Opinion ID: 894898
Heading Depth: 1
Heading Rank: 4

Heading: Jurisdictional Veil-Piercing

Text: As its second basis for general jurisdiction, the court of appeals imputed Province's Texas contacts to Minden, concluding the two entities operated as a single business enterprise and that Minden, through Province, did business in Texas. In 1925, the Supreme Court of the United States considered whether a North Carolina court had jurisdiction over a nonresident parent corporation whose subsidiary did business in North Carolina. Cannon Mfg. Co. v. Cudahy Packing Co., 267 U.S. 333, 335, 45 S.Ct. 250, 69 L.Ed. 634 (1925). In affirming the district court's dismissal for lack of jurisdiction, the Court held: Through ownership of the entire capital stock and otherwise, the defendant dominates [its subsidiary], immediately and completely; and exerts its control both commercially and financially in substantially the same way, and mainly through the same individuals, as it does over those selling branches or departments of its business not separately incorporated which are established to market the [defendant's] products in other states. The existence of the [subsidiary] as a distinct corporate entity is, however, in all respects observed. Its books are kept separate. All transactions between the two corporations are represented by appropriate entries in their respective books in the same way as if the two were wholly independent corporations. Id. The Court concluded that the corporate separation, though perhaps merely formal, was real. It was not pure fiction. Id. at 337, 45 S.Ct. 250. The Court has never disavowed Cannon, despite an opportunity to do so. Instead, it essentially echoed the Cannon rule in Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 781 n. 13, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984). See William A. Voxman, Comment, Jurisdiction over a Parent Corporation in Its Subsidiary's State of Incorporation, 141 U. PA. L.REV. 327, 339 (1992) (noting that Keeton footnote implicitly recognized Cannon's continuing validity). In that case, then-Justice Rehnquist, writing for the Court, noted that jurisdiction over a parent corporation [does not] automatically establish jurisdiction over a wholly owned subsidiary. . . . Each defendant's contacts with the forum State must be assessed individually. Keeton, 465 U.S. at 781 n. 13, 104 S.Ct. 1473; see also Voxman, 141 U. PA. L.REV. at 338 (noting that [t]he clear implication of Rehnquist's assertion is that the nature of the parent-subsidiary relationship may well be a factor in determining whether jurisdiction comports with due process, but the existence of the relationship will not, in and of itself, be dispositive of the issue). The Fifth Circuit Court of Appeals followed Cannon in Hargrave v. Fibreboard Corp.: Cannon . . . stands for the proposition that so long as a parent and subsidiary maintain separate and distinct corporate entities, the presence of one in a forum state may not be attributed to the other. Cases in this circuit appear to have followed the Cannon rule in applying the Texas long-arm statute, although sometimes without explicit citation. We have noted often that 100% stock ownership and commonality of officers and directors are not alone sufficient to establish an alter ego relationship between two corporations. Generally, our cases demand proof of control by the parent over the internal business operations and affairs of the subsidiary in order to fuse the two for jurisdictional purposes. The degree of control exercised by the parent must be greater than that normally associated with common ownership and directorship. All the relevant facts and circumstances surrounding the operations of the parent and subsidiary must be examined to determine whether two separate and distinct corporate entities exist. Hargrave, 710 F.2d 1154, 1160 (5th Cir. 1983) (citations omitted). The court held that the two corporations at issue maintained a degree of corporate separation that was more than superficial and [t]he policy making authority held and exercised by [the parent] was no more than that appropriate for a sole shareholder of a corporation and not enough to warrant the extraterritorial exercise of jurisdiction over that shareholder. Id. at 1161. The court concluded: The Lone Star of Texas may shine brightly throughout the world, but its long arm is not judicially all encompassing. Id. We recently followed Hargrave (and, by implication, Cannon ) in explaining when the contacts of a related corporate entity may be considered for purposes of determining general jurisdiction. BMC Software Belg., N.V. v. Marchand, 83 S.W.3d 789, 795-796 (Tex.2002). We held that [p]ersonal jurisdiction may exist over a nonresident defendant if the relationship between the foreign corporation and its parent corporation that does business in Texas is one that would allow the court to impute the parent corporation's `doing business' to the subsidiary. Id. at 798 (citing Hargrave, 710 F.2d at 1159 and Walker v. Newgent, 583 F.2d 163, 167 (5th Cir.1978)). The rationale for exercising jurisdiction is that the parent corporation exerts such domination and control over its subsidiary `that they do not in reality constitute separate and distinct corporate entities but are one and the same corporation for purposes of jurisdiction.' Id. (quoting Hargrave, 710 F.2d at 1159 (citations omitted)). We required that the party seeking to ascribe one corporation's actions to another by disregarding their distinct corporate entities prove this allegation, because Texas law presumes that two separate corporations are distinct entities. Id.; accord 4A WRIGHT & MILLER, FEDERAL PRACTICE & PROCEDURE § 1069.4 (noting a reluctance to exercise personal jurisdiction over a subsidiary merely because its parent corporation is doing business in the forum state). We concluded that there was no evidence to support the trial court's finding of general jurisdiction over a Belgian subsidiary based on allegations it was the alter ego of its American parent. BMC Software, 83 S.W.3d at 801. 