K Mart Corp. v. Knitjoy Mfg., Inc.

• Decision Date: 21 June 1982
• Docket Number: Civ. No. 80-74586.
• Citation: 542 F. Supp. 1189
• Parties: K MART CORPORATION, a Michigan corporation, Plaintiff, v. KNITJOY MANUFACTURING, INC., a foreign corporation; Leo F. Owyong and Daisy D. Owyong, individuals, Defendants.
• Court: U.S. District Court — Western District of Michigan

542 F. Supp. 1189

K MART CORPORATION, a Michigan corporation, Plaintiff, v. KNITJOY MANUFACTURING, INC., a foreign corporation; Leo F. Owyong and Daisy D. Owyong, individuals, Defendants.

Civ. No. 80-74586.

United States District Court, E. D. Michigan, S. D.

June 21, 1982.

James C. Tuttle, Troy, Mich., Robert W. Steele, Robert E. Hebda, Edward C. LaRose, Howrey & Simon, Washington, D. C., for plaintiff.

Roger K. Timm, Nancy C. Edmunds, Dykema, Gossett, Spencer, Goodnow & Trigg, Detroit, Mich., for defendants.

SUPPLEMENTAL OPINION AND ORDER ON JURISDICTION

COHN, District Judge.

I.

A.

This is an action by K Mart Corporation (K Mart) for breach of express and implied warranties and fraudulent misrepresentation against Knitjoy Manufacturing, Inc. (Knitjoy) and its principals, Leo and Daisy Owyong, in the sale of clothing from Knitjoy to K Mart which K Mart alleges failed to comply with the Flammable Fabrics Act, 15 U.S.C. § 1191 et seq (the Act). Knitjoy, a Philippines corporation, and the Owyongs, residents of the Philippines, have moved to dismiss the complaint for lack of personal jurisdiction, Fed.R.Civ.P. 12(b)(2).

Suit was begun on December 30, 1980; the motion to dismiss was filed on April 30, 1981 and K Mart responded on May 27, 1981. After supplemental briefs were filed by the parties, the Court heard argument in chambers on June 11, 1981, at which time it indicated it would deny Knitjoy's motion. K Mart asked for additional discovery as to the question of jurisdiction over the Owyongs.

On December 21, 1981 the Court entered an Opinion and Order on Jurisdiction formally denying Knitjoy's motion to dismiss and setting a briefing schedule on the Owyongs' motion in light of discovery conducted in the Far East in October 1981. 534 F.Supp. 153 (E.D.Mich.1981). K Mart filed a supplemental brief on February 23, 1982, accompanied by a motion for a preliminary injunction to restrain defendants from removing assets from the United States. Knitjoy and the Owyongs responded on March 22, 1982. The parties filed reply briefs on April 22 and May 7, 1982.

The Court heard oral argument on May 11, 1982. In part at the suggestion of the Court, the parties filed post-hearing briefs. K Mart has also directed two letters to the Court to which defendants have responded. Finally, K Mart has filed a motion for leave to amend its complaint so it could make more specific its allegations against the Owyongs.¹

B.

The Court concludes:

(1) The Owyongs' motion to dismiss is denied. While the Court finds the facts presented by K Mart insufficient to pierce the corporate veil under either Michigan or Philippine law,² the Owyongs are subject to personal jurisdiction in Michigan under M.S.A. § 27A.705(2) M.C.L.A. § 600.705(2) because of K Mart's allegations that they were parties to a fraud which caused consequences giving rise to an action for tort to occur in Michigan (2) K Mart's motion for a preliminary injunction restraining Knitjoy and the Owyongs from removing assets from the United States is denied;

(3) K Mart's motion for leave to amend its complaint is granted.

II.

The facts underlying the formation of the contract between K Mart and Knitjoy are set forth in the Court's December 21, 1981 opinion. Additional facts are included as necessary in this opinion as part of the Court's analysis of the legal contentions of the parties. The burden of proving facts sufficient to support the exercise of personal jurisdiction over the Owyongs rests with K Mart. McNutt v. GMAC, 298 U.S. 178, 189, 56 S.Ct. 780, 785, 80 L.Ed. 1135 (1936). However, K Mart needed only demonstrate a prima facie case of the existence of jurisdictional facts and the factual allegations in its pleadings are assumed to be true; K Mart need not demonstrate the validity of its claim on the merits. O'Hare Int'l. Bank v. Hampton, 437 F.2d 1173, 1176-77 and n.2 (7th Cir. 1971); United States v. Montreal Trust Co., 358 F.2d 239, 242 (2nd Cir.), cert. denied, 384 U.S. 919, 86 S.Ct. 1366, 16 L.Ed.2d 440 (1966).

