Mechtect Motorsports v. All Mechtech CA4/1 ( 2014 )

Filed 12/10/14 Mechtect Motorsports v. All Mechtech CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
MECHTECH MOTORSPORTS, INC. et al., D063426
Cross-complainants, Cross-defendants,
and Respondents,
(Super. Ct. No. 37-2011-00055785-
v. CU-BC-NC)
ALL MECHTECH, LLC et al.,
Cross-defendants, Cross-complainants,
and Appellants.
APPEAL from a judgment of the Superior Court of San Diego County, Earl H.
Maas III, Judge. Affirmed.
Boudreau Williams and Jon R. Willams; Stratton & Green and Cynthia Lee
Stratton for Cross-defendants, Cross-complainants and Appellants.
Kenneth N. Greenfield, Alexandra N. Selfridge for Cross-complainants, Cross-
defendants and Respondents.
A jury returned a verdict holding William Dunivan individually liable for
breaching a contract he had assigned to his wholly owned limited liability company
before the alleged breach occurred. The trial court then found Dunivan individually
liable for the same breach based on the alter ego doctrine. Dunivan and his limited
liability company contend the trial court erred by (1) allowing the jury to consider
Dunivan's individual liability, and (2) applying the wrong criteria to find Dunivan liable
on an alter ego basis.1 We conclude the trial court applied the correct criteria to invoke
the alter ego doctrine and that its findings are supported by substantial evidence.
Accordingly, we affirm the judgment on that basis and do not reach appellants' challenge
regarding the jury's finding of Dunivan's individual liability.
FACTUAL AND PROCEDURAL BACKGROUND
Mechtech Motorsports (the business) was a high-performance automotive business
that specialized in off-road and street performance vehicles. Jim McFarland established
the business as a sole proprietorship in 1985 and incorporated it as Mechtech Motorsports
Inc. (MMI) about eight to ten years later. He was its chief executive officer; his wife,
Jeanne McFarland, was its bookkeeper and corporate president.2
MMI listed the business for sale in late 2009 or early 2010 through Vanguard
Resource Group, with Don DiSpaltro serving as the broker. Dunivan, who lived in Texas
and had experience repairing and racing automobiles, offered to purchase the business for
1 We find it curious—especially in a case involving alter ego findings—that both
Dunivan and his limited liability company would appeal the judgment when the
challenged findings adversely affect only Dunivan.
2 For convenience and clarity we will refer to Jim and Jeanne McFarland by their
first names and will refer to Jim and MMI collectively as the McFarland Parties.
2
$150,000. MMI countered at $174,500, and Dunivan accepted. Through DiSpaltro,
MMI and Dunivan entered into an "Earnest Money Receipt and Offer of Purchase of Sale
of Assets" (the Purchase Agreement) dated as of July 20, 2010. The Purchase Agreement
identified the purchaser as "William R. Dunivan Jr. or Assignee."
MMI and Dunivan agreed to escrow instructions and opened escrow on August
23, 2010. Two days later, MMI completed its due diligence on Dunivan's financial
suitability, which revealed he had excellent credit and a net worth of approximately $5
million. Dunivan provided a "Buyer's Disclosure Statement" in which he warranted that
there was no reason he would not have sufficient operating capital for the business, there
was no person or entity other than himself that would have an equity interest in the
business, and that he would not have to borrow or obtain from other sources any of the
funds he would need to purchase or operate the business. MMI was satisfied with
Dunivan's financial condition and removed the suitability contingency on August 25.
That same day, MMI and Dunivan amended the Purchase Agreement to modify
the payment terms, which required Dunivan to deposit $50,000 to open escrow and to
deposit the remaining $124,500 into escrow prior to closing. Dunivan made the initial
$50,000 escrow deposit on August 28 with a check from his personal checking account.
All the parties were aware that Dunivan intended to fund the balance of the purchase
price with a portion of the approximately $750,000 in proceeds he expected to receive
from the sale of real estate he owned in Texas, which that state was acquiring to widen a
highway.
