Wilton Corp. v. Ashland Casting Corp.

• Decision Date: 20 July 1999
• Docket Number: No. 98-6189,98-6189
• Parties: (6th Cir. 1999) Wilton Corporation, Plaintiff-Appellant, v. Ashland Castings Corporation; Ashland Capital Corporation; Chimera Corporation, Defendants, Keith A. Brown, Defendant-Appellee. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 670

188 F.3d 670 (6th Cir. 1999)

Wilton Corporation, Plaintiff-Appellant, v. Ashland Castings Corporation; Ashland Capital Corporation; Chimera Corporation, Defendants, Keith A. Brown, Defendant-Appellee.

No. 98-6189

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: July 20, 1999

Decided and Filed: August 18, 1999

Appeal from the United States District Court for the Eastern District of Tennessee at Winchester, No. 96-00094--R. Allan Edgar, Chief District Judge.

William G. Colvin, SCHUMAKER & THOMPSON, Chattanooga, Tennessee, for Appellant.

Michael C. Cohan, CAVITCH, FAMILO, DURKIN & FRUTKIN, Cleveland, Ohio, for Appellee.

Donald J. Ray, Ray & Van Cleave, Tulahoma, Tennessee, for Defendants.

Before: WELLFORD, SILER, and GILMAN, Circuit Judges.

WELLFORD, J., delivered the opinion of the court, in which SILER, J., joined. GILMAN, J. (p. 678), delivered a separate concurring opinion.

OPINION

HARRY W. WELLFORD, Circuit Judge.

Plaintiff Wilton Corporation ("Wilton") appeals from the district court's grant of summary judgment in favor of defendant Keith A. Brown. Wilton argues that the district court erred in finding that there was insufficient evidence to create a genuine issue of material fact. Brown countered by filing a motion for damages and costs to be paid by Wilton, arguing that Wilton's appeal was frivolous. For the reasons set forth below, we AFFIRM the district court and GRANT Brown's motion for sanctions against Wilton for filing a frivolous appeal, and REMAND to the district court for a hearing to determine the proper damages and costs to be awarded Brown.

I.

Wilton, a Colorado corporation with its principal place of business in Illinois, has a manufacturing facility located in Winchester, Tennessee. Wilton required certain metal castings to be supplied for use as product components. Ashland Castings ("Ashland")¹, an Ohio corporation with its principal place of business in Ohio, produced the castings used in production by Wilton under a contract. Ashland was owned by defendant, Keith A. Brown, its sole shareholder, president and chairman of the board. Brown provided his own capital for Ashland stock, and he loaned the company substantial amounts of his own money, in addition to arranging for outside financing for the company. Brown, however, was not involved in the day-to-day operations of the company, which suffered losses on a consistent basis. In sum, Brown covered all of Ashland's losses by contributing capital or making loans. He drew no salary and received no distributions or dividends from Ashland.

In April of 1994, Ashland contracted to supply Wilton with castings for wheel hubs on a one year fixed price basis. The contract was negotiated by Charles Harwell, general manager of Ashland, and Jim Wiseman, the purchasing manager at Wilton. Brown was not involved in the negotiation of the contract. At the time of the contract, Wilton dealt with Ashland as a corporate entity. Wilton did not call upon Brown to guarantee Ashland's performance.

In June of 1994, there was a serious fire at Ashland's facility, which caused significant expense and disrupted production. For pressing financial reasons, Ashland decided to increase its prices to its customers, including Wilton. Wilton objected, arguing that Ashland was bound by the price in the 1994 contract. When the situation was brought to Brown's attention, he declined to intervene. Due to a lack of other suppliers, Wilton continued to purchase castings from Ashland for a time at the higher price under protest.

In December of 1995, Wilton sued Ashland for damages, alleging breach of contract among other things. Thereafter, Wilton amended its complaint to add Ashland Capital, Chimera Corp., and Brown personally. The claims against Chimera and Brown requested that Ashland's corporate veil be pierced, and that the court impose Ashland's liabilities on both Chimera, a separate corporation, and Brown. Chimera and Brown moved for summary judgment. The district court granted Chimera and Brown's motions for summary judgment, which were not made final pursuant to Fed. R. Civ. P. 54(b). In July of 1998, however, the parties entered into a consent judgment, making Ashland solely liable for breach of contract and awarding Wilton damages of $155,395.51. The consent judgment also disposed of all the remaining claims in the action.

