Krausz Puente LLC v. Frank Westall, et al.,
No. B164989 (Cal.App. 01/25/2005)
The California Court of Appeal, Second Appellate District, Division Three, affirmed the trial court's decision to set aside a transfers from Slam Site and Strategic Alliance Partners, the debtors, to Game Licensing Group, as fraudulent.
Further, where the owners of Slam and Strategic, Frank Westall and Edward Hilt, obtained a company, Case Ladder, that performed services connected to Slam and Strategic's services and subsequently sold Case Ladder in exchange for e-Universe, Inc. stocks without compensating Slam or Strategic, the court affirmed the trial court's decision to impose a $4.5 million constructive trust on the e-Universe stock in favor of plaintiff-creditor.
Finally, the court also held that Westall and Hilt were personally liable for fraudulent transfers pursuant an alter ego theory because Westhall and Hilt exhibited control of the debtor companies; commingled funds; personally used the funds; undercapitalized the debtor companies; diverted the assets of the debtor companies to GLG and Case Ladder; and, failed to follow corporate formalities.
Krausz Puente LLC v. Frank Westall, et al., No. B164989 (Cal.App. 01/25/2005)
COURT OF APPEAL OF CALIFORNIA, SECOND APPELLATE DISTRICT,
January 25, 2005, Filed
NOTICE: [*1] NOT TO BE PUBLISHED IN OFFICIAL REPORTS. CALIFORNIA RULES OF COURT, RULE 977(a), PROHIBIT 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 THIS OPINION HAS NOT BEEN CERTIFIED FOR PUBLICATION OR ORDERED PUBLISHED FOR THE PURPOSES OF RULE 977.
PRIOR HISTORY: APPEAL from a judgment of the Superior Court of Los Angeles County, No. BC213129. Ray L. Hart, Judge.
COUNSEL: Clark & Trevithick, Judith Ilene Bloom and Vincent Tricarico for Defendants and Appellants.
Case, Knowlson, Jordan & Wright and J. Patrick Fleming, Jr. for Plaintiff and Respondent.
JUDGES: KLEIN, P. J.; CROSKEY, J., ALDRICH, J. Concurred.
OPINION: Defendants and appellants Frank Westall (Westall) and Edward Hilts (Hilts) (collectively, defendants or appellants) appeal a judgment in favor of plaintiff and respondent Krausz Puente LLC (Krausz) following a court trial.
There is no challenge to the sufficiency of the evidence. Appellants' contentions relate to the imposition of discovery sanctions, and the trial court's legal rulings with respect to fraud, alter ego liability and fraudulent transfers.
We conclude appellants have [*2] not demonstrated any reversible error and affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND n1
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n1 Appellants explicitly state they are not appealing "on the basis of insufficiency of evidence." Accordingly, our statement of facts is based in large part on the facts as found by the trial court in its statement of decision. (Californians for Population Stabilization v. Hewlett-Packard Co. (1997) 58 Cal.App.4th 273, 279, fn. 3.)
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This litigation arises out of a lease for space at the Puente Hills Mall to a start-up company known as Slam Site. That entity, along with its parent Strategic Alliance Partners (Strategic), sought to provide a virtual reality gaming experience where players could challenge themselves or one another in a high-tech environment. The concept was relatively new and untried on a large scale, but was attractive to Krausz, the owner of the mall, because of its desire to expand its entertainment wing by including such an avant-garde attraction. [*3]
After months of negotiations concerning its terms, the lease was executed in April 1997. These negotiations included considerable discussion about the financial strength of both Strategic and Slam Site. The principals, Westall and Hilts, submitted financial records indicating the companies had some $ 600,000 available to cover expenses, if necessary. As added assurance, Strategic agreed to guarantee the deal.
Months of construction work followed during which initial plans were scaled back and redesigned as expenses mounted. As originally contemplated, the store was to be an elaborate complex featuring Hollywood-type set designs in which customers would utilize sophisticated computers and other devices to play virtual reality games. As finally designed, the store lacked the intricate equipment and sets that would clearly distinguish it from other arcade-like entertainment. Pursuant to the terms of the lease, Krausz financed much of that work by disbursing tenant improvement funds of approximately $ 580,000.
Slam Site eventually opened for business in December 1997, but failed to meet expectations. Although adjacent to an AMC movie complex with one of the highest traffic counts [*4] in the country, the store simply could not attract a sufficient number of customers to make it viable. Hilts and Westall attempted to attract new investors but to little avail. A loan of $ 150,000 was arranged with a Northern California backer, but it failed to make a significant difference. Although rent payments had been delayed under the terms of the lease, Slam Site could not generate enough funds to pay expenses.
