Edwards Co., Inc. v. Monogram Industries, Inc.

• Decision Date: 23 April 1984
• Docket Number: No. 82-2019,82-2019
• Citation: 730 F.2d 977
• 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

Page 977

730 F.2d 977

EDWARDS COMPANY, INC., Plaintiff-Appellant, v. MONOGRAM INDUSTRIES, INC., Monotronics, Inc. and Entronic

Company, Defendants-Appellees.

No. 82-2019.

United States Court of Appeals, Fifth Circuit.

April 23, 1984.

Larry D. Knippa, Houston, Tex., for plaintiff-appellant.

Dan Matthews, San Antonio, Tex., for Monogram Industries, Inc.

Charles L. Babcock, Dallas, Tex., for amicus-National Realty Committee, Inc.

Appeal from the United States District Court for the Southern District of Texas.

Before CLARK, Chief Judge, BROWN, GEE, RUBIN, REAVLEY, POLITZ, RANDALL, TATE, JOHNSON, WILLIAMS, GARWOOD, JOLLY, HIGGINBOTHAM and DAVIS, Circuit Judges.

RANDALL, Circuit Judge:

This case involves 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 debt of Monotronics owed to Edwards. ³

After a bench trial, the district court, applying Texas law in this diversity case, refused to pierce Monotronics' veil. It held that "[Edwards] has failed to show that Monotronics was incorporated for an illegal, fraudulent, or improper purpose, that Monogram employed inequitable means to place [Edwards] in a position of disadvantage, or that [Edwards] acted to its detriment as a result of representations made by Monogram." Record Vol. III at 760. ⁴ A panel of this court reversed, 700 F.2d 994 (5th Cir.1983), holding that where a "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," id. at 995, notwithstanding the fact that the creditor has made no showing of fraud or injustice. We granted en banc rehearing, 715 F.2d 157 (5th Cir.1983), primarily to decide whether, under Texas law, ⁵ a plaintiff suing on a contract must show fraud or injustice before piercing the corporate veil, and secondarily to determine whether the panel correctly characterized Monotronics as having "no existence of its own." 713 F.2d 139, 142 (5th Cir.1983). ⁶

Contrary to the panel, we agree with the district court that in order to pierce the corporate veil on a contract claim in Texas, a showing of fraud or injustice is required and that no such showing was made here. Although not necessary to our result, we also conclude that the district court's findings of fact, which are not clearly erroneous, and the full record in this case do not support the panel's conclusion that Monotronics had no existence separate from that of Monogram. We therefore affirm the judgment of the district court.

I. FACTUAL BACKGROUND.

The facts of this case have been fully described in the panel opinion, and can be summarized here as follows: In 1977, Monogram decided to acquire Entronic Corporation, a corporation located in Earth City, Missouri that produced and sold smoke detectors. Entronic was a profitable business, with a sales volume of $9,000,000 in 1976, pre-tax earnings that reached $1,000,000 by June 30, 1977, and a net worth at June 30, 1977, of approximately $900,000. Entronic was considered an especially attractive acquisition because it had strong sales in the "captured market," i.e., among customers who were required by law to install smoke detectors.

Monogram decided to effect its purchase of Entronic through Monotronics, a wholly-owned subsidiary created in May 1977. ⁷ Monogram's contribution to the capital of Monotronics at formation was approximately $1,800,000 in cash. In July 1977, Monotronics bought seventy-five percent of Entronic's stock pro rata from its shareholders. Then Monotronics and these shareholders formed Entronic Company, a limited partnership organized under the laws of the State of Missouri. Monotronics constituted the sole general partner, with a seventy-five percent interest in the partnership's profits and losses, and the other shareholders in Entronic Corporation were limited partners with a total interest of twenty-five percent. Both Monotronics and the limited partners contributed their Entronic stock to the partnership and Entronic Corporation was subsequently liquidated.

Monotronics was operated out of Monogram's offices in Santa Monica, California. All of the officers and directors of Monotronics were either officers or directors of Monogram. Monotronics did not have its own payroll, telephone or office space, and all of Monotronics' bookkeeping was handled by Monogram. Entronic's employees scheduled production, ordered supplies and marketed Entronic's smoke alarms. Entronic's financing, which was required primarily for working capital and for a plant expansion in Texas, was accomplished through unsecured loans provided by or guaranteed by Monogram.

