Louis Martin, Jr. v. U.S. Merchants Financial Group, Inc. ( 2014 )

Affirmed and Opinion Filed December 8, 2014.
Court of Appeals
S In The
Fifth District of Texas at Dallas
No. 05-13-00999-CV
LOUIS MARTIN, JR., Appellant
V.
U.S. MERCHANTS FINANCIAL GROUP, INC., Appellee
On Appeal from the 134th Judicial District Court
Dallas County, Texas
Trial Court Cause No. 10-15757
MEMORANDUM OPINION
Before Justices Francis and Myers 1
Opinion by Justice Myers
U.S. Merchants Financial Group, Inc. (Merchants) obtained a California default judgment
against Synergy Design Group, Inc. (Synergy) based on a breach of contract complaint. In an
effort to collect the California judgment, Merchants next brought suit in California against
Synergy’s vice president, Louis Martin, Jr.; that suit was dismissed for lack of personal
jurisdiction over Martin. Using an alter ego theory, Merchants then brought suit against Martin in
Texas to collect the California judgment. Following a bench trial, the trial court rendered
judgment against Martin for the amount of the California judgment plus interest and court costs.
In his issues on appeal, Martin contends the trial court erred by (1) failing to find this
action is barred by statute; (2) failing to find this action is barred by collateral estoppel; (3)
1
Justice David Lewis was a member of the panel and participated at the submission of this case, but he did not participate in the issuance of
this opinion. See TEX. R. APP. P. 41(b).
finding the evidence sufficient to support the finding that Martin caused the corporation to
perpetrate a fraud; and (4) finding the evidence sufficient to support the necessary actual fraud
required to pierce the corporate veil. We affirm the trial court’s judgment.
I. Factual and Procedural Background
Martin and his business partner, Chuck Clark, sold a road flare called the “TurboFlare
360” under the corporate structure of Synergy. To secure a $2.75 million dollar order with Sam’s
Club, Martin was directed to contact Merchants to handle Sam’s Club requirements for
packaging and shipping. Martin negotiated and contracted with Merchants to pay $278,000 for
packaging and shipping services.
After Merchants completed the packaging and shipping under the contract, Synergy only
remitted payment of $6,773. Merchants filed a breach of contract suit against Synergy in
California in 2004, and was awarded a default judgment. To collect the judgment, Merchants
then brought an action in California to pierce Synergy’s corporate veil using an alter ego theory
against Martin six years later. The California court dismissed the alter ego action for lack of
personal jurisdiction over Martin. Merchants then filed this action against Martin in Texas. After
a bench trial, the trial court found in favor of Merchants, and now Martin appeals.
II. Barred by Statute
Martin argues that because the California court granted Martin’s motion to quash the
service of process for lack of personal jurisdiction, this action is barred in Texas. Martin argues
Texas law bars this action because the California court barred the action in California. Martin
further argues he cannot be “bound by a judgment in personam resulting from litigation in which
he is not designated as a party or to which he has not been made a party by service of process.”
We must first determine if this action is barred by Texas law. Martin contends that
because Merchants brought suit against him in California to enforce the Synergy judgment and
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the California court found that it lacked jurisdiction over Martin, the same suit would be barred
in California and is consequently now barred in Texas. The statute on which Martin relies states,
an “action on a foreign judgment is barred in this state if the action is barred under the laws of
the jurisdiction where rendered.” TEX. CIV. PRAC. & REM. CODE ANN. § 16.066(a) (West 2008).
We review questions of statutory construction de novo. Crosstex Energy Servs., L.P. v.
Pro Plus, Inc., 430 S.W.3d 384, 389 (Tex. 2014). When the statute is clear and unambiguous, we
read the language according to its common meaning “without resort to rules of construction or
extrinsic aids.” State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006). “The plain meaning of the
text is the best expression of legislative intent unless a different meaning is apparent from the
context or the plain meaning leads to an absurd result.” Altus Brands II, LLC v. Alexander, 435
S.W.3d 432, 440 (Tex. App.—Dallas 2014, no pet.) (citing City of Rockwall v. Hughes, 246
S.W.3d 621, 625 (Tex. 2008)).
