Wednesday, July 27, 2011

Misik v. D'Arco (Cal. Ct. App. - July 27, 2011)

I like this rule.  You can add an individual as the alter ego of a corporate defendant that was found liable pursuant to Section 187 of the CCP even if you didn't allege alter ego liability at trial.  You don't need a whole new lawsuit either; you simply have to convince the court that it'd be substantively appropriate to amend the judgment to add the individual as a judgment debtor.  When the individual is, in fact, the alter ego of the defendant, that makes sense.

Of course, plaintiff could initially assert alter ego liability in the complaint.  For settlement pressure or other reasons.  But I agree that there's no obligation to do so.  Sometimes it'll be more efficient to decide the alter ego issue later, and if that's what plaintiff wants, I think that's fine.  Maybe we want to first see if there's liability, and maybe also see (if there is) if the corporate defendant will pay the judgment before spending additional resources on alter ego issues.  Plaintiffs are allowed to make a lot of tactical decisions in how they frame their complaint.  This additional option seems perfectly reasonable to me as well.  Especially since, if given the option, that's probably what I'd elect in the vast majority of cases I'd file.

So I think the Court of Appeal gets this one right.  It's reasoning is more doctrinal and less policy-centered than mine, but we reach the same result.

Two other things about this case.  First, the fraud.  Pretty straightforward, and all too common.  Martin Ballardo convinces Thomas Misik to loan $150,000 at 12% interest.  Misik thinks he's lending the money directly to Ballardo, but nonetheless signs a promissory note to "Sayrahan Group LLC" that's countersigned by Thomas D'Arco, neither of whom Ballardo has ever heard of.  Which, parenthetically, should be a huge warning sign.  But it's 12%, right?!

Wrong.  You're never getting that money.  Or even your principal back.  Immediately after getting the $150,000 from Misik, Sayrahan's liabilities exceed its assets.  And Sayrahan never even has more than $3500 in its bank account -- ever -- even though it's just gotten $150,000.  They ain't repaying.  And, not surprisingly, default.

That's a pretty decent case for alter ego liability in my book, even if Sayrahan or D'Arco was actually guilty of fraud.  To hold otherwise would allow these schemes -- which, I might add, are fairly common -- to work pretty well.  Why perform actual Madoff-like fraud, for which you might go to prison, when you can simply take money from someone, do whatever you feel like doing with it (and take a "management fee" for yourself), and then have the corporation go bankrupt when it inevitably doesn't work out.

Indeed, without alter ego liability, I'd imagine that these schemes would be even more common than they are.  Why not?  Again, no need to commit fraud.  Just find someone stupid or greedy enough to loan you a six-figure amount at a crazy interest rate -- trust me, there are lots of these people around -- and tell them "I can't tell you what it's for.  It's a secret.  But what do you care?  You're getting 15% a year!"  Then put the money on red in Vegas, or (equivalently) on commodity futures options in the market -- and see what happens.  If you hit, you double your money and pay the guy back, and pocket the proceeds.  (Plus, most likely, he reinvests, and you do it again!)  If you don't, who cares:  Not your money.  You start a new group -- Sayrahan II -- and do it again.  It's all good for you.

Seems to me a perfectly appropriate application of alter ego liability to stop this stuff.  It's one thing if it's an actual entity with assets and the like.  It's another if it's a thing like this, which (as D'Arco admits) has absolutely nothing other than D'Arco himself; no address other than his house, no web site, no assets, etc.  That's a decent case for alter ego liability, and no reason not to make its application more efficient through CCP 187.

None of which, by the way, says that you should actually invest in these things.  If it's too good to be true, I promise you it is.  That's the lesson of the past ten years.  As well as the lesson of every ten years since at least the 1500s.  That each generation has a hard time learning this doesn't make it any less true.

One last thing.  Thomas D'Arco?  He's a lawyer in Canoga Park.  Still practicing law.  Hopefully -- hopefully -- not still taking people's money.