States offer their citizens the privilege of doing business through the corporate form, such as a traditional corporation, or an LLC. The principal advantage of these forms is the limitation of liability offered its participants. The idea is that without such a liability shield, persons would be reluctant to engage in business ventures, thus impeding the growth of commerce.

But as with every right, the legal system must be wary of abuse. With regard to corporate forms, a major concern is that an individual may choose to perpetrate a fraud by treating it as an extension of the self; i.e., where the form is a sham controlled by the person in an attempt to evade personal creditors. If court finds a “unity of interest” such that the corporate form and controlling person are one and the same, it will disregard that entity for liability purposes if required to prevent an injustice. This is known as “piercing the corporate veil” or “alter ego” liability.

In lawsuits, victorious plaintiffs often discover that a judgment against a corporation cannot be satisfied because the corporation has been looted, the corporate identity was a fiction, or alter egos who controlled the corporation possess all its assets. In such cases courts have long held that alter ego liability applies after the judgment has been entered against the corporation. Thus, even if allegations of alter ego were not part of the main case, after its conclusion, a plaintiff may seek to have the judgment amended to include the name of an individual who was the alter ego of the corporation, pursuant to Cal. Code Civ Pro. §187. As one court put it: “Amendment of a judgment to add an alter ego is an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant.”

There are several reported cases in California whereby a plaintiff was able to do this by post-judgment motion in the same case that established liability against the corporation. In the 2020 case of Lopez v. Escamilla, however, the California Court of Appeal gave its approval to the use of a subsequent, independent action to establish alter ego liability.

Most recently, in another installment of the Lopez v. Escamilla case, the Court of Appeal addressed the due process limitations of applying alter ego post-judgment. The defendant in the action, whom the plaintiff alleged was the alter ego of the corporation found liable in the previous action, argued against the imposition of liability on the basis that he did not litigate the prior action against the corporation. Instead, judgment was taken by default. Thus, according to the argument, it would be a violation of his due process rights to impose such liability on him.

The Court of Appeal disagreed. While the cases imposing alter ego liability post-judgment commonly featured the targeted individual defending the litigation against the corporation–thereby providing notice and the chance to defend required by due process—here the situation was no different. The defendant claimed to have been ignorant of the litigation, but the plaintiff alleged that he was the only person behind the corporation. As such, there arose a reasonable inference that the corporation’s default was a strategic move by defendant. Thus, the fact judgment was by default did not eliminate a triable issue that defendant controlled the litigation against the corporation, and thus was not denied due process. In addition, because liability was sought by way of independent action, the defendant would have a full opportunity to defend himself.

The Lopez decision will do much to eliminate the possibility that an alter ego defendant can evade liability by directing the strategic default of the corporate entity. Section 187 will continue to be a powerful tool to prevent abuse of the corporate form.