U.S. Court of Appeals for the Sixth Circuit, Product Solutions Int., Inc. v. Aldez Containers, LLC, Docket No. 21-2952

Veil-Piercing “Claim.”

 

Veil Piercing Action

 

Piercing the Corporate Veil

 

Is Piercing the Corporate Veil a Remedy or a Separate Cause of Action?

 

Res Judicata In Diversity Actions (Application of Federal Law or of State Law?)

 

Michigan Law

 

 

 

 

Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 2:21-cv-11129.

 

 

Plaintiff Product Solutions International, Inc. (“PSI”) appeals the dismissal of its complaint against Aldez Containers, LLC (“Aldez”). PSI sued Aldez and associated parties in 2019 alleging various claims arising from a contract dispute. The district court dismissed Aldez from that suit because PSI failed to state a claim against Aldez. In 2021, PSI filed a second complaint solely against Aldez for the same conduct as the 2019 suit. The district court held that the 2021 suit was barred by res judicata. We AFFIRM.

 

 

On September 24, 2019, PSI commenced an action (the “2019 suit”) against P.B. Products, Copek, Byrne, and Aldez. Prod. Sols. Int’l, Inc. v. P.B. Prods., LLC, No. 19-CV-12790, 2020 WL 3129978, at *1 (E.D. Mich. June 12, 2020). That diversity suit alleged breach of contract, promissory estoppel, fraud, silent fraud, negligent misrepresentation, innocent misrepresentation, and non-acceptance of conforming goods under the Uniform Commercial Code. Id. The complaint contained no allegations regarding any duty owed or any breach by Aldez. Id. at *3. The defendants jointly moved to dismiss the complaint. Id. at *1. The district court granted the motion in part, dismissing Copek, Byrne, and Aldez from the suit, but permitted some claims against P.B. Products to continue. Id. at *3. PSI never sought leave to amend its complaint to fix the deficient allegations against Aldez.

 

 

On May 17, 2021, PSI commenced the present action (the “2021 suit”) against Aldez. In the 2021 suit, PSI sued Aldez only for breach of contract, promissory estoppel, and non-acceptance of conforming goods under the Uniform Commercial Code. PSI had alleged these three claims in the 2019 suit and the claims arose from the same facts. Aldez moved to dismiss the complaint arguing that it was barred by res judicata and that it failed to state a claim. PSI responded that in the 2019 suit, its claims were pleaded directly against Aldez, whereas in the 2021 suit, it sought to pierce P.B. Product’s corporate veil and hold Aldez vicariously liable. The district court granted the motion to dismiss solely on the basis of res judicata. It held that PSI’s claims in the 2021 suit “[were], or could have been, resolved in the first” suit. (Op. & Order Granting Def.’s Mot. to Dismiss, R. 9, PageID # 191.) PSI timely appealed.

 

 

The parties’ briefing in this appeal almost exclusively focuses on the merits of the district court’s application of res judicata. Accordingly, the first issue we must address is whether federal or state res judicata law governs this case. PSI seeks to apply federal principles of res judicata, whereas Aldez believes Michigan law should be applied. An intra-circuit split seems to have developed on whether federal or state res judicata law applies in diversity actions. In Rawe v. Liberty Mutual Fire Insurance Co., 462 F.3d 521, 528 (6th Cir. 2006), we held that in “successive diversity actions, federal res judicata principles apply.” See also Allied Erecting & Dismantling Co. v. Genesis Equip. & Mfg., Inc., 805 F.3d 701, 709 (6th Cir. 2015) (citing Rawe favorably); J.Z.G. Res., Inc. v. Shelby Ins. Co., 84 F.3d 211, 214 (6th Cir. 1996) (“We shall apply federal res judicata principles in successive federal diversity actions.”). However, recently, we have cast doubt on Rawe, suggesting that it was inconsistent with then-existing Supreme Court precedent, and was therefore wrongly decided from the start. N.D. Mgmt., Inc. v. Hawkins, 787 F. App’x 891, 896 (6th Cir. 2019). Specifically, five years before Rawe, the Supreme Court held that federal courts sitting in diversity should apply “the law that would be applied by state courts in the State in which the federal diversity court sits” so long as the state rule is not “incompatible with federal interests.” Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508–09 (2001). Rawe made no mention of Semtek. Furthermore, in 2008, two years after Rawe, the Supreme Court reiterated that “for judgments in diversity cases, federal law incorporates the rules of preclusion applied by the State in which the rendering court sits.” Taylor v. Sturgell, 553 U.S. 880, 891 n.4 (2008) (citing Semtek, 531 U.S. at 508). (…) Therefore, as binding Supreme Court precedent, we must follow Semtek over Rawe and apply Michigan law.

 

 

(…) In the 2019 suit, the district court dismissed PSI’s claims against Aldez for failing to state a claim. Specifically, the district court found that “the complaint did not allege that Aldez was a party to any contract. The complaint merely alleged that Aldez is a shipping company.” Prod. Sols. Int’l, 2020 WL 3129978, at *3. In the 2021 suit, PSI altered its “claims” and now seeks to pierce P.B. Products’ corporate veil and hold Aldez vicariously liable. Besides changing the theory of recovery, the 2019 and 2021 complaints are virtually identical. We agree with the district court that the pleadings fail to allege sufficient facts to plausibly claim breach of contract, promissory estoppel, and non-acceptance of conforming goods under the Uniform Commercial Code. To get around the obviously deficient pleadings, PSI has added a few paltry allegations that “P.B. Products, LLC is the agent, alter ego, and mere instrumentality of [Aldez].” (Compl., R. 1, PageID  #2.) It argues that in the 2019 suit all its claims were filed as “direct claims” against Aldez, but the 2021 suit’s complaint is different because it brings a veil-piercing “claim.” However, piercing the corporate veil is not a cause of action under Michigan law.1 Gallagher v. Persha, 891 N.W.2d 505, 509 (Mich. Ct. App. 2016) (recognizing that under Michigan law, piercing the corporate veil is “a remedy, and not a separate cause of action”). In fact, PSI admitted at oral argument that the 2021 suit is preemptively seeking relief in the hopes it receives a favorable judgment in its 2019 suit against P.B. Products. We are not aware of any context under Michigan law that permits a party to recover for an alleged injury before obtaining a judgment. We refuse to let PSI do that in this case.

 

 

1PSI relies primarily on Gallagher v. Persha, 891 N.W.2d 505, 515 (Mich. Ct. App. 2016), to argue that it is entitled to bring its second veil piercing action. However, in that case, the Michigan Court of Appeals held that “when a judgment already exists against a corporate entity, an additional cause of action is not needed to impose liability against a shareholder or officer if a court finds the necessary facts to pierce the corporate veil.” Id. at 515 (emphasis added). In the present appeal, no previously obtained judgment exists—the 2019 suit is still pending. Accordingly, Gallagher cannot save PSI’s 2021 suit.

 

 

Because the complaint does not allege any wrongdoing by Aldez and corporate veil piercing is not a cause of action under Michigan law, the 2021 suit’s complaint fails to state a claim.

 

 

The issue of whether the dismissal of the 2021 action will have any preclusive effect on PSI’s ability to bring a Gallagher-type action in the event it obtains a favorable judgment in the 2019 suit is not yet ripe. Accordingly, we decline to address it.

 

 

 

(U.S. Court of Appeals for the Sixth Circuit, Aug. 22, 2022, Product Solutions Int., Inc. v. Aldez Containers, LLC, Docket No. 21-2952, Recommended for Publication)