My Bread Baking Co. v. Cumberland Farms, Inc. 413

MY BREAD BAKING CO. 413

v. 413

CUMBERLAND FARMS, INC. et al. [FN1] 413

FN1. Cumberland Farms Dairy Stores, Inc., Cape Cod Farms, Inc., Narragansett Food Stores, Inc., Central Food Stores, Inc., and Commonwealth Dairy Stores, Inc. are the codefendants. 413

Supreme Judicial Court of Massachusetts, Bristol. 413

Argued Jan. 4, 1968. 413

Decided Feb. 5, 1968. 413

*615 CUTTER, Justice. 413

The remaining count in this action alleges conversion of certain property by Cumberland Farms, Inc. (C.F. Inc.). There was a substantial verdict for the plaintiff (My Bread) against C.F. Inc. and also a verdict for each codefendant (fn. 1). The case is before us on C.F. Inc.'s exception to the judge's refusal to direct a verdict for it. The facts are stated in their aspect most favorable to My Bread. 413

In August, 1960, Byron Haseotes discussed with Joseph Duchaine, 'the sole proprietor' of My Bread, the sale of the latter's bakery products in 'Cumberland Farms' retail dairy stores. Haseotes was the secretary and treasurer and a stockholder of C.F. Inc., of each codefendant, and of fifteen other corporations. 413

After August, 1960, My Bread began selling its bakery products in the retail dairy stores, and provided bakery racks for use in this operation. The racks were delivered by My Bread directly to the local store in which they were used. [FN2] In September, 1963, when the business arrangement with My Bread was terminated, My Bread sought the return of the racks. It was prevented by the local store managers, acting on the instructions of Haseotes, from recovering them from all but a few of the **750 'Cumberland Farms' stores. Title to the racks remained in My Bread at all times. 414

FN2. These racks consisted of a check-out counter on which the store cash register was placed, a gondola, and a bakery rack. 414

*616 In August, 1960, the capital stock of C.F. Inc. and of each codefendant was owned by Haseotes, his parents, his brothers, and his sisters. There was no joint financing of these corporations. The officers and directors of each corporation were the same. The sole business of the codefendants 'was the operation of chains of (small) retail dairy stores * * * in Massachusetts * * *.' C.F. Inc. did not operate retail stores. [FN3] It conducted 'a bottling * * * plant which processed and packaged milk and other diary products and * * * (sold) its dairy products at * * * wholesale * * * to the * * * five' codefendants. Haseotes testified that in August, 1960, C.F. Inc. did not sell dairy products to all of the 'Cumberland Farms' stores in which My Bread was to sell its bakery products. In 1962 or 1963, however, it began to do so. All of the defendants used the trade name 'Cumberland Farms.' Persons dealing with all of these corporations treated them as 'Cumberland Farms.' 414

FN3. Each of the codefendants operated stores in a specified area in Massachusetts or Rhode Island. Each corporation 'designated its various stores by numbers in a series. Thus, for example, stores operated by Commonwealth Dairy Stores, Inc. each had a store number from 300 to 399 * * *. These store numbers were used in * * * correspondence between the parties.' From 1960 to 1963, C.F. Inc. had a peddler's license for the sale of milk in the New Bedford area. It owned trucks and delivered milk in 1960 and 1961 in connection with sales of milk to the store operating corporations by the processing plants. 414

C.F. Inc. never owned any stock interest in the five codefendants, nor did those corporations own any stock in it. The advertising of all six corporations was purchased in separate transactions and always used the trade name 'Cumberland Farms.' [FN4] In August, 1960, the Haseotes family dairy businesses were operated out of headquarters in Woonsocket. Processing and bottling were then done in two plants, one in Woonsocket and the other in Boston. Prior to the alleged conversion, the Woonsocket and Boston plants were consolidated in a new plant in Canton, and each defendant corporation moved its principal office to that *617 plant. Thereafter the 'same business manager operated all the businesses from the Canton address.' Haseotes 'participated in the operation of all the corporations and it was his decision where money was to go in the various corporations.' 414

