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Friday, December 02, 2005

Ney v. Murray

Filed 12/1/05 Ney v. Murray CA2/3


California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.





Plaintiffs and Appellants,



Defendant and Respondent.


(Los Angeles County

Super. Ct. No. SC069176)

APPEAL from a judgment of the Superior Court of Los Angeles County,

Lorna Parnell, Judge. Affirmed.

Woollacott Jannol, and Jay A. Woollacott for Defendant and Respondent.

Michael R. Blaha for Plaintiffs and Appellants.



Plaintiffs Philippe Ney and Jacqueline (“Keline”) Howard brought the underlying contract and fraud action against numerous defendants, including Jean Pierre Murray. The case was resolved by the trial court’s rulings that granted Murray’s motion for nonsuit and declined to apply the alter ego doctrine to hold him responsible as a member of Surf Channel, LLC., a limited liability company. Plaintiffs appeal. We affirm.


1. Factual synopsis.

a. The players and creation of Surf Channel.

Viewing the evidence according to the applicable rules (Alpert v. Villa Romano Homeowners Assn. (2000) 81 Cal.App.4th 1320, 1327), it shows that the events leading up to this lawsuit occurred between 1997 and 1999. We are told that Surf Channel is an one-hour cable television program about surfing and other related sports that is made from in-house production and the acquisition of footage produced by others.

Plaintiff Howard, born in France but a U.S. citizen who lives in Los Angeles, ran a company called “Bureau L. A.,” through which she rendered freelance journalism services. In 1997, Cyril Viguier, a French citizen, contacted Howard with the idea of creating a cable channel about surfing. At the time, Viguier was living in France, and needed someone in Los Angeles to look into the feasibility of his idea. Howard began by contacting cable television outlets in southern California to learn about production requirements.

In March 1998, Viguier, Stephane Attia, and another, retained attorney David Steiner to create an entity for their surf channel project. Surf Channel, LLC, Surf Channel Marketing, and Surf Channel Productions were formed in March 1998.

Viguier moved to Los Angeles in March 1998 and Howard’s work increased. Initially, production was done at Howard’s office and house. Production included pre-production and meetings. The cameramen, sound engineers, and Howard’s full-time assistant came to her house. She saw Viguier and Attia frequently during this time. Howard periodically sent invoices to Surf Channel. When Surf Channel’s offices moved to Sunset Boulevard in the summer of 1998, Howard’s work for them diminished. Howard worked on Surf Channel’s behalf between October 1997 and March 1998.

Plaintiff Ney, also of French origin, was a film editor working for Integrated Imagination when Howard asked Integrated Imagination to work for Surf Channel. Soon after Ney met Attia and then Viguier, the three began discussing the possibility of Ney working directly for Surf Channel rather than through Integrated Imagination. Some of the discussions occurred at Howard’s house. After Integrated Imagination closed down, Attia asked Ney to edit the show for Surf Channel. He began working for Surf Channel in March 1998.

Defendant Jean Pierre Murray was an investor in Surf Channel. Over the spring and summer of 1998, Murray invested $200,000 in the company. He did this through Carillo Investments, an entity in which he held an interest. In return, Carillo received a one‑third membership interest in Surf Channel.

b. Plaintiffs’ claims to ownership of Surf Channel.

Howard testified that in the beginning, Viguier and she agreed that they and Attia would be “three equal people” in the enterprise. In June 1998, Surf Channel sent Howard a letter referring to her 10 percent interest (five percent in Surf Channel, and five percent in Surf Channel Productions). When Howard complained about the size of her interest, Viguier responded that equity space had to be left open for investors. Ultimately, Howard agreed to the figure because she trusted Viguier and because the company was new. She accepted the amount in a letter to Steiner dated July 1, 1998. Howard never received a document in the nature of a membership certificate reflecting her interest in Surf Channel; and she never asked for one.

Ney, Attia, and Viguier began negotiating the financial terms of Ney’s work for Surf Channel in April 1998. In June or July 1998, Surf Channel promised Ney an equity interest in the company. Ney proposed that he provide discounted editing services and a discounted rental fee for his editing equipment in return for which he would obtain equity in Surf Channel commensurate with the services he provided. He originally proposed a five percent equity participation, but increased that figure to at least eight percent. Ney put his proposals in writing, and gave the document first to Attia in June 1998, and later to Viguier in October 1998. Neither Attia nor Viguier signed the document, although Viguier told Ney that his proposal was “fine.” Ney’s proposal was rejected by Surf Channel’s counsel.

