

Opinion issued
May 10, 2012

In
The
Court of
Appeals
For
The
First District
of Texas
————————————
NO. 01-10-00950-CV
———————————
RAYTHEON COMPANY, Appellant
V.
BOCCARD
USA CORPORATION, Appellee

 

 
On Appeal from the 215th
District Court 
Harris County, Texas

Trial Court Case No. 2004-18474
 

 
 
O P I N I O N
          Boccard USA Corporation sued Raytheon
Company seeking to hold it liable for a breach of contract by Raytheon Company’s
former third-tier subsidiary, United Engineers International, Inc. (“United
Engineers”) based on the theory of alter ego. 
A jury found United Engineers had breached its contract with Boccard and made an affirmative finding on Boccard’s alter ego claim against Raytheon Company.  Based on the jury’s verdict, the trial court rendered
judgment against Raytheon Company in favor of Boccard.  
          Of
the four issues raised by Raytheon Company on appeal, the dispositive issue we
address is whether Boccard had standing to pursue its
alter ego claim.  Because we hold that Boccard did not have standing to pursue the claim, we vacate
the trial court’s judgment and dismiss the case.  
Background Summary
          In May 1998, United
Engineers entered into a turnkey agreement with Atlantic Methanol Production
Company LLC (“AMPCO”) in which United Engineers agreed to provide “all design,
engineering, procurement, construction, . . . [and] other work
necessary to build a methanol production facility” for AMPCO in Equatorial
Guinea.  To build the plant, United
Engineers needed fabricated piping spool, and Boccard
agreed to supply such material to United Engineers.  In June 1999, the two companies entered into
a contract, in the form of a purchase order, setting out the terms of the agreement
by which Boccard would supply piping spool to United
Engineers.  The contract stated that the total
price of the order was not to exceed $5.5 million.  
          Over
the next year, disputes arose between the two companies regarding the order.  Each side accused the other of not
sufficiently performing its obligations under the agreement.  For example, Boccard
asserted that United Engineers failed to timely supply Boccard
with drawings and other information necessary for it to complete the order, and
United Engineers contended that Boccard was causing
unnecessary delays.  Over time, the scope
and the cost of order incrementally increased. 
After the last of the product was shipped by Boccard
to United Engineers in May 2000, Boccard claimed that
United Engineers still owed it over $3.9 million.  United Engineers claimed that Boccard had deviated from the agreement and, as a result, owed
money to United Engineers.  
          Around
this same time, United Engineers and its parent company, Raytheon Engineers
& Constructors, Inc. (“RE&C”), were sold to Morrison Knudsen, a
construction company.  Before the sale,
United Engineers was a wholly-owned subsidiary of RE&C, and RE&C was a
wholly-owned subsidiary of Raytheon Engineers and Constructors International,
Inc. (“RECI”), which is in turn, was a wholly owned subsidiary of Raytheon
Company (“Raytheon”).  Following the
sale, Raytheon and RECI remained as parent and subsidiary.  After purchasing RE&C and its
subsidiaries, including United Engineers, Morrison Knudsen and RE&C merged
to form Washington Group International, Inc. (“Washington Group”).  At that point, United Engineers became a
wholly-owned subsidiary of Washington Group. 

