U.S. v. Clinical Leasing Service, Inc.

• Decision Date: 10 December 1992
• Docket Number: No. 91-3939,91-3939
• Citation: 982 F.2d 900
• Parties: 37 Fed. R. Evid. Serv. 755 UNITED STATES of America, Plaintiff-Appellee, v. CLINICAL LEASING SERVICE, INC., et al., Defendants, Melvin Soll and Leroy T. Brinkley, Defendants-Appellants. (Summary Calendar).
• Court: U.S. Court of Appeals — Fifth Circuit

Page 900

982 F.2d 900

37 Fed. R. Evid. Serv. 755

UNITED STATES of America, Plaintiff-Appellee, v. CLINICAL LEASING SERVICE, INC., et al., Defendants Melvin Soll and Leroy T. Brinkley, Defendants-Appellants.

No. 91-3939

(Summary Calendar).

United States Court of Appeals Fifth Circuit.

Dec. 10, 1992.

Adolph Swimmer, Atlanta, GA, Kenneth Benton, Philadelphia, PA, for Soll.

Kathy McAlice, Mesirov, Gelmar, Joffe, Cramer, & Jameson, Philadelphia, PA, for Brinkley.

Leroy T. Brinkley, pro se.

Thomas L. Watson, Asst. U.S. Atty., Harry Rosenberg, U.S. Atty., New Orleans, LA, for plaintiff-appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before GARWOOD, JONES, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

The government brought suit against defendants, Melvin Soll and Leroy Brinkley, seeking to hold them personally liable for fines imposed against their corporation, Clinical Leasing Service, Inc. ("Clinical"), for violations of the Federal Controlled Substances Act ("FCSA"), 21 U.S.C. § 842 et seq. (1988). A jury found Soll and Brinkley liable for the corporation's fines on the grounds that Clinical was the alter ego of Soll and Brinkley, and that Clinical was used by them to frustrate a legislative purpose. Soll and Brinkley appeal, arguing that the district court improperly instructed the jury and that the district court's actions and comments denied them a fair trial. Finding no error, we affirm.

I

The government originally filed suit against Clinical, seeking fines for registration and recordkeeping violations of the FCSA. ¹ See 21 U.S.C. § 842, et seq. (1988). The district court imposed a $337,000 civil fine on the corporation. Soll and Brinkley made a settlement offer to pay the fine over several years, ² but the government refused. The government then seized the available assets of Clinical, but these were valued at less than $15,000. Consequently, the government filed suit against Clinical's only shareholders, Soll and Brinkley, seeking to find them personally liable for the balance of the fines. The government sought to pierce the corporate veil on two theories: (1) alter ego and (2) frustration of a legislative purpose. ³ The jury found in favor of the government on both theories.

Soll and Brinkley now challenge the verdict, contending that the district court erred in:

(a) improperly instructing the jury on the alter ego theory;

(b) allowing the government to pierce the corporate veil after Soll and Brinkley had made an offer of settlement; and

(c) terminating the direct examination of Soll during trial, and making prejudicial comments during voir dire. ⁴

II

A

Soll and Brinkley argue that the district court failed to instruct the jury properly on the Louisiana law ⁵ of piercing the corporate veil under the alter ego theory. We review jury instructions for abuse of discretion. See Koonce v. Quaker Safety Products & Mfg. Co., 798 F.2d 700, 719 (5th Cir.1986) ("The district judge 'has wide discretion to select his own words and to charge in his own style.' " (quoting Sandidge v. Salen Offshore Drilling Co., 764 F.2d 252, 262 (5th Cir.1985))). "If the jury instructions are 'comprehensive, balanced, fundamentally accurate, and not likely to confuse or mislead the jury, the charge will be deemed adequate.' " Id. (quoting Scheib v. Williams-McWilliams Co., 628 F.2d 509, 511 (5th Cir.1980)). "The crucial issue on review is whether the jury had an understanding of the issues and its duty to determine those issues." Id.

Under Louisiana law, shareholders are generally not held individually responsible for debts of the corporation. Kingsman Enterprises v. Bakersfield Elec. Co., 339 So.2d 1280, 1282 (La.App. 1st Cir.1976). However, where the corporation is merely the alter ego of the shareholder, Louisiana courts have ignored the corporate form and have held the individual shareholder or shareholders liable. Id. In applying this alter ego doctrine, Louisiana courts have traditionally focused on the following five elements: (1) commingling of corporate and shareholder funds; (2) failure to follow statutory formalities for incorporation and the transaction of corporate affairs; (3) undercapitalization of the corporation; (4) failure to provide separate bank accounts and bookkeeping records; and (5) failure to hold regular shareholder or director meetings. Id. n. 1; see also Jones v. Briley, 593 So.2d 391, 395 (La.App. 1st Cir.1991) (using five-element test); GI's Club of Slidell, Inc. v. Am. Legion Post # 374, 504 So.2d 967, 968 (La.App. 1st Cir.1987) (same); Harris v. Best of Am. Inc., 466 So.2d 1309, 1315 (La.App. 1st Cir.) (same), writ denied, 470 So.2d 121 (La.1985).

