Ledford v. Keen ( 2021 )

Case: 20-50650 Document: 00515982514 Page: 1 Date Filed: 08/17/2021
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
August 17, 2021
No. 20-50650
Lyle W. Cayce
Clerk
Ms. Karen M. Ledford,
Plaintiff—Appellant,
versus
Donna Keen; Joe D. Suttle; Katrina Suttle; Wesley
Suttle,
Defendants—Appellees.
Appeal from the United States District Court
for the Western District of Texas
USDC No. 6:20-CV-616
Before Jolly, Duncan, and Oldham, Circuit Judges.
Stuart Kyle Duncan, Circuit Judge:
Karen Ledford was run over by a barrel-racing horse at a Texas rodeo.
She timely sued Kosse Roping Club, the rodeo operator, for negligence. Ten
months later, outside of the applicable limitations period, she added the
club’s directors. The district court dismissed her claims against the directors
as untimely. On appeal, Ledford argues she was entitled to pierce the club’s
corporate veil and sue the directors personally. Therefore, she claims, her
timely suit against the club stopped the clock running against the directors.
We need not pass on the validity of this tolling theory because we decide that,
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No. 20-50650
under Texas law, Ledford could not pierce the club’s corporate veil based
solely on evidence that the club was undercapitalized. We therefore affirm
the district court’s judgment dismissing Ledford’s claims against the
directors as untimely.
I.
On June 9, 2017, Ledford was walking around a barrel-racing arena at
a rodeo in Kosse, Texas, when a horse and rider galloped out of a chute and
hit her. Ledford was badly hurt. On December 19, 2018, she sued Kenda
Eckols (the owner of the rodeo land), Kosse Roping Club (“KRC”) and
Johnny Hoyle d/b/a Cadillac Rodeo Company (the rodeo’s operators), and
Lacy Aubihl (the rider), for negligence. She also brought premises liability
and gross negligence claims against Eckols, KRC, and Hoyle.
Before filing her complaint, between November 2017 and April 2018,
Ledford had learned several facts about KRC relevant to this appeal: KRC is
a Texas non-profit corporation, and its directors are Joe Suttle, Wesley
Suttle, Katrina Suttle, and Donna Keen (the “Directors”); KRC did not
carry liability or other insurance at the time of Ledford’s injury; and KRC’s
assets amounted to about $8,000. After suit was filed, Ledford learned during
discovery that KRC historically maintained a checking balance of about
$7,000 or less.
On October 25, 2019, Ledford filed an amended complaint adding the
Directors as defendants and alleging the following: The Directors had
“consistently kept [KRC] under-capitalized and uninsured to an
unreasonable degree” and had “failed to maintain other corporate
formalities.” As a result, KRC would be unable to satisfy any judgment for
Ledford. KRC represented “an attempted sham” by the Directors to
“perpetrate a fraud” on Ledford and similarly situated plaintiffs, entitling
Ledford to pierce the corporate veil and hold them individually liable. The
2
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amended complaint brought negligence, premises liability, and gross
negligence claims against the previously named defendants plus the
Directors, and added an “action to pierce the corporate veil” against the
Directors alone. It also “affirmatively plead[ed] equitable tolling” of the
limitations period for Ledford’s claims against the Directors.
The Directors filed two substantially similar summary judgment
motions, arguing (a) Ledford’s claims were time barred, (b) Ledford was not
entitled to equitable tolling, and (c) Ledford could not pierce KRC’s
corporate veil. The district court granted both motions, agreeing with the
Directors’ timeliness, tolling, and piercing arguments.1 The court then
severed Ledford’s claims against the Directors and entered final judgment.
Ledford appealed.
II.
We review a summary judgment de novo. Patel v. Tex. Tech Univ., 941
F.3d 743, 747 (5th Cir. 2019). Summary judgment should be granted “if the
movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
We view the evidence in the light most favorable to the non-movant,
“drawing all justifiable inferences in the non-movant’s favor.” Renwick v.
PNK Lake Charles, L.L.C., 901 F.3d 605, 611 (5th Cir. 2018) (cleaned up).