FN4. The telephone operator at the consolidated Canton plant usually answered the telephone by saying 'Cumberland Farms' except when a caller called on a line for one of the Haseotes family's real estate corporations. 414

In August, 1963, Haseotes as sales manager of C.F. Inc., signed and sent out circular memoranda concerning the sale of bread (including My Bread products) in 'Cumberland Farms' stores. These were on C.F. Inc. letterhead and were addressed to a large number of retail stores or store managers in mandatory language, using such terms as 'must' and stating policies 'to be strictly adhered to.' There was in evidence a loaf which had on its wrapper the name 'Cumberland Farms' and a notation that it was distributed by 'Cumberland Farms, Inc. of Boston.' 414

Haseotes testified that, in his dealings with My Bread, he never acted on behalf of C.F. Inc. because that corporation did not operate retail stores, nor did it have any control over the store operating corporations. One of My Bread's officers, however, testified that he 'always dealt with * * * Haseotes as 'Cumberland Farms',' although he did on occasion on Haseotes's request make out checks [FN5] to **751 other corporations. He also obtained certificates of insurance which included the names of several of the Haseotes corporations. 415

FN5. From August, 1960, through September, 1963, My Bread made payments in connection with the sale of its products in 'Cumberland Farms' dairy stores. From November 29, 1962, to August 10, 1963, some five checks (totaling $9,477) from My Bread payable to C.F. Inc. were delivered livered to and cashed by C.F. Inc. These moneys were deposited in C.F. Inc.'s account and then were withdrawn and applied to the appropriate store operating corporation account. On other occasions, My Bread checks were made payable to the various codefendant corporations by name. 415

FN6. See also Hanson v. Bradley, 298 Mass. 371, 379--382, 10 N.E.2d 259; Browne v. Brockton Nat. Bank, 305 Mass. 521, 529--531, 26 N.E.2d 360; Leventhal v. Atlantic Fin. Corp., 316 Mass. 194, 198--201, 55 N.E.2d 20, 154 A.L.R. 260; Galdi v. Caribbean Sugar Co., 327 Mass. 402, 407--408, 99 N.E.2d 69; 291 Washington St., Inc. v. School St. Liquors, Inc., 331 Mass. 150, 152--153, 117 N.E.2d 809; Franks v. Markson, 337 Mass. 278, 282, 149 N.E.2d 619; Perry v. Perry, 339 Mass. 470, 478--479, 160 N.E.2d 97; Albre v. Sinclair Constr. Co., Inc., 345 Mass. 712, 717, 189 N.E.2d 563. See also Berry v. Old So. Engraving Co., 283 Mass. 441, 450--451, 186 N.E. 601, which should be compared with National Labor Relations Bd. v. E. C. Brown Co., 184 F.2d 829, 831--832 (2d Cir.); Westland Housing Corp. v. Commissioner of Ins., 352 Mass. ---, ---, 225 N.E.2d 782 (Mass.Adv.Sh. (1967) 655, 666). Cf. Albert Richards Co., Inc. v. Mayfair, Inc., 287 Mass. 280, 288, 191 N.E. 430; Packard Clothes, Inc. v. Director of Div. of Employment Security, 318 Mass. 329, 334--335, 61 N.E.2d 528. Cf. also Sherman v. Texas Co., 340 Mass. 606, 608--609, 165 N.E.2d 916. 416

