Appeal from a judgment entered in the United States District Court for the Southern District of New York, Duffy, J., pursuant to Fed.R.Civ.P. 54(b) against third-party plaintiff-appellant PepsiCo, Inc. PepsiCo alleges that third-party defendant-appellee Banner Industries, Inc., caused its partially owned subsidiary, Commercial Lovelace Motor Freight, Inc., to use assets of Commercial Lovelace Motor Freight's own wholly owned subsidiary, Lee Way Motor Freight, Inc., which Commercial Lovelace had purchased from PepsiCo, to pay debts owed to Banner instead of other debts for which plaintiff St. Paul Fire and Marine Insurance Co. had issued bonds; PepsiCo was Lee Way Motor Freight's guarantor on these bonds. PepsiCo's complaint against Banner is based on theories of alter ego liability and tortious acts by Banner directly to PepsiCo. Affirmed.
Van Graafeiland, Meskill and Winter, Circuit Judges.
This is an appeal from a judgment entered in the United States District Court for the Southern District of New York, Duffy, J., pursuant to Fed.R.Civ.P. 54(b) dismissing defendant-third-party plaintiff-appellant PepsiCo, Inc.'s (PepsiCo) third-party complaint against third-party defendant-appellee Banner Industries, Inc. (Banner). PepsiCo's complaint sought damages for losses it suffered when it became liable on bonds it guaranteed as a surety on behalf of its wholly owned subsidiary, Lee Way Motor Freight, Inc. (Lee Way). These bonds were drawn in favor of plaintiff St. Paul Fire and Marine Insurance Co. (St. Paul); their value exceeded $1 million.
PepsiCo alleges that when Banner's partially owned subsidiary, Commercial Lovelace Motor Freight, Inc. (CL), bought Lee Way from PepsiCo in 1984, Banner caused CL to sell off Lee Way's assets to pay debts CL owed to Banner. According to PepsiCo, if Banner had not caused CL to pay its debts to Banner in this fashion, Lee Way would have retained sufficient assets to pay its own debts, and PepsiCo would not have become liable on the guarantee it had executed in St. Paul's favor.
When Lee Way defaulted on its obligations, St. Paul sued PepsiCo for the money due on the bonds. PepsiCo answered the complaint and denied liability. It also filed a third-party complaint asserting two causes of action against Banner: that Banner was CL's alter ego, and therefore is accountable for CL's misdeeds and that Banner caused PepsiCo's loss "in whole or material part by the wrongful diversion of Lee Way assets," and therefore is accountable for its own improper conduct. The district court granted summary judgment for Banner and dismissed the third-party complaint. PepsiCo appeals from this decision.
We affirm the dismissal by the district court, but we do so on a jurisdictional basis without reaching the merits.
During the time that PepsiCo owned Lee Way, Lee Way and St. Paul executed many bonds. These bonds covered such areas of potential liability for Lee Way as workers' compensation claims and claims for state licensing and regulatory fees and taxes. In the event that Lee Way defaulted on any of the obligations guaranteed by a St. Paul bond, however, PepsiCo had agreed to indemnify St. Paul "from all loss and expense . . . incurred by [St. Paul] by reason of having executed any bond" for Lee Way. The indemnity agreement included a provision that "under no circumstances will termination or cancellation of [a] bond relieve [PepsiCo] of its obligation to indemnify [St. Paul]."
In 1984, PepsiCo sold the financially ailing Lee Way to CL. Lee Way had pre-tax losses of over $23 million in 1983; in the offering memorandum distributed by PepsiCo to CL, Alex. Brown & Sons, an investment advisor, described Lee Way as "a likely candidate for a leveraged buyout." In the course of negotiations surrounding the sale of Lee Way to CL, PepsiCo alleges it made an issue of CL's ability to continue to operate Lee Way, and required that any purchaser of Lee Way operate Lee Way in such a way that Lee Way could pay its debts, including those debts for which St. Paul had issued bonds. According to PepsiCo, its pre-sale investigation of CL indicated that CL was a company with a "positive net worth." Furthermore, CL represented that it could restore Lee Way to profitability; however, as CL noted in its proposed business plan, a document discussing implementation of the sale, CL intended to finance its purchase of Lee Way through "the transfer and/or sale of assets."
