Logix Development v. Faherty

Filed 4/13/07 Logix Development v. Faherty CA2/8

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION EIGHT

APPEAL from a judgment of the Superior Court of Los Angeles County, Ernest Hiroshige, Judge. Vacated and remanded in part; affirmed in part.

Manning & Marder, Kass, Ellrod, Ramirez, Anthony J. Ellrod, Steven J. Renick, L. Trevor Grimm and Allison G. Vasquez for Plaintiffs and Appellants.

Horvitz & Levy, Peter Abrahams, Andreas M. Gauthier, Jason T. Weintraub; Murchison & Cumming, Edmund G. Farrell, Michael J. Nuez; Monaghan, Monaghan, Lamb & Marchisio and Patrick J. Monaghan, Jr., for Defendant and Appellant.

* * * * * *

Logix Development Corporation (Logix), D. Keith Howington and Anne Howington filed an action against multiple defendants, including appellant J. Roger Faherty, over disputes arising from a common venture involving pay-per-viewadult entertainment channels. The case went to trial against Faherty only as the alter ego of one of the corporate defendants, and the jury returned verdicts of $18,084,612 for Logix, and $4,457,234 in favor of the Howingtons. We reject Fahertys contention that, as a matter of law, he cannot be held to be the alter ego of the corporate defendant in question. We also find that the judgment in favor of Logix must be reduced by $12,548,510 and that the Howingtons recovery under the judgment must be reduced by $1,604,751. In all other respects, we affirm the judgment.

FACTS

1. The Chronology of Salient Events

Logix is a software development company that developed the technology to turn large dish satellites off and on very quickly, i.e., in three and a half seconds.^[1]Previously, it had taken hours, if not days, to turn a subscription on or off. Logixs new technology is particularly useful for pay-per-view programs. In the television market, sporting events and adult entertainment comprise a very significant part of pay-per-view programming. Logix had clients in both of these sectors. A dispute with a company offering adult entertainment ended up with Logix acquiring two explicit adult entertainment networks. According to Keith Howington, Logixs chief executive officer, Logix did quite well with these channels, winding up with over 50 percent of the market share of the adult entertainment market.

In the 1990s, Graff Pay-Per-View operated two channels in the large-dish market. Appellant Faherty became chief executive officer and chairman of Graff Pay-Per-View in 1991; Graff changed its name to Spice Entertainment Companies, Inc., (Spice) in 1997. Spice leased transponders, which is space on a satellite from which to relay signals from its broadcast headquarters to the homes of its subscribers. Spice had the right to sublease unused space to other broadcasters.

Logixs two explicit adult entertainment networks provided formidable competition to Spices adult movies because the latter did not contain explicit sexual scenes. However, Spices board of directors decided that Spice would not go into the explicit business because it would erode its customer base.

Faherty appears to have disagreed with this decision. At the end of 1995, he approached Logix with a proposal that seemed attractive to Logix. As related by Logixs CEO Howington, Faherty proposed that Spice would buy Logixs two adult channels and that Logix would provide technical and sales support. As part of its compensation, Logix would get a portion of the revenue from the adult channels.

The identity of the buyer under Fahertys suggestion remained unsettled for a long time. In February 1996, letters of intent were exchanged under which no less than three different corporate entities were suggested as buyers; Spice International, a wholly owned subsidiary of Graff Pay-Per-View, was one of the proposed buyers. The negotiations dragged on during 1996. The only negotiators with whom Logix dealt were Faherty, Donald McDonald, then vice president of Spice, and Daniel Barsky, who was senior vice president, general counsel and secretary to the board of directors of Spice.

As it turned out, the entity with whom Logix finally concluded the agreement that was first proposed by Faherty in 1995 was Emerald Media, Inc. (EMI). We digress from our chronological account to provide the background on EMI.

Sometime in 1996, Paul Mindnich, who was a former business associate of Fahertys, asked Faherty for a job or a business opportunity. Faherty called him back after a few days and asked Mindnich if he would be interested in working for EMI, which Faherty said was involved in the adult entertainment business. Mindnich went to Spices corporate offices in New York for a meeting about the job. Faherty referred Mindnich on to McDonald and to Barsky. Mindnich agreed with McDonald and Barsky that he, Mindnich, would take the job of president of EMI at a salary of $5,000 per month.

The record reflects that Mindnich signed as the incorporator on the certificate of incorporation issued for EMI in Delaware on August 30, 1996. However, Mindnich testified^[2]that: he did not know whether EMI ever issued any shares to anybody; he never invested any money in EMI and he did not know anyone who did so; he did not know where his paychecks came from, and he didnt care to know whether EMI had any working capital. Mindnich assumed from the first that EMI  was doing business in the explicit end of the porn business. 

Mindnich stated that his role was basically to sign documents. Mindnich would be summoned by McDonald or Barsky to sign documents prepared by Barsky; he could not remember reading any of the documents that he was asked to sign. When it appeared that Mindnich might become a defendant in an unrelated civil action, he informed Faherty of that fact, who then arranged for Mindnich to sell EMI to Judy Savar; Mindnich never expected to, and did not, receive any proceeds from this sale.

Savars relationship with EMI was no different from Mindnichs. She was approached by McDonald, whom she had known for 22 years and whom she considered family.^[3] Savar and McDonald had done business for years. McDonald asked her if she would like an opportunity to own her own company; he told her that this company ran itself. McDonald explained that EMI was a high-risk company because it was in the adult entertainment business and because it was in a lot of debt. Savar was not very happy about either item of information, but McDonald assured her that she would have a salary and that a company he worked for had an option on EMI. If the option was exercised, she could profit by it in the end.

