Appendix — LDB Corp. v. Gibraltar Savings

8 9) ; messy U.S.

8-1644 4 KILLED

—<

No.

a | ark 7 1988

: ' JOSEPH F. SPANIOL, JR.

IN THE CLERK 4

Supreme Court of the United States

OCTOBER TERM, 1988

LDB CORPORATION,

_ Petitioner,

GIBRALTAR SAVINGS,

Respondent.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

ERWIN N. GRISWOLD

Counsel of Record

DONALD B. AYER

LAURA B. FARMELO

JONES, DAY, REAVIS & POGUE

1450 G Street, N.W.

Washington, D.C. 20005-2088

(202) 879-3939

Counsel for Petitioner

BRETT A. RINGLE

JONES, DAY, REAVIS & POGUE

2300 Trammel Crow Center

Dallas, Texas 75201

IVAN IRWIN, JR.

A. B. CONANT, JR.

SHANK, IRWIN, CONANT,

LIPSHY & CASTERLINE

2100 Lincoln Plaza

500 North Akard

Dallas, Texas 75201

Of Counsel

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

APPENDIX TABLE OF CONTENTS

. Amended Opinion of the United States Court of

Appeals for the Fifth Circuit —........000000

. Judgment of the United States Court of Appeals

RE Te ND pretest erccoctisasectortatcepeeationksncs

. Order of the United States Court of Appeals for the

Fifth Circuit on Petition for Rehearing ....................

. Amended Final Judgment of the United States Dis-

trict Court for the Western District of Texas

. Verdict Form, United States District Court for the

pf dy Bie ey.” RRR eee eunnn ener

. Plaintiff’s Proposed Special Issue ...........................2.-.

. Second Amended Final Judgment of the United

States District Court for the Western District of

PE Sri eae haligtia ae aia aaa

la

APPENDIX A

Amended Opinion of the Court of Appeals

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 87-5569

GIBRALTAR SAVINGS,

Plaintiff-A ppellee -

Cross-A ppellant,

versus

LDBRINKMAN CORPORATION,

Defendant-A ppellant

Cross-A ppellee,

and

LLOYD D. BRINKMANN,

Defendant-Cross-A ppeliee.

Appeals from the United States District Court

for the Western District of Texas

December 2, 1988

(As Amended December 30, 1988)

A.B. Conant, Jr., Ivan Irwin, Jr., David M. Pruessner,

Mark R. Randall, Shank, Irwin, Conant, Lipshy and

Casterline, Dallas, Tex., John N. McCamish, Jr., Jona-

than D. Pauerstein, J. Patrick Deely, McCamish, Ingram,

2a

Martin and Brown, San Antonio, Tex., for defendant-

appellant cross-appellee.

Bernard William Fischman, Houston, Tex., Franklin

D. Houser, San Antonio, Tex., for plaintiff-appellee cross-

appellant.

Before GEE, DAVIS, and SMITH, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

This appeal challenges $6,000,000 plus interest and

attorneys’ fees awarded upon jury findings that officers

of a holding company fraudulently induced a $5 million

loan to a subsidiary and that they thereafter “looted” the

named borrower’s assets and thus tortiously interfered

with its contractual obligations to the lender. The dis-

trict court also granted judgment notwithstanding the

verdict with regard to claims that the individual owner

and the holding company were the “alter egos” of the

borrower and its guarantors. We affirm in part, reverse

in part, and remand for a redetermination of damages.

I. Overview.

Gibraltar Savings $5 million note was defaulted upon

by the named borrower, a real estate development cor-

poration, subsidiaries of which participated in multiple

limited partnerships. The lender sued the borrower, its

director-guarantors, and the borrower’s corporate parent

(also a guarantor) and its parent corporation (a holding

company) and its individual owner. The borrower, its

corporate parent, and other related enterprises are now

insolvent. The individual director-guarantors have set-

tled with Gibraltar.' This case was tried solely against

the last links in the chain: entrepreneur Lloyd D. Brink-

man and his principal holding company, LDBrinkman

1The borrower’s president and chairman, Ben D. Woody, has

settled his personal guaranty on the note for $350,000. Delbert G.

McDougal, the other general partner in these real estate develop-

ment joint ventures, who also guaranteed Gibraltar’s $5 million loan,

has settled as well with the lender for $350,000.

3a

Corp. The entity to which Gibraltar made the loan was

a real estate development subsidiary of a mobile home

manufacturer wholly owned by LDBrinkman Corp., which

also was the parent company of most of Brinkman’s other

ventures.’

The jury awarded Gibraltar Savings $6 million against

the defendants as the borrower’s (and its parent-guaran-

tor’s) “alter ego,” and for both fraud and tortious in-

terference with the borrower’s contractual relationships

with regard to the loan Gibraltar negotiated for it

through the holding company. The trial court granted,

in part, the defendants’ motion for judgment notwith-

standing the verdict, finding the “alter ego” theory un-

supported by the evidence; this ruling left no basis of

liability against Brinkman personally, and he does not

appeal.

However, the verdict on the fraud charge, attacked by

LDBrinkman Corp. as clearly erroneous, unproven for

failure to establish reliance, and based upon non-

actionable opinion statements, was left standing; the

district court entered, against the holding company,

judgment thereon and upon a finding of tortious inter-

ference with contractual relations. The defendants’

counterclaim for usury was rejected. The court awarded

$332,500 attorneys’ fees under a Texas statute allowing

such fee-shifting in contractual recoveries; that award

2 LDBrinkman Corp. acted as Brinkman’s holding company for:

a chain of pizzarias; LDBrinkman Co., a very large floor-covering

distributor with sizeable business debt; a company called Com-

mercial Aviation, which also had obtained over $3,000,000 in loans;

and Brinkcraft, Inc. (BI), a recently-acquired mobile home manu-

facturer, which was the sole owner of the entity to which Gibraltar

extended its loan. Brinkman allowed the former BI owner Ben D.

Woody—retained as president and chairman, but without any owner-

ship interest—to branch it and later-organized subsidiaries into

real estate development limited partnerships and other fields utiliz-

ing BI’s prefabricated structures, LDBrinkman Co.’s floor coverings,

and the like.

4a

of attorneys’ fees is also challenged by LDBrinkman

Corp. on appeal. Gibraltar’s cross-appeal against both

LDBrinkman Corp. and Brinkman seeks to reinstate the

jury’s finding of “alter ego” liability.

II. Brinkcraft Development, Inc.

Lloyd D. Brinkman now presides over very little of a

once-solvent and far-extended Texas business empire that

reached throughout the Middle South and Southwest and

that once had annual revenues of over a quarter-billion

dollars. In addition to a series of unrelated business and

financial ventures, Brinkman moved a rather minor floor-

covering company into industry prominence, extended it

horizontally by the purchase of a manufactured-housing

concern, and eventually established a development com-

pany to utilize his other businesses’ supplies. This cor-

poration, in turn, expanded into property management

and limited partnerships for further real estate develop-

ment. When the oil-backed economy of the Southwest

went sour, the bottom fell out of Brinkman’s realty

ventures.

Ignoring the earliest beginnings of Brinkman’s ever-

increasing commercial endeavors, the history of the de-

velopment subsidiaries begins with his buy-out of a modu-

lar construction company operated as_a sole proprietor-

ship. Ben D. Woody nurtured his mobile home and man-

ufactured-housing business for several years with con-

siderable success. Brinkman acquired all of Woody’s

stock in the company in 1978, retaining Woody as presi-

dent and chairman. In order to identify the manufac-

tured-housing business more closely with his other con-

cerns and thus to strengthen the financial appearance of

his fiedgling empire, Brinkman renamed the company

Brinkcraft, Inc. (BI), and placed it under his holding

company, LDBrinkman Corp.

In 1982, BI for the first time ventured into real es-

tate development through a series of limited partnerships.

5a

These ventures typically had BI and one Delbert G. Mc-

Dougal as general partners with, respectively, 50 percent

and 25 percent ownership, and Woody as limited partner

with the remaining 25 percent ownership. These limited

partnerships were managed by McDougal and operated

by Brinkcraft Development Co. (BDC), which was

wholly-owned by the BI subsidiary established to engage

in various development ventures: Brinkcraft Develop-

ment, Inc. (BDI), which was created to develop proper-

ties largely through placement of modular units pur-

chased from BI. Brinkman’s corporate structure for real

estate projects thus was:

Lloyd D. Brinkman

LDBRINKMAN CORP.

(Kerrville-based holding company )

LDBRINKMAN CO. BRIN KCRAFT, INC. (BI) OTHER COMPANIES

(floor covering) (Wichita Falls manufactured housing

concern under Woody)

BRIN KCRAFT DEVELOPMENT, INC. (BDI)

(Lubbock-based modular construction company under

McDougal)

BRIN KCRAFT DEVELOPMENT CO. (BDC)

PROPERTY MANAGEMENT LIMITED PARTNERSHIPS OTHER PROJECTS

(BI—50% owner/gen. p.;

McDougal—25%

owner/gen. p.; and

Woody—25% owner/

limited partner)

Gibraltar’s $5 million loan to BDI (guaranteed by BI,

Woody, and McDougal), which occasioned this suit, was

intended to fund existing and planned joint ventures by

BDC. Though the holding company had no direct relation

with BDI or BDC, McDougal was required to obtain

LDBrinkman Corp.’s approval (through the holding com-

pany’s chief financial officer) before commencing any

BDC development projects. In large part, Woody’s con-

trol of BI was similarly circumscribed, though none of

ail

6a

LDBrinkman Corp.’s officers occupied any positions at

BI, BDI, or BDC.

III. A Roster of the Remaining Players.

Ray Hufhines was BI’s comptroller and chief financial

officer, but testified that he took his orders principally

from the holding company’s finance personnel. Herb

Bradshaw, senior vice president of LDBrinkman Corp.,

was hired some months before the default on the Gib-

raltar loan and was one of the prime movers in divesting

the holding company of the Brinkcraft’s subsidiaries (see

infra note 47); Gibraltar, indeed, offered proof that he

was brought into the company with the thought that he

would sell off or otherwise pare back the holding com-

pany’s marginal operating subsidiaries. Don Bullock was

the holding company’s treasurer, and Thomas Ratcliffe

was its chief financial officer; together they ran most of

Brinkman’s business operations on a daily basis and were

responsible for all but the most important fiscal decisions.

Ratcliffe had obtained some $2.5 million for BDI from

BancTexas, Dallas (BanceTexas), which Brinkman served

as a director. (BancTexas had extended to Brinkman

sizeable personal and corporate loans and was threaten-

ing to call some of these loans during the period in

question.)

Ratcliffe desired to have the BancTexas $2.5 million

retired through the Gibraltar loan of $5 million; while

this was disclosed to the lender, Gibraltar now alleges

that other, equally-important, business rationales (of LD

Brinkman Corp. and Brinkman, not of the development

companies) were undisclosed. CFO Ratcliffe allegedly

had enormous input into BDC investment choices and

general decisionmaking, and—quite obviously—was in-

volved in the daily operations of both BDI and BDC.

(Ratcliffe terminated his employment with LDBrinkman:«

Corp. when the Gibraltar loan went bad, but escaped with

a lucrative “consulting” golden parachute.)

EEE

Ta

Thad Finley, LDBrinkman Corp.’s in-house counsel,

sat on the boards of, or was an officer of, most of Brink-

man’s businesses. His connection with the instant loan

will be explored below. Brinkman’s longtime friend Ivan

Irwin, Jr., acted as the holding company’s outside general

counsel and also, apparently, actively advised on business

decisions. He sat on BI’s board and served Brinkman as

particular matters required. Homer Kirby, a lawyer and

self-styled workout specialist, is associated with outside

counsel Irwin’s law partners and was the person to whom

LDBrinkman Corp. transfered BI’s stock; Gibraltar ac-

cuses him of plundering the subsidiary’s remaining as-

sets before he filed BI’s bankruptcy.

Frederic Farlow was a long-time friend of, and finan-

cier for, Lloyd D. Brinkman; through Farlow, Brinkman,

personally and for his various ventures, had obtained

some $5-6,000,000 credit from Farlow’s previous employ-

ers. Gibraltar Savings’ chief loan executive, James Hol-

lingsworth, hired Farlow as a Gibraltar loan production

officer, and thereafter approved Farlow’s (sometimes

ambitious) loan recommendations, including the one in

question. A self-described “money peddler,” Farlow was

an extremely aggressive and eager promoter of both him-

self and deals he wished to see consummated.

While both Hollingsworth and Farlow were with

Lloyds Bank (the former in California, the latter in

Houston), Hollingsworth supervised some of Farlow’s

lending activities; Brinkman had obtained two Lloyds

Bank loans through Farlow during this period, but Hol-

lingsworth had no contact with these transactions. When

Lloyds Bank closed its Houston office, it was natural for

Farlow to offer his services to Gibraltar’s new Texas

corporate finance head, for whom he had previously

worked. It is disputed whether Hollingsworth was, or

needed to be, apprised of Farlow’s personal relationship

with Brinkman and Ratcliffe, though he clearly knew

that their business contact was extremely friendly, that

Farlow sought to service his clients to the benefit of all

an,

LL ce

8a

parties and that Farlow might embellish the merits of a

loan he negotiated.

IV. What Farlow Was Told During the Loan

Negotiations.

Through Farlow, Ratcliffe sought and obtained a $5

million loan for BDI from Gibraltar. Little else is clear

and undisputed. Not only particular acts, statements, or

omissions are controverted, but the entire tone of the

negotiations could not be more diametrically character-

ized: In Gibraltar’s view, their new employee acted as

virtual agent for Brinkman and LDBrinkman Corp.’s

officers, who duped him into a misplaced trust and gen-

erally took advantage of their past friendship and ami-

cable business relations and his current desire to con-

summate several loan deals; according to the defendants,

Farlow was an aggressive promoter who went to all

lengths to sell them on the loan and whose lax investiga-

tion and careless (reckless) lending zeal came back to

haunt his new employer.

From the verdict, it is clear that the jury was largely

persuaded by Gibraltar’s case; the lender’s evidence was

elaborate and far-ranging, and we wili not attempt to

summarize all of it here. Additional facts that do not

clearly fit into the overall puzzle will be described where

appropriate. It is fair to say from the evidence, however,

that the initial contact came from LDBrinkman Corp.

Whether an informal mention of possible financing

from Gibraltar had previously occurred, it is certain that

LDBrinkman Corp.’s CFO, Ratcliffe, raised the topic of

a new loan with Farlow in August 1984. At this time,

Farlow negotiated the transfer of some $4 million of

Lloyds loans owed by Brinkman or his companies to Gib-

raltar; this refinancing was completed before the present

negotiations began, and those sums were either repaid

when due or were kept current by their respective bor-

rowers. Farlow had also submitted to Lloyds a proposed

—_

9a

unsecured loan to finance development of new real estate

projects; when Farlow was unable to convince his then

employer to accept the deal, Ratcliffe turned to Bane

Texas. It is this prior similar proposal upon which LD

Brinkman Corp. bases its contention that Farlow knew

of the need for financing for BDC projects, and that thus

it was he who initiated the transaction.

During the discussions concerning his loan request for

BDI, Ratcliffe was the sole representative, though he

held no position with the ostensible borrower—even as,

for a time, one of its four directors, he had not been

denominated treasurer or secretary. Neither Woody nor

McDougal—nor, indeed, any officer cof BI or BDI—took

any part in negotiating the Gibraltar loan, and both later

guarantors maintain that they knew nothing of Rat-

cliffe’s refinancing plan until presented with the com-

pleted loan documents for their signatures. BI’s and

BDI’s comptroller also testified that he know nothing of

the Gibraltar loan until after the fact. To reinforce, in

the lending officers’ minds, that the holding company

was the real party in interest, the sole correspondence

regarding the loan was on LDBrinkman Corp. stationery.

During August and September 1984, Ratcliffe and

Farlow negotiated telephonically and in person, and, per

Farlow’s later testimony, Ratcliffe made, inter alia, the

following representations, which Farlow first passed onto

chief Gibraltar loan officer Hollingsworth and, in turn,

to Gibraltar’s entire loan committee:

1. BI’s intercompany debt to LDBrinkman Corp. was

$7 million, and BDI’s “outside debt” was solely $2.5

million owed to BancTexas; *

3 Ratcliff. had negotiated the line of credit with BancTexas—

which Brinkman served by sitting on its board of directors. That

debt was due, and the lender was unwilling to roll it over, though

LDBrinkman Corp.’s owner and officers sought such a direct re-

financing and attempted to persuade BancTexas that the subsidiary

would remain solvent—despite their alleged knowledge that BDI

10a

2. The Gibraltar $5 million would be used exclusively

to repay BDI’s BancTexas debt, with the balance as

operating capital to finish BDC’s real estate development

projects;

3. LDBrinkman Corp. would subordinate its $7 mil-

lion in unsecured advances to BI, until the Gibraltar loan

was repaid;

4. LDBrinkman Corp. would impose a moratorium on

dividend payments from BI to LDBrinkman Corp.; and

5. LDBrinkman Corp. would maintain both BI and

BDI as “going concerns” until the Gibraltar loan was

repaid.

Based upon Farlow’s repetition of these statements to

Hollingsworth and upon the financial information gleaned

from LDBrinkman Corp.’s and BI’s annual reports, a

Gibraltar credit analyst prepared a “credit request.”

This in-house credit request was never circulated to the

borrower or those acting for it, but was placed before

the bank’s executives; they considered that analysis, a

spread-sheet compiled from financial statements and an-

nual reports, along with further financial data. Included

in this package were documents provided by Farlow; sub-

mitted previously with respect to the Lloyd’s refinancing

showing BDI with almost $4 million in assets and the

individual guarantors with more than $4 million com-

bined worth, of which almost $1 million was liquid.