Merchants brought suit against Martin in California seeking a declaration that Martin was
Synergy’s alter ego. Martin filed a special appearance and motion to quash service of process for
lack of personal jurisdiction which the trial court granted. 2 However, it is a well-settled rule that
a court’s judgment for lack of jurisdiction does not bar the plaintiff from bringing the action in
another court having jurisdiction. See GMS Props., Inc. v. Superior Court, 33 Cal. Rptr. 163, 169
(Cal. Ct. App. 1963) (quoting E.H. Schopler, Res Judicata Effect of Judgment Dismissing Action,
or Otherwise Denying Relief, for Lack of Jurisdiction or Venue, 49 A.L.R. 2d 1040 (1956)). This
action is not barred in California because a California judgment for lack of jurisdiction does not
2
We note, the record does not contain the official court reporter’s trial transcript from the California proceedings. However, it does contain
a copy of a document entitled “Nature of Proceedings” date stamped as “Minutes Entered 10/27/10 County Clerk” which states,
Matters are called for hearing. The Court issues its oral tentative as fully reflected in the notes of the official court reporter
this date, incorporated herein by reference. The Court, having read and considered all papers filed and heard argument,
rules as follows: Specially Appearing Defendant’s Evidentiary Objections are OVERRULED as to item nos. 1-7.
Defendant Louis Martin, Jr.’s motion to quash summons for lack of personal jurisdiction is GRANTED. The Court’s ruling
is more fully reflected in the notes of the official court reporter this date, incorporated herein by reference.
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bar the plaintiff from bringing the action in another court that does have jurisdiction. See GMS
Props., 33 Cal. Rptr. at 169. We therefore, conclude this action is not barred in Texas under
section 16.066(a) of the civil practice and remedies code.
Martin also relies on Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 110
(1969), for the proposition that a party cannot be bound by a foreign judgment when that party
was not designated as a party in that suit. We agree that the “consistent constitutional rule has
been that a court has no power to adjudicate a personal claim or obligation unless it has
jurisdiction over the person of the defendant.” Id. (citing Pennoyer v. Neff, 95 U.S. 714 (1878)).
While we agree with this statement of law, the facts in Zenith are distinguishable.
In Zenith, a district court in Illinois relied on the parties’ pre-trial stipulation that
Hazeltine Research, Inc. (HRI) and Hazeltine Corporation (Hazeltine) were considered one
entity for purposes of the litigation. 395 U.S. at 107. HRI was an Illinois corporation and wholly
owned subsidiary of Hazeltine, which was a New York corporation. HRI was the named
respondent in the litigation, and Hazeltine was not named as a party in the suit. Hazeltine did not
make an appearance in the litigation until Zenith proposed that judgment be entered against it, at
which time Hazeltine filed a special appearance. Hazeltine did not formally participate in the
proceedings until after the district court had entered its initial findings of fact and conclusions of
law. Relying on the pre-trial stipulation made by the parties to the suit, the district court entered
judgments for damages and injunctive relief against Hazeltine as well as against the named
counter-defendant, HRI. Id. On appeal, the court of appeals vacated the district court’s
judgment, holding that Hazeltine could not be bound by a judgment resulting from litigation in
which it was not designated as a party or to which it had not been made a party by service of
process. Id. at 110. Hazeltine was not a named party, was never served, and did not formally
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appear at the trial. The stipulation represented HRI’s agreement to be bound by, and to be liable
for, the acts of its parent and was signed by HRI, not Hazeltine. Id. The Supreme Court stated:
If the alter ego issue had been litigated, and if the trial court had decided that HRI
and Hazeltine were one and the same entity and that jurisdiction over HRI gave
the court jurisdiction over Hazeltine, perhaps Hazeltine’s appearance before
judgment with full opportunity to contest jurisdiction would warrant entry of
judgment against it. But that is not what occurred here. The trial court’s judgment
against Hazeltine was based wholly on HRI’s stipulation. HRI may have executed
the stipulation to avoid litigating the alter ego issue, but this fact cannot foreclose
Hazeltine, which has never had its day in court on the question of whether it and
its subsidiary should be considered the same entity for purposes of this litigation.