Savar entered into an employment contract with EMI. She was paid $90,000 a year and worked for about two hours a week; sometimes she would go for weeks without doing anything. She lived in California, and EMI was located in Pittsburgh, Pennsylvania. (At one point, EMIs address was McDonalds home near Pittsburgh.) Under her employment contract, Savar was barred from entering into any agreement on behalf of EMI. She never received any stock in EMI, and never paid for any stock in EMI. Like Mindnich, her role was to sign documents but, unlike Mindnich, she also attended some conventions on behalf of EMI. She signed EMI tax returns, but never saw any EMI financial documents.

On August 30, 1996, the same date that appears in EMIs Delaware Certificate of Incorporation signed by Mindnich, Media Licensing, Inc. and Danish Satellite Television, S.A., granted EMI a license for products and services furnished under the name Eurotica. Eurotica was a sexually explicit adult entertainment channel. EMI subleased transponder space for this channel from Spice.

The contract that had taken over a year to negotiate was entered into in January 1997 between Logix and EMI. Howington had never met or spoken with Mindnich,^[4]and at no point in the negotiations had anyone mentioned EMI or Mindnich to Howington. It was at the last minute that Howington was told to change the signature line on the contract to reflect Mindnich and EMI. As Logix puts it in the opening brief, Logix had in fact entered into a contract with a sham, an entity created by Faherty personally, in order to take advantage of the lucrative explicit adult business that the Spice Board had decided to pass up.

In addition to the agreement between Logix and EMI, Howington and EMI entered into a noncompetition agreement.^[5]Under the Logix-EMI agreement, EMI was to pay Logix service fees equal to 20 percent of the sales processed through Logixs call center. In addition, under both agreements EMI was to pay Logix and Mr. and Mrs. Howington a certain percentage of the net sales, which was termed the override percentage. The agreements defined the override as a percentage of the total net revenue derived from explicit movies and explicit programming. In substance, the override was to be 5 percent on the first $1 million of sales; the override increased with increasing sales so that at $2 million and above, the override was 10 percent. Overrides were to be paid for any explicit networks operated by EMI or companies affiliated with EMI.^[6] Spice was expressly named and covered by the agreements as an EMI affiliate. The Logix-EMI agreement also called for the payment of $600,000 by EMI to Logix.

Initially, the four explicit networks (see fn. 6, ante) produced substantial revenues. In December 1997, EMIs monthly revenues were $1.8 million. Faherty claims, however, that competition from cable and the small dish satellite industry began to cut into revenues. During 1998, the Logix-EMI agreement was amended three times to provide for a reduction in the service fees and overrides paid by EMI; two of these amendments were executed on January 13, 1998.^[7]Logix claims that these amendments were coerced by Faherty and McDonald by threats to shut down EMI if the amendments were not accepted by Logix. These amendments resulted in decreased fees and overrides paid to Logix, and are important to the damage calculations and the sums awarded by the jury, since a significant part of the award was what Logix would have been paid under the original terms of the agreement, and before these amendments reduced the fees. We refer to these amendments collectively as the 1998 amendments.

In addition to, and perhaps in part because of, decreasing earnings, EMI was never able to open a merchant account, which is a relationship with a financial institution that allows one to process sales made through credit cards. Since EMI was not able to open such an account, Logix used its merchant account to process subscriptions for EMI. According to Howington, this exposed Logix to millions of dollars in credit card liability.

In May 1998, Spice sold Spice Hot to Califa Entertainment Group. Logix contends that under the revenue sharing provisions of its contract with EMI, it should have participated in the price obtained for Spice Hot and that it was also entitled to the override fees that would have been generated by Spice Hot.^[8]

In March 1999 Playboy Enterprises acquired Spice in a merger with Spice; as part of that acquisition, an independent company called Directrix was spun off. Directrix became a publicly held corporation and Faherty left Spice to become chairman of Directrix.

In April 2001 EMI shut down its explicit channels and terminated the Logix-EMI agreement, which would have expired under its terms in January 2002. Three weeks later, in May 2001, Logix and the Howingtons filed the present action. After shutting down its explicit channels and terminating the agreement with Logix, EMI sold the subscriber lists for the explicit networks to New Frontier for $750,000.

As far as Logix was concerned, EMIs termination was not the end of the story. Logix claimed that the broadcasting of channels by Playboy between July 2001 and January 2002 was subject to the Logix-EMI agreement, with the effect that override fees generated by these channels were due and payable to Logix. As Logix puts it in its opening brief: The relationship between the original Spice and the merged Playboy/Spice meant that, under Logixs contract with EMI, it had the right to a percentage of the revenues from these channels after they were purchased by Playboy/Spice.^[9]

In July 2001, Playboy acquired Spice Hot from Califa^[10]and renamed the channel Spice Platinum. Sometime later, Playboy acquired a channel called Hot Network Plus. Both Spice Platinum and Hot Network Plus were explicit channels. (We take up in part 4 of the Discussion portion of this opinion the definition of an explicit channel.) After July 2001, Playboy also operated Hot Network and Hot Zone. Faherty contends that these latter two channels were not explicit. Whether a channel was, or was not, explicit is germane because under the Logix-EMI agreement, override fees were to be paid by EMI only for explicit channels.

2. Evidence of Damages and the Jurys Award

The jurys award was based solely and exclusively on the testimony and the calculations provided by plaintiffs expert Wayne Lorch.^[11]

A. The Award of $18,084,612 to Logix

The first item of damages awarded by the jury was $1,933,619, which Lorch described as the difference between the service fees per the contract and the service fees actually paid after the 1998 amendments.