At the time, Woody and McDougal were thought to be

taking a one-half interest in BDI but had not been con-

sulted on their willingness to guarantee the contemplated

loan. (Woody testified that he resisted the stock transfer

could not meet such an amount in the short term of any contem-

plated refinancing, and also despite their conclusion that the busi-

ness’s future was questionable. Brinkman admitted he would not

have “felt right” about leaving BDI’s debt to BancTexas unpaid,

so Farlow was contacted to obtain a Gibraltar loan to eliminate

the BancTexas debt.

lla

and told Ratcliffe on September 6, 1984, that he “didn’t

want to own a corporation owing $5 million [but] with

no assets.” Despite pressure placed on Woody by Brink-

man, Ratcliffe, and Finley, the transfer never took

place.) No guaranty was sought from LDBrinkman

Corp. or Brinkman. Because Ratcliffe was not an officer

or director of BDI or BI at the time, LDBrinkman

Corp.’s in-house counsel Finley prepared a special cor-

porate resolution for Ratcliffe’s signature authorizing

him to sign BI’s guaranty of the BDI note.*

The loan documents originally were prepared for BDC,

but this was changed to BDI. The lender knew that no

financial statements were available for either BDI or |

BDC, and that BDI was a “shell” without independent

assets. (Its corporate checking account seldom had a con-

tinuing balance of over $100.) Gibraltar’s loan commit-

tee approved the deal during the first week of September.

On September 5, Farlow visited LDBrinkman Corp.

headquarters in Kerrville to present the loan documents

for Lubbock-based BDI. When Farlow again went to

Kerrville for the closing on September 14, still no BI

or BDI representatives were present. On September 26,

the loan proceeds were wired not to BDI in Lubbock, but

to BI’s account at its offices in Wichita Falls. Under

Ratcliffe’s direct instructions to BI’s comptroller, the loan

proceeds were distributed by bank wire as follows: (1)

4Contrary to the facts recited in that resolution, no board

meeting was held, and in the rush of later events, Finley, Ratcliffe,

and Brinkman—allegedly “realizing their error’—attempted to

“cover its [LDBrinkman Corp.’s] tracks” by creating a conveniently-

backdated “unanimous consent” for BI’s directors to sign. Woody

protested the date recited in the resolution, refused to participate

in the effort to formalize and authorize the prior actions of Rat-

cliffe, and thus made it clear that his and BI’s approvai was not

sought until long after the fact. At the same time, Finley prepared

another unanimous consent for the directors’ signatures reciting

BI’s board’s unanimous consent to the Woody-McDougal buy-back

of BDI.

12a

$2,525,000 to BaneTexas; (2) $475,000 on BDI’s account

to satisfy BDI’s line of credit (guaranteed by BI, Woody,

and McDougal) from its Lubbock bank; and (3) $2 mil-

lion to LDBrinkman Corp. in Dallas.

During the loan negotiations, Ratcliff failed to mention

BDI’s additional “outside” debt of almost $1 million,

LDBrinkman Corp.’s intention to use proceeds from the

Gibraltar loan to retire part of the debt owed BDI’s Lub-

bock bank, or the possibility of LDBrinkman Corp.’s di-

verting $2 million to repay part of LDBrinkman Corp.’s

advances to BDI. Ratcliffe admitted that he saw BDI

“as just a subsidiary that was used to make the loan,”

and so he perceived no impropriety in dividing the moneys

received as most benficial to the holding company, re-

gardless of the prior representation that the Gibraltar

loan would be used exclusively to retire the BancTexas

debt and then to supply BDI and BDC with working

capital for their real estate projects.

Ratcliffe also concealed LDBrinkman Corp.’s contem-

poraneous plan to dispose of the Brinkcraft subsidiaries

and to treat them as “discontinued operations” from as

early as the spring of 1984, months before the Gibraltar

loan was negotiated. Ratcliffe and Brinkman both testi-

fied that the decision to discontinue BI and_BDI was not

made until November or December 1984,° but consider-

able evidence to the contrary was adduced at trial.

V. The Default.

Gibraltar contends that LDBrinkman Corp.’s diversion

of the loan proceeds was but the first link in a chain of

acts designed to strip BI of its cash and other readily-

5 Brinkman stated that LDBrinkman Corp.’s board of directors

made such a year-end decision to discontinue the Brinkcraft subsid-

iaries, but no corporate minutes were prepared to document this

significant decision affecting an important component of LDBrink-

man Corp.’s business.

_ soll

13a

saleable assets, thus shifting a good part of Brinkman’s

loss on the Brinkcraft subsidiaries to their outside cred-

itors. In total, between the time Gibraltar’s loan (Sep-

tember 26, 1984) and the point at which LDBrinkman

Corp. formally wrote the subsidiaries off its hooks (April

1985), LDBrinkman Corp. took a total of $3.067 million

directly from BI in cash and assets, and, additionally,

$1.3 million directly from the real estate development

partnerships controlled by BDC.®

The intercompany advances from LDBrinkman Corp.

to BI, which were thus recovered by LDBrinkman Corp.,

were not evidenced for the most part by promissory notes

or other documentation. BI in general, and the develop-

ment projects in particular, were always undercapital-

ized, and it was the holding company’s advances that

kept the subsidiaries “afloat.”

Woody testified that if BI needed money for a project,

“we would call the Kerrville office and they would ad-

vance money to us.” Similar ad hoc financing occurred

for BDI and BDC. When orders would come to send

money back to the parent, BI and BDI obeyed, even if

such instructions were contrary to the lines of communi-

eation LDBrinkman Corp. itself had established for the

movement of “excess funds.” Such transfers were not

formally-declared dividends, but were simply intercom-

pany advances flowing in the opposite direction.’

6 The $1.3 million figure represented the proceeds from the

profitable sales of two of the development projects. In both in-

stances, McDougal testified that he had intended to use those funds

to reduce the Gibraltar obligation, but was prevented, under the

threat of losing his job, from doing so by express orders (from

Brinkman and Ratcliffe on the Sagewood sale and from Herb Brad-

shaw on the undeveloped Albuquerque land), to send the proceeds

directly to the parent company.

7 While characterizing Brinkman’s machinations as a “shell game”

is inappropriate, it is clear from Woody’s testimony that the osten-

sibly separate entities were entirely controlled by LDBrinkman

l4a

In December 1984, Ratcliffe transmitted BI’s financial

statement to Republic National Bank, Dallas, without

mention of the $5 million Gibraltar loan to BI’s subsid-

iary BDI, but excused that violation of accepted account-

ing procedures later, “because that debt was in Brinkcraft

Development and it was a voting control of Brinkcraft

Development and was only temporary. And accounting

rules say you do not consolidate that subsidiary.” ®

This was directly opposite to the prior practice of the

holding company and BI with regard to reporting sub-

sidiaries’ finances. While BDI was reported on a “con-

solidated basis” with BI because it was 100-percent owned

by BI, and while similarly wholly-owned BI had previously

been consolidated in LDBrinkman Corp.’s financial report-

ing, Ratcliffe decided to remove BDI from BI’s statement,

thus concealing the $5 million debt in BI’s fiscal report.

BI’s comptroller testified that he protested that this

financial statement would be false and misleading, even

if BI’s “control” of BDI was, indeed, only “temporary”;

Corp. and Ratcliffe and Brinkman. If Brinkman wanted a VDI

project discontinued, it was discontinued, without regard to the

losses which BI would incur. Brinkman once demanded that BI

surrender an aircraft on loan from Commercial Aviation, and

though BI complied, it thereafter had to lease one from an unrelated

company. Brinkman similarly demanded that BI sell off its division

known as Woodco Supply in a partial liquidation of assets, and

it was done. When the LDBrinkman Corp. decided to change BI’s

name back to one similar to what Woody had used before the buy-

out, Woody, although president of the company and a member of its

board of directors, was not consulted and took no part in the action.

When LDBrinkman Corp. demanded that $1 million from the pro-

ceeds of a large Albuquerque sale be deposited directly with the

parent company, the subsidiary complied. Though having no com-

mon officers and only a few overlapping directors, Wichita Falls-

based BI had its corporate minutes prepared and kept at LDBrink-

man Corp. headquarters in Kerrville.

8LDBrinkman Corp.’s own experts testified that Ratcliffe had

no acceptable basis for this “bizarre” interpretation of proper

accounting rules.

15a

though 50 percent of the stock was supposed to have been

transferred to Woody and McDougal on September 6,

1984 (the day after Farlow visited LDBrinkman Corp.

headquarters in Kerrville to present the loan documents

for Lubbock-based BDI), this buy-back had fallen through

almost four months before Ratcliffe made his question-

able accounting decision.

On June 1, 1985, Ratcliffe terminated his employment

with LDBrinkman Corp. and went on a three-year,

$130,000 annual “consulting contract.” At a June 10

meeting, LDBrinkman Corp.’s senior vice president Herb

Bradshaw and Gibraltar’s representatives—Hollingsworth

and Farlow—met in Houston to discuss “a problem” with

the loan. LDBrinkman Corp. also had present in-house

counsel Finley, outside general counsel Ivan Irwin, and

treasurer Don Bullock, as well as Woody and McDougal

representing the Brinkcraft subsidiaries.

At this meeting, the holding company officers disclosed

for the first time (1) that a portion of the loan pro-

ceeds had been applied in a manner at variance with

what Ratcliffe (now departed) had promised Farlow;

(2) Ratcliffe had instructed BI’s comptroller to “delete”

the Gibraltar loan from BI’s financial statements; (3)

that neither BI nor BDI had any capacity to repay the

loan; and (4) that LDBrinkman Corp. had no intention

of continuing its prior financial support for the Brink-

craft subsidiaries, which would allow continued debt serv-

ice by DEI or BI. Hollingsworth thereupon called the

loan under the demand provision of the note.

Negotiations between Gibraltar and the borrower’s

guarantors continued, despite the lender’s demand and

despite BI’s rapidly-accelerating decline. When a $5.5

million judgment against BI was awarded a construction

company for defects in the modular units BI supplied for

a Port Aransas condominium complex, patience with,

and confidence in, the parent-guarantor evaporated.

Nonetheless, the lender was repeatedly reassured that

16a

more time might see the subsidiary’s loan made good

from the sale of other development projects. This was

the period, however, during which almost $4.4 million in

BI assets was applied by the holding company to repay

a majority of LDBrinkman Corp.’s $7 million in past

advances to BI.

In September 1985, on advice of its counsel, LDBrink-

man Corp. instructed BI not to pay principal or accrued

interest on the Gibraltar loan. Prior to that date, LD

Brinkman Corp. had funded the interest payments, and

in at least one instance made the payment directly. In

October 1985, after first changing the name back to

something similar to what BI had been called when

Woody had owned it, LDBrinkman Corp. transferred all

of BI’s stock to “Dallas businessman” Homer Kirby, a

self-styled ‘‘work out” expert.

Kirby, who is a lawyer associated with one of LD

Brinkman Corp. outside counsel Irwin’s law partners,

gave no money, notes, or other consideration for the

stock. In his attempts to “salvage LDBrinkman from

financial ruin,” Kirby conferred upon himself a $7500

monthly salary, and, on one occasion, a $30,000 real es-

tate commission for disposing of some of BI’s property.

Kirby filed Chapter 11 proceedings for the company af-

ter Gibraltar filed suit in November 1985.

VI. The Sut.

The loan was never repaid, and interest accrued to

trial to the tune of $787,226. Gibraltar® sued the con-

tractual parties, BI’s successor under Kirby, and individ-

ual guarantors McDougal and Woody, as well as LD-

Brinkman Corp. and Lloyd Brinkman. To avoid forec-

® The plaintiff here is a California corporation that is unaffiliated

with the Texas institution of the same name, and so jurisdiction

below was based upon diversity, as well as upon federal questions

raised by statutory claims Gibraltar pled.

17a

ing Woody and McDougal into personal bankruptcy, and

in return for their cooperation, Gibraltar settled their

individual liabilities under their guaranties for $1,000,000

and an assignment of their interests in the partnerships.

Subsequent to dismissal of claims against them individ-

ually, the settlement sum was negotiated down to

$350,000 each, once the assigned joint ventures met cer-

tain agreed-upon financial goais. Once Kirby petitioned

for Chapter 11 relief, Gibraltar obtained from the bank-

ruptcy court an agreed judgment of $5 million and $5000

attorneys’ fees.

The only defendants remaining here are Lloyd D.

Brinkman and LDBrinkman Corp. While the original

and amended complaints listed other parties, Gibraltar’s

third amended complaint alleged that LDBrinkman Corp.

and Brinkman were liable as the Brinkcraft subsidiaries’

“alter egos” and for RICO” violations, common-law

fraud, and tortious interference with contractual rela-

tions. This final amendment also removed an interest

claim against LDBrinkman Corp. that would have sup-

ported a charge of usury by Gibraltar under Texas law

and on the basis of which the defendants counterclaimed.

The jury found two of Ratcliffe’s statements to have

fraudulently induced the loan to BDI. Awarding no sep-

arate damages, the jury also found LDBrinkman Corp.

to have tortiously interfered with the contractual obliga-

tions of BDI to the lender. The jury made four further

findings that BI was the “alter ego” of BDI, that LD

Brinkman Corp. was the “alter ego” of both BDI and

BI, and that the holding company was, in turn, the

“alter ego” of Brinkman. Gibraltar’s other claims were

rejected. The verdict was $6 million.

On motions for judgment notwithstanding the verdict,

the trial judge disregarded the “alter ego” finding as

10 Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.

§§ 1961 et seq.

bitte

18a

unsupported by the evidence because, (1) with respect to

Brinkman, LDBrinkman Corp. has not been shown to be

incapable of meeting any judgment against it, and (2)

with respect to LDBrinkman Corp., use of BI and BDI

as “shells” did not necessitate “alter ego” liability, since

there was liability for Ratcliffe’s fraudulent representa-

tions. We affirm the judgment notwithstanding the ver-

dict, but upon slightly different grounds.

VII. Disregarding BDI and BI’s Corporate Evidence.

A. Standing To Bring the “Alter Ego” Claim?

As LDBrinkman Corp. states, “The reasons for Gibral-

tar’s alter ego accusations are transparent”: Brinkman

and LDBrinkman Corp. are the only solvent parties.

Given the fact that the named borrower is in bankruptcy,

the question, then, is how it happened that this litigation

was not tried by a bankruptcy court. While the claims

which Gibraltar raises are precisely those expected to be

raised by the bankruptcy trustee, and while the district

court ordered additional claims to be deleted by amend-

ment of the complaint under the view that fraudulent

transfer claims were properly of the debtor’s estate, we

cannot agree with the defendants that Gibraltar’s avoid-

ance of the bankruptcy proceeding was improper with

respect to the causes of action the district court allowed

to go forward.

Brinkman and LDBrinkman Corp. first contend that

the lender lacks standing to bring “alter ego” claims be-

cause we have previously held that a bankrupt’s creditor

cannot bring an “alter ego” claim against third parties

in order to avoid the bankruptcy proceeding. The de-

fendants’ argument, in short, is that the United States

District Court for the Western District of Texas lacked

jurisdiction to hear the “alter ego” claims concerning

businesses on the bankruptcy docket of the Northern Dis-

19a

trict of Texas. Prior precedent indeed has prohibited

claims—such as Gibraltar’s—apart from a subsidiary’s

ongoing bankruptcy, but we find the present situation

distinguishable.

The theory denying Gibraltar standing on this issue

is that “alter ego” liability against the parent company

or owners, if appropriate at all, should be pursued by

BDI’s and BI’s bankruptcy trustees for the benefit of all

creditors, not just one whose claim is large enough, or

its cause great enough, to allow it to assail the alleged

“alter egos” in other fora. We have held on several oc-

casions that such “alter ego” claims are the “property

of the estate” within the meaning of the Bankruptcy

Code. See S.J. Acquisition, Inc. v. Eastway Delivery

Serv., Inc., 817 F.2d 1142 (5th Cir.1987).”

S.I. Acquisition would preclude Gibraltar’s asserting

the “alter ego” claims, but for key distinguishing factors.

First, Gibraltar sought and obtained leave, over LD

Brinkman Corp.’s vigorous objection, in both the bank-

ruptcy proceedings and the court below, to prosecute the

third amended complaint, thereby satisfying the notice

requirement expressed in S.J. Acquisition. 817 F.2d at

1154 n. 13. See also In re River Hills Apts. Fund, Inc.,

813 F.2d 702 (5th Cir.1987). In addition to the initial

hearing on whether the case could proceed, the standing

issue was unsuccessfully asserted on several occasions at

trial, including in the defendants’ motion for a directed

verdict. These rulings go unappealed.

Second, though they appealed the order lifting the

bankruptcy stay. LDBrinkman Corp. voluntarily dis-

11 Jn re Lanchart, Inc. d/b/a Lancer Homes, f/d/b/a Brinkcraft,

Inc., No. 7-85-70218 (N.D. Tex. filed Nov. 25, 1985) (the BI bank-

ruptcy proceedings).

12 See also In re MortgageAmerica, 714 F.2d 1266 (5th Cir.

1983) ; Chicago Florsheim Shoe Store Co. v. Cluett, Peabody & Co.,

826 F.2d 725 (7th Cir. 1987).

20a

missed its appeal (under the erroneous assumption that

the issue was moot).’* Normally, we would review an

order pursuant to 11 U.S.C. § 362(d) lifting an auto-

matic stay under an abuse-of-discretion standard, but we

decline to engage in this inquiry because the issue is not

properly before us.* Nothing in S.J. Acquisition requires

an independent evaluation of even potentially meritorious

arguments; the power to lift the stay was properly exer-

cised by the bankruptcy judge, and the propriety of that

order on the instant facts is not now in question.

A third distinguishing factor also defeats the defen-

dants’ reliance upon the bankruptcy cases: Here it is the

alleged “alter ego” entity itself that challenges the cred-

itor-plaintiff’s attempt to penetrate the corporate veil.

In S.J. Acquisition, the bankruptcy trustee sought to pro-

hibit a creditor-plaintiff from pursuing its claim through

the trustee’s contempt power. Here, in contrast, the

trustee’s leave was obtained.

