Opinion
Hearing Granted Aug. 2, 1961.
Opinion vacated 17 Cal.Rptr. 150, 366 P.2d 502.
Frank De Marco, Jr., Los Angeles, for petitioner.
Greenberg, Shafton & Schlei, Los Angeles, for real party in interest.
NOURSE, Justice pro tem.
Petitioner, Empire Steel Corporation of Texas, Inc., (hereinafter called 'Empire') seeks to prevent the superior court from proceeding in an action brought against it by Associated Metals and Minerals Corporation, real party in interest here. Petitioner is a corporation organized under and having its principal place of business in Texas. Real party in interest is a corporation organized and existing under the laws of the state of New York. Real party in interest is, and petitioner is not, qualified to do business in this state.
Real party in interest commenced an action in respondent court to recover damages for the breach by Gachman Steel Corporation of California (a California corporation hereinafter called 'Gachmen') of a contract to purchase from real party in interest certain steel. The complaint filed by it is in two counts. The first count alleges the contract between it and Gach man and the breach thereof. By the second count the same cause of action as is set forth in the first count is repleaded but alleges Petitioner is subject to the jurisdiction of the court of this state if it was 'doing business in this state' within the meaning of section 411, Code of Civil Procedure. The term 'doing business in this State' is 'a descriptive one that the courts have equated with such minimum contacts with the state 'that the maintenance of the suit does not offend 'traditional notions of fair play and substantial justice'''. Henry R. Jahn & Son v. Superior Court, 49 Cal.2d 855, at page 858, 323 P.2d 437, at page 439. "[D]oing business' within the meaning of section 411 of the Code of Civil Procedure is synonymous with the power of the state to subject foreign corporations to local process.' 49 Cal.2d at page 858, 323 P.2d at page 439.
There is no mechanical or quantitative test as to whether a foreign corporation is doing business within this state so as to make service upon it of process satisfy due process but each case must be decided upon its own facts. Henry R. Jahn & Son v. Superior Court, supra, 49 Cal.2d at page 862, 323 P.2d at page 411; Fisher Governor Co. v. Superior Court, 53 Cal.2d 222, 1 Cal.Rptr. 1.
We are satisfied that petitioner's activities and contacts with this state did not constitute doing business within this state within the meaning of section 411, Code of Civil Procedure, as that section has been construed by our Supreme Court, and to make it subject to process in the pending action.
The facts as disclosed by the declarations filed in support of and in opposition to petitioner's motion in the trial court are: Petitioner has its principal office and principal place of business in Fort Worth, Texas; it is there engaged in maintaining a steel warehouse for the brokering and warehousing and selling of steel products; it is not engaged in any manufacture but ships steel products in interstate commerce; its principal activities, however, being in the state of Texas. In 1957, petitioner desired to engage in business in California but found that because its books were kept in Texas that it could not secure financing from the banks in California. It thereupon caused Gachman to be organized and acquired all of the issued capital stock of Gachman in return for cash, steel inventories, office furniture, equipment and receivables, of the total value of $225,000 and at that time loaned to Gachman the sum of $92,000 for which it took Gachman's note bearing interest at 5 1/2 per cent per annum. Petitioner has no salesmen or solicitors within the state of California, does not solicit or make sales within the state of California, does not receive orders for any sales to customers within the state of California, has no employees within the state of California other than that the president of Gachman is also an officer and director of petitioner. It maintains no bank accounts in the state of California, purchases no products from California, maintains no office in the state of California, owns no property in the state, pays no rent or other charges to any preson in the state of California; makes no sales to independent contractors, jobbers or other persons in the state of California for resale there and does not negotiate for or arrange the distribution of any of its products within the state. Petitioner and Gachman keep and at all times have kept separate books of accounts and records, each set of books being kept at the home office of each corporation; After the formation of Gachman it paid to petitioner the sum of $75,000 in reduction of the principal of the aforesaid note. In 1959, due to the steel strike, Gachman got into financial difficulties and from that time until the fall of 1960, Empire sold to Gachman certain merchandise of the value of approximately $23,000 for which it did not receive payment, which sum was apparently added to the principal of the note.
In October 1960, the subject action was commenced and shortly thereafter, on its petition, Gachman was declared a bankrupt.
