Williams v. Midwest Employers

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________________
No. 00-31391
__________________________
JO ANN WILLIAMS, ETC.,
Plaintiff,
versus
MIDWEST EMPLOYERS CASUALTY CO. and
on behalf of Willie E. Williams
Defendant-Plaintiff-Third Party Plaintiff-Appellant,
versus
ADAMS PLASTICS, INC. AND SPARTECH CORPORATION,
Defendants-Third Party Defendants-Appellees.
___________________________________________________
Appeal from the United States District Court
for the Western District of Louisiana
(97-CV-1208)
___________________________________________________
March 21, 2002
Before KING, Chief Judge, and DAVIS, Circuit Judges and VANCE,1
District Judge.
PER CURIAM:2
Appellant Midwest Employers Casualty Company appeals
multiple partial summary judgment rulings against it regarding
1
District Judge of the Eastern District of Louisiana,
sitting by designation.
2
Pursuant to the 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that this opinion should not be published and is not precedent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.
excess insurance coverage for the workers' compensation claim of
a former employee of its insured, Adams Plastics, Inc. Appellant
sought to impose liability on Adams and its parent company,
Spartech Corporation, under the theory of "piercing the corporate
veil" for claims it brought as assignee of the employee and as a
third-party plaintiff. The district court concluded that, as an
assignee of Williams' workers' compensation claim, Midwest was
entitled to recover from Adams up to the amount of Adams' self-
insured retention and that there was no merit to any of Midwest's
other claims. After our review of the voluminous record in this
case, we conclude that the district court did not err when it
granted summary judgment sua sponte against Midwest on the issues
of the existence vel non of insurance coverage and on piercing
the corporate veil. We further decide that the district court
did not err when it determined that Williams' settlement with and
release of Spartech foreclosed Midwest's claims against Spartech
as Williams' assignee. Finally, we decide that the district
court erred when it dismissed sua sponte Midwest's claims against
Adams for breach of its contractual duties to defend and settle
claims. Accordingly, we affirm in part and reverse and remand in
part.
I. Background
Adams Plastics, Inc. d/b/a Spartech Films, was incorporated
in 1985 with 1000 shares of stock at par value of $1.00 per share
2
and $150,000 of paid-in capital. Spartech Corporation owned all
of the stock of Adams. Adams engaged in the business of
manufacturing and selling plastic film products at a plant that
Adams owned in Monroe, Louisiana. Adams' plant, land, and
equipment had a value of over $1.4 million and a lease value of
$150,000 per year. The plant's local general manager directed
day-to-day activities, and he was responsible for negotiating raw
materials contracts and formulating the annual business plan.
Adams' board of directors retained final approval power over the
business plans. Adams' board of directors had some overlapping
members with Spartech's board, and the two companies shared some
common business departments that operated out of St. Louis,
Missouri. They filed consolidated financial statements and
federal tax returns with the Securities and Exchange Commission
and the Internal Revenue Service, respectively. Each company
kept separate books, and Adams' board conducted business through
unanimous consents, as permitted by Louisiana law.
In October 1991, Spartech closed Adams' Monroe plant because
Adams had become a severe financial drain on Spartech. Indeed,
between 1989 and 1991, in an effort to keep Adams in business,
Spartech "downstreamed" cash to Adams on a weekly basis, totaling
over one million dollars per year. After it closed Adams' plant,
Spartech transferred the Adams plant and land to an inactive
subsidiary and offset the value of the transferred property
3
against Adams' debt to Spartech.
In 1989, Charles Northern, an insurance broker, approached
Adams and offered to help the company become a self-insurer for
workers' compensation claims and to help it obtain excess
workers' compensation coverage from Midwest. Louisiana
employers had the option of purchasing workers' compensation
liability insurance or becoming a "qualified self-insurer," with
an appropriate excess policy of workers' compensation insurance.