Strategic, incorporated in 1995 for the purpose of generating software licensing revenue, spawned not only Slam Site, but Game Licensing Group (GLG) as well. During the course of several years, employees, assets, and equipment were transferred from one company to the other. As a result, neither Strategic nor Slam Site had the financial wherewithal to pay their creditors.
Westall and Hilts eventually became associated with another company, Cases Ladder, which provided a way for players of virtual reality games to rank themselves against other players and to display these rankings at its internet site. Believing there was a direct connection between that service and the business of Slam Site, Westall and Hilts sought an arrangement that would provide them with a significant, [*5] if not controlling, interest in the company.
Cases Ladder eventually was incorporated and sold to e-Universe, Inc. (e-Universe), an internet company offering various forms of gaming and other cyber entertainment. The transfer netted Westall and Hilts, in addition to other designees, some 700,000 shares of restricted e-Universe stock valued at $ 10 a share. The financial health, however, of Strategic and Slam Site did not benefit from these transfers. This was particularly true after certain software licensing revenues were diverted either to Cases Ladder or GLG.
Unable to pay its debts or to arrange for other financing, Slam Site defaulted on its lease and closed for business in early 1999. Although the company was obligated under the lease to remit all tenant improvement monies upon breach, it failed to do so and appellants repaid none of those monies to Krausz. Both Strategic and Slam Site ceased all operations and legally were no longer in existence or good standing as of March 1, 1999.
Krausz filed suit against Westall and Hilts for breach of contract and fraud among other causes of action, alleging, inter alia, that Westall and Hilts were personally liable [*6] under an alter ego theory. Krausz sought to pierce the corporate veil and impose a constructive trust on the e-Universe stock that Westall, Hilts, and their designees received as a result of the alleged wrongful incorporation of Cases Ladder and its subsequent sale. Krausz also sought the imposition of a constructive trust upon the proceeds of any past sales of any e-Universe stock by the principals.
Following an eight-week bench trial, the trial court issued an extensive Statement of Decision. On November 26, 2002, the trial court entered judgment in favor of Krausz and against Westall and Hilts, jointly and severally, in the sum of $ 4,526,891.50, and ordered them to turn over their shares of e-Universe toward satisfaction of the judgment.
Westall and Hilts filed a timely notice of appeal.
Appellants contend the trial court erred: in imposing evidentiary sanctions; in finding them liable for fraud or deceit; in finding Hilts and Westall were the alter egos of Strategic, Slam Site and Cases Ladder; and in applying the law of fraudulent transfers.
1. No abuse of discretion in imposition of discovery sanctions.
a. Procedural history. [*7]
On November 14, 2001, following a discovery motion by Krausz, the trial court ordered Hilts to "immediately make available to Plaintiff's designated expert all computers, including hard drives and all other electronic storage media in Hilts' possession, custody and/or control."
Hilts delayed compliance for six days. In the meantime, Hilts deleted numerous files and folders, including materials relating to this case.
On February 15, 2002, Krausz moved for an order for terminating, issue and/or evidence sanctions, as well as monetary sanctions in the amount of $ 16,330, on the ground Hilts had deliberately destroyed more than 5,300 relevant computer files in direct violation of the trial court's discovery order. Hilts, in turn, argued the files were personal in nature and had little, if anything, to do with the substance of the litigation.
The trial court found Hilts willfully destroyed relevant evidence subject to a prior court order, and that Hilts "deleted these files for a malicious purpose, that is, to deprive plaintiff of evidence that would be helpful to it in the prosecution of its case."
In determining the appropriate sanction, the trial court rejected Krausz's request [*8] for terminating sanctions as well as Hilts' contention a monetary sanction would suffice. The trial court selected an evidence sanction, explaining: "Given the type of documents plaintiff sought to discover in the first instance, the scope of the files deleted, plaintiff's theory of the case, and the extensive discovery already conducted, an evidentiary sanction restricting Hilts' testimony appears to be the one that would effectuate justice between the parties. This narrowly tailored sanction is proportional to the wrong perpetrated by Hilts and limits his ability to testify on matters that may have motivated his destruction of potentially incriminating evidence. Such a limiting sanction is in addition to the imposition of monetary sanctions that are related to the costs and fees borne by plaintiff in resolving this issue."
