Manchester Equipment Co., Inc. v. American Way

• Decision Date: 09 August 1999
• Docket Number: No. CV 97-6798.,CV 97-6798.
• Parties: MANCHESTER EQUIPMENT CO., INC., Plaintiff, v. AMERICAN WAY AND MOVING CO., INC., A subsidiary of Mayflower Transit, Inc., Louderback Transportation Co., Inc., A subsidiary of Mayflower Transit, Inc., Mayflower Transit, Inc., a subsidiary of Unigroup, Inc. and Unigroup, Inc., Defendants.
• Court: U.S. District Court — Eastern District of New York

60 F.Supp.2d 3

MANCHESTER EQUIPMENT CO., INC., Plaintiff, v. AMERICAN WAY AND MOVING CO., INC., A subsidiary of Mayflower Transit, Inc., Louderback Transportation Co., Inc., A subsidiary of Mayflower Transit, Inc., Mayflower Transit, Inc., a subsidiary of Unigroup, Inc. and Unigroup, Inc., Defendants.

No. CV 97-6798.

United States District Court, E.D. New York.

August 9, 1999.

COPYRIGHT MATERIAL OMITTED

Kressel, Rothlein & Roth, by Stephen Kressel, Massapequa, NY, for plaintiff.

Law Offices of George W. Wright, by George W. Wright, Mayflower Transit, Inc., New York City, for defendant.

MEMORANDUM AND ORDER

WEXLER, District Judge.

Plaintiff Manchester Equipment Co., Inc. ("Manchester") is a computer equipment distributing and servicing company. In this diversity action, Manchester seeks to hold defendants liable for the loss of approximately $500,000 worth of computer equipment stolen from Manchester by an individual posing as a Manchester client. All defendants exception Mayflower Transit, Inc. ("Mayflower") have been dismissed for lack of personal jurisdiction. Presently before the court is Mayflower's motion for summary judgment. For the reasons set forth below, the motion is granted.

BACKGROUND

I. Factual Background

The facts leading to the loss of Manchester's computer equipment are summarized in the parties' submissions to this court. For purposes of this motion, the facts are construed in the light most favorable to Manchester, the non-moving party. See Anderson v. Liberty Lobby, 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Covington v. City of New York, 171 F.3d 117, 121 (2d Cir.1999).

Sometime in May of 1997, a Manchester officer received a telephone call from an individual who identified himself as David Lancaster. Mr. Lancaster stated that he was a Vice President of Time-Warner, an established Manchester client. Lancaster placed an order with Manchester for a large quantity of computer equipment valued at approximately $500,000. A Manchester sales manager testified at deposition that he verified Lancaster's identity as a Time-Warner officer with a Time-Warner executive in New York and with a representative of a Time-Warner affiliate.

In June of 1997, Manchester received a written purchase order from Lancaster for the computer equipment referred to in the May telephone call. This purchase order listed an address in Wilmington, Delaware as the shipping destination. Lancaster identified the Wilmington address as a Time-Warner distribution center. In reality, however, the address provided by Lancaster was the address of American Way Moving and Storage Co., Inc. ("American Way"). American Way is engaged, inter alia, in the business of providing moving and storage services. Unbeknownst to Manchester, once the order was placed, Lancaster contacted American Way to arrange for delivery of the equipment. Specifically, Lancaster contacted American Way's terminal manager, identified himself as a Time-Warner Vice President and explained that he wished to purchase 2,500 feet of storage space for computer equipment. Lancaster told the American Way representative that the computer equipment would need to be stored for a short period of time and would be picked up by Time-Warner trucks for shipment to a Warner Communications facility in Pennsylvania.

Manchester shipped the computers ordered by Lancaster in two separate shipments to the Delaware address. The computers were received by American Way on June 12 and 13, 1997. They were thereafter released to Lancaster's drivers. At the time of pick-up, Manchester had not been paid for the equipment. Invoices sent to Time-Warner's offices to the attention of David Lancaster were returned to Manchester as undeliverable.

II. Plaintiff's Complaint

Plaintiff's lawsuit, commenced in New York State Court and removed to this court, alleges a single cause of action. Specifically, plaintiff alleges that its loss of the computer equipment was caused by the negligence of defendants in "failing to implement reasonable and appropriate measures of identification and verification before delivery of the [computer equipment] to the person or persons unknown."

III. The Present Motion

As noted above, all defendants, except for Mayflower, have been dismissed for lack of personal jurisdiction. Mayflower, the parent company of American Way, now moves for summary judgment.

