Radaszewski by Radaszewski v. Telecom Corp., s. 91-1342

• Decision Date: 14 December 1992
• Docket Number: 91-1343,Nos. 91-1342,s. 91-1342
• Citation: 981 F.2d 305
• Parties: Konrad RADASZEWSKI, by Cecelia RADASZEWSKI, his duly appointed guardian of the person and estate, Appellant, v. TELECOM CORPORATION, Appellee, and Flexi-Van Leasing, Inc. Konrad RADASZEWSKI, by Cecelia RADASZEWSKI, his duly appointed guardian of the person and estate, Appellee, v. TELECOM CORPORATION, Appellant, and Flexi-Van Leasing, Inc.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 305

981 F.2d 305

Konrad RADASZEWSKI, by Cecelia RADASZEWSKI, his duly

appointed guardian of the person and estate, Appellant, v. TELECOM CORPORATION, Appellee, and Flexi-Van Leasing, Inc.

Konrad RADASZEWSKI, by Cecelia RADASZEWSKI, his duly

appointed guardian of the person and estate, Appellee, v. TELECOM CORPORATION, Appellant, and Flexi-Van Leasing, Inc.

Nos. 91-1342, 91-1343.

United States Court of Appeals,

Eighth Circuit.

Submitted June 11, 1992.

Decided Nov. 12, 1992.

Rehearing Denied Dec. 14, 1992.

Bart L. Strother, of Kansas City, MO, argued (Max W. Foust, and James P. Frickleton, on the brief), for appellant.

Robert Christopher Abele, Kansas City, MO, argued (S. Michael Thomas, on the brief), for appellee.

Before RICHARD S. ARNOLD, Chief Judge, HEANEY, Senior Circuit Judge, and MAGILL, Circuit Judge.

RICHARD S. ARNOLD, Chief Judge.

This is an action for personal injuries filed on behalf of Konrad Radaszewski, who was seriously injured in an automobile accident on August 21, 1984. Radaszewski, who was on a motorcycle, was struck by a truck driven by an employee of Contrux, Inc. The question presented on this appeal is whether the District Court had jurisdiction over the person of Telecom Corporation, which is the corporate parent of Contrux. This question depends, in turn, on whether, under Missouri law, Radaszewski can "pierce the corporate veil," and hold Telecom liable for the conduct of its subsidiary, Contrux, and Contrux's driver. The District Court held that it lacked jurisdiction. We agree, though for different reasons.

I.

In general, someone injured by the conduct of a corporation or one of its employees can look only to the assets of the employee or of the employer corporation for recovery. The shareholders of the corporation, including, if there is one, its parent corporation, are not responsible. This is a conscious decision made by the law of every state to encourage business in the corporate form. Obviously the decision has its costs. Some injuries are going to go unredressed because of the insolvency of the corporate defendant immediately involved, even when its shareholders have plenty of money. To the general rule, though, there are exceptions. There are instances in which an injured person may "pierce the corporate veil," that is, reach the assets of one or more of the shareholders of the corporation whose conduct has created liability. In the present case, the plaintiff seeks to hold Telecom Corporation liable for the conduct of an employee of its wholly owned subsidiary, Contrux, Inc.

Under Missouri law, a plaintiff in this position needs to show three things. The leading case is Collet v. American National Stores, Inc., 708 S.W.2d 273 (Mo.App.1986). The Missouri Court of Appeals had this to say:

A tripartite test has been developed for analysis of the question. To "pierce the corporate veil," one must show;

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and

(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

Id. at 284. ¹

It is common ground among all parties that Telecom, as such, has had no contact with Missouri. If it is subject to jurisdiction over its person in Missouri courts, it is only because of the conduct of Contrux, its subsidiary. So the issue of jurisdiction over the person depends on whether the corporate veil of Contrux can be pierced to bring Telecom into the case. As it happens, this is also the question upon which Telecom's substantive liability depends. (We assume for present purposes that Contrux is liable--this has not yet been proved.) Telecom raised the issue by filing a motion to dismiss the complaint for lack of jurisdiction under Fed.R.Civ.P. 12(b)(2) and for failure to state a claim under 12(b)(6). The parties have treated the matter as one of jurisdiction, and so will we, but in fact the underlying issue is the same: is Telecom liable for what Contrux did? ²

