USCA1 Opinion
United States Court of Appeals
For the First Circuit
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No. 96-1530
CHARLES A. BIRBARA and DAVID G. MASSAD,
Plaintiffs, Appellees,
v.
GORDON LOCKE ET AL.,
Defendants, Appellants,
and
TECHNOLOGY FINANCE GROUP, INC.,
Defendant.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
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Before
Boudin, Circuit Judge,
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Aldrich, Senior Circuit Judge,
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and Lynch, Circuit Judge.
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Alexander D. Widell, with whom Eugene R. Scheiman and Baer, Marks
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& Upham LLP were on brief, for appellants.
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Roy A. Bourgeois, with whom Amato J. Bocchino and Bourgeois,
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Dresser & White were on brief, for appellees.
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November 7, 1996
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LYNCH, Circuit Judge. Two sophisticated investors
LYNCH, Circuit Judge.
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bought computer-lease tax shelters. The 1986 revisions to
the Tax Code undercut the economic rationale for such tax
shelters. As a result, the seller of the shelters,
Technology Finance Group ("TFG"), later became insolvent and
violated its investment contracts. A public company,
Creative Resources, Inc. ("CRI"), acquired control of TFG,
poured in money and attempted, unsuccessfully, to salvage the
company. The two investors, plaintiffs here, sued TFG, its
new parent and two individuals, officers of the parent, inter
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alia, for TFG's breach of contract on a corporate veil
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piercing theory. The investors obtained a jury verdict of
$250,000.1 We reverse and vacate the verdict, finding the
evidence insufficient to meet the strict standards
Massachusetts has set for piercing the corporate veil.
Facts
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In 1986, plaintiffs Charles Birbara and David
Massad each purchased a one-half ownership interest in a
commercial computer from a subsidiary of TFG, a Delaware
corporation that leased commercial equipment as tax shelters.
In addition, Massad purchased a second computer from the TFG
affiliate. These computers were subject to existing "user
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1. With interest, this resulted in an award of $427,945.21.
The court and jury rejected fraud, conversion and deceptive
trade practices claims against the defendants. TFG has not
appealed from the verdict against it.
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leases" with companies that had actual possession of the
computers, as well as to the right of a TFG subsidiary to
sell the computers when the leases expired. TFG was required
to pay plaintiffs the proceeds of these sales, less certain
fees. Following the enactment of the Tax Reform Act of 1986,
TFG became unable to market its equipment leases and
consequently could not generate adequate operating capital.
In an effort to return the company to firm financial footing,
Jerry Minsky, TFG's then-president and CEO, who is not a
party to this suit, decided that TFG would not pay investors
the proceeds from the sales of their equipment but rather
would retain these funds, thereby violating the investment
contracts.
TFG continued to face financial problems. In 1989,
CRI, a public Nevada corporation which owned several other
businesses, acquired complete ownership of TFF, Inc., a
Delaware corporation which owned all of TFG's outstanding
common stock. CRI began taking steps to ameliorate TFG's
financial problems. Gordon Locke and Dennis Williamson,
members of the CRI Board of Directors' Executive Committee
and CRI's only preferred shareholders, together invested
$250,000 in CRI. CRI, in turn, made interest bearing loans
to TFG, which were properly documented in the accounts of
both companies. Locke and Williamson became executive vice
presidents of TFG, for which Williamson received an annual
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salary of $206,250 and a monthly automobile allowance, and
for which Locke received an annual salary of $187,500 and a
monthly automobile allowance. In addition, TFG's by-laws
were amended to curtail the power of the CEO, Minsky.
CRI was careful to observe all the corporate
formalities with respect to TFG. The two companies had
different boards of directors and separate board meetings.
Although, consistent with good accounting practice, CRI and
TFG eventually had consolidated financial statements, each
kept its own financial records.
The new management of TFG decided to continue
Minsky's policy of violating contracts with TFG investors by
reselling equipment leases without paying investors the
proceeds, believing that this was the only way to continue to
improve TFG's financial health as well as to avoid favoring
investors whose equipment had not been sold before TFG was
acquired by CRI. CRI, however, did begin the process of
offering to all of the investors whose contracts were
violated a settlement package which included cash, notes, and
CRI stock.