When analyzed, these facts show that petitioner's contacts with the state of California consisted of (1) its acquisition and continued ownership of all of the outstanding stock of Gachman, (2) sales of merchandise in interstate commerce to Gachman and the extension of credit to Gachman therefor. In our opinion these contacts are not sufficient to constitute doing business in California under the rules laid down by our Supreme Court in Henry R. Jahn & Son v. Superior Court, supra, 49 Cal.2d 855, 323 P.2d 437; Carl F. W. Borgward, G. M. B. H. v. Superior Court, 51 Cal.2d 72, 330 P.2d 789; Fisher Governor Co. v. Superior Court, supra, 53 Cal.2d 222, 1 Cal.Rptr. 1.
Ownership by petitioner of all of the stock of Gachman did not constitute doing business in California by petitioner so as to make it subject to process in an action brought in this state upon a contract of Gachman with a foreign corporation. Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333, 45 S.Ct. 250, 69 L.Ed. 634; National Carbide Corp. v. Commissioner, 336 U.S. 422, 69 S.Ct. 726, 93 L.Ed. 779, see note at p. 789; Berkman v. Ann Lewis Shops, 2 Cir., 246 F.2d 44; Harris v. Deere & Company, 4 Cir., 223 F.2d 161, at page 162; Manville Boiler Co. v. Columbia Boiler Co. of Pottstown, 4 Cir., 269 F.2d 600, at page 606; 14 Cal.L.Rev. 12-21; 18 Fletcher, Cyclopedia Corporations, § 8773, pp. 817-821. There is nothing in the facts before us to show that Gachman acted as the agent of petitioner but to the contrary the facts demonstrate that the entity of Gachman was strictly perserved and that it operated as an entirely separate entity.
The sales of merchandise by Empire to Gachman and the extension of credit upon those sales are not sufficient contacts to constitute doing business and to give the courts of this state jurisdiction over petitioner in an action brought upon a contract of Gachman which has no relationship whatsoever to the sales made by petitioner. Fisher Governor Co. v. Superior Court, supra, 53 Cal.2d 222, 1 Cal.Rptr. 1.
The fact that the person served with process was an officer of petitioner does not serve to subject petitioner to the jurisdiction of the California courts for there is no showing whatsoever that he acted in California in any capacity other than as an officer of Gachman.
It is the contention of real party in interest, however, that under the facts shown and which we have related, that Gachman was the alter ego of petitioner and that therefore service upon an officer of Gachman was service upon petitioner. The doctrine of alter ego is used to pierce the corporate veil and impose upon a stockholder or stockholders of a corporation a liability which has accrued against the corporation where not to do so would operate as a fraud or promote an injustice upon the creditor of the corporation. The question as to whether the corporate veil should or should not be pierced is a substantive question which is to be decided by the final judgment rendered. It is not a matter to be decided at the preliminary stages of an action when only jurisdiction is an issue and where the evidence before the court at the preliminary hearing shows that a substantial question of fact exists which Cannon Mfg. Co. v. Cudahy Packing Co., D.C.,
Cannon Mfg. Co. v. Cudahy Packing Co.,The very question to be decided in rendering a judgment as between real party in interest and petitioner is, will the recognition of the separate entity of Gachman operate so as to sanction a fraud or promote an injustice? To decide that question at the preliminary stages and in determining whether the court has juridiction is to decide the ultimate question upon which petitioner's liability depends.
