Filed 7/27/21 S.T.I. Demolition v. Quarles CA2/1
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
S.T.I. DEMOLITION, INC., B307978
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. TC022945)
v.
CHARLES QUARLES,
Defendant and Respondent.
APPEAL from an order of the Superior Court of
Los Angeles County, Maurice A. Leiter, Judge. Reversed.
Attlesey Storm, Keith A. Attlesey, John P. Ward, and
Marc Thomas for Plaintiff and Appellant.
Law Offices of Michael Jay Berger and Michael Jay Berger
for Defendant and Respondent.
____________________________
A judgment creditor challenges the trial court’s denial of its
postjudgment motion to add a party to the judgment pursuant to
the alter ego doctrine. We conclude that the trial court did not
apply the alter ego law correctly when it failed to consider all
elements of that doctrine and all the relevant factors identified by
our alter ego jurisprudence. We therefore remand the case for
the trial court to evaluate the motion to amend the judgment in
light of all the circumstances relevant to alter ego liability. If
upon remand, the trial court concludes that the motion to add the
party as an alter ego to the judgment is well-founded, then it
must also consider the judgment debtor’s laches defense.
BACKGROUND
Appellant is S.T.I. Demolition, Inc. (STI), doing business as
Full Scale Demolition, a construction company. Respondent is
Charles Quarles (sometimes referred to as Quarles),1 the former
president and chief executive officer of The Bedford Group
(Bedford), a corporation engaged in property development.
1. Judgment
In February 2011, after a bench trial, STI obtained a
judgment against Bedford for $108,863.70. In its judgment
renewal dated August 7, 2020, STI indicated Bedford owed it
$212,571.58.
1We grant STI’s motion to correct the identity of
respondent. It is undisputed that Charles Quarles is the only
respondent.
2
2. Debtor’s examination
On August 21, 2019, STI filed an application and order for
a debtor’s examination. On September 26, 2019, John Ward,
counsel for STI, examined Quarles as Bedford’s representative.
No reporter was present.
3. STI moved to amend the judgment
On June 3, 2020, STI filed a motion to amend the judgment
to add Quarles as a judgment debtor. STI argued that Quarles
was Bedford’s alter ego.
In support of the motion, the president of STI, Ralph
Rodriguez, averred that STI and Bedford entered into a written
contract on an unspecified date. According to Rodriguez, Bedford
failed to pay STI, and STI obtained a judgment against Bedford
in February 2011. Rodriguez stated that Quarles appeared at
trial. Rodriguez believed that Bedford continues to operate
because it has a website and is registered with the California
Secretary of State. Specifically, in May 2019, Bedford filed a
statement of information with the Secretary of State signed by
Quarles as Bedford’s president.
Attorney Ward filed a declaration stating that Quarles
appeared on behalf of Bedford at a debtor’s examination that
Ward conducted on September 26, 2019. According to Ward,
Quarles testified that Quarles always owned 100 percent of
Bedford’s shares, and since 2012, Bedford has had no employees.
Quarles told Ward that, in 2012, Bedford sold all of its assets and
currently owns no assets and has no bank accounts. Ward
averred that Quarles testified he continues to conduct business
out of Bedford’s offices and uses the following e-mail:
cquarles@thebedfordgroup.com. Additionally, Bedford maintains
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a website. Ward reported that Quarles testified Bedford is
“essentially defunct” and Quarles did not shut it down because
the website attracts customers to his consulting business and it
would cost him $10,000 to “shut down Bedford and discharge its
debts via bankruptcy.”
According to Ward, Mr. Quarles stated that, at an
unspecified date, Bedford prevailed in an arbitration against
Zurich Insurance and obtained a $17 million arbitration award.
“Mr. Quarles stated that he used $2,000,000 of the award to
satisfy a debt owed to Hanmi Bank secured by his personal
residence” on Kenway Drive (the Kenway Property). Ward
reported that “Mr. Quarles stated Hanmi Bank agreed to sell the
note to his nephew Darren Gooden so Mr. Quarles would not lose
[the] Kenway [Property] to Hanmi.” Ward explained that
Quarles testified 40 percent of the arbitration award was used to
pay Bedford’s attorneys and an unspecified amount was used to
pay City National Bank for a line of credit.
Documents attached to STI’s motion to amend the
judgment showed that in March 1998, Bedford conveyed the
Kenway Property by grant deed to Charles and JoAnn Quarles.
