Williams v. Midwest Employers ( 2002 )


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  •                 IN THE UNITED STATES COURT OF APPEALS
    FOR THE FIFTH CIRCUIT
    __________________________
    No. 00-31391
    __________________________
    JO ANN WILLIAMS, ETC.,
    Plaintiff,
    versus
    MIDWEST EMPLOYERS CASUALTY CO. and
    on behalf of Willie E. Williams
    Defendant-Plaintiff-Third Party Plaintiff-Appellant,
    versus
    ADAMS PLASTICS, INC. AND SPARTECH CORPORATION,
    Defendants-Third Party Defendants-Appellees.
    ___________________________________________________
    Appeal from the United States District Court
    for the Western District of Louisiana
    (97-CV-1208)
    ___________________________________________________
    March 21, 2002
    Before KING, Chief Judge, and DAVIS, Circuit Judges and VANCE,1
    District Judge.
    PER CURIAM:2
    Appellant Midwest Employers Casualty Company appeals
    multiple partial summary judgment rulings against it regarding
    1
    District Judge of the Eastern District of Louisiana,
    sitting by designation.
    2
    Pursuant to the 5th Cir. R. 47.5, the court has determined
    that this opinion should not be published and is not precedent
    except under the limited circumstances set forth in 5th Cir. R.
    47.5.4.
    excess insurance coverage for the workers' compensation claim of
    a former employee of its insured, Adams Plastics, Inc.    Appellant
    sought to impose liability on Adams and its parent company,
    Spartech Corporation, under the theory of "piercing the corporate
    veil" for claims it brought as assignee of the employee and as a
    third-party plaintiff.    The district court concluded that, as an
    assignee of Williams' workers' compensation claim, Midwest was
    entitled to recover from Adams up to the amount of Adams' self-
    insured retention and that there was no merit to any of Midwest's
    other claims.     After our review of the voluminous record in this
    case, we conclude that the district court did not err when it
    granted summary judgment sua sponte against Midwest on the issues
    of the existence vel non of insurance coverage and on piercing
    the corporate veil.    We further decide that the district court
    did not err when it determined that Williams' settlement with and
    release of Spartech foreclosed Midwest's claims against Spartech
    as Williams' assignee.    Finally, we decide that the district
    court erred when it dismissed sua sponte Midwest's claims against
    Adams for breach of its contractual duties to defend and settle
    claims. Accordingly, we affirm in part and reverse and remand in
    part.
    I.   Background
    Adams Plastics, Inc. d/b/a Spartech Films, was incorporated
    in 1985 with 1000 shares of stock at par value of $1.00 per share
    2
    and $150,000 of paid-in capital.       Spartech Corporation owned all
    of the stock of Adams.   Adams engaged in the business of
    manufacturing and selling plastic film products at a plant that
    Adams owned in Monroe, Louisiana.      Adams' plant, land, and
    equipment had a value of over $1.4 million and a lease value of
    $150,000 per year.   The plant's local general manager directed
    day-to-day activities, and he was responsible for negotiating raw
    materials contracts and formulating the annual business plan.
    Adams' board of directors retained final approval power over the
    business plans.   Adams' board of directors had some overlapping
    members with Spartech's board, and the two companies shared some
    common business departments that operated out of St. Louis,
    Missouri.   They filed consolidated financial statements and
    federal tax returns with the Securities and Exchange Commission
    and the Internal Revenue Service, respectively.      Each company
    kept separate books, and Adams' board conducted business through
    unanimous consents, as permitted by Louisiana law.
    In October 1991, Spartech closed Adams' Monroe plant because
    Adams had become a severe financial drain on Spartech.      Indeed,
    between 1989 and 1991, in an effort to keep Adams in business,
    Spartech "downstreamed" cash to Adams on a weekly basis, totaling
    over one million dollars per year.      After it closed Adams' plant,
    Spartech transferred the Adams plant and land to an inactive
    subsidiary and offset the value of the transferred property
    3
    against Adams' debt to Spartech.
    In 1989, Charles Northern, an insurance broker, approached
    Adams and offered to help the company become a self-insurer for
    workers' compensation claims and to help it obtain excess
    workers' compensation coverage from Midwest.    Louisiana
    employers had the option of purchasing workers' compensation
    liability insurance or becoming a "qualified self-insurer," with
    an appropriate excess policy of workers' compensation insurance.
    Northern obtained financial information from Adams, including
    historical loss and payroll data, and he filled out Midwest's
    two-page insurance application that he had developed with
    Midwest.   Midwest did not ask Adams for any other information or
    documentation.   Midwest responded to Adams' application with a
    proposal for coverage, and Adams accepted the proposal.     Midwest
    issued the policy in May 1989.   The policy covered losses for
    workers' compensation claims for occupationally-caused disease if
    the employee's last exposure occurred during the term of the
    policy.
    Under the policy, Adams represented that it was a duly
    qualified self-insurer under the workers' compensation laws of
    Louisiana.   At that time, to qualify as a self-insurer, an
    employer had to own real estate in Louisiana worth $25,000.
    Adams met this qualification at the time it applied for insurance
    with Midwest, and at the time Midwest issued the policy in May
    4
    1989.   In July 1989, however, Louisiana changed its laws and
    required a prospective self-insurer to get approval from the
    Louisiana Office of Workers' Compensation Administration ("OWCA")
    and to prove that it could pay a $150,000 per-claim deductible
    and post a $200,000 bond or cash with the State as security to
    pay claims if the self-insurer could not.   Northern applied to
    the State to obtain approval for Adams under the new workers'
    compensation scheme.   The OWCA tentatively approved Adams as a
    qualified self-insurer in August 1991.   Midwest renewed Adams'
    policy in 1990 and 1991.   In September 1991, the OWCA revoked
    Adams' self-insurer status because Adams was unable to provide
    the State with the necessary security.   Adams then terminated its
