SE TX Inns Inc v. May-Ridge, L.P.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 06a0327p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
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Plaintiff-Appellant, -
SOUTHEAST TEXAS INNS, INC.,
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No. 05-5892
v.
,
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PRIME HOSPITALITY CORPORATION, -
Defendant-Appellee. -
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Appeal from the United States District Court
for the Middle District of Tennessee at Nashville.
Nos. 04-00347; 03-00635—William J. Haynes, Jr., District Judge.
Argued: March 6, 2006
Decided and Filed: August 30, 2006
Before: SUTTON and GRIFFIN, Circuit Judges; OBERDORFER, District Judge.*
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COUNSEL
ARGUED: Eugene N. Bulso, Jr., BOULT, CUMMINGS, CONNERS & BERRY, Nashville,
Tennessee, for Appellant. Garry K. Grooms, STITES & HARBISON, Nashville, Tennessee, for
Appellee. ON BRIEF: Eugene N. Bulso, Jr., Melissa Ballengee Alexander, BOULT,
CUMMINGS, CONNERS & BERRY, Nashville, Tennessee, for Appellant. Garry K. Grooms,
Stephen H. Price, STITES & HARBISON, Nashville, Tennessee, for Appellee.
GRIFFIN, J., delivered the opinion of the court, in which SUTTON, J., joined.
OBERDORFER, J. (pp. 15-16), delivered a separate dubitante.
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OPINION
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GRIFFIN, Circuit Judge. This cause of action arises from the breach of a lease agreement
executed between plaintiff-appellant Southeast Texas Inns, Inc. (“Southeast”), a Tennessee
corporation, and May-Ridge, L.P. (“May-Ridge”), a Delaware limited partnership and subsidiary
*
The Honorable Louis F. Oberdorfer, United States District Judge for the District of Columbia, sitting by
designation.
1
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 2
of defendant-appellee Prime Hospitality Corporation (“Prime”).1 Southeast sued Prime, the alleged
alter ego of May-Ridge, seeking to pierce May-Ridge’s corporate veil in order to hold Prime liable
for May-Ridge’s breach of contract. The district court granted Prime’s motion to dismiss pursuant
to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be
granted. Southeast now timely appeals the order of dismissal. We affirm.
I.
On July 9, 2000, Southeast and May-Ridge executed an eleven-year lease agreement (“the
Lease”), whereby May-Ridge agreed to rent and operate three Southeast-owned AmeriSuites hotels
located in Texas from July 9, 2000, until June 20, 2011.2 Under the pertinent terms of the Lease,
May-Ridge was to pay $242,687 per month as “Minimum Rent,” along with “Additional Rent,” if
applicable, “with respect to each Property with respect to each Lease Year beginning with the 2001
Lease Year, in an amount, not less than zero, equal to eight percent (8%) of Excess Total Hotel Sales
for such Property.” In addition, the parties agreed that May-Ridge’s obligations under the Lease
were to be secured3by, inter alia, certain “Retained Funds” held by Southeast, as well as the hotels’
personal property. Pursuant to § 21.6 of the Lease, May-Ridge was to maintain a minimum net
worth “in an amount at least equal to the aggregate of one year’s Minimum Rent payable pursuant
to this Agreement; it being expressly understood and agreed that the right to receive the Retained
Funds, if assigned to Tenant, may for such purpose be counted as equity at the full amount thereof.”
Section 3.5 of the Lease further provides that Southeast shall hold the Retained Funds as security
for performance by May-Ridge of the terms of the Lease and, in the event of default, Southeast may
apply the entire amount of the Retained Funds as may be necessary to compensate Southeast toward
the payment of rent or other damages sustained due to such breach by May-Ridge.
The Lease, at § 22.16, also contains a “nonrecourse” provision, which provides that
“[n]othing contained in this Agreement shall be construed to impose any liabilities or obligations
on Tenant’s general partners, limited partners, agents or employees (or any shareholders, officers,
directors, agents or employees of any of the foregoing) for the performance of the obligations of
Landlord or Tenant hereunder.” Although Prime signed the Lease, its signature served only to
“acknowledge[] and agree[] to be bound by the provisions of Section 22.11 [the trade area
restriction] of the foregoing Lease Agreement,” and neither Prime nor any company affiliated with
Prime signed a guaranty of the Lease. In fact, although the original purchase agreement expressly
contemplated that Prime would provide a limited guaranty of the Lease equal to one year’s base rent,
the parties intentionally struck and deleted this “Prime Guaranty” provision when the amended
1
Prime is a publicly-traded company that owns, franchises, operates and manages hotels across the country.
Prime is the franchisor of AmeriSuites and Wellesley Inn & Suites hotel chains. In May 2000, Ridgewood Holding
Corporation (“Ridgewood”), a Delaware corporation and wholly owned subsidiary of Prime, and another Prime entity,
Maywood Holding Corporation, formed May-Ridge as a Delaware limited partnership with its principal place of business
in New Jersey.
2
The Lease had its genesis in a Sales and Purchase Agreement (“original purchase agreement”) dated May 16,
2000, entered into between Prime and Southeast’s parent company, ShoLodge, Inc. The original purchase agreement
was amended by agreement on July 9, 2000 (“amended purchase agreement”), the same date the lease was consummated.
3
Section 1.81 of the Lease provides that “‘Retained Funds” means approximately $3.1 million, an amount in
excess of the minimum annual rent due under the Lease of about $2.9 million.
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 3
purchase agreement was executed.4 Finally, § 22.14 of the Lease provides that Tennessee law
governs its interpretation, construction, application, and enforcement.
Both parties abided by the terms of the Lease until March 2003, when Douglas Vicari,
Prime’s chief financial officer and the president of May-Ridge, allegedly advised John Buttolph,
president of Southeast, that May-Ridge planned to “walk away” from5 the Lease for economic
reasons and that the March 2003 rent payment would be its last payment. When May-Ridge failed
to pay rent for the month of April, Southeast terminated the Lease effective April 4, 2003. Southeast
alleges that, as a result of May-Ridge’s breach, it lost over $20 million in gross “Minimum Rent”
for the eight-year remainder of the Lease term and that it is owed nearly $10 million in liquidated
damages.
The present case is an appeal from one of two cases that were consolidated in the district
court. In June 2003, Southeast instituted an action (Case No. 3:03-CV-0635) against May-Ridge,6
Ridgewood, and Prime to recover damages caused by May-Ridge’s alleged breach of the Lease.
Southeast alleged that May-Ridge operated as a mere “alter ego” of Prime and Ridgewood and that
the latter two defendants were thus legally responsible for May-Ridge’s breach. Prime and
Ridgewood responded by moving to dismiss pursuant to FED. R. CIV. P. 12(b)(6). Thereafter, in
accordance with an Agreed Order, Southeast dismissed without prejudice its claims against Prime
and Ridgewood, with leave to amend the pleadings after a designated six-month period of discovery.