FNa. Mass.Adv.Sh. (1967) 1493, 1496--1497. 416

FN7. See The Willem Van Driel, Sr., 252 F. 35, 37--39 (4th Cir.), cert. den. 248 U.S. 566, 39 S.Ct. 9, 63 L.Ed. 424 sub nom. Pennsylvania R.R. v. Naam Looze Vennoot Schap, 248 U.S. 566, 39 S.Ct. 9, 63 L.Ed. 424; Luckenbach S.S. Co., Inc., v. W. R. Grace & Co., Inc., 267 F. 676, 681 (4th Cir.), cert. den. 254 U.S. 644, 41 S.Ct. 14, 65 L.Ed. 454; Costan v. Manila Elec. Co., 24 F.2d 383, 384--385 (2d Cir.); G.E.J. Corp. v. Uranium Aire, Inc., 311 F.2d 749, 756--757 (9th Cir.); Consolidated Sun Ray, Inc. v. Oppenstein, 335 F.2d 801, 806--808 (8th Cir.). See also Fletcher, Cyc. Corporations (Perm. ed.) ss 41--47; Cavitch, Business Organizations, s 120.05; Oleck, Modern Corporation Law (and 1965 supp.), s 10; Henn, Corporations, ss 143--145; Ballantine, Corporations (Rev. ed.) ss 134--138; Douglas and Shanks, Insulation from Liability through Subsidiary Corporations, 39 Yale L.J. 193, 195--210; Cataldo, Limited Liability with One-Man Companies and Subsidiary Corporations, 18 Law and Contemp.Prob. 473, 488--496; note, 71 Harv.L.Rev. 1122; annotation, 7 A.L.R.3d 1343. Cf. Steven v. Roscoe Turner Aeronautical Corp., 324 F.2d 157, 160--161, 7 A.L.R.3d 1332 (7th Cir.); Markow v. Alcock, 356 F.2d 194, 197--198 (5th Cir.); National Bond Fin. Co. v. General Motors Corp., 238 F.Supp. 248, 254--258 (W.D.Mo.), affd. 31 F.2d 1022 (8th Cir.). 416

It may be, as one commentator suggests (see Peairs, Business Corporations ss 8--10, esp. at p. 33), that Massachusetts has been somewhat more 'strict' than other jurisdictions *620 in respecting the separate entities of different corporations. Nevertheless, our law concerning disregarding the corporate fiction has been stated, in cases already cited, essentially in the same general terms employed in decisions elsewhere (fn. 7). Where there is common control of a group of separate corporations engaged in a single enterprise, failure (a) to make clear which corporation is taking action in a particular situation and the nature and extnet of that action, or (b) to observe with care the formal barriers between the corporations with a proper segregation of their separate businesses (see Acton Plumbing & Heating Co. v. Jared Builders, Inc., 368 Mich. 626, 628--630, 118 N.W.2d 956), records, and finances, may warrant some disregard of the separate entitles in rare particular situations in order to prevent gross inequity. 416

2. On the evidence the jury could reasonably have reached the following conclusions. (a) Haseotes was responsible by an order to the local stores for a highhanded, inexcusable refusal by employees of the various retail stores to return My Bread's racks to it at the termination of the bread sale arrangement. (b) Although no one of the codefendant operating store corporations was a subsidiary of C.F. Inc. (in the sense that C.F. Inc. owned the whole or a part of its stock), all the defendant corporations (including C.F. Inc.) were under the full stock control of the Haseotes family and were operated as a closely coo rdinated single enterprise. Haseotes himself could be found to have been a dominant **753 figure in the whole 'Cumberland Farms' enterprise. (c) The basic common enterprise was the processing, distribution, and sale of milk and dairy products. C.F. Inc., on the evidence, could reasonably be regarded as to the principal corporation of the enterprise and the codefendants as its affiliates or satellites so that, when one thought of 'Cumberland Farms,' one would naturally think of C.F. Inc. (d) Because all the corporations were operated ambiguously from the same headquarters as part of a single enterprise, the jury could reasonably infer that Haseotes, in furtherance of the interests of C.F. Inc. in the distribution of its products, *621 was intervening actively in the conduct of the satellite corporations. (e) Haseotes without (so far as this record shows) clear indication of the capacity in which (and the corporations for which) he was acting, dealt in 1960 with Duchaine of My Bread for 'Cumberland Farms' in a very confused manner. Although My Bread's representatives probably knew of the existence of the separate corporations, they might reasonably think (absent a clear indication by Haseotes that he was acting for the retail store corporations and not for C.F. Inc.) that My Bread, with respect to the general wholesale distribution of bread, was dealing with C.F Inc. That was the corporation which was engaged, for the whole 'Cumberland Farms' enterprise, in the general wholesale distribution of milk and other dairy products. It would have been the logical corporation to arrange to purchase bread at wholesale for distribution through the 'Cumberland Farms' stores. (f) The bill of exceptions reveals no basis for an inference that any of the codefendants was inadequately capitalized, a ground frequently relied upon, when taken with other factors, as permitting disregard of a corporate entity. See e.g. Mull v. Colt Co., Inc., 31 F.R.D. 154, 158--166 (S.D.N.Y). Cf. Hanson v. Bradley, 298 Mass. 371, 380--381, 10 N.E.2d 259; Eskimo Pie Corp. v. Whitelawn Dairies, Inc., 266 F.Supp. 79, 82 (S.D.N.Y.); Walkoszky v. Carlton, 18 N.Y.2d 414, 420-- 421, 276 N.Y.S.2d 585, 223 N.E.2d 6. 417

