Lead Opinion
WELLFORD, J., delivered the opinion of the court, in which SILER, J., joined. GILMAN, J. (p. 678), delivered a separate concurring opinion.
Plaintiff Wilton Corporation (“Wilton”) appeals from the district court’s grant of summary judgment in favor of defendant Keith A. Brown. Wilton argues that the district court erred in finding that there was insufficient evidence to create a genuine issue of material fact. Brown countered by filing a motion for damages and costs to be paid by Wilton, arguing that Wilton’s appeal was frivоlous. For the reasons set forth below, we AFFIRM the district court and GRANT Brown’s motion for sanctions against Wilton for filing a frivolous appeal, and REMAND to the district court for a hearing to determine the proper damages and costs to be awarded Brown.
I.
Wilton, a Colorado corporation with its principal place of business in Illinois, has a manufacturing facility located in Winchester, Tennessee. Wilton required certain metal castings to be supplied for use as product components. Ashland Castings (“Ashland”)
In April of 1994, Ashland contracted to supply Wilton with castings for wheel hubs on a one year fixed price basis. The contract was negotiated by Charles Harwell, general manager of Ashland, and Jim Wiseman, the рurchasing manager at Wilton. Brown was not involved in the negotiation of the contract. At the time of the contract, Wilton dealt with Ashland as a corporate entity. Wilton did not call upon Brown to guarantee Ashland’s performance.
In June of 1994, there was a serious fire at Ashland’s facility, which caused significant expense and disrupted production. For pressing financial reasons, Ashland decided to increase its prices to its customers, including Wilton. Wilton objected, arguing that Ashland was bound by the price in the 1994 contract. When the situation was brought to Brown’s attention, he declined to intervene. Due to a lack of other suppliers, Wilton continued to purchase castings from Ashland for a time at the higher price under protest.
In December of 1995, Wilton sued Ash-land for damages, alleging breach of contract among other things. Thereafter, Wilton amended its complaint to add Ash-land Capital, Chimera Corp., and Brown persоnally. The claims against Chimera and Brown requested that Ashland’s corporate veil be pierced, and that the court impose Ashland’s liabilities on both Chimera, a separate corporation, and Brown. Chimera and Brown moved for summary judgment. The district court granted Chimera and Brown’s motions for summary judgment, which were not made final pursuant to Fed.R.Civ.P. 54(b). In July of 1998, however, the parties entered into a consent judgment, making Ashland solely liable for breach of contract аnd awarding Wilton damages of $155,395.51. The con
Wilton filed this appeal, challenging the order wherein the district court found that Ashland’s corporate veil could not be pierced to impose the corporation’s liability on Brown personally. The appeal asserts that personal liability should be imposed. Brown has filed a motion seeking damages and costs based on what he asserts is а frivolous appeal. Wilton has filed no response, but argued in oral argument that Brown’s motion should be denied.
II.
We review the district court’s grant of summary judgment de novo, using the same standards applied by the district court. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587,
In determining whether Ashland’s corporate veil should be pierced to make Brown responsible for the liabilities of Ashland, the district court applied the substantive law of Ohio.
(1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own;
(2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and
(3) injury or unjust loss resulted to the plaintiff from such control and wrong.
Belvedere,
Wilton argues that the district court erred in finding that the evidence was insufficient to allow a jury to consider the question. Basically, Wilton claims that Ashland had no mind, will, or existence separate from that of Brown because Brown was the sole funding source of Ash-land, and because of Brown’s decision nоt to interfere in the decision to breach the supply contract with Wilton by raising the price. The decision to breach the contract, Wilton argues, had the effect of minimizing Brown’s further risk of loss of investment to the detriment of Wilton. Wilton argues generally that the deposition testimony and documents create a genuine issue of material fact as to whether Brown should be answerable for damages caused by Ash-land.
Brown argues that Wilton has not put forth even a sсintilla of evidence to suggest that Ashland did not have a valid existence separate from Brown himself. Brown first points out that limited liability is a fundamental principle of corporate law, and that the rule applies even where there is only one shareholder. See, e.g., First Nat’l Bank of Chicago v. F.C. Trebein Co.,
The district court found, in granting Brown summary judgment, that there is simply no evidence that Brown’s actions caused Ashland to commit fraud or to misrepresent the relationship between Ash-land and Brown. We agree that a simple breach of contract cannot suffice as the type of “illegal” or fraudulent act intended by the court in Belvedere under the plain circumstances here. A party who suffers a loss from a corporation’s breach ordinarily has reсourse against the corporation and its assets or guarantors, if any. Brown did not exercise his ownership or control to defraud or to deceive Wilton. The district court committed no error in granting Brown judgment.