    excess policy with Midwest effective September 30, 1991.     Adams
    paid all premiums due during the term of the Midwest policy.
    Willie Williams was employed by Adams at its plant in
    Monroe.   In October 1989, Williams complained that he was
    disabled as a result of lung problems caused by breathing in
    plastic at the Adams plant.   F.A. Associates handled Williams'
    claim as a third-party administrator on behalf of Adams.     Adams
    paid Williams weekly workers' compensation benefits totaling
    $23,760 until October 9, 1991, when Adams ceased doing business.
    Weeks before Adams shut-down its operations, F.A. Associates sent
    Adams and Midwest a letter summarizing Williams' case and the
    potential for "rather heavy exposure" it presented.   The letter
    5
    also indicated that Adams had stated an intention to shut its
    doors and "walk away" from any liabilities.   F.A. Associates
    noted that it had an obligation to notify Williams' attorney of
    the lack of funds to pay his client's benefits.
    In October 1991, Williams filed a claim in the OWCA against
    Adams and Spartech for continued benefits based on his
    allegations that he was permanently and totally disabled.
    Williams then settled all of his claims against Spartech for
    $7500.   The settlement was approved by the workers' compensation
    court, and it included a release of all claims by Williams
    against Spartech.   Williams reserved his rights against Adams.
    In July 1994, he obtained a default judgment against Adams
    declaring that he was permanently and totally disabled and
    entitled to benefits of $212.00 per week indefinitely.   Adams was
    insolvent and failed to pay the judgment.   In September 1994,
    Williams filed a supplementing and amending petition naming
    Midwest as an additional defendant seeking payment of the default
    judgment.   The suit against Midwest was dismissed for lack of
    subject matter jurisdiction.   In response, Midwest filed a
    declaratory judgment action in the United States District Court
    for the Western District of Louisiana to determine coverage under
    the policy.   Before the district court entered its final ruling,
    Williams filed a motion against Adams to accelerate payment in
    workers' compensation court.   Midwest received a notice of the
    6
    hearing on this motion.    Additionally, Adams notified Midwest
    that the motion had been filed and that it had no means to or
    intention of defending the claim.     Midwest did not defend the
    claim in workers' compensation court, and the court granted
    Williams' motion for acceleration of payments.     Ultimately, the
    federal district court issued a judgment declaring that Midwest
    was obliged to pay all workers' compensation benefits and medical
    expenses that Williams was entitled to receive that exceeded
    Adams' $150,000 self-insured retention under the Adams/Midwest
    policy.     Midwest sought to appeal the district court's ruling,
    but it missed both the deadline to file for a new trial and the
    deadline to file an appeal.    This Court dismissed its appeal as
    untimely.
    In June 1997, Williams sued Midwest seeking $404,318.25 (the
    amount of the judgment against Adams in excess of $150,000) in
    Louisiana state court.    Midwest removed the action to federal
    district court.   On April 7, 1998, Midwest filed a third-party
    complaint against Adams and Spartech.     Midwest asserted tort and
    contract claims against Spartech and Adams, based on alleged
    breaches of contractual duties and improper conduct in connection
    with Williams' workers' compensation claim.     Midwest also
    asserted that Adams was not an independent corporation, but a
    "veil" for Spartech and part of a single corporate enterprise
    with Spartech.
    7
    In November 1999, Midwest settled Williams' claim for
    $267,500 and took an assignment of any claims Williams might have
    against Adams and Spartech.   Midwest, in its capacity as
    Williams' assignee, then sought to undo the Spartech settlement
    and to assert claims against Spartech and Adams for all workers'
    compensation benefits to which Williams was entitled.   Midwest
    further claimed that Spartech should be liable for Adams'
    obligations to Williams under the corporate veil doctrine.
    On July 21, 2000, Midwest moved for partial summary judgment
    on the veil piercing issue.   At a pretrial conference on   August
    18, 2000, the court ordered the parties to brief the issue of
    insurance coverage as it related to the declaratory judgment
    ruling and it informed the parties that it was considering
    Midwest's partial summary judgment on the veil piercing issue.
    On September 8, 2000, the district court sua sponte granted a
    partial summary judgment in favor of Spartech and Adams, the
    nonmoving parties on the corporate veil motion, based on the
    lengthy record before it.   In a separate ruling also issued on
    September 8, 2000, the district court dismissed with prejudice
    Midwest's claims relating to the validity of the excess insurance
    contract based on the ruling in the declaratory judgment action
    and it dismissed Midwest's breach of contract claims.   The court
    ruled that Midwest, in its capacity as Williams' assignee, was
    entitled to judgment against Adams in the amount of $126,240 plus
    8
    interest, which is the amount of Adams' self-insured retention
    ($150,000) minus the benefits that Adams actually paid to
    Williams ($23,760).    Finally, in a third ruling, the district
    court granted Adams' and Spartech's motion for partial summary
    judgment dismissing Midwest's claim that the settlement between
    Spartech and Williams was fraudulent, collusive, or otherwise
    unlawful or invalid.
    On September 20, 2000, the district court entered a separate
    final judgment on its rulings.    Midwest moved for a new trial.
    The district court denied Midwest's motion for new trial on
    October 24, 2000, and Midwest timely filed its notice of appeal.
    II. Discussion
    This court reviews a grant of summary judgment de novo,
    applying the same standard as the district court.     See Harken
    Exploration Company v. Sphere Drake Insurance PLC, 
    261 F.3d 466
    ,
    470 (5th Cir. 2001).    Summary judgment is proper only when there
    is not a genuine issue as to any material fact, and the movant is
    entitled to a judgment as a matter of law. 
    Id.
         We review the
    evidence in the light most favorable to the non-movant and make
    all reasonable inferences in its favor.    Id.; Matsushita Electric
    Industrial Co., Ltd. v. Zenith Radio Corp., 
    475 U.S. 574
    , 587-88,
    
