Hanson Southwest Corp. v. Dal-Mac Const. Co.

• Decision Date: 30 March 1977
• Docket Number: No. 19008,DAL-MAC,19008
• Citation: 554 S.W.2d 712
• Parties: HANSON SOUTHWEST CORPORATION and Hanson Development Company, Appellants, v.CONSTRUCTION COMPANY, Appellee.
• Court: Texas Court of Appeals

Page 712

554 S.W.2d 712

HANSON SOUTHWEST CORPORATION and Hanson Development Company, Appellants, v. DAL-MAC CONSTRUCTION COMPANY, Appellee.

No. 19008.

Court of Civil Appeals of Texas, Dallas.

March 30, 1977.

Rehearing Denied July 6, 1977.

Joel Held, Simon, Twombly & Held, L. Vance Stanton, Strother, Davis, Stanton & Levy, Dallas, for appellants.

Robert H. Thomas, Strasburger & Price, Dallas, for appellee.

AKIN, Justice.

Hanson Southwest Corporation and Hanson Development Company appeal from an adverse judgment rendered in favor of Dal-Mac Construction Company for damages allegedly arising from the breach of a construction contract. The contract was between Dal-Mac and Hanson Southwest for the construction of a shopping center known as Masters Village. Dal-Mac worked on the center for approximately two and one-half months, but stopped because it had not been paid. Dal-Mac then sued Hanson Southwest on the contract and its parent corporation, Hanson Development, on an alter-ego theory. Acting on a jury verdict, the trial court rendered judgment against both defendants jointly and severally for $422,504.36, plus $87,500.00 in attorneys' fees. Both defendants appeal. Because we hold that the jury findings and the evidence fail to support a judgment against the parent corporation, we reverse and render with respect to Hanson Development. Because we also hold that attorneys' fees are not recoverable on the contract, we likewise reverse and render with respect to the recovery of attorneys' fees allowed by the trial court. With respect to the claim of Dal-Mac against Hanson Southwest, we reverse and remand for a new trial because the damages awarded are unsupported by evidence.

Alter Ego

Dal-Mac asserts, and the jury found, that Hanson Southwest was the alter ego of Hanson Development and, therefore, liable to it in damages resulting from Dal-Mac's contract with Hanson Southwest. To support the findings with respect to alter ego, Dal-Mac relies on Hanson Development's guaranty of the purchase-money loan for the site, Hanson Development's control of the flow of funds to Hanson Southwest, Hanson Development's ownership of all of the stock of Hanson Southwest, and representations made to third parties that Masters Village was owned by Hanson Development or by the "Hanson Companies" (an umbrella term used to refer to a number of related companies, although no legal entity by that name exists). We cannot agree that these factors, even if established, make Hanson Southwest the alter ego of Hanson Development. There must be some ground in addition to mere unity of financial interest, ownership, and control for a court to treat them as one in law and make each responsible for the torts and contracts of the other. That additional ground turns on whether there was good faith and honesty in the use of a subsidiary corporate entity for legitimate ends. Generally, it is determined by whether the subsidiary corporate entity is so controlled and manipulated by the parent for the parent's own interests that it prejudices innocent third parties or is in contravention of the public welfare. See State v. Swift & Co., 187 S.W.2d 127, 133-34 (Tex.Civ.App. Austin 1945, writ ref'd); Pelletier, Corporations, Annual Survey of Texas Law, 21 S.W.L.J. 134, 141-42 (1967); Ballantine, Parent and Subsidiary Corporations, 14 Cal.L.Rev. 12, 19 (1926). The general rule is that courts will not disregard separate legal entities because of identity of ownership, directors and officers unless the purpose of the relationship is to defeat public convenience Much confusion exists in determining the criteria for disregarding the corporate entity. This confusion exists partially because of the words used to describe the condition. Courts have used such terms as "dummy," "sham," "instrumentality," "agency," "adjunct," "tool," "device," and "business conduit," to name a few. What these words mean relative to the fact situation of the case is elusive. As Mr. Justice Cardozo, then Associate Judge of the New York Court of Appeals, observed in Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 155 N.E. 58, 61 (1926):

protect fraud, defend crime, or justify wrongs, such as violation of anti-trust laws. Bell Oil & Gas Co. v. Allied Chemical Corp., 431 S.W.2d 336, 339 (Tex.1968).