Rather than amending its pleadings after the discovery period, Southeast commenced the present,
separate lawsuit against Prime (Case No. 3:04-CV-0347) on essentially the same grounds, alleging
that Prime actually directed and controlled the operation of the Texas hotels and that May-Ridge,
now insolvent, is merely the alter-ego of Prime. Southeast advances numerous allegations
purportedly entitling it to pierce May-Ridge’s corporate veil and hold Prime liable for7 damages
incurred as a result of its subsidiary’s breach. The district court consolidated the cases.
Prime promptly filed a Rule 12(b)(6) motion to dismiss in the instant case, contending that
Southeast’s allegations of undercapitalization or lack of corporate formalities do not rise to the level
of fraud or something like fraud necessary to warrant the extreme measure of piercing May-Ridge’s
corporate veil.
4
The amended purchase agreement, which was executed contemporaneously with the Lease, is frequently
referenced in the Lease (see §§ 1.65, 1.78, 3.5) attached as an exhibit to Southeast’s complaint. Because it bears directly
on Southeast’s claims, the amended purchase agreement, in addition to the Lease, may be considered by this court in
reviewing the propriety of the order granting Prime’s motion to dismiss. See Jackson v. City of Columbus, 194 F.3d 737,
745 (6th Cir. 1999) (“[d]ocuments attached to a motion to dismiss are considered part of the pleadings if they are referred
to in the plaintiff’s complaint and are central to the plaintiff’s claim.”), overruled on other grounds by Swierkiewicz v.
Sorema N.A., 534 U.S. 506 (2002).
5
As Southeast acknowledges in Paragraph 14 of its complaint, in the wake of the events of September 11, 2001,
“[t]he revenues which the Hotels generated in 2001 and 2002 did not reach the levels which Prime had projected at the
time the Lease was executed. From July 9, 2000, to the end of calendar year 2002, Prime lost approximately $3.5 million
in the operation of the Hotels.”
6
The action was initiated in the Chancery Court for Sumner County, Tennessee, and timely removed by May-
Ridge to federal court under 28 U.S.C. § 1332, the federal diversity statute.
7
Ultimately, in Case No. 3:03-CV-0635, the district court entered summary judgment in favor of Southeast with
respect to the contract claim against May-Ridge. Southeast and May-Ridge thereafter entered into an Agreed Final
Judgment in favor of plaintiff against May-Ridge in the amount of $7.25 million. No appeal has been taken from Case
No. 3-03-CV-0635.
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 4
On January 7, 2005, the district court issued an opinion and order granting Prime’s motion
to dismiss. The district court concluded that Southeast’s complaint failed to allege facts sufficient
to state a claim against Prime that would warrant piercing May-Ridge’s corporate veil. Specifically,
the court held that, although Southeast adequately alleged that Prime exerted complete dominion and
control over May-Ridge and Ridgewood, the complaint failed to allege circumstances evincing a
fraud or similar injustice, a requisite element of an alter-ego claim under Delaware law. The court
thus dismissed all claims against Prime. The district court subsequently denied Southeast’s motion
to alter or amend the judgment. Southeast timely appeals the judgment in favor of Prime.
II.
Southeast appeals from an order entered under FED. R. CIV. P. 12(b)(6), which authorizes the
dismissal of any complaint that fails “to state a claim upon which relief can be granted.” This court
reviews the district court’s dismissal of a complaint under Rule 12(b)(6) de novo. Arrow v. Fed.
Reserve Bank of St. Louis, 358 F.3d 392, 393 (6th Cir. 2004). In order to survive a 12(b)(6) motion,
the plaintiff’s complaint must allege facts which, if proved, would entitle the plaintiff to relief.
Conley v. Gibson, 355 U.S. 41, 45-46 (1957). In reviewing a 12(b)(6) motion, this court “must
construe the complaint in a light most favorable to the plaintiff, accept all of the factual allegations
as true and determine whether the plaintiff can prove no set of facts in support of his claims that
would entitle him to relief.” Arrow, 358 F.3d at 393 (citations omitted). “Although this is a liberal
pleading standard, it requires more than the bare assertion of legal conclusions. Rather, the
complaint must contain either direct or inferential allegations respecting all the material elements
to sustain a recovery under some viable legal theory.” NHL Players Ass’n v. Plymouth Whalers
Hockey Club, 419 F.3d 462, 468 (6th Cir. 2005) (citation omitted).
Moreover, in any complaint averring fraud or mistake, “the circumstances constituting fraud
or mistake shall be stated with particularity.” FED. R. CIV. P. 9(b). See Yuhasz v. Brush Wellman,
Inc., 341 F.3d 559, 563 (6th Cir. 2003) (citing FED R. CIV. P. 9(b)). “When a cause of action seeks
to pierce the corporate veil on the basis of fraud, it is subject to FED. R. CIV. P. 9(b).” Bd. of
Trustees of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 173 n.10 (3d Cir.
2002) (citation omitted).
III.
A threshold issue is whether Tennessee or Delaware law applies in determining if
Southeast’s complaint states a cognizable claim to pierce the corporate veil of May-Ridge. In
assessing Prime’s motion to dismiss, the district court held that issues pertaining to the Lease and
its construction, application, and enforcement were governed by Tennessee law in accordance with
the choice-of-law rules of the forum state8 and the express choice-of-law provision contained in
8
Tennessee adheres to the rule of lex loci contractus – “a contract is presumed to be governed by the law of
the jurisdiction in which it was executed absent a contrary intent.” Vantage Tech., LLC v. Cross, 17 S.W.3d 637, 650
(Tenn. Ct. App. 1999) (citing Ohio Cas. Ins. Co. v. Travelers Indem. Co., 493 S.W.2d 465, 467 (Tenn. 1973)). “If the
parties manifest an intent to instead apply the laws of another jurisdiction, then that intent will be honored provided
certain requirements are met.” Id. (citing Goodwin Bros. Leasing, Inc. v. H & B, Inc., 597 S.W.2d 303, 306 (Tenn.
1980). The choice-of-law provision must be executed in good faith, the chosen jurisdiction must bear a material
connection to the transaction, the basis for the choice of jurisdiction must be reasonable and not a sham, and, finally, the
choice of the jurisdiction must not be contrary to the fundamental policy of a state having a materially greater interest
and whose law would otherwise govern. Id.; Thomas v. Lytle, 104 F. Supp. 2d 906, 926-27 (M.D. Tenn. 2000), aff’d,
52 F. App’x 671 (6th Cir. 2002).
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 5
§ 22.14 of the Lease.9 See generally The Andersons, Inc. v. Consol, Inc., 348 F.3d 496, 501 (6th Cir.
