Opinion
14-20-00605-CV
01-20-2022
STEVEN ZHAO, Appellant v. ICOMPOSITE, LLC AND MICHAEL ROHAN, Appellees
On Appeal from the 125th District Court Harris County, Texas Trial Court Cause No. 2016-46046
Panel consists of Chief Justice Christopher and Justices Zimmerer and Wilson.
MEMORANDUM OPINION
Jerry Zimmerer, Justice
Appellant Steven Zhao appeals from the trial court's denial of his special appearance. Concluding the jurisdictional evidence does not establish that Zhao is Chinagrate Prospera Corporation's ("Prospera") alter ego, nor that he individually availed himself of the privilege of conducting activities within Texas, thereby invoking the benefits and protections of Texas laws, we reverse the trial court's order denying Zhao's special appearance, and render judgment dismissing appellees iComposite, LLC and Michael Rohan's (collectively "iComposite") claims against Zhao.
Background
Prospera is a Nevada corporation. Prospera alleged that it had an oral agreement with iComposite under which iComposite would sell fiberglass grating materials imported by Prospera and, in return, Prospera would pay iComposite a five-percent commission. It is undisputed that iComposite subsequently sold more than $500,000 worth of Prospera's grating materials. A dispute erupted when iComposite failed to remit any money to Prospera. The dispute grew to include allegations by iComposite of quality issues with Prospera's grating materials, the failure of Prospera to pay iComposite's expenses and salaries, and a disagreement over whether certain sales arranged by iComposite were subject to a different commission structure. When the dispute remained unresolved, Prospera filed suit against iComposite alleging breach of contract.
IComposite filed counterclaims against Prospera. It then added Chinagrate Composite Structures (Nantong), Ltd., a Chinese company, as a third-party defendant. IComposite alleged that it was owed additional sums above the amount of money it admittedly withheld from Prospera. Later, iComposite added Zhao as a third-party defendant to the case. IComposite alleged Zhao is the alter ego of Prospera and that he is liable to them in that capacity. IComposite asserted that "personal jurisdiction is proper over Zhao, because, despite initially claiming to be a Chinese citizen and resident to this Court, he is a U.S. Citizen and resident of California who did business in Texas when he agreed to the contract and transactions with iComposite that serve as the basis of this lawsuit." IComposite further alleged that Zhao engaged in business in Texas and that the lawsuit arose from Zhao's business in Texas. Finally, iComposite alleged that "Zhao is the owner and sole officer" of Prospera.
Zhao filed a Rule 120a special appearance. See Tex. R. Civ. P. 120a. Zhao attached his declaration and iComposite's answers to Prospera's request for admissions to his special appearance. It is undisputed that Zhao is Prospera's sole officer, director, and employee. In his declaration Zhao stated that he is also the general manager of Nantong. Zhao continued that he has never owned real property, maintained personal property, nor maintained a residence in Texas. Zhao also stated that he has never maintained a bank account, nor has he had a telephone listing in Texas. Zhao also stated that he has never been a party to a contract with a Texas resident. In addition, Zhao stated that he had never traveled to Texas except in a corporate capacity for Prospera or Nantong. Zhao further stated that both Prospera and Nantong maintain their own books and records. Zhao stated that his personal records are not commingled with either Prospera's or Nantong's corporate records. Finally, Zhao stated that Prospera and Nantong maintain their own corporate bank accounts and that his personal funds are not commingled in those accounts.
IComposite filed a response to Zhao's special appearance. Among other documents, iComposite attached to its response records from the Nevada Secretary of State; and records and copies of Prospera's bank statements from June 2011, January 2012, September 2013, and January 2014. The Nevada records establish that Prospera is a Nevada corporation in good standing and that Zhao is its sole officer. The bank records show either a $60,000 or $80,000 online transfer to Zhao's Complete Advantage bank account on June 1, 2011, and a $50,000 online transfer to the same account on January 7, 2012. Finally, the bank records show an $800,000 online transfer from Zhao's Complete Advantage bank account on January 2, 2014.
The trial court held a non-evidentiary hearing to consider Zhao's special appearance. The trial court subsequently denied Zhao's special appearance. The trial court did not file findings of fact and conclusions of law. This appeal followed.
