Opinion ID: 420942
Heading Depth: 2
Heading Rank: 1

Heading: Alter Egos?

Text: 34 In evaluating Nicolet's claim with respect to the alter ego issue, we face a preliminary question regarding the law to be applied. The district court made no explicit choice of law; instead, the court held that the alter ego issue comes out the same under either Texas or Pennsylvania law. We too decline to answer the choice of law question, since our examination of Pennsylvania and Texas law also reveals an identity of result concerning the alter ego issue. We begin that examination by looking to relevant Pennsylvania jurisprudence. 5 35 The well-settled rule in Pennsylvania is that a corporation is normally regarded as a legal entity separate and distinct from its shareholders, even if the stock is held entirely by one person. Ashley v. Ashley, 482 Pa. 228, 393 A.2d 637, 641 (Pa.1978); College Watercolor Group, Inc. v. William H. Newbauer, Inc., 468 Pa. 103, 360 A.2d 200, 207 (Pa.1976). The legal fiction of a separate corporate identity was developed in the interest of convenience and justice and will be recognized and upheld unless specific and unusual circumstances call for an exception. Ashley, 393 A.2d at 641; Wedner v. Unemployment Compensation Board of Review, 449 Pa. 460, 296 A.2d 792, 794-95 (Pa.1972) (quoting Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir.1967)); Kellytown Co. v. Williams, 284 Pa.Super. 613, 426 A.2d 663 (Pa.Super.1981). The separateness of the corporate identity will be disregarded only when the entity is used to defeat public convenience, justify wrong, protect fraud or defend crime. Sams v. Redevelopment Authority, 431 Pa. 240, 244 A.2d 779, 781 (Pa.1968). Thus, the Pennsylvania courts will pierce the corporate veil when justice and policy demand and when the rights of innocent parties are not prejudiced nor the theory of the corporate entity rendered useless. Ashley, 393 A.2d at 641. Such factors as failure to adhere to corporate formalities, substantial intertwining of affairs, undercapitalization, and use of the corporation and its assets to further the shareholder's own interests are to be considered in making such a determination. Department of Environmental Resources v. Peggs Run Coal Co., 55 Pa.Cmwlth. 342, 423 A.2d 765, 768-69 (Pa.Cmwlth.1980). See also Zubik, 384 F.2d at 272-73; Helder v. Whittenberg Liquidating Co., 522 F.Supp. 480, 483 n. 3 (E.D.Pa.1981); Carpenters' District Council v. W.O. Kessel Co., 487 F.Supp. 54, 57 (W.D.Pa.1980). 36 Applying these tenets of Pennsylvania law to the facts of this case as stated above, we agree with the district court that the nature of the relationship between T & N and K & M presents no genuine issue of material fact. In all formalistic respects, K & M and T & N were independent entities; the companies maintained separate assets, books, ledgers, bank accounts, and other corporate and financial records. Nicolet has raised no factual issue concerning undercapitalization on the part of K & M, nor has Nicolet shown that public inconvenience, wrong, fraud, or crime will result from honoring K & M's corporate identity. To the extent that T & N profited from the business of its American subsidiary, such benefits were not shown to be derived from a misuse of the corporate form. In short, Nicolet has presented nothing more nefarious than the interest and involvement that properly may be demonstrated by an active parent corporation. 37 Texas law commands the same conclusion as to the relationship between T & N and K & M. This circuit has thoroughly examined the Texas alter ego liability rule in the recent cases of Miles v. American Telephone & Telegraph Co., 703 F.2d 193 (5th Cir. 1983), and Edwards Co. v. Monogram Industries, Inc., 700 F.2d 994 (5th Cir. 1983). In Miles, the court noted that Texas courts are loathe to merge the separate legal identities of parent and subsidiary unless the latter exists as a mere tool or 'front' for the parent, or the corporate fiction is utilized to achieve an inequitable result, or to conceal fraud or illegality. 703 F.2d at 195. The court continued by restating the well-settled rule: 38 Proof of an identity of shareholders or of corporate directors and officers, or of domination by the parent of its subsidiary's affairs, will not justify treatment of the two as one business unit. Nor does the parent's ownership of 100 percent of the subsidiary's stock alone defeat their separate existence. 39 Id. (citations omitted). The Court then listed a variety of factors used in evaluating whether a subsidiary is merely an adjunct of its parent: 40 [S]uch factors include whether: (1) distinct and adequately capitalized financial units are incorporated and maintained; (2) daily operations of the two corporations are separate; (3) formal barriers between management of the two entities are erected, with each functioning in its own best interests; and (4) those with whom the corporations come in contact are apprised of their separate identity. Other factors deemed important by the commentators and Texas courts are: (1) common stock ownership; (2) the method and degree of financing of the subsidiary by the parent; (3) common directors or officers; (4) separate books and accounts; (5) common business departments; (6) extent to which contracts between parent and subsidiary favor one over the other; and (7) connection of parent's employee, officer or director to subsidiary's tort or contract giving rise to suit. 41 Id. at 195-96 (citing Douglas & Shanks, Insulation from Liability Through Subsidiary Corporations, 39 Yale L.J. 193 (1929)). 42 In Edwards, this court had the following comments regarding the nature of the parent-subsidiary relationship: 43 The subsidiary must have some substance, some meat on its bones. The simple rubric of filing charters of incorporation for nonfunctioning subsidiaries will not suffice to insulate parent corporations from liability. 44 We are not saying that mere domination of a subsidiary by a parent may allow piercing of the subsidiary's veil. Of course the parent may dominate the subsidiary. A subsidiary by its nature is ultimately subservient in any case, and domination is the prerogative of the parent. The parent can dictate the direction, the form and the style of the subsidiary. It can hire and fire, create and dissolve. And the subsidiary will still insulate the parent from liabilities incurred by the subsidiary. 45 700 F.2d at 1002. The Edwards court emphasized that [m]ere domination will not satisfy the Texas standards for piercing the veil. Virtually total disregard by the parent of the subsidiary is required before a court applying Texas law may disregard the subsidiary. Id. at 1004. 46 When measured against these principles of Texas law, the undisputed evidence demonstrates the absence of any issue of material fact as to T & N's status as K & M's alter ego. While K & M is bound by T & N's general policy decisions, there can be no question that K & M functions autonomously in conducting its business and financial affairs. K & M's internal operations are sufficiently independent of T & N's control to preclude a piercing. Thus, as to this issue, Texas law reaches a result identical to Pennsylvania law. 47 As the party moving for summary judgment, T & N has the burden of establishing that no genuine issue of material fact existed and that judgment in its favor was warranted as a matter of law. Nicholas Acoustics & Specialty Co. v. H & M Construction Co., 695 F.2d 839, 844 (5th Cir.1983). Fed.R.Civ.P.56(c). The nonmoving party, Nicolet, was then required to bring forward significant probative evidence demonstrating the existence of a genuine issue of fact. Ferguson v. National Broadcasting Co., 584 F.2d 111, 114 (5th Cir.1978). Nicolet, however, has failed to present any facts illustrating the sort of corporate umbilication necessary to disregard K & M's separate corporate identity. Accordingly, Nicolet's response cannot withstand T & N's motion for summary judgment on the alter ego issue. 48