UNITED STATES COURT OF APPEALS FIFTH CIRCUIT
______________
No. 91-3939
(Summary Calendar) ______________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
CLINICAL LEASING SERVICE, INC., ET AL.,
Defendants,
MELVIN SOLL and LEROY T. BRINKLEY,
Defendants-Appellants.
__________________________________________________
Appeal from the United States District Court For the Eastern District of Louisiana (90 CV 4364 H) __________________________________________________ (December 10, 1992)
Before GARWOOD, JONES, and EMILIO M. GARZA, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:*
The government brought suit against defendants, Melvin Soll
and Leroy Brinkley, seeking to hold them personally liable for
fines imposed against their corporation, Clinical Leasing Service,
Inc. ("Clinical"), for violations of the Federal Controlled
Substances Act ("FCSA"), 21 U.S.C. § 842 et. seq. (1988). A jury
* Local Rule 47.5.1 provides: "The publication of opinions that have no precedential value and merely decide particular cases on the basis of well- settled principles of law imposes needless expense on the public and burdens on the legal profession." Pursuant to that Rule, the Court has determined that this opinion should not be published. found Soll and Brinkley liable for the corporation's fines on the
grounds that Clinical was the alter ego of Soll and Brinkley, and
that Clinical was used by them to frustrate a legislative purpose.
Soll and Brinkley appeal, arguing that the district court
improperly instructed the jury and that the district court's
actions and comments denied them a fair trial. Finding no error,
we affirm.
I
The government originally filed suit against Clinical, seeking
fines for registration and recordkeeping violations of the FCSA.1
See 21 U.S.C. § 842, et. seq. (1988). The district court imposed
a $337,000 civil fine on the corporation. Soll and Brinkley made
a settlement offer to pay the fine over several years,2 but the
government refused. The government then seized the available
assets of Clinical, but these were valued at less than $15,000.
Consequently, the government filed suit against Clinical's only
shareholders, Soll and Brinkley, seeking to find them personally
liable for the balance of the fines. The government sought to
pierce the corporate veil on two theories: (1) alter ego and (2)
1 Clinical operated the Delta Women's Clinic (the "Clinic") in New Orleans. The U.S. Drug Enforcement Agency ("DEA") discovered that the Clinic was dispensing controlled substances in violation of the FCSA. 2 Brinkley was the President and a director of Clinical, while Soll was the Secretary-Treasurer and a director. Both owned all of Clinical's outstanding stock.
-2- frustration of a legislative purpose.3 The jury found in favor of
the government on both theories.
Soll and Brinkley now challenge the verdict, contending that
the district court erred in:
(a) improperly instructing the jury on the alter ego theory;
(b) allowing the government to pierce the corporate veil after Soll and Brinkley had made an offer of settlement; and
(c) terminating the direct examination of Soll during trial, and making prejudicial comments during voir dire.4
II
A
3 This theory for piercing the corporate veil is well- established. See First Nat'l City Bank v. Banco Para El Comercio, 462 U.S. 611, 630, 103 S. Ct. 2591, 2601, 77 L. Ed. 2d 46 (1983) ("[T]he Court has consistently refused to give effect to the corporate form where it is interposed to defeat legislative policies."); see also Bangor Punta Operations, Inc. v. Bangor & Aroostook R.R. Co., 417 U.S. 703, 713, 94 S. Ct. 2578, 2584, 41 L. Ed. 2d 418 (1974) ("Although a corporation and its shareholders are deemed separate entities for most purposes, the corporate form may be disregarded in the interests of justice where it is used to defeat an overriding public policy."). 4 In their reply brief, Soll and Brinkley also challenge the verdict for: (a) insufficient evidence of neglect of corporate formalities; (b) insufficient evidence of undercapitalization; and (c) the unconstitutional application of the "frustration of legislative purpose" theory for corporate disregard. However, we will not consider these arguments on appeal as they were not raised in the initial brief. See Peteet v. Dow Chem. Co., 868 F.2d 1428, 1437 (5th Cir.) ("We may not review arguments raised for the first time in the appellant's reply brief."), cert. denied, 493 U.S. 935, 110 S. Ct. 328, 107 L. Ed. 2d 318 (1989).
