Empire Steel Corp. of Texas, Inc. v. Superior Court of Los Angeles County

• Decision Date: 16 November 1961
• Citation: 17 Cal.Rptr. 150,366 P.2d 502,56 Cal.2d 823
• Court: California Supreme Court
• Parties: , 366 P.2d 502 EMPIRE STEEL CORPORATION OF TEXAS, INC., Petitioner, v. SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent, Associated Metals & Minerals Corporation, Real Party in Interest. L. A. 26458.

Page 150

17 Cal.Rptr. 150

56 Cal.2d 823, 366 P.2d 502

EMPIRE STEEL CORPORATION OF TEXAS, INC., Petitioner, v. SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent Associated Metals & Minerals Corporation, Real Party in Interest.

L. A. 26458.

Supreme Court of California, In Bank.

Nov. 16, 1961.

Frank De Marco, Jr., Los Angeles, for petitioner.

No appearance for respondent.

Greenberg, Shafton & Schlei and Norbert A. Schlei, Los Angeles, for real party in interest.

WHITE, Justice.

This is a petition for writ of prohibition by Empire Steel Corporation of Texas, Inc. (hereinafter referred to as Empire), wherein it seeks to prevent respondent superior court from proceeding in an action brought against it by Associated Metals and Minerals Corporation (hereinafter referred to as Associated), the real party in interest herein. Empire moved to quash the instant service of summons on the ground that it was not subject to the jurisdiction of respondent court, but its motion was denied by that court. The present writ also is sought on jurisdictional grounds. Petitioner is organized and exists under the laws of Texas, and has not formally qualified to do business in California.

In the pending action, Associated seeks to recover $25,000 alleged damages for breach of a contract by Gachman Steel Corporation of California (hereinafter referred to as Gachman), a wholly owned and controlled subsidiary of Empire, in that Gachman failed to take delivery of quantities of steel purchased from Associated. As plaintiff, Associated also seeks to recover its damages from Empire, on the grounds that Gachman operated in California as the alter ego of Empire, and that Empire's conduct with respect to Gachman was fraudulent as to those firms doing business with Gachman. The Gachman corporation is in bankruptcy. The instant service of process upon Empire in the basic action was effected when a copy of the summons and complaint was delivered to Dan J. Gachman, a resident of Los Angeles, who is currently vice-president of Empire and president of Gachman. (Corp.Code, § 6500.) An alternative writ of prohibition issued. ¹

Empire is engaged in brokering, warehousing, and selling steel products. While most of its business activity is confined to Texas, it made occasional sales in California in the period between 1945 and 1957. In 1957, Empire desired to carry on a more extensive business in California, but was advised by local financing institutions that it would be necessary to have a corporation whose assets and books were kept in California before local credit could be extended.

The Gachman corporation was organized in California in June 1957, as a wholly owned subsidiary of Empire. Dan Gachman, who according to verified averments by the real party in interest owns 47.5 per cent of the outstanding stock of Empire, moved to Los Angeles and assumed the management of Gachman, Inc. The real party in interest also avers that Dan Gachman was Empire's president until sometime between September 1959 and November 1960 (allegedly based upon Dun & Bradstreet reports). It further appears according to the real party in interest that one Leon Gachman also owns 47.5 per cent of Empire's stock, and that the remaining five per cent is owned by Jacob Gachman. Apparently Dan, Leon, and Jacob Gachman make up the boards of directors and executive personnel for both Empire and Gachman.

Gachman was established with inventory, office furniture, and fixtures furnished largely by Empire, and Gachman leased its vehicles from the same corporation which leased vehicles to Empire. The leasing corporations is also owned by the Gachman family. Empire made an initial transfer of steel inventory valued at approximately $242,000, and thereafter at least another $23,000 worth of Empire's inventory was transferred to Gachman, Inc. Apparently Empire's customers in California continued to make inquires of Empire, but they were referred to Gachman, Inc. Dan Gachman testified that in the three years of Gachman's operations there were very many such referrals. Also, Empire made some direct shipments to points outside of California for customers of Gachman, Inc.