“We also review de novo the district court’s interpretation of state law and
give no deference to its determinations of state law issues.” Tradewinds Env’t
1
The court also rejected Ledford’s arguments that she was entitled to “deferment
of the statute of limitation[s] per the Discovery Rule” and that she lacked legal capacity to
file suit until at least September 2017. Ledford does not challenge either of those rulings on
appeal.
3
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Restoration, Inc. v. St. Tammany Park, L.L.C., 578 F.3d 255, 258 (5th Cir.
2009).
III.
This is the logic of Ledford’s argument: (1) her timely suit against
KRC, (2) stopped limitations running against the Directors, (3) because she
can pierce KRC’s corporate veil. We need not pass on the validity of this
tolling theory because, as explained below, Ledford is not entitled to pierce
KRC’s corporate veil.
A.
Some preliminary matters first. The district court correctly concluded
Ledford’s claims were subject to Texas’s two-year limit for personal injury
actions. See Tex. Civ. Prac. & Rem. Code § 16.003(a).2 Under the
“legal injury rule,” the clock started when Ledford was hurt on June 9, 2017.
See Schlumberger Tech. Corp. v. Pasko, 544 S.W.3d 830, 834 (Tex. 2018) (per
curiam). Ledford sued KRC within two years, but she did not add the
Directors until October 25, 2019, over four months late. So, her claims
against the Directors are untimely unless some basis for tolling applies. See,
e.g., Snyder v. Eanes Indep. Sch. Dist., 860 S.W.2d 692, 699–700 (Tex. App.—
Austin 1993, writ denied) (negligence claim barred where plaintiff added
defendants outside two-year period and discovery rule did not apply).
As a basis for tolling, Ledford invokes veil-piercing. She argues the
Directors operated KRC as a sham, and so by suing KRC she effectively sued
the Directors and stopped the clock against them. The district court ruled
Ledford had waived this argument, however. Thinking Ledford was
2
“When sitting in diversity, we apply the state’s statutes of limitation and
accompanying tolling rules.” Bloom v. Aftermath Pub. Adjusters, Inc., 902 F.3d 516, 517 (5th
Cir. 2018).
4
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advancing an alter-ego theory, the court ruled Ledford had failed to raise it in
her amended complaint. This was error. Ledford pled enough facts to allege
a “sham to perpetrate a fraud,” a valid basis for veil-piercing under Texas
law. See Castleberry v. Branscum, 721 S.W.2d 270, 272 & n.2 (Tex. 1986)
(explaining a distinct basis for veil piercing is “when the [corporate] fiction
is used as a means of perpetrating fraud” or as “a sham to perpetrate a
fraud”) (citations omitted); Gentry v. Credit Plan Corp., 528 S.W.2d 571, 575
(Tex. 1975) (tolling limitations to prevent use of corporate entity “as a cloak
for fraud or illegality or to work an injustice”). Moreover, Ledford pled an
“action to pierce [KRC’s] corporate veil” and claimed equitable tolling
because she timely sued KRC.3 Thus, the district court was mistaken that
Ledford waived this basis for tolling.4
The court did, however, go on to reject Ledford’s veil-piercing theory
on its merits, and the Directors urge this as an alternative ground for
affirming. We therefore consider whether Ledford can pierce KRC’s
corporate veil.
B.
Texas law permits courts to “disregard the corporate fiction . . . when
the corporate form has been used as part of a basically unfair device to achieve
an inequitable result.” SSP Partners v. Gladstrong Invs. (USA) Corp., 275
3
See Spring St. Partners-IV, L.P. v. Lam, 730 F.3d 427, 443 (5th Cir. 2013) (“Under
Texas law, ‘an assertion of veil piercing or corporate disregard does not create a substantive
cause of action [;] . . . such theories are purely remedial and serve to expand the scope of
potential sources of relief by extending to individual shareholders or other business entities
what is otherwise only a corporate liability.’” (citation omitted)).
4
Cf. Smith v. McKinney, 792 S.W.2d 740, 742 (Tex. App.—Houston [14th Dist.]
1990, writ denied) (“A matter in avoidance of the statute of limitations that is not raised
affirmatively in the pleadings will, therefore, be deemed waived.” (quoting Woods v.