The jury could properly infer (because of Haseotes's actions, the general corporate situation, and Haseotes's failure to dispel ambiguities) that Haseotes in all matters connected with the My Bread arrangement was acting for C.F. Inc. and that the satellite companies in following Haseotes's orders concerning the bread racks (fn. 2) were caused to act by C.F. Inc. and were acting as its agents. See Mueller v. Seaboard Commercial Corp., 5 N.J. 28, 33--35, 73 A.2d 905. See also Wallach v. Hadley Co., 331 Mass. 699, 701, 122 N.E.2d 355. 417

The jury could reasonably decide that C.F. Inc., through Haseotes, brought about and was liable for the conversions. A directed verdict was properly refused. 417

KINNEY SHOE CORPORATION, a New York corporation, Plaintiff-Appellant, 418

v. 418

Lincoln M. POLAN, Defendant-Appellee. 418

No. 90-2466. 418

United States Court of Appeals, 418

Fourth Circuit. 418

Argued March 6, 1991. 418

Decided July 17, 1991. 418

As Amended Aug. 26, 1991. 418

OPINION 418

CHAPMAN, Senior Circuit Judge: 418

Plaintiff-appellant Kinney Shoe Corporation ("Kinney") brought this action in the United States District Court for the Southern District of West Virginia against Lincoln M. Polan ("Polan") seeking to recover money owed on a sublease between Kinney and Industrial Realty Company ("Industrial"). Polan is the sole shareholder of Industrial. The district court found that Polan was not personally liable on the lease between Kinney and Industrial. Kinney appeals asserting that the corporate veil should be pierced, and we agree. 418

I. 418

The district court based its order on facts which were stipulated by the parties. In 1984 Polan formed two corporations, Industrial and Polan Industries, Inc., for the purpose of re-establishing an industrial manufacturing business. The certificate of incorporation for Polan Industries, Inc. was issued by the West Virginia Secretary of State in November 1984. The following month the certificate of incorporation for Industrial was issued. Polan was the owner of both corporations. Although certificates of incorporation were issued, no organizational meetings were held, and no officers were elected. 418

In November 1984 Polan and Kinney began negotiating the sublease of a building in which Kinney held a leasehold interest. The building was owned by the Cabell County Commission and financed by industrial revenue bonds issued in 1968 to induce Kinney to locate a manufacturing plant in Huntington, West Virginia. Under the terms of the lease, Kinney was legally obligated to make payments on the bonds on a semi-annual basis through January 1, 1993, at which time it had the right to purchase the property. Kinney had ceased using the building as a manufacturing plant in June 1983. 418

The term of the sublease from Kinney to Industrial commenced in December 1984, even though the written lease was not signed by the parties until April 5, 1985. On April 15, 1985, Industrial subleased part of the building to Polan Industries for fifty percent of the rental amount due Kinney. Polan signed both subleases on behalf of the respective companies. 419

Other than the sublease with Kinney, Industrial had no assets, no income and no bank account. Industrial issued no stock certificates because nothing was ever paid in to this corporation. Industrial's only income was from its sublease to Polan Industries, Inc. The first rental payment to Kinney was made out of Polan's personal funds, and no further payments were made by Polan or by Polan Industries, Inc. to either Industrial or to Kinney. 419