In return for the value of the initial inventory and equipment in excess of the value of its capital stock, Gachman, inc. gave to Empire its note for approximately $92,000, payable 18 months from June 1957 at five and one-half per cent interest. Concerning the $92,000 indebtedness, Dan Gachman testified: 'That was supposed to have been paid up pretty quick, but * * * we paid them $75,000 and never got caught up. Q: When did you stop making payments on schedule to Empire Steel Corporation? A: I never made an exact schedule of payments with them.' The balance of $17,000 was never paid, and the note was not renegotiated between the two corporations. Dan Gachman testified that in the two years prior to February 1961, 'about the only way' that Empire received any payments from Gachman, Inc. was through offsets for 'tires * * * or various and sundry things.' But as of November 1960, Gachman owed Empire approximately $40,000. When asked, 'How did it get back up to $40,000?', Dan Gachman testified: 'I think we bought some material from time to time. I rode them (Empire) and in preference paid someone else. I used them more than I used any other creditor, let's put it that way.' Dan Gachman also testified that in the later years of the operations of Gachman, many creditors 'were screaming for their money.' He further stated: 'I was juggling the best I could with the amount of money I had to stay in business.'

The instant contract with Associated was made in California in February 1960, a time when it was fairly well known that Gachman was financially unstable, and the contract contains measures designed to preserve a security interest for Associated in the goods to be sold. But the real party in interest states that the latter contract merely 'superseded and replaced a number of written contracts relating to the same steel materials entered into during a period of approximately one year prior to February (1960),' at times when Associated did rely on the then good credit of Gachman, Inc.

It was stated on behalf of Associated in its declaration in the trial court in opposition to Empire's motion to quash service of process that: 'The testimony of Mr. Gachman indicates that Empire used Gachman Steel as its alter ego; that Gachman Steel has long been insolvent if its obligations to Empire and other companies owned by the Gachmans were treated as bona fide debts; that Empire withheld action on its purported debts owed by Gachman Steel so that the latter company could go on in business and incur debts to third parties like plaintiff.' The real party in interest has also alleged that Empire's shipments to Gachman were disguised contributions to capital made in the form of sales so that Empire could claim creditor status in the event of bankruptcy by Gachman. Empire is presently asserting a creditor's claim against the bankrupt Gachman corporation for approximately $40,000.

Whether service of process upon petitioner's vice-president Dan J. Gachman, pursuant to section 6500 of the Corporations Code, was valid depends herein upon whether Empire was 'doing business in this State,' within the meaning of Code of Civil Procedure, section 411, subdivision 2. (Cosper v. Smith & Wesson Arms Co., 53 Cal.2d 77, 82, 346 P.2d 409; West Publishing Co. v. Superior Court, 20 Cal.2d 720, 726, 128 P.2d 777.) In California, the aforesaid term, 'doing business,' 'is synonymous with the power of the state to subject foreign corporations to local process.' (Cosper v. Smith & Wesson Arms Co., supra, 53 Cal.2d 77, 82, 346 P.2d 409, 413.) Thus, whether or not a foreign corporation is doing business within this state and is subject to the jurisdiction of our courts depends upon the limits for such jurisdiction as determined by our statutory and constitutional provisions, which in turn are subject to applicable federal constitutional guarantees, especially the due process guarantee of the Fourteenth Amendment. (Jeter v. Austin Trailer Equipment Co., 122 Cal.App.2d 376, 381, 265 P.2d 130.) The problem of jurisdiction over a foreign corporation is therefore a combined state and federal question. (Harris v. Deere & Company, D.C., 128 F.Supp. 799, 801-802.) Specifically, we have held that the term 'doing business' is a descriptive one that the courts have equated with such minimum contacts with the state 'that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice. " (Henry R. Jahn & Son v. Superior Court, 49 Cal.2d 855, 858, 323 P.2d 437, 439.)

Petitioner argues that Empire itself has not had the requisite 'minimum contacts' within this state, since all business affairs in California have been carried on through its subsidiary, Gachman, Inc. Principal reliance is placed upon Cannon Manufacturing Company v. Cudahy Packing Company, 267, U.S. 333, 45 S.Ct. 250, 69 L.Ed. 634, for the proposition that ownership and control of a subsidiary corporation does not subject the parent corporation to jurisdiction within the state where the subsidiary is engaged in business activity. The Cannon case held that the parent corporation was not 'present' within the state wherein the wholly owned and controlled subsidiary carried on business, since parent and subsidiary were separate legal entities. (267 U.S. at 336-338, 45 S.Ct. 250.) In the words of Justice Brandeis, the spokesman for the court in that case: '(W)e cannot say that for purposes of jurisdiction, the business of the Alabama (subsidiary) corporation in North Carolina (the state of suit) became the business of the defendant (parent corporation).' (267 U.S. at 338, 45 S.Ct. at 252.) However, it was noted in Cannot that the cause of action there sued upon was not related to the activities of the subsidiary in the state of suit, but was an action on a contract...