Fletcher v. Atex, Inc.

OPINION BY: JOSE A. CABRANES, Circuit Judge:

This is a consolidated appeal from a final judgment of the United States District Court for the Southern District of New York (Morris E. Lasker, Judge), granting defendant-appellee Eastman Kodak Company's motion for summary judgment and dismissing all claims against it in two actions, Fletcher v. Atex, Inc., . . . and Hermanson v. 805 Middlesex Corp., Inc.,. . . . [In] Fletcher v. Atex, Inc.,. . . . [t]he plaintiffs-appellants filed suit against Atex, Inc. ("Atex") and its parent, Eastman Kodak Company ("Kodak"), to recover for repetitive stress injuries that they claim were caused by their use of computer keyboards manufactured by Atex.

Plaintiffs-appellants argue that the district court erred in granting summary judgment in favor of Kodak on the ground that Kodak could be held liable for the plaintiffs' alleged injuries. They contend that summary judgment was inappropriate because genuine issues of material fact existed regarding Kodak's liability as a defendant . . . .

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The plaintiffs claim that the district court erred in granting Kodak's motion for summary judgment on their alter ego theory of liability. The plaintiffs offer two arguments in this regard. First, they contend that the district court was estopped from granting Kodak's motion for summary judgment because the New York state court found in King v. Eastman that issues of material fact existed regarding Kodak's domination of Atex. Second, they argue that even if collateral estoppel does not apply in the instant case, genuine issues of material fact remain that preclude a grant of summary judgment in favor of Kodak.

The district court correctly noted that "under New York choice of law principles, 'the law of the state of incorporation determines when the corporate form will be disregarded and liability will be imposed on shareholders.'" . . .. Because Atex was a Delaware corporation, Delaware law determines whether the corporate veil can be pierced in this instance.

Delaware law permits a court to pierce the corporate veil of a company "where there is fraud or where [it] is in fact a mere instrumentality or alter ego of its owner." . . . Although the Delaware Supreme Court has never explicitly adopted an alter ego theory of parent liability for its subsidiaries, lower Delaware courts have applied the doctrine on several occasions, as has the United States District Court for the District of Delaware. . . . Thus, under an alter ego theory, there is no requirement of a showing of fraud. . . .. To prevail on an alter ego claim under Delaware law, a plaintiff must show (1) that the parent and the subsidiary "operated as a single economic entity" and (2) that an "overall element of injustice or unfairness . . . [is] present." . . .

In the New York state action of King v. Eastman, the court granted Kodak's motion for summary judgment, relying on an erroneous interpretation of Delaware's alter ego doctrine. The court noted that although the plaintiffs had raised "ample questions of fact regarding the first element of the piercing theory -- domination," they made "no showing that Kodak used whatever dominance it had over Atex to perpetrate a fraud or other wrong that proximately caused injury to them." This was an error; under Delaware law, the alter ego theory of liability does not require any showing of fraud.

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To prevail on an alter ego theory of liability, a plaintiff must show that the two corporations "'operated as a single economic entity such that it would be inequitable . . . to uphold a legal distinction between them.'" Harper. . . (quoting Mabon,. . . ). Among the factors to be considered in determining whether a subsidiary and parent operate as a "single economic entity" are:

"Whether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder."

Harco,. . . (quoting United States v. Golden Acres, Inc.,. . . ). As noted above, a showing of fraud or wrongdoing is not necessary under an alter ego theory, but the plaintiff must demonstrate an overall element of injustice or unfairness. . . .

A plaintiff seeking to persuade a Delaware court to disregard the corporate structure faces "a difficult task." Harco. . . . Courts have made it clear that "the legal entity of a corporation will not be disturbed until sufficient reason appears." Id. Although the question of domination is generally one of fact, courts have granted motions to dismiss as well as motions for summary judgment in favor of defendant parent companies where there has been a lack of sufficient evidence to place the alter ego issue in dispute. . . .

Kodak has shown that Atex followed corporate formalities, and the plaintiffs have offered no evidence to the contrary. Significantly, the plaintiffs have not challenged Kodak's assertions that Atex's board of directors held regular meetings, that minutes from those meetings were routinely prepared and maintained in corporate minute books, that appropriate financial records and other files were maintained by Atex, that Atex filed its own tax returns and paid its own taxes, and that Atex had its own employees and management executives who were responsible for the corporation's day-to-day business. The plaintiffs' primary arguments regarding domination concern (1) the defendant's use of a cash management system; (2) Kodak's exertion of control over Atex's major expenditures, stock sales, and the sale of Atex's assets to a third party; (3) Kodak's "dominating presence" on Atex's board of directors; (4) descriptions of the relationship between Atex and Kodak in the corporations' advertising, promotional literature, and annual reports; and (5) Atex's assignment of one of its former officer's mortgage to Kodak in order to close Atex's asset-purchase agreement with a third party. The plaintiffs argue that each of these raises a genuine issue of material fact about Kodak's domination of Atex, and that the district court therefore erred in granting summary judgment to Kodak on the plaintiffs' alter ego theory. We find that the district court correctly held that, in light of the undisputed factors of independence cited by Kodak, "the elements identified by the plaintiffs . . . [were] insufficient as a matter of law to establish the degree of domination necessary to disregard Atex's corporate identity.". . .

First, the district court correctly held that "Atex's participation in Kodak's cash management system is consistent with sound business practice and does not show undue domination or control.". . . The parties do not dispute the mechanics of Kodak's cash management system. Essentially, all of Kodak's domestic subsidiaries participate in the system and maintain zero-balance bank accounts. All funds transferred from the subsidiary accounts are recorded as credits to the subsidiary, and when a subsidiary is in need of funds, a transfer is made. At all times, a strict accounting is kept of each subsidiary's funds.

