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)

California Court of Appeal (Third Appellate District), North Valley Mall v. Longs Drug Stores, Docket C079281, Certified for Publication

Contract (alteration): Corporation: Merger: De facto merger: (Corporate veil): Reverse triangular merger: Transfer of corporate stock: Creditors and shareholders: Assignment:

At issue in this case is whether the court should “go behind” the form of a corporate reorganization in order to alter contractual obligations, when the corporation utilized the type of reorganization it used in order to avoid altering its contractual obligations. The type of reorganization used in this case is a common one, and is referred to as a reverse triangular merger (A reverse triangular merger is one in which an acquiring corporation forms a new subsidiary, which is merged into the surviving corporation. In this case a survivor corporation, North Valley Mall, LLC, merged with Longs Drug Stores, Inc., the surviving corporation, by sale of its stock but with retention of its legal title to the property at issue). The usefulness of such a merger is to leave the target corporation intact as a subsidiary of the acquiring corporation where the target corporation has contracts or assets that are not easily assignable.

We conclude that where the form of reorganization was not chosen to disadvantage creditors or shareholders, we will not ignore the form of reorganization chosen by the corporation. We will affirm the judgment.

Corporations “ ‘have an identity apart from that of the owners.’ ” (Kraft, Inc. v. County of Orange (1990) 219 Cal.App.3d 1104, 1109.) Therefore, “the transfer of corporate stock is not deemed a transfer of the real property of a legal entity because the separate legal entity still owns the property.” (Ibid.) However, a traditional merger--one in which two or more corporations merge, one survives and the others disappear--results in the transfer of the assets of each disappearing corporation to the surviving corporation. (Marsh’s Cal. Corp. Law, (4th ed. 2013) Corporate Reorganizations § 19.10[C], p. 19-103; Phillips v. Cooper Laboratories (1989) 215 Cal.App.3d 1648, 1660.)

The transaction between CVS and Longs was a reverse triangular merger, sometimes referred to as a triangular phantom merger. This form of reorganization is used when the target corporation, in this case Longs, has licenses, permits, or property which is impossible or highly burdensome to attempt to transfer. (Marsh’s Cal. Corp. Law, supra, § 19.01[H], p. 19-18.) In a reverse triangular merger, the acquiring corporation (CVS) forms a new subsidiary, which is merged into the target corporation (Longs) so that the target corporation is a surviving corporation that continues to own its assets. (Ibid.) Here, CVS acquired all of the issued and outstanding shares of Longs. To effectuate the stock acquisition, CVS formed a subsidiary called Blue MergerSub Corp., which merged with and into Longs, with Longs being the surviving corporation. Longs became a wholly owned subsidiary of CVS, and was converted to a limited liability company named Longs Drug Stores, LLC. Longs remains vested with legal title to the property at issue.

There Was No Sale or Lease of the Property.

(…) Courts usually describe reverse triangular mergers as similar to stock acquisitions because they do not work an assignment of contractual obligations from the target to the acquiring parent company.

(…) “The intention of the parties as expressed in the contract is the source of contractual rights and duties. A court must ascertain and give effect to this intention by determining what the parties meant by the words they used.” (Pacific Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co. (1968) 69 Cal.2d 33, 38, fn. omitted.) In this case, the plain language of the agreement specifies that the trigger for removing the CAM charge cap is the “sale or lease of any portion of the subject property to any third person . . . .” When the agreement was made, Longs was a corporation. A plaintiff who chooses to deal with a corporation must have known “that shares of stock therein might be owned by different stockholders and are subject to assignment to others in the ordinary course of business.” (Ser-Bye Corp. v. C.P.&G. Markets, Inc. (1947) 78 Cal.App.2d 915, 920, superseded by statute on another point, as stated in In re Alberto (2002) 102 Cal.App.4th 421, 430, fn. 4.)

(…) The Further Agreement indicates that the parties intended the CAM cap to be lifted if the corporate real property was sold or leased. We cannot interpret this language to include a sale of corporate stock. NVM asks us to conclude that even if the property at issue was never sold or leased by Longs, we should look behind the reverse triangular merger and conclude that it was a de facto merger, resulting in the transfer of the property to CVS. We decline to do so.

(…) Some courts have concluded that reverse triangular mergers do not effect a de facto merger unless they are structured to disadvantage creditors or shareholders. (In re McKesson HBOC, Inc. Securities Litigation (N.D. Cal. 2000) 126 F.Supp.2d 1248, 1277; Binder v. Bristol-Myers Squibb, Co. (N.D. Ill. 2001) 184 F.Supp.2d 762, 769-770.) There is no evidence this transaction was structured as a reverse triangular merger for either of these purposes.

(…) We will not interfere with the reasonable economic expectations of the parties to these reorganizations where there is no effort to disadvantage creditors or shareholders.

Secondary authorities: Gutterman et al., Cal. Transactions Forms (2018) Business Entities, § 12:8.; Marsh’s Cal. Corp. Law, (4th ed. 2013) Corporate Reorganizations.

(California Court of Appeal (Third Appellate District), Sept. 25, 2018, North Valley Mall v. Longs Drug Stores, Docket C079281, Acting P.J. Blease, Certified for Publication)

Un contrat entre deux entreprises liées à un centre commercial prévoyait un versement périodique dû par la société A. en faveur de la société B. au titre de la participation à l’entretien du centre commercial. La participation ne pouvait pas dépasser un montant déterminé, cette limite maximale n’étant plus applicable en cas de vente ou de mise en location des actifs de la société A.

Ultérieurement, par le biais d’une « reverse triangular merger », une société tierce est fondée dans le seul but de reprendre le capital-actions de A. Dite société a donc repris ce capital social, A. restant propriétaire de ses actifs (sa forme juridique a toutefois été modifiée, le management remplacé, et les locaux de la direction transférés).

Constatant cette réorganisation, B. demande à A. et à sa nouvelle société-mère une participation à l’entretien du centre commercial d’un montant supérieur au maximum contractuel précité. A. s’y oppose. D’où la présente procédure. B. invoque la théorie juridique de la fusion de fait (« de facto merger »). Elle considère qu’il convient de regarder au-delà du type de fusion choisi et de prendre en compte ici une « fusion de fait » impliquant une situation contemplée par le contrat entre A. et B., soit le transfert des actifs qui permet de juger comme nulle la clause de valeur maximale de la participation à l’entretien du centre commercial.

En l’espèce, la cour rejette la théorie de la fusion de fait, et considère qu’au moment de contracter au sujet de la question de la participation des frais du centre commercial, l’intention des parties était d’abolir la limite supérieure de ces frais uniquement en cas de transfert ou de location des actifs, et non en cas de transfert de la propriété des actions de la société, ledit transfert n’impliquant aucune modification s’agissant de la propriété des actifs, qui restent en main de la même société : seul l’actionnariat change, dans le cadre d’une « reverse triangular merger » (la forme juridique de l’entreprise a elle aussi été modifiée, ce qui n’est pas relevant ici dans la mesure où c’est bien la forme sociale (peu importe laquelle) qui détient encore et toujours ses propres actifs, avant et après les opérations d’acquisition). La cour serait prête à juger autrement, et à appliquer la théorie « de facto merger », si des parties utilisaient le montage de « reverse triangular merger » pour porter préjudice aux droits des créanciers ou des actionnaires sociaux, ce qui n’est pas le cas en l’espèce.