Ciraulo Plumbing Inc v. Gilroy Constr. Inc

• Decision Date: 30 August 2010
• Docket Number: H034217,No. 1-07-CV084438,1-07-CV084438
• Parties: CIRAULO PLUMBING, INC., Plaintiff and Respondent, v. GILROY CONSTRUCTION, INC., et al., Defendants and Appellants.
• Court: California Court of Appeals Court of Appeals

CIRAULO PLUMBING, INC., Plaintiff and Respondent,

v.GILROY CONSTRUCTION, INC., et al., Defendants and Appellants.

H034217

No. 1-07-CV084438

Court Of Appeal Of The State Of California Sixth Appellate District

Filed: August 30, 2010

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

Premo, J.

Defendant Gilroy Construction, Inc. (Gilroy Construction), was the general contractor on two residential development projects; plaintiff Ciraulo Plumbing, Inc. (Ciraulo Plumbing), was the plumbing subcontractor. Shortly before the plumbing work was complete, Gilroy Construction fired Ciraulo Plumbing, ostensibly because it was not meeting the construction timetable. Ciraulo Plumbing sued Gilroy Construction, its principals Vince Giacalone and Michael McDermott, and three other entities for breach of contract, quantum meruit, and open book account. The trial court found, among other things, that Gilroy Construction had breached the contracts and that it was the alter ego of Giacalone and McDermott, making them personally liable for the corporation's breach. Giacalone and McDermott appeal from the judgment, challenging only the trial court's alter ego finding. We shall affirm.

I. Factual and Procedural Background

In or about 2005, Giacalone and McDermott formed four companies to hold, manage, and develop two residential developments known as the Third Street and Vickery Lane projects. The "owner entities," as they were known at trial, were Third Street Partners, LLC and Vickery Lane, LLC. Giacalone-McDermott Management, LLC managed the two projects. Gilroy Construction, a California corporation, was the general contractor.

Vince Giacalone and Peter Ciraulo had been good friends. Ciraulo had done many jobs for Giacalone in the past on an informal trade basis. After a series of conversations about the Third Street and Vickery Lane projects, Giacalone and Ciraulo agreed that Ciraulo Plumbing would do the plumbing work for 10 percent less than the lowest bids received. The written contracts between Ciraulo Plumbing and Gilroy Construction specified that the contract prices were $115,008 for the Third Street job and $187,500 for the Vickery Lane job.

Disputes arose during the course of construction and eventually Ciraulo Plumbing was fired and another plumbing contractor was hired to complete the work. Ciraulo Plumbing filed suit, pleading causes of action for breach of contract and open book account against Gilroy Construction and quantum meruit against Giacalone and McDermott and all four of their companies. The first amended complaint also alleged, among other things, that all defendants were the alter egos of all other defendants.¹

Trial was to the court in February 2009. Evidence pertaining to the alter ego issue included evidence of how the companies were organized and capitalized. GiacaloneMcDermott Management, LLC had two members, the two individual defendants. It had capital of around $10,000. It was, in turn, the only member of both owner entities. The owner entities had each been capitalized at about $800,000, which amounts were contributed by Giacalone, either out of his pocket or through an unsecured line of credit he obtained from a bank.

As to Gilroy Construction, neither Giacalone nor McDermott knew exactly how the company was organized. When asked to name Gilroy Construction's shareholders, McDermott responded, "I believe Mr. Giacalone is the president; I'm the vice-president; and I think Lisa Burns [Giacalone's sister] is the treasurer; and I think Paul Giacalone [Giacalone's brother] is the secretary. But I'm not--It's in the documentation that you have." The trial court followed up with the same question and McDermott again listed the corporate officers. He eventually admitted that he did not know who the shareholders were and did not believe any share certificates had been issued. Giacalone was unable to state whether he was an officer or shareholder of Gilroy Construction because he is a shareholder "in dozens and dozens of different ventures." He later stated that he was sure he and McDermott were shareholders and thought that their wives might be shareholders as well. He did not know if shares of stock were ever issued nor whether he had ever received income from Gilroy Construction. According to Giacalone, he and McDermott created the corporation because California law requires a corporation to hold the contractor license. The corporation had some "modest" amount of cash, possibly less than $5,000.

