Court Opinion

ID: 4767873
Source: CourtListenerOpinion
Date Created: 2021-08-18 00:00:43.113865+00
Date Added: 2024-06-11T08:09:20.192559
License: Public Domain

Case: 20-50650      Document: 00515982514         Page: 1    Date Filed: 08/17/2021

           United States Court of Appeals
                for the Fifth Circuit                                 United States Court of Appeals
                                                                               Fifth Circuit

                                                                             FILED
                                                                       August 17, 2021
                                   No. 20-50650
                                                                        Lyle W. Cayce
                                                                             Clerk
   Ms. Karen M. Ledford,

                                                            Plaintiff—Appellant,

                                       versus

   Donna Keen; Joe D. Suttle; Katrina Suttle; Wesley
   Suttle,

                                                          Defendants—Appellees.

                  Appeal from the United States District Court
                       for the Western District of Texas
                            USDC No. 6:20-CV-616

   Before Jolly, Duncan, and Oldham, Circuit Judges.
   Stuart Kyle Duncan, Circuit Judge:
          Karen Ledford was run over by a barrel-racing horse at a Texas rodeo.
   She timely sued Kosse Roping Club, the rodeo operator, for negligence. Ten
   months later, outside of the applicable limitations period, she added the
   club’s directors. The district court dismissed her claims against the directors
   as untimely. On appeal, Ledford argues she was entitled to pierce the club’s
   corporate veil and sue the directors personally. Therefore, she claims, her
   timely suit against the club stopped the clock running against the directors.
   We need not pass on the validity of this tolling theory because we decide that,
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   under Texas law, Ledford could not pierce the club’s corporate veil based
   solely on evidence that the club was undercapitalized. We therefore affirm
   the district court’s judgment dismissing Ledford’s claims against the
   directors as untimely.
                                        I.
          On June 9, 2017, Ledford was walking around a barrel-racing arena at
   a rodeo in Kosse, Texas, when a horse and rider galloped out of a chute and
   hit her. Ledford was badly hurt. On December 19, 2018, she sued Kenda
   Eckols (the owner of the rodeo land), Kosse Roping Club (“KRC”) and
   Johnny Hoyle d/b/a Cadillac Rodeo Company (the rodeo’s operators), and
   Lacy Aubihl (the rider), for negligence. She also brought premises liability
   and gross negligence claims against Eckols, KRC, and Hoyle.
          Before filing her complaint, between November 2017 and April 2018,
   Ledford had learned several facts about KRC relevant to this appeal: KRC is
   a Texas non-profit corporation, and its directors are Joe Suttle, Wesley
   Suttle, Katrina Suttle, and Donna Keen (the “Directors”); KRC did not
   carry liability or other insurance at the time of Ledford’s injury; and KRC’s
   assets amounted to about $8,000. After suit was filed, Ledford learned during
   discovery that KRC historically maintained a checking balance of about
   $7,000 or less.
          On October 25, 2019, Ledford filed an amended complaint adding the
   Directors as defendants and alleging the following: The Directors had
   “consistently kept [KRC] under-capitalized and uninsured to an
   unreasonable degree” and had “failed to maintain other corporate
   formalities.” As a result, KRC would be unable to satisfy any judgment for
   Ledford. KRC represented “an attempted sham” by the Directors to
   “perpetrate a fraud” on Ledford and similarly situated plaintiffs, entitling
   Ledford to pierce the corporate veil and hold them individually liable. The

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   amended complaint brought negligence, premises liability, and gross
   negligence claims against the previously named defendants plus the
   Directors, and added an “action to pierce the corporate veil” against the
   Directors alone. It also “affirmatively plead[ed] equitable tolling” of the
   limitations period for Ledford’s claims against the Directors.
           The Directors filed two substantially similar summary judgment
   motions, arguing (a) Ledford’s claims were time barred, (b) Ledford was not
   entitled to equitable tolling, and (c) Ledford could not pierce KRC’s
   corporate veil. The district court granted both motions, agreeing with the
   Directors’ timeliness, tolling, and piercing arguments.1 The court then
   severed Ledford’s claims against the Directors and entered final judgment.
   Ledford appealed.
                                               II.
           We review a summary judgment de novo. Patel v. Tex. Tech Univ., 941
   F.3d 743, 747 (5th Cir. 2019). Summary judgment should be granted “if the
   movant shows that there is no genuine dispute as to any material fact and the
   movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
   We view the evidence in the light most favorable to the non-movant,
   “drawing all justifiable inferences in the non-movant’s favor.” Renwick v.
   PNK Lake Charles, L.L.C., 901 F.3d 605, 611 (5th Cir. 2018) (cleaned up).
   “We also review de novo the district court’s interpretation of state law and
   give no deference to its determinations of state law issues.” Tradewinds Env’t

