Grand Laboratories, Inc. v. Midcon Labs of Iowa
| Decision Date | 17 August 1994 |
| Docket Number | 94-1573,Nos. 93-3165,s. 93-3165 |
| Citation | 32 F.3d 1277 |
| Parties | GRAND LABORATORIES, INC., Appellee, v. MIDCON LABS OF IOWA, Barco Laboratories, Inc.; Midcon Labs, Inc., a Missouri corporation; Barco Laboratories of Iowa, Inc., an Iowa corporation; Kansas City Southern Industries, Inc., a Delaware corporation; PVI, Inc., a Missouri corporation; Central Biomedia, Inc., a Missouri corporation, Appellants. GRAND LABORATORIES, INC., Appellee, v. MIDCON LABS OF IOWA, INC.; Barco Laboratories, Inc., Defendants, Midcon Labs, Inc., a Missouri corporation, Appellant, Barco Laboratories of Iowa, Inc., an Iowa corporation, Defendant, Kansas City Southern Industries, Inc., a Delaware corporation, Appellant, PVI, Inc., a Missouri corporation; Central Biomedia, Inc., a Missouri corporation, Defendants. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Robert B. Best, Jr., Kansas City, MO, argued (John K. Power, on the brief), for appellants.
George T. Qualley, Sioux City, IA, argued, for appellee.
Before MAGILL, Circuit Judge, FRIEDMAN, * Senior Circuit Judge, and LOKEN, Circuit Judge.
Defendants Kansas City Southern Industries, Inc. (KCSI) and its subsidiary Midcon Labs, Inc. (Midcon) appeal the district court's judgment awarding plaintiff Grand Laboratories, Inc. (Grand) compensatory and punitive damages in this diversity case. A jury found that Midcon was liable as a successor corporation for a default judgment of $1,785,380 entered for Grand and against Mid-Continent Biological Laboratories, Inc. in 1986, that KCSI was liable for the same amount under a "piercing the corporate veil" theory, and that KCSI was liable for $6,400,000 in punitive damages. Defendants argue that there was insufficient evidence to support a finding of Midcon's successor liability under Iowa law and that the district court erred in submitting the question of punitive damages to the jury. We reverse.
Grand is a South Dakota corporation that develops, produces, and markets veterinary biological products. Dr. Duane C. Pankratz (Pankratz) is Grand's sole shareholder. KCSI is a publicly-traded holding company located in Kansas City, Missouri, that owns various subsidiary companies. Midcon was a wholly-owned subsidiary of PVI, Inc., which in turn was a wholly-owned subsidiary of KCSI. Midcon was incorporated in 1984 for the purpose of developing, producing, and selling veterinary biological products, but ceased all operations in 1988.
Pankratz, who has a background in veterinary medicine and animal pathology, began developing veterinary biological products in the late 1960s. He formed Grand and, in the early 1970s, hired Patrick Graham to assist in the company's production efforts. In 1978, Grand decided to broaden its marketing efforts by licensing a company to produce and sell its products on a royalty basis. The licensee, Grand Laboratories of Missouri (Grand of Missouri), received permission to use Grand's trade secrets in producing veterinary biological products. Grand provided Grand of Missouri with product outlines 1 and other materials needed to make product; in exchange, Grand received a percentage of Grand of Missouri's net profits and a royalty based on the number of bottles of product sold. Grand of Missouri operated on a farm owned by Gary Buffington, who was a part owner and managing officer of the company. Graham was also a part owner of Grand of Missouri, as was Buffington's brother, Virgil.
In 1979, Pankratz fired Graham from Grand, accusing him of stealing $150,000 worth of product to sell for himself. Graham then began working for Grand of Missouri as a consultant. Soon after Graham was fired from Grand, Grand of Missouri stopped paying royalties to Grand even though it continued to produce Grand's products. In response, Grand obtained an injunction in federal district court enjoining Grand of Missouri and its agents from using Grand's trade secrets.
At around the same time, Graham and the Buffingtons joined with John Schrag, Don Wubbena, and Bill Thomas to form a company called Mid-Continent Biological Laboratories, Inc. (MBL). MBL sold veterinary biological products. In 1981, Grand brought suit in federal district court against MBL, Schrag, and Wubbena (MBL Case), alleging that MBL had misappropriated Grand's trade secrets and was producing the same products that Grand of Missouri had produced under its licensing agreement. In November 1983, the court entered an interlocutory default judgment (Default Judgment) in the MBL Case. The court enjoined MBL and its agents from using or disclosing Grand's trade secrets, ordered MBL to return to Grand any documents or materials containing Grand's trade secrets, but deferred quantifying monetary damages until the trial of other claims against Schrag and Wubbena. In March 1986, the court entered final default judgment against MBL in the amount of $1,785,000 (MBL Judgment). Grand never collected on this judgment.
