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Pro Tanks Leasing v. Midwest Propane and Refined Fuels, LLC

United States District Court, Sixth Circuit

December 18, 2013

PRO TANKS LEASING, et al., Plaintiffs,
v.
MIDWEST PROPANE AND REFINED FUELS, LLC, et al. Defendants

MEMORANDUM OPINION AND ORDER

THOMAS B. RUSSELL, District Judge.

This matter is before the Court upon Defendants Midwest Propane and Refined Fuels LLC ("Midwest"), Innovative Energy Solutions, LLC ("Innovative"), and Grundy Electric Cooperative, Inc.'s ("Grundy") Motion to Dismiss Plaintiffs' Complaint for Lack of Personal Jurisdiction as to Grundy and Innovative. (Docket No. 33.) Plaintiffs have responded. (Docket No. 41.) Defendants have replied. (Docket No. 44.) This matter is now fully briefed and ripe for adjudication. For the following reasons, the Court will DENY Defendants' Motion to Dismiss Plaintiffs' Complaint for Lack of Personal Jurisdiction. The Court also DENIES Defendants' request for oral argument on their Motion to Dismiss Plaintiffs' Complaint for Lack of Personal Jurisdiction.

BACKGROUND

The Court notes the facts in this case are lengthy and there is a voluminous record including deposition testimony. The Court has highlighted most of the pertinent background facts.

Claims Asserted

This action arises from an Asset Purchase Agreement ("APA") entered into by Defendant Midwest and Plaintiffs, under which the Plaintiffs essentially purchased Midwest's propane business-including assets, accounts receivables, and the Midwest name. (Docket No. 1, Page 4-5.) Plaintiffs allege that after the APA was executed they learned that a significant number of the propane tanks that were purchased "did not contain the requisite data plates and as a result contain no value, " which was concealed and/or misrepresented by Defendants. Id. at 5. Plaintiffs also allege that Defendant knowingly provided inaccurate information regarding the receivables purchased and/or failed to provide accurate information after learning the information provided was incorrect. Id.

Plaintiffs bring claims for breach of contract, fraud, and an equitable action to pierce the veils of Innovative and Grundy. (Docket No. 1, Page 3.) They assert that jurisdictional discovery has revealed that Midwest was the "alter ego" of Innovative and Grundy. (Docket No. 41, Page 3.) Accordingly, Plaintiffs seek to hold Grundy and Innovative liable for the breach of contract and fraud claims. On the other hand, Defendants assert that this Court lacks personal jurisdiction over Grundy and Innovative.

Asset Purchase Agreement

The proceeds paid by Plaintiffs pursuant to the APA were distributed in the following manner:[1] (1) $35, 000 to Grundy's construction account for two parcels which Grundy owned that Plaintiffs wanted to be part of the transaction for their office and plant;[2] and (2) the remaining proceeds went to Grundy's accounts, which according to the manager of the three entities was because Midwest was going to be dissolved shortly after the purchase because it did not own any more assets.[3] (Docket No. 33-6, Page 56-58.) The remaining proceeds were kept separate on Grundy's books and used to make loan payments on a note which Grundy had guaranteed for the benefit of Midwest. Id. at 58.

In the APA, Midwest, Grundy, and Innovative all agreed to a non-competition and non-solicitation clause for a period of ten years. (Docket No. 12-2, Page 26, Article 10.) The APA also contained a provision titled "Submission to Jurisdiction" in which "[t]he parties hereto irrevocably submit to the exclusive jurisdiction of the state courts of Kentucky... or if jurisdiction exists to the United States District Court for the Western District of Kentucky over any dispute arising out of or relating to this Agreement." (Docket No. 12-2, Page 28, Article 12.10.) The parties do not appear to dispute that the "Submission to Jurisdiction" provision only applied to Midwest.

Overview of Entities

Grundy is a Missouri corporation and electric cooperative with its main office in Trenton, Missouri. (Docket No. 41, Page 2.) Innovative and Midwest are both Missouri LLCs also located in Trenton, Missouri. Innovative appears to have been primarily a holding company with no assets or employees. Midwest primarily sold propane and refined fuel. Grundy Electric is the sole owner of Innovative and Innovative is the sole owner of Midwest Propane and Refined Fuels LLC ("Midwest").[4] (Docket No. 33, Page 15.)

These Defendants entered into a Management and Service Agreement among themselves, whereby Grundy would provide operations and management service to Innovative and Midwest. This Management Service Agreement provided for payments from Midwest to Grundy in exchange for Grundy providing management services for Midwest. Notably, Grundy would "at times" give these payments back to Midwest due to its poor financial condition. (Docket No. 33-6, Page 63.)

