Tamko Roofing Products v. Smith Engineering Co.

Decision Date16 June 2006
Docket NumberNo. 04-3913.,04-3913.
Citation450 F.3d 822
PartiesTAMKO ROOFING PRODUCTS, INC., Plaintiff-Appellant, v. SMITH ENGINEERING COMPANY; Smith Environmental Corporation; Kenneth C. Dargatz; Defendants, Haden Schweitzer Corporation, Defendant-Appellee.
CourtU.S. Court of Appeals — Eighth Circuit

Peter E. Strand, argued, Washington, DC (Manual Lopez, Houston, TX, and Carlos Porvencio and Christine Hudson, Washington, DC, on the brief), for appellant.

Cathy J. Dean, argued, Kansas City, MO (Jason Stuart Dalen and R. Chace Ramey, on the brief), for appellee.

Before ARNOLD, JOHN R. GIBSON, and SMITH, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

Tamko Roofing Products, Inc. appeals the judgment of the district court in favor of Haden Schweitzer Corporation on Tamko's claims for tortious interference and prima facie tort, as well as the district court's refusal to pierce the corporate veil of Haden's subsidiaries, referred to collectively as "Smith," to hold Haden liable for the judgment Tamko had obtained against them. We affirm the judgment of the district court.1


This diversity action stems from a series of contracts executed in 1999 between Tamko and Smith for the sale and service of certain pollution control devices. According to Tamko, the pollution control devices failed to perform as Smith had promised, so, in December 2000, Tamko sued Smith for fraudulent misrepresentation, breach of contract, and breach of warranty. The case was tried to a jury, which found in favor of Tamko. At issue in this appeal is Tamko's attempt to hold Smith's parent, Haden, liable for the actions of its subsidiary, Smith.

Smith was founded in 1925, but became a wholly-owned subsidiary of Haden in 1991. Although Smith had been profitable in the past, by 1997 it was running short of its budget and by 1998 it had begun to lose money. In an effort to lower the cost and increase the efficiency of Smith's pollution control devices, Smith and Haden jointly developed and patented a single can oxidizer. During the development process, Smith acquired the oldest patent describing this type of oxidizer, and, in May 1998, sued a third party for its infringement, ultimately obtaining a $9.3 million judgment—the "Eisenmann judgment."

In spite of the companies' efforts, Smith continued to lose money, and in May 2001, Haden sold all of Smith's stock to Anguil Environmental Systems, Inc. As part of the transaction, Smith assigned the Eisenmann judgment to Haden and licensed the oxidizer technology to Haden Drysys Environmental, Ltd., another subsidiary of Haden. Three months after the stock sale, Smith filed for liquidation under California insolvency proceedings. In conjunction with this filing, Smith made an assignment for the benefit of its creditors to Development Specialties, Inc., the entity appointed as trustee under the California insolvency proceedings, and ceased doing business shortly thereafter. In March 2002, Development Specialties and others brought suit against Haden seeking to have the transfer of the Eisenmann judgment to Haden set aside on the grounds that it was fraudulent. The parties ultimately reached a settlement, whereby Haden and Development Specialties each received a portion of the Eisenmann judgment.

In late 2002, Tamko filed an amended complaint in its ongoing litigation against Smith, which added claims against Haden and its president, Kenneth Dargatz. The amended complaint asked the district court to pierce Smith's corporate veil to hold its parent Haden liable as Smith's "alter ego."2 The amended complaint also asserted claims against Haden and Dargatz directly for tortious interference and prima facie tort. The district court granted summary judgment in favor of Haden and Dargatz on Tamko's claim for tortious interference, holding that Tamko had failed to create a genuine issue of material fact that Haden or Dargatz caused Smith's breach of its contract with Tamko. The district court denied summary judgment with respect to Tamko's remaining claims against Haden and Dargatz,3 and the case proceeded to trial.

At the close of all the evidence, the court granted judgment as a matter of law on Tamko's claim against Haden for prima facie tort, finding that there was no evidence that Tamko was damaged by the transfer of the Eisenmann judgment. The court submitted Tamko's claims against Smith to the jury, which found in favor of Tamko. In addition, the district court sought an advisory opinion from the jury on Tamko's alter ego claim against Haden, with the understanding that the ultimate question of whether to pierce the corporate veil "would be decided in equity by the Court." Specifically, the court asked the jury whether Haden should be treated as Smith's alter ego on account of: (1) the failure to keep their funds separate, (2) the transfer of the Eisenmann judgment to Haden, or (3) the licensing of Smith's oxidizer technology to Haden Drysys Environmental. The jury answered the first and third questions in the negative, but answered the second question in favor of piercing the corporate veil, finding that "an inequitable result occurred by assigning the Eisenmann judgment to Haden."