Analysis
On appeal Zhao argues the trial court erred when it denied his special appearance because there was legally and factually insufficient evidence to support the trial court's implied finding that he is Prospera's alter ego for jurisdictional purposes. Zhao additionally argues that the trial court erred when it denied his special appearance because there is no evidence supporting the assertion of personal jurisdiction over him in his individual capacity.
I. Standard of review and applicable law
Whether a court has personal jurisdiction over a defendant is a question of law. Am. Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 805-06 (Tex. 2002). The trial court's decision to grant or deny a special appearance is subject to de novo review on appeal. Id. at 806. However, the trial court's factual findings supporting its ruling on the special appearance may be challenged for legal and factual sufficiency. BMC Software Belg., N.V. v. Marchand, 83 S.W.3d 789, 795 (Tex. 2002). When, as here, the trial court did not issue findings of fact, all facts necessary to support the trial court's ruling and supported by the evidence are implied in favor of the trial court's ruling. Watamar Holding S.A. v. SFM Holdings, S.A., 583 S.W.3d 318, 325 (Tex. App.-Houston [14th Dist] 2019, no pet.). When the appellate record includes the reporter's and clerk's records, these implied findings are not conclusive and may be challenged for legal and factual sufficiency. BMC Software, 83 S.W.3d at 795.
When examining a legal-sufficiency challenge, we review the evidence in the light most favorable to the challenged finding and indulge every reasonable inference that would support it. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). We credit favorable evidence if a reasonable fact finder could, and disregard contrary evidence unless a reasonable fact finder could not. Id. at 827. The evidence is legally sufficient if it would enable reasonable and fair-minded people to reach the verdict under review. Id. The fact finder is the sole judge of witness credibility and the weight to give their testimony. See id. at 819.
Texas courts may exercise personal jurisdiction over a nonresident if "(1) the Texas long-arm statute authorizes the exercise of jurisdiction, and (2) the exercise of jurisdiction is consistent with federal and state constitutional due-process guarantees." Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569, 574 (Tex. 2007); see also Tex. Civ. Prac. & Rem. Code § 17.042. Under the Texas long-arm statute, the plaintiffs bear the initial burden of pleading allegations sufficient to confer jurisdiction. Retamco Operating, Inc. v. Republic Drilling Co., 278 S.W.3d 333, 337 (Tex. 2009). When the plaintiff meets this initial burden, the burden shifts to the defendant to negate all potential bases for personal jurisdiction pleaded by the plaintiffs. Id.
The long-arm statute permits Texas courts to exercise personal jurisdiction over a nonresident defendant that "does business" in Texas. Tex. Civ. Prac. & Rem. Code § 17.042; BMC Software, 83 S.W.3d at 795. The statute lists three activities that constitute "doing business": (1) contracting with a Texas resident when either party is to perform the contract in whole or in part in Texas; (2) committing a tort in whole or in part in Texas; and (3) recruiting Texas residents for employment inside or outside of Texas. Tex. Civ. Prac. & Rem. Code § 17.042. This list, however, is not exclusive, and the statute's "doing business" requirement is limited only by the requirements of federal due process guarantees. Cappuccitti v. Gulf Indus. Products, Inc., 222 S.W.3d 468, 479 (Tex. App.- Houston [1st Dist.] 2007, no pet.).
With respect to personal jurisdiction, federal due process requires two things. First, the nonresident defendant must have purposefully established such minimum contacts with the forum state that the defendant could reasonably anticipate being sued there. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475- 76 (1985). A nonresident establishes minimum contacts with Texas by purposefully availing itself of the privileges and benefits inherent in conducting business in the state. BMC Software, 83 S.W.3d at 795. There are three components to the "purposeful availment" inquiry. Searcy v. Parex Res., Inc., 496 S.W.3d 58, 67 (Tex. 2016). First, only the defendant's contacts with the forum are relevant, not the unilateral activity of another party, or a third person. Id. Second, the contacts must be purposeful rather than random, fortuitous, isolated, or attenuated. Id. Third, the defendant must seek some benefit, advantage, or profit by availing itself of the jurisdiction. Id.