Id. at 111. In the case at bar, the California court entered a judgment against Synergy–and
Synergy alone–not Martin. Unlike in Zenith, however, Martin does not complain about the
opportunity to participate in the proceeding in California nor the proceeding in Texas below. 3 In
fact, Martin did participate in the California proceeding long enough to be dismissed for lack of
personal jurisdiction. As for the Texas proceeding below, Martin was the only named respondent
and he does not complain to this court about a lack of service of process.
Here, Martin wants to expand Zenith to mean a separate proceeding to pierce the
corporate veil can never be brought against a litigant if the litigant was not represented when the
corporation was originally found liable. We decline to interpret Zenith so broadly. The parties in
Zenith were not, as here, trying to pierce a corporate veil. Accordingly, Zenith does not support
Martin’s argument that Merchants is barred from bringing this action against him in Texas.
We decide Martin’s first issue against him.
III. Barred by Collateral Estoppel
Martin argues this suit is barred by collateral estoppel because Merchants litigated and
lost the same claim in California. Martin contends the alter ego issue presented in the trial below
3
Martin does contend the alter ego issue was litigated in California. However, Martin failed to provide this Court with an official reporter’s
record from the California proceedings so that is not a determination we can make. We further note that Martin does not challenge the validity of
the Synergy judgment.
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was identical to the one presented in California: it required the same proof, the same evidentiary
standard, the same evidence, and the same legal arguments.
Both parties agree we apply California law to determine the effect of the California
judgment. See Centre Equities, Inc. v. Tingley, 106 S.W.3d 143, 150 (Tex. App.—Austin 2003,
no pet.). Under California law, the doctrine of collateral estoppel is well established:
Traditionally, we have applied the doctrine only if several threshold requirements
are fulfilled. First, the issue sought to be precluded from relitigation must be
identical to that decided in a former proceeding. Second, this issue must have
been actually litigated in the former proceeding. Third, it must have been
necessarily decided in the former proceeding. Fourth, the decision in the former
proceeding must be final and on the merits. Finally, the party against whom
preclusion is sought must be the same as, or in privity with, the party to the
former proceeding.
Gikas v. Zolin, 6 Cal. 4th 841, 849 (Cal. 1993).
The party asserting collateral estoppel bears the burden of establishing these
requirements. Esparza v. Cnty. of Los Angeles, 168 Cal. Rptr. 3d 482, 492 (Cal. Ct. App. 2014).
California requires “every estoppel must be certain to every intent, and not to be taken by
argument or inference.” Kemp Bros. Const., Inc. v. Titan Elec. Corp., 53 Cal. Rptr. 3d 673, 679
(Cal. Ct. App. 2007).
The record does not contain the official court reporter’s record of the October 27, 2010
hearing in California. Further, the one-page summary of the hearing that is provided to this Court
states, “[t]he Court’s ruling is more fully reflected in the notes of the official court reporter this
date, incorporated herein by reference.” Martin argues the pleadings should be enough for this
Court to determine the same issues were litigated. However, nothing in the record supports an
inference, much less a conclusion, that the California court decided if Merchants could pierce the
corporate veil of Synergy. 4 There is simply no basis for concluding the parties fully and fairly
4
We note that Martin’s appellate brief included two pages of purported quotes from the California trial judge explaining her ruling, but the
official reporter’s record was not provided for our review.
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litigated the issue of piercing the corporate veil. See Kemp, 53 Cal. Rptr. 3d at 675. Without the
official reporter’s record, we cannot review whether or not the issues were identical or actually
litigated, and consequently, we cannot conclude collateral estoppel bars these proceedings in
Texas. We decide Martin’s second issue against him.
IV. Sufficiency of the Evidence
In his last two issues, Martin challenges the legal and factual sufficiency of the evidence
that Martin caused the corporation to perpetrate a fraud and that he engaged in “actual fraud.”
