Metropolitan News-Enterprise

 

Wednesday, August 24, 2022

 

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Court of Appeal:

City Can Be Alter Ego of Another Governmental Entity

Decision Reinstates $85 Million Lawsuit Against City of Carson

 

By a MetNews Staff Writer

 

The Court of Appeal for this district held yesterday that one governmental entity can be held to be the alter ego of another governmental entity.

It so deciding, it rejected the contention by the City of Carson that “alter ego” is “a common law doctrine that does not apply to public agencies.”

Acting Presiding Justice Elizabeth A. Grimes of Div. Eight authored the opinion. It reverses a judgment of dismissal which followed Los Angeles Superior Court Judge Maureen Duffy-Lewis’s sustaining of demurrers without leave to amend.

Grimes’s opinion declares that the alter ego allegations of the complaint by Cam-Carson LLC are sufficient, if established to be true, to affix liability on the city based on a contract to which it was not a party. It is allegedly an alter ego of the Carson Reclamation Authority (“CRA”).

Cam-Carson, a partnership of developers, sued the city and the CRA for $85 million on the ground that gross mismanagement and malfeasance resulted in a lack of funding for remediation work they were contractually obliged to perform, resulting in the plaintiff being unable to proceed with a 40-acre development of a mall along the San Diego Freeway (Interstate 405).

Allegations of Complaint

According to the complaint, finances of the city, the now-insolvent CRA, and the successor agency to the CRA “are managed by the same City employee and involve common funds” and “the same individuals, employees, members, and officers…manage and control the activities for all three entities.” It asserts:

“The CRA’s and the City’s finances are so intertwined that the City’s auditors require the City to include the CRA in the City’s own consolidated financial statements.”

The pleading further alleges:

“[T]he City created the CRA in an attempt to shield itself from liability while still receiving the primary benefits of the Project, but then failed to properly capitalize or supervise the CRA at all. On information and belief, the City did this specifically so that it could afford to be derelict in its duties and push all liability to the CRA despite the fact that the CRA was managed and operated by the City’s own officials.”

In sustaining the demurrers without leave to amend, Duffy-Lewis opined:

“There are insufficient allegations for alter ego liability. The City is not party to the contract and cannot be liable for Breach of Implied Covenant.”

Grimes’s Opinion

Grimes declared:

“We hold the alter ego doctrine may be applied to government entities where the facts justify an equitable finding of liability. Here, the allegations in plaintiffs second amended complaint are sufficient to survive the City’s demurrer. We cannot say, as a matter of law, the City cannot be held the alter ego of the CRA if plaintiff is able to prove the facts alleged. Accordingly, the trial court erred in sustaining the City’s demurrer to plaintiffs breach of contract claim.”

The justice noted that a review of precedents in California and other states, as well as federal holdings, has unearthed no decision proclaiming that one governmental entity may never be the alter ego of another.

She went on to say:

“The City recites information from the city charter, the law creating and governing successor agencies, and the documents establishing the CRA as a joint powers authority. Of course it is true that the City exists as a separate legal entity from the CRA. But in every single enterprise alter ego case, there are always two or more formally separate defendants who the plaintiff alleges should be deemed one and the same under equitable principles, not under statutory law. We see no reason these principles should be different when government entities are involved.”

The opinion also says that Duffy-Lewis erred in sustaining a demurrer to a cause of action against the city for breaching an implied covenant in connection with a development agreement to which it was a party.

The case is Cam-Carson, LLC v. Carson Reclamation Authority, 2022 S.O.S. 4019.

Richard P. Bress, Daniel S. Schecter, Robert J. Ellison and Nima H. Mohebbi of Latham & Watkins represented Cam-Carson. Sunny K. Soltani and June S. Ailin of the Irvine firm of Aleshire & Wynder acted for the city.

 

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