Judge Teresa A. Beaudet, Case Number: 18STCV03053, Date: 2023-10-05 Tentative Ruling

Plaintiff People of the State of California (“Plaintiff”) filed this action on October 31, 2018 against Defendant Kandypens Inc. (“Kandypens”). The Complaint alleges causes of action for (1) violation of Unfair Competition Law, (2) violation of the Stop Tobacco Access to Kids Enforcement Act, and (3) violation of the Safe Drinking Water and Toxic Enforcement Act.

On July 16, 2021, the Court issued a Final Judgment in this matter (herein, the “Judgment”). The Judgment provides, inter alia, that Plaintiff has “established that Defendant Kandypens…has violated (1) the Stop Tobacco Access to Kids Enforcement Act…(2) the Safe Drinking Water and Toxic Enforcement Act…and (3) California’s Unfair Competition Law…” (July 16, 2021 Judgment at p. 1:2-6.) The July 16, 2021 Judgment provides for injunctive relief and other affirmative undertakings. (See July 16, 2021 Judgment at pp. 1:7-9:2.) The July 16, 2021 Judgment also provides for civil penalties, providing, inter alia, that “[t]he Court hereby assesses against Kandypens a statutory penalty of $1,200,000.00. This penalty is assessed under each of the STAKE Act, the UCL, and Prop 65 as follows…” (July 16, 2021 Judgment, ¶ 17.)

Plaintiff now moves for an order amending the Judgment entered on July 16, 2021 to add Graham Gibson as a judgment debtor. Graham Gibson (“Gibson”) filed a “response” to the motion.

On October 5, 2023, the Court issued an Order continuing the hearing on the instant motion to November 6, 2023. The Court’s October 5, 2023 Order noted that “Plaintiff relies on evidence submitted for the first time in connection with the reply in responding to Gibson’s assertion that the Court does not have personal jurisdiction over him. Because Gibson has not had the opportunity to respond to Plaintiff’s Reply Declaration of Joshua L. Crowell, the Court will permit Gibson to file and serve a surreply.” (October 5, 2023 Order at p. 5.) The October 5, 2023 Order provides that “[t]he Court will permit Gibson to file and serve a surreply on or before Nov. 1, 2023, solely to address the evidence submitted by Plaintiff in connection with the reply.” (Ibid.) On November 1, 2023, Gibson filed a surreply to support his response to Plaintiff’s motion.

As set forth above, the July 16, 2021 Judgment in this matter provides for civil penalties, stating, inter alia, that “[t]he Court hereby assesses against Kandypens a statutory penalty of $1,200,000.00. This penalty is assessed under each of the STAKE Act, the UCL, and Prop 65 as follows…” (July 16, 2021 Judgment, ¶ 17.) The Judgment provides that “Kandypens will pay the total penalty in thirty-five (35) equal monthly installments of $33,333.33 each, and a thirty-sixth and final payment of 33,333.45 payable to the City of Los Angeles. Kandypens first payment will be due and payable on August 1, 2021. Each subsequent payment will be due on the first of each month through June 1, 2024.” (July 16, 2021 Judgment, ¶ 19.)

Plaintiff indicates that “[o]n February 1, 2022—just six months into its payment obligation—Kandypens missed its required installment payment.” (Crowell Decl., ¶ 5, Ex. 3 (Mahmood Decl.) ¶ 4.) The July 16, 2021 Judgment provides that “[i]n the event of Kandypens’ default of payment beyond the grace period, without additional notice, the People may accelerate all of the remaining installments and declare the balance due immediately, and proceed to enforce all rights and remedies under law or equity...” (July 16, 2021 Judgment, ¶ 21.) Plaintiff states that “[o]n February 17, 2022, the People served Kandypens, by and through its counsel, Jeffrey Matura, with a Notice of Default.” (Crowell Decl., ¶ 5, Ex. 3 (Mahmood Decl.) ¶ 5.) Plaintiff states that “Kandypens began making smaller, deficient $10,000 monthly payments in March 2022. But as of August 2022, Kandypens has stopped making those payments as well.” (Crowell Decl., ¶ 5, Ex. 3 (Mahmood Decl.) ¶ 7.) Plaintiff asserts that “[t]he Court should amend the judgment to add Gibson as a judgment debtor under the alter ego doctrine and Section 187 of the Code of Civil Procedure.” (Mot. at p. 4:10-11.)

As an initial matter, Gibson asserts in his response that the Court does not have personal jurisdiction over Gibson, such that the instant motion should be denied.[1] Gibson asserts that “[i]n this case…neither general nor specific jurisdiction exists.” (Response at p. 2:19-20.) The Court notes that Gibson does not appear to cite to legal authority in the response concerning general or specific jurisdiction. In the reply, Plaintiff cites to Pavlovich v. Superior Court (2002) 29 Cal.4th 262, 268, where the California Supreme Court noted that “California courts may exercise personal jurisdiction on any basis consistent with the Constitutions of California and the United States. The exercise of jurisdiction over a nonresident defendant comports with these Constitutions if the defendant has such minimum contacts with the state that the assertion of jurisdiction does not violate traditional notions of fair play and substantial justice.” (Internal quotations and citation omitted.)

