Castleberry v. Branscum

GONZALEZ, Justice,

dissenting.

Castleberry sued Branscum and Byboth under the doctrine of alter ego. I agree with the court that Castleberry incurred a legal injury. However, I disagree that Castleberry should be able to recover for that injury under the doctrine of alter ego or any other theory which was submitted to the jury. Those theories simply do not apply to the facts of this case. Thus, despite the court’s commendable attempt to set guidelines for disregarding the corporate entity, I dissent because I do not agree with all of its statements on the law or with its application to the facts of this case.

The Sham to Perpetrate a Fraud Theory

While I agree with most of the court’s statements on the law for piercing the corporate veil, its standard for disregarding the corporate entity when used as a sham to perpetrate a fraud is far too broad. Prior to this decision, this court consistently held “that personal liability should be imposed on a stockholder only in extraordinary circumstances.” Sagebrush Sales Co. v. Strauss, 605 S.W.2d 857, 860 (Tex. 1980). See also Lucas v. Texas Industries, Inc., 696 S.W.2d 372 (Tex.1984); Torregrossa v. Szelc, 603 S.W.2d 803 (Tex.1980); (recent cases where this court recognized that disregarding the corporate fiction is an extraordinary equitable remedy). Under the court’s current analysis, the corporate entity may be pierced, as a sham to perpetrate a fraud, anytime recognition of “the separate corporate existence would bring about an inequitable result.” This standard is so broad that it is not a standard. It fails to provide any guidance on the necessary elements to assert a cause of action under this theory. Presumably, a party only needs to assert that it would be unfair or inequitable to recognize the corporate existence; the corporate veil will be pierced whenever the courts do not like the outcome, irrespective of the type of alleged misconduct by the parties. Piercing the corporate existence whenever a party does not receive a “complete” or “fair” recovery is an unworkable approach.

*278

The Application of the Theory

I also disagree with the court’s holding that there was some evidence for piercing the corporate veil based on the grounds of recovery pleaded and submitted to the jury. The court of appeals held there was no evidence on any theory which would allow “piercing the corporate veil.” Thus, in our review of this no evidence point, we must examine the record in its most favorable light to Castleberry, considering only the evidence and inferences which support the findings, and rejecting the evidence and inferences contrary to the findings. Sagebrush Sales, 605 S.W.2d 857 ; Garza v. Alviar, 395 S.W.2d 821 (Tex.1965).

Generally, the courts will not disregard the existence of the corporate entity. Lucas, 696 S.W.2d at 374 ; First Nat. Bank in Canyon v. Gamble, 134 Tex. 112 , 132 S.W.2d 100, 103 (1939). The courts, however, will “pierce the corporate veil” under appropriate circumstances. In his attempt to disregard the corporate entity in this ease, Castleberry only pleaded an alter ego theory.

The alter ego doctrine applies when: (1) there is such a unity between the corporation and the individual that the separateness of the corporation has ceased; and (2) the facts are such that holding only the corporation liable would promote injustice. First Nat. Bank of Canyon, 132 S.W.2d at 103 ; Mortgage & Trust, Inc. v. Bonner & Co., 572 S.W.2d 344, 348 (Tex.Civ.App.—Corpus Christi 1978, writ ref’d n.r.e.). See Gentry v. Credit Plan Corp. of Houston, 528 S.W.2d 571, 573 (Tex.1975). Thus, the alter ego doctrine may be used to disregard the corporate fiction where a corporation is organized and operated as a mere tool or business conduit of an individual. Pacific American Gasoline Co. of Texas, v. Miller, 76 S.W.2d 833, 851 (Tex.Civ.App.—Amarillo 1934, writ ref'd). Under the alter ego doctrine, the corporate existence, or lack thereof, is the cause of the injustice. See Lucas, 696 S.W.2d at 376 .

