Mid-Continent Telephone Corp. v. Home Telephone Co.

• Decision Date: 31 December 1969
• Docket Number: No. DC 6924.,DC 6924.
• Citation: 307 F. Supp. 1014
• Parties: MID-CONTINENT TELEPHONE CORPORATION, Plaintiff, v. HOME TELEPHONE COMPANY, Lon J. Darley and Rex B. Darley, and Union Telephone Company of Mississippi Inc., Defendants.
• Court: U.S. District Court — Northern District of Mississippi

307 F. Supp. 1014

MID-CONTINENT TELEPHONE CORPORATION, Plaintiff, v. HOME TELEPHONE COMPANY, Lon J. Darley and Rex B. Darley, and Union Telephone Company of Mississippi Inc., Defendants.

No. DC 6924.

United States District Court N. D. Mississippi, Delta Division.

December 31, 1969.

Lawrence J. Franck and George Butler, Jackson, Miss., Edward F. Whipps, Columbus, Ohio, for plaintiff.

Robert Weaver, Jackson, Miss., Ross L. Franks, Hernando, Miss., Dudley E. Bridgforth, Jr., Olive Branch, Miss., Charles H. Ryan, Monroe, La., for defendants.

MEMORANDUM OPINION ON THE AFFIRMATIVE DEFENSE THAT PLAINTIFF CANNOT MAINTAIN ITS ACTION BECAUSE OF ILLEGALLY TRANSACTING BUSINESS WITHIN THE STATE OF MISSISSIPPI

KEADY, Chief Judge.

This diversity action for damages and injunctive relief arising from alleged breach of contract is brought against Home Telephone Company (Home), Lon J. Darley, Rex B. Darley and Union Telephone Company of Mississippi, Inc., all being Mississippi citizens, by Mid-Continent Telephone Corporation (Mid-Continent), which is an Ohio citizen. Defendants have pleaded, as an affirmative defense, that Mid-Continent is doing business within the State of Mississippi without having acquired a certificate of authority from the Secretary of State, in violation of Mississippi laws,¹ and is barred from maintaining this action in federal district court.

A separate evidentiary hearing restricted to a disposition of this issue has been held to enable the court to rule upon this matter in advance of a consideration of the merits of the case.

THE EVIDENCE

As the facts are largely uncontradicted, the court is confronted with the familiar problem of whether the evidence discloses that plaintiff is "doing business" within the state in violation of the statute. Admittedly no certificate of authority has been obtained from the Mississippi Secretary of State.

Mid-Continent is an Ohio corporation, with its principal place of business located at Hudson, Ohio, and its general offices in the Cleveland vicinity. Incorporated in 1960, Mid-Continent exists principally as a telephone holding company, and has acquired either all or the great majority of the common stock in more than 35 operating telephone companies and in three community antenna television companies. The subsidiary companies are separately incorporated and as such they operate in 11 states, including Mississippi, where Mid-Continent owns all the common stock in an operating company known as Florence Telephone Company (Florence), which covers the service areas of Florence and Prentiss, Mississippi.

Its system presently being the nation's fifth largest telephone system, Mid-Continent employs approximately 162 persons, who are largely specialist personnel, at its home and general offices in Ohio and 23 employees at a data processing center located in Pennsylvania. This is the only state other than Ohio where Mid-Continent has become qualified to do business.

Mid-Continent does not, itself, engage in any telephone, communication or other public utility business; it does not own any telephone lines, equipment or plant of any kind, nor does it hold any certificate from any federal or state regulatory authority empowering it to engage in telephone, communication or other type of public utility business. Mid-Continent's principal corporate purposes are copied below.²

Mid-Continent has no office, agency, telephone listing, warehouse or bank account within Mississippi, nor does it own any real estate, plant or other property therein. It has no officers, employees or agents who are stationed within the state, and except as hereinafter brought out none enter its borders.