The next item of $488,281 was, according to Lorch, the difference between override fees under the original contract and the override fees actually paid after the 1998 amendments. Both of these awards were predicated on the theory that the amendments were coerced and for that reason were invalid and unenforceable. Faherty does not challenge the claim that the amendments were coerced and invalid, and that the differentials calculated by Lorch are accurate.

The sale of Spice Hot by Spice to Califa Entertainment Group in 1998 generated two awards. First, there was the sum of $1,715,134, which was described as the Logix revenue participation in the sale of the Spice Hot channel to Califa under the terms of the original agreement. Second, $422,318 was the total of the estimated override fees from the Spice Hot channel revenues.

Next, the jury awarded $12,775,260. There are three components to this award. First, there is an award for $10,943,759, which is the present value of future override fees for a period of five years after the termination of the Logix-EMI contract. Second, there is an award of $1,604,751 for channels Hot Network and Hot Zone that were operated by Playboy for the period between July 2001 and January 2002; as noted, Faherty contends that these channels were not explicit. Third, there is an award of $226,750 for the Spice Platinum and Hot Network Plus channels, which were admittedly explicit, operated by Playboy between July 2001 and January 2002.

B. The Award of $4,457,234 to the Howingtons

The Howingtons were awarded the same sums as Logix, with the exception of the service fees and the present value of the future override fees, for which they did not receive awards.

Thus, the Howingtons were awarded $488,281 for the difference between override fees under the original contract and the override fees actually paid after the 1998 amendments. They were awarded $1,715,134 arising from the sale of the Spice Hot channel to Califa and $422,318 for the estimated override fees from the Spice Hot channel revenues. Finally, they were awarded the total of $1,831,501 for override fees generated by four channels operated by Playboy between July 2001 and January 2002. As with Logix, $1,604,751 of this sum were override fees generated by two channels, Hot Network and Hot Zone, that Faherty contends were not explicit.

PROCEDURAL EVENTS

The operative first amended complaint^[12]filed by Logix and the Howingtons^[13]alleged 10 causes of action and named as defendants EMI, Spice, Faherty, McDonald, Savar, as well as Directrix, Playboy, New Frontier and one other corporation who is not material to this case. In the complaint, Logix alleged among other things that EMI was the alter ago of Faherty and McDonald.

In addition to the breach of contract claim against Faherty, which was the only cause of action to go to trial (see text, post), the complaint also alleged causes of action for fraud and conspiracy against the defendants, Faherty included. The trial court granted Fahertys motion for judgment on the pleading on these causes of action on the ground that these claims were barred by the statute of limitations. Logix contends in its cross-appeal that this ruling was in error.

Prior to trial, EMI stipulated to a judgment of $40 million in favor of Logix, and settled with Logix. In February 2004, Logix settled with Spice for a payment of $8,032,500. McDonald filed for bankruptcy prior to trial, and Logix settled with Savar for $1,000. New Frontier paid Logix $75,500, and also settled. It appears that the other corporate entities named as defendants were dismissed. This left Faherty as the sole defendant.

The case went to trial against Faherty on the causes of action for breach of contract and for breach of fiduciary duty. After all sides rested, the trial court granted nonsuit on the cause of action for breach of fiduciary duty. Thus, the case went to the jury on the single cause of action for breach of contract against Faherty.

The jury returned a series of special verdicts, which found that: (1) Faherty was an alter ego of EMI; (2) EMI breached its agreement with Logix and the Howingtons; (3) Logix was damaged by the breach; (4) Logixs damages were $18,084,612. The jury made parallel findings in the case of the Howingtons and found their damages to be $4,457,234. As noted, the jurys award of damages was based on calculations provided by plaintiffs expert Wayne Lorch.

The trial court denied Fahertys motions for a new trial and for a judgment notwithstanding the verdict, in which Faherty challenged the damage awards as excessive and contended that the alter ego doctrine was inapplicable because Faherty was never a shareholder of EMI. The trial court granted Fahertys motion for an offset based on the settlement with Spice ($8,032,500). This appeal followed.

DISCUSSION

1. Ownership of Stock Is Not a Prerequisite for the Application of the Alter Ego Doctrine

Faherty contends that the person against whom the alter ego doctrine is applied must own stock in the corporationbefore this doctrine can be invoked. Faherty claims that this is an absolute, threshold requirement for the application of the alter ego doctrine. He points to the undisputed fact that there is no evidence that he owns or owned any stock in EMI, and concludes that for this reason the alter ego doctrine cannot be applied to him and EMI.

We disagree. The alter ego doctrine does not require that the person against whom the doctrine is invoked must own stock in the corporation.

We begin with the governing general principles. Before the acts and obligations of a corporation can be legally recognized as those of a particular person, and vice versa, the following combination of circumstances must be made to appear: First, that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased; second, that the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice. (Minifie v. Rowley (1921) 187 Cal. 481, 487.) This statement of the rule, still considered authoritative,^[14]emphasizes the broad equitable nature of the doctrine. As the Supreme Court has put it: The essence of the alter ego doctrine is that justice be done. What the formula comes down to, once shorn of verbiage about control, instrumentality, agency, and corporate entity, is that liability is imposed to reach an equitable result. (Latty, Subsidiaries and Affiliated Corporations (1936) p. 191.) Thus the corporate form will be disregarded only in narrowly defined circumstances and only when the ends of justice so require. (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 301.)