An extension of S.J. Acquisition in LDBrinkman Corp.’s

favor would mean that allegedly liable “alter egos” could

escape liability should the trustee for a “shell” corpora-

13 L. DBrinkman Corp. v. Gibraltar Savings (In re Lanchart, Inc.),

No. 7-85-70218 (N.D.Tex. filed Nov. 25, 1985), appeal docketed,

No. 87-1332 (5th Cir. May 6, 1987), voluntarily dismissed (5th Cir.

Sept. 14, 1987).

i4 When the district court lifted the autematic stay of proceed-

ings, the defendants argued that there was no authority to allow

other proceedings to continue. At the time the stay was lifted, the

bankrupt borrower and parent-guarantors were named parties to

Gibraltar’s action. There are multiple instances in which separate

proceedings have been allowed to coincide against a debtor. The

defendants cite no cases limiting the discretion of the bankruptcy

court to lift a stay allowing a claim such as Gibraltar’s to be

tried elsewhere. Expressing no view as to whether the instant

exercise of the power to lift the automatic stay was an abuse of dis-

cretion, we hold that the defendants cannot succeed on their stand-

ing argument, because they voluntarily dismissed their appeal from

the district court’s ruling that the bankruptcy judge could lift the

stay on this suit.

21a

tion which it (the alleged “alter ego”) has thrown into

bankruptcy simply choose not to prosecute a potentially

meritorious “alter ego” claim. We decline to convert the

recognized shield for the debtor’s estate into a shield for

potentially liable “alter egos”; should the bankruptcy

trustee decline the gauntlet, the veil-piercing sword is

available to trot claimants or contract creditors, should

they choose to attack in the bancruptcy proceeding or,

with the bankruptcy court’s leave, in another forum.

B. Gibraltar’s Legal Theory.

The liability which Gibraltar seeks to impose upon

LDBrinkman Corp. and Brinkman is a direct contractual

one, as their operation of BI and BDI as “alter egos” for

the overall parent holding company and the owner made

them, not the “shell” subsidiaries, the real parties to the

transaction. While both Gibraltar and LDBrinkman

Corp. would characterize the “alter ego” issue as merely

a cause of action for a “sham to perpetrate a fraud,”

the contractual liability sought is not for LDBrinkman

Corp.’s own acts, but as it stands in the shoes of its sub-

sidiaries through which it chose to transact business. See

Valdes v. Leisure Resource Group, Inc., 810 F.2d 1345

(5th Cir.1987).

This classic “alter ego” theory is, as correctly perceived

by the district court, unsupported by the evidence under

the current statement of Texas law on “piercing the cor-

porate veil.” We find, as did the district court, that there

was insufficient evidence of lack of separateness to jus-

tify a jury finding that LDBrinkman Corp. and Brink-

man were the ‘alter egos’ of BI and BDI. We accord-

ingly affirm the judgment notwithstanding the verdict

granted by the district court on the defendants’ “alter

ego” liability.

The plaintiff cannot switch from one _ veil-piercing

theory to another. As our discussion of Texas law will

make clear, the lender’s “sham to perpetrate a fraud”

22a

ground for corporate disregard is distinct from the sole

ground addressed by the parties below: classic “alter

ego” based upon the absence of any legal or factual dis-

tinction between the challenged corporate entity and its

corporate or individual owner. Gibraltar chose the “alter

ego” ground and not the distinct “sham to perpetrate a

fraud” ground; the potentially meritorious alternative

basis for corporate disregard is foreclosed, even if its

factual and legal requirements may have been subsumed

under the arguments made. We made absolutely clear in

Valdes that an “[a]ppellee may not change legal horses

midway through this stream” in its pursuit of direct

liability of owners of a corporation, the lega! separate-

ness of which is to be disregarded. 810 F.2d at 1353

nT:

C. The Texas Approach to the Problem of Corporate

Disregard

1. “Alter Ego.”

In summarizing state law on “corporate disregard,”

the Texas Supreme Court began its most recent analysis

with a general remark, then listed specific grounds previ-

ously recognized by caselaw:

We disregard the corporate fiction, even though

formalities have been observed and corporate and

individual property have been kept separately, when

the corporate form has been used as part of a basic-

ally unfair device to achieve an inequitable result.

Specifically, we disregard the corporate fiction: (1)

when the fiction is used as a means of perpetrating

fraud; (2) where a corporation is organized and

operated as a mere tool or business conduit of

another corporation; (8) where the corporate fiction

is resorted to as a means of evading an existing legal

obligation; (4) where the corporate fiction is em-

ployed to achieve or perpetrate monopoly; (5) where

23a

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.

Castleberry v. Branscum, 721 S8.W.2d 270, 271-72 (Tex.

1986} (citation and footnotes omitted). We recently

explained our bewilderment at some of the nuances of

the Castleberry opinion in Pan Eastern Exploration Co.

v. Hufo Oils, 855 F.2d 1106, 1131 (5th Cir.1988) :

The Castleberry opinion is puzzling. It begins with

a most general principle—‘when the corporate form

has been used as part of a basically unfair device to

achieve an inequitable result’—then follows with a

laundry list of seven relatively detailed rationales

that intertwine and overlap, yet point in various di-

rections. We think we can fairly discern, however,

three distinct strands of corporate disregard under

Texas law . .. ., each [with] a different application.

One strand is obviously a classic “alter ego” prong. The

phrase “alter ego” is certainly common in legal thought,'®

but it is now a misstatement of Texas law to use “alter

15JIn a footnote immediately following this passage, the Court

added a seventh ground, which in practice is an indicator of the

other grounds, but which we list here for completeness: (7) where

the corporation is inadequately capitalized.

16 Classic “alter ego” has often been (and still is) used as a

generic term for corporate disregard or “veil-piercing,” but the

Castleberry opinion makes clear that “alter ego” is a particular

kind of rationale for corporate disregard. See Pan Eastern, 855

F.2d at 1130-33; Valdes v. Leisure Resource Group, Inc., 810 F.2d

at 1354. The focus of “alter ego” proper is on the legal adequacy

of the corporation’s existence, the failure to maintain separate

identities between corporate forms, and the relationship between

the corporation and its controlling corporate or individual owners.

See United States v. Jon-T Chemicals, Inc., 768 F.2d 686, 696

(5th Cir. 1985), cert. denied, 475 U.S. 1014, 106 S.Ct. 1194, 89

L.Ed.2d 309 (1986) ; Nelson v. Int’l Paint Co., 734 F.2d 1084, 1091-

93 (5th Cir. 1984).

24a

ego” as a generic description of “disregarding the cor-

porate fiction.” The parties never objected to this usage

in the district court, however, and in fact used it in their

appellate briefs.

The first clause of Castleberry’s “laundry list” mis-

leadingly implies that Texas law excludes classic “alter

ego,” ie., “ ‘disregarding’ the corporate existence when

there really is no legal or formal separate existence be-

cause of complete domination by the owners, co-mingling

of funds, flaws in corporate formalities, ete.” Pan East-

ern, 855 F.2d at 1131 n. 39. Yet, as the court made clear

later in the Castleberry opinion, “alter ego” is one of the

grounds of corporate disregard recognized in Texas—

specifically, under ground number (2): “TAjlter ego is

only one of the bases for disregarding the corporate fic-

tion: ‘where a corporation is organized and operated as

a mere tool or business conduit of another corporation.’ ”

721 S.W.2d at 272 (quoting Pacific Am. Gas. Co. v. Mil-

ler, 76 S.W.2d 833, 851 (Tex.Civ.App.—Amarillo 1934,

writ ref’d) ).

Many wholly-owned subsidiaries and closely-held cor-

porations are not factually distinct from their owners.

Many are in fact controlled and operated in close concert

with the interests of the owners, and do not have a dis-

tinct factual existence: separate employees, offices, or

properties; consolidated financial reporting and tax re-

turns; and the like. Such conduct is perfectly natural

and proper and provides no basis for ignoring legal in-

dependence."?

17 Compare Edwards Co. ». Monogram Indus., Inc., 730 F.2d 977

(5th Cir. 1984) (en banc) (“shell” subsidiary was formally dis-

tinct, and creditor was not misled; corporate disregard under Texas

law was therefore improper) with United States v. Jon-T Chemicals,

Inc., 768 F.2d at 696 (laundry list of 12 factors for judging lack

of separateness under then-current Texas law). In Valdes, we

remarked that

[allter ego status is tautological with actual control of the

subservient entity. Unrestricted ownership of that entity pro-

25a

The problem arises when such a corporation is not

treated as legally distinct; when, in other words, the

owners neglect to maintain the formal independence of

the corporation as required by law. “Alter ego’s ration-

ale is: ‘if the shareholders themselves disregard the sep-

aration of the corporate enterprise, the law will also dis-

regard it so far as necessary to protect individual and

corporate creditors.’” Castleberry, 721 S.W.2d at 272

(quoting Ballantine, Corporations § 123 at 294 (1946) ).

Under Castleberry,

Alter ego applies when there is such a unity between

corporation and individual [or parent corporation]

that the separateness of the corporation has ceased

and holding only the corporation liable would result

in an injustice. It is shown from the total dealings

of the corporation and the individual, including the

degree to which corporate formalities have been fol-

lowed and corporate and individual property have

been kept separately, the amount of financial inter-

est, ownership and control the individual [or parent]

maintains over the corporation, and whether the

corporation has been used for personal for parental]

purposes.

Id. (citations omitted).

Whether sounding in contract or tort, invoking “alter

ego” against a corporation may result in a windfall for

creditors or tort claimants. In theory, even if the cor-

poration was adequately capitalized, and even if the

claimant did not rely upon the financial backing of the

corporation’s owners, the claimant is still entitled-to re-

cover as a sort of private attorney general. “Alter ego,”

therefore, properly focuses upon the relationship between

vides a logical backdrop for domination, although ownership

alone will not support an alter ego finding.

810 F.2d at 1354 (citing Gentry v. Credit Plan Corp., 528 S.W.2d

571, 573 (Tex. 1975) ).

Se

26a

the corporation and its owners and not upon the relation-

ship between the corporation and the claimant-creditor.

Castleberry states the rationale for “alter ego” liability

purely in terms of reciprocal fairness, “but clearly the

rule is also designed to give incentives to those using the

corporate form to obey the state’s laws fully by main-

taining corporate formalities, and thus the legal separate-

ness, of the corporation.” Pan Eastern, 855 F.2d at 1182.

Owners that fail to maintain full legal formalities can-

not expect to enjoy the limited liability that flows from

the corporate form. In addition to legal formalities,

formal sufficiency includes adequate capital; thus Castle-

berry’s seventh reason in its laundry list of reasons for

corporate disregard—inadequate capitalization—is closely

related to “alter ego,” although it also fits comfortably

in the third strand of corporate disregard.

Of course, the different species of corporate disregard

seldom occur in pure form, so “alter ego” usually will

be accompanied by assertions of unfairness to the claim-

ant. But our present purpose is to isolate analytically

the strands of the doctrine, and there is nothing in the

“alter ego” strand to suggest that anything more is re-

quired than the failure of the owners to maintain the

corporation as a distinct legal entity.

2. “Illegal Purpose.”

The second strand of corporate disregard relates to the

use the corporate form as a technique for avoiding legal

limitations upon natural persons or corporations. In Pan

Eastern, we termed this the “illegal purpose” strand of

corporate disregard:

Looking at the Castleberry list, ‘(5) where the cor-

porate fiction is used to circumvent a statute’ and

‘(4) where the corporate fiction is employed to

achieve or perpetrate monopoly’ are directly within

this strand, while others overlap somewhat or fit in-

27a

directly: ‘(6) where the corporate fiction is relied

upon as a protection of crime or to justify wrong’;

‘(3) where the corporate fiction is resorted to as a

means of evading an existing legal obiigation.’

Id. As with “alter ego” proper, the focus is on the rela--

tionship between and among the corporation, its owners,

and the laws of the state rather than on the relationship

between the claimant and the corporation; and, again,

a creditor’s recovery may be a windfall, because the

claim may be unrelated to the illegal purpose. Still, it

makes sense to refuse to allow owners to limit liability

with the corporate form—even from unrelated civil

claims—when the corporation is an instrument of il-

legality.

“Tllegal purpose” disregard differs from “alter ego,”

however, because it can be used even when all corporate

legal formalities have been kept. There are few cases

that illustrate this strand of corporate disregard in any

pure form; in practice, the “illegal purpose” rationale is

usually an alternative basis in an “alter ego” or ‘sham

to perpetrate fraud” case.

3. “Sham To Perpetrate a Fraud.”

The third strand traditionally goes under the name

“sham to perpetrate fraud,” Pace Corp. v. Jackson, 155

Tex. 179, 190, 284 S.W.2d 340, 351 (1955), or as Castle-

berry puts it, “(1) when the fiction is used a a means

of perpetrating fraud.” 721 S.W.2d at 271. Elements

of this strand can be found “(3) where the corporate

fiction is resorted to as a means of evading an existing

legal obligation” and “(6) where the corporate fiction

is relied upon as a protection of crime or to justify

wrong.”

The variety of shams is infinite, but many fit this

case’s pattern: A closely held corporation owes un-

|

28a

wanted obligations, it siphons off corporate revenues,

sells off much of the corporate assets, or does other

acts to hinder the ongoing business and its ability

to pay off its debts. .

Id. at 275 (citations omitted). This strand includes,

especially for tort claimants, but also for some contract

creditors, the concept of inadequate capitalization as a

basis for corporate disregard. For the first time, the

focus of veil-piercing aralysis is on some inequitable

result for the claimant, because of abuses of the cor-

porate form.

~Castleberry is emphatic that this category allows a

corporate disregard in a much broader range of cases

than those strictly speaking of fraud; citing Pacific Am.

Gas., 76 S.W. at 849, the opinion utilizes the term “con-

structive” fraud, but its reasoning is much broader:

The basis used here to disregard the corporate fic-

tion, a sham to perpetrate a fraud, is separate from

alter ego. It is sometimes confused with intentional

fraud; however, ‘[nJeither fraud nor an intent to

defraud need be shown as a prerequisite to disre-

garding the corporate entity; it is sufficient if recog-

nizing the separate corporate existence would bring

about an inequitable result.’

Castleberry, 721 S.W.2d at 272-73 (citations omitted).

The court emphasized that this standard for corporate

disregard is whether honoring legal independence would

result in “inequity” or “injustice”; the purpose “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.” Jd. at 273.

Castleberry specifically holds that the question of in-

justice cr inequity is a question of fact for the jury.

The category is further discussed in Pan Eastern:

29a

The only limitation on this broad strand of corpo-

rate disregard is that the focus is on injustice or

unfairness to the claimant caused by the corporation

and its owners. The unfairness must be something

greater than the mere failure to recover a full meas-

ure of damages; for example, the running of the

statute of limitations as to a tort victim who simply

sued the wrong related entity is not enough. See

Lucas v. Texas Industries, Inc., 696 S.W.2d 372

(Tex.1984). In contract cases (or in any case based

on deliberate acts), the inequity frequently comes

from reasonable reliance on the financial backing of

the owners. Without reliance, the contract claimant

cannot avoid the risk of insolvency that it originally

accepted as part of the bargain. See, e.g., Bell Oil

& Gas Co. v. Allied Chemical Corp., 431 S.W.2d 336

(Tex.1968) ; Edwards Co. v. Monogram Industries,

730 F.2d 977 (5th Cir.1984) (en banc).

855 F.2d at 1133 (emphasis in original).

D. Evidentiary Sufficiency for Corporate Disregard

Here.

Though Gibraltar and LDBrinkman Corp. would amal-

gamate the “alter ego” and “sham to perpetrate a fraud”

strands of corporate disregard,’* the district court sub-

mitted to the jury oniy the former prong under Texas

veil-piercing law. The jury instruction on the difficult

question of corporate disregard is set forth in the foot-

note.’®

18 Only Brinkman’s brief clearly indicates that Gibraltar’s con-

tentions go not to an “alter ego” theory but to a “sham to perpe-

trate a fraud.”

19 The instruction reads as follows:

Gibraltar also contends that Brinkcraft Development, Inc. and

Brinkcraft, Inc. were the alter egos of LDBrinkman Corpora-

tion and that LDBrinkman Corporation is the alter ego of

Lloyd Brinkman. The general rule is that corporations and

|)

ofa

We are mindful that such a jury finding, limited thus

to the sufficiency of the showing of a lack of separate

corporate existence to justify classic “alter ego” liability,

“is heavily fact-specific and, as such, is peculiarly within

shareholders are separate and distinct and that the liability

of one cannot be imposed on the other; however, the existence

of a corporate entity may be disregarded where it is proved

that the corporation was created as a mere device or sham to

accomplish some ulterior purpose or as a mere instrumentality

or agent of another corporation or individual owning all or

most of its stock, or where the purpose is to evade some statute

or to accomplish some fraud or illegal purpose.

In order to pierce the corporate veil under the theory that a

corporation is the alter ego of its shareholder, the Plaintiff, in

this case Gibraltar, must prove both, one, that the separateness

of the corporation and the shareholder has ceased to exist and,

two, that upholding the separate corporate existence, would,

under the circumstances, sanction fraud or promote injustice.

Where one is the principal stockholder of one or more cor-

porations and personally conducts their business or manages

their assets, he may be found individually liable for the cor-

porate obligations if it is proved that he has consistently en-

gaged in a course of conduct by which he has ignored the exist-

ence of the corporate entity or entities and has, in fact, con-

ducted business as an individual by exercising such paramount

and personal control over the operations of the corporation or

corporations that their corporate existence has been disre-

garded and their business interests and his own personal inter-

ests cannot be reasonably separated.

You are further instructed that majority or total ownership

of all the stock in a corporation or mere control by the share-

holder of a corporation does not mean that the corporation is

the alter ego of its shareholders. Gibraltar must show by a pre-

ponderance of the evidence that the absence of separateness be-

tween the parent and the subsidiary is so complete and that

the two are so intertwined that the subsidiary is nothing but a

name or a conduit through which the parent conducts its own

business. There must be a showing that for all practical pur-

poses the subsidiary existed in name only and that there was

virtually total disregard by the parent of the subsidiary’s sepa-

rate existence.

