Opinion
Nos. 98-CV-2777 D, 98-CV-2968 D, 00-CV-2245 D (Consolidated Cases)
February 19, 2003
ORDER DENYING DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT
This matter is before the Court on the motions of Defendants Deffenbaugh Industries, Inc. ("DII") and Mid-Continent Fuel Company, Inc. ("MCFC") for summary judgment pursuant to Fed.R.Civ.P. 56(b) on Counts I and II of Plaintiffs Signature Combs, Inc., et al. ("Plaintiffs")' Third Amended Complaint ("Complaint"). Defs.' Mots. For Summ. J., Doc. ##388-1, 391-1, Case #98-cv-02777; Doc. ##290-1, 293-1, Case #98-cv-02968. Defendants contend that summary judgment should be granted in their favor because neither DII nor MCFC is a successor to Carter Oil Company as alleged in Plaintiffs' Complaint. Due to the existence of genuine issues of material fact regarding Plaintiffs' successor liability claims, the Court DENIES Defendants' motions for summary judgment on Count II. I. Factual Background
In a separate Order dated February 14, 2003, this Court dismissed Count I, in its entirety, with respect to all Defendants, so that aspect of the present motion is moot.
Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq., Plaintiffs seek to recover response costs allegedly incurred by Plaintiffs at the South 8th Street Landfill Superfund Site and the Gurley Pit Superfund Sites (collectively, the "Gurley Sites"). These response costs stem from remedial measures taken to alleviate hazardous waste dumped at the Gurley Sites in the 1950s-1970s. Plaintiffs do not allege in their Complaint that either DII's or MCFC's own conduct created any liability in connection with the Gurley Sites. Rather, DII and MCFC have been named as Defendants based solely on the allegation that they are successors to Carter Oil Company, which allegedly contributed some of the oil resulting in the hazardous contamination of the Gurley Sites. See Def. MCFC's Mem. In Supp. of Mot. For Summ. J. at 1; Def. DII's Mem. In Supp. Of Mot. For Summ. J. at 1.
The relevant facts and background information for the above-titled consolidated cases can be found in this Court's February 14, 2003 Order. In the interest of brevity, these facts will not be recited herein.
The parties differ over whether the proper name is Carter Oil Service or Carter Waste Oil. Based on their statements of fact and affidavits, however, it is clear that both names refer to the same enterprise — the waste oil business run by the Carters which entered into an October 11, 1980 Asset Purchase Agreement with Radium which forms the basis for Plaintiffs' successor liability theory. For the sake of convenience, the Court will use the name Carter Waste Oil to refer to this enterprise because it, not Carter Oil Service, was the name used in the Asset Purchase Agreement.
Defendants attached affidavit testimony to their summary judgment motions from Ronald D. Deffenbaugh, President of both Defendants during the relevant time periods involved. Mr. Deffenbaugh stated that neither Defendant ever acquired, contractually, through a corporate merger, or otherwise, any assets or liabilities of Carter Waste Oil or of any member of the Carter family. See Aff. of Ronald D. Deffenbaugh ¶¶ 4-7; MCFC's Mem. at 2-3; DII's Mem. at 3. As a result, Defendants contend that they are not successors to Carter Waste Oil and cannot be held liable for Carter Waste Oil's CERCLA liability.
In response, Plaintiffs allege that DII and MCFC may be held liable as successors to Carter Waste Oil's CERCLA liability. First, Plaintiffs contend that another entity controlled by Mr. Deffenbaugh, Quality Analytical Services, Inc. (f/k/a Industrial Service Corporation, f/k/a Radium Petroleum Company) (collectively referred to as "Radium"), assumed successor liability for Carter Waste Oil's CERCLA liability because Radium acquired Carter Waste Oil's business through what amounted to a "de facto" merger or "mere continuation" of the Carter Waste Oil business. See Pls.' Mem. at 2-3 n. 2. Second, Plaintiffs allege that MCFC and DII are in effect alter egos of Radium because of the loose corporate structure, common ownership, and common governance of the three entities, and because of Radium's lack of insurance, undercapitalization, and lack of cash flow. See id. at 15.
II. Summary Judgment Standard
Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In other words, summary judgment is appropriately granted "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).
The party moving for summary judgment may satisfy its initial burden of proving the absence of a genuine issue of material fact by showing that there is a lack of evidence to support the nonmoving party's case. Id. at 325. To accomplish this, the movant may submit affirmative evidence negating an essential element of the nonmoving party's claim or attack the opponent's evidence to show why it does not support a judgment for the nonmoving party. 10a Charles A. Wright et al., Federal Practice and Procedure § 2727, at 35 (2d ed. Supp. 1996). A court may consider any material that would be admissible or usable at trial. Id. at § 2721.
