Opinion
Case No. C 92-2203 BAC.
February 17, 1993
ORDER
This matter comes before the court on the motions of defendants Louis Phelps, Theodore Kolb, Avery Chope, Jesper Petersen, Allan Blumenfeld, and Walter Sullivan III for summary judgment. After careful consideration of the parties' written and oral arguments, defendants' motions are GRANTED in part and DENIED in part.
LEGAL STANDARD
Summary judgment is appropriate only when a defendant shows that there is no genuine issue as to any material fact, and that he is entitled to judgment as a matter of law. Fed.R.Civ.P. 56. A genuine issue exists when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party,"Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S. Ct. 2505, 2510 (1986), and material facts are those "that might affect the outcome of the suit under the governing law . . .,"id. at 248, 106. S. Ct. at 2510. In making this determination, the court accepts the nonmoving party's evidence as true, and draws all reasonable inferences in the light most favorable to him. Lindahl v. Air France, 930 F.2d 1434, 1437 (9th Cir. 1991) (citing Anderson, 477 U.S. at 255, 106 S. Ct. at 2513, andMatsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 1356 (1986)).
BACKGROUND
Plaintiff Shoreline Associates, a limited partnership, was formed in 1981 to develop a racetrack and related complex. John Thorpe has been the individual general partner of Shoreline Associates since its inception. His co-general partner was Shorelands Corp., and the Shorelands Corp. Board of Directors was involved in all major decisions concerning the partnership. Louis Phelps, Thorpe's personal attorney, and Theodore Kolb, Phelps's partner at Sullivan, Roche Johnson, were limited partners in Shoreline Associates, as were defendants Avery Chope, Jesper Petersen, Allan Blumenfeld, and Walter Sullivan III.
Shoreline Associates was forced into insolvency in late 1990. Faced with large financial losses, Phelps and Kolb, together with Lawrence Brookes (who was of counsel to Sullivan, Roche Johnson), introduced Albert J. Miller to Thorpe. The attorneys recommended that Miller be brought into the Shoreline Associates project as a consultant, representing to Thorpe that Miller was an experienced "turn around expert," and that he could bring substantial financial assets to Shoreline Associates. In actuality, Miller was a defendant in numerous lawsuits alleging fraud, the IRS was pursuing Miller for $30 million in back taxes, and he had defaulted on other obligations totaling more than $1 million. According to Shoreline Associates, defendants Phelps, Kolb, and Brookes were familiar with Miller's questionable background when they recommended him to Thorpe.
Shoreline Associates agreed to pay Miller $25,000 for a restructuring plan, and Miller ultimately suggested to Shoreline Associates's partners that they form a new company to continue the racetrack project. Existing investors in Shoreline Associates's would have the right to buy into the new company for a fraction of the money they had had in the old, and would end up owning the same percentage of the new company that they had owned in Shoreline Associates — without the liabilities. Shoreline Associates' limited partners accepted Miller's recommendation, and Shorelands Park was formed in March 1991. The subscription offering was restricted to Shoreline Associates partners. Miller was elected Chairman and CEO. Defendants Chope, Petersen, Phelps, Kolb, Blumenfeld, and Sullivan all subscribed to Shorelands Park. Chope, Petersen, Kolb, and Sullivan were also members of Shorelands Park's Board of Directors, and Louis Phelps held an "honorary" non-voting seat.
Shoreline Associates offers evidence that could support a finding that Shorelands Park was from the outset inadequately capitalized, and that the assets of Shoreline Associates were transferred to Shorelands Park for less than a reasonable sum. Shoreline Associates also offers evidence that Shorelands Park's board members had little regard for Shorelands Park's corporate form. Neither the solicitation, nor the subsequent issuance of stock several months after Shorelands Park commenced business, were registered with any regulatory agency, or made with permit or qualification. The stock subscription agreement (which, arguably, was illusory) was altered, subscribers' rights were unilaterally rescinded, and directors were allowed to vote without making required subscription payments.
Shortly after Shorelands Park's formation, Miller announced that Shorelands Park would abandon the racetrack project, and instead offer to sell "franchise rights" in a nonexistent theme park to Hong Kong investors, who could then use the rights to obtain visas. By January 1992, Miller had concluded that he could not find any Hong Kong investors, and Shorelands Park collapsed.
Plaintiff's third amended complaint, filed on March 19, 1992, contains five claims for relief: fraud, negligent misrepresentation, successor liability, alter ego liability, and breach of contract.
Plaintiff did not seek leave to add the negligent misrepresentation and breach of contract claims, but, in order to expedite these proceedings, the court chooses to reach their merits.
