Energy Coal S P A v. CITGO Petroleum Corporation ( 2016 )

Case: 15-30863 Document: 00513662441 Page: 1 Date Filed: 09/01/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 15-30863 FILED
September 1, 2016
Lyle W. Cayce
ENERGY COAL S.P.A., Clerk
Plaintiff-Appellant
v.
CITGO PETROLEUM CORPORATION,
Defendant-Appellee
Appeal from the United States District Court
for the Western District of Louisiana
Before WIENER, CLEMENT, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
An Italian energy company contracted to provide various services in
Venezuela for a subsidiary of the state-owned oil company Petróleos de
Venezuela, which is called PDVSA. After it allegedly did not receive the $186
million owed under the contracts, the Italian company filed suit in Louisiana.
Why did the Italian company file suit in a forum located many thousands of
miles away from both where it is headquartered and where it performed the
contracts? To try and take advantage of the single business enterprise theory
under which Louisiana courts have allowed companies in certain
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circumstances to be held liable for the acts of their affiliates. The entity named
as a defendant was PDVSA’s American affiliate, CITGO.
The plaintiff’s case thus hinged on applying Louisiana law. But the
district court held that the law of the state where CITGO is incorporated,
Delaware, governs this attempt to disregard the corporate form. We agree with
its analysis of this controlling choice-of-law question.
I.
Energy Coal is an Italian company, based in Genoa. Its principal
business is buying and selling fuel grade petroleum coke, which is a byproduct
of oil refining.
Petróleo is a wholly-owned subsidiary of PDVSA. Both Petróleo and
PDVSA were formed under Venezuelan law and are based in Caracas.
Energy Coal and Petróleo entered into a number of contracts that
provided that Energy Coal would perform certain work and services in
Venezuela relating to the construction and renovation of PDVSA facilities and
the sale and transportation of petroleum coke. The contracts included a
provision providing that any disputes would be resolved under Venezuelan law
in a Venezuelan forum.
After Petróleo allegedly failed to pay for these services, Energy Coal filed
suit in Louisiana state court seeking over $186 million in damages. Instead of
naming Petróleo as the defendant, Energy Coal sued a nonparty to the
contracts: CITGO Petroleum Corporation, a Delaware corporation with its
headquarters in Houston. CITGO also operates a refinery in Lake Charles,
Louisiana. 1 CITGO, like Petróleo, is a wholly-owned subsidiary of PDVSA.
1 CITGO did not challenge personal jurisdiction, even though Louisiana is neither its
principal place of business nor its state of incorporation. Daimler AG v. Bauman, 134 S. Ct.
746, 760 (2014) (noting that although those locations are not the exclusive sources of general
jurisdiction, they are the “paradigm all-purpose forums”).
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Energy Coal alleged that this relationship allows CITGO to be sued for
Petróleo’s actions under Louisiana’s single business enterprise doctrine, which
is a “theory for imposing liability where two or more business entities act as
one.” Brown v. ANA Ins. Grp., 994 So. 2d 1265, 1272 (La. 2008).
CITGO removed the suit to federal court on the basis of diversity
jurisdiction. It then filed a motion to dismiss, arguing that Delaware law
determined if CITGO could be held liable for Petróleo’s actions. The district
court agreed that Delaware law governed and thus dismissed CITGO because
Energy Coal did not allege any of the exceptional circumstances (like fraud,
public wrong, or contravention of law) in which Delaware will disregard the
corporate form.
II.
We review choice-of-law questions de novo. Adams v. Unione
Mediterranea Di Sicurta, 220 F.3d 659, 674 (5th Cir. 2000). Choice-of-law
decisions can be resolved at the motion to dismiss stage when factual
development is not necessary to resolve the inquiry. See Fortune v. Taylor
Fortune Grp., LLC, 620 F. App’x 246, 247–48 (5th Cir. 2015).
In diversity cases, the law of the forum state governs that inquiry.
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496–97 (1941). Louisiana
provides the following guidance:
Except as otherwise provided in this Book, an issue in a case
having contacts with other states is governed by the law of the
state whose policies would be most seriously impaired if its law
were not applied to that issue.
That state is determined by evaluating the strength and
pertinence of the relevant policies of all involved states in the light
of: (1) the relationship of each state to the parties and the dispute;
and (2) the policies and needs of the interstate and international
systems, including the policies of upholding the justified
expectations of parties and of minimizing the adverse
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consequences that might follow from subjecting a party to the law
of more than one state. 2
LA. CIV. CODE ANN. art. 3515.
