U.S. v. Jon-T Chemicals, Inc., JON-T

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Citation768 F.2d 686
Docket NumberJON-T,No. 84-1325,84-1325
PartiesUNITED STATES of America, Plaintiff-Appellee, v.CHEMICALS, INC., and Lewis M. Overton, Jr., Receiver for Jon-T Chemicals, Inc., Defendants-Appellants.
Decision Date16 August 1985

Brantly Harris, Houston, Tex., for defendants-appellants.

William French Smith, Atty. Gen., William S. Liebman, Dept. of Justice, Washington, D.C., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, POLITZ, and WILLIAMS, Circuit Judges.

GOLDBERG, Circuit Judge:

This is the latest installment in a series of cases that threatens to become, in its own small way, a latter-day Jarndyce and Jarndyce. 1 The cases arose as a result of fraudulent misrepresentations by John H. Thomas, Lonnie D. Clark, and Jon-T Farms, Inc., to obtain agricultural subsidies under the Upland Cotton Program. 2 Initially, the government sought and obtained criminal convictions against these defendants, which we subsequently affirmed on appeal. United States v. Thomas, 593 F.2d 615 ("Thomas I ") (affirming in part and remanding in part), modified on rehearing, 604 F.2d 450 (1979) (per curiam), aff'd after remand, 617 F.2d 436 (5th Cir.), cert. denied, 449 U.S. 841, 101 S.Ct. 120, 66 L.Ed.2d 48 (1980); United States v. Clark, 546 F.2d 1130 (5th Cir.1977). The government then brought a civil action to recover the erroneously-paid subsidies, obtaining a summary judgment against Thomas, Clark, and Jon-T Farms based on the collateral estoppel effect of their criminal convictions. United States v. Thomas, 709 F.2d 968 (5th Cir.1983) ("Thomas II ") (affirming lower court decision). Now, the government seeks to hold liable the parent company of Jon-T Farms--Jon-T Chemicals--on the ground that Farms was its alter ego or agent.

The district court, sitting without a jury, found that Jon-T Chemicals exercised total domination and control over Jon-T Farms and that consequently Farms was the alter ego of Chemicals. On this basis, it entered judgment against Chemicals in the amount of $4,787,604.20. Because the district court applied the correct legal standard and made findings of fact that are not clearly erroneous, we affirm.


Jon-T Chemicals, an Oklahoma corporation, was incorporated in 1969 as a fertilizer and chemicals business. The following year, John H. Thomas became its majority shareholder as well as its president and board chairman, positions which he retained throughout the 1970 to 1973 period.

In April 1971, Chemicals incorporated Jon-T Farms as a wholly-owned subsidiary to engage in the farming and land-leasing business. Chemicals initially invested $1,000 to establish Farms, but later raised this investment to $10,000. All of the directors and officers of Farms were directors and officers of Chemicals, and Thomas served as the president and chairman of both corporations. In addition, Farms used the offices, computer, and accountant of Chemicals without paying any fee; Chemicals paid the salary of Farms's only regular employee; and Chemicals made ongoing, informal advances to Farms to pay Farms's expenses, reaching $1.8 million by the end of 1973 and $7.1 million in January 1975.

In 1972 and 1973, Thomas, along with other business associates (including a number of directors, officers, and employees of Chemicals and Farms), formed two cotton farming joint ventures. The ventures leased land from Farms and employed a custom farmer. On behalf of the ventures, Thomas and Farms submitted fraudulent applications for agricultural subsidies under the Upland Cotton Program. As a result of these applications, the Commodity Credit Corporation ("CCC") paid the joint ventures $2,263,601.15 in subsidies in the form of forty-two sight drafts. In addition, Thomas and Farms converted the proceeds of five other CCC sight drafts totalling $269,901.90.

After obtaining criminal convictions against Thomas and Farms, the Government commenced this civil action against Thomas, Farms, and Chemicals in June 1978, alleging violations of the False Claims Act, 31 U.S.C. Secs. 231-235 (current version at 31 U.S.C. Secs. 3729-3731 (1982)), and common law conversion. 3 Initially, the district court granted partial summary judgment against Thomas and Farms, finding them jointly and severally liable for the false representations and conversions. Before the district court awarded damages, however, Farms went into bankruptcy, and further proceedings against it were stayed pursuant to 11 U.S.C. Sec. 362 (1982). The district court therefore entered final judgment only against Thomas, finding him liable in the amount of $4,787,604.20. This judgment against Thomas has been affirmed on appeal. Thomas II, 709 F.2d 968.