2003) (noting that, in diversity cases, a district court should apply the choice-of-law provisions of
the forum state).
But the district court, citing the “internal affairs” doctrine recognized by the Tennessee
courts,10 applied the law of Delaware, where May-Ridge was formed and incorporated, for the
limited purpose of determining whether the allegations in Southeast’s complaint sufficiently
provided justification to disregard the separate corporate entities of Prime and its subsidiary, May-
Ridge, and to pierce May-Ridge’s corporate veil. Southeast now challenges the court’s decision to
apply Delaware law to its alter ego claim.
According to Southeast, the choice-of-law provision contained in § 22.14 of the Lease cannot
be disregarded when it was made in good faith and the state chosen (Tennessee) bears some
reasonable relationship to the transaction. Goodwin, 597 S.W.2d at 306. Plaintiff further disputes
the district court’s application of the internal affairs doctrine as justification for applying Delaware
substantive law to the issue of piercing the corporate veil. Underlying Southeast’s argument that
Tennessee, not Delaware, law should apply is its strenuous insistence that Tennessee does not
require a plaintiff to prove actual fraud in order to pierce the corporate veil. Citing Talkington v.
Anchor Gasoline, Inc., 829 F. Supp. 505, 514 (M.D. Tenn. 1993); Stigall v. Wickes Mach., 801
S.W.2d 507, 511 (Tenn. 1990); Continental Bankers Life Ins. Co. of the South v. The Bank of Alamo,
578 S.W.2d 625, 632 (Tenn. 1979); and Boles v. Nat’l. Dev. Co., Inc., 175 S.W.3d 226, 236 (Tenn.
Ct. App. 2005), app. denied (Tenn. 2005), for the proposition that fraud is but one of several
acceptable avenues of recovery in an alter ego action, Southeast maintains that its allegations that
Prime exercised complete dominion over May-Ridge and used its control to perpetrate violations
of certain “positive legal duties”11 suffices to state a claim to pierce the corporate veil under
Tennessee law.
We initially note that Southeast’s argument that fraud is not a required element of an action
to pierce the corporate veil under Tennessee law has already been considered and rejected by this
court in IBC Mfg. Co. v. Velsicol Chem. Corp., No. 97-5340, 187 F.3d 635, 1999 WL 486615 (6th
Cir. July 1, 1999), in which we surveyed Tennessee’s case law on this issue (including the principal
cases on which Southeast now relies) and concluded that “Tennessee law still requires an element
of fraud in order to pierce a corporate veil.” IBC Mfg., 1999 WL 486615 at *4 (emphasis added).12
9
Section 22.14 of the Lease provides that it “shall be interpreted, construed, applied and enforced in accordance
with the laws of the State of Tennessee applicable to contracts between residents of Tennessee which are to be performed
entirely within Tennessee . . . .”
10
“Tennessee has long adhered to the ‘internal affairs’ doctrine, under which matters involving the internal
affairs of a foreign corporation are deemed substantive in nature and ‘should be resolved in accordance with the law of
the state of incorporation.’” Hicks v. Lewis, 148 S.W.3d 80, 84 (Tenn. Ct. App. 2003), app. denied (Tenn. Apr. 5, 2004).
See also Thomas, 104 F. Supp. 2d at 927; Amberjack Ltd. v. Thompson, No. 02A01-9512-CV-00281, 1997 WL 613676,
at *8-9 (Tenn. Ct. App. Oct. 7, 1997).
11
Southeast cites Prime’s alleged breach of § 21.6 of the Lease and breach of the fiduciary duties which
Douglas Vicari and Richard Szymanski (a director and corporate officer of Ridgewood) owed to May-Ridge and
Ridgewood as violations of “positive legal duties.”
12
In IBC Mfg., we noted that the first Tennessee case to consider the subject of piercing the corporate veil,
Neese v. Fireman’s Fund Ins. Co., 386 S.W.2d 918 (Tenn. Ct. App. 1964), did not require proof of fraud. However, we
further noted:
In a subsequent case, the Tennessee Supreme Court disregarded Neese and declared that three
elements must be proved to permit a subsidiary’s veil to be pierced:
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 6
See also Thomas, 104 F. Supp. 2d at 928 (favorably citing IBC Mfg. for the proposition that fraud
is a requisite element of a claim to pierce the corporate veil under Tennessee law).
Moreover, insofar as the parties debate whether Southeast must show “actual fraud” or
“fraud per se,” this is largely a matter of semantics under the circumstances, and underscores that
the choice-of-law issue is not pivotal, given that under both Delaware and Tennessee law, “fraud
or similar injustice” must be demonstrated in order to pierce the corporate veil. See, e.g., Mobil Oil
Corp. v. Linear Films, Inc., 718 F. Supp. 260, 268 (D. Del. 1989) (“[f]raud or something like it is
required” under Delaware law to sustain an alter ego claim), and cases cited therein; LaSalle Nat’l
Bank v. Perelman, 82 F. Supp. 2d 279, 295 (D. Del. 2000) (“In order to prevail on a claim to pierce
the corporate veil . . . a plaintiff must prove that the corporate form causes fraud or similar
injustice.”); In re Foxmeyer Corp., 290 B.R. 229, 236 (D. Del. 2003) (quoting Mobil Oil Corp., 718
F. Supp. at 268, for the proposition that fraud or something akin to it is required), and cases cited
therein; Outokumpu Eng’g Enters., Inc. v. Kvaerner EnviroPower, Inc., 685 A.2d 724, 729 (Del.
Super. Ct. 1996) (“[T]he alter ego theory requires that the corporate structure cause fraud or similar
injustice[;]” thus, “[m]ere dominion and control of the parent over the subsidiary [alone] will not
support alter ego liability.”); Wallace v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999) (“Piercing the
corporate veil under the alter ego theory requires that the corporate structure cause fraud or similar
injustice. Effectively, the corporation must be a sham and exist for no other purpose than as a
vehicle for fraud.”) (footnote and internal quotations omitted)). Accord Continental Bankers, 578
S.W.2d at 632 (the control of the parent corporation over the subsidiary “must have been used to
commit a fraud or wrong[.]”); Elec. Power Bd. of Chattanooga v. St. Joseph Valley Structural Steel
Corp., 691 S.W.2d 522, 526 (Tenn. 1985) (quoting the Continental Bankers test); Tenn. Racquetball
Investors, Ltd. v. Bell, 709 S.W.2d 617, 622 (Tenn. Ct. App. 1986) (citing Continental Bankers and
noting that under an alter ego theory of liability, “mere dominance, standing alone, does not render
“(1) The parent corporation, at the time of the transaction complained of, exercises complete
dominion over its subsidiary, not only of finances, but of policy and business practice in respect to the
transaction under attack, so that the corporate entity, as to that transaction, had no separate mind, will
or existence of its own.
