DEMURRER TO COMPLAINT; MOTION TO STRIKE PORTIONS OF COMPLAINT

Moving Parties: Defendants Allan J. Hardy, Gemini Aluminum Corportation, and Hargan Investments, Inc.

Respondent: Plaintiff HMA, Inc.

POS: Moving OK; Opposing OK

This is an action to impose alter ego liability, to avoid and annul an allegedly fraudulent transfer under the Uniform Fraudulent Transfer Act, and to recover allegedly improper corporate distributions. The Complaint, filed on 7/26/13, asserts causes of action for:

1. Imposition of Alter Ego Liability
2. Avoidance of Fraudulent Transfer
3. Improper Corporate Distributions

The Final Status Conference is set for 8/21/14. Trial is set for 8/26/14.

(1) DEMURRER:

Defendants Allan J. Hardy (“Hardy”), Gemini Aluminum Corporation (“Gemini”) and Hargan Investments, Inc. (“Hargan”) (collectively “Defendants”) demur to the Complaint on the grounds that it does not state facts sufficient to constitute a cause of action against them.

FIRST CAUSE OF ACTION FOR IMPOSITION OF ALTER EGO LIABILITY:

To allege alter ego, plaintiffs must plead a unity of interest and ownership such that the separate personalities of the corporation and the individuals do not exist, and that an inequity will result if the corporate entity is treated as the sole actor. (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1285.) “[C]ourts have followed a liberal policy of applying the alter ego doctrine where the equities and justice of the situation appear to call for it rather than restricting it to the technical niceties depending upon pleading and procedure.” (First Western Bank & Trust Co. v. Bookasta (1968) 267 Cal.App.2d 910, 915.)

“The allegation that a corporation is the alter ego of the individual stockholders is insufficient to justify the court in disregarding the corporate entity in the absence of allegations of facts from which it appears that justice cannot otherwise be accomplished.” Meadows v. Emett & Chandler (1950) 99 Cal. App. 2d 496, 498-99 (allegations insufficiently stated that individuals held stock and transacted business through the corporation, and fell short by not alleging whatsoever that recognizing the entity would sanction fraud or promote injustice). No one test controls as to the alter ego doctrine which involves considering all of the circumstances, which may include: The commingling of funds; identical equitable ownership; the same offices; identical officers, directors and employees; disregarding of corporate formalities; and use of one as a mere shell or conduit for the other’s affairs. (Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, LLP (1999) 69 Cal.App.4th 223, 250.) The factors for determining an alter ego relationship are not exhaustive, but may be considered with the particular circumstances of the case. (Greenspan v. LADT, LLC (2010) 191 Cal.App.4th 486, 511-13.)

“Ordinarily, a corporation is regarded as a legal entity separate and distinct from its stockholders, officers and directors. Under the alter ego doctrine, however, where a corporation is used by an individual or individuals, or by another corporation, to perpetrate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the corporation’s acts as if they were done by the persons actually controlling the corporation.” (Robbins v. Blecher (1997) 52 Cal.App.4th 886, 892.) “Under the alter ego doctrine…, when the corporate form is used to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts will ignore the corporate entity and deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners.” (Sonora Diamond Corp. v. Sup. Ct. (2000) 83 Cal. App. 4th 523, 538.)

The Complaint herein alleges that there exists a unity of interest and ownership between Defendants, such that any individuality and separateness between Defendants has ceased, by reason of which Hardy and Hargan are the alter egos of Gemini and are jointly and severally liable for Gemini’s obligations under a judgment (Complaint ¶ 32); Hardy is the sole or controlling shareholder of both Gemini and Hargan, and exercises complete and exclusive dominion and control over both Gemini and Hargan (Id. ¶ 32a); Hardy has withdrawn excessive sums from the operations of Gemini in excess of reasonable compensation and without adequate consideration, leaving Gemini undercapitalized and underfunded for its ongoing business operations (Id. ¶ 32b); since 2007 Hardy has withdrawn, on average, in excess of $1 million per year without leaving sufficient assets in Gemini to meet its debts and obligations, including its obligation to Plaintiff (Ibid.); immediately after the first judgment was entered, Hardy filed UCC-1 liens indicating that Hardy, as creditor, loaned monies to Hargan, as debtor (Id. ¶ 32c); Gemini and Hargan are owned and operated as a common enterprise (Id. ¶ 32d); Hardy caused Hargan to assert a bogus third party claim in order to hinder and deny Plaintiff’s enforcement of the second judgment against Gemini (Id. ¶ 32e); adherence of the separate existence of Defendants would permit an abuse of the corporate privilege and would sanction fraud or promote injustice (Id. ¶ 33); and Defendants have engaged in fraudulent and inequitable conduct, diverting funds from Gemini to Hardy, then to Hargan, which were purportedly loaned to Gemini for the purpose of creating a fraudulent lien, all with the intent of defeating Plaintiff’s ability to collect the monies due to it from Gemini (Ibid.).

The Complaint alleges adequate facts to support a claim against Hardy and Hargan under the alter ego theory. The demurrer to the first cause of action is overruled.