Ney worked for Surf Channel until just before Christmas 1998, when Surf Channel’s checks written to him bounced. Ney also never saw the operating agreement for the limited liability company. Nor did he see an assignment of a membership interest to him; and he received no certificate evidencing a membership interest. He never asked for these documents. Nonetheless, Ney believed he had an agreement with Surf Channel for equity in the company, and testified that he had rendered services on Surf Channel’s programs in reliance on that agreement.

Howard and Ney concede in their opening brief that Murray never made any misrepresentations directly to either of them. Howard testified that Murray made no promises to her about equity in a Surf Channel entity. Nor did Howard ever claim to Murray that she had an equity interest in Surf Channel. Likewise, Ney never received a signed document from Murray indicating that Ney held an equity interest in Surf Channel, and Murray never made a promise nor ever entered into an oral or written agreement with Ney about Ney’s interest in Surf Channel. Nor did Ney ever have a conversation with Murray about how he was being compensated for his editing services for Surf Channel. Still, Ney believed that Murray was aware of Ney’s claim to equity because not only was Murray in charge of finances, but he was with Viguier and Attia on a daily basis.

c. The sale of Surf Channel.

On February 2 or 3, 1999, Viguier told Howard that the company was being liquidated and he wanted Howard to sign a letter to protect her interests. She refused to sign. The next day, Attia came to Howard and, in a very aggressive manner, asked her to sign the letter. Infuriated, Howard refused again. In March 1999, Howard received a letter from a new attorney representing Surf Channel, Gerard Soussan. She did not sign that letter either. None of the letters is found in the appellate record and their contents are not made apparent.

On February 5, 1999, Attia sent Ney a facsimile, which Ney believed was to pay $15,000 in bounced Surf Channel checks written to him. The letter added that Ney would receive “ ‘no further compensation of any kind whatsoever, such as monetary compensation, equity, assets, profit-sharing, or otherwise . . . .’ ” Ney understood by that letter that his interest in Surf Channel had been released. Instead of signing that facsimile, Ney responded with his own facsimile on February 8, 1999, proposing a third alternative to Attia and Viguier under which the three would each share in 50 percent of the equity of a new company called the Polo Channel. No one on behalf of Surf Channel signed Ney’s proposal.

The following month, on March 4, 1999, Murray sold his interest in Surf Channel for $300,000 to a group of investors headed by Selim Zilkha, a friend of Murray’s father. Zilkha created a Delaware limited liability company called Surf Channel (“Surf Channel Delaware”). Murray’s involvement with Surf Channel ended with the buyout of his interest. At the time of his buyout, Murray was unaware of any other transaction involving the transfer of Surf Channel’s assets. Before his buyout, Murray knew only that Zilkha and his affiliated group were going to buy Surf Channel.

It turns out that Viguier and Attia also transferred their interests in Surf Channel California to Zilkha’s group. But in return, they received a 25 percent interest each in the Delaware company. Murray testified he received no membership interest in the Delaware entity as part of the sale of his interests in the California company.

Murray did not learn of Viguier’s and Attia’s interest in the new company until Viguier told him after the sale. The following month, April 1999, Viguier and Attia entered into an agreement with Murray in which the two agreed to convey to Murray a five percent interest each in the net profits of Surf Channel Delaware, provided Murray complied with the terms of the agreement and only in the event the Delaware company were sold to a third party or went public and Viguier and Attia received distributions of their share of the net profits.

Neither Ney nor Howard received anything in the Zilkha transaction.

2. Procedural synopsis.

Ney and Howard each brought a complaint against 13 defendants, including Viguier, Attia, and Murray. The cases were consolidated for all purposes. We are told that Attia lives in Bali and was never served with a complaint. Plaintiffs dismissed the Zilkha-related defendants before trial.

Hence, plaintiffs proceeded at trial against Murray, Viguier, and Surf Channel on their complaints alleging, with respect to Murray, that he entered into contracts with them in which they would perform services in exchange for membership interests in Surf Channel. Plaintiffs alleged that Murray breached these agreements and their implied covenant of good faith and fair dealing. Additionally, plaintiffs charged Murray with fraud. They alleged that Murray made false representations to induce plaintiffs to perform services in exchange for interests in Surf Channel. Finally, plaintiffs sought quantum meruit for the reasonable value of their services, and sought to pierce the corporate veil to establish that Murray and Viguier were alter egos of Surf Channel and hence personally liable for Surf Channel’s obligations.