Northern obtained financial information from Adams, including
historical loss and payroll data, and he filled out Midwest's
two-page insurance application that he had developed with
Midwest. Midwest did not ask Adams for any other information or
documentation. Midwest responded to Adams' application with a
proposal for coverage, and Adams accepted the proposal. Midwest
issued the policy in May 1989. The policy covered losses for
workers' compensation claims for occupationally-caused disease if
the employee's last exposure occurred during the term of the
policy.
Under the policy, Adams represented that it was a duly
qualified self-insurer under the workers' compensation laws of
Louisiana. At that time, to qualify as a self-insurer, an
employer had to own real estate in Louisiana worth $25,000.
Adams met this qualification at the time it applied for insurance
with Midwest, and at the time Midwest issued the policy in May
4
1989. In July 1989, however, Louisiana changed its laws and
required a prospective self-insurer to get approval from the
Louisiana Office of Workers' Compensation Administration ("OWCA")
and to prove that it could pay a $150,000 per-claim deductible
and post a $200,000 bond or cash with the State as security to
pay claims if the self-insurer could not. Northern applied to
the State to obtain approval for Adams under the new workers'
compensation scheme. The OWCA tentatively approved Adams as a
qualified self-insurer in August 1991. Midwest renewed Adams'
policy in 1990 and 1991. In September 1991, the OWCA revoked
Adams' self-insurer status because Adams was unable to provide
the State with the necessary security. Adams then terminated its
excess policy with Midwest effective September 30, 1991. Adams
paid all premiums due during the term of the Midwest policy.
Willie Williams was employed by Adams at its plant in
Monroe. In October 1989, Williams complained that he was
disabled as a result of lung problems caused by breathing in
plastic at the Adams plant. F.A. Associates handled Williams'
claim as a third-party administrator on behalf of Adams. Adams
paid Williams weekly workers' compensation benefits totaling
$23,760 until October 9, 1991, when Adams ceased doing business.
Weeks before Adams shut-down its operations, F.A. Associates sent
Adams and Midwest a letter summarizing Williams' case and the
potential for "rather heavy exposure" it presented. The letter
5
also indicated that Adams had stated an intention to shut its
doors and "walk away" from any liabilities. F.A. Associates
noted that it had an obligation to notify Williams' attorney of
the lack of funds to pay his client's benefits.
In October 1991, Williams filed a claim in the OWCA against
Adams and Spartech for continued benefits based on his
allegations that he was permanently and totally disabled.
Williams then settled all of his claims against Spartech for
$7500. The settlement was approved by the workers' compensation
court, and it included a release of all claims by Williams
against Spartech. Williams reserved his rights against Adams.
In July 1994, he obtained a default judgment against Adams
declaring that he was permanently and totally disabled and
entitled to benefits of $212.00 per week indefinitely. Adams was
insolvent and failed to pay the judgment. In September 1994,
Williams filed a supplementing and amending petition naming
Midwest as an additional defendant seeking payment of the default
judgment. The suit against Midwest was dismissed for lack of
subject matter jurisdiction. In response, Midwest filed a
declaratory judgment action in the United States District Court
for the Western District of Louisiana to determine coverage under
the policy. Before the district court entered its final ruling,
Williams filed a motion against Adams to accelerate payment in
workers' compensation court. Midwest received a notice of the
6
hearing on this motion. Additionally, Adams notified Midwest
that the motion had been filed and that it had no means to or
intention of defending the claim. Midwest did not defend the
claim in workers' compensation court, and the court granted
Williams' motion for acceleration of payments. Ultimately, the
federal district court issued a judgment declaring that Midwest
was obliged to pay all workers' compensation benefits and medical
expenses that Williams was entitled to receive that exceeded
Adams' $150,000 self-insured retention under the Adams/Midwest
policy. Midwest sought to appeal the district court's ruling,
but it missed both the deadline to file for a new trial and the
deadline to file an appeal. This Court dismissed its appeal as
untimely.
In June 1997, Williams sued Midwest seeking $404,318.25 (the
amount of the judgment against Adams in excess of $150,000) in
Louisiana state court. Midwest removed the action to federal
district court. On April 7, 1998, Midwest filed a third-party
complaint against Adams and Spartech. Midwest asserted tort and
contract claims against Spartech and Adams, based on alleged
breaches of contractual duties and improper conduct in connection
with Williams' workers' compensation claim. Midwest also
asserted that Adams was not an independent corporation, but a
"veil" for Spartech and part of a single corporate enterprise
with Spartech.