When responding to a motion for summary judgment, the "adverse party may not rest upon the mere allegations or denials of [its] pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). A genuine issue for trial exists if the evidence would permit a reasonable jury to return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
In evaluating a motion for summary judgment, all evidence and facts must be viewed in a light most favorable to the nonmoving party.Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Walbourn v. Erie County Care Facility, 150 F.3d 584, 588 (6th Cir. 1998). Justifiable inferences based on facts are also to be drawn in favor of the non-movant. Kalamazoo River Study Group v. Rockwell Int'l Corp., 171 F.3d 1065, 1068 (6th Cir. 1999).
III. Analysis
Plaintiffs claim that DII, MCFC, and Radium are alter egos, thereby allowing Plaintiffs to pierce DII's and MCFC's corporate veils and hold them responsible for Radium's CERCLA liability. See Pls.' Mem. at 15. Defendants argue that they cannot be held liable for Radium's (or Carter Waste Oil's) CERCLA liability because they are not successors to any such liability. See MCFC's Mem. at 2-3; DII's Mem. at 3. Implicit in this argument is that DII's and MCFC's corporate veils cannot be pierced. This Court has ruled that genuine issues of material fact prevent exist with regard to Plaintiffs' "de facto" merger or "mere continuation" assertions. See Order Denying Def. Radium's Mot. For Summ. J. (dated February 19, 2003). Therefore, if Plaintiffs demonstrate at least the existence of genuine issues of material fact regarding whether DII and MCFC are alter egos of Radium, the Court must deny Defendants' summary judgment motions.
To determine whether circumstances warrant a piercing of the corporate veil, courts look to the applicable state corporate law. See, e.g., Anspec Co., Inc. v. Johnson Controls, Inc., 922 F.2d 1240, 1248 (6th Cir. 1991). Plaintiffs assert, and Defendants do not refute, that Missouri law governs whether Plaintiffs can pierce DII's corporate veil, and Minnesota law governs whether Plaintiffs can pierce MCFC's corporate veil. See Pls.' Mem. at 16, 19.
A. Plaintiffs' Allegation That DII and Radium are Alter Egos
Under Missouri law, a corporation may be deemed an "alter ego" or "a mere adjunct" of another corporation "when one corporation shows . . . domination and control over another." Collet v. Am. Nat'l. Stores, Inc., 708 S.W.2d 273, 283-84 (Mo.Ct.App. 1986). The Collet Court adopted a three-part test to determine when the corporate veil has been pierced, requiring a plaintiff to show:
(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and
(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of,Collet, 708 S.W.2d at 284 (citation omitted).
Up to eleven factors may be examined to ascertain whether one corporation exercised sufficient control over another under the first part of the Collet test. Id. at 284 (citing Northern Illinois Gas Co. v. Total Energy Leasing Corp., 502 F. Supp. 412, 416-417 (N.D. Ill. 1980). In deciding whether the second factor has been met, courts need not find evidence of actual fraud, but may also consider the financial health of the corporation at issue, including whether the corporation is undercapitalized. See Radaszewski v. Telecom Corp., 981 F.2d 305, 308 (8th Cir. 1992) ("Undercapitalizing a subsidiary, which we take to mean creating it and puffing it in business without a reasonably sufficient supply of money, has become a sort of proxy under Missouri law for the second Collet element."); see also Dwyer v. ING Inv. Co., 889 S.W.2d 902 (Mo.Ct.App. 1995) (finding that the second factor is triggered by "[o]peration of a corporation without a profit objective" and by "manipulation of assets."). The Telecom Corp. Court reasoned that undercapitalization is significant because, although it is not necessarily unlawful, "the creation of an undercapitalized subsidiary justifies an inference that the parent is either deliberately or recklessly creating a business that will not be able to pay its bills or satisfy judgments against it." Id. at 308. Finally, Missouri courts have held that the Collet tripartite test applies whether the corporations are affiliated with one another, such as alter egos, or whether the corporations have a parent-subsidiary relationship. See Hefner v. Dausmann, M.D., 966 S.W.2d 660 (Mo.Ct.App. 1999).