    106 S. Ct. 1348
    , 1356, 89 L. Ed. 2d. 538 (1986).    A fact is
    material if it might affect the outcome of the suit under
    governing law.   Id.; Anderson v. Liberty Lobby, Inc., 
    477 U.S.
                             9
    242, 248, 
    106 S. Ct. 2505
    , 2510, 
    91 L. Ed. 2d 202
     (1986).     There
    is a genuine issue as to a material fact if the evidence is such
    that a reasonable jury could return a verdict for the non-movant.
    
    Id.
    A. Midwest's Claims as Subrogee of Williams
    The Court finds no error in the district court's ruling that
    Williams released his claim against Spartech, and therefore had
    no claim to assign to Midwest.   Midwest presented no evidence to
    indicate that any of Spartech's representations led Williams to
    agree to a settlement and release that he otherwise would not
    have made.   See LA. CIV. CODE art. 1955 ("Error induced by fraud
    need not concern the cause of the obligation to vitiate consent,
    but it must concern a circumstance that has substantially
    influenced that consent.").   Williams was represented by counsel
    in the workman's compensation proceeding who vigorously pursued
    his claim.   Williams obviously knew there was a relationship
    between Adams and Spartech because he included Spartech as a
    defendant.   Further, Williams' attorney could have ascertained
    the nature of the Adams/Spartech relationship without
    "difficulty, inconvenience, or special skill."      LA. CIV. CODE
    art. 1954 ("Fraud does not vitiate consent when the party against
    whom the fraud was directed could have ascertained the truth
    without difficulty, inconvenience, or special skill.").     Six
    years elapsed between the release and the assignment, and
    10
    Williams made no complaint about the release.    Therefore, because
    Williams released any claims he might have had against Spartech,
    Midwest, as assignee of Williams' rights, has no claims against
    Spartech.   Accordingly, Midwest cannot, as assignee, attach
    liability to Spartech through the piercing the corporate veil
    doctrine.
    B. Midwest's Claims in its Own Capacity
    Midwest raises various issues on appeal regarding its claims
    as third-party plaintiff against Adams and Spartech.
    1. Tort Claims
    Midwest asserted tort claims based on alleged intentional
    and negligent misrepresentations regarding Adams qualified self-
    insured status.   We find that Midwest's tort claims are
    prescribed.   Although the district court did not rule on the
    issue of prescription, this Court may decide a case on any ground
    that was presented to the trial court.   Breaux v. Dilsalver, 
    254 F.3d 533
    , 538 (5th Cir. 2001)(citing Dandridge v. Williams, 
    397 U.S. 471
    , 475 n. 6, 
    90 S. Ct. 1153
    , 1157 n. 6, 
    25 L. Ed. 491
    (1970)); see also Gregory v. Missouri Pacific Railroad Company,
    