William M. Mercer, Inc., 769 S.W.2d 515, 518 (Tex. 1988))).
5
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S.W.3d 444, 454 (Tex. 2008) (quoting Castleberry, 721 S.W.2d at 271–72);
see also Spring St. Partners-IV, L.P. v. Lam, 730 F.3d 427, 443–44 (5th Cir.
2013). This veil-piercing doctrine applies in various scenarios, including
“when the [corporate] fiction is used as a means of perpetrating fraud.” SSP
Partners, 275 S.W.3d at 454 (quoting Castleberry, 721 S.W.2d at 271–72).
Only “constructive fraud” is required, meaning “the breach of some legal or
equitable duty which, irrespective of moral guilt, the law declares fraudulent
because of its tendency to deceive others, to violate confidence, or to injure
public interests.” Spring Street Partners, 730 F.3d at 443 (quoting Castleberry,
720 S.W.2d at 273). “[N]either fraud nor an intent to defraud need be
shown,” but only that “recognizing the separate corporate existence would
bring about an inequitable result.” Ibid. (quoting Castleberry, 720 S.W.2d at
272–73).5 As noted, Ledford’s tolling argument relies on this theory. But the
district court found veil piercing was unavailable because Ledford’s evidence
consisted of nothing more than KRC’s “lack of insurance and
undercapitalization.” Ledford contests this conclusion on appeal.6
5
The Texas legislature partly overruled the seminal veil-piercing decision in
Castleberry by amending the Texas Business Corporation Act in 1989—for instance, by
precluding shareholder liability for contractual obligations absent actual fraud. See Tex.
Bus. Orgs. Code § 21.223(a)(2), (b); see also W. Horizontal Drilling, Inc. v. Jonnet
Energy Corp., 11 F.3d 65, 68 & n.4 (5th Cir. 1994) (noting this). But those amendments are
not relevant here because they “left untouched” the “constructive fraud” standard for tort
claims. Farr v. Sun World Sav. Ass’n, 810 S.W.2d 294, 296 (Tex. App.—El Paso 1991, no
writ); see also TecLogistics, Inc. v. Dresser-Rand Grp., 527 S.W.3d 589, 597 (Tex. App.—
Houston [14th Dist.] 2017, no pet.).
6
The Directors argue that the cases on which Ledford relies to support her tolling
theory were alter ego cases and should be limited to that context. See Gentry, 528 S.W.2d
at 572 n.1, 575 (holding parent company’s use of a subsidiary as its alter ego meant “the
filing of suit against [the subsidiary] stopped the running of the statute [of limitations] in
favor of [the parent]”); Matthews Constr. Co. v. Rosen, 796 S.W.2d 692, 692–94 (Tex. 1990)
(similar). We need not address that argument because, as explained below, Ledford’s
sham-to-perpetrate-a-fraud theory fails in any event.
6
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We begin by assessing Texas law on this point. The Texas Supreme
Court has not directly answered whether undercapitalization alone justifies
veil-piercing under a sham-to-perpetrate-a-fraud theory. So, we must make
an “Erie guess” about how it would answer the question. Boren v. U.S. Nat’l
Bank Ass’n, 807 F.3d 99, 105 (5th Cir. 2015). “Typically, we treat state
intermediate courts’ decisions as the strongest indicator of what a state
supreme court would do, absent a compelling reason to believe that the state
supreme court would reject the lower courts’ reasoning.” Hux v. S. Methodist
Univ., 819 F.3d 776, 780–81 (5th Cir. 2016) (citation omitted).