3
Dunivan and MMI amended the escrow instructions on September 1 to reflect
Dunivan's assignment to All Mechthech, LLC (the LLC), a Texas limited liability
company Dunivan would form the next day.
On October 1, 2010, MMI assigned to the LLC the lease for the property on which
the business operated. The lessor, The Wyne-Snow Industrial Park (the Lessor),
consented to the assignment.
Because of delays in the sale of Dunivan's Texas property, the parties restructured
the sale of the business from being an all-cash purchase to MMI carrying a $132,250.50
balance for 60 days. This would allow escrow to close on the sale of the business before
Dunivan received his proceeds from the sale of his Texas property.
On October 29, 2010, MMI and Dunivan amended the Purchase Agreement to
designate the LLC as the purchaser. Dunivan, as manager of the LLC, signed (1) a
promissory note agreeing to pay $132,250.50 to MMI by December 29, 2010; and (2) a
security agreement securing the promissory note. Dunivan also wrote a personal check to
escrow in the amount of $4,662 to cover the business's rent payment. Escrow closed
November 1, 2010.
The same day that escrow closed, the LLC attempted to register to do business in
California. Due to a variety of errors, however, the LLC did not become registered until
2012. The LLC was initially unable to open bank accounts in California, so Dunivan
used his personal credit card to purchase parts for the business.
Within a week after escrow closed, Dunivan began giving indications he intended
to close the business. He told Jim he wanted to "unravel the deal," but Jim was unwilling
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to. Neither Dunivan nor the LLC made the final payment of $132,250.50 due under the
Purchase Agreement and promissory note. In late November or early December,
Dunivan notified the business's employees and customers that the business would close
on January 15, 2011. It did.
In June 2011, the Lessor sued MMI, Jim, the LLC, and Dunivan for unpaid rent
that began accruing after the business closed. The McFarland Parties filed a cross-
complaint against appellants asserting indemnity claims arising from the Lessor's lawsuit,
contract and fraud claims arising from nonpayment of the balance of the purchase price
and nonpayment of rent, and a related claim for declaratory relief. The cross-complaint
alleged the LLC was Dunivan's alter ego, and vice versa. Appellants filed their own
cross-complaint against MMI, Jim, and Jeanne alleging a variety of contract and fraud
claims arising from alleged misrepresentations regarding the nature and profitability of
the business. The Lessor eventually settled with appellants and dismissed its complaint.
The parties went to trial on their cross-complaints. They tried their legal claims to
a jury and the McFarlands Parties' alter ego claim to the court. The jury returned a
verdict in favor of the McFarland Parties on their contract claim, but found against them
on their fraud claim. The jury held both Dunivan and the LLC liable on the McFarlands
Parties' contract claim. The jury found against appellants on all their claims.
After the jury returned its verdict, the court, having already received all evidence
during the first phase of trial, heard argument on the McFarlands Parties' alter ego
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claim.3 The parties also argued the propriety of holding Dunivan individually liable for
breach of contract in light of his assignment of the Purchase Agreement to the LLC. The
trial court issued a minute order ruling in favor of the McFarland Parties as follows:
"Following completion of a jury trial, including verdict, the
parties presented the Court with argument on the remaining
Equitable issues. As the jury declined to award Punitive damages,
the issues left to the Court were limited. This Court finds in favor of
the McFarland parties, against the Dunivan parties on the issues of
Alter Ego, and whether the jury properly considered him in breach
of contract personally, as opposed to only his Assignee, All
Mechtech LLC.
"This decision is based upon the evidence which supports that
Mr. Dunivan was the sole owner and decision maker of the LLC.
The agreed upon evidence that the payment by the LLC on the
remaining note was always linked to the sale of Dunivan's personal
real estate supports that he was closely tied to the finances which
could never be timely paid without his personal involvement. The
decision to close the shop, terminate the business and stop paying on
debts were all made personally by Dunivan.
"It would be inequitable to allow Mr. Dunivan, having breached
the contract for purchase, to avoid payment simply by refusing to
fully fund the LLC with the anticipated (though late realized) sales
proceeds of his personal property."