          About
a year after the corporate merger, Washington Group and its subsidiaries,
including United Engineers, filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code in Reno, Nevada. 
As a creditor, Boccard filed a proof of claim
in the bankruptcy court for the monies it claimed were owed by United Engineers
on the AMPCO methanol plant project.  
          When
the bankruptcy petition was filed, Washington Group became the debtor-in-possession,
acting in the capacity of a bankruptcy trustee.[1]  As debtor-in-possession, Washington Group
filed an adversary proceeding in the bankruptcy court against Raytheon and
RECI.  Among its claims, Washington Group
alleged that, before Morrison Knudsen purchased RE&C, Raytheon had depleted
RE&C of its working capital rendering it insolvent.  It further alleged that Raytheon had misrepresented
to Morrison Knudsen the true financial condition of RE&C, failing to
disclose a number of RE&C’s liabilities.  In January 2002, Raytheon and Washington Group
entered into a settlement agreement whereby each party mutually released the
other from all claims.  
          In
July 2003, Boccard filed an adversary proceeding seeking
to resolve its claim against Washington Group. 
On January 27, 2004, the bankruptcy court signed a stipulated order
dismissing Boccard’s adversary proceeding with
prejudice but allowing Boccard a claim in the bankruptcy
proceeding in the amount of $3.1 million. 
The order expressly provided that it had no res judicata or other
preclusive effect.  
          On
April 8, 2004, Boccard filed the instant suit against
Raytheon.  Boccard
asserted, inter alia, that United Engineers breached its contract by failing to
pay all amounts owed to Boccard for supplying the fabricated
piping spool for the construction of the AMPCO methanol plant.  Boccard sought to
hold Raytheon liable for United Engineers’s breach of
contract based on the theory of alter ego. 
Boccard alleged that, prior to selling
RE&C and United Engineers to Morrison Knudsen, Raytheon, and its linear
subsidiaries, had disregarded the corporate form to the point that each wholly-owned
subsidiary and its respective parent company were the alter egos of one another.  In other words, United Engineers and its
parent, RE&C, were alter egos of each other; RE&C and RECI were alter
egos; and RECI and Raytheon were alter egos.  Boccard claimed that
Raytheon, as the ultimate parent corporation in the chain, was liable for
United Engineers’s breach of contract.  
          Raytheon
filed a motion for partial summary judgment in which it challenged Boccard’s alter ego claim. 
Raytheon asserted, inter alia, that Boccard
did not have standing to assert an alter ego claim because the claim belonged
exclusively to the bankruptcy estate.  Raytheon
argued that, pursuant to the Bankruptcy Code, only the bankruptcy trustee, or as
in this case, the debtor-in-possession, has standing to assert a claim owned by
the bankruptcy estate.  
          The
trial court denied Raytheon’s motion for partial summary judgment.  The case proceeded to trial before a jury.  The jury found in favor of Boccard on its breach of contract and alter ego claims.  The trial court rendered judgment on the
jury’s verdict, awarding Boccard $3,444,513.62 in
damages.[2]  This appeal followed.  
Standing 
          In
its first issue, Raytheon asserts that Boccard lacked
standing to assert its alter ego claim. 
Without the alter ego claim, Boccard cannot
recover against Raytheon for breach of contract. 
A.      General Legal Principles Regarding
Standing 
          Standing
focuses on the question of who may bring an action.  See Patterson
v. Planned Parenthood, 971 S.W.2d 439, 442 (Tex. 1998).  Standing is a component of subject-matter
jurisdiction, and subject-matter jurisdiction is essential to the authority of
a court to decide a case.  Tex. Ass’n
of Bus. v.
Tex. Air Control Bd., 852 S.W.2d 440, 443 (Tex. 1993); see also DaimlerChrysler Corp. v. Inman, 252 S.W.3d 299, 304 (Tex. 2008)
(“A court has no jurisdiction over a claim made by a plaintiff without standing
to assert it.”).  Standing is never
presumed, cannot be waived, and can be raised for the first time on appeal.  Tex. Ass’n of Bus., 852 S.W.2d at 444–45.
 We review standing under the same
standard by which we review subject-matter jurisdiction generally.  Id. at 446.  Whether
the trial court has subject-matter jurisdiction is a question of law that we
review de novo.  Tex. Dep’t of Parks & Wildlife v.
Miranda, 133 S.W.3d 217, 226 (Tex. 2004).
B.      Exclusive Standing of Debtor-in-Possession
to File Alter Ego Claim
          Raytheon asserts that,
before the bankruptcy action was filed, the alter ego claim belonged to United
Engineers and RE&C; however, on the filing of the bankruptcy action, the
alter ego claims passed into the bankruptcy estate.  Raytheon contends that Washington Group, as
debtor-in-possession, is the only party with standing to prosecute a claim
belonging to the bankruptcy estate, including the alter ego claim. [3]
          The property of a bankruptcy estate
includes “all legal or equitable interests of the debtor in property as of the