The case was tried before a jury except for the alter ego allegations. At the close of plaintiffs’ case, Murray moved for nonsuit of all four claims brought by both plaintiffs, other than the alter ego claims. Plaintiffs stipulated to nonsuit of the claims for breach of contract and of the implied covenant of good faith and fair dealing. The court granted nonsuit according to the stipulation, and then granted Murray’s motion for nonsuit of the fraud and quantum meruit claims. Murray remained a defendant with respect to the alter ego claim.

Turning to Viguier and Surf Channel, the jury returned a verdict finding them liable for fraud and assessing compensatory and punitive damages. Before judgment was entered against Viguier and Surf Channel, plaintiffs dismissed the two from the action.[1]

The court then turned to the alter ego allegations. Following presentation of evidence and argument, the court ruled that alter ego liability could be imposed for conduct occurring in 1998 and 1999, before the Corporations Code was amended as of January 1, 2000, to provide for application of alter ego liability to members of a limited liability company. (Stats. 1999, ch. 490, § 3, Corp. Code, § 17101, subd. (b).) However, the court ruled that plaintiffs had failed to carry their burden to show that alter ego liability should be imposed on Murray. The court found that declining to find alter ego would not work an injustice. Judgment was entered in favor of Murray and against plaintiffs. Plaintiffs’ timely appeal followed.


Plaintiffs contend the trial court erred in granting Murray’s motion for nonsuit of their fraud cause of action and in ruling that Murray was not an alter ego of Surf Channel. Plaintiffs also contend the trial court erred in refusing to instruct the jury on fraud.


I. Nonsuit.

a. Standard of review.

“ ‘A defendant is entitled to a nonsuit if the trial court determines that, as a matter of law, the evidence presented by plaintiff is insufficient to permit a jury to find in his favor. [Citation.]’ ” (Adams v. City of Fremont (1998) 68 Cal.App.4th 243, 262.)

When reviewing a judgment of nonsuit in favor of defendant at close of plaintiff’s case (Code Civ. Proc., § 581c), we consider only the grounds specified by the moving party in support of its nonsuit motion. (Carson v. Facilities Development Co. (1984) 36 Cal.3d 830, 839.) Based on the same analysis as utilized by the trial court, we must determine whether the plaintiff presented “any substantial issue of fact for the determination of the jury . . . . [T]here must be a substantial conflict in evidence to deprive the court of this power. [Citation.]” (Gerard v. Ross (1988) 204 Cal.App.3d 968, 981.) We do not weigh the evidence or consider the credibility of the witnesses. Instead, we are required to accept as true the evidence most favorable to the plaintiff, while disregarding conflicting evidence. (Alpert v. Villa Romano Homeowners Assn., supra, 81 Cal.App.4th at p. 1327.) “ ‘ “ ‘The judgment of the trial court cannot be sustained unless interpreting the evidence most favorably to plaintiff’s case and most strongly against the defendant and resolving all presumptions, inferences and doubts in favor of the plaintiff a judgment for the defendant is required as a matter of law.’ ” ’ [Citation.]” (Ibid.) “ ‘ “When there is doubt in the court’s mind about the inferences that may reasonably be drawn from the evidence it is the duty of the court to let the case go to the jury. . . . [Citation.]” ’ ” (Espinosa v. Little Co. of Mary Hospital (1995) 31 Cal.App.4th 1304, 1313, italics omitted.)

“ ‘If a plaintiff produces no substantial evidence of liability . . . then the granting of a nonsuit is proper.’ And, while the court may infer facts from the evidence, those inferences must be logical and reasonable. The decision about what inferences can permissibly be drawn by the fact finder are questions of law for determination by the court, inasmuch as an inference may not be illogically and unreasonably drawn, nor can an inference be based on mere possibility or flow from suspicion, imagination, speculation, supposition, surmise, conjecture or guesswork. [Citations.]” (Kidron v. Movie Acquisition Corp. (1995) 40 Cal.App.4th 1571, 1580-1581.)

“ ‘Because a successful nonsuit motion precludes submission of plaintiff’s case to the jury, courts grant motions for nonsuit only under very limited circumstances. [Citation.]’ ” (Espinosa v. Little Co. of Mary Hospital, supra, 31 Cal.App.4th at p. 1313.)

b. The law under plaintiffs’ theory of the case.

Murray moved for nonsuit of the fraud cause of action on the ground there were “[n]o representations made by Mr. Murray to either defendant [sic] and, therefore, no fraud.” Plaintiffs responded by relying on the rule that those who accept the fruits of a fraud, with knowledge of the fraud, inferentially ratify it and will be liable, even though they did not personally perpetrate the fraud. Focusing on the knowledge element, plaintiffs asserted that there was enough circumstantial evidence of Murray’s knowledge of Viguier’s and Surf Channel’s fraud that the jury could have found Murray liable, notwithstanding Murray was not the one who made the misrepresentations.