“[C]ourts have identified two ways to establish personal jurisdiction. Personal jurisdiction may be either general or specific.” (Pavlovich v. Superior Court, supra, 29 Cal.4th at pp. 268-269 [internal quotations omitted].) The Court notes that “[a] defendant that has substantial, continuous, and systematic contacts with the forum state is subject to general jurisdiction in the state, meaning jurisdiction on any cause of action.” (HealthMarkets, Inc. v. Superior Court (2009) 171 Cal.App.4th 1160, 1167.) In the reply, Plaintiff does not appear to dispute Gibson’s assertion that the Court does not have general jurisdiction over Gibson. However, Plaintiff asserts that Gibson’s activities directed toward California support specific jurisdiction. “[W]hen determining whether specific jurisdiction exists, courts consider the relationship among the defendant, the forum, and the litigation. A court may exercise specific jurisdiction over a nonresident defendant only if: (1) the defendant has purposefully availed himself or herself of forum benefits; (2) the controversy is related to or arises out of [the] defendant’s contacts with the forum; and (3) the assertion of personal jurisdiction would comport with fair play and substantial justice.” (Pavlovich v. Superior Court, supra, 29 Cal.4th at p. 269 [internal quotations and citations omitted].)

In the response, Gibson asserts that he “has…not purposefully availed himself to California, and no facts are present that demonstrate sufficient ‘minimum contacts’ over Gibson with respect to California.” (Response at p. 2:25-3:1.) In his declaration in support of the response, Gibson states that in 2006, he moved from California to Arizona. (Gibson Decl., ¶ 2.) Gibson states that he “lived in Arizona continuously since 2006,” and that he does “not intend to again reside in California.” (Gibson Decl., ¶ 3.) Gibson states that he “[does] not own any real property in California and [does] not own any business interests in California.” (Gibson Decl., ¶ 4.) Gibson further states that “[u]ntil December 2022, [he] was the CEO of Kandypens.” (Gibson Decl., ¶ 7.) Gibson asserts that “Kandypens is a Delaware corporation. Its principal place of business is Arizona.” (Gibson Decl., ¶ 8.) Gibson states that in his capacity as CEO of Kandypens, he worked in Arizona. (Gibson Decl., ¶ 9.) Gibson further states that “[i]n [his] capacity as CEO of Kandypens, [he] occasionally visited California for legitimate business purposes that were solely for and on behalf of Kandypens.” (Gibson Decl., ¶ 10.)

As set forth above, Plaintiff asserts that Gibson’s activities directed towards California support specific jurisdiction. As to the first prong of the specific jurisdiction analysis, Plaintiff asserts that “[b]y founding and leading Kandypens, a corporate entity whose principal place of business is in California, Gibson purposely availed himself of the benefits in this state.” (Reply at p. 3:21-22.) “[P]urposeful availment occurs where a nonresident defendant purposefully direct[s] [its] activities at residents of the forum, purposefully derive[s] benefit from its activities in the forum, create[s] a substantial connection with the forum, deliberately has engaged in significant activities within the forum, or has created continuing obligations between [itself] and residents of the forum.” (Anglo Irish Bank Corp., PLC v. Superior Court (2008) 165 Cal.App.4th 969, 978-979 [internal quotations and citations omitted].) In Anglo Irish Bank, the Court of Appeal noted that “[i]n our view, reliance on state substantive law of agency and alter ego to determine the constitutional limits of specific personal jurisdiction is unnecessary and is an imprecise substitute for the appropriate jurisdictional question. The proper jurisdictional question is not whether the defendant can be liable for the acts of another person or entity under state substantive law, but whether the defendant has purposefully directed its activities at the forum state by causing a separate person or entity to engage in forum contacts.” (Id. at p. 983.)

Plaintiff asserts that “[a]lthough Gibson claims that the company is principally based in Arizona, its legal pleadings in another lawsuit and corporate filings say otherwise.” (Reply at p. 3:22-24.) Plaintiff’s counsel submits a declaration in support of the reply attaching a copy of the complaint filed in the action titled Kandypens, Inc. v. Puff Corp., Case No. 2:20-cv-00358, in the U.S. District Court for the Central District of California.” (Crowell Reply Decl., ¶ 2, Ex. 1.) The complaint in this matter alleges that “Kandypens is a Delaware corporation with its principal place of business in Santa Barbara, California.” (Crowell Reply Decl., ¶ 2, Ex. 1, ¶ 2.) Plaintiff also provides copies of Kandypens’ “Statement and Designation by Foreign Corporation” filed with the California Secretary of State in August 2014, which list “Corporate Addresses” in California. (Crowell Reply Decl., ¶ 3, Ex. 2.) In addition, Kandypens’ “Statement of Information” filed with the California Secretary of State in August 2023 lists a “Principal Address” and “Mailing Address” in California. (Crowell Reply Decl., ¶ 4, Ex. 3.) In his declaration filed in support of the surreply, Gibson asserts that “[i]n its Complaint filed January 13, 2020, against Puff Corp. in the United States District Court for the Central District of California, Kandypens erroneously identified its principal place of business as Santa Barbara, California,” and that “[i]n several filings submitted to the California Secretary of State, Kandypens erroneously identified its principal place of business as also in Santa Barbara, California.” (Gibson Surreply Decl., ¶¶ 3-4.)[2]