7
In November 1999, Midwest settled Williams' claim for
$267,500 and took an assignment of any claims Williams might have
against Adams and Spartech. Midwest, in its capacity as
Williams' assignee, then sought to undo the Spartech settlement
and to assert claims against Spartech and Adams for all workers'
compensation benefits to which Williams was entitled. Midwest
further claimed that Spartech should be liable for Adams'
obligations to Williams under the corporate veil doctrine.
On July 21, 2000, Midwest moved for partial summary judgment
on the veil piercing issue. At a pretrial conference on August
18, 2000, the court ordered the parties to brief the issue of
insurance coverage as it related to the declaratory judgment
ruling and it informed the parties that it was considering
Midwest's partial summary judgment on the veil piercing issue.
On September 8, 2000, the district court sua sponte granted a
partial summary judgment in favor of Spartech and Adams, the
nonmoving parties on the corporate veil motion, based on the
lengthy record before it. In a separate ruling also issued on
September 8, 2000, the district court dismissed with prejudice
Midwest's claims relating to the validity of the excess insurance
contract based on the ruling in the declaratory judgment action
and it dismissed Midwest's breach of contract claims. The court
ruled that Midwest, in its capacity as Williams' assignee, was
entitled to judgment against Adams in the amount of $126,240 plus
8
interest, which is the amount of Adams' self-insured retention
($150,000) minus the benefits that Adams actually paid to
Williams ($23,760). Finally, in a third ruling, the district
court granted Adams' and Spartech's motion for partial summary
judgment dismissing Midwest's claim that the settlement between
Spartech and Williams was fraudulent, collusive, or otherwise
unlawful or invalid.
On September 20, 2000, the district court entered a separate
final judgment on its rulings. Midwest moved for a new trial.
The district court denied Midwest's motion for new trial on
October 24, 2000, and Midwest timely filed its notice of appeal.
II. Discussion
This court reviews a grant of summary judgment de novo,
applying the same standard as the district court. See Harken
Exploration Company v. Sphere Drake Insurance PLC, 261 F.3d 466,
470 (5th Cir. 2001). Summary judgment is proper only when there
is not a genuine issue as to any material fact, and the movant is
entitled to a judgment as a matter of law. Id. We review the
evidence in the light most favorable to the non-movant and make
all reasonable inferences in its favor. Id.; Matsushita Electric
Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88,
106 S. Ct. 1348, 1356, 89 L. Ed. 2d. 538 (1986). A fact is
material if it might affect the outcome of the suit under
governing law. Id.; Anderson v. Liberty Lobby, Inc., 477 U.S.
9
242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). There
is a genuine issue as to a material fact if the evidence is such
that a reasonable jury could return a verdict for the non-movant.
Id.A. Midwest's Claims as Subrogee of Williams
The Court finds no error in the district court's ruling that
Williams released his claim against Spartech, and therefore had
no claim to assign to Midwest. Midwest presented no evidence to
indicate that any of Spartech's representations led Williams to
agree to a settlement and release that he otherwise would not
have made. See LA. CIV. CODE art. 1955 ("Error induced by fraud
need not concern the cause of the obligation to vitiate consent,
but it must concern a circumstance that has substantially
influenced that consent."). Williams was represented by counsel
in the workman's compensation proceeding who vigorously pursued
his claim. Williams obviously knew there was a relationship
between Adams and Spartech because he included Spartech as a
defendant. Further, Williams' attorney could have ascertained
the nature of the Adams/Spartech relationship without
"difficulty, inconvenience, or special skill." LA. CIV. CODE
art. 1954 ("Fraud does not vitiate consent when the party against
whom the fraud was directed could have ascertained the truth
without difficulty, inconvenience, or special skill."). Six
years elapsed between the release and the assignment, and
10
Williams made no complaint about the release. Therefore, because
Williams released any claims he might have had against Spartech,
Midwest, as assignee of Williams' rights, has no claims against
Spartech. Accordingly, Midwest cannot, as assignee, attach
liability to Spartech through the piercing the corporate veil
doctrine.