(2) Such control must have been used to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or a dishonest and unjust act in contravention of third parties’
rights.
(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.”
See Continental Bankers Life Ins. Co. v. Bank of Alamo, 578 S.W.2d 625, 632 (Tenn. 1979) (emphasis
added).
Several cases decided after Continental Bankers included an element of fraud in the piercing the
corporate veil test. See Schlater v. Haynie, 833 S.W.2d 919, 926 (Tenn. Ct. App. 1991); Anderson
v. Durbin, 740 S.W.2d 417, 418 (Tenn. Ct. App. 1987); Electric Power Bd. of Chattanooga v. St.
Joseph Valley Structural Steel Corp., 691 S.W.2d 522, 526 (Tenn. 1985).
In one abtrusely reasoned, post Continental Bankers case, the Tennessee Supreme Court applied Neese
instead of Continental Bankers, see Stigall v. Wickes Mach., 801 S.W.2d 507, 510-11 (Tenn. 1990).
The Stigall court did not specifically renounce Continental Bankers, nor did it state that fraud was not
a requirement for veil piercing because the element of fraud was not in dispute in the case. See id.
Accordingly, we believe that Tennessee law still requires an element of fraud in order to pierce a
corporate veil.
IBC Mfg., 1999 WL 486615 at *4.
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 7
[a corporate director] liable for 13the corporate debts”; “[u]se of control to commit fraud or wrong”
is also required to fix liability).
“[T]he requisite injustice or unfairness . . . is also not simple in nature but rather something
that is similar in nature to fraud or a sham.” In re Foxmeyer, 290 B.R. at 236. As succinctly
explained by the federal district court, applying Delaware law in Mobil Oil:
Any breach of contract and any tort . . . is, in some sense, an injustice. Obviously
this type of “injustice” is not what is contemplated by the common law rule that
piercing the corporate veil is appropriate only upon a showing of fraud or something
like fraud. The underlying cause of action does not supply the necessary fraud or
injustice. To hold otherwise would render the fraud or injustice element
meaningless, and would sanction bootstrapping.
The law requires that fraud or injustice be found in the defendants’ use of the
corporate form.
718 F. Supp. at 268-69 (emphasis added). See also Medi-Tec of Egypt Corp. v. Bausch & Lomb
Surgical, No. Civ. A. 19760-NC, 2004 WL 415251, at *4 n.30 (Del. Ch. Mar. 4, 2004) (quoting
Mobil Oil, 718 F. Supp. at 268). “The ‘injustice’ must be more than the breach of contract alleged
in the complaint . . . or even the burden of bringing the action in another forum.” Outokumpu Eng’g
Enters., 685 A.2d at 729 (citing Mobil Oil, 718 F. Supp. at 268).
With regard to an alter ego claim under Tennessee law, this court has similarly explained,
[W]e understand [the corporate veil theory] to apply primarily to prevent fraud or
other tortious wrongdoing. Plaintiffs have made no allegations of fraud in this case.
We do not believe this theory should be expanded to relieve creditors of contractual
obligations and limitations of which they were fully aware at the time they entered
into a contract.
Foster Wheeler Energy Corp. v. Metro. Knox Solid Waste Auth., Inc., 970 F.2d 199, 203 (6th Cir.
1992) (internal citations omitted).
In both Tennessee and Delaware, “[t]he principle of piercing the fiction of the corporate veil
is to be applied with great caution and not precipitately, since there is a presumption of corporate
regularity,” Schlater v. Haynie, 833 S.W.2d 919, 925 (Tenn. Ct. App. 1991) (citing 18 Am. Jur. 2d
Corporations, § 43, p. 842, nn. 79, 80, 81), and “[t]he party wishing to pierce the corporate veil has
the burden of presenting facts demonstrating that it is entitled to this equitable relief.” Oceanics
Schools, Inc. v. Barbour, 112 S.W.3d 135, 140 (Tenn. Ct. App. 2003) (citing Schlater, 833 S.W.2d
at 925). Accord Wallace, 752 A.2d at 1183 (“Persuading a Delaware court to disregard the corporate
entity is a difficult task.”) (quoting Harco Nat’l Ins. Co. v. Green Farms, Inc., No. Civ. A. 1131,
1989 WL 110537, at *6 (Del. Ch. Sept. 19, 1989)).
13
In Boles, cited as supporting authority by Southeast, the Tennessee Court of Appeals recently commented
that “Tennessee’s burden of proof [for an alter ego claim], though substantial, does not require proof of actual fraud.”
175 S.W.3d at 236 n.1. We note, however that this brief comment on the topic was made in a footnote with no citation
to authority and thus, without further explanation, cannot be interpreted as a variance from the Tennessee precedent
which requires proof of fraud or some equivalent wrong.
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 8
Beside the indispensable elements of complete dominion and control14 and the sanction of
fraud or injustice by the corporate form, the courts of Tennessee and Delaware also consider certain
common, non-exclusive factors in determining whether to disregard the corporate veil. The
Delaware courts, for instance, verify exclusivity of control by examining
whether the corporation was adequately capitalized for the corporate undertaking;
whether the corporation was solvent; whether dividends were paid, corporate records
kept, officers and directors functioned properly, and other corporate formalities were
observed; whether the dominant shareholder siphoned corporate funds; and whether,
in general, the corporation simply functioned as a facade for the dominant
shareholder.
In re Foxmeyer Corp., 290 B.R. at 235 (quoting Harco, 1989 WL 110537 at *4).
The Tennessee courts gauge the necessity of piercing the corporate veil by using comparable
factors:
(1) whether there was a failure to collect paid in capital; (2) whether the corporation
was grossly undercapitalized; (3) the nonissuance of stock certificates; (4) the sole
ownership of stock by one individual; (5) the use of the same office or business
location; (6) the employment of the same employees or attorneys; (7) the use of the
corporation as an instrumentality or business conduit for an individual or another
corporation; (8) the diversion of corporate assets by or to a stockholder or other
entity to the detriment of creditors, or the manipulation of assets and liabilities in
another; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the
formation and use of the corporation to transfer to it the existing liability of another
person or entity; and (11) the failure to maintain arms length relationships among
related entities.
Oceanics Schools, 112 S.W.3d at 140 (quoting FDIC v. Allen, 584 F. Supp. 386, 397 (E.D. Tenn.
1984)) (internal citations omitted). “It is not necessary that all of these factors weigh in a plaintiff’s
favor in order to justify the piercing of the corporate veil.” Oceanic Schools, 112 S.W.3d at 140-41
(citation omitted).
Simply put, given the striking parallels between Delaware and Tennessee law pertaining to
the issue of piercing the corporate veil, the choice-of-law question is not outcome-determinative in
this case.15 Under the law of either state, Southeast must sufficiently allege that May-Ridge’s
corporate form was used to sanction a “fraud or similar injustice” in order to survive Prime’s
12(b)(6) motion to dismiss.