You are further instructed that a subsidiary corporation

may become the alter ego of its parent corporation when the

3la

the province” of the factfinder. United States v. Jon-T

Chemicals, Inc., 768 F.2d at 694. While the court hears

the same evidence, when a jury finds facts and makes

conclusions within its province, those determinations must

ordinarily be upheld. The trial judge concluded that the

jury’s verdict on “alter ego” liability was unsupported

because Gibraltar “failed to present any evidence” that

BDI was LDBrinkman Corp.’s “alter ego” and “failed to

present sufficient evidence” that BI was. We review the

district court’s determination contrary to the jury find-

ing with a significant preference for upholding the

verdict. See Boeing Co. v. Shipman, 411 F.2d 365, 374-

75 (5th Cir.1969) (en banc).

Although we set out both sides of key factual disputes,

for the sake of brevity we recite the facts from a per-

spective favorable to Gibraltar, since the jury’s findings

in its favor must be upheld unless completely unreason-

able. Id. at 374. Our power to review the “alter ego”

verdict is thus limited; such a jury finding must be

upheld unless, (1) as a matter of law, the theory was

inapposite to the case, or (2) the factual conclusions

parent corporation totally dominates and controls the subsidi-

ary as its agent or business conduit.

You are instructed that the question of alter ego does not

turn upon any one fact. In making this determination, you

may consider whether the parent and subsidiary have common

stock ownership. Parent and subsidiary have common business

deposits. Parent and subsidiary file consolidated financial state-

ments and tax returns. Parent finances the subsidiary. Parent

causes the incorporation of the subsidiary. Subsidiary operates

with grossly inadequate capital. Parent pays the salaries and

other expenses of the subsidiary. Parent uses the subsidiary’s

property as its own. The subsidiary does not observe the basic

corporate formalities such as keeping separate books and rec-

ords and holding in [sic] shareholder and board meetings. A

subsidiary does not become the alter ego of its parent merely

because of stock ownership, a duplication of some or all of the

directors or officers, or an exercise of the control that stock

ownership gives to the stockholder. [Emphasis added.]

32a

were such as no reasonable juror could reach. While the

first is not the case, because Gibraltar’s complaint al-

leged facts sufficient to implicate total lack of regard

for the Brinkcraft subsidiaries’ corporate independence,

we agree with the district court’s determination that LD

Brinkman Corp.’s operation of BI and BDI was not

proven to be such as would allow a reasonable factfinder

(properly instructed) to impose “alter ego” liability.

The sufficiency of the evidence is governed by federal

law in a diversity case. Id. at 368-70. We agree with

the district court that the record evidence requires a

conclusion that the Brinkcraft subsidiaries (1) had their

own staff, payroll, accounting department, auditors and

attorneys; (2) kept separate books and bank accounts;

(3) filed a consolidated federal income tax return sepa-

rate from the return filed by LDBrinkman Corp.; (4)

were managed by separate boards of directors that had

overlapping, but not identical, memberships with that of

the holding company; and (5) were centrally managed

by the officers of LDBrinkman Corp., but had their own

officers.

There was some evidence indicating a laxity of corpo-

rate minutes and other documentation, but such is not

unusual in small corporations; nor is business conducted

by non-contemporary declarations of unanimous consent,

and by “past-dated” resolutions or minutes, necessarily

indicative of a lack of corporate legal and formal sepa-

rateness.

Indeed, the fact that such measures were taken indi-

cates that efforts were being made to observe corporate

distinctions between parent and subsidiary.” We note

20In order to authorize the Woody-McDougal buy-back of BDI,

LDBrinkman Corp. in-house counsel Finley prepared yet another

“Certificate of Corporate Resolutions” for BI’s board—reciting the

“unanimous” consent of BI’s directors to the transfer of 50% of

BDI’s stock to the subsidiaries’ management.

33a

| that at least some of the “past-dated” documents formal-

: izing prior actions were taken well in advance of litiga-

tion (either the bankruptcy proceeding or this suit) and

so were not all as Gibraltar would characterize them.

That LDBrinkman Corp.’s chief financial officer and

in-house counsel provided services for the subsidiaries

was neither unusual nor improper, it is indicative of a

similar effort to keep operations distinct that measures

were taken to formalize actions when such unofficial ad-

vise or representation needed to be formalized. The dis-

trict court thus correctly determined that Gibraltar

failed to prove that any of the particular instances in

which LDBrinkman Corp. personnel acted on behalf of

the Brinkcraft subsidiaries or required acts on their part

constituted an abuse of their corporate identity.

BI’s and BDI’s boards were completely distinct from,

even if subservient to, LDBrinkman Corp. This would

be virtually fatal to any “alter ego” claim, though the

opposite—the mere fact of interlocking directorates and

officers—could not turn separate corporations into “alter

egos.” From all this, it is clear that LDBrinkman Corp.

maintained the separate legal and factual existence of the

Brinkcraft subsidiaries with much more than “just a

piece of paper lying in a file cabinet.” Edwards Co. v.

Monogram Indus., Inc., 730 F.2d at 985.

In Lucas v. Texas Indus., Inc., 696 S.W.2d 372 (Tex.

1984), the Texas Supreme Court refused to find that a

parent company was the “alter ego” of its subsidiary

where enumerated common characteristics did not exist.

As applied to the instant facts the catalogued indicia in

Lucas provide a convenient summary: (1) that there

was not a complete disregard of corporate formalities;

(2) that efforts were made to keep minutes and records

of intracompany transactions; (3) that complete and sep-

arate corporate and financial records were maintained;

(4) that separate bank accounts were maintained and

that property and assets were not indiscriminately com-

alle

34a

mingled; (5) that stockholder and director meetings were

held; (6) that officers and directors were not only not

identical, but were not even substantially overlapping;

(7) that there were differences in the business activities

and offices of the holding company and the Brinkcraft

subsidiaries; and (8) that Gibraltar was in no way con-

fused about LDBrinkman Corp.’s formal distance from,

and lack of legal liability for, the BDI loan.

Turning to the “mere tool or business conduit” instruc-

tion, this was also an attempt to instruct the jury on

“alter ego” proper. Castleberry, 721 S.W.2d at 272

(citing Pacific Am. Gas., 76 S.W.2d at 851); Gentry v.

Credit Plan Corp., 528 S.W.2d at 573, cited with approval

in Castleberry, 721 S.W.2d at 273. The focus of “alter

ego” is on the relationship between the corporations

whose identities are sought to be collapsed; use of sub-

sidiaries as conduits for business beneficial to a=parent

or owner does not—alone—establish liability. Ratcliffe’s

“admission” that he simply chose BDI to be the instru-

mentality for securing additional funds for the Brink-

man empire is not as decisive as Gibraltar argues.

At all times relevant to this dispute, the Brinkcraft

subsidiaries were run as separate and legally distinct

corporations. All corporate formalities were maintained.

The normal exercise of the rights and powers incident to

ownership does not raise an “alter ego” question of

whether the corporation was a “mere tool or business

conduit” of its owners. There was simply no evidence in

this case of any improprieties in the manner in which BD!

and its subsidiaries, parent, overall parent, or other af-

filiates were operated.

With respect to Brinkman’s liability as “alter ego”

for LDBrinkman Corp., we must reach the same result.

The holding company’s stock was publicly traded; the

holding company had some 1700 direct shareholders; ap-

propriate filings were made with the Internal Revenue

Service, the Securities and Exchange Commission, and

35a

other governmental bodies; regular minutes, board meet-

ings, and like formalities were observed; there was an

audit and conflict committee upon which Brinkman did

not serve; and it had three outside directors on its board

besides the president of a subsidiary and Brinkman.

These formalities properly isolated Brinkman from in-

dividual liability on a theory of “alter ego” proper.

Absent such a showing of substantial record evidence

of both legal and factual lack of separateness, it is clear

that there was an insufficient showing to create a ma-

terial question that BI or BDI was operated in such a

fashion as to create classic “alter ego” liability on the

part of either LDBrinkman Corp. or Brinkman. Pace

Corp. v. Jackson, 155 Tex. at 190, 284 S.W.2d at 351.

The “alter ego” issue should not have been submitted to

the jury. Lubbock Feed Lots, Inc. v. Iowa Beef Proces-

sors, Inc., 630 F.2d 250, 260 (5th Cir. 1980) ; Boeing Co.,

411 F.2d at 374-75. Accordingly, judgment notwithstand-

ing the verdict was appropriate.

E The Third Ground for Corporate Disregard.

Gibraltar makes two arguments to sustain the legally

defective “alter ego” theory of its case: first, that be-

fore Castleberry, Texas veil-piercing law had not categor-

ically distinguished between the classic “alter ego” and

“sham to perpetrate a fraud” prongs for corporate dis-

regard; and second, that “conduit” liability (which was

charged to the jury) overlaps both “alter ego” and ‘‘sham

to perpetrate a fraud,” and thus implicitly can establish

liability under the latter denomination.

However, Casileberry itself states that the various

strands were distinct in prior caselaw and that, while

circumstances might support disregard under multiple

theories, each must. stand by itself, under each individual

test. Castleberry also placed “conduit” doctrines squarely

and solely as an element of the “alter ego” analysis. 721

S.W.2d at 272 (citing Pacific Am. Gas., 76 S.W.2d 851).

tel

36a

Undaunted, however, by the categorical rejection of just

these arguments in Valdes, 810 F.2d at 1353 n. 7, Gibral-

tar emphasizes the jury’s fraud findings and the soiled

facts of this case, which we admit put the equities on the

lender’s side. The only prop which Gibraltar retains is

thus that LDBrinkman Corp.’s entire scheme was fraud-

ulent.

The “sham to perpetrate a fraud” basis for corporate

disregard rests upon the abuse of corporate forms “as

part of a basically unfair device to achive an inequitable

result.” Castleberry, 721 S.W.2d at 271. It is evident

that LDBrinkman Corp.’s management utilized the Gi-

braltar loan principally to benefit the holding company

and not the Brinkcraft subsidiaries or BDC’s real estate

partnerships. A decidedly unequal allocation among par-

ent and subsidiaries of the costs and benefits of the cor-

porate form, or their use to shift the costs and risks of

business to outside parties, may justify disregarding cor-

porate identities, even where all the legal formalities

have been maintained. See Pan Eastern, 855 F.2d at

1135. It is a fact question whether there existed such a

“profound asymmetry in the behavior of the managers

of the [parents] and their affiliates, [that] a reasonable

juror could conclude that now ‘recognizing the separate

corporate existence would bring about an inequitable re-

sult.’”” Id. (quoting Castleberry, 721 S.W.2d at 273).

With respect to Brinkman, Gibraltar contends that he

“habitually” utilized his various companies “as his per-

sonal credit card for more than $200,000 per year in

personal and household expenses,” and in particular looted

the Brinkcraft subsidiaries immediately after securing

the loan. In Texas, when a corporate officer or other

fiduciary is self-serving in his use of corporate rights or

property, disregarding the corporate veil may be appro-

priate. Rose v. Intercontinental Bank, N.A., 705 S.W.2d

752, 755 (Tex.App.—Houston [1st Dist.] 1986, writ ref’d

n.r.e.); Tigrett v. Pointer, 580 S.W.2d 375 (Tex.Civ.

olla

37a

App.—Dallas 1978, writ ref’d n.r.e.). Again, however,

Brinkman’s alleged “self-dealing” abuse of the subsidi-

aries’ assets fits solely a “sham to perpetrate a fraud”

theory, and this question was not squarely presented to

the jury; in fact, much of the evidence on both sides of

this issue was excluded.”!

Looking from the bottom up, instead of from the bene-

fit running to the holding company and Brinkman, Gi-

braltar argues that BDI was, and is, admitted to be a

mere shell, and reasonable jurors could have found suf-

ficient evidence that LDBrinkman Corp.’s and Brinkman’s

loose and grey division between the subsidiaries, as well

as “looting” and “draining” BI and BDI assets, amounted

to a “sham to perpetrate a fraud” on Gibraltar. Whether

that could have been established to the jury’s satisfaction,

the fact is that Gibraltar failed to make out a clearly-

presented case that financial manipulations by Brinkman

and LDBrinkman Corp. “propped it up”. as a mere shell

and conduit that allowed the subsidiaries to generate im-

properly-siphoned profits for a longer period than other-

wise would have occurred. The maintenance of BDI’s

timely loan payments solely through LDBrinkman Corp.

advances (one made directly to the lender), so as to post-

pone concern over the borrower’s ability to meet the debt

service and thus delaying an allegedly inevitable de-

fault, also might have evidenced “a sham to perpetrate a

fraud”; but such a scheme was not presented to the jury,

which, consequently, did not have an opportunity to pre-

vent an “inequitable result.”

Not only is the reliance component (what Gibraltar

knew or reasonably believed about BI and its operation

*1 The court allowed only limited testimony regarding Brinkman’s

conduct with respect to dividends, annual bonuses, and the like.

While his “conspicuous consumption” was documented to some ex-

tent, this evidence was itself curtailed because the judge viewed

it as without “a frazzling thing to do with this lawsuit”; similarly,

38a

of BDI) of such a conclusion a clear question of fact,”

but Castleberry makes plain that it is a jury question

whether there was unfairness or injustice to the creditor-

claimant caused by the use of “shell” companies or by

the evasion of existing legal obligations. Noting that

Gibraltar sought and obtained a chattel lien and the hold-

ing company’s guaranty on the refinancing of Commer-

cial Aviation'’s $3 million Lloyds loan, we express no legal

opinion as to estoppel or as to whether the failure to seek

a guaranty from either LDBrinkman Corp. or Brinkman

affects the reliance component which Gibraltar would

have faced. We acknowledge, however, Gibraltar’s fac-

tual obstacle on the reliance issue.** It is obvious that

whether he reimbursed advances, or they were offset against his

annual bonus, or whether he paid interest thereon, and- was sup-

pressed for the most part.

22 Rose, 705 S.W.2d at 755; Atomic Fuel Extraction Corp. v.

Slick’s Estate, 386 S.W.2d 180, 191 (Tex.Civ.App.—San Antonio

1964, writ ref’d n.r.e.).

23 Compare Sagebrush Sales Co. v. Strauss, 605 S.W.2d 857 (Tex.

1980) (jury found that the business affairs of the individual were

indistinguishable from the business affairs of the corporation;

that the creditor corporation relied on the personal financial state-

ments of the individual; and that the defendant intended to cause

its creditor to believe that credit was being extended to him in-

dividually) with Pace Corp. v. Jackson, 155 Tex. at 190, 282 S.W.2d

at 351 (‘Respondent was as well acquainted with the financial

structure of Pace Corporation as were [the individual owners].”)

and Hanson Southwest Corp. v. Dal-Mac Constr. Co., 554 S.W.2d

712, 718 (Tex.Civ.App.—Dallas 1977, writ ref’d n.r.e.) (‘“[Entering

voluntarily] into the contract [though] realizing that it [the

‘shell’] might not be financially sound and despite fruitless efforts

to obtain a guarantee from the parent company|(, plaintiff construc-

tion company cannot now pierce the defendant’s corporate veil].”)

and Paine v. Carter, 469 S.W.2d 822, 827 (Tex.Civ.App.—Houston

[14th Dist.] 1971, writ ref’d n.r.e.) (“T]he contract recognizes and

assumes the separate existence of [the companies. Choosing] to

deal with both ... in their separate legal capacities [, their inde-

pendence will not be disregarded now . .. .] Moreover, where a

party knows of the relationship between a corporation and its

shareholders and chooses freely and voluntarily to deal with them

in their respective capacities, he is estopped to claim that the cor-

39a

the general corporate structure of Brinkman’s empire

was known to Farlow and the members of the loan com-

mittee. From the financial information in Gibraltar’s

possession, it is also evident that the lender was amply

aware that BDI had no individual assets and was oper-

ated as a “shell.”

Similarly, we must agree with LDBrinkman Corp. that

the issue of repayment of LDBrinkman Corp.’s advances

to both BI and BDI from the subsidiaries’ assets would

not have assisted Gibraltar in a “sham to perpetrate a

fraud” inquiry. There were independent jury findings

adverse to Gibraltar with respect to early repayment of

intercompany debt while BDI, and in turn BI, were left

to default on Gibraltar’s loan. While Gibraltar employs

sinister phrases such as “looting,” “siphoning off,” “can-

nibalizing the last few scraps off the body,” and “tossing

the corpse,” these accusations are only a rehashing of the

lender’s complaint that LDBrinkman Corp.’s advances to

the Brinkeraft subsidiaries should have been judicially

subordinated to Gibraltar’s loan.

But the jury found that LDBrinkman Corp. did not

agree to subordinate its debt to Gibraltar’s and com-

mitted no fraud in this regard. Gibraltar knew of the

inter-company debt between the Brinkcraft subsidiaries

and LDBrinkman Corp. but failed to protect itself with

a subordinate agreement from LDBrinkman Corp. Cor-

porate disregard cannot write new terms for a loan.

Since LDBrinkman Corp. breached no contract and com-

mitted no fraud, Gibraltar cannot use a veil-piercing

theory to create a subordination agreement which Gi-

braltar never sought.

Similarly, Gibraltar complains about the use of the

loan proceeds, on the day of the Joan, in another at-

porat{e form should be ignored].”) and Atomic Fuel, 386 S.W.2d

at 191 (“Atomic, with full knowledge, chose to deal with the corpo-

rations to the exclusion of [the owner].”).

a

40a

tempt to show that repayment of advances from LD

Brinkman Corp. defaulted it. However, the jury found

that LDBrinkman Corp. did not commit fraud with re-

spect to the use of the loan proceeds. Again, Gibraltar

obtained no contractual restrictions on the use of the

loan proceeds, and cannot now complain of “misapplica-

tion.” Since we cannot term these jury findings clearly

erroneous, we hold that any “sham to perpetrate a fraud”

would not have been supported by these rejected con-

tentions.

