Unpublished Disposition, 925 F.2d 1470 (9th Cir. 1988)
Annotate this CaseSENTRY LIFE INSURANCE COMPANY, Plaintiff-Appellee,v.Alan ROBERTS, M.D.; Alan Roberts, M.D., Inc., Defendants-Appellants.
No. 88-6366.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted Aug. 7, 1990.Decided Feb. 21, 1991.
Before REINHARDT and LEAVY, Circuit Judges, and KING* , District Judge.
MEMORANDUM**
Alan Roberts, M.D., and Alan Roberts, M.D., Inc., appeal from the district court's order granting partial summary judgment in favor of the plaintiff, Sentry Life Insurance Company ("Sentry"). The court determined that Roberts, Inc. was the alter ego of Dr. Roberts for the "limited purpose of considering the earnings of Roberts, Inc. to be the earnings of Dr. Roberts" in computing disability benefits due under a policy issued to Dr. Roberts by Sentry. We reverse and remand.
FACTS AND PROCEEDINGS
Sentry is a Wisconsin corporation authorized to do business in California. Dr. Alan Roberts is an orthopedic surgeon and a citizen of California. Dr. Roberts is president, sole shareholder and director, and an employee of Alan Roberts, M.D., Inc., a California professional corporation.
Effective June 9, 1978, Dr. Roberts became insured under two disability income insurance plans ("the plans") which Sentry offered to eligible members of the American Medical Association. The plans offered a $3,000 total monthly indemnity, following a six month elimination period, in the event of total disability. If the insured later returned to work, the plans provided that he or she would continue to receive the monthly indemnity "less 50% of compensation earned in the performance" of his or her duties.
On October 30, 1979, Roberts submitted a claim form which alleged that he had become totally disabled and unable to work on June 14, 1979, due to peptic ulcer disease. Sentry approved the payment of benefits on January 31, 1980. Sentry paid Roberts a total of $23,100 under the plans for the period between December 14, 1979, and August 3, 1980.
On August 4, 1980, Roberts returned to work part-time as a consultant. While Roberts was not paid a salary by Roberts, Inc. in August and September 1980, in October he received a lump sum payment of $19,205.93 as compensation for work performed in all three months. Rather than averaging the October earnings over the three-month period, Sentry notified Roberts on March 5, 1981, that he would be paid the $3,000 monthly indemnity for both August and September because he did not "actually ... receive any money" in those months. However, Roberts would not receive an indemnity for October because fifty percent of the reported income for that month ($8,103) exceeded the amount of the monthly indemnity.
On January 8, 1981, Roberts called a special meeting of the Board of Directors of Roberts, Inc. Acting as Chairman and sole director, Roberts announced that "it was important that there be sufficient money in the corporate accounts to pay the corporate bills and meet the obligations of the consulting agreement with Dr. Fannie Roberts1 if Dr. Alan Roberts should have to stop work" because of his poor health. This statement led to the "unanimous" adoption of the following resolution:
RESOLVED: That until such time as Dr. Alan Roberts has regained his full health and is capable of working on a full-time basis, he will not be paid his salary on a monthly basis but instead his salary will accumulate and be paid on October 31 of each year, the end of the corporate accounting year.
Pursuant to this resolution, Roberts' monthly salary was placed in investment accounts in the name of Roberts, Inc.
Thereafter, in every month except October, Roberts reported to Sentry that he had received no salary from Roberts, Inc. and was therefore entitled to the $3,000 monthly indemnity. In October of 1981, 1982, 1983, and 1984, Roberts informed Sentry that the salary he received from Roberts, Inc. was greater than the monthly indemnity and therefore he did not qualify for any benefits that month. He refused, however, to reveal the amount of his accumulated salary or the corporation's earnings, claiming that the plans did not require such disclosure.2 Roberts continued to receive the monthly indemnity of $3,000 from Sentry for each month except October throughout this four-year period.
On April 6, 1984, Sentry filed this action against both Dr. Roberts and Roberts, Inc. after it discovered a declaration filed by Dr. Roberts in his divorce action in which he stated that he was earning $33,333 per month. Sentry sought declaratory relief and damages for breach of contract, breach of covenant of good faith and fair dealing, fraud and concealment, money paid by mistake, and money paid and received. Roberts counterclaimed for breach of implied covenant of good faith and fair dealing, abuse of process, and fraud.