The trial court’s conclusions of law found “Martin engaged in conduct constituting ‘actual fraud’
. . . by at the outset of the relationship, making false and misleading representations to Merchants
. . . ”; “Martin deceptively represented and misrepresented Synergy’s financial inability to pay
Merchants for the services Merchants provided”; and “Martin, acting in his capacity as an officer
and stockholder of Synergy, misused Synergy’s corporate fiction to defraud Merchants and
evade a legitimate obligation for Martin’s personal benefit.”
In a legal sufficiency review, we consider the evidence in the light most favorable to the
verdict and indulge every reasonable inference that would support it. City of Keller v. Wilson,
168 S.W.3d 802, 822 (Tex. 2005). “The final test for legal sufficiency must always be whether
the evidence at trial would enable reasonable and fair-minded people to reach the verdict under
review.” Id., 168 S.W.3d at 827. We cannot substitute our judgment for that of the trier of fact,
so long as the evidence falls within this zone of reasonable disagreement. Id., 168 S.W.3d at 822.
Findings of fact in a case tried to the court have the same force and effect as jury findings
and are reviewed by the same standards used to review challenges to the sufficiency of the
evidence to support jury findings. Altus, 435 S.W.3d at 440. In our factual sufficiency review, we
consider all the evidence, setting aside the finding only if the evidence supporting the finding is
so weak or so against the great weight and preponderance of the evidence that the finding is
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clearly wrong and unjust. See Dow Chem. Co. v. Francis, 46 S.W.3d 237, 242 (Tex. 2001). As
fact-finder in a bench trial, the trial court is the sole judge of the credibility of the witnesses.
Altus, 435 S.W.3d at 440.
We have traditionally applied the alter ego doctrine to pierce the corporate veil when
there is a “unity between the corporation and the individual to the extent that the corporation’s
separateness has ceased, and holding only the corporation liable would be unjust.” Castleberry v.
Branscum, 721 S.W.2d 270, 272 (Tex. 1986). However, the issue of alter ego has been codified
to a substantial degree. See Latham v. Burgher, 320 S.W.3d 602, 608 (Tex. App.—Dallas 2010,
no pet.). The statute states in relevant part,
(a) A holder of shares, an owner of any beneficial interest in shares, or a
subscriber for shares whose subscription has been accepted, or any affiliate of
such a holder, owner, or subscriber or of the corporation, may not be held liable to
the corporation or its obligees with respect to:
***
(2) any contractual obligation of the corporation or any matter relating to
or arising from the obligation on the basis that the holder, beneficial
owner, subscriber, or affiliate is or was the alter ego of the corporation or
on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or
other similar theory;
***
(b) Subsection (a)(2) does not prevent or limit the liability of a holder, beneficial
owner, subscriber, or affiliate if the obligee demonstrates that the holder,
beneficial owner, subscriber, 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, beneficial owner, subscriber, or
affiliate.
TEX. BUS. ORGS. CODE ANN. § 21.223 (West 2012). In the context of piercing the corporate veil,
actual fraud is not equivalent to the tort of fraud. In the piercing of the corporate veil, actual
fraud involves “dishonesty of purpose or intent to deceive.” Latham, 320 S.W.3d at 607 (citing
Castleberry, 721 S.W.2d at 273; Priddy v. Rawson, 282 S.W.3d 588 (Tex. App.—Houston [14th
Dist.] 2009, pet. den.); Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd., 237
S.W.3d 379, 387 (Tex.App.—Houston [14th Dist.] 2007, no pet.)).
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Martin argues specifically that the evidence was legally and factually insufficient to show
that “Martin caused Synergy to do anything about the payment of Merchants, much less
perpetrate a fraud.” We disagree.
Martin bases his arguments on the theory that he was a “sales representative” with no
control over the corporation. However, the record shows Martin and Chuck Clark, together as
business partners, formed, operated, and were officers in no less than thirteen different
companies between 2002 and 2012. Ten of these companies were formed and administratively
dissolved between August 2002 to September 2007. Clearly, as a founding shareholder and
officer of these corporations, Martin had some control over the actions taken by these businesses.