As the general contractor, Gilroy Construction was the nominal contracting party on contracts with all the subcontractors, of which there were more than 30. When the subcontractors submitted invoices, Gilroy Construction did not pay them but passed the invoices on to the owner entities to pay the subcontractors directly. The trial court attempted to clarify the arrangement by asking McDermott, "But [Gilroy Construction] wasn't contracting with subcontractors promising to pay subcontractors for the work; right?" McDermott replied, "Yes, it was, but the payments came directly from the owners and Gilroy Construction received the management fee for it."

Neither Gilroy Construction nor the owner entities had any employees. Giacalone and McDermott were employed by Giacalone-McDermott Management LLC, which also employed the comptroller. The enterprise occasionally utilized the services of personsemployed by Giacalone Electrical Services, one of Vince Giacalone's companies, for administrative assistance and for supervision at the project sites. All of the entities worked out of the offices of Giacalone Electrical Services.

In its statement of decision, the trial court rejected Ciraulo Plumbing's cause of action for open book account. The trial court also rejected its quantum meruit claim against the owner entities. The trial court did find that Gilroy Construction had breached the two subcontracts and that Ciraulo Plumbing was entitled to the contract price less amounts already paid. As to the alter ego issue, the trial court found that Giacalone and McDermott had formed Gilroy Construction in July 2005, that they were the "owners (although share certificates were not issued) and officers of the corporation," and that they had formed the company with "modest" capital contributions and maintained "minor" amounts of cash in the corporate account. The trial court further found that Gilroy Construction had entered into contracts with over 30 contractors but that when the contractors submitted invoices the company passed the bills along to the owner entities for payment. "McDermott viewed the owning entities as ultimately responsible for payment of subcontractors' invoices. In essence, Giacalone and McDermott used Gilroy Construction as a shell or instrumentality to contract with subcontractors such as Ciraulo Plumbing, paying them or not through [the owner entities], companies they controlled through the sole member of these companies, Giacalone-McDermott Mgt., LLC, of which they in turn were the sole members. Under these circumstances, it would be inequitable to treat Gilroy Construction's breach of its subcontracts as its act alone, and not as the acts of Giacalone, McDermott, [and the owner entities]. See Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300-301."

The trial court entered judgment in favor of Ciraulo Plumbing and against Gilroy Construction, Third Street Partners, LLC, Vickery Lane, LLC, and Giacalone and McDermott individually.² The judgment in favor of Ciraulo Plumbing was for $32,651.92 plus prejudgment interest for the Vickery Lane project and $21,851.52 plus prejudgment interest on the Third Street project.

II. Discussion

A. Legal Framework and Standard of Review

Although the trial court found that Gilroy Construction was the alter ego of Giacalone and McDermott and of the owner entities, only Giacalone and McDermott have appealed. They challenge the sufficiency of the evidence to support the trial court's alter ego finding as it applies to them.

"Alter ego is a limited doctrine, invoked only where recognition of the corporate form would work an injustice to a third person." (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1285.) "The essence of the alter ego doctrine is that justice be done.... Thus the corporate form will be disregarded only in narrowly defined circumstances and only when the ends of justice so require." (Mesler v. Bragg Management Co., supra, 39 Cal.3d at p. 301.)

The general rule is that the alter ego doctrine applies where the unity of interest between the individual and the entity is such that the separateness of the two has ceased and where adherence to the corporate fiction would sanction a fraud or promote injustice. (Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 837 (Associated Vendors).) The two primary requirements, unity of interest and inequitable results, may be shown by a variety of factors. As our Supreme Court noted long ago, "the conditions under which a corporate entity may be disregarded vary according to the circumstances in each case." (Automotriz etc. De California v. Resnick (1957) 47 Cal.2d 792, 796.) "The failure to issue stock... although not conclusive evidence, is anindication that defendants were doing business as individuals. [Citations.]... 'While the fact standing alone that a corporation remains inchoate without stockholders or stock is not of itself determinative of an alter ego relationship upon its part, nevertheless it does indicate that such corporation may exist merely to serve the interests of another--a corporation or an individual.' " (Ibid., quoting Marr v. Postal Union Life Ins. Co. (1940) 40 Cal.App.2d 673, 682.)

"Another factor to be considered in determining whether individuals dealing through a corporation should be held personally responsible for the corporate obligations is whether there was an attempt to provide adequate capitalization for the corporation.... 'If a corporation is organized and...