Quarles v. Fuqua Industries, Inc.

• Citation: 504 F.2d 1358
• Decision Date: 05 November 1974
• Docket Number: No. 73-1825,73-1825
• Parties: Herman QUARLES et al., Plaintiffs-Appellants, v. FUQUA INDUSTRIES, INC., et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1358

504 F.2d 1358

Herman QUARLES et al., Plaintiffs-Appellants, v. FUQUA INDUSTRIES, INC., et al., Defendants-Appellees.

No. 73-1825.

United States Court of Appeals, Tenth Circuit.

Argued Aug. 20, 1974.

Decided Nov. 5, 1974.

Mortimer A. Berlin, Topeka, Kan., for plaintiffs-appellants.

Charles N. Henson, Topeka, Kan., for defendants-appellees.

Before HILL and DOYLE, Circuit Judges, and SMITH, ^* District judge.

HILL, Circuit Judge.

This class action was filed by 42 separate plaintiffs against 13 separate defendants. Seven plaintiffs' claims have been dismissed upon their own motion, and this action was dismissed against ten defendants on plaintiffs' own motion. Fuqua Industries, Inc., Career Enterprises, Inc., and L. E. Timberlake ¹ remain as defendants.

Appellants seek compensatory and punitive damages, for themselves and for all members of the class so damaged in the State of Kansas, amounting to $40,000,000 plus costs. Appellants claim the defendants placed misleading advertising on radio and television and in the newspaper and promised jobs to appellants. In this manner, appellants were fraudulently induced to enter into training course contracts and enroll in vocational training schools in Topeka, Kansas. Appellants also allege that agency and partnership arrangements existed among and between the various defendants during these fraudulent activities' occurrences.

The activities of three corporations are primarily involved in this suit. Career Enterprises, Inc. (hereinafter called Career) of St. Petersburg, Florida, engaged in the business of operating and franchising a system of adult vocational training schools. It is not clear exactly what was the relationship between Career and Career Enterprises of Kansas, Inc. (hereinafter called Career of Kansas); the parties and the trial court treated them as one and assumed both were doing business in Kansas. The record does show Career of Kansas was a wholly owned subsidiary of Career. Fuqua Industries, Inc. (hereinafter called Fuqua) is a Delaware corporation with corporate offices in Atlanta, Georgia; Fuqua is a holding company and its business is investing in other corporations' stock. Fuqua employs approximately forty persons, eighteen to twenty are professional persons-- lawyers, accountants and insurance and financial experts-- and the remainder are secretarial and clerical persons.

On May 30, 1969, Fuqua acquired 100% Of Career's stock. Career, in operation about five years prior to this date, operated and franchised schools in 38 states and the District of Columbia. Fuqua contracted with William L. Phillips, then president of Career, and Francis W. MacNeil, then secretary-treasurer of Career, for continuation of their services to Career for a five-year period following the acquisition. ² Career continued its business, operating as a subsidiary of Fuqua, and was so operating at all times relevant to appellants' claims.

Apparently, there was a slump in the adult vocational training market and Career's operations ceased to be profitable. On December 1, 1971, Fuqua sold 100% Of Career's stock to Fortune Enterprises, Inc., a corporation organized by William L. Phillips. According to testimony of Lawrence P. Klamon, senior vice president and general counsel of Fuqua, the sale was made because '. . . Career gave no promise of being very profitable in the future . . . and the best possibility for Career to remain as a viable company was to hopefully reduce its overhead (and) shrink the scope of its operations.' These efforts to be taken by Career were evidently unsucessful; on July 20, 1972, the United States District Court for the Middle District of Florida issued an order staying all proceedings against Career Enterprises, Inc., a bankrupt.

Appellants' complaint was filed on November 5, 1971. On February 11, 1972, several defendants including Fuqua filed a motion to quash and to dismiss, for more definite statement and to separately state and number. One ground asserted for quashing and dismissing was lack of jurisdiction over the persons of defendants. Testimony of Mortimer A. Berlin, appellants' attorney, Joseph F. Savage III, then assistant secretary and assistant general counsel of Fuqua, and Lawrence P. Klamon was given before the trial judge. After the dismissal of the other parties and the withdrawal of Fuqua's attorneys as counsel for Career, the motion was treated as on behalf of Fuqua only. The trial court sustained the motion to quash and dismiss. The court concluded that Fuqua did not transact business within the State of Kansas within the meaning of the Kansas Long Arm Statute, that the service of process was ineffective and that the court lacked personal jurisdiction over Fuqua.

The issue presented here is: Did Fuqua in any manner 'transact business' in the State of Kansas so that it submitted to the jurisdiction of the courts of Kansas? For reasons set forth below, we do not believe Fuqua transacted business in Kansas, and thus, the trial court correctly determined it had no jurisdiction over Fuqua.