Belvedere puts in plain and simple terms the rule we apply in this case:
A fundamental rule of corporate law is that, normally, shareholders, officers, and directors are not liable for the debts of the corporation. See Presser, Piercing The Corporate Veil (1991) 1-4. An exception to this rule was develоped in equity to protect creditors of a corporation from shareholders who use the corporate entity for criminal or fraudulent purposes.
Belvedere,
III.
A.
We now consider Brown’s motion for sanctions. Brown moved for damages and
Frivolous Appeals — Damages and Costs
If a court of appeals determines that an appeal is frivolous, it may, after a separately filed motion or notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee.
There has been no formal, separate response by Wiltоn, or its counsel, to this motion.
We first note that Wilton has produced no evidence that Ashland was a sham corporation or that Brown exercised complete dominion and control over it. Brown filed an affidavit in early 1997, in which he stated under oath that he “was not involved in establishing the prices for Wilton” and that it was Chuck Harwell who negotiated the contract with Wilton. In their depositions, neither Harwell, who acknowledged being the person responsible for dеaling with Wilton, nor Wilton’s president, Charles Vogl, had any information that Brown himself negotiated the original price or amended and increased prices for Ashland. Furthermore, Wilton made no allegation that Brown drew money out of Ashland in the form of salary, dividends, or other distributions to offset his very large losses; that Ashland’s corporate formalities were suspect; that Ashland relied upon Brown in any way when Wilton made its deal with Harwell; that Ashland did not consistently and continually lose money after 1993; or that Ashland was not a corporation in good standing. Moreover, Wilton has produced no evidence that Brown made any representations or inducements to obtain or keep Wilton’s business.
The district court found that Wilton’s claims in response to Brown’s motion for summary judgment were narrowed considerably: “that Brown caused [Old] Ashland to breach its contract with Wilton and that this action constitutes fraud or an illegal act” under Belvedere rationale.
Nothing in the record indicates that Brown fraudulently induced [Old] Ash-land to make this decision. Faced with the knowledge that Brown would not be providing further capital to the corporation and with continuing losses, [Old] Ashland decided to increase its prices and to breach its contract with Wilton. This decision does not constitute fraud and does not justify imposing personal liability on Brown.
Piercing the corporatе veil is an equitable remedy designed to avoid the injustice which results from abuse of the corporate form.... [Old] Ashland’s breach of contract with Wilton, whether motivated by Brown’s refusal to provide continuing capital to the company or his desire to minimize liability as a guarantor, simply does not rise to this level....
Earlier, the district court concluded that “Wilton has presented no evidence that Brown acted with malice, in his self-interest, or contrary to the perсeived best interests of [Old] Ashland. Brown, as sole shareholder, merely decided to stop personally funding [Old] Ashland’s continuing losses.” There was simply no “tortious interference,” “fraud,” or illegality involved in this conduct.
Contrary to Wilton’s argument made to the district court and to this court on appeal, Ashland, as a corporation in good standing and substantially capitalized, was a separate business entity. Ash-land’s liabilities were not those of Brown, its principal investor and offiсer, unless by reason of fraudulent, illegal or unjust acts. No such acts were demonstrated by Wilton
B.
We have related factual details of the controversy in order to reflect our view that the district court acted entirely properly in granting Brown summary judgment under the facts and the applicable law. We are now called upon to decide whethеr this appeal by Wilton is “frivolous” under App. R. Civ. P. 38. Pursuant to that rule, Brown has filed a motion for damages and costs and Wilton has had full opportunity to respond.
