In a decision which provides a nuance to existing case law, the California Court of
Appeal, Second Appellate District, ruled in the matter Pueblo Radiology Medical Group,
Inc. v. T.Dalton Gerlach DJDAR8190 ("Pueblo case") that individual defendants in a breach
of contract case against a corporate entity which successfully prevailed on an alter ego
claim in a bifurcated matter could recover attorneys' fees even though no determination
had ever been made in regard to any breach of contract in the first instance.
In the Pueblo case, Pueblo Radiology Medical Group, Inc. ("Pueblo") had entered
into a~contractwith Vitascan, Inc. ("Vitascan")to provide interpretation services of imaging
scans from a Vitascan mobile imatron electron beam tomography scanner. The contract
contained an attorney's fee clause. J. Dalton Gerlach ("Gerlach") signed the contract on
behalf of Vitascan. Gerlach was Vitascan's President. Daniel Parker ("Parker") was
Vitascan's secretary. Gerlach and Parker were the sole shareholders of Vitascan. Neither
appeared to have executed a guarantee.
The subject contract was entered into for the time period covering June I, 2001 to
December 30, 2003. During the contractual time period, Vitascan advised Pueblo that its
services were no longer neede4. In June 2002, Pueblo filed a complaint for damages for
.breach of contract, common counts and an accounting naming Vitascan, Gerlach and
Parker as defendants. The complaint alleged that Gerlach and Parker were alter egos of
Vitascan ceased operations in September 2003 and filed for bankruptcy in March
2004. In July 2004, Gerlach and Parker filed a motion to bifurcate the breach of contract
claim from the alter ego claim. The trial court granted the motion and tried the alter ego
issue first. In March 2006, following a IS-day bench trial, the court issued a statement of
decision finding in favor of Gerlach and Parker on the alter ego issue, only, and later
awarded $250,000 in attorneys' fees to Gerlach and Parker under Civil Code section 1717.
On appeal, Pueblo did not challenge the trial court's finding on the alter ego issue,
but argued that the trial court's award of attorneys' fees was premature because the breach
of contract claim had not yet been decided. In their briefing, both sides relied upon the
seminal decision in Reynolds Metals Co. v. Alperson (1979) 25 Ca1.3d 124 ("Reynolds
Metals case"). In the Reynolds Metals case, a plaintiff had brought suit against two
shareholders and directors of two bankrupt corporations seeking to hold them personally
liable on an alter ego theory for debts the corporation owed. One of the promissory notes
contained an attorney fee provision. The individual defendants had not signed the
promissory notes. After the individual defendants prevailed on the alter ego claim and
breach of contract claim, they sought attorneys' fees. The California Supreme Court held
that the defendants were entitled to fees under the reciprocity provision of Civil Code
section 1717,even though they were not signatories to the promissory note containing the
attorney fee clause.
In the Pueblo case, Pueblo contended that the Reynolds Metals case was
distinguishable because the alter ego defendants in that matter had only sought attorneys'
fees after they had prevailed on both the alter ego claim and the breach of contract claim.
The Court of Appeal disagreed, ruling that, since the only theory of liability against
Gerlach and Parker related to the alter ego c~aim,no adjudication as to the underlying
breach of contract claim was necessitated, at least as against them.
The Pueblo case provides an important nuance to breach of contra.ctcases involving
attorney fee clauses. If a shareholder or officer of a corporate entity is sued on an alter ego
theory, and is not a g11arantor of the corporate obligation, the Pueblo case stands for.the
proposition that, should the alter ego theory be bifurcated, the alter ego defendants can
prevail and recover attorney's fees based on the entity's contract, even though no
adjudication with respect to the breach of contract claim has yet occurred.
About the Authors: Edward F. Morrison, J.r.is the founding partner and Christina S.
Karayan is a senior associate of The Mo!risdn Law Group, a professional corporation.
Their biographies can be viewed at www.morrisonlawgroup.com.
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