California Court of Appeal Imposes Alter Ego Liability

In Toho-Towa, Co., Ltd. v. Morgan Creek Productions, Inc. (, the Court of Appeal for the Second Appellate District affirmed an order imposing alter ego liability on defendant for a $5 million arbitration award against two of defendant's foreign affiliates.  Alter ego (or its related "single enterprise" theory of liability) is rarely applied, but was applied and upheld here.  This case presents a textbook for actions not to take if defendants wish to maintain corporate distinctions.  Here, the defendant and the liable entities were all owned by the same individual.  This alone would not have been enough.  The actions of the companies caused the disregarding of the corporate form.  First, defendant promised the plaintiff that the other entities with which it contracted would have sufficient assets.  In fact, one of the foreign affiliates had no bank account; the other received no income.  Employees of defendant who were not also employees of the foreign affiliates operated the business of the foreign affiliates.  The general counsel of defendant controlled the affiliates' arbitration defense and the defendant paid the legal costs.  Under these circumstances, it was clear that the entities were operated as a common business enterprise and alter ego liability was imposed.  While a clear-cut case, this case provides guidance as to what not to do.