1. Single Business Enterprise Here, the court of appeals held that Province and Minden operated as a single business enterprise  a theory we have never endorsed  and, therefore, Province's Texas contacts could be imputed to Minden. [5] 202 S.W.3d at 202; see Southern Union Co. v. City of Edinburg, 129 S.W.3d 74, 86-87 (Tex.2003) (noting that this Court has never considered the `single business enterprise' concept in any detail and declining to decide whether a theory of `single business enterprise' is a necessary addition to Texas law regarding the theory of alter ego for disregarding corporate structure). In doing so, the court of appeals examined eight factors as they related to Minden and Province: (1) common employees, (2) common offices, (3) centralized accounting, (4) payment of wages by one corporation to another corporation's employees, (5) common business name, (6) services rendered by the employees of one corporation on behalf of another corporation, (7) undocumented transfers of funds between corporations, and (8) unclear allocation of profits and losses between corporations. 202 S.W.3d at 201-02. The court's analysis failed to recognize, however, that veil-piercing for purposes of liability (substantive veil-piercing) is distinct from imputing one entity's contacts to another for jurisdictional purposes (jurisdictional veil-piercing). Courts have acknowledged that jurisdictional veil-piercing and substantive veil-piercing involve different elements of proof. See, e.g., Wells Fargo & Co. v. Wells Fargo Express Co., 556 F.2d 406, 425 (9th Cir.1977) (noting that undercapitalization, which is important to deciding whether to pierce the veil raised by a subsidiary corporation in order to hold the parent corporation liable for failure of the subsidiary to meet its debts, may not be relevant to a showing that the two corporations are in fact one so as to establish that the out-of-state corporation  be it parent or subsidiary  is present within the forum for jurisdictional purposes; instead, the operative question is whether the two corporations are in fact mere `divisions' or `branches' of a larger whole); Daimler-Benz Aktiengesellschaft v. Olson, 21 S.W.3d 707, 721 n. 5 (Tex.App.-Austin 2000, pet. dism'd w.o.j.) (Although many of the factors relevant to [determining whether subsidiaries' contacts should be imputed to parent] may also be relevant in determining whether a parent corporation should be liable for the actions of its subsidiary, the determination whether two corporate entities are one and the same for jurisdictional purposes is distinct.), cert. denied, 535 U.S. 1077, 122 S.Ct. 1960, 152 L.Ed.2d 1021 (2002); see also 2-32 WILLIAM V. DORSANEO, TEXAS LITIGATION GUIDE § 32.06 (2005). This makes sense in light of the fact that personal jurisdiction involves due process considerations that may not be overridden by statutes or the common law. Cf. City of Monroe Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 667-668 (6th Cir.2005) (refusing, in case involving jurisdictional allegations based on alleged control person under the securities laws, to substitute our analysis of the securities laws' substantive bases for liability for the required, due-process based personal jurisdiction analysis); AT & T Co. v. Compagnie Bruxelles Lambert, 94 F.3d 586, 591 (9th Cir.1996) (concluding that liability is not to be conflated with amenability to suit in a particular forum. Personal jurisdiction has constitutional dimensions, and regardless of policy goals, Congress cannot override the due process clause, the source of protection for non-resident defendants.); In re Baan Co. Sec. Litig., 245 F.Supp.2d 117, 129 (D.D.C.2003) (noting that liability under the Securities Act cannot on its own support personal jurisdiction, as such an approach impermissibly conflates statutory liability with the Constitution's command that the exercise of personal jurisdiction must be fundamentally fair); Michiana Easy Livin' Country, Inc. v. Holten, 168 S.W.3d 777, 790-91 (Tex.2005) (rejecting theory that where defendant directed a tort was relevant inquiry for specific jurisdiction, as such a rule improperly equat[ed] the jurisdictional inquiry with the underlying merits); Nat'l Indus. Sand Ass'n v. Gibson, 897 S.W.2d 769, 773 (Tex.1995) (observing that [c]onspiracy as an independent basis for jurisdiction has been criticized as distracting from the ultimate due process inquiry: whether the out-of-state defendant's contact with the forum was such that it should reasonably anticipate being haled into a court in the forum state and declining to recognize personal jurisdiction based on conspiracy allegation); John A. Swain & Edwin E. Aguilar, Piercing the Veil to Assert Personal Jurisdiction Over Corporate Affiliates: An Empirical Study of the Cannon Doctrine, 84 B.U.L. REV. 445, 453 (2004) (noting that the principle of limited liability is statutory and does not speak to judicial jurisdiction). For this reason, fraud  which is vital to piercing the corporate veil under section 21.223 of the Business Organizations Code  has no place in assessing contacts to determine jurisdiction. See TEX. BUS. ORGS.CODE § 21.223. Similarly, some of the factors courts look to in determining whether an entity may be held liable as a single business enterprise are irrelevant to an analysis of jurisdictional contacts. For example, the court of appeals examined whether Province and Minden shared a common name and concluded that [Minden's] partnership name and initials, PHC-Minden, L.P. can be construed as a reference to Province Healthcare Company. 