Case Name: Tim Devine v. Scayl, Inc. a/k/a Nexo, et al.

Case No.: 17CV319725

Defendant Stephen Douty’s Motion for Summary Judgement or, in the Alternative, Summary Adjudication

Factual and Procedural Background

Plaintiff Tim Devine (“Devine”) is an accomplished and well-respected music executive, entrepreneur, and technology worker. (Complaint, ¶1.)

In or around April 2014, defendant Scayl, Inc. a/k/a Nexon (“Scayl”) hired Devine to be the Senior Vice President of Business Development pursuant to a written employment agreement. (Complaint, ¶¶15 and 17 and Exh. A.) Devine entered into this agreement with Scayl, then acting via its Chief Executive Officer, Mike McEvoy (“McEvoy”). (Id.)

Scayl and Devine agreed that Devine’s compensation was to be $10,000 per month in addition to fringe benefits. (Complaint, ¶16.) Additionally, Devine’s contract includes a three month severance package valued at approximately $30,000. (Id.)

After Devine commenced work at Scayl, Devine received two bi-weekly paychecks of $5,000 issued on or around May 1, 2014 and May 15, 2014. (Complaint, ¶18.) Approximately one year later in May 2015, Scayl paid Devine one additional paycheck for $6,666.67. (Id.) Scayl otherwise failed to pay Devine for his work. (Id.)

For approximately four months from the beginning of Devine’s employment with Scayl, Scayl reimbursed Devine for business expenses incurred by Devine while performing his job duties. (Complaint, ¶19.) Thereafter, Devine continued to incur expenses on behalf of Scayl, but Scayl ceased reimbursing Devine with the exception of two $4,000 checks paid in July 2015 and May 2016, respectively. (Id.) Devine continues to necessarily cover business expenses for Scayl with no reimbursement. (Id.)

In or around October 2014, defendant Stephen Douty (“Douty”) took over McEvoy’s position as CEO. (Complaint, ¶20.) Following Douty’s take-over, Devine repeatedly demanded Douty cause Scayl to pay Devine his wages and expense reimbursements owed. (Complaint, ¶21.)

Scayl is presently being funded entirely by Douty. (Complaint, ¶22.) On information and belief, Douty commingles his personal assets with those of his companies, including Scayl. (Id.) On information and belief, Douty intentionally keeps Scayl undercapitalized and underfunded to justify defendants’ continued failure to pay Devine his wages and expense reimbursements. (Id.)

On April 18, 2017, plaintiff Devine filed a complaint in Los Angeles County Superior Court against defendants Scayl and Douty asserting causes of action for:

(1) Breach of Written Contract
(2)
(3) Breach of the Implied Covenant of Good Faith and Fair Dealing
(4)
(5) Violation of Labor Code §§200, 218, 1194, et seq. [Failure to Pay Wages]
(6)
(7) Violations of Labor Code §§1194 and 1197, et seq. [Failure to Pay Minimum Wage]
(8)
(9) Violation of Labor Code §226 [Failure to Provide Itemized Wage Statements]
(10)
(11) Violation of Labor Code §2802 [Failure to Reimburse Business & Travel Expenses]
(12)
(13) Violation of Civil Code §§1572, 1709 – 1710 [Fraud]
(14)
(15) Conversion
(16)
(17) Goods and Services Rendered
(18)
(19) Quantum Meruit/ Unjust Enrichment
(20)
(21) Violation of Business & Professions Code §§17200, et seq.
(22)

On August 3, 2017, the Los Angeles County Superior Court (Hon. Ruth Ann Kwan) granted defendant Scayl’s motion to transfer venue to Santa Clara County. On November 27, 2017, Santa Clara County Superior Court assumed jurisdiction.

On December 22, 2017, defendant Scayl filed notice of Chapter 7 Bankruptcy case closure.

On December 28, 2017, defendant Scayl filed an answer to plaintiff Devine’s complaint.

On December 29, 2017, defendant Douty filed an answer to plaintiff Devine’s complaint.

On November 8, 2019, defendant Douty filed the motion now before the court, a motion for summary judgment/ adjudication of plaintiff Devine’s complaint.

On January 10, 2020, plaintiff Devine filed a request for dismissal of the second, eighth, ninth, and tenth causes of action of his complaint.