In light of those decisions, we think the Texas Supreme Court would
not conclude that undercapitalization alone justifies piercing the corporate
veil. A significant datum is Ramirez v. Hariri, which rejected the argument
that “undercapitalization, by itself and without reference to any other
factors, is sufficient to justify piercing the corporate veil.” 165 S.W.3d 912,
916 (Tex. App.—Dallas 2005, no pet.). While noting the landmark
Castleberry opinion stated in a footnote that “[i]nadequate capitalization is
another basis for disregarding the corporate fiction,” ibid. (quoting
Castleberry, 721 S.W.2d at 272 n.3), Ramirez reasoned the Texas Supreme
Court could not have meant to convey that undercapitalization was itself a
sufficient basis for veil piercing. Id. at 917. The Castleberry footnote, the court
pointed out, cited two decisions denying that very proposition. Id. at 916–17.7
Ramirez’s holding meshes with decisions by other Texas intermediate
courts. See Durham v. Accardi, 587 S.W.3d 179, 186 (Tex. App.—Houston
7
Those decisions were Torregrossa v. Szelc, 603 S.W.2d 803 (Tex. 1980), and
Tigrett v. Pointer, 580 S.W.2d 375 (Tex. App.—Dallas 1978, writ ref’d n. r. e.). Tigrett held
that “grossly inadequate” capitalization, “standing alone, would [not] justify piercing the
corporate veil.” 580 S.W.2d at 383, 387. Torregrossa, in turn, rejected a district court’s
reading of Tigrett to support an alter ego holding based on undercapitalization alone. 603
S.W.2d at 804–05.
7
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[14th Dist.] 2019, no pet.) (holding undercapitalization alone is “insufficient
to establish alter ego”); Endsley Elec., Inc. v. Altech, Inc., 378 S.W.3d 15, 26
(Tex. App.—Texarkana 2012, no pet.) (noting “undercapitalization can be a
factor in determining whether an individual is the alter ego of the corporation,
but alone is insufficient”); Tigrett, 580 S.W.2d at 386–87 (same); see also
Morgan v. D&S Mobile Home Ctr., Inc., No. 07-13-00263-CV, 2014 WL
3809751, at *2 (Tex. App.—Amarillo Aug. 1, 2014, no pet.) (memo op.)
(inadequate capitalization is “one factor” in assessing veil-piercing but “[i]t
alone does not entitle a complaint to such relief”); Shaw v. Maddox Metal
Works, Inc., 73 S.W.3d 472, 481 (Tex. App.—Dallas 2002, no pet.)
(“[U]ndercapitalization is a factor to be considered in determining whether
a corporation is operated as an alter ego.”); Assocs. Dev. Corp. v. Air Control
Prods., Inc., 392 S.W.2d 542, 545–46 (Tex. App.—Austin 1965, writ ref’d
n.r.e.) (evidence of undercapitalization had “weight” but did not “tilt the
scales far enough to overcome the lack of evidence” corporation was “sham
or [an] alter ego”); see also 15 Tex. Jur. 3d Corporations § 162 (2021)
(stating inadequate capitalization is “not sufficient to pierce the corporate
veil” but “only one factor to be considered”).8 We are therefore persuaded
that, under Texas law, undercapitalization alone would not be sufficient to
pierce the corporate veil.9
8
Cf. Howell v. Hilton Hotels Corp., 84 S.W.3d 708, 715 (Tex. App.—Houston [1st
Dist.] 2002, pet. denied (op. on reh’g)) (upholding summary judgment for defendant where
plaintiffs failed to produce any evidence of undercapitalization but suggesting this could be
a sufficient basis for veil piercing).
9
Two of our decisions, discussing Castleberry, remark that the sham-to-perpetrate-
a-fraud theory “includes the concept of inadequate capitalization as a basis for corporate
disregard.” Pan E. Exploration Co. v. Hufo Oils, 855 F.2d 1106, 1133 (5th Cir. 1988),
superseded on other grounds by Tex. Bus. Corp. Act art. 21.223(a)(3); see Gibraltar Sav.