SECOND CAUSE OF ACTION FOR AVOIDANCE OF FRADULENT TRANSFER UNDER THE UNIFORM FRADUDULENT TRANSFER ACT:

A fraudulent conveyance claim is defined in the Uniform Fraudulent Transfer Act (“UFTA”), which is codified in CC § 3439, et seq. “A fraudulent conveyance is a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.” (Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13.) “A transfer of assets made by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer, if the debtor made the transfer (1) with an actual intent to hinder, delay, or defraud any creditor, or (2) without receiving reasonably equivalent value in return, and either (a) was engaged in or about to engage in a business or transaction for which the debtor’s assets were unreasonably small, or (b) intended to, or reasonably believed, or reasonably should have believed, that he or she would incur debts beyond his or her ability to pay as they became due. [Citations.]” (Cortez v. Vogt (1997) 52 Cal.App.4th 917, 928; see also CC § 3439.04.)

The Complaint alleges that commencing in or about December 2009, Defendants conspired between and among themselves to hinder, delay and defraud Plaintiff in the collection and enforcement of its claim, including the first and second judgment (Complaint ¶ 36); from and after 2007, Plaintiff was and is the holder of a claim against Gemini for the unpaid balance of aluminum sold and delivered to Gemini (Id. ¶ 37); Plaintiff’s claim is in the sum of $1,926,121.00, plus post judgment costs and interest (Ibid.); in or about December 2009, less than two months after the first judgment was entered against Gemini, Gemini and Hargan entered into the Gemini-Hargan Note and Security Agreement, and caused a UCC-1 financing statement to be filed with the office of the Secretary of State, ostensibly creating a lien on all of Gemini’s tangible and intangible assets (Id. ¶ 38); there was no consideration of the Gemini-Hargan Note and Security Agreement and it was done with the intent to hinder, delay or defraud Plaintiff in the collection and enforcement of its claim (Id. ¶¶ 39-40); Plaintiff is entitled to have the Gemini-Hargan Note and Security Agreement, and the UCC-1 financing statement annulled and declared void as to Plaintiff to the extent necessary to satisfy the judgment (Id. ¶ 43); to the extent Hargan has received any property, or the proceeds of any property fraudulently transferred from Gemini, Hargan holds such property in constructive trust for the benefit of Plaintiff (Id. ¶ 44); and that as a result, Plaintiff has been damaged (Id. ¶ 45).

The Complaint alleges adequate facts to support a cause of action for fraudulent transfer. Defendants, in their demurrer, contend that Plaintiff has merely alleged that Hargan has a preferred security interest. However, the Complaint alleges that Defendants created an improper lien and distributed funds in order to hinder Plaintiff’s collection efforts. A transfer under the UFTA is defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset …, and includes payment of money, release, lease, and CREATION OF A LIEN or other encumbrance.” (CC § 3439.01(i), emphasis added.) Thus, the demurrer to the second cause of action is overruled.

THIRD CAUSE OF ACTION FOR IMPROPER CORPORATE DISTRIBUTIONS:

Partly to protect corporate creditors, the Corporations Code imposes many restrictions on distributions to shareholders and corporate loans or guaranties. The directors may be personally liable to the corporation for violating these restrictions. (See Corps.C. §§ 316, 500–503, 506.) For example, directors approving an illegal shareholder distribution or illegal loan or guaranty may be sued by a nonconsenting creditor whose claim arose before the unlawful distribution (or approval of the illegal loan or guaranty). Such suit is brought in the corporation’s name for the benefit of all the corporation’s creditors. (See Corps.C. § 316(a).) Similarly, a nonconsenting creditor whose claim arose before the date of an illegal distribution may sue any shareholder who knowingly received the distribution. Again, such suit is brought in the corporation’s name for the benefit of all creditors. (See Corps.C. § 506(a), (b).)

The Complaint alleges that Hardy and Does 1 to 25, as directors of Gemini, approved multiple distributions of Gemini’s assets to Hardy as its shareholder (Complaint ¶ 53); since 2007, such distributions averaged in excess of $1 million per year (Ibid.); and that as a result of such distributions Gemini is now and will be in the future, unlikely to meet its liabilities as they mature (Id. ¶ 54).

The Complaint adequately alleges facts to support a derivative claim against Hardy, as a director and shareholder, for improper distributions. Thus, the demurrer to the third cause of action is overruled.

(2) MOTION TO STRIKE:

Defendants also move to strike certain portions of the Complaint relating to the first trial or first judgment on the grounds that that what happened at the first trial is irrelevant and should not be allowed in the Complaint.

The court may strike out any irrelevant, false, or improper matter inserted in any pleading and strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (CCP § 436.)

However, based on the long and extensive litigation history between the parties, it appears that allegations explaining the chronological event and the circumstances for the allegedly improper lien by Hardy are relevant and material to Plaintiff’s claims of alter ego and fraudulent transfer. Thus, the motion to strike is denied.

Defendants have 10 days to answer.