Krivo Industrial Sup. Co. v. National Distill. & Chem. Corp.

Decision Date07 August 1973
Docket NumberNo. 72-1710,72-1710
Citation483 F.2d 1098
PartiesKRIVO INDUSTRIAL SUPPLY COMPANY and Morgan Precision Parts, Inc., et al., Plaintiffs-Appellants, v. NATIONAL DISTILLERS AND CHEMICAL CORPORATION, Defendant-Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

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Samuel G. McKerall, James L. Shores, Birmingham, Ala., Lewis & Burns, Robert E. Lewis, Hawkins, Rhea, Keener & Cusimano, Gadsden, Ala., for plaintiffs-appellants.

Reid B. Barnes, Robert McDavid Smith, Birmingham, Ala., for defendant-appellee.

Before GEWIN, GODBOLD and RONEY, Circuit Judges.

RONEY, Circuit Judge:

Plaintiffs, ten creditors of a now reorganized corporation, individually sued National Distillers and Chemical Corp., the major creditor of that corporation, on their debts. Finding that the cases all involved common questions of law and fact, the District Court consolidated them for trial on the single issue of liability. The issue of damages was severed and was reserved for subsequent proceedings. The alleged liability of National Distillers was predicated upon the rule that, when one corporation controls and dominates another corporation to the extent that the second corporation becomes the "mere instrumentality" of the first, the dominant corporation becomes liable for those debts of the subservient corporation attributable to an abuse of that control. After hearing plaintiffs' evidence, the District Court granted a directed verdict in favor of National Distillers. We affirm, finding that the evidence was insufficient to establish a jury question as to the presence of the requisite degree of control.

I. The Law

In this diversity suit, federal law provides the procedural standard against which we must judge the propriety of the directed verdict, and Alabama law provides the substantive legal context within which we must scrutinize the evidence.

Directed Verdicts

The standard for reviewing a directed verdict is set out in Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969):

On motions for directed verdict and for judgment notwithstanding the verdict the Court should consider all of the evidence — not just that evidence which supports the non-mover\'s case — but in the light and with all reasonable inferences most favorable to the party opposed to the motion. If the facts and inferences point so strongly and overwhelmingly in favor of one party that the Court believes that reasonable men could not arrive at a contrary verdict, granting of the motions is proper. On the other hand, if there is substantial evidence opposed to the motions, that is, evidence of such quality and weight that reasonable and fairminded men in the exercise of impartial judgment might reach differing conclusions, the motions should be denied, and the case submitted to the jury. A mere scintilla of evidence is insufficient to present a question for the jury. The motions for directed verdict and judgment n.o.v. should not be decided by which side has the better of the case, nor should they be granted only when there is a complete absence of probative facts to support a jury verdict. There must be a conflict in substantial evidence to create a jury question. However, it is the function of the jury as the traditional finder of the facts, and not the Court, to weigh conflicting evidence and inferences, and determine the credibility of witnesses.

411 F.2d at 374-375.

On appeal, then, the party against whom a verdict was directed must demonstrate the existence of a conflict in substantial evidence. He must show that, at trial, he introduced sufficient evidence so that reasonable men, weighing all the evidence, might reach different conclusions. Backer v. Coursey, 472 F.2d 887 (5th Cir. 1973); Jones v. Concrete Ready-Mix, Inc., 464 F.2d 1323 (5th Cir. 1972); Trawick v. Manhattan Life Ins. Co., 447 F.2d 1293 (5th Cir. 1971).

The "Instrumentality" Doctrine

We note at the outset that the case before us involves only the question of National Distillers' liability under the "instrumentality" theory. It involves no question of fraud, deceit, or misrepresentation. Nor does it involve charges that National Distillers received large amounts of security for small debt and made excessive, overreaching profits through foreclosure. Hence, we must examine the evidence exclusively within the framework of the narrow rule of corporation law known as the "instrumentality" doctrine.

Basic to the theory of corporation law is the concept that a corporation is a separate entity, a legal being having an existence separate and distinct from that of its owners. This attribute of the separate corporate personality enables the corporation's stockholders to limit their personal liability to the extent of their investment. But the corporate device cannot in all cases insulate the owners from personal liability. Hence, courts do not hesitate to ignore the corporate form in those cases where the corporate device has been misused by its owners. The corporate form, however, is not lightly disregarded, since limited liability is one of the principal purposes for which the law has created the corporation.