Grundy Electric, Innovative, and Midwest all resided at the same business address of 4100 Oklahoma Avenue, although it appears they had separate entrances. (Docket No. 33-6, Page 10-12, 37-38.) Grundy' and Innovative have a common board of directors/ownership group, but the employees of Grundy and Midwest are not identical. (Docket No. 33-3, Number 35.) Innovative's ownership group governs Midwest. Midwest dissolved as a LLC in March 2012. (Docket No. 41-9.)

I. Midwest Propane and Refined Fuels, LLC

Midwest Propane was organized as an LLC in July 1999. It was created for the purpose of retail sale and delivery of propane. (Docket No. 33-3, Page 1.) After acquiring two existing propane companies in August 1999, Midwest was in continuous operation until January 28, 2011, when substantially all of its assets were sold to Plaintiffs, including its name and any variations thereof.

All of the Midwest employees were paid by Midwest. Id. at 41. Midwest had an operating account that was separate from Grundy Electric and it had its own website separate from Grundy and Innovative. Midwest paid its own bills during its period of operation, including insurance coverage. All customer payments for the sale of propane were directly deposited into a Midwest bank account and records were kept as to these payments.[5] Grundy employees handled Midwest billing, accounting services, customer service, consulting, and assisted in Midwest's collection efforts pursuant to the Management and Services Agreement. (Docket No. 33-6, Page 34, 40.)

Midwest typically operated at a loss-it did not regularly make money. Id. at 42-43. Those losses were covered through loans, which Grundy guaranteed, from the National Cooperative Service Corporation ("NCSC"), a subsidiary of Cooperative Finance Corporation ("CFC"). Grundy also donated capital to cover these losses.[6] (Docket No. 33, Page 28.) Midwest did not transfer assets or revenue in return for the guarantees or the donated capital. Id. Grundy has also guaranteed Midwest's purchase of product/their trade debt. Id. at 50-52. However, it appears Grundy never directly wrote checks for Midwest's operating expenses.

NCSC also loaned Midwest money for its startup costs. (Docket No. 33-5, Page 31-32.) Grundy guaranteed that loan.[7] Software that Midwest used to manage its propane business was located at 4100 Oklahoma Avenue and was on some of the same computers used by Grundy employees. In some instances, Midwest did not own the real estate where it operated-Grundy Electric did.

Since its formation, Midwest has either held regular monthly meetings or reported in regular monthly meetings of Innovative. These regular monthly meetings were held separate from Grundy's meetings. At no time did Grundy refer to Midwest as its department or division. (Docket No. 33-3, Page 11, ΒΆ 80.)

II. Innovative Energy Solutions, LLC

Innovative is a not for profit LLC organized in June 1999 as a subsidiary of Grundy Electric.[8] "Its purpose is to further the economic, community and member services development efforts of rural electric cooperatives." (Docket No. 33-3, Page 1.) Innovative owns no tangible assets. (Docket No. 33-6, Page 32.) At monthly meetings the ownership group of Innovative would discuss the Midwest operations report and financial report. These meetings were held separate from Grundy Electric's monthly meetings. Innovative covered the payroll taxes and salaries of employees for Midwest, but Midwest wrote them a check to perform this apparently administrative task.[9] Innovative has never guaranteed any debts owed by Midwest. Innovative does not generate any income and does not own any assets. It does not have any employees, other than Scott Wilson who is the manager.

III. Grundy Electric Cooperative, Inc.

Grundy Electric is a Missouri rural electric distribution cooperative incorporated in 1938 and was created by reason of the Rural Electrification Act of 1936 in order to bring electricity to rural communities. As a cooperative, it is owned by and is responsible to its members. The members elect an eight member board of directors. Grundy's board meets once a month and holds an annual membership meeting. By law, Grundy Electric can only serve its members with electric power and is not allowed to make a profit. Any profit is returned to its members. Because Grundy Electric is not required to file an income tax return, it does not receive any tax benefit from the operation of Midwest Propane. (Docket No. 33-3, Page 1.)

Scott Wilson served as a Manager for Grundy Electric, Innovative, and Midwest.[10] (Docket No. 41, Page 2; 33-6, Page 8-9, 20.) His managerial services as to Innovative and Midwest were provided under a formal Management and Services Agreement between Defendants. (Docket No. 33-6, Page 22.) However, he was only paid by Grundy. (Docket No. 33-6, Page 21-22.) He was not required to keep separate time sheets while doing work for Grundy or Innovative. (Docket No. 33-6, Page 14-15.)

