Highland Springs Conference And Training Center v. City of Banning, 244 Cal. App. 4th 267 (Cal. App. 4th Dist. 2016)
Why It Matters: Many real estate entities often create and use single purpose entities (SPE) to seek land use entitlements for development projects. This case addresses whether a related corporate entity should be considered an alter ego of an SPE and be liable for an award of attorneys' fees if the SPE dissolves. The Court of Appeal for the Fourth Appellate District reversed a trial court's order denying a motion to amend judgments, including a judgment awarding over $1 million in attorney fees and costs, entered four years earlier, to add a new party alleged to be the named SPE real party in interest's alter ego, as a judgment debtor. The case was remanded to the trial court to examine the relationship between the SPE real party in interest and related corporate entity and consider, among other factors, whether there was a unity of interest and ownership that would extend liability of the SPE to the other entity.
Facts: In 2006, the City of Banning (City) certified an environmental impact report (EIR) and approved related entitlements for the development of an approximately 1500-acre property known as Black Bench Ranch. In November 2006, Highland Springs Conference and Training Center and four other organizations (Plaintiffs) filed a California Environmental Quality Act (CEQA) action challenging the City's certification of the EIR and project approval. Plaintiffs named "SCC/Black Bench, LLC, dba SunCal Companies" (SCC/BB) as the only real party in interest. In April 2008, the trial court set aside and vacated the City's certification of the EIR and project approvals. SCC/BB appealed the judgment but failed to deposit record preparation costs, resulting in the court's dismissal of the appeal. In August 2008, Plaintiffs moved to recover attorney fees and costs. Neither the City nor SCC/BB opposed the motion. The court awarded $1,081,545.97 in attorney fees and costs against SCC/BB. By the end of 2008, SCC/BB lost the property in foreclosure and in 2010, SCC/BB was dissolved.
In October 2012, four years after the issuance of the attorney fees order and almost six years after the lawsuit was filed, Plaintiffs moved to add SCC Acquisitions (SCCA) to the judgments as an additional judgment debtor based on the claim that SCCA was the alter ego of SCC/BB, and should therefore be liable for paying the attorney fees and costs award. Both SCCA and SCC/BB conducted business under the names "SunCal" and "The SunCal Companies" in connection with procuring the Black Bench Property, obtaining the project approvals, and in the CEQA litigation. SCCA opposed the motion and denied that it was the alter ego of SCC/BB as the two companies were formed and run as separate entities, with separate assets and separate accounting.
The trial court denied the motion solely on the basis that Plaintiffs failed to timely file the motion by waiting four years after the judgment was entered. It concluded that Plaintiffs knew, or reasonably should have known, of the alleged alter ego relationship long before they moved to amend to include SCCA, but noted that absent the four-year delay the court would likely have granted the motion to hold SCCA liable for the fees based on the equities.
The Decision: The Court of Appeal held that the trial court erroneously denied the motion to amend the judgments to add SCCA as a judgment debtor solely on the issue of delay. More significantly, the Court of Appeal remanded the case to the trial court with instructions to examine more closely the alter ego claim. In so holding, the Court of Appeal clarified that the question of "whether plaintiffs unreasonably delayed in filing the motion to amend is irrelevant to the merits of plaintiffs' alter ego claim against SCCA. It is only relevant to whether plaintiffs' alter ego claim was barred by the equitable, affirmative defense of laches." In this case, the claim was not barred by laches because SCCA failed to present sufficient evidence that it was prejudiced by plaintiffs' delay in filing the motion, even if the delay was unreasonable.
The Court of Appeal articulated the factors that must be weighed by the trial court in deciding whether SCCA was the alter ego to SCC/BB. In so doing, the Court of Appeal also noted that alter ego is an extreme remedy and that the standards for applying alter ego principles are high as the imposition of liability on an alter ego must be exercised cautiously. In order to hold SCCA liable for the attorney fees, Plaintiffs must show by a preponderance of the evidence that:
(1) the added parties controlled and were virtually represented in the underlying proceeding,
(2) a unity of interest and ownership exists such that the entity and its owners no longer have separate personalities, and
(3) treating the acts as those of the entity alone will produce an inequitable result. Factors relevant to finding a unity of interest and ownership include commingling of funds/assets, identical equitable ownership, use of the same offices/employees, disregard of corporate formalities, identical directors/officers, use of one entity as a "shell," and inadequate capitalization of the original judgment debtor.
- Alter ego liability is an equitable remedy that does not have a statute of limitations and can be brought at any time after judgment through a motion to amend under Code of Civil Procedure Section 187.
- When conducting business through an SPE, related corporate entities must be careful to avoid creating a unity of interest that could extend liability to the alter ego if the SPE were dissolved. For example, only the SPE should be named in applications, correspondence and as a party to improvement agreements.