In charging the jury, the district court included the elements above, but added two more: (a) failure to pay dividends; and (b) withdrawal of corporate funds for the personal use of the stockholders. See Record on Appeal, vol. 7, at 147-48. Soll and Brinkley argue that the district court abused its discretion in not strictly adhering to the five elements enumerated in Kingsman. We disagree.

First, Soll and Brinkley have not cited, nor has this Court found, a single Louisiana case suggesting that a court is limited to the five factors in Kingsman. Moreover, the court in Kingsman recognized that the five factors it listed are not exclusive. See Kingsman, 339 So.2d at 1282 n. 1 ("These factors may include but are not limited to....").

Second, Louisiana courts have recognized that the additional factors given by the district court are proper criteria for determining shareholder liability under the alter ego theory. See Riggins v. Dixie Shoring Co., Inc., 592 So.2d 1282, 1283 (La.1992) ("Some of the many factors which may properly be considered include: ... non-payment of dividends, ... [and] siphoning of funds of the corporation...."); Rivers v. Schlumberger Well Surveying Corp., 389 So.2d 807, 813 (La.App. 3d Cir.1980) (considering the paying of dividends as a factor in deciding whether to pierce the corporate veil); Dillman v. Nobles, 351 So.2d 210, 214 (La.App. 4th Cir.1977) (considering the withdrawal of corporate funds for personal use as a factor in deciding whether to pierce the corporate veil). Therefore, we find no abuse of discretion in the district court's formulation of factors to consider under the alter ego theory.

Soll and Brinkley also contend that the district court abused its discretion by failing to explain alter ego liability in its charge to the jury. See Baker v. Raymond Int'l, Inc., 656 F.2d 173, 180 (5th Cir.1981) (holding that it is reversible error for a district court to fail to "present adequately and in context the factors that might warrant the imposition of [alter ego] liability"), cert. denied, 456 U.S. 983, 102 S.Ct. 2256, 72 L.Ed.2d 861 (1982). After reviewing the record, we find that the district court adhered to Baker's prescriptions.

In Baker, we first noted that a court should explain "at least the rudiments of limited liability." Baker, 656 F.2d at 180. For example, we stated that a court should instruct a jury that shareholders are "immune from liability for its debts in the absence of ... exceptional circumstances." Id. The district court fulfilled this requirement by stating that "as a general rule, shareholders are not responsible for debts of the corporation.... However, under certain circumstances ... shareholders become liable individually for corporate debts." Record on Appeal, vol. 7, at 146.

Second, we stated that a court should describe to the jury the "degree of control that must be found to establish that an ostensibly separate corporation is a mere instrumentality [i.e., alter ego]." Baker, 656 F.2d at 180. For example, in the context of a parent-subsidiary relationship, we noted that a court should instruct the jury that to hold the dominant party liable, "the jury must find that this control 'amounts to total domination of the subservient corporation, to the extent that the subservient corporation manifests no separate corporate interests of its own.' " Id. at 181 (quoting Krivo Indus. Supply Co. v. National Distillers & Chem. Corp., 483 F.2d 1098, 1106 (5th Cir.1973)). The district court also met this requirement by instructing the jury that to find Soll and Brinkley liable, it had to find them to be "indistinguishable" from the corporation. See Record on Appeal, vol. 7, at 146-47. ⁶

Third, we indicated in Baker that a court should instruct the jury to weigh all the factors given, but not consider any one to be dispositive. Baker, 656 F.2d at 181. The district court so advised the jury by stating that "[n]o one factor determines whether the corporate form should be disregarded. I have given you seven of them. No one determines by itself whether you should disregard the corporate form." Record on Appeal, vol. 7, at 148.

Lastly, we stated that a court should "elaborate[ ] the significance of [a specific] factor" where warranted by the facts. Baker, 656 F.2d at 181. Soll and Brinkley contend that the district court erred in not elaborating on the element of undercapitalization. ⁷ Specifically, they argue that the district court should have instructed the jury that continuous corporate operations for a reasonable period of time are per se indicative of adequate capitalization. We disagree.

In Matter of Multiponics, Inc., 622 F.2d 709, 717 (5th Cir.1980), we stated that "the concept of undercapitalization has never been precisely defined." "[T]his inquiry is highly factual and may vary substantially with the industry, size of the debt, account methods employed, and like factors." Id. Therefore, the law does not provide that sustained corporate operations preclude a finding of undercapitalization.

Furthermore, "[t]he trial court has no duty to give the jury an exegesis of legal principles that might enable a plaintiff to recover." Laird v. Shell Oil Co., 770 F.2d 508, 510 (5th Cir.1985); see United States v. Jon-T...