Plaintiff also asserts that “[e]ven if Kandypens were not principally located in California, Gibson purposefully directed activities at the state in his role as the company’s majority shareholder, president, and Chief Executive Officer.” (Reply at p. 4:3-5.) Plaintiff’s counsel’s reply declaration attaches a copy of excerpts of the December 11, 2020 deposition of Kandypens, which designated Gibson as its witness. (Crowell Reply Decl., ¶ 5, Ex. 4 (Gibson Depo.)) In the deposition, Gibson was asked “Q…Do you understand that to the extent that you are testifying on topics for which you have been designated as a person most qualified, you are testifying on behalf of Kandypens?” (Id. at p. 12:8-11.) Gibson responded, “Yeah. It’s my company.” (Id. at p. 12:12.) Gibson was also asked, “Could you tell me what your current role is at KandyPens?” to which Gibson responded “President, founder, and CEO.” (Id. at p. 14:4-6.)

Plaintiff notes that Gibson testified that “[s]o I am more of a large, you know, customer -- customer service, shipping and fulfillment, and product creation and marketing.” (Crowell Reply Decl., ¶ 5, Ex. 4 (Gibson Depo.) at p. 53:3-5.) Gibson testified that “I run all the marketing.” (Id. at p. 41:1.) Plaintiff also cites to the following testimony from Gibson’s deposition: “Q…Can you tell me, generally, what KandyPens House LA is? A[.] Yes. It’s a concept that I created that’s called experiential marketing. It’s where someone can come and learn about our products, try our products, and get to know the company that makes them. Get to know the brand…Q[.] Okay. And when did you create KandyPens House LA? A[.] October of 2019.” (Id. at p. 131:3-18.) Gibson also testified “A[.] I would say, since we’ve had the house, we’ve had less than a dozen events.” (Id. at p. 133:11-12.) In addition, Plaintiff cites to the following testimony from Gibson’s deposition: “Q[.] And this is a post on the KandyPens Instagram account about something called Combschella; correct? A[.] Yes…Q[.] And what did your sponsorship entail? A[.] We had a booth and -- where we showed our products.” (Id. at p. 95:25-96:23.) Plaintiff argues that “Gibson “intentionally directed activities at California by causing Kandypens’ agents to engage in economic activity with the state’s residents,” and that Gibson “also intentionally derived benefits from these California activities—generating customers and revenue for Kandypens.” (Reply at pp. 4:22-23; 5:3-4.)

In the surreply, Gibson argues that “Plaintiff…does not allege that Gibson’s conduct took place in California or that Gibson intentionally directed any conduct to California. In fact, Plaintiff’s allegations are tellingly devoid of any intent from Gibson to California. The only allegations involving California pertain to Kandypens and the judgment entered against Kandypens, not to Gibson as an individual.” (Surreply at p. 5:10-14.) But as set forth above, Plaintiff provides evidence that Gibson cause the “Kandypens House” to be established in Los Angeles, that the company hosted several “experiential marketing” events there, and that Gibson was involved in the company’s sponsorship of the “Combschella” event. (Reply at p. 4:12-16.)

In addition, in the reply, Plaintiff asserts that “[j]urisdiction exists even if Gibson directed these activities from Arizona or in his official capacity as Chief Executive Officer.” (Reply at p. 5:5-6.) Plaintiff cites to Seagate Tech. v. A. J. Kogyo Co. (1990) 219 Cal.App.3d 696, 699, where “Nakata, a Japanese citizen who resides in Japan, was, at all times relevant, the president of A.J. Kogyo Co., Ltd. (Kogyo), an established Japanese corporation. Hiroshi Tanaka (also known as Matt Taylor) had worked for Nakata in Japan. Tanaka and Nakata decided that the United States presented a market for computer-related products, and Tanaka came to California in order to set up a business to take advantage of that market: Nippon Electronic Technology (NET). Nakata, the major investor in the new corporation, became its president and major shareholder. Tanaka was named as vice-president and was issued corporate shares on the basis of his services.” “Seagate was approached by Tanaka on behalf of NET, seeking to purchase, on credit, substantial quantities of disk drives” and “Seagate was unwilling to extend credit to NET without some sort of a guaranty.” (Ibid.) “By the instant action, Seagate sought to recover its loss from Kogyo and from several individuals, including Nakata, who it alleges conspired to defraud it. Both Kogyo and Nakata sought to quash service of process.” (Id. at p. 700.)

