De La Hoya v. Coldwell Banker Mexico, Inc. , 125 F. App'x 533 ( 2005 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
February 28, 2005
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
No. 04-20358
OSCAR DE LA HOYA; ANN M. THORPE; WILLIAM R. FAWTHROP;
CAROLYN RENEE FINCHER; WILLIAM LEE HUGHART; CHING
HUGHART; BRENT MCGILLIVRAY; JERRY MELCHIONNA;
STEVEN R. OFFERDAHL; LISA R. OSBORN-OFFERDAHL; JERRY
ROBINSON; JOHN T. SEACE; LISA SEACE; DEBRA TAYLOR;
STEVAN TAYLOR; GRETCHEN VIEHMANN; MONICA E. WOOLEY,
Plaintiffs-Appellants,
versus
COLDWELL BANKER MEXICO, INC., doing business as Coldwell
Banker Affiliates de Mexico; RICHARD A. SMITH, Individually;
COLDWELL BANKER REAL ESTATE CORPORATION; CENDANT
CORP.; COLDWELL BANKER AFFILIATES DE MEXICO SA DE CV,
Defendants-Appellees.
Appeal from the United States District Court for
the Southern District of Texas
(USDC No. 4:02-CV-2951)
_________________________________________________________
Before REAVLEY, DeMOSS and PRADO, Circuit Judges.
REAVLEY, Circuit Judge:*
*
Pursuant to 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 R. 47.5, the Court has determined that this opinion should not be
published and is not precedent except under the limited circumstances set forth in 5TH CIR.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.
This case arises from a series of real estate transactions in Mexico between
1999 and 2001. Plaintiffs engaged the services of a Coldwell Banker franchise
there to buy or sell real estate and allege that the franchisee misappropriated their
money from an escrow account. Plaintiffs originally filed suit in Texas state court
and defendants removed on the basis of diversity. The district court denied
plaintiffs’ motion to remand to state court, finding that the non-diverse defendants
had been improperly joined. The court then dismissed plaintiffs’ claims against the
diverse defendants for lack of personal jurisdiction and failure to state a claim. We
vacate because the court lacked diversity jurisdiction.
I. Background
Defendants in this case are Coldwell Banker Mexico, Inc. (“CBMI”),
Coldwell Banker Affiliates de Mexico, S.A. de C.V. (“CBAM”), Coldwell Banker
Real Estate Corporation (“CBREC”), and Richard A. Smith.1 Richard Smith is
president of both CBMI and CBAM. Smith also owns 100% of CBMI’s shares and
1% of CBAM’s shares. CBMI owns the remaining 99% of CBAM’s shares.
CBMI and CBREC had a contract under which CBMI would act as
CBREC’s subfranchisor in Mexico. With CBREC’s consent, CBMI assigned its
1
Plaintiffs originally also sued Cendant Corporation. The district court dismissed
this portion of the case for failure to state a claim, and plaintiffs do not appeal that order.
2
rights and duties under the subfranchise contract to CBAM in 1998. In 1999,
CBAM entered into a franchise agreement with Mañana Today S. de R.L. de C.V.
(“Mañana Today”), a Mexican sociedad de responsibilidad limitada de capital
variable. Under the agreement, Mañana Today and its president, Luetta “LuLu”
Jacobsen, would operate a Coldwell Banker franchise in Cabo San Lucas, Mexico
called Coldwell Banker LuLu Jacobsen and Associates (the “Cabo franchise”). The
franchise agreement provided that “[f]ranchised services shall not include the
offering or performing of ancillary real estate services, including . . . escrow.”
However, Mañana Today could provide ancillary services as a separate business.
CBAM retained the right to inspect, review, and audit all franchisee financial
records, including those relating to ancillary services. CBAM also retained the right
to terminate the franchise for good cause.
Plaintiffs allege the following facts: Between October 1999 and November
2001, plaintiffs each separately engaged the services of the Cabo franchise to buy or
sell real estate located in Baja Mexico. During the course of the real estate
transactions and pursuant to instructions from franchise employees, they sent funds
to an escrow account maintained by the Cabo franchise. LuLu Jacobsen
misappropriated funds from this account. Defendants knew that Jacobsen had
mishandled client funds in the past and that she was misappropriating funds between
3
1999-2001. Despite that knowledge, defendants failed to take action to prevent or
remedy the situation by auditing the financial records of the Cabo franchise or
terminating the franchise.