One of TFG's numerous creditors took steps to
attach a TFG bank account in Connecticut. TFG transferred
funds out of this account into a TFG account in a Canadian
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bank in order to meet the payroll for TFG employees.2 For
several months in 1990, Locke ran TFG's payroll out of his
personal attorney operating account in New York and was
reimbursed with funds transferred out of the TFG Canadian
account. Eventually, in January 1991, CRI sold TFG. TFG
owed CRI over one million dollars; this debt was forgiven at
the time TFG was sold.
Neither of the plaintiffs in this case ever had any
direct dealings with CRI, Locke or Williamson. Both
plaintiffs had a number of other tax shelter investments, and
relied on David Levinson, their financial advisor, as to this
investment. Indeed, Massad never even read the initial
offering memorandum. Levinson first became aware of TFG's
financial difficulties in February 1990, after calling TFG in
preparation for a meeting with Birbara. On February 20,
Levinson spoke to Locke, who told him that he was sure that
plaintiffs' computers had been sold. Although Locke was not
familiar with plaintiffs' machines, he indicated that all of
the computers had been sold, and that he would try to
determine exactly what had happened to plaintiffs' machines.
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2. In both of his depositions taken before trial, Locke
testified that it was his best recollection that the funds
were transferred out of TFG's Connecticut account into a CRI
account in Canada. However, at trial he testified that his
recollection had been incorrect and bank statements were
produced to substantiate his trial testimony.
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Levinson conveyed this information to plaintiffs,
and in the next few days spoke to Locke or Williamson several
times in an effort to find out more. Levinson knew he was
speaking with Locke and Williamson in their capacities as TFG
officers and was not confused about the various corporate
relationships. On February 27, 1990, Williamson informed
Levinson that the computer owned by plaintiffs jointly had
been sold by prior management in October 1989, and the next
day, Levinson was told that Massad's computer had also been
sold in October 1989 by prior management.
CRI, however, had taken control of TFG prior to the
sale of the two computers, and thus the new management had
been involved in these sales. Moreover, the bill of sale
for Massad's computer dates from late February 1990, after
Levinson's calls. Defendants contend that Massad's computer
was actually sold in November 1989 by the company in
possession (which later reimbursed TFG), and that the
February bill of sale was simply an accounting between TFG
and that other company. Defendants assert that this was a
common industry practice. The jury would have been warranted
in disbelieving defendants' claim that Massad's computer had
been sold in November 1989.
Levinson's telephone calls prompted Locke in early
March to send each of the plaintiffs the settlement form
letter on CRI stationery that he was in the process of
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sending out to all TFG investors. The letter provided in
relevant part:
Early last year this company acquired all
the stock of Technology Finance Group,
Inc. ("TFG") from which you purchased [an
interest] in equipment as indicated in
the attached Schedule A. At the end of
June, 1989 management changed. This
Company, and its subsidiary TFG, is now
operated by new management. We, the new
management have reviewed TFG's books and
records and concluded, to the best of our
knowledge, in relation to the equipment
owned by you, that TFG owes you
Additional Rent . . . . Regrettably,
over the past 5 years, prior management
of TFG has not remitted sums to owners of
equipment to a total amount of
approximately $7 Million. Further, we
concluded, upon review of the financial
statements of the Company . . . that TFG
does not have the financial resources to
repay these funds.
. . . .
Your concern and disappointment at the
position in which you have been placed is
extremely understandable. However, it is
most important that you understand that
the management responsible for the
decisions not to pay you have resigned
and that new management is concerned to
provide you with the maximum economic
benefit possible under the circumstances.
The jury would have been warranted in finding that
the statement that former management was responsible for the
sales of plaintiffs' computers was not true. However,
despite the misrepresentation, plaintiffs were not confused
about the relationship between the corporate entities, nor
did they take any action in reliance on the new management
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language in the letter. Although the majority of TFG's
investors accepted the standard settlement package,
plaintiffs declined to do so.
Procedural History
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Plaintiffs, who are Massachusetts residents, filed
this diversity suit in the District of Massachusetts in 1990,
alleging breach of contract, common law fraud, conversion,
interference with contractual obligations, and violation of
the Massachusetts deceptive trade practices statute, Mass.
Gen. L. ch. 93A, 2. Aware of TFG's precarious financial
condition, the plaintiffs brought suit not only against TFG,
but also against CRI, Locke, and Williamson.