Charles Quarles signed the deed as president of Bedford. The
deed states: “ ‘The grantors and the grantees in this conveyance
are comprised of the same parties who continue to hold the same
proportionate interest in in [sic] the property, R & T 11923(d).’ ”
(Capitalization omitted.)
In 2006, Charles and JoAnn Quarles transferred a deed of
trust on the Kenway Property to Hanmi Bank. In June 2012,
Hanmi Bank filed a notice of default and election to sell
indicating that Charles and JoAnn Quarles owed $16,509,082.58.
On January 8, 2018, Hanmi Bank assigned the deed of trust to
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the Gooden Group, Inc., whose managing director was Darren
Gooden. It is undisputed that Darren Gooden is Quarles’s
nephew and was a former employee of Bedford.2
4. Quarles’s opposition
Charles Quarles opposed STI’s motion arguing, among
other things, that Bedford’s “payment to Hanmi Bank was a
payment of a business debt because the bank required
Mr. Quarles to collateralize his home in order to secure a
$37 million construction loan from the bank to the Bedford
Group.” (Capitalization omitted.) Quarles also argued that the
equitable doctrine of laches prevented STI from adding him as a
judgment debtor.
In his declaration in opposition to STI’s motion, Quarles
stated he was the former president and former chief executive
officer of Bedford. Bedford was involved in the construction of a
condominium complex in Oakland, California (Oakland
Property). Hanmi Bank entered into a construction agreement
with Bedford and other entities to loan money to Thomas Berkley
Square Housing, LLC for the construction of the Oakland
Property. The loan was secured not only by the Oakland
Property, but also by Charles and JoAnn Quarles’s personal
residence. According to Quarles, he signed a commercial
guaranty of Hanmi Bank’s loan to Thomas Berkley Square
Housing, LLC for the construction of the Oakland Property
secured by his personal residence.
Quarles averred that when Thomas Berkeley Square
Housing, LLC defaulted on the loan, Hanmi Bank sold the
2 STI’s evidence indicated that Gooden was the former
“Senior Director of Sales for The Bedford Group of Companies.”
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Oakland Property and commenced litigation against both Charles
and JoAnn Quarles for the outstanding indebtedness. Hanmi
bank agreed to postpone its trustee sale of the Kenway property,
and on the day before the scheduled foreclosure sale, JoAnn
Quarles filed for bankruptcy. According to Quarles, during the
bankruptcy, Quarles reached a settlement agreement with
Hanmi wherein it would be paid $1.2 million in satisfaction of its
loan.
According to Quarles, Bedford obtained insurance proceeds
from litigation concerning the Oakland Property “around”
September 2014. Quarles “used the proceeds” from litigation
against the insurer of the Oakland Property to pay the first
$1 million of the latter settlement with Hanmi Bank. Quarles
did not identify the recipients of the remaining insurance
proceeds or dispute Ward’s declaration that Bedford recovered
$17 million from the insurer. According to Quarles, “I did not
divert corporate funds for my own personal use. My payment to
Hanmi Bank . . . was for a debt that was incurred for a business
purpose. . . . While part of the debt was secured by . . . my home, I
had to allow Lender [Hanmi Bank] to collateralize my home in
order for the construction loan to be provided to the Bedford
Group.”
According to Quarles, Bedford ceased doing business in
2013. Quarles explained that he continued using the e-mail
address “because that is the only e-mail address [he] ha[s] ever
used.” Bedford “still maintains a website because [Mr. Quarles]
hope[s] that business may be revived again someday.”
5. Trial court order
In its written decision, the trial court concluded Quarles
had control of the litigation between STI and Bedford resulting in
6
the 2011 judgment. The trial court reasoned: “Quarles owned
the entirety of Bedford’s shares. Quarles’s control of Bedford
during the underlying litigation means he dominated the entity
and had control over the litigation; the element of virtual[ ]
representation is satisfied.”
The court then turned to whether Bedford and Quarles had
a unity of interest, a prerequisite to establishing alter ego
liability. “The principal issue here is whether Quarles diverted
Bedford’s money to pay personal debts, thereby comingling
business and personal assets.” The trial court stated that “the
Hanmi loan was a business obligation in nature, even though it
was placed on Quarles’s personal residence.” Based on the
finding that the Hanmi loan was a business expense, the trial
court concluded, “The evidence before the Court does not show
Quarles commingled business and personal assets. The elements
of alter-ego liability have not been established.” The trial court
then denied STI’s motion to add Quarles as an additional
defendant.
