Opinion ID: 433422
Heading Depth: 1
Heading Rank: 2

Heading: the necessity of showing fraud or injustice.

Text: 15 We note at the outset that Edwards seeks to hold Monogram liable for a contractual obligation as opposed to a tort claim. In First National Bank in Canyon v. Gamble, 134 Tex. 112, 132 S.W.2d 100 (1939), the Texas Supreme Court set forth the showing a plaintiff must make in order to pierce the corporate veil when suing on a contract. In Gamble, the plaintiff sued a subsidiary to collect on a promissory note. The court held the parent company liable for the subsidiary's debt because the two corporations had no separate identities and because the officers of the parent had breached a relationship of trust between the parties in interest. The court noted that the corporate fiction could not be disregarded unless the separateness of the corporation has ceased and 'the facts are such that an adherence to the fiction of the separate existence of the corporation would ... sanction a fraud or promote injustice.'  132 S.W.2d at 103 (quoting Minifie v. Rowley, 187 Cal. 481, 202 P. 673 (1921)) (emphasis added). 16 That a showing of fraud or injustice must be made by creditors was reaffirmed by the Texas Supreme Court when it discussed the different requirements for piercing the corporate veil in contract and tort cases in Bell Oil & Gas Co. v. Allied Chemical Corp., 431 S.W.2d 336 (Tex.1968), and Gentry v. Credit Plan Corp., 528 S.W.2d 571 (Tex.1975). In Bell, Allied Chemical Corporation sought recovery from Bell Oil & Gas Company for the debts incurred by an affiliated corporation, Mid-Tex Development Company, and a subsidiary corporation, Apollo Oil Company. The suit was based upon contractual obligations and not upon fraud or some other tort. 431 S.W.2d at 338. The trial court and the court of civil appeals had found that Bell and its co-parent corporation, Lubell & Company, were liable for their subsidiaries' debts because they had  'so used their respective stock ownership of Mid-Tex Development Company and Apollo Oil Company as to make those companies a mere agent, representative, adjunct, device, stooge or dummy'  of Bell. Id. at 339 (quoting court of civil appeals' quote of trial court). In reversing, the Texas Supreme Court held that, in a contract case, the corporate form is not to be disregarded unless the corporate entity is being  'used to defeat public convenience, justify wrongs, such as violation of the anti-trust laws, protect fraud, or defend crime.'  Id. (quoting State v. Swift & Co., 187 S.W.2d 127, 131-32) (Tex.Civ.App.--Austin 1945, writ ref'd) (citations omitted). 17 In distinguishing contract claims from tort claims, the court noted that: 18 The attempt to hold a parent corporation where the claim asserted is of contractual origin presents added difficulties. The very reasonable question must be met and answered why one who contracted with the subsidiary and received the promise which he bargained for but who has been disappointed in the fulfillment by the subsidiary of its commitment should be allowed to look to the parent. As a matter of contract right it is evident he may not. Additional compelling facts must appear. 19 431 S.W.2d at 339-40 (quoting Douglas & Shanks, Insulation From Liability Through Subsidiary Corporations, 39 Yale L.J. 193, 210 (1929)). The court recognized that delineation of these additional compelling facts in the form of a general rule is difficult, but concluded that the corporate arrangement must be one which is likely to be employed in achieving an inequitable result by bringing into operation a basically unfair device which in all probability will result in prejudice to those dealing with [it], or one which has actually resulted in the complaining party's having been placed in a position of disadvantage by the exercise of inequitable means, of which the corporate arrangement is a part. 431 S.W.2d at 340. The court then proceeded to determine whether Bell had used Mid-Tex and Apollo to perpetrate fraud or injustice. The court found that there was no evidence that Mid-Tex was originally incorporated for an illegal, improper or fraudulent purpose, id., and that Apollo was organized to succeed Mid-Tex. The court also found that no credit was advanced by Allied to either Mid-Tex or Apollo because of any representation, statements or guarantees made by Bell. Id. at 341. Finally, the court found that each of the corporations had been maintained as a separate corporate entity and that during the time that Allied had sold petroleum products to Mid-Tex and Apollo, Bell received no payments or credits from Mid-Tex on indebtedness to Bell. Id. Thus, the court held that since Bell had not engaged in any fraud or injustice, Allied could look only to Mid-Tex or Apollo for payment. 