At the close of the evidence, the trial judge
entered a directed verdict against the plaintiffs on the
fraud claim concerning the computer they owned jointly. The
defendants then moved, pursuant to Rule 50(a), for judgment
as a matter of law on various grounds, including a lack of
personal jurisdiction. The district court denied the motion,
ruling that the personal jurisdiction issue had been waived,
but even if it had not, that the jury could find the
defendants had sufficient contacts with Massachusetts for a
proper exercise of personal jurisdiction. The jury found for
the defendants on the remaining fraud and interference with
contractual relations claims, but for the plaintiffs on the
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breach of contract claim. The trial judge reserved decision
on the Massachusetts deceptive trade practices claim.
After the verdict, defendants again moved for
judgment as a matter of law, pursuant to Rule 50(b). The
trial court denied the motion. At the same time, it ruled
that the defendants had not violated the Massachusetts
deceptive trade practices statute, finding that the decision
to breach the contract with the plaintiffs was a valid
business judgment rather than an attempt on the part of the
defendants to line their pockets.
Personal Jurisdiction
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The defendants question whether there is personal
jurisdiction over them under the Massachusetts long arm
statute, Mass. Gen. L. ch. 233A, 3, and the United States
Constitution. The district court found that all three
defendants had waived their objections to personal
jurisdiction and that in any event, the jury could find that
the defendants had sufficient contacts with Massachusetts for
a proper exercise of jurisdiction. The trial judge was
plainly correct that CRI waived any objection to
jurisdiction: at the final pre-trial conference, defense
counsel conceded there was no jurisdictional issue with
respect to CRI. Because parties are, as a general matter,
bound by the representations, concessions, and stipulations
of their attorneys, United States v. Woburn City Athletic
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Club, 928 F.2d 1, 6 (1st Cir. 1991), this express waiver is
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dispositive on the issue of the trial court's jurisdiction
over CRI.
The matters of waiver and personal jurisdiction
over the two individual defendants are far closer. Because
we find that plaintiffs did not submit evidence sufficient to
sustain their verdict on the merits, we pretermit resolution
of the jurisdictional issue. See Norton v. Mathews, 427 U.S.
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524, 530-31, 96 S. Ct. 2771, 1773-76A, 49 L. Ed. 2d 672 (1976)
(where merits can be easily resolved in favor of the party
challenging jurisdiction, resolution of complex and
theoretical jurisdictional issue may be avoided); Menorah
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Ins. Co., Ltd. v. INX Reinsurance Corp., 72 F.3d 218, 223 n.9
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(1st Cir. 1995).
Piercing the Veil
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TFG admittedly violated its contract with
plaintiffs, has not appealed and is liable to plaintiffs.
TFG is insolvent and plaintiffs, as TFG's putative creditors,
seek to have CRI, the corporate parent, and Locke and
Williamson, individuals who were officers of both TFG and
CRI, satisfy TFG's contractual obligations. Although
corporate and individual defendants present slightly
different questions, Pepsi Cola Metropolitan Co. v. Checkers,
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Inc., 754 F.2d 10, 15-16 (1st Cir. 1985), the analyses are
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sufficiently similar to warrant discussing them together,3
only distinguishing the two categories when necessary.
Neither party disputes that Massachusetts law
controls in this diversity action. Our review is de novo.
We will only reverse if the evidence, when viewed in the
light most favorable to the verdict, would allow a reasonable
factfinder to come to only one conclusion -- that the moving
party was entitled to a judgment in its favor. Conway v.
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Electro Switch Corp., 825 F.2d 593, 598 (1st Cir. 1987).
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Plaintiffs seek to make the corporate parent and
two of its officers liable for the damages owed for breach of
contract by a subsidiary.4 Specifically, CRI acquired 100%
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3. The leading Massachusetts case on piercing the corporate
veil, My Bread Baking Co. v. Cumberland Farms, Inc., 233
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N.E.2d 748 (Mass. 1968), notes in dicta that a "corporation
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or a person controlling a corporation and directing, or
participating actively in its operations may become subject
to civil or criminal liability on principles of agency or of
causation," My Bread, 233 N.E.2d at 751 (citation omitted),
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and this court has applied the same analysis to individual
defendant shareholders as it has to defendant corporations.