DISCUSSION
A. The Successor Liability and Alter Ego ClaimsOrdinarily, a corporation is considered a legal entity separate from that of it shareholders, and its shareholders' exposure to liability is limited to the amount they have invested in the corporation. However, under California law, courts may "pierce the corporate veil" and hold a successor corporation or individual shareholders liable for the debts of the original corporation (1) if there is "such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist" and (2) "an inequitable result will follow," if the acts are treated as those of the corporation alone. Automotriz del Golfo de Cal. v. Resnick, 47 Cal. 2d 792, 796 (1947), quoted in Jack Farenbaugh Son v. Belmont Constr., Inc., 194 Cal. App. 3d 1023, 1032-33, 240 Cal. Rptr. 78, 82-83 (1987), and in NEC Elecs., Inc. v. Hurt, 208 Cal. App. 3d 772, 777, 256 Cal Rptr. 441, 443 (1989). The existence of these elements is a question for the trier of fact. E.g., Jack Farenbaugh Son, 194 Cal. App. 3d 1032, 240 Cal. Rptr. at 83 (1987).
The court applies California law in analyzing Shoreline Associates' successor liability and alter ego claims. Courts look to federal law where the plaintiff's claims arise out of the Labor Management Relations Act, e.g., Seymour v. Hull Moreland Eng'g, 605 F.2d 1105, (9th Cir. 1979), but where — as here — a plaintiff's claims arise out of California law, California law governs successor liability and alter ego issues.See, e.g., Firstmark Capital Corp. v. Hempel Fin. Corp., 859 F.2d 92 (9th Cir. 1988) (applying California law).
1. Shorelands Park's Successor Liability
Shoreline Associates argues, and the court agrees, that a genuine issue exists as to whether Shorelands Park is liable under principles of successor liability for Shoreline Associates' debts. See, e.g., Economy Ref. Serv. Co. v. Royal Nat'l Bank of N.Y., 20 Cal. App. 3d 434, 439-40, 97 Cal. Rptr. 706 (1971) ("Transfers of all of the assets of a person or corporation in straightened circumstances, without fair consideration, to a corporation having substantially the same ownership, by which the just claims of creditors are defeated, are of such fraudulent nature that the new corporation may be held to the debt of the old."); accord Gordon v. Aztec Brewing Co., 33 Cal. 2d 514, 523 (1949) (corporation alter ego of partnership).
2. The Individual Defendants' Alter Ego Liability
Of course, the fact that Shorelands Park might be responsible for the debts of Shoreline Associates does not necessarily mean that Shorelands Park's shareholders are individually liable.Arnold v. Browne, 27 Cal. App. 3d 386, 396, 103 Cal. Rptr. 775, 782 (1972) ("In any event, the intermingling of the two corporations has no relevance to the liability of the individual defendants."), overruled on other grounds, Reynolds Metals Co. v. Alperson, 25 Cal. 3d 124, 158 Cal. Rptr. 1 (1979). The court may impose liability on the individual defendants only if Shorelands Park was their alter ego. California courts consider a large number of factors when deciding whether to pierce the corporate veil: commingling of funds and other assets; failure to segregate funds; unauthorized diversion of corporate funds; an individual's treatment of corporate assets as his own; the failure to obtain authority to issue stock or to subscribe to or issue the same; an individual's holding himself out as personally liable for the debts of the corporation; the failure to maintain minutes or adequate corporate records; unity of ownership; the failure to adequately capitalize a corporation, and the use of a corporation as a mere shell; the concealment and misrepresentation of the responsible owners' identities; the disregard of legal formalities; the diversion of assets from a corporation by or to a stockholder or other person or entity; the manipulation of assets and liabilities between entities so as to concentrate assets in one and liabilities in the other; and the use of a corporation as a subterfuge for illegal transactions.Arnold v. Browne, 27 Cal. App. 3d at 395, 103 Cal. Rptr. at 781-182; Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal. App. 2d 825, 838-40, 26 Cal. Rptr. 806, 813-15 (1962). Courts ordinarily require several of these factors to be present before they will impose alter ego liability. Associated Vendors, 210 Cal. App. 2d at 840, 26 Cal. Rptr. at 815.
Construing the evidence in the light most favorable to Shoreline Associates, the court believes that a reasonable trier of fact could conclude that Shorelands Park was the alter ego of the individual defendants. Summary judgment is, therefore, DENIED.
