California court looks at alter ego doctrine

A recent case arose from an attorney’s claim for unpaid wages, filed in 2005 with California’s labor commissioner and against her employer. The court initially awarded her nearly $13,000. Years later, her award was raised to $101,000.

The attorney’s employer – 1538 Cahuenga Partners, LLC – and its principal filed a malpractice suit against her. She filed a retaliation claim with the commissioner, as well as a cross-complaint seeking indemnity for legal expenses.

The commissioner sued Cahuenga and asked for damages for the attorney’s defense costs in the retaliation claim.

Read more: U-Haul and one of its managers sued for alleged retaliation, discrimination, harassment

These cases were consolidated. In all claims, the attorney and the commissioner won and became judgment creditors. In 2010, the attorney brought a motion to add her employer’s principal to the judgment so that he could be considered a judgment debtor.

The trial court and the California Court of Appeal refused to add the principal. In 2012, an amended judgment awarded the commissioner over $297,000 and awarded the attorney over $101,000, which would be offset against any recovery by the commissioner.

For years, the commissioner and the attorney unsuccessfully tried enforcing this amended judgment. They applied for orders compelling certain individuals and entities – namely, Cahuenga’s principal, a paralegal who used to work for the company, BAG Fund, Inc., and BAG Fund, LLC – to appear in court so that they could be examined about their knowledge of Cahuenga’s assets and liabilities.

The paralegal was examined in 2016. She testified to the following:

• She started working for the principal, whom she called her boss, as a paralegal in 1997.
• Since then, she has essentially been working for him through various entities.
• The principal originally hired her to work with the lawyers at a company known as Century West Financial, which she did for around three years.
• He then offered her a position working for a lawyer whom he had hired to work for Global West Management.
• She became a full-time employee of Global West Management.
• Sometime in late 2004 or early 2005, she started working as a paralegal and full-time employee for Cahuenga, where she stayed for four to five years.
• When she was there, Cahuenga had a litigation department that hired a total of seven or eight lawyers, with one or two lawyers and one or two paralegals being employed at a time.
• Cahuenga also had an accounting department or bookkeeper.
• In early 2010, the principal lost Cahuenga when it was sold or transferred to another person.
• After that, BAG Fund, Inc. was the one that paid her.
• She still worked for the principal and considered him her boss.

In 2020, the labor commissioner filed a motion to amend the judgment to add the principal as Cahuenga’s alter ego. This time, the trial court granted the motion.

Employer’s principal also a debtor

In the case of Hacker v. Fabe, the California Court of Appeal for the Second District affirmed the judgment of the trial court, which added Cahuenga’s principal as an alter ego judgment debtor. The appellate court awarded the appeal’s costs to the labor commissioner and to the attorney.

Under the alter ego doctrine, when a corporation is being used to commit fraud, to circumvent the law, or to accomplish another wrongful or inequitable purpose, courts will ignore the corporate entity and deem its acts to be the acts of the equitable owners or of those actually controlling the corporation.

To decide whether the alter ego doctrine is applicable, courts should consider factors such as the two entities’ commingling of funds and assets, identical equitable ownership, identical directors and officers, use of the same offices and employees, disregard of corporate formalities, and the use of one entity as a mere shell or conduit for the affairs of the other. Courts should take all circumstances into account instead of focusing on any one factor.

In this case, the appellate court held that the trial court reasonably inferred from the circumstances that the separate personalities of the corporation and its principal did not actually exist. Specifically, the trial court considered the following:

• the principal’s complete control over and manipulation of Cahuenga
• his destruction of relevant records of assets
• his control of the litigation
• his sharing of lawyers with Cahuenga
• his act of immediately transferring the company to another person after the unfavorable judgment
• the paralegal’s receipt of paychecks from Cahuenga until the company’s transfer
• the paralegal’s continued work for the principal under the auspices of another company