Pepsi Cola, 754 F.2d at 15-16. However, commentators have
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noted that courts have evinced a "greater willingness to
reach the assets of corporate as opposed to personal
shareholders." Easterbrook & Fischel, The Economic Structure
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of Corporate Law 56 & n.9 (1991); Hackney & Benson,
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Shareholder Liability for Inadequate Capital, 43 U. Pitt. L.
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Rev. 837, 873 (1982) (collecting cases); Hamilton, The
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Corporate Entity, 49 Tex. L. Rev. 979, 992 (1971).
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4. That CRI acquired ownership of TFF, Inc. and thus of TFG
in 1989 while plaintiffs entered in their contracts with TFG
several years earlier in 1986 does not defeat plaintiffs'
claim, because the actions leading to the breach of contract
occurred in 1989 and 1990, after CRI had made the
acquisition. Thus, this case does not involve an effort to
hold a later parent responsible for the pre-parenthood
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of the stock of TFF, Inc., which in turn owned all of the
common stock of TFG (but not its preferred stock). Thus, CRI
was the parent once removed.
To start, CRI is a publicly traded, not a closely
held corporation. Caselaw and precedent elsewhere draw
distinctions between close and public corporations, and the
cases where courts have allowed creditors to reach the assets
of shareholders have almost always involved close
corporations. Easterbrook & Fischel, The Economic Structure
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of Corporate Law 55-56 & n.8 (1991) (explaining that a
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"manager's incentive to undertake overly risky projects is
greater in close corporations"). Massachusetts apparently
has not yet addressed the issue of piercing the corporate
veil of a public corporation. The key Massachusetts cases on
piercing the corporate veil have all involved close, family-
owned defendant corporations. In this silence, we will
assume, dubitante, that Massachusetts would apply the same
standards in deciding whether to pierce the corporate veil
when the defendant is a public corporation as it has when the
defendant is a close corporation.
Further, this case concerns injured creditors of
the subsidiary seeking to impose contract obligations on the
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activities of its new corporate child. See, e.g., C.M. Corp.
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v. Oberer Dev. Co., 631 F.2d 536, 539 (7th Cir. 1980)
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(parent's acquisition of subsidiary after breach of warranty
renders analysis of relationship between two corporations
irrelevant).
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parent and its officers. Several courts and commentators
have suggested that it should be more difficult to pierce the
veil in a contract case than in a tort case. See, e.g.,
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Edwards v. Minogram Indus., 730 F.2d 977, 980-984 (5th Cir.
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1984) (en banc); Blumberg, The Law of Corporate Groups:
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Substantive Law 17.01, 17.06, at 349-51, 359-60 (1987)
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("[T]he underlying facts and policies in contract are often
very different from those in tort . . . ."); Easterbrook &
Fischel, supra, at 58 ("Courts are more willing to disregard
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the corporate veil in tort than in contract cases."); Douglas
& Shanks, Insulation from Liability Through Subsidiary
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Corporations, 39 Yale L.J. 193, 210-11 (1929). We have found
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no Massachusetts Supreme Judicial Court case applying the
veil piercing doctrine in a contract case. The Appeals Court
cases that do so have not addressed the question of whether
it is more difficult to pierce the corporate veil in contract
than in tort. E.g., Evans v. Multicon Const. Corp., 574
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N.E.2d 395, 400 (Mass. App. Ct. 1991), review denied, 577
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N.E.2d 304 (Mass. 1991) (tbl.).
We need not, however, resolve this issue, because
we find that plaintiffs do not even meet the standard
articulated by the Supreme Judicial Court in its seminal
ruling on veil piercing in a tort case, My Bread Baking Co.
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v. Cumberland Farms, Inc., 233 N.E.2d 748 (Mass. 1968). As a
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preliminary matter, we note that "Massachusetts has been
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somewhat more 'strict' than other jurisdictions in respecting
the separate entities of different corporations." My Bread,
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233 N.E.2d at 752.
It is true that My Bread teaches that the principle
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that corporations are generally to be regarded as distinct
entities is not "of unlimited application":
Although common ownership of the stock of
two or more corporations together with
common management, standing alone, will
not give rise to liability on the part of
one corporation for the acts of another
corporation or its employees, additional
facts may be such as to permit the
conclusion that an agency or similar
relationship exists between the entities.
