Poyner v. Lear Siegler, Inc.

• Decision Date: 14 October 1976
• Docket Number: No. 75-1939,75-1939
• Citation: 542 F.2d 955
• Parties: Joe Terry POYNER, by and through his statutory guardian, Dorothy Poyner, Plaintiff-Appellee, v. LEAR SIEGLER, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 955

542 F.2d 955

Joe Terry POYNER, by and through his statutory guardian, Dorothy Poyner, Plaintiff-Appellee, v. LEAR SIEGLER, INC., Defendant-Appellant.

No. 75-1939.

United States Court of Appeals, Sixth Circuit.

Argued March 30, 1976.

Decided Oct. 14, 1976.

Richard C. Roberts, Threlkeld, Whitlow & Roberts, Paducah, Ky., for defendant-appellant.

Charles A. Williams, Paducah, Ky., for Joe Terry Poyner.

George R. Effinger, Boehl, Stopher, Graves & Deindoerfer, Paducah, Ky., for L. A. Distributors, Inc.

Before PHILLIPS, Chief Judge, and McCREE and LIVELY, Circuit Judges.

McCREE, Circuit Judge.

Lear Siegler, Inc. (LSI) appeals from a judgment against it in behalf of Joe Terry Poyner (Poyner). The district court held LSI liable under a default judgment previously obtained by Poyner against Erma Werke GmbH ¹ (Erma), LSI's wholly owned subsidiary. Because we conclude that under Kentucky law the separate corporate identities of LSI and Erma should not have been disregarded, we reverse.

Poyner, a sixteen year old minor, received a serious injury when the .22 caliber pistol with which he and a friend had been playing accidentally discharged. The weapon, manufactured by Erma, had been exported by another West German firm and was distributed in the United States by L. A. Distributors, Inc. (L.A.), a New York corporation. The gun had reached Kentucky when Poyner's friend gained access to it. Poyner is now a paraplegic as a result of his injury.

On July 18, 1969, Poyner filed an action in United States District Court for the Western District of Kentucky, alleging that his injuries had been caused by a defect in the pistol and seeking to recover damages from both L.A. and Erma. Pursuant to K.R.S. § 454.210, the long-arm statute, service was made on both defendants through the Secretary of State of Kentucky. Both defendants received actual notice of the action. Nevertheless, Erma elected not to appear to defend the suit, and after hearing proofs of Poyner's damages, the district court entered judgment for him in the amount of $398,830.77 on July 5, 1972.

However, because Erma has no assets within the United States, and because satisfying the judgment in West Germany would involve great effort and expense, Poyner sought assets in the United States that could be applied to the judgment. Accordingly, on July 5, 1973, plaintiff filed a supplemental complaint against LSI, a Delaware corporation, to hold LSI liable for the judgment against Erma. LSI's relationship with Erma had been disclosed by L.A. in a third party complaint filed on December 21, 1971, seeking indemnification or contribution from LSI should L.A. be held liable on Poyner's original complaint.

The district court entered judgment on the supplemental complaint against LSI on May 1, 1975. It found that LSI, as sole shareholder, had the right according to West German law "to interfere at any time in the daily concerns of Erma." It found that the two members of Erma's aufsichtsrat, or advisory board, were LSI personnel based in the United States, and that no formal meetings of that board were held, nor were records of meetings kept. It further found that LSI, exercising this control, had consciously adopted a "legal strategy" according to which Erma would not appear in this nor any other products liability action in the United States. The district court also found that LSI would then give "sub rosa assistance to other defendants . . . ."

The district court concluded that LSI had exercised its control of Erma to adopt a strategy designed to frustrate recovery for injuries, regardless of the merits of products liability claims, and had thereby worked "an unfair hardship on Erma's foreseeable American creditors." Therefore, the court decided that Erma's separate legal identity should be ignored and that LSI, as its sole shareholder, should be held responsible for Erma's obligations.

Because it regarded Erma as "nothing more than a factory owned by LSI," and because LSI had controlled the litigation, the district court, applying the doctrines of collateral estoppel and res judicata, refused to permit LSI to open the judgment against Erma and to contest the merits of plaintiff's case. Accordingly, it held that LSI was bound by the original judgment.

Three principal issues are presented in this appeal. The first, which Poyner contends that we cannot consider because LSI did not raise it timely, concerns the validity of the judgment against Erma. The resolution of this issue depends upon whether the Kentucky long-arm statute was applicable and properly followed, and whether its application to Erma is constitutionally permissible. The second is whether it was proper to pierce the corporate veil and thereby to hold LSI liable for Erma's obligation. The third is, if LSI should be held liable for Erma's obligations, whether the default judgment may be opened to permit LSI to contest the merits of the original action.

