Opinion ID: 27049
Heading Depth: 2
Heading Rank: 2

Heading: Midwest's Claims in its Own Capacity

Text: Midwest raises various issues on appeal regarding its claims as third-party plaintiff against Adams and Spartech.
Midwest asserted tort claims based on alleged intentional and negligent misrepresentations regarding Adams qualified selfinsured status. We find that Midwest's tort claims are prescribed. Although the district court did not rule on the issue of prescription, this Court may decide a case on any ground that was presented to the trial court. Breaux v. Dilsalver, 254 F.3d 533, 538 (5th Cir. 2001)(citing Dandridge v. Williams, 397 U.S. 471, 475 n. 6, 90 S. Ct. 1153, 1157 n. 6, 25 L. Ed. 491 (1970)); see also Gregory v. Missouri Pacific Railroad Company, 32 F.3d 160, 164 (5th Cir. 1994)(citing cases). Under Louisiana Civil Code article 3492, [d]elictual actions are subject to a liberative prescriptive period of one year. LA. CIV. CODE art. 3492. When the plaintiff's complaint on its face reveals that prescription has run, the burden is on the plaintiff to show why 11 the claim has not prescribed. Lima v. Schmidt, 595 So.2d 624, 628 (La. 1992). Here, the face of Midwest's third-party complaint reveals that the one-year prescriptive period on Midwest's tort claims has run because it filed its third-party claims against Adams and Spartech in April 1998, and the claims relate to acts allegedly performed at the latest in 1991. Midwest contends that the prescriptive period was suspended under the principle of contra non valentem. Suspension of the prescriptive period under the contra non valentem principle occurs when the cause of action is not known or reasonably knowable by the plaintiff, even though his ignorance is not induced by the defendant. Corsey v. State Dept. of Corrections, 375 So.2d 1319, 1322 (La. 1979). The Louisiana Supreme Court, however, noted that this principle will not except the plaintiff's claim from the running of prescription if his ignorance is attributable to his own willfulness or neglect; that is, a plaintiff will be deemed to know what he could by reasonable diligence have learned. Id. Clearly, Midwest was on inquiry notice of its claims in 1991 when Adams cancelled its insurance with Midwest because it could not maintain its self-insured status. Further, Midwest asserts that it was mislead as to the identity of its insured, but it is undisputed that when Adams returned the cancellation endorsement to Midwest in 1991, it changed the insured designation on the 12 form from Spartech Films, A Division of Spartech, Inc. to Spartech Films, A Division of Adams Plastics, Inc. Midwest could have discovered the factual basis of its claims through the exercise of reasonable diligence much earlier than a year before its suit was filed in 1998. See Corsey, 375 So.2d at 1322. Further, Midwest admitted it knew of the alleged misrepresentations when it filed its declaratory judgment action against Williams in May 1995. Midwest's complaint alleged that Adams misrepresented its qualified self-insured status when it applied for insurance coverage from Midwest. See Rec. Doc. 60, Ex. 11, Complt. at ¶ IX. Therefore, the one-year prescriptive period had run well before Midwest filed its third-party complaint against Adams and Spartech in April 1998 on claims involving misrepresentations about Adams' financial status. Accordingly, Midwest's tort claims are prescribed.
The district court dismissed Midwest's claims regarding the existence of insurance coverage based on issue preclusion. The application of issue preclusion is a question of law that we review de novo. United States v. Brackett, 113 F.3d 1396, 1398 (5th Cir. 1997). Midwest contends that the district court improperly granted dismissal sua sponte on the coverage issue. In Celotex Corp. v. Catrett, the Supreme Court held that district courts possess the power to enter summary judgments sua sponte. 13 477 U.S. 317, 326, 106 S. Ct. 2548, 2554 (1986). The power to enter summary judgment sua sponte, however, is tempered by the requirement to provide proper notice. Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 28 F.3d 1388, 1397 (5th Cir. 1994)(citing Celotex, 477 U.S. at 326, 106 S. Ct. at 2554); Judwin Properties, Inc. v. United States Fire Ins. Co., 973 F.2d 432, 436-37 (5th Cir. 1992)(A district court may grant a motion for summary judgment sua sponte, provided that it give proper notice to the adverse party.)(citations omitted); see also Fed. R. Civ. Proc. 56(c) (requiring that summary judgment motion be served at least 10 days before the time fixed for the hearing). Failure to give notice may be harmless when the nonmovant has no additional evidence or if all the nonmovant's additional evidence is reviewed by the appellate court and none of the evidence presents a genuine issue of material fact. Nowlin v. Resolution Trust Corp., 33 F.3d 498, 504 (5th Cir. 1994)(quoting Leatherman, 28 F.3d at 1398). This circuit also recognizes two instances in which the district or appellate court can sua sponte dismiss an action on issue preclusion grounds. Nagle v. Lee, 807 F.2d 435, 438 (5th Cir. 1987). One exception allows a court to raise the issue preclusion defense on its own when all the relevant data and legal records are before the court and the demands of