PepsiCo apparently was content to rely on CL's assertions that it would restore Lee Way to profitability, as it did not insist that CL agree to pay PepsiCo for any liability resulting from the St. Paul indemnity agreement. Under the terms of the indemnity agreement, PepsiCo would remain liable for claims based on acts that occurred before the sale of Lee Way. In fact, as PepsiCo admits, even if the bonds had been cancelled as of the day of the sale, PepsiCo "would still be liable for Lee Way's failure, after the sale, to pay for those workers['] compensation claims that had accrued before the sale." Nevertheless, although PepsiCo "had CL contractually agree to use CL's best efforts to replace PepsiCo on its guarantees . . . and . . . [caused] St. Paul to cancel its bonds," it did not extract a promise from CL that PepsiCo's own liability would be limited. CL was under no obligation to PepsiCo to hold it harmless from the indemnity agreement.
The sale to CL went through based on PepsiCo's understanding that CL was a financially viable operation, and that even though it was not profitable at the time of the sale, its management was capable of operating Lee Way and CL together in a commercially feasible manner.
The injury from which PepsiCo alleges it suffers was avowedly a result of the concealment from PepsiCo of Banner's true relation to CL, which PepsiCo contends was one of financial domination and managerial control. PepsiCo insists that it had no knowledge at the time it sold Lee Way to CL of this relationship. As to Banner's financial relation to CL, it was clear that at the time of the sale Banner was both a debtor and a substantial creditor of CL. The financial arrangements between the two companies included a tax-sharing agreement. PepsiCo urges, however, that the receivables on CL's books that were owed to it by Banner were debts that Banner had either refused to pay or for which "there was not even a claimed assurance of realizability." Upon examination of a balance sheet for CL, which was certified for CL by Arthur Andersen & Co., one of PepsiCo's expert witnesses testified that he did not think that realization by CL of the money it was owed was "assured beyond reasonable doubt. . . . I have seen nothing which would permit me to state unequivocally that Banner has guaranteed payment of the tax effect of the CL losses."
PepsiCo alleges that the operational relationship between CL and Banner was, in fact, one of complete domination and control of CL by Banner. Although Banner had entered an Employee Stock Ownership Plan (EOP) in March 1983, which reduced its holding in CL from 100 percent to 49.99 percent, and later further reduced its holdings by ten percent, Banner, in PepsiCo's view, retained control of CL through domination of CL's board of directors, manipulation of CL's officers, undercapitalization of CL and the consequent dependence of CL on Banner for financial support. PepsiCo contends that, through Banner's influence and domination of CL, Banner caused CL to "plunder" Lee Way, stripping it of assets. The revenue from the sale of these assets was then allegedly used to settle CL's debts to Banner. When CL could no longer afford to operate Lee Way as a going concern because of the alleged asset-stripping carried on by CL, Lee Way defaulted on its obligations under the St. Paul bonds. If CL had not complied with Banner's ambitions and stripped Lee Way of its assets, then, PepsiCo alleges, Lee Way would not have defaulted on its obligations under the St. Paul bonds. Thus, PepsiCo argues that Banner is responsible for its injury both because of its direct acts and its control of CL.
After CL's alleged plunder of Lee Way, in February 1985, CL merged with Lee Way to form a company known as Lee Way Holding Co. This was reputedly done so that the assets of both companies could be pooled to pay the liabilities of both. PepsiCo alleges that this act in itself harmed it because all of CL's assets were subject to liens, while none of Lee Way's were. Thus, the merger resulted in Lee Way's assets being easily available for the payment of debts for which CL's own liened assets were unavailable. Furthermore, at the time of the merger, CL owed Lee Way almost $7 million. This debt was wiped out in the merger. A week after the merger took place, Lee Way Holding Co. filed for protection from its creditors under Chapter 11 of the Bankruptcy Code. See in re Lee Way Holding Co., No. 2-85-00661 (Bkrtcy.S.D.Ohio).