We note at the outset, and before addressing Fahertys specific contention, that adherence to the fiction of the separate existence of EMI would sanction a fraud or promote injustice. (Minifie v. Rowley, supra, 187 Cal. at p. 487.) The evidence is that Faherty freely manipulated EMI, making EMI Logixs contracting partner in a substantial transaction, and then terminated both EMI and the agreement between EMI and Logix. As the verdict and the settlements show, the decision to terminate EMI and the Logix agreement had substantial and adverse economic consequences. Adherence to the fiction of EMIs separate corporate existence would accomplish exactly what Faherty intended to accomplish, i.e., shield him from the adverse economic consequences of his decisions to terminate EMI and the Logix agreement. It would leave Logix and the Howingtons with a shell of a corporation that the evidence shows is judgment proof. These facts are a paradigm for the application of the alter ego doctrine.

In contending that stock ownership is an absolute requirement for the application of the alter ego doctrine, Faherty relies in large part on Riddle v. Leuschner (1959) 51 Cal.2d 574. The trial court in Riddle concluded that all three members of the Leuschner family were the alter egos of two corporations, Yosemite Creek Company and Kadota Creek Company. The Supreme Court, however, concluded that Richard Leuschner, Sr., who was the president of Yosemite and assistant treasurer of Kadota, and who was paid a salary of $600 per month and owned no stockin either Yosemite or Kadota was not the alter ego of the corporations, while Mrs. Leuschner, his wife, and Leuschner, Jr., her step son, were held by the Supreme Court to be alter egos of the corporations. (Id. at pp. 580-581.) Mrs. Leuschner owned one share of Yosemite stock, and owned no shares of Kadota stock. Leuschner, Jr., owned 268 shares of Yosemite stock and one-third of the shares in Kadota. (Id. at p. 576.)

Faherty contends that the sole basis for reversal as to Mr. Leuschner[, Sr.,] was that the alter ego doctrine does not apply where [i]t is undisputed that [the defendant] held none of the stock in the corporation. (Ibid. [Riddle v. Leuschner, supra, 51 Cal.2d at p. 580.]) (Italics in original.)

Fahertys rendition of Riddle v. Leuschner is unduly truncated. We set forth the courts analysis of Leuschner, Sr.s situation in the margin.^[15]It is apparent that it is by no means true that the sole basis for the courts conclusion as to Leuschner, Sr. was that he owned no stock in the corporations. The courts analysis focused on the question of control; the fact that Leuschner, Sr., owned no stock was indicative of his lack of control, which also appeared from the other facts of record. The fact that the court was concerned with the realities of who controlled the corporations was evident in the phrasing of its conclusion regarding Mrs. Leuschner and Leuschner, Jr., whom it held to be alter egos of the corporation: The fact that both Leuschner, Jr., and Mrs. Leuschner controlled and dominated the corporations does not preclude holding each of them personally liable for the obligations of the business, since it is settled that two or more shareholders of a corporation may be liable as principals or partners under the alter ego principle. (Riddle v. Leuschner, supra, 51 Cal.2d at p. 581.)

Riddle v. Leuschnersfocus, not on the question of stock ownership, but on the control exercised by the person over the corporation, is reflected in the modern cases dealing with the alter ego doctrine. (E.g., Robbins v. Blecher (1997) 52 Cal.App.4th 886, 892, citing Communist Party v. 522 Valencia, Inc. (1995) 35 Cal.App.4th 980, 993 [a court may disregard the corporate entity and treat the corporations acts as if they were done by the persons actually controlling the corporation]; Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538 [the courts will ignore the corporate entity and deem the corporations acts to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners].)

That the ultimate concern is control and not the ownership of stock squares with the remedial nature of the doctrine. The concern is with what the person is able to do because of his or her control of the corporation. Whether the person owns the corporation, and the nature of that ownership, is relevant because ownership usually brings with it control. The alter ego doctrine is invoked to remedy the injustice caused by a persons manipulation of the corporate entity ‑‑ a manipulation made possible by that persons control over the corporate entity.

We do not mean to imply by this that ownership is irrelevant when it comes to the application of the alter ego doctrine. We only hold that ownership must be construed broadly, as it has been to extend to equitable ownership (Sonora Diamond Corp. v. Superior Court, supra, 83 Cal.App.4th at p. 538), and with an understanding that ownership is important because it generally goes to the ultimate question of control by the person over the corporation.

Indicative of the low priority that the court in Riddle v. Leuschner accorded to stock ownership is that the court brushed aside the fact that Mrs. Leuschner owned only one share out of several hundred of Yosemite stock, and owned no stock in Kadota, yet found her to be the alter ego of both corporations. (Riddle v. Leuschner, supra, 51 Cal.2d 574, 580-581.) Given these facts and this result, it cannot be true that the court gave particular weight to the fact of stock ownership.

There is a further aspect of the courts holding regarding Mrs. Leuschner that demonstrates that stock ownership was not held in Riddle v. Leuschner to be an absolute prerequisite for the application of the alter ego doctrine. Mrs. Leuschner owned no shares in Kadota, yet the court found her to be the alter ego of that corporation, as well. (Riddle v. Leuschner, supra, 51 Cal.2d 574, 581.)