The whole problem of the relation between parent and subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterized as an "alias" or a "dummy." All of this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation. Dominion may be so complete, interference so obstrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent. Where control is less than this, we are remitted to the tests of honesty and justice. Ballantine, Parent and Subsidiary Corporations, 14 Cal.L.Rev. 12, 18, 19, 20. The logical consistency of a juridical conception will indeed be sacrificed at times, when the sacrifice is essential to the end that some accepted public policy may be defended or upheld. This is so, for illustration, though agency in any proper sense is lacking where the attempted separation between parent and subsidiary will work a fraud upon the law . . . . At such times unity is ascribed to parts which, at least for many purposes, retain an independent life, for the reason that only thus can we overcome a perversion of the privilege to do business in a corporate form. (emphasis added)

The problem as delineated by Justice Cardozo is as troublesome today as then because of the metaphors used by our courts to describe the act or acts necessary to trigger the application of alter ego. Courts have generally been less reluctant to disregard the corporate entity in tort cases than in cases of contract because the injured party in contract cases had the opportunity to select the entity with whom he contracted; in a tort case, no such selection is made by a plaintiff. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571, 573 (Tex.1975). Because Dal-Mac's contract with the subsidiary, Hanson Southwest, is the basis of the claim against the parent, Hanson Development, our further consideration of the alter-ego doctrine will be limited to the more stringent standards applied to contracts. In Bell Oil & Gas Co., at 340, Justice Norvell quoted from Douglas and Shanks, Insulation from Liability Through Subsidiary Corporation, 39 Yale L.J. 193, 210-11 (1929), the following:

The attempt to hold a parent corporation where the claim asserted is of contractual origin presents added difficulties. The very reasonable question must be met and answered why one contracted with the subsidiary and received the promise which he bargained for but who has been disappointed in the fulfillment by the subsidiary of its commitment should then be allowed to look to the parent. As a matter of contract right it is evident he may not. Additional compelling facts must appear.

Justice Norvell also observed that it is difficult, if not impossible, to put these "additional compelling facts" in the form of a "laundry list." Bell Oil & Gas Co. at 340: see 1 Hildebrand, Texas Corporations § 5 at 43 (1942). Generally, courts find these "additional compelling facts" in cases where the plaintiff has acted to his detriment upon representations made by officers of the parent corporation concerning control Since Dal-Mac cannot hold Hanson Development on its contract with Hanson Southwest merely because it owns and controls the subsidiary, we must review the evidence to ascertain if additional compelling facts exist so as to justify ignoring the corporate entity of Hanson Southwest and to hold Hanson Development liable. Virtually all of the negotiations leading to the contract were between Dal-Mac's chief executive officer, Herbert McJunkin, and Hanson Southwest's Vice President, John Notestine. Notestine originally introduced himself as being with the "Hanson Companies." Notestine was, in fact, an officer of Hanson Southwest only. Notestine also furnished McJunkin with copies of "Topics," a publication of the "Hanson Companies" directed to potential shopping-center tenants. This publication listed centers as being operated by the "Hanson Companies" regardless of which of several related corporations actually owned the center. McJunkin testified that, prior to execution of the contract, he attempted to obtain a credit report on Hanson Southwest through his bank, but was told that no reports were available. Fearing that Hanson Southwest might be a "shell" corporation, he requested that the contract be guarantied by the Hanson brothers personally or by Hanson Development, but never received a guaranty. McJunkin admitted that he was told that he would not receive a personal guaranty from the Hanson brothers prior to execution of the contract on May 30, but was uncertain whether he was told that he would not receive a Hanson Development guaranty. At a meeting with Notestine on June 25, McJunkin was told that a "financial assurance" (either a Hanson Development guaranty or a copy of a loan commitment) was in the mail. Despite never receiving this assurance, Dal-Mac continued construction until August 12.

and ownership of the subsidiary and the payment of its debts. See 39 Yale L.J. at 211.

Under these facts, Dal-Mac has not answered Professor Shank's question of why the claimant who contracted with the subsidiary and is disappointed should be permitted recovery from the parent. Dal-Mac entered into the contract with Hanson Southwest realizing that it might not be financially sound and despite fruitless efforts to obtain a guaranty from the...