The sanctions order prohibited Hilts "from testifying on behalf of defendants about the books and records of [Slam Site], Strategic Alliance Partners, Cases Ladder or [GLG], their relationships to one another, or their financial history."
Thereafter, during trial, the trial court modified the evidence sanction. Due to Westall's sleep apnea which impaired [*9] his memory, the trial court amended the sanction order and permitted Hilts to testify on behalf of Westall, but not himself.
Subsequently, the trial court again revisited the evidence sanction in the Statement of Decision, which provides: "Having reviewed [Hilts'] testimony in the context of the case, the court concludes that the interests of justice will best be served by considering Hilts' testimony on behalf of all Defendants, including himself. The evidence sanction is therefore modified to allow the Court to do so. The monetary sanction, however, remains as previously ordered.)"
b. No merit to appellants' contention the trial court erred in not imposing a lesser sanction.
We review the trial court's imposition of discovery sanctions for an abuse of discretion. (Argaman v. Ratan (1999) 73 Cal.App.4th 1173, 1176.)
Appellants contend the evidence sanction was overbroad, was unworkable, and that monetary sanctions would have been sufficient. The arguments are meritless.
The trial court found that given the nature of the discovery violation, namely, a willful destruction of computer records subject to a prior court order, monetary sanctions would have been [*10] insufficient to remedy the harm to Krausz. We entirely agree.
As for the claim the evidence sanction was overbroad and unworkable, appellants have no cause to complain. The trial court subsequently modified the evidence sanction to enable Hilts to testify on behalf on Westall. Thereafter, in ruling on the matter, the trial court considered Hilts' testimony on behalf of both appellants.
Given this record, the trial court acted judiciously in seeking to tailor the sanction to the egregious discovery abuse committed by Hilts. There was no prejudicial abuse of discretion in the trial court's ruling.
2. Appellants' arguments relating to the trial court's fraud ruling are meritless.
a. Trial court acted within its discretion in allowing Krausz to amend the complaint to conform to proof.
(1) Procedural history.
The third cause of action of the fourth amended complaint pled that to induce Krausz to enter into the lease and guarantee agreements, Westall and Hilts made false "promises and representations of material fact to [Krausz], including inter alia, that defendants intended to and would comply with all terms and conditions of the Lease and Guarantee."
At the close [*11] of Krausz's case, Krausz moved to amend the fourth amended complaint to conform to proof and to add greater detail to the allegations of fraudulent misrepresentations pled in the third cause of action, specifically: defendants had represented to Krausz that Strategic had the financial ability to honor its guarantee of Slam Site's lease obligations, and that although Strategic's financials showed Strategic had a small net loss, defendants had assured Krausz that Strategic earned an annual profit in excess of $ 600,000, which entire profit was distributed to Hilts and Westall as officer salaries and would be available to cover Slam Site's lease obligations, if necessary.
Drawing on these allegations, Krausz also moved to add a seventh cause of action for fraud, further alleging, inter alia, that at the time defendants made these representations to Krausz, they failed to disclose that Strategic owed more than $ 1 million to Westall and Hilts pursuant to accounts they maintained.
The trial court granted leave to amend, finding the complaint already pled fraud in the inducement, defendants had not objected at trial to the relevance of the evidence relating to false representations by [*12] them to induce Krausz to enter into the lease, and under these circumstances, defendants were not prejudiced or surprised by the amendment.
(2) No abuse of discretion in grant of leave to amend.
Code of Civil Procedure section 576 provides: "
Any judge, at any time before or after commencement of trial, in the furtherance of justice, and upon such terms as may be proper, may allow the amendment of any pleading or pretrial conference order." We review the trial court's order granting leave to amend for an abuse of discretion. (City of Stanton v. Cox (1989) 207 Cal. App. 3d 1557, 1563, 255 Cal. Rptr. 682.)
Appellants contend the trial court erred in granting leave to amend because there was no showing by Krausz why an amendment could not have been sought earlier in the proceedings, and the belated amendment added an entirely new legal theory and prejudiced defendants who had prepared a defense based on the longstanding allegations of the complaint.
The argument is unavailing. As the trial court found, the proposed amendment did not add an entirely new legal theory. The existing complaint already pled fraud in the inducement, specifically, [*13] that defendants made false "representations of material fact to [Krausz] . . . with the intent to deceive and defraud [Krausz], and to induce [Krausz] to act in reliance thereon."
Further, as the trial court noted, appellants did not object at trial to the relevance of the evidence relating to the particular false representations which were the subject of the proposed amendment. Therefore, the trial court properly rejected appellants' claim they were somehow prejudiced or surprised by the mid-trial amendment.