The analysis is thus issue-based so that the law of one state may govern
one issue in the case and the law of a different state may govern another. That
is what the district court held here. It concluded that Venezuelan law would
govern the merits of the contract dispute in light of the choice-of-law clause in
the contract between Energy Coal and Petróleo. CITGO is not a signatory to
that agreement, however, so the law that governs its liability for Petróleo’s
breach is determined by the Code’s general choice-of-law inquiry. NorAm
Drilling Co. v. E & PCo Int’l, LLC, 131 So. 3d 926, 929–30 (La. App. 2 Cir.
2013) (conducting choice-of-law inquiry even though contract contained choice-
of-law provision because defendant was not a party to the contract).
That inquiry requires us to first identify the state policies implicated in
this conflict. We consider not only the policies underpinning the single
business enterprise theory and alter-ego theories in Louisiana and Delaware,
but those states’ more general policies concerning disregard of the corporate
form. LA. CIV. CODE ANN. art. 3515 cmt. c (explaining that courts should
consider not only “policies embodied in the particular rules of law claimed to
be applicable,” but also the “more general policies” of each state).
The single business enterprise theory was first articulated by the
Louisiana First Circuit Court of Appeals in the early 1990s in response to the
well-publicized failure of a large insurance company with multiple affiliated
sister companies. Green v. Champion Ins. Co., 577 So. 2d 249, 251–53, 257–58
(La. App. 1 Cir. 1991). The court allowed the liquidator of the failed insurance
company to reach its sister company’s assets on the ground that separate
2This article considers many of the same factors listed in § 6 of the RESTATEMENT
(SECOND) OF CONFLICTS (1971).
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corporate existences could be disregarded when “corporations represent
precisely the same single interest” or “a single corporation has been
fragmented into branches that are separately incorporated and are managed
by a dominant or parent entity, or have interlocking directorates.” 3 Id. at 257.
In the years following Green, the First Circuit took a more expansive view of
the theory, particularly in cases of wholly-owned subsidiaries, in which it held
that “[i]f one corporation is wholly under the control of another, the fact that it
is a separate entity does not relieve the latter from liability.” Hamilton v. AAI
Ventures, LLC, 768 So. 2d 298, 302 (La. App. 1 Cir. 2000).
The Supreme Court of Louisiana has never adopted the single business
enterprise theory. See Brown, 994 So. 2d at 1272 n.13 (declining to address
validity of the single business enterprise doctrine because all parties stipulated
it applied). Some have read its emphasis on the separate legal identities of
parent and subsidiary corporations as inconsistent with the doctrine. Bujol v.
Entergy Servs., Inc., 922 So. 2d 1113, 1127 (La. 2004) (“The law has long been
clear that a corporation is a legal entity distinct from its shareholders and the
3 Framing the doctrine as a way to determine whether a corporation was an alter ego
or instrumentality of a corporation, the Green court listed eighteen nonexhaustive factors to
be used in this determination:
corporations with identity or substantial identity of ownership, that is, ownership of
sufficient stock to give actual working control; common directors or officers; unified
administrative control of corporations whose business functions are similar or
supplementary; directors and officers of one corporation act independently in the
interest of that corporation; corporation financing another corporation; inadequate
capitalization (“thin incorporation”); corporation causing the incorporation of another
affiliated corporation; corporation paying the salaries and other expenses or losses of
another corporation; receiving no business other than that given to it by its affiliated
corporations; corporation using the property of another corporation as its own;
noncompliance with corporate formalities; common employees; services rendered by
the employees of one corporation on behalf of another corporation; common offices;
centralized accounting; undocumented transfers of funds between corporations;
unclear allocation of profits and losses between corporations; and excessive
fragmentation of a single enterprise into separate corporations.
Id. at 257–58.
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shareholders of a corporation . . . shall not be personally liable for any debt or
liability of the corporation. The same principle applies where one corporation
wholly owns another.” (citations omitted)), adhered to on reh’g, (La. 2006); see
also 8 Glenn G. Morris, & Wendell H. Holmes, LOUISIANA CIVIL LAW TREATISE
(BUSINESS ORGANIZATIONS) § 32.15 (2016) (“The reasoning in [Bujol] is
inconsistent with the approach being taken in [single business enterprise]
cases by some lower courts. Those courts appear to believe that veil piercing
between affiliated corporations poses a different, less serious departure from
the principles of corporation law than does similar piercing to a human
shareholder. The Louisiana Supreme Court has indicated that the controlling
principles are similar in both settings . . . .” (footnote omitted)).
This has contributed to a hodgepodge of views about the doctrine in lower
Louisiana courts. In re Gulf Fleet Holdings, Inc., 491 B.R. 747, 786 (Bankr.
