Opinion ID: 3156819
Heading Depth: 2
Heading Rank: 1

Heading: Corporate Alter Ego

Text: The district court found that “FPMC Brick Marine Corporation [the owner of the M/V FPMC 19] and FBMC are alter egos of FPMC and thereby of each other.” It also found that FPMC, FBMC, and FPCA are all alter egos 6 Case: 14-20619 Document: 00513281568 Page: 7 Date Filed: 11/23/2015 No. 14-20619 No. 14-20693 of each other. As a result, the court held that service on the vessel masters was sufficient to serve all of the entities, and that FPCA’s failure to challenge personal jurisdiction could be imputed to FPMC and FBMC. These findings of alter ego, which did not cite a single supporting case, were erroneous. Texas law recognizes that the corporate form can be disregarded in certain circumstances. See Castleberry v. Branscum, 721 S.W.2d 270, 272-73 (Tex. 1986). One of the bases for doing so is the alter ego doctrine, whereby “a corporation is organized and operated as a mere tool or business conduit of another corporation.” Id. at 272. Proof of imputed contacts or an alter ego relationship may be the basis for exercising jurisdiction over a non-resident defendant. See BMC Software Belg., N.V. v. Marchand, 83 S.W. 3d 789, 798 (Tex. 2002); see also Hargrave v. Fibreboard Corp., 710 F.2d 1154, 1160 (5th Cir. 1983). The Texas Supreme Court has “acknowledged that jurisdictional veilpiercing and substantive veil-piercing involve different elements of proof” given that jurisdiction implicates due process considerations that cannot be overridden by statutes or common law. PHC-Minden, L.P. v. Kimberly-Clark Corp., 235 S.W.3d 163, 174-75 (Tex. 2007). 2 The court outlined the following factors relevant for jurisdictional veil-piercing: 3 2 For this reason, some alter ego cases cited by the parties are inapposite because they recite factors to consider in substantive veil piercing rather than jurisdictional veil piercing. E.g. United States v. Jon-T Chems., Inc., 768 F.2d 686, 691-92 (5th Cir. 1985) (the “laundry list” factors). 3 The law in this area addresses parent-subsidiary corporations, but it is applicable to other intracorporate relationships as well. The parties discuss the relationships among the entities in this case as if FPCA is the parent of both FBMC and FPMC, and the district court found that FPMC is the parent of FBMC and FPMC Brick Marine Corporation. It is unclear from the record what the actual relationships are. 7 Case: 14-20619 Document: 00513281568 Page: 8 Date Filed: 11/23/2015 No. 14-20619 No. 14-20693 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. PHC-Minden, 235 S.W.3d at 175 (quoting BMC Software, 83 S.W.3d at 799). Other factors to consider are “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.” Id. (citing 4A WRIGHT & MILLER, FEDERAL PRACTICE & PROCEDURE § 1069.4). However, “[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.” Id. (quoting Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571, 573 (Tex. 1975)). There must be a “plus factor, something beyond the subsidiary’s mere presence within the bosom of the corporate family.” Id. at 176 (quoting Dickson Marine, Inc. v. Panalpina, Inc., 179 F.3d 331, 338 (5th Cir. 1999)). Not pertinent to jurisdictional veil piercing analysis, however, are allegations of fraud 4 and a common name among the entities. Id. at 175. 4 Garnishees are thus incorrect to stress that fraud is necessary in order to find alter ego for jurisdictional purposes. 8 Case: 14-20619 Document: 00513281568 Page: 9 Date Filed: 11/23/2015 No. 14-20619 No. 14-20693 In this case, the district court found an alter ego 5 relationship among FPMC Brick Marine Corporation (the owner of the M/V FPMC 19), FBMC, and FPMC because: (1) FPMC operated the MV FPMC 19; (2) FPMC Brick Marine Corporation and FBMC are both owned by FPMC; 6 (3) ship operations are performed out of FPMC’s office; (4) FPMC lists the vessels on its website even though “nominally owned” by other entities; and (5) FPMC’s organizational chart indicates that the master of each vessel reports to FPMC. It also found that FPCA, FBMC, and FPMC (all of the Garnishees) are alter egos of each other because: (1) all of the entities report to and are run by the same founder; (2) they share a group administrative office that combines several functions together; and (3) management of the entities is controlled at the “Formosa Plastics Group level.” 7 Plaintiffs repeat these conclusions on appeal and cite portions of the record that consist of their own statements as to these “facts.” The court relied almost exclusively on two “organizational charts” submitted by Plaintiffs (taken from Garnishees’ website) in finding alter ego. 5 The district court actually seemed to apply the single business entity theory for piercing the jurisdictional veil, not the alter ego theory. See Castleberry, 721 S.W.2d at 272 (“Many Texas cases have blurred the distinction between alter ego and the other bases for disregarding the corporate fiction and treated alter ego as a synonym for the entire doctrine of disregarding the corporate fiction.”); see also Goodyear Dunlop Tires Ops., S.A. v. Brown, 131 S. Ct. 2846, 2857 (2011) (declining to address single business entity argument). The single business entity theory would pierce the veil “when two or more corporations associate together and, rather than operate as separate entities, integrate their resources to achieve a common business purpose.” S. Union Co. v. City of Edinburg, 129 S.W.3d 74, 86 (Tex. 2003) (internal quotation and citation omitted). The Texas Supreme Court has never endorsed this theory in any context. PHC-Minden, 235 S.W.3d at 173. 6 It is unclear how the district court found this, as the page in the record it cites to for this proposition does not so indicate. 7 It is unclear what this level is as there is no entity called “Formosa Plastics Group.” 