Opinion ID: 420942
Heading Depth: 1
Heading Rank: 4

Heading: nicolet's appeal in hargrave: summary judgment

Text: 32 Nicolet attacks the district court's grant of summary judgment for T & N on two major grounds. First, Nicolet claims that summary judgment was improper because a genuine issue of material fact existed as to whether T & N was the alter ego of K & M. Second, Nicolet charges that the district court erred in failing to address the alternative theories of T & N's liability raised in Nicolet's third-party complaint. We shall address these contentions in turn. 33
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
49 In its initial third-party complaint against T & N, Nicolet advanced three alternative theories of T & N's liability: alter ego liability, successorship liability, and contribution or indemnity. Although the district court's memorandum opinion supporting the grant of summary judgment for T & N discussed only the alter ego liability issue, the order granting summary judgment purported to dispose of Nicolet's entire case against T & N. On appeal, Nicolet contends that the court erred in granting summary judgment without considering its other two theories of liability and argues that a remand is necessary for development and consideration of these theories. We cannot agree. Fed.R.Civ.P. 56(e) provides in part: 50 When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of his pleading, but his response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If he does not so respond, summary judgment, if appropriate, shall be entered against him. 51 Our review of the record indicates that Nicolet failed to set forth specific facts raising a genuine, triable issue on its theories of successorship liability and contribution or indemnity. Although the complaint refers to both of these grounds of recovery, Nicolet never broached them again until this appeal. Neither Nicolet's brief in opposition to T & N's motion for summary judgment nor its comments at oral argument on the summary judgment motion 6 mentioned a single fact that would trigger a genuine issue on these theories. This failure to raise potential factual issues is especially enlightening in view of T & N's head-on challenge in its motion for summary judgment; T & N not only attacked Nicolet's alternative successorship liability theory, but also raised its own independent ground for dismissal, the Pennsylvania survival of claims statute. Still Nicolet failed to present facts in support of its pleaded theories. 52 Even more significant is the character of Nicolet's motion for reconsideration of the summary judgment. By the time Nicolet filed its motion for reconsideration, the trial court had entered its memorandum opinion addressing the alter ego considerations as well as the summary judgment order dismissing Nicolet's complaint in toto. Seemingly, this was the perfect opportunity for Nicolet to urge the district court to consider its alternative theories of liability. Again, however, Nicolet was silent, making no mention of these other pleaded contentions. 53 In its brief, Nicolet offers the following account of its actions: 54 In short, by its own actions Turner & Newall deflected the district court and the parties onto single-track adjudication of the alter ego issues .... Nicolet did not contest the motion for summary judgment on the successorship and component liability ground because it reasonably believed the present concern was the alter ego doctrine alone, as it affected jurisdiction and the merits. 55 Reply Brief for Nicolet at 16-17. We have searched the record in vain for some indication that Nicolet preserved these matters by raising a genuine issue of triable fact before the district court. I forgot or I was confused is not a sufficient explanation for failure to do so. 56 In DeBardeleben v. Cummings, 453 F.2d 320 (5th Cir.1972), this court characterized as almost axiomatic the principle that any genuine material issue of fact must somehow be shown to exist in the District Court. Id. at 324. The court there stated: 57 Where the moving papers do not reveal the presence of a factual controversy on a material issue, the adversary cannot simply assent by silence to the factual theory presented in the motion--and on which the parties stand in the Trial Court--and then assert thereafter on appeal as grounds for reversal a purported factual disagreement never before revealed. 58 Id. See also Compass Insurance Co. v. Vanguard Insurance Co., 649 F.2d 331, 334 (5th Cir.1981); Franz Chemical Corp. v. Philadelphia Quartz Co., 594 F.2d 146, 150 (5th Cir.1979). 59 When T & N moved for summary judgment, Nicolet's opposition to the motion not only failed to present any data tending to establish the existence of a genuine issue of fact, but also completely failed even to refer to its alternative theories of recovery. Nicolet's silence continued through the summary judgment hearing and a motion for reconsideration; indeed, Nicolet never mentioned these theories again until this appeal. [A] plaintiff in his opposition to a motion for summary judgment cannot abandon an issue and then, after an unpalatable decision by the trial judge, on appeal, by drawing on the pleadings resurrect the abandoned issue. Edward B. Marks Music Corp. v. Continental Record Co., 222 F.2d 488, 492 (2d Cir.1955). Our review of the record convinces us that Nicolet abandoned its alternative theories of recovery by failing to present them to the trial court. Because Nicolet failed to raise a genuine issue of material fact on these theories as required by Fed.R.Civ.P. 56(e), the district court appropriately granted summary judgment for T & N on the whole case.
60 Summary judgment is, of course, Damoclean and lethal. It can serve as a quick sword untangling the Gordian knot of litigation. Nicholas Acoustics, 695 F.2d at 844. We are persuaded that the district court's use of the beneficent scalpel provided by Fed.R.Civ.P. 56 was proper in all respects. When Nicolet abandoned its theories of successorship liability and contribution or indemnity by failing to raise genuine issues of material fact, the district court properly focused on the theory that was contested by both parties. After examining the parties' supporting affidavits, the district court concluded that Nicolet had failed to raise a genuine issue of material fact with regard to T & N's asserted alter ego liability. Accordingly, the district court entered summary judgment for T & N. For the reasons stated above, we affirm that grant of summary judgment.