Initially, the District Court granted Telecom's motion to dismiss on the ground that the first element of the Collet formulation, control, had not been met. This ruling was certified for interlocutory appeal under 28 U.S.C. § 1292(b), and we reversed. Radaszewski v. Contrux, Inc., 891 F.2d 672 (8th Cir.1989). We held that, at least as a matter of pleading, Radaszewski had alleged sufficient facts to satisfy the requirement of control. We further held that the District Court had not allowed plaintiff enough time for discovery. The judgment dismissing the complaint was reversed, and the cause remanded for additional discovery and for reconsideration by the District Court of the motion to dismiss. On remand, we said, plaintiff would need

to show that Telecom's control of Contrux and Contrux's undercapitalization [this term, as we shall see, is used as a sort of proxy for the second element of the Collet formulation--improper motive] proximately caused his injury in order for the district court to exercise personal jurisdiction over Telecom.

891 F.2d at 675.

The District Court has now permitted the additional discovery, and we have a full documentary record. It has also reconsidered the motion to dismiss, and has again granted it. As to the second element of the Collet test (improper or unjust use of the subsidiary), the District Court held that plaintiff had made a sufficient showing to survive a motion to dismiss. But as to the third element, proximate cause, the District Court ruled for the defendant. No injury has been caused to the plaintiff by Telecom's control and use of its subsidiary, the Court reasoned, because the plaintiff has not yet established that the subsidiary is liable to him for anything. Only if liability is established, and plaintiff then unsuccessfully attempts to collect from Contrux, would it appear that the parent's misuse of the corporate form, as, for example, by putting Contrux into business with insufficient capital, had done any harm to Radaszewski. On this basis, the District Court dismissed the complaint of Radaszewski against Telecom for lack of jurisdiction over Telecom's person. The dismissal was without prejudice, presumably on the theory that, if Radaszewski should establish Contrux's liability to him, and if the judgment should be uncollectible, Radaszewski could then re-file against Telecom. This ruling, like the previous one, was certified for interlocutory appeal under 28 U.S.C. § 1292(b). We granted leave to appeal, and the case is again before us.

II.

For convenience, we quote again the second element of the Collet formulation. In order to pierce the corporate veil, a plaintiff must show, among other things, that the defendant's control of a subsidiary has

been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal rights....

Collet, 708 S.W.2d at 284. To satisfy this second element, plaintiff cites no direct evidence of improper motivation or violation of law on Telecom's part. He argues, instead, that Contrux was undercapitalized.

Undercapitalizing a subsidiary, which we take to mean creating it and putting it in business without a reasonably sufficient supply of money, has become a sort of proxy under Missouri law for the second Collet element. On the prior appeal, for example, we said that "Missouri courts will disregard the existence of a corporate entity that is operated while undercapitalized." 891 F.2d at 674. Accord, Grote Meat Co. v. Goldenberg, 735 S.W.2d 379 (Mo.App.1987); Collet, supra, 708 S.W.2d at 286-87. The reason, we think, is not because undercapitalization, in and of itself, is unlawful (though it may be for some purposes), but rather because the creation of an undercapitalized subsidiary justifies an inference that the parent is either deliberately or recklessly creating a business that will not be able to pay its bills or satisfy judgments against it. This point has been made clear by the Supreme Court of Missouri. In May Department Stores Co. v. Union Electric Light & Power Co., 341 Mo. 299, 327, 107 S.W.2d 41, 55 (1937), the Court found an improper purpose in a case where a corporation was "operating it without sufficient funds to meet obligations to those who must deal with it." Similarly, in Consolidated Sun Ray, Inc. v. Oppenstein, 335 F.2d 801 (8th Cir.1964), we said:

Making a corporation a supplemental part of an economic unit and operating it without sufficient funds to meet obligations to those who must deal with it would be circumstantial evidence tending to show either an improper purpose or reckless disregard of the rights of others.

Id. at 806-07.

Here, the District Court held, and we assume, that Contrux was undercapitalized in the accounting sense. Most of the money contributed to its operation by Telecom was in the form of loans, not equity, and, when Contrux first went into business, Telecom did not pay for all of the stock that was issued to it. This is a classic instance of watered stock, of putting a corporation into business without sufficient equity investment. Telecom in effect concedes that Contrux's balance sheet was anemic, and that, from the point of view of generally accepted accounting principles, Contrux was inadequately capitalized. Telecom says, however, that this doesn't matter, because Contrux had $11,000,000 worth of liability insurance available to pay judgments like the one that Radaszewski hopes to obtain. No one...