Entronic's business remained strong for several months: Immediately following the acquisition, one month's sales were approximately $1,800,000 and in March 1978 sales were $1,600,000. In April, however, sales fell to $1,000,000 and in May sales had fallen to $340,000, with losses of $187,000. This decline in profits is attributed to several factors: General Electric's "dumping" alarms on the market at greatly reduced prices; poor quality control and a high rate of smoke alarms returned to the plant; and difficulties in collecting accounts receivable.

Although several attempts were made to rescue Entronic, sales continued to drop and losses mounted. In February 1979, Monotronics sold its interest in Entronic to Newco W.A.H., a corporation headed by the former president of Entronic, Al Hayes. Soon after that, Newco filed a Chapter 11 bankruptcy petition in the Southern District of Texas. At the time of the trial, Monotronics was not conducting any business and had total assets of approximately $10,000.

Entronic's largest outstanding creditor was Edwards. Edwards manufactures the "midi-horns" that sound the alarm in smoke detectors. Edwards first sold midi-horns to Entronic Corporation in late 1976. Before Entronic was allowed to buy these horns on credit, Edwards performed an extensive credit check on Entronic, obtaining information not only from Entronic's bank but also from some of Entronic's creditors.

More midi-horns were sold to then-Entronic Company in the fall of 1977 and Edwards experienced difficulty in getting paid. Eventually, after putting a credit hold on Entronic, Edwards was paid. It then sold Entronic $352,247.68-worth of midi-horns from March 23, 1978 to June 30, 1978. Payment was not made by Entronic on this extended credit, resulting in liability of the general partner Monotronics for the debt, and this suit was then brought.

Edwards was not misled into extending any credit because of any misrepresentation made by Monogram. As the panel noted:

Edwards did not learn of Monogram's July 1977 acquisition until December 1977, after Edwards had experienced credit problems with Entronic in the fall of 1977. It did not learn of Monotronics' existence until the following September, over one month after the last shipment to Entronic. The shipments made in the spring and summer of 1978 were made without knowledge of Monotronics' existence, but they also were made without any assurance or representation from Monogram that it would stand for Entronic's debts.

700 F.2d at 999. ⁸

II. THE NECESSITY OF SHOWING "FRAUD OR INJUSTICE."

We note at the outset that Edwards seeks to hold Monogram liable for a contractual obligation as opposed to a tort claim. In First National Bank in Canyon v. Gamble, 134 Tex. 112, 132 S.W.2d 100 (1939), the Texas Supreme Court set forth the showing a plaintiff must make in order to pierce the corporate veil when suing on a contract. In Gamble, the plaintiff sued a subsidiary to collect on a promissory note. The court held the parent company liable for the subsidiary's debt because the two corporations had no separate identities and because the officers of the parent had breached a relationship of trust between the parties in interest. The court noted that the corporate fiction could not be disregarded unless "the separateness of the corporation has ceased and 'the facts are such that an adherence to the fiction of the separate existence of the corporation would ... sanction a fraud or promote injustice.' " 132 S.W.2d at 103 (quoting Minifie v. Rowley, 187 Cal. 481, 202 P. 673 (1921)) (emphasis added).

That a showing of fraud or injustice must be made by creditors was reaffirmed by the Texas Supreme Court when it discussed the different requirements for piercing the corporate veil in contract and tort cases in Bell Oil & Gas Co. v. Allied Chemical Corp., 431 S.W.2d 336 (Tex.1968), and Gentry v. Credit Plan Corp., 528 S.W.2d 571 (Tex.1975). In Bell, Allied Chemical Corporation sought recovery from Bell Oil & Gas Company for the debts incurred by an affiliated corporation, Mid-Tex Development Company, and a subsidiary corporation, Apollo Oil Company. The suit was "based upon contractual obligations and not upon fraud or some other tort." 431 S.W.2d at 338. The trial court and the court of civil appeals had found that Bell and its co-parent corporation, Lubell & Company, were liable for their subsidiaries' debts because they had " 'so used their respective stock ownership of Mid-Tex Development Company and Apollo Oil Company as to make those companies a mere agent, representative, adjunct, device, stooge or dummy' " of Bell. Id. at 339 (quoting court of civil appeals' quote of trial court). In reversing, the Texas Supreme Court held that, in a contract case, the corporate form is not to be disregarded unless the corporate entity is being " 'used to defeat public convenience, justify wrongs, such as violation of the anti-trust laws, protect fraud, or defend crime.' " Id. (quoting State v. Swift & Co., 187 S.W.2d 127, 131-32) (Tex.Civ.App.--Austin 1945, writ ref'd) (citations omitted).

In distinguishing contract claims from tort claims, the court noted that:

"The attempt to hold a parent corporation where the...