Notwithstanding the jury's finding on the alter ego question, the district court granted judgment as a matter of law in favor of Haden. The court reasoned that the jury, "due to certain necessary evidentiary rulings during trial, had insufficient evidence before it to make an informed decision on that issue." Based on the evidence before it, the court found that Tamko had failed to overcome the presumption of the separate existence of Smith and Haden. In due course, the district court denied Tamko's motion under Federal Rule of Civil Procedure 59(e) to reconsider its decision on the alter ego claim, and this appeal followed.


Tamko argues that the district court erred by refusing to pierce Smith's corporate veil and hold Haden liable as its alter ego. We review the district court's factual findings in support of its alter ego determination for clear error, while reviewing its legal conclusions de novo. Greater Kansas City Laborers Pension Fund v. Superior Gen. Contractors, Inc., 104 F.3d 1050, 1054-55 (8th Cir.1997). The parties agree that the question is governed by California law. See United States v. Scherping, 187 F.3d 796, 802 (8th Cir.1999).

Under California law, "a corporation is regarded as a legal entity, separate and distinct from its stockholders, officers and directors, with separate and distinct liabilities and obligations." Sonora Diamond Corp. v. Superior Court, 83 Cal. App.4th 523, 538, 99 Cal.Rptr.2d 824 (Cal. Ct.App.2000). Nonetheless, in certain "narrowly defined circumstances" and "when the ends of justice so require," a court may disregard the corporate form to hold the shareholders responsible as the "alter ego" of the corporation. Mesler v. Bragg Mgmt. Co., 39 Cal.3d 290, 216 Cal. Rptr. 443, 702 P.2d 601, 607 (Cal.1985); Slottow v. Am. Cas. Co., 10 F.3d 1355, 1360 (9th Cir.1993). Under California law, "[a]lter ego is an extreme remedy, sparingly used." Sonora Diamond, 83 Cal. App.4th at 539, 99 Cal.Rptr.2d 824; see also Las Palmas Assoc. v. Las Palmas Ctr. Assoc., 235 Cal.App.3d 1220, 1249, 1 Cal.Rptr.2d 301 (Cal.Ct.App.1991) ("Because society recognizes the benefits of allowing persons and organizations to limit their business risks through incorporation, sound public policy dictates that imposition of alter ego liability be approached with caution.").

Although there is no "litmus test" for judging when to hold a parent liable for the acts of its subsidiary, "[t]here are, nevertheless, two general requirements." Mesler, 216 Cal.Rptr. 443, 702 P.2d at 606. First, the court must find a "unity of interest and ownership" between the parent and subsidiary such that their separate personalities no longer exist. Id. Second, the court must satisfy itself that if the acts are treated as those of the subsidiary alone, "an inequitable result will follow." Id. It is the plaintiff's burden to establish both elements and thereby overcome the presumption of a separate corporate existence. Mid-Century Ins. Co. v. Gardner, 9 Cal.App.4th 1205, 1212, 11 Cal.Rptr.2d 918 (Cal.Ct.App.1992). "The issue is one for the trier of fact and is reviewed on appeal according to the usual standards for sufficiency of the evidence to support the conclusion." Id. at 1213, 11 Cal. Rptr.2d 918.

The parties focus much of their briefing on the "unity of interest and ownership" element, arguing that the factors typically considered by California courts cut either for or against the district court's finding that no such unity existed between Smith and Haden. See Associated Vendors Inc. v. Oakland Meat Co., 210 Cal. App.2d 825, 838-40, 26 Cal.Rptr. 806 (Cal. Ct.App.1962) (cataloguing factors). We need not decide whether, as Tamko argues, the district court's findings with respect to these factors were clearly erroneous, since Tamko fails to present evidence from which the court could have found that "an inequitable result will follow" from the refusal to pierce Smith's corporate veil. Mesler, 216 Cal.Rptr. 443, 702 P.2d at 607.

In seeking to establish the requisite inequitable result, Tamko claims that due to Haden's actions, Smith will be prevented from "meeting its obligations" with respect to the fraud judgment Tamko had obtained against it. However, "California courts have rejected the view that the potential difficulty a plaintiff faces collecting a judgment is an inequitable result that warrants application of the alter ego doctrine." Neilson v. Union Bank of California, N.A., 290 F.Supp.2d 1101, 1117 (C.D.Cal.2003) (collecting cases). Instead, they "require some evidence of bad faith conduct on the part of defendants before concluding that an inequitable result justifies an alter ego finding." Cambridge Elec. Corp. v. MGA Elec., Inc., 227...

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