    32 F.3d 160
    , 164 (5th Cir. 1994)(citing cases).    Under Louisiana
    Civil Code article 3492, "[d]elictual actions are subject to a
    liberative prescriptive period of one year."    LA. CIV. CODE art.
    3492.   When the plaintiff's complaint on its face reveals that
    prescription has run, the burden is on the plaintiff to show why
    11
    the claim has not prescribed.   Lima v. Schmidt, 
    595 So.2d 624
    ,
    628 (La. 1992).   Here, the face of Midwest's third-party
    complaint reveals that the one-year prescriptive period on
    Midwest's tort claims has run because it filed its third-party
    claims against Adams and Spartech in April 1998, and the claims
    relate to acts allegedly performed at the latest in 1991.
    Midwest contends that the prescriptive period was suspended under
    the principle of contra non valentem.     Suspension of the
    prescriptive period under the contra non valentem principle
    occurs when "the cause of action is not known or reasonably
    knowable by the plaintiff, even though his ignorance is not
    induced by the defendant."   Corsey v. State Dept. of Corrections,
    
    375 So.2d 1319
    , 1322 (La. 1979).     The Louisiana Supreme Court,
    however, noted that "this principle will not except the
    plaintiff's claim from the running of prescription if his
    ignorance is attributable to his own willfulness or neglect; that
    is, a plaintiff will be deemed to know what he could by
    reasonable diligence have learned."     
    Id.
    Clearly, Midwest was on inquiry notice of its claims in 1991
    when Adams cancelled its insurance with Midwest because it could
    not maintain its self-insured status.     Further, Midwest asserts
    that it was mislead as to the identity of its insured, but it is
    undisputed that when Adams returned the cancellation endorsement
    to Midwest in 1991, it changed the insured designation on the
    12
    form from "Spartech Films, A Division of Spartech, Inc." to
    "Spartech Films, A Division of Adams Plastics, Inc."     Midwest
    could have discovered the factual basis of its claims through the
    exercise of reasonable diligence much earlier than a year before
    its suit was filed in 1998.     See Corsey, 375 So.2d at 1322.
    Further, Midwest admitted it knew of the alleged
    misrepresentations when it filed its declaratory judgment action
    against Williams in May 1995.    Midwest's complaint alleged that
    Adams misrepresented its qualified self-insured status when it
    applied for insurance coverage from Midwest.     See Rec. Doc. 60,
    Ex. 11, Complt. at ¶ IX.   Therefore, the one-year prescriptive
    period had run well before Midwest filed its third-party
    complaint against Adams and Spartech in April 1998 on claims
    involving misrepresentations about Adams' financial status.
    Accordingly, Midwest's tort claims are prescribed.
    2. Contract Claims
    The district court dismissed Midwest's claims regarding the
    existence of insurance coverage based on issue preclusion.       The
    application of issue preclusion is a question of law that we
    review de novo.    United States v. Brackett, 
    113 F.3d 1396
    , 1398
    (5th Cir. 1997).    Midwest contends that the district court
    improperly granted dismissal sua sponte on the coverage issue.
    In Celotex Corp. v. Catrett, the Supreme Court held that district
    courts "possess the power to enter summary judgments sua sponte."
    13
    