Faherty states in his opening brief: Riddle explained that the ownership requirement serves important policy interests. Because alter ego is an equitable doctrine designed to prevent abuse of the statutory privileges granted to corporations, it should apply only to individuals who have an ownership stake in the company and therefore enjoy the opportunity for personal financial gain from the corporations separate existence. (See Riddle [v. Leuschner], supra, 51 Cal.2d at p. 580.) Unfortunately, as is apparent from the text of the Riddle decision itself (fn. 15, ante), neither the citation to Riddle provided by Faherty, nor any other part of Riddle, explained that the ownership requirement serves important policy interests, as Faherty contends. Nothing in Riddle supports Fahertys theory that ownership of stock is an essential element of the alter ego doctrine.

Faherty contends, however, that the threshold requirement allegedly established by Riddle v. Leuschner has been consistently followed by California courts, the threshold requirement being that the person must own stock in the corporation. Since Riddle v. Leuschner created no such threshold requirement, Fahertys interpretations of California cases that purportedly follow this requirement are incorrect.

Thus, Brenelli Amedeo, S.P.A. v. Bakara Furniture, Inc. (1994) 29 Cal.App.4th 1828, 1841, holds that stockholders may be held to be alter egos of the corporation. The decision does not hold that only stockholders may be held to be alter egos of the corporation and makes no mention of Riddle v. Leuschner.

Faherty contends that Minnesota Mining & Manufacturing Co. v. Superior Court (1988) 206 Cal.App.3d 1025 (Minnesota Mining) follows Riddle v. Leuschner in requiring ownership of at least one share before alter ego liability is imposed. Minnesota Mining contains no such holding. Minnesota Mining, supra, at page 1028 holds: Where the alter ego doctrine applies, ownership of even one share is sufficient to hold a shareholder liable for the debts of a corporation. (Riddle v. Leuschner[, supra,] 51 Cal.2d 574, 580.) In other words, once it has been found that the alter ego theory applies, ownership of one share of stock will make that shareholder liable for the debts of the corporation. This is quite different from requiring at least one share of stock before the alter ego doctrine can be invoked.

Unfortunately, Faherty carries his misinterpretation of Minnesota Mining over into Mesler v. Bragg Management Co., supra, 39 Cal.3d 290 and First Western Bank & Trust Co. v. Bookasta (1968) 267 Cal.App.2d 910. Both decisions, Faherty claims, stand for the same proposition as Minnesota Mining.

This is incorrect for two reasons. First, as we have seen, Minnesota Mining does not hold that ownership of stock is required before the alter ego doctrine can be applied, and neither Mesler v. Bragg Management Co. nor First Western Bank & Trust Co. v. Bookasta adopts Fahertys interpretation of Minnesota Mining. Second, neither of these two cases holds that stock ownership is an essential predicate for the application of the alter ego doctrine. In Mesler v. Bragg Management Co., supra, 39 Cal.3d 290, 295-296, the plaintiffs theory was the two original defendants were the wholly owned subsidiaries of a third corporation. The court concluded that the third corporation was in fact the alter ego of the original defendants. Neither ownership of stock, nor Riddle v. Leuschner, nor the rule that Faherty claims Riddle stands for is mentioned anywhere in the opinion. First Western Bank & Trust Co. v. Bookasta, supra, 267 Cal.App.2d 910, 916, only holds, citing Riddle v. Leuschner, that the amount of shares owned is not material when it comes to the application of the alter ego doctrine, which is a correct interpretation of Riddle v. Leuschner.

Faherty cites Shea v. Leonis (1939) 14 Cal.2d 666 for the proposition that a demurrer was sustained in that case as to [an] alter ego claim that failed to allege defendant owned stock. This too is in error. In this case, the complaint alleged that the defendant lessor had assigned the lease to a corporation in which he and his family held stock. The court held that the complaint sufficiently alleged an alter ego theory against the individual members of the family, when it alleged that the particular family members owned stock in the assignee corporation. The one exception was Adelina F. Leonis; the court noted that it was not alleged against her that she has any beneficial interest in said stock. (Id. at p. 670.) Since the alter ego theory was predicated in Shea on stock ownership, it was clear that as far as Adelina was concerned, an alter ego theory could not be maintained. Shea v. Leonis does not stand for the general proposition that a person must own stock in the corporation before the alter ego theory may be applied.

Finally, VirtualMagic Asia, Inc. v. Fil-Cartoons, Inc. (2002) 99 Cal.App.4th 228, 244, which held that when a parent corporation is the alter ego of a subsidiary corporation, the court will exercise jurisdiction over the parent if it has jurisdiction over the subsidiary, simply has no application to this case, nor does it stand for the proposition that a person must own shares in a corporation before the alter ego doctrine is applied.

Firstmark Capital Corp. v. Hempel Financial Corp. (9th Cir. 1988) 859 F.2d 92 and S.E.C. v. Hickey (9th Cir. 2003) 322 F.3d 1123, are the only cases cited by Faherty which stand for the proposition that a person must own shares in a corporation before the alter ego doctrine may be applied. Both of these federal decisions do in fact interpret Riddle v. Leuschner the way Faherty does. (S.E.C. v. Hickey, supra, at p. 1129; Firstmark Capital Corp. v. Hempel Financial Corp., supra, at p. 94.)

As we have shown, however, the conclusion by Faherty that Riddle v. Leuschner requires stock ownership before the alter ego doctrine is applied is not an accurate interpretation of Riddle. Riddle v. Leuschner did not hold that stock ownership is an absolute threshold requirement for the application of the doctrine, but considered stock ownership to be only one of several factors that may be taken into account. Indeed, as we have noted, Riddle imposed alter ego liability on Mrs. Leuschner in the case of Kadota, in which she owned no stock.