comity, continuity in the law, and essential justice mandate judicial 14 invocation of the principles of issue preclusion. See id. at 439 n. 2 (citing American Furniture Co. v. International Accommodations Supply, 721 F.2d 478, 482 (5th Cir. 1981)). Here, Adams and Spartech specifically pleaded issue preclusion as dictated by Federal Rule of Civil Procedure 8(c) in their first amended answer to Midwest's third-party complaint (see Rec. Doc. 212) and in their answer to Midwest's first amended third-party complaint (see Rec. Doc. 339). See FED. R. CIV. P. 8(c). Further, the court asked the parties for briefs on the preclusive effect of the declaratory judgment ruling at the August 18, 2000 pretrial conference, and in response, the parties briefed the preclusion issue before the court ruled on it. See Rec. Doc. 550, 567, 580. Moreover, all of the relevant data and legal records, such as the declaratory judgment action pleadings and rulings (see Rec. Doc. 60), were before the district court. Therefore, essential justice mandated judicial invocation of the principles of issue preclusion before the commencement of the trial. See Nagle, 807 F.2d at 439. Midwest contends that the district court erred by applying issue preclusion to its coverage claims because the coverage issues were not actually litigated in the previous action. We find no error in the district court's application of the principle of issue preclusion. The principle of issue preclusion bars a party from relitigating issues of fact or law that were 15 necessary to the court's judgment and actually determined in a prior action. Sidag Aktiengesellschaft v. Smoked Foods Products Co., Inc., 776 F.2d 1270, 1275 (5th Cir. 1985). In Midwest's 1995 declaratory action against Williams, Midwest challenged Williams' right to collect workers' compensation benefits under the policy it issued to Adams. See Midwest v. Williams, Civil Action No. 95-CV-0798 (M.D. La. October 15, 1997), appeal denied, 161 F.3d 877 (5th Cir. 1998)(appeal denied based on untimely filing of notice of appeal). One of the issues Midwest asserted in its complaint was that Williams had no claim against it because the excess insurance policy it issued to Adams was void ab initio as a result of Adams' material misrepresentations that Adams was a qualified self-insurer. See Rec. Doc. 60; Ex. 11, Complt. at ¶ IX. In addition, Midwest asked for a declaration that Williams' employer was not an insured under the policy and that it had no coverage obligation because Williams settled his claim with Spartech. Midwest argued as it does here that since Spartech Films was listed on the policy endorsement as a division of Spartech, Inc., Spartech Films was Spartech. See Rec. Doc. 618, Ex. XII, Summ. J. Memo. at 8 n. 1. Midwest moved for summary judgment and the district court ultimately issued a ruling that Midwest was obliged to pay Williams' claim in excess of the $150,000 self-insured retention. Midwest raised the 16 fraud/misrepresentation issue in its pleadings on the motion. See Rec. Doc. 618, Ex. XII, Reply Memo. at 7. The court's ruling became final after Midwest's appeal was denied by the Fifth Circuit as untimely. See 161 F.3d at 880. The declaratory judgment found that Williams' employer, Adams Plastics, Inc., d/b/a Spartech Films, was Midwest's insured and that it was obliged to pay workers' compensation benefits to Williams for injuries resulting from Williams' employment by Adams. See Lamana v. LeBlanc, 526 So.2d 1107, 1109 (La. 1988)(res judicata can be invoked to bar relitigation of issue presented in pleadings and addressed or referred to in judgment). The determination of the coverage issue was essential to the court's final judgment against Midwest because Midwest could not have been found to be liable to pay Williams unless the court determined that Adams was the insured and that the underlying excess policy between Adams and Midwest was valid. Accordingly, the district court did not err when it ruled that the issue of the identity of the insured and the validity of the policy were actually litigated and necessary to the judgment. Since the district court committed no error in finding that Spartech was not a party to the insurance contract, it properly dismissed Midwest's contract claims against Spartech. Regarding Midwest's remaining contract claims against Adams, we find that the district court erred in dismissing sua sponte 17 Midwest's claims that Adams breached its duty to use diligence and good faith in the investigation, defense, and settlement of Williams' claim. The district court failed to provide the parties with notice that it planned to rule on the issue. See Leatherman, 28 F.3d at 1397-98; Judwin Properties, 973 F.2d at 436-37. At the pretrial conference the court asked the parties to brief the existence of any duties Spartech and Adams may have had under the contract, but it did not specifically ask for briefs on whether the duties were breached. See Rec. Doc. 550. Further, the parties' earlier summary judgment motions and their responses to the court's pretrial order merely addressed the issue of whether Spartech had a duty under the contract. Accordingly, the district court's ruling on Midwest's claim against Adams for breach of contractual duties to defend and settle claims is reversed and remanded.
