Middle Tennessee News Co. v. Charnel of Cincinnati

• Citation: 250 F.3d 1077
• Decision Date: 08 May 2001
• Docket Number: No. 00-2296,00-2296
• Parties: (7th Cir. 2001) Middle Tennessee News Co., Inc. d/b/a Austin Book and Merchandise, Plaintiff-Appellee, v. Charnel of Cincinnati, Inc., Charnel of Louisville, Inc., Charnel Co., Inc. and Steve Nelson, in his Individual capacity, Defendant-Appellants
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1077

250 F.3d 1077 (7th Cir. 2001)

Middle Tennessee News Co., Inc. d/b/a Austin Book and Merchandise, Plaintiff-Appellee, v. Charnel of Cincinnati, Inc., Charnel of Louisville, Inc., Charnel Co., Inc. and Steve Nelson, in his Individual capacity, Defendant-Appellants.

No. 00-2296

In the United States Court of Appeals For the Seventh Circuit

Argued January 24, 2001

Decided May 8, 2001

Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 97 C 1944--Larry J. McKinney, Chief Judge. [Copyrighted Material Omitted]

[Copyrighted Material Omitted] Before Flaum, Chief Judge, Evans, and Williams, Circuit Judges.

Williams, Circuit Judge.

Although tentatively scheduled for trial, this case, which essentially is a contract dispute, was disposed of on the merits by the district court through the appointment of an independent accountant whose findings were adopted by the district court as final on the issues of liability and damages. The defendants, Charnel of Cincinnati, Inc., Charnel of Louisville, Inc., Charnel Company, Inc. and Steve Nelson (collectively "Charnel"), now raise several jurisdictional issues and challenge the district court's disposition of this case as a denial of their right to jury trial.

I

On December 9, 1997, Middle Tennessee News Co., Inc., doing business as Austin Book and Merchandise ("Austin"), brought a diversity action in federal court against Charnel, alleging essentially a breach of contract for Charnel's failure to pay the amount due and owing on a series of prior sales to Charnel Companies (to whom we shall return in a moment). Austin alleges in its complaint that it "sold on account and delivered" books to Charnel from November 14, 1995 through May 26, 1997. It also alleges that Charnel-- through Nelson, who is the president and sole shareholder of Charnel of Cincinnati, Charnel of Louisville and Charnel Company--held themselves out to Austin at all times as one corporation, i.e., the Charnel Companies.

The district court held a pre-trial conference with the parties on June 8, 1999. The parties dispute what actually occurred in this conference, and the only record of what transpired is the district court's order dated that same day. In it, the district court states that counsel for Charnel said that he was not ready for trial because "there was substantial accounting work to be done, and that he had had discussions with Counsel for [Austin] about the use of a third-party accountant."¹ Counsel for Austin acknowledged that "certain issues [were] more amenable to resolution by an accounting [sic] rather than by lawyers and juries," and indicated that "he would not object to the procedure if [Charnel] would agree to pay the amount found due and owing by the third-party accountant within thirty (30) days of the submission of his/her findings." The district court then adopted these suggestions and generally outlined a procedure whereby an independent accountant would decide the issues in this case, under the supervision of a magistrate judge and with the participation of the parties.

Once the district court released the order to the parties, Charnel twice objected, stating that it had not agreed to this procedure and refused to participate. Over Charnel's repeated objections, the district court proceeded, the independent accountant made findings of liability and damages (on the basis of only Austin's submissions) and the district court adopted the findings, resulting in judgment in favor of Austin. Charnel now appeals.

II

A

At the outset, we must address our jurisdiction in this case. See generally Cook v. Winfrey, 141 F.3d 322, 325 (7th Cir. 1998) ("The requirement that jurisdiction be established as a threshold matter spring[s] from the nature and limits of the judicial power of the United States and is inflexible and without exception.") (alteration in original) (internal quotation marks omitted). Where jurisdiction is challenged as a factual matter, the party invoking jurisdiction has the burden of supporting the allegations of jurisdictional facts by competent proof, NLFC, Inc. v. Devcom Mid-America Inc., 45 F.3d 231, 237 (7th Cir. 1995), which means "proof to a reasonable probability that jurisdiction exists." Target Market Publishing, Inc. v. Advo, Inc., 136 F.3d 1139, 1142 (7th Cir. 1998). In diversity cases, when there are two or more defendants, plaintiff may aggregate the amount against the defendants to satisfy the amount in controversy requirement only if the defendants are jointly liable; however, if the defendants are severally liable, plaintiff must satisfy the amount in controversy requirement against each individual defendant. Motorists Mut. Ins. Co. v. Simpson, 404 F.2d 511, 513 (7th Cir. 1969).