-3- Soll and Brinkley argue that the district court failed to
instruct the jury properly on the Louisiana law5 of piercing the
corporate veil under the alter ego theory. We review jury
instructions for abuse of discretion. See Koonce v. Quaker Safety
Products & Mfg. Co., 798 F.2d 700, 719 (5th Cir. 1986) ("The
district judge `has wide discretion to select his own words and to
charge in his own style.'" (quoting Sandidge v. Salen Offshore
Drilling Co., 764 F.2d 252, 262 (5th Cir. 1985))). "If the jury
instructions are `comprehensive, balanced, fundamentally accurate,
and not likely to confuse or mislead the jury, the charge will be
deemed adequate.'" Id. (quoting Scheib v. Williams-McWilliams Co.,
628 F.2d 509, 511 (5th Cir. 1980)). "The crucial issue on review
is whether the jury had an understanding of the issues and its duty
to determine those issues." Id.
Under Louisiana law, shareholders are generally not held
individually responsible for debts of the corporation. Kingsman
Enterprises v. Bakersfield Elec. Co., 339 So. 2d 1280, 1282 (La.
App. 1st Cir. 1976). However, where the corporation is merely the
alter ego of the shareholder, Louisiana courts have ignored the
corporate form and have held the individual shareholder or
5 Though Clinical was incorporated in Delaware, with Louisiana as its principal place of business, the parties agree, see Brief for Soll at 9-10; Brief for United States at 30, that Louisiana law governs whether Soll and Brinkley should be held personally liable for Clinical's debts. See Restatement (Second) Conflicts of Law § 306 (1971) ("The obligations owed by a majority shareholder to the corporation . . . will be determined by the local law of the state of incorporation, except . . . where, with respect to the particular issue, some other state has a more significant relationship . . . ." (emphasis added)).
-4- shareholders liable. Id. In applying this alter ego doctrine,
Louisiana courts have traditionally focused on the following five
elements: (1) commingling of corporate and shareholder funds; (2)
failure to follow statutory formalities for incorporation and the
transaction of corporate affairs; (3) undercapitalization of the
corporation; (4) failure to provide separate bank accounts and
bookkeeping records; and (5) failure to hold regular shareholder or
director meetings. Id. n.1; see also Jones v. Briley, 593 So. 2d
391, 395 (La. App. 1st Cir. 1991) (using five-element test); GI's
Club of Slidell, Inc. v. Am. Legion Post #374, 504 So. 2d 967, 968
(La. App. 1st Cir. 1987) (same); Harris v. Best of Am. Inc., 466
So. 2d 1309, 1315 (La. App. 1st Cir.) (same), writ denied, 470 So.
2d 121 (La. 1985).
In charging the jury, the district court included the elements
above, but added two more: (a) failure to pay dividends; and (b)
withdrawal of corporate funds for the personal use of the
stockholders. See Record on Appeal, vol. 7, at 147-48. Soll and
Brinkley argue that the district court abused its discretion in not
strictly adhering to the five elements enumerated in Kingsman. We
disagree.
First, Soll and Brinkley have not cited, nor has this Court
found, a single Louisiana case suggesting that a court is limited
to the five factors in Kingsman. Moreover, the court in Kingsman
recognized that the five factors it listed are not exclusive. See
Kingsman, 339 So. 2d at 1282 n.1 ("These factors may include but
are not limited to . . . .").
-5- Second, Louisiana courts have recognized that the additional
factors given by the district court are proper criteria for
determining shareholder liability under the alter ego theory. See
Riggins v. Dixie Shoring Co., Inc., 592 So. 2d 1282, 1283 (La.
1992) ("Some of the many factors which may properly be considered
include: . . . non-payment of dividends, . . . [and] siphoning of
funds of the corporation . . . ."); Rivers v. Schlumberger Well
Surveying Corp., 389 So. 2d 807, 813 (La. App. 3d Cir. 1980)
(considering the paying of dividends as a factor in deciding
whether to pierce the corporate veil); Dillman v. Nobles, 351 So.