Since Gibraltar did not (1) ask the district court to

submit a clear “sham to perpetrate a fraud” count to

the jury, (2) submit appropriate jury charges to the

court covering this theory, or (3) object (because it

omitted this veil-piercing theory) to the special verdict

form which the judge used, Gibraltar does not enjoy the

right to retry its corporate disregard case on this theory

now. Simply submitting its own substitute form of

special interrogatories does not entitle Gibraltar to a sec-

ond crack at veil-piercing, and it is beyond our province

to rule upon this alternate ground for corporate disre-

gard, which Gibraltar simply failed adequately to put

before the jury.

Because of this holding, we decline to reach Brink-

man’s contention that so long as LDBrinkman Corp. has

assets to meet a judgment against it, there is no basis to

pierce the veil to establish personal liability on his part.

The Texas cases upon which he and the district court re-

lied may indeed inoculate him from the burden of the

jury determination, so long as LDBrinkman Corp. was

able to satisfy Gibraltar Savings’ recovery. See Lucas v.

Texas Indus., Inc., 696 S.W.2d at 375; Hanson South-

west Corp. v. Dal-Mac Constr. Co., 554 S.W.2d at 718.

VIII. Attorneys’ Fees.

Recognizing that neither Brinkman nor LDBrinkman

Corp. stood, absent “alter ego” liability, in privity to the

4la

lender, the trial court nonetheless held that the fraud

recovery “sounded in contract.’” Based upon Milton v.

Aranas Shrimp Coop., 668 S.W.2d 735 (Tex.App.—Cor-

pus Christi 1984, error dism’d), and Collin County Sav.

& Loan v. Miller Lumber Co. 653 S.W.2d 114 (Tex.App.

—Dallas 1983, no writ), the district court granted an

amended fee of $332,500. We reverse the award of at-

torneys’ fees.

If we were to uphold the “alter ego” finding, LDBrink-

man Corp. might be liable for attorneys’ fees as if it

were a contractual maker or guarantor of the note. Tex.

Civ.Prac. & Rem.Code § 38.001 (Vernon’s Supp.1987).

Because such liability was not established, we express no

opinion on whether disregard alone would activate sec-

tion 38.001 and entitle Gibraltar to attorneys’ fees. We

also determine at this juncture to address the “present-

ment” question and other alleged bars to an attorneys’

fees award which the defendants assert.

The claims directly against LDBrinkman Corp. and

Brinkman (fraud in the inducement and tortious inter-

ference with contractual relations) “sound in contract,”

and so the lender contends that fee-shifting may be ap-

propriate on the fraud claims alone. There is admittedly

no requirement in the statute (or its predecessor, Tex.

Rev.Civ.Stat. art. 2226, repealed eff. Sept. 1, 1985), that

the action be for enforcement of an oral or written con-

tract, or even that it be against a contracting party. It

is sufficient if the action arises out of a relationship

contractual in nature or essentially “one sounding in

contract.” Milton, 668 S.W.2d at 737; Alaimo v. Wood-

lands Nat'l Bank, 698 S.W.2d 234 (Tex.App.—Beaumont

1985, no writ) ; Higgins v. Smith, 722 S.W.2d 825 (Tex.

App.—Houston [14th Dist.] 1987, no writ).

Gibraltar argues that its suit is founded upon writ-

ten contractual agreements, i.e., the note and the various

guaranties, and accordingly that its suit is one that

sounds in contract; therefore, it argues that LDBrink-

|

42a

man Corp.’s fraudulent representations made to induce

the loan “sound in contract” and that hence attorneys’

fees are recoverable. The fraud “exception” has never

been extended beyond suits between parties bound by a

contract, however, and we decline to apply the statute to

a third party not in privity, simply upon an allegation

(even when proven to the satisfaction of a jury) that that

third party tortiously interfered with the contract or

fraudulently induced it. See Marcus, Stowell & Beye Gov’t

Sec., Inc. v. Jefferson Inv. Corp., T97 F.2d 227, 233-34

(5th Cir. 1986); Neeley v. Bankers Trust Co., 757 F.2d

621, 633-34 (5th Cir.1985). .

IX. Usury.

In its first and second amended complaints, Gibraltar

prayed to “recover from the Defendants jointly and

severally ... for the liquidated sum of $5,000,000.00 plus

interest as provided in the Note herein described.” In its

third amended complaint, that prayer was dropped. Be-

cause Texas cases hold that amendment of a pleading

does not cure a usurious interest charge created by the

filing of an earlier pleading and does not relieve a lender

from liability under the statute, the defendants cross-

claimed that Gibraltar “charged” interest against them

in violation of Texas’ usury statute. Tex.Rev.Civ.Stat.

Ann. art. 5069-1.06.*

24 As the district court noted, defendants’ $2,361,678 demand for

statutory usury treble damages is completely unsupported by the

evidence; what calculation allowed them to reach the base sum

they utilized escapes us, as it did the district court. Neither in

their appellate briefs, nor at oral argument, could LDBrinkman

Corp.’s present counsel satisfy this confusion. Reference to inter-

est accrued at the time of trial and to the cross-examination of

Hollingsworth indicates the interest claimed to that time on the

loan, but why LDBrinkman Corp. chooses that sum (without set-off

for statutory prejudgment interest, we note) eludes our under-

standing.

43a

Assuming that the usury counterclaimed based upon

the superseded pleadings of Gibraltar was Squarely pre-

sented,” we agree with the district court, however, that

the factually-similar case of Fibergrate Corp. v. Research-

Cottrell, Inc., 481 F.Supp. 570 (N.D.Tex.1979), is fully

dispositive of the defendants’ usury counterclaimed.

There, the defendant’s motion for summary judgment

was predicated upon an allegedly impermissible request

for interest contained in the plaintiff's damage prayer.

In denying defendant’s motion, then District J udge Hig-

ginbotham observed,

A permissible construction of [the usury provision]

is that a creditor seeking to recover interest as dam-

ages is not making a ‘charge’ of interest. The in-

terest claim is not rooted in a free contractual re-

lationship between two private parties, but is an

element of nonconsensual damages.

Id. at 572. While later state cases arguably are at

variance with the outcome of Fibergrate, nothing has

25 There are Texas cases that imply, based upon state civil pro-

cedure anomalies, that amendment of the pleadings does not cure

usury created by the filing of an earlier pleading. See, e.g., Tyra v.

Bob Carroll Constr. Co., 639 S.W.2d 690 (Tex. 1982); Nationwide

Fin. Corp. v. English, 604 S.W.2d 458 (Tex.Civ.App.—Tyler 1980,

writ dism’d). However, under Fed.R.Civ.P. 15, an amended pleading

is expressly deemed to “relate back” to the commencement of an

action. Notwithstanding what may be the rule prevailing in the

Texas state courts, in a diversity case rule 15 is procedural, and

this question should be viewed solely as a matter of federal law.

See, e.g., Seidman v. Fishburne-Hudgins Ed. Found., Inc., 724 F.2d

413 (4th Cir. 1984); Davis v. Piper Aircraft Corp., 615 F.2d 606

(4th Cir.), cert. dism’d, 448 U.S. 911, 101 S.Ct. 25, 65 L.Ed.2d 1141

(1980); 3 J. Moore, Moore’s Federal Practice 1 15.02[3] at 15-16

(2d ed. 1985). The filing of the third amended complaint thus

defeats the usury argument since, as Gibraltar correctly contends,

there is no comparable federal rule creating a cause of action, for

usury or otherwise, solely from the pleadings.

44a

directly impeached its authority, and we find its rea-

soning persuasive.”°

The initial two complaints were against more defend-

ants than the two remaining here. Gibraltar may have

inartfully drafted its prayer for relief, but the interest

claimed was clearly proper against those who were con-

tractually bound to pay the note. The district court

chose to read the first and second complaints as seeking

the interest eo nomine solely from BDI and the guaran-

tors.27 Against these parties, the district court entered

judgment in granting the motion for summary judgment.

After this judgment, Gibraltar amended its complaint to

remove the prayer for contractual interest.**

26 See Danziger v. San Jacinto Sav. Ass’n, 732 S.W.2d 300, 305

(Tex. 1987) (Gonzalez, J., concurring) (“This court has not directly

faced this issue [whether] pleadings alone can constitute the charg-

ing of usurious interest. ... The better rule is that the filing of a

petition may constitute the charging of usurious interest only when

the underlying agreement is usurious[, because] the usury must

be established on the face of the loan instrument [and] errors in

drafting of a complaint cannot change the terms and meaning of

the original agreement.”) (emphasis in original; citing Fibergrate

and distinguishing Tyra and Nationwide Fin.; other citations omit-

ted).

27 As to Brinkman, the district court also held that he lacked

standing to assert the statutory penalties for usury, because—as

a non-obligor—he had no contractual liability absent a finding of

“alter ego” liability. Greenway Bank & Trust v. Smith, 679 S.W.2d

592 (Tex.App.—Houston [1st Dist.] 1984, writ ref’d n.r.e.). We

express no view whether this is a correct reading of the usury

provision.

28 See Petroscience Corp. v. Diamond Geophysical, Inc., 663

S.W.2d 68, 70 (Tex.App.—Houston [14th Dist.] 1983, writ ref’d

n.r.e.) (“We hold that when a pleading (constituting the sole evi-

dence of a “charge”) admittedly seeking a usurious rate of interest

is abandoned and amended so as to seek a lawful interest rate

before any defense of usury is asserted, as a matter of law no

usurious ‘charge’ has been made.”). See also Killebrew ». Bartlett,

568 S.W.2d 915, 917 (Tex.Civ.App.—Amarillo 1978, no writ) (sec-

ond amended complaint dropped usurious interest demand, so jury’s

45a

None of the cases cited by the defendants approaches

the facts here. There was no underlying usury, as neces-

sary under the reasoning of Justice Gonzalez’s Danziger

concurrence. We also cannot say that clear error is

presented by the district court’s reading of the first and

second complaints as (impliedly) limited to the bor-

rower and guarantors—thus presenting LDBrinkman

Corp. no usury claim at all. Indeed, one unique circum-

stance amply distinguishes defendants’ cited authority:

Had the “alter ego” finding not been vacated by the

district judge, then defendants would have been held to

have contracted for the interest; Gibraltar’s original

prayer for relief would thus have been proper against

them as well as against BDI and BI and the individual

guarantors.

X. The Other Findings.

We now turn to the jury findings of LDBrinkman

Corp.’s tortious interference with the contractual rela-

tions between Gibraltar and LDBrinkman Corp.’s Brink-

craft subsidiaries and of fraud in two of Ratcliffe’s rep-

resentations to Farlow. For reasons that will be ex-

plained, the judgment on the first fraud count cannot

stand, but we uphold that portion of the verdict that

was based upon the second fraud finding and the finding

of tortious interference with business relations. We also

hold that the amount of damages was erroneously deter-

mined and must be adjusted.

refusal to find usury left undisturbed because debtor failed to prove

“eharging” as a matter of law); but see Missouri-Kansas-Texas

R.R. v. Fiberglass Insulators, 707 S.W.2d 943, 950 (Tex.App.—

Houston [1st Dist.] 1986, writ ref’d n.r.e.) (based upon pre-Danziger

dicta from the Supreme Court and distinguishable appellate prece-

dent, questioned implications of Petroscience and even the validity

of Killebrew, but nonetheless concluded that oral usurious interest —

demand was not a “changing”; no usurious pleadings had been

filed).

46a

A. Sufficiency of the Evidence.

In reviewing the sufficiency of the evidence to support

the jury verdict, a court of appeals must consider all

of the evidence, drawing all reasonable inferences in

favor of the prevailing party. Quinn v. Southwest Wood

Products, Ine., 597 F.2d 1018 (5th Cir.1979). The

appeals court is not free to reweigh the evidence and

set aside the jury verdict merely because the jury could

have drawn different conclusions or because the court

feels other results would have been more reasonable.”

Weighing the conflicting evidence and the inferences to

be drawn from that evidence, and determining the rela-

tive credibility of the witnesses, are the province of the

jury, and its decision must be accepted if the record

contains any competent and substantial evidence tending

fairly to support the verdict. Dartez v. Fibreboard

Corp., 765 F.2d 456 (5th Cir.1985).

Substantial evidence, while something less than the

weight of the evidence, is such relevant evidence as a

reasonable mind might accept as adequate to support a

conclusion, even if different conclusions also might be

supported by the evidence. Refrigerated Transp. Co. v.

ICC, 663 F.2d 528 (5th Cir. Unit B Dec. 1981) ; Solis v.

Rio Grand City Indep. Schooi Dist., 734 F.2d 243 (5th

Cir.1984). Under this standard, it is not the function

of the appeals court to reverse merely if it believes the

evidence might have supported a different verdict. If

there is an evidentiary basis upon which the verdict can

be supported, the jury’s determinations will be left un-

disturbed, even where there is substantial contradictory

evidence that could have supported an opposite verdict.®

29 Pope v. Rollins Protective Serv. Co., 703 F.2d 197 (5th Cir.

1983); Nowell v. Dick, 413 F.2d 1204 (5th Cir. 1969); Ford Motor

Co. v. Mathis, 322 F.2d 267 (5th Cir. 1963).

30 Ratner v. Sioux Natural Gas Corp., 770 F.2d 512, 519 (5th

Cir. 1985); Conan Properties, Inc. v. Conans Pizza, Inc., 752 F.2d

145 (5th Cir. 1985); Wood v. Diamond M Drilling Co., 691 F.2d

me es

47a

“We decide only if reasonable jurors could agree with

this verdict.” Texoma AG—Products, Inc. v. Hartford

Acc. & Indem. Co., 755 F.2d 445, 448 (5th Cir.1985).

B. Tortious Interference with Contractual Relations.

The jury found that LDBrinkman Corp.’s officers

tortiously interfered with BDI and BI’s obligations under

the loan and the parent’s guaranty. Gibraltar did not

emphasize this claim at trial, and neither side adequately

briefed the issue on appeal. We conclude, however, that

this jury finding was supported by the evidence, and that

judgment—in an amount as will be discussed—on this

verdict is appropriate.

Texas law on a third party’s wrongful interference with

contractual obligations is well-developed, and we have

often been calied upon to interpret it.*1 Under Texas

common law, the elements of a cause of action for tor-

tious interference with contractual relations are: (1) a

contract; (2) an intentional and wilful act, interfering

with the contract, that was calculated to cause damage

to the plaintiff; (3) the lack of any legally justifiable

cause or excuse on the part of the defendant; and (4)

actual damages.** The court’s charge thoroughly ex-

1165 (5th Cir.), cert. denied, 460 U.S. 1069, 103 S.Ct. 1528, 75

L.Ed.2d 947 (1982); Calloway v. Manion, 572 F.2d 1033 (5th Cir.

1978).

31 F.g., Hi-Line Elec. Co. v. DowCo Elec. Prod., 765 F.2d 1359,

1362 (5th Cir. 1985); C.E. Serv., Inc. v. Control Data Corp., 759

F.2d 1241, 1248 n. 10 (5th Cir.), cert. denied, 474 U.S. 1037, 106

S.Ct. 604, 88 L.Ed.2d 583 (1985) ; Union Carbide Corp. v. UGI Corp.,

731 F.2d 1186, 1189-90 (5th Cir. 1984); Cook Indus., Inc. v. Com-

munity Grain, Inc., 614 F.2d 978, 980 (5th Cir.), cert. denied, 449

U.S. 952, 101 S.Ct. 356, 66 L.Ed.2d 216 (1980).

82 Clements v. Withers, 437 S.W.2d 818, 821 (Tex. 1969); White

v. Larson, 586 S.W.2d 212, 215 (Tex.Civ.App.—El Paso 1979, no

writ); Armendariz v. Mora, 553 S.W.2d 400, 404 (Tex.Civ.App.—

El! Paso 1977, writ ref’d n.r.e.).

48a

plained these elements and specifically emphasized excuse

or privilege, which had been argued to defeat the cause

of action in unsuccessful motions for summary judgment

and directed verdict.*

The jury finding that LDBrinkman Corp. wrongfully

interfered with BDI’s contractual obligation under the

note provides ample support for the verdict, even if the

jury found no separate damages for this interference.

The finding that Gibraltar sustained no damage is incon-

sistent with the finding of interference. However, incon-

sistent jury responses require a remand for a new trial

only if the answers are irreconcilable. Willard v. The

John Hayward, 577 F.2d 1009 (Sth Cir.1978). Evi-

dently, the jury intended to avoid a “double recovery,”

and if the verdict is to be given effect, the judgment may

be sustained on this alternate ground. See Holt Oil &

Gas Corp. v. Harvey, 801 F.2d 773, 781 (5th Cir.1986),

cert. denied, 481 U.S. 1015, 107 S.Ct. 1892, 95 L.Ed.2d

449 (1987).

C. Fraud.

Under Texas law, a plaintiff may recover for fraud

upon establishing that (1) the defendant made a false

33 The final instruction painstakingly elaborated the law:

Gibraltar also contends that LDBrinkman Corporation and

Lloyd Brinkman, individually, wrongfully interfered with the

contractual obligation of Brinkcraft Development, Inc. under

its note to Gibraltar. To prove wrongful interference, Gibraltar

must prove each of the following elements by a preponderance

of the evidence. First, the existence of a contract. Second, an

intentional and willful act of interference with the contract

that was calculated to damage Gibraltar. Third, lack of suffi-

cient excuse or justification on the part of what was alleged

to have interfered and, fourth, that such intentional act was a

proximate cause of actual damages. You are instructed that

interference with contract is privileged where it results from

the exercise of a party’s own rights or where the party

possesses an equal or superior interest to that of the Plaintiff

in the subject matter. [Emphasis added. ]

49a

material representation consisting of either a positive un-

true statement of material fact, the concealment of a

material fact, or nondisclosure of a material fact which

he had a duty to disclose; (2) the defendant knew the

material representation was false or made it recklessly

without any knowledge of its truth; (3) he made the

representation with the intent that it should be acted

upon by the plainitff; (4) the plaintiff acted in reliance

upon the representation; and (5) the plaintiff suffered

injury.** In Texas a plaintiff may recover for fraudulent

inducement to enter a contract based upon either mis-

representation of a past or existing fact (“false state

ment”) or the intentional tort of “false promise,” *

which requires proof of an intention not to perform at

the time the representation was made. Fredonia Broad-

casting Corp. v. RCA Corp., 569 F.2d 251, 258 (5th

Cir.), cert. denied, 439 U.S. 859, 99 S.Ct. 177, 58 L.Ed.