    477 U.S. 317
    , 326, 
    106 S. Ct. 2548
    , 2554 (1986).    The power to
    enter summary judgment sua sponte, however, is tempered by the
    requirement to provide proper notice.     Leatherman v. Tarrant
    County Narcotics Intelligence and Coordination Unit, 
    28 F.3d 1388
    , 1397 (5th Cir. 1994)(citing Celotex, 
    477 U.S. at 326
    , 106
    S. Ct. at 2554); Judwin Properties, Inc. v. United States Fire
    Ins. Co., 
    973 F.2d 432
    , 436-37 (5th Cir. 1992)("A district court
    may grant a motion for summary judgment sua sponte, provided that
    it give proper notice to the adverse party.")(citations omitted);
    see also Fed. R. Civ. Proc. 56(c) (requiring that summary
    judgment motion be served at least 10 days before the time fixed
    for the hearing).    Failure to give notice may be harmless when
    the nonmovant has no additional evidence or if all the
    nonmovant's additional evidence is reviewed by the appellate
    court and none of the evidence presents a genuine issue of
    material fact."     Nowlin v. Resolution Trust Corp., 
    33 F.3d 498
    ,
    504 (5th Cir. 1994)(quoting Leatherman, 
    28 F.3d at 1398
    ).     This
    circuit also recognizes two instances in which the district or
    appellate court can sua sponte dismiss an action on issue
    preclusion grounds.     Nagle v. Lee, 
    807 F.2d 435
    , 438 (5th Cir.
    1987).   One exception allows a court to raise the issue
    preclusion defense on its own when all the relevant data and
    legal records are before the court and the demands of comity,
    continuity in the law, and essential justice mandate judicial
    14
    invocation of the principles of issue preclusion.    See 
    id.
     at 439
    n. 2 (citing American Furniture Co. v. International
    Accommodations Supply, 
    721 F.2d 478
    , 482 (5th Cir. 1981)).
    Here, Adams and Spartech specifically pleaded issue
    preclusion as dictated by Federal Rule of Civil Procedure 8(c) in
    their first amended answer to Midwest's third-party complaint
    (see Rec. Doc. 212) and in their answer to Midwest's first
    amended third-party complaint (see Rec. Doc. 339).     See FED. R.
    CIV. P. 8(c).   Further, the court asked the parties for briefs on
    the preclusive effect of the declaratory judgment ruling at the
    August 18, 2000 pretrial conference, and in response, the parties
    briefed the preclusion issue before the court ruled on it.     See
    Rec. Doc. 550, 567, 580.   Moreover, all of the relevant data and
    legal records, such as the declaratory judgment action pleadings
    and rulings (see Rec. Doc. 60), were before the district court.
    Therefore, essential justice mandated judicial invocation of the
    principles of issue preclusion before the commencement of the
    trial.   See Nagle, 
    807 F.2d at 439
    .
    Midwest contends that the district court erred by applying
    issue preclusion to its coverage claims because the coverage
    issues were not actually litigated in the previous action.     We
    find no error in the district court's application of the
    principle of issue preclusion.   The principle of issue preclusion
    bars a party from relitigating issues of fact or law that were
    15
    necessary to the court's judgment and actually determined in a
    prior action.    Sidag Aktiengesellschaft v. Smoked Foods Products
    Co., Inc., 
    776 F.2d 1270
    , 1275 (5th Cir. 1985).
    In Midwest's 1995 declaratory action against Williams,
    Midwest challenged Williams' right to collect workers'
    compensation benefits under the policy it issued to Adams.      See
    Midwest v. Williams, Civil Action No. 95-CV-0798 (M.D. La.
    October 15, 1997), appeal denied, 
    161 F.3d 877
     (5th Cir.
    1998)(appeal denied based on untimely filing of notice of
    appeal).    One of the issues Midwest asserted in its complaint was
    that Williams had no claim against it because the excess
    insurance policy it issued to Adams was void ab initio as a
    result of Adams' material misrepresentations that Adams was a
    qualified self-insurer.    See Rec. Doc. 60; Ex. 11, Complt. at ¶
    IX.   In addition, Midwest asked for a declaration that Williams'
    employer was not an insured under the policy and that it had no
    coverage obligation because Williams settled his claim with
    Spartech.   Midwest argued as it does here that since Spartech
    Films was listed on the policy endorsement as a division of
    Spartech, Inc., Spartech Films was Spartech.      See Rec. Doc. 618,
    Ex. XII, Summ. J. Memo. at 8 n. 1.      Midwest moved for summary
    judgment and the district court ultimately issued a ruling that
    Midwest was obliged to pay Williams' claim in excess of the
    $150,000 self-insured retention.      Midwest raised the
    16
    fraud/misrepresentation issue in its pleadings on the motion.
    See   Rec. Doc. 618, Ex. XII, Reply Memo. at 7.   The court's
    ruling became final after Midwest's appeal was denied by the
    Fifth Circuit as untimely.   See 
    161 F.3d at 880
    .    The declaratory
    judgment found that Williams' employer, "Adams Plastics, Inc.,
    d/b/a Spartech Films," was Midwest's insured and that it was
    obliged to pay workers' compensation benefits to Williams for
    injuries resulting from Williams' employment by Adams.     See
    Lamana v. LeBlanc, 
    526 So.2d 1107
    , 1109 (La. 1988)(res judicata
    can be invoked to bar relitigation of issue presented in
    pleadings and addressed or referred to in judgment).    The
    determination of the coverage issue was essential to the court's
    final judgment against Midwest because Midwest could not have
    been found to be liable to pay Williams unless the court
    determined that Adams was the insured and that the underlying
    excess policy between Adams and Midwest was valid.    Accordingly,
    the district court did not err when it ruled that the issue of
    the identity of the insured and the validity of the policy were
    actually litigated and necessary to the judgment.    Since the
    district court committed no error in finding that Spartech was
    not a party to the insurance contract, it properly dismissed
    Midwest's contract claims against Spartech.
    Regarding Midwest's remaining contract claims against Adams,
    we find that the district court erred in dismissing sua sponte
    17
    Midwest's claims that Adams breached its duty to use diligence
    and good faith in the investigation, defense, and settlement of
    Williams' claim.   The district court failed to provide the
    parties with notice that it planned to rule on the issue.     See
    Leatherman, 
    28 F.3d at 1397-98
    ; Judwin Properties, 
    973 F.2d at 436-37
    .   At the pretrial conference the court asked the parties
    to brief the existence of any duties Spartech and Adams may have
    had under the contract, but it did not specifically ask for
    briefs on whether the duties were breached.     See Rec. Doc. 550.
    Further, the parties' earlier summary judgment motions and their
    responses to the court's pretrial order merely addressed the
    issue of whether Spartech had a duty under the contract.
    Accordingly, the district court's ruling on Midwest's claim
    against Adams for breach of contractual duties to defend and
    settle claims is reversed and remanded.
    3. Piercing the Corporate Veil
    Midwest contends that the district court violated its due
    process rights by sua sponte granting summary judgment in favor
    of the nonmovants, Adams and Spartech, on the corporate identity
    issue without the proper notice.     In Exxon Corp. v. v. St. Paul
    Fire and Marine Insurance Co., 
    129 F.3d 781
    , 786 (5th Cir. 1997),
    this Court indicated that in order to achieve the goal of Federal
    Rule of Civil Procedure 56, the prompt disposition of cases when
    there is no genuine issue of material fact for the court to
    18
    consider, the district court may grant summary judgment for the
    nonmovant sua sponte.
    Here, Midwest brought the partial summary judgment motion on
    the issue of corporate identity, so it had to have been on notice
    that the district court was considering the issue.    See Goldstein
    v. Fidelity and Guaranty Insurance Underwriters, Inc., 
    86 F.3d 749
    , 750 (7th Cir. 1996)(affirming grant of summary judgment in
    favor of nonmovant; after plaintiff filed for summary judgment
    both parties on notice that summary judgment being considered).
    Further, the court informed the parties at the August 18, 2000
    pretrial conference that the court would consider Midwest's
    motion before the trial.   See Rec. Doc. 550.   Accordingly, we
    find that the district court did not violate Midwest's due
    process rights.
    Corporations function as distinct legal entities, separate
    from the individuals who own them, and their shareholders are
    generally not liable for the debts of the corporation.     Riggins
    v. Dixie Shoring Co., Inc., 
    590 So.2d 1164
    , 1167 (La. 1991); see
    also LA. REV. STAT. § 12:93(B).    Louisiana law holds that the
    limited liability afforded corporate ownership should be
    disregarded only in "exceptional circumstances."     Id. at 1168
    (emphasis added).   Louisiana courts are reluctant to pierce the
    corporate veil in the absence of fraud, malfeasance, or criminal
    wrongdoing. See id. (piercing the veil is often justified to
    19
    prevent the use of the corporate form to defraud creditors).
    Additionally, Louisiana courts are less likely to disregard the
    corporate veil when the underlying claim is based on contract
    rather than tort.    See Riggins v. Dixie Shoring Co., Inc., 
    592 So.2d 1282
    , 1285 (La. 1992)(concurrence in denial of
    rehearing)(in contract cases plaintiff chooses to rely solely on
    obligation of corporation without any additional guarantees from
    its shareholders).
    The Louisiana Supreme Court stated in Riggins that piercing
    the corporate veil usually occurs when shareholders use the
    corporate form to practice fraud or deceit or when the corporate
    form is so ignored that the corporation has become
    indistinguishable from its shareholders:
    There are limited exceptions to the rule of non-liability of
    shareholders for the debts of a corporation, where the court
    may ignore the corporate fiction and hold the individual
    shareholders liable. Generally that is done where the
    corporation is found to be simply the "alter ego" of the
    shareholder. It usually involves situations where fraud or
    deceit has been practiced by the shareholder acting through
    the corporation. (Citations omitted). Another basis for
    piercing the corporate veil is when the shareholders
    disregard the requisite corporate formalities to the extent
    that the corporation ceases to be distinguishable from the
    shareholders. (Citations omitted).
    590 So.2d at 1167.
    The totality of the circumstances is determinative when a party
    seeks to pierce the corporate veil.   
    Id.
       The Riggins court
    listed several factors that courts consider when determining
    whether to apply the alter ego doctrine:
    20
    (1) commingling of corporate and shareholder funds; (2)
    failure to follow statutory formalities for incorporating
    and transacting corporate affairs; (3) undercapitalization;
    (4) failure to provide separate bank accounts and
    bookkeeping records; and (5) failure to hold regular
    shareholder and director meetings.
    
