Bucyrus-Erie Co. v. General Products Corp.
| Decision Date | 05 March 1981 |
| Docket Number | Nos. 79-3172,BUCYRUS-ERIE,79-3173,s. 79-3172 |
| Citation | 643 F.2d 413 |
| Parties | COMPANY, Plaintiff-Appellee, Cross-Appellant, v. GENERAL PRODUCTS CORPORATION and John A. Hubly, Defendants-Appellants, Cross-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
E. Bruce Hadden, Jones, Campbell & Hadden, James P. Jones, Columbus, Ohio, for defendants-appellants, cross-appellees.
Rudolph Janata, Jr., Porter, Wright, Morris & Arthur, John C. Hartranft, Robert W. Trafford, Columbus, Ohio, for plaintiff-appellee, cross-appellant.
Before ENGEL and BROWN, Circuit Judges, and MARKEY, Chief Judge. *
John A. Hubly (Hubly) appeals from a judgment of the United States District Court for the Southern District of Ohio holding him personally liable to Bucyrus-Erie Company (B-E) for fraud, participation in conversion, intentional or reckless mismanagement and as the alter ego of General Products Corporation (General).
B-E cross appeals that portion of the judgment denying it recovery of interest on General's corporate obligation. We affirm in part and reverse in part.
This diversity action arises out of the sale of heavy construction machinery and related parts and accessories (machinery) by B-E, a Wisconsin corporation, to General, an Ohio corporation, pursuant to floor plan financing agreements calling for payment of the purchase price in monthly installments of 10%, with interest at 113/4% per annum on the unpaid balance, and permitting General to employ, at its election, a "Fleet Rental" arrangement whereby General might lease machines to its customers and remit 80% of the monthly rentals to B-E. General was required, within 15 days of a sale, to remit to B-E so much of sale proceeds as are necessary to pay B-E in full for the machinery sold, plus accrued interest thereon. During the period between sale and remittance to B-E, General agreed to hold the monies due B-E "in trust". To secure payment, B-E retained a purchase money security interest in the machinery and in the sale proceeds.
B-E filed its original complaint on December 21, 1976. An amended complaint, filed April 11, 1978 contained 11 claims for relief, Counts 1-7 against General and Counts 8-11 against Hubly individually. Hubly is president, chairman of the board and majority shareholder of General. B-E alleged that Hubly fraudulently misrepresented for two years the status of five machines as having been leased by General, when those machines had actually been sold; that Hubly participated in conversion of the proceeds of the sale to his own personal use and to that of General; and that Hubly negligently mismanaged the affairs of General. B-E requested that Hubly be held personally liable, as the alter ego of General, for the corporate obligations arising from sale of the machines.
There being no serious dispute over its liability, the district court directed a verdict against General on Counts 1-7. That verdict is not challenged on this appeal. Hubly's liability on the claims of fraud, conversion and negligent mismanagement (Counts 8-10, denominated by the court as Claims One, Two, and Three, respectively) were submitted to a jury for determination of liability and damages.
Respecting those claims, the court's instruction included:
In the event that you compute damages in this case, except for Plaintiff's theory of holding Defendant Hubly liable in damages for General Products' liability to Bucyrus-Erie concerning the five machines Claim 4 (sic) sold to third parties, you are instructed to disregard the issue of interest, as this matter will be later considered by the Court.
Concerning the alter ego claim (Count 11, denominated Claim Four by the court), the court instructed:
Regarding damages, if you find that Hubly is personally liable, having found for the Plaintiff concerning the three elements Alternate verdict forms were supplied. The instruction relevant on this appeal read:
mentioned, then the amount of damages recoverable will be the amount unpaid to Plaintiff for the five machines, $247,842.57 plus $79,882.38 interest.
Two, if you find for the Plaintiff against Defendant Hubly, then you will sign the verdict form entitled "Verdict for Plaintiff," and indicate the dollar amount of damages you decide to award.
The court submitted special interrogatories to the jury, asking it to determine whether it found Hubly to have committed fraud, conversion and mismanagement and, if so, the amount of damages it awarded under each claim. In each instance, the jury said it found Hubly liable and found damages in the amount of $247,842.57.