2d 167 (1978) .*

34 Stone v. Lawyers Ins. Corp., 554 §.W.2d 183, 185 (Tex. 1977);

Custom Leasing, Inc. v. Texas Bank & Trust Co., 516 S.W.2d 138,

143 (Tex. 1974); Oilwell Division, U.S. Steel Corp. v. Fryer, 493

S.W.2d 487, 491 (Tex. 1973); see also Valdes, 810 F.2d at 1350;

Chemetron Corp. v. Business Funds, Inc., 682 F.2d 1149, 1171-72

(5th Cir. 1982), vacated on other grounds, 460 U.S. 1007, 103 S.Ct.

1245, 75 L.E.2d 476 (1983).

385 This fraud theory is called misrepresentation of future intend-

ment in some of the older cases. See, e.g. Statham v. City of Tyler,

257 S.W.2d 742, 744 (Tex.Civ.App.—Texarkana 1953, writ ref’d

n.r.e.). :

86 The trial court properly and comprehensively instructed the

jury on this point:

A promise to do something in the future cannot be the basis

of a claim for fraud unless the promissor, at the time he made

the promise, made it with a positive intent not to perform it.

Mere failure to perform a promise to do something in the

future does not establish that a party had no intention to per-

form at the time the promise was made.

50a

Five alleged misrepresentations made by Raitcliffe to

Farlow were presented to the jury; only two were found

to have constituted fraud (broadly defined in the instruc-

tions). The answers to interrogatories set forth in the

footnote constituted the jury’s acceptance of proof with

regard to the various representations which Gibraltar

claimed fraudulently induced it to issue the loan to

BDI.*

1. Understatement of BDI’s Total Debt.

The defendants have highlighted a major problem with

the first fraud count with respect to the finding of fraud

in Ratcliffe’s representations of BDI’s financial situation

and the amount of its outside debt.* The pretrial order

37 The subject interrogatories and answers read as follows:

1. Do you find that LDBRINKMAN CORPORATION com-

mitted fraud against GIBRALTAR SAVINGS by making any

of the following alleged misrepresentations:

ANSWER: “YES” OR “NO” AS TO EACH.

(a) That the total existing debt of Brinkcraft Inc. other

than the debt owing to LDBrinkman Corporation did not ex-

ceed $2,500,000.

Answer: Yes.

(b) That the business of Brinkcraft, Inc. and Brinkcraft

Development, Inc. was ongoing and successful in scope.

Answer: Yes.

* * * *

ANSWER QUESTION NO. 2 ONLY IF YOU ANSWERED

“YES” TO ANY PART OF QUESTION NO. 1, OTHERWISE

SKIP TO QUESTION NO. 5.

29. What amount of money, if paid now in cash, do you

find would fairly and reasonably compensate GIBRALTAR

SAVINGS for the fraud, if any, committed against it by the

LDBRINKMAN CORPORATION?

Answer: $6,000,000.

38 These representatives were obviously false in several respects.

BDI had “outside debt” (i.e., debt owed to banking institutions) of

nearly $1 million beyond the $2.5 million owed to Banc-Texas. It

5la

and the special interrogatory submitted to the jury ad-

dressed only the misrepresentation of total existing debt

of Brinkcraft, Inc. Gibraltar acknowledges that the in-

terrogatory should have referred to Brinkcraft Develop-

ment, Inc.’s total debt. The issue becomes not whether

there was ample evidence, but whether the jury was mis-

led by the incorrect wording of the verdict form.

Gibraltar believes that the jury was not misled, first,

because Gibraltar never contended that Ratcliffe repre-

sented that the outside debt of BI was only $2.5 mil-

lion; *° rather, he represented to Farlow that the outside

debt of BDI did not exceed that amount. Second, Gib-

raltar argues that the verdict can be harmonized with

the judgment; analogizing to the situation in which there

are apparent conflicts between answers in a jury verdict,

Gibraltar suggests that the question is whether the

answer may fairly be said to represent a logical and

probable decision on the issue as submitted, although the

form of the issue or alternative selective answers pre-

scribed by the court may have been the probable cause

of the difficulty and produced the apparent conflict.‘

is undisputed that $475,000 was used out of the Gibraltar loan

proceeds to reduce that additional outside debt, and that fact was

not disclosed to Gibraltar until the June 10, 1985, meeting. Those

funds were supposed to be used to complete the developments proj-

ects, the sale of which then would have been the source of repay-

ment of Gibraltar’s $5 million loan. Without such specific repay-

ment arrangements, denominating the $2.5 (sic) for “working capi-

tal” would have been unnecessary; if Gibraltar had intended to allow

the half not going to BankTexas as to be fully discretionary funds,

such denomination, and indeed dividing the loan into halves, were

merely superfluous.

39 Gibraltar was given BI’s audited financial statements revealing

BI’s outside debt to be much more than $2.5 million. These fiscal

reports were put into evidence during the case in chief.

4° Griffin v. Matherne, 471 F.2d 911, 917 (5th Cir. 1973); R.B.

Co. v. Aetna Ins. Co., 299 F.2d 753, 760 (5th Cir. 1962); Aquachem

Co. v. Olin Corp., 699 F.2d 516, 520 (11th Cir. 1983).

52a

We cannot say, based upon our review of the record,

that the jury was clearly not misled. Given the volume

of evidence and testimony regarding multiple, overlap-

ping businesses with similar names (referred to differ-

ently by different parties and witnesses) and about which

at least two witnesses themselves misspoke,*’ the most

attentive, careful, and clear-minded jurors might well

have been confused regarding certain details.

But more is at stake in the misidentification of BDI’s

total indebtedness than simply whether the jury, overall,

was misled. Because the pretrial order also contained the

misnomer, Gibraltar should have been limited to evidence

of fraud in BI’s financial disclosures. While we can

accept that the omission of the word “Development” in

the relevant section of the pretrial order was merely an

inadvertent oversight or typographical omission, we must

hold that the pretrial order allowed proof only on a claim

against BI.*? -

2. Planned Dissolution.

While vague statements regarding the future financial

prospects of a commercial concern are nonactionable

41 Woody had to correct one reference he made to BI, when he

had meant to say BDI. It also appears from context that Hufhines,

BI’s comptroller, misspoke in the same way during his testimony.

42 Under Fed.R.Civ.P. 16(e), omission from the pretrial order

means that a claim for misrepresentation of BDI’s financial status

was never properly incorporated into Gibraltar’s case. Valdes, 810

F.2d at 1857; Woods ex rel. Woods v. International Harvester Co.,

697 F.2d 635, 639 (5th Cir. 1983). While evidence as to both BI’s

and BDI’s finances was admitted (usually without objection), we

have held that the Federal Rules of Civil Procedure prohibit crea-

tion and introduction of new facts, theories, or causes of action

on the eve of trial, because a “defendant would be facing the pos-

sibility of being held liable under a claim it had no opportunity

to evaluate and defend against.” Flannery v. Carroll, 676 F.2d

126, 131 (5th Cir. 1982). See also Valdes, 810 F.2d at 1357; Swift

v. State Farm Mut. Auto. Ins. Co., 796 F.2d 120 (5th Cir. 1986)

58a

opinion or future speculation,* it is well settled in Texas

that a promise to do an act in the future is actionable

as fraud where it is made with the purpose to deceive

and without any intention of performing the promised

act.“* Beyond the falsity, reasonable reliance, and other

elements of an ordinary fraud action, “false promise”

requires proof of an intention not to perform at the time

the representation was made. Fredonia Broadcasting

Corp. v. RCA Corp., 569 F.2d at 258.

The jury was properly instructed on the elements re-

quired of both the “false statement” and “false promise”

strands of Texas law. Indeed, the defendants did not

object to, and do not now challenge, the jury instructions

on this issue. Contending that “[t]he events that

destroyed the company—the downturn in the Texas

economy and the $5[.5] million judgment-from the con-

struction lawsuit—occurred much later,” the defendants

obscure the fact that Gibraltar’s “ongoing and success-

ful” count focused not upon predictions of the Brinkcraft

subsidiaries’ anticipated profits, but upon its owners’

concluded decision to divest the holding company of a

subsidiary already viewed as “unprofitable” prior to Gib-

raltar’s loan.** The debate thus is over the characteriza-

tion of Ratcliffe’s representations that the Brinkcraft

subsidiaries were “on going and successful” and that

LDBrinkman Corp. would continue to finance them so

long as Gibraltar’s loan was outstanding.

43 Zar v. Omni Indus., Inc., 818 F.2d F.2d 689, 693 (5th Cir.

1987).

44 Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432 (Tex. 1986) ;

Trenholm v. Ratcliff, 646 S.W.2d 927 (Tex. 1983); New Process

Steel Corp. v. Steel Corp., 703 S.W.2d 209 (Tex.App.—Houston

[1st Dist.] 1985, no writ).

‘5 Compare Stone v. Lawyers Title Ins. Corp., 554 S.W.2d 183,

185 (Tex 1977) with William B. Roberts, Inc. v. McDrilling Co.,

579 S.W.2d 335 (Tex.Civ.App.—Corpus Christi 1979, no writ).

See also Custom Leasing, Inc. v. Texas Bank & Trust Co., 516

S.W.2d 138, 143 (Tex. 1974).

ice ii

54a

LDBrinkman Corp. would have us hold, as a matter

of law, that such a statement was an ambiguous personal

opinion at best, upon which no reliance could be reason-

ably placed and which, again as a matter of law, is not

actionable under Texas law. Gibraltar, on the other

hand, contends that the remarks were misstatements

“both of existing fact and which in the context of this

case, constituted a secret intention not to perform.”

Thus, as to a false representation of fact regarding the

future performance of an act, Gibraltar’s argument is

that Ratcliffe’s “promise” to fund BDI at least for the

term of the loan “was clearly intended to mean and be

perceived by [] Farlow and LDB[rinkman Corp.] would

continue its financial support of the subsidiaries until the

loan was repaid.”

At several stages in the trial, Gibraltar’s witnesses

categorically declared that the loan would not have been

issued but for the assurances that the Brinkcraft sub-

sidiaries would remain as LDBrinkman Corp., operating

units with the full backing of the holding company. Most

importantly, Farlow extensively evaluated his discussions

with both CFO Ratcliffe and in-house counsel Finley;

he reiterated on several occasions his contemporary inter-

pretation of the representations and how he related them

to Hollingsworth.”

46 Farlow testified that Ratcliffe told him,

[Y]Jou know that Brinkman is not going to let one of his com-

panies go bad and we are going to keep this as a going concern,

and this money is going to enable us to work this situation out.

[Emphasis added. ]

Summarizing his testimony, Farlow said that he would not have

recommended the BDI loan, and the loan committee surely would

not have approved it, had it not been for the implied promise that

LDBrinkman Corp. would continue to hold at least a one-half

interest in the Brinkcraft subsidiaries. In response to a probing

inquiry of his recollection of the purport of the “ongoing and suc-

cessful” statements, Farlow testified:

Ratcliffe and I had an understanding that . . . it would be a

going concern as long as there was money owed to our company.

[Continued]

55a

Given that the jury was properly instructed, the ver-

dict evinces the jury’s acceptance to Farlow’s testimony.

Its application of the facts under the law, as properly

presented to it, was that these representations were not

mere expressions of opinion or speculation of future

profitability or other events, but rather were unambigu-

ous declarations of positive fact secretly contradicted by

prior LDBrinkman Corp. actions, or were a false assur-

ance of a future course of LDBrinkmar Corp.’s conduct,

the performance of which had already been determined

to the contrary.

The evidence was overwhelming that LDBrinkman

Corp. had made the decision, prior to negotiating the

loan, that it intended to sell or dispose of BI.*7 Yet it

46 [Continued]

[H]e said they were not going to sell it, they were not going

to dispose of it until we were paid off, so I assume that we are

saying the same thing. It was never represented to me any

other way [but] that they were ongoing, successful companies.

[Emphasis added. ]

47 Ratcliffe’s representations that BI and BDI were ongoing and

successful in scope likewise were false representations, both of

existing fact and as to LDBrinkman Corp.’s and Brinkman’s secret

intention not to perform. As evidenced by internal memoranda,

LDBrinkman Corp. had determined, as early as March 1984, that

BI was unprofitable and began its efforts to get rid of the subsidi-

ary while negotiating with Gibraltar. When Herb Bradshaw was

brought on board, it was expressly envisioned that he would divest

BI. In June 1984, LDBrinkman Corp.’s board voted to dispose of

BI for “80% of its book value.” In LDBrinkman Corp.’s 1984 SEC

filing, BI was “discontinued” as an LDBrinkman Corp. subsidiary

effective August 1, 1984, and was no longer consolidated in LDBrink-

man Corp.’s financial reporting. The appellant’s brief itself admit-

ted that “[dJiscontinuance reporting is simply a form of accounting

required when a sale of business is contemplated.” Since the Woody-

McDougal buy-back had fallen through by this year-end filing, the

contemplated sale was not that to management.

While the buy-back of BDI by the subsidiaries’ officers would

have left the parent corporation with significant interests in, and

control over, the former subsidiary and left it as an “ongoing”

enterprise, even after Woody and McDougal pulled out of the deal,

56a

permitted Ratcliffe to represent that both BI and BDI

were ongoing and would be allowed to operate, grow, and

successfully repay their outside liabilities, knowing that

Gibraltar would rely upon LDBrinkman Corp.’s promise

to keep the subsidiary viable until the loan was repaid.

This satisfies the requirement that the “false promises”

be reckless or with knowledge of their falsity.** While a

representation regarding the “ongoing” nature of sub-

sidiaries which a parent corporation is selling to the

subsidiaries’ officers would not necessarily be false, in the

context of this case these representations were hardly

“ambiguous expressions of opinion” as suggested by LD

Brinkman Corp.”

LDBrinkman Corp. continued the divestiture effort; on Septem-

ber 6, 1984 (the day after Farlow presented the loan documents to

LDBrinkman Corp.’s officers in Kerrville and the day the BDI buy-

back was to occur), Ratcliffe made inquiries as to writing both

BDI and BI off of the holding company’s accounts. On September

14, 1984, the very day that Ratcliffe was signing the loan documents

in Kerrville, LDBrinkman Corp.’s San Antonio accountants were

obtaining information on how to treat BI as a “disposal segment”

of the holding company’s business.

48 Valdes, 810 F.2d at 1350 n. 3; J.L. Williams & Co. v. Robert

E. McKee, Inc., 612 S.W.2d 649, 651 (Tex.Civ.App.—Dallas 1981,

writ ref’d n.r.e.).

49 Radcliffe represented that LDBrinkman Corp. would continue

its financial support of BI and BDI until such time as the loan was

repaid. LDBrinkman Corp. makes no contention that it was im-

possible for LDBrinkman Corp. to perform these promises; only

that Gibraltar was not entitled to rely upon them. Given their

past relationship, however, Farlow was justified in relying upon

representations by his long-term friend and client. Ratcliffe selected

BDI as a convenient “shell corporation” through which to borrow

funds. Ratcliffe’s representation that the subsidiaries would be

“ongoing” was reasonably believed, and Farlow’s testimony was

accepted by the jury. Given that the jury was properly instructed,

it must be presumed that it determined that these representations

were an unambiguous declaration of positive facts which LDBrink-

man Corp. secretly had already determined to contravene.

57a

Thus, we reject the defendants’ legal contention that

the “ongoing and successful” statements were merely

expressions of opinion and not promises as to existing

facts required to impose liability for fraudulent induce-

ment to contract. That Ratcliffe “promised” continued

financial backing by the holding company is as apt a

characterization of the questioned remarks as that they

were, and were intended to be, personal opinions about

future profitability and fiscal health. The materiality of

such financing is undisputed, and that Gibraltar made

inquiries of this nature and expressed concern over the

holding company’s intentions was testified to by both

Hollingsworth and Farlow. Inferences reasonably drawn

from these facts lead us to conclude that—in context—

Ratcliffe’s representations were not merely non-actionable

statements of opinion. See Valdes, 810 F.2d at 1350.

It is also completely unavailing to argue that Farlow,

if not others at Gibraltar, knew of the management

buy-back that was contemplated for BDI, and that that

reasonably should have put the lender on notice that LD

Brinkman Corp. might otherwise dispose of or close down

the operating subsidiaries. The interest which Woody

and McDougal contemplated acquiring would have still

left LDBrinkman Corp. with a controlling interest in

the Brinkcraft subsidiaries and in each of the limited

partnerships.

Furthermore, BI was a general partner and one-half

owner in each of BDC’s limited partnerships. Brinkman

was a limited partner in some of those real estate proj-

ects. Additionally, he served as chairman of BDI and had

a strong influence on BI. In the context in which Rat-

cliffe’s representations were made, it would not be ex-

pected that LDBrinkman Corp. was. going to cut the addi-

tional ties with the subsidiaries, even if Woody’s buy-

back had occurred. It was reasonable for the jury to find

either that it was fraudulent not to disclose the concluded

plans to divest the Brinkcraft subsidiaries or that the

58a

assurance was a false promise that LDBrinkman Corp.

would maintain its interest in them, either through con-

tinued control after the Woody-McDougal buy-back or

otherwise.