B. The Breach of Contract, Negligent Misrepresentation, and Fraud Claims
1. Shoreline Associates's Election of Remedies
Defendants urge the court to hold that Shoreline Associates rescinded the Asset Sale and Use Agreement, and that, having elected its remedy, Shoreline Associates may not now seek additional damages on the breach of contract, fraud, and negligent misrepresentation claims. Shoreline Associates, on the other hand, contends that it elected to terminate the agreement — not rescind it. If true, Shoreline Associates is entitled to recover damages for Shorelands Park's breach up to the time the agreement was terminated, and to recover tort-based damages. E.g., B.L. Metcalf Gen. Contractor, Inc. v. Earl Erne, Inc., 212 Cal. App. 2d 689, 28 Cal. Rptr. 382, 386 (1963). "The question of whether a contract has been cancelled, rescinded, or abandoned is a mixed question of law and fact. . . ." Thompson v. Boyd, 217 Cal. App. 2d 365, 32 Cal. Rptr. 513 (1963). The parties' dispute over their intent in ending the contract is a material issue, and summary judgment on this matter would therefore be inappropriate.
Having concluded that there is a disputed issue of fact as to whether the contract was terminated or rescinded, and having concluded in Part A(2), supra, that a reasonable trier of fact could find that Shorelands Park is the alter ego of the individual defendants, the court must DENY defendants' motions for summary judgment on Shoreline Associates's claim for breach of contract.
2. The Fraud and Negligent Misrepresentation Claims
The court notes at the outset that Shoreline Associates has not opposed the motions of defendants Chope, Petersen, Blumenfeld, and Sullivan for summary judgment on the claims for fraud and negligent misrepresentation. Accordingly, the court GRANTS summary judgment in favor of defendants Chope, Petersen, Blumenfeld, and Sullivan on those claims.
Defendants Kolb and Phelps urge the court to grant them summary judgment as well, arguing (1) that the third amended complaint fails state a claim for negligent misrepresentation against Phelps, and (2) that the complaint does not satisfy the pleading requirements of Fed.R.Civ.P. 9(b).
a. Negligent Misrepresentation.
In setting forth the cause of action for negligent misrepresentation, Shoreline Associates alleges that the "[d]efendants KOLB, PHELPS, and BROOKES made the representations set forth in paragraph 11 without reasonable grounds for believing them to be true. . . ." In paragraph 11, Shoreline Associates alleges that the defendants failed to disclose material information. California law, however, does not recognize a cause of action for negligent misrepresentation where a plaintiff alleges that the defendant omitted information: to be liable, the defendant must have made a positive assertion on which the plaintiff relied. E.g., Byrum v. Brand, 219 Cal. App. 3d 926, 942, 268 Cal. Rptr. 609, 620 (1990). Presumably plaintiff meant to incorporate paragraph 10, which alleges that defendants made positive misrepresentations of fact. The difficulty with paragraph 10 is that Shoreline Associates inadvertently replaced Mr. Phelps's name with Mr. Sullivan's. The effect of Shoreline Associates's "word processing error" is that no claim for negligent misrepresentation against Mr. Phelps is ever alleged. The court construes Mr. Phelps's motion for summary judgment as one for dismissal for failure to state a claim, and GRANTS it. Plaintiff has ten days to file a fourth amended complaint. This ruling is not to be construed as permission to add new claims, and plaintiff is henceforth on notice that it will have to live with consequences of any future word processing errors.
b. Federal Rule of Civil Procedure 9(b)
Fed.R.Civ.P. 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity," and Kolb and Phelps argue that the third amended complaint fails to satisfy these specificity requirements. Assuming that the Sullivan/Phelps word processing error is corrected, the court disagrees: "[T]he particularity requirement of Rule 9(b) . . . does not render the general principles set forth in Rule 8 entirely inapplicable to pleading allegations of fraud." 5 Charles Alan Wright Arthur R. Miller,Federal Practice and Procedure § 1298, at 617 (2d ed. 1990). While not a model of precision, the complaint identifies the speakers and their audience, the contents of the false and omitted representations, and describes how the speakers benefited by the fraud. In short, the complaint adequately warns the defendants "of the claim[s] against [them] and of the acts relied upon as constituting the fraud charged." Id. at 608 (citing inter alia Deutsch v. Flannery, 823 F.2d 1361 (9th Cir. 1987)). Defendants' motion for summary judgment on the fraud and negligent misrepresentation claims is, accordingly, DENIED.
CONCLUSION
For all of the foregoing reasons, the motions of Messrs. Phelps and Kolb are DENIED in their entirety. Summary judgment is GRANTED in favor of Messrs. Chope, Petersen, Blumenfeld, and Sullivan on the claims for fraud and negligent misrepresentation, and DENIED on the other claims. Plaintiff has ten days from the date of this order to file a fourth amended complaint that corrects the word processing error that replaced Mr. Phelps's name with Mr. Sullivan's.
IT IS SO ORDERED.