commencement of the case.”  11 U.S.C. § 541(a)(1).  “The phrase
‘all legal or equitable interests of the debtor in property’ has been construed
broadly, and includes ‘rights of action’ such as claims based on state or
federal law.”  Highland Capital Mgmt. LP v. Chesapeake Energy Corp., 522 F.3d 575,
584 (5th Cir. 2008).  More
precisely, “all legal or equitable interests” include causes of action
belonging to the debtor when the bankruptcy petition is filed.  See Highland
Capital Mgmt., L.P. v. Ryder Scott Co., 212 S.W.3d 522, 530 (Tex.
App.—Houston [1st Dist.] 2006, pet. denied) (citing In re Educators Group Health Trust, 25 F.3d 1281, 1283 (5th Cir. 1994)).
 A trustee, as the representative of the
bankruptcy estate, is the only party with standing to prosecute causes of
action belonging to the estate.[4]
 See
Tow v. Pagano, 312 S.W.3d 751, 757 (Tex. App.—Houston [1st Dist.] 2009, no
pet.) (citing Kane
v. Nat’l Union Fire Ins. Co., 535 F.3d 380, 385 (5th Cir. 2008)); Highland Capital Mgmt., 212 S.W.3d at
530.  In other words, “[i]f a cause of action belongs to the estate, then the
trustee has exclusive standing to assert the claim.[5]
 In
re Educators Group Health Trust, 25 F.3d at 1284; see In re S.I. Acquisition, 817 F.2d 1142, 1153–54 (5th Cir. 1987) (observing
that the “general bankruptcy policy of ensuring that all similarly-situated
creditors are treated fairly” requires that the trustee have the first
opportunity to pursue estate actions without interference from individual
creditors).  In short, only a trustee or
a debtor-in-possession can assert a claim that is property of the bankruptcy
estate. [6]
 See
Tow, 312 S.W.3d at 757.
          To determine if a cause of action is
property of the estate, a court must consider whether, under state law, the
debtor could have asserted the action at the commencement of the bankruptcy proceeding.
 See
Highland Capital Mgmt., 212 S.W.3d at 530.  United Engineers is a Pennsylvania
corporation while RE&C, RECI, and Raytheon are Delaware corporations.  The parties agree that Delaware and
Pennsylvania law governs the determination of whether the alter ego claim
belongs to the bankruptcy estate. 
          The parties also agree that the
relevant inquiry here is whether Delaware and Pennsylvania law permit a
wholly-owned subsidiary to pierce its own corporate veil to reach the assets of
its parent corporation.  No Delaware or
Pennsylvania state court has answered this question.  
          Federal courts have held that Delaware
law allows a debtor corporation to pierce its own corporate veil, thereby
giving a bankruptcy trustee or debtor-in-possession exclusive standing to
assert an alter ego claim on behalf of the bankruptcy estate.  See,
e.g., In re Alper Holdings USA, Inc., 398 B.R.
736, 759–60 (S.D.N.Y. 2008); In re OODC, LLC, 321 B.R. 128, 136–37 (Bankr.
D. Del. 2005); In re
Enron Corp., Adversary Pro. No. 02–3609 A, 2003 WL
1889040, at *3–7 (Bankr. S.D.N.Y. Apr. 17, 2003); Pereira v. Cogan, 265 B.R. 32, 35 (S.D.N.Y. 2001); Murray v. Miner, 876 F. Supp. 512, 517
(S.D.N.Y. 1995), aff’d,
74 F.3d 402 (2d Cir. 1996).  Federal
courts interpreting Pennsylvania law have reached the same conclusion.  See, e.g., Jamuna Real Estate LLC v. Bagga, 365 B.R. 540, 563–64 (Bankr. E.D. Pa. 2007); Cedarbrook Plaza, Inc. v. Gottfried, No. CIV. A.
97–1560, 1997 WL 330390, at *9–10 (E.D. Pa. June 6, 1997).
          Boccard asserts that these
federal decisions lack analysis and ignore established Delaware and
Pennsylvania corporate law.  Boccard points out that the subsidiaries involved here—RECI, RE&C, and United
Engineers—are each 100 percent owned by its respective parent
corporation.  Boccard
contends that, under Delaware law, a wholly-owned subsidiary cannot pierce its
own corporate veil to reach its parent.  It bases this assertion on Delaware law
indicating that, while a wholly-owned subsidiary owes a duty to act in its
parent’s best interest, the parent company does not owe the subsidiary a
reciprocal duty to act in its best interest. 
See, e.g., Trenwick Amer. Litig. Trust v. Ernst & Young, LLP, 906
A.2d 168, 173 (Del. Ch. 2006) (“Wholly-owned
subsidiary corporations are expected to operate for the benefit of their parent
corporations; that is why they are created.  Parent corporations do not owe such
subsidiaries fiduciary duties.  That is
established Delaware law.”).  Boccard
argues that permitting a wholly-owned subsidiary to pierce its own corporate
veil to reach its parent’s assets is inconsistent with these principles.  Boccard asserts
that Pennsylvania law also embraces these basic corporate legal principles. 
          In support of its position, Boccard relies on Anadarko
Petroleum Corp. v. Panhandle Eastern Corp., 545 A.2d 1171, 1174 (Del. 1988).  The facts and allegations in Anadarko, however, bear little resemblance to the instant case.  The issue in Anadarko involved “whether a corporate parent and directors of a
wholly-owned subsidiary owe fiduciary duties to the prospective stockholders of
the subsidiary after the parent declares its intention to spin-off the
subsidiary.”  Id. at 1172.  The Supreme Court of
