Nec Electronics Inc. v. Hurt

Decision Date08 March 1989
Docket NumberNo. H002543,H002543
Citation256 Cal.Rptr. 441,208 Cal.App.3d 772
CourtCalifornia Court of Appeals Court of Appeals
PartiesNEC ELECTRONICS INC., Plaintiff and Respondent, v. Porter HURT, Defendant and Appellant.

Vernon H. Granneman, Kevin M. Fong, Jeffrey H. Wong, Pillsbury, Madison & Sutro, San Jose, for plaintiff and respondent, NEC Electronics.

Ed W. Hendren, Holtzmann, Wise & Shephard, Palo Alto, for defendant and appellant, Porter Hurt.

ELIA, Associate Justice.

Respondent NEC Electronics Inc. ("NEC") filed a motion to amend its judgment against Ph Components ("Ph") to add appellant Porter Hurt ("Hurt") as a judgment debtor. The trial court granted the motion and Hurt brings this appeal. We reverse.

FACTUAL AND PROCEDURAL BACKGROUND

NEC filed suit against Ph in March 1985 to recover amounts due for goods which NEC sold to Ph. Frank Finelli, Ph's chief financial officer, was served with the NEC complaint. Neither Finelli nor Hurt, the sole shareholder and chief executive officer of Ph, was named as a party or served in his individual capacity. Ph subsequently appeared by filing a general denial.

In April 1985, Finelli met with representatives of NEC to discuss the financial problems of Ph and its need to compromise the claims of unsecured creditors. NEC acknowledged Ph's financial problems and stated that it would not take further legal action at least through May 1985.

In May 1985, Hurt, Finelli and Brad Hartman, a representative of NEC, attended a meeting of Ph's unsecured creditors. The creditors were informed that Hurt was willing to advance $1.5 million of his personal funds to provide additional working capital for Ph. Ph hoped to avoid filing a Chapter 11 petition for bankruptcy but indicated that it would do so if necessary. A creditors' committee was formed and at the conclusion of the meeting the creditors' committee agreed to recommend a thirty day moratorium on the outstanding unsecured trade debt of Ph.

On July 29, 1985, the creditors' committee proposed a Joint Plan of Reorganization for Ph. This plan was communicated to Ph's creditors. Two days before trial, NEC wrote counsel for Ph that NEC was rejecting the plan and intended to prosecute its action against Ph to conclusion. In addition, counsel for NEC wrote: "At the conclusion of that action, we intend to carefully analyze our client's rights against Ph's shareholder and any other entities or individuals who may have liability on account of our client's claim.... With interest, we estimate that NEC is currently owed $160,000. An immediate cash payment by an entity other than PH, presumably its shareholder, to our client of one-half of that total amount ($80,000) would be sufficient to settle NEC's claim...." (Italics added.)

On the day before trial, Ph notified NEC that it would not appear. The trial took place on August 23, 1985 with NEC calling one witness and submitting certain additional documentary evidence. Ph was not present. The court entered judgment against Ph and in favor of NEC for $139,366.37 together with prejudgment interest. Ph did not appeal this judgment.

On October 9, 1985, Ph filed a voluntary petition under Chapter 11 of the Federal Bankruptcy Act. As part of those proceedings, NEC took the depositions of Hurt and Finelli. Approximately six months later, NEC filed a motion pursuant to Code of Civil Procedure section 187 to amend the judgment against Ph to name Hurt as an additional judgment debtor. The basis for the motion was NEC's allegation that Hurt was the alter ego of Ph.

The trial court granted the motion. It found that Hurt received in excess of $2,800,000 in "loans" from Ph. These "loans" or "advances" were not documented through ordinary loan documents or reflected in the corporate minutes. No interest was paid on any of the moneys even though large sums remained outstanding for several years. Although Hurt eventually repaid a large portion of the principal sum to the corporation, a substantial dispute still exists over whether additional moneys are owed to Ph.

Ph also paid insurance, berthing fees, maintenance and fuel expenses for a boat owned by Hurt. Ph leased an automobile for Hurt's wife, who was not a Ph employee. In addition, Ph made over 30 monthly mortgage payments on Hurt's personal residence. The trial court found that Hurt used his personal funds to pay corporate obligations, including property taxes, building rent, payroll and legal expenses. Hurt claimed these payments constituted partial repayment of the loans Hurt received from Ph but as noted above, the advances and repayments were not adequately accounted for by Hurt. Finally, Hurt paid $375,000 of his personal assets to fund the reorganization of the Ph Chapter 11 Bankruptcy case. These facts led the trial court to conclude that Hurt was the alter ego of Ph.