B. Midwest's Claims in its Own Capacity
Midwest raises various issues on appeal regarding its claims
as third-party plaintiff against Adams and Spartech.
1. Tort Claims
Midwest asserted tort claims based on alleged intentional
and negligent misrepresentations regarding Adams qualified self-
insured status. We find that Midwest's tort claims are
prescribed. Although the district court did not rule on the
issue of prescription, this Court may decide a case on any ground
that was presented to the trial court. Breaux v. Dilsalver, 254
F.3d 533, 538 (5th Cir. 2001)(citing Dandridge v. Williams, 397
U.S. 471, 475 n. 6, 90 S. Ct. 1153, 1157 n. 6, 25 L. Ed. 491(1970)); see also Gregory v. Missouri Pacific Railroad Company,
32 F.3d 160, 164 (5th Cir. 1994)(citing cases). Under Louisiana
Civil Code article 3492, "[d]elictual actions are subject to a
liberative prescriptive period of one year." LA. CIV. CODE art.
3492. When the plaintiff's complaint on its face reveals that
prescription has run, the burden is on the plaintiff to show why
11
the claim has not prescribed. Lima v. Schmidt, 595 So.2d 624,
628 (La. 1992). Here, the face of Midwest's third-party
complaint reveals that the one-year prescriptive period on
Midwest's tort claims has run because it filed its third-party
claims against Adams and Spartech in April 1998, and the claims
relate to acts allegedly performed at the latest in 1991.
Midwest contends that the prescriptive period was suspended under
the principle of contra non valentem. Suspension of the
prescriptive period under the contra non valentem principle
occurs when "the cause of action is not known or reasonably
knowable by the plaintiff, even though his ignorance is not
induced by the defendant." Corsey v. State Dept. of Corrections,
375 So.2d 1319, 1322 (La. 1979). The Louisiana Supreme Court,
however, noted that "this principle will not except the
plaintiff's claim from the running of prescription if his
ignorance is attributable to his own willfulness or neglect; that
is, a plaintiff will be deemed to know what he could by
reasonable diligence have learned." Id.Clearly, Midwest was on inquiry notice of its claims in 1991
when Adams cancelled its insurance with Midwest because it could
not maintain its self-insured status. Further, Midwest asserts
that it was mislead as to the identity of its insured, but it is
undisputed that when Adams returned the cancellation endorsement
to Midwest in 1991, it changed the insured designation on the
12
form from "Spartech Films, A Division of Spartech, Inc." to
"Spartech Films, A Division of Adams Plastics, Inc." Midwest
could have discovered the factual basis of its claims through the
exercise of reasonable diligence much earlier than a year before
its suit was filed in 1998. See Corsey, 375 So.2d at 1322.
Further, Midwest admitted it knew of the alleged
misrepresentations when it filed its declaratory judgment action
against Williams in May 1995. Midwest's complaint alleged that
Adams misrepresented its qualified self-insured status when it
applied for insurance coverage from Midwest. See Rec. Doc. 60,
Ex. 11, Complt. at ¶ IX. Therefore, the one-year prescriptive
period had run well before Midwest filed its third-party
complaint against Adams and Spartech in April 1998 on claims
involving misrepresentations about Adams' financial status.
Accordingly, Midwest's tort claims are prescribed.
2. Contract Claims
The district court dismissed Midwest's claims regarding the
existence of insurance coverage based on issue preclusion. The
application of issue preclusion is a question of law that we
review de novo. United States v. Brackett, 113 F.3d 1396, 1398
(5th Cir. 1997). Midwest contends that the district court
improperly granted dismissal sua sponte on the coverage issue.
In Celotex Corp. v. Catrett, the Supreme Court held that district
courts "possess the power to enter summary judgments sua sponte."