In this case, the instruction submitted to the jury on alter ego stated that “a corporation may become an ‘alter ego’ or mere extension of the individual ... if the individual is using the corporate entity as a sham to perpetrate fraud.” Byboth and Branscum failed to object to the inclusion of this theory as a factor for finding alter ego. This court has held that individuals can be liable when it appears they are using the corporate entity as a sham to perpetrate a fraud. Torregrossa v. Szelc, 603 S.W.2d 803, 804 (Tex.1980); Pace Corp. v. Jackson, 155 Tex. 179 , 284 S.W.2d 340, 351 (1955). Therefore, even though the sham to perpetrate a fraud theory for piercing the corporate entity was not pleaded, such a theory was before the jury in the charge. Castleberry, then, had to produce some evidence either under an alter ego theory or under a use of the corporate entity as sham to perpetrate a fraud theory-

Texan Transfer was formed by Brans-cum, Byboth, and Castleberry as a business partnership for the delivery of furniture. In 1980, Texan Transfer was incorporated with each of the partners owning one-third of the corporation’s stock. Shortly after the incorporation of Texan Transfer, Branscum started a moving business, Elite Moving, as a sole proprietorship. 1

While a stockholder in Texan Transfer, Castleberry found out about Elite Moving, and filed an assumed name certificate for Elite. Castleberry testified that after Branscum found out about the filing:

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

*279 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.

Texan Transfer allowed Elite Moving to use its employees and trucks. Branscum admitted the companies had no written rental agreement and that no mileage records were kept to show how much Elite Moving owed Texan Transfer. Furthermore, Elite advertised in the phone directory and newspapers, Texan Transfer did not.

Castleberry eventually became dissatisfied with the business arrangement; he, Branscum and Byboth agreed that the corporation would purchase his stock. A stock purchase agreement and promissory note were executed by Byboth, signing for the corporation as President. The stock sale included two cash payments and the promissory note. Neither Branscum nor Byboth signed the agreement or note in their individual capacity.

The court holds that the above facts and testimony are some evidence either of alter ego or use of the corporate entity as a sham to perpetrate a fraud. I submit that Branscum’s statements and actions in forming Elite Moving, while constituting some evidence of usurption of corporate opportunities, are not evidence of alter ego or use of the corporate entity to perpetrate a fraud.

In the six months prior to the stock purchase agreement, Texan Transfer’s income dramatically dropped. Castleberry attributed this drop in income to the fact that he, Byboth, and Branscum were no longer working the trucks, but had hired employees to work the trucks. After the stock purchase, Texan Transfer experienced financial difficulties and its assets were sold. Texan Transfer made the first of the two cash payments to Castleberry but did not make the second payment, nor did it make any payments on the promissory note.

In 1982, Branscum and Byboth formed a new corporation, Custom Carriers, Inc. Custom Carriers had the same business address as Texan Transfer and Elite Moving. Branscum and Byboth terminated Texan Transfer’s contract with its main customer, Freeds Furniture. Custom Carriers received the contract with Freeds. Branscum and Byboth sold Texan Transfer’s only assets, its trucks, to individuals who later became independent contractors for Custom Carriers. Branscum and By-both paid themselves “back salaries” with the proceeds.

Sometime after Castleberry filed suit, Branscum told his former wife, that “he would open another company ... so that Joe [Castleberry] wouldn’t get paid.” By-both also conceded that Custom Carriers was formed because of this lawsuit.

The above statements and actions by Branscum and Byboth in forming Custom Carriers constitute some evidence under either the trust fund doctrine or a theory of denuding the corporate assets. The statements also show that Branscum did not intend to pay the debt. Clearly, Castleber-ry could assert a claim against Byboth and Branscum for their actions in dealing with the corporate assets. The above statements and evidence, however, are not evidence that Texan Transfer was the alter ego of Branscum and Byboth and are not evidence that the corporate entity (Texan Transfer) was used as a sham to perpetrate a fraud on Castleberry.