v. LDBrinkman Corp., 860 F.2d 1275, 1289 (5th Cir. 1988). But those decisions were using
precisely the same language Castleberry used in discussing the fraud theory, see Castleberry,
8
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Ledford does not contest that conclusion. She argues only that
evidence of KRC’s “[c]onsistent, gross undercapitalization” and
“intentional[] emptying [of] bank accounts year after year,” showed the
Directors used KRC as a shell to shield them from liability. Specifically,
Ledford relies on evidence that: (1) KRC never had liability insurance; (2) Joe
Suttle recognized rodeos are dangerous; (3) KRC’s “only asset [at the time
of Suttle’s deposition] was a checking account with less than $200”;
(4) KRC consistently maintained a checking balance too low to compensate
injured rodeo attendees; and (5) this was due to KRC’s use of leftover
revenue for rodeo upgrades and charitable donations. The Directors argue
that the district court correctly found this evidence amounted to nothing
more than evidence KRC was undercapitalized. We agree.10
Stripped to its essentials, Ledford’s evidence shows only that the
Directors did not purchase liability insurance, did not retain sufficient funds
to compensate an injured spectator, and used leftover rodeo revenue for
rodeo improvements and donations to other community organizations. As
the district court found, this evidence is indistinguishable from evidence that
KRC was undercapitalized. See, e.g., Ramirez, 165 S.W.3d at 915 (company
had substantial assets, significant revenue, and liability insurance, indicating
adequate capitalization); Durham, 587 S.W.3d at 186 (treating failure to carry
worker’s compensation insurance as evidence of undercapitalization).
721 S.W.2d at 272 n.3, and, as noted, subsequent Texas intermediate courts have explained
that Castleberry did not set up undercapitalization alone as sufficient for veil-piercing.
10
The Directors also argue no authority exists for disregarding the corporate form
of a non-profit like KRC. The district court suggested this argument was reasonable but did
not rely on it. Because we agree Ledford’s evidence is insufficient to support veil piercing,
we need not decide whether veil-piercing may operate against a non-profit corporation, an
open question under Texas law. See 20 Tex. Prac., Business Organizations
§ 25:14 (3d ed.) (noting no Texas law “directly address[es] veil piercing in the nonprofit
corporation context,” other than the district court’s opinion in this case).
9
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Ledford does use colorful rhetoric in trying to impose sinister motives on the
Directors’ conduct—for example accusing the Directors of “raid[ing]”
KRC’s bank account after every rodeo. But she does not even attempt to
rebut the Directors’ evidence that they did not form KRC to avoid liability,
use it as a shell to avoid liability, or otherwise abuse the corporate form for
their personal benefit.11 And Ledford fails to present any additional evidence
that might support her sham theory, e.g., evidence showing the Directors
used KRC to “perpetrate a fraud, evade an existing obligation, achieve or
perpetrate a monopoly, circumvent a statute, protect a crime, or justify
wrong.” Spring St. Partners, 730 F.3d at 443 (emphasis removed) (quoting
SSP Partners, 275 S.W.3d at 451); see also Tigrett, 580 S.W.2d at 382, 385–87
(requiring “additional compelling facts,” such as president’s transfer of
company’s assets to himself in violation of his fiduciary duty, to find
constructive fraud); SSP Partners, 275 S.W.3d at 455 (“[E]vidence of abuse
. . . is necessary before disregarding the existence of a corporation.”).12 Thus,
we agree with the district court that Ledford’s evidence amounts to nothing
more than evidence of undercapitalization, which is insufficient standing
alone to support a veil-piercing theory under Texas law.
11
For instance, the Directors presented evidence that (a) they simply failed to
anticipate the need to compensate an injured spectator; (b) Joe Suttle believed, based on
his experience, that the stock contractor had liability insurance; and (c) their spending
leftover funds on future rodeos, rodeo upgrades, and charitable donations was consistent
with KRC’s benevolent mission.
12
Cf. Nugent v. Estate of Ellickson, 543 S.W.3d 243, 267 (Tex. App.—Houston [14th
Dist.] 2018, no pet.) (op. on reh’g) (reversing imposition of alter-ego liability in absence of
evidence defendant used corporation to “engage in fraudulent conduct, avoid existing
obligations, circumvent statutes, or the like” (citing SSP Partners, 275 S.W.3d at 455));
Strobach v. WesTex Cmty. Credit Union, 621 S.W.3d 856, 880 (Tex. App.—El Paso 2021,
no pet.) (op. on reh’g) (“While . . . constructive fraud does not require evidence of
wrongful intent, . . . it nevertheless requires evidence that the defendant breached some
legal or equitable duty.”).
10
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IV.
In sum, Ledford’s veil-piercing theory fails and, along with it, any
argument that the limitations clock against the Directors was tolled by her
suing KRC. The district court’s summary judgment is therefore
AFFIRMED.
11