Plaintiffs allege numerous facts giving rise to the requisite control under Collet. Plaintiffs claim that intermingling of the affairs of Radium and DII, and dominance of DII over Radium, are exemplified by Ronald Deffenbaugh's control over both companies; the substantial overlap in directors and officers between the companies; sharing of phone numbers, addresses, and principal places of business; the fact that Donna Carter was paid by Radium as well as by DII checks; the tank used by the Carters to transport their waste oil was obtained and installed at a DII facility; meetings between Mr. Deffenbaugh and the Carters took place at DII facilities; and Carter Waste Oil's bookkeeping was kept at the offices of DII. See Pls.' Mem. at 17.
Plaintiffs also contend that the second Collet factor was met because QAS has no insurance with which to fund its potential CERCLA liability.See id. at 18. This impropriety is compounded, Plaintiffs allege, by the fact that Radium was on notice of its potential CERCLA liability since at least 1998 or 1999. when it sought declaratory judgment in a related suit regarding its potential CERCLA liability. See id. Moreover, Plaintiffs point out, Radium has no business operations or cash flow. See id. at 19. Thus, Plaintiffs maintain, Radium knew that there was a threat of CERCLA liability yet it chose not to acquire insurance to protect itself from any such liability. Plaintiffs aver that this gives rise to a reasonable inference that DII's control over Radium has been used for an improper purpose. See id. at 18-19.
Finally, Plaintiffs allege that the third Collet factor is met because DII has rendered Radium insolvent. See id. at 19 (citing 66, Inc. v. Crestwood Commons Redev. Corp., 998 S.W.2d 32, 42 (Mo. 1999) ("When the dominant corporation renders the subservient corporation insolvent, `then the requisite injury and causal connection are established.'") (citingCollet, 708 S.W.2d at 287)).
Construing all evidence and facts in a light most favorable to the non-movant Plaintiffs, see Matsushita, 475 U.S. at 587, and drawing all justifiable inferences based on these facts in favor of the non-movant Plaintiffs see Kalamazoo River, 171 F.3d at 1068, the Court finds that Plaintiffs raise sufficient factual contentions of overlapping control, undercapitalization, and proximate causation to create a genuine issue of material fact as to their claim that Radium and DII are alter egos.
B. Plaintiffs' Allegation That MCFC and Radium are Alter Egos
Under Minnesota law, courts apply a two-part test to determine whether the corporate veil has been pierced. First, "the relationship of the individual and the corporation must be such that the distinction between the two becomes blurred and the corporation seems to be a mere `facade' for the dealings of the individual." Barton v. Moore, 558 N.W.2d 746, 749 (Minn. 1997). Second, "`piercing the corporate veil [must be] necessary to avoid injustice or fundamental unfairness.'" Id. (citation omitted); see also Victoria Elevator Co., 283 N.W.2d at 512 ("[W]here the formalities of corporate existence are disregarded by [a party] seeking to use it, corporate existence cannot be allowed to shield the [party] from liability for damages incurred by those dealing with the corporation."). While the Minnesota Supreme Court has only addressed cases involving alter ego corporate liability for the actions of an individual, other Minnesota courts have clarified that this veil-piercing/alter ego analysis applies equally to situations seeking to hold one corporation accountable for the actions of another. See, e.g., Ass'n of Mill Elevator Mut. Ins. Co. v. Barzen Int'l, Inc., 553 N.W.2d 446, 449 (Minn.App. 1996).
Factors considered significant in determining whether a corporation has become "a facade" of another include:
insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely facade for individual dealings.Victoria Elevator Co. of Minnesota v. Meriden Grain Co., Inc., 283 N.W.2d 509, 512 (Minn. 1979).
Plaintiffs allege that the first criterion is met because Mr. Deffenbaugh served as president and sole director of both companies from 1986 through MCFC's dissolution; Daisy Folsum served as assistant secretary for both companies; and MCFC and Radium shared the same address and phone number. See Pls.' Mem. at 20. Plaintiffs allege that the second factor has been met because MCFC has no insurance to fund any CERCLA liability which it may have. See id. at 20.
Construing all evidence and facts in a light most favorable to the non-movant Plaintiffs, and drawing all justifiable inferences based on these facts in favor of the non-movant Plaintiffs, the Court finds that Plaintiffs raise sufficient factual contentions of a blurred corporate relationship and fundamental unfairness to create a genuine issue of material fact as to their claim that Radium and MCFC are alter egos.
IV. Conclusions
Accordingly, the Court holds that the existence of genuine issues of material fact regarding Plaintiffs' claims that DII and MCFC are alter egos of Radium, and therefore successors to Carter Waste Oil's alleged CERCLA violations, preclude the Court from granting DII's and MCFC's motions for summary judgment. The Court therefore DENIES Defendants' motions for summary judgment on successor liability for Count II of Plaintiffs' Complaint.
IT IS SO ORDERED.