In Cam-Carson, LLC v. Carson Reclamation Authority, B312729 (Cal. App. August 23, 2022), the plaintiff sought to hold the City of Carson (“City”) liable for the Carson Reclamation Authority’s (“CRA”) breach of contract between the plaintiff and CRA. The trial court sustained the City’s demurrer to the breach of contract claim and the plaintiff appealed.
Under the alter ego doctrine, a corporate identity may be disregarded where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of a corporation. In California, two conditions must be met for the alter ego doctrine to be invoked: (1) there must be such a unity of interest and ownership that the separate personalities of the corporation and the shareholder do not really exist; and, (2) there must be an inequitable result if the acts are treated as those of the corporation alone. Factors courts consider in determining whether these conditions exist include the commingling of funds, identical equitable ownership in the entities, the use of the same offices and employees, disregard for corporate formalities, identical directors and officers, and the use of one entity as a shell for the affairs of another.
The California Second District Court of Appeal noted that government entities regularly engage in commercial activities with the private sector. Furthermore, a government entity may create another government entity to perform certain activities for the purpose of avoiding liability. Thus, the Court held that the alter ego doctrine may apply to government entities if comparable facts of unity of interest and ownership are established.
The City argued that the recitals in the conveyancing agreement prevented the application of the alter ego doctrine. The recitals showed that the plaintiff knew pertinent facts at the time the conveyancing agreement was entered. Based on these recitals, the City argued that there was no concealment and no basis for holding the City liable on an alter ego theory because the element of fraud, concealment, bad faith, or injustice was completely absent.
The Court disagreed. The complaint alleged that after the agreement was entered into, organizational formalities were ignored; funds were commingled; and the City failed to properly capitalize CRA, concealed their funding deficit, and made numerous representations to induce the plaintiff to advance additional funds.
Additionally, the plaintiff did not need to allege a claim of fraud in order to establish alter ego liability. The alter ego doctrine can be satisfied by evidence that adherence to the fiction of the separate corporate entity would promote injustice.
The Court reviewed California, federal, and other states’ precedents and found that while some declined to apply the alter ego doctrine to governmental entities based on the facts of the case, none of the cases supported the idea that the alter ego doctrine may never be applied to governmental entities as a matter of law.
The Court explained that because it found that the plaintiff sufficiently alleged a breach of contract claim under the alter ego doctrine, the City could also be liable for breach of the implied covenant of good faith and fair dealing.
The Court reversed the dismissal and remanded the case with instructions for the trial court to vacate its order sustaining the City’s demurrer.