Plaintiffs brought suit in Texas state court, alleging common law and statutory
negligence, gross negligence, breach of fiduciary duty, conversion, common law and
statutory fraud, and breach of contract. Defendants removed, claiming that CBMI,
CBREC, and Smith had been improperly joined to defeat diversity. Smith is a
citizen of Texas. CBMI is also a citizen of Texas (principal place of business and
incorporation in Texas). CBAM is a citizen of Mexico (principal place of business
and incorporation in Mexico). CBREC is a citizen of California and New Jersey
(incorporation in California, principal place of business in New Jersey). Plaintiffs
are citizens of California, Ohio, North Carolina, Virginia, Minnesota, Washington,
Texas, Florida, Mexico, and Canada. Thus, the inclusion of Smith, CBMI, or
CBREC in the suit would destroy complete diversity.
The district court agreed with defendants and thus denied plaintiffs motion to
remand to state court and dismissed CBMI, CBREC, and Smith. The court then
granted CBAM’s motion to dismiss for lack of personal jurisdiction. On plaintiffs’
motion for reconsideration, the district court affirmed its prior orders. In addition,
the court concluded that plaintiffs had failed to state a claim against CBAM. This
4
appeal followed. Plaintiffs contest the district court’s findings that CBMI and Smith
were improperly joined and its consequent failure to remand the case to state court.
Plaintiffs also contest the district court’s dismissal of CBREC as improperly joined
in the “Statement of Jurisdiction” portion of their appellate brief. However, they fail
to advance any support for this contention in that section or in the brief’s
“Argument” section. Thus, that issue is waived, and we consider only the joinder of
CBMI and Richard Smith. United States v. Valdiosera-Godinez, 932 F.2d 1093,
1099 (5th Cir. 1991). We have jurisdiction over the district court’s final order of
dismissal under 28 U.S.C. § 1291.
II. Subject Matter Jurisdiction
A. Law of Improper Joinder
We review the district court’s denial of plaintiffs’ motion for remand to state
court de novo. Sid Richardson Carbon & Gasoline Co. v. Interenergy Res., Ltd.,
99 F.3d 746, 751 (5th Cir. 1996). Where plaintiffs file in state court, defendants can
remove on the basis of diversity only by establishing the prerequisites of 28 U.S.C.
§ 1332—complete diversity and amount in controversy exceeding $75,000. 28
U.S.C. §§ 1441(a), 1332. If non-diverse defendants are present, defendants must
show that complete diversity exists by establishing that the non-diverse parties have
been improperly joined. 28 U.S.C. § 1441(b); Smallwood v. Ill. Cent. R.R. Co., 385
5
F.3d 568, 572-73 (5th Cir. 2004) (en banc). Defendants bear a “heavy burden” of
showing improper joinder, but can do so by showing that: (1) plaintiffs fraudulently
pleaded false jurisdictional facts, or (2) there is no reasonable basis on which the
district court can predict that plaintiffs might be able to recover against the non-
diverse defendants. Id. 573-74. In the present case, defendants do not contend that
plaintiffs pleaded false jurisdictional facts. Thus, this court must determine whether
defendants have carried their burden of showing that there is no reasonable basis on
which the court can predict that plaintiffs might recover against CBMI and Richard
Smith.
The court may resolve whether a plaintiff has a reasonable basis of recovery
under state law by conducting “a Rule 12(b)(6)-type analysis, looking initially at the
allegations of the complaint to determine whether the complaint states a claim under
state law against the [non-diverse] defendant. Ordinarily, if a plaintiff can survive a
Rule 12(b)(6) challenge, there is no improper joinder.”2 Smallwood, 385 F.3d at
573. A district court may not dismiss a complaint under 12(b)(6) “unless it appears
beyond doubt that the plaintiff can prove no set of facts in support of his claim
2
Plaintiffs contend that removal is improper unless “there is no possibility that the
plaintiff can establish a cause of action against any of the Texas or California defendants
under any theory of liability viable under applicable state law.” This statement is
misleading—we consider only whether plaintiffs can establish the theories of liability that
they pleaded in the state court complaint. Cavallini v. State Farm Mut. Auto. Ins. Co., 44
F.3d 256, 263-64 (5th Cir. 1995).