An additional factor to consider in determining whether Texan Transfer is the alter ego of Byboth and Branscum is that the underlying suit is based in contract and not in tort. Lucas, 696 S.W.2d at 375 ; Gentry, 528 S.W.2d at 573 ; Bell Oil & Gas Co. v. Allied Chemical Corp., 431 S.W.2d 336 (Tex.1968). In contract cases, as opposed to tort cases, the courts are less willing to disregard the corporate entity. This result follows because a plaintiff in a contract case ordinarily has an opportunity to investigate the financial strength of the corporation while dealing with it in a business transaction. Lucas, 696 S.W.2d at 375 ; *280 Gentry, 528 S.W.2d at 573 ; Hickman v. Rawls, 638 S.W.2d 100, 102 (Tex.App.—Dallas 1982, writ ref’d n.r.e.). Castleberry asserts that Byboth and Branscum should be personally liable on a promissory note (a contract) executed by Texan Transfer. As an incorporator, however, Castleberry was more fully aware than other creditors of the potential viability of the corporation; still, he chose to contract only with the corporation and not with Branscum and Byboth in their individual capacities.

The court never states, nor can I determine, how Texan Transfer was the alter ego of Branscum and Byboth or how the corporate entity (Texan Transfer) was used to perpetrate a fraud. I agree with the court that Castleberry was wronged. However, he should not recover under the theories pleaded and submitted to the jury. Castleberry simply did not assert the proper cause of action. Castleberry did not sue because Texan Transfer was a sham, he sued because it stopped doing business and he did not get paid. The corporate entity, Texan Transfer, did not cause Castleber-ry’s legal injury. Therefore, the court of appeals reached the correct result since there was no evidence on any theory for piercing the corporate veil that was either pleaded or submitted to the jury in the charge.

The Instruction

Finally, I disagree with the manner in which the court handles the submitted instruction. The trial court separately submitted the following issue for both Brans-cum and Byboth: “Do you find from a preponderance of the evidence that Texan Transfer, Inc. was the alter ego of [Brans-cum or Byboth]?” Additionally, the trial court submitted the following instruction:

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 shareholder and Board of Directors; filing of tax returns, entering into contracts, maintenance of bank accounts, holding titles 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.

The submitted instruction contains two errors: (1) it allows the jury to affirmatively answer the issue on theories for piercing the corporate entity which are not included under the alter ego doctrine; and (2) it allows the jury to find alter ego simply because Branscum or Byboth failed to meet one of the “indicia of a separate corporate entity” — any one of the elements in the list of corporate formalities.

The first problem with the submitted instruction is that it allowed the jury to consider theories of recovery which are not included under the doctrine of alter ego. However, Branscum and Byboth failed to object to the inclusion of the improper theories. These theories, then, were “subsumed” in the alter ego issue even though they are not theories under alter ego. Therefore, the sham to perpetrate a fraud theory for piercing the corporate entity *281 was included in the “alter ego” issue. This error in the trial court’s instruction was waived.

Branscum and Byboth, however, objected to the second error in the instruction, stating that the instruction “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.” Thus, Branscum and Byboth objected to the submission of the instruction because it allowed the jury to find alter ego based on failure of Texan Transfer to maintain any of the “elements” in the list of corporate formalities.

The court states that:

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.

721 S.W.2d at 277. The court’s interpretation of defendant’s objection is hypertechnical. Clearly, Branscum and Byboth stated that the instruction was erroneous because it allowed the jury to find alter ego based on a violation of any one of the “elements” in the list of corporate formalities. In other words, if the jury found that Texan Transfer failed to “maintain separate stationery” (one of the elements in the list of corporate formalities), it could then find that Texan Transfer failed to “adhere to corporate formalities” or failed to “maintain a separate corporate existence” (two of the five alternative grounds for disregarding the corporate fiction — “factors”). Thus, the jury could answer “we do” merely on failure to maintain separate stationery. Because the jury’s answer could be based on an affirmative finding of a violation of only one of the listed corporate formalities, the instruction was erroneous. I simply cannot comprehend how this court can render against Byboth and Branscum on an issue which allows the jury to find alter ego merely because Texan Transfer and Branscum and Byboth did not maintain separate stationery.