In sum, appellants have failed to show a prejudicial abuse of discretion by the trial court in the grant of leave to amend.
b. Appellants' reliance on parol evidence rule is misplaced; although the lease is an integrated agreement, parol evidence is admissible to show fraud in the inducement.
Turning to the merits of the fraud claim, appellants contend it is barred by the parol evidence rule because the written lease is an integrated agreement, superseding all prior oral representations. n2 Further, Krausz had received financials from Strategic and Slam Site, showing those entities had sustained losses. Therefore, according to appellants, Krausz is barred from asserting [*14] it relied to its detriment on purported oral statements by defendants that the financial statements were not accurate and that Strategic had the ability to handle Slam Site's lease obligations.
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n2 The lease states at paragraph 25.6: "Entire Agreement; Amendment. There are no oral or written agreements or representations between the parties hereto affecting the Lease not contained herein. The Lease supersedes and cancels any and all previous negotiations, arrangements, representations, brochures, displays, projections, estimates, agreements, and understandings, if any, made by, to, or between Landlord and Tenant and their respective agents and employees with respect to the subject matter thereof, and none shall be used to interpret, construe, supplement or contradict the Lease. The Lease, and all amendments thereto, shall be considered to be the only agreement between the parties hereto and their representatives and agents."
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The parol evidence rule, as set forth in Code of Civil Procedure section 1856 [*15] , subdivision (a), provides: "Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement."
The parol evidence rule bars the introduction of extrinsic evidence which contradicts the express language of a contract. "The parol evidence rule is a fundamental rule of contract law which operates to bar extrinsic evidence contradicting the terms of a written contract. [Citation.] It is not merely a rule of evidence but is substantive in scope.[n3 ] [Citations.] Under that rule the act of executing a written contract, whether required by law to be in writing or not, supersedes all the negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument. [Citation.] Extrinsic evidence cannot be admitted to prove what the agreement was, not for any of the usual reasons for exclusion of evidence, but because as a matter of law the agreement is the writing itself." (BMW of North America, Inc. v. New Motor Vehicle Bd. (1984) 162 Cal. App. 3d 980, 990, 209 Cal. Rptr. 50.) [*16]
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n3 Pursuant to the general rule (Evid. Code, § 353), Krausz contends appellants waived their parol evidence objection by failing to object on that ground below. However, as noted, the parol evidence rule is not merely a rule of evidence but is a substantive rule of contract law. Therefore, Evidence Code section 353 is inapplicable.
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Appellants' reliance on the parol evidence rule is misplaced. Code of Civil Procedure section 1856 provides in relevant part at subdivision (g): "This section does not exclude other evidence of the circumstances under which the agreement was made or to which it relates, as defined in Section 1860, or to explain an extrinsic ambiguity or otherwise interpret the terms of the agreement, or to establish illegality or fraud." (Italics added.)
Case law is in accord. For example, in Ferguson v. Koch (1928) 204 Cal. 342, the Supreme Court explained: "Parol evidence is always admissible to prove [*17] fraud, and it was never intended that the parol evidence rule should be used as a shield to prevent the proof of fraud. Hence, the fact that the sale of an automobile is evidenced by a written contract will not prevent the purchaser from proving by parol evidence that the sale was induced by fraud. And this is true even though the contract recites that all conditions and representations are embodied therein. [Citations.] There is no such sanctity surrounding a writing that parties may not be permitted to go back of it and show that there was such fraud practiced in the procurement of the same as to vitiate the writing. The law never countenanced a rule which would deny to one the right to prove that fraud had been practiced upon him." (Id., at p. 347; accord Vai v. Bank of America (1961) 56 Cal.2d 329, 344, 15 Cal. Rptr. 71.)
Accordingly, the parol evidence rule did not preclude Krausz from presenting evidence it was fraudulently induced by defendants' misrepresentations to enter into the lease agreement.
c. Appellants' remaining arguments relating to fraud are unavailing.
Appellants further contend there was no duty of disclosure to Krausz [*18] in the absence of a fiduciary relationship; Krausz's theory of nondisclosure is contrary to public policy; and Krausz's claim it relied on Strategic's financials is inherently incredible. These arguments merit no discussion.
In the opening brief, appellants also contend Krausz failed to establish justifiable reliance on Strategic's financials, and that Krausz failed to show intent to defraud. These arguments are nothing more than challenges to the sufficiency of the evidence to support the trial court's findings. However, the reply brief expressly eschews any attack on the sufficiency of the evidence. Therefore, it is unnecessary to address these arguments.