In late 1983, after the Default Judgment was entered, Graham sent an inquiry to Oppenheimer Industries, Inc., of Kansas City, seeking investors to form a veterinary biological company. W.R. Jenkins, a Missouri entrepreneur, responded to Graham's inquiry. Jenkins and Graham met, discussed Graham's background in veterinary biological products, and inspected several properties suitable for starting the company. Jenkins then approached KCSI about acquiring the properties. Phillip Brown, a KCSI vice president, toured the properties and met with Graham and Jenkins to discuss the veterinary biological products industry.
In the spring of 1984, the properties were purchased in the name of Northern Farms, Inc., a company owned equally by Jenkins and KCSI. The purchase included a 329-acre farm in Irwin, Missouri, a 160-acre farm in Lamar, Missouri, and a building in Lamar. On May 1, 1984, Brown incorporated a new company called Midcontinent Biological Labs USA, Inc. (MBL II) to produce veterinary biological products. Initially, Northern Farms was the sole shareholder of MBL II. In June 1984, MBL II changed its name to Midcon. In early 1985, Jenkins decided he did not want to participate in the project, so Northern Farms sold all of the Midcon stock to KCSI. Midcon later became a subsidiary of PVI, Inc., which was a wholly-owned subsidiary of KCSI.
Midcon hired Graham and other consultants to assist in developing products. It sold veterinary biological products until 1988. A few months before Midcon ceased operations, Grand filed the instant lawsuit against KCSI and Midcon. 2 The third amended complaint contained six counts, four alleging that defendants had knowingly misappropriated Grand's trade secrets relating to veterinary biological products (Counts I, II, III, and VI) and two alleging that defendants were liable for the MBL Judgment because Midcon was a "mere continuation" of MBL and MBL had fraudulently transferred its assets to Midcon to avoid paying the judgment (Counts IV and V).
The district court bifurcated Counts I, II, III, and VI for trial separate from Counts IV and V. In May 1992, shortly before trial, the parties reached a settlement as to Counts I, II, III, and VI. The settlement agreement provided that in exchange for payment, Grand agreed to release defendants "from any and every claim, demand, cause of action and item of damage which was directly or indirectly alleged or claimed in Counts One, Two, Three, and Six of the Third Amended Complaint." In response to the settlement, the court dismissed Counts I, II, III, and VI with prejudice.
The district court denied defendants summary judgment on Counts IV and V, however, and those counts proceeded to trial. At the conclusion of Grand's case and at the conclusion of all of the evidence, defendants moved for judgment as a matter of law. The district court denied both motions and submitted Counts IV and V to the jury along with the issue of punitive damages. The jury found that Midcon was liable as MBL's successor corporation for the MBL Judgment on both "mere continuation" and fraudulent transfer grounds, that KCSI was liable for the MBL Judgment under a "piercing the corporate veil" theory, and that KCSI was liable for $6,400,000 in punitive damages. After the verdict was issued, defendants again moved for judgment as a matter of law. The district court denied the motion and defendants timely appealed. 3
Defendants raise two primary arguments on appeal: (1) that Grand failed as a matter of law to prove that Midcon is liable as MBL's successor corporation for the MBL Judgment, and (2) that the district court erred in submitting the issue of punitive damages to the jury. We agree and hold that Grand failed to show that Midcon is liable under a fraudulent transfer theory or that Midcon was a mere continuation of MBL. Moreover, because Grand failed to establish Midcon's underlying liability for the MBL Judgment, as a matter of law KCSI is not liable for that amount nor is it liable for punitive damages.
Defendants argue that Grand failed to prove that Midcon is liable as a successor corporation for the MBL Judgment. Specifically, they claim that, as a matter of law, Grand did not prove that there was a fraudulent transfer of assets from MBL to Midcon or that Midcon was a mere continuation of MBL. We review the district court's denial of defendants' posttrial motion for judgment as a matter of law. 4
In reviewing the district court's denial of a motion for judgment as a matter of law, this court must: (1) resolve direct factual conflicts in favor of the nonmovant; (2) assume as true all facts supporting the nonmovant which the evidence tended to prove; (3) give the nonmovant the benefit of all reasonable inferences; and (4) affirm the denial of the motion if the evidence so viewed would allow reasonable jurors to differ as to the conclusions that could be drawn. Hastings v. Boston...
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