify claiming a larger share. Landa also
points out that Carter failed to abide by rule 1.8.1 (former rule 3-300) of the

Rules of Professional Conduct,1 which requires that lawyers take certain
steps before entering into a business transaction with a client. He claims

1    All further rule references are to the California Rules of Professional
Conduct.
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these ethical transgressions are sufficiently severe as to justify a refusal to
award any fee to Carter.
      Landa did not raise this argument below until after the trial court
issued its tentative statement of decision, and the court determined that
Carter’s alleged conflict of interest was not a principal controverted issue. It
nonetheless indulged the discussion, saying, “[W]ere the court to address the
issue of a conflict of interest, the court would find that Carter did not have a
conflict precluding recovery of his fee.” The court first noted that “every
attorney enters into a ‘business’ transaction with a client when the attorney
agrees to represent the client for a fee; such a transaction is clearly not
intended to be covered by [rule 1.8.1].” It then explained that Carter did not
actually obtain an interest in Nuevagua. Because the project was
unsuccessful, any claim to equity he could have made never ripened.
      Landa cites several cases for the proposition that a court may refuse to
award any fee to an attorney where a conflict of interest pervades the entire
attorney-client relationship. (See, e.g., Fair v. Bakhtiari (2011) 195
Cal.App.4th 1135, 1150 (Fair); A.I. Credit Corp., Inc. v. Aguilar &
Sebastinelli (2003) 113 Cal.App.4th 1072, 1076; Goldstein v. Lees (1975) 46
Cal.App.3d 614, 618.) This result properly obtains “ ‘[w]here the entire
contract is prohibited by statute or public policy’ ” and even then is not a
mandatory rule but rather a discretionary option for the trial court. (Fair,
supra, 195 Cal.App.4th at p. 1150; quoting Vapnek et al., Cal. Practice Guide:
Professional Responsibility (The Rutter Group 2010) ¶ 5:430.) Here, Landa
can point to the purported violation of rule 1.8.1 as a reason why a contract
might have been prohibited by public policy, but since that contract was
never actually entered into and because Carter is not seeking to enforce such
a contract, his argument sputters.

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      It is plain that Carter did not abide by rule 1.8.1 in the course of his
negotiations with Landa; he did not secure a fair and reasonable agreement
in writing, encourage Landa to seek the advice of independent counsel, and
obtain written consent to the deal. But because the deal remained
unrealized, he never obtained an interest in the company. The trial court
thought as much, stating that “Carter never acquired an interest in
Nuevagua.” But even if he had, any benefit to which he was entitled was
still contingent on the success of the project. And as the court noted, the
project’s failure was uncontroverted, rendering any claim to its equity
pointless: “it is undisputed that the venture was not a success, and therefore
no bonus was due,” and “the issue of the interest in Nuevagua never ripened,
as the venture was not successful.”
      Even if Landa’s ethical argument survives this analysis, the trial court
effectively disposed of the issue by awarding Carter half of his fees—the
portion that was never affected by his potential equity share in Nuevagua.
As the court understood their implied agreement, the men agreed that half of
Carter’s fees would be paid regardless of the fate of the project. And by
awarding him half and no more, the court cleared away any aspect of Carter’s
claim that could be tied to his purported interest in Nuevagua and thus
affected by the ethical concerns raised.
      Landa insists the trial court did not appreciate the interplay between
Carter’s undefined equity interest in Nuevagua and his incentive to overbill.
But the court understood, as do we, that this is merely a prosaic problem.
Landa has succeeded in describing the inherent tension present in any
attorney-client relationship. Strictly speaking, lawyers billing on a time
basis always have an incentive to work unnecessary hours or inflate their
time spent in order to be paid more, which of course runs contrary to the

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client’s interest in obtaining legal services at a reasonable cost. This dynamic
does not necessarily change when an attorney’s compensation takes an
atypical form. Here, the trial court properly concluded that this inherent
conflict did not prevent Carter from recovering the portion of his fee,
calculated on a standard hourly basis, which it deemed the parties had
agreed to even absent the success of the water project.
      Finally, we note that even if Carter possessed a mature and obvious
conflict of interest, it does not follow that he would necessarily be barred from
recovering fees. The Supreme Court recently clarified this point; it is within
the trial court’s discretion to weigh specific factors, including “the
egregiousness of the attorney’s conduct, its potential and actual effect on the
client and the attorney-client relationship, and the existence of alternative
remedies [to determine] whether and to what extent forfeiture of
compensation is warranted.” (Sheppard, Mullin, Richter & Hampton, LLP v.
J-M Manufacturing Co., Inc. (2018) 6 Cal.5th 59, 89.) If Landa had both
raised this argument earlier and demonstrated that Carter had a ripe conflict
of interest, it would have been for the trial court to determine whether all the
relevant factors justified a forfeiture of Carter’s entire fee.

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                              DISPOSITION
     The judgment is affirmed. Respondent is entitled to costs on appeal.

                                                                   DATO, J.

WE CONCUR:

BENKE, Acting P. J.

AARON, J.

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