           1
              The court also rejected Ledford’s arguments that she was entitled to “deferment
   of the statute of limitation[s] per the Discovery Rule” and that she lacked legal capacity to
   file suit until at least September 2017. Ledford does not challenge either of those rulings on
   appeal.

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   Restoration, Inc. v. St. Tammany Park, L.L.C., 578 F.3d 255, 258 (5th Cir.
   2009).
                                              III.
            This is the logic of Ledford’s argument: (1) her timely suit against
   KRC, (2) stopped limitations running against the Directors, (3) because she
   can pierce KRC’s corporate veil. We need not pass on the validity of this
   tolling theory because, as explained below, Ledford is not entitled to pierce
   KRC’s corporate veil.
                                               A.
            Some preliminary matters first. The district court correctly concluded
   Ledford’s claims were subject to Texas’s two-year limit for personal injury
   actions. See Tex. Civ. Prac. & Rem. Code § 16.003(a).2 Under the
   “legal injury rule,” the clock started when Ledford was hurt on June 9, 2017.
   See Schlumberger Tech. Corp. v. Pasko, 544 S.W.3d 830, 834 (Tex. 2018) (per
   curiam). Ledford sued KRC within two years, but she did not add the
   Directors until October 25, 2019, over four months late. So, her claims
   against the Directors are untimely unless some basis for tolling applies. See,
   e.g., Snyder v. Eanes Indep. Sch. Dist., 860 S.W.2d 692, 699–700 (Tex. App.—
   Austin 1993, writ denied) (negligence claim barred where plaintiff added
   defendants outside two-year period and discovery rule did not apply).
            As a basis for tolling, Ledford invokes veil-piercing. She argues the
   Directors operated KRC as a sham, and so by suing KRC she effectively sued
   the Directors and stopped the clock against them. The district court ruled
   Ledford had waived this argument, however. Thinking Ledford was

            2
             “When sitting in diversity, we apply the state’s statutes of limitation and
   accompanying tolling rules.” Bloom v. Aftermath Pub. Adjusters, Inc., 902 F.3d 516, 517 (5th
   Cir. 2018).

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   advancing an alter-ego theory, the court ruled Ledford had failed to raise it in
   her amended complaint. This was error. Ledford pled enough facts to allege
   a “sham to perpetrate a fraud,” a valid basis for veil-piercing under Texas
   law. See Castleberry v. Branscum, 721 S.W.2d 270, 272 & n.2 (Tex. 1986)
   (explaining a distinct basis for veil piercing is “when the [corporate] fiction
   is used as a means of perpetrating fraud” or as “a sham to perpetrate a
   fraud”) (citations omitted); Gentry v. Credit Plan Corp., 528 S.W.2d 571, 575
   (Tex. 1975) (tolling limitations to prevent use of corporate entity “as a cloak
   for fraud or illegality or to work an injustice”). Moreover, Ledford pled an
   “action to pierce [KRC’s] corporate veil” and claimed equitable tolling
   because she timely sued KRC.3 Thus, the district court was mistaken that
   Ledford waived this basis for tolling.4
           The court did, however, go on to reject Ledford’s veil-piercing theory
   on its merits, and the Directors urge this as an alternative ground for
   affirming. We therefore consider whether Ledford can pierce KRC’s
   corporate veil.
                                                B.
           Texas law permits courts to “disregard the corporate fiction . . . when
   the corporate form has been used as part of a basically unfair device to achieve
   an inequitable result.” SSP Partners v. Gladstrong Invs. (USA) Corp., 275

           3
             See Spring St. Partners-IV, L.P. v. Lam, 730 F.3d 427, 443 (5th Cir. 2013) (“Under
   Texas law, ‘an assertion of veil piercing or corporate disregard does not create a substantive
   cause of action [;] . . . such theories are purely remedial and serve to expand the scope of
   potential sources of relief by extending to individual shareholders or other business entities
   what is otherwise only a corporate liability.’” (citation omitted)).
           4
             Cf. Smith v. McKinney, 792 S.W.2d 740, 742 (Tex. App.—Houston [14th Dist.]
   1990, writ denied) (“A matter in avoidance of the statute of limitations that is not raised
   affirmatively in the pleadings will, therefore, be deemed waived.” (quoting Woods v.
   William M. Mercer, Inc., 769 S.W.2d 515, 518 (Tex. 1988))).