The minimum contacts element of due process is further divided into general and specific personal jurisdiction. Moki Mac, 221 S.W.3d at 575. There is no allegation that Zhao meets the requirements for general jurisdiction. Specific jurisdiction exists when the claims in question arise from or relate to the defendant's purposeful contacts with Texas. Am. Type Culture Collection, 83 S.W.3d at 806. In conducting a specific-jurisdiction analysis, we focus on the relationship among the defendants, Texas, and the litigation. See Guardian Royal Exch. Assur., Ltd. v. English China Clays, P.L.C., 815 S.W.2d 223, 228 (Tex. 1991). For a nonresident defendant's contacts with Texas to support an exercise of specific jurisdiction, there must be a substantial connection between the defendant's purposeful contacts with Texas and the operative facts of the litigation. See Moki Mac, 221 S.W.3d at 585.
Second, if the nonresident defendant has purposefully established minimum contacts with the forum, the exercise of personal jurisdiction must also comport with traditional notions of fair play and substantial justice. Burger King, 471 U.S. at 475-76. As to fairness, the defendant bears the burden of presenting a "compelling case" that exercising jurisdiction over him would not be fair and just. Guardian Royal, 815 S.W.2d at 231. Only in rare cases, however, will a Texas court's exercise of personal jurisdiction not comport with fair play and substantial justice when the nonresident defendant has purposefully established minimum contacts with the forum state. Id.
II. The trial court erred when it denied Zhao's special appearance because iComposite failed to meet its burden to establish that Zhao is Prospera's alter ego for jurisdictional purposes.
When it denied Zhao's special appearance, the trial court impliedly found that Zhao and Prospera are alter egos for personal-jurisdiction purposes. See BMC Software, 83 S.W.3d at 795. The trial court may exercise personal jurisdiction over Zhao if the relationship between Prospera and Zhao would allow Texas courts to impute Prospera's Texas contacts to Zhao. See PHC-Minden, L.P. v. Kimberly-Clark Corp., 235 S.W.3d 163, 173 (Tex. 2007); Wormald v. Villarina, 543 S.W.3d 315, 321-22 (Tex. App.-Houston [14th Dist.] 2017, no pet.) (noting that legal standard from PHC-Minden case applies when plaintiff asserts that natural person is an alter ego of a corporate entity the natural person owns). The rationale for doing so is that Zhao exerts such domination and control over Prospera that the two do not in reality constitute separate and distinct legal persons but are one and the same legal person for personal-jurisdiction purposes. See PHC-Minden, 235 S.W.3d at 173. Texas law presumes that Zhao and Prospera are separate legal persons, and therefore iComposite had the burden of proving that Texas courts should treat Zhao and Prospera as alter egos for personal-jurisdiction purposes. See id.; BMC Software Belg., N.V., 83 S.W.3d at 798 ("The party seeking to ascribe one corporation's actions to another by disregarding their distinct corporate entities must prove the allegation."). Direct and reverse veil piercing are appropriate (1) where a corporation is organized and operated as a mere tool or business conduit of another; and (2) there is such "unity between corporation and individual that the separateness of the corporation has ceased" and holding only the corporation or individual liable would result in injustice. Richard Nugent & CAO, Inc. v. Estate of Ellickson, 543 S.W.3d 243, 266 (Tex. App.-Houston [14th Dist.] 2018, no pet.) (citing Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex. 1986)). Courts will not disregard the corporate fiction and pierce the corporate veil absent exceptional circumstances. See Lucas v. Tex. Indus., Inc., 696 S.W.2d 372, 374 (Tex. 1984).
IComposite argues in its appellee's brief that "the court must apply Nevada law for the substantive elements of alter ego when, as here, the subject entity relevant to the alter ego analysis, Prospera, is a Nevada corporation." While that may be true at the liability stage of the proceedings, a question we need not reach, neither side demonstrated that Nevada law differed from the law of Texas in the area of jurisdictional veil-piercing at issue in this appeal. We therefore apply Texas law. See Johnson v. Structured Asset Servs., LLC, 148 S.W.3d 711, 720 (Tex. App-Dallas 2004, no pet.) (presuming sister state's law is the same as Texas law in the absence of a request to take judicial notice or proper proof of the other state's law) (citing Burns v. Resolution Tr. Corp., 880 S.W.2d 149, 151 (Tex. App-Houston [14th Dist] 1994, no writ)).