Midwest contends that the district court violated its due process rights by sua sponte granting summary judgment in favor of the nonmovants, Adams and Spartech, on the corporate identity issue without the proper notice. In Exxon Corp. v. v. St. Paul Fire and Marine Insurance Co., 129 F.3d 781, 786 (5th Cir. 1997), this Court indicated that in order to achieve the goal of Federal Rule of Civil Procedure 56, the prompt disposition of cases when there is no genuine issue of material fact for the court to 18 consider, the district court may grant summary judgment for the nonmovant sua sponte. Here, Midwest brought the partial summary judgment motion on the issue of corporate identity, so it had to have been on notice that the district court was considering the issue. See Goldstein v. Fidelity and Guaranty Insurance Underwriters, Inc., 86 F.3d 749, 750 (7th Cir. 1996)(affirming grant of summary judgment in favor of nonmovant; after plaintiff filed for summary judgment both parties on notice that summary judgment being considered). Further, the court informed the parties at the August 18, 2000 pretrial conference that the court would consider Midwest's motion before the trial. See Rec. Doc. 550. Accordingly, we find that the district court did not violate Midwest's due process rights. Corporations function as distinct legal entities, separate from the individuals who own them, and their shareholders are generally not liable for the debts of the corporation. Riggins v. Dixie Shoring Co., Inc., 590 So.2d 1164, 1167 (La. 1991); see also LA. REV. STAT. § 12:93(B). Louisiana law holds that the limited liability afforded corporate ownership should be disregarded only in exceptional circumstances. Id. at 1168 (emphasis added). Louisiana courts are reluctant to pierce the corporate veil in the absence of fraud, malfeasance, or criminal wrongdoing. See id. (piercing the veil is often justified to 19 prevent the use of the corporate form to defraud creditors). Additionally, Louisiana courts are less likely to disregard the corporate veil when the underlying claim is based on contract rather than tort. See Riggins v. Dixie Shoring Co., Inc., 592 So.2d 1282, 1285 (La. 1992)(concurrence in denial of rehearing)(in contract cases plaintiff chooses to rely solely on obligation of corporation without any additional guarantees from its shareholders). The Louisiana Supreme Court stated in Riggins that piercing the corporate veil usually occurs when shareholders use the corporate form to practice fraud or deceit or when the corporate form is so ignored that the corporation has become indistinguishable from its shareholders: There are limited exceptions to the rule of non-liability of shareholders for the debts of a corporation, where the court may ignore the corporate fiction and hold the individual shareholders liable. Generally that is done where the corporation is found to be simply the alter ego of the shareholder. It usually involves situations where fraud or deceit has been practiced by the shareholder acting through the corporation. (Citations omitted). Another basis for piercing the corporate veil is when the shareholders disregard the requisite corporate formalities to the extent that the corporation ceases to be distinguishable from the shareholders. (Citations omitted). 590 So.2d at 1167. The totality of the circumstances is determinative when a party seeks to pierce the corporate veil. Id. The Riggins court listed several factors that courts consider when determining whether to apply the alter ego doctrine: 20 (1) commingling of corporate and shareholder funds; (2) failure to follow statutory formalities for incorporating and transacting corporate affairs; (3) undercapitalization; (4) failure to provide separate bank accounts and bookkeeping records; and (5) failure to hold regular shareholder and director meetings. Id. (citations omitted). The ultimate inquiry, however, requires a balance of the policies behind the recognition of a separate corporate existence with the policies justifying piercing. Huard v. Shreveport Pirates, Inc., 147 F.3d 406, 409 (5th Cir. 1998)(citing Glazer v. Commission on Ethics for Public Employees, 431 So.2d 752, 757 (La. 1983)). As the Louisiana Supreme Court stated in Glazer, the same factual scenario may result in veil piercing in some contexts but not in others, depending on the competing interests and policies involved: Depending on the various competing policies and interests involved, the same factual scenario may result in recognition of a separate corporate identity for some purposes, i.e. insulation of shareholders from liability, and a disallowance of the separate corporate entity privilege for others. Each situation must be considered by the court on its merits. The facts presented must demonstrate some misuse of the corporate privilege in that situation or the need of limiting it in order to do justice. 