3. Alter ego liability.
a. The alter ego liability of Westall and Hilts.
(1) Trial court's ruling.
With respect to the alter ego liability of Westall and Hilts, the Statement of Decision contains an extensive analysis, providing as follows:
"The evidence establishes that . . . Hilts and Westall were the alter egos of the three corporate entities involved in the case, . . . Strategic, [Slam Site] and Cases Ladder, Inc.
"Alter ego exists where there is a unity of interest and ownership with the corporations such [*19] as to blur the distinction between the corporations and the individuals, and where the upholding of the distinction between the two would produce an inequitable result or perpetrate a fraud. In the seminal case of Associated Vendors, Inc. v. Oakland Meat Co., Inc. (1962) 210 Cal. App. 2d 825, 26 Cal. Rptr. 806, the court catalogued factors that many courts have weighed in determining whether a corporate entity is the alter ego of another entity or of an individual. While all of the 19 factors are not necessarily present here, many significant factors are evident, including the following:
"[(a)] Common ownership: Both Westall and Hilts controlled all three-defendant corporations. Westall owned approximately 74% of the shares of Strategic, while Hilts owned over 125,000 options of Strategic. Strategic owned 95% of [Slam Site's] shares of stock. Westall and Hilts also were the majority shareholders of Cases Ladder, Inc.
"[(b)] Common Officers, Directors, and Control: Westall and Hilts occupied virtually the same positions in each company. While the titles may have differed slightly, their roles, duties, and authority remained the same.
"[(c)] Personal [*20] use of corporate funds: both Westall and Hilts treated the assets of the corporations as their own. The records maintained, especially those denominated 'due to/due from' accounts, reflect the ways personal expenses accrued by Westall were paid out of corporate funds. If the principals had truly desired to maintain the separateness of the accounts they could have exercised more exacting control over the way expenses were reimbursed to the officers. No expense reports or other such documents exist to document the disbursement of corporate funds to cover personal expenditures. There is no indication in the corporate minutes or elsewhere evidencing a policy to reimburse such personal items as health club memberships, massages, vacation trips, and the like. This is especially true since Westall and Hilts testified that such reimbursements were made to compensate Westall for certain licensing revenues he had donated to the corporate entities. The actual financial records, as opposed to the 'due to/due from' accounts, never reflected the amounts supposedly owing to Westall or Hilts.
"[(d)] Commingling of Funds, Common Offices, Common Employees, and Common General Counsel: There [*21] is little doubt that there was commingling of funds in light of the joint ledger accounts maintained by Hilts to show a running balance of total monies available to the principals regardless of source. The argument that such commingling is not uncommon among parents and subsidiaries fails to address the question in a meaningful way. If such transfers were authorized the financial records would have so indicated. As a result, it was impossible to determine the true assets and liabilities of the various entities. The way in which the books were maintained allowed the directors and officers to conceal the true financial picture of these companies. As to the employees, most were transferred from one corporation to the next and sometimes back again at the whim of the Westall and/or Hilts. The same corporate offices housed each of the entities involved here and there was very little distinction between Strategic, [Slam Site], [GLG], and Cases Ladder. Each of the corporations had the same counsel, Mr. Smoot, who also was the secretary to the Boards of [Slam Site], Strategic and Cases Ladder, Inc.
"[(e)] Undercapitalization: The evidence adduced at trial makes it clear that none [*22] of the corporate entities involved here possessed the resources (i.e. assets) to meet its commitments. The defense claims that at the time [Slam Site] entered into the lease with Krausz that Strategic had some $ 2 million in licensing income. If such was the case, the actual liabilities reflected in the 'due to/due from' accounting scheme were in excess of $ 1 million, in addition to the over $ 2,000,000 of liabilities reflected on the companies' financial statements. This was an 'off book' liability not set forth in any of the financial records presented to Krausz or others. If the $ 2 million in income truly existed, none of it was available to meet the expenses of the corporate entities. Several employees testified that they often were asked to wait for their salaries to be paid past the time they were due. Hilts further admitted that the corporations experienced several 'cash crunches' that made it difficult for [Slam Site] or Strategic to meet its obligations. The evidence also establishes that several months after entering into the lease with Krausz . . ., [Slam Site] defaulted on its lease for space in the Burbank mall owing some $ 45,000. In order to help pay for the [*23] buildout of [Slam Site] at the Puente Hills mall, Hilts and Westall attempted to secure a loan from an investor, Mr. Hsu, in the amount of $ 150,000. This amount was never repaid. Monies simply were not available as needed to cover the expenses incurred when [Slam Site] executed its lease for space in the Puente Hills Mall. One witness, Norman Katayama, testified that he often prayed for the survival of the corporations. Little did he realize that these companies were literally started on a 'wing and a prayer' with no hope of meeting the demands placed on them. The capital that Defendants say existed either at the formation of the businesses or a the time it entered into the lease agreements with Krausz . . . was illusory compared with the expenses to be paid and the risk of loss that existed from the beginnings of the beginnings of the companies.
