Opinion
No. 3:01-CV-1841-R
May 23, 2002
FINDINGS, CONCLUSIONS, AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
By Order of Reference, the United States District Court referred Defendant's First Amended 12(b)(1) and 12(b)(7) Motion to Dismiss, filed October 19, 2001, to the undersigned United States Magistrate Judge for recommendation.
Background
The instant case arises out of a construction agreement between Bridgefarmer Panama, S.A. ("B-Panama"), and Marine Industrial Services, S.A. ("MISSA"). The agreement was for the performance of services for the Panama Canal Railway Company at the French Canal, Republic of Panama. Plaintiff Central De Fianzas, as MISSA's insurance carrier, claimed a direct right to initiate an arbitration proceeding against B-Panama in the Republic of Panama and Plaintiff subsequently initiated an arbitration action against B-Panama. The Corte Supreme de Justicia — Sala de Negocios Generales ultimately issued an opinion against B-Panama in favor of Plaintiff, enforcing an arbitration award against B-Panama.
Plaintiff alleges that B-Panama is a mere division of Bridgefarmer and Associates ("BA") — an alter-ego — therefore entitling Plaintiff to a judgment against BA. Defendant, however, seeks dismissal under Rule 12(b)(7) of the Federal Rules of Civil Procedure, stating that Plaintiff has failed to join B-Panama — an indispensable party to this action. Defendant also seeks dismissal on the grounds that joinder of B-Panama as a necessary and indispensable party will defeat diversity jurisdiction under Rule 12(b)(1).
Standard
Rule 19 of the Federal Rules of Civil Procedure outlines the circumstances under which joinder is appropriate. Under Rule 19, a party should be joined, when feasible, if: (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest. Fed.R.Civ.P. 19(a).
If the court determines that such a party should be joined, but that joinder is not feasible because it would deprive the court of jurisdiction over the suit, the court must determine "if the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable." Fed.R.Civ.P. 19 (b). Rule 19(b) outlines a list of factors that the court must consider in determining whether a party is indispensable. First, the court must consider to what extent a judgment rendered in the person's absence might be prejudicial to the person or those already parties. Second, the court must consider the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided. Third, the court must consider whether a judgment rendered in the person's absence will be adequate. And, as a final consideration, the court must consider whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder. Fed.R.Civ.P. 19(b).
Discussion
In the instant case, Plaintiff seeks to enforce a Panamanian judgment against Defendant BA, and asserts that the action should proceed without joining B-Panama since B-Panama is merely the "alter ego" of BA, and BA's participation in this suit is sufficient to satisfy the interests of B-Panama, its "subsidiary." Defendant admits that B-Panama is an affiliate company owned by BA, but argues that B-Panama is a separate Panamanian corporate entity. Defendant also points out that the Panamanian arbitral award and the foreign judgment Plaintiff seeks to enforce was issued against B-Panama, and contends that B-Panama is an indispensable party to this litigation for the principal reason that it has an interest in the enforcement of a judgment rendered against it.
Plaintiff s Supplemental Response at 2.
I. Piercing the Corporate Veil
It appears from the pleadings that Plaintiff is trying to pierce B-Panama's corporate veil and hold BA liable under an alter ego theory. Plaintiff argues that "to fuse the parent company and its subsidiary . . . [the movant] must prove the parent controls the internal business operations and affairs of the subsidiary. The degree of control exercised by the parent must be greater than normally associated with common ownership and directorship." Plaintiff further argues that "alter ego applies when there is such unity between the corporation and the individual [or the subsidiary as in this case] that the separateness of the corporation has ceased and holding the corporation only liable would result in justice. . . Alter ego rationale is: if the shareholders themselves disregard the separation of the corporate enterprise, the law will also disregard it so far as necessary to protect individual and corporate creditors." Id, citing Castleberry v. Branscum, 721 S.W.2d 270 (Tex. 1986).
Plaintiffs Supplemental Response at 2, citing Conner v. Conticarriers and Terminals, Inc., 944 S.W.2d 405 (Tex.App-Houston [14th Dist] 1997, no writ).