In line with its interest in acquiring independent telephone companies, Mid-Continent's chief executive officers have at times visited Mississippi with the aim of attempting to acquire new operating subsidiaries. Negotiations for acquiring independent companies, which are conducted over a multi-state area, occupy substantial portions of the time and energy of Mid-Continent's president and vice-president, and they have on various occasions during the years 1967 and 1968 made business trips to Mississippi. When an acquisition is made, it is for the purchase of corporate stock of the local telephone company, either for cash or for exchange of Mid-Continent's stock. As a result of such trips, in August 1968, Mid-Continent acquired 100% of Florence's common stock which had been previously owned by local shareholders. Mid-Continent's officers visited several other telephone companies in the state, had discussion with their stock owners, but no contracts were executed. Similar negotiations were conducted in Mississippi during a portion of this time by Mid-Continent's officers with the Darleys, who owned the common stock in Home, an independent telephone company with its principal place of business at Olive Branch, Mississippi. Although the document forming the subject of the instant litigation was finally executed on November 15, 1968, by the Darleys and Mid-Continent at Hudson, Ohio, a considerable part of the negotiations was held in Mississippi by Mid-Continent officers who were authorized to make binding commitments for their employer. At all times Mid-Continent has maintained an active interest in acquiring available Mississippi-based telephone companies where profitable to its system.

Florence, which at present is Mid-Continent's only Mississippi subsidiary, is incorporated under Mississippi law and operates entirely within this state. As a typical subsidiary corporation, Florence holds certificates of Public Convenience and Necessity issued by the Mississippi Public Service Commission for rendering telephone service, and it has its own Board of Directors, officers, records and books of account, bank account, customers and employees. Florence owns title to its telephone lines, equipment and other operating properties. The persons who are officers and directors of Florence are in no case the same as Mid-Continent's officers and directors. The directors are local citizens elected upon the vote of Mid-Continent, Florence's sole and only stockholder.

In accordance with its custom in dealing with its operating subsidiary corporations, Mid-Continent, after acquiring the corporate stock of Florence, executed a service agreement, by which Mid-Continent agreed to furnish to Florence services in the various areas of executive advice, engineering service, customer and employee relations, as well as legal, accounting, financial, tax and insurance assistance. These services are provided, upon Florence's request, through communications by telephone, letter or personal visit with Mid-Continent's supervisory personnel in Ohio as well as by visits of Mid-Continent's personnel to Florence. For this, Florence is required to pay Mid-Continent 3% of its gross operating revenue upon the parent's interim billing, subject to later periodic adjustment. These services are billed to Florence at cost. For the short year, August-December 1968, Florence paid Mid-Continent $2,616.96 for these items; for the 9-month period, January 1 to September 30, 1969, Mid-Continent has billed Florence $8,836.78, which represents .0073% of Mid-Continent's income derived from serving its operating subsidiaries. Upon occasion, Mid-Continent also makes loans of money to Florence, charging the subsidiary with the same interest rate paid by it. Interest for the 9-month period ending September 30, 1969, paid by Florence amounted to $3,704.17, or .0016% of total interest income paid to Mid-Continent by all operating subsidiaries. Mid-Continent has assisted Florence in obtaining REA financing in Mississippi, having provided requisite engineering services and agreeing to increase Florence's equity capital by $370,000 to obtain additional REA financing. Furthermore, Mid-Continent maintains an equipment and supply department through which Florence, or any other subsidiary, may, but it is not required to, purchase construction and maintenance materials and equipment at favorable prices. These various services rendered by Mid-Continent are performed solely for its operating subsidiaries, and within the State of Mississippi, only Florence. It does not do business with, or provide services to, any outside person, firm or corporation, nor does it trade in any manner with the general public, or any segment thereof, within the state.

THE LAW

It is now well settled that in diversity cases federal courts will apply the law of the forum state to determine whether a foreign corporation has been "doing business" without meeting the qualification requirements of the state and is thereby disqualified from bringing an action in the local courts, state or federal. Woods v. Interstate Realty Co., 337 U.S. 535, 69 S.Ct. 1235, 93 L.Ed. 1524 (1949); Humboldt Foods, Inc. v. Massey, 297 F.Supp. 236 (N.D.Miss.1968). Thus, our task here is to ascertain and apply the rule in Mississippi.

In looking to state law, it should be noted at the outset that courts in some jurisdictions have held that the meaning of the phrase "doing business" is indivisible and does not vary according to the context in which it is used, i.e., the same levels of activity are considered "doing business" by a foreign corporation whether for purposes of: (1) taxing it, (2) serving process on it, or (3) barring it from state courts for failure to meet the state's qualification requirements. Marcus v. J. R. Watkins Co., 279 Ala. 584, 188 So.2d 543 (1966); 36 Am.Jur.2d 318, Foreign Corporations, § 324. Courts of other states have held that the meaning of the phrase "doing business" changes according to the context in which it is used. In some states, for example, a greater level of activity is required to obtain service of process on a foreign corporation than to bar it from the courts of the state for "doing business" without qualifying. The reason generally given for the distinction is that in...