K Mart relies on two legal theories for the exercise of personal jurisdiction over the Owyongs. First, K Mart argues that Knitjoy is the "alter ego" of the Owyongs and the Court should pierce the corporate veil of Knitjoy, treating its acts as acts of the Owyongs; under this theory the Owyongs can be deemed to have "transacted business" in Michigan, M.S.A. § 27A.705(1) M.C.L.A. § 600.705(1), through the very acts of Knitjoy which the Court has already determined are sufficient for the exercise of personal jurisdiction over the corporation. Second, K Mart argues the Owyongs are subject to jurisdiction in Michigan by virtue of their having executed fraudulent guarantees of compliance with the Act as agents of Knitjoy under the Michigan common law principle that agents are individually liable for their torts; under this theory the Owyongs can be deemed to have caused consequences to occur in Michigan resulting in an action for tort, M.S.A. § 27A.705(2) M.C.L.A. § 600.705(2).³

A.

1.

The record contains the following key facts relevant to the issue of whether Knitjoy is the "alter ego" of the Owyongs:

(1) Knitjoy is constituted and operated as a "family business".

Specifically, (a) the Owyongs own 97% of Knitjoy stock; (b) Leo Owyong serves as president and general manager while Daisy Owyong serves as vice-president of Knitjoy; (c) five members of the Owyong family (including Leo and Daisy Owyong) were incorporators of Knitjoy; (d) the Knitjoy board of directors rarely fails to ratify actions taken by the Owyongs, although two of its members are officers of the Development Bank of the Philippines due to its large outstanding loans to Knitjoy; and (e) Leo and Daisy Owyong control the day-to-day operations of Knitjoy, and although the board of directors meets regularly, it confines itself to minor matters and ratification of the actions of the Owyongs.

(2) Knitjoy and the Owyongs on occasion intermingle corporate and personal funds.

Specifically, (a) Leo and Daisy Owyong have on several occasions advanced or loaned money from their personal accounts to Knitjoy; (b) Leo Owyong paid a commission fee of $5,200.20 on a letter of credit for the benefit of Knitjoy with the National Bank of Detroit in July 1981 by a check drawn on his personal bank account in Manufacturers Hanover Trust Company in New York;⁴ and (c) Leo Owyong personally invested $25,000 for a 25% interest in Drater Trading, Inc., a New York corporation begun by a friend of Leo Owyong in anticipation (up to now unrealized) that Drater would increase Knitjoy's export business to the United States.

(3) Knitjoy requires financial support from the Owyongs to secure credit.

Specifically, (a) all creditors with outstanding loans to Knitjoy have required personal guarantees of the Owyongs; and (b) Daisy Owyong's brother, Dewey Dee, has guaranteed certain Knitjoy letters of credit and was responsible for a certain joint venture involving Knitjoy. While Dewey Dee has recently been accused of financial misdealings in the Philippines, there is nothing to suggest these activities are in any way related to Knitjoy or that Dewey Dee has any current direct financial interest in Knitjoy.

2.

Under Michigan or Philippine law, the corporate veil will not be pierced unless

"the notion of a corporation as a legal entity is used to defeat public convenience, justify a wrong, protect fraud or defend crime .... The fiction of a corporate entity different from the stockholders themselves was introduced for convenience and to serve the ends of justice, but when it is invoked to subvert the ends of justice it should be and is disregarded by the courts."

Soloman v. Western Hills Development Co., 110 Mich.App. 257, 263, 312 N.W.2d 428 (1981); see note 2, supra. Disregard of corporate formalities alone is not sufficient to justify piercing the veil; in addition, fraud, illegality or injustice must be shown. Soloman, supra, 110 Mich.App. at 263, 312 N.W.2d 428.

K Mart's factual exposition is simply insufficient to justify piercing the Knitjoy corporate veil. As noted by the Court at oral argument and argued by Knitjoy, there is no evidence that the Owyongs have abused Knitjoy's corporate form in any way for personal gain. K Mart has not shown that it or anyone else has been defrauded or misled by the fact that Knitjoy operates as a corporation with the Owyongs as its principals. The facts K Mart has elicited via discovery demonstrate that Knitjoy is a closely held corporation controlled in large part by the Owyongs, who have contributed to its financial health on several occasions. Nothing in the record suggests the Owyongs have "bled" Knitjoy to defeat creditors, treated Knitjoy as their own "personal" asset, disregarded corporate formalities or done anything other than operate a closely held corporation in a manner commensurate with their ownership stake in that corporate entity.

In fact, it appears the only theory upon which the Court could pierce Knitjoy's corporate form on the record before it would be to hold that every closely held corporation is the "alter ego" of its principals. As noted above, that is not the law of either Michigan or the Philippines.

B.

1.

K Mart's second theory for the exercise of personal jurisdiction over the Owyongs, i.e., that as agents of Knitjoy they fraudulently executed written guarantees of compliance with the Act for which they may be held personally liable, is supported by the following facts in the record:

(1) Leo and Daisy Owyong signed an agreement to the terms of K Mart import orders on January 24, 1979, which included a guarantee that all clothing manufactured for those orders would comply with the Act;

(2) Leo Owyong signed a guarantee on January 24, 1979 that Knitjoy invoices would each bear a guarantee that "reasonable and representative tests" showed that clothing delivered under that invoice conformed to the requirements of the Act (3) Knitjoy invoices

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