Castleberry v. Branscum

721 S.W.2d 270, 29 Tex. Sup. Ct. J. 481, 1986 Tex. LEXIS 563

• Court: Texas Supreme Court
• Decided: July 2, 1986
• Docket: C-4536
• Status: Published

Opinions

SPEARS, Justice.

Joe Castleberry sued Texan Transfer, Inc. and Byron Branscum and Michael By-both, individually, on a promissory note signed by the corporation for Castleberry’s shares in the closely held corporation. The jury found that Branscum and Byboth used Texan Transfer as a sham to perpetrate a fraud. Based on the jury findings, the trial court rendered judgment against Texan Transfer, disregarding its corporate fiction to hold both Byboth and Branscum individually liable. The court of appeals reversed and rendered, holding: (1) there was no evidence to support the jury’s findings; (2) the instruction submitted to the jury was defective; and (3) the issues should not have been submitted to the jury because disregarding the corporate fiction is solely a question of law. 695 S.W.2d 643. We reverse the court of appeals judgment and affirm the trial court, because under the applicable law there was some evidence to support the jury’s verdict, the objection to the instruction was improper, and disregarding the corporate fiction is a fact question for the jury.

Disregarding the Corporate Fiction

The corporate form normally insulates shareholders, officers, and directors from liability for corporate obligations; but when these individuals abuse the corporate privilege, courts will disregard the corporate fiction and hold them individually liable. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571, 573 (Tex.1975); Bell Oil & Gas Co. v. Allied Chemical Corp., 431 S.W.2d 336, 340 (Tex.1968); Pace Corp. v. Jackson, 284 S.W.2d 340, 351 (Tex.1955).

We disregard the corporate fiction, even though corporate formalities have been observed and corporate and individual property have been kept séparately, when the corporate form has been used as part of a basically unfair device to achieve an inequitable result.¹ Bell Oil & Gas Co. v. Allied Chemical Corp., 431 S.W.2d at 340. Specifically, we disregard the corporate fiction:

(1) when the fiction is used as a means of perpetrating fraud;²

(2) where a corporation is organized and operated as a mere tool or business conduit of another corporation;

(3) where the corporate fiction is resorted to as a means of evading an existing legal obligation;

(4) where the corporate fiction is employed to achieve or perpetrate monopoly;

(5) where the corporate fiction is used to circumvent a statute; and

(6) where the corporate fiction is relied upon as a protection of crime or to justify wrong.³

Pacific American Gasoline Co. of Texas v. Miller, 76 S.W.2d 833, 851 (Tex.Civ.App.—Amarillo 1934, writ ref’d). See also Boy E. Thomas Const. Co. v. Arbs, 692 S.W.2d 926, 938 (Tex.App.—Ft. Worth 1985), writ ref’d n.r.e. per curiam, 700 S.W.2d 919 (Tex.1985); Roylex, Inc. v. Langson Bros. Const. Co., 585 S.W.2d 768, 771 (Tex.Civ. App.—Houston [1st Dist.] 1979, writ ref’d n.r.e.); Wolf v. Little John Corp. of Liberia, 585 S.W.2d 774, 778 (Tex.Civ.App.—Houston [1st Dist.] 1979, writ ref’d n.r.e.); Sutton v. Reagan & Gee, 405 S.W.2d 828, 837 (Tex.Civ.App.—San Antonio 1966, writ ref’d n.r.e.).

Many Texas cases have blurred the distinction between alter ego and the other bases for disregarding the corporate fiction and treated alter ego as a synonym for the entire doctrine of disregarding the corporate fiction. See, e.g., William B. Boberts, Inc. v. McDrilling Co., 579 S.W.2d 335 (Tex.Civ.App.—Corpus Christi 1979, no writ); Dunn v. Growers Seed Ass’n, 620 S.W.2d 233, 236-37 (Tex.Civ.App.—Amarillo 1981, no writ). However, as Pacific American Gasoline Co. of Texas v. Miller indicates, alter ego is only one of the bases for disregarding the corporate fiction: “where a corporation is organized and operated as a mere tool or business conduit of another corporation.”

Alter ego applies when there is such unity between corporation and individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice. First Nat. Bank in Canyon v. Gamble, 134 Tex. 112, 132 S.W.2d 100, 103 (1939). It is shown from the total dealings of the corporation and the individual, including the degree to which corporate formalities have been followed and corporate and individual property have been kept separately, the amount of financial interest, ownership and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes. See Lucas v. Texas Industries, Inc., 696 S.W.2d 372, 374 (Tex.1984); Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573-75. Alter ego’s rationale is: “if the shareholders themselves disregard the separation of the corporate enterprise, the law will also disregard it so far as necessary to protect individual and corporate creditors.” Ballantine, Corporations § 123 at 294 (1946).

