A Postjudgment, Independent Action To Enforce Alter Ego Liability On A Contract Is Considered An Action On The Contract

In MSY Trading Inc., et al. v. Saleen Automotive, Inc., the California Court of Appeal recently ruled on a question of first impression: whether a postjudgment, independent action to establish alter ego liability for a judgment on a contract is subject to an award of attorney fees (pursuant to the contract) for a prevailing party, even if the prevailing party had not signed that contract.  The Court of Appeal affirmed that any prevailing party, having prevailed in an action based on the contract, could properly seek attorney fees as allowed by the contract.  The Court of Appeal also noted that had such alter ego allegations been made in the prior breach of contract action, the prevailing party would most certainly have been entitled to recover its attorney’s fees —  therefore, the postjudgment, independent action to establish alter ego liability on that judgment must be considered an action based on the contract.

Background

Plaintiff MSY Trading Inc. is a Japanese company in the business of importing and exporting vehicles, and Plaintiff KIC Trading Inc. is MSY Trading's representative, handling all of their logistics in the United States (collectively “Plaintiffs”).  Defendant Steve Saleen is in the business of selling supercharged cars under the Saleen brand, and is the chief executive officer of both Saleen Automotive Inc. and Saleen Signature Cars (which is wholly owned by Saleen Automotive).

Plaintiffs had previously filed a lawsuit in Riverside Superior Court in 2012 (the “Riverside Action”) against an entity called SMS Retail Corona for breach of contract, which entity was in the Saleen family of companies.  The Riverside Action eventually settled in January 2014, subject to a payment schedule that allowed, in the event payments were not made as scheduled, for a stipulated judgment to be taken against SMS Retail Corona, its parent company, SMS Signature Cars, Inc., and against Saleen Automotive.  However, Saleen Automotive was not a signatory to the settlement agreement.  The settlement agreement further provided “in the event of any legal action or proceeding brought by either party hereto against the other arising out of this Agreement, the prevailing party shall be entitled to recover its costs and attorney's fees incurred in such legal action or proceeding.”

When the settling defendants failed to make payments according to the payment schedule, Plaintiffs moved to enforce the settlement agreement against defendants for the full balance of the remaining payments and for attorney fees.  Judgment was entered against SMS Retail Corona and SMS Signature Cars in October 2014.  On February 2016, Plaintiffs filed a motion in the Riverside Action to amend the judgment to add Saleen Automotive, Saleen Signature Cars, and Mr. Saleen as alter egos of the judgment debtors.  The motion was granted as to Saleen Signature Cars (which was simply the SMS Signature Cars entity under a new name), but was denied without prejudice as to Mr. Saleen and Saleen Automotive.

Plaintiffs filed a new lawsuit in May 2016, seeking to hold Mr. Saleen and Saleen Automotive liable on the judgment in the Riverside Action as alter egos of the judgment debtors.  However, while Saleen Automotive was found to be an alter ego in this action, Mr. Saleen was not.  Accordingly, both Plaintiffs and Mr. Saleen moved for their attorneys’ fees — which fees were granted for both parties.  Plaintiffs appealed the award of Mr. Saleen’s attorneys’ fees.

The Doctrine of Reciprocity

Ultimately the Court of Appeal affirmed the award of Mr. Saleen’s attorney’s fees by relying upon the doctrine of reciprocity.  The doctrine of reciprocity is established in Civil Code section 1717 and by Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, which held that even though a party may not be a signatory to a contract, if the party may be sued on the contract as if it were a party to it and the plaintiff would be entitled to attorney’s fees should it prevail in enforcing the contractual obligation, so should any other party be entitled to attorney’s fees if it prevails.

It is also true that generally, a judgment rendered in a case involving a contract that includes an attorney’s fees and costs provision extinguishes all further contractual rights, including the contractual attorney’s fees clause, when that judgment is made.  However, the reason an alter ego can be added to a judgment is because in the eyes of the law, the alter ego was a party, albeit by a different name — therefore, a postjudgment, independent action to establish alter ego liability for a judgment on a contract must itself be considered an action on the contract. 

Accordingly, the Court of Appeal reasoned that a postjudgment, independent action to establish alter ego liability for a judgment on a contract is just as subject to the doctrine of reciprocity as the original breach of contract action in which the judgment was made.  To hold otherwise would only incentivize wasteful proceedings, as a plaintiff would simply wait to make any alter ego claims until a judgment has been made.

Conclusion

While oftentimes corporate entities are created for the primary purpose of managing liability, alter ego claims can derail those efforts in litigation.  However, as seen above, if an alter ego defendant prevails in defending itself from an action on a contract that includes a prevailing party attorneys’ fees provision, the alter ego may be entitled to recover its attorneys’ fee — even if it is not a signatory to that contract.  To ensure that your corporate entity is properly protected against alter ego claims, please promptly contact your regular counsel at Atkinson, Andelson, Loya, Ruud & Romo for a thorough explanation of best practices moving forward.

This AALRR post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

© 2020 Atkinson, Andelson, Loya, Ruud & Romo

Categories: Business, Litigation

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