6
which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
Although courts are limited to review of the complaint and attached papers when
conducting a Rule 12(b)(6) inquiry, for purposes of determining improper joinder
we may pierce the pleadings and consider summary judgment-type evidence.
McKee v. Kansas City S. Ry. Co., 358 F.3d 329, 334 (5th Cir. 2004). In reviewing
that evidence and the complaint, we consider unchallenged factual allegations in the
light most favorable to plaintiffs and resolve contested fact issues and ambiguities in
controlling state law in plaintiffs’ favor. Id.
Plaintiffs claim that CBAM (the Mexican, and thus diverse, defendant) is
liable for failing to control the Cabo franchise’s escrow activities despite its power
to do so and its knowledge that Jacobsen was misappropriating funds. Plaintiffs
then argue that CBMI and Smith are liable for CBAM’s failure to act under the
“single business enterprise” theory. Thus, plaintiffs’ claims against the non-diverse
defendant depend on the viability of their claims of single business enterprise and
CBAM’s liability.
B. Defendants have not established that there is no reasonable basis for
predicting plaintiffs’ possible recovery against the non-diverse defendants
The single business enterprise theory has been developed in the lower Texas
state courts as an equitable veil-piercing theory. As one Texas Court of Appeals has
phrased it, “when two corporations are not operated as separate entities but instead
7
integrate their resources to achieve a common business purpose, it may be equitable,
under exceptional circumstances, to hold each constituent corporation liable for the
debts and liabilities incurred in the common enterprise.” N. Am. Van Lines, Inc. v.
Emmons, 50 S.W.3d 103, 120 (Tex. Ct. App. 2001).
Defendants argue that plaintiffs did not plead single business enterprise
liability in their complaint and thus cannot rely on it to defeat removal. See
Cavallini, 44 F.3d at 263-64 (stating that a plaintiff cannot rely on a legal theory not
advanced in their state court complaint to establish possible recovery against a non-
diverse defendant). Indeed, plaintiffs did not expressly plead the single business
enterprise theory in their complaint. Plaintiffs’ failure to include the phrase “single
business enterprise” in the complaint is not dispositive, however. Rather, we must
determine whether what plaintiffs did plead was sufficient to allege single business
enterprise. See Lovick v. Ritemoney Ltd., 378 F.3d 433, 438 (5th Cir. 2004) (stating
that, under Rule 8(a), a complaint suffices if it gives the defendant “fair notice of
what the plaintiff’s claim is and the grounds upon which it rests”) (internal quotation
marks omitted); Penley v. Westbrook, 146 S.W.3d 220, 232 (Tex. Ct. App. 2004)
(“Texas follows a ‘fair notice’ pleading standard, which looks to whether the
opposing party can ascertain from the pleading the nature and basic issues of the
controversy and what testimony will be relevant at trial.”). Plaintiffs’ state court
8
complaint alleged that the Cabo franchise was “engaged in a joint enterprise with
defendants” and referred to all defendants as “Coldwell Banker.” Plaintiffs argue
that together, these factors were sufficient to put defendants on notice of the nature
and basic issues of their claims, including that they sought to impose liability under
the single business enterprise doctrine.
Joint enterprise and single business enterprise are distinct theories of liability.
N. Am. Van Lines, 50 S.W.3d at 116, 120 (stating that, while the theories share
some elements, single business enterprise does not require an equal right to direct
and control). However, at least one Texas Court of Appeals has held that
allegations of joint enterprise and alter ego sufficed to also claim single business
enterprise liability. Rio Grande Valley Gas Co. v. City of Edinburg, 59 S.W.3d
199, 208-10 (Tex. Ct. App. 2000), rev’d on other grounds, S. Union Co. v. City of
Edinburg, 129 S.W.3d 74 (Tex. 2003). The court in Rio Grande concluded that the
allegations of joint enterprise and alter ego, along with the facts alleged in support
thereof, gave defendants fair notice of the plaintiff’s claim of single business
enterprise, relying on Texas’s liberal pleading standards. Id.