As set forth below, the alter ego doctrine requires
evaluating a number of factors. The trial court did not do so, but
instead, in analyzing whether there was a unity of interest
between Bedford and Quarles, focused only on how to
characterize the payment on the Hanmi Bank loan, which had
been collateralized with Quarles’s personal residence. The trial
court made no findings as to whether applying the alter ego
doctrine was in the interest of justice or as to Quarles’s equitable
laches defense.
DISCUSSION
“The trial court is authorized to amend a judgment to add
judgment debtors. [Citation.] The judgment may be amended to
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add additional judgment debtors on the ground that a person or
entity is the alter ego of the original judgment debtor. [Citation.]
It 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.” (Relentless Air
Racing, LLC v. Airborne Turbine Ltd. Partnership (2013)
222 Cal.App.4th 811, 815 (Relentless); see also Greenspan v.
LADT LLC (2010) 191 Cal.App.4th 486, 508 (Greenspan).)
In general, a corporation is regarded as a separate legal
entity. (Sonora Diamond Corp. v. Superior Court (2000)
83 Cal.App.4th 523, 538 (Sonora Diamond Corp.).) STI carries
the burden to overcome the presumption of the separate existence
of the corporate entity. (Mid-Century Ins. Co. v. Gardner (1992)
9 Cal.App.4th 1205, 1212.) “ ‘ “[C]ourts will not permit
themselves to be blinded or deceived by mere forms or law” ’ ” but
must consider the requirements of justice. (Greenspan, supra,
191 Cal.App.4th at p. 510; see also Troyk v. Farmers Group, Inc.
(2009) 171 Cal.App.4th 1305, 1343 [“ ‘The essence of the alter ego
doctrine is that justice be done.’ [Citation.]”].)
To prevail on a motion to add a judgment debtor as an alter
ego of a corporation, STI must demonstrate that “(1) the parties
to be added as judgment debtors had control of the underlying
litigation and were virtually represented in that proceeding;
(2) there is such a unity of interest and ownership that the
separate personalities of the entity and the owners no longer
exist; and (3) an inequitable result will follow if the acts are
treated as those of the entity alone.” (Relentless, supra,
222 Cal.App.4th at pp. 815–816.) We discuss each element
seriatim and then turn to respondent’s laches argument.
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I. The Record Supports the Trial Court’s Finding that
Quarles Had Control of the Underlying Litigation
and Was Virtually Represented in That Proceeding
The trial court found that Quarles had control of the
underlying litigation. Quarles does not challenge that finding on
appeal.
In any event, the evidence supports only the conclusion
that Quarles was virtually represented in Bedford’s litigation
with STI. The undisputed evidence shows Quarles was Bedford’s
president, chief executive officer, and only shareholder. The
undisputed evidence also shows that Quarles was present at
trial. The record contains no evidence supporting the inference
that Quarles did not control the underlying litigation.
II. The Trial Court Must Determine Whether There is
Such a Unity of Interest and Ownership that Bedford
and Quarles’s Separate Personalities No Longer
Exist
Our jurisprudence has identified several factors a trial
court must consider in deciding whether a corporation and an
individual are alter egos. These factors include: “Commingling
of funds and other assets, failure to segregate funds of the
separate entities, and the unauthorized diversion of corporate
funds or assets to other than corporate uses [citations]; the
treatment by an individual of the assets of the corporation as his
own [citations]; the failure to obtain authority to issue stock or to
subscribe to or issue the same [citations]; the holding out by an
individual that he is personally liable for the debts of the
corporation [citations]; the failure to maintain minutes or
adequate corporate records, and the confusion of the records of
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the separate entities [citations]; the identical equitable ownership
in the two entities; the identification of the equitable owners
thereof with the domination and control of the two entities;
identification of the directors and officers of the two entities in
the responsible supervision and management; sole ownership of
all of the stock in a corporation by one individual or the members
of a family [citations]; the use of the same office or business
location; the employment of the same employees and/or attorney
[citations]; the failure to adequately capitalize a corporation; the
total absence of corporate assets, and undercapitalization
[citations]; the use of a corporation as a mere shell,
instrumentality or conduit for a single venture or the business of
an individual or another corporation [citations]; the concealment
and misrepresentation of the identity of the responsible
ownership, management and financial interest, or concealment of
personal business activities [citations]; the disregard of legal
formalities and the failure to maintain arm’s length relationships
among related entities [citations]; the use of the corporate entity
to procure labor, services or merchandise for another person or
entity [citations]; the diversion of assets from a corporation by or
to a stockholder or other person or entity, to the detriment of
creditors, or the manipulation of assets and liabilities between
entities so as to concentrate the assets in one and the liabilities
in another [citations]; the contracting with another with intent to
avoid performance by use of a corporate entity as a shield against
personal liability, or the use of a corporation as a subterfuge of
illegal transactions [citations]; and the formation and use of a
corporation to transfer to it the existing liability of another
person or entity [citations].” (Associated Vendors, Inc. v. Oakland
10
Meat Co., Inc. (1962) 210 Cal.App.2d 825, 838–840; see also Misik
v. D’Arco (2011) 197 Cal.App.4th 1065, 1073 (Misik).)