Delaware concluded “that prior to the date of distribution the interests held
by Anadarko’s prospective stockholders were insufficient to impose fiduciary
obligations on the parent and the subsidiary’s directors.”  Id.  The court concluded that, “in a parent and
wholly-owned subsidiary context, the directors of the subsidiary are obligated
only to manage the affairs of the subsidiary in the best interests of the
parent and its shareholders.”[7]
 Id. at 1174.  Significantly, the context in which the Anadarko court reached this conclusion was
not one in which claims of insolvency were made, as in this case.[8]
 See
id. at 1172–74. 
          Usually, the fiduciary duties of the
directors of a wholly-owned subsidiary corporation run to the parent
corporation, not to the subsidiary itself. 
See Trenwick,
906 A.2d at 200–01.  However, once the subsidiary corporation is
insolvent, those duties shift to the subsidiary and to its creditors.  In re Scott Acquisition Corp., 344 B.R. 283, 286–88 (Bankr. D. Del. 2006); accord Trenwick, 906 A.2d at 203 n.96; see also In re Greater Se. Comm. Hosp. Corp.,
353 B.R. 324, 342 n.24 (Bankr. D.D.C.
2006) (citing Trenwick
for the proposition that fiduciary duties of director of wholly-owned
subsidiary flow to parent corporation, except when subsidiary becomes
insolvent).  Although a wholly-owned
subsidiary is not owed fiduciary duties by its corporate parent under normal
circumstances, Trenwick,
906 A.2d at 191–92 (citing Anadarko,
545 A.2d at 1174), the Supreme Court of Delaware has recognized “that a parent
owes fiduciary duties to its subsidiary when that subsidiary is insolvent.”  In re Tronox Inc., 450 B.R. 432, 438 (Bankr. S.D.N.Y 2011) (citing N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla,
930 A.2d 92, 101–02 (Del. 2007)); see In
re Scott Acquisition Corp., 344 B.R. at 288–89 (holding that directors
of wholly-owned insolvent subsidiary owe fiduciary duties not only to subsidiary’s
creditors, but also to subsidiary because duties owed to creditors are
derivative of duties owed to subsidiary).   
          Here, central to Boccard’s alter
ego claims were its allegations—and ultimately Boccard’s proof at trial—that the subsidiaries were,
at all relevant times, operated as insolvent entities.  Thus, the corporate legal principles cited by
Boccard, regarding the duties owed between a
subsidiary and its parent, are inapposite to a determination of whether a
wholly-owned insolvent subsidiary can
pierce its own corporate veil to reach its parent’s assets.  See In re Mirant Corp., 326
B.R. 646, 651 (Bankr. N.D. Tex. 2005)
(concluding that Anadarko “was
totally inapposite to case at bar” because claims involved in that case—fraudulent transfer, fraud,
and alter ego—“presuppose or implicate the insolvency
of the [debtor subsidiaries]”). 
          Boccard
also cites Caplin v. Marine Midland Grace Trust Co. of New
York for the proposition that a debtor estate, and therefore the trustee,
has no claim against a party or an entity that was in pari delicto with the debtor.  See 406
U.S. 416, 430, 92 S. Ct. 1678, 1686 (1972). 
Boccard asserts that RECI and RE&C were
complicit in permitting its respective parent to use it as an alter ego to the
detriment of creditors.  Boccard contends that, under Caplin, such complicity prevents
the subsidiaries from asserting an alter ego claim.  It avers that RECI and RE&C are “just as
liable as Raytheon.”  
          Under
Pennsylvania law, the legal fiction that a corporation is a legal entity
separate and distinct from its shareholder may be disregarded, and the
corporate veil “pierced,” “whenever one in control of a corporation uses that
control, or uses the corporate assets, to further [its] own personal interests.
. . .”  Village at Camelback Prop. Owners Assoc. v. Carr, 538 A.2d 528,
532–533 (Pa. Super. 1988) (quoting Ashley
v. Ashley, 393 A.2d 637, 641 (Pa. 1978)).  
          In Delaware,
a plaintiff must produce evidence that demonstrates the parent corporation’s
complete domination and control of the subsidiary.  See Wallace
v. Wood, 752 A.2d 1175, 1183–84
(Del. Ch. 1999).  The degree of control
required is “exclusive domination and control . . . to the point that [the
subsidiary] no longer [has] legal or independent significance of [its] own.”  Id. at 1184.  Thus, to
pursue a parent corporation’s assets under the theory of alter ego, a trustee need
not establish that the subsidiary is in pari delicto with its parent.  To the contrary, the parent’s domination and
control over the subsidiary are hallmarks of an alter ego claim.  
          As explained
by the Second Circuit Court of Appeals, “[W]here the parties do not stand on
equal terms and one party controls the other, the in pari delicto doctrine does not apply.”
 Kalb, Voorhis & Co. v. Am. Fin. Corp.,
8 F.3d 130, 133 (2d Cir. 1993).  In
Kalb, the court held that “[t]he in pari delicto
defense does not apply to [alter ego] actions because the essential element of
such claims is that a controlling shareholder forced the corporation to act for
the benefit of the shareholder through domination and control.”  Id.  In such cases, the element of mutual
fault (in pari