14
Under Delaware law, to hold a parent corporation liable for the actions of a subsidiary pursuant to the alter
ego doctrine, a plaintiff must demonstrate that the parent corporation exercises “exclusive domination and control” to
the point that the subsidiary “no longer ha[s] legal or independent significance of [its] own.” Wallace, 752 A.2d at 1184
(internal citation and quotation marks omitted). Accord Continental Bankers, 578 S.W.2d at 632 (“The parent
corporation . . . exercises complete dominion and control over its subsidiary, not only of finances, but of policy and
business practice . . . so that the corporate entity, as to that transaction, had no separate mind, will or existence of its
own.”).
15
The district court, using Delaware law as the basis for its analysis of Southeast’s alter ego claim, likewise
recognized that “Tennessee law would have compelled a similar result.”
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 9
IV.
Southeast sets forth numerous allegations ostensibly showing that May-Ridge and Prime
acted as a single economic entity and May-Ridge was in fact merely the alter ego of Prime.
Southeast avers that “[a]lthough May-Ridge executed the Lease and was nominally the lessee of the
Hotels, Prime actually directed and controlled the operation of the Hotels.” Comp. ¶ 9. In this
regard, Southeast alleges that: the hotels were operated exclusively by employees of Prime, who
provided all management, front desk, maintenance, housekeeping, reservations, human resources,
and other services necessary to operate the hotels; Prime provided all such services on its own
behalf, not pursuant to any management or other agreement with May-Ridge, and without any
franchise agreement pertaining to the AmeriSuites hotel chain; Prime bore all the risk of loss
associated with the operation of the hotels and stood to benefit from any profits generated by the
hotels; from July 9, 2000, through the termination of the lease, Prime purportedly received all
revenues generated by the hotels; and, on a weekly basis, Prime “swept” all cash generated by the
hotels from the local bank accounts maintained by the hotels and deposited all such funds into
Prime’s central bank account in New Jersey. Comp. ¶¶ 10, 13.
Southeast further alleges that Prime bypassed the legal operational structure of the hotels by
never providing May-Ridge with any capital and by directly paying all of the hotels’ vendors and
services. Comp. ¶ 11. According to Southeast, “Prime so controlled the finances of May-Ridge that
it was actually Prime’s tax department which determined whether and to what extent May-Ridge
was to pay a franchising fee to Prime in connection with the three AmeriSuites hotels involved in
this case.” Comp. ¶ 22. In total, Prime allegedly spent $4.2 million in excess of the hotels’ revenues
to operate the hotels, a sum which was neither a loan to May-Ridge nor an equity contribution.
Comp. ¶ 12.
In addition, Southeast avers that Prime’s CEO, Attilio Petrocelli, was the person who had
the authority to make, and in fact made, all significant decisions on behalf of May-Ridge, including
decisions regarding May-Ridge’s compliance with the Lease terms, even though he was not an
officer or director of May-Ridge. Comp. ¶ 9. Southeast alleges that the decision to default on the
Lease was made by Petrocelli, who was advised by Ridgewood’s officers, Vicari and Szymanski,
to “walk away” from the Lease, even though the latter two individuals did not have the authority to
order default or to turn the hotels over to Southeast and testified that they considered only what was
in the best interests of Prime. Comp. ¶ 17.
In addition, Southeast alleges that May-Ridge has been rendered insolvent as a result of the
default under the Lease and has no assets with which to satisfy its legal obligations to Southeast.
Comp. ¶¶ 19, 23. Southeast contends that such insolvency is a direct result of Prime’s use of its
control of May-Ridge to inadequately capitalize the subsidiary. Comp. ¶¶ 7, 19. Southeast
maintains that Prime knew when it established May-Ridge that May-Ridge was going to operate at
a loss for a substantial period of time and that it did not have sufficient available assets to meet its
projected operating expenses. Comp. ¶ 20. Prime allegedly failed to maintain May-Ridge’s net
worth equal to one year’s base rent in accordance with § 21.6 of the Lease. Comp. ¶ 21.
Finally, with regard to the corporate structure of May-Ridge, Southeast alleges that Prime
“set up May-Ridge for the sole purpose of limiting its liability under the Lease.” Comp. ¶ 25.
Southeast avers that there were neither May-Ridge partnership meetings nor Ridgewood board
meetings. Comp. ¶24. Prime allegedly exercised “plenary control” over May-Ridge and Ridgewood
and used this control: to cause the officers and directors of Ridgewood to violate their duties of
loyalty to these entities; to cause May-Ridge to default under the Lease; and to cause May-Ridge
and Ridgewood to have inadequate capital with which to finance May-Ridge’s foreseeable operating
expenses, to the extent that “[n]either May-Ridge nor Ridgewood had any mind or will of its own.”
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 10
Comp. ¶¶ 24-26. Southeast concludes that “[t]o adhere to the fiction of May-Ridge’s separate
corporate existence would promote injustice.” Comp. ¶ 27.
V.
Reviewing these allegations, we agree with the district court that Southeast has stated
sufficient facts that, if true, establish the dominion/control component of a claim to pierce the
corporate veil. Wallace, 752 A.2d at 1184; Continental Bankers, 578 S.W.2d at 632. Southeast
avers with detail that corporate formalities were ignored in various ways, Prime directed day-to-day
operations of the hotels and provided all employees and services, Prime financed the operations of
the three hotels during the lease period and received and retained all revenues from the hotels,
Prime’s CEO made all significant decisions on behalf of May-Ridge, and Prime bypassed the legal
structure set up to operate the hotels.
However, as previously noted, “[m]ere dominion and control of the parent over the
subsidiary will not [alone] support alter ego liability.” Outokumpu, 685 A.2d at 730. See also
Continental Bankers, 578 S.W.2d at 631 (“to disregard the corporate entities requires, in the case
of parent and subsidiary, more than a showing that they have similar corporate names and locations
and the exercise of dominion through common officers and directors.”). Likewise, Southeast’s
allegations that appropriate corporate formalities were not observed by Prime and May-Ridge
“standing alone are insufficient for the alter ego theory to operate to pierce the corporate veil.”
Mobil Oil, 718 F. Supp. at 267.
Southeast nonetheless argues that two alleged violations of “positive legal duties” by Prime
supply the requisite “fraud or injustice” necessary to complete its alter ego claim: (1) Prime’s failure
to provide adequate capital to finance May-Ridge as required by § 21.6 of the Lease (Comp. ¶ 21),
and (2) Prime’s use of its dominion and “plenary control” over May-Ridge and Ridgewood to “cause
the officers and directors of Ridgewood to violate their duties of loyalty to these entities.” Comp.