Martin owned 50% interest in AOS, Inc., a nominee entity created to be a corporate shareholder
of Synergy, Inc. AOS held either 50% or 66.7% ownership interest of Synergy; there is
conflicting evidence as to the exact percentage of ownership held by AOS. Both Synergy and
AOS had allowed their corporate charters to lapse and both also filed for reinstatement around
the time Synergy contracted with Merchants.
Synergy was incorporated in the State of Florida on August 22, 2002 and thereafter
forfeited its corporate charter. On September 5, 2003, a Corporation Reinstatement form was
filed with the Florida Secretary of State’s office for reinstatement of Synergy’s charter. AOS was
incorporated in the State of Florida in April 2002 and thereafter forfeited its corporate charter.
On September 22, 2003, a Corporation Reinstatement form was filed with the Florida Secretary
of State’s office for reinstatement of AOS’ charter.
Douglas Farrell, director of sales for Merchants, testified that he only dealt with Martin
during negotiations on the “TurboFlare 360” transactions with Synergy. When negotiating with
Merchants, Martin represented verbally and in writing that he was the “CEO” of Synergy. Farrell
testified that “the fact that we were dealing with the person in charge of the company, a person
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that with whatever representations they might make, would have the final say in the matter and
that their word was binding and bound the company to, you know, obligations for the
transaction.” At trial, Martin admitted that he was not the CEO of Synergy and that it would be
“false” if he had in fact represented himself to be the CEO of Synergy while soliciting business
from Merchants.
After Merchants gave Martin a quote for the Sam’s deal, Martin called Farrell to
negotiate better terms. During the call, Martin represented that Synergy had a thin profit margin;
the initial pricing Farrell offered to them almost made them unable to do the program; and
Synergy needed reduced pricing. Farrell conferred with the president of Merchants who agreed
to the reduced pricing but required information regarding Synergy’s ability to pay for the
services. Farrell went back to Martin and directly asked him, “Mr. Martin, are you able to pay
this bill?” Farrell recounted Martin’s response:
But I recall him taking the question rather lightly. And he kind of
chuckled. He said, oh, you don't need to worry about our creditworthiness or our
ability to make payment. We certainly -- we certainly are able to pay. Money is
not an issue. We have the money in reserves and assets to make payment and I
personally assure you that you will get paid. Please don't worry.
During trial, Martin testified Synergy’s margin for the Sam’s deal was actually between 25% and
50% on the final terms.
Martin personally assured Farrell that: 1) Martin would oversee the transactions between
Merchants and Synergy, 2) Synergy was financially strong and had sufficient revenue and assets
to pay the anticipated charges by Merchants, 3) Synergy would promptly pay Merchants for the
work, and 4) Merchants had Martin’s “personal assurance” that the debt would be paid. Farrell’s
account of these facts was uncontroverted by Martin.
Farrell testified that Martin’s representations about Synergy’s finances and personal
assurances of payment were material to Merchants’ decision to extend credit to Synergy. Martin
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never denied making the critical representations relating to himself and Synergy’s purported
financial status. Martin never told Farrell that he did not have the authority to pay Merchant’s
bill without the approval of Chuck Clark. In fact, Farrell did not hear the name “Chuck Clark”
until discovery in this lawsuit.
After Merchants completed their part of the contract with Synergy and had sent numerous
invoices to Synergy totaling $278,452, Synergy only remitted payment of $6,773. Martin blamed
Clark, claiming Clark controlled all financial matters. Martin testified that Clark maintained the
company checkbook in his office, and Clark “handled all the accounts payable, all the accounts
receivable, all the invoicing, all the tax returns, all accounting issues, all payroll, and most of the
major decisions.” It was also established at trial that Martin never asked Clark to see the books or
financials. However, on February 17, 2004, in response to a Merchants’ email inquiring about
payment status of the past-due invoices, Martin stated,
I apologize for the delay in payment. I certainly understand your desire to collect
what is owed as I feel the same way about all of our accounts. I was expecting to
receive full payment from Sam’s Club by this time, but we have not yet received
this. As S.D.G. is a smaller company, we are unfortunately unable to make
payment on these invoices until we receive the income from Sam’s Club. Again,
my apologies for this delay. Hopefully, we will be receiving final payment from
Sam’s in the next couple of weeks. As soon as we do, all monies owed to U.S.