The facts in the present case illustrate the application of what we have just said. Real party in interest points to the evidence that petitioner sold merchandise to Gachman and did not enforce payment therefor and permitted Gachman to enter into the contract with real party in interest upon which this suit is based and upon the further evidence that commencing in 1959 Gachman was in financial difficulties. From this it draws the permissible inferences that Gachman at the time of entering into the contract with real party in interest did not have sufficient capital to meet its obligations and that this fact was known to petitioner. Upon these facts and inferences it would invoke the principle set forth in Automotriz, etc., De California S. A. De C. V. v. Resnick, 47 Cal.2d 792, at page 797, 306 P.2d 1, at page 4, 63 A.L.R.2d 1042, that the corporate veil will be pierced if a corporation is a 'mere shell' and is organized and carries on business in such a way that it 'is likely to have no sufficient assets available to meet its debts, * * *.' Assuming that this principle of law is applicable where a corporation, although it had at the outest capital reasonably adequate to meet its prospective liabilities, later reaches a financial condition where its capital is inadequate, still that does not mean that the corporate veil will of necessity be pierced for it would still be encumbent on the plaintiff to prove that it would be unjust to deny it the right to impose liability upon the parent corporation. Whether the failure of petitioner to advance additional capital to Gachman operated as a fraud upon or so as to impose an injustice upon real party in interest would depend, to some degree at least, on whether real party in interest intered into the contract in reliance upon the credit of Gachman or on the other hand, entered into the contract with full knowledge that Gachman was not financially responsible. The complaint here indicates that this is a substantial question of fact in the pending litigation for the contract sued upon shows on its face that real party in interest did not, in entering into the contract, rely upon the credit of Gachman, for by the terms of the contract it was not obligated to make delivery of the goods (failure to make delivery of which constitutes the cause of action sued upon) until Gachman had paid in installments extending over a period of four months a sum in excess of $50,000 then due real party in interest and that it was then only obligated to make delivery into a bonded warehouse retaining a security interest in the goods delivered. One cannot claim that he is defrauded or unjustly imposed upon where he contracts with full knowledge of the facts out of which he contends the fraud or injustice arises.
The complaint further shows that real party in interest required two of the stockholders of Empire to guarantee the payment of Gachman's $50,000 indebtedness and that the parties expressly agreed that the guarantee should not be deemed to be the guarantee of Empire.
It seems to us self-evident that under the facts in the present case the question of whether the corporate veil may be pierced can only be decided when the action is Requiring real party in interest to bring its action in Texas would not, as contended by real party in interest, work any hardship upon it. The contract sued upon can as well be produced in Texas as in California. The proof that Gachman refused to perform the contract and purchase the goods can as easily be proved in Texas as in California. That real party relied upon the solvency of Gachman is no more difficult to prove in Texas than in California. There seems to be no question but that Gachman was insolvent and it is evident that in proving how and to what extent petitioner financed Gachman, what control petitioner exercised over Gachman in the matter of the contracts in question, it would be necessary to produce the books and records not only of Gachman but of petitioner and we see no reason why petitioner should be compelled to bring its books and records to California in order to relieve plaintiffs of the necessity, by deposition and an inspection made under order of the court, to prove the contents of Gachman's books in Texas. The prosecution of the action in Texas would not lead to any multiplicity of litigation. The litigation as against Gachman has been brought to an end by the bankruptcy proceedings. As to the individual defendants, one of them resides in Texas and is not subject to the jurisdiction of the California courts, while the other resides in California and we presume is not subject to the jurisdiction of the Texas courts. Therefore, it would be necessary to bring two actions no matter in which state the original action is commenced in order that judgments might be obtained against both individual defendants. In short, we hold that the fair and orderly administration of the law does not permit the service upon petitioner here to constitute due process.
Whether petitioner's claim against Gachman for the balance due it for merchandise delivered to Gachman is to be subordinated to the rights of other creditors is a matter for the bankruptcy court. Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281; Taylor v. Standard Gas & E. Co., 306 U.S. 307, 618, 59 S.Ct. 543, 83 L.Ed. 669.
The present action is to be differentiated from Henry R. Jahn & Son v. Superior Court, supra; Carl F. W. Borgward v. Superior Court, supra; West Publishing Co. v. Superior Court, 20 Cal.2d 720, 128 P.2d 777; Cosper v. Smith & Wesson Arms Co., 53 Cal.2d 77, 346 P.2d 409. In each of those cases the cause of action sued upon was predicated upon a contract arising out of or acts of the defendant directly connected with the contacts of the defendant with this state while in the present case the suit was upon the contract of the subsidiary and the entire basis for imposing liability upon the petitioner is predicated not on something that it did in this state but on something that it failed to do, that is, its alleged failure to advance sufficient money to Gachman to enable it to meet its obligations.
The alternative writ of prohibition is discharged. Let a peremptory writ of mandate issue requiring the respondent court to enter its order quashing service of summons upon petitioner.
SHINN, P.J., and VALLEE, J., concur.