¶ 26. In this latter regard, Southeast asserts, in pertinent part, that:
17. The decision to default under the terms of the Lease was made by Prime’s
chief executive officer, Attilio Petrocelli, who held no position of any kind with
May-Ridge or Ridgewood. Messrs. Vicari and Szymanski, the directors and officers
of Ridgewood, recommended to Mr. Petrocelli that the tenant “walk away” from the
lease, but neither acting individually nor both acting collectively as the Board of
Directors of Ridgewood had the authority to default and turn the Hotels over to the
plaintiff. Further, in recommending to Mr. Petrocelli that May-Ridge default under
the terms of the Lease, neither Mr. Vicari nor Mr. Szymanski analyzed or considered
what was in the best interests of either May-Ridge or Ridgewood. Both Mr. Vicari
and Mr. Szymanski have testified that they considered only what was in Prime’s best
interests.
18. Neither Mr. Vicari nor Mr. Szymanski, nor Mr. Petrocelli, for that matter,
approached the plaintiff to attempt to renegotiate the terms of the Lease so that May-
Ridge could continue to lease the hotels, even though to do so would have been in
the best interests of May-Ridge and Ridgewood.
It is significant, however, that Southeast also acknowledges in its complaint that Prime spent
approximately $4.2 million in excess of the hotels’ revenues to operate the hotels from July 2000
to April 2003. Comp. ¶ 12. Southeast avers that, in the wake of the events of September 11, 2001,
the performance of the hotels “suffered greatly.” Comp. ¶ 144. “The revenues which the Hotels
generated in 2001 and 2002 did not reach the levels which Prime had projected at the time the Lease
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 11
was executed. From July 9, 2000, to the end of calendar year 2002, Prime lost approximately $3.5
million in the operation of the Hotels.” Id.
In light of these averments, Southeast’s premise that it would have been in the best interests
of May-Ridge and Ridgewood to renegotiate the Lease and that the officers breached their fiduciary
duties to these entities by advising May-Ridge to walk away from the Lease, is not only questionable
from a business standpoint, but also is undermined by Southeast’s own acknowledgment that the
venture was unprofitable. In light of these contradictory assertions contained in the complaint that,
on the one hand, the corporate officers breached their fiduciary duties to Ridgewood by
recommending that the Lease be terminated and, on the other hand, that there were sound economic
reasons to do so, we agree with the district court that the complaint does not plead sufficient facts
establishing that the officers breached their fiduciary duties.
More importantly, these conclusory allegations, couched in terms of a contractual breach,
are not tantamount to the fraud or injustice required to pierce the corporate veil. As we have already
emphasized, “[t]he injustice must be more than the breach of contract alleged in the complaint. . . .”
Outokumpu, 685 A.2d at 729. Southeast does not plead with specificity that, in making the decision
to walk away from the Lease without renegotiating it, Prime and the corporate officers misused the
limited liability supplied to Prime by May-Ridge’s and Ridgewood’s corporate forms to sanction
a fraud, injustice, or equivalent misfeasance. Viewing this case from its proper perspective – a
consensual contractual agreement between sophisticated parties – we are not persuaded that
Southeast has pleaded extraordinary circumstances that justify piercing May-Ridge’s corporate
veil.16
16
As noted in 1 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 41.85:
The alter ego doctrine and its criteria are applicable to impose substantive liability whether that
liability is in causes of action in tort, in contract, or both, although mere breach of contract is generally
not sufficient to justify a disregard of the corporate entity. In other words, courts usually apply more
stringent standards to piercing the corporate veil in a contract case than they do in tort cases. This is
because the party seeking relief in a contract case is presumed to have voluntarily and knowingly
entered into an agreement with a corporate entity, and is expected to suffer the consequences of the
limited liability associated with the corporate business form, while this is not the situation in tort cases.
Further, one who has contracted with a selected party and received the promise bargained for should
not be allowed to look to another merely because he or she is disappointed in the selected party’s
performance. Thus, under contract law, the disappointed one may not hold the other liable without
additional compelling facts. Generally, courts find these “additional compelling facts” in affiliated
corporation cases where the plaintiff has acted to his or her own detriment upon representations made
by officers of the parent corporation concerning control and ownership of the subsidiary and the
payment of its debts. Also, a finding of fraud is an essential element of an alter ego determination in
contract cases, while no finding of fraud is required in tort cases.
[T]he general policy distinction remains that courts are more likely to disregard the corporate entity
in tort cases than in cases of contract cases because the injured party in contract cases had the
opportunity to select the entity with whom he or she contracted; in a tort case, no such selection is
made by a plaintiff. Accordingly, absent very compelling equitable considerations, courts should not
rewrite contracts or disturb the allocation of risk the parties have themselves established.
(Footnotes omitted). See also Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1577 (10th Cir. 1990) (citing
Fletcher § 41.85 and noting that “The obvious difference between consensual and nonconsensual transactions is that the
claimants in consensual transactions generally have chosen the parties with whom they have dealt and have some ability,
through personal guarantees, security agreements, or similar mechanisms, to protect themselves from loss. For example,
the fact that a company is undercapitalized can be overcome in many contractual settings, because the parties can allocate
the risk of financial failure as they see fit.”); Edwards Co., Inc. v. Monogram Indus., Inc., 730 F.2d 977, 981 (5th Cir.
1984) (“The attempt to hold a parent corporation [liable] where the claim asserted is of a contractual origin presents
added difficulties. The very reasonable question must be met and answered why one who contracted with the subsidiary
and received the promise which he bargained for but who has been disappointed in the fulfillment by the subsidiary of
its commitment should be allowed to look to the parent. As a matter of contract right it is evident he may not. Additional
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 12
Southeast also avers in its complaint that Prime did not capitalize May-Ridge with sufficient
net worth as required by § 21.6 of the Lease, pursuant to which May-Ridge “shall at all times
maintain Net Worth . . . in an amount at least equal to the aggregate of one year’s Minimum Rent
[$2,912,244] payable pursuant to this Agreement[.]” Southeast claims that Prime used its control
of May-Ridge to cause this default. Comp. ¶¶ 21, 26. According to Southeast, had the net worth
requirement been fulfilled, it could have recovered $2.9 million of its $7.25 million judgment against
May-Ridge.
The district court held that this purported violation of a positive legal duty did not rise to the
level of “fraud or similar injustice,” stating:
[T]he Court disagrees with Southeast’s characterization that May-Ridge was
insufficiently capitalized, as the complaint alleges that the hotels operated with
sufficient capital and revenues until the date of breach, that May-Ridge and
Ridgewood were rendered insolvent “as a result of the default under the terms of the
Lease Agreement, and the subsequent termination of the Lease Agreement.”
(Complaint at ¶¶ 23, 27).
