Amfac Foods, Inc. v. International Systems & Controls Corp.

• Decision Date: 23 November 1982
• Citation: 294 Or. 94,654 P.2d 1092
• Parties: AMFAC FOODS, INC., dba Lamb-Weston, Respondent on review, v. INTERNATIONAL SYSTEMS & CONTROLS CORPORATION and Flodin, Inc., Petitioners on review. CA 16706; SC 28071. *
• Court: Oregon Supreme Court

Page 1092

654 P.2d 1092

294 Or. 94

AMFAC FOODS, INC., dba Lamb-Weston, Respondent on review, v. INTERNATIONAL SYSTEMS & CONTROLS CORPORATION and Flodin Inc., Petitioners on review.

CA 16706; SC 28071.

Supreme Court of Oregon In Banc ^*.

Argued and Submitted March 2, 1982.

Decided Nov. 23, 1982.

John B. Arnold, Eugene, argued the cause for petitioners on review. With him on the petition were Johnson, Harrang & Swanson, Eugene, and V. Thomas Lankford, Jr., and Sharp, Randolph & Green, Washington, D.C. On the briefs were Walter J. Cosgrave, and Cosgrave, Kester, Crowe, Gidley & Lagesen, Portland.

Thomas S. Moore, Portland, argued the cause and filed a petition for respondent on review. With him on the brief were William H. Morrison, and Morrison, Dunn, Cohen, Miller & Carney, Portland.

PETERSON, Justice.

Plaintiff Amfac Foods, Inc. (Amfac) brought this action to recover damages it allegedly incurred as a result of defendants' breach of contract. From a jury verdict in plaintiff's favor, defendants appealed. The Court of Appeals affirmed. 52 Or.App. 907, 630 P.2d 868 (1981). This case involves, inter alia, the question whether a corporate shareholder, by exercising control over the affairs of a corporation of which it is the sole shareholder, may lose the limitation of liability which corporate shareholders normally enjoy and become liable to creditors of the corporation.

Amfac is a food processing firm which manufactures potato products. In early 1976 Amfac decided to build a large plant in Hermiston to process a new product. Amfac retained an engineering firm named Austin Company (Austin), not a party to this action, to construct and equip the plant. Austin contracted with defendant Flodin, Inc. (Flodin) to fabricate and install the major portion of the line machinery. ¹ Flodin, an engineering and manufacturing firm specializing in food processing machinery, had previously built such machinery for Amfac. Since 1973 Flodin had been a wholly-owned subsidiary of defendant International Systems & Controls, Inc. (ISC), a Texas-based holding company.

Following negotiations, a purchase order dated June 26, 1976, was prepared by Austin and sent to Flodin. It specified the machinery needed and set forth the relevant terms. Although Flodin neither signed nor expressly accepted the document as the agreement between the parties, it began to design and fabricate the equipment described in the June 26, 1976, purchase order. There is evidence from which the trier of fact could find that the purchase order of June 26, 1976, was a contract between Flodin and Amfac, through Austin, Amfac's agent. Numerous construction delays occurred, some of which were occasioned by Flodin's failure to perform timely and properly. Eventually Flodin notified Austin that it was having cash-flow problems and that it would be forced to stop production of the ordered machinery unless a different agreement was reached. A new purchase order dated December 7, 1976, was prepared by Austin and signed by Flodin, ISC and Austin. The new order gave Flodin $100,000 more than the original purchase order. ²

Flodin continued to have problems completing its work. Delivery by Flodin was not completed until mid-January 1977. Amfac contends that the machinery arrived in an unfinished and defective condition and that it sustained substantial damages as a result of repairs and delays.

ISC owned all of the outstanding shares of Flodin capital stock. One of the main issues in the case is whether ISC is liable for Flodin's conduct. Amfac asserted two bases for recovery against ISC, Flodin's parent: (1) that Flodin was ISC's agent and is liable under agency principles for Flodin's breach; and (2) that ISC had so substantially interfered with Flodin's management and the performance of Flodin's contractual obligations that it should be held liable for Flodin's failure to perform under principles variously denominated "piercing the corporate veil," "alter ego," and the like.

Defendants denied the claim of breach of contract and contested the extent of Amfac's damages. In addition, the defendants claimed that the terms of the December 7 purchase order determined the parties' rights, not the purchase order of June 26. ISC also denied that it was liable for Flodin's conduct.