I. Defendant Douty’s motion for summary judgment/ adjudication is DENIED.
II.

Defendant Douty’s liability on each of the causes of action asserted in plaintiff Devine’s complaint is premised, partially or entirely, upon an alter ego theory. (See Complaint, ¶9.) Defendant Douty moves for summary judgment/ adjudication by arguing plaintiff Devine cannot establish defendant Douty was the alter ego of Scayl.

“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, 31 Cal.Rptr.2d 433.) “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. (1985) 39 Cal.3d 290, 301, 216 Cal.Rptr. 443, 702 P.2d 601.)

Whether a party is liable under an alter-ego theory is normally a question of fact. (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1248, 1 Cal.Rptr.2d 301; accord, RLH Industries, Inc. v. SBC Communications, Inc. (2005) 133 Cal.App.4th 1277, 1288, 35 Cal.Rptr.3d 469.) “The conditions under which the corporate entity may be disregarded, or the corporation be regarded as the alter ego of the stockholders, necessarily vary according to the circumstances in each case inasmuch as the doctrine is essentially an equitable one and for that reason is particularly within the province of the trial court.” (Stark v. Coker (1942) 20 Cal.2d 839, 846, 129 P.2d 390.) Nevertheless, it is generally stated that in order to prevail on an alter-ego theory, the plaintiff must show that “(1) there is such a unity of interest that the separate personalities of the corporations no longer exist; and (2) inequitable results will follow if the corporate separateness is respected.” (Tomaselli v. Transamerica Ins. Co., supra, 25 Cal.App.4th at p. 1285, 31 Cal.Rptr.2d 433.)

“The alter ego test encompasses a host of factors: ‘[1] [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, and the confusion of the records of the separate entities …; the identical equitable ownership in the two entities; the identification of the equitable owners thereof with the domination and control of the two entities; identification of the directors and officers of the two entities in the responsible supervision and management; sole ownership of all of the stock in a corporation by one individual or the members of a family …; the use of the same office or business location; the employment of the same employees and/or attorney …; 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, 81 Cal.Rptr.2d 425, quoting Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 838–840, 26 Cal.Rptr. 806; see also VirtualMagic Asia, Inc. v. Fil–Cartoons, Inc. (2002) 99 Cal.App.4th 228, 245, 121 Cal.Rptr.2d 1.) “No single factor is determinative, and instead a court must examine all the circumstances to determine whether to apply the doctrine. [Citation.]” (VirtualMagic Asia, Inc. v. Fil–Cartoons, Inc., supra, 99 Cal.App.4th at p. 245, 121 Cal.Rptr.2d 1.)

(Zoran Corp. v. Chen (2010) 185 Cal.App.4th 799, 810–812; emphasis added.)

Defendant Douty proffers the following facts to address the host of factors that a court must consider in determining whether to apply the alter ego doctrine: From incorporation through its eventual bankruptcy, and pursuant to its bylaws, Scayl held frequent, regular board meetings, of which regular minutes were kept and maintained as party of Scayl’s ordinary course of business. Scayl’s start-up business developed mesh networking technologies that enabled people to communicate directly, more efficiently, privately, and securely, with easy email-like ease-of-use and no attachment size limits. Scayl had its own business bank accounts at Wells Fargo, which remained active until Scayl stopped operating. At times, all of Scayl’s bank records and tax returns were available to its board of directors in a “Due Diligence” folder on DropBox, to which the board had access. At no time were Scayl’s bank records or tax returns withheld from any member of the board of directors. The records were available to the board of directors at all times and reviewed by the board at various times from January 2014 until Scayl’s bankruptcy in August 2017. All tax returns for Scayl were filed with the IRS, the State of California, and the State of Oregon. In addition, all appropriate franchise taxes were paid.

Plaintiff Devine was a member of Scayl’s board of directors from in or around January 2014 through June 2017, when plaintiff was removed after filing the instant lawsuit. During his tenure as a director, plaintiff regularly attended the company’s board meetings, along with director Jonathan Bower, and Douty. Plaintiff entered into a board of director agreement with Scayl in April 2014. The Director Agreement was signed by plaintiff on April 6, 2014 and digitally signed by Scayl’s then-CEO, McEvoy, the same day. The Director Agreement did not provide for monetary compensation; it provided a stock option comprising a grant of 305,000 shares of Scayl.