The Court of Appeal in Seagate found that “some acts taken by a corporate officer are not only the acts of the corporation, but the acts of the individual. Where an act of this type creates contact with the forum state, that contact may be the contact of the individual as well as the contact of the corporation and, therefore, should be considered in determining if the forum state has personal jurisdiction over the individual. The basis for the exercise of jurisdiction over Nakata is that in causing Kogyo to issue the guaranty, Nakata caused the in-state ‘effect’ that Seagate extended credit to NET.” (Seagate Tech. v. A. J. Kogyo Co., supra, 219 Cal.App.3d at p. 702.) The Court of Appeal further noted that “[b]y guaranteeing NET’s liabilities, Nakata enabled NET to do business with Seagate; i.e., to conduct business within the forum state and to obtain the benefits and protections of its laws. The guaranty was the method by which NET was to receive direct, and Nakata indirect, economic advantage from business conducted within the state. For these purposes it is not particularly relevant that the party directly benefited was NET rather than Nakata himself. Had NET been owned by another, the result might be different; but Nakata was NET’s major shareholder and had a real interest in its profits. Any economic benefit gained by NET was also gained by Nakata personally.” (Id. at pp. 705-06.) As set forth above, Gibson acknowledges that “[i]n my capacity as CEO of Kandypens, I occasionally visited California for legitimate business purposes that were solely for and on behalf of Kandypens.” (Gibson Decl., ¶ 10.) In addition, as discussed above, Plaintiff provides evidence that Kandypens indicated that its principal place of business is in California.

As to the second prong of the specific jurisdiction analysis, Plaintiff asserts that this case is substantially connected to Gibson’s California activities. Plaintiff notes that the Complaint in this action contains a section alleging that “Defendant Targets Minors and Young Adults with Social Media Marketing.” (Compl., p. 18:4.) Plaintiff alleges, inter alia, that “[n]ot only does Kandypens allow minors to purchase tobacco products from its website, but Kandypens actively targets minors through the use of social media marketing designed to reach and appeal to adolescent, teen, and young-adult audiences.” (Compl., ¶ 72.) Plaintiff notes that the Complaint’s first cause of action is for violation of the Unfair Competition Law, and that on April 16, 2021, the Court issued an Order on Plaintiff’s motion for remedies which indicates, inter alia, that “[i]njunctive relief involving Defendant’s marketing practices is appropriate.” (April 16, 2021 Order at p. 5:16.) In the surreply, Gibson argues that “none of Plaintiff’s allegations are substantially connected to Gibson’s contacts with California. Rather, Gibson’s conduct, as alleged by Plaintiff, all occurred in Arizona.” (Surreply at p. 6:2-4.)[3] This argument is addressed above in connection with the first prong.

As to the third prong, Plaintiff asserts that exercising jurisdiction over Gibson would be fair and reasonable. Plaintiff cites to Snowney v. Harrah's Entertainment, Inc. (2005) 35 Cal.4th 1054, 1070, where the California Supreme Court found that in making the determination as to whether the assertion of specific jurisdiction is fair, “the court must consider the burden on the defendant, the interests of the forum State, and the plaintiff’s interest in obtaining relief. It must also weigh in its determination the interstate judicial system’s interest in obtaining the most efficient resolution of controversies; and the shared interest of the several States in furthering fundamental substantive social policies. Where [, as here,] a defendant who purposefully has directed [its] activities at forum residents seeks to defeat jurisdiction, [it] must present a compelling case that the presence of some other considerations would render jurisdiction unreasonable. In this case, defendants do not contend the exercise of jurisdiction would be unfair or unreasonable, and we see no reason to conclude otherwise.” (Internal quotations and citations omitted.)

The Court notes that in its initial response to the instant motion, Gibson does not appear to specifically assert that the exercise of jurisdiction over him would be unfair or unreasonable. In addition, Plaintiff asserts in the reply that “the case is largely concluded, and a judgment is already entered. Given that Gibson and Kandypens have been able to litigate this case in California since 2018, they have conducted marketing activities in California, the company’s Chief Operating Officer is located in California (Crowell Reply Decl., Ex. 5 (Zender Dep.), at p. 7:22-25)[4], its primary bank account is located in a California bank (id., at p. 15:5-15), and Gibson resides in a neighboring state, Gibson cannot make a convincing argument—let alone a compelling one—that exercising jurisdiction over him would be unreasonable.” (Reply at p. 5:26-6:4.) In the surreply, Gibson argues without citing to any evidence that “[a]ny documents or information related to Gibson are also in Arizona.” (Surreply at p. 7:2-3.) Gibson also asserts that “Arizona provides an alternative forum for Plaintiff to try and pursue Gibson on the judgment.” (Surreply at p. 7:4-5.) However, the Court finds that Plaintiff has the stronger argument on the third prong.

Based on the foregoing, the Court finds that Plaintiff has demonstrated that the Court has personal jurisdiction over Gibson.

As to the Code of Civil Procedure section 187 analysis, Plaintiff cites to Triyar Hospitality Management, LLC v. WSI (II)—HWP, LLC (2020) 57 Cal.App.5th 636, 641, where the Court of Appeal noted that “[t]he authority provided to the courts by Code of Civil Procedure section 187 includes the power to add a judgment debtor where a person or entity is an alter ego of the original judgment debtor. In doing so, the court is amending the judgment to add the real judgment debtor. To prevail in a motion to add judgment debtors, WSI must show 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.” (Internal citations omitted.)