In McClung v. Watt (1922) 190 Cal. 155, our Supreme Court stated the rule plaintiffs advocate. There, the plaintiff had alleged that she conveyed property to the defendant mortgage company. Defendant Watt was the owner of a large interest of the defendant corporation. The corporation allegedly obtained the plaintiff’s deed by reason of Watt’s fraudulent acts and representations, and allegedly knew of the fraud, ratified, and approved of it. (Id. at p. 160.) The Supreme Court concluded that the complaint stated a cause of action against the corporation sufficient to deprive Watt of the right to change venue. (Id. at pp. 159, 162.)

In reaching this conclusion, McClung articulated the rule that “one who accepts the fruits of a fraud, with knowledge of the misrepresentations or concealments by which the fraud was perpetrated, thereby inferentially ratifies the fraud complained of and will be liable therefor even though he did not personally participate in the fraud, and this is so apart from any consideration of the theory of agency. [Citations.]” (McClung v. Watt, supra, 190 Cal. at p. 161, italics added; see 34 Cal.Jur.3d (2005) Fraud & Deceit, § 5, p. 315; 37 Am.Jur.2d (2001) Fraud & Deceit, § 300, pp. 314-315; cf. Central Mutual Ins. Co. v. Schmidt (1957) 152 Cal.App.2d 671, 673-674 [stating rule and noting facts did not support its application in that case].)

Murray counters by arguing that this rule is inapplicable as a matter of law. He relies on agency principles, including the Restatement Second of Agency. He asserts that ratification of Viguier’s and Attia’s fraud “could only apply to a transaction involving [plaintiffs] to which Murray could become a party as a principal by accepting acts done [by] Viguier or Attia as his putative agents.” However, McClung states its theory of liability applies “apart from any consideration of the theory of agency.” (McClung v. Watt, supra, 190 Cal. at p. 161, italics added.)

Rather than to distinguish McClung away, Murray focuses on the only case to cite the McClung rule, namely, Central Mutual Ins. Co. v. Schmidt, supra, 152 Cal.App.2d 671, at pages 673-674 (“Schmidt”). Murray cites Schmidt to extrapolate that the McClung rule is actually based on agency principles. Murray’s sleight of hand is unpersuasive.

The Schmidt court stated the McClung rule and then observed: “In the instant case there is nothing in the record to indicate that defendant in any way personally profited from the transaction.” (Schmidt, supra, 152 Cal.App.2d at p. 674.) As the facts of Schmidt rendered the McClung rule inapplicable, Schmidt came “down to this critical question: Does an agent who executes a contract of sale on behalf of his principal incur personal liability to the vendee for failure to disclose to the latter latent material facts?” (Id. at p. 675.) That question turned on a factual issue, to be tried on remand, of the extent to which the agent participated in the transaction such as would place on him the affirmative duty of making full disclosure. (Id. at p. 676.) Thus, Schmidt is not authority for the proposition Murray cites, namely, that the rule of McClung is based in agency principles. Rather than to reject the McClung rule, Schmidt cited it and then noted that it was inapplicable to its facts and then applied an alternative theory, namely, that of agency. McClung remains good law.

Finally, we are not persuaded by Murray’s argument that there was no “qualifying transaction” upon which to base plaintiffs’ fraud theory. He asserts that plaintiffs never exchanged their services for membership interests in Surf Channel in a transaction with Murray with the result there was nothing for him to ratify. He argues that “Viguier and Attia did not purport to act for Murray in procuring [plaintiffs’] services.” However, the transaction that plaintiffs allege Murray inferentially ratified by accepting the benefits was broader than the mere failure to transfer to plaintiffs their equity in Surf Channel before 1999. It included the March 1999 sale to Surf Channel Delaware that disregarded plaintiffs’ putative interests in the California company. The jury could reasonably conclude that Murray accepted benefits by receiving plaintiffs’ discounted services and realizing a profit on his investment in the sale to Zilkha that would have been smaller had plaintiffs been paid their share. Murray misses the point when he argues that Viguier and Attia did not purport to act for him. The question in McClung was whether the circumstances show that Murray inferentially ratified the fraud when he accepted the benefits.