delicto) is not present, thereby rendering the defense unavailable.  See id.  Accordingly, the court held that “because
[Kalb, Voorhis] alleges that AFC dominated and
controlled Circle K, the in pari delicto doctrine would not bar Circle K from
asserting an alter ego claim. . . .”  Id. 
Here, Boccard also alleged that the corporate
parents dominated and controlled the subsidiaries.  Thus, the in
pari delicto doctrine would not apply.  See id.
          At this point, we are still left to determine whether Delaware
and Pennsylvania law permits a corporation to pierce its own veil.  The decisions on this issue, in the context
of whether a trustee has standing to assert an alter ego claim on behalf of the
bankruptcy estate, vary widely from state to state.  
          Courts in some states, including
Michigan, Arkansas, Alabama, Tennessee, Missouri, and Maryland have held that a
corporation may not pierce its own veil to permit a trustee to pursue an alter
ego theory on behalf of a bankruptcy estate.  See,
e.g., In re RCS Engineered Prods. Co., Inc., 102 F.3d 223, 226 (6th Cir. 1996) (Michigan); In
re Ozark Equip. Co., Inc., 816 F.2d 1222, 1225–26 (8th Cir. 1987) (Arkansas); In re Cello
Energy, LLC, No. 10–04877, 2011 WL 1332292, at
*5 (Bankr. S.D.
Ala. Apr. 7, 2011) (Alabama); In re Cincom iOutsource, Inc., 398
B.R. 223, 231–32 (Bankr. S.D. Ohio 2008) (Ohio); In re Elegant Custom Homes, Inc., No.
CV 06-2574-PHX-DGC, 2007 WL 1412456, at *4 (Arizona); In re Del-Met Corp., 322 B.R. 781, 833–34 (M.D. Tenn. 2005)
(Tennessee); In re Transcolor
Corp., 296 B.R. 343, 367 (Bankr. D. Md. 2003) (Maryland); In
re Mar-Kay Plastics, Inc., 234 B.R. 473, 482 (Bankr.
W.D. Mo. 1999) (Missouri).  These courts have generally held that, in
those states, piercing the corporate veil is designed to protect the rights of
third party creditors, not to protect the rights of the corporation itself, see, e.g., RCS Engineered Prods. Co., Inc.,
102 F.3d at 226, and allowing a corporation to pierce its own veil would have
the effect of denying the corporation its own corporate existence.  See,
e.g., In re Dakota Drilling, Inc., 135 B.R. 878, 884 (Bankr.
D. N.D. 1991).
          States in which courts have allowed an
alter ego action to be brought by a corporation include Virginia, North
Carolina, Nevada, Florida, Georgia, New York, and Utah.[9]
 See,
e.g., Steyr-Daimler-Puch of
Am. Corp. v. Pappas, 852 F.2d 132, 135–36 (4th Cir. 1988)
(Virginia); Alvarez v. Ward, No.
1:11CV03, 2011 WL 7025906, at *3–4 (W.D. N.C. Oct. 17, 2011)
(North Carolina); Trustees Of The
Construction Industry & Laborers Health & Welfare Trust v. Vasquez,
2011 WL 4549228, at *2–3 (D. Nev. Sept. 29, 2011) (Nevada); In re Xenerga,
Inc., 449 B.R. 594, 599–600 (Bankr.
M.D. Fla. May 24, 2011); Baillie
Lumber Co. v. Thompson, 612 S.E.2d 296, 299 (Ga. 2005) (Georgia); Green v. Bate Records, Inc., 97 B.R.
163, 165–66 (S.D. N.Y. 1989) (New York); Anr Ltd. v. Chattin, 89 B.R. 898, 903 (D. Utah
1988).  In these cases, the courts
sought to benefit the debtor corporation estate, “ultimately benefitting the
estate’s creditors” in accordance with “the Bankruptcy Code’s ultimate goal of
balancing the equities and interests of all affected parties in a bankruptcy
case.”  In re Elegant Custom Homes, 2007 WL 1412456, at *3 (citing In re Folks, 211 B.R. 378, 386 (B.A.P.
9th Cir. 1997)).  
          A similar holding was reached by the Court
of Appeals for the Fifth Circuit in S.I.
Acquisition, Inc., 817 F.2d at 1152–53.  There, the Fifth Circuit concluded that, under
Texas law, a corporation could pierce its own corporate veil because “the
predominate policy of Texas alter ego law is that the control entity that has
misused the corporation form will be held accountable for the corporation’s
obligations.”  Id. at 1152.  The court explained that the law was based “on
equitable concerns” and was not dependent on the specific relationships between
the alter ego and the creditors.  See id.  As a result, the court concluded that the
alter ego action was property of the bankruptcy estate.  Id. at 1153.  The
court also noted that its decision furthered a policy underlying the Bankruptcy
Code because, if the creditor’s alter ego action were not stayed, it would
“promote the first-come-first-served unequal distribution dilemma that the
Bankruptcy Code . . . sought to prevent.”  Id.
at 1153–54.  
          In line with S.I. Acquisition, the Court of Appeals for the Third Circuit
explained the rationale for allowing a corporation to pierce its own veil, as
follows:
It may seem strange to allow a corporation to pierce its
own veil, since it cannot claim to be either a creditor that was deceived or
defrauded by the corporate fiction, or an involuntary tort creditor.  In some states, however, piercing the
corporate veil and alter ego actions are allowed to prevent unjust or
inequitable results; they are not based solely on a policy of protecting
creditors.  Because piercing the
corporate veil or alter ego causes of action are based upon preventing inequity
or unfairness, it is not incompatible with the purposes of the doctrines to
allow a debtor corporation to pursue a claim based upon such a theory.
 