The legal standard for piercing the corporate veil between the entity and its owner for personal-jurisdiction purposes differs from the legal standard for piercing the corporate veil between the entity and its owner for liability purposes. See PHC-Minden, 235 S.W.3d at 174. The different standard makes sense given that personal jurisdiction involves due-process considerations that may not be overridden by statutes or the common law. See id. For this reason, fraud-a finding of which would be vital to piercing the corporate veil under section 21.223 of the Business Organizations Code-has no place in determining whether Zhao and Prospera are alter egos for personal-jurisdiction purposes. See Tex. Bus. Orgs. Code Ann. § 21.223; PHC-Minden, 235 S.W.3d at 175. Similarly, some of the factors that courts consider in determining whether an entity may be held liable under a veil-piercing theory hold no relevance to an alter-ego analysis for personal-jurisdiction purposes. See PHC-Minden, 235 S.W.3d at 175 .
Instead, to "fuse" Zhao and Prospera for personal-jurisdiction purposes, iComposite had to prove that Zhao controls Prospera's internal business operations and affairs to a degree greater than that normally associated with ownership of a corporation, and the evidence must show that Zhao and Prospera ceased to be separate so that the corporate fiction should be disregarded to prevent fraud or injustice. See id. The Supreme Court of Texas has indicated that in deciding whether Prospera and Zhao are alter egos for personal-jurisdiction purposes, Texas courts should determine whether Prospera is "separate and distinct" from Zhao, taking into account the amount of Prospera's stock owned by Zhao, the observance of corporate formalities, and the degree of Zhao's control over Prospera's general policy and administration. See id. According to the Supreme Court of Texas, the jurisdictional evidence must prove "atypical control" or a "plus factor" by the alleged alter ego. PHC-Minden, 235 S.W.3d at 176. This court has used the standard for jurisdictional veil-piercing of the corporate veil between a parent company and a subsidiary company to assess jurisdictional veil-piercing as between an individual and a corporation. See Wormald, 543 S.W.3d at 322 (citing Greenfield Energy, Inc. v. Duprey, 252 S.W.3d 721, 731 (Tex. App.-Houston [14th Dist.] 2008, no pet.)).
To determine whether an alter ego relationship exists for jurisdictional purposes, courts look to the total dealings of the corporation and the individual, including the degree to which corporate and individual property have been kept separate, the amount of financial interest, ownership, and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes. Wilmington Tr., Nat'l Ass'n v. Hsin-Chi-Su, 573 S.W.3d 845, 855 (Tex. App.-Houston [14th Dist.] 2018, no pet.). Courts also consider the following as evidence of alter ego status: payment of alleged corporate debt with personal checks or other commingling of funds, representations that the individual will back the corporation financially, the diversion of corporate profits for personal use, and inadequate capitalization. Id. On appeal, we consider whether the record as a whole supports the trial court's implied finding that Zhao is Prospera's alter ego. See Wormald, 543 S.W.3d at 322.
We conclude the record evidence does not rise to the level of proof necessary to show that Zhao is an alter ego of Prospera. The Nevada Secretary of State records establish that Prospera is a Nevada corporation in good standing and Zhao is its sole officer. Zhao's counsel stated during the special appearance hearing that Zhao is the owner of Prospera. However, under Texas law, common ownership, directorship, or officers is insufficient, without more, to establish alter ego for jurisdictional purposes. PHC-Minden, 235 S.W.3d at 175.