Two weeks after the merger of CL and Lee Way, St. Paul instituted this action in the Southern District of New York seeking payment from PepsiCo of its debt under the indemnity agreement. PepsiCo impleaded Banner as a third-party defendant in St. Paul's action, alleging that Banner's domination of CL and its actions in causing CL to strip Lee Way of its assets were the cause of PepsiCo's liability. Specifically, PepsiCo stated two causes of action against Banner: that "third-party defendant Banner used CL and CL used Lee Way as alter egos, . . . without due regard for the separate corporate existences of CL and Lee Way, by reason whereof the corporate veils of CL and Lee Way should be pierced and Banner . . . should be required to indemnify and pay over to PepsiCo the amount of any liability herein," and that any liability of PepsiCo to St. Paul "will have been caused by the third-party defendant Banner, and the third-party defendant should be required to indemnify and pay over to PepsiCo the amount of any adjudged liability herein." PepsiCo initially denied liability to St. Paul, but has since entered into an "interim arrangement" whereby it has agreed to pay St. Paul "for all loss and expense reasonably and in good faith incurred by St. Paul in administering, defending and/or settling" claims arising out of Lee Way's default on the bonds. Four months after filing its third-party complaint against Banner, PepsiCo filed a claim as an unsecured creditor in Lee Way Holding Co.'s bankruptcy proceeding.
St. Paul and Banner both moved for summary judgment in the instant action. The district court did not rule on St. Paul's motion, finding it moot in light of the interim arrangement. It granted Banner's motion as to both counts of PepsiCo's complaint, however, on the ground that "PepsiCo [had] not established wrongdoing by Banner sufficient to disregard corporate separateness and cannot be permitted to shift to Banner the losses suffered by virtue of its status [as] a guarantor of Lee Way debts." PepsiCo thereafter filed a motion requesting the entry of judgment pursuant to Fed.R.Civ.P. 54(b), which the district court granted. PepsiCo thereafter filed a notice of appeal from this judgment.
On appeal, PepsiCo argues that the district court's decision had the effect of ruling that Banner was not liable because PepsiCo had not sought an agreement from Banner that Banner would pay any debts to St. Paul that Lee Way was not able to pay. Specifically, PepsiCo urges that the district court misconstrued the law as it applies to alter ego liability, that the district court did not adequately consider the record presented to it, that the district court should not have ruled against PepsiCo on the ground that PepsiCo "theoretically could have avoided the harm," and that the district court should have made findings of fact with respect to the dismissal of PepsiCo's second cause of action.
A. Jurisdiction: Appealability
In granting PepsiCo's motion for the entry of judgment pursuant to Rule 54(b), the district court gave no reasons for its action. The Federal Rules of Civil Procedure, however, require that
[when] more than one claim for relief is presented in an action, . . . the court may direct the entry of a final judgment as to one or more but fewer than all of the claims . . . only upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment. In the absence of such determination and direction, any order or other form of decision, however designated, which adjudicates fewer than all the claims . . . shall not terminate the action as to any of the claims . . . and the order or other form of decision is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties.
Fed.R.Civ.P. 54(b). In this case, the court merely wrote the words "Motion granted So ordered" and signed the cover of the notice of motion submitted by PepsiCo. It rendered no opinion on the matter and adopted no reasons for the decision.