There is a further reason why Firstmark Capital Corp. v. Hempel Financial Corp. and S.E.C. v. Hickey are not persuasive. Imposing an absolute requirement of stock ownership on the alter ego doctrine does not square with the flexible, equitable nature of the doctrine. There may well be cases, as in the instance of Mrs. Leuschner in Riddle v. Leuschner, when a person dominates and controls a corporation, as Mrs. Leuschner did in the instance of Kadota, without owning any stock in the corporation. In such a situation, imposing a formal, technical requirement of stock ownership would mean that the courts would be unable to rectify the harm done when a person manipulated a corporation for unjust ends. This would be undesirable, and at odds with the function of the alter ego doctrine.

In any event, the decisions of lower federal courts are not binding on us (Mesler v. Bragg Management Co., supra, 39 Cal.3d 290, 299), nor do we find Firstmark Capital Corp. v. Hempel Financial Corp. and S.E.C. v. Hickey persuasive in that these decisions are incorrect statements of California law on this subject.

We conclude by observing that there are reported California cases where alter ego liability was imposed on persons or entities who did not own the corporation, or any part of it. As noted, Riddle v. Leuschner is one such case, in the instance of Mrs. Leuschner and Kadota. In Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1248-1251, alter ego liability was imposed on two corporations without any cross-ownership between the two corporate entities. This was done on the single-enterprise theory, where the two corporations joined in the commission of a single enterprise. A similar case is Tran v. Farmers Group, Inc. (2002) 104 Cal.App.4th 1202, 1220, where Farmers Group was held to form one enterprise with Truck Insurance Exchange; Farmers Group did not own any part of Truck Insurance Exchange. This, of course, is not an exhaustive list of such cases, but it is sufficient to carry the point.

In sum, we conclude that ownership of stock is not a prerequisite for the application of the alter ego doctrine.

2. There Is Substantial Evidence That Faherty Was EMIS Alter Ego

Faherty contends that there is no evidence that he had a unity of interest and ownership with EMI.

The conditions under which the corporate entity may be disregarded, or the corporation be regarded as the alter ego of the stockholders, necessarily vary according to the circumstances in each case inasmuch as the doctrine is essentially an equitable one and for that reason is particularly within the province of the trial court. (Stark v. Coker (1942) 20 Cal.2d 839, 846.) We conclude that there is substantial evidence that supports the finding by the jury that Faherty was the alter ego of EMI.

Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825, 838-840, lists many factors that are relevant to an alter ego determination, and Logix contends that several of these factors are present in this case. Without cataloguing all the factors, we focus only on a few examples that, in our opinion, are particularly supportive of the jurys alter ego determination.

The identification of the equitable owner with the domination and control of the corporate entity is one of such factors. (Associated Vendors, Inc. v. Oakland Meat Co., supra, 210 Cal.App.2d at p. 839.) Here it is clear that Mindnich and Savar, ostensibly owners and chief executive officers of EMI, were nothing but figureheads who blindly did what they were told to do, e.g., they signed documents without reading them. Neither Mindnich nor Savar ever actually owned, or even saw, a share of EMI stock, although they were supposed to be owners of the corporation. Mindnich was separated from his ownership of EMI without any payment, and at Fahertys direction. Matters went so far that Savar, allegedly the owner and chief executive officer of EMI, was prohibited by her employment contract from entering into agreements on behalf of EMI, or of binding EMI in any way. With Mindnich and Savar effectively out of the picture, it is clear that it was Faherty, assisted by McDonald and Barsky, who controlled EMI. This is confirmed by the circumstance that, despite negotiations between Logix and Faherty and his assistants that lasted for over a year wherein EMI was never mentioned, at the last minute EMI was suddenly designated as Logixs contracting partner. Mindnich, who it appears was under no delusions about either EMI or the role he was expected to play, was never involved in the negotiations with Logix. Those negotiations were conducted by Faherty, McDonald and Barsky.

The failure to adequately capitalize the corporation is another factor listed in Associated Vendors, Inc. v. Oakland Meat Co., supra, 210 Cal.App.2d 825, 839. Here the evidence is that Mindnich, who was the first owner and president of EMI, never put any capital into EMI, and knew no one who did; he did not even know where his paychecks came from. Savar was no different. She never received any stock in EMI, even though she stated that she was the owner of EMI. All of this is reflected, and confirmed, by the circumstance that EMI was never able to open a merchant account through which credit card sales could be handled. Thus, the inference that EMI had no capitalization is not only reasonable, from a realistic point of view it is compelling. EMI was simply a shell created to facilitate entry into the sexually explicit adult entertainment market. Hand in glove with this factor is another one identified in Associated Vendors, Inc. v. Oakland Meat Co at page 838, which is the failure to obtain authority to issue stock or to subscribe to or issue the same. There is no evidence that any stock in EMI was ever issued; the evidence is that neither Mindnich or Savar ever held any stock in EMI.

That EMI was a shell is also shown by the fact it had only one employee, Marlene Caruso, who worked as a bookkeeper for EMI for two or three hours per week, and that at one point EMIs office was in McDonalds home.

As previously stated, the above is just a sampling of the facts that support the finding that Faherty was EMIs alter ego. We are satisfied that this finding is not only supported by substantial evidence, but is the correct and realistic appraisal of Fahertys relationship with EMI.

Faherty contends that Logix produced no evidence that an inequitable result would occur unless Faherty was treated as EMIs alter ego.

The answer to this is that EMI, devoid of assets or capital, is manifestly unable to respond in damages caused by a breach of the Logix-EMI agreement. The injustice of the situation is that Faherty created a corporate shell for the purpose of shielding him from liabilities that he has created. This is the paradigm for the application of the alter ego doctrine, and requires no further discussion.

