St. Paul Fire and Marine Ins. Co. v. PepsiCo, Inc.

• Decision Date: 08 September 1989
• Docket Number: D,No. 1318,1318
• Citation: 884 F.2d 688
• Parties: , Bankr. L. Rep. P 73,092 ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Plaintiff, v. PEPSICO, INC., Defendant-Appellant. PEPSICO, INC., Third-Party Plaintiff-Appellant, v. BANNER INDUSTRIES, INC., Third-Party Defendant-Appellee. ocket 89-7110.
• Court: U.S. Court of Appeals — Second Circuit

Page 688

884 F.2d 688

14 Fed.R.Serv.3d 1165, Bankr. L. Rep. P 73,092

ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Plaintiff, v. PEPSICO, INC., Defendant-Appellant.

PEPSICO, INC., Third-Party Plaintiff-Appellant, v. BANNER INDUSTRIES, INC., Third-Party Defendant-Appellee.

No. 1318, Docket 89-7110.

United States Court of Appeals, Second Circuit.

Argued May 24, 1989.

Decided Sept. 8, 1989.

Arthur S. Friedman, New York City (Laurie S. Josephs, Friedman, Wang & Bleiberg, New York City, of counsel), for appellant.

Thomas D. Yannucci, Washington, D.C. (Frederick M. Rowe, Michael E. Baumann, Joyce L. Bernstein, Kirkland & Ellis, Washington, D.C., of counsel), for appellee.

Before VAN GRAAFEILAND, MESKILL and WINTER, Circuit Judges.

MESKILL, Circuit Judge:

This is an appeal from a judgment entered in the United States District Court for the Southern District of New York, Duffy, J., pursuant to Fed.R.Civ.P. 54(b) dismissing defendant-third-party plaintiff-appellant PepsiCo, Inc.'s (PepsiCo) third-party complaint against third-party defendant-appellee Banner Industries, Inc. (Banner). PepsiCo's complaint sought damages for losses it suffered when it became liable on bonds it guaranteed as a surety on behalf of its wholly owned subsidiary, Lee Way Motor Freight, Inc. (Lee Way). These bonds were drawn in favor of plaintiff St. Paul Fire and Marine Insurance Co. (St. Paul); their value exceeded $1 million.

PepsiCo alleges that when Banner's partially owned subsidiary, Commercial Lovelace Motor Freight, Inc. (CL), bought Lee Way from PepsiCo in 1984, Banner caused CL to sell off Lee Way's assets to pay debts CL owed to Banner. According to PepsiCo, if Banner had not caused CL to pay its debts to Banner in this fashion, Lee Way would have retained sufficient assets to pay its own debts, and PepsiCo would not have become liable on the guarantee it had executed in St. Paul's favor.

When Lee Way defaulted on its obligations, St. Paul sued PepsiCo for the money due on the bonds. PepsiCo answered the complaint and denied liability. It also filed a third-party complaint asserting two causes of action against Banner: that Banner was CL's alter ego, and therefore is accountable for CL's misdeeds and that Banner caused PepsiCo's loss "in whole or material part by the wrongful diversion of Lee Way assets," and therefore is accountable for its own improper conduct. The district court granted summary judgment for Banner and dismissed the third-party complaint. PepsiCo appeals from this decision.

We affirm the dismissal by the district court, but we do so on a jurisdictional basis without reaching the merits.

BACKGROUND

During the time that PepsiCo owned Lee Way, Lee Way and St. Paul executed many bonds. These bonds covered such areas of potential liability for Lee Way as workers' compensation claims and claims for state licensing and regulatory fees and taxes. In the event that Lee Way defaulted on any of the obligations guaranteed by a St. Paul bond, however, PepsiCo had agreed to indemnify St. Paul "from all loss and expense ... incurred by [St. Paul] by reason of having executed any bond" for Lee Way. The indemnity agreement included a provision that "under no circumstances will termination or cancellation of [a] bond relieve [PepsiCo] of its obligation to indemnify [St. Paul]."

In 1984, PepsiCo sold the financially ailing Lee Way to CL. Lee Way had pre-tax losses of over $23 million in 1983; in the offering memorandum distributed by PepsiCo to CL, Alex. Brown & Sons, an investment advisor, described Lee Way as "a likely candidate for a leveraged buyout." In the course of negotiations surrounding the sale of Lee Way to CL, PepsiCo alleges it made an issue of CL's ability to continue to operate Lee Way, and required that any purchaser of Lee Way operate Lee Way in such a way that Lee Way could pay its debts, including those debts for which St. Paul had issued bonds. According to PepsiCo, its pre-sale investigation of CL indicated that CL was a company with a "positive net worth." Furthermore, CL represented that it could restore Lee Way to PepsiCo apparently was content to rely on CL's assertions that it would restore Lee Way to profitability, as it did not insist that CL agree to pay PepsiCo for any liability resulting from the St. Paul indemnity agreement. Under the terms of the indemnity agreement, PepsiCo would remain liable for claims based on acts that occurred before the sale of Lee Way. In fact, as PepsiCo admits, even if the bonds had been cancelled as of the day of the sale, PepsiCo "would still be liable for Lee Way's failure, after the sale, to pay for those workers['] compensation claims that had accrued before the sale." Nevertheless, although PepsiCo "had CL contractually agree to use CL's best efforts to replace PepsiCo on its guarantees ... and ... cause[d] St. Paul to cancel its bonds," it did not extract a promise from CL that PepsiCo's own liability would be limited. CL was under no obligation to PepsiCo to hold it harmless from the indemnity agreement.

