Key Points

  • The Second Appellate District, Division One, held that the Fair Employment and Housing Act does not alter the common-law presumption that a corporation exists separately from an alleged alter ego.
  • A FEHA plaintiff who seeks to hold a corporate employer's owner personally liable bears the burden to rebut the presumption of corporate separateness.
  • FEHA's statement of purpose and its liberal-construction clause do not clearly disclose a legislative intent to displace the presumption, and FEHA contains no provision on alter ego liability.
  • FEHA's asymmetrical attorney fee and cost standard, drawn from Christiansburg, does not support a contrary presumption favoring alter ego liability.
  • The court affirmed judgment for owner Kurt Schneiter and ordered the parties to bear their own costs on appeal.

A California appeals court held Monday that the state's job-discrimination law leaves in place the common-law presumption that a corporation exists separately from its owner. The ruling means a worker who wins a harassment verdict against a company must still prove why the company's owner should pay it personally.

The Second Appellate District, Division One, affirmed a judgment for Kurt Schneiter, who owns the two corporations that employed Ana Villasenor as a restaurant hostess from December 2015 to April 2016. Justice M. Kim wrote the published opinion, and Presiding Justice Rothschild and Justice Weingart concurred.

The panel said it had found no authority on the question. "The parties cite no authority—and our research has uncovered none—addressing whether FEHA alters the presumption of corporate separateness," Kim wrote, referring to the Fair Employment and Housing Act. Under the decision, an employee who cannot collect from a corporate employer still bears the burden under the alter ego doctrine, which lets a court disregard a corporation's separate identity and hold its owner liable for its obligations.

Schneiter is the sole member of MMart 1, LLC, a nonparty, and through that company owns SR Restaurant Holdings Group, Inc., which in turn owns SR Long Beach FD, Inc. Villasenor sued both corporations and Schneiter. She alleged that her supervisor, Steven Butler, sexually harassed her and retaliated against her for rejecting his advances, resulting in her constructive discharge.

The case was tried in two phases. A jury found the two corporations liable for sexual harassment and other FEHA violations and awarded Villasenor $345,061.17 in compensatory damages and $100,000 in punitive damages. The Los Angeles County Superior Court then heard the alter ego claim without a jury and found that Villasenor had proved neither a unity of interest and ownership between Schneiter and the companies nor an inequitable result if the companies were treated as separate.

"Simply put, Schneiter is a business owner who appears on balance to have availed himself appropriately of the protections of the Corporations Code," the trial court wrote in its statement of decision. The trial court also said it was "unpersuaded by the evidence presented that plaintiff's judgment against the entity defendants will necessarily go unsatisfied." Schneiter had estimated at trial that the companies held about $720,000 in liquid assets. A later amended judgment awarded Villasenor $949,672.50 in attorney fees and $103,241.65 in costs against the two corporations.

On appeal, Villasenor did not dispute the trial court's reading of the evidence. She argued instead that the court erred by applying the presumption at all, and that FEHA must be read to create a contrary presumption favoring alter ego liability. She had not made that argument in the trial court. The panel reached it anyway because it presented a pure question of law.

Kim began with the California Supreme Court's rule, applied in McMillin Albany LLC v. Superior Court, that courts presume that the Legislature did not intend a statute to displace the common law unless the statute's language or evident purpose shows that intent. "FEHA does not expressly address alter ego liability," Kim wrote.

Villasenor relied on section 12920 of the Government Code, which declares FEHA's purpose to provide effective remedies against discrimination, and section 12993, subdivision (a), which directs courts to construe the act liberally. The panel held that neither provision clearly discloses an intent to alter the presumption.

The court held that the presumption is compatible with FEHA's remedial purpose. "Where a FEHA plaintiff fully collects a judgment from a corporate defendant, the plaintiff need not collect any portion of the judgment from an alleged alter ego," Kim wrote. When a company cannot pay, the opinion said, a plaintiff who rebuts the presumption can still collect from the owner. "Villasenor does not persuasively explain why altering the presumption in all FEHA cases as she proposes would be necessary to ensure that FEHA provides effective remedies," the court added.

Villasenor also pointed to FEHA's asymmetrical rule on attorney fees and costs. Under that rule, which California courts drew from the U.S. Supreme Court's 1978 decision in Christiansburg Garment Co. v. Equal Employment Opportunity Commission, a winning plaintiff ordinarily recovers fees, while a winning defendant recovers fees and costs only if the suit was frivolous, unreasonable or groundless. Villasenor argued that the cases applying the rule called on the court to "harmonize FEHA law and alter ego law."

The panel rejected that reading. The fee cases "interpreted former section 12965(b)—FEHA's express provision regarding attorney fees and costs—and its interplay with other statutes or rules," Kim wrote. The court said courts adopted the fee rule because the risk of paying defendants' fees and costs would chill FEHA litigation.

The presumption of corporate separateness poses a different risk, the court held, because it "becomes relevant only when a plaintiff prevails and seeks to enforce the judgment against a corporate defendant's alleged alter ego." Kim wrote that "the Legislature reasonably could believe that few prospective plaintiffs and attorneys would refrain from litigating FEHA claims solely because they might be unable to collect a judgment from a corporate defendant and unable to rebut the presumption."

The court also distinguished California Supreme Court decisions Villasenor cited, including Flannery v. Prentice, which held that FEHA fee awards belong to the attorneys rather than the client. Flannery "did not consider alter ego liability," the panel wrote, and it said the same of Ramirez v. Charter Communications, Inc., a ruling on an arbitration agreement's fee clause.

The panel affirmed the judgment for Schneiter and ordered the parties to bear their own costs on appeal, citing the Supreme Court's 2021 decision in Pollock v. Tri-Modal Distribution Services, Inc. The decision leaves Villasenor's verdict and fee award enforceable against the two corporations alone.

Lawyers for Villasenor included Matthew J. Matern of Matern Law Group. Schneiter was represented by Ryan N. Burns of Much Shelist.