Nor does the Court find that Southeast was “injured” as a result of this
“undercapitalization”. * * * Southeast is entitled to retain $3,127,800.00 in
‘Retained Funds’, which would have counted toward May-Ridge’s net worth
calculation had Prime assigned those funds to May-Ridge. Even if, as Southeast
alleges, those funds were never formally assigned to May-Ridge, Southeast is still
entitled to mitigate its damages from May-Ridge’s breach of the Lease Agreement
by retention of these funds. Thus, even accepting Southeast’s allegations as true, the
Court fails to discern any concrete injury suffered by Southeast as a result of May-
Ridge’s “undercapitalization.”
Southeast views the court’s reasoning as flawed, arguing that, pursuant to § 21.6 of the
Lease, the Retained Funds could only be used to satisfy the net-worth requirement if such funds
were assigned to May-Ridge; and, because the complaint does not allege such an assignment,
Southeast’s holding of the Retained Funds therefore does not “mitigate” the damages caused by
May-Ridge’s violation of the net worth requirement. Curiously, Southeast further asserts in its
appellate brief that it “was never paid Retained Funds of $3,127,800" and that “[t]he Retained
Funds, although characterized as a deposit, were in fact a rebate of rent to be paid upon expiration
of the Lease Agreement.”
We, however, find the district court’s reasoning to be sound. First, even accepting as true
the allegation that Prime caused May-Ridge to breach the Lease’s net-worth covenant, we reiterate
that allegations pertaining to the mere breach of an underlying contract or undercapitalization, alone,
do not warrant piercing the corporate veil in order to hold the parent corporation liable for such
breach. Mobil Oil, 718 F. Supp. at 268; Greene v. Hill Home Dev., Inc., No. 03A01-9210-CH-
00369, 1993 WL 17115, at *3 (Tenn. Ct. App. Jan. 28, 1993) (“Failure of a business venture and
resulting loss of capital does not constitute gross under-capitalization as that term is used [to pierce
the corporate veil].”). Southeast does not allege that Prime was “involved in an elaborate shell game
or [was] otherwise abusing the corporate form to effect a fraud.” Outokumpu Eng’g Enters., 685
A.2d at 729. There is no averment that “the corporation [is] a sham and exist[s] for no other purpose
than as a vehicle for fraud.” In re Sunstates Corp. Shareholder’s Litig., 788 A.2d 530, 534 (Del. Ch.
2001) (citation omitted). In the present context involving a contract, Southeast does not allege that
compelling facts must appear.”) (quoting Bell Oil & Gas Co. v. Allied Chem. Corp., 431 S.W.2d 336, 339-40 (Tex.
1968)).
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 13
it was misled at the time the Lease was executed. Indeed, Southeast’s acknowledgment that Prime
effectively capitalized May-Ridge until the date of the breach – by funding the operations of the
hotels from July 2000 through the termination of the Lease and by spending over $4.2 million of its
own money during a three-year period, despite significant losses in revenue – contradicts the
existence of a fraudulent corporate shell game, and there is no allegation that Prime was ever
unjustly enriched as a result of the hotel operations. Thus, the mere alleged breach of the Lease’s
net-worth covenant does not justify piercing the corporate veil.
Second, Southeast’s claim that its receipt of the Retained Funds does not “mitigate” the
damages caused by May-Ridge’s alleged breach of the net-worth covenant defies the express
language of the pertinent Lease provisions. The final clause of the net-worth provision, § 21.6,
states that the parties to the Lease “expressly understood and agreed that the right to receive the
Retained Funds, if assigned to Tenant, may for such purpose be counted as equity at the full amount
thereof.” Section 1.81 defines “Retained Funds” as a cash amount equal to $3,127,800, which was
in excess of the annual minimum rent of $2,912,244 due under the Lease. Section 3.5 further
provides that “Landlord [Southeast] is holding the Retained Funds as security for the faithful
observance and performance by Tenant of all the terms, covenants and conditions of this Lease,” and
that Southeast “may . . . appropriate and apply the entire Retained Funds or so much thereof as may
be necessary to compensate Landlord toward the payment of Rent or other sums or loss or damage
sustained by Landlord due to such breach on the part of Tenant.” These Lease provisions clearly
provide that the Retained Funds are to be “counted as equity” in satisfaction of the net-worth
covenant. Thus, as the district court properly concluded, Southeast suffered no concrete injury as
a result of May-Ridge’s alleged under-capitalization.
Further, only if no default occurred would “any unapplied balance of the Retained Funds . . .
be paid to Tenant . . . at the end of the Term.” Lease § 3.5. Obviously, such an uneventful Lease
term did not occur. Thus, any rights that Prime or May-Ridge may have had with respect to the
Retained Funds were relinquished when May-Ridge defaulted under the Lease. Southeast’s
unsupported assertion that the Retained Funds were never paid to it or held as security for the Lease
obligations is contrary to the express language of the Lease attached to and incorporated into
Southeast’s own complaint.
We therefore conclude that Southeast has not alleged extraordinary circumstances that would
warrant piercing May-Ridge’s corporate veil in order to hold Prime liable for its subsidiary’s breach
of the Lease. In so holding, we underscore that this is a consensual contract setting in which
sophisticated parties negotiated and entered into the Lease with full knowledge of its terms. Prime’s
limited guaranty of the Lease equal to one year’s base rent, contained in § 4.5 of the original
purchase agreement, was struck from the amended purchase agreement executed contemporaneously
with the Lease. It is readily apparent that, in lieu of such a guaranty, May-Ridge’s obligations under
the Lease were to be secured by the Retained Funds held by Southeast, as well as by the hotels’
personal property.
Under similar circumstances, courts have been justifiably hesitant to pierce the corporate veil
and hold a parent company liable for the breach of a commercial lease by its subsidiary or affiliate
where the parent did not guarantee the tenant’s performance. See generally 1 Fletcher Cyc. Priv.
Corp. § 41.85. See also Telecom Int’l Am., Ltd. v. AT & T Corp., 280 F.3d 175, 200-01 (2d Cir.
2001) (affirming summary judgment and holding that plaintiff “has no grounds to pierce [parent’s]
corporate veil” where parent “wanted to limit its potential losses” by creating subsidiary “as a
separate entity with only as much capital as then-currently needed,” “declined to enter into any
agreement with [plaintiff] or to guarantee [subsidiary’s] obligations to [plaintiff] under the
agreements [subsidiary] signed”); Schlater, 833 S.W.2d at 926-27 (disallowing claim to pierce
corporate veil where “[p]laintiff’s only complaint is that he was unable to collect delinquent rent
under a lease with a corporation which became insolvent because of unprofitable operations during
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 14
which all of the corporation’s assets had been pledged to a bank to obtain operating funds. This,
standing alone, is insufficient to establish liability for the debt against officers, stockholders, or the
corporation which was permitted by the bank to use some of the mortgaged assets in an effort to pay
the debt from profits of an operation which also proved unprofitable” and where “[t]here is no
evidence that [plaintiff] was misled at the time the lease was executed.”); Tenn. Racquetball
Investors, 709 S.W.2d at 622 (dismissing alter ego claim and emphasizing that it was not alleged or
shown that “at the time of the creation” of lease “there was any ground to believe that [plaintiff] was
in reality dealing” with shareholder; “[o]n the contrary, it was clearly understood that the
corporation [] was created specially to deal with plaintiff in lieu of” shareholder); Greene, 1993 WL
17115, at *3 (refusing to pierce corporate veil where “plaintiffs knew, at all times, that they were
dealing with a corporation and that [its sole shareholder] was acting in his capacity as president.