Phar-Mor, Inc. v. Coopers
& Lybrand, 22 F.3d 1228, 1240 n.20 (3rd Cir. 1994) (citations omitted).
          Delaware law and Pennsylvania law,
governing alter ego claims, is based on the equitable concerns discussed in S.I. Acquistion.  “Delaware law permits a court to pierce the
corporate veil ‘where there is fraud or where [the corporation] is in fact a
mere instrumentality or alter ego of its owner.’”  NetJets Aviation, Inc.
v. LHC Commc’ns LLC, 537 F.3d 168, 177 (2d Cir. 2008)
(quoting Geyer v. Ingersoll Publications
Co., 621 A.2d 784, 793 (Del. Ch. 1992)).  “To prevail under the alter-ego theory of
piercing the veil, a plaintiff need not prove that there was actual fraud but
must show a mingling of the operations of the entity and its owner plus an
overall element of injustice or unfairness.”  Id.  The factors that a court must consider when
evaluating an alter-ego argument for veil piercing under Delaware law include,
whether the corporation was
adequately capitalized for the corporate undertaking; whether the corporation
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.
 
Id. at 176–77.
          Pennsylvania courts applying the
equitable remedy of alter ego liability will allow the corporate veil to be
pierced to “prevent fraud, illegality, or injustice, or when recognition of the
corporate entity would defeat the public purpose or shield someone from a
liability for a crime.”  Village at Camelback Prop. Owners Assn. Inc.,
538 A.2d at 533. 
The Supreme Court of Pennsylvania addressed alter ego liability under
Pennsylvania law in Ashley v. Ashley,
393 A.2d 637 (Pa. 1978).  There, the
court summarized as follows:
This legal fiction of a separate corporate entity was
designed to serve convenience and justice and will be disregarded whenever
justice or public policy demand and when the rights of innocent parties are not
prejudiced nor the theory of the corporate entity rendered useless.  We have said that whenever one in control of a
corporation uses that control, or uses the corporate assets, to further his or
her own personal interests, the fiction of the separate corporate identity may
properly be disregarded.
 