Merchants will be paid in full. I appreciate your continued patience, I will let you
know as soon as payment is sent.
So again, Martin represented that he was aware of the financial situation of Synergy. This
statement was further shown to be deceptive because according to Synergy’s general ledger and
check register, during the 34-day period immediately preceding Martin’s sending of this email,
Synergy made significant cash deposits totaling $864,051.95, including a $232,575.33 cash
deposit noted as “Sam’s payment” on January 15, 2004 and a $631,476.62 cash deposit from
“Sales” on February 12, 2004. Martin never told Farrell that Synergy received full payment from
Sam’s Club.
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Further, Synergy’s records reveal payments made between January 20, 2004 and
February 12, 2004, listed as shareholder liabilities totaling $454,912.35, including a payment of
$244,912.35 specifically to AOS and $180,000 directly to Martin. Even though Martin blamed
Clark and complains Clark controlled and represented the financial status of Synergy, Martin’s
personal checking account records reflect a deposit in the amount of $207,000 on February 23,
2004, so Martin was aware Synergy had funds available.
Merchants offered testimony from John Golle, who had prior business dealings with
Martin and Synergy. Golle testified Martin and Clark used Synergy as a corporate shell to avoid
payment of a large debt, which was litigated to judgment, and remains outstanding and unpaid.
Golle produced financial records of Synergy that were obtained during his litigation with
Synergy, and maintained in his company’s business records. Merchants obtained those records
from Golle when, after being ordered by the court to obtains Synergy’s financial records from
Clark, Martin claimed that he could not produce any of Synergy’s financial records because they
had all been “blown away in a hurricane.” Golle testified, “all of my interaction [with Synergy]
was with Mr. Martin, not Mr. Clark.”
Since Martin was an originating officer of AOS and wholly negotiated the contract with
Merchants, a reasonable and fair-minded person could determine Martin had sufficient control of
Synergy’s operations. Because Martin approached and misrepresented himself to Farrell,
personally enjoyed the financial benefit from the completion of the Sam’s deal, and repeatedly
falsely represented to Merchants that they would be paid, a reasonable and fair-minded person
could have concluded Martin exhibited “dishonesty of purpose or intent to deceive.” See Latham,
320 S.W.3d at 607. This evidence showed Synergy was used to achieve an inequitable result. A
corporation’s limitation on liability can be ignored only “when the corporate form has been used
as part of a basically unfair device to achieve an inequitable result.” Latham, 320 S.W.3d at 610
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(citing SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 451 (Tex. 2008)). We
conclude viewing the evidence in the light most favorable to the verdict and considering all of
the evidence in a neutral light both lead to the same result: the evidence is sufficient to support
the trial court’s finding that Martin engaged in conduct constituting actual fraud. We decide
Martin’s third issue against him.
V. Conclusion
Having decided Martin’s issues against him, we affirm the judgment of the trial court.
/Lana Myers/
LANA MYERS
JUSTICE
130999F.P05
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S
Court of Appeals
Fifth District of Texas at Dallas
JUDGMENT
LOUIS MARTIN, JR., Appellant On Appeal from the 134th Judicial District
Court, Dallas County, Texas
No. 05-13-00999-CV V. Trial Court Cause No. 10-15757.
Opinion delivered by Justice Myers. Justice
U.S. MERCHANTS FINANCIAL GROUP, Francis participating.
INC., Appellee
In accordance with this Court’s opinion of this date, the judgment of the trial court is
AFFIRMED.
It is ORDERED that appellee U.S. MERCHANTS FINANCIAL GROUP, INC. recover
its costs of this appeal from appellant LOUIS MARTIN, JR..
Judgment entered this 8th day of December, 2014.
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