The figurative terminology "alter ego" and "disregard of the corporate entity" is generally used to refer to the various situations that are an abuse of the corporate privilege. The equitable owners of a corporation, for example, are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will; when they hold themselves out as being personally liable for the debts of the corporation; or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs.
The Seminole Hot Springs Corporation was duly incorporated in California on March 8, 1954. It conducted a public swimming pool that it leased from its owner. On June 24, 1954, plaintiffs' daughter drowned in the pool, and plaintiffs recovered a judgment for $ 10,000 against Seminole for her wrongful death. The judgment remains unsatisfied. On January 30, 1957, plaintiffs brought the present action to hold defendant Cavaney personally liable for the judgment against Seminole. Defendant, the estate of a former director of a defunct corporation, appealed from a trial court judgment holding it personally liable for a wrongful death award against the corporation in a prior litigation. Defendant argued that decedent, an attorney, merely accepted director status to accommodate the defunct corporation, and the evidence did not support the determination that the "alter ego" doctrine was applicable. The court disagreed, holding that the trial court was not required to believe the statement that decedent was only a "temporary" director and officer "for accommodation." However, the court reversed the judgment on the grounds that decedent was not a party to the wrongful death action against the corporation, and the judgment in that action was therefore not binding upon him.
Can Cavaney or his estate be held liable for the debts of Seminole?
In this action to hold defendant personally liable upon the judgment against Seminole plaintiffs did not allege or present any evidence on the issue of Seminole's negligence or on the amount of damages sustained by plaintiffs. They relied solely on the judgment against Seminole. Defendant correctly contends that Cavaney or his estate cannot be held liable for the debts of Seminole without an opportunity to relitigate these issues. Cavaney was not a party to the action against the corporation, and the judgment in that action is therefore not binding upon him unless he controlled the litigation leading to the judgment. Although Cavaney filed an answer to the complaint against Seminole as its attorney, he withdrew before the trial and did not thereafter participate therein. The filing of an answer without any other participation is not sufficient to bind Cavaney. "In order that the rule stated in this section [that a person in control of the litigation is bound by the judgment] should apply it is necessary that the one in whose favor or against whom the rules of res judicata operate participate in the control of the action and if judgment is adverse, be able to determine whether or not an appeal should be taken. It is not sufficient that he supplies the funds for the prosecution or defense, that he appears as a witness or cooperates without having control."