In arriving at its decision, the trial court made numerous findings of fact concerning the relationship of Fuqua and Career. The findings of the trial court are presumptively correct, Walker v. Wiar, 276 F.2d 39 (10th Cir. 1960), and a trial court's findings will not be reversed unless they are clearly erroneous. Burgert v. Tietjens, 499 F.2d 1 (10th Cir. 1974); Federal Security Ins. Co. v. Smith, 259 F.2d 294 (10th Cir. 1958).

Appellants maintain this court may deal with all the given facts and urge this court to be freer in drawing differing conclusions than is usually the case because no weighing of conflicting evidence and no evaluation of witnesses' credibility were involved here. The trial court did hear testimony of three witnesses; however, the standard of review remains the clearly erroneous one even when only documentary evidence is presented. Sta-Rite Indus. Inc. v. Johnson, 453 F.2d 1192 (10th Cir. 1971), cert. den'd, 406 U.S. 958, 92 S.Ct. 2062, 32 L.Ed.2d 344 (1972); Mid-Continent Cas. Co. v. Everett, 340 F.2d 65 (10th cir. 1965). Reviewing the entire record, we conclude the trial court's findings of fact are supported by evidence and are not clearly erroneous.

A federal court, in diversity actions, may obtain personal jurisdiction over nonresidents of the state in which that district court is held by complying with the long arm statute of the state in which the district court sits. F.R.Civ.P. Rule 4(d)(7) and (e); Wilshire Oil Co. v. Riffe, 409 F.2d 1277 (10th Cir. 1969). Personal service was made upon appellee Fuqua in Fulton County, Georgia, pursuant to the Kansas Long Arm Statute, Kan.Stat. Ann. 60-308 (Supp.1973). Section 60-308(b) provides in pertinent part:

Any person, whether or not a citizen or resident of this state, who in person or through an agent or instrumentality does any of the acts hereinafter enumerated, thereby submits said person . . . to the jurisdiction of the courts of this state as to any cause of action arising from the doing of any of said acts:

(1) The transaction of any business within this state . . ..

In determining the propriety of service of process under a state long arm statute, we look to state law rather than federal law. Steinway v. Majestic Amusement Co., 179 F.2d 681 (10th Cir. 1949), cert. den'd, 339 U.S. 947, 70 S.Ct. 802, 94 L.Ed. 1362 (1950). The trial court applied Kansas law and concluded Fuqua itself was not transacting business in Kansas, the corporate separation was maintained between Fuqua and Career, and Career was not Fuqua's agent.

Appellants have not contended Fuqua itself 'transacted business' within Kansas as defined by the Kansas Supreme Court. The trial court specifically found that Fugua had no officers, agents or employees in Kansas at any time material to this action and that Fuqua had not engaged in any business transactions in Kansas. Thus, appellants have relied on alter ego and agency theories.

As previously mentioned, it has been assumed that Career was doing business in Kansas. Consequently, under this assumption, the subsidiary was subject to the jurisdiction of the Kansas courts. Appellants argue that Fuqua conducted no other business than managing its subsidiaries, ipso facto, the subsidiary Career's operations were Fuqua's business, and the Kansas Long Arm Statute could reach Fuqua. No Kansas case has been located which indicates Kansas' possible application of the alter ego doctrine for jurisdiction over a nonresident parent corporation when a subsidiary corporation has transacted business within the state and the parent itself has not. Kansas, however, has recognized the alter ego doctrine. Kilpatrick Bros., Inc. v. Poynter, 205 Kan. 787, 473 P.2d 33 (1970). Under this doctrine, the corporate entity is disregarded and liability fastened on an individual who uses the corporation merely as in instrumentality to conduct his own personal business. The liability must arise from fraud or injustice perpetrated on third parties dealing with the corporation. Id. 473 P.2d at 42. See Doyn Aircraft, Inc. v. Wylie, 443 F.2d 579 (10th Cir. 1971). In applying this doctrine to a situation involving an Oklahoma statute, this court summarized the general case law in the following manner:

Where a nonresident corporation is organized for the very purpose of holding and controlling the stock of a resident corporation and thus manages and directs the internal affairs of the resident corporation, courts have disregarded the corporate entity and treated it as the alter ego of the nonresident corporation for the purpose of service of process . . .. But, none of the cases we have seen go so far as to hold mere ownership and voting of a majority of the stock of a resident or domesticated corporation by a nonresident corporation sufficient to justify ignoring the corporate entity for the purpose of service of process. Steinway v. Majestic Amusement Co., supr...