Edwards Co., Inc. v. Monogram Industries, Inc.
| Decision Date | 21 March 1983 |
| Docket Number | No. 82-2019,82-2019 |
| Citation | 700 F.2d 994 |
| Parties | EDWARDS COMPANY, INC., Plaintiff-Appellant, v. MONOGRAM INDUSTRIES, INC., Monotronics, Inc. and Entronic Company, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Larry D. Knippa, Houston, Tex., for plaintiff-appellant.
Dan Matthews, Houston, Tex., for Monogram Industries, Inc.
Thomas Collins, Houston, Tex., for Monotronics, Inc., et al.
Appeal from the United States District Court for the Southern District of Texas.
Before JOHNSON, WILLIAMS and JOLLY, Circuit Judges.
This case constitutes an attempt by Edwards Company, Inc., 1 to pierce the corporate veil of Monotronics, Inc., in order to hold its parent corporation, Monogram, Inc., 2 liable for $352,000 in debts owed to Edwards. 3
After a nonjury trial, the lower court, applying Texas law in this diversity case, refused to pierce Monotronics's veil. It held that in order to pierce the corporate veil in Texas a showing of fraud, illegality or injustice is required and that a showing of domination or control is insufficient.
Our interpretation of Texas law, as applied to the facts of this case, differs. In our view, where, as here, the subsidiary has no real corporate existence but serves as a mere conduit for the parent, Texas law permits a creditor to go against the parent for debts incurred. We therefore reverse and remand this case.
Once upon a time, there was a corporation in Earth City, Missouri, known as Entronic Corporation. Entronic produced and sold smoke detectors or alarms.
In 1977 Monogram decided that Entronic would be a good acquisition. Entronic had been in existence for several years, consistently showing a profit. In 1976 it had a sales volume of $9 million. By June 30, 1977, it had pre-tax earnings of approximately $1 million and a net worth of between $800-900,000. The future for Entronics was promising, especially considering that it had strong sales in the "captured market," i.e., where government legislation required installation of smoke detectors.
Monogram, an acquisition-minded company, decided in March or April of 1977 to purchase Entronic Corporation. It did so by creating a wholly owned subsidiary, Monotronics, 4 which bought seventy-five percent of the Entronic stock, dissolved Entronic Corporation and reformed it as Entronic Company. Monotronics comprised the sole general partner, and the former twenty-five percent shareholders in the corporation were limited partners with twenty-five percent ownership.
Several reasons existed for Monogram's decision to form Monotronics as a subsidiary-intermediary between it and Entronic Company. The smoke detector industry was a volatile, high-technology industry, and could "go up in smoke" at any moment, leaving creditors to be paid. Products liability was also a concern. 5 Taxes were also a concern in that, if Monogram were the general partner, both Texas and Missouri would tax all of Monogram's revenues.
So in May 1977 Monotronics was incorporated, and in July 1977 control of Entronic Corporation was purchased for $1.579 million. An additional $251,000 "capital" was put into Monotronics by Monogram. 6
Business remained strong for Entronic Company for several months. During one month shortly following acquisition sales were somewhere around $1.7-1.8 million. In March 1978 sales were $1.6 million. In April, however, sales fell to $1 million. By May sales had fallen to $340,000 with losses totalling $187,000. This precipitate decline in profits is attributed to several related factors: General Electric "dumping" alarms on the market at greatly reduced prices; poor quality control and a high rate of detectors returned to the plant; and difficulties in collecting accounts receivable.
Despite numerous and repeated efforts to salvage the situation, sales continued to decline, losses mounted, 7 and in February 1979 Monotronics sold its interest in Entronic to a new corporation, Newco W.A.H., headed by the former president of Entronic, Al Hays. Newco promptly filed a Chapter 11 bankruptcy proceeding in the Southern District of Texas. At the time of the trial Monotronics was not conducting any business and had total assets of about $10,000.
The largest outstanding creditor was Edwards. Edwards manufactures the "midi-horns" which sound the alarm in the smoke detectors. Edwards had sold horns to Entronic Company in the fall of 1977 and, after considerable difficulty and after putting a credit hold on Entronic, had been paid. Additional sales had been made between March 23, 1978, and June 30, 1978, of $352,247.86-worth of alarms specially designed for the Entronic smoke detectors. Payment was not made for this extended credit, and this suit was brought.