13
477 U.S. 317, 326, 106 S. Ct. 2548, 2554 (1986). The power to
enter summary judgment sua sponte, however, is tempered by the
requirement to provide proper notice. Leatherman v. Tarrant
County Narcotics Intelligence and Coordination Unit, 28 F.3d
1388, 1397 (5th Cir. 1994)(citing Celotex, 477 U.S. at 326, 106
S. Ct. at 2554); Judwin Properties, Inc. v. United States Fire
Ins. Co., 973 F.2d 432, 436-37 (5th Cir. 1992)("A district court
may grant a motion for summary judgment sua sponte, provided that
it give proper notice to the adverse party.")(citations omitted);
see also Fed. R. Civ. Proc. 56(c) (requiring that summary
judgment motion be served at least 10 days before the time fixed
for the hearing). Failure to give notice may be harmless when
the nonmovant has no additional evidence or if all the
nonmovant's additional evidence is reviewed by the appellate
court and none of the evidence presents a genuine issue of
material fact." Nowlin v. Resolution Trust Corp., 33 F.3d 498,
504 (5th Cir. 1994)(quoting Leatherman, 28 F.3d at 1398). This
circuit also recognizes two instances in which the district or
appellate court can sua sponte dismiss an action on issue
preclusion grounds. Nagle v. Lee, 807 F.2d 435, 438 (5th Cir.
1987). One exception allows a court to raise the issue
preclusion defense on its own when all the relevant data and
legal records are before the court and the demands of comity,
continuity in the law, and essential justice mandate judicial
14
invocation of the principles of issue preclusion. See id. at 439
n. 2 (citing American Furniture Co. v. International
Accommodations Supply, 721 F.2d 478, 482 (5th Cir. 1981)).
Here, Adams and Spartech specifically pleaded issue
preclusion as dictated by Federal Rule of Civil Procedure 8(c) in
their first amended answer to Midwest's third-party complaint
(see Rec. Doc. 212) and in their answer to Midwest's first
amended third-party complaint (see Rec. Doc. 339). See FED. R.
CIV. P. 8(c). Further, the court asked the parties for briefs on
the preclusive effect of the declaratory judgment ruling at the
August 18, 2000 pretrial conference, and in response, the parties
briefed the preclusion issue before the court ruled on it. See
Rec. Doc. 550, 567, 580. Moreover, all of the relevant data and
legal records, such as the declaratory judgment action pleadings
and rulings (see Rec. Doc. 60), were before the district court.
Therefore, essential justice mandated judicial invocation of the
principles of issue preclusion before the commencement of the
trial. See Nagle, 807 F.2d at 439.
Midwest contends that the district court erred by applying
issue preclusion to its coverage claims because the coverage
issues were not actually litigated in the previous action. We
find no error in the district court's application of the
principle of issue preclusion. The principle of issue preclusion
bars a party from relitigating issues of fact or law that were
15
necessary to the court's judgment and actually determined in a
prior action. Sidag Aktiengesellschaft v. Smoked Foods Products
Co., Inc., 776 F.2d 1270, 1275 (5th Cir. 1985).
In Midwest's 1995 declaratory action against Williams,
Midwest challenged Williams' right to collect workers'
compensation benefits under the policy it issued to Adams. See
Midwest v. Williams, Civil Action No. 95-CV-0798 (M.D. La.
October 15, 1997), appeal denied, 161 F.3d 877 (5th Cir.
1998)(appeal denied based on untimely filing of notice of
appeal). One of the issues Midwest asserted in its complaint was
that Williams had no claim against it because the excess
insurance policy it issued to Adams was void ab initio as a
result of Adams' material misrepresentations that Adams was a
qualified self-insurer. See Rec. Doc. 60; Ex. 11, Complt. at ¶
IX. In addition, Midwest asked for a declaration that Williams'
employer was not an insured under the policy and that it had no
coverage obligation because Williams settled his claim with
Spartech. Midwest argued as it does here that since Spartech
Films was listed on the policy endorsement as a division of
Spartech, Inc., Spartech Films was Spartech. See Rec. Doc. 618,
Ex. XII, Summ. J. Memo. at 8 n. 1. Midwest moved for summary
judgment and the district court ultimately issued a ruling that
Midwest was obliged to pay Williams' claim in excess of the
$150,000 self-insured retention. Midwest raised the
16
fraud/misrepresentation issue in its pleadings on the motion.