INSTRUCTIONS PHRASED IN TERMS TO PERMIT RECOVERY "IF

INJUSTICE WOULD RESULT" SHOULD NOT BE GIVEN

The defendants assert that the trial court erred in its instructions relative to ISC's responsibility for the acts of Flodin. The trial court instructed the jury that even if no agency relationship existed between Flodin and ISC, ISC should be held liable "if you find that an injustice would result if ISC was not held responsible for the acts or omissions of Flodin." The trial court so instructed the jury three separate times:

" * * * An owner of stock, whether it is an individual or if it is another corporation, the owners of stock in a subsidiary corporation or a parent corporation, if it is a subsidiary, it is not liable on the contracts of a subsidiary corporation unless it is proved that the party dealing with the subsidiary was misled as to the actual party with whom it was dealing or if the parent corporation used a subsidiary to perpetrate a fraud or injustice on the other person, or, third, unless you find that the subsidiary corporation was acting as the agent of the parent corporation. * * *

"Now, it is not necessary that the plaintiff prove any fraud or dishonesty in this case. If the plaintiff proves that the defendant ISC did in fact control the acts of defendant Flodin, and if you find that an injustice would result if ISC was not held responsible for the acts or omissions of Flodin, then you may hold the defendant ISC responsible for the acts of Flodin. * * *.

" * * * If you would further find that Flodin was acting as an agent for ISC or that ISC should be held liable to the plaintiff so as to prevent an injustice to be perpetrated upon the plaintiff, and that ISC should be held responsible for the acts of Flodin, then you could return your verdict in favor of the plaintiff and against both defendants, ISC and Flodin. Got that?"

Although the trial court's instructions are consistent with the broad brushstrokes of our earlier equity decisions, we conclude that instructing a jury in such terms was erroneous. ³

No one can disagree with the abstract proposition that the decisions of courts and juries must be just and fair. Honesty, fairness and justice are terms which describe a morally perfect standard, but an instruction to a jury to "avoid an unjust result" states an imperfect legal standard because each juror, in the end, decides the case by his or her subjective standard of right and wrong. Such a standard, though abstractly perfect, does not permit persons whose conduct is governed by the standard to plan their activities or conduct their affairs with a minimal degree of assurance that what they are doing is lawful. The effect of the court's instructions was to set the jury adrift with virtually no guidance as to the circumstances under which a shareholder may be held liable for a corporate obligation. The determining factor, under the court's instructions, was each juror's subjective feeling as to what is just or unjust. Although the rule under which the jury was instructed is not necessarily inconsistent with our previous decisions, it is an unsatisfactory statement of the law. In this opinion we state a definite rule to be applied in such situations. ⁴

EXCEPTIONS TO SHAREHOLDER IMMUNITY

What, then, is the rule of law which applies in this situation? Because most cases considering this question are in equity and subject to de novo appellate review, courts have not articulated rules with the specificity typical of rules applied in actions at law. Analysis of our decisions, of opinions of other courts and of the writings of commentators leads to the conclusion that understandable legal rules relative to this theory of recovery can be articulated so as to achieve a degree of predictability in both law and equity cases.

This case presents a variant of a recurrent problem--viz., a corporation, alleged to be liable to a plaintiff, happens to be judgment-proof or nearly so, and the plaintiff seeks to have its claim satisfied out of the assets of a shareholder.

The question of when and under what circumstances a shareholder becomes liable for a corporate obligation has troubled judges and lawyers for a century or so. Although corporate shareholders were not insulated from liability for debts of the corporation in common law England, ⁵ shareholder insulation from such liability has been a cornerstone of corporate law in the United States since the nineteenth century. Virtually every state has a statute similar to ORS 57.131(1), which limits a shareholder's liability to the cost of the shares held. ⁶

Limited shareholder liability was extended to corporate shareholders to encourage risk capital investments. In 1929 then Professor William O. Douglas wrote:

" * * * [N]o one would claim that the availability of limited liability played an insignificant part in the expansion of industry and in the growth of trade and commerce. It has had a potent influence. Limited liability is now accepted in theory and in practice. It is ingrained in our economic and legal systems. The social and economic order is arranged accordingly. Our philosophy accepts it. It is legitimate for a man or group of men to stake only a part of their fortune on an enterprise. Legislatures, courts and business usage have made it so. Each has taken the extreme but logical step of allowing one man to do what one thousand men may do. * * *." ⁷

The corporate form was not intended to be a device by which persons could engage in business without obligation or risk. The privilege of limited liability of the shareholders of a business corporation carries with it the obligation to conduct business as a...