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Donna Leek et al v. Jay Cooper

April 15, 2011

DONNA LEEK ET AL., PLAINTIFFS AND APPELLANTS,
v.
JAY COOPER, DEFENDANT AND RESPONDENT.
LARRY LEONARDO, PLAINTIFF AND APPELLANT,
v.
JAY COOPER, DEFENDANT AND RESPONDENT.



(Super. Ct. No. SCV21571) (Super. Ct. No. SCV21570) APPEAL from a judgment of the Superior Court of Placer County, Larry D. Gaddis, Judge, Margaret E. Wells, Court Commissioner.

The opinion of the court was delivered by: Blease , J.

CERTIFIED FOR PUBLICATION

Reversed in part and affirmed in part.

This is a pleading case masquerading as a summary judgment case. Employees of a corporate-owned car dealership sued the corporation and its sole shareholder, alleging causes of action for age discrimination and violation of the California Family Rights Act. The trial court granted the shareholder's motions for summary judgment on the ground that only the corporation as the employer could be held liable for discrimination, and an alter ego theory was not pleaded in the complaint. The court further granted the shareholder's motion for attorney fees and costs pursuant to Government Code section 12965, subdivision (b).

Plaintiffs' claims regarding the merits of the summary judgment motion are twofold. They do not deny that only an employer may be liable to an employee for discrimination under the California Fair Employment and Housing Act (FEHA) or for violation of the Family Rights Act. They claim that Cooper was an employer under the statutes, the proper test for determining who is an employer being the degree to which that person controls the employee. They also claim that Cooper is liable for the wrongdoing of the corporate employer under an alter ego theory.

The alter ego theory was tendered in a motion to amend their pleading to assert it as a ground of Cooper's liability. The plaintiffs did not make an offer of proof in support of the motion. Rather, they offered the facts tendered in opposition to the motion for summary judgment as grounds justifying an amendment. The trial court denied the request on the ground the facts, if true, did not establish Cooper's liability as an alter ego of the corporation.

We shall conclude that Cooper's control over the employees is not the proper test to determine whether he was the actual employer. The essence of the alter ego doctrine is not that the individual shareholder becomes the corporation, but that the individual shareholder is liable for the actions of the corporation. (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300.) The proper method for determining whether the sole shareholder of a corporate employer is liable for the wrongdoing employer/corporation, is by the application of an alter ego theory. We agree with the trial court that plaintiffs did not adequately plead an alter ego theory of recovery in their complaint. This being the case, defendant Cooper was under no duty to negate an alter ego claim.

Plaintiffs attempted to raise the issue of alter ego in their opposition to the summary judgment motion. Because the facts they claimed to be undisputed were insufficient to state a claim of alter ego, it is not reasonably possible that they could amend their complaints to allege the theory, and the trial court did not abuse its discretion in denying leave to amend.

We shall reverse the portion of the judgment awarding attorney fees to Cooper because we do not find the action unreasonable, frivolous, meritless or vexatious. Likewise, we deny Cooper's motions for sanctions on appeal because we do not find the appeal frivolous.

FACTUAL AND PROCEDURAL BACKGROUND

We deal with two separate actions, which we have consolidated for purposes of oral argument and for this opinion. In the first action, plaintiffs Donna Leek, John Borden, and Cindy Buschmann alleged that they were employed by Auburn Honda, a California corporation, and Cooper.*fn1 In the second action Leonardo also alleged that he was employed by Auburn Honda and Cooper. All plaintiffs alleged that Cooper is the sole owner of Auburn Honda, owning all of its stock and making all of its business decisions.

At the time of their terminations, Leek was 49, Buschmann was 51, Borden was 66, and Leonardo was 56. All allege that they were replaced by substantially younger employees, and that Cooper told Leonardo he planned to get rid of older employees in order to reduce payroll expenses. Both actions alleged age discrimination pursuant to FEHA. (Gov. Code, § 12900 et seq.)

Leonardo's complaint additionally contained a cause of action for violation of the California Family Rights Act. (Gov. Code, § 12945.1 et seq.) The factual basis for this claim was that just prior to his termination Leonardo informed Cooper he needed to take leave to care for his terminally ill mother, that Cooper became enraged at the request, and that he informed Leonardo he had a business to run, which did not include taking care of old sick people.

Cooper filed an answer to each complaint that consisted of a general denial and numerous affirmative defenses, including the defense that he had no employer-employee relationship with the plaintiffs.

Cooper then filed a motion for summary judgment in both actions. The basis for the motions for summary judgment was that Government Code section 12940, barring discrimination against employees, limits liability for discrimination to the employer, not to management personnel. With respect to the Leonardo complaint, Cooper argued the Family Rights Act and FEHA contain the same definition of an employer. Thus, he asserted the same argument with respect to his claim based on the Family Rights Act.