See Rec. Doc. 618, Ex. XII, Reply Memo. at 7. The court's
ruling became final after Midwest's appeal was denied by the
Fifth Circuit as untimely. See 161 F.3d at 880. The declaratory
judgment found that Williams' employer, "Adams Plastics, Inc.,
d/b/a Spartech Films," was Midwest's insured and that it was
obliged to pay workers' compensation benefits to Williams for
injuries resulting from Williams' employment by Adams. See
Lamana v. LeBlanc, 526 So.2d 1107, 1109 (La. 1988)(res judicata
can be invoked to bar relitigation of issue presented in
pleadings and addressed or referred to in judgment). The
determination of the coverage issue was essential to the court's
final judgment against Midwest because Midwest could not have
been found to be liable to pay Williams unless the court
determined that Adams was the insured and that the underlying
excess policy between Adams and Midwest was valid. Accordingly,
the district court did not err when it ruled that the issue of
the identity of the insured and the validity of the policy were
actually litigated and necessary to the judgment. Since the
district court committed no error in finding that Spartech was
not a party to the insurance contract, it properly dismissed
Midwest's contract claims against Spartech.
Regarding Midwest's remaining contract claims against Adams,
we find that the district court erred in dismissing sua sponte
17
Midwest's claims that Adams breached its duty to use diligence
and good faith in the investigation, defense, and settlement of
Williams' claim. The district court failed to provide the
parties with notice that it planned to rule on the issue. See
Leatherman, 28 F.3d at 1397-98; Judwin Properties, 973 F.2d at
436-37. At the pretrial conference the court asked the parties
to brief the existence of any duties Spartech and Adams may have
had under the contract, but it did not specifically ask for
briefs on whether the duties were breached. See Rec. Doc. 550.
Further, the parties' earlier summary judgment motions and their
responses to the court's pretrial order merely addressed the
issue of whether Spartech had a duty under the contract.
Accordingly, the district court's ruling on Midwest's claim
against Adams for breach of contractual duties to defend and
settle claims is reversed and remanded.
3. Piercing the Corporate Veil
Midwest contends that the district court violated its due
process rights by sua sponte granting summary judgment in favor
of the nonmovants, Adams and Spartech, on the corporate identity
issue without the proper notice. In Exxon Corp. v. v. St. Paul
Fire and Marine Insurance Co., 129 F.3d 781, 786 (5th Cir. 1997),
this Court indicated that in order to achieve the goal of Federal
Rule of Civil Procedure 56, the prompt disposition of cases when
there is no genuine issue of material fact for the court to
18
consider, the district court may grant summary judgment for the
nonmovant sua sponte.
Here, Midwest brought the partial summary judgment motion on
the issue of corporate identity, so it had to have been on notice
that the district court was considering the issue. See Goldstein
v. Fidelity and Guaranty Insurance Underwriters, Inc., 86 F.3d
749, 750 (7th Cir. 1996)(affirming grant of summary judgment in
favor of nonmovant; after plaintiff filed for summary judgment
both parties on notice that summary judgment being considered).
Further, the court informed the parties at the August 18, 2000
pretrial conference that the court would consider Midwest's
motion before the trial. See Rec. Doc. 550. Accordingly, we
find that the district court did not violate Midwest's due
process rights.
Corporations function as distinct legal entities, separate
from the individuals who own them, and their shareholders are
generally not liable for the debts of the corporation. Riggins
v. Dixie Shoring Co., Inc., 590 So.2d 1164, 1167 (La. 1991); see
also LA. REV. STAT. § 12:93(B). Louisiana law holds that the
limited liability afforded corporate ownership should be
disregarded only in "exceptional circumstances." Id. at 1168
(emphasis added). Louisiana courts are reluctant to pierce the
corporate veil in the absence of fraud, malfeasance, or criminal
wrongdoing. See id. (piercing the veil is often justified to
19
prevent the use of the corporate form to defraud creditors).
