Legal Standard Governing Application of the Alter Ego Doctrine to Bucci and Titan

We have noted that when a corporation is lawfully operated, the general rule is that only the corporate entity itself, and not its shareholders, officers, or other persons (legal or natural), bear liability for the consequences of the corporation's actions. (See Investigation on the Commission's own Motion into the Operations, Practices, and Conduct of Coral Communications, Inc., D.01-04-035, 2001 Cal. PUC LEXIS 289 *88.) By contrast, under the alter ego doctrine:

the corporate veil may be "pierced," i.e., individuals or other corporations acting on behalf of the corporation may be held liable for its debts and misdeeds. The doctrine requires that there be such a unity of interest and ownership between the corporation and the individuals or other corporation that the separate entities cease to exist, and that an inequitable result would follow if the doctrine were not applied. [Citations omitted] (Id. at **88-89.)

CPSD and Respondents agree that the legal standard for finding an individual to be the alter ego of a corporation is stated in Watson v. Commonwealth Ins. Co. (1936) 8 Cal.2d 61, 68; 63 P.2d 295, 298:

The two requirements are that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and that adherence to the fiction of separate existence would, under the circumstances, promote fraud or injustice. On the second score it is sufficient that it appear that recognition of the acts as those of a corporation only will produce inequitable results.

It is well established that application of the alter ego doctrine is a question of fact and that determining its application depends heavily upon the facts of the individual case. (Alexander v. Abbey of the Chimes (1980) 104 Cal. App. 3d 39, 46; 163 Cal.Rptr. 377, 381.) Courts have considered an array of factors in analyzing alter ego problems, including some CPSD suggests apply here: commingling of funds and other assets, 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 failure to maintain minutes or adequate corporate records, sole ownership of all of the stock in a corporation by one individual or the members of a family, the employment of the same attorney, and the diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors. (Associated Vendors, Inc. v. Oakland Meat Co., Inc. (1962) 210 Cal. App. 2d 825, 838-840; 26 Cal.Rptr. 806, 814-815, citations omitted.) These factors have been the subject of hearings and a considerable amount of conflicting evidence has been adduced as to whether they characterized the relationship between Bucci and ACI. However, resolution of these factual disputes does not determine the outcome of this matter. Instead, the controlling factor here is the application of another legal doctrine, due process of law, as established in the United States Constitution.

Respondents assert that finding Bucci liable for the award against ACI would constitute a denial of due process of law. The alter ego doctrine is subject to standards of due process arising under the 14th Amendment to the United States Constitution. This limitation was recognized by the California Supreme Court in Motores de Mexicali, S. A. v. Superior Court (1958) 51 Cal. 2d 172, 331 P.2d 1.

Motores de Mexicali was an attempt to recover on a judgment against a corporation whose commercial drafts had been dishonored. The corporation was insolvent and the judgment creditor sought to recover from the individual shareholders who had operated it. Those shareholders, like Bucci and Titan in this proceeding, had never been named or served in the action against the corporation. The judgment creditor-relying on two decisions cited by the parties to this proceeding, Mirabito v. San Francisco Dairy Co. (1935), 1 Cal.2d 400, 35 P.2d 513 and Thomson v. L. C. Roney & Co. (1952) 112 Cal.App.2d 420, 246 P.2d 1017-argued that it was permissible to retroactively amend the judgment to name non-parties as debtors. The Supreme Court distinguished those cases on the grounds that each case involved adding parties, who had controlled or participated in the suits leading to the judgments. It then noted:

[A]n amendment to the judgment here to include [the individual principals] would constitute a denial of due process of law. (U.S. Const., 14th Amend.) That constitutional provision guarantees that any person against whom a claim is asserted in a judicial proceeding shall have the opportunity to be heard and to present his defenses. [Citations omitted.] To summarily add [the principals] to the judgment heretofore running only against [their corporation], without allowing them to litigate any questions beyond their relation to the allegedly alter ego corporation would patently violate this constitutional safeguard. Nor is this difficulty overcome by the suggestion that [the principals] should have intervened in the action brought solely against [their corporation] if they desired to assert any personal defenses against the drafts. They were under no duty to appear and defend personally in that action, since no claim had been made against them personally. (51 Cal. 2d at 176; 331 P.2d at 3.)

Bucci and Titan are entitled to due process and the opportunity to respond to the allegations that ACI operated unlawfully. Bucci was neither a named respondent nor a party to the proceeding in which the Commission ordered ACI to make restitution to ratepayers. There is no evidence that Bucci had any control over ACI's participation in the Commission's proceeding against ACI. By the time that proceeding commenced, ACI was in receivership, and the evidence is that the receiver hired counsel to represent ACI and controlled ACI's defense. Further, the receiver stipulated to the violations that resulted in the Commission order to make restitution. Under the circumstances, to hold Bucci personally liable for that restitution would violate his due process rights. This conclusion also exonerates Titan from any liability, for it was not a party to the Commission's earlier proceeding either. Since personal liability cannot constitutionally be fastened on Bucci, the relationship between Bucci and Titan is irrelevant to this proceeding.

Because we determine that the alter ego doctrine cannot be applied to Bucci and Titan so as to hold them liable for ACI misconduct, we find they are not liable for the restitution ordered in D.00-04-012.