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   S.W.3d 444, 454 (Tex. 2008) (quoting Castleberry, 721 S.W.2d at 271–72);
   see also Spring St. Partners-IV, L.P. v. Lam, 730 F.3d 427, 443–44 (5th Cir.
   2013). This veil-piercing doctrine applies in various scenarios, including
   “when the [corporate] fiction is used as a means of perpetrating fraud.” SSP
   Partners, 275 S.W.3d at 454 (quoting Castleberry, 721 S.W.2d at 271–72).
   Only “constructive fraud” is required, meaning “the breach of some legal or
   equitable duty which, irrespective of moral guilt, the law declares fraudulent
   because of its tendency to deceive others, to violate confidence, or to injure
   public interests.” Spring Street Partners, 730 F.3d at 443 (quoting Castleberry,
   720 S.W.2d at 273). “[N]either fraud nor an intent to defraud need be
   shown,” but only that “recognizing the separate corporate existence would
   bring about an inequitable result.” Ibid. (quoting Castleberry, 720 S.W.2d at
   272–73).5 As noted, Ledford’s tolling argument relies on this theory. But the
   district court found veil piercing was unavailable because Ledford’s evidence
   consisted of nothing more than KRC’s “lack of insurance and
   undercapitalization.” Ledford contests this conclusion on appeal.6

           5
              The Texas legislature partly overruled the seminal veil-piercing decision in
   Castleberry by amending the Texas Business Corporation Act in 1989—for instance, by
   precluding shareholder liability for contractual obligations absent actual fraud. See Tex.
   Bus. Orgs. Code § 21.223(a)(2), (b); see also W. Horizontal Drilling, Inc. v. Jonnet
   Energy Corp., 11 F.3d 65, 68 & n.4 (5th Cir. 1994) (noting this). But those amendments are
   not relevant here because they “left untouched” the “constructive fraud” standard for tort
   claims. Farr v. Sun World Sav. Ass’n, 810 S.W.2d 294, 296 (Tex. App.—El Paso 1991, no
   writ); see also TecLogistics, Inc. v. Dresser-Rand Grp., 527 S.W.3d 589, 597 (Tex. App.—
   Houston [14th Dist.] 2017, no pet.).
           6
              The Directors argue that the cases on which Ledford relies to support her tolling
   theory were alter ego cases and should be limited to that context. See Gentry, 528 S.W.2d
   at 572 n.1, 575 (holding parent company’s use of a subsidiary as its alter ego meant “the
   filing of suit against [the subsidiary] stopped the running of the statute [of limitations] in
   favor of [the parent]”); Matthews Constr. Co. v. Rosen, 796 S.W.2d 692, 692–94 (Tex. 1990)
   (similar). We need not address that argument because, as explained below, Ledford’s
   sham-to-perpetrate-a-fraud theory fails in any event.

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           We begin by assessing Texas law on this point. The Texas Supreme
   Court has not directly answered whether undercapitalization alone justifies
   veil-piercing under a sham-to-perpetrate-a-fraud theory. So, we must make
   an “Erie guess” about how it would answer the question. Boren v. U.S. Nat’l
   Bank Ass’n, 807 F.3d 99, 105 (5th Cir. 2015). “Typically, we treat state
   intermediate courts’ decisions as the strongest indicator of what a state
   supreme court would do, absent a compelling reason to believe that the state
   supreme court would reject the lower courts’ reasoning.” Hux v. S. Methodist
   Univ., 819 F.3d 776, 780–81 (5th Cir. 2016) (citation omitted).
           In light of those decisions, we think the Texas Supreme Court would
   not conclude that undercapitalization alone justifies piercing the corporate
   veil. A significant datum is Ramirez v. Hariri, which rejected the argument
   that “undercapitalization, by itself and without reference to any other
   factors, is sufficient to justify piercing the corporate veil.” 165 S.W.3d 912,
   916 (Tex. App.—Dallas 2005, no pet.). While noting the landmark
   Castleberry opinion stated in a footnote that “[i]nadequate capitalization is
   another basis for disregarding the corporate fiction,” ibid. (quoting
   Castleberry, 721 S.W.2d at 272 n.3), Ramirez reasoned the Texas Supreme
   Court could not have meant to convey that undercapitalization was itself a
   sufficient basis for veil piercing. Id. at 917. The Castleberry footnote, the court
   pointed out, cited two decisions denying that very proposition. Id. at 916–17.7
           Ramirez’s holding meshes with decisions by other Texas intermediate
   courts. See Durham v. Accardi, 587 S.W.3d 179, 186 (Tex. App.—Houston