Had they wished to protect themselves against corporate insolvency, they were free to do so.
[Plaintiffs] consciously chose not to do so” by “proceeding with the closing of the transaction” even
though the owner/president had declined to sign in his individual capacity).
For the foregoing reasons, we conclude that Southeast has failed as a matter of law to state
a claim to pierce May-Ridge’s corporate veil. We therefore affirm the dismissal of Southeast’s
claims.
Affirmed.
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 15
_________________
DUBITANTE
_________________
LOUIS F. OBERDORFER, District Judge, dubitante. Plaintiff is a Tennessee corporation
with its principal place of business there. It brought this action in a Tennessee state court claiming
that Defendant, Prime Hospitality Corporation (a Delaware corporation), caused a related entity,
May-Ridge, L.P. (also a Delaware entity), to break a lease between Plaintiff and May-Ridge. A
clause in that lease expressed the intention of Plaintiff and May-Ridge that Tennessee law apply to
any disputes regarding the “interpret[ation], constru[ction], appli[cation], and enforce[ment]” of the
lease. Lease § 22.14 (JA 83-84). As a federal court sitting in diversity, we are obligated to apply
Tennessee choice of law principles in selecting the law applicable to the present dispute. See Mill’s
Pride, Inc. v. Continental Ins. Co., 300 F.3d 701, 704 (6th Cir. 2002).
I am not confident as to Tennessee law on two issues presented by this case: (1) Whether
Tennessee choice of law principles direct the selection of Tennessee or Delaware law for the
determination of whether Plaintiff may pierce the “corporate veil” of May-Ridge and its general
partner, Ridgewood Holding Corporation? and (2) What is Tennessee law on the veil-piercing issue?
With respect to choice of law, I start with the expression by Plaintiff and May-Ridge of an
intention to be guided by Tennessee law with respect to issues regarding the “interpret[ation],
constru[ction], appli[cation], and enforce[ment]” of the lease. Lease § 22.14 (JA 83-84). From that
statement, it may be reasonably inferred that the parties generally preferred Tennessee law. In
addition, I find no clear default rule among Tennessee choice of law principles. Some intermediate
Tennessee courts have applied forum law in determining whether a plaintiff may pierce a corporate
veil. See, e.g., Boles v. National Dev. Co., Inc., 175 S.W.3d 226, 236-38 (Tenn. Ct. App. 2005);
Oceanics Sch., Inc. v. Barbour, 112 S.W.3d 135, 140 (Tenn. Ct. App. 2003). Other intermediate
Tennessee courts have applied the law of the place of registration of the entity the corporate veil of
which is to be pierced. See, e.g., Hicks v. Lewis, 148 S.W.3d 80, 84 (Tenn. Ct. App. 2003);
Amberjack, Ltd., Inc. v. Thompson, 1997 WL 613676, at *8-9 (Tenn. Ct. App. Oct. 7, 1997). The
Tennessee Supreme Court apparently has not resolved this conflict.
My colleagues finesse the choice of law issue by concluding that the corporate veil piercing
stance of Delaware law is not, for purposes of this case, materially different from that of Tennessee
law. I am not persuaded that this is the case.
Delaware law requires proof of “fraud or similar injustice” to pierce a corporate veil in
circumstances similar to those here. E.g., Wallace v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999)
(“Piercing the corporate veil under the alter ego theory requires that the corporate structure cause
fraud or similar injustice.”); Outokumpu Eng’g Enters., Inc. v. Kvaerner EnviroPower, Inc., 685
A.2d 724, 729 (Del. Sup. Ct. 1996) (“[T]he alter ego theory requires that the corporate structure
cause fraud or similar injustice.”).
The Tennessee standard appears to be less stringent. In Continental Bankers, the Tennessee
Supreme Court required for the piercing of a corporate veil in circumstances similar to those here
only that a parent have used its control of its subsidiary(ies) “to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and unjust act.”
Continental Bankers Life Ins. Co. of the South v. Bank of Alamo, 578 S.W.2d 625, 632 (Tenn. 1979)
(emphasis added). An unpublished decision of this circuit (and a federal district court decision
relying on that decision), applying Tennessee law, invokes a more restrictive standard – a standard
even more restrictive than that of Delaware law. See IBC Mfg. Co. v. Velsicol Chem. Corp., 1999
WL 486615, at *3-4 (6th Cir. July 1, 1999) (unpublished disposition) (requiring a showing of fraud
No. 05-5892 Southeast Texas Inns v. Prime Hospitality Corp. Page 16
itself); Thomas v. Lytle, 104 F. Supp. 2d 906, 928 (M.D. Tenn. 2000) (same). But the Tennessee
Supreme Court has not abandoned the twenty-six year old Continental Bankers standard, nor given
much, if any, indication of an intention to do so. See Stigall v. Wickes Mach., 801 S.W.2d 507, 510-
11 (Tenn. 1990); Electric Power Bd. of Chattanooga v. St. Joseph Valley Structural Steel Corp., 691
S.W.2d 522, 526 (Tenn. 1985). Our duty is to ascertain currently applicable Tennessee law (i.e.,
Tennessee law as today’s Tennessee Supreme Court would apply it). See Commissioner of Internal
Revenue v. Estate of Bosch, 387 U.S. 456, 464-465 (1967).
My colleagues have ventured into the uncertainty of Tennessee law and have ruled on it.
They may very well be correct in concluding that the Tennessee Supreme Court would adopt and
apply a “fraud or similar injustice” standard a la Delaware. But the Tennessee Supreme Court has
a rule that it “may, at its discretion, answer questions certified to it by . . . a Court of Appeals of the
United States.” Tenn. Supr. Ct. R. 23.
Considerations of comity and common sense persuade me that we should accept the
Tennessee Supreme Court invitation and certify to it two Tennessee law questions: (1) “Which
state’s law applies to Plaintiff’s efforts to hold Defendant liable for May-Ridge’s breach of the
relevant lease?” and (2) “If Tennessee law applies, has Plaintiff alleged sufficiently inequitable
conduct to justify piercing the ‘corporate veils’ of May-Ridge and its general partner Ridgewood?”