Williams v. Freeport Sulphur Co. ( 1930 )

While a motion for rehearing filed by appellees was pending in this court, the appellants, by election of the stockholders of appellee Freeport Texas Company, were placed in control of the business affairs of that corporation and thereby came into possession of the books, the right to the inspection of which constituted the subject-matter of this suit.

In this situation, the attorneys for appellants and appellees, and the attorneys appearing as friends of the court, filed motions to dismiss the suit because its subject-matter had ceased to exist and the controversy now presents only moot questions.

The parties further ask that the opinion and judgment of this court reversing the judgment of the trial court and rendering judgment for appellants be withdrawn.

It is obvious that upon the facts disclosed in the motion the questions in the case have become moot, and the suit should therefore be dismissed. Southwestern Tel. Tel. Co. v. Galveston County (Tex.Civ.App.)59 S.W. 589; McWhorter v. Northcut, 94 Tex. 86, 58 S.W. 720.

The motion to dismiss has been granted, but after due consideration we have reached the conclusion that the request to withdraw our opinion and judgment should be refused.

Under the now existing facts neither the reasoning nor the conclusions expressed in our original opinion can by any proceedings in this suit reach the Supreme Court for final determination, and therefore our conclusions cannot be regarded as settled rules of decision in this state. But we do not feel that the conclusions expressed in the opinion, except as hereinafter indicated, are unsound or will harmfully affect the jurisprudence of the state. In so far as the parties to this controversy are concerned, their immediate rights which constituted the subject-matter of the suit have been fortuitously settled just as the judgment of this court fixed them. In these circumstances, the court feels constrained to refuse the motion to withdraw the opinion. We deem it permissible and proper, however, to make corrections, or modifications, and additions to the conclusions of fact and law contained in our original opinion.

In their motion for rehearing appellees somewhat vigorously complain of the statement in our opinion that "the fixing and payment of the salaries of the officers, the amount of dividends declared, and their payment, and the custody of all of the income of the Sulphur Company, was held and exercised by officers of the Texas Company in the office of that company in New York."

In this statement we did not intend, and we do not think it can be fairly interpreted, to go beyond the facts testified to by appellees' witness Maercky. The officers of the Texas Company who exercised the authority to determine the matters mentioned in the statement did act upon such matters in the New York office of the Texas Company. These officers of the Texas Company were also officers of the sulphur company, but the only ground upon which Mr. Maercky based his conclusions that in determining these questions they were acting as officers of the sulphur company rather than the Texas Company was that when the result of such decisions was made known to him the communication was written on a letterhead bearing the name of the sulphur company, and the dual officer in New York who signed these communications, and who was an officer of both companies, signed as an official of the sulphur company. It seems to us that upon the facts in this case set out in our original opinion the capacity in which these dual officers acted in directing the affairs of the sulphur company should not rest upon the name of the company appearing on the head of the letter communicating to their subordinate the decision of questions determinative of the control and domination of the sulphur company by the Texas Company, nor upon the official designation which the writer saw fit to append to his signature to the letter. The domination and control of the business of the sulphur company by the Texas Company was determinative of the question of whether the Texas Company was doing business in this state through its agent, the sulphur company. Mr. Maercky's testimony discloses that he did not and could not know the truth of this matter, but the facts within his knowledge and to which he testified were, in our opinion, sufficient to raise the issue of such domination and control. It is clear from the record that the fact vel non of such domination and control was within the knowledge of Mr. Swenson, who was the president of both companies, and of other dual officers of the two companies; and when in these circumstances they kept silent and failed to disclose the true facts, the courts should give probative force to their silence, and this, added to the other circumstances shown by the record, leads this court to the irresistible conclusion that the business of the sulphur company was wholly dominated and controlled by the Texas Company.

We were not unmindful when our original opinion was written that the Supreme Court of this state had seemingly entirely repudiated the decision in the case of Buie v. Railway Company, 95 Tex. 51, 65 S.W. 27,55 L.R.A. 861. But we thought, and still think, that the Peterson Case,205 U.S. 364, 27 S.Ct. 513, 51 L.Ed. 841, which caused such repudiation, is distinguishable upon its facts from the instant case.

Upon further consideration, however, we feel constrained to withdraw the holding in that opinion that because of the sole ownership of the stock of the sulphur company by the Texas Company, it was unnecessary for the facts to otherwise show the control and domination by the Texas Company of the sulphur company.

The legal fiction of the separate entity of a corporation as distinct from that of the owner or owners of its stock cannot be generally disregarded without destroying the primary object and purpose of such organization, but such legal fiction should be disregarded when necessary for the prevention of fraud or to protect the legal rights of third parties. The fiction of separate entity is not so sacred that a court of equity, looking through forms to the substance of things, may not ignore it to circumvent fraud or wrong to innocent parties. This rule seems to be well settled when the wrong complained of is the violation of a clear statutory or common-law right of the complainant. United States v. Reading Co., 253 U.S. 26, 40 S.Ct. 425, 64 L.Ed. 760; United States v. Del. Lack. Western R. R., 238 U.S. 516, 35 S.Ct. 873, 59 L.Ed. 1438; Chicago, M. St. P. Ry. v. Minn. Civic Ass'n, 247 U.S. 490,38 S.Ct. 553, 62 L.Ed. 1229.

In the Reading Case, which arose under the Commodities Clause of the Hepburn Act (49 USCA § 1(8), a holding company owned the capital stock of a coal mining company and of a carrier which transported the coal. The Commodities Clause forbade a carrier to transport a commodity "mined, or produced by it, or under its authority," or which it owned "in whole or in part," or in which it had "any interest, direct or indirect." After stating that the mere ownership of stock in a coal company by a carrier which transported the former's product did not violate the clause, the Supreme Court held that even if the carrier in the instant case did not own any stock in the coal company, they were both controlled by the holding company that the evidence showed that the holding company used them both as a mere "instrumentality," that the coal was both mined and transported under the same "authority," and that the clause had therefore been violated. A similar holding was made in the other cited cases.

In cases of this kind the courts generally substitute the rule or theory of identity for that of the separate entity of the corporations involved in the controversy. United States v. Lehigh Valley R. R. Co.,220 U.S. 272, 31 S.Ct. 387, 55 L.Ed. 458; Luckenbach S. S. Co. v. W. R. Grace Co. (C.C.A.) 267 F. 676.

The rule which gives immunity to the stockholders of a corporation being based upon the legal fiction of the separate entity of the corporation, when the justice and equity of a particular case require that this fiction be ignored, there can be no sound objection to the substitution therefor of the legal fiction of identity.

It seems to us that the law should resolutely set its face against corporate wrong and injustice inflicted through improper manipulation by parent corporations of their subsidiaries, and to accomplish this end restrictive technicalities should not be permitted to stand in the way.

Motion to dismiss granted.

Motion to withdraw opinion refused.