This is the essence of plaintiffs’ theory: Viguier and Surf Channel falsely promised plaintiffs equity in Surf Channel LLC in return for services plaintiffs rendered. When Surf Channel was sold, plaintiffs were never paid for their interests in the company. Murray inferentially ratified Viguier’s and Surf Channel’s fraud even though he did not make any representations, because he knew of the fraud and accepted the benefits of it by obtaining cheap labor and realizing a profit in the sale to Surf Channel Delaware in derogation of plaintiffs’ interests. Murray’s liability holds “apart from any consideration of the theory of agency. [Citations.]” (McClung v. Watt, supra, 190 Cal. at p. 161, italics added.) Plaintiffs concede Murray made no misrepresentations. But, as noted, by realizing a profit on his investment in the sale, Murray accepted the fruits of the fraud. Hence, resolution of the nonsuit question turns on whether Murray knew that Viguier and Surf Channel had promised Howard and Ney equity in the company and then failed to recognize that interest in the sale of Surf Channel California. (Ibid.)

c. What the record shows.

Murray’s liability turns on his knowledge. Yet, neither plaintiff testified that they talked or corresponded with Murray about membership interests in a Surf Channel entity. They testified that they never claimed an interest to Murray and never received any documents from Murray showing their equity interests. Nor did Ney ever have a conversation with Murray about how he was being compensated for his editing services for Surf Channel. As for the sale to Surf Channel Delaware, Murray testified he did not read the transaction documents and did not know who was involved other than that he had sold his interests in the California company to Zilkha. The only reasonable inference to be derived from this is not only did Murray not know about equity deals Viguier and Attia made with plaintiffs, but he did not know who did or did not participate in the sale to Zilkha.

Thus, plaintiffs are left with demonstrating Murray’s knowledge of Viguier’s and Attia’s promises circumstantially. Plaintiffs posit the following evidence of Murray knowledge: (1) Murray’s responsibilities at Surf Channel were “the financial advisor, legal things . . . the accounting and all that kind of thing.” (2) Plaintiffs claim that Murray spoke to attorney Steiner about Steiner’s December 17, 1998, letter concerning his retainer agreement with Surf Channel. (3) Murray transferred Surf Channel’s files from Steiner to the company’s new attorney, Soussan. (4) Ney was told that Murray was an investor in Surf Channel and “in charge of [Surf Channel’s] finances to a certain extent . . . .” (5) Murray considered himself to be a kind of financial advisor for Surf Channel. (6) Ney testified I believe he [Murray] was well informed, because he was in charge of finances. And he was constantly with Mr. Viguier and Mr. Attia, . . . on a daily basis[,] I’m sure for at least a couple of hours a day, if not more.” (7) Murray agreed with Viguier and Attia that he “ ‘would not be responsible for or involved in the day-to-day management of Surf Channel California . . . .’ ” (8) Murray signed most checks, and all those in excess of $2,500, and was the final decision-maker on any Surf Channel expenses over $10,000. (9) Often, Murray would ask what the check was for. (10) He also looked for investors. (11) Murray was in Surf Channel’s offices on nearly a daily basis, and spent 10 to 15 hours a week on Surf Channel business.

From this evidence, plaintiffs argue the jury could infer that because Murray was in charge of hiring lawyers and office accounting, he must have known about attorney Steiner’s and Viguier’s promises to plaintiffs and must have known of Surf Channel’s attempt to get plaintiffs to release their interests in February 1999. Plaintiffs assert that the jury could reasonably infer from Murray’s check‑writing and decisionmaking about expenditures in excess of $10,000, that he must have known that when Surf Channel offered Ney $15,000, it was to release Ney’s equity interest in Surf Channel. Finally, plaintiffs insist that the jury could infer, notwithstanding Murray’s contentions to the contrary, that he knew the details of the sale to Surf Channel Delaware and that plaintiffs had been squeezed out.

We conclude plaintiffs have not adduced sufficient evidence to send the case against Murray to the jury. Merely because he functioned as accountant and personally wrote checks (since he invested $200,000 of his money into the company) does not logically mean that Murray knew about Howard’s and Ney’s negotiations with Viguier and Attia. Stated differently, there is nothing in the evidence to show that Murray knew that the checks’ amounts were calibrated to an intricate deal for equity, or that some checks may have been written to influence Ney to release his interest in the company. The record shows that Howard and Ney were paid for their work, apart from the bounced checks at the end of 1998. Ney’s testimony that he believed Murray knew of his deal with Viguier, is nothing but guesswork on Ney’s part. To reach the conclusion plaintiffs proffer, the jury would have to speculate that Murray -- who is not a film editor or public relations man -- understood that payments for services were made at a discount and the $15,000 check was paid to force Ney to release his interests and not to replace a bounced check. The jury would have to reach this conclusion in spite of Ney’s testimony that he did not discuss his deal with Murray and Murray was not responsible for or involved in the daily management of Surf Channel. It would have to assume that because Murray made decisions about expenditures in excess of $10,000, that he was told the $15,000 check to Ney was for a purpose other than reimbursement of a bounced check for the same amount. There is simply no evidence, other than speculation, that Murray knew Ney and Howard claimed an interest in the company.