Wilton filed this appeal, challenging the order wherein the district court found that Ashland's corporate veil could not be pierced to impose the corporation's liability on Brown personally. The appeal asserts that personal liability should be imposed. Brown has filed a motion seeking damages and costs based on what he asserts is a frivolous appeal. Wilton has filed no response, but argued in oral argument that Brown's motion should be denied.

II.

We review the district court's grant of summary judgment de novo, using the same standards applied by the district court. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); J.C. Wyckoff & Associates, Inc. v. Standard Fire Ins. Co., 936 F.2d 1474, 1483 (6th Cir. 1991). Summary judgment is appropriate where there are no genuine issues of material fact, and the moving party is entitled to a judgment as a matter of law. See Fed. R. Civ. P. 56. We determine whether sufficient evidence has been presented to create an issue of fact, not to weigh the evidence or make credibility determinations. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).

In determining whether Ashland's corporate veil should be pierced to make Brown responsible for the liabilities of Ashland, the district court applied the substantive law of Ohio.² In accordance with Ohio law, the district court applied the three-prong test articulated in Belvedere Condominium Unit Owners' Assoc. v. R.E. Roark Companies., Inc., 617 N.E.2d 1075 (Ohio 1993), to decide whether to pierce Ashland's corporate veil. According to Belvedere, the corporate form may be disregarded only when:

(1). Control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own;

(2). Control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and

(3). Injury or unjust loss resulted to the plaintiff from such control and wrong.

Belvedere, 617 N.E.2d at 1086. In the instant case, the district court held that Wilton failed to establish the second prong of the Belvedere test. The court reasoned that, assuming that Ashland had breached its contract with Wilton, "breach of contract standing alone is insufficient to constitute fraud and to justify the extraordinary remedy of piercing the corporate veil." The court noted that not uncommonly, corporations breach contracts as a result of business pressures and practices. Piercing the corporate veil, however, was designed to reach the pockets of those who intentionally abuse the corporate form, in such instances as when corporate funds are used for personal purposes of the owner, or where the creditor does not realize that a corporation is involved rather than the individual owner-operator, or there is a sham corporation. Under the circumstances of this case, the district court reasoned that Brown's conduct "simply does not rise to this level of fraud," and there was no proof of fraud and manipulation of the corporation on the part of Brown.

Wilton argues that the district court erred in finding that the evidence was insufficient to allow a jury to consider the question. Basically, Wilton claims that Ashland had no mind, will, or existence separate from that of Brown because Brown was the sole funding source of Ashland, and because of Brown's decision not to interfere in the decision to breach the supply contract with Wilton by raising the price. The decision to breach the contract, Wilton argues, had the effect of minimizing Brown's further risk of loss of investment to the detriment of Wilton. Wilton argues generally that the deposition testimony and documents create a genuine issue of material fact as to whether Brown should be answerable for damages caused by Ashland.

Brown argues that Wilton has not put forth even a scintilla of evidence to suggest that Ashland did not have a valid existence separate from Brown himself. Brown first points out that limited liability is a fundamental principle of corporate law, and that the rule applies even where there is only one shareholder. See, e.g., First Nat'l Bank of Chicago v. F.C. Trebein Co., 52 N.E. 834 (Ohio 1898); LeRoux's Billyle Supper Club v. Ma, 602 N.E.2d 685 (Ohio Ct. App. 1991); see also Ohio Const., art. XIII, 3 ("[B]ut in no case shall any stockholder be individually liable otherwise than for the unpaid stock owned by him or her."). He also points out that Wilton has the burden to show that each of the three Belvedere prongs are met in this case. See University Circle Research Center Corp. v. Galbreath Co., 667 N.E.2d 445, 448 (Ohio Ct. App. 1995). Brown argues that, under Wilton's strained analysis, ANY corporation with one shareholder that breaches a contract might satisfy the Belvedere test, and that the Belvedere factors are not satisfied under any reasonable version of the facts submitted by Wilton. Although Brown admittedly exercised a high degree of control over the business of the corporation, he relies on the statement in Belvedere that "mere control over a corporation is not in itself a sufficient basis for shareholder liability." Belvedere, 617 N.E.2d at 1086.

The district court found, in granting Brown summary judgment, that there is simply no evidence that Brown's actions caused Ashland to commit fraud or to misrepresent the relationship between Ashland and Brown. We agree that a simple breach of contract cannot suffice as the type of "illegal" or fraudulent act intended by...