9 20 A different result was obtained in Gentry v. Credit Plan Corp., where the plaintiffs brought a tort claim against a parent corporation for the acts of its subsidiary. In distinguishing tort claims from contract actions, the court observed that: 21 Unlike a suit for breach of contract, the plaintiff in a tort case does not have the burden of justifying a recovery against the parent when he willingly contracted with the subsidiary. The problem in such a case is essentially one of allocating the loss. It is not necessary to establish fraud, and the financial strength or weaknesses of the subsidiary is an important consideration. 22 528 S.W.2d at 573 (citing Bell ). 23 In Gentry, the court found that the subsidiary Credit Plan was not operated and used by the parent Colonial as a separate entity and that the subsidiary was undercapitalized. Thus, the plaintiffs were allowed to recover in tort from Colonial since no showing of fraud or injustice was required. 10 24 The stricter standard applied to contract claims has been recognized and applied by several lower Texas courts subsequent to Bell and Gentry. See, e.g., Hanson Southwest Corp. v. Dal-Mac Construction Co., 554 S.W.2d 712, 717 (Tex.Civ.App.--Dallas 1977, writ ref'd n.r.e.) (court held that additional compelling facts must be present to pierce in a contract case and found that no showing of fraud or injustice had been made by plaintiff); Angus v. Air Coils, Inc., 567 S.W.2d 931, 933 (Tex.Civ.App.--Dallas 1978, no writ) (court acknowledged contract-tort distinction drawn in Gentry and refused to disregard corporate entity and impose corporation's contractual indebtedness on individual incorporator and director of business absent evidence of fraud or bad faith); Siboney Corp. v. Dresser Industries, Inc., 521 S.W.2d 639, 642-43 (Tex.Civ.App.--Houston [1st Dist.] 1975, writ ref'd n.r.e.) (court recognized contract-tort distinction and refused to hold parent corporation liable for subsidiary's debts where subsidiary not operated for fraudulent or improper purposes, and plaintiff did not advance credit to subsidiary on basis of parent's guarantees). 11 25 Thus, we believe that the panel erred in concluding that, in a contract case, a plaintiff need only show that a subsidiary is a mere agent or conduit of the parent to pierce the corporate veil. 12 A showing that the subsidiary was used by the parent for fraud or injustice must also be present. 26 Such a showing has not been made in this case. As we noted at the outset, the district court found that [Edwards] has failed to show that Monotronics was incorporated for an illegal, fraudulent, or improper purpose, that Monogram employed inequitable means to place [Edwards] in a position of disadvantage, or that [Edwards] acted to his detriment as a result of misrepresentations made by Monogram. Record Vol. III at 760. This finding is borne out by the record. 13 Edwards' chief financial officer testified that shipments made to Entronic during the spring and summer of 1978 were made without any assurance or representation from Monogram that it would stand for Entronic's debts. Moreover, no evidence was introduced to indicate misplaced reliance on misleading conduct by Monogram. Nor did Monotronics prefer itself as a creditor of Edwards. In fact, none of the loans (aggregating approximately $2,100,000) made by Monogram to Entronic was ever repaid. Thus, Edwards relied on Entronic's credit and its credit alone. Even after Edwards had difficulty obtaining payment from Entronic, it continued to advance credit to Entronic in excess of $350,000. Because Edwards has failed to show that there has been any fraud or injustice, it has not met the requirements for piercing the corporate veil in a contract case under Texas law. 27