2d 210, 214 (La. App. 4th Cir. 1977) (considering the withdrawal of
corporate funds for personal use as a factor in deciding whether to
pierce the corporate veil). Therefore, we find no abuse of
discretion in the district court's formulation of factors to
consider under the alter ego theory.
Soll and Brinkley also contend that the district court abused
its discretion by failing to explain alter ego liability in its
charge to the jury. See Baker v. Raymond Int'l, Inc., 656 F.2d
173, 180 (5th Cir. 1981) (holding that it is reversible error for
a district court to fail to "present adequately and in context the
factors that might warrant the imposition of [alter ego]
liability"), cert. denied, 456 U.S. 983, 102 S. Ct. 2256, 72 L. Ed.
2d 861 (1982). After reviewing the record, we find that the
district court adhered to Baker's prescriptions.
In Baker, we first noted that a court should explain "at least
the rudiments of limited liability." Baker, 656 F.2d at 180. For
-6- example, we stated that a court should instruct a jury that
shareholders are "immune from liability for its debts in the
absence of . . . exceptional circumstances." Id. The district
court fulfilled this requirement by stating that "as a general
rule, shareholders are not responsible for debts of the
corporation. . . . However, under certain circumstances . . .
shareholders become liable individually for corporate debts."
Record on Appeal, vol. 7, at 146.
Second, we stated that a court should describe to the jury the
"degree of control that must be found to establish that an
ostensibly separate corporation is a mere instrumentality [i.e.,
alter ego]." Baker, 656 F.2d at 180. For example, in the context
of a parent-subsidiary relationship, we noted that a court should
instruct the jury that to hold the dominant party liable, "the jury
must find that this control `amounts to total domination of the
subservient corporation, to the extent that the subservient
corporation manifests no separate corporate interests of its own.'"
Id. at 181 (quoting Krivo Indus. Supply Co. v. National Distillers
& Chem. Corp., 483 F.2d 1098, 1106 (5th Cir. 1973)). The district
court also met this requirement by instructing the jury that to
find Soll and Brinkley liable, it had to find them to be
"indistinguishable" from the corporation. See Record on Appeal,
vol. 7, at 146-47.6
6 Moreover, this instruction complied fully with Soll and Brinkley's Requested Charge No. 5. See Soll's Record Excerpts at 22; see also Holley v. Palermo, 461 So. 2d 539, 542 (La. App. 3d Cir. 1984) (holding that "a creditor may pierce the corporate veil where . . . the corporation has ceased to be distinguishable from
-7- Third, we indicated in Baker that a court should instruct the
jury to weigh all the factors given, but not consider any one to be
dispositive. Baker, 656 F.2d at 181. The district court so
advised the jury by stating that "[n]o one factor determines
whether the corporate form should be disregarded. I have given you
seven of them. No one determines by itself whether you should
disregard the corporate form." Record on Appeal, vol. 7, at 148.
Lastly, we stated that a court should "elaborate[] the
significance of [a specific] factor" where warranted by the facts.
Baker, 656 F.2d at 181. Soll and Brinkley contend that the
district court erred in not elaborating on the element of
undercapitalization.7 Specifically, they argue that the district
court should have instructed the jury that continuous corporate
operations for a reasonable period of time are per se indicative of
adequate capitalization. We disagree.
In Matter of Multiponics, Inc., 622 F.2d 709, 717 (5th Cir.
1980), we stated that "the concept of undercapitalization has never
been precisely defined." "[T]his inquiry is highly factual and may
vary substantially with the industry, size of the debt, account
methods employed, and like factors." Id. Therefore, the law does
not provide that sustained corporate operations preclude a finding
of undercapitalization.
its shareholders"). 7 Concerning this element, the district court stated "[w]hat is adequate capitalization depends upon the nature of the business of the corporation." Record on Appeal, vol. 7, at 147.
-8- Furthermore, "[t]he trial court has no duty to give the jury
an exegesis of legal principles that might enable a plaintiff to
recover." Laird v. Shell Oil Co., 770 F.2d 508, 510 (5th Cir.