It follows then, that Murray could not know that Ney and Howard had an interest that was overlooked in the deal with Surf Channel Delaware. Murray testified he did not know about the sale of anyone else’s interests to Zilkha until two weeks after the transaction was consummated. Murray testified, at the time he sold his interest in Surf Channel California, that he was unaware of any other transaction involving the transfer of Surf Channel’s assets. He did not read the transaction documents beyond the part in which his shares were sold to Zilkha’s group.

Nor do plaintiffs make a better case by focusing on the testimony that Murray was “in charge of legal affairs.” They posit that, as one in that position, Murray must have known about Surf Channel’s attempt to get plaintiffs to release their equity interest in February 1999. However, there is no suggestion that Murray was a lawyer; the company had retained counsel. And there is no evidence about what being “in charge of legal affairs” meant, other than the fact that Murray transferred the company’s files from its first attorney to its newly retained lawyer and communicated with Steiner when the latter was terminating his services. The jury would have to surmise from the file transfer that Murray read all the documents therein, and in particular read attorney Steiner’s letter granting Howard an equity interest. As the appellate record does not contain the letters in which Surf Channel attempted to force plaintiffs to release their interests, we are unable to assess their contents and cannot guess what the jury would conclude. In any event, Howard and Ney both testified that the attempt to force them to relinquish their interests occurred between February 2 and 5, 1999, whereas Murray testified he did not know about the sale to Zilkha until after that. Even if these letters were an actual attempt to force plaintiffs to release their interests in Surf Channel, there is no evidence that Murray knew about them.

At bottom, plaintiffs insist that Murray must have known about the fraud because of his status as a member of the company who wrote checks and saw other members regularly. But the Limited Liability Company Act states: “Except as otherwise provided . . . no member of a limited liability company shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the limited liability company . . . solely by reason of being a member of the limited liability company.” (Corp. Code, § 17101, subd. (a), italics added.)[2] The nonsuit motion was properly granted.

II. Alter ego liability.

a. The law of alter ego liability.

The jury found Surf Channel liable for perpetrating a fraud on plaintiffs. Under the alter ego doctrine, plaintiffs sought to skirt the corporate entity and treat Surf Channel’s acts as if they were done by Murray who was actually controlling Surf Channel.

We have recently discussed the Beverly-Killea Limited Liability Company Act. In People v. Pacific Landmark (2005) 129 Cal.App.4th 1203, we explained, “ ‘ “[a] limited liability company is a hybrid business entity formed under the Corporations Code . . . [which] provides members with limited liability to the same extent enjoyed by corporate shareholders [citation] . . . .” ’ [citation] while maintaining the attributes of a partnership for federal income tax purposes. [Citation.]” (Id. at pp. 1211-1212.) The limited liability company consists of members “ ‘ “who own membership interests [citation]. The company has a legal existence separate from its members . . . but . . . the members . . . actively participate in the management and control of the company [citation]” [citation].’ [Citation.]” (Id. at p. 1212.)

“While generally members of a limited liability company are not personally liable for judgments, debts, obligations, or liabilities of the company ‘solely by reason of being a member’ (Corp. Code, § 17101, subd. (a)), they are subject to liability under the same circumstances and to the same extent as corporate shareholders under common law principles governing alter ego liability and are personally liable under the same circumstances and extent as corporate shareholders. (§ 17101, subd. (b); [citation].)” (People v. Pacific Landmark, supra, 129 Cal.App.4th at p. 1212.)

As an aside, we first address Murray’s contention that the trial court erred in ruling that alter ego liability could be imposed on him for conduct that occurred in 1998 and 1999, before the provisions of the Limited Liability Company Act came into effect allowing for application alter ego liability. (Stats. 1999, ch. 490, § 3.)[3] The parties argued extensively in the trial court about whether the Legislature intended the 1999 amendment to be retroactively applied. We conclude that the trial court did not err in declining to pierce the corporate veil, with the result we need not determine whether the amendment could be applied retroactively. Nor need we determine whether alter ego liability would have been available before 1999 in any event.