9 Case: 14-20619 Document: 00513281568 Page: 10 Date Filed: 11/23/2015 No. 14-20619 No. 14-20693 The first chart apparently shows the internal reporting structure of FPMC and the second purports to show the various levels of ownership of the entities. The charts are not probative. First, the charts do not actually depict corporate structure. There is no indication of ownership; they do not indicate which entity owns what, which entities are parents, or subsidiaries, or brother/sister. Nor is it even clear that the “entities” on the chart are formal entities, because they have no corporate form designations. Normal organizational charts make distinctions for, e.g., corporations, LLC’s, disregarded entities, or foreign entities. Further, Garnishees FPCA and FBMC are not even represented on the charts. Second, the charts do not show the functional relationship among the entities. “In determining whether an alter ego relationship exists, the court should focus on the relationship between the corporation and the entity or individual that allegedly abused corporate formalities.” Zahra Spiritual Trust v. United States, 910 F.2d 240, 245 (5th Cir. 1990) (citing Castleberry, 721 S.W.2d at 272). As Garnishees correctly put it, the organizational charts are “irrelevant because they are not probative of the issue of alter ego. They show only the structure, but not the relationships between the Formosa entities.” They do not indicate any “plus factor” that entails “something beyond the subsidiary’s mere presence within the bosom of the corporate family.” PHC-Minden, 235 S.W.3d at 176. At best, they demonstrate mere affiliation, which is insufficient to pierce the veil, or common names, which are irrelevant to jurisdictional veil piercing. They do not even appear to show that the entities share common functions; the “Group Administration” boxes report to the Execupive [sic] Board, but there is no indication that these functions are performed for the entities listed on the chart. In no way do these descriptions suggest control “greater than that normally associated with common 10 Case: 14-20619 Document: 00513281568 Page: 11 Date Filed: 11/23/2015 No. 14-20619 No. 14-20693 ownership and directorship” or that the “entities cease to be separate so that the corporate fiction should be disregarded to prevent fraud or injustice.” PHCMinden, 235 S.W.3d at 175. In sum, the charts are not evidence that satisfies the tests endorsed by the Texas Supreme Court for jurisdictional veil piercing. The district court’s findings of alter ego were clearly erroneous. Because this means that neither FBMC nor FPMC was effectually served with process, nor can personal jurisdiction be asserted over these entities based on an alter ego relationship with FPCA, we must remand with instructions to dismiss the garnishment proceeding against FBMC and FPMC. II. District Court’s Exercise of Quasi in Rem Jurisdiction Quasi in rem actions are based on a claim for money begun by attachment or other seizure of property when the district court has no jurisdiction over the person of the [judgment] defendant, but has jurisdiction over either property that the court can apply to the satisfaction of the defendant's debt or persons who themselves owe an obligation to the defendant that the court can apply to the satisfaction of the debt. Stena Rederei AB v. Comision de Contratos del Comite Ejecutivo General del Sindicato Revolucionario de Trabajadores Petroleros de la Republica Mexicana, S.C., 923 F.2d 380, 391 (5th Cir. 1991) (citation omitted). The district court here relied several times on its finding that [t]he Formosa Entities were served with writs of garnishment while in the state to support its exercise of quasi in rem jurisdiction over the debt owed to Curacao. It is unclear on which basis the court predicated quasi in rem jurisdiction: whether it emanated from service of process or personal jurisdiction based on alleged alter ego status of FBMC or FPMC, or on the debt itself being found in Texas. For good reason, the Garnishees challenge any quasi in rem jurisdiction. 11 Case: 14-20619 Document: 00513281568 Page: 12 Date Filed: 11/23/2015 No. 14-20619 No. 14-20693 To the extent that the court believed it could exercise jurisdiction over the debt via the persons of the Garnishees, it was misguided. Our previous discussion eliminates quasi in rem jurisdiction on this basis. Alternatively, the presence of the debt in Texas might provide a basis for the exercise of jurisdiction over it for the Plaintiffs' benefit. See Shaffer v. Heitner, 433 U.S. 186, 207, 97 S. Ct. 2569, 2581 (1977) ([P]resence of property in a State may bear on the existence of jurisdiction by providing contacts among the forum State, the defendant, and the litigation.). Setting aside due process minimum contacts concerns, the prerequisite to this theory is a determination under state law that the debt (or other property) is actually found in the state. Rush v. Savchuk, 444 U.S. 320, 328 n.14, 100 S. Ct. 571, 577 n.14 (1980); see also United States Rubber v. Poage, 297 F.2d 670, 674 (5th Cir. 1962). Texas allows attachment or garnishment only of a debt whose situs is within the jurisdiction of the court. T.&H. Smith & Co. v. Taber, 40 S.W. 156, 157 (Tex. Civ. App. 1897); see also Wirt Franklin Petrol. Co. v. Gruen, 139 F.2d 659, 660 (5th Cir. 1944) (Garnishment is in the nature of a proceeding in rem, as to which the situs of the res is generally determinative for purposes of jurisdiction.). The situs of the debt under Texas law is either the domicile of the creditor, Gerlach Merc. Co. v. Hughes-Bozarth-Anderson Co., 189 S.W. 784, 788 (Tex. Civ. App. Amarillo 1916), or wherever the debtor may be found. T&H.Smith, 40 S.W. at 157. The first condition is inapplicable here, and the second is a reprise of the failed attempts to serve or find personal jurisdiction over FBMC or FPMC in Texas. Consequently, the debt to Curacao was not found in Texas.