In addition, a Texas Court of Appeals has held that, where the plaintiff
referred to two corporate defendants by a single name in his complaint but did not
include an allegation of single business enterprise, defendants were not prejudiced
9
when the trial court later allowed the plaintiff to amend the complaint to allege
single business enterprise. Beneficial Pers. Servs. v. Rey, 927 S.W.2d 157, 164-65
(Tex. Ct. App. 1996). According to the court, by referring to defendants by a single
name, plaintiffs had provided sufficient notice to defendants that they sought to hold
both liable through theories of corporate liability. Id. Beneficial thus suggests that,
by referring to defendants by a single name in the complaint, a plaintiff adequately
pleads single business enterprise, because the pleading puts defendants on notice of
plaintiff’s intention to pursue any available theory of corporate liability. See Penley,
146 S.W.3d at 232 (noting that a pleading is adequate in Texas if defendants can
ascertain from it the basic issues of the controversy).
While not a model of clarity, we find that, given liberal pleading standards
and resolving all ambiguities in Texas law in plaintiffs’ favor, defendants could
ascertain from plaintiffs’ allegation of joint enterprise and reference to all
defendants by a single name that plaintiffs intended to pursue available theories of
corporate liability, including single business enterprise. We turn now to whether
defendants have established that there is no reasonable basis on which the court can
predict plaintiffs’ possible recovery against CBMI and Smith under that theory.
In determining whether two corporations are operated as a single business
enterprise, courts consider a list of non-exhaustive factors, including: (1) common
10
employees; (2) common offices; (3) centralized accounting; (4) payment of wages
by one corporation to the other’s employees; (5) common business name; (6)
services rendered by the employees of one corporation on behalf of the other; (7)
undocumented transfers of funds between corporations; (8) unclear allocations of
profits and losses between corporations; and (9) common ownership. Bridgestone
Corp. v. Lopez, 131 S.W.3d 670, 681-82 (Tex. Ct. App. 2004); Paramount
Petroleum Corp. v. Taylor Rental Ctr., 712 S.W.2d 534, 536-37 (Tex. Ct. App.
1986). Evidence of less than all of these factors can sustain a finding of single
business enterprise. See Nat’l Plan Adm’rs, Inc. v. Nat’l Health Ins. Co., 150
S.W.3d 718, 745-47 (Tex. Ct. App. 2004) (upholding jury finding of single business
enterprise where evidence established several, but not all, factors).
Plaintiffs came forward with evidence in the district court satisfying several of
the single business enterprise factors. It is undisputed that Smith owns 100% of
CBMI and 1% of CBAM, and that CBMI owns the remaining 99% of CBAM. It is
also undisputed that Smith served as president of both CBMI and CBAM. The
names of both CBMI and CBAM included “Coldwell Banker,”3 and plaintiffs’
evidence showed that CBMI also listed “Coldwell Banker Affiliates de Mexico”
3
See Bridgestone Corp. v. Lopez, 131 S.W.3d 670, 686 (Tex. Ct. App. 2004)
(finding that Bridgestone/Firestone, Inc. and Bridgestone Corp. shared a common
business name because both names contained “Bridgestone”).
11
(CBAM) as an assumed name in a filing with the Texas Secretary of State. Michael
Bohannon testified by affidavit that, as an employee of Richard Smith Company, he
was leased to CBMI but also worked for CBAM on the sale of the Cabo franchise
to Jacobsen. Several items of evidence showed that CBMI, CBAM, and Richard
Smith shared a common office in Bryan, Texas. Phillip Hendrix, who worked as
CBAM’s general director, testified in a deposition that Smith transferred funds to
CBAM “a few times a year.”
Instead of disputing plaintiffs’ evidence, defendants argue that the single
business enterprise theory is not available to plaintiffs based on the Texas Supreme
Court’s decision in Southern Union Co. v. City of Edinburgh, 129 S.W.3d 74 (Tex.