Id. at 751-52. The Supreme Judicial Court explained that it
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is appropriate to depart from the general principle of
corporate separateness:
(a) when there is active and direct
participation by the representatives of
one corporation, apparently exercising
some form of pervasive control, in the
activities of another and there is some
fraudulent or injurious consequence of
the intercorporate relationship, or (b)
when there is a confused intermingling of
activity of two or more corporations
engaged in a common enterprise with
substantial disregard of the separate
nature of the corporate entities, or
serious ambiguity about the manner and
capacity in which the various
corporations and their respective
representatives are acting. In such
circumstances, in imposing liability upon
one or more of a group of "closely
identified" corporations a court "need
not consider with nicety which of them"
ought to be held liable for the act of
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one corporation "for which the plaintiff
deserves payment."
Id. at 752 (citation omitted). However, in setting these
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circumstances in context, the Supreme Judicial Court
explained:
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 extent of that action, or (b) to
observe with care the formal barriers
between the corporations with a proper
segregation of their separate businesses
records, and finances, may warrant some
disregard of the separate entities in
rare particular situations in order to
prevent gross inequity.
Id. (internal citation omitted).
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Since My Bread, in a variety of factual settings
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(albeit none exactly analogous to this case), the Supreme
Judicial Court has repeated that under Massachusetts law, the
corporate veil will only be pierced in rare situations.
Spaneas v. Travelers Indem. Co., 668 N.E.2d 325, 326 (Mass.
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1996) (corporate veil will only be pierced to prevent gross
inequity); Berger v. H.P. Hood, Inc., 624 N.E.2d 947, 950
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(Mass. 1993) (corporate form will be respected absent
"compelling reason of equity" to do otherwise); Gurry v.
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Cumberland Farms, Inc., 550 N.E.2d 127, 134 (Mass. 1990)
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(same); Worcester Ins. Co. v. Fells Acres Day Sch., 558
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N.E.2d 958, 968-69 (Mass. 1990) (noting the reluctance to
disregard the corporate form); Commonwealth v. Beneficial
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Fin. Co., 275 N.E.2d 33, 91 (Mass. 1971) (courts will only
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look through the corporate veil to "accomplish . . .
essential justice"), cert. denied, 407 U.S. 910 (1972) and
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407 U.S. 914 (1972); Gordon Chem. Co. v. Aetna Casualty &
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Surety Co., 266 N.E.2d 653, 657 (Mass. 1971); see also United
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Elec. Workers v. 163 Pleasant St. Corp., 960 F.2d 1080, 1091
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(1st Cir. 1992) ("Under Massachusetts common law,
disregarding the corporate form is permissible only in rare
situations.").
We review the evidence in light of the two prong My
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Bread test, starting with the second prong. Plaintiffs
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clearly did not meet their burden of showing by a
preponderance of the evidence a "confused intermingling" of
CRI's and TFG's activities with "substantial disregard of
the separate nature of the corporate entities," or "serious
ambiguity about the manner and capacity in which the [two]
corporations and their respective representatives [were]
acting." My Bread, 233 N.E.2d at 752. Defendants were
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extremely careful about maintaining the formal distinctions
between CRI and TFG. The two companies had distinct boards
of directors, had separate board meetings, and each kept
individual financial records. There is no evidence showing
that TFG was a sham or merely a shield behind which CRI could
hide to escape liability for its own obligations. Beneficial
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Fin. Co., 275 N.E.2d at 91-92; Gordon Chem. Co., 266 N.E.2d
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at 657.
The primary evidence on which plaintiffs rely is
TFG's movement of funds from a bank account in its own name
in Connecticut into another TFG account in a Canadian bank in
order to meet the payroll for TFG employees. For several
months, defendant Locke ran TFG's payroll out of his own
attorney operating account in New York because steps had been
taken to attach TFG's Connecticut account. Locke was
reimbursed with funds transferred out of the TFG Canadian
account. It is undisputed that the funds disbursed by Locke
and repaid by TFG went only to TFG employees. Plaintiffs
were unaware of the transfers at the time and the transfers
did not affect them. This is not the sort of "confused
intermingling" we think the Supreme Judicial Court had in
mind.
Plaintiffs also argue that confused intermingling
was evident from cash infusions into TFG by CRI, Locke and
Williamson. However, all the money transferred from CRI to
TFG was in the form of loans that were properly recorded in
the financial records of both corporations. Moreover, there
was insufficient competent evidence of transfers of money in
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the other direction, that is, from TFG to CRI.5 These loans
do not support the claim of confused intermingling.