Because we hold that it was improper to disregard the separate corporate identities of Erma and LSI, it is unnecessary to decide the other two issues.

The question whether, in these circumstances, a corporation should be held liable for its corporate subsidiary's obligations that arise from the state law of products liability, is clearly a substantive issue governed by Kentucky law. See Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).

The approach of the Kentucky courts to piercing the corporate veil has been described as evincing "a general aversion for any disregard of the corporate entity." Campbell, "Limited Liability for Corporate Shareholders: Myth or Matter-of-Fact," 63 Ky.L.J. 23, 48 (1975). Poyner argues that we should expand the doctrine of Minton v. Cavaney, 56 Cal.2d 576, 15 Cal.Rptr. 641, 364 P.2d 473 (1961), which provides that the corporate veil should be pierced if a corporation is grossly undercapitalized, see 1 Fletcher, Cyclopedia of the Law of Private Corporations § 44.1 (1974), and apply it to this case because LSI "has refused to risk any of its subsidiaries' assets in this country." But Poyner has cited no cases, and we have found none, in which the Kentucky courts have followed the growing trend of denying corporate entity treatment for inadequate capitalization, except in the event of fraudulent reorganization. E. g., Harlan Pub. Svce. Co. v. Eastern Constr. Co., 254 Ky. 135, 71 S.W.2d 24, 29 (1934). We do not believe that the Kentucky courts would so extend a doctrine which they have not yet adopted in its basic formulation.

Ownership and control of a corporate entity by the persons sought to be held individually liable is necessary but not sufficient by itself for denial of entity treatment. Ky. Auto Mechanics Serv. Co. v. Ky. Auto Parts Co., 267 Ky. 531, 102 S.W.2d 1022 (1937) (one corporation owned the other's stock); C. L. & L. Motor Express Co. v. Achenbach, 259 Ky. 228, 82 S.W.2d 335 (1935) (two corporations had the same shareholders); id. at 340, citing Bergenthal v. State Garage and Trucking Co., 179 Wis. 42, 190 N.W. 901 (1922) (two corporations had same shareholders, officers and offices). Before a Kentucky court will disregard the corporate entity, it must also determine that the artificial personality serves to shield individuals from legal responsibility for fraudulent or criminal acts, or that the form of organization is subversive of public policy. ² Big Four Mills v. Commercial Credit Co., 307 Ky. 612, 211 S.W.2d 831, 834 (1948). A corporation cannot "avoid . . . responsibility through the interposition of a mere legal fiction . . . ." Hermitage Land and Timber Co. v. Scott's Executrices, 263 Ky. 651, 93 S.W.2d 1, 4 (1936). The Kentucky courts will deny entity treatment only where "(t)he corporation was . . . organized to (or) has . . . in fact deprived (plaintiff) of any remedy he has . . . ." Lowry Watkins Mfg. Co. v. Bullington Mfg. Co., 248 Ky. 285, 58 S.W.2d 591, 593 (1933).

There emerges, then, a but-for test according to which the corporate entity is disregarded only where control of the fictive corporate person achieves a result which could not otherwise have been achieved directly. Lowry Watkins Mfg. Co., supra, at 592. Accordingly, LSI is liable if its ownership and control of Erma deprived Poyner of a remedy against Erma which he would have possessed but for LSI's control.

The district court found that LSI had exercised its control over Erma consciously to adopt the following "scheme": an injured American consumer would be forced either to bring suit in Germany to effect recovery against the manufacturer, or to "be faced with a double legal hurdle to get to LSI's assets in the United States." The prospect of being required to litigate in Germany or to prove both the products liability claim and the case for piercing the veil in a court in the United States "would be prohibitive." Therefore, the court "found" that the arrangement imposed an unfair hardship on Erma's foreseeable American creditors, and that the separate legal identities should be ignored.

If these determinations are actually "findings," our review is limited to the clearly erroneous standard. F.R.Civ.P. 52(a). However, the fact that a trial court labels determinations as "findings" does not make them so if they are in reality conclusions of law. In that case, they are subject to unrestricted review. Elyria-Journal Broadcasting Co. v. Lorain Journal Co.,298 F.2d 356 (6th Cir. 1961).

Whether it is appropriate to disregard the corporate entity, and whether Poyner would have to litigate both liability for the injuries and LSI's liability for Erma's obligations in order to recover from LSI, are clearly questions of law. Whether an arrangement works an "unfair" hardship is similarly a question of law. If a determination concerns whether the evidence showed that something occurred or existed, it is a finding of fact. However, if a determination is made by processes of legal reasoning from,...