For individual defendant Nelson, Austin has not met its burden of demonstrating to a reasonable probability that jurisdiction exists in diversity, because Austin has neither alleged a separate amount in controversy against him nor demonstrated that he may be held jointly liable for corporate debts. Under Indiana law,² corporate officers and shareholders acting on behalf of the corporation are generally not liable for the contractual obligations of the corporation. Winkler v. V. G. Reed & Sons, Inc., 638 N.E.2d 1228, 1231 (Ind. 1994). Indiana courts are reluctant to disregard corporate form, but will do so to prevent fraud or injustice to third parties. Id. at 1232.

To determine whether piercing the corporate veil is appropriate, plaintiffs must show that "the corporate form was so ignored, controlled or manipulated that it was merely the instrumentality of another and that the misuse of the corporate form would constitute a fraud or promote injustice," under an eight- factor balancing test.³ Aronson v. Price, 644 N.E.2d 864, 867 (Ind. 1994). Austin has presented no evidence that justifies piercing the corporate veil and holding Nelson liable for corporate debts. We find the sole evidence that Nelson held out his corporations as and did business as Charnel Companies insufficient to hold Nelson personally liable for the debt of the corporations.

For corporate defendants Charnel of Cincinnati, Charnel of Louisville and Charnel Company, however, Austin has met its burden of demonstrating to a reasonable probability that jurisdiction exists in diversity. That these three companies, through their shared president and sole shareholder, Nelson, at all times held themselves out as and did business as one corporation, i.e., the Charnel Companies, is sufficient to hold them jointly liable.⁴ See Clark Auto Co., Inc. v. Fyffe, 116 N.E.2d 532, 535-36 (Ind. App. 1954). In this case, like the case in Clark Auto, Austin has demonstrated to a reasonable probability that "the business of these corporations was conducted in such a manner that innocent third parties had no way of knowing with which they were dealing," and therefore the three companies cannot claim the benefit of the corporate form to separate and limit liability. Id. at 536.

Our inquiry into jurisdiction is not complete, however.⁵ On December 9, 1999, Charnel of Cincinnati and Charnel of Louisville ("petitioners") filed voluntary petitions for Chapter 7 bankruptcy and, as a consequence, they received the protection of an automatic stay under 11 U.S.C. sec. 362(a)(1), which stayed the "commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor." Id. The automatic stay remains in effect until the bankruptcy court disposes of the case or grants relief from the stay. Williams v. Chicago Hous. Auth., 144 F.3d 544, 546 (7th Cir. 1998). Actions taken in violation of an automatic stay ordinarily are void.⁶ Matthews v. Rosene, 739 F.2d 249, 251 (7th Cir. 1984); see also Eastern Refractories Co. Inc. v. Forty Eight Insulations Inc., 157 F.3d 169, 172 (2d Cir. 1998).

In this case, an automatic stay arose on December 9, 1999--the date petitioners filed for bankruptcy--and continued until the bankruptcy court ultimately granted the petitioners' motions to voluntarily dismiss the cases on March 24, 2000.⁷ Although both parties were aware of the bankruptcy case, neither informed the district court of it and the parties proceeded as if there were no stay.

On November 17, 1999, and before the stay, the independent accountant appointed by the magistrate judge, pursuant to the order of the district court, made his findings of liability and damages. While the stay was in effect, the independent accountant submitted his report to the district court and the magistrate judge, again pursuant to the order of the district court, allowed the parties an opportunity (1) to submit any objections to the independent accountant's findings so that he could consider them and make any changes before the findings became final and (2) to raise any other issues of material fact. But continuing in protest of the procedure, Charnel elected not to object. After the stay had expired, on April 10, 2000, the district court accepted the independent accountant's report and entered judgment.

Although we must consider the magistrate judge's action void because taken in violation of the stay, it was not necessary for, nor a material element in, the district court's entry of judgment. The independent accountant made his findings before the stay went into effect and no one, at any time, objected to the substance of the findings. Consequently, we believe the district court's judgment, adopting these findings, did not violate the stay.

In conclusion, we find that there was insufficient evidence to maintain diversity jurisdiction over Nelson--who therefore must be dismissed from this action--and that there was sufficient evidence to maintain diversity jurisdiction over Charnel of Cincinnati, Charnel of Louisville and Charnel Company (the bankruptcy stay notwithstanding).

B

Now that we have settled jurisdiction, we turn to the substantive issue in this...