1985); see United States v. Jon-T Chemicals, Inc., 768 F.2d 686,
694 n.8 (5th Cir. 1985) ("We do not require a district court [in
instructing a jury on alter ego liability] to list and expressly
consider every factor that might be relevant to an ultimate factual
issue. This would convert even a simple issue into a lengthy
ordeal and would virtually ensure that a district judge would hear
only a handful of case in his or her lifetime."), cert. denied, 475
U.S. 1014, 106 S. Ct. 1194, 89 L. Ed. 2d 309 (1986). Because the
jury instructions were fundamentally accurate, and gave the jury a
basic understanding of the issues, we find no abuse of discretion.8
B
Soll and Brinkley next argue that the district court erred by
not finding that the government was equitably estopped from
pursuing its suit. They specifically contend that it was
inequitable for the government, on the one hand, to reject their
8 Soll and Brinkley also contend that the district court erred in submitting the "frustration of legislative purpose" theory to the jury without evidence that the stockholders were personally involved in the FCSA violations. However, we need not reach this issue on appeal. The jury was asked separate interrogatories about the traditional alter ego theory and the frustration of legislative purpose theory, and answered both inquiries against the stockholders. See Record on Appeal, vol. 4, at 990. Because the district court's instructions on alter ego liability were proper, and Soll and Brinkley have not otherwise disputed their liability under this theory, judgment for the government was justified even without considering the frustration of legislative purpose question.
-9- settlement offer and oppose Clinical's bankruptcy petition,9 and on
the other hand, to initiate suit against them in hopes of finding
them personally liable. We strongly disagree.
In support of their novel proposition))that as a prerequisite
to any suit piercing the corporate veil, a plaintiff (1) must
accept any settlement offer submitted by shareholders,10 and (2)
must not oppose the corporation's bad faith resort to the
bankruptcy laws11))Soll and Brinkley cite a single case which is
irrelevant to this issue.12 Rather than applying equitable estoppel
to prevent suits against individual shareholders, some courts have
used equitable estoppel to allow plaintiffs to pierce the corporate
veil. See, e.g., Matter of Kaiser, 791 F.2d 73, 75 (7th Cir.)
("The rules under which the corporate veil may be pierced go by
9 As the government proceeded to collect the fine for violating the FCSA, Clinical filed a petition for bankruptcy. The government moved to dismiss the petition, alleging that (1) the petition was filed in bad faith; and (2) Clinical was not a potentially viable business capable of rehabilitation. The bankruptcy court dismissed Clinical's petition, finding both of these arguments applicable. See Government Exhibit 21, included in Government Record Excerpts. 10 We do not know of any good reason why a plaintiff should have to accept a settlement offer by shareholders, particularly where, as in this case, the shareholders had a documented record of: (a) not filing tax returns, see Government Exhibit 5, at 37 (statement of Melvin Soll); (b) filing bankruptcy petitions in bad faith, see Government Exhibit 21; and (c) ignoring DEA warnings. See Record on Appeal, vol. 6, at 178-80. 11 See supra note 9. 12 Soll and Brinkley cite our decision in Gibraltar Sav. v. LDBrinkman Corp., 860 F.2d 1275 (5th Cir. 1988). See Brief for Soll at 20. However, nowhere in this case do we discuss equitable estoppel in the context of preventing a party from piercing the corporate veil.
-10- many names, . . . such as alter ego and equitable estoppel."
(emphasis added)), cert. denied, 479 U.S. 1011, 107 S. Ct. 655, 93
L. Ed. 2d 710 (1986). Therefore, we find no error in the district
court's refusal to apply equitable estoppel.
C
Lastly, Soll and Brinkley claim that they were denied a fair
trial. During trial, the district court terminated Soll's direct
examination because of leading questions. During voir dire, the
district court warned the jury on several occasions to disregard
the fact that Soll and Brinkley operated an abortion clinic. Soll
and Brinkley contend that the district court (a) abused its
discretion by cutting off Soll's direct examination, and (b) erred
because its warnings "unduly sensitized" the jury to the volatile
issue of abortion.
