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FLETCHER v. ATEX

August 17, 1994

MARIANNE E. FLETCHER, NANCY L. BARTLEY, RAPHAEL PAGANELLI, and CHARLOTTE EVANS, Plaintiffs,
v.
ATEX, INC. and EASTMAN KODAK COMPANY, Defendants. JENNY L. HERMANSON, and CHRISTY SCATTARELLA, Plaintiffs, v. 805 MIDDLESEX CORP., formerly known as ATEX, INC., EASTMAN KODAK COMPANY, and APPLE COMPUTERS, INC., Defendants.


Lasker


The opinion of the court was delivered by: MORRIS E. LASKER

LASKER, D.J.

 The plaintiffs in these actions allege a variety of soft tissue and other injuries, including "carpal tunnel" syndrome, which they contend were caused by the repetitive stress involved in the use of keyboards manufactured by Atex, Inc., now known as 805 Middlesex Corp.

 Eastman Kodak Company, Atex's parent company, moves for summary judgment dismissing all claims against it in both actions. Kodak's identical motion in related cases pending in state court was recently granted. King v. Eastman Kodak Co., No. 23439/92 (N.Y. Sup. Ct. Jun. 9, 1994). However, the decision in King is not binding on the plaintiffs in the instant case because they were not party to the state court determination. Expert Elec. Inc. v. Levine, 554 F.2d 1227, 1233 (2d Cir.), cert. denied, 434 U.S. 903, 54 L. Ed. 2d 190, 98 S. Ct. 300 (1977).

 The plaintiffs allege that Kodak is liable for their injuries even though Kodak did not manufacture the Atex keyboards because i) Atex was merely Kodak's alter ego or instrumentality; ii) Atex represented that Kodak participated in the manufacture of the keyboards; iii) Kodak acted in tortious concert with Atex; and iv) Atex was Kodak's agent.

 Alter Ego Liability

 Under New York choice of law principles, "the law of the state of incorporation determines when the corporate form will be disregarded and liability will be imposed on shareholders." Kalb, Voorhis & Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir. 1993). Since Atex was incorporated in Delaware, its law controls on this issue.

 Under Delaware law, "a court can pierce the corporate veil of an entity where there is fraud or where [it] is in fact a mere instrumentality or alter ego of its owner." Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del. Ch. 1992) (emphasis added); see also Harper v. Delaware Valley Broadcasters, Inc., 743 F. Supp. 1076, 1085 (D. Del. 1990), aff'd, 932 F.2d 959 (3d Cir. 1991) (recognizing alter ego theory as "something of a new development in the Delaware [state] courts").

 The plaintiffs contends that Atex is merely Kodak's instrumentality or alter ego because Atex participated in Kodak's centralized cash management system, Atex was insured under Kodak's liability insurance policy, Kodak's Annual Report for 1986 and a 1990 Atex software manual erroneously describe Atex as part of a "division" of Kodak, and a 1985 promotional publication by Atex states incorrectly that Atex "merged" with Kodak in 1981, instead of becoming Kodak's subsidiary. Plaintiffs also argue that Kodak unduly dominated its subsidiary's affairs because a number of Kodak employees sat on Atex's board of directors, Atex employees regularly met with Kodak employees to discuss general business matters, and Atex could not undertake major capital expenditures, execute real estate leases, or sell stock without Kodak's approval.

 Under Delaware law, a subsidiary may be regarded as its parent's alter ego if the corporations "operate[] as a single economic entity such that it would be inequitable . . . to uphold a legal distinction between them." Mabon, Nugent & Co. v. Texas American Energy Corp., 1990 Del. Ch. LEXIS 46, 1990 WL 44267, at *4 (Del. Ch. Apr. 12, 1990). However, "disregard of the corporate entity is appropriate only in exceptional circumstances." Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 270 (D. Del. 1989).

 The factors to be analyzed in determining whether Atex and Kodak indeed "operated as a single economic entity" include:

 
whether the [subsidiary] was adequately capitalized for the corporate undertaking; whether [it] was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder.

 Harco Nat. Ins. Co. v. Green Farms, Inc., 1989 Del. Ch. LEXIS 114, 1989 WL 110537, *4 (Del. Ch. 1989) (citing United States v. Golden Acres, Inc., 702 F. Supp. 1097, 1104 (D. Del. 1988)).

 Plaintiffs' claim of undue domination, when measured by this standard, is not persuasive. While it appears that Kodak and Atex are indeed close, the subsidiary possesses sufficient indicia of a separate corporate existence that it cannot be viewed as a mere instrumentality of Kodak. Plaintiffs, for example, have not challenged Kodak's representations that both companies observed corporate formalities at all times, that Atex managed its own day to day affairs, and that between 1981 (when Kodak acquired Atex) and 1992 (when Atex sold substantially all its assets to a third party), only ...


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