As stated, Monotronics was wholly owned by Monogram, with Monogram holding 100 percent of the outstanding shares in Monotronics. Monotronics's sole reason for existing was as general partner of Entronic Company. It had no other function.
All of the officers and directors of Monotronics were either officers or directors of Monogram. None of the Monotronics officers and directors lived in either Missouri or Texas, which were the sites of the smoke detector business of Entronic Company. The chairman of the board and chief executive officer of Monogram was also president of Monotronics. The treasurer and assistant treasurer of Monogram occupied similar positions with Monotronics.
When Monotronics acquired Entronic Corporation, Al Hays was Entronic's president. He remained as chief executive officer of Entronic Company, but he was never an employee, officer or director of Monotronics or Monogram. Hays was fired in October 1978 and replaced by Coy Powers, a Monogram employee from Venice, California. When Monotronics sold its general partnership in February 1979, it sold to Hays's newly formed corporation, Newco, which promptly filed for bankruptcy.
Monotronics never had a payroll, a telephone or office space. It did not have any stationery of its own until September 1978, and this was paid for by Monogram. One of the bank accounts in which its "capital" was deposited had no printed checks. The office space and telephones which Monotronics used were Monogram's at 100 Wilshire Boulevard in Santa Monica, California. This was Monotronics's headquarters, although Monotronics was never licensed to do business in California.
No one from Monotronics ever actually exercised day-to-day control over Entronic's operations. No one ever scheduled production, ordered supplies or marketed Entronic's smoke alarms. All of these "details" were performed by Entronic employees.
All of the bookkeeping for Monotronics was handled by Monogram. No charges were assessed for this bookkeeping. Monotronics's federal income tax returns were combined with Monogram's. Monogram's SEC and annual reports to stockholders stated that it was in the smoke detector business.
Despite the initial infusion of $251,000 "capital" into Monotronics, this money lay fallow until Monotronics sold its interest in Entronic. 8 The actual financing mechanism was for Monogram to make direct unsecured loans to Entronic 9 or to line up credit for Entronic. 10 Monotronics was essentially leap-frogged in all these financial matters.
Monogram made numerous payments for accounting, legal and other services rendered to Monotronics and Entronic. These "advances for expenditures" totalled over $273,000 for fiscal 1978 and 1979. Repayment for these advances was not made.
Monogram paid state franchise taxes for Monotronics, patent search fees and filing fees.
Although minutes were kept in Monotronics's name, they were at best inconsistent. For example, in October 1977, when Monotronics formally authorized the borrowing of money from Monogram, over $484,000 in unsecured advances had already been made by Monogram to Entronic. On the other hand, no minutes were taken to record the firing of Al Hays, the move of the entire operation from Missouri to Texas or the doubling of the size of the plant, 11 the hiring of Coy Powers, nor are there any minutes dealing with the severe deterioration of the business or any proposal to recover from that deterioration until November 1978, long after the deterioration had begun.
No effort was ever made to get consent of Entronic Company's limited partners to business decisions concerning Entronic.
When it became apparent that the situation was not salvagable, Monogram devised a number of plans for the impending bankruptcy, including the one which eventually was used (sale to Newco and Al Hays of Monotronics's interest; the $200,000 loan; and attempted release of Monogram/Monotronics from debts owed to general unsecured creditors). One plan would have involved obtaining agreement from ninety-five percent of the creditors for relinquishment of their claims in exchange for payment by Monogram of fifty cents "on the dollar." The high percentage of creditor agreement to the plan was considered necessary because Monogram felt that those creditors who did not agree could thereafter go against Monogram for the debts. As the chairman and chief executive officer of Monogram stated: "[A]t that point Monogram would be in to such an extent that there would be, as a practical matter ... they'd have no choice but to pay."
As stated, Edwards had sold its "midi-horns" to Entronic in the fall of 1977, unaware of the entry of Monogram/Monotronics on the scene. Although it had difficulty receiving payment at that time, its claims were eventually satisfied.
Edwards learned of Monogram's involvement with Entronic in December 1977 when it obtained a Dun & Bradstreet report dated June 2, 1977, which announced the prospective acquisition by Monogram. No mention of Monotronics or of any subsidiary involvement was contained in the report. 12
According to testimony at trial, Edwards did not learn of Monotronics's existence until September 1978. It learned of...
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