           7
              Those decisions were Torregrossa v. Szelc, 603 S.W.2d 803 (Tex. 1980), and
   Tigrett v. Pointer, 580 S.W.2d 375 (Tex. App.—Dallas 1978, writ ref’d n. r. e.). Tigrett held
   that “grossly inadequate” capitalization, “standing alone, would [not] justify piercing the
   corporate veil.” 580 S.W.2d at 383, 387. Torregrossa, in turn, rejected a district court’s
   reading of Tigrett to support an alter ego holding based on undercapitalization alone. 603
   S.W.2d at 804–05.

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   [14th Dist.] 2019, no pet.) (holding undercapitalization alone is “insufficient
   to establish alter ego”); Endsley Elec., Inc. v. Altech, Inc., 378 S.W.3d 15, 26
   (Tex. App.—Texarkana 2012, no pet.) (noting “undercapitalization can be a
   factor in determining whether an individual is the alter ego of the corporation,
   but alone is insufficient”); Tigrett, 580 S.W.2d at 386–87 (same); see also
   Morgan v. D&S Mobile Home Ctr., Inc., No. 07-13-00263-CV, 2014 WL
   3809751, at *2 (Tex. App.—Amarillo Aug. 1, 2014, no pet.) (memo op.)
   (inadequate capitalization is “one factor” in assessing veil-piercing but “[i]t
   alone does not entitle a complaint to such relief”); Shaw v. Maddox Metal
   Works, Inc., 73 S.W.3d 472, 481 (Tex. App.—Dallas 2002, no pet.)
   (“[U]ndercapitalization is a factor to be considered in determining whether
   a corporation is operated as an alter ego.”); Assocs. Dev. Corp. v. Air Control
   Prods., Inc., 392 S.W.2d 542, 545–46 (Tex. App.—Austin 1965, writ ref’d
   n.r.e.) (evidence of undercapitalization had “weight” but did not “tilt the
   scales far enough to overcome the lack of evidence” corporation was “sham
   or [an] alter ego”); see also 15 Tex. Jur. 3d Corporations § 162 (2021)
   (stating inadequate capitalization is “not sufficient to pierce the corporate
   veil” but “only one factor to be considered”).8 We are therefore persuaded
   that, under Texas law, undercapitalization alone would not be sufficient to
   pierce the corporate veil.9

           8
              Cf. Howell v. Hilton Hotels Corp., 84 S.W.3d 708, 715 (Tex. App.—Houston [1st
   Dist.] 2002, pet. denied (op. on reh’g)) (upholding summary judgment for defendant where
   plaintiffs failed to produce any evidence of undercapitalization but suggesting this could be
   a sufficient basis for veil piercing).
           9
             Two of our decisions, discussing Castleberry, remark that the sham-to-perpetrate-
   a-fraud theory “includes the concept of inadequate capitalization as a basis for corporate
   disregard.” Pan E. Exploration Co. v. Hufo Oils, 855 F.2d 1106, 1133 (5th Cir. 1988),
   superseded on other grounds by Tex. Bus. Corp. Act art. 21.223(a)(3); see Gibraltar Sav.
   v. LDBrinkman Corp., 860 F.2d 1275, 1289 (5th Cir. 1988). But those decisions were using
   precisely the same language Castleberry used in discussing the fraud theory, see Castleberry,