    Id.
     (citations omitted).
    "The ultimate inquiry, however, requires a balance of the
    policies behind the recognition of a separate corporate existence
    with the policies justifying piercing."   Huard v. Shreveport
    Pirates, Inc., 
    147 F.3d 406
    , 409 (5th Cir. 1998)(citing Glazer v.
    Commission on Ethics for Public Employees, 
    431 So.2d 752
    , 757
    (La. 1983)).   As the Louisiana Supreme Court stated in Glazer,
    the same factual scenario may result in veil piercing in some
    contexts but not in others, depending on the competing interests
    and policies involved:
    Depending on the various competing policies and interests
    involved, the same factual scenario may result in
    recognition of a separate corporate identity for some
    purposes, i.e. insulation of shareholders from liability,
    and a disallowance of the separate corporate entity
    privilege for others. Each situation must be considered by
    the court on its merits. The facts presented must
    demonstrate some misuse of the corporate privilege in that
    situation or the need of limiting it in order to do justice.
    431 So.2d at 758 (citation omitted).
    The Court finds that the district court committed no error
    in dismissing Midwest's veil piercing claim because there is no
    evidence that Spartech or Adams misused the corporate privilege
    to the detriment of Midwest or that Spartech and Adams are
    indistinguishable.   Adams was properly formed with an initial
    21
    paid-in capital of $150,000.   Adams and Spartech maintained
    separate books, and Adams' day-to-day operations were handled by
    Adams' general manager in Monroe.     Adams' board of directors
    conducted business by unanimous consents, which is permitted by
    Louisiana law.   Further, that Adams' board of directors
    overlapped with Spartech's board and that it was located in St.
    Louis, where Spartech's corporate offices were located, do not
    present genuine issues of fact as to whether Spartech controlled
    Adams.    There is no evidence that anyone other than Adams' board
    members made decisions for Adams, such as approving the annual
    business plans formulated by Adams' general manager in Monroe.
    Midwest argues that the corporate veil should be pierced
    because Adams and Spartech misused the corporate form in
    procuring insurance from Midwest so that Midwest issued its
    policy in ignorance of Adams' financial problems.     Midwest, is an
    excess insurer, however, which in no event would be liable for
    Adams' self-insured retention, regardless of Adams' financial
    condition.   Midwest's policy does not specify that the insolvency
    of the insured is a breach of contract or that it voids the
    policy.   Indeed, Midwest agreed that Adams' insolvency would not
    terminate the policy.   The Midwest policy provides:
    Bankruptcy or insolvency of the Insured will not relieve the
    Insurer of its duties and liabilities under this policy.
    After the Insured's retention has been reached, payments due
    under this policy will be made by the Insurer as if the
    Insured had not become bankrupt or insolvent, but not in
    excess of the Insurer's limit of indemnity.
    22
    Appellant's Rec. Excerpts 13; Midwest Excess Ins.
    Policy at Part Seven(K).
    Adams was obliged to pay premiums to Midwest for the coverage
    issued under the policy, and there is no evidence that Adams
    failed to pay its premiums before it terminated the policy.3
    Midwest issued the insurance policy to Adams as a qualified self-
    insured, which it was at the time the policy was issued in May
    1989.    Also, Adams' failure to maintain its qualification as a
    self-insurer did not increase Midwest's obligation under its
    contract because the policy provided that such an event would not
    result in Midwest's having to pay the self-insured retention.
    The policy states:
    If the Insured should terminate such qualifications or if
    qualification of the Insured as a self-insurer is cancelled
    or revoked while this policy is in force, the amounts
    payable under this policy will not exceed the amounts which
    would have been payable if such qualifications had been
    maintained in full force and effect.
    