Turning to the substance of the court’s ruling, “[t]he alter ego doctrine arises when a plaintiff comes into court claiming that an opposing party is using the corporate form unjustly and in derogation of the plaintiff’s interests. [Citation.] . . . ‘As the separate personality of the corporation is a statutory privilege, it must be used for legitimate business purposes and must not be perverted. When it is abused[,] it will be disregarded and the corporation looked at as a collection or association of individuals, so that the corporation will be liable for acts of the stockholders or the stockholders liable for [the] acts done in the name of the corporation.’ [Citation.]” (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300.)

The conditions under which the corporate entity will be disregarded vary according to the circumstances of each case and the analysis is very fact specific. (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1285, fn. 13.) Two general requirements must be met before the corporate veil will be pierced: “ ‘(1) [T]hat there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.’ [Citation.]” (Mesler v. Bragg Management Co., supra, 39 Cal.3d at p. 300.) We review the trial court’s ruling under the substantial evidence test. (See Wollerscheim v. Church of Scientology (1999) 69 Cal.App.4th 1012, 1014.)

In determining whether there was a unity of interest between the individual and the corporation, courts consider myriad factors (Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 838), several of which must be present for the corporate entity to be disregarded. (Id. at p. 840.) Distilled from the cases, the following are among the factors considered: (1) financial issues, such as the failure to adequately capitalize a corporation or the total absence of corporate assets (id. at p. 839); (2) corporate formality questions -- such as whether the corporation was properly and legally formed; whether legal formalities were respected (id. at pp. 838-840); (3) ownership issues -- such as who makes up the membership and whether assets have been diverted from the company by or to a stockholder, to the detriment of creditors (id. at p. 840); and finally, (4) commingling questions -- such as whether corporate assets have been diverted to other than company uses (ibid.); whether a member treats the company assets as his or her own (id. at p. 839); whether the corporation is used as a shell, instrumentality, or conduit for the single venture or business of an individual (ibid.); whether the identity of the responsible ownership, management, and financial interests has been concealed and misrepresented (id. at pp. 839-840); has the corporate entity been used to procure labor, services or merchandise for another person or entity (id. at p. 840); or contracted with another with intent to avoid performance by use of a corporate entity as a shield against personal liability. (Ibid.; Tomaselli v. Transamerica Co. supra, 25 Cal.App.4th at p. 1285, fn. 13.) “If these factors show a unity of interest, and it is also shown that honoring the corporate shell would promote a fraud or injustice, the third party may be permitted to ‘pierce the corporate veil’ and hold the parent entity liable for the corporate activities. [Citation.]” (Tomaselli, supra.)

Rather than to repeat the evidence in detail, we delineate the following facts that support the sufficiency of the trial court’s findings: With respect to financial issues, Murray risked $200,000 to start Surf Channel, with no guarantee of a return. The $200,000 was considered adequate capitalization in 1998, given Surf Channel’s budget and plans. The amount was considered sufficient for a start‑up company, based on Attia’s and Viguier’s experiences in programming, production, and editing film, and given there would be no budget for salaries. Murray did not take a salary. While plaintiffs cite numerous facts showing the poverty of Surf Channel as evidence of the company’s inadequate capitalization, the founders of Surf Channel believed his investment to be sufficient and indeed only ran into financial trouble in the end of 1998, when checks bounced. Thereafter, Surf Channel was sold.

In any event, Murray maintained detailed records of company financial transactions based on a computer program. Murray authorized and signed checks for the company. Viguier and Attia could sign checks under $2,500, without Murray’s approval. Plaintiffs argue that the numerous checks written to cash are evidence that Viguier and Attia “were using the LLC as their own personal ATM.” However, Murray explained that frequently Surf Channel needed cash, for example when they were filming on location abroad and needed cash for small items such as food, lodging, and camera equipment. The court found this explanation to be plausible. In any event, Murray obtained back-up documentation when Viguier, Attia, and Howard asked to be reimbursed for money they spent on Surf Channel expenditures. Otherwise, Murray kept detailed receipts and credit card slips documenting all items he paid on behalf of the company.

The company was properly formed, plaintiffs’ assertions to the contrary notwithstanding.[4] Surf Channel consulted a lawyer, Steiner, who formed the entity and drafted an operating agreement. Certificates of membership interest were issued at a meeting of the members. Surf Channel’s tax returns were prepared by the company’s outside certified public accountant who examined the company’s records, including bank account records. Three other entities, Surf Channel Marketing, LLC, and Surf Channel Productions, LLC, and Surf Channel Interactive, were formed at the same time as Surf Channel, but were never active and had no assets. Plaintiffs have provided no evidence that records of these separate entities were not segregated, or that Surf Channel’s funds had been diverted to these companies to the detriment of plaintiffs. Or that they were in any manner used as shells for Surf Channel’s purposes. (Associated Vendors, Inc. v. Oakland Meat Co., supra, 210 Cal.App.2d at pp. 838-840.)

