United States Court of Appeals,

Fifth Circuit.

No. 93-8366

Summary Calendar.

WESTERN HORIZONTAL DRILLING, INC., Plaintiff-Appellee,

v.

JONNET ENERGY CORPORATION, et al., Defendants,

E.J. Jonnet and Joe Jonnet, Defendants-Appellants.

Jan. 12, 1994.

Appeal from the United States District Court For the Western District of Texas.

Before GARWOOD, SMITH, and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:

E.J. Jonnet and Joe Jonnet ("the Jonnets") appeal the district court's summary judgment for

Western Horizontal Drilling ("Western"). Because we find no genuine issue of material fact exists,

we affirm the district court.

I. FACTS AND PROCEDURAL HISTORY

In April 1991, Western sued the Jonnet Energy Corporati on ("Jonnet Energy") in Texas state

court to co llect an outstanding debt of $196,194.03 for services and materials rendered on one of

Jo nnet Energy's oil wells. Later that month, Jonnet Energy removed the suit to federal co urt

.

Western later joined Jontex Energy Corporati on ("Jontex"), E.J. Jonnet, and Joe Jonnet as defendants

in an attempt to pierce Jonnet Energy's corporate veil. In June 1992, Western sent the defendants,

inter alia, several requests for admission. For purposes of this appeal, the relevant requests for

admission sent to E.J. and Joe Jonnet, individually, read as follows:

Request for Admission No. 1: Jonnet Energy Corporation is merely a conduit for yo ur personal finances and business transactions.

Request for Admission No. 2: Jontex Energy, Inc. is merely a conduit for your personal

finances and business transactions.

The Jonnets neve r respo nded to Western's requests, thereby deeming them admitted pursuant to1 In addition to actual damages, Western also had sued the defendants for exemplary damages

and incorporated this issue in its summary judgment motion. The district court denied summary

judgment as to exemplary damages and sent the issue to trial. After a bench trial, the court denied

Western exemplary damages. Western does not appeal the court's ruling. federal rules. F ED .R.C IV .P. 36(a).

Western moved for summary judgment based on the deemed admissions. With regard to the

Jonnets, Western argued that it should be permitted to pierce Jonnet Energy's corporate veil because

the Jonnets were "alter egos" of the corporations. The defendants did not contest summary judgment

as to Jonnet Energy and Jontex. E.J. and Joe Jonnet, however, opposed summary judgment as to

themselves. They originally argued that the deemed admissions did not, by themselves, establish

personal liability under the alter ego theory of piercing the corporate veil. In November 1992, the

district court granted summary judgment for Western, stating that the Jonnets' deemed admissions

were "the very definition of "alter ego' as provided" by Texas law. 1 The Jonnets then moved to alter

the court's judgment, this time arguing that the alter ego theory had been superseded by amendments

to the Texas Business Corporati on Act in 1989. The district court in May 1993 denied the Jonnets'

motion on the ground that the amendment neither abolished nor modified the alter ego theory. The

Jonnets now appeal.

II. DISCUSSION

A. Standard of Review

We review a summary judgment de novo, applying the same standard as the district court.

D.E.W., Inc. v. Local 93, Laborers' Int'l. Union, 957 F.2d 196, 199 (5th Cir.1992); F ireman's Fund

Ins. Co. v. Murchison, 937 F.2d 204, 207 (5th Cir.1991). Therefore, summary judgement is

appropriate if there is "no genuine issue as to any material fact and

... the moving party is entitled to

a judgment as a matter of law." F ED .R.C IV .P. 56(c).

B. Texas Law Regarding the Alter Ego Theory

The fundamental concept of corporate law is that the corporati on is a wholly separate, legal

entity. As such, the corporation, and not its shareholders, is liable for its own debts and torts. K rivo

Indus. Supply Co. v. National Distillers and Chem. Corp., 483 F.2d 1098, 1102-03 (5th Cir.1973).2 We have stated several times that Castleberry is a confusing opinion. See, e.g., Gibraltar

Sav. v. LDBrinkman Corp., 860 F.2d 1275, 1287 (5th Cir.1988); Pan Eastern Exploration Co. v.

Hufo Oils, 855 F.2d 1106, 1131-33 (5th Cir.1988). Nonetheless, under Texas law, courts do not hesitate to ignore the corporate form when it "has been

used as part of a basically unfair device to achieve an inequitable result." C astleberry v. Branscum,

721 S.W.2d 270, 271 (Tex.1986). In the landmark C astleberry case, the Texas Supreme Court listed

six situations in which Texas courts may pierce the corporate veil:

(1) when the fiction is used as a means of perpetrating a fraud;

(2) where a corporati on is organized and operated as a mere tool or business conduit of ano ther

corporati on;

(3) where the corporate fiction is resorted to as a means of evading an existing legal obligation;

(4) where the corporate fiction is employed to achieve or perpetrate monopoly;

(5) where the corporate fiction is used to circumvent a statute; and

(6) where the corporate fiction is relied upon as a protection of crime or to justify wrong.