STANDARD

As the Court stated in its prior Order, (Docket No. 24, Page 3), the issue of personal jurisdiction largely turns on whether Midwest was the "alter ego" of Innovative and Grundy.[11] See, e.g., Estate of Thomson ex rel. Estate of Rakestraw v. Toyota Motor Corp. Worldwide, 545 F.3d 357, 362 (6th Cir. 2008) (endorsing use of alter-ego theory to exercise personal jurisdiction); Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S.Ct. 2846, 2857 (2011) (acknowledging the theory of piercing the corporate veil for jurisdictional purposes, but declining to address it because it was not previously raised). To the extent Defendants relied on Martin ex rel. Estate of Martin v. S. Indiana Treatment Ctr., Inc., 2004 WL 2595946 (W.D. Ky. May 27, 2004), or Velandra v. Regie Nationale des Usines Renault, 336 F.2d 292, 297 (6th Cir. 1964), for the notion that the "alter ego" analysis would not be determinative as to whether the Court has personal jurisdiction over Grundy and Innovative, their reading of these cases is not consistent with more recent Sixth Circuit precedent. In Velandra the Sixth Circuit stated:

The ownership of the subsidiary carrying on local activities in Michigan represents merely one contact or factor to be considered in assessing the existence or non-existence of the requisite minimum contacts with the State of Michigan, but is not sufficient of itself to hold the present corporations amenable to personal jurisdiction.

Velandra, 336 F.2d at 297. Plaintiffs do not assert the Court has personal jurisdiction over Innovative and Grundy merely because of their ownership of Midwest. On the contrary, they assert personal jurisdiction based on piercing of the corporate veil and alter ego doctrines. Essentially, they allege Grundy and Innovative exercise "undue control" or are the "alter egos" of Midwest. Accordingly, the above statement from Velandra does not resolve Plaintiffs' claims. However, another portion of the opinion is related:

Considering first the chain of corporate ownership, Regie owns 100% of the stock of Renault, and Renault in turn owns 100% of the stock of Great Lakes, which, as indicated, carries on substantial economic activities within the State of Michigan. However, the mere ownership by a corporation of all of the stock of a subsidiary amenable to the jurisdiction of the courts of a state may not alone be sufficient to justify holding the parent corporation likewise amenable. In the early case of Cannon Mfg. Co. v. Cudahy Packing Co ., the Supreme Court held that the activities of a subsidiary did not subject its parent corporation to the personal jurisdiction of local courts.
It should be noted that the ruling of the Cannon case, if not qualified by the subsequent ruling in the International Shoe Company case, has been at least qualified in later cases holding foreign corporations amenable to the personal jurisdiction of local courts because of the local activities of subsidiary corporations upon the theory that the corporate separation is fictitious, or that the parent has held the subsidiary out as its agent, or, more vaguely, that the parent has exercised an undue degree of control over the subsidiary.
Unfortunately, such reasoning in these and similar cases, fails to explain the decisions of the courts adequately. Thus the law relating to the fictions of agency and of separate corporate entity was developed for purposes other than determining amenability to personal jurisdiction, and the law of such amenability is merely confused by reference to these inapposite matter.

Velandra, 336 F.2d 292, 296-97 (6th Cir. 1964) (emphasis added). Admittedly, although this Court would not do so, this portion of the opinion could be read to render the "alter ego" determination separate from the determination of whether the Court possesses personal jurisdiction over the parents whose veil was pierced. In fact, an unpublished Western District of Kentucky case, in dicta, appears to have interpreted this statement that way:

Velandra points out that Cannon Mfg. Co. v. Cudahy Packing Co., 267 U.S. 333 (1925), the original case that held the activities of a subsidiary did not subject a parent corporation to the personal jurisdiction of local courts, was later qualified by cases following International Shoe and the minimum contacts analysis. 336 F.2d at 296. These qualifying cases held that foreign corporations are amenable to personal jurisdiction of local courts solely because of the activities of subsidiary corporations under the theory that the corporate separation was fictitious, Intermountain Ford Tractor Sales Co. v. Massey-Ferguson Ltd, 210 F.Supp. 930 (C.D. Utah 1962), or that the parent held the subsidiary out as its agent, Curtis Publishing Co. v. Cassel, 302 F.2d 132 (10th Cir. 1962), or that the parent exercised an undue degree of control over the subsidiary, Focht v. Southwestern Skyways, Inc., 220 F.Supp. 441 (Colo. 1963). Velandra points out that the law relating to the fictions of agency and of separate corporate entity was developed for purposes other than determining the amenability to personal jurisdiction, and therefore the law of amenability is confused by reference to these inapposite matters. 336 F.2d at 297.
Therefore, the Velandra court came to the common sense solution that the question goes back to whether the parent has the minimum contacts, and that a subsidiary carries on local activities is merely one factor to be considered in assessing whether or not the parent has the requisite contacts with a state. Id. (emphasis added.)