Plaintiffs' argument that there was serious
confusion about the manner and capacity in which the two
corporations and their representatives acted is similarly
unpersuasive. There is no evidence that there was any
confusion about on whose behalf a director was acting in any
given instance. Locke and Williamson, in their capacities as
directors of both CRI and TFG, did sometimes act on behalf of
both corporations simultaneously, but that is to be expected
when individuals serve as directors for both a parent and its
subsidiary. It is also to be expected that when a subsidiary
company profits, the parent company will as well. That the
fortunes of CRI and TFG were to some extent linked does not,
as plaintiffs suggest, militate in favor of piercing the
corporate veil.
Plaintiffs admitted they were not misled about the
relationship between TFG and CRI. Indeed, Massad did not
even know that he had invested in TFG, let alone that CRI had
become its parent. Plaintiffs neither knew nor cared about
the relationship between CRI and TFG, but rather relied on
their financial advisor, Levinson, who understood the
corporate relationship.
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5. The bank statements, the best evidence, show no transfers
from TFG to CRI.
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As to the first prong of the My Bread test, the
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evidence is only that Locke and Williamson served on the
boards of both TFG and CRI. Mere overlapping of boards does
not meet the test of "active and direct participation by the
representatives of one corporation, apparently exercising
some form of pervasive control." My Bread, 233 N.E.2d at
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752. Moreover, plaintiffs have failed to show any
"fraudulent or injurious consequence of the intercorporate
relationship." Plaintiffs argue that the settlement offers
were misleading and fraudulent, because defendants attributed
the decision to retain investment returns to TFG's prior
management, when it had been the decision of the new
management to continue the policy of violating investment
contracts.
Even assuming this misrepresentation might have
supported fraud or unfair practices claims against the
defendants (claims the jury and court here rejected), we
think plaintiffs' argument misses the point of the corporate
disregard doctrine. The phrase "fraudulent or injurious
consequence" is limited in My Bread by the phrase "of the
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intercorporate relationship." There was no failure to "make
clear which corporation [was] taking action" or "to observe
with care" the corporate form. My Bread, 233 N.E.2d at 752.
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The Massachusetts Appeals Court has put this point well:
"There is present in the cases which have looked through the
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corporate form an element of dubious manipulation and
contrivance, finagling, such that corporate identities are
confused and third parties cannot be quite certain with what
they are dealing." Evans, 574 N.E.2d at 400;6 cf. Oman Int'l
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Fin. Ltd. v. Hoiyong Gems Corp., 616 F. Supp. 351, 364
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(D.R.I. 1985) (noting that the better reasoned cases under
Rhode Island law only pierce the corporate veil when the
injurious consequences are a direct result of the misuse of
the corporate form). Plaintiffs were never misled about
which corporate entity -- CRI or TFG -- was obligated to them
or was dealing with them. Cf. Leatherbee Mortgage Co. v.
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Cohen, 638 N.E.2d 939, 940 (Mass. App. Ct. 1994); Massey's
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Plate Glass Co. v. Quinlan, 1992 WL 141885, at *3 (Mass.
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Dist. Ct. 1992).
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6. To the extent that the earlier Massachusetts Appeals
Court decision in Bump v. Robbins, 509 N.E.2d 12 (Mass. App.
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Ct. 1987) could be read to the contrary, we believe it to be
inconsistent with My Bread and effectively overruled by
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Evans. See MCLE-NELI, Appellate Practice 108-13 (1980);
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Henn, Civil Interlocutory Appellate Review Under G.L.M.
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c.231, 118 & G.L.M. c.211, 3, 81 Mass. L. Rev. 24 (1996).
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Bump pierced the corporate veil despite the plaintiff's lack
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of confusion about with whom he was dealing, based on the
particular facts and circumstances of the case and the belief
that My Bread does not "mak[e] such confusion an absolute
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requirement." 509 N.E.2d at 24. Bump, which imposed
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liability on a parent under Mass. Gen. L. ch. 93A, also
involved findings of a de facto merger and an undisclosed
principal and articulated its holding by stating that the
parent "was liable on agency principles" for the conduct of
its subsidiary. Id.