Kinney filed suit against Industrial for unpaid rent and obtained a judgment in the amount of $166,400.00 on June 19, 1987. A writ of possession was issued, but because Polan Industries, Inc. had filed for bankruptcy, Kinney did not gain possession for six months. Kinney leased the building until it was sold on September 1, 1988. Kinney then filed this action against Polan individually to collect the amount owed by Industrial to Kinney. Since the amount to which Kinney is entitled is undisputed, the only issue is whether Kinney can pierce the *211 corporate veil and hold Polan personally liable. 419

The district court held that Kinney had assumed the risk of Industrial's undercapitalization and was not entitled to pierce the corporate veil. Kinney appeals, and we reverse. 419

II. 419

We have long recognized that a corporation is an entity, separate and distinct from its officers and stockholders, and the individual stockholders are not responsible for the debts of the corporation. See, e.g., DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir.1976). This concept, however, is a fiction of the law " 'and it is now well settled, as a general principle, that the fiction should be disregarded when it is urged with an intent not within its reason and purpose, and in such a way that its retention would produce injustices or inequitable consequences.' " Laya v. Erin Homes, Inc., 352 S.E.2d 93, 97-98 (W.Va.1986) (quoting Sanders v. Roselawn Memorial Gardens, Inc., 152 W.Va. 91, 159 S.E.2d 784, 786 (1968). 419

Piercing the corporate veil is an equitable remedy, and the burden rests with the party asserting such claim. DeWitt Truck Brokers, 540 F.2d at 683. A totality of the circumstances test is used in determining whether to pierce the corporate veil, and each case must be decided on its own facts. The district court's findings of facts may be overturned only if clearly erroneous. Id 419

Kinney seeks to pierce the corporate veil of Industrial so as to hold Polan personally liable on the sublease debt. The Supreme Court of Appeals of West Virginia has set forth a two prong test to be used in determining whether to pierce a corporate veil in a breach of contract case. This test raises two issues: first, is the unity of interest and ownership such that the separate personalities of the corporation and the individual shareholder no longer exist; and second, would an equitable result occur if the acts are treated as those of the corporation alone. Laya, 352 S.E.2d at 99. Numerous factors have been identified as relevant in making this determination. [FN*] 419

FN* The following factors were identified in Laya: 420

(1) commingling of funds and other assets of the corporation with those of the individual shareholders; 420

(2) diversion of the corporation's funds or assets to noncorporate uses (to the personal uses of the corporation's shareholders); 420

(3) failure to maintain the corporate formalities necessary for the issuance of or subscription to the corporation's stock, such as formal approval of the stock issue by the board of directors; 420

(4) an individual shareholder representing to persons outside the corporation that he or she is personally liable for the debts or other obligations of the corporation; 420

(5) failure to maintain corporate minutes or adequate corporate records; 420

(6) identical equitable ownership in two entities; 420

(7) identity of the directors and officers of two entities who are responsible for supervision and management (a partnership or sole proprietorship and a corporation owned and managed by the same parties); 420

(8) failure to adequately capitalize a corporation for the reasonable risks of the corporate undertaking; 420

(9) absence of separately held corporate assets; 420

(10) use of a corporation as a mere shell or conduit to operate a single venture or some particular aspect of the business of an individual or another corporation; 420

(11) sole ownership of all the stock by one individual or members of a single family; 420

(12) use of the same office or business location by the corporation and its individual shareholder(s); 420

(13) employment of the same employees or attorney by the corporation and its shareholder(s); 420

(14) concealment or misrepresentation of the identity of the ownership, management or financial interests in the corporation, and concealment of personal business activities of the shareholders (sole shareholders do not reveal the association with a corporation, which makes loans to them without adequate security); 420

(15) disregard of legal formalities and failure to maintain proper arm's length relationships among related entities; 420

(16) use of a corporate entity as a conduit to procure labor, services or merchandise for another person or entity; 420

(17) diversion of corporate assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors, or the manipulation of assets and liabilities between entities to concentrate the assets in one and the liabilities in another; 420

(18) contracting by the corporation with another person with the intent to avoid risk of nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge for illegal transactions; 420

(19) the formation and use of the corporation to assume the existing liabilities of another person or entity. 420