No single factor governs; instead, a trial court must “look at
all the circumstances” in applying the alter ego doctrine. (Sonora
Diamond Corp., supra, 83 Cal.App.4th at p. 539.) We review the
trial court’s factual findings underlying an alter ego
determination for substantial evidence. (Baize v. Eastridge
Companies, LLC (2006) 142 Cal.App.4th 293, 303.) We review
questions of law independently. (Crocker National Bank v. City
and County of San Francisco (1989) 49 Cal.3d 881, 888.)
Here, the trial court considered only whether Bedford’s
payment to Hanmi Bank from the Zurich Insurance proceeds
constituted commingling of business and personal funds. As we
explain below, substantial evidence supports the trial court’s
finding that the Hanmi Bank payment was for a Bedford debt
and not a debt personal to Quarles, and thus did not, by itself,
evidence commingling. As we also explain, the trial court
committed legal error in failing to consider the totality of
circumstances when it concluded that there was no unity of
interest between Bedford and Charles Quarles.
a. Substantial evidence supported the conclusion
that the Hanmi loan payment was for a Bedford
debt notwithstanding Quarles’s guarantee of
that loan and posting of the family residence as
collateral for that debt
It is undisputed that Hanmi Bank loaned money to Thomas
Berkley Square Housing, LLC for the construction of the Oakland
Property, one of Bedford’s construction projects. Hanmi Bank
did not loan Charles or JoAnn Quarles money personally.
Bedford paid off its own debt when it paid either $1 million or
11
$2 million to Hanmi Bank.3 Charles Quarles averred that he
signed a commercial guaranty. As a guarantor, he was
answering for Bedford’s debt. (Civ. Code, § 2787 [“A surety or
guarantor is one who promises to answer for the debt, default, or
miscarriage of another, or hypothecates property as security
therefor.”].) Although STI correctly points out that the payment
from the Zurich settlement proceeds to Hanmi Bank
unencumbered equity in the Quarles’s residence, that
encumbrance was a product of Bedford’s debt. Viewed through
the substantial evidence lens, Bedford’s payment to Hanmi Bank
constituted payment for Bedford’s debt, and by itself, does not
establish commingling of Bedford’s and Quarles’s funds just
because the Quarles residence served as part of the collateral for
Hanmi Bank’s loan to Bedford. (San Diegans for Open
Government v. City of San Diego (2016) 245 Cal.App.4th 736, 740
[under substantial evidence test, appellate court must view the
evidence in the light most favorable to the trial court’s order].)
b. The trial court, however, failed to consider all
mandated factors when it determined there
was no unity of interest between Bedford and
Quarles
A trial court must consider many factors in evaluating an
alter ego claim. In his respondent’s brief, Quarles acknowledges
the following relevant factors: “ ‘the disregard of legal formalities
and the failure to maintain arm’s length relationships among
3STI argues that the trial court failed to determine
whether Bedford paid $1 million or $2 million to Hanmi Bank.
The nature of the payment—whether it was for a business or
personal debt—is not dependent on whether the amount of the
payment was $1 million or $2 million.
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related entities,’ ‘the failure to maintain minutes or adequate
corporate records,’ ‘the confusion of the records of the separate
entities,’ the ‘failure to segregate funds of the separate entities,’
‘[c]ommingling of funds and other assets,’ . . . ‘sole ownership of
all of the stock in a corporation by one individual or the members
of a family’ . . . ‘the use of the same office or business location,’ . . .