Mayflower argues several grounds in support of its motion. First, Mayflower, sued solely in its capacity as the parent company of American Way, argues that the facts do not support imposition of liability based on this relationship. Mayflower also argues that it had no relationship with Manchester whatsoever and therefore owed Manchester no duty of care. Turning to the merits of plaintiff's claim, Mayflower argues that Manchester will be unable to prove American Way's liability, therefore it will be impossible to impose liability upon Mayflower. Finally, Mayflower argues that Manchester's own negligence in allowing itself to be "duped" by Lancaster should estop Manchester from recovering its loss from Mayflower.

In response to Mayflower's motion, Manchester states the issue succinctly. "The question for the court is whether the negligence of the subsidiary non-party, American Way, can be attributed to its parent, Mayflower ..." The court turns to that issue.

DISCUSSION

I. Legal Principles

A. Standards For Motion For Summary Judgment

A motion for summary judgment is granted only if the court determines that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. FRCP 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The party seeking judgment bears the burden of demonstrating that no issue of fact exists. McLee v. Chrysler Corp. 109 F.3d 130, 134 (2d Cir.1997). However, when the nonmoving party fails to make a showing on an essential element of its case with respect to which it bears the burden of proof, summary judgment will be granted. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The party resisting summary judgment must not only show a disputed issue of fact, but it must also be a material fact in light of the substantive law. Only disputed facts that "might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 242, 106 S.Ct. 2505.

B. Parent Company Liability For Acts Of A Subsidiary

The law recognizes that corporations may be organized in ways to limit liability among separate entities. Under New York law, a parent company is not automatically liable for the acts of its wholly-owned subsidiary. Instead, the law is quite to the contrary. Liability is never imposed solely upon the fact that a parent owns a controlling interest in the shares of a subsidiary. People v. Garban, LLC f/k/a Garban Ltd., 1999 WL 496182 at *3-4 (Sup.Ct.1999), quoting, Morris v. New York State Dep't of Taxation and Finance, 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993). In fact, New York courts are "reluctant" to disregard corporate form and will do so only if the form has been used to achieve fraud or the parent exercises such extreme dominion and control over the subsidiary as to render the corporate form a sham. Gartner v. Snyder, 607 F.2d 582, 586 (2d Cir.1979).

It is the level of control that a parent exercises over a subsidiary that will determine whether the parent can be held liable for the subsidiary's acts. Parent liability will be found if: (1) the parent exercised "such control that the subsidiary `has become a mere instrumentality' of the parent, which is the real actor; (2) the control has been used to commit fraud or other wrong and, (3) the fraud or wrong results in an unjust loss or injury to plaintiff." Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 138 (2d Cir.1991), quoting, Lowendahl v. Baltimore & Ohio R.R., 247 A.D. 144, 157, 287 N.Y.S. 62 (1st Dep't), aff'd., 272 N.Y. 360, 6 N.E.2d 56 (1936). Liability may be predicated either upon a showing of fraud or complete domination of the subsidiary by the parent corporation. Passalacqua, 933 F.2d at 138.

Factors to be considered in determining whether there has been a sufficient showing of control include whether there has been adherence to corporate formalities, the degree of capitalization of the subsidiary and the use of the subsidiary's funds by the parent. American Protein Corporation v. AB Volvo, 844 F.2d 56, 60 (2d Cir.1988). Other factors include overlap in ownership, officers, directors and personnel, common office space or telephone numbers, the degree of discretion demonstrated by the subsidiary, whether the corporations are treated as independent profit centers and the payment or guarantee of the subsidiary's debts by the parent. People v. Garban, LLC f/k/a/ Garban Ltd., 1999 WL 496182 at *3-4 (Sup.Ct. 1999). Importantly, the fact that directors sit on the boards of both the parent and the subsidiary, standing alone, is not enough to establish the level of control necessary to hold the parent liable for the subsidiary's acts. See id. In addition, it has been held that the control exercised by the parent must exist with respect to the transaction at issue. See id.

C. Agency Liability

In addition to claiming that Mayflower is liable to Manchester because it is American Way's parent company, Manchester argues that Mayflower is responsible for the acts of American Way because American Way served as Mayflower's agent in connection with the transaction at issue.

At the outset, the court recognizes that in the case of a parent-subsidiary relationship, it has been held that the standards to be applied for determining whether a corporation is acting as an agent for a related corporation are the same as the standards discussed above. To impose a less stringent standard would defeat...