Appellants requested a statement of decision on the equitable issues tried to the
court. Accordingly, the court issued the following statement:
"The Court found Plaintiff's [sic] to be more persuasive and credible
than Mr. Dunivan. Mr. Dunivan was the sole owner of the LLC, and
made all financial decisions regarding the LLC. Mr. Dunivan
testified that he always intended his personal assets (Real Estate) to
be used to fund the final purchase of the business in question. There
were no circumstances where the business itself could have made the
3 The court heard the McFarland Parties' expert testimony regarding alter ego issues
during the first phase of the trial, but did so outside the presence of the jury.
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final cash payment in a timely manner. The testimony of both the
McFarlands and Mr. Dunivan established without reasonable dispute
that Dunivan intended to close the business, return property and stop
paying debts and rent.
"It would be inequitable to allow Mr. Dunivan, having breached
the contract for purchase, to avoid payment simply be [sic] refusing
t[o] fully fund the LLC with the anticipated (though late realized)
sales proceeds of his personal property."
The court entered judgment in favor of the McFarland Parties and against
appellants. Appellants timely appealed.
DISCUSSION
Appellants contend the trial court erred in two ways. The first was by allowing the
jury to hear and consider Dunivan's individual liability for the LLC's contractual
obligations. According to appellants, the only bases for Dunivan's name to appear on the
special verdict form were under an alter ego theory or on the theory that his assignment to
the LLC was somehow ineffective. Appellants contend both of these theories presented
questions for the trial court to resolve. The second error, according to appellants, was the
trial court's conclusion that Dunivan was liable for the LLC's obligations on an alter ego
basis. Appellants contend the trial court reached that conclusion by applying the wrong
legal criteria.
We conclude the trial court applied the correct criteria to invoke the alter ego
doctrine and that its findings are supported by substantial evidence. Because the
judgment is supported on that basis, we need not address whether the trial court erred by
allowing the jury to consider Dunivan's individual liability.
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Overview of the Alter Ego Doctrine
"Ordinarily, a corporation is regarded as a legal entity, separate and distinct from
its stockholders, officers and directors, with separate and distinct liabilities and
obligations." (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal. App. 4th 523, 538
(Sonora Diamond).) However, "[a] corporate identity may be disregarded—the
'corporate veil' pierced—where an abuse of the corporate privilege justifies holding the
equitable ownership of a corporation liable for the actions of the corporation." (Ibid.)
"Under the alter ego doctrine, then, when the corporate form is used to perpetrate a fraud,
circumvent a statute, or accomplish some other wrongful or inequitable purpose, the
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."4 (Ibid.) "The alter ego doctrine prevents individuals or other
corporations from misusing the corporate laws by the device of a sham corporate entity
formed for the purpose of committing fraud or other misdeeds." (Ibid.) "The essence of
the alter ego doctrine is that justice be done." (Mesler v. Bragg Management Co. (1985)
39 Cal. 3d 290, 301 (Mesler).)
"In California, two conditions must be met before the alter ego doctrine will be
invoked. First, there must be such a unity of interest and ownership between the
4 The alter ego doctrine also applies to limited liability companies. (Corp. Code,
§ 17703.04, subd. (b) ["A member of a limited liability company shall be subject to
liability under the common law governing alter ego liability . . . under the same or similar
circumstances and to the same extent as a shareholder of a corporation may be personally
liable for any debt, obligation, or liability of the corporation . . . ."].)
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corporation and its equitable owner that the separate personalities of the corporation and
the shareholder do not in reality exist. Second, there must be an inequitable result if the
acts in question are treated as those of the corporation alone." (Sonora Diamond, supra,