The basis used here to disregard the corporate fiction, a sham to perpetrate a fraud, is separate from alter ego. It is sometimes confused with intentional fraud; however, “[n]either fraud nor an intent to defraud need be shown as a prerequisite to disregarding the corporate entity; it is sufficient if recognizing the separate corporate existence would bring about an inequitable result.” Fletcher, Cyclopedia Corporations § 41.30 at 30 (Supp.1985); Cary & Eisenberg, Corporations 101 (5th ed. 1980); R. Clark, The Duties of the Corporate Debtor to its Creditors, 90 Harv. L. Rev. 505, 543, 44 (1977); 1 Hildebrand, Texas Corporations § 5 at 40 (1942); 2 G. Hornstein, Corporation Law and Practice § 755 (1959); See also Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573 (1975); Pacific American Gasoline Co. of Texas v. Miller, 76 S.W.2d at 840, 849; Rose v. Intercontinental Bank, N.A., 705 S.W.2d 752, 756 (Tex.App.—Houston [1st Dist.] 1986, writ ref’d n.r.e.); Tigrett v. Pointer, 580 S.W.2d 375, 385 (Tex.Civ.App.—Dallas 1979, writ ref’d n.r.e.); National Marine Service, Inc. v. Thibodeaux, 501 F.2d 940, 942 (Fifth Cir.1974). Thus, we held in Pacific American Gasoline Co. of Texas v. Miller that note holders could disregard the corporate fiction without showing common-law fraud or deceit when the circumstances amounted to constructive fraud. 76 S.W.2d at 840, 849. In Tigrett v. Pointer, the Dallas Court of Appeals disregarded the corporate fiction, stating correctly that “[w]hether [the individual] misled them or subjectively intended to defraud them is immaterial ... [f]or the action was so grossly unfair as to amount to constructive fraud.” 580 S.W.2d at 385.

To prove there has been a sham to perpetrate a fraud, tort claimants and contract creditors must show only constructive fraud. We distinguished constructive from actual fraud in Archer v. Griffith:

Actual fraud usually involves dishonesty of purpose or intent to deceive, whereas constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interests.

390 S.W.2d 735, 740 (Tex.1964).

Because disregarding the corporate fiction is an equitable doctrine, Texas takes a flexible fact-specific approach focusing on equity. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 575; First Nat. Bank in Canyon v. Gamble, 132 S.W.2d at 103; Pacific American Gasoline Co. v. Miller, 76 S.W.2d at 851; Tigrett v. Pointer, 580 S.W.2d at 381-82. For example, in First Nat. Bank in Canyon v. Gamble, this court held that we would disregard the corporate fiction when the “facts are such that adherence to the fiction would promote injustice and lead to an inequitable result.” 132 S.W.2d at 105. More recently, in Gentry v. Credit Plan Corp. of Houston, we again took an equitable approach, holding that the purpose in disregarding the corporate fiction “is to prevent use of the corporate entity as a cloak for fraud or illegality or to work an injustice, and that purpose should not be thwarted by adherence to any particular theory of liability.” 528 S.W.2d at 575. Dean Hildebrand, a leading authority on Texas corporation law, stated well the equitable approach: “When this [disregarding the corporate fiction] should be done is a question of fact and common sense. The court must weigh the facts and consequences in each case carefully, and common sense and justice must determine [its] decision.” Hildebrand, Texas Corporations § 5 at 42 (1942).⁴

The Evidence

In this case, the court of appeals found no evidence to support the jury verdict. The jury instruction presented alternative bases for disregarding the corporate fiction, including using Texan Transfer as a sham to perpetrate a fraud. We turn first to see whether there is some evidence to support this basis, since it is Castleberry’s strongest. Under the no evidence test, we consider only the evidence and inferences supporting the jury’s findings and disregard the evidence and inferences to the contrary. Sagebrush Sales Co. v. Strauss, 605 S.W.2d 857, 859 (Tex.1980).

In June 1980, Branscum, Byboth, and Castleberry formed a partnership to move furniture. Three months later, they incorporated as Texan Transfer, Inc. They each owned one-third of the closely held corporation’s shares. Byboth was president; Cast-leberry was vice-president; and Branscum was secretary-treasurer. Soon thereafter Branscum formed a competing business, Elite Moving. When Castleberry found out about Elite Moving, he filed an assumed name certificate. Castleberry testified that when Branscum found out about the assumed name certificate:

A He [Branscum] became very upset, [stating] that it was his company and his name, and that if he wanted to start a moving company that it was his prerogative, he could do whatever he wanted to do.