Similarly without merit is Fahertys argument that his liability should cease as of March 1999 when he left Spice and became chairman of Directrix. The fact is that, whether at Directrix or Spice, Faherty dominated EMI until he closed EMI down in April 2001. And there is no doubt that Faherty was directly involved, and pivotal, in the shutdown of EMI. It was Faherty who negotiated the sale of EMI to New Frontier, prior to EMI shutting down in April 2001. Indeed, ultimately EMIs subscriber list was sold to New Frontier for $750,000, a circumstance that gave rise to Logix suing New Frontier. (As noted, New Frontier settled with Logix for $75,500.)

3. There Is No Substantial Evidence To Support the Award of $10,943,759 to Logix for Future Override Fees

The jury awarded $10,943,759 for the present value of future override fees that would have been paid to Logix for a period of five years after the termination of the Logix-EMI agreement.

The parties join issue on the award of $10,943,759 over the question whether the text of the agreement between Logix and EMI can be interpreted to provide that override fees were to be paid after the termination of the contract, as long as EMI was operating the adult entertainment channels. Logix, of course, takes the affirmative of this issue. We set forth the contested provision in the margin,^[16]and note that, under another provision, the agreement has a term of five years, commencing in January 1997.

As far as an interpretation of the contractual provisions is concerned, Logix points out that the first sentence of section 4.5 of the agreement, which deals with service fees, is expressly limited to the Term of the agreement, but that the second sentence that governs overrides does not refer to the Term of the agreement. (See fn. 16, ante.) According to Logix, this means that service fees are to be paid during the Term of the agreement, and that override fees are to be paid without reference to the Term, i.e., they are to be paid even after the agreement was terminated. Factually, Logix relies on the testimony of Keith Howington that his understanding was that the override fees were to be paid as long as EMI was broadcasting the channels, and even after the termination of the agreement with Logix. Faherty, on the other hand, contends that section 4.5 can be only interpreted to provide that both the service fees and the override fees were due and payable solely during the Term of the contract, and that Howingtons subjective understanding to the contrary is irrelevant.

We do not think that a substantive disposition of the award of $10,943,759 needs to rest on the technical niceties of contract interpretation, i.e., whether section 4.5 of the Logix-EMI agreement should be interpreted to mean that override payments had to be paid after that agreement was terminated. The critical fact is that there appears to be no evidence to support the proposition that the adult entertainment channels would have been broadcast by EMI for five years after the termination of the Logix-EMI agreement. Since this issue was not briefed by the parties, we requested the views of the parties on this matter under the provisions of Government Code section 68081.

It appears that the assumption that EMI would broadcast the channels for five years after the termination of the Logix-EMI agreement is rendered academic by the undisputed fact that EMI was shut down in April 2001. Given that EMI ceased operations in April 2001, it is a hypothetical exercise to calculate how much in override payments EMI would have earned after January 2002, when its agreement with Logix was to terminate under the provisions of the agreement.

The hypothetical nature of this damage award is underlined by the fact that the four channels selected by Lorch for this projection of lost future income were those that were actually operated by Playboy between July 2001 and January 2002. Thus, the award is based on selections of channels made by Playboy, not EMI (or Faherty), after EMI ceased operations. There simply is no evidence that these four channels were even operated after January 2002, or that they were operated by an entity that was under a contractual obligation to pay override fees to Logix and the Howingtons.

The situation would be different if EMI continued to operate until January 2002, and if EMI would have actually continued to broadcast the channels in question after the termination of the agreement. There might then be some evidence in the form of testimony by Faherty, as an example, that he intended to carry on the broadcasts for a certain period of time. The fact is, however, that EMI shut down in April 2001, 10 months before the agreement terminated.

The fact that Lorch was able to calculate the present value of override payments paid for a five-year period does not mean that there is evidence that EMI would have operated the channels for five additional years. In fact, Lorch calculated the present value of future override payments not only for five years, but alternatively for 10 ($16,043,368) and 15 years ($18,419,701) into the future, as well. The jury was left to pick between 5, 10 and 15 years of future override payments. The fact that the jury picked five years does not mean that there is evidence that supports this finding. Indeed, the arbitrary selection by Lorch of 5, 10 and 15 years indicates that these time periods do not correspond to any facts of record.

In partial response to our inquiry pursuant to Government Code section 68081, Logix informs us that the evidence that supports this award is set forth at pages 66-72 of its brief. The cited portion of Logixs brief discusses whether the agreement is reasonably susceptible to the construction that Logix has adopted; it is a discussion of contractual interpretation, and makes no mention of evidence that supports the award of $10,943,759.

As it stands, all we have is the undisputed fact that EMI ceased operations in April 2001. Thus, it is a contradiction in terms to claim that, given that EMI shut down in April 2001, Logix can claim loss of future override fees that would have been generated after the termination of the Logix-EMI agreement in January 2002.

Since there is no evidence to support the award of $10,943,759, it must be set aside.

4. Override Fees Were Due Only for Channels Operated Between July 2001 to January 2002 That Satisfied the Definition of Explicit Channels in the Logix-EMI Agreement

Section 1.1 of the Logix-EMI agreement provides that an explicit network shall mean a television network whose programming consists primarily of explicit version adult motion picture and related programming. Explicit version adult movies and related programming is programming which depicts heterosexual and lesbian situations and nudity and which depicts actual penetration of body parts, erect genitalia and ejaculation.

