He mentioned something about a program with a mid-west oil company, something like that, and I said, did you hear anything else. And he said, no. I, having just come 12 days before from a terrible meeting with the MBf peopled, the new franchisee, having received a letter several days later from their chairman making all kinds of demands and threatening legal action, when he told me that he heard that the may be doing something with Carte Blanche, 'cause I was in New York and he was in Chicago with the Carte Blanche people, I called Barnum. He wasn't in. I wrote him a memo. . . .
And the reason I wrote him the memo was to tell him that, if you are going to do anything with Carte Blanche, my God, don't do it now, because I've got people who have been posturing for a lawsuit now for the last several years and we just had a terrible meeting and we just had a terrible letter threatening all kind of litigation. So, my God, you know, if you're going to do anything with it, this is really a lousy time to do it.
The only other witness produced by plaintiff who had direct knowledge of the meetings which had occurred between it and CBI was Mr. Khoo. Mr. Khoo, who first joined MBf in August 1984 and was appointed general manager for plaintiff in December 1984, attended the April 15, 1985 meeting. Over defendant's objections, written notes which Mr. Khoo had taken concerning what had occurred at that meeting, and which he stated he had transcribed "about ten days to two weeks" thereafter, were admitted into evidence. (Tr. 599; see Pl. Exhs. 97, 98).
Relying on those notes, Khoo testified that he had a very strong recollection that Flug had informed plaintiff at the meeting that CBI would honor its obligations under the Franchise Agreement (Tr. 602). In response to the question of whether or not Flug had informed Data Loy that CBI was finished and had suggested that perhaps MBf had not been fully apprised of this fact before it decided to assume control of plaintiff, Khoo testified that he could not recall such statements being made at that time. However, when directed to review his notes, he admitted that these statements must have been made, as his notes so reflected (Tr. 611-12).
There can be no doubt that in the circumstances at hand the parent, initially Carte Blanche, then Diners, had the power of total control over the subsidiary CBI. CBI's financial existence from the date of its inception in 1972 through the date it breached the Franchise Agreement and thereafter, was largely dependent on money loaned it by the parent; its chairman Flug was also an officer of another subdivision of the parent; and by 1984 it had no books, offices, or employees separate from those of the parent. However, as observed in Judge Leisure's March 1991 opinion, it is well settled under New York law that the parent's mere power to control the subsidiary is not enough to pierce the corporate veil. Carte-Blanche, 758 F.Supp. at 914-918; see Passalacqua Builders, Inc. v. Resnick Developers South, Inc. (2d Cir. 1991) 933 F.2d 131, 137-139; American Protein Corp. v. AG Volvo (2d Cir. 1988) 844 F.2d 56, 60; Gorrill v. Icelandair/Flugleidir (2d Cir. 1985) 761 F.2d 847, 853. If it were enough, veil piercing would occur in each and every case involving a wholly owned subsidiary.
The most recent statement of this Circuit as to what is required under New York law to pierce the corporate veil is Passalacqua, which was decided after Judge Leisure's March 1991 decision. We note at the outset that the Court there held that the trial court had improperly taken the question from the jury. In the instant case Judge Leisure has done precisely what Judge Pollack was criticized for not doing, namely submitting the question to a finder of fact.
Acting as such finder, we deem the following considerations to be significant. First, plaintiff does not suggest that CBI was not originally established for a proper corporate purpose. Second, there is no suggestion that any assets of CBI were "switched around" and improperly put to the use of the parent or any other subsidiary. Third, we find that there is no evidence that any assets were improperly taken from CBI by Diners; all CBI assets which were transferred to the parent were in repayment of a perfectly lawful outstanding corporate debt. Fourth, originally, and until the declining profitability of the enterprise made it impracticable, CBI functioned with its own personnel and separate office space. This last situation began to change when the parent determined that it made no sense to continue to support the subsidiary, and instructed Flug to wind down CBI's business. It seems to us to follow that Flug's conduct is the crux of this case, and therefore that his credibility -- or lack thereof -- in explaining such conduct is critical to our decision. See Passalacqua, 933 F.2d at 138; American Protein, 844 F.2d at 60; Carte-Blanche, 758 F.Supp. at 915, 918-19.
As noted above, Flug testified that at the time he decided not to provide plaintiff with the services it had requested, he believed plaintiff was itself in breach of the Franchise Agreement. He further stated that at the time of the April 15, 1985 meeting he had determined -- and told plaintiff -- that CBI would continue to meet its obligations under the Franchise Agreement, but that he did not believe these obligations included providing plaintiff with the "new" services it had requested in late 1984.
We found Flug to be a very credible witness and his testimony in this regard to be very persuasive. To be sure, he was wrong in his belief that plaintiff had breached the Franchise Agreement prior to April 15; but we are confident that this is what he then thought and that this belief motivated his actions. Similarly, despite the fact that the arbitrators later determined that CBI's refusal to provide plaintiff with the services which it had requested constituted a breach of the Franchise Agreement, we are confident that Flug did not at the time believe CBI's actions in this regard to be wrongful.
On the basis of this evidence, we are persuaded that Flug's decision that CBI would not provide plaintiff with the services it had requested was the result of his personal belief that plaintiff had breached the Franchise Agreement and his belief that CBI was not obligated to provide plaintiff with these services. We are also persuaded that Flug's negotiating tactics in 1981 (i.e. his failure to yield to plaintiff's demand for a right of first refusal in connection with the proposed termination agreement) were based on his belief that plaintiff's making of this demand was part of a negotiation tactic, and that any yielding on his part would only result in a higher price that CBI would ultimately have to pay for a termination agreement. In brief, we find that Flug's entire conduct in his dealings with plaintiff were consistent with his obligation as an officer of CBI to protect its own corporate interests. That such efforts also benefitted CBI's parent was an inevitable consequence of the relation between every subsidiary and its parent.
Accordingly, on the basis of the evidence produced, we can not conclude that the corporate veil should be pierced. We therefore find in favor of defendants and direct the clerk to enter judgment accordingly.
Dated: September 4, 1992
New York, New York
WHITMAN KNAPP, U.S.D.J.