As to the first element set forth in Triyar, Plaintiff asserts that Gibson controlled Kandypens’ legal defense and was represented. Plaintiff cites to the transcript of the deposition of Gibson, as PMQ of Kandypens. (Crowell Decl., ¶ 3, Ex. 1.) As discussed, Gibson testified that his current role at KandyPens is “President, founder, and CEO.” (Crowell Decl., ¶ 3, Ex. 1 (Gibson Depo.) at p. 14:4-6.) Plaintiff notes that Gibson served as the person most qualified on the noticed deposition topics for Kandypens. (Id. at p. 12:4-7.)

Plaintiff also indicates that Gibson signed verifications to Kandypens’ responses to Plaintiff’s interrogatories and requests for admissions. (Crowell Decl., ¶¶ 8-10, Exs. 6-8.) Plaintiff also provides a copy of the “Declaration of Graham Gibson in support of Kandypens’ Response in Opposition to Plaintiff’s Motion for Issue and/or Monetary Sanctions.” (Crowell Decl., ¶ 13, Ex. 11.) Plaintiff notes that this declaration provides that Gibson “reviewed all the various discovery responses received from Plaintiff in this case, including all interrogatories, requests for admission, and requests for production,” that “[o]ther than myself and Mr. Zender, no other employee at Kandypens is sufficiently knowledgeable or qualified to respond to Plaintiff’s discovery requests,” that Gibson “worked diligently with our lawyers to produce all information and documents responsive to Plaintiff’s discovery requests,” and that he “personally searched Kandypens’ e-mails, documents, and other records to locate information and documents responsive to Plaintiff’s requests and the Stipulations.” (Crowell Decl., ¶ 13, Ex. 11, ¶¶ 10-12, 14.)

Plaintiff cites to Alexander v. Abbey of Chimes (1980) 104 Cal.App.3d 39, 45, where the Court of Appeal noted that “it is now settled that . . . the authority of the court will be exercised to impose liability under a judgment upon the alter ego who has had control of the litigation.” (Internal quotations omitted.) The Alexander Court found that “[i]n the instant action, there was sufficient evidence that appellant had controlled the litigation between respondents and Abbey. The attorney that represented Abbey at the original trial testified that he primarily dealt during the litigation with appellant; that appellant was kept fully advised of what was occurring in the lawsuits and in the process of the lawsuits; that appellant was also an attorney and his discussions with appellant were on a lawyer-to-lawyer basis; that appellant was completely familiar with all of the issues that were going to be tried and prepared documents that were used in the litigation; that hearings were continued and reset at times convenient to appellant; and that appellant participated in the litigation both as chief operating officer and as a lawyer.” (Id. at p. 46.) Plaintiff asserts that similarly here, Gibson controlled the underlying litigation.

In his response, Gibson asserts that “Plaintiff’s argument that Gibson ‘dominated’ Kandypens’ defense and solely controlled that defense is false and contrary to the facts known to Plaintiff.” (Response at p. 4:14-15.) Gibson states that he is the “majority shareholder of Kandypens” at 56%, and that “[t]he other shareholders of Kandypens include James Zender (24%) and JDI Investments (20%).” (Gibson Decl., ¶¶ 18-19.) Gibson states that “[w]hile I occasionally communicated with Kandypens’ counsel regarding Kandypens’ defense, I was not the only shareholder to do so, as James Zender also participated in these communications and made decisions regarding Kandypens’ defense strategies and decision-making processes.” (Gibson Decl., ¶ 21.) However, Plaintiff notes that “Gibson argues that he was not the only person who helped with Kandypens defense…But he cites no authority for the proposition that control precludes anyone else’s involvement in the case.” (Reply at p. 6:23-25.)

Based on a consideration of the foregoing, the Court finds that Plaintiff has demonstrated that Gibson “had control of the underlying litigation and [was] virtually represented in that proceeding…” (Triyar Hospitality Management, LLC v. WSI (II)—HWP, LLC, supra, 57 Cal.App.5th at p. 641.)

As to the second element set forth in Triyar, Plaintiff asserts that Kandypens and Gibson did not maintain separate identities. “Ordinarily, a corporation is regarded as a legal entity separate and distinct from its stockholders, officers and directors. Under the alter ego doctrine, however, where a corporation is used by an individual or individuals, or by another corporation, to perpetrate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the corporation’s acts as if they were done by the persons actually controlling the corporation. In general, the two requirements for applying the alter ego doctrine are that (1) there is such a unity of interest and ownership between the corporation and the individual or organization controlling it that their separate personalities no longer exist, and (2) failure to disregard the corporate entity would sanction a fraud or promote injustice.” (Communist Party v. 522 Valencia, Inc. (1995) 35 Cal.App.4th 980, 993 [internal citations omitted].) Plaintiff notes that “[u]ndercapitalization of the business, commingling of corporate and personal funds, and failure to observe the corporate formalities are examples of business practices that would leave individual shareholders vulnerable to a finding of alter ego liability.” (Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc., supra, 217 Cal.App.4th at p. 1107.) “An important factor in determining alter ego liability is that a corporate entity is so undercapitalized that it is likely to have no sufficient assets to meet its debts.” (Butler America, LLC v. Aviation Assurance Co., LLC (2020) 55 Cal.App.5th 136, 146.)