    Id.
     at General Section E, "Qualified Self-Insurer."
    The district court confirmed that Midwest had no obligation to
    pay the amount of Adams' self-insured retention to Williams.       See
    Rec. Doc. 609, Memorandum Ruling at 6-7.
    Further, because piercing the corporate veil is essentially
    an equitable remedy, the district court was correct to take into
    account Midwest's conduct with regard to Adams.    See Brown v.
    3
    Adams paid premiums totaling $21,869 for the May 1989 - May
    1990 period and $27,022 for the May 1990 - May 1991 period. See
    Apellant's Rec. Excerpt 13.
    23
    Benton Creosoting Co., Inc., 
    147 So.2d 89
    , 94 (La. Ct. App.
    1962)(piercing the corporate veil especially appropriate when
    court is exercising equitable powers)(quoting Mayo v. Pioneer
    Bank & Trust Company, 
    274 F.2d 320
    , 321 (5th Cir. 1960)); see
    also See Watson v. Big T Timber Co., Inc., 
    382 So.2d 258
    , 262
    (La. Ct. App. 1980); Giuffria Realty Co., Inc. v. Kathman-Landry,
    Inc., 
    173 So.2d 329
    , 334 (La. Ct. App. 1965)(corporate veil
    should be pierced when adherence to the corporate fiction would
    clearly result in inequity).   Midwest did no underwriting of its
    own and did not request financial information from Adams beyond
    the limited information Northern, the insurance broker, provided
    in the short-form application.   Moreover, Northern testified that
    financial information on the insured was generally not important
    to an excess insurer because its only liability was for amounts
    above the self-insured retention.
    Further, the evidence in the record demonstrates that
    Midwest was notified of Williams' claim in September 1991.    A
    letter from Adams' third-party administrator, F.A. Associates,
    who had investigated the claim, indicated that Williams' workers'
    compensation claim had the potential to create heavy exposure and
    that Adams could not continue to pay Williams.   See Rec. Doc.
    522, Ex. 2.   Adams terminated its policy with Midwest at about
    the same time because it could not maintain self-insured status.
    It was not until three years later, during which period Midwest
    24
    took no action, that Williams took a judgment against Adams
    declaring him to be permanently and totally disabled and entitled
    to weekly benefits indefinitely.     Further, although Midwest was
    given notice of the motion to accelerate benefits, it did nothing
    to defend it.   Indeed, Midwest admitted that its settled policy
    was to do nothing to aid in or handle the defense of claims
    against its insured regardless of whether the insured was
    insolvent and unable to put on a defense.     See Rec. Doc. 218, Ex.
    9; Deposition of Matthew Jerabek at 48-51, 74-75.    Therefore,
    considering the record before the district court, we find that it
    did not err when it granted summary judgment against Midwest on
    the piercing corporate veil issue.
    III. Conclusion
    In light of the foregoing analysis, we AFFIRM all of the
    rulings of the district court, except for its order granting
    summary judgment against Midwest on the issue of whether Adams
    breached the insurance contract by failing to defend and settle
    Williams' claim.   We REVERSE and REMAND that issue alone to the
    district court.
    25
    