"[(f)] Diversion of assets from one corporate entity to the next: In quick succession the assets of Strategic were transferred to [Slam Site], then to [GLG] or Cases Ladder, Inc. The purpose of these transfers was to avoid paying the expenses incurred by the companies, but to allow insiders to be compensated. This intricate [*24] scheme involved the hiding of liabilities, the false reporting of financial strength, and the ultimate diversion of monies, employees, and officers from one entity to the next. The plan also involved the 'payment' of some $ 80,000 for a company, Cases Ladder, that at the time of transfer was worth in excess of $ 1 million. These fraudulent diversions demonstrate clearly the use of the corporate form to shield the principals from actual and potential liabilities. They rendered the companies judgment proof and unable to satisfy even a portion of their considerable debt.
"[(g)] Failure to follow corporate formalities: The evidence establishes that Defendants failed to abide by the usual corporate formalities in the keeping of their financial records and in the maintenance of their minutes. The failure to maintain, adequate financial records reflecting the actual assets and liabilities of the corporations is discussed, supra. As to corporate minutes, Defendants elected not to memorialize the most significant events in the history of the companies. The minutes fail to reflect any discussion of the lease with Krausz, the build-out of the [Slam Site] location, the attempt to [*25] secure additional capital by way of loans to the companies, or the decision to wind down and go out of business. The evidence also established that neither Strategic nor [Slam Site] complied with formal procedure in the winding down of the corporations. Both entities simply went out of business without notice to creditors or otherwise. Although such compliance may not have been compel1ed by law, the failure to follow these formalities is another benchmark establishing alter ego. Defendants' omissions evince [their] intent to treat the corporate entities as if they were their personal property.
"These various factors, considered separately and together, demonstrate that the corporate form was an illusion that allowed the principals to benefit and the creditors to go unsatisfied. Each entity involved here was but an instrumentality or conduit of the other in the advancement of a single venture, to wit, the development of virtual reality gaming supported by software licensing revenue and other investments. There was such unity of interest and ownership that the separateness of the various corporations had in effect ceased to exist. The principals, Hilts and Westall, blurred the distinction [*26] between themselves as individuals and the corporate entities such that the separate personalities of the corporations and the individuals no longer existed. To preserve the fiction of the corporate form under the circumstances presented here would promote injustice and make it inequitable for Hilts and Westall to escape liability for the obligations they incurred. (See Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal. App. 3d 1220, 1248-1252.) Plaintiff has proved by clear and convincing evidence that Hilts and Westall formed this single enterprise for the purpose of committing a continuing fraud against Krausz."
Having set forth the trial court's alter ego ruling, we now turn to appellants' contentions in that regard.
(2) No merit to appellants' contention the trial court misapplied the Associated Vendors factors.
As set forth above, the trial court based its alter ego ruling in large part on Associated Vendors, Inc., supra, 210 Cal. App. 2d 825, utilizing those of the various factors that it deemed pertinent here. Appellants contend the trial court misapplied the Associated Vendors factors. However, it is not the role [*27] of this court to apply the Associated Vendors factors de novo, or to reweigh the evidence. Rather, the issue at this juncture is whether there is substantial evidence to support the trial court's findings in that regard. (Id., at p. p. 835.)
However, as indicated, the reply brief disclaims any intent to appeal on the basis of insufficiency of evidence. Therefore, appellants have waived their challenge to the trial court's findings on the Associated Vendor factors.
b. The alter ego liability of Hilts individually.
(1) Trial court's ruling.