83 Cal.App.4th at p. 538.)
"There 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." (Mesler,
supra, 39 Cal.3d at p. 300.) Factors the trial court may consider include, but are not
limited to, the following: " ' "[1] [c]ommingling of funds and other assets . . . ; [2] the
holding out by an individual that he is personally liable for the debts of the
corporation . . . ; [3] [the] sole ownership of all of the stock in a corporation by one
individual or the members of a family . . . ; [4] the failure to adequately capitalize a
corporation . . . ; [5] the use of a corporation as a mere shell, instrumentality or conduit
for a single venture or the business of an individual or another corporation . . . ; [6] the
disregard of legal formalities and the failure to maintain arm's length relationships among
related entities; [7] the contracting with another with intent to avoid performance by use
of a corporate entity as a shield against personal liability . . . ; [and] [8] the formation and
use of a corporation to transfer to it the existing liability of another person or entity." ' "
(Zoran Corp. v. Chen (2010) 185 Cal. App. 4th 799, 811-812 (Zoran), citations omitted;
Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal. App. 2d 825, 838-840
(Associated Vendors).) "No one characteristic governs, but the courts must look at all the
circumstances to determine whether the doctrine should be applied." (Sonora Diamond,
supra, 83 Cal.App.4th at p. 539.)
9
Standard of Review
Appellants assert the trial court's alter ego analysis is subject to de novo review
because the trial court applied the wrong legal criteria. The McFarland Parties counter
that the substantial evidence standard governs because the trial court applied the correct
legal criteria and appellants are merely challenging the trial court's evidentiary findings
regarding those criteria. The McFarland Parties have the better argument.
The statement of decision addresses the unity of interest that arose from Dunivan's
ownership, control, and inadequate capitalization of the LLC, and concludes it would
therefore be inequitable to allow Dunivan to avoid payment. This is the two-pronged test
outlined in Sonora Diamond for determining whether the alter ego doctrine applies.
(Sonora Diamond, supra, 83 Cal.App.4th at p. 538.) Appellants' true challenge, then, is
to the sufficiency of evidence supporting the trial court's determination that both prongs
were satisfied. We review this challenge for substantial evidence. (Toho-Towa Co., Ltd.
v. Morgan Creek Productions, Inc. (2013) 217 Cal. App. 4th 1096, 1108.)
Under the substantial evidence standard of review, "the power of an appellate
court begins and ends with the determination as to whether there is any substantial
evidence, contradicted or uncontradicted, which will support the finding of fact."
(Grainger v. Antoyan (1957) 48 Cal. 2d 805, 807, italics omitted.) We are required to
accept all evidence that supports the successful party, disregard the contrary evidence,
and draw all reasonable inferences to uphold the judgment. (Minelian v. Manzella (1989)
215 Cal. App. 3d 457, 463.) Thus, it is not our role to reweigh the evidence, redetermine
the credibility of the witnesses, or resolve conflicts in the testimony, and we will not
10
disturb the judgment if there is evidence to support it. (Reichardt v. Hoffman (1997) 52
Cal. App. 4th 754, 766; see Leff v. Gunter (1983) 33 Cal. 3d 508, 518.)
Analysis
Substantial evidence supports the trial court's alter ego findings. Beginning with
the unity of interest between Dunivan and the LLC, the McFarland Parties' accounting
expert, Richard Holstrom, testified the LLC was inadequately capitalized. (Zoran, supra,
185 Cal.App.4th at pp. 811-812.) Holstrom testified Dunivan invested approximately
$68,000 in the LLC. But based on the business's expected cash flow, compared with its
expected operating expenses and the known $132,250.50 balloon payment due on the
purchase price within 60 days of the close of escrow, Holstrom opined the LLC should
have been funded with $231,510—more than three times the amount Dunivan actually
invested. The trial court interrupted appellants' argument during the equitable phase to
observe that the balloon payment "was an expense that was due under the best of
circumstances within 60 days after the sale, and the business was never going to cover
that . . . . [¶] So [Dunivan] always had to put in under the rosiest of circumstances
$110,000 more. I mean that is the place where I see that the strongest argument on [the
McFarland Parties'] part on the capitalization aspect of it." We find this reasoning
persuasive and conclude substantial evidence supports the finding that the LLC was
inadequately capitalized.5
5 The parties debate whether inadequate capitalization can, standing alone, justify
piercing the corporate veil. We need not resolve that question because the record
contains substantial evidence of the presence of additional alter ego factors. We note,
11
Holstrom also testified about the lack of separateness between Dunivan and the
LLC from an accounting standpoint. (Zoran, supra, 185 Cal.App.4th at pp. 811-812.)