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           Ledford does not contest that conclusion. She argues only that
   evidence of KRC’s “[c]onsistent, gross undercapitalization” and
   “intentional[] emptying [of] bank accounts year after year,” showed the
   Directors used KRC as a shell to shield them from liability. Specifically,
   Ledford relies on evidence that: (1) KRC never had liability insurance; (2) Joe
   Suttle recognized rodeos are dangerous; (3) KRC’s “only asset [at the time
   of Suttle’s deposition] was a checking account with less than $200”;
   (4) KRC consistently maintained a checking balance too low to compensate
   injured rodeo attendees; and (5) this was due to KRC’s use of leftover
   revenue for rodeo upgrades and charitable donations. The Directors argue
   that the district court correctly found this evidence amounted to nothing
   more than evidence KRC was undercapitalized. We agree.10
           Stripped to its essentials, Ledford’s evidence shows only that the
   Directors did not purchase liability insurance, did not retain sufficient funds
   to compensate an injured spectator, and used leftover rodeo revenue for
   rodeo improvements and donations to other community organizations. As
   the district court found, this evidence is indistinguishable from evidence that
   KRC was undercapitalized. See, e.g., Ramirez, 165 S.W.3d at 915 (company
   had substantial assets, significant revenue, and liability insurance, indicating
   adequate capitalization); Durham, 587 S.W.3d at 186 (treating failure to carry
   worker’s compensation insurance as evidence of undercapitalization).

   721 S.W.2d at 272 n.3, and, as noted, subsequent Texas intermediate courts have explained
   that Castleberry did not set up undercapitalization alone as sufficient for veil-piercing.
           10
              The Directors also argue no authority exists for disregarding the corporate form
   of a non-profit like KRC. The district court suggested this argument was reasonable but did
   not rely on it. Because we agree Ledford’s evidence is insufficient to support veil piercing,
   we need not decide whether veil-piercing may operate against a non-profit corporation, an
   open question under Texas law. See 20 Tex. Prac., Business Organizations
   § 25:14 (3d ed.) (noting no Texas law “directly address[es] veil piercing in the nonprofit
   corporation context,” other than the district court’s opinion in this case).

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   Ledford does use colorful rhetoric in trying to impose sinister motives on the
   Directors’ conduct—for example accusing the Directors of “raid[ing]”
   KRC’s bank account after every rodeo. But she does not even attempt to
   rebut the Directors’ evidence that they did not form KRC to avoid liability,
   use it as a shell to avoid liability, or otherwise abuse the corporate form for
   their personal benefit.11 And Ledford fails to present any additional evidence
   that might support her sham theory, e.g., evidence showing the Directors
   used KRC to “perpetrate a fraud, evade an existing obligation, achieve or
   perpetrate a monopoly, circumvent a statute, protect a crime, or justify
   wrong.” Spring St. Partners, 730 F.3d at 443 (emphasis removed) (quoting
   SSP Partners, 275 S.W.3d at 451); see also Tigrett, 580 S.W.2d at 382, 385–87
   (requiring “additional compelling facts,” such as president’s transfer of
   company’s assets to himself in violation of his fiduciary duty, to find
   constructive fraud); SSP Partners, 275 S.W.3d at 455 (“[E]vidence of abuse
   . . . is necessary before disregarding the existence of a corporation.”).12 Thus,
   we agree with the district court that Ledford’s evidence amounts to nothing
   more than evidence of undercapitalization, which is insufficient standing
   alone to support a veil-piercing theory under Texas law.

           11
              For instance, the Directors presented evidence that (a) they simply failed to
   anticipate the need to compensate an injured spectator; (b) Joe Suttle believed, based on
   his experience, that the stock contractor had liability insurance; and (c) their spending
   leftover funds on future rodeos, rodeo upgrades, and charitable donations was consistent
   with KRC’s benevolent mission.
           12
              Cf. Nugent v. Estate of Ellickson, 543 S.W.3d 243, 267 (Tex. App.—Houston [14th
   Dist.] 2018, no pet.) (op. on reh’g) (reversing imposition of alter-ego liability in absence of
   evidence defendant used corporation to “engage in fraudulent conduct, avoid existing
   obligations, circumvent statutes, or the like” (citing SSP Partners, 275 S.W.3d at 455));
   Strobach v. WesTex Cmty. Credit Union, 621 S.W.3d 856, 880 (Tex. App.—El Paso 2021,
   no pet.) (op. on reh’g) (“While . . . constructive fraud does not require evidence of
   wrongful intent, . . . it nevertheless requires evidence that the defendant breached some
   legal or equitable duty.”).

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                                      IV.
         In sum, Ledford’s veil-piercing theory fails and, along with it, any
   argument that the limitations clock against the Directors was tolled by her
   suing KRC. The district court’s summary judgment is therefore
                                                               AFFIRMED.

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