In May 1985, Sentry filed a motion for partial summary judgment. Sentry sought summary judgment on Roberts' counterclaims and also asked the court to summarily adjudicate that Roberts, Inc. was the alter ego of Dr. Roberts for the limited purpose of considering the monthly earnings of Roberts, Inc. to be the earnings of Dr. Roberts under the plans. While granting Sentry's motions as against Roberts' counterclaims, the court denied Sentry's motion as to alter ego, stating that "Sentry has not shown as a matter of undisputed fact that the separate corporate identity of Alan Roberts, M.D., Inc., can be disregarded for the 'limited purpose' of ascertaining the earnings of Roberts."
In December 1986, Sentry again moved for partial summary judgment on the alter ego issue, citing the Supreme Court's recent comments on summary judgment in Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986), and a recent California Supreme Court decision on alter ego. See Mesler v. Bragg Management Co., 39 Cal. 3d 290, 216 Cal. Rptr. 443, 702 P.2d 601 (1985).
In July 1987, the district judge granted Sentry's motion. Considering the monthly earnings of Roberts, Inc. to be the earnings of Dr. Roberts under the plans, the court held that Dr. Roberts was not entitled to monthly benefits after December 31, 1980, and would therefore have to refund all disability benefits paid by Sentry after that date ($210,000), plus interest.
Sentry's claims of fraud and tortious bad faith were tried to the court in April 1988. Sentry claimed that Dr. Roberts' refusal to disclose either the corporation's income or his own earnings constituted fraud and bad faith. Sentry also sought to extend tort liability to Roberts, Inc. under an alter ego theory. Following the conclusion of Sentry's case, however, the court granted Roberts' motion for involuntary dismissal under Federal Rule of Civil Procedure 41(b). The court found that neither defendant had failed to perform any reporting obligations under the plans and had not committed any act of fraud or bad faith.
Judgment was entered on July 20, 1988. Roberts and Roberts, Inc. timely appeal from the grant of partial summary judgment in favor of Sentry on its declaratory relief and contract claims. Sentry does not appeal from those portions of the judgment dismissing its tort claims.
DISCUSSION
The only issue on appeal is whether the court properly granted partial summary judgment in favor of Sentry on the alter ego issue. We note that there is no question raised as to the meaning of the clause "compensation earned" in the disability policy.3 Sentry interprets the clause to mean compensation that is actually paid, rather than compensation which has been earned but remains unpaid.4
The question of whether an individual is the alter ego of his corporation is a matter of state law. See Wolfe v. United States, 798 F.2d 1241, 1244 & n. 3 (9th Cir. 1986) (as amended 806 F.2d 1410), cert. denied, 482 U.S. 927 (1987). The doctrine of alter ego applies under California law where: (1) there is such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) an inequitable result will follow if the acts giving rise to liability are treated as those of the corporation alone. See Mesler v. Bragg Management Co., 39 Cal. 3d 290, 299, 216 Cal. Rptr. 443, 448, 702 P.2d 601, 606 (1985); Orloff v. Allman, 819 F.2d 904, 908 (9th Cir. 1987).
The question is raised whether bad faith is also an element of the alter ego doctrine under California law. We have held that where there has been an abuse of the corporate form, such as under-capitalization or misrepresentation of the corporate structure to creditors, an "inequitable result" is established and " [n]o specific finding of bad faith is required." Orloff, 819 F.2d at 909 (citing RRX Indus., Inc. v. Lab-Con, Inc., 772 F.2d 543, 546 (9th Cir. 1985)). However, where no such abuse is alleged, it must be shown that the individual "hid behind his corporation in bad faith."5 Id.; see United States v. Standard Beauty Supply Stores, Inc., 561 F.2d 774, 777 (9th Cir. 1977) (California alter ego doctrine applies "where some conduct amounting to bad faith makes it inequitable" for the defendant to hide behind the corporate veil) (quotation omitted). See also Westinghouse Elec. Corp. v. Superior Court of Alameda County, 17 Cal. 3d 259, 274, 131 Cal. Rptr. 231, 242, 551 P.2d 847, 858 (1976) ("Bad faith in one form or another must be shown before the court may disregard the fiction of separate corporate existence.") (quotation omitted).