Laya, 352 S.E.2d at 98-99 (footnote omitted). 420

*212 The district court found that the two prong test of Laya had been satisfied. The court concluded that Polan's failure to carry out the corporate formalities with respect to Industrial, coupled with Industrial's gross undercapitalization, resulted in damage to Kinney. We agree 420

It is undisputed that Industrial was not adequately capitalized. Actually, it had no paid in capital. Polan had put nothing into this corporation, and it did not observe any corporate formalities. As the West Virginia court stated in Laya, " '[i]ndividuals who wish to enjoy limited personal liability for business activities under a corporate umbrella should be expected to adhere to the relatively simple formalities of creating and maintaining a corporate entity.' " Laya, 352 S.E.2d at 100 n. 6 (quoting Labadie Coal Co. v. Black, 672 F.2d 92, 96-97 (D.C.Cir.1982)). This, the court stated, is " 'a relatively small price to pay for limited liability.' " Id. Another important factor is adequate capitalization. "[G]rossly inadequate capitalization combined with disregard of corporate formalities, causing basic unfairness, are sufficient to pierce the corporate veil in order to hold the shareholder(s) actively participating in the operation of the business personally liable for a breach of contract to the party who entered into the contract with the corporation." Laya, 352 S.E.2d at 101-02 421

In this case, Polan bought no stock, made no capital contribution, kept no minutes, and elected no officers for Industrial. In addition, Polan attempted to protect his assets by placing them in Polan Industries, Inc. and interposing Industrial between Polan Industries, Inc. and Kinney so as to prevent Kinney from going against the corporation with assets. Polan gave no explanation or justification for the existence of Industrial as the intermediary between Polan Industries, Inc. and Kinney. Polan was obviously trying to limit his liability and the liability of Polan Industries, Inc. by setting up a paper curtain constructed of nothing more than Industrial's certificate of incorporation. These facts present the classic scenario for an action to pierce the corporate veil so as to reach the responsible party and produce an equitable result. Accordingly, we hold that the district court correctly found that the two prong test in Laya had been satisfied 421

In Laya, the court also noted that when determining whether to pierce a corporate veil a third prong may apply in certain cases. The court stated: 421

When, under the circumstances, it would be reasonable for that particular type of a party [those contract creditors capable of protecting themselves] entering into a contract with the corporation, for example, a bank or other lending institution, to conduct an investigation of the credit of the corporation prior to entering into the contract, such party will be charged with the knowledge that a reasonable credit investigation would disclose. If such an investigation would disclose that the corporation is grossly undercapitalized, based upon the nature and the magnitude of the corporate undertaking, such party will be deemed to have assumed the risk of the gross undercapitalization and will not be permitted to pierce the corporate veil. 421

Laya, 352 S.E.2d at 100. The district court applied this third prong and concluded that Kinney "assumed the risk of Industrial's defaulting" and that "the application of the doctrine of 'piercing the corporate veil' ought not and does not [apply]." While we agree that the two prong test of Laya was satisfied, we hold that the district court's conclusion that Kinney had assumed the risk is clearly erroneous 421

Without deciding whether the third prong should be extended beyond the context of the financial institution lender mentioned *213 in Laya, we hold that, even if it applies to creditors such as Kinney, it does not prevent Kinney from piercing the corporate veil in this case. The third prong is permissive and not mandatory. This is not a factual situation that calls for the third prong, if we are to seek an equitable result. Polan set up Industrial to limit his liability and the liability of Polan Industries, Inc. in their dealings with Kinney. A stockholder's liability is limited to the amount he has invested in the corporation, but Polan invested nothing in Industrial. This corporation was no more than a shell--a transparent shell. When nothing is invested in the corporation, the corporation provides no protection to its owner; nothing in, nothing out, no protection. If Polan wishes the protection of a corporation to limit his liability, he must follow the simple formalities of maintaining the corporation. This he failed to do, and he may not relieve his circumstances by saying Kinney should have known better 421

III. 422

For the foregoing reasons, we hold that Polan is personally liable for the debt of Industrial, and the decision of the district court is reversed and this case is remanded with instructions to enter judgment for the plaintiff 422

REVERSED AND REMANDED WITH INSTRUCTIONS 422