Piercing the Veil 4: Texas Law Means What it Says

The fact pattern of this case is complicated, but can be boiled down to these basics. In 1985, the City of Edinburg signed a franchise agreement with Rio Grande Valley Gas Co. (“RGVG”), to supply natural gas to customers within its city limits. In exchange for the franchise, RGVG paid Edinburg 4% of the gross income derived from all gas sales within the city.

Natural gas prices for consumers are regulated and set by the Texas Railroad Commission. As things developed, the market price dropped significantly below the regulated price. Large industrial customers began clamoring for cheaper gas than was available at regulated rates. What to do? Well, the owners of RGVG formed another company, Reata Industrial Gas Co. (this is called a brother-sister relationship between the corporations) and used it to sell deregulated “spot market” gas to industrial customers in Edinburg. The price for this spot market gas fluctuated in price according to the market price, and put a lot of extra money in the pockets of RGVG’s and Reata’s owners.

At some point in time Edinburg realized that it wasn’t getting 4% of the gross revenues of those spot sales, and it sued RGVC, Reata, its successors, and affiliated entities (basically every company in sight), under the “single business enterprise” theory. The time period at issue was from October 1, 1985, through September 30, 1993, and by this time the amount in controversy was up to $774,445.33. As is common, the liability for attorneys fees dwarfed the amount in controversy: $3,518,000. Now that’s a number that needs the additional assets of more than one business entity in order to ensure collection.

Here’s how the 13th District Texas Court of Appeals described the “single business enterprise” theory to impose one business’s liability on another business entity:

The ‘single business enterprise’ theory is described as analogous to partnership principles: that when corporations are not operated as separate entities, but rather integrate their resources to achieve a common business purpose, each constituent corporation may be held liable for the debts incurred by the other component entities in pursuit of that business purpose.

Factors that are relevant to determine whether a “single business enterprise” is present include:

common employees
common offices
centralized accounting
payment of wages by one corporation to another corporation’s employees
common business name
services rendered by the employees of one corporation on behalf of another corporation
undocumented transfers of funds between corporations
unclear allocation of profits and losses between corporations

Now, this sort of test means that a court looks at these factors, and any others the plaintiffs want to raise (note the “including” term at the beginning). In other words, every “single business enterprise” case is different. Every test in every case is a little bit different. As long as a plaintiff lists multiple affiliated entities and shows a few of these factors, or any other “connection”, then the case becomes a “fact case” and a jury gets called in to decide it. No motion for summary judgment, no easy way out for the defendants. It’s full bore “dog and pony show” time for the defense, and all the legal fees that entails.

Just for good measure, the City also pleaded the theory of “joint enterprise liability”, which requires proof of the following:

an agreement among the members of the group;
a common purpose;
a community of pecuniary interest; and
an equal right to control the enterprise.

This one smacks of “plain old” conspiracy, other than that last element. And it was only appropriate, I suppose, in a sarcastic sort of way, that the trial court referred to the corporate defendants as the “Valero family.” The jury found a single business enterprise, but no joint enterprise liability.

Well, the Court of Appeals went way back to the horrible 1987 decision of Castleberry v. Branscum, and decided this case as though Casteberry was still good law. I was stunned when I read the opinion, as to how thoroughly the Court of Appeals used the old Castleberry logic.

The Court of Appeals just totally ignored Article 2.21 of the Texas Business Corporation Act, a law passed after, and in response to, the Castleberry decision in a valiant attempt to restore some sanity to Texas law. That law overturned the Castleberry decision. It made the decision irrelevant by “superceding” it.

Now, to bring you up to speed, Article 2.21 provides that a plaintiff can pierce a corporation’s veil on any of the theories of alter ego, actual fraud, constructive fraud, sham to perpetuate a fraud, and any other similar theory, ONLY if the plaintiff shows the person or entity upon whom liability is alleged:

1- caused the corporation to be used for the purpose of perpetuating, and did perpetrate, an actual fraud on the plaintiff primarily for the direct personal benefit of such person or entity; or
2- expressly agreed to assume liability, such as signing a guaranty of corporate debts, or
3- is otherwise liable to the plaintiff under the Texas Business Corporation Act or another applicable statute.

There is no “factor” test. There is no “includes.” The single business enterprise theory, as well as the joint enterprise liability theory, are covered by Article 2.21, Texas Business Corporation Act. As such, the Texas Supreme Court rightly said:

Since 1993, article 2.21 has provided that…..section A of article 2.21 is the exclusive means for imposing liability on a corporation for the obligations of another corporation in which it owns shares…..The City argues that the Valero entities had common directors, shared employees, and had central accounting and payroll systems. We have held that such facts do not justify disregarding the corporate structures of affiliated companies. But more importantly, proof of such facts would not establish liability under article 2.21….We…render judgment that the City take nothing.

Bingo. Turn out the lights, the party’s over. Or maybe we should let it begin. Peace on earth to you folks brave enough to own your own businesses.

S. Union Co., et al. v. City of Edinburg, 129 S.W.3d 74 (Tex. 2003)


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