2003). In that case, the court declined to rule on the viability of the single business
enterprise theory. Id. at 86-87. It held, however, that the theory could not be used
to impute the contracts of one corporation to an affiliated corporation due to Texas
Business Corporation Act article 2.21, because article 2.21 requires a showing of
actual fraud and the single business enterprise theory does not.4 Id. at 86-89.
4
Article 2.21 provides:
A. A holder of shares, an owner of any beneficial interest in shares,
. . . or any affiliate thereof or of the corporation, shall be under no
obligation to the corporation or to its obligees with respect to:
...
12
Southern Union is distinguishable from the present case, however, because
the obligation that plaintiffs seek to recover on is based on CBAM’s alleged
negligence, rather than on a contract. Article 2.21 speaks only to a “contractual
obligation of the corporation or any matter relating to or arising from the
obligation.” TEX. BUS. CORP. ACT art. 2.21 (Vernon 2003); see Nordar Holdings,
Inc. v. W. Sec. (USA) Ltd., 969 F. Supp. 420, 422 and 423 n.2 (N.D. Tex. 1997)
(noting that article 2.21 applies to contract cases).
Defendants also suggested at oral argument that Smith, as CBMI and
CBAM’s president, cannot be in a single business enterprise with those corporations
as a matter of law and that there is no evidence of inequitable conduct that would
support veil-piercing. Although these arguments are belatedly raised, we address
them for the sake of clarity. See Najarro v. First Fed. Sav. & Loan Ass’n of
Nacogdoches, 918 F.2d 513, 516 (5th Cir. 1990) (“In the absence of manifest
(2) any contractual obligation of the corporation or any matter
relating to or arising from the obligation on the basis that the holder, owner,
. . . or affiliate is or was the alter ego of the corporation, or on the basis of
actual fraud or constructive fraud, a sham to perpetrate a fraud, or other
similar theory, unless the obligee demonstrates that the holder, owner, . . .
or affiliate caused the corporation to be used for the purpose of perpetrating
and did perpetrate an actual fraud on the obligee primarily for the direct personal
benefit of the holder, owner, . . . or affiliate[.]
TEX. BUS. CORP. ACT art. 2.21 (Vernon 2003).
13
injustice, this court will not consider arguments belatedly raised after appellees have
filed their brief.”).
We find no support for defendants’ contention that Smith cannot be in a
single business enterprise with CBMI and CBAM. In fact, a Texas Court of
Appeals has upheld a jury’s finding that a corporation and its chairman operated as
a single business enterprise. Hall v. Timmons, 987 S.W.2d 248, 252 (Tex. Ct. App.
1999). This argument thus fails to establish that there is no reasonable basis for
predicting that plaintiffs could prevail in imposing liability on Smith under the single
enterprise theory.
It is unclear what degree of inequitable conduct defendants believe is
necessary to justify imposing liability on CBMI and Smith under the single business
enterprise theory. Generally, Texas law supports piercing the corporate veil when
the corporate form “is used as part of an unfair device to achieve an inequitable
result.” Nat’l Plan, 150 S.W.3d at 744. For example, under the alter ego theory, a
plaintiff must show that the corporation is “merely a tool or business conduit of
another corporation. At a minimum, the plaintiff must prove that he has fallen
victim to a basically unfair device by which [a subsidiary corporation] has been used
to achieve an inequitable result.” N. Am. Van Lines, 50 S.W.3d at 119 (internal
citations and quotation marks omitted).
14
However, a plaintiff need not show fraud to recover under the single business
enterprise theory. Id. Single business enterprise liability is based instead on “equity
analogies to partnership principles of liability[,]” holding one corporation liable for
the debts of another when the two have integrated resources and operations to
achieve a common purpose. Id. Texas courts have upheld imposition of liability
under the theory based on plaintiffs’ proof of factors showing integrated resources
and common purpose, without requiring further proof of inequitable conduct. See,
e.g., Nat’l Plan,150 S.W.3d at 744-47; N. Am. Van Lines, 50 S.W.3d at 120-21;
Paramount Petroleum, 712 S.W.2d at 536. Resolving any ambiguity in the law in
plaintiffs’ favor, we conclude that plaintiffs’ proof of several single business
enterprise factors is sufficient to establish a reasonable basis for recovery against
CBMI and Smith under that theory.