W.D. La. 2013) (“[C]ourts outside of Louisiana’s First Circuit have applied the
single business enterprise doctrine in varying forms, although some
commentators have criticized the broad scope of the doctrine and some courts
have attempted to tether the doctrine to more traditional veil-piercing
doctrines.”). The Second Circuit, for example, has retreated from its once
expansive view of the theory and now characterizes it as requiring a showing
similar to what piercing the corporate veil requires. Compare Town of
Haynesville, Inc. v. Entergy Corp., 956 So. 2d 192, 197 (La. App. 2 Cir. 2007)
(analyzing the single business enterprise theory as a form of piercing), with
Town of Haynesville, Inc. v. Entergy Corp., 840 So. 2d 597, 606–07 (La. App. 2
Cir. 2003) (affirming denial of summary judgment when single business
enterprise theory was used to increase the amount of one company’s
contractual liability because of the separate contracts of a sister corporation);
see Morris & Holmes, supra, at § 32.15 (calling the 2003 Haynesville decision
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an “unprecedented use of the [single business enterprise] theory”). Likewise,
Louisiana’s Fourth Circuit has described it as an “equitable doctrine, similar
to the piercing of the corporate veil.” Hopkins v. Howard, 930 So. 2d 999, 1008
(La. App. 4 Cir. 2006). So too has Louisiana’s Fifth Circuit. Peyton Place,
Condo. Assocs., Inc. v. Guastella, 18 So. 3d 132, 149 (La. App. 5 Cir 2009). We
have similarly described the single business enterprise theory as a “veil
piercing theory . . . implemented to disregard the concept of corporate
separateness when a juridical person is used to ‘defeat public convenience,
justify wrong, protect fraud, or defend crime.’” In re Ark–La–Tex Timber Co.,
482 F.3d 319, 335 (5th Cir. 2007) (quoting Smith v. Cotton’s Fleet Serv., Inc.,
500 So. 2d 759, 762 (La. 1987)). This makes sense as both piercing the
corporate veil and the single business entity doctrine disregard the corporate
form in order to hold either shareholders in the former situation and affiliated
companies in the latter liable for the debts of that corporation. Brock M.
Degeyter, Corporate and Business Law, 52 LA. B.J. 115, 116 (2004).
Delaware has more steadfast policies on whether a corporation can be
liable for its affiliate’s conduct. It “respects corporate formalities, absent a
basis for veil-piercing, recognizing that the wealth-generating potential of
corporate and other limited liability entities would be stymied if it did
otherwise.” Alliance Data Sys. Corp. v. Blackstone Capital Partners V L.P.,
963 A.2d 746, 769 (Del. Ch. 2009) (“This allows parents to engage in risky
endeavors precisely because the parents can cabin the amount of risk they are
undertaking by using distinct entities to carry out certain activities.”). These
general policies can give way in cases of alter-ego liability in which one
corporation is acting as an instrumentality, or alter ego, of its parent. Allied
Capital Corp. v. GC–Sun Holdings, L.P., 910 A.2d 1020, 1044 n.62 (Del. Ch.
2006). But Delaware courts only disregard the corporate form in the
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“exceptional case” where there is fraud or injustice through the misuse of the
corporate form. MicroStrategy Inc. v. Acacia Research Corp., 2010 WL
5550455, at *11 (Del. Ch. Dec. 30, 2010); Case Fin., Inc. v. Alden, 2009 WL
2581873, at *4 (Del. Ch. Aug. 21, 2009).
Having identified the relevant policies, the next step is to evaluate the
“strength and pertinence” of these policies by looking at each parties’
relationship with the state and the factual or legal connection to the events
giving rise to the dispute. LA. CIV. CODE ANN. art. 3515 & cmt. c (“A legislative
policy that is strongly espoused by the enacting state for intra-state cases may
in fact be attenuated in a particular multistate case that has only minimal
contacts with that state. Similarly, the same policy may prove to be far less
pertinent if the case has sufficient contacts with that state, but not contacts of
the type that would actually implicate that policy.”).
Neither Delaware nor Louisiana has significant connections to the
events giving rise to this case. The contracts were not negotiated or performed
in those states (or anywhere in this country). Energy Coal points out that it
purchases $40–$50 million of petcoke in Louisiana each year, but does not
allege that any of that petcoke has a connection to this dispute. It also cites
CITGO’s operation of a refinery in Louisiana, which requires it to possess a
certificate of authority to do business in the state, but again does not allege
any direct connection between that refinery and this dispute. 4
4 Although not alleged in its complaint, Energy Coal contends on appeal that CITGO’s
Louisiana refinery was ensured a source of petroleum coke from one of the Venezuelan plants
that was a focus of a contract and that this shows a Louisiana connection. But Energy Coal
acknowledges that it withdrew a motion to amend the complaint that would have added these
allegations. We thus cannot consider the new allegations. See Roebuck v. Dothan Sec., Inc.,
515 F. App’x 275, 280 (5th Cir. 2013) (“[T]he complaint may not be amended by the briefs in
opposition to a motion to dismiss.”) (internal quotations and citations omitted). Even if we
could, this attenuated connection between the performance of the contract and Louisiana
would not change our conclusion that the state of incorporation governs whether CITGO can
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Delaware’s connection is that it is where CITGO incorporated. That
single tie is an important one. In a previous assessment of Louisiana choice-
of-law decisions, we concluded that “the law of the state of incorporation
applies in determining whether it is appropriate to pierce the corporate veil.”