Holstrom acknowledged Dunivan's investments in the LLC—made in the form of
loans—were documented in a ledger, but noted the ledger did not include indicia that the
loans were made at arm's length.6 To the contrary, Holstrom characterized the interest-
free loans as "atypical" in that they were made on preferential terms that a bank or
uninterested party would not agree to. Holstrom also characterized as "not typical"
Dunivan's use of his personal credit card to purchase parts for the business. Finally,
everyone understood Dunivan intended to fund the remainder of the purchase price with a
portion of the proceeds from the sale of his own real estate. Thus, from an accounting
standpoint, substantial evidence supports a finding of a lack of separateness between
Dunivan and the LLC.
however, that appellants overstate the import of Associated Vendors, supra, 210
Cal. App. 2d 825. While that court stated no case has "held that this factor alone requires
invoking" the alter ego doctrine, the case does not state that a court may not invoke the
doctrine based on inadequate capitalization alone. (Id. at p. 842.) Likewise, the
McFarland Parties overstate the import of Automotriz Del Golfo De California S. A. De
C. V. v. Resnick (1957) 47 Cal. 2d 792. While that court held inadequate capitalization is
"[a]nother factor to be considered," it was not the only factor that court considered. (Id.
at p. 798 ["the trial court was entitled to consider the failure to issue any stock or apply
for permission to do so and the creation and operation of Erbel, Inc. with little or no
capital, as well as all relevant facts concerning the manner in which the business was
operated."].)
6 Holstrom testified those indicia include "a date of the transaction, how much
money was lent, the terms of the payback, whether or not the interest, if any, is being
charged at market rates to indicate that there's actually a separateness between the money
being—between the owner and the corporation."
12
Substantial evidence also supports a finding of a disregard of corporate
formalities. (Zoran, supra, 185 Cal.App.4th at pp. 811-812.) Dunivan assigned his role
as purchaser to the LLC before the LLC ever existed. The LLC operated in California
before it was registered to do so and did not obtain all required licenses and permits for
the business. Additionally, the trial court received Dunivan's deposition testimony
wherein he trivialized the LLC's corporate formalities.7
Other substantial evidence also supports the finding that there was a unity of
interest between Dunivan and the LLC. Dunivan was the LLC's sole owner. (Zoran,
supra, 185 Cal.App.4th at pp. 811-812.) He had already incurred the $132,250.50
liability by the time he established the LLC and he transferred that existing liability to the
LLC. (Id. at p. 812.) In that vein, Dunivan testified in his deposition that "part of the
appeal of using an LLC" was "the quality of limited liability." In light of all the
foregoing, we conclude substantial evidence supports the trial court's finding that a unity
of interest existed between Dunivan and the LLC.
Substantial evidence also supports the trial court's finding that it would be
inequitable to allow Dunivan to avoid liability. Everyone understood Dunivan intended
to fund the remainder of the purchase price with a portion of the proceeds from the sale
of his own real estate. Dunivan sought to avoid that result by forming the LLC and
7 For example, when asked if the LLC held formal meetings beyond an initial
one held on September 3, 2010, Dunivan responded: "Yeah. Every day I conduct a
meeting . . . . [¶] Did I specifically write down every day what we talked about? No,
because sometimes we didn't talk about much. 'Shave looks pretty good today. Yeah.
You need a haircut pretty bad.' Yeah, you know, all I can say.' "
13
transferring his interests to it. Notably, Dunivan only did so after MMI had completed its
investigation of his financial suitability—timing the broker, DiSpaltro, testified was not
typical for a transaction of this type. And although DiSpaltro may have known earlier in
the transaction that Dunivan "had mentioned that he had a corporation in Texas," neither
DiSpaltro nor Dunivan communicated to the McFarland Parties prior to the completion of
due diligence that Dunivan might assign his interests to some entity. To the contrary,
Dunivan had warranted in his Buyer's Disclosure Statement that no person or entity other
than himself would have an equity interest in the business. Obviously, the McFarland
Parties became aware of the assignment when it occurred, but by then MMI had
completed its due diligence and DiSpaltro testified he never advised the McFarland
Parties of the possibility of reopening due diligence. In addition, even after the
assignment, the parties understood the balance of the purchase price would still be funded
by a portion of the proceeds from the sale of Dunivan's property. This evidence supports
the trial court's finding that it would be inequitable to allow Dunivan to use the LLC as a
shield to avoid payment.