Our conclusion that plaintiffs’ claim that CBMI and Smith were engaged in a
single business enterprise with CBAM survives an improper joinder Rule 12(b)(6)-
type analysis does not end our inquiry, however. There is no reasonable basis to
conclude that they may recover from those defendants on that theory unless CBAM
is itself liable. Thus, we must determine whether their claims against CBAM can
survive a 12(b)(6)-type challenge.5
5
Defendants argue that plaintiffs contend only that CBAM is vicariously liable for
the acts of the Cabo franchise under Texas agency law principles and that they cannot
15
Plaintiffs’ complaint alleges, among other things, negligence on the part of all
defendants, including CBAM. “The elements of a negligence cause of action are a
duty, a breach of that duty, and damages proximately caused by the breach of duty.”
Doe v. Boys Club of Greater Dallas, Inc., 907 S.W.2d 472, 477 (Tex. 1995). In
Texas, where a party has a right to control the activities of another (created either
contractually or through actual exercise of control), that party has a concomitant
duty to exercise that control reasonably. Read v. The Scott Fetzer Co., 990 S.W.2d
732, 736 (Tex. 1998); see also Fitz v. Days Inns Worldwide Inc., 147 S.W.3d 467,
471 (Tex. Ct. App. 2004); Barnes v. Wendy’s Int’l, Inc., 857 S.W.2d 728, 729-30
(Tex. Ct. App. 1993). Here, plaintiffs’ complaint alleged that all defendants,
including CBAM, “ha[d] the obligation to exercise control over [the Cabo
franchise,]” that “[d]espite . . . warnings, [defendants] did little to protect the funds
of its clients[,]” and that “[defendants’] acts and omissions caused the loss of
plaintiffs’ monies.”
Plaintiffs came forward with evidence supporting their claim that CBAM had
a right of control over Mañana Today’s escrow services. The franchise agreement,
show the requisite agency relationship. This argument is meritless. Plaintiffs’ complaint
clearly argues direct liability on the part all defendants. Plaintiffs’ Original Petition at ¶¶
11, 12 (stating that “plaintiffs make claims against all defendants under [various state
law] causes of action” and that defendants “are liable . . . for their own acts and
omissions”).
16
while generally exempting escrow services from its terms, required Mañana Today
to keep records of those services and gave CBAM the right to inspect them and
terminate the franchise for good cause. Defendants argue that CBAM had no right
of control over Mañana Today’s escrow activities, because those activities were
outside the scope of the franchise agreement. However, plaintiffs also came
forward with evidence that CBAM actually exercised control over the escrow
services. Michael Schiable, a member of Cabo San Lucas’s real estate professional
community, testified by affidavit that Phillip Hendrix informed him in November
2001 that “Coldwell Banker” (presumably CBAM, Hendrix’s employer) had
required Jacobsen to sign an agreement to use only third party escrow services after
learning of her misappropriations over one year earlier.
Plaintiffs also submitted evidence of customer complaints directed to CBAM
supporting its claim that CBAM was aware of LuLu Jacobsen’s misappropriations
for over a year before it terminated her franchise in December 2001. Construing
this unchallenged evidence and any ambiguities in Texas law in plaintiffs’ favor, we
conclude that a right of control arguably arose from the franchise agreement,
CBAM’s exercise of control, or a combination of the two, and CBAM’s knowledge
and failure to timely act on that knowledge arguably breached that duty.
Consequently, defendants have not established that there is no reasonable basis for
17
the court to predict that plaintiffs may prevail against CBAM on their negligence
theory, and thus against CBMI and Smith as part of a single business enterprise with
CBAM.
III. Conclusion
Our de novo review of the record reveals that defendants have failed to carry
their “heavy burden” of establishing the improper joinder of CBMI and Richard
Smith. The district court therefore lacked subject matter jurisdiction, and its
dismissal of CBAM for want of personal jurisdiction and failure to state a claim are
void. We vacate the order of dismissal and remand with instructions that the case
be remanded to state court.
VACATED and REMANDED with instructions.
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