The plaintiffs responded to the summary judgment motion, arguing that Cooper was the alter ego of Auburn Honda on the apparent theory that Cooper was their employer. They pointed to evidence that Cooper was the president of Auburn Honda, and that there were no directors of the corporation, that Cooper "individually" fired the plaintiffs, that Cooper "individually" makes all policy, procedure, and management decisions for Auburn Honda, that Cooper "individually" owns the land on which the dealership is located, and that he raises the rent as he sees fit.

The trial court granted summary judgment as to both complaints. It ruled that pursuant to Reno v. Baird (1998) 18 Cal.4th 640 (Reno), an individual manager or supervisor could not be held liable for discrimination under the FEHA. It further ruled that plaintiffs had not alleged alter ego liability in their complaint, thus the evidence proffered to that effect was unavailing. The court denied plaintiffs' request to amend the complaint to allege alter ego liability, finding that the evidence proffered was insufficient to establish alter ego liability.

The trial court granted Cooper's motions for attorney fees pursuant to Government Code section 12965, subdivision (b), providing that the court may, in its discretion, award reasonable attorney fees and costs to the prevailing party. Cooper was awarded a total of $49,747.00 in attorney fees.

DISCUSSION

I Employer Liability

In Reno, supra, the California Supreme Court held that only the employer, not individual supervisory employees, may be held personally liable under FEHA for discriminatory hiring, firing, and personnel practices. (18 Cal.4th at p. 645.) By contrast, individuals may be held liable under FEHA for harassment. (Ibid.) In so holding, the Supreme Court agreed with an earlier Court of Appeal decision, Janken v. GM Hughes Electronics (1996) 46 Cal.App.4th 55 (Janken), which reasoned that discrimination claims arise "out of the performance of necessary personnel management duties." (Id. at p. 63.) By contrast, harassment is not conduct necessary to personnel management, but is instead "conduct outside the scope of necessary job performance, conduct presumably engaged in for personal gratification, because of meanness or bigotry, or for other personal motives." (Ibid.)

It is thus settled that only an employer may be liable for discrimination under FEHA, and Leonardo does not argue that anyone other than an employer may be liable for violation of the Family Rights Act.

Notwithstanding plaintiffs' agreement with the conclusion that liability under the statutes in question extends only to employers, they argue that the policy reasons cited in Reno and Janken, supra, are inapplicable here. Leonardo argues a distinction must be made because Cooper is the sole shareholder of the corporate employer and makes all of its management decisions. Specifically, he claims that this situation does not result in any conflict of interest between an individual supervisory employee and the employer that would have a chilling effect on management decisions.

Janken and Reno, supra, expressed the opinion that imposing personal liability on individual supervisory employees would impair the exercise of supervisory judgment, creating conflicts of interest and chilling effective management. (Janken, supra, 46 Cal.App.4th at p. 72; Reno, supra, 18 Cal.4th at pp. 651-652.) They reasoned that holding supervisory employees liable:

"would coerce the supervisory employee not to make the optimum lawful decision for the employer. Instead, the supervisory employee would be pressed to make whatever decision was least likely to lead to a claim of discrimination against the supervisory employee personally, or likely to lead only to that discrimination claim which could most easily be defended. The employee would thus be placed in the position of choosing between loyalty to the employer's lawful interests at severe risk to his or her own interests and family, versus abandoning the employer's lawful interests and protecting his or her own personal interests." (Janken, supra, 46 Cal.App.4th at p. 74, quoted in Reno, supra, 18 Cal.4th at p. 653.) We agree that these policy reasons are not applicable in this case. Nevertheless, the Supreme Court has made clear that liability for discrimination extends only to the employer, and not to individual employees. Plaintiffs make no argument that liability rests with anyone but the employer. Instead, they argue that Cooper was in fact the employer because of the control he exercised over them. They point to tests other courts have employed to determine whether a person is an employee or independent contractor, whether a shareholder in a professional corporation is an employee for purposes of the Americans with Disabilities Act, or whether two corporations should be considered a single employer for Title VII purposes, and argue that those methods are appropriate for determining when a sole shareholder of an employer corporation may be considered an employer.

We disagree. A determination that a person is the alter ego of a corporation does not make the alter ego an employer. Rather it makes the alter ego liable for the obligations of the corporation. In this instance, where a third party seeks to hold the sole shareholder liable for the wrongdoing of the corporation, an alter ego theory is the appropriate way to determine whether the shareholder is liable. As demonstrated ...


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