Q Okay.

A And that if I did not sign the name, sign the company name over to him that he would see to it that I would never get anything out of Texan Transfer.

Q I’m sorry, could you repeat that last part?

A That he would see that I never got anything out of Texan Transfer. He would take whatever it had out of it, anything he could to make sure I had nothing.

Branscum made similar statements later to Texan Transfer’s bank.

In July 1981, at Byboth’s suggestion, Castleberry sold his stock back to the corporation, receiving a corporate promissory note for approximately $42,000. Byboth signed the note as Texan Transfer’s president. Texan Transfer made the initial installment payment of $1,000 and then defaulted on the remaining $41,000.

Castleberry testified that after the buyout, Elite Moving began to take over more and more of Texan Transfer’s business. Branscum testified that after the buy-out Texan Transfer, Elite Moving, and later Custom Carriers were all in the same business and all operated out of his residence. Controlled by Branscum and Byboth, Texan Transfer allowed Elite Moving to use its employees and trucks. Texan Transfer supposedly loaned Elite Moving its trucks, but Branscum admitted that the companies had no written rental agreement and that no mileage records were kept to show how much Elite Moving owed Texan Transfer. Elite advertised for furniture-moving business in the phone directory and in newspapers, but Texan Transfer did not. Brans-cum also conceded that Texan Transfer could do Elite Moving’s work. While Texan Transfer’s business declined, Elite Moving’s prospered.

Ken Warren, CPA for Texan Transfer, Custom Carriers, Byboth, and Branscum, testified to Byboth and Branscum’s financial handling of Texan Transfer and Elite Moving. For the eighteen months prior to the buy-out agreement, Texan Transfer had a net income of $65,479. After the agreement in 1981, Texan Transfer’s annual net income fell to $2,814 and in 1982 it lost more than $16,000. In contrast, the newly formed Elite Moving declared an income in 1982 of $195,765. Castleberry maintained that Texan Transfer’s losses were caused by Byboth and Branscum’s manipulations, while Byboth and Branscum argued that they were simply natural business losses. The jury was entitled to believe either inference.

Sometime after Castleberry filed suit in April 1982, Branscum told Sue Campbell, then his wife, that Castleberry “would never get a dime, that he would file bankruptcy before Castleberry got any money out of the company ... [that] “he would open the company in another name so that Joe [Castleberry] wouldn’t get paid.” Shortly thereafter in September, 1982, Byboth and Branscum started another furniture moving company, Custom Carriers, Inc. At trial Byboth conceded that Custom Carriers was formed because of this lawsuit. Moreover, according to Joe Freed, owner of Freed Furniture Company, Byboth and Branscum terminated Texan Transfer’s contract with Freed Furniture, with whom Texan Transfer did the majority of its business; and they obtained for Custom Carriers the same contract — doing the same deliveries at the same rate. Freed also testified that he had had no problems with Texan Transfer. Freed was at that time the father of Branscum’s girlfriend and is now Branscum’s father-in-law.

Byboth and Branscum also sold Texan Transfer’s means of doing business and its only assets — its trucks — to “independent contractors” of Custom Carriers. With the money, they paid themselves “back salaries.”

We hold that this is some evidence of a sham to perpetrate a fraud. A jury could find that Byboth and Branscum manipulated a closely-held corporation, Texan Transfer, and formed competing businesses to ensure that Castleberry did not get paid. Castleberry had little choice but to sell his shares back to the corporation. While this evidence may be no evidence of intentional fraud, constructive fraud, not intentional fraud, is the standard for disregarding the corporate fiction on the basis of a sham to perpetrate a fraud.

In determining if there is an abuse of the corporate privilege, courts must look through the form of complex transactions to the substance. The variety of shams is infinite, but many fit this case’s pattern: a closely held corporation owes unwanted obligations; it siphons off corporate revenues, sells off much of the corporate assets, or does other acts to hinder the on-going business and its ability to pay off its debts; a new business then starts up that is basically a continuation of the old business with many of the same shareholders, officers, and directors. Blank v. Olcovich Shoe Corp., 20 Cal.App.2d 456, 67 P.2d 376, 379 (2nd 1937); Plaza Express Co. v. Middle States Motor Freight, Inc., 40 Ill. App.2d 117, 189 N.E.2d 382, 384-85 (1st Dist.1963); Team Central, Inc. v. Teamco, Inc., 271 N.W.2d 914, 923 (Iowa 1979); Addison v. Tessier, 65 N.M. 222, 335 P.2d 554, 557 (1959); Dairy Co-Operative Ass’n v. Brandes Creamery, 147 Or. 488, 30 P.2d 338, 342 (1934); Culinary Workers and Bartenders Union v. Gateway Cafe, Inc., 91 Wash.2d 353, 588 P.2d 1334,1343 (1979); Dummer v. Wheeler Osgood Sales Corp., 198 Wash. 381, 88 P.2d 453, 456-458 (1939); Soderberg Advertising, Inc. v. Kent-Moore Corp., 11 Wash.App. 721, 524 P.2d 1355, 1361-62 (1st 1974).

