Alleged Alter Ego Can Compel Arbitration Clause

By Catherine Schlomann Robertson
Pahl & McCay
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Please understand that the information discussed in this Article is general in nature and is not intended to be legal advice. It is intended to assist owners and managers in understanding this issue area, but it may not apply to the specific fact circumstances or business situations of all owners and managers. You may need to consult applicable state and local laws. For specific legal advice, consult your attorney.

Does an alleged Alter Ego Defendant have the right to Enforce an Arbitration Clause, thereby potentially drastically reducing the potential litigation costs of a proceeding?  A recent California case has ruled that it does, that the right of an alleged alter ego to compel arbitration is co-extensive with the rights of the entity with which it is alleged to have a unity of interest.

Generally, only signatories to arbitration agreements can enforce them by compelling arbitration of the claims subject to the agreement.  Until recently, no reported California case discussed the rule when a non-signatory individual, sued as an alter ego, of a signatory corporation, moves to compel arbitration.  In Rowe v. Exline, 153 Cal. App. 4th 1276 (2007), the Court allowed a non-signatory (an alleged alter ego) to enforce an arbitration provision given the stated public policy in favor of arbitration in federal and state courts. 

Rowe entered into a settlement agreement with Initiatek, a corporation in which Exline and Trahan were shareholders and officers. The agreement was signed by Rowe as an individual and by Exline and Trahan as officers of Initiatek.Exline and Trahan later dissolved Initiatek and distributed its assets to the shareholders. As a result, refused its to comply with the settlement agreement.

Rowe subsequently sued Initiatek, Exline, and Trahan, alleging breach of contract by Initiatek and alleging that Exline and Trahan were liable on the theory that Initiatek was merely their alter ego.

All the defendants moved to compel arbitration. The trial court denied the motion, holding that only the claims against Initiatek were subject to the arbitration agreement because the arbitration agreement applied only to claims against Initiatek, not to claims against Exline and Trahan as individuals.

The Appellate Court reversed the trial court and held that all of the claims were subject to the arbitration agreement, and that a non-signatory may enforce a corporation's arbitration agreement where the corporation is alleged to be the non-signatory's alter ego. In accordance with this holding, the Court ruled that the arbitration agreement applied to the breach of contract claim against Exline and Trahan.  The court stated: “Rowe does not refute the law permitting a non-signatory to compel arbitration if sued as a signatory's agent. Nor does he provide any persuasive reason why a non-signatory should be precluded from compelling arbitration if sued as a signatory's alter ego. Indeed, while an agent is one who acts on behalf of a corporation, an alter ego is one who, effectively, is the corporation. By suing Exline and Trahan for breach of the Agreement on the ground that they are Initiatek's alter egos, and even alleging in the complaint that Exline and Trahan entered into the Agreement, Exline and Trahan are “entitled to the benefit of the arbitration provisions.”  Rowe v. Exline, 153 Cal. App. 4th 1276, 1285 (Cal. App. 1st Dist. 2007).  Furthermore, claims framed in tort are subject to contractual arbitration provisions when they arise out of the contractual relationship between the parties. Dryer v. L.A. Rams, 40 Cal. 3d 406, 418 (Cal. 1985)

This decision furthers the ability of the alleged alter ego to defend itself in arbitration if the claims are within the scope of the arbitration clause.  The limits on discovery and on exemplary damages in arbitration, as compared with state court, can make that option worth considering for individuals facing alter ego claims.

After receiving her a B.S. in Finance and her J.D. from the University of San Francisco in 1988, Catherine Robertson has provided collection, bankruptcy and pre-judgment remedy solutions for the clients of Pahl & McCay. She is a partner at Pahl & McCay, and has been rated A-V (highest professional and ethical rating) by Martindale-Hubbell. Should you require expertise or assistance in collecting an outstanding obligation, please consider Pahl & McCay.