Plaintiff alleges a fictitious corporate separation between National and SITC, but the record contains no evidence whatsoever that would justify a finding of an alter ego, and therefore the piercing of corporate veils, or the disregarding of corporate entities. However, the Velandra holding proves that the alter ego, or undue degree of control analysis, is actually irrelevant to whether National has minimum contacts with Kentucky.

Martin ex rel. Estate of Martin v. S. Indiana Treatment Ctr., Inc., 2004 WL 2595946, at *3 n. 3 (W.D. Ky. May 27, 2004) (emphasis added). This Court would not read Velandra so broadly. It appears that Velandra may have merely been criticizing the frequency in which Courts would assert "alter ego" or "lack of corporate separateness" as justifications for finding personal jurisdiction when the circumstances for a true corporate veil piercing remedy were not applicable.

This Court believes when the unique circumstances for a corporate veil piercing and/or alter ego determination are met the proper question is not whether the parent has minimum contacts with a jurisdiction. To the contrary, the proper question is whether the parent and/or the subsidiary have minimum contacts, because the parent is essentially one in the same with the subsidiary-it is its "alter ego." However, when the circumstances do not merit piercing of the corporate veil, it is well established that the question is whether the parent itself has the minimum contacts with the state. Velandra, 336 F.2d at 297. Ownership of the subsidiary-when there is no piercing of the corporate veil involved-is considered one contact in the analysis, but that relationship alone does not decide the personal jurisdiction question. Id. In any event, to the extent Martin or Velandra could be read to hold or imply otherwise, it is inconsistent with more recent precedent from the Sixth Circuit:

This argument raises a critical point in the jurisdictional analysis: the extent to which a parent corporation is subject to general jurisdiction based on activities of a subsidiary.

As one of our sister Circuits has explained:

federal courts have consistently acknowledged that it is compatible with due process for a court to exercise personal jurisdiction over an individual or a corporation that would not ordinarily be subject to personal jurisdiction in that court when the individual or corporation is an alter ego or successor of a corporation that would be subject to personal jurisdiction in that court.
Patin v. Thoroughbred Power Boats Inc., 294 F.3d 640, 653 (5th Cir. 2002) (collecting cases). Normally, courts apply the alter-ego theory of personal jurisdiction to parent-subsidiary relationships. The alter-ego theory of personal jurisdiction, in the parentsubsidiary context, provides that "a non-resident parent corporation is amenable to suit in the forum state if the parent company exerts so much control over the subsidiary that the two do not exist as separate entities but are one and the same for purposes of jurisdiction." Danton v. Innovative Gaming Corp., 246 F.Supp.2d 64, 72 (D. Me. 2003).
Courts in this Circuit, in several unpublished opinions, have endorsed the use of the alter-ego theory to exercise personal jurisdiction. See Flynn v. Greg Anthony Constr. Co., 95 Fed.App'x. 726, 736-38 (6th Cir. 2003); Niemi v. NHK Spring Co. Ltd., No. 3:03 CV 7512, 2006 WL 954248, at *1 (N.D. Ohio Apr. 12, 2006); Simsa v. Gehring L.P., No. 05 CV 72159, 2006 WL 467914, at *4 (E.D. Mich. Feb. 24, 2006); Bradford Co. v. Afco Mfg., No. 1:05 CV 449, 2006 WL 143343, at *4 (S.D. Ohio Jan.19, 2006); Invacare Corp. v. Sunrise Med. Holdings, Inc., No. 1:04 CV 1439, 2004 WL 3403352, at *7-8 (N.D. Ohio Dec. 15, 2004); Med. Distrib., Inc. v. Quest Healthcare, Inc., No. 3:00 CV 154, 2002 WL 32398447, *4-*5 (W.D. Ky. Feb. 1, 2002); see also Warren v. Dynamics Health Equip. Mfg. Co., 483 F.Supp. 788, 792-93 (M.D. Tenn. 1980). These cases ...

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