At the time plaintiff signed the Director Agreement with Scayl, the company was not generating revenue or profitable, and it needed to raise money, facts known to Plaintiff, which prompted then-CEO McEvoy’s removal and Douty’s subsequent hire. The board of directors, including plaintiff, terminated McEvoy as Scayl’s CEO because he was not raising sufficient capital for the company. Plaintiff later learned that Scayl was undercapitalized under McEvoy, with only approximately $50,000 in fund at the time McEvoy was terminated as CEO.

In April 2014, plaintiff signed a written employment agreement to become Scayl’s Vice President of Business Operations. During the period when plaintiff joined Scayl as a board member until McEvoy’s termination, plaintiff only received one paycheck in May 2014 from Scayl. Despite the lack of capital being generated by Scayl, plaintiff continued working for the company for three years because of its potential upside and because in any start-up business there is a need to raise capital.

In October 2014, Douty was hired as Scayl’s CEO by a five-member board of directors which included plaintiff because of Douty’s fundraising experience. Douty’s employment agreement provided for an annual base salary of $240,000. Douty also held a seat on Scayl’s board, replacing McEvoy. During his tenure as Scayl’s CEO, Douty did not personally employ plaintiff or any other board member. Douty played no role and had no participation in hiring plaintiff since plaintiff’s involvement with Scayl predated Douty joining the company. Douty never had any ownership interest in Scayl, as he did not own any shares or have any ownership stake in Scayl. While Douty received stock options in Scayl as part of his compensation, at no point did he ever exercise any of the stock options in the company. As CEO, Douty reported to Scayl’s board of directors which evaluated Douty’s performance and could discipline or terminate him with or without cause. In October 2016, Scayl’s board of directors started to interview replacements for Douty and plaintiff considered taking the job as CEO.

During Douty’s tenure with Scayl, the company was not generating revenue or a profit. While Douty and plaintiff sought investors, their success was minimal and their efforts did not generate enough investor funds to satisfy the company’s ongoing expenses and debts. In an effort to maintain adequate capitalization to allow the company to continue operating, Douty personally advanced more than $400,000 in loans to the company. At the time Douty made the loans to keep Scayl operating, Scayl had insufficient funds in its bank accounts to satisfy necessary operating expenses. As of April 2014, all of Scayl’s assets, consisting of Scayl’s intellectual property, were pledged to Edgelink LLC, its sole secured creditor. Douty made approximately 115 separate advances to Scayl for the purpose of continuing Scayl’s product development efforts so its products could be taken to market. Douty kept records of all such advances and recorded them as liabilities in Scayl’s accounting system. Upon request, Douty provided a copy of his ledger to all board members to keep them informed of Scayl’s financial status.

In order to assist with his efforts to maintain adequate capitalization of Scayl to meet operational needs, Douty requested on two occasions that other board members, including plaintiff and Bower, also advance loans to the company but both declined to do so. At no time did Douty commingle company and personal funds, or use Scayl’s funds for any purpose other than a legitimate business purpose. Additionally, at no point during Douty’s tenure as director and CEO was Scayl purposefully or intentionally undercapitalized. Each advance Douty made to Scayl was for the specific purpose to maintain enough capitalization to ensure the company could keep developing its product, become financeable and stave off bankruptcy. Plaintiff understood that the advances made by Douty were the only thing keeping Scayl operational. Without the loans Douty made to the company, Scayl would have gone out of business sooner than it did.

As part of the effort to reduce operating costs, in the fall of 2014, Douty made the decision for Scayl to not renew a lease for dedicated office space, and the company’s directors and officers (including plaintiff, Douty, and Bower) began working for Scayl out of their respective homes. Scayl’s business address, 2995 Woodside Road, Suite 400, was a “mail office” business that provides business addresses to companies so that they do not have to use a PO box or residential office. Douty worked out of his home office in Woodside, but the home was not Scayl’s corporate office.

Upon being hired as Scayl’s CEO, Douty received three initial paychecks of $10,000 each dated October 31, 2014, November 15, 2014, and November 30, 2014. Douty only deposited one further paycheck from Scayl for an additional $10,000. Pursuant to his employment agreement, Douty should have been compensated approximately $580,000 by Scayl, but due to lack of funds, Douty was only paid a total of $40,000.