Respecting the alter ego claim, the jury was given Interrogatory Nine. The jury was not asked about damages if it found liability under the alter ego theory, that question having been determined and announced by the court as quoted above. Special Interrogatory Nine read:
If you rendered a verdict in favor of Plaintiff and against Defendant Hubly, did you find the corporate entity was disregarded and Hubly held liable for certain sums General Products owes to Bucyrus-Erie?
The jury signed the "Verdict for Plaintiff" form and answered "Yes" to Interrogatory Nine. Its unanimous verdict for B-E on all counts made no reference to interest.
In its Order of August 24, 1978, and in its judgment of the same date, the court awarded judgment to B-E against Hubly in the amount of $247,842.57. On August 29, 1978, B-E filed a motion pursuant to Rule 60 of the Federal Rules of Civil Procedure 1 requesting that the judgment be amended to include the interest specified by the court under the alter ego theory, i. e., $79,882.38, on the ground that it had been omitted through clerical error or inadvertence. In an Order of October 17, 1978, the court denied the request. Though the court found error on other matters and amended the judgment accordingly, and though it made no finding on whether the omission of $79,882.39 interest resulted from error (it said the omission "may" not have resulted from error), the court decided that it had erred in specifying that amount in its charge, saying:
In any event, this Court has determined that its charge to the jury regarding interest was erroneous. An individual, even though personally liable for corporate debts as an "alter ego" of the corporation may nonetheless be not liable for a contractual interest rate applicable only to corporations.
The basis for the court's denial of the request was its view that an award of the $79,882.39 contract interest would violate the Ohio usury laws. 2
Hubly moved for judgment notwithstanding the verdict or for a new trial, challenging the instructions on alter ego, fraud, conversion, and negligent mismanagement and the court's refusal of instructions on certain defenses. The court denied Hubly's motion in an Order of November 9, 1978.
Whether the district court erred in: (1) instructing the jury on Hubly's liability under the alter ego, fraud, conversion, or negligent mismanagement theory of liability;
(2) refusing instructions on certain defenses; and (3) declining to award interest at the contract rate.
OPINIONThe purpose of jury instructions is to inform the jury on the law and to provide proper guidance and assistance in reaching its verdict. The trial court enjoys considerable latitude in selecting appropriate language, the test being whether the instructions as a whole correctly state the applicable law. The instructions here met that test.
The notion of the corporation as a legal entity is a fiction of the law introduced for convenience in conducting business. Under Ohio law 3, when "urged to an end subversive of its policy", the fiction should be disregarded and the corporation considered as an aggregation of persons, both in equity and at law. State v. Standard Oil Co., 49 Ohio St. 137, 30 N.E. 279 (Sup.Ct.1892). To honor the fiction in the present case would be "subversive of its policy".
No precise test for disregarding the corporate fiction has been articulated by the courts, each case being regarded as "sui generis" and decidable on its own facts. 4 Nonetheless, certain general principles have been recognized. As recently set forth in Brunswick Corp. v. Waxman, 459 F.Supp. 1222, 1229 (E.D.N.Y.1978), aff'd 599 F.2d 34 (2d Cir. 1979), the corporate fiction should be disregarded when: (1) domination and control over the corporation by those to be held liable is so complete that the corporation has no separate mind, will, or existence of its own; (2) that domination and control was used to commit fraud or wrong or other dishonest or unjust act, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong 5. The district court's present instruction to the jury on the alter ego claim was clearly in accordance with those principles.
In attacking the jury's alter ego finding, Hubly says the court's instructions overemphasized some corporate formalities to the exclusion of others, such as his contracting in the corporate name and paying debts with corporate checks, and that the court included in its instructions only those formalities favorable to B-E. That assertion is without merit.
Observance of corporate formalities was but one of several factors the jury was instructed to consider. Moreover, the list of corporate formalities included in the instruction did not purport to be exhaustive, the instruction directing the jury to consider the enumerated formalities and "... similar matters".
Hubly then says the district court erred in instructing the jury to consider whether the corporation was adequately financed, originally or subsequently, for the business in which it was engaged. We find no error in the instruction. Undercapitalization is generally regarded an important factor in applying the alter ego doctrine, 6 and sound policy considerations support a requirement for adequate financing as a prerequisite to...
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