The Instruction

The court of appeals also held that the jury instruction on alter ego was reversible error. The trial court submitted the following issue separately for both By-both and Branscum: “Do you find from a preponderance of the evidence that Texan Transfer, Inc. was the alter ego of the defendant?”⁵ This instruction accompanied the issue:

You are instructed that a corporation may become an “alter ego” or mere extension of the individual if the individual controls the corporation and conducts its business affairs without due regard for the separate corporate nature of the business; or that such separate corporate nature ceased to exist; or if the corporate assets are dealt with by the individual as if owned by the individual; or if corporate formalities are not adhered to by the corporation; or if the individual is using the corporate entity as a sham to perpetrate fraud or to avoid personal liability. You are further instructed that in determining whether the corporation adhered to corporate formalities and maintained a separate existence, you may consider whether the corporation maintained separate offices; maintained separate books; maintained separate employees; had separate stationary; issued stock; held regular meetings of its shareholders and Board of Directors; kept and maintained written records of the proceedings of meetings of the shareholders and Board of Directors; filing of tax returns, entering into contracts, maintenance of bank accounts, holding title to property, and other indicia of a separate corporate entity. You are instructed that the existence of one or more of these factors may or may not make Texan Transfers, Inc. the alter ego of (defendant). Whether or not Texan Transfer, Inc. was the alter ego of (defendant) should be determined from the total dealings of (defendant) and Texan Transfer, Inc. (Emphasis added.)

The court’s charge defined fraud as constructive fraud: “Fraud is any act, omission, concealment that involves a breach of legal duty, trust, or confidence justly reposed and that is injurious to another person, or by which an undue and unconscionable advantage is taken.” The constructive fraud definition was not objected to and thus was tried by consent.

The court of appeals found the last part of the instruction defective: “that the existence of one or more of these factors may or may not make Texan Transfer, Inc. the alter ego of (defendant).” “One or more factors” is ambiguous; it is not clear if “one or more factors” refers to the alternative grounds for disregarding the corporate fiction or to the list of corporate formalities. If “one or more factors” refers to the list of corporate formalities, the instruction is incorrect because no one item alone would justify disregarding the corporate fiction. See Lucas v. Texas Industries, Inc., 696 S.W.2d at 374; Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573.

The instruction is also incorrect if “one or more factors” refers to the alternative bases for disregarding the corporate fiction. As noted above, a proper alter ego instruction should include all the relevant factors and consider the total dealings of the corporation and the individual. Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d at 573. This instruction, however, treats the several alter ego factors as if each factor alone were a sufficient basis for disregarding the corporate fiction (without due regard for the separate corporate nature of the business, or whether such separate corporate nature ceased to exist, or if the corporate assets are dealt with by the individual as if owned by the individual, or if corporate formalities are not adhered to).

Although the instruction is erroneous, the defendants have waived error by not properly objecting. Tex. R. Civ. P. Rule 274 provides:

A party objecting to a charge must point out distinctly the matter to which he objects and the grounds of his objection.

The purpose of Rule 274 is to afford trial courts an opportunity to correct errors in the charge, by requiring objections both to clearly designate the error and to explain the grounds for complaint. Brown v. American Transfer & Storage, 601 S.W.2d 931, 938 (Tex.1980); Davis v. Campbell, 572 S.W.2d 660, 663 (Tex.1978). An objection that does not meet both requirements is properly overruled and does not preserve error on appeal.

The defendants objected:

[T]o the use of the conjunctive word “or” in the special issue as submitted in that same issue. It may confuse the jury or, in the alternative, prejudice the Defendant and the jury may find any one element would necessarily warrant a finding of “we do” to Special Issues No. 1 and No. 2.

This objection fails both requirements of Rule 274. The objection does not distinctly and separately point out the instruction’s errors, because it is unclear whether the “any one element” complaint refers to the alternative grounds for disregarding the corporate fiction or to the list of corporate formalities. Moreover, the objection complains of “elements,” but the instruction mentions only “factors.”

