Castleberry v. Branscum

• Decision Date: 02 July 1986
• Docket Number: No. C-4536,C-4536
• Citation: 721 S.W.2d 270
• Parties: Joe A. CASTLEBERRY, Petitioner, v. Byron BRANSCUM et al., Respondents.
• Court: Texas Supreme Court

Page 270

721 S.W.2d 270

Joe A. CASTLEBERRY, Petitioner, v. Byron BRANSCUM et al., Respondents.

No. C-4536.

Supreme Court of Texas.

July 2, 1986.

Rehearing Denied Jan. 14, 1987.

Bill Liebbe, McKool & Vassalo, Dallas, for petitioner.

Allen R. Morris, Dallas, for respondents.

SPEARS, Justice.

Joe Castleberry sued Texan Transfer, Inc. and Byron Branscum and Michael Byboth, individually, on a promissory note signed by the corporation for Castleberry's shares in the closely held corporation. The jury found that Branscum and Byboth used Texan Transfer as a sham to perpetrate a fraud. Based on the jury findings, the trial court rendered judgment against Texan Transfer, disregarding its corporate fiction to hold both Byboth and Branscum individually liable. The court of appeals reversed and rendered, holding: (1) there was no evidence to support the jury's findings; (2) the instruction submitted to the jury was defective; and (3) the issues should not have been submitted to the jury because disregarding the corporate fiction is solely a question of law. 695 S.W.2d 643. We reverse the court of appeals judgment and affirm the trial court, because under the applicable law there was some evidence to support the jury's verdict, the objection to the instruction was improper, and disregarding the corporate fiction is a fact question for the jury.

Disregarding the Corporate Fiction

The corporate form normally insulates shareholders, officers, and directors from liability for corporate obligations; but when these individuals abuse the corporate privilege, courts will disregard the corporate fiction and hold them individually liable. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571, 573 (Tex.1975); Bell Oil & Gas Co. v. Allied Chemical Corp., 431 S.W.2d 336, 340 (Tex.1968); Pace Corp. v. Jackson, 284 S.W.2d 340, 351 (Tex.1955).

We disregard the corporate fiction, even though corporate formalities have been observed and corporate and individual property have been kept separately, when the corporate form has been used as part of a basically unfair device to achieve an inequitable result. ¹ Bell Oil & Gas Co. v Allied Chemical Corp., 431 S.W.2d at 340. Specifically, we disregard the corporate fiction:

(1) when the fiction is used as a means of perpetrating fraud; ²

(2) where a corporation is organized and operated as a mere tool or business conduit of another corporation;

(3) where the corporate fiction is resorted to as a means of evading an existing legal obligation;

(4) where the corporate fiction is employed to achieve or perpetrate monopoly;

(5) where the corporate fiction is used to circumvent a statute; and

(6) where the corporate fiction is relied upon as a protection of crime or to justify wrong. ³

Pacific American Gasoline Co. of Texas v. Miller, 76 S.W.2d 833, 851 (Tex.Civ.App.--Amarillo 1934, writ ref'd). See also Roy E. Thomas Const. Co. v. Arbs, 692 S.W.2d 926, 938 (Tex.App.--Ft. Worth 1985), writ ref'd n.r.e. per curiam, 700 S.W.2d 919 (Tex.1985); Roylex, Inc. v. Langson Bros. Const. Co., 585 S.W.2d 768, 771 (Tex.Civ.App.--Houston [1st Dist.] 1979, writ ref'd n.r.e.); Wolf v. Little John Corp. of Liberia, 585 S.W.2d 774, 778 (Tex.Civ.App.--Houston [1st Dist.] 1979, writ ref'd n.r.e.); Sutton v. Reagan & Gee, 405 S.W.2d 828, 837 (Tex.Civ.App.--San Antonio 1966, writ ref'd n.r.e.).

Many Texas cases have blurred the distinction between alter ego and the other bases for disregarding the corporate fiction and treated alter ego as a synonym for the entire doctrine of disregarding the corporate fiction. See, e.g., William B. Roberts, Inc. v. McDrilling Co., 579 S.W.2d 335 (Tex.Civ.App.--Corpus Christi 1979, no writ); Dunn v. Growers Seed Ass'n, 620 S.W.2d 233, 236-37 (Tex.Civ.App.--Amarillo 1981, no writ). However, as Pacific American Gasoline Co. of Texas v. Miller indicates, alter ego is only one of the bases for disregarding the corporate fiction: "where a corporation is organized and operated as a mere tool or business conduit of another corporation."

