Court of Appeal Clarifies "Alter Ego" Liability for Employment Claims

Cooper was the sole shareholder and day to day operator of Auburn Honda, a corporation. A group of former employees sued Auburn Honda and Cooper for age discrimination and other things.  Cooper moved for summary judgment on the ground he could not be held liable, since only the employer is liable for employment discrimination. The plaintiffs argued Cooper indeed was the employer as an "alter ego" of the corporation.

The court did not permit the plaintiffs to claim Cooper was the alter ego of Auburn in opposition to the motion for summary judgment. So, small business owners, here is the discussion of application of the alter ego doctrine to a shareholder:

To succeed on their alter ego claim, plaintiffs must be able to show: (1) such a unity of interest and ownership between the corporation and its equitable owner that no separation actually exists, and (2) 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.)


Several factors are to be considered in applying the doctrine, among them are: “„[c]ommingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion of corporate funds or assets to other than corporate uses; . . . the treatment by an individual of the assets of the corporation as his own; . . . the failure to obtain authority to issue stock or to subscribe to or issue the same; . . . the holding out by an individual that he is personally liable for the debts of the corporation; . . . the failure to maintain minutes or adequate corporate records . . .; sole ownership of all of the stock in a corporation by one individual or the members of a family; . . . the failure to adequately capitalize a corporation; the total absence of corporate assets, and undercapitalization; . . . 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; . . . the concealment and misrepresentation of the identity of the responsible ownership, management and financial interest, or concealment of personal business activities; . . . the disregard of legal formalities and the failure to maintain arm's length relationships among related entities; . . . the use of the corporate entity to procure labor, services or merchandise for another person or entity; . . . the diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another; . . . the contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability, or the use of a corporation as a subterfuge of illegal transactions; . . . and the formation and use of a corporation to transfer to it the existing liability of another person or entity.‟ . . . [¶] This long list of factors is not exhaustive. The enumerated factors may be considered „[a]mong‟ others „under the particular circumstances of each case.‟" (Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, LLP (1999) 69 Cal.App.4th 223, 249-250, quoting Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 838-840.)

So, the court held that Cooper did not qualify as an alter ego under this list of factors because the Plaintiffs did not bring forth sufficient evidence.

The case is Leek v. Cooper and the opinion is here.

Ninth Circuit: Everyone's an Employer under FLSA

So, the FLSA's wage and hour provisions receive little attention in California. But with the bad economy and companies going bankrupt, the Ninth Circuit Court of Appeals may have just given plaintiffs a reason to heart federal court.

Boucher and a couple of others worked for the Castaways Hotel in Nevada. The Castaways filed for Bankruptcy protection. Later, it fired the plaintiffs. Undeterred by their former employer's insolvency, they sued the CEO, CFO and a senior manager responsible for labor relations (hi, HR managers!).

The defendants asked the district court to dismiss the case because they were not the plaintiffs' employer - that was the Castaways' role. The district court obliged. But the Ninth Circuit reversed as to the federal claims. As to claims brought under Nevada's wage and hour laws, the Court of Appeals, relying on the Nevada Supreme Court's opinion, held that individuals cannot be held liable.

As to the FLSA claims, however, the Court decided that the individuals could be held liable as employers. They got no help from the defendants, who did not argue the point apparently. Here is the money quote:

In the case at bar, Ballard has alleged that Defendant Villamor was responsible for handling labor and employment matters at the Castaways; Defendant Shaw was chairman and chief executive officer of the Castaways; and Defendant Van Woerkom was the Castaways’ chief financial officer and had responsibility for supervision and oversight of the Castaways’ cash management. The plaintiff also alleges that Shaw held a 70 percent ownership interest in the Castaways, Villemor held a 30 percent ownership interest and all three defendants had “control and custody of the plaintiff class, their employment, and their place of employment.” (See Complaint ¶¶ 9-11.)
Accepting these allegations of material fact as true, Ballard’s claim withstands a motion to dismiss. . . .

The individuals spent their brief arguing that the bankruptcy proceedings by the Castaways insulated them from liability. Logically, if the individuals stand in the shoes as employers under FLSA, then they should be covered by the Castaways' bankruptcy too, right? Nope.

We have never addressed the question whether a company’s bankruptcy affects the
liability of its individual managers under the FLSA. But our case law regarding guarantors, sureties and other non-debtor parties who are liable for thedebts of the debtor leaves no doubt about the answer: the Castaways bankruptcy has no effect on the claims against the individual managers at issue here.

So, the plaintiffs could proceed against these senior managers who owned The Castaways by suing under the FLSA, even though the Castaways went bankrupt and eventually liquidated.

The case is Boucher v. Shaw and the opinion is here.

Court of Appeal: No Defense Attorneys' Fees for Frivolous Claims?

The Court of Appeal agreed with the district court that Laura Young's FEHA claim for harassment against her former supervisor was frivolous, vexatious, etc. The trial court, however, awarded only one dollar in attorneys' fees against Young. The court's rationale was that since employer Exxon was going to pay the supervisor's fees, and since Exxon did not complain that the action against Exxon itself was frivolous, the court should not award fees that Exxon would ultimately recover.

Does that make a lot of sense? Yes, but only if you're gutting the attorneys' fees statute. Employers are responsible to pay for employees' defense costs under Labor Code section 2802, unless the employee is found to have engaged in actual unlawful harassment. So, a frivolous claim against an employee by implication is part of the claim against the employer, no? And given most claims against individual managers are barred as a matter of law, and given awards of attorneys' fees are as rare as hen's teeth anyway, one would think that a court would want to give effect to the Legislature's decision to permit an award of attorneys' fees when claims are frivolous. Right?

No. The court of appeal agreed with the trial court and held that where, as in this case, the employer is paying an individual employee's defense costs, the trial court need not award attorneys' fees if the claim against the employer is not frivolous. You don't believe me? Here's the quote:

In short, despite its finding that Young’s case against Lopez was frivolous and vexatious, the trial court had the discretion to deny attorney fees to Lopez. Because the award would benefit only Exxon, a defendant which was not otherwise entitled to an award and which did not show it incurred any significant fees on Lopez’s behalf that it would not have incurred in any event, we see no abuse of discretion in the trial court’s decision.

By the way, the attorneys' fees statute, Government Code section 12965(b) is very simple and says nothing about differing standards for employers and employees.

In actions brought under this section,the court, in its discretion, may award to the prevailing party reasonable attorney's fees and costs, including expert witness fees, except where the action is filed by a public agency or a public official, acting in an official capacity.

The statute says nothing about basing awards on who pays the fees. I know it says "discretion," but the courts have held that prevailing plaintiffs are generally entitled to fees as a matter of right, while prevailing defendants have a heavy burden to establish the claims were "frivolous, unreasonable, or without foundation." I think the courts may have lost sight of the plain language of the statute over the years.

While I'm complaining, the Court of Appeal also decided not to publish its analysis of Young's claims on the merits. That means the bar will not benefit from the court's detailed analysis of Young's claims for discrimination, harassment, retaliation, etc. The decision should be published if only because Young claimed a mental disability and that her outbursts and conduct in violation of policy were attributable to the disability. The Court distinguished Gambini v. Total Renal Care, discussed here, and held that Young's disability did not exempt her from termination for her misconduct.

Anyway, I'm sure Exxon is happy to have won the case. But there was a dark lining in a silver cloud that may affect employment litigation for the rest of us. The opinion in Young v. Exxon is here.