On May 1, 2017, a revolving line of credit note was executed detailing Scayl’s repayment schedule of the capital Douty advanced the company. Attached to the note is a schedule of each transaction detailing the funds advanced by Douty. The note was executed by Douty, as lender, and Scayl, as debtor, through Bower, Scayl’s chairman of the board of directors. At no point in time did Scayl repay any of the amounts that Douty loaned to the company.

On August 3, 2017, Scayl filed for Chapter 7 protection in the United States Bankruptcy Court in the Northern District of California. On November 3, 2017, the Bankruptcy Court issued its final decree whereupon the bankruptcy was closed. Scayl has ceased to operate and is defunct.

In opposition, plaintiff Devine contends there is evidence which supports a finding of alter ego liability or, at the very least, presents a triable issue of material fact. Plaintiff Devine points to Douty’s own evidence which demonstrates that Scayl was undercapitalized. Plaintiff Devine also puts forth his own evidence affirming Scayl’s lack of operating capital. The court does not find the mere fact that Scayl was undercapitalized to be in conflict. The more important factor is the underlying reason for the undercapitalization. As explained by Douty, Scayl was a start-up company in search of funding which was undercapitalized before he assumed the position of CEO and continued to be undercapitalized thereafter due to the inability to obtain funding, despite Douty’s advancement of $400,000 in loans to keep Scayl in operation. Devine does not offer any evidence which would present a triable issue of material fact with regard to this explanation for the undercapitalization.

Plaintiff Devine also proffers evidence from which he asserts that Douty “dominated and controlled” Scayl. Specifically, upon becoming CEO, without consulting the Board or anyone at Scayl, Douty changed Scayl’s product from an email product to a file transfer product and rebranded Scayl’s name to ‘Nexo, Inc.’” Douty’s isolation, unilateral decision-making, and failure to communicate was frustrating to Scayl’s Board and shareholders and drove Peter Weinstein to resign from the Board. Douty handled Scayl’s accounting and bookkeeping. Arguably, this evidence conflicts with Douty’s evidence that he reported to the board of directors who evaluated his performance and could terminate him with or without cause. The evidence also conflicts with Douty’s assertion that he regularly informed the board of directors on Scayl’s status financially, operationally, and developmentally.

In addition to this conflict in the evidence, plaintiff Devine proffers evidence that Douty made payments to Scayl’s creditors from his personal checking account. This too conflicts with Douty’s proffered assertion that at no point in time did Douty commingle company and personal funds, or use Scayl’s funds for any purpose other than a legitimate business purpose. The conflicting evidence presents a triable issue of material fact.

Douty goes on to argue that even if plaintiff Devine could establish a unity of interest that the separate personalities of the corporations no longer exist, plaintiff Devine must also establish that inequitable results will follow if the corporate separateness is respected. Douty cites Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 539 where the court wrote, “The alter ego doctrine does not guard every unsatisfied creditor of a corporation but instead affords protection where some conduct amounting to bad faith makes it inequitable for the corporate owner to hide behind the corporate form.” Douty then goes on to cite to the same evidence above to argue that he acted in good faith because, among other things, “There is no evidence to suggest Douty engaged in any improper behavior with corporate assets, such as commingling or self dealing.” However, as discussed above, the evidence is in conflict and, thus, presents a triable issue of material fact.

Since there is at least a triable issue with regard to defendant Douty’s liability under an alter ego theory, the court need not address defendant Douty’s additional arguments regarding direct liability.

“Summary adjudication may also be granted as to a claim for punitive damages even though it does not dispose of an entire cause of action.” (Weil & Brown et al., CAL. PRAC. GUIDE: CIV. PRO. BEFORE TRIAL (The Rutter Group 2019) ¶10:41, p. 10-12 citing Code Civ. Proc. §437c, subd. (f)(1); Catalano v. Superior Court (2000) 82 Cal.App.4th 91, 97.) Douty misunderstands his burden on summary adjudication. The burden lies initially with the moving party. Douty must affirmatively demonstrate that plaintiff Devine cannot establish oppression, fraud, or malice. (Code Civ. Proc., §437c, subd. (p)(2).) The burden does not shift to Devine until Douty meets his initial burden which he has not done in simply asserting, “Plaintiff has no evidence.”

Accordingly, defendant Douty’s motion for summary judgment or, in the alternative, summary adjudication is DENIED.