This evidence also distinguishes this case from those involving the mere
"[d]ifficulty in enforcing a judgment or collecting a debt" that do not warrant alter ego
liability. (Sonora Diamond, supra, 83 Cal.App.4th at p. 539.) Nor, as appellants suggest,
is this a case of "holding Dunivan individually liable because he had provided start-up
funding for [the LLC] with his own personal assets, as is typical of practically every
small business." Rather, this is a case where Dunivan identified a specific source of
14
funds that would be used to pay the balance of the purchase price but then created a
limited liability company to shield himself and those funds.
Appellants argue the trial court's finding that "[i]t would be inequitable to allow
Mr. Dunivan, having breached the contract for purchase, to avoid payment" was
influenced by the jury's improper finding that Dunivan individually breached the
Purchase Agreement. (Italics added.) We are not persuaded. The statement of decision
makes no reference to the jury's finding. Rather, in the context of the trial court having
just concluded in the preceding paragraph of the statement of decision that there was a
unity of interest between Dunivan and the LLC, we construe the reference to Dunivan
"having breached the contract" as referring to Dunivan acting through the LLC. (Uzyel v.
Kadisha (2010) 188 Cal. App. 4th 866, 896 [ambiguities in a statement of decision that are
not brought to the trial court's attention will be resolved in favor of the prevailing party].)
Appellants argue that because Jim and Jeanne, themselves, used a corporation
(MMI) to operate the business, they are estopped from invoking the alter ego doctrine. In
support of this argument, appellants cite Communist Party v. 522 Valencia, Inc. (1995)
35 Cal. App. 4th 980 (Communist Party) 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." Appellants
mischaracterize Communist Party. The plaintiff in that case, a national political party
organized as an unincorporated association—not a corporation at all—invoked the alter
ego doctrine to reach assets held by two corporations the party claimed it "controlled,
dominated and operated" such that "it was the beneficial owner of all the assets held by
15
both corporations." (Id. at p. 988.) The party succeeded before the trial court, but was
reversed on appeal. The appellate court explained, the "alter ego is used to prevent a
corporation from using its statutory separate corporate form as a shield from liability only
where to recognize its corporate status would defeat the rights and equities of third
parties; it is not a doctrine that allows the persons who actually control the corporation to
disregard the corporate form." (Id. at p. 994.) With that purpose in mind, the appellate
court explained why the doctrine did not apply: "In this case, there is no third party;
respondent claims that it itself is identical to the corporations. Respondents have cited no
case authority, and we have found none, in which rather than being used to reach behind
the corporate form to attach liability to another individual or entity, the alter ego doctrine
has been employed to establish a relationship of identity between the defendant
corporation and the plaintiff itself, in order to allow the plaintiff to obtain for itself the
assets of the corporation." (Id. at p. 995.) Communist Party is inapposite here because
the McFarland Parties are precisely the type of third parties the alter ego doctrine was
intended to protect. Appellants' argument is further undermined by the fact that at least
one other case they cite in their opening brief applied the alter ego doctrine in favor of a
corporate plaintiff. (See NEC Electronics Inc. v. Hurt (1989) 208 Cal. App. 3d 772, 777-
778 [finding substantial evidence supported finding of alter ego, but reversing on other
grounds].)
In sum, substantial evidence supports the trial court's determinations that a unity of
interest exists between Dunivan and the LLC and that it would be inequitable to allow
Dunivan to escape liability.
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DISPOSITION
The judgment is affirmed. Respondents are entitled to their costs on appeal.
O'ROURKE, J.
WE CONCUR:
McCONNELL, P. J.
AARON, J.
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