Sentry does not allege undercapitalization or misrepresentation of the corporate form by Roberts. Rather, it claims that Roberts caused the corporation to pass the annual salary resolution in order to hide his income behind the corporation so as to qualify for individual disability benefits. It follows that in order to prevail on an alter ego theory, Sentry must prove that Roberts passed the resolution in bad faith.6
We find that a genuine issue of fact exists as to whether Roberts passed the annual salary resolution in order to qualify for disability benefits and, even if he did, whether it constituted bad faith. In his declaration submitted in opposition to summary judgment, Roberts insists that he passed the annual salary resolution, not to defraud Sentry, but to ensure that the corporation could pay its bills in the event his disability prevented him from working. He maintains that the fact the reserves were not needed in retrospect does not show bad faith or a fraudulent purpose on his part.7 Roberts also claims that at the time he passed the resolution, he "believed that when [he] got paid [his] salary was not significant insofar as [his] disability benefits were concerned." He notes that he passed the annual salary resolution two months before he received Sentry's letter which stated that it would only count money "actually received" in a month as "compensation earned."8 From this evidence, it appears that Roberts' good faith is subject to a genuine dispute and thus should not have been decided on summary judgment.
REVERSED AND REMANDED.
Honorable Samuel P. King, Senior United States District Judge for the District of Hawaii, sitting by designation
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3
The agreement provided that Dr. Fannie Roberts, Dr. Roberts' mother, was to receive $2,100 per month for her consulting services
In fact, Roberts was paid $398,000 in October 1981, and $400,000 in October 1982, 1983, and 1984, respectively, by Roberts, Inc
The plans provided that in the event the insured returned to work, Sentry would "pay the amount of the Monthly Indemnity stated in the Schedule applicable to the Insured reduced by 50% of the compensation earned in the performance of such duties."
Roberts argues that the court improperly "reformed" the policy when it held that the "compensation earned" by the insured, Dr. Roberts, included the net monthly income of an uninsured third party, Roberts, Inc. Reformation, however, is an equitable remedy used to correct or amend a written contract where, through mistake coupled with actual or equitable fraud, the writing does not conform to the party's actual agreement. See Appalachian Ins. Co. v. McDonnell Douglas Corp., 214 Cal. App. 3d 1, 19, 262 Cal. Rptr. 716, 725 (1989). It is undisputed that the parties understood that only the insured's monthly income would be counted for the purposes of computing benefits. The question is whether the alter ego doctrine may be used to treat the income of the corporation as that of Dr. Roberts
Conversely, a finding of fraud is not a prerequisite to the imposition of alter ego liability. Wenban Estate, Inc. v. Hewlett, 193 Cal. 675, 227 P. 723, 732 (1924) (fact that there was "no showing or claim of fraud" did not defeat alter ego liability); Engineering Serv. Corp. v. Longridge Inv. Co., 153 Cal. App. 2d 404, 314 P.2d 563, 570 (1957) (alter ego liability does not require proof of fraudulent intent)
Contrary to Sentry's contention, Roberts, Inc. did not necessarily violate California Labor Code Sec. 204, which requires that professional employees be paid on a monthly basis, in passing the annual salary resolution. Absent fraud, deceit, or oppression, an employer and employee may lawfully agree not to maintain regular monthly paydays. See In re Moffett, 12 Cal. App. 2d 320, 55 P.2d 584, 588, vacated on jurisdictional grounds, 13 Cal. App. 2d 741, 57 P.2d 538 (1936). This conclusion is supported by section 204 itself, which provides that "a collective bargaining agreement that provides different pay arrangements" than those set forth in section 204 applies to all covered employees
Sentry claims that the stated purpose for accumulating Dr. Roberts' salary, to ensure that the corporation had sufficient funds to pay its bills, was a sham as the investment account was never used to pay corporate bills
Roberts also states that at the time he passed the resolution, he erroneously thought that he would be entitled to benefits under the plans if, after returning to work, he made less than 50% of the money he earned before his disability. Thus, the timing of his salary payment would have been irrelevant under his interpretation of the plans
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