Id. at 641 (citations omitted).
          The focus of Delaware and Pennsylvania
law is on the conduct of the corporation rather than on the relationship
between the corporation and its creditors. 
The law of those states emphasizes equitable concerns, directed at holding
the control entity accountable and addressing unjust enrichment to that company.  We are convinced that the policies that
persuaded the Fifth Circuit that alter ego claims against a debtor’s parent corporation
may be brought by the bankruptcy estate representative, rather than individual
creditors, support the same conclusion in this case.  See S.I.
Acquisition, 817 F.2d at 1152–53; see also Baillie Lumber, 612
S.E.2d at 300.  
          Moreover, we recognize that the
alter ego doctrine is an equitable remedy. 
See Peacock v. Thomas, 516
U.S. 349, 354, 116 S. Ct. 862, 866 (1996). 
To the extent
that each were damaged by its respective parent’s domination and control over
it to the point that it was rendered insolvent and unable to meet its legal
obligations, the subsidiary should have standing to assert an equitable claim
against its dominant parent.  See In re iPCS,
Inc., 297 B.R. 283, 298 (Bankr. N.D. Ga. 2003)
(interpreting Delaware law and holding that estate representative had standing
to assert alter ego claim of debtor corporation).  
          We conclude that, under Delaware and
Pennsylvania law, a corporation, particularly an insolvent one, has standing to
pierce its own corporate veil under an alter ego theory to reach the assets of
its parent.  See S.I. Acquisition, 817 F.2d at 1152.  We
further conclude that such claim passes into the bankruptcy estate on the
filing of the bankruptcy petition.  See 11 U.S.C. § 541(a)(1).  At that point,
the trustee or debtor-in-possession has exclusive standing to assert the alter
ego claim.  See Tow, 312 S.W.3d at 757; Highland
Capital Mgmt., 212 S.W.3d at 530.  As
applied to this case, the debtor-in-possession, Washington Group, was the only
party with standing to assert an alter ego claim against Raytheon.  Boccard did not
have standing to assert the alter ego claim. 
Thus, we hold that the trial court was without subject-matter jurisdiction
to render judgment based on the equitable claim of alter ego.  
          We sustain Raytheon’s first issue.[10]