Finally, turning to the commingling-related factors, the trial court specifically stated that it believed Murray’s explanation for the manner in which Surf Channel’s funds were handled. The record shows that Viguier, Attia, and Murray agreed that the latter would not be responsible for the day-to-day operation of Surf Channel. Murray explained that he did not have experience in the creative side of the company. His role involved oversight of the company’s expenditures, including signing checks, and giving advice. Otherwise, Murray acted as an investor and restricted his involvement to that. Plaintiffs make much of Murray’s claim that he held an ownership interest in Surf Channel although Carillo Investments, an entity in which he held an interest, was really the entity that contributed the seed money to Surf Channel. Plaintiffs cite this as evidence that Murray has misrepresented the identity of the ownership interest in the company. Apart from the fact that Murray never hid the name of the investor, we do not see how the source of Murray’s investment is relevant to plaintiffs’ injuries. That is, nothing about Carillo Investments’ membership interest in Surf Channel related to the alleged fraud in this case or prevented plaintiffs from realizing their equity interest. There is no evidence that any money was surreptitiously transferred to Carillo Investments to plaintiffs’ detriment.

Plaintiffs cite a letter written by Steiner to Murray in August 1998, referring to Murray’s removal of $23,000 to $28,000 in Surf Channel funds to repay himself some loans Murray had made to Surf Channel, and Murray’s use of one of his company’s credit cards to pay for certain Surf Channel’s expenses. Plaintiffs assert that this is evidence of a commingling of and unauthorized diversion of funds. However, plaintiffs failed to explain the meaning or relevance of Steiner’s letter while Murray explicated his credit card use in a manner that the trial court believed. We will not reassess that evaluation. In sum, the factors discussed do not show a unity of interest such as would satisfy the first requirement under the alter ego doctrine. (Tomaselli v. Transamerica Ins. Co., supra, 25 Cal.App.4th at p. 1285, fn. 13.)

Turning to the other requirement, the evidence supports the court’s conclusion that honoring the corporate shell would not promote a fraud or injustice. (Tomaselli v. Transamerica Ins. Co., supra, 25 Cal.App.4th at p. 1285.) We have already demonstrated that while Murray risked a large amount of money, he took no salary in return. Murray should not be held responsible simply because he was an investor and therefore a deep pocket. “ ‘Mere ownership of all the stock and control and management of a corporation by one or two individuals is not of itself sufficient to cause the courts to disregard the corporate entity. [Citations.]’ ” (Meadows v. Emett & Chandler (1950) 99 Cal.App.2d 496, 499.) More important, Murray did not participate in and did not know of the fraud Viguier perpetrated on plaintiffs. Because there was no basis for liability against Murray personally, we agree with the trial court that no injustice would be promoted in declining to hold him responsible for the fraud that Viguier committed against plaintiffs.

“Alter ego is an extreme remedy, sparingly used. [Citation.]” (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 539.) It 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., supra, 25 Cal.App.4th at p. 1285.) “The essence of the alter ego doctrine is that justice be done. . . . [T]he 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.) Plaintiffs have not demonstrated how justice requires the setting aside of the Surf Channel entity vis-à-vis Murray.


The judgment is affirmed.



We concur:

CROSKEY, Acting P.J.


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[1] In their reply brief, plaintiffs intimate that they settled their claims with Viguier and Surf Channel.

[2] Plaintiffs also contend that the trial court erred in declining to instruct the jury from McClung. However, as plaintiffs presented their case, the McClung rule applied only to Murray. Given our conclusion that the court properly granted Murray’s nonsuit motion, we need not reach the question of whether the jury should have been allowed to hear the instruction. As Murray notes, the trial court cannot have erred with respect to an instruction on which it had no occasion to rule.

[3] Murray also raises a wholly new argument on appeal, namely, that plaintiffs’ dismissal of all their claims against Surf Channel with prejudice after the jury verdict was rendered but before the judgment was entered, obliterated the debt Surf Channel owed as the result of the jury verdict. They argue that without a debt owed, there is nothing to pierce the corporate veil for. We need not reach this issue either because we conclude the trial court properly ruled that there was no basis for alter ego liability.

[4] Plaintiffs quote from Steiner that “things were done pretty informally,” and “this wasn’t the most formal of LLC’s.” However, plaintiffs have not demonstrated that the company was not properly formed or that the legal formalities were not respected. To the contrary, Steiner testified that despite the relaxed atmosphere, the formalities were respected, and Murray, Viguier and Attia received corporate documents.


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