202 S.W.3d at 201. Whether two related entities share a common name, however, does not affect whether each has sufficient contacts with the forum for jurisdictional purposes. 2. Factors Instead, we recently outlined the relevant factors for jurisdictional veil-piercing: To fuse the parent company and its subsidiary for jurisdictional purposes, the plaintiffs must prove the parent controls the internal business operations and affairs of the subsidiary. But the degree of control the parent exercises must be greater than that normally associated with common ownership and directorship; the evidence must show that the two entities cease to be separate so that the corporate fiction should be disregarded to prevent fraud or injustice. BMC Software, 83 S.W.3d at 799 (citations omitted). We also relied on our prior precedent, which held that [a] subsidiary corporation will not be regarded as the alter ego of its parent merely because of stock ownership, a duplication of some or all of the directors or officers, or an exercise of the control that stock ownership gives to stockholders. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571, 573 (Tex.1975). A leading treatise suggests that in determining whether a subsidiary corporation is subject to the jurisdiction of a forum state because its parent corporation is present or doing business there, courts should determine whether the subsidiary is separate and distinct from its parent corporation for personal jurisdiction purposes, taking into account the amount of the subsidiary's stock owned by the parent corporation, the existence of separate headquarters, the observance of corporate formalities, and the degree of the parent's control over the general policy and administration of the subsidiary. 4A WRIGHT & MILLER, FEDERAL PRACTICE & PROCEDURE § 1069.4. Here, the court of appeals cited the following as evidence that Province and Minden were a single business enterprise: the record shows that Province and [Minden] have at least one common employee and that Province pays certain [Minden] employees, although the salaries are intercompany payables. The names of the two companies are similar, and Province employees provide various services to assist [Minden] in its operations. Province exercises control over [Minden]'s revenues and expenditures and oversees [Minden]'s operations, financial performance, and completion of strategic initiatives. Further, Province audits [Minden]'s financial goals to determine if [Minden] will be able to meet these goals. Considering the totality of this evidence, we conclude that Province and [Minden] have integrated their resources to achieve a common business purpose. 202 S.W.3d at 202. Upon closer examination, however, it is clear that Province does not exercise the sort of control over Minden that is required to fuse them for jurisdictional purposes. BMC Software, 83 S.W.3d at 799. Much of the evidence cited points to parental involvement  involvement consistent with its investor status  not atypical control. See 16 MOORE'S FEDERAL PRACTICE § 108.42[3][b]. Appropriate parental involvement includes monitoring the subsidiary's performance, supervision of the subsidiary's finance and capital budget decisions, and articulation of general policies. Id. What is lacking here is the plus factor, something beyond the subsidiary's mere presence within the bosom of the corporate family. Dickson Marine, Inc. v. Panalpina, Inc., 179 F.3d 331, 338 (5th Cir.1999); see also Central States, Southeast & Southwest Areas Pension Fund v. Reimer Express World Corp., 230 F.3d 934, 943 (7th Cir.2000) (holding that constitutional due process requires that personal jurisdiction cannot be premised on corporate affiliation or stock ownership alone where corporate formalities are substantially observed and the parent does not exercise an unusually high degree of control over the subsidiary); De Castro v. Sanifill, Inc., 198 F.3d 282, 283-84 (1st Cir.1999) (requiring strong and robust evidence of parental control over subsidiary, such that subsidiary is mere shell, before subsidiary's contacts could be imputed to parent). The two entities maintain separate headquarters, Minden in Louisiana and Province in Tennessee. Minden's Board of Governors approves Minden's budget and oversees day-to-day operations, and Minden alone establishes its policies and procedures for providing health care to patients. Province is not involved in Minden's physician recruitment, and the two entities share no directors. While Minden's chief executive officer, chief nursing officer, and chief financial officer receive their paychecks from Province, their salaries are inter-company payables; that is, the monies come from Minden's revenues. Similarly, while Province provides Minden's general liability insurance and a group health insurance policy for its employees, the policies are funded from Minden's revenues. There is no indication that Minden and Province have disregarded corporate formalities. The court of appeals cited evidence that two Minden employees received Province stock options, but we have said that a parent company's offering a stock option plan to a subsidiary's employees is acceptable under IRS regulations and is not evidence of abnormal control over the subsidiary. BMC Software, 83 S.W.3d at 800. Put simply, we find no evidence of control other than that consistent with Province's investor status, and the court of appeals erred in imputing Province's Texas contacts to Minden.