431 So.2d at 758 (citation omitted). The Court finds that the district court committed no error in dismissing Midwest's veil piercing claim because there is no evidence that Spartech or Adams misused the corporate privilege to the detriment of Midwest or that Spartech and Adams are indistinguishable. Adams was properly formed with an initial 21 paid-in capital of $150,000. Adams and Spartech maintained separate books, and Adams' day-to-day operations were handled by Adams' general manager in Monroe. Adams' board of directors conducted business by unanimous consents, which is permitted by Louisiana law. Further, that Adams' board of directors overlapped with Spartech's board and that it was located in St. Louis, where Spartech's corporate offices were located, do not present genuine issues of fact as to whether Spartech controlled Adams. There is no evidence that anyone other than Adams' board members made decisions for Adams, such as approving the annual business plans formulated by Adams' general manager in Monroe. Midwest argues that the corporate veil should be pierced because Adams and Spartech misused the corporate form in procuring insurance from Midwest so that Midwest issued its policy in ignorance of Adams' financial problems. Midwest, is an excess insurer, however, which in no event would be liable for Adams' self-insured retention, regardless of Adams' financial condition. Midwest's policy does not specify that the insolvency of the insured is a breach of contract or that it voids the policy. Indeed, Midwest agreed that Adams' insolvency would not terminate the policy. The Midwest policy provides: Bankruptcy or insolvency of the Insured will not relieve the Insurer of its duties and liabilities under this policy. After the Insured's retention has been reached, payments due under this policy will be made by the Insurer as if the Insured had not become bankrupt or insolvent, but not in excess of the Insurer's limit of indemnity. 22 Appellant's Rec. Excerpts 13; Midwest Excess Ins. Policy at Part Seven(K). Adams was obliged to pay premiums to Midwest for the coverage issued under the policy, and there is no evidence that Adams failed to pay its premiums before it terminated the policy.3 Midwest issued the insurance policy to Adams as a qualified selfinsured, which it was at the time the policy was issued in May 1989. Also, Adams' failure to maintain its qualification as a self-insurer did not increase Midwest's obligation under its contract because the policy provided that such an event would not result in Midwest's having to pay the self-insured retention. The policy states: If the Insured should terminate such qualifications or if qualification of the Insured as a self-insurer is cancelled or revoked while this policy is in force, the amounts payable under this policy will not exceed the amounts which would have been payable if such qualifications had been maintained in full force and effect. Id. at General Section E, Qualified Self-Insurer. The district court confirmed that Midwest had no obligation to pay the amount of Adams' self-insured retention to Williams. See Rec. Doc. 609, Memorandum Ruling at 6-7. Further, because piercing the corporate veil is essentially an equitable remedy, the district court was correct to take into account Midwest's conduct with regard to Adams. See Brown v. 3 Adams paid premiums totaling $21,869 for the May 1989 - May 1990 period and $27,022 for the May 1990 - May 1991 period. See Apellant's Rec. Excerpt 13. 23 Benton Creosoting Co., Inc., 147 So.2d 89, 94 (La. Ct. App. 1962)(piercing the corporate veil especially appropriate when court is exercising equitable powers)(quoting Mayo v. Pioneer Bank & Trust Company, 274 F.2d 320, 321 (5th Cir. 1960)); see also See Watson v. Big T Timber Co., Inc., 382 So.2d 258, 262 (La. Ct. App. 1980); Giuffria Realty Co., Inc. v. Kathman-Landry, Inc., 173 So.2d 329, 334 (La. Ct. App. 1965)(corporate veil should be pierced when adherence to the corporate fiction would clearly result in inequity). Midwest did no underwriting of its own and did not request financial information from Adams beyond the limited information Northern, the insurance broker, provided in the short-form application. Moreover, Northern testified that financial information on the insured was generally not important to an excess insurer because its only liability was for amounts above the self-insured retention. Further, the evidence in the record demonstrates that Midwest was notified of Williams' claim in September 1991. A letter from Adams' third-party administrator, F.A. Associates, who had investigated the claim, indicated that Williams' workers' compensation claim had the potential to create heavy exposure and that Adams could not continue to pay Williams. See Rec. Doc. 522, Ex. 2. Adams terminated its policy with Midwest at about the same time because it could not maintain self-insured status. It was not until three years later, during which period Midwest 24 took no action, that Williams took a judgment against Adams declaring him to be permanently and totally disabled and entitled to weekly benefits indefinitely. Further, although Midwest was given notice of the motion to accelerate benefits, it did nothing to defend it. Indeed, Midwest admitted that its settled policy was to do nothing to aid in or handle the defense of claims against its insured regardless of whether the insured was insolvent and unable to put on a defense. See Rec. Doc. 218, Ex. 9; Deposition of Matthew Jerabek at 48-51, 74-75. Therefore, considering the record before the district court, we find that it did not err when it granted summary judgment against Midwest on the piercing corporate veil issue.