With respect to the alter ego liability of Hilts, the Statement of Decision provides:
"Hilts relies on Riddle v. Leuschner (1959) 51 Cal.2d 574, for the proposition that it would be unfair to impose personal liability on him as an individual for corporate conduct since he had no ownership interest in the companies. Subsequent decisions, such as Minton v. Cavaney (1961) 56 Cal.2d 576, 15 Cal. Rptr. 641, Goldsmith v. Tub-O-Wash (1962) 199 Cal. App. 2d 132, 18 Cal. Rptr. 446, and Las Palmas Associates, supra, as well as cases from a variety of different jurisdictions [*28] (Guilder v. Corinth Construction Corp. (1997) 235 A.D.2d 619; Robert's Hawaii School Bus, Inc. v. Laupahoehoe Transportation Company, Inc. (1999) 91 Haw. 224, 982 P.2d 853) make it clear that stock ownership is not the determining factor on the issue of whether a court should disregard the corporate entity. The fact that Hilts held over 100,000 options to purchase shares of Strategic (that could be exercised at anytime), combined with his 'ownership' role as director or officer of the various entities, is sufficient to establish that he was an equitable owner who should not be allowed to escape liability for his fraudulent actions."
(2) No merit to the contention that Hilts, as a matter of law, cannot be an alter ego.
Hilts contends that it is undisputed he did not own any stock in either Strategic or Slam Site, and because he was a non-owner, as a matter of law he cannot be an alter ego of either entity. The argument is unavailing.
As indicated, the trial court found Hilts held over 100,000 options to purchase shares of Strategic, exercisable at any time. Based thereon, the trial court properly deemed Hilts to be an equitable owner and therefore [*29] subject to alter ego liability.
4. No merit to appellants' contentions regarding the trial court's fraudulent transfer ruling.
a. The pertinent statute.
Civil Code section 3439.04 provides in relevant part: "(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows: [P] (1) With actual intent to hinder, delay, or defraud any creditor of the debtor. [P] (2) Without receiving a reasonably equivalent value in exchange for the transfer . . . and the debtor either: [P] (A) Was engaged . . . in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction. [P] (B) . . . believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due."
b. Trial court's fraudulent transfer ruling.
In this regard, the Statement of Decision provides:
"In rapid succession the assets of Strategic were transferred to [Slam [*30] Site], then to [GLG] or Cases Ladder, Inc. The goal of these transfers was to avoid paying the expenses incurred by the companies, but to allow insiders to be compensated for monies they claimed to have invested. . . . This scheme involved the secreting of liabilities, the false reporting of financial strength, and the ultimate diversion of monies, employees, and officers from one entity to the next. This is especially seen in the transfer of certain game licensing revenue owed to Strategic by the Software of the Month Club. Hilts and Westall executed releases on behalf of Strategic that allowed for the payment of this revenue to their newly formed entity, [GLG], for which there was no recordation of a fictitious business name statement. At times it was represented to be a partnership while on other occasions it was claimed to be a subsidiary of Strategic. As a result of the transfer, Strategic had little, if no revenue by mid-1998, to pay its numerous creditors. Although Strategic eventually ceased to exist, its business, unencumbered by debt, was carried on by this successor entity.
"Westall and Hilts eventually became associated with another start-up company, Cases Ladder, [*31] that allowed players of virtual reality games to rank themselves against other players and to display these rankings at its Internet site. Believing there was a direct connection between that service and the business of [Slam Site], Westall and Hilts sought an arrangement that would provide them with a significant, if not controlling, interest in the company. The plan initially involved the acquisition of Cases Ladder by [Slam Site] in exchange for the promise to provide the original owners with capital to pay for salaries and needed expansion of the business. Although Defendants now contend that [Slam Site] never owned Cases Ladder (the pertinent agreement having never been signed), the evidence adduced at trial is to the contrary. Westall announced to his investors in a newsletter that [Slam Site had] acquired Cases Ladder and that he looked forward to working on projects of mutual interest, and then provided an influx of capital to the fledging company. The Cases Ladder Internet site also declared that it was a "[Slam Site] company" and a bank account was opened under the fictitious business name of "Strategic Alliance Partners doing business as Cases Ladder." All in all, [*32] Defendants simply treated the business as if it was an asset of [Slam Site] and/or Strategic. As such, Cases Ladder had to be transferred so as to not risk it being available to creditors. To accomplish this diversion, the company was incorporated in August 1998, with Hilts and Westall as officers and directors. [Fn. omitted.] Attempting to justify the diversion, they recharacterized the salary paid to employees of Cases Ladder as loans that they memorialized in a series of backdated promissory notes. The value of these purported loans totaled approximately $ 80,000. Claiming that repayment of this sum amounted to the reasonably equivalent value of Cases Ladder, Defendants effectuated the transfer."