Additionally, Louisiana courts are less likely to disregard the
corporate veil when the underlying claim is based on contract
rather than tort. See Riggins v. Dixie Shoring Co., Inc., 592
So.2d 1282, 1285 (La. 1992)(concurrence in denial of
rehearing)(in contract cases plaintiff chooses to rely solely on
obligation of corporation without any additional guarantees from
its shareholders).
The Louisiana Supreme Court stated in Riggins that piercing
the corporate veil usually occurs when shareholders use the
corporate form to practice fraud or deceit or when the corporate
form is so ignored that the corporation has become
indistinguishable from its shareholders:
There are limited exceptions to the rule of non-liability of
shareholders for the debts of a corporation, where the court
may ignore the corporate fiction and hold the individual
shareholders liable. Generally that is done where the
corporation is found to be simply the "alter ego" of the
shareholder. It usually involves situations where fraud or
deceit has been practiced by the shareholder acting through
the corporation. (Citations omitted). Another basis for
piercing the corporate veil is when the shareholders
disregard the requisite corporate formalities to the extent
that the corporation ceases to be distinguishable from the
shareholders. (Citations omitted).
590 So.2d at 1167.
The totality of the circumstances is determinative when a party
seeks to pierce the corporate veil. Id. The Riggins court
listed several factors that courts consider when determining
whether to apply the alter ego doctrine:
20
(1) commingling of corporate and shareholder funds; (2)
failure to follow statutory formalities for incorporating
and transacting corporate affairs; (3) undercapitalization;
(4) failure to provide separate bank accounts and
bookkeeping records; and (5) failure to hold regular
shareholder and director meetings.
Id. (citations omitted).
"The ultimate inquiry, however, requires a balance of the
policies behind the recognition of a separate corporate existence
with the policies justifying piercing." Huard v. Shreveport
Pirates, Inc., 147 F.3d 406, 409 (5th Cir. 1998)(citing Glazer v.
Commission on Ethics for Public Employees, 431 So.2d 752, 757
(La. 1983)). As the Louisiana Supreme Court stated in Glazer,
the same factual scenario may result in veil piercing in some
contexts but not in others, depending on the competing interests
and policies involved:
Depending on the various competing policies and interests
involved, the same factual scenario may result in
recognition of a separate corporate identity for some
purposes, i.e. insulation of shareholders from liability,
and a disallowance of the separate corporate entity
privilege for others. Each situation must be considered by
the court on its merits. The facts presented must
demonstrate some misuse of the corporate privilege in that
situation or the need of limiting it in order to do justice.
431 So.2d at 758 (citation omitted).
The Court finds that the district court committed no error
in dismissing Midwest's veil piercing claim because there is no
evidence that Spartech or Adams misused the corporate privilege
to the detriment of Midwest or that Spartech and Adams are
indistinguishable. Adams was properly formed with an initial
21
paid-in capital of $150,000. Adams and Spartech maintained
separate books, and Adams' day-to-day operations were handled by
Adams' general manager in Monroe. Adams' board of directors
conducted business by unanimous consents, which is permitted by
Louisiana law. Further, that Adams' board of directors
overlapped with Spartech's board and that it was located in St.
Louis, where Spartech's corporate offices were located, do not
present genuine issues of fact as to whether Spartech controlled
Adams. There is no evidence that anyone other than Adams' board
members made decisions for Adams, such as approving the annual
business plans formulated by Adams' general manager in Monroe.
Midwest argues that the corporate veil should be pierced
because Adams and Spartech misused the corporate form in
procuring insurance from Midwest so that Midwest issued its
policy in ignorance of Adams' financial problems. Midwest, is an
excess insurer, however, which in no event would be liable for
Adams' self-insured retention, regardless of Adams' financial
condition. Midwest's policy does not specify that the insolvency
of the insured is a breach of contract or that it voids the
policy. Indeed, Midwest agreed that Adams' insolvency would not
terminate the policy. The Midwest policy provides:
Bankruptcy or insolvency of the Insured will not relieve the
Insurer of its duties and liabilities under this policy.
