In Toho-Towa Co., Ltd., v. Morgan Creek Productions (2013) 217 Cal. App. 4th 1096, the court held that the assets of one business entity could be used to satisfy the obligations of a different, but related, business entity. This case deals with the “single enterprise” theory (also known as the “greater enterprise theory) of liability for related business entities, which permits a court to disregard the separateness of the entities so that the assets of one entity can be used by creditors to satisfy the liabilities of another.
Toho-Towa, a Japanese company, negotiated with Morgan Creek Productions, a Delaware corporation, to acquire Japanese distribution rights to a motion picture, The Good Shepherd. After the parties had reached agreement as to the terms of the distribution deal, Morgan Creek’s general counsel told Toho-Towa that Morgan Creek International B.V., a Netherlands company, rather than Morgan Creek, would grant Toho-Towa the distribution rights under the agreement, and that a third entity, Morgan Creek International Ltd., a Bermuda corporation, would guarantee the Netherlands company’s contractual obligations to Toho-Towa.
The general counsel assured Toho-Towa that the Netherlands company and the Bermuda corporation would have sufficient assets to meet any financial obligations Toho-Towa might be owed with respect to the motion picture. As a consequence of these assurances, Toho-Towa entered into a written agreement with the Netherlands company to distribute the motion picture in Japan. Pursuant to the terms of the distribution agreement, the Netherlands company ended up owing Toho-Towa approximately $4.5 million for expenses advanced to distribute the motion picture. Toho-Towa submitted its invoice to the Netherlands company requesting payment of this amount. Toho-Towa’s invoice was forwarded to Morgan Creek’s chief financial officer, who advised Toho-Towa by email that he was “speaking with our owner, Mr. Jim Robinson, re the payment date.” The invoice was never paid.
Toho-Towa initiated an arbitration proceeding against the Netherlands company and the Bermuda corporation and received an award that was confirmed by the court, resulting in a $5.8 million judgment (including interest and attorney’s fees). Neither the Netherlands company nor the Bermuda corporation satisfied the judgment entered against them.
Through discovery in aid of execution of judgment, Toho-Towa learned that the three Morgan Creek entities were owned by a single individual, James Robinson; that the work of the Netherlands company and the Bermuda corporation was performed by employees of Morgan Creek, the Delaware corporation; and that the companies were operated in such a way that no money flowed to the foreign Morgan Creek entities. Based on this information, Toho-Towa moved, pursuant to CCP § 187, to add Morgan Creek to its judgment against the Netherlands and Bermuda companies on the theory that Morgan Creek was the alter ego of the other two entities.
The ability under § 187 to amend a judgment to add a defendant, thereby imposing liability on the new defendant without trial, requires both (1) that the new party be the alter ego of the old party and (2) that the new party had controlled the litigation, thereby having had the opportunity to litigate, in order to satisfy due process concerns.
The court found the following factors relevant to its conclusion that Morgan Creek was the alter ego of the Netherlands and Bermuda companies:
- The entities were all owned by the same person, James Robinson.
- Robinson was the only person with authority to resolve the dispute with Toho-Towa.
- The Bermuda company had no employees and no bank account.
- The Netherlands company’s financial arrangements were such that it never received any money. Rather, all of its licensing income went directly to the Bermuda company’s lender.
- Employees of Morgan Creek negotiated the foreign licensing deals on behalf of the other entities.
- Brian Robinson, the owner’s son, sold television rights for the international film library owned by the Bermuda company, even though he was not employed by the Bermuda company.
- Morgan Creek’s general counsel handled the legal affairs of the Netherlands and Bermuda companies, including drafting contracts and providing legal consultation, though he was not employed by either of these companies.
- Morgan Creek’s chief financial officer, who was not employed by the Bermuda company provided financial services to it at least once a month, while Morgan Creek’s in-house accountants routinely prepared its financial statements.
- Morgan Creek had control over the underlying arbitration, by selecting counsel, receiving legal bills, reviewing pleadings, consulting on strategy decisions, and designating one of its own officers as the person most knowledgeable as to why the Netherlands and Bermuda companies did not pay the money they owed to Toho-Towa.
The court said that the “single-business-enterprise” theory is an equitable doctrine applied to reflect partnership-type liability principles when corporations integrate their resources and operations to achieve a common business purpose.
The court found that the evidence supported the trial court’s conclusion that the Morgan Creek entities, though formed as separate corporations, were operated with integrated resources in pursuit of a single business purpose, and that Morgan Creek so dominated the finances, policies and practices of the other two companies that the other two companies latter had no separate “mind, will or existence” of their own, but were merely conduits through which Morgan Creek conducted its business.
A necessary element of alter ego cases is that there be fraud or injustice that would be avoided by disregarding the corporate form. The court found substantial evidence for the conclusion that it would be inequitable to uphold the Netherlands company’s separate existence under the circumstances of this case.
Toho-Towa negotiated the distribution rights to the motion picture with Morgan Creek. When that negotiation was concluded, Morgan Creek told Toho-Towa that the contract would actually be with the Netherlands company, not Morgan Creek, because this was how Morgan Creek conducted its distribution business. Morgan Creek assured Toho-Towa that there would be sufficient assets to pay Toho-Towa any monies due under the agreement. Toho-Towa was not told and did not know that the Netherlands company’s operations were structured by Morgan Creek in such a way that it never received any money from its licensees and thus would not have funds to meet its payment obligations under the agreement.
These factors combined to fulfill the requirements for the use of the single-enterprise doctrine to disregard the corporate form in this case.
Richard G. Burt, Attorney and Counselor at Law is available to answer your questions about business entity assets. Contact our offices today.