We also conclude that the bank records found in the record are insufficient because they establish only that Zhao and Prospera maintained their own bank accounts and that Prospera had an ongoing business. Zhao's declaration reinforces these determinations. The fact Zhao transferred $800,000 into Prospera's bank account, and Prospera transferred $130,000 to Zhao's account in two transactions six months apart also reinforces the conclusion that Prospera and Zhao maintained separate finances. See Wilmington Tr. Nat'l Ass'n, 573 S.W.3d at 856 (stating that subsidies were insufficient to establish alter ego for jurisdictional purposes because they did not demonstrate atypical control). IComposite offered no evidence that the funds in the Prospera account were used for Zhao's direct personal benefit, nor that Zhao paid Prospera's debts with his personal checks. Wilmington Trust, 573 S.W.3d at 858. There is no evidence that Zhao paid Prospera's corporate debts with personal checks, that he made any representations that he would personally financially-back Prospera, nor that any corporate profits were diverted for his personal use. See id. at 855. The bank statements in the record are insufficient to establish the commingling of funds necessary to support a finding that Zhao was Prospera's alter ego. See id. at 856 (concluding evidence that the defendant and other family members subsidized corporation's operations was insufficient to establish the type of atypical control needed for jurisdictional veil-piercing); Cappuccitti, 222 S.W.3d at 482 ("Courts also consider as proof of alter ego the payment of alleged corporate debts with personal checks or other commingling of funds; representations that the individual will financially back the corporation; the diversion of company profits to the individual for personal use; and inadequate capitalization.").
Inadequate capitalization for alter ego purposes, requires proof of a corporation's capital, other assets, debts, and liabilities. See Endsley Elec, Inc. v. Altech, Inc., 378 S.W.3d 15, 25 (Tex. App.-Texarkana 2012, no pet.) (no pet.) (stating alter ego requirements for liability purposes). IComposite failed to provide any evidence on Prospera's capital, assets, debts, or liabilities. Instead, the record contains evidence that Prospera was sufficiently capitalized to have an ongoing business selling grating materials because it was undisputed that Prospera had consigned to, and iComposite had sold, more than $500,000 in grating materials since the beginning of the relationship. See Torregossa v. Szelc, 603 S.W.2d 803, 804 (Tex. 1980) (holding there was "no showing" that the corporation was inadequately capitalized because there was no evidence on the corporation's assets and what happened to them when the charter was forfeited, or that there were any unpaid creditors); Endsley Elec., Inc., 378 S.W.3d at 25 (holding there was no evidence the corporation was inadequately capitalized because "Altech failed to produce any evidence regarding the level and/or status of Endsley Electric's capital, other assets, debts, and liabilities.").
The final evidence iComposite offered was Zhao's deposition testimony stating that he traveled to Texas in his role as a corporate representative of Nantong. This evidence is not a factor considered in an alter ego jurisdictional analysis. See Cappuccitti, 222 S.W.3d at 481 (stating that "courts look to the total dealings of the corporation and the individual, including the degree to which corporate and individual property have been kept separate, the amount of financial interest, ownership, and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes").
The alter ego evidence contained in this record is far different from the evidence found in two recent cases where a jurisdictional alter ego finding was affirmed. See Booth Creek Mgmt. Corp. v. New Exec. Grp., Ltd., No. 14-19-00715-CV, 2020 WL 4760163 (Tex. App.-Houston [14th Dist.] 2020, no pet.) (mem. op.); Cappuccitti, 222 S.W.3d at 474-78. In both cases, the party asserting alter ego jurisdiction offered extensive evidence that the individual failed to maintain a distinction between his personal money and the corporation's over a substantial period of time and with multiple failures to maintain separation between personal and corporate business.
In Cappuccitti, the individual paid corporate debts out of his own accounts, maintained a personal bank account the company used as a line of credit, and when the company shut down, the individual paid debts owed to himself while leaving a third-party creditor unpaid. Cappuccitti, 222 S.W.3d at 483-84. In Booth Creek, the individual did not maintain his own bank account, instead he used the corporation's bank account. The corporation paid the individual's personal expenses and it paid for the individual's other business endeavors. Booth Creek Mgmt. Corp., 2020 WL 4760163, at *7-9. Finally, in both cases, additional evidence was present supporting the assertion of alter ego jurisdiction. See id. ("In this case, Gillett and Booth Creek operated out of the same physical address and Gillett used his Booth Creek email address and office to conduct the transactions that form the basis of this suit. Booth Creek paid non-employees 'success fees' in connection with these transactions and other potential investments personal to Gillett. Booth Creek's CFO, one of three employees, was involved in negotiating the Acknowledgements used in the discounted letters of credit transactions."); Cappuccitti, 222 S.W.3d at 484 (listing extensive evidence supporting alter ego finding).