Alter ego applies when there is such unity between corporation and individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice. First Nat. Bank in Canyon v. Gamble, 134 Tex. 112, 132 S.W.2d 100, 103 (1939). It is shown from the total dealings of the corporation and the individual, including the degree to which corporate formalities have been followed and corporate and individual property have been kept separately, the amount of financial interest, ownership and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes. See Lucas v. Texas Industries, Inc., 696 S.W.2d 372, 374 (Tex.1984); Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573-75. Alter ego's rationale is: "if the shareholders themselves disregard the separation of the corporate enterprise, the law will also disregard it so far as necessary to protect individual and corporate creditors." Ballantine, Corporations § 123 at 294 (1946).

The basis used here to disregard the corporate fiction, a sham to perpetrate a fraud, is separate from alter ego. It is sometimes confused with intentional fraud; however, "[n]either fraud nor an intent to defraud need be shown as a prerequisite to disregarding the corporate entity; it is sufficient if recognizing the separate corporate existence would bring about an inequitable result." Fletcher, Cyclopedia Corporations § 41.30 at 30 (Supp.1985); Cary & Eisenberg, Corporations 101 (5th ed. 1980); R. Clark, The Duties of the Corporate Debtor to its Creditors, 90 Harv. L. Rev. 505, 543, 44 (1977); 1 Hildebrand, Texas Corporations § 5 at 40 (1942); 2 G. Hornstein, Corporation Law and Practice § 755 (1959); See also Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573 (1975); Pacific American Gasoline Co. of Texas v. Miller, 76 S.W.2d at 840, 849; Rose v. Intercontinental Bank, N.A., 705 S.W.2d 752, 756 (Tex.App.--Houston [1st Dist.] 1986, writ ref'd n.r.e.); Tigrett v. Pointer, 580 S.W.2d 375, 385 (Tex.Civ.App.--Dallas 1979, writ ref'd n.r.e.); National Marine Service, Inc. v. Thibodeaux, 501 F.2d 940, 942 (Fifth Cir.1974). Thus, we held in Pacific American Gasoline Co. of Texas v. Miller that note holders could disregard the corporate fiction without showing common-law fraud or deceit when the circumstances amounted to constructive fraud. 76 S.W.2d at 840, 849. In Tigrett v. Pointer, the Dallas Court of Appeals disregarded the corporate fiction, stating correctly that "[w]hether [the individual] misled them or subjectively intended to defraud them is immaterial ... [f]or the action was so grossly unfair as to amount to constructive fraud." 580 S.W.2d at 385.

To prove there has been a sham to perpetrate a fraud, tort claimants and contract creditors must show only constructive fraud. We distinguished constructive from actual fraud in Archer v. Griffith:

Actual fraud usually involves dishonesty of purpose or intent to deceive, whereas constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interests.

390 S.W.2d 735, 740 (Tex.1964).

Because disregarding the corporate fiction is an equitable doctrine, Texas takes a flexible fact-specific approach focusing on equity. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 575; First Nat. Bank in Canyon v. Gamble, 132 S.W.2d at 103; Pacific American Gasoline Co. v. Miller, 76 S.W.2d at 851; Tigrett v. Pointer, 580 S.W.2d at 381-82. For example, in First Nat. Bank in Canyon v. Gamble, this court held that we would disregard the corporate fiction when the "facts are such that adherence to the fiction would promote injustice and lead to an inequitable result." 132 S.W.2d at 105. More recently, in Gentry v. Credit Plan Corp. of Houston, we again took an equitable approach, holding that the purpose in disregarding the corporate fiction "is to prevent use of the corporate entity as a cloak for fraud or illegality or to work an injustice, and that purpose should not be thwarted by adherence to any particular theory of liability." 528 S.W.2d at 575. Dean Hildebrand, a leading authority on Texas corporation law, stated well the equitable approach: "When this [disregarding the corporate fiction] should be done is a question of fact and common sense. The court must weigh the facts and consequences in each case carefully, and common sense and justice must determine [its] decision." Hildebrand, Texas Corporations § 5 at 42 (1942). ⁴

The Evidence

In this case, the court of appeals found no evidence to support the jury verdict. The jury instruction presented alternative bases for disregarding the corporate fiction, including using Texan Transfer as a sham to perpetrate a fraud. We turn first to see whether there is some evidence to support this basis, since it is Castleberry's strongest. Under the no evidence test, we consider only the evidence and inferences supporting the jury's findings and disregard the evidence and inferences to the contrary. Sagebrush Sales Co. v. Strauss, 605 S.W.2d 857, 859 (Tex.1980).

In June 1980, Branscum, Byboth, and Castleberry formed a partnership to move furniture. Three months later, they incorporated as Texan Transfer, Inc. They each owned one-third of the closely held corporation's shares. Byboth was president; Castleberry was vice-president; and Branscum was secretary-treasurer. Soon thereafter Branscum formed a competing business, Elite Moving. When Castleberry found out about Elite Moving, he filed an assumed name certificate. Castleberry testified that when Branscum found out about the assumed name certificate:

A He [Branscum] became very upset, [stating] that it was his company and his name, and that if he wanted to start a moving company that it was his prerogative, he could do...