BLACK’S LAW DICTIONARY (6th ed.) defines “frivolous appeal” as:
One in which no justiciable question has been presented and appeal is readily recognizable as devoid of merit in that there is little prospect that it can ever succeed. Brooks v. General Motors Assembly Division, Mo.App.,527 S.W.2d 50 , 53.4
We believe that generally this may be an appropriate standard, but we lоok to the law of this circuit in dealing with this question. In Martin v. Commissioner of Internal Revenue,
Some cases have added the qualification that thе appeal be “obviously without merit” for Rule 38 sanctions to be applied. See Dallo, supra; Cincinnati Bronze, supra; Akron Paint & Varnish, supra. Our most recent case on this subject has described the Rule 38 sanctions requirement to be: “Sanctions are appropriate where ‘the appeal was prosecuted with no reasonable expectation of altering the district court’s judgment and for purposes of delay or harassment or out of sheer obstinacy.’ ” Allinder v. Inter-City Products Corp. (USA),
A majority of other circuits have not requirеd “bad faith” or “intentional misconduct” as a basis of Rule 38 sanctions. See Nagle v. Alspach,
We believe that this circuit, on the whole, does not require that an applicant such as Brown must demonstrate bad faith or intentional misconduct on the part of Wilton in order to prevail on its motion, but the issue is not free of doubt. Boggild v. Kenner Products, Division of CPG Products Corp.,
Thus, though we find this appeal to have been filed without delay or bad faith, we do find it to be wholly without merit. We conclude that this appeal involved an issue already “clearly resolved,” that it was “insubstantial,” and the plaintiffs arguments essentially had no reasonable expeсtation of altering the district court’s judgment based on law or fact.
In conclusion, we merely note that whether or not to impose sanctions in an appeal of this sort presents the court with a difficult choice. We do not wish to chill any appeal, especially in the criminal context, which involves serious, controversial, doubtful, or even novel questions. Where a client reasonably relies on the advice of counsel, it may be that a sanсtion for a frivolous appeal is properly imposed on the attorney if the appeal is without merit or substance. In any event, we are confident that such sanctions will rarely be imposed.
We conclude, in sum, that defendant has made out a case for the imposition of sanctions. “In order to protect this court’s ability to serve litigants with meritorious cases and in order to make lawyers give thoughtful consideration to whether there are grounds fоr an appeal before filing an
We REMAND to the district court because a hearing on damages and costs is indiсated. The district judge, acting as a special master, is in the best position to have such a hearing and assess these items fairly and efficiently.
Notes
. In 1995, the assets of Ashland Capital Corp. were purchased by DF Acquisition Corp., which then changed its name to Ashland Castings Corp. Though the district court refers to Ashland Capital Corporation as "Old Ash-land” and to Ashland Castings Corp. as "New Ashland,” we are dealing only with "Old Ash-land” in this appeal. Therefore, the "Old” and "New” distinctions are unnecеssary.
. The district court applied the law of Ohio because (1) the parties agreed that Ohio law governs the issue, and (2) there is no conflict between the competing doctrines in the laws of Tennessee and Ohio. We need not inquire into choice-of-law issues; the parties did not dispute that Ohio law applied. See Pampillonia v. RJR Nabisco, Inc.,
. Wilton puts it in its brief (p. 5) "that Brown used his power as sole shareholder, as president, as a director and chairman of the board, and as its primary, if not only source of funding, to cause Ashland to breach its contract with Wilton.”
. WEBSTER’S THIRD INTERNATIONAL DICTIONARY, in defining ''frivolous,” uses such terms as "of little weight or importance,” "not serious,” and "clearly insufficient.”
Concurrence Opinion
concurring.
I fully concur in Judge Wellford’s analysis of both the merits of this case and the issue of sanctions. My disagreement is with the decision to remand the case to the district court for it to determine the proper amount of the sanctions.
There are two reasons to believe that a determination of the appropriate sanctions is an appellate question. First, Rule 38 of the Federal Rules of Appellate Procedure states that “If a court of appeals determines that an appeal is frivolous, it may ... award just damages and ... costs ...” (emphasis added). Fed. R.App. P. 38. The plain language of the rule does not appear to contemplate a remand. Second, in nine of the ten appellate cases cited in the majority’s opinion in which sanctions were awarded, those sanctions were awarded at the appellate level. See Dallo v. INS,
Determining the award of sanctions at the appellate level strikes me as more efficient from the viewpoint of both the parties and the court system. The district court does not possess any more information than do we about the costs that Brown incurred in this appeal. Furthermore, with the district court’s crowded docket and the possibility of still another appeal, it may well take months to dispose of what we could handle in a matter of weeks.
I also question the need for oral argument in a matter such as this, the absence of which would allow us to give as much consideration to this collateral issue as would the district court. In addition, our decision would almost certainly be final. I would therefore be inclined to follow Judge Posner’s approach in Hill v. Norfolk & Western Ry. Co.,