‘the unauthorized diversion of corporate funds or assets to other
than corporate uses . . . .” Quarles also correctly points out “no
single factor is determinative . . . .” (Highland Springs
Conference & Training Center v. City of Banning (2016)
244 Cal.App.4th 267, 281 [“No single factor governs; courts must
consider all of the circumstances of the case in determining
whether it would be equitable to impose alter ego liability.”].)
Here, the trial court considered only one transaction—the
Hanmi Bank loan—as relevant to commingling. The trial court
failed to evaluate “all the circumstances”4 encompassed in the
4 These circumstances include, but are not limited to, the
following facts: Quarles in his capacity as president of Bedford
transferred the Kenway property to Charles and JoAnn Quarles
representing that Bedford and the Quarles’s were the “same
parties.” (Capitalization omitted.) Hanmi Bank assigned the
deed of trust on the Kenway Property to the Gooden Group, Inc.,
whose managing director was Darren Gooden, a former employee
of Bedford and Quarles’s nephew. Although Bedford has stopped
conducting business in 2013, Bedford maintains offices, a
website, and an e-mail address. Quarles operates his consulting
business in the same offices. Bedford received $17 million in
insurance proceeds in 2014 after Bedford “went out of business.”
In 2019, Quarles continued to represent to the California
Secretary of State that he was Bedford’s “president.”
(Capitalization omitted.) According to Quarles, his current use of
Bedford’s website benefits Quarles’s consulting business. By
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above-described factors. We thus must remand this matter for
the trial court to consider, based on the totality of circumstances,
whether there is such a unity of interest and ownership between
Bedford and Quarles that their separate personalities no longer
exist. (See Misik, supra, 197 Cal.App.4th at p. 1075 [where trial
court applied incorrect law to deny motion to amend based on
alter ego, appellate court reversed and remanded for trial court to
make factual determinations].)
III. The Trial Court Did Not Determine Whether an
Inequitable Result Would Follow if Bedford and
Quarles Were Treated as Separate Entities
On appeal, the parties dispute whether an inequitable
result would follow if Bedford and Quarles were treated as
separate entities. Based on its conclusion that there was no
unity of interest between Bedford and Quarles, the trial court
did not consider this additional element of alter ego liability.
We decline the parties’ invitation to make any such finding in the
first instance on appeal. (Stark v. Coker (1942) 20 Cal.2d 839,
846 [alter ego is an equitable doctrine and is particularly within
the province of the trial court]; see People v. Orabuena (2004)
116 Cal.App.4th 84, 100 [appellate court cannot substitute its
discretion for the discretion of the trial court].) Upon remand, if
the trial court determines that there is such a unity of interest
and ownership that the separate personalities of Bedford and
Quarles no longer exist, it must then consider the final element of
setting forth these facts, we express no opinion on how the trial
court should rule on the unity of interest element of the alter ego
analysis.
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alter ego liability—whether an inequitable result would follow if
Quarles were not added to the judgment as Bedford’s alter ego.
IV. Laches
The parties dispute whether the laches doctrine applies to
this case. “ ‘ “Laches is an equitable defense based on the
principle that those who neglect their rights may be barred from
obtaining relief in equity. [Citation.]” ’ ” (Golden Gate Water Ski
Club v. County of Contra Costa (2008) 165 Cal.App.4th 249, 263.)
“The existence of laches is a question of fact to be determined by
a weighing of all of the applicable circumstances by the trial
judge.” (Rouse v. Underwood (1966) 242 Cal.App.2d 316, 323.)
The trial court did not consider Quarles’s laches defense
apparently because it concluded there was no unity of interest
between Bedford and Quarles with which to pierce Bedford’s
corporate veil. If, upon remand, the trial court concludes that
Quarles and Bedford are alter egos, then the court must evaluate
Quarles’s laches defense.5
5 Quarles argues inter alia that the near 10-year passage
of time since STI obtained its judgment against Bedford has
prejudiced Quarles in defending against STI’s alter ego claim
because Bedford’s books and records have been destroyed and its
accountant is deceased. STI disputes these claims and argues
that laches does not apply.
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DISPOSITION
The order denying S.T.I. Demolition, Inc. (STI)’s motion to
add a judgment debtor is reversed. The case is remanded to the
trial court for additional proceedings consistent with this opinion.
STI is awarded its costs on appeal.
NOT TO BE PUBLISHED.
BENDIX, Acting P. J.
We concur:
CHANEY, J.
CRANDALL, J.*
* Judge of the San Luis Obispo County Superior Court,
assigned by the Chief Justice pursuant to article VI, section 6 of
the California Constitution.
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