Patin v. Thoroughbred Power Boats, Inc., 294 F.3d 640, 646–47 (5th Cir. 2002)
(citing Quickick, Inc. v. Quickick Int’l, 304 So. 2d 402, 406 (La. App. 1st Cir.
1974) (agreeing with “the district court’s determination that the Louisiana
State Supreme Court would most likely conclude the law of the state of
incorporation governs the determination when to pierce a corporate veil”).
Louisiana courts look to the state of incorporation not just when deciding
issues involving piercing, which as noted above is a close relative of the single
business enterprise theory, but also when deciding more general questions of
corporate structure. Id. at 647; see, e.g., S.F. Estates, S.A. v. Westfeldt Bros.,
1998 WL 12243, at *4 (E.D. La. Jan. 13, 1998) (holding that the substantive
law of a company’s state of incorporation should be used to determine the
viability of its corporate structure); Powerup of Se. La. Inc. v. Powerup U.S.A.,
Inc., 1994 WL 543631, at *3 (E.D. La. Oct. 5, 1994) (same); cf. Lone Star Indus.,
Inc. v. Redwine, 757 F.2d 1544, 1548 n.3 (5th Cir. 1985) (determining that the
Supreme Court of Louisiana would apply the law of the state of incorporation
to determine the viability of a corporation after dissolution).
One court has applied this principle that “Louisiana courts and courts
applying Louisiana law apply the law of the place of incorporation to determine
fundamental issues of corporate structure” in a single business enterprise case.
NorAm Drilling Co., 131 So. 3d at 930 (citing Quickick, 304 So. 2d at 406). In
NorAm, a Texas plaintiff tried to hold a company liable for its affiliate’s breach
be held liable for its affiliate’s breach. See NorAm Drilling Co., 131 So. 3d at 930 (applying
Texas law even though contract was to be performed in Louisiana).
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of a contract to drill a methane well in Louisiana. Id. at 927. Even though the
Louisiana contacts were stronger in that case than here because it was where
the contract was to be performed, the court still applied Texas law which does
not recognize the single business enterprise theory. Id. at 930. Although
NorAm involved the choice-of-law statute governing conventional obligations,
it recognized that the specific conflict articles are derived from the general
principles of article 3515 and went on to conclude under that general provision
that “Texas law would be the most seriously impaired” if its law were not
applied because it “has a strong interest in litigation deciding corporate
structure of companies formed and existing under Texas law.” Id. at 929–30.
That conclusion, to which we must defer under Erie on this question of
state law, applies with equal if not greater force with respect to Delaware’s
interest here. Applying Louisiana law to hold a Delaware corporation
responsible for its foreign affiliate’s alleged breach of a contract in Venezuela
would substantially undermine the high bar Delaware sets for disregarding
corporate separateness. It would also be at odds with the expectations of the
parties. Given the provision in its contract providing that Venezuelan law
would govern any disputes, Energy Coal had no reasonable expectation that it
could seek recourse under the laws of Louisiana. LA. CIV. CODE ANN. art. 3515
cmt. c (“All other factors being equal, the parties should not be subjected to the
law of a state that they had no reason to anticipate would be applied to their
case.”). Energy Coal argues that CITGO’s obtaining a certificate of authority
to do business in Louisiana should have put it on notice that it could be
subjected to single business enterprise liability. But see NorAm Drilling Co.,
131 So. 3d at 930 (rejecting application of Louisiana law even though defendant
was authorized to do business in state). That would mean any corporation
conducting business in Louisiana could be liable in the state’s courts for the
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conduct of an affiliate occurring anywhere in the world. No case law supports
that astonishingly broad principle and the district court correctly recognized it
could lead to rampant forum shopping, something the Louisiana choice-of-law
principles aim to prevent. LA. CIV. CODE ANN. art. 3515 cmt. c.
We thus agree with the district court that Delaware law governs whether
CITGO can be held liable for its affiliate’s breach. As Energy Coal
acknowledges that it cannot disregard the corporate form under Delaware law,
the judgment is AFFIRMED.
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