profitability; however, as CL noted in its proposed business plan, a document discussing implementation of the sale, CL intended to finance its purchase of Lee Way through "the transfer and/or sale of assets."

The sale to CL went through based on PepsiCo's understanding that CL was a financially viable operation, and that even though it was not profitable at the time of the sale, its management was capable of operating Lee Way and CL together in a commercially feasible manner.

The injury from which PepsiCo alleges it suffers was avowedly a result of the concealment from PepsiCo of Banner's true relation to CL, which PepsiCo contends was one of financial domination and managerial control. PepsiCo insists that it had no knowledge at the time it sold Lee Way to CL of this relationship. As to Banner's financial relation to CL, it was clear that at the time of the sale Banner was both a debtor and a substantial creditor of CL. The financial arrangements between the two companies included a tax-sharing agreement. PepsiCo urges, however, that the receivables on CL's books that were owed to it by Banner were debts that Banner had either refused to pay or for which "there was not even a claimed assurance of realizability." Upon examination of a balance sheet for CL, which was certified for CL by Arthur Andersen & Co., one of PepsiCo's expert witnesses testified that he did not think that realization by CL of the money it was owed was "assured beyond reasonable doubt.... I have seen nothing which would permit me to state unequivocally that Banner has guaranteed payment of the tax effect of the CL[ ] losses."

PepsiCo alleges that the operational relationship between CL and Banner was, in fact, one of complete domination and control of CL by Banner. Although Banner had entered an Employee Stock Ownership Plan (ESOP) in March 1983, which reduced its holding in CL from 100 percent to 49.99 percent, and later further reduced its holdings by ten percent, Banner, in PepsiCo's view, retained control of CL through domination of CL's board of directors, manipulation of CL's officers, undercapitalization of CL and the consequent dependence of CL on Banner for financial support. PepsiCo contends that, through Banner's influence and domination of CL, Banner caused CL to "plunder[ ]" Lee Way, stripping it of assets. The revenue from the sale of these assets was then allegedly used to settle CL's debts to Banner. When CL could no longer afford to operate Lee Way as a going concern because of the alleged asset-stripping carried on by CL, Lee Way defaulted on its obligations under the St. Paul bonds. If CL had not complied with Banner's ambitions and stripped Lee Way of its assets, then, PepsiCo alleges, Lee Way would not have defaulted on its obligations under the St. Paul bonds. Thus, PepsiCo argues that Banner is responsible for its injury both because of its direct acts and its control of CL.

After CL's alleged plunder of Lee Way, in February 1985, CL merged with Lee Way to form a company known as Lee Way Holding Co. This was reputedly done so that the assets of both companies could be pooled to pay the liabilities of both. PepsiCo alleges that this act in itself harmed it because all of CL's assets were subject to liens, while none of Lee Way's were.

                Thus, the merger resulted in Lee Way's assets being easily available for the payment of debts for which CL's own liened assets were unavailable.  Furthermore, at the time of the merger, CL owed Lee Way almost $7 million.  This debt was wiped out in the merger.  A week after the merger took place, Lee Way Holding Co. filed for protection from its creditors under Chapter 11 of the Bankruptcy Code.    See In re Lee Way Holding Co., No. 2-85-00661 (Bkrtcy.S.D.Ohio)
                

Two weeks after the merger of CL and Lee Way, St. Paul instituted this action in the Southern District of New York seeking payment from PepsiCo of its debt under the indemnity agreement. PepsiCo impleaded Banner as a third-party defendant in St. Paul's action, alleging that Banner's domination of CL and its actions in causing CL to strip Lee Way of its assets were the cause of PepsiCo's liability. Specifically, PepsiCo stated two causes of action against Banner: that "third-party defendant Banner used CL and CL used Lee Way as alter egos, ... without due regard for the separate corporate existences of CL and Lee Way, by reason whereof the corporate veils of CL and Lee Way should be pierced and Banner ... should be required to indemnify and pay over to PepsiCo the amount of any liability herein," and that any liability of PepsiCo to St. Paul "will have been caused ... by the third-party defendant Banner, and the third-party defendant should be required to indemnify and pay over to PepsiCo the amount of any adjudged liability herein." PepsiCo initially denied liability to St. Paul, but has since entered into an "interim arrangement" whereby it has agreed to pay...