"The conduct of a fair trial is vested in the sound discretion
of the trial judge." Cranberg v. Consumers Union of U.S., Inc.,
756 F.2d 382, 391 (5th Cir.), cert. denied, 474 U.S. 850, 106 S.
Ct. 148, 88 L. Ed. 2d. 122 (1985). "On review, this conduct will
be measured against a standard of fairness and impartiality." Id.
Soll and Brinkley contend that the district court abused its
discretion in terminating Soll's direct testimony "without any
explanation." Brief for Soll at 23. We disagree.
When the district court terminated Soll's direct testimony,
the court sustained a specific objection by government's counsel to
-11- leading questions.13 Therefore, we find that the district court
adequately explained its actions.
Furthermore, the exclusion of Soll's direct testimony was
within the sound discretion granted the district court by Fed. R.
Evid. 611.14 The record indicates that Soll's counsel attempted to
elicit direct testimony from Soll through leading questions. See
Record on Appeal, vol. 6, at 197, 200. A few minutes before
terminating direct testimony, the district court specifically
warned Soll's attorney not to lead the witness. See id. at 197.
The record further indicates that the district court warned Soll's
13 Soll's testimony immediately preceding termination was:
BY MR. KERRIGAN [Soll's counsel]:
Q. Did you [Soll] also have, as Mr. Brinkley did in his office, a computer terminal at your home?
A. Yes.
Q. Is that where you law office is or was?
A. That's correct.
Q. So, information that was available from the clinic on the things that the other witnesses have talked about were available to you at your own))
MR. WATSON [government's counsel]: Objection, Your Honor. He's continuing to lead.
THE COURT: I sustain the objection. We're going to cut the questions now. You can't raise them properly. Sorry. Let's go on.
Record on Appeal, vol. 6, at 200. 14 Under Fed. R. Evid. 611(a), a district court "shall exercise reasonable control over the mode and order of interrogating witnesses." Furthermore, "[l]eading questions should not be used on the direct examination of a witness." Fed. R. Evid. 611(c).
-12- attorney about leading questions on at least seven previous
occasions. See id. at 16-17, 32, 46, 48, 135, 147, 186. Under
these circumstances, we find no abuse of discretion in the district
court's termination of Soll's direct testimony.
Soll and Brinkley further allege that the district court's
warnings concerning abortion denied them a fair trial. Soll and
Brinkley did not object to these comments, and therefore, we review
this aspect of the district court's conduct for plain error. See
Miles v. Olin Corp., 922 F.2d 1221, 1228 (5th Cir. 1991) ("Because
[appellant] did not object to the district court's comments in this
case, we review only for plain error."). "Only an error so
fundamental that it generates a miscarriage of justice rises to the
level of `plain error.'" Kuehne & Nagel (AG & CO) v. Geosource,
Inc., 874 F.2d 283, 292 (5th Cir. 1989).
Soll and Brinkley seem to argue that in warning the jury
repeatedly not to consider abortion,15 the district court somehow
"planted" abortion as a prejudicial factor in the minds of the
jury. However, the record indicates that Soll's own attorney
repeatedly referred to abortion in addressing the jury during his
opening statement.16 Thus, rather than create prejudice, the
district court's admonitions attempted to rectify the prejudice
caused by Soll and Brinkley's own counsel.17 Furthermore, it would
15 See Record on Appeal, vol. 5, at 7, 12, 24, 29. 16 See, e.g., Record on Appeal, vol. 5, at 61, 64-65. 17 For example, during his opening statement, Kerrigan stated:
-13- be nonsensical to find that the district court erred in giving
cautionary instructions where Soll and Brinkley themselves
requested extensive voir dire on abortion. See Record on Appeal,
vol. 4, at 1031, 1033. Thus, we do not find the district court's
cautionary instructions so prejudicial as to constitute error,
plain or otherwise.
III
For the foregoing reasons, we AFFIRM.
[Brinkley] got involved in the pro-choice movement, and he started a company called National Family Planning, and also did business as Controlled Parenthood. That company around this country made information available to ladies in order to get safe pregnancy terminations.
Why was he aware of that? Because one of his friends in college died because of a botched abortion. He formed a business with Mr. Soll, and they felt that this was information and this was service that people were entitled to.
Record on Appeal, vol. 5, at 65.
-14-