I confess I probably would have turned away the defendant in this case had he asked me to take up his appeal from a judgment finding him liable as the alter ego of his company on a loan obligation. Alter ego findings are very difficult to reverse, and the defendant in Creation Harmony Trading, Inc. v. Li (D2d4 May 27, 2021) no. B301004 (non-pub.) personally promised to repay the obligation. And not only is the finding reviewed on the very deferential substantial-evidence standard, but there was not even a court reporter at the trial! Game, set, and match, I would have concluded.
Yet, the defendant got the judgment reversed on appeal. And the defendant showed there are limits to the alter ego doctrine. Here is how he did it.
Defendant corporation borrowed over $300,000 from plaintiff for its car purchasing business. The corporation later fell into arrears. The individual defendant, as the "responsible party" for the defendant corporation, signed an arrears summary stating $100,000 was still owing. But the corporation never paid any further on the principal.
The individual defendant explained the company couldn't pay because someone else owed him money, and he promised to pay the plaintiff once he got the money. The individual also admitted he was "doing the car purchasing business both under the company's name and his own name."
The trial court entered judgment against both the company and the individual jointly and severally.
In the absence of a reporter's transcript, the appellant may use a settled statement:
To overcome the lack of a reporter's transcript, the appellant obtained a settled statement. A settled statement is a summary of trial court proceedings approved by the trial court under California Rules of Court, rule 8.137. Settled statements are relatively rare, and trial judges may even refuse to issue them: the refusal is reviewed for abuse of discretion, but worse than that, it is not reviewable on direct appeal, and can only be reviewed via writ, and I understand the Courts of Appeal are not inclined to grant writ review.
But the trial court did issue a settled statement here. And the record via settled statement possibly proved more favorable to the appellant than a reporter's transcript would have.
The substantial evidence standard of review is difficult, but not impossible, to overcome on appeal:
When the Court of Appeal reviews the trial court's factual findings, it will leave them undisturbed when "there is substantial evidence, contradicted or uncontradicted, which will support the determination, and when two or more inferences can reasonably be deduced from the facts, a reviewing court is without power to substitute its deductions for those of the trial court.” (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874, italics omitted.)
“Substantial evidence,” however, is not “ ‘synonymous with “any” evidence. It must be reasonable ..., credible, and of solid value ....’ [Citation.]” (Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627, 1633.) “While substantial evidence may consist of inferences, such inferences must be ‘a product of logic and reason’ and ‘must rest on the evidence’ [Citation]; inferences that are the result of mere speculation or conjecture cannot support a finding. [Citations].” (Ibid.)
Substantial-evidence review is not to be understood as no review at all: “Substantial evidence is therefore not merely an appellate incantation designed to conjure up an affirmance. To the contrary, it is essential to the integrity of the judicial process that a judgment be supported by evidence that is at least substantial. An appellate court need not blindly seize on any evidence in order to affirm the judgment. The Court of Appeal was not created merely to echo determinations of the trial court. A decision supported by a mere scintilla of evidence need not be affirmed on review." (Roddenberry v. Roddenberry (1996) 44 Cal. App. 4th 634, 652.)
Here, the Second District Court of Appeal, noting the "limited record" (which ordinarily disfavors the appellant) prevented affirmance of alter ego, which required "detailed findings." (No citation is given for this purported requirement, and where no statement of decision is requested – and there is no evidence of that here – the trial court actually is not required to make express findings.)
Working in the appellant's favor here is the settled statement. The settled statement is prepared at an early stage in the appeal, where the respondent may not be aware of the appellant's theory on appeal. Here, the respondent might not have included all the evidence that might have supported the judgment on appeal – even inferentially if not directly. Relying on the settled statement, the Second District observed that the respondent plaintiff failed to cite to the record in support of its contention that the individual defendant failed to segregate his funds from the corporation's and treated the corporation's assets as his own. The court held that the evidence that the individual defendant agreed to pay back the loan when his personal loan was repaid, and that he does the car business under his own personal name, could not support an inference of commingling. I found this surprising, but the court cited case law in support: Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 539 [parent company's contribution of funds to assist subsidiary in meeting financial obligations does not render parent liable for subsidiary's obligations].
But arguably there was a unity of interest demonstrated by the individual's promise to guarantee the corporation's contract. (Mid-Century Ins Co. v. Gardner (1992) 9 Cal.App.4th 1205, 1213, fn. 3 (Gardner).) But the court distinguished that, in this case, the promise was only for one debt, not the corporation's debts generally. And the respondent did not argue the individual defendant breached his promise to repay in its complaint, at trial (at least according to the settled statement), or on appeal. This forfeited the argument. (Ochoa v. Pacific Gas & Electric Co. (1998) 61 Cal.App.4th 1480, 1488, fn. 3 [arguments not raised in the trial court are forfeited on appeal].) Forfeiture more often is applied against appellants, but it may be applied against respondents, too.
Finally, the respondent failed to establish the alter-ego finding was necessary to avoid an inequitable result. “The purpose of the doctrine is not to protect every unsatisfied creditor, but rather to afford him protection, where some conduct amounting to bad faith makes it inequitable, ... for the equitable owner of a corporation to hide behind its corporate veil. [Citation.]” (Gardner, supra, 9 Cal.App.4th at p. 1213 (italics in original).) Again, there was no evidence in the settled statement of any bad faith.
The Upshot: In the appropriate case, the Court of Appeal may reverse for lack of substantial evidence supporting all the necessary elements of a claim. And a settled statement can be a viable substitute for a reporter's transcript on appeal. But, still, and although, I would not bet on it.
Tim Kowal helps trial attorneys and clients win their cases and avoid error on appeal. He co-hosts the Cal. Appellate Law Podcast at www.CALPodcast.com, and publishes a newsletter of appellate tips for trial attorneys at www.tvalaw.com/articles. His appellate practice covers all of California's appellate districts and throughout the Ninth Circuit, with appellate attorneys in offices in Orange County and Monterey County. Contact Tim at firstname.lastname@example.org or (714) 641-1232.