Castleberry, 721 S.W.2d at 272.

To better understand Castleberry, 2 we have interpreted the case as establishing three broad

categories in which a court may pierce a corporate veil: (1) the corporation i s the al ter ego of i

ts

owners and/or shareholders; (2) the corporation is used for illegal purposes; and (3) the corporation

is used as a sham to perpetrate a fraud. V illar v. Crowley Maritime Corp., 990 F.2d 1489, 1496 (5th

Cir.1993); F idelity & Deposit Co. v. Commercial Casualty Consultants, Inc., 976 F.2d 272, 274-75

(5th Cir.1992). Thus, alter ego is but one of several methods for piercing the corporate veil. The

Castleberry court defined alter ego as when "a corporati on is organized and operated as a mere tool

or business conduit of another corporation." Castleberry, 721 S.W.2d at 272; see also Harrell v.

DCS Equip. Leasing Corp., 951 F.2d 1453, 1458-59 (5th Cir.1992); P an Eastern Exploration Co.

v. Hufo Oils, 855 F.2d 1106, 1130-33 (5th Cir.1988). The C astleberry court further established that

alter ego "is shown from the total dealings of the corporati on and the individual, including the degree

to which corporate formalities have been followed and corporate and individual property have been

kept separately, the amount of financial interest, ownership and control the individual maintains over3 The legislature was responding to the "uproar in the business community over the

ramifications of Castleberry on stockholder liability." Farr v. Sun World Sav. Ass'n, 810 S.W.2d

294, 296 (Tex.App.1991). One commentator stated that "[t]he public policy of encouraging

business formation and capital investment was too vital to the troubled Texas economy to allow

the court's decision to stand as a dangerous new precedent for shareholder liability." Boyce L.

Graham, Navigating the Mists of Metaphor: Examination of the Doctrine of Piercing the

Corporate Veil, 56 J.A IR L. & C OM . 1135, 1177 (1991).

4 The amendments also eliminated constructive fraud as a means of piercing the corporate veil

in contract claims. T EX .R EV .C IV .S TAT .A NN . art. 2.21 A(2) (Vernon Supp.1993). To pierce the

corporate veil in contract claims, actual fraud must be proven. The amendments preserved the

right to use either actual or constructive fraud to pierce the corporate veil in tort claims. Farr,

810 S.W.2d at 296. the corporation, and whether the corporation has been used for personal purposes." Id.

The Castleberry decision significant ly curtailed shareholders' rights relative to common law

corporate disregard theory. In response, 3 the Texas legislature amended its Business Corporati on Act

in 1989 to read, in part:

A. A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose

subs cription has been accepted shall be under no obligation to the corporation or to its

obligees with respect to:

* * * * * *

(3) any contractual obligation of the corporati on o n the basis of the failure of the corporation to

observe any corporate formality, including without limitation: (a) the failure to comply with

any requirement of this Act or of the articles of incorporation or bylaws of the corporati on;

or (b) the failu re t o o bserve any requirement prescribed by this Act or by the articles of

incorporation or bylaws for acts to be taken by the corporati on, its board of directors, or its

shareholders.

T EX .R EV .C IV .S TAT .A NN

. art. 2.21 A(3) (Vernon S upp.1993). The amendments overruled

Castleberry to the ext ent that a failure to observe corporate formalities is no longer a factor in

proving the alter ego theory in contract claims. F arr v. Sun World Sav. Ass'n, 810 S.W.2d 294, 296

(Tex.App.1991); V

illar, 990 F.2d at 1496 n. 8 & 1500; F idelity & Deposit Co., 976 F.2d at 275. 4

Thus, to pierce the corporate veil using the alter ego theory in a contract claim, the claimant must

look to the remaining factors outlined in Castleberry.

C. The Jonnets' First Argument

Befor e addressing the merits of the case on appeal, the Jonnets first argue that the

amendments did, in fact, abolish the alter ego doctrine in co nt ract claims because the failure to5 We recognize that the Texas Supreme Court seems to be ignoring the amendments to article

2.21 and continues to permit a failure to observe corporate formalities as a means of proving alter

ego. Mancorp, Inc. v. Culpepper, 802 S.W.2d 226, 228 (Tex.1990); see also Coastal Shutters &