The objection also does not adequately explain its grounds. The grounds given here, that the instruction “may confuse the jury” or “prejudice the defendant,” are too general since they do not explain why the instruction is legally incorrect or how it would confuse the jury or prejudice the defendants. Motor 9, Inc. v. World Tire Corp., 651 S.W.2d 296, 301 (Tex.App.— Amarillo 1981, writ ref’d n.r.e.); Quarles v. Smith, 379 S.W.2d 91, 93 (Tex.Civ.App.—Houston 1964, writ ref’d n.r.e.).

Jury Question

Finally, the court of appeals held that disregarding the corporate fiction is solely a question of law and, therefore, should not be submitted to the jury. We disagree. The different bases for disregarding the corporate fiction involve questions of fact. Except in very special circumstances, fact questions should be determined by the jury. Tex. Const. Art. I, § 15; State v. Credit Bureau of Laredo, Inc., 530 S.W.2d 288, 293 (Tex.1975). Therefore, we hold that the controlling issues, based on pleadings and some evidence, of the alternative bases for disregarding the corporate fiction should be submitted to the jury. See Tex. R. Civ. P. 279.

We reverse the court of appeals’ judgment and affirm the trial court’s judgment.

GONZALEZ, J., files a dissenting opinion in which CAMPBELL, WALLACE and ROBERTSON, JJ., join.

1 . Other doctrines besides disregarding the corporate fiction have been used in cases similar to this: fraudulent conveyance, Texas Sand Co. v. Shield, 381 S.W.2d 48, 52-53 (Tex.1964) and Tex. Bus. & Comm. Code ch. 24 (Vernon Supp. 1986); the trust fund doctrine, Henry 1. Siegel Co., Inc. v. Holliday, 663 S.W.2d 824 (Tex.1984); breach of fiduciary duties, International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 577 (Tex.1963); and the denuding theory, World Broadcasting System, Inc. v. Bass, 328 S.W.2d 863, 866 (Tex.1959).

These four doctrines and disregarding the corporate fiction have different elements and remedies, and they protect different parties and interests at different times; but they serve very similar ideals and principles. R. Clark, The Duties of the Corporate Debtor to Its Creditors, 90 Harv. L. Rev. 505, 540-54 (1972). In practice, the doctrine of disregarding the corporate fiction functions to "loosen up the level of proof and the atomistic nature of the analyses required in a fraudulent conveyance action explicitly denominated as such." Id. at 552.

2 . The phrase, "a sham to perpetrate a fraud,” comes from Pace Corp. v. Jackson, 284 S.W.2d at 351.

3 . Inadequate capitalization is another basis for disregarding the corporate fiction. Torregrossa v. Szetc, 603 S.W.2d 803 (Tex.1980); Tigrett v. Pointer, 580 S.W.2d 375, 381-82 (Tex.Civ.App.—Dallas 1979, writ refd n.r.e.). It is instructive to compare the six categories in Pacific American Gasoline Co. of Texas v. Miller with the categories in 2 Hornstein, Corporation Law and Practice §§ 752-758 (1959) (same basic categories, but labeled somewhat differently).

4 . All other major authorities support an equitable approach as well. Ballantine, Corporations § 122 (1946) (disregard when there is misuse of the corporate privilege or injustice); Cary & Eisenberg, Corporations 80-81 (5th ed. 1980) (disregard when "the facts warrant the application of equitable principles"); 1 Fletcher, Cyclopedia Corporations § 41 at 413 (Perm.Ed. 1983) (disregarded in the interests of justice and equity); 19 Hamilton, Business Organizations § 237 at 247 (Texas Practice 1973) (“notions of simple justice and fairness”); Henn and Alexander, Laws of Corporations § 146 at 344 (3rd ed. 1983) ("Corporateness will not be recognized to produce unjust or undesirable consequences inconsistent with the purpose of the concept [allowing incorporation]¹’); 2 Hornstein, Corporation Law and Practice § 751 at 262 (1959) (disregard when corporation becomes "vehicle for injustice’’); Latty, Subsidiaries and Affiliated Corporations 191 (1936) (“What the formula comes down to, once shorn of verbiage about control, instrumentality, agency and corporate entity, is that liability is imposed to reach an equitable result”).

5 . Each basis for disregarding the corporate fiction should be pleaded separately. Tex. R. Civ. P. 45, 47. Castleberry only pleaded alter ego, but because Byboth and Branscum did not object to the charge for a lack of pleadings, any error was waived. Murray v. O & A Express, Inc., 630 S.W.2d 633, 637 (Tex.1982).

1 . Ostensibly, Texan Transfer and Elite Moving were not in competition with one another. Texan Transfer was in the furniture moving business and Elite Moving was in the general moving business.