Plaintiff indicates that here, Gibson testified that “I'm 56 percent owner.” (Crowell Decl., ¶ 3, Ex. 1 (Gibson Depo.) at p. 151:5.) In addition, as set forth above, Gibson testified that his role at Kandypens was the “President, founder, and CEO.” (Id. at p. 14:4-6.) Plaintiff testified that “It’s my company.” (Id. at p. 12:12.)

Plaintiff asserts that “[b]ecause Kandypens was Gibson’s company, he dispensed with corporate formalities, particularly when it came to respecting the role of the board of directors.” (Mot. at p. 7:26-27.) Plaintiff cites to the March 9, 2023 debtor’s examination of James Zender, who states that he is the “cofounder, COO of Kandypens.” (Crowell Decl., ¶ 4, Ex. 2, p. 5:16-17.) Mr. Zender was asked, “does Kandypens prepare board meeting minutes?” to which Mr. Zender responded, “No.” (Id. at p. 13:23-24.) Mr. Zender also stated that “[b]eing that we don’t have a Board, it’s usually just nothing formal when we have meetings and things like that. So we don’t have specific board meetings being that it’s just two of us.” (Id. at p. 14:1-4.) Plaintiff notes that Gibson does not respond to this point in his response.

Plaintiff also asserts that Gibson used the company to fund his other business interests to the Kandypens’ detriment. Plaintiff indicates that Kandypens made a $250,000.00 investment in a company called “Choice Wellness.” (Crowell Decl., ¶ 14, Ex. 12.) Mr. Zender testified that it was “correct” that “Choice Wellness” was “basically Mr. Gibson’s side gig or…venture.” (Crowell Decl., ¶ 4, Ex. 2, p. 19:7-18.) Mr. Zender further testified that Kandypens did not receive any return for the $250,00.00 loan. (Id. at p. 20:1-3.) In response to the question, “as far as you know, does Choice Wellness…currently have any assets,” Mr. Zender responded, “…I’m sure we have product in the warehouse, but that’s all that I’m aware of.” (Id. at p. 20:16-19.) Plaintiff asserts that “[t]he Choice Wellness transaction was another example of Gibson’s disregard of corporate formalities. Because Kandypens did not hold formal board meetings, let alone prepare meeting minutes, there is no record that the board approved the investment or concluded that it served the company’s interests.” (Mot. at p. 9:3-6.)

In addition, Plaintiff asserts that “[a]nother example of Gibson’s self-dealing is the Kandypens House (also called the Blue Jay House).” (Mot. at p. 9:12-13.) Plaintiff indicates starting in November 2019, Kandypens leased a large house in Los Angeles for a rent of approximately $20,000 per month. (Crowell Decl., ¶ 16, Ex. 14.) Gibson was asked in his deposition, “[c]an you tell me, generally, what KandyPens House LA is?” to which Gibson responded, “Yes. It’s a concept that I created that’s called experiential marketing. It’s where someone can come and learn about our products, try our products, and get to know the company that makes them. Get to know the brand.” (Crowell Decl., ¶ 3, Ex. 1 (Gibson Depo.) at p. 131:6-11.) Plaintiff asserts that although the house was supposed to be an “experiential marketing” concept, Gibson used it for his outside business interests and personal enjoyment. Gibson testified that events hosted at the “KandyPens House LA” include “[a]lot of health and wellness events…we had a lot of CBD vendors come and show their products. We had some birthday parties for celebrities. We had a Halloween party there in October. We had a 420 party on 4/20.” (Crowell Decl., ¶ 3, Ex. 1 (Gibson Depo.) at p. 133:1-7.) Gibson also testified that he used the house as “a vacation home.” (Id. at p. 133:25.)

Plaintiff also asserts that Gibson “used his control of Kandypens to give himself outsized shareholder distributions without regard to the company’s creditors and prospective liabilities.” (Mot. at p. 10:11-12.) Plaintiff notes that the instant action was filed in October of 2018. Plaintiff states that “[b]etween Kandypens’ establishment in 2014 and the end of 2018, the company made distributions of $793,430.” (Mot. at p. 10:13-14, citing Crowell Decl., ¶ 17, Ex. 15 (2018 Year-End Financials) at p. 2.) Plaintiff asserts that “in 2019, distributions soared to almost $1.5 million for that year alone,” and that “just the first half of 2020, amidst a deadly pandemic, economic catastrophe, and the vigorous litigation of this action, the company distributed another $1.2 million.” (Mot. at p. 10:15-18, citing Crowell Decl., ¶¶ 14-15, Exs. 12-13, pp. 2.)

Plaintiff cites to Automotriz del Golfo de California S. A. de C. v. v. Resnick (1957) 47 Cal.2d 792, 796-797, where the California Supreme Court noted that “[a]nother factor to be considered in determining whether individuals dealing through a corporation should be held personally responsible for the corporate obligations is whether there was an attempt to provide adequate capitalization for the corporation. In Ballantine on Corporations (rev. ed., 1946), at pages 302-303, it is stated: If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of the law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If the capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege.” (Internal quotations omitted.)