After the Insured's retention has been reached, payments due
under this policy will be made by the Insurer as if the
Insured had not become bankrupt or insolvent, but not in
excess of the Insurer's limit of indemnity.
22
Appellant's Rec. Excerpts 13; Midwest Excess Ins.
Policy at Part Seven(K).
Adams was obliged to pay premiums to Midwest for the coverage
issued under the policy, and there is no evidence that Adams
failed to pay its premiums before it terminated the policy.3
Midwest issued the insurance policy to Adams as a qualified self-
insured, which it was at the time the policy was issued in May
1989. Also, Adams' failure to maintain its qualification as a
self-insurer did not increase Midwest's obligation under its
contract because the policy provided that such an event would not
result in Midwest's having to pay the self-insured retention.
The policy states:
If the Insured should terminate such qualifications or if
qualification of the Insured as a self-insurer is cancelled
or revoked while this policy is in force, the amounts
payable under this policy will not exceed the amounts which
would have been payable if such qualifications had been
maintained in full force and effect.
Id. at General Section E, "Qualified Self-Insurer."
The district court confirmed that Midwest had no obligation to
pay the amount of Adams' self-insured retention to Williams. See
Rec. Doc. 609, Memorandum Ruling at 6-7.
Further, because piercing the corporate veil is essentially
an equitable remedy, the district court was correct to take into
account Midwest's conduct with regard to Adams. See Brown v.
3
Adams paid premiums totaling $21,869 for the May 1989 - May
1990 period and $27,022 for the May 1990 - May 1991 period. See
Apellant's Rec. Excerpt 13.
23
Benton Creosoting Co., Inc., 147 So.2d 89, 94 (La. Ct. App.
1962)(piercing the corporate veil especially appropriate when
court is exercising equitable powers)(quoting Mayo v. Pioneer
Bank & Trust Company, 274 F.2d 320, 321 (5th Cir. 1960)); see
also See Watson v. Big T Timber Co., Inc., 382 So.2d 258, 262
(La. Ct. App. 1980); Giuffria Realty Co., Inc. v. Kathman-Landry,
Inc., 173 So.2d 329, 334 (La. Ct. App. 1965)(corporate veil
should be pierced when adherence to the corporate fiction would
clearly result in inequity). Midwest did no underwriting of its
own and did not request financial information from Adams beyond
the limited information Northern, the insurance broker, provided
in the short-form application. Moreover, Northern testified that
financial information on the insured was generally not important
to an excess insurer because its only liability was for amounts
above the self-insured retention.
Further, the evidence in the record demonstrates that
Midwest was notified of Williams' claim in September 1991. A
letter from Adams' third-party administrator, F.A. Associates,
who had investigated the claim, indicated that Williams' workers'
compensation claim had the potential to create heavy exposure and
that Adams could not continue to pay Williams. See Rec. Doc.
522, Ex. 2. Adams terminated its policy with Midwest at about
the same time because it could not maintain self-insured status.
It was not until three years later, during which period Midwest
24
took no action, that Williams took a judgment against Adams
declaring him to be permanently and totally disabled and entitled
to weekly benefits indefinitely. Further, although Midwest was
given notice of the motion to accelerate benefits, it did nothing
to defend it. Indeed, Midwest admitted that its settled policy
was to do nothing to aid in or handle the defense of claims
against its insured regardless of whether the insured was
insolvent and unable to put on a defense. See Rec. Doc. 218, Ex.
9; Deposition of Matthew Jerabek at 48-51, 74-75. Therefore,
considering the record before the district court, we find that it
did not err when it granted summary judgment against Midwest on
the piercing corporate veil issue.
III. Conclusion
In light of the foregoing analysis, we AFFIRM all of the
rulings of the district court, except for its order granting
summary judgment against Midwest on the issue of whether Adams
breached the insurance contract by failing to defend and settle
Williams' claim. We REVERSE and REMAND that issue alone to the
district court.
25