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As was said in Pepsi Cola, we believe the two prong
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general analysis in My Bread is exemplary and does not
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provide an exhaustive list of considerations. My Bread sets
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the standard for deciding when to pierce the corporate veil
under Massachusetts law; Pepsi Cola elucidates some factors
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that may be considered when engaging in a My Bread analysis.
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Pepsi Cola, 754 F.2d at 15.7 The majority of the Pepsi Cola
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factors cut against piercing the corporate veil in this case.
Plaintiffs largely based their case against the
individual defendants on a theory that the two defendants ran
TFG for their personal benefit -- that by drawing salaries
and receiving certain benefits, the defendants were siphoning
off corporate funds.8 But that theory is topsy-turvy:
managers should not be put to the Hobson's choice of either
working for free or facing personal liability. Such a rule
would undercut, not advance, the policy reasons for the
corporate disregard doctrine. See Evans, 574 N.E.2d at 399
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7. These factors include insufficient capitalization,
nonobservance of corporate formalities, failure to pay
dividends, insolvency at the time of the litigated
transaction, siphoning off corporate funds, absence of
functioning officers besides the dominant shareholders,
absence of corporate records, use of the corporation to
advance the interests of the dominant shareholders, and use
of the corporation in promoting fraud. Pepsi Cola, 754 F.2d
__________
at 16.
8. In contrast to the situation in Pepsi Cola, 754 F.2d at
__________
14, there was no credible evidence of subterfuge or
channeling excessive payments; nor was there any indication
that the benefits were not part of a legitimate benefits
plan.
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(benefit gained by individual defendants was a legitimate
business purpose and so a factor pointing against veil
piercing).
Indeed, only one of the Pepsi Cola factors can
___________
arguably be said to militate in favor of veil piercing here:
when plaintiffs' computers were sold, TFG was insolvent,
unable to pay its debts as they fell due. However,
considering TFG's insolvency in light of policies
Massachusetts has sought to foster provides us with a
different perspective. Evans, 574 N.E.2d at 399. The
_____
Supreme Judicial Court has recently, in dicta, said of the
_____
corporate disregard doctrine:
[I]t relates to the quite distinct issue
whether the effects of liability of one
corporate entity should be visited upon a
related entity. Corporate distinctness
is respected as a means of limiting
liability and thus fostering investment
in corporate enterprises.
Strom v. American Honda Motor Co., 667 N.E.2d 1137, 1145-46
_____ _________________________
(Mass. 1996).
This case involves an attempt to impose liability
on a new parent corporation and its officers for their
efforts to salvage an insolvent, struggling business. TFG
was not initially insufficiently capitalized for the purposes
of its corporate endeavor and only became insolvent after a
change in the tax laws. See Laborers Clean-Up Contract
___ ___________________________
Admin. Trust Fund v. Uriarte Clean-Up Serv., Inc., 736 F.2d
__________________ _____________________________
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516, 525 (9th Cir. 1984) (distinguishing, in dicta, the
_____
propriety of veil piercing when a subsidiary was
undercapitalized at the outset from veil piercing when a
subsidiary began with sufficient funds but subsequently fell
upon hard times).
The basic contract was entered into between
plaintiffs and TFG, and TFG became insolvent before CRI
assumed ownership. CRI bought TFG knowing that it was
insolvent and pumped a great deal of money into TFG to try to
make it profitable again. That TFG may have continued to be
undercapitalized in these circumstances does not argue for
piercing the corporate veil. Indeed, the contrary may well
be true. This is not a case involving a close corporation
where the parent may "form a subsidiary with minimal
capitalization for the purpose of engaging in risky
activities" and where absolute limited liability would create
"incentives to engage in a socially excessive amount of risky
activities." Easterbrook & Fischel, supra, at 57. Nor is
_____
this a case of "financial misconduct of the subsidiary
involving such manipulation as asset-stripping or asset-
siphoning, which depletes the resources of the subsidiary."
Blumberg, supra, 17.01, at 350. In sum, this is not that
_____
"rare particular situation" where disregarding the corporate
form is necessary "to prevent gross inequity." My Bread, 233
________
N.E.2d at 752.
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Accordingly, after examining the case in the light
most favorable to the verdict, we find the evidence
insufficient to warrant piercing TFG's corporate veil to
reach CRI's assets or the individual defendants' assets under
the stringent requirements set forth by Massachusetts law.
We reverse and vacate the jury verdict.
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