Because of a supposed lack of sufficient record evidence

on an essential element of fraud, LDBrinkman Corp.

contends that there was no proof of reliance, even if we

hold that Gibraltar could reasonably rely upon Ratcliffe’s

statements. The heart of this contention has two prongs:

(1) that what little reliance testimony that was heard

all concerned the supposed oral “subordination” agree-

ment, and (2) that Farlow, from his past dealings with

Brinkman’s business empire and from the documents sub-

mitted by Ratcliffe, knew or should have known how the

“shell” corporations and their cash surpluses were rou-

tinely utilized as momentarily most opportune for the

holding company.

While there was ample proof of LDBrinkman Corp.’s

lack of intention to perform in order to substantiate a

“false promise” theory, no fraud claim could succeed

without separate evidence of reliance.*® Although reli-

ance might seem almost unreasonable on the part of

careful and considered lending officers, Farlow’s testi-

mony and that of other Gibraltar employees, to the

effect that the loan would not have been made but for

the “ongoing and successful” representation, constitutes

proof of actual reliance on Gibraltar’s part.

50 Ratner v. Sioux Natural Gas Corp., 770 F.2d 512, 519 (5th

Cir. 1985) (failure to prove each element in relation to each alleged

misrepresentation required reversal of general verdict of common-

law fraud with regard to that statement) ; Mozingo v. Correct Mfg.

Corp., 752 F.2d 168, 176 (5th Cir.1985) (when particular elements

of a general verdict lack adequate support in the record ...a new

trial is required); Statham v. City of Tyler, 257 S.W.2d at 744

(failure to prove any element as to the five alleged misrepresenta-

tions of existing fact or future intendment entitled the defendant

to summary judgmnt).

59a

The defendants also argue that the data contained

in the financial statements and annual reports reviewed

by Gibraltar employees in the course of preparing the

credit request and the spread sheets “negate justifiable

reliance.” However, while knowledge of facts that would

lead a reasonably prudent person to conduct further

inquiry to clarify a misimpression or reveal a misrepre-

sentation can be deemed equivalent to knowledge of the

truth,’ we cannot agree that the interpretation of cor-

porate records and divination of LDBrinkman Corp.’s

and Brinkman’s business intentions are tantamount to

circumstances in which the plaintiff’s possession of the

defendant’s accurate internal documents might foreclose

a later claim that fraudulant statements misled the

plaintiff and contradicted those documents.

We also cannot overlook this unequivocal evidence of

Gibraltar’s reliance upon the “ongoing and successful”

assurances of continued funding, even though it is true

that the thrust of Gibraltar’s trial efforts on the five

fraud claims, and most of the reliance testimony, con-

cerned Ratcliffe’s alleged representations regarding sub-

ordination and regarding divided payments (i.e., the

third and fourth of the five alleged misrepresentations).

It is true that the jury found no fraud in Ratcliffe’s

alleged promises that LDBrinkman Corp. would impose

a moratorium on repayment of its advances to BI until

Gibraltar was repaid, and would, in effect, subordinate

the subsidiary’s $7 million intercompany debt to the sum

which BI contingently owed Gibraltar on the guaranty

of the BDI loan. However, the jury’s rejection of claims

that those statements constituted fraud does not impugn

its acceptance of other counts that are adequately sup-

ported in the record with respect to all essential ele-

ments of liability. Although the direct argumentation

51 Laughlin v. FDIC, 657 S.W.2d 477, 482 (Tex. App.—Tyler

1983, no writ); Lewis v. River Oaks Capital Corp., 466 S.W.2d 348,

352 (Tex.Civ.App.—Houston [1st Dist.] 1971, writ ref’d n.r.e.).

60a

and proof of actual reliance could have been stronger,

this is no more true with respect to the “ongoing and

successful” count than with respect to the “subordina-

tion” counts.

We hesitate to overturn a verdict where the instruc-

tion was clear and unambiguous,®* and we must agree

that there was sufficient evidence to support the jury’s

finding of reliance. We disagree entirely with defend-

ants’ vehement contention that Gibraltar could not have

relied as a matter of law. While the defendants’ evidence

of Farlow’s zeal in pursuit of this loan, of his close

association with both Brinkman and Ratcliffe, and that

he was told more regarding the planned divestiture than

what he admitted is all persuasive in comparison to the

bare assertions of Gibraltar employees after the fact,

such credibility choices are the jury’s not ours; we refuse

to substitute our reading of the evidence for that of

a factfinder.** While we find the contradictory evidence

and inferences persuasive, they are not so compelling

as to allow us to supplant the jury’s determination.

52 The charge read:

You are further instructed that fraud does not exist if a

misrepresentation did not induce a transaction, did not deceive

the injured person or otherwise affect his or its actions. In

other words, if you find that the complaining party would have

engaged in the transaction anyway and that the alleged mis-

representations had no effect upon the decision, there was no

reliance and there can be no recovery.

53 The parties’ conflicting characterizations of the evidence are

based upon the credibility or non-credibility assigned to certain

witnesses, but “[i]t is not the function of this court to make credi-

bility choices and findings of fact.” Reditt v. Mississippi Extended

Care Centers, Inc., 718 F.2d 1381, 1386 (5th Cir.1983). See also

Smith v. Texas Dept. of Water Res., 799 F.2d 1026, 1031 (5th

Cir.1986), cert. denied, U.S. , 108 S.Ct. 1012, 98 L.Ed.2d

977 (1988); Ratliff v. Governor’s Highway Safety Prog., 791 F.2d

394, 401 (5th Cir.1986); Sylvester v. Callon Energy Serv., Inc., 724

F.2d 1210, 1216 (5th Cir.1984).

54 If there had been a specific finding on reliance, we would be

even more hesitant to overturn the verdict, but the obscurity of the

6la

D. Proof of Damages.

LDBrinkman Corp’s argument that Gibraltar failed

to prove its damages is predicated on the contention

that this was a “secured” loan. However, the loan was

absolutely denominated an “unsecured working capital

loan.” The Woody, McDougal, and BI guaranties were

not “security” * in the sense that a collateral pledge of

the development partnerships’ real property would have

been.

LDBrinkman Corp. argues that Gibraltar had to con-

tinue to pursue McDougal and Woody, even though

one element in a general instruction does not necessarily indicate

that the jury ignored the individual elements of the claims pre-

sented to it. Ratner v. Sioux Natural Gas Corp., 770 F.2d at 518

(“The frailty of a general verdict does not absolve us from uphold-

ing it if possible. Cases that justify disregarding the jury’s deter-

minations seldom arrive in this court.’’).

We cannot conclude that the jury overlooked its duty to find each

element specifically. We cannot say whether, if the issue had been

squarely addressed, we would have found the testimony of Gibral-

tar’s employees so insubstantial that no rational trier-of-fact could

have found that Gibraltar actually relied; absent such a conclusion

and without any indication, such as a faulty or less direct charge,

that the jury did not address the reliance issue with respect to each

count. we cannot hold that the record lacks sufficient evidence to

allow reasonable jurors to find that the lender actually relied upon

the “ongoing and successful” representation either in issuing the

loan or in accepting only BI’s guaranty, rather than demanding one

from the holding company, Texoma AG-Products, Inc. v. Hartford

Acc. & Indem. Co., 755 F.2d 445, 448 (5th Cir.1985) (“We decide

only if reasonable jurors could agree with this verdict.”).

55 A guaranty is an undertaking by the guarantor to answer for

the payment of some debt or performance of a contract of another

person in the event of the principal’s default. It has independent

value, United States v. Vahlco Corp., 800 F.2d 462 (5th Cir.1986),

but it is not such that Gibraltar’s recovery should be discounted by

more than the amount received in settlement from Woody and

McDougal. Of course, the guaranty of an insolvent guarantor is

worthless, and so BI’s surety of its subsidiary has no present value.

But the worth of the greed judgment against BI needs to be

ascertained.

62a

they did not participate in the loan negotiations and had

no control over the disbursement of the loan proceeds

or the use of the subsidiaries’ assets. While Texas law

requires that the principal be joined in a suit against

the guarantor unless the principal is “notoriously in-

solvent,” °° the defendants cite no authority for their

argued corollary rule, that the creditor must sue each

guarantor. Gibraltar properly and legally compromised

with the individual guarantors rather than force them

into personal bankruptcy, and in no way thereby com-

promised claims against coguarantor BI or against the

parent and owner under separate causes of action.

The Texas authorities cited by LDBrinkman Corp.

are securities cases without direct application to a case

such as this** LDBrinkman Corp.’s arguments based

upon the law of fraudulent securities transactions is

misplaced, because the straight loan of money without

expectation of participating in the profits of the venture,

as here, does not implicate the out-of-pocket limit on

damages appropriate in actions under the securities

laws.°°

56 Tex.Civ.Prac. & Rem.Code § 17.001 (Vernon’s) (formerly Tex.

Rev.Civ.Stat.Ann. art. 1987, repealed effective Sept. 1, 1985).

57 Western Cottage Piano & Organ Co. v. Anderson, 101 S.W. 1061,

1064 (Tex.Civ.App.—Fort Worth 1907, error ref’d) (plaintiff was

not required to prove that a third-party’s chattel mortgage was

insufficient security for the loan which the defendant induced the

plaintiff to make to that third party, in order for suit against the

fraudulent inducer to go forward). See also 38 C.J.S. Guaranty § 92

(1987 Supp.); United States v. Kohn, 243 F.Supp. 293, 296 (W.D.

S.C.1965).

58 F.g., In re Letterman Bros. Energy Sec. Litig., 799 F.2d 967

(5th Cir.1986), cert. denied, 480 U.S. 918, 107 S.Ct. 1373, 94 L.Ed.2d

689 (1987); Huddleston v. Herman & MacLean, 640 F.2d 534 (5th

Cir. Unit A Mar. 1981), aff’d in part, rev'd in part, 459 U.S. 375,

103 S.Ct. 683, 74 L.Ed.2d 548 (1983).

59 See McClure v. First Nat’l Bank, 497 F.2d 490, 493-94 (5th Cir.

1974), cert. denied, 420 U.S. 930, 95 S.Ct. 1182, 43 L.Ed.2d 402

a |

63a

LDBrinkman Corp. also complains that the award of

$6 million has no foundation in the evidence. It is quite

apparent that in assessing Gibraltar’s damages, the jury

took into account not only the $5.0 million loan proceeds,

but also the reasonable value of the use or detention of

those funds through the time of trial. While the remain-

ing defendants were not legally obligated for interest,

equity might entitle the lender to such an amount as part

of its damages.

Under several cases from the Texas state courts and

federal courts construing Texas law, it has been held

that an award of prejudgment interest is permitted un-

der general principles of equity.” Gilbraltar would have

been entitled to equitable prejudgment interest, which

would have been assessed by the court in entering judg-

ment upon the verdict. The jury knew that the interest

accrued and unpaid to the time of trial was $787,226.

However, the jury apparently selected a rate that equated

to an amount somewhat greater than the rate provided

in the note, this error must be reformed by the district

(1975); Bellah v. First Nat’l Bank, 495 F.2d 1109, 1111 (5th Cir.

1974).

60 F.g., Phillips Petroleum Co. v. Stahl Petroleum Co., 569 S.W.2d

480, 485 (Tex.1978); Crown Cent. Petroleum Corp. v. Nat'l Union

Fire Ins. Co., 768 F.2d 632 (5th Cir.1985); Union Bank v. First

Nat'l Bank, 677 F.2d 1074 (5th Cir.1982). In the recent landmark

Texas case of Cavnar v. Quality Control Parking, Inc., 696 S.W.2d

549, 552-53 (Tex.1985), the court held that in a tort action, inter-

est as damages is compensation allowed by law “as additional dam-

ages for lost use of money” during the lapse of time between the

accrual of the claim and the date judgment is entered. Citing

numerous Texas decisions, the Texas Supreme Court held that

plaintiffs have been permitted to recover prejudgment interest on

both liquidated and unliquidated claims in both contract and tort

disputes. See, e:g., Miner-Dederick Const. Corp. v. Mid-County

Rental Serv., Inc., 603 S.W.2d 193, 200 (Tex. 1980). The court

concluded that as a matter of law, a prevailing plaintiff may recover

prejudgment interest on damages that have accrued by the time

of judgment. Cavnar, 696 S.W.2d at 554,

64a

court to reflect the correct amount of prejudgment in-

terest which Texas law allows.

Adjustment in accordance with actual damages also

appears to be appropriate, because the district court

apparently did not provide a credit for any sums actually

received by Gibraltar from the settlements with Woody

and McDougal and the agreed judgment against BI.

Thus, on remand the district court should reduce the

judgment by the amounts, if any, which Gibraltar has

been paid by Woody, McDougal, and/or BDI, BI, and

their successors.** We remand for this limited purpose

only.

XI. Conclusion.

In summary, the district court correctly entered judg-

ment in favor of Gibraltar and against LDBrinkman

Corporation for $5,000,000, representing the principal

amount due on the Gibraltar note from BDI. This re-

covery is subject to reduction for sums actually received

by Gibraltar from McDougal and Woody on their settle-

61 During appeal of this matter, Gibraltar finally entered a stipu-

lation on June 1, 1988, that, if this judgment were affirmed by us,

it would offset any direct recovery from LDBrinkman Corp. or

Brinkman against the agreed judgment of $5 million and $5000

attorney’s fees which it had previously obtained against the now-

bankrupt successors to BI and BDI. See Gibraltar Savings v.

Lanchart, Inc. f/d/b/a Brinkcraft, Inc., et al., No. SA-85-2166

(W.D.Tex. Dec. 4, 1986). BI’s guarantee may thus prove worthless,

once the bankruptcy of its successor corporation is concluded, but

if Gibraltar has received value on the agreed judgment, the lender

cannot be allowed a double recovery.

Woody’s and McDougal’s settlement for $700,000 and the assign-

ment of their interests in the joint ventures must be factored into

any recalculation; whatever vaiue Gibraltar thus recovered, or may

realize, on the assignments, must offset the liability recognized by

this decision. To the extent that Gibraltar is entitled to sums in

excess of these prior recoveries on that debt, it may pursue

LDBrinkman Corp., which enjoys a theoretical, if not realistic,

right of contribution or subrogation against BI and BDI, if the

now-bankrupt successor retains any assets.

65a

ment with Gibraltar and from BDI, BI, and their suc-

cessors in favor of Gibraltar. On remand, the district

court will determine what sums Gibraltar has received

from these sources and reduce Gibraltar’s judgment

accordingly. Gibraltar’s recovery so computed shall be

increased to reflect an appropriate amount of prejudg-

ment interest.

We also affirm the district court’s dismissal of Gibral-

tar’s action against L.D. Brinkman individually, because

we conclude that the district court correctly granted judg-

ment notwithstanding the verdict on the jury findings

accepting Gibraltar’s “alter ego” theory of recovery

against LDBrinkman Corp. and Brinkman individually.

Because of our determination that the “alter ego” find-

ings were Gibraltar’s only predicate for recovery of at-

torneys’ fees, our conclusion that the district court cor-

rectly set aside these jury findings also requires us to

reverse the district court’s award of attorneys’ fees to

Gibraltar. Accordingly, the judgment of the district court

is AFFIRMED in part, REVERSED in part, and RE-

MANDED for further proceedings consistent with this

opinion.

iiiiaiaasata ica

66a

APPENDIX B

Judgment of the Court of Appeals

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 87-5569

D.C. Docket No. SA-85-CA-2166

GIBRALTAR SAVINGS,

Plaintiff-A ppeliee

Cross-A ppellant,

versus

LDBRINKMAN CORPORATION,

Defendant-A ppellant

Cross-A ppellee,

and

LLOYD D. BRINKMAN,

Defendant-Cross-A ppellee.

Appeals from the United States District Court

for the Western District of Texas

Before GEE, DAVIS, and SMITH, Circuit Judges.

67a

JUDGMENT

This cause came on to be heard on the record on ap-

peal and was argued by counsel.

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court that the judgment

of the District Court in this cause is affirmed in part and

reversed in part, and the cause is remanded to the Dis-

trict Court for further proceedings in accordance with

the opinion of this Court.

IT IS FURTHER ORDERED that defendant-appel-

lant cross-appellee pay to plaintiff-appellee cross-appel-

lant the costs on appeal, to be taxed by the Clerk of this

Court.

Filed December 2, 1988

Issued as Mandate: Jan. 11, 1989

68a

APPENDIX C

Order of the Court of Appeals

On Petition for Rehearing and

Suggestion for Rehearing En Banc

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 87-5569

GIBRALTAR SAVINGS, A California Corporation,

Plaintiff-A ppellee

Cross-A ppellant,

versus

LDBRINKMAN CORPORATION,

Defendant-A ppellant

Cross-A ppellee,

and

LLOYD D. BRINKMAN,

Defendant-Cross-A ppellee.

Appeals from the United States District Court

for the Western District of Texas

(December 30, 1988)

(Opinion December 2, 5th Cir. 1988, 860 F.2d 1275)

69a

ON PETITION FOR REHEARING AND

SUGGESTION FOR REHEARING EN BANC

Before GEE, DAVIS, and SMITH, Circuit Judges.

PER CURIAM:

Appellant’s petition for rehearing correctly notes that

there is no finding that “Gibraltar made out a case that

Brinkman and LDBrinkman Corp. looted and drained the

assets of the Brinkcraft subsidiaries,” as erroneously

stated in the opinion, supra, at 1286. That sentence is

amended to read, “The plaintiff cannot switch from one

veil-piercing theory to another.”

The petition for rehearing also properly observes that

Herb Bradshaw was not hired until January 1985, after

the September 1984 loan had been made. Accordingly,

the second sentence of Part III of the maj. op. supra at

1279, is amended to read, “Herb Bradshaw, senior vice

president of LDBrinkman Corp., was hired some months

before the default on the Gibraltar loan and was one of

the prime movers in divesting the holding company of the

Brinkeraft subsidiaries (see infra note 47); Gibraltar,

indeed, offered proof that he was brought into the com-

pany with the thought that he would sell off or otherwise

pare back the holding company’s marginal operating

subsidiaries.”