In his response, Gibson asserts that “[t]here is no unity of interest and ownership such that the separate personalities of the entity and its owners no longer exists.” (Response at p. 5:3-4.) Gibson states in his supporting declaration that “I have never commingled KandyPens’ funds or assets with my own,” and that “Kandypens’ had (and still has) its own bank account and assets separate and apart from any bank accounts and assets held by me.” (Gibson Decl., ¶¶ 23-24.) Gibson states that “I have never diverted Kandypens’ funds or assets to myself or used them in any manner other than for Kandypens’ business purposes.” (Gibson Decl., ¶ 25.)

Gibson further asserts that “Plaintiff points to the ‘Kandypens House’ and the investment into Choice Wellness to argue Kandypens and Gibson are one-in-the-same, but Plaintiff again misstates the facts.” (Response at p. 5:18-20.) Gibson states “[t]he ‘Kandypens House’ was used by all Kandypens shareholders and various employees to advertise and promote Kandypens’ business and products.” (Gibson Decl., ¶ 26.) But as noted by Plaintiff, Gibson does not deny that he used the Kandypens House as his vacation home. (Reply at p. 9:5-6.)

Gibson also states that “Kandypens is the sole owner of Choice Wellness.” (Gibson Decl., ¶ 28.) Gibson states that “I have never had (and do not currently have) any ownership interest at all in Choice Wellness.” (Gibson Decl., ¶ 29.) Plaintiff counters that “[t]hat is the point. Kandypens’ Chief Operating Officer testified that Choice Wellness was Gibson’s CBD side venture…But instead of investing in the venture himself, Gibson had his alter ego, Kandypens, make the investment.” (Reply at p. 8:26-28.)

Gibson also states that “[t]he reason why Kandypens stopped paying on the judgment is because it lost a lawsuit with its biggest competitor, which resulted in significant financial harm to the company and its business operations.” (Gibson Decl., ¶ 34.) Gibson further asserts that “[t]he demand for Kandypens’ products has also decreased year-over-year, such that the revenue simply does not exist to keep the lights on and pay the judgment.” (Gibson Decl., ¶ 35.) Gibson states that “[a]fter judgment was entered against Kandypens in August 2021, all distributions to all shareholders, including me, stopped.” (Gibson Decl., ¶ 31.) Gibson argues that “[t]he facts show that Kandypens paid on the judgment for as long as it could, and then had to stop paying because its business operations deteriorated due to the lawsuit with its competitor and a change in market conditions.” (Response at p. 6:21-24.) Plaintiff counters that Gibson’s “defenses against undercapitalization are unpersuasive.” (Reply at p. 8:6.) Plaintiff notes that the instant action was filed in October 2018, and states that “the company paid out $1.2 million to shareholders in the first half of 2020 alone.” (Reply at p. 8:10-12.) Plaintiff asserts that “Gibson was required to provide Kandypens with adequate capital to cover its ‘prospective liabilities’ and ‘risks of loss,’ not just its immediate liabilities.” (Reply at p. 8:12-14; see Automotriz del Golfo de California S. A. de C. v. v. Resnick, supra, 47 Cal.2d at p. 797, “[i]t is coming to be recognized as the policy of the law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If the capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege.” [Internal quotations omitted].)

In light of the foregoing, the Court finds that Plaintiff has demonstrated that “there is such a unity of interest and ownership that the separate personalities of the entity and the owners no longer exist.” (Triyar Hospitality Management, LLC v. WSI (II)—HWP, LLC, supra, 57 Cal.App.5th at p. 641.)

As to the third element set forth in Triyar, Plaintiff asserts that “[a]dhering to the fiction of Kandypens’ separate existence from Gibson would lead to an inequitable result.” (Mot. at p. 12:1-2.) Plaintiff asserts that “[t]he plaintiff’s inability to collect a judgment satisfies the inequitable result requirement for alter ego liability.” (Mot. at p. 12:9-10.) Plaintiff cites to Butler America, LLC v. Aviation Assurance Co., LLC (2020) 55 Cal.App.5th 136, 147, where the Court of Appeal noted that “Garrick argues there is no evidence that an equitable result will follow if the acts of AFS are treated as those of AFS alone. But it would be an inequitable result to preclude Butler from collecting its judgment by treating AFS as a separate entity.” Plaintiff asserts that here, Kandypens “is unable to satisfy the judgment in large part due to Gibson’s improper use of its corporate form for his own purposes. Treating its assets as his own, Gibson caused the company to waste significant sums on his side business venture (Choice Wellness) and his party house (Kandypens House). He also used extravagantly large shareholder distributions, relative to Kandypens’ liabilities, risks, and earnings, to divert millions of dollars of much-needed assets from the company to himself, leaving it dangerously undercapitalized. And he took these actions after the People had commenced their action, fully aware of the company’s potential legal liability. It would be unjust to treat Gibson separately from the company he controlled, precluding the People from collecting the judgment. Therefore, it would be entirely proper to treat him as Kandypens’ alter ego and add him as a judgment debtor.” (Mot. at p. 12:19-13:2.)