Courts have generally declined to find alter ego liability based on a parent corporation's use of a cash management system. . . . . The plaintiffs offer no facts to support their speculation that Kodak's centralized cash management system was actually a "complete commingling" of funds or a means by which Kodak sought to "siphon all of Atex's revenues into its own account."

Second, the district court correctly concluded that it could find no domination based on the plaintiffs' evidence that Kodak's approval was required for Atex's real estate leases, major capital expenditures, negotiations for a sale of minority stock ownership to IBM, or the fact that Kodak played a significant role in the ultimate sale of Atex's assets to a third party. Again, the parties do not dispute that Kodak required Atex to seek its approval and/or participation for the above transactions. However, this evidence, viewed in the light most favorable to the plaintiffs, does not raise an issue of material fact about whether the two corporations constituted "a single economic entity." Indeed, this type of conduct is typical of a majority shareholder or parent corporation. See Phoenix Canada Oil Co. v. Texaco, . . . (declining to pierce the corporate veil where subsidiary required to secure approval from parent for "large investments and acquisitions or disposals of major assets"), . . .; Akzona, . . . (same, where parent approval required for expenditures exceeding $ 850,000); . . . In Akzona, the Delaware district court noted that a parent's "general executive responsibilities" for its subsidiary's operations included approval over major policy decisions and guaranteeing bank loans, and that that type of oversight was insufficient to demonstrate domination and control. Akzona, . . . Similarly, the district court in the instant case properly found that the presence of Kodak employees at periodic meetings with Atex's chief financial officer and comptroller to be "entirely appropriate." . . .

The plaintiffs' third argument, that Kodak dominated the Atex board of directors, also fails. Although a number of Kodak employees have sat on the Atex board, it is undisputed that between 1981 and 1988, only one director of Atex was also a director of Kodak. Between 1989 and 1992, Atex and Kodak had no directors in common. Parents and subsidiaries frequently have overlapping boards of directors while maintaining separate business operations. In Japan Petroleum, the Delaware district court held that the fact that a parent and a subsidiary have common officers and directors does not necessarily demonstrate that the parent corporation dominates the activities of the subsidiary. . . . Since the overlap is negligible here, we find this evidence to be entirely insufficient to raise a question of fact on the issue of domination.

Fourth, the district court properly rejected the plaintiffs' argument that the descriptions of the relationship between Atex and Kodak and the presence of the Kodak logo in Atex's promotional literature justify piercing the corporate veil. Fletcher. . . . The plaintiffs point to several statements in both Kodak's and Atex's literature to evidence Kodak's domination of its subsidiary. For example, plaintiffs refer to (1) a promotional pamphlet produced by EPPS (a/k/a Atex) describing Atex as a business unit of EPPS and noting that EPPS was an "agent" of Kodak; (2) a document produced by Atex entitled "An Introduction to Atex Systems," which describes a "merger" between Kodak and Atex; (3) a statement in Kodak's 1985 and 1986 annual reports describing Atex as a "recent acquisition[]" and a "subsidiary . . . combined in a new division"; and (4) a statement in an Atex/EPPS document, "Setting Up TPE 6000 on the Sun 3 Workstation," describing Atex as "an unincorporated division of Electronic Pre-Press Systems, Inc., a Kodak company." They also refer generally to the fact that Atex's paperwork and packaging materials frequently displayed the Kodak logo.

It is clear from the record that Atex never merged with Kodak or operated as a Kodak division. The plaintiffs offer no evidence to the contrary, apart from these statements in Atex and Kodak documents that they claim are indicative of the true relationship between the two companies. Viewed in the light most favorable to the plaintiffs, these statements and the use of the Kodak logo are not evidence that the two companies operated as a "single economic entity." See Coleman v. Corning Glass Works, . . . (upholding corporate form despite "loose language" in annual report about "merger" and parent's reference to subsidiary as a "division"), . . . ; Japan Petrol., . . . (noting that representations made by parent in its annual reports that subsidiary serves as an agent "may result from public relations motives or an attempt at simplification"); American Trading & Prod. Corp. v. Fischbach & Moore, Inc. . . . ("boastful" advertising and consideration of subsidiaries as "family" do not prove that corporate identities were ignored).

Fifth, the plaintiffs contend that Atex's assignment of its former CEO's mortgage to Kodak in order to close the sale of Atex's assets to a third party is evidence of Kodak's domination of Atex. We reject this argument as well. The evidence is undisputed that Kodak paid Atex the book value of the note and entered into a formal repayment agreement with the former CEO. Formal contracts were executed, and the two companies observed all corporate formalities.

Finally, even if the plaintiffs did raise a factual question about Kodak's domination of Atex, summary judgment would still be appropriate because the plaintiffs offer no evidence on the second prong of the alter ego analysis. The plaintiffs have failed to present evidence of an "overall element of injustice or unfairness" that would result from respecting the two companies' corporate separateness. See Harper, . . . (holding that plaintiff cannot prevail on alter ego theory "because he has failed to allege any unfairness or injustice which would justify the court in disregarding the [companies'] separate legal existences"). In the instant case, the plaintiffs offer nothing more than the bare assertion that Kodak "exploited" Atex "to generate profits but not to safeguard safety." There is no indication that Kodak sought to defraud creditors and consumers or to siphon funds from its subsidiary. The plaintiffs' conclusory assertions, without more, are not evidence . . . and are completely inadequate to support a finding that it would be unjust to respect Atex's corporate form.

For all of the foregoing reasons, the district court's order entering summary judgment on the plaintiffs' alter ego theory of liability is affirmed. . . .