In holding that the error in the instruction does not require reversal, the court ignores the fact that the submitted instruction is framed in the disjunctive, while its own definition of alter ego is found in the conjunctive. The court states that alter ego:

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.

The court, then, states that alter ego may be found by looking at one factor and another factor and yet another factor. The submitted instruction, however, tells the jury to look at factor one, or, factor two, or, factor three. Thus, the submitted instruction is clearly an erroneous misstatement on the law of alter ego.

This court has repeatedly reversed the trial court for errors in the charge, including erroneous instructions. Gulf Coast State Bank v. Emenhiser, 562 S.W.2d 449 (Tex.1978); Jackson v. Fontaine’s Clinics, Inc., 499 S.W.2d 87 (Tex.1973). See also Washington v. Reliable Life Ins. Co., 581 S.W.2d 153 (Tex.1979); Dutton v. Southern Pacific Transportation, 576 S.W.2d 782 (Tex.1978); Scott v. Atchinson, Topeka & Santa Fe Ry., 572 S.W.2d 273 (Tex.1978). In Gulf Coast State Bank , we held that the instructions given to the jury constituted a misstatement of law. In reversing, we stated that “[a] trial court’s charge which does not instruct the jury as to the correct law is improper.... The erroneous charge constituted error which was reasonably calculated to cause and probably did cause the rendition of an improper judgment.” 562 S.W.2d at 453-54 . Here, as in Gulf Coast State Bank , the erroneous instruction constituted a misstatement of *282 law. We should remand this case to the trial court for a new trial.

Finally, the court takes a unique approach in its review of “preserved error.” The court of appeals held that:

the court’s charge as a whole permitted the jury to find that Texan Transfer was [Byboth and Branscum’s] alter ego based upon the existence of only one of the factors listed above. Under the court’s charge, the jury could have found Texan Transfer to be [Byboth and Branscum’s] alter ego upon a finding that “one or more” of the above quoted factors existed.

695 S.W.2d at 645. The court of appeals then held that the erroneous instruction constituted harmful error. The court of appeals reversed the judgment and rendered for Branscum and Byboth, holding there was no evidence of alter ego.

Castleberry, the adversely affected party, had to assert, by point of error on motion for rehearing at the court of appeals, any complaints he had in regard to that court’s opinion. In his motion for rehearing and in his writ application before this court, Castleberry only complained that “[t]he Court of Appeals erred in holding that the Court’s charge to the jury on the issue of alter ego was fatally defective because the issue and explanatory instruction fairly submitted the controlling issues.” Nowhere does Castleberry assert that Branscum and Byboth failed to object to the instruction or that their objection was insufficient. The rule is well established that to raise a point of error before this court, the complaining party must have raised the point on motion for rehearing in the court of appeals. Albright v. City of Houston, 677 S.W.2d 487, 488 (Tex.1984); Smith v. Baldwin, 611 S.W.2d 611, 618 (Tex.1980).

The court of appeals never had a chance to address whether Branscum and Byboth’s objection was sufficiently specific. No complaint was lodged against the objection. The court of appeals is authorized to correct errors in the judgment of the trial court. The court of appeals did not have an opportunity to address this “alleged” error; this entire argument was initiated by the court. Branscum and Byboth were never given an opportunity to respond that their objection was sufficient. This court is authorized to review errors in the judgment of the court of appeals, it is not authorized to assert, on its own initiative, errors that occurred at the trial court.

Ironically, in affirming Castleberry’s recovery, the court broadly construes the “alter ego” instruction to include a theory that was not pleaded and that has very little in common with the alter ego doctrine. At the same time, the court strictly construes Branscum and Byboth’s objection to the instruction, holding that it insufficient to preserve error, presumably because it fails to specify in which sentence the error occurred. The inconsistency in this approach is apparent.

I agree with the court that the court of appeals incorrectly held that alter ego was a question of law which should not be submitted to the jury. For the above reasons, I would remand this cause to the trial court.

CAMPBELL, WALLACE and ROBERTSON, JJ., join this dissent.