The trial court also concluded that Hurt had an opportunity to present a defense in the proceedings between NEC and Ph. The court stressed that Hurt was the chief executive officer of Ph as well as its sole shareholder and that Hurt had knowledge of the lawsuit while it was pending. Although Hurt delegated responsibility to Finelli to retain counsel to oppose the lawsuit, Hurt knew of the amounts owed to NEC and was continuously involved in efforts to satisfy that indebtedness. The court concluded that (1) Porter Hurt was the alter ego of Ph; (2) Hurt controlled the litigation between NEC and Ph on behalf of Ph and (3) Hurt had an opportunity to present a defense to the claim against Ph by NEC.

Hurt appeals the order granting NEC's motion to amend the judgment. He asserts four points on appeal. First, Hurt argues that he was not the alter ego of Ph. Second, Hurt contends that he did not have an opportunity to present a defense in the initial litigation. Third, Hurt urges that there was insufficient evidence to establish that he controlled the litigation between Ph and NEC. Finally, Hurt claims that NEC is estopped to add Hurt as a judgment debtor because NEC knew of Hurt's relationship with Ph when it filed its lawsuit against Ph.

In reviewing Hurt's contentions, we must consider whether the trial court's findings are supported by substantial evidence. (Dow Jones Co. v. Avenel (1984) 151 Cal.App.3d 144, 151, 198 Cal.Rptr. 457.) With this standard in mind, we next turn to the arguments presented by Hurt.

DISCUSSION
I. Alter Ego Liability.

Hurt's first argument is that there was insufficient evidence to show that Hurt was the alter ego of Ph. We disagree.

There are two general requirements for disregarding the corporate entity. First, there must be "such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist." (Automotriz etc. De California v. Resnick (1957) 47 Cal.2d 792, 796, 306 P.2d 1.) Second, it must be demonstrated that "if the acts are treated as those of the corporation alone, an inequitable result will follow." (Id. at p. 796, 306 P.2d 1.) "When considering the application of the alter ego doctrine to a particular situation, it must be remembered that it is an equitable doctrine and, though courts have justified its application through consideration of many factors, their basic motivation is to assure a just and equitable result." (Alexander v. Abbey of the Chimes (1980) 104 Cal.App.3d 39, 48, 163 Cal.Rptr. 377.)

Hurt concedes that there is evidence of unity of interest and ownership between Hurt and Ph. However, he argues that the evidence does not establish that an inequitable result will follow if the acts are treated as Ph's alone. Hurt claims that the only inequity to NEC is its inability to collect from Ph.

We reject this argument. The evidence discloses that Hurt depleted the assets of Ph by receiving approximately $2.8 million in "loans" and by using corporate moneys to pay for his personal expenses. Although the evidence reveals that Hurt paid back a portion of this sum, there is still a dispute over whether Hurt owes Ph additional amounts. Quite clearly, this evidence demonstrates that Hurt manipulated the assets of Ph to the detriment of Ph's creditors. As a consequence, there is substantial evidence to support the trial court's conclusion that Hurt's manipulation of the assets of Ph produced an inequity to NEC and that Hurt was indeed Ph's alter ego. (Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 840-842, 26 Cal.Rptr. 806.)

II. Authority of the Court to Amend the Judgment to Add Additional Judgment Debtors.

Hurt argues that he did not control or have an opportunity to present a defense in the underlying action between Ph and NEC. For these reasons, Hurt urges that the court improperly amended the judgment to add him as an additional judgment debtor. We agree.

Section 187 of the Code of Civil Procedure grants to every court the power to use all means to carry its jurisdiction into effect, even if those means are not set out in the code. 1 (Fairfield v. Superior Court (1966) 246 Cal.App.2d 113, 120, 54 Cal.Rptr. 721.) Under section 187, the court has the authority to amend a judgment to add additional judgment debtors. (Dow Jones Co. v. Avenel, supra, 151 Cal.App.3d 144, at p. 148, 198 Cal.Rptr. 457.)

Judgments are often amended to add additional judgment debtors on the grounds that a person or entity is the alter ego of the original judgment debtor. (Farenbaugh & Son v. Belmont Construction, Inc. (1987) 194 Cal.App.3d 1023, 1029, 240 Cal.Rptr. 78; Mirabito v. San Francisco Dairy Co. (1935) 8 Cal.App.2d 54, 60, 47 P.2d 530.) This is an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant. (Mirabito v. San Francisco Dairy Co., supra, 8 Cal.App.2d at 57, 47 P.2d 530; Thomson v. L.C. Roney & Co., Inc. (1952) 112 Cal.App.2d 420, 428-429, 246 P.2d 1017.) "Such a procedure is an appropriate and complete method by which to bind new...

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