Presumably because both Thomas and Farms were insolvent, the Government proceeded to press its claims against Chemicals. 4 The district court found that Farms was a mere appendage of Chemicals and that therefore Chemicals was liable for the illegal acts of Farms. Accordingly, it entered final judgment against Chemicals, holding it jointly and severally liable with Thomas for the $4,787,604.20. After the district court denied several post-trial motions by Chemicals, Chemicals brought this appeal.


Although Chemicals raises nine issues on appeal, these all boil down to a single question: Did the district court err in finding that Farms was the alter ego of Chemicals? 5 If Farms was the alter ego of Chemicals, then Chemicals is liable for torts committed by Farms, as the district court held. In reviewing the court's alter ego finding, we first consider whether the court applied the correct legal standard 6 and then examine its factual findings.


Under the doctrine of limited liability, the owner of a corporation is not liable for the corporation's debts. Creditors of the corporation have recourse only against the corporation itself, not against its parent company or shareholders. See Baker v. Raymond International, 656 F.2d 173, 179 (5th Cir.1981), cert. denied, 456 U.S. 983, 102 S.Ct. 2256, 72 L.Ed.2d 861 (1982). It is on this assumption that "large undertakings are rested, vast enterprises are launched, and huge sums of capital attracted." Anderson v. Abbott, 321 U.S 349, 362, 64 S.Ct. 531, 537-38, 88 L.Ed. 793 (1944).

While limited liability remains the norm in American corporation law, certain equitable exceptions to the doctrine have developed. The most common exception is for fraud. If, for example, a corporation is established for a fraudulent purpose or is used to commit an illegal act, or if its shareholders drain the corporation's assets, limited liability may not apply. Another exception arises where, as here, a parent company totally dominates and controls its subsidiary, operating the subsidiary as its business conduit or agent. See Nelson v. International Paint Co., 734 F.2d 1084, 1091-93 (5th Cir.1984) (applying Texas law); Edwards Co. v. Monogram Industries, 730 F.2d 977, 980-82 (5th Cir.1984) (en banc) (same); Miles v. AT & T, 703 F.2d 193, 195 (5th Cir.1983) (same); Baker, 656 F.2d at 179-81 (applying Jones Act and admiralty law).

[T]he control required for liability under the 'instrumentality' rule amounts to total domination of the subservient corporation, to the extent that the subservient corporation manifests no separate corporate interests of its own and functions solely to achieve the purposes of the dominant corporation. As Professor Fletcher states:

The control necessary to invoke what is sometimes called the "instrumentality rule" is not mere majority or complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal.

1 W. Fletcher, [Cyclopedia of the Law of Private Corporations] Sec. 43 at 204-05 [rev.perm.ed. 1963].

Krivo Industrial Supply Co. v. National Distillers & Chemical Corp., 483 F.2d 1098, 1106 (5th Cir.1973) (applying Alabama law). In such cases, the subsidiary is considered the "alter ego," "agent," or "instrumentality" of the parent company, and the district court, acting in its equitable capacity, is entitled to pierce the corporate veil.

The complementary theories of limited liability and piercing the corporate veil have provoked consternation among courts and legal scholars alike. They have been variously described as a "legal quagmire," Ballantine, Separate Entity of Parent and Subsidiary Corporations, 14 Calif.L.Rev. 12, 15 (1925), and as being "enveloped in the mists of metaphor," Berkey v. Third Avenue Ry., 244 N.Y. 84, 155 N.E. 58, 61 (1926) (Cardozo, J.); see Krivo, 483 F.2d at 1103 (quoting Ballantine and Cardozo). Nowhere is this more true than in the case of the alter ego doctrine. In some sense, every subsidiary is the alter ego of its parent company. Where the subsidiary is wholly-owned by the parent and has the same directors and officers, operating the subsidiary independently of the parent company not only has little practical meaning, it would also constitute a breach both of the subsidiary's duty to further the interests of its owner, and of the directors' and officers' duty towards the parent company. Nevertheless, our cases are clear that one-hundred percent ownership and identity of directors and officers are, even together, an insufficient basis for applying the alter ego theory to pierce the corporate veil. Nelson, 734 F.2d at 1092; Miles, 703 F.2d at 195. Instead, we maintain the fiction that an officer or director of both corporations can change hats and represent the two corporations separately, despite their common ownership.

In lieu of articulating a coherent doctrinal basis for the alter ego theory, we have instead developed a laundry list of factors to be used in determining whether a subsidiary is the alter ego of its parent. These include whether:

(1) the parent and the subsidiary have...

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