In the response, Gibson argues that “[n]o inequitable result will occur from the recognition of Kandypens’ corporate identity. Kandypens is a legitimate corporation, with its incorporation in Delaware and its principal place of business in Arizona. No dispute exists that it has stopped paying on the judgment owed to Plaintiff. Plaintiff therefore has the right to accelerate the full amount of the judgment and to enforce that judgment against Kandypens. For example, it can conduct discovery regarding Kandypens’ finances, try to garnish Kandypens’ bank accounts, initiate collection proceedings, and take other permitted action. Plaintiff is therefore in no worse position than that of a typical judgment creditor. No inequitable result will occur.” (Response at p. 7:4-12.) Plaintiff counters that “[a]s long as Kandypens is the sole judgment debtor, it is highly unlikely it will ever have the assets to satisfy the judgment.” (Reply at p. 9:15-16.) Plaintiff cites to the debtor’s examination of James Zender, who stated that “[r]ight now we’re just, literally, barely making it,” and that “[i]t’s just kind of an ever present downward spiral because your sales are nothing like they were.” (Crowell Reply Decl., ¶ 6, Ex. 5, pp. 29:18-19; 30:1-2.) Plaintiff notes that in Triyar Hospitality Management, LLC v. WSI (II)—HWP, LLC, supra, 57 Cal.App.5th at page 643, the Court of Appeal found that “as long as Triyar is the sole judgment debtor, it is highly unlikely it will ever have assets to satisfy the judgment. Given that the trial court found Triyar and the Yaris are one and the same, it would be inequitable to preclude WSI from collecting its judgment by treating Triyar as a separate entity.”

Gibson further asserts that “an inequitable result will occur if the Court binds Gibson to the judgment.” (Response at p. 7:13-14.) Gibson states that “[i]f the Court grants Plaintiff's Motion to Amend Judgment, I will have to file for personal bankruptcy, which will create for me an unnecessary hardship.” (Gibson Decl., ¶ 37.) Plaintiff counters that Gibson “argues that adding him as a judgment debtor would cause an inequitable result against him because he cannot afford the judgment. But he fails to provide any factual support for that assertion.” (Reply at p. 9:25-27.) Plaintiff also notes that Gibson “cites no authority for the proposition that once alter ego liability has been established, and an inequitable result for the plaintiff has been shown, the alter ego’s ability to pay should be considered by the court.” (Reply at p. 9:27-10:2.)

Based on the foregoing, the Court finds that Plaintiff has demonstrated that “an inequitable result will follow if the acts are treated as those of the entity alone.” (Triyar Hospitality Management, LLC v. WSI (II)—HWP, LLC, supra, 57 Cal.App.5th at p. 641.)

Based on the foregoing, Plaintiff’s motion for an order amending the Judgment entered on July 16, 2021, to add Graham Gibson as a judgment debtor is granted.

[1]The Court notes that Gibson states in his response to the instant motion that he “incorporates by reference the statements and arguments set forth in his Motion to Quash Service of the Motion to Amend Judgment and the Declaration of Gibson submitted to support his Motion to Quash, both filed concurrently with this Response.” (Response at p. 2:10-13.) Gibson does not cite to any legal authority demonstrating that this approach is appropriate. Moreover, pursuant to California Rules of Court, rule 3.1113, subdivision (d), “[e]xcept in a summary judgment or summary adjudication motion, no opening or responding memorandum may exceed 15 pages.” Incorporating Gibson’s motion to quash filed on September 25, 2023 into Gibson’s response to the instant motion would result in the response exceeding 15 pages. For the foregoing reasons, the Court declines to consider Gibson’s separate motion to quash herein.

[2]Plaintiff asserts in the reply that “[a]lthough Gibson has submitted several declarations in this case claiming that the company’s principal place of business is in Arizona, such representations are inconsistent with Kandypens’ corporate documents and legal pleadings outside this case. He should not be allowed to switch facts whenever it suits his interests. If anything, this material inconsistency undermines the credibility of the other bare assertions made in his declarations.” (Reply at p. 4, fn. 2.)

[3]As discussed above, Gibson states that he is a resident of Arizona, and that in 2006, he moved from California to Arizona. (Gibson Surreply Decl., ¶ 9.)

[4]The Court notes that Plaintiff’s counsel’s reply declaration indicates that “[a]ttached hereto as Exhibit 5 is a true and correct copy of relevant excerpts of the March 9, 2023, debtor’s examination of Kandypens, Inc., which designated James Zender as its witness.” (Crowell Reply Decl., ¶ 6.)

THE PEOPLE OF THE STATE OF CALIFORNIA, Plaintiff, vs. KANDYPENS INC., et al. Defendants.	Case No.:	18STCV03053
	Hearing Date:	November 6, 2023
	Hearing Time:	10:00 a.m.
	TENTATIVE RULING RE: PEOPLE’S MOTION TO AMEND JUDGMENT TO ADD GRAHAM GIBSON AS JUDGMENT DEBTOR UNDER CODE OF CIVIL PROCEDURE SECTION 187

Superior Court of California

County of Los Angeles

Department 50