One of the most difficult applications of the rule permitting the corporate form to be disregarded arises when one corporation is sought to be held liable for the debts of another corporation. A corporation may become liable for the debts of another corporation in two ways. First, expressly or impliedly, it may assume responsibility for those debts by indicating to the creditors of the other corporation that it stands behind those debts as a guarantor. In this situation, one separate and distinct corporation becomes responsible for the debts of another separate and distinct corporate entity. The corporate form of each remains intact and liability is not predicated upon disregarding the corporate form of the debtor. Second, a corporation may be held liable for the debts of another corporation when it misuses that corporation by treating it, and by using it, as a mere business conduit for the purposes of the dominant corporation. See generally 1 W. Fletcher, Cyclopedia of the Law of Private Corporations § 43 (perm. ed. rev. 1963). The rationale for holding the dominant corporation liable for the subservient corporation's debts is that, since the dominant corporation has misused the subservient corporation's corporate form by using it for the dominant corporation's own purposes, the debts of the subservient corporation are in reality the obligations of the dominant corporation. In these cases, "the courts will look through the forms to the realities of the relation between the companies as if the corporate agency did not exist and will deal with them as the justice of the case may require." United States v. Reading Co., 253 U.S. 26, 63, 40 S.Ct. 425, 434, 64 L.Ed. 760 (1920); cf. Chicago, Milwaukee & St. Paul Ry. Co. v. Minneapolis Civic & Commerce Ass'n, 247 U.S. 490, 38 S.Ct. 553, 62 L.Ed. 1229 (1918). Here, then, the corporate form of the subservient corporation is disregarded so as to affix liability where it justly belongs. Plaintiffs' claim in this case is based on this second theory of liability.

In formulating a basis for predicating liability of a dominant corporation for the acts or omissions of another corporation, courts have developed various legal theories and descriptive terms to explain and to describe the relationship between a dominant and a subservient corporation. For example, under the "identity" theory the separate corporate identities are disregarded and both corporations are treated as one corporation. See United States v. Lehigh Valley R.R. Co., 220 U.S. 257, 31 S.Ct. 387, 55 L.Ed. 458 (1911). Alternatively, a subservient corporation may be labeled the instrument, agent, adjunct, branch, dummy, department, or tool of the dominant corporation. See, e. g., Constitution Publishing Co. v. Dale, 164 F.2d 210 (5th Cir. 1947); Birmingham Realty Co. v. Crossett, 210 Ala. 650, 98 So. 895 (Ala.1923). "Instrumentality" is perhaps the term most frequently employed to describe the relationship between a dominant corporation and its subservient corporation, and Alabama law follows this characterization. In Forest Hill Corp. v. Latter & Blum, Inc., 249 Ala. 23, 29 So.2d 298 (Ala. 1947), the Alabama Supreme Court stated:

The notion of separate corporate existence will not be recognized where a corporation is so organized and controlled and its business conducted in such a manner as to make it merely an instrumentality of another, and in such circumstances the fiction may not be prosecuted to permit the corporation to evade its just responsibilities.

29 So.2d at 302. See also Brown v. Standard Casket Mfg. Co., 234 Ala. 512, 175 So. 358 (1937); Birmingham Realty Co. v. Crossett, supra.

Nevertheless, the mere incantation of the term "instrumentality" will not substitute for rigorous, tough-minded analysis. Professor Ballantine once described this aspect of the law of corporations as a "legal quagmire," Ballantine, Separate Entity of Parent and Subsidiary Corporations, 14 Cal.L.Rev. 12, 15 (1925), and Justice Cardozo observed that these cases tend to be "enveloped in the mists of metaphor." Berkey v. Third Avenue Ry. Co., 244 N.Y. 84, 155 N.E. 58, 61 (1926). Moreover, the very term "instrumentality" is a poor one because all corporations are in one sense "instrumentalities" of their stockholders. See May Dept. Stores Co. v. Union Electric Light & Power Co., 341 Mo. 299, 107 S. W.2d 41 (1937).

To counteract the dangers of a legal analysis based upon ambiguous metaphors and to avoid the trap of mere definitionalism, the case law has developed a more concrete test to guide the application of the "instrumentality" doctrine. Although the Alabama courts have yet to delineate a more precise test, the parties in the case at bar agree, and we agree, that two elements are essential for liability under the "instrumentality" doctrine. First,...

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