These factual corrections do not affect the result. See,

e.g., Mulder v. Commissioner, 861 F.2d 1333 (5th Cir.

1988) (per curiam) (on petition for rehearing). The

petition for rehearing is DENIED, and no member of

this panel nor judge in regular active service having

requested that the court be polled on rehearing en banc

(Fed. R. App. P. 35 and Loc. R. 35), the suggestion for

rehearing en banc is DENIED.

ENTERED FOR THE COURT:

/s/ Jerry E. Smith

United States Circuit Judge

70a

APPENDIX D

Amended Finai Judgment of the District Court

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

SAN ANTONIO DIVISION

No. SA-85-CA-2166

GIBRALTAR SAVINGS, a California Corporation

v.

LDBRINKMAN CORPORATION and

LLOYD D. BRINKMAN, Individually

AMENDED FINAL JUDGMENT

[Filed Aug. 24, 1987]

This case was assigned for trial on May 19, 1987, and

there came the parties appearing through their respective

attorneys of record and announced ready for trial. A

jury of six qualified citizens of the Western District of

Texas was empaneled and thereupon the parties proceeded

to state the evidence and at the conclusion of which both

sides rested.

The case was then submitted to the jury, and their ver-

dict was returned into court on May 29, 1987. Based

upon the pleadings, stipulations of the parties, the evi-

dence and the jury verdict which is on file in the record

of this case, which provides in relevant part as follows:

1. Do you find that LDBRINKMAN CORPORA-

TION committed fraud against GIBRALTAR SAV-

)

Tla

INGS by making any of the following alleged mis-

representations:

ANSWER: “Yes” or “No” as to each.

(a) That the total existing debt of Brinkcraft Inc.

other than the debt owing to LDBRINKMAN COR-

PORATION did not exceed $2,500,000.

ANSWER: Yes.

(b) That the business of Brinkcraft, Inc. and Brink-

craft Development Inc. was ongoing and successful

in scope.

Answer: Yes.

ANSWER QUESTION NO. 2 ONLY IF YOU AN-

SWERED “YES” TO ANY PART OF QUESTION

NO. 1, OTHERWISE SKIP TO QUESTION NO. 5.

2. What amount if [sic] money, if paid now in cash,

do you find would fairly and reasonably compensate

GIBRALTAR SAVINGS for the fraud, if any, com-

mitted against it by the LDBRINKMAN CORPORA-

TION?

Answer: $6,000,000.!*!

9. Do you find that Brinkcraft Development, Inc. is

(or was during the events made the subject of this

case) the alter ego of Brinkcraft Inc.?

Answer “Yes” or “No”’.

Answer: Yes.

10. Do you find that Brinkcraft Development, Inc.

is (or was during the events made the subject of

this case) the alter ego of the LDBRINKMAN COR-

PORATION?

Answer: “Yes” or “No”.

Answer: Yes.

* Note by counsel: Interrogatories 3 through 8 were omitted in

the district court’s judgment. The full text of the interrogatories

and answers appears in Appendix E, infra, pp. 75a-79a.

-

72a

11. Do you find that Brinkcraft Inc. is (or was

during the event [sic] made the subject of this case)

the alter ego of the LDBRINKMAN CORPORA-

TION?

Answer: “Yes” or “No”.

Answer: Yes.

12. Do you find that LDBRINKMAN CORPORA-

TION is (or was during the events made the subject

of this case) the alter ego of LLOYD D. BRINK-

MAN?

ANSWER: “YES” OR “NO”.

ANSWER: YES.

the Court finds that the Plaintiff, GIBRALTAR SAV-

INGS, a California Corporation, should recover from the

Defendant LDBRINKMAN CORPORATION, a Texas

Corporation, the sum of Six Million Dollars ($6,000,000.00)

with interest at the rate of 6.64% per annum from the

date hereof, until paid in full.

The Court finds that the jury’s findings concerning

alter ego are not supported by the evidence and, there-

fore, shall be disregarded by the Court. First, with re-

spect to the jury’s finding of alter ego as to the De-

fendant LLOYD D. BRINKMAN, there is no evidence

that LDBRINKMAN CORPORATION would be unable

to satisfy any judgment that might be entered against

the corporation and thus, as a matter of law, LDBRINK-

MAN CORPORATION cannot be the alter ego of LLOYD

D. BRINKMAN. See Lucas v. Texas Industries, Inc.,

696 S.W.2d 372 (Tex. 1984) ; Hanson Southwest Corp. v.

Dal-Mac Construction Co., 554 S.W.2d 712 (Tex. Civ.

App.—Dallas 1977, writ ref’s n.r.e.).

Where a parent corporation totally dominates and con-

trols a subsidiary, operating the subsidiary as its busi-

ness conduit or agent, the subsidiary is considered the

alter ego of the parent company. The factors to be used

73a

in determining whether a subsidiary is the alter ego of

its parent include whether parent and subsidiary have

common stock ownership, common directors or officers,

and common business departments; whether parent and

subsidiary filed consolidated financial statements and tax

returns; whether parent finances subsidiary; whether

parent caused incorporation of subsidiary; whether sub-

sidiary operates with grossly inadequate capital; whether

parent pays salaries and other expenses of subsidiaries;

whether subsidiary receives no business except that given

to it by the parent; whether parent uses subsidiary’s

property as its own; whether daily operations of the two

are kept separate; and whether subsidiary does not ob-

serve basic corporate formalities. U.S. v. Jon-T Chemi-

cals, Inc., 763 F.2d 686 (5th Cir.1985).

The Court finds that Plaintiff failed to present any

evidence that Brinkcraft Development Inc. was the alter

ego of LDBRINKMAN CORPORATION and failed to

present sufficient evidence to support the jury finding

that Brinkeraft Inc. was the alter ego of LDBRINKMAN

CORPORATION.

The Court further finds that the Defendants have

failed to meet their burden of proof with respect to their

usury counterclaim. The essence of the counterclaim is

that GIBRALTAR set forth a demand for interest on the

contract (i.e. the $5,000,000.00 note) when no interest

was due. As a non-obligor, Defendant BRINKMAN

lacks standing to assert the statutory penalties for usury,

Greenway Bank and Trust of Houston v. Smith, 679 S.W.

2d 592 (Tex. App.—Houston [1st Dist.] 1984, no writ).

A reading of the First and Second Amended Complaints

show [sic] that interest eo nomine on the contract was

sought only from the maker and guarantor and not from

BRINKMAN or the Parent Corporation.

Moreover, the Court finds there was no evidence of

“charging” within the meaning of the statute. Missouri-

iia i ciel

74a

Kansas Texas Railroad Company v. Fiberglass Insula-

tors, 707 S.W.2d 948, 950 (Tex. App.—Houston [1st

Dist.] 1986, no writ). Nor was any evidence offered as

to any calculations of damages for the alleged usury. In

sum, no evidence was offered in support of the usury

counterclaim. Accordingly, the Court enters Judgment

for the Plaintiff on the Defendants’ counterclaim for

usury.

The Court further finds that Plaintiff GIBRALTAR

SAVINGS is entitled to recover attorneys’ fees and court

costs from Defendant LDBRINKMAN CORPORATION

in the sum of $332,500. The Court finds that this action

is one “sounding in contract”, and, therefore, attorneys’

fees are recoverable under § 38.001 of the Texas Civil

Practice and Remedies Code. See Milton v. Aransas

Shrimp Co-op, 668 S.W.2d 785 (Tex.App.—Corpus Christi

1983, error dism’d). See also Collin County Savings &

Loan v. Miller Lumber Company, Inc., 653 8.W.2d 114

(Tex.App.—Dallas, 1983, no writ). A separate Judg-

ment concerning attorneys’ fees shall be entered.

For all of which let execution issue if not timely paid.

All other relief not expressly granted here is DE-

NIED.

This Judgment supersedes the Final Judgment entered

on August 6, 1987, but same is nunc pro tune for such

Judgment, and is entered because of an error in the

amount of attorneys’ fees awarded. |

SIGNED and ENTERED this 12th day of August, |

1987. |

/s/ Lucius D. Bunton

Lucius D. BUNTON

United States District Judge

75a

APPENDIX E

Verdict Form *

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

No. SA-85-CA-2166

GIBRALTAR SAVINGS

V.

LDBRINKMAN CORPORATION and LLOYD D. BRINKMAN

VERDICT FORM

Answer all of the following questions from a pre-

ponderance of the evidence.

1. Do you find that LDBRINKMAN CORPORATION

committed fraud against GIBRALTAR SAVINGS by

making any of the following alleged misrepresentations:

ANSWER “YES” OR “NO” AS TO EACH.

(a) That the total existing debt of Brinkcraft Inc. other

than debt owing to LDBrinkman Corporation, did not

exceed $2,500,000.

Answer: Yes.

(b) That the business of Brinkcraft, Ine. and Brinkeraft

Development, Inc. was ongoing and successful in scope.

Answer: Yes.

*C.A. Record Excerpts for Appellants (Vol. 1), pp. 52-57.

76a

(c) That all debt of Brinkcraft Development, Inc. and

Brinkeraft, Inc. to the parent company, LDBrinkman

Corporation, would be subordinated to the new debt to be

created in favor of Gibraltar Savings.

Answer: No.

(d) That $2,500,000 of the $5,000,000 line of credit

would be used as working capital to finance the comple-

tion of Brinkeraft Development, Inc.’s existing projects.

Answer: No.

(e) The sale of Brinkcraft Development, Inc.’s develop-

ment project would be the primary source of repayment

of the line of credit.

ANSWER: No.

ANSWER QUESTION NO. 2 ONLY IF YOU AN-

SWERED “YES” TO ANY PART OF QUESTION NO.

1, OTHERWISE SKIP TO QUESTION NO. 5.

2. What amount of money, if paid in cash, do you find

would fairly and reasonably compensate GIBRALTAR

SAVINGS for the fraud, if any, committed against it by

the LDBRINKMAN CORPORATION?

ANSWER: 6,000,000.00

ANSWER IN DOLLARS AND CENTS OR “NONE”.

ANSWER QUESTION NO. 3 ONLY IF YOU AN-

SWERED “YES” TO ANY PART OF QUESTION NO.

1, OTHERWISE SKIP TO QUESTION NO. 5.

3. Do you find that LDBRINKMAN CORPORATION

acted with malice, willfullness or callous and reckless

indifference to the rights of GIBRALTAR SAVINGS?

ANSWER “YES” OR “NO”.

ANSWER: Yes.

|

77a

ANSWER QUESTION NO. 4 ONLY IF YOU AN-

SWERED “YES” TO QUESTION NO. 3, OTHERWISE

SKIP TO QUESTION NO. 5.

4. What amount of money, if paid now in cash, do you

find should be awarded against the Defendant LDBRINK-

MAN CORPORATION as punishment for such fraud,

if any?

ANSWER: None.

ANSWER IN DOLLARS AND CENTS OR “NONE”.

5. Do you find that the Defendant(s) wrongfully inter-

fered with the contractual obligation of Brinkcraft De-

velopment, Inc. under its note to GIBRALTAR SAV-

INGS?

ANSWER “YES” OR “NO” AS TO EACH DEFEND-

ANT.

LDBRINKMAN CORPORATION Yes.

LLOYD D. BRINKMAN No.

ANSWER QUESTION NO. 6 ONLY IF YOU AN-

SWERED “YES” TO ANY PART OF QUESTION NO.

5, OTHERWISE SKIP TO QUESTION NO. 9.

6. What amount of money, if paid now in cash, do you

find would reasonably and fairly compensate GIBRAL-

TAR SAVINGS for the damages, if any, it sustained as

a result of the wrongful interference by the Defend-

ant(s)?

ANSWER: None.

ANSWER IN DOLLARS AND CENTS OR “NONE”.

ANSWER QUESTION NO. 7 ONLY IF YOU AN-

SWERED “YES” TO ANY PART OF QUESTION NO.

5, OTHERWISE SKIP TO QUESTION NO. 9.

78a

7. Do you find that the Defendant(s) acted with actual

malice?

ANSWER “YES” OR “NO”.

ANSWER: No.

ANSWER QUESTION NO. 8 ONLY IF YOU AN-

SWERED “YES” TO QUESTION NO. 7, OTHERWISE

SKIP TO QUESTION NO. 9.

8. What amount of money, if paid now in cash do you

find should be awarded against the Defendant(s) as

punishment for wrongful interference?

ANSWER: ——.

ANSWER IN DOLLARS AND CENTS OR “NONE”.

9. Do you find that Brinkcraft Development, Ince. is (or

was during the events made the subject of this case)

the alter ego of Brinkcraft Inc?

ANSWER “YES” OR “NO”,

ANSWER: Yes.

10. Do you find that Brinkeraft Development, Ine. is

(or was during the events made the subject of this case)

the alter ego of the LDBRINKMAN CORPORATION?

ANSWER “YES” OR “NO”,

ANSWER: Yes.

11. Do you find that Brinkcraft Ine. is (or was during

the event [sic] made the subject of this case) the alter

ego of the LDBRINKMAN CORPORATION?

ANSWER “YES” OR “NO”.

ANSWER: Yes.

12. Do you find that LDBRINKMAN CORPORATION

is (or was during the events made the subject of this

case) the alter ego of LLOYD D. BRINKMAN?

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ANSWER “YES” OR “NO”.

ANSWER: Yes.

13. Do you find that the Defendant(s) violated section

1962 (c), Title 18, U.S. Code—The RICO Act?

ANSWER “YES” OR “NO” AS TO EACH DEFEND-

ANT.

LDBRINKMAN CORPORATION: No.

LLOYD BRINKMAN: No.

ANSWER QUESTION NO. 14 ONLY IF YOU AN-

SWERED “YES” TO ANY PART OF QUESTION NO.

13, OTHERWISE STOP.

14. What amount of money, if paid now in cash, do you

find would fairly and reasonably compensate GIBRAL-

TAR SAVINGS for its damages, if any, proximately

caused by the Defendant(s)’s violation of the RICO Act?

ANSWER: ——.

ANSWER IN DOLLARS AND CENTS OR “NONE”.

/s/ Delma Gonzales

Foreperson

DATE: 5-29-87

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APPENDIX F

Plaintiff’s Proposed Special Issue *

(Hand Written—File Stamped)

Special Issue

(f) That LDBrinkman Corporation would not sell or

dispose of Brinkcraft, Inc until the $5,000,000 loan

was repaid.

Denied

/s/ Lucius D. Bunton

[Filed May 27, 1987]

*C.A. Combined Supplemental Record Excerpts of Appellant and

Cross-Appellees, p. 372,

8la

APPENDIX G

Second Amended Final Judgment of the District Court

UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

SAN ANTONIO DIVISION

SA-85-CA-2166

GIBRALTAR SAVINGS, A California Corporation

v.

LDBRINKMAN CORPORATION and

LLoyD D. BRINKMAN, Individually -

Second Amended Final Judgment

{Filed Mar. 17, 1989]

BEFORE THIS COURT is Gibraltar Savings’ Motion

for Entry of Amended Judgment after Remand in the

above-numbered cause. The cause was tried to a jury

verdict on May 29, 1987.

An appeal commenced and on December 2, 1988 the

United States Court of Appeals for the Fifth Circuit

affirmed in part, reversed in part, and remanded to this

Court with instructions to this Court to redetermine the

correct amount of the Judgment by (1) deleting the at-

torney’s fees, (2) allowing a credit for any recovery

which Gibraltar might have received from the Brink-

craft Judgment or from Ben D. Woody or Delbert G.

McDougal and increasing the amount of the judgment by

an appropriate amount of prejudgment interest pursuant

to state law.

Woody and McDougal are the persons with whom

Gilbraltar agreed on June 1, 1988, to offset any direct

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recovery from LDBrinkman Corp or Brinkman against

the agreed judgment of $5,000,000 and $5000 attorney’s

fees entered by this Court to prevent double recovery by

the lender, Gilbraltar. The Fifth Circuit recited in foot-

note 61 Gibraltar Savings v. LDBrinkman, 660 F.2d

1306, (5th Cir. 1988) the principle that to avoid a dou-

ble recovery to the lender, this Court must factor into

the final judgment the value that Gibraltar recovered or

may recover on the assignments made by Woody and

McDougal. The Fifth Circuit expressly determined that

this Court correctly entered judgment in favor of Gibral-

tar and against LDBrinkman Corporation for $5,000,000

representing the principal amount due on the Gibraltar

note from BDI.

These tasks are strictly ministerial, the remand con-

templated the accomplishment of only this limited pur-

pose. The Court finds that no amounts have been re

ceived from the Woody and McDougal assignment. There

is no manner in which this Court could reduce the value

of the judgment by the undetermined future value of the

Woody and McDougal assignment. The _ stipulation

should be accorded its full purpose; any recovery from

Woody and McDougal shall be counted as an offset in

favor of LDBrinkman of those funds which are due

Gibraltar.

Texas Courts allow the recovery of interest as dam-

ages in compensation for the loss of use of the money

between the date the claim accrues and the date the

judgment is entered. The interest rate allowed under

Cavnar v. Quality Control Parking, Inc., 696 S.W.2d

549, 552-53 (Tex. 1985) and as extended by Perry Roof-

ing Co. v. Olcott, 744 S.W.2d 020 [should be 929] (Tex.

1988) is ten percent per annum. There is no reason to

depart from this figure and accordingly, ten percent per

annum on the principle sum of $5,000,000 from August

15, 1985 to this date is appropriate. No attorney’s fees

shall be added. The entire sum shall bear interest from

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this date until satisfaction at the rate of 9.32 percent

per annum. Let execution lie if not timely paid.

Whether the parties agree to assign the value of the

Brinkcraft judgment now or in the future is not the

concern of this Court. It shall not be assigned by Order

of this Court.

SO ORDERED, ADJUDGED AND DECREED, this,

the 18th day of March, 1989.

/s/ Lucius D. Bunton

Lucius D. BUNTON

Chief Judge