Under the plain terms of Rule 54(b), this writing is not sufficient to constitute the entry of a final determination, and thus we would not have appellate jurisdiction over this case. See, e.g., Pension Benefit Guaranty Corp. v. LTV Corp., 875 F.2d 1008, 1013 (2d Cir. 1989); National Bank v. Dolgov, 853 F.2d 57, 58 (2d Cir. 1988) (per curiam); Haynesworth v. Miller, 261 U.S. App. D.C. 66, 820 F.2d 1245, 1252-53 (D.C.Cir. 1987); Santa Maria v. Owens-Illinois, Inc., 808 F.2d 848, 854-56 (1st Cir. 1986). However, we have recognized an exception to Rule 54(b)'s requirements "where the question of whether a Rule 54(b) certificate was improvidently granted is a close one, [and therefore] we may decline to dismiss the appeal 'chiefly because we believe that our disposition of the appeal . . . will make possible a more expeditious and just result for all parties.'" Pension Benefit Guaranty Corp., 875 F.2d at 1014 (quoting Gumer v. Shearson, Hammill & Co., 516 F.2d 283, 286 (2d Cir. 1974)). This exception applies if the record reveals that the district court could "easily" provide acceptable reasons for the entry of judgment and "[the] interest of sound judicial administration favors an expeditious resolution of the conflict presented." Id. at 1015; see also National Bank, 853 F.2d at 58 (district court did not give reasons for certification under Rule 54(b) and reasons for certification were not apparent from limited record before the Court); Perez v. Ortiz, 849 F.2d 793, 796-97 (2d Cir. 1988) (policies underlying Rule 54(b) best served by exercising jurisdiction over appeal where reasons district court would provide on remand were "obvious").
In this case, we are troubled by the district court's action for two reasons. First, the court's error was not that it used formulaic and conclusory language in granting PepsiCo's motion for the entry of judgment, see, e.g., National Bank, 853 F.2d at 58 (criticizing use of conclusory language to fulfill requirements of Rule 54(b)); Cullen v. Margiotta, 811 F.2d 698, 711 (2d Cir.), cert. denied, 483 U.S. 1021, 97 L. Ed. 2d 764, 107 S. Ct. 3266 (1987) (same). While we have allowed the use of such language in cases where other considerations have militated against dismissing an appeal, see, e.g., Pension Benefit Guaranty Corp., 875 F.2d at 1014-15, in this case the language used cannot be described as even "conclusory." Rather, the district court expressed no independent reasoning to indicate that it had considered the record before it and had determined that certification under Rule 54(b) was appropriate. The only indication we have that the court examined the issue in any manner is the inscription granting certification that appears on the cover of the moving papers.
Second, the interim arrangement cited by the district court as the reason St. Paul's motion for summary judgment was moot is not a final determination of PepsiCo's liability. Had a judgment been entered on St. Paul's claim, the issue currently before us would clearly be of relevance to the determination of liability in this case. However, without a judgment entered against PepsiCo, its obligation is certain only insofar as it continues to abide by the interim arrangement. To this effect, the extent of PepsiCo's liability is unknown, and hence the size of PepsiCo's claim against Banner is undetermined.
As to the first problem, however (the problem of the district court's abbreviated notation granting PepsiCo's motion), we believe that the reasons for the district court's actions are readily apparent from the record presented to us. The third-party claim at issue completely disposes of PepsiCo's entire claim for indemnity. It thus finally determines a distinct and separable part of the suit. There is no just reason for delay, as PepsiCo has already asserted to the district court that it has been making payments to St. Paul, and thus, it has already paid those funds for which it claims it is entitled to reimbursement.
This latter fact also disposes of the second problem we have identified with the district court's action. St. Paul's complaint against PepsiCo and PepsiCo's complaint against Banner state that PepsiCo's potential liability to St. Paul is $1,020,000, in addition to attorney's fees and costs (although the interim arrangement places no such limitation on the amount of payments PepsiCo is to make to St. Paul). In fact, in an affidavit supporting St. Paul's motion for summary judgment, an attorney for St. Paul stated that PepsiCo had, as of April 27, 1987, paid St. Paul more than $1,600,000 for loss and expense incurred by St. Paul. In its brief, PepsiCo states that it has paid St. Paul over $2 million as of the date of the district court's decision denying summary judgment to St. Paul. Furthermore, PepsiCo has stated that it is "not disputing its liability for" the $2 million it has paid St. Paul.
Because PepsiCo has already paid St. Paul an amount exceeding the amount requested in St. Paul's complaint,*fn1 and because it is unlikely that St. Paul's reasonable costs and attorney's fees incurred in connection with this matter exceed the difference between the amount paid and the amount of the bond, we will proceed on the premise that St. Paul's demand has become moot, as PepsiCo has given St. Paul everything St. Paul has requested in its complaint.*fn2 In effect, PepsiCo's liability has been determined by its payments pursuant to the interim arrangement. Thus, resolution of the ...