Insulation, Inc. v. Derr, 809 S.W.2d 916, 921 (Tex.App.1991). Contra Robert F. Gray, Jr., et

al., Corporations, 45 Sw.L.J. 1525, 1541 (1992) ("many times [Texas] courts still mistakenly fail

to apply these legislative amendments when piercing the corporate veil"). However, because we

find the amendments to article 2.21 clear and unambiguous, our interpretation of the statute starts

and finishes there. observe corporate formalities is the very essence of the alter ego theory. Therefore, they argue, if

the legislature has concluded that c laimants in contract actions can no longer point to a failure to

observe corporate formalities to pierce the corporate veil, then ergo the legislature has abolished the

alter ego doctrine entirely. The Jonnets rely on our opinion in Pan Eastern Exploration, 855 F.2d

1106. In that case, we parsed C astleberry and identified three distinct strands of corporate disregard

theory. We remarked that "there is nothing in the alter ego strand to suggest that anything more is

required than the failur e o f the owners to maintain the corporation as a distinct legal entity." P an

Eastern Exploration, 855 F.2d at 1132. The Jonnets insist that our description of the alt er ego

doctrine is co-extensive with the language used in the amendments to article 2.21, meaning the alter

ego doctrine, as we described it in Pan Eastern Exploration, has been abolished.

We reject the Jo nnet s' argument. A "failure to observe any corporate formality,"

T EX .R EV .C IV .S TAT .A NN

. art. 2.21 A(3), is not synonymous with a "failure of the owners to maintain

the corporati on as a distinct legal entity." P an Eastern Exploration, 855 F.2d at 1132. The language

we used in Pan Eastern Exploration relies significant ly on Castleberry. The Texas Supreme Court

emphasized the significance of legal distinctness: "[a]lter ego applies when there is such unity

between corporati on and individual that the separateness of the corporati on has ceased." C astleberry,

721 S.W.2d at 272. Prior to the amendments to article 2.21, one component of demonstrating that

that "separateness" no longer existed was pointing to a failure to observe corporate formalities. The

amendments now preclude the use of such information in proving alter ego to pierce the corporate

veil. Villar, 990 F.2d at 1496 n. 8 & 1500; F idelity & Deposit Co., 976 F.2d at 275. At least one

Texas court since enactment of the amendments supports our reasoning. See Farr, 810 S.W.2d at

296. 56 We also note that among the Western interrogatories to the Jonnets to which they wholly

failed to make any answer whatever were the following:

INTERROGATORY NO. 3.: With respect to the subject cause of action, describe

with specificity those facts and theories which you contend to refute any of

Western's claims or substantiate any of your defenses, and explain.

INTERROGATORY NO. 19.: Have you ever represented on your stationery or in

any other manner during the period of either Jonnet Energy Corporation's or

Jontex Energy, Inc.'s existence that you were doing business as an individual under

the firm name and style of either corporation.

INTERROGATORY NO. 20.: Have you at any time during Jonnet Energy

Corporation's or Jontex Energy, Inc.'s existence ever signed any contracts, letters,

or other papers in your individual capacity doing business as or on behalf of either

of said corporations?

D. The Jonnets' Second Argument

Having established that the alter ego doctrine is alive and well in Texas, albeit modified by

t he amendments to article 2.21, we now must address the Jonnets' argument on the mer its, i.e.,

whether summary judgment for Western was appropriate. The Jonnets contend that, assuming the

alter ego doctrine exists in Texas, Western failed to proffer evidence that would demonstrate (1) the

Jonnets had an ownership interest in Jonnet Energy and (2) an injustice would result if the corporati on

was held liable.

We reject this argument, too, not because Western need not proffer such evidence but because

the evidence, when viewed in a light mo st favorable to the Jonnets, leaves no genuine issue of

material fact as to whether Jonnet Energy was the Jonnets' alter ego. Moreover, we note that the

Jonnets have never, either in their responses to Western's motion for summary judgment or in their

motion to alter or amend the district court's summary judgment against them, or elsewhere, proffered

or pointed to any summary judgment evidence, or even alleged any fact, tending to indicate that they

had no (or only minority) ownership in Jonnet Energy or that an injustice would not result if the

corporate veil were not pierced, or any other factor indicating that the corporate veil should not be

pierced. In such a context, the Jonnets' deemed admissions, though few in number, speak volumes. 6

Castleberry defines alter eg o as when "a corporation is organized and operated as a mere tool or

business conduit of another corp orati on." C astleberry, 721 S.W.2d at 272. In our own alter egocases, we have looked to Castleberry for the appropriate definition of the doctrine under Texas law.

Harrell v. DCS Equip. Leasing Co rp., 951 F.2d 1453, 1458-59 (5th Cir.1992); P an Eastern

Exploration Co. v. Hufo Oils, 855 F .2d 1106, 1130-33 (5th Cir.1988). The Jonnets' deemed

admissions are nearly identical to the Castleberry court's definition of alter ego. As a matter of law,

the Jonnets have admitted to being the alter ego of Jonnet Energy. Consequently, no genuine issue

of material fact exists.

The district court's summary judgment for Western was appropriate and is AFFIRMED.