Plaintiff also cites Castleberry in support of the assertion that BA can be subjected to liability with respect to the judgment rendered against B-Panama under Texas shareholder liability law and "alter ego" principles. However, Defendant is correct in stating that the parameters of Castleberry have been statutorily limited through the passage of Article 2.21 of the Texas Business Corporation Act, which provides that a shareholder "shall be under no obligation to the corporation or to its obligees with respect to . . . any contractual obligation of the corporation unless the obligee demonstrates that the holder . . . caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct benefit of the holder." Tex.Bus.Corp. Act, Art. 2.21(a) (Vernon 2000). Thus, in any action in which the obligee of a corporation's contractual obligation is trying to hold the corporation's shareholders liable for that obligation, the obligee must meet the requirements of Article 2.21(A), regardless of the theory underlying the claim. See Thrift v. Hubbard, 44 F.3d 348, 353 (5th Cir. 1995) (providing that a corporation is the alter ego of a shareholder is not enough; in order to pierce the corporate veil, the obligee must also demonstrate fraud by and an direct benefit to the obligor). Therefore, in order for Plaintiff to pierce the corporate veil, it must prove that both the common law alter ego claim applies and that the shareholder used the corporation to perpetuate a fraud.
Plaintiff asserts a myriad of "facts" in attempting to prove that alter ego applies, and that no separation exists between the two relevant entities. However, the only clearly substantiated facts include the following: (1) that B-Panama was undercapitalized; (2) that invoices reflecting work for the project at issue were not sent by B-Panama to the outside customer but were incorporated into BA's billings to the customer, asking that payments be made back to B A; (3) that the tax treatment is that of a consolidated corporate return wherein B-Panama is treated as a subcontractor and 100% of the revenue of B-Panama is eliminated revenue by BA in its tax return; (4) that testimony of Blackledge revealed that at the Dallas office of BA, there exists no outward indicia that BA even has a separate subsidiary known as B-Panama in that no signage to that effect is utilized; and (5) that the testimony of Blackledge revealed that he was the project manager with "overall responsibility for both field and office operation" and that he was integrally involved in every aspect of the project.
Plaintiff has provided the Court with no citations for many of the "facts" asserted. Without the benefit of such documentation, the Court is inclined to question the reliability of Plaintiffs statements and shall therefore give weight to only those assertions that cite to a specific source. Those assertions are listed above.
Based on the information provided, this Court is hesitant to recommend that the District Court make a finding that B-Panama is merely a division of the parent company BA, as alleged by Plaintiff. There simply has not been a sufficient showing that the two entities are not separate for alter ego purposes. Moreover, as Defendant has pointed out, the Texas legislature has limited shareholder liability under the alter ego theory to those instances in which the plaintiff can demonstrate that the shareholder has perpetrated actual fraud. See Tex.Bus.Corp. Act, Art. 2.21 (a). Plaintiff has neither pled nor made a suggestion of fraud in this case. Therefore, Plaintiffs attempt to pierce the corporate veil must fail.
II. Indispensable Party
Having determined that the Court should not consider BA to be the alter ego of B-Panama based on the information provided, the Court now turns to the issue of whether B-Panama should be considered an indispensable party for purposes of Fed.R.Civ.P. Rule 19(b).
In applying the four factors set out in Rule 19(b), it is clear that Defendant's 12(b)(7) motion should be granted. First, Defendant would indeed be prejudiced if not joined as a party to this action, in that it would not be allowed to defend itself or its interests with respect the arbitration award or the Panamanian judgment, should related issues arise in the district court proceeding. Moreover, the Court would be limited in the relief that it could shape without B-Panama being joined as a party, and a judgment rendered in this action would not likely be adequate. Finally, Plaintiff already holds a judgment against B-Panama, and any subsequent judgment rendered by the district court could subject the parties to multiple or inconsistent judgments.
Conclusion
In sorting through the numerous arguments of the parties regarding applicable law and the true nature of the instant suit, one thing remains clear: Plaintiff is, in some capacity, seeking recognition in the district court of a judgment entered against B-Panama. At this stage, Plaintiff has not provided the Court with sufficient reason to determine that BA is indeed the parent company of B-Panama, and there does appear to be a good deal of support for Defendant's contention that B-Panama would suffer prejudice if it were not joined to the suit since any decision or judgment rendered subsequent to the proceeding in the district court would possibly expose Defendant to multiple or inconsistent judgments.
In a situation such as the one presented by the instant case, wherein the Court has determined that B-Panama should be joined as a party to this suit, and that joinder is not feasible because it would deprive the court of jurisdiction over the suit, the Court must ultimately determine "if the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable." Fed.R.Civ.P. 19(b). The four-part test has revealed that B-Panama is indeed an indispensable party to this action, and Defendant's Motion to Dismiss should therefore be granted. Therefore, this Court recommends that this action be dismissed due to Plaintiffs failure to join B-Panama — a party that appears by all accounts to be indispensable with respect to this litigation.
RECOMMENDATION
Based on the reasons set out above, this Court hereby recommends that Defendant's Motion to Dismiss be GRANTED, and that this action be dismissed without prejudice.