Here, iComposite, which had the burden to prove its alter ego allegation, failed to bring forward evidence proving Zhao exercised the atypical control over Prospera that is required for a finding of jurisdictional alter ego. The level of control iComposite showed was significantly less than the amount of control shown in the Wilmington Trust National Association, a case in which this Court held that atypical control was not shown. 573 S.W.3d at 856. In Wilmington Trust, the evidence established that: (1) the president was the sole shareholder; (2) the company shared office space with the shareholder and other affiliated companies; (3) the company was permitted to use the shareholder's intellectual property without paying a license fee; (4) management of the company was divided among affiliated entities without management fees; and (5) the shareholder had personally guaranteed a loan to the company. Id. at 855-58.
We conclude that iComposite failed to meet its burden and hold that the evidence is insufficient to support the trial court's implied finding that Zhao is the alter ego of Prospera. As a result, Prospera's contacts with Texas cannot be ascribed to Zhao. We sustain Zhao's second issue on appeal.
III. Zhao had insufficient contacts with Texas to support specific jurisdiction over him.
Having determined that Zhao is not Prospera's alter ego, we turn to his first issue on appeal in which he argues the trial court erred when it denied his special appearance because his own purposeful contacts with Texas are insufficient to support specific jurisdiction over him. We agree with Zhao.
IComposite alleged that Zhao, a California resident, was subject to specific jurisdiction in Texas because he contracted with iComposite, conducted transactions with iComposite in Texas pursuant to that contract, and subsequently breached that contract. The jurisdictional evidence does not support that allegation. Instead, the evidence establishes that Zhao has never (1) owned real or personal property in Texas, (2) maintained a residence here, (3) had a bank account in Texas, and has never personally been a party to a contract with a Texas resident. In addition, the evidence establishes that while Zhao has traveled to Texas, it was only in his capacity as an officer of either Prospera or Nantong. IComposite offered no evidence controverting Zhao's evidence. We conclude that Zhao's contacts with Texas in his personal capacity cannot support an assertion of specific jurisdiction over him. See Holloway v. Skinner, 898 S.W.2d 793, 795 (Tex. 1995) ("[T]he actions of a corporate agent on behalf of the corporation are deemed the corporation's acts."); Wormald, 543 S.W3d at 323 ("In some situations the fiduciary-shield doctrine protects employees from personal jurisdiction when the employee acted on behalf of his employer."). We therefore sustain Zhao's first issue on appeal.
IV. IComposite has not shown it is entitled to a remand.
In a single cross-appeal issue iComposite asks that if we reverse the trial court's denial of Zhao's special appearance, we remand the case back to the trial court to allow iComposite an opportunity to conduct additional jurisdictional discovery and to possibly amend its pleadings. IComposite conditionally asked for this in the trial court but never obtained a ruling from the trial court. IComposite cites only Rule 38.2(b)(2) of the Texas Rules of Appellate Procedure in support of this argument. See Tex. R. App. P. 38.2(b)(2). This rule, however, addresses when a cross-point requires the taking of additional evidence-not when a party had the opportunity to, but failed to produce sufficient evidence at a trial or hearing. IComposite provides no argument or authority that would suggest otherwise. IComposite also offers no other argument or authority that would authorize such a remand. We therefore overrule iComposite's cross-appeal issue. See Lawler v. DiGiuseppe, No. 05-03-00468-CV, 2004 WL 1209569, at *5 (Tex. App.-Dallas June 3, 2004), aff'd in part and rev'd in part on other grounds DiGiuseppe v. Lawler, 269 S.W3d 588 (Tex. 2008); cf. Sorrow v. Harris Cty. Sheriff, 622 S.W.3d 496, 507 (Tex. App.-Houston [14th Dist.] 2021, pet. denied) ("Sorrow never secured a ruling, or refusal to rule, from the trial court on his request, motion, or his other discovery objections; therefore, he failed to preserve any error for our review with regard to the Sheriff's responses to discovery.").
Conclusion
Having sustained Zhao's issues on appeal and overruled iComposite's cross-appeal issue, we reverse the trial court's order denying Zhao's special appearance and render judgment dismissing iComposite's claims against Zhao for lack of personal jurisdiction.