Krausz's expert testimony established that "at the time of the transfer[,] Cases Ladder was worth in excess of $ 1 million." Thus, Cases Ladder was worth "far more than the $ 80,000 'purchase price' paid to e-Universe's predecessor in interest." Further, the "fact that e-Universe ultimately purchased the company, incorporated only eight months previously, for shares of stock valued in excess of $ 7 million speaks volumes about how the parties viewed their own transaction. The facts [*33] adduced at trial make it evident that this fraudulent transfer of assets was accomplished with the intent to render Strategic and [Slam Site] insolvent so as to frustrate [Krausz's] efforts at collecting the amounts owed to it under the lease and recovering the disbursement of the allowances for tenant improvements."
Krausz presented "overwhelming evidence establishing that Strategic and [Slam Site] were nothing but vehicles created to perpetrate a continuing fraud on unknowing investors. Westall and Hilts claim that they, like other investors, made nothing from these ventures. Not so. With time and happenstance on their side resulting from the proliferation of Internet start-up companies, they were able to parlay their investment so as to capitalize from the sale of Cases Ladder to e-Universe. This was a substantial benefit from which they should not be allowed to profit."
"Having established a fraudulent transfer, as set forth in Civil Code section 3439.04, [Krausz] is entitled to set it aside as provided for in Civil Code section 3439.07. Consistent with the terms of that section, the [trial] court hereby imposes a [*34] constructive trust on e-Universe stock [that] Westall, Hilts, and their designees received as a result of the wrongful transfer of Cases Ladder. . . . Defendants [are] ordered to hold the former assets, or assets received in exchange for the former assets, of [Slam Site] and Strategic in trust for [Krausz]."
Having set forth the trial court's ruling, we now turn to appellants' contentions.
c. No merit to appellants' contention no assets were diverted to GLG.
Appellants assert there is no evidence that any asset was diverted to GLG and thus made unavailable to pay rent. According to appellants, all that was shown was that GLG was identified as a division of Strategic and used to collect licensing revenues. This contention is essentially a challenge to the sufficiency of the evidence and therefore waived, pursuant to the reply brief's waiver of any argument based on insufficiency of the evidence. However, we briefly dispose of the issue.
In 1997 and 1998, Strategic, the guarantor of the lease, derived much of its income from royalty payments paid by Software of the Month Club (SOMC). These fees amounted to hundreds of thousands of dollars. In the spring of 1998, appellants [*35] instructed SOMC to redirect the royalty payments from Strategic to GLG. Contrary to appellants' claim that GLG was merely a division of Strategic, and not a separate entity, appellants informed SOMC that GLG was a partnership, and they indemnified SOMC against potential liability to Strategic for making the royalty payments to GLG. Further, appellants' bookkeeper, Larry Tolman, testified he understood that GLG was a company separate and apart from Strategic and Slam Site.
Accordingly, the evidence showed that Strategic's revenues from the SOMC royalty payments were redirected to GLG, a separate entity, and therefore were no longer available to Strategic's creditors, including Krausz.
d. No merit to appellants' contention no assets of Slam Site were diverted to Cases Ladder, Inc.
Appellants contend there was no transfer of any asset of Slam Site to Cases Ladder, Inc. because Slam Site's acquisition of Cases Ladder was never finalized, and therefore Cases Ladder was never an asset of Slam Site to begin with. The trial court properly rejected this claim, finding the evidence showed that Slam Site owned Cases Ladder. The trial court noted, inter alia, Westall announced to his investors [*36] in a newsletter that Slam Site had acquired Cases Ladder, the Cases Ladder internet site declared it was a "Slam Site company," and a bank account was opened under the fictitious business name of "Strategic Alliance Partners doing business as Cases Ladder."
Thereafter, defendants removed the business of Cases Ladder from Slam Site. In the spring of 1998, correctly anticipating that Cases Ladder might be worth millions of dollars, defendants decided to spin off Cases Ladder by incorporating it, in order to position the business for sale. In August 1998, Cases Ladder was incorporated, with Westall and Hilts as the majority shareholders. Slam Site received $ 80,000 for Cases Ladder (consisting of repayment of a series of backdated promissory notes from Hilts to Slam Site), although Cases Ladder's value at the time of incorporation was in excess of $ 900,000. Thus, at the time Cases Ladder was spun off from Slam Site and incorporated, Slam Site simply was repaid its outlay for salary payments it had made to Cases Ladder's personnel.
On this record, the trial court properly found that appellants fraudulently transferred Cases Ladder from Slam Site.
The judgment [*37] is affirmed. Krausz shall recover costs on appeal.
KLEIN, P. J.