Document Info

Docket Number: 00-31391

Filed Date: 3/22/2002

Precedential Status: Non-Precedential

Modified Date: 12/21/2014

Authorities (27)

United States v. Brackett , 113 F.3d 1396 ( 1997 )

Gregory v. Missouri Pacific Railroad , 32 F.3d 160 ( 1994 )

Huard v. Shreveport Pirates, Inc. , 147 F.3d 406 ( 1998 )

MIDWEST EMPLOYERS CASUALTY CO., Plaintiff-Appellant-... , 161 F.3d 877 ( 1998 )

american-furniture-company-inc-dba-american-of-martinsville-plaintiff , 721 F.2d 478 ( 1981 )

Judwin Properties, Inc. v. United States Fire Insurance ... , 973 F.2d 432 ( 1992 )

65-fair-emplpraccas-bna-1870-65-empl-prac-dec-p-43413-jolene , 33 F.3d 498 ( 1994 )

Charles Nagle v. Harry Lee, Sheriff of Jefferson Parish ... , 807 F.2d 435 ( 1987 )

Charlene Leatherman v. Tarrant County Narcotics ... , 28 F.3d 1388 ( 1994 )

Exxon Corporation v. St. Paul Fire and Marine Insurance ... , 129 F.3d 781 ( 1997 )

robert-k-mayo-h-e-harper-and-jack-c-murrell-as-trustees-in-bankruptcy , 274 F.2d 320 ( 1960 )

harry-edward-breaux-lelia-breaux-olivier-camille-breaux-smatt-carole-jean , 254 F.3d 533 ( 2001 )

harken-exploration-company-plaintiff-counter-v-sphere-drake-insurance , 261 F.3d 466 ( 2001 )

Michael Goldstein v. Fidelity and Guaranty Insurance ... , 86 F.3d 749 ( 1996 )

Lima v. Schmidt , 595 So. 2d 624 ( 1992 )

Glazer v. Com'n on Ethics for Pub. Employees , 431 So. 2d 752 ( 1983 )

Riggins v. Dixie Shoring Co., Inc. , 592 So. 2d 1282 ( 1992 )

Riggins v. Dixie Shoring Co., Inc. , 590 So. 2d 1164 ( 1991 )

Corsey v. State, Through Dept. of Corrections , 375 So. 2d 1319 ( 1979 )

Lamana v. LeBlanc , 526 So. 2d 1107 ( 1988 )

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