It is conceded that Hot Network and Hot Zone, two channels operated by Playboy between July 2001 and January 2002, did not depict ejaculation, while Spice Platinum and Hot Network Plus, also operated by Playboy during the same period, did and that, for this reason, the latter two channels qualify as explicit under section 1.5 of the Logix-EMI agreement.

Faherty does not question that Playboys marketing of the four channels between July 2001 and January 2002 is subject to the Logix-EMI agreement.^[17] The issue that the parties present for decision is whether the phrase which depicts actual penetration of body parts, erect genitalia and ejaculation in section 1.5 requires all three, or whether the three sexual functions listed are alternatives, any one of which renders the production explicit. The interpretation chosen has a substantial effect, since the override fees generated by Hot Network and Hot Zone, which did not depict all three sexual functions, exceeded $1.6 million, while Spice Platinum and Hot Network Plus generated $226,750.

The trial court gave the jury the following special instruction: In giving effect to the general meaning of a writing, particular words are sometimes wholly disregarded, or supplied, or transposed. Thus, or may be given the meaning of and, or vice versa, if the remainder of the agreement shows that a reasonable person in the position of the parties would so understand it. The authority cited in support of this instruction is McNeil v. Graner (1949) 91 Cal.App.2d 858.

The instruction given to the jury is an incorrect statement of the law, and it is not supported by the opinion of the court in McNeil v. Graner, supra, 91 Cal.App.2d 858, 864.

The issue in McNeil v. Graner was the interpretation to be given to the word of in the written assignment of a royalty interest, when the assigned interest was made subject, among other things, to one-eightieth (1/80) of its pro rata share of the costs of operation and maintenance. (McNeil v. Graner, supra, 91 Cal.App.2d 858, 862, italics added.) The trial court gave a literal construction to this clause and declared that it means that each unit holder is required to pay only one-eightieth of one-eightieth of the monthly expense. (Ibid.) The appellate court held that this led to an absurd result, that the word of was obviously an error, and that the correct word was or. (Id. at pp. 862-864.)

The court in McNeil v. Graner made clear that the necessary predicate for disregarding, transposing or supplying another word for the one appearing in the writing is when the word in the writing is clearly inconsistent with the balance of the document and is therefore a mistake, as in McNeil, or when it is clear a word has been inadvertently omitted. (McNeil v. Graner, supra, 91 Cal.App.2d at pp. 863-864.) The starting point in every case is the language of the contract. If, as Civil Code section 1638 provides, the language of the contract is clear and explicit, and does not involve an absurdity, the words of the contract govern.^[18] The court in McNeil made this clear in its lengthy citation from Williston, which we set forth in the margin,^[19]and which now appears, with some changes in 11 Williston on Contracts (4th ed. 1999) section 32.9, pages 440-444. In Willistons terms, it is only when a portion of the writing [appears to be] useless or inexplicable (see fn. 19, ante) that the court will consider changing or adding words in the writing.^[20]

It is clear that the special instruction that was given is not limited by the important proviso that it is only when a word appears to be in error, as in McNeil v. Graner, or is missing that one can proceed to consider substituting the correct word for the incorrect one, or to consider supplying a missing word. There is no carte blanche to wholly disregard or supply or transpose words unless it is apparent that a word used in the document is wrong or is missing. This squares with the basic principle that [w]here the language of a contract is clear and not absurd, it will be followed. (1 Witkin, Summary of Cal. Law, supra, Contracts, 741, p. 827 [citing authorities, inter alia Civ. Code,  1638].)

It does not appear that the word and in the phrase which depicts actual penetration of body parts, erect genitalia and ejaculation (italics added) is, in light of the terms of the agreement, demonstrably a mistake, as the word of was obviously in error in McNeil. While or is an alternative to and, or is not the word that was used in the agreement. The Logix-EMI agreement is 26 pages long and a relatively complex and sophisticated document. Parties who are capable of negotiating and producing such a document are capable of knowing when they want to use and and when they prefer or. Since the definition of explicit was an important aspect of the document, it may safely be assumed that some thought and care went into the phrasing of that definition.

It follows that the trial court erred in initially determining that an ambiguity existed in the language of the contract. The trial courts determination of whether an ambiguity exists in a contract is a question of law, subject to independent review on appeal. (1 Witkin, Summary of Cal. Law, supra, Contracts,  741, p. 828.) The phrase which depicts actual penetration of body parts, erect genitalia and ejaculation is not ambiguous, nor does the word and render it ambiguous. Contrary to Logixs argument, the question is not whether all the circumstances listed in section 1.5 are to be treated in the conjunctive,^[21]but whether the single word and in the quoted phrase is incorrect, and whether or should be substituted for and in this phrase.

Logix is also in error in ascribing to two decisions of our Supreme Court the purported holding that and and or are freely interchangeable in a document or in a statute, and that the courts are free to substitute one for the other. Neither Arnold v. Hopkins(1928) 203 Cal. 553 nor Universal Sales Corp. v. Cal. etc. Mfg. Co. (1942) 20 Cal.2d 751 stand for such a proposition, but both cases are in accord that when it appears that one of these words is in error, the other may be substituted.

Finally, it is irrelevant that there is evidence that industry standards, to use Logixs term, have it that programming is explicit when one of the three sexual activities is shown, nor is CEO Howingtons understanding of these industry standards material. It is axiomatic that the terms of an agreement may be explained or supplemented, but not contradicted, by a course of dealing or a usage of trade. (Code Civ. Proc.,  1856, subd. (c); see generally 2 Witkin, Cal. Evidence (4th ed. 2000