 
Conclusion
          Because we hold that Boccard did not have
standing to pursue its alter ego claim against Raytheon, we vacate the trial
court’s judgment and dismiss the case.   
 
 
                                                                      Laura
Carter Higley
                                                                      Justice

 
Panel consists of Chief
Justice Radack and Justices Higley and Brown.




[1]
        Rather than a trustee, the debtor
ordinarily manages the bankruptcy estate in a Chapter 11 proceeding, acting as
the “debtor-in-possession.”  11 U.S.C. §§ 1101(1), 1107.


[2]         The jury found that Boccard
was entitled to $3,588,121.22 in breach of contract damages.  The trial court subtracted $143,607.60,
representing the amount Boccard had received through
the bankruptcy court proceedings. 


[3]
        A
debtor-in-possession has many of the powers of a bankruptcy trustee.  See
11 U.S.C. § 1107.  Relevant to this case, section 323(b) of the
Bankruptcy Code gives trustees the right to prosecute any action belonging to
the bankruptcy estate, and debtors-in-possession have the same rights to sue and
be sued as does a trustee.  See id.; see also 11 U.S.C. § 323(b); ASARCO
LLC v. Americas Mining Corp., 396 B.R. 278, 325 & n.32 (Bankr. S.D. Tex. 2008). 
Because there is no distinction between the two terms for purposes of
the present discussion, we will use the terms, debtor-in-possession and trustee,
interchangeably.
 


[4]
        “[A]ny
act to obtain possession of property of the estate or of property from the
estate” is subject to an automatic stay.  11 U.S.C. § 362(a)(3).
 The automatic stay is “self-executing,
effective upon the filing of the bankruptcy petition,” and it acts as “an
injunction issuing from the authority of the bankruptcy court.”  In re Gruntz, 202 F.3d 1074, 1081–82 (9th
Cir. 2000).  Accordingly, actions
taken in violation of the automatic stay, including judicial proceedings, are
void.  Id. at 1082.  Claims that are not administered or abandoned
remain the property of the estate forever.  See 11
U.S.C. § 554; Matthews v. Potter, 316
Fed. Appx.
518, 521 (7th Cir. 2009) (“The trustee may abandon a legal claim, but until
then only the trustee, as the real party in interest, has standing to sue.”); In re Associated Vintage Grp.,
Inc., 283 B.R. 549, 566 n.14 (B.A.P. 9th Cir. 2002) (“Unscheduled property
remains ‘property of the estate’ after the case is closed (i.e. forever).”)
 


[5]
        Boccard
contends that Bankruptcy Code section 544 does not provide authority for a
trustee to pursue an alter ego claim on behalf of the bankruptcy estate.  We agree. 
Generally, when courts allow a trustee to bring an alter ego claim, they
permit it under section 541 rather than under section 544 because “[t]he
purpose of [section] 544 is to give a trustee the power of a hypothetical lien
creditor to avoid transfers of and liens on the debtor’s property when the
trustee cannot prevent them under other sections of the bankruptcy code. . . .  Many courts have completely rejected [section]
544’s use as a means for debtor corporations to bring alter ego actions.”  In re
Icarus Holding, LLC, 391 F.3d 1315, 1319 n.4 (11th Cir. 2004).  As mentioned, causes of action that, under
applicable state law, were available to the debtor, at the time that the
bankruptcy case commenced, become property of the estate pursuant to section
541.  La. World Exposition v. Fed. Ins. Co., 858 F.2d 233, 245 (5th Cir. 1988).
 The trustee “steps into the shoes of the
debtor at the commencement of the case” and may assert those claims that are
part of the debtor’s estate.  ASARCO, 396 B.R. at 325; see In re E.F. Hutton Sw. Props. II, Ltd., 103 B.R. 808, 812 (Bankr. N.D. Tex. 1989) (“If an action
belongs to the estate, the trustee has the power and duty to prosecute the
action for the benefit of all creditors and shareholders in the estate.”).
 


[6]
        Boccard
asserts in its brief that Raytheon’s challenge to Boccard’s
ability to assert the alter ego claim is not a challenge to its standing to
assert that claim; rather, it is a challenge to Boccard’s
capacity to bring the claim.  Boccard points out that a challenge to a party’s capacity
must be raised by a verified denial.  See Tex. R. Civ. P. 93.  It contends that Raytheon has waived its
challenge to Boccard’s right to bring the alter ego
claim because Raytheon did not file a verified denial.  We disagree with Boccard’s
characterization of Raytheon’s challenge. 
The case law is clear that a trustee has exclusive standing to assert a claim that is property of the bankruptcy
estate.  See Tow v. Pagano, 312 S.W.3d 751, 757 (Tex. App.—Houston [1st
Dist.] 2009, no pet.); Highland Capital Mgmt., L.P. v. Ryder Scott
Co., 212 S.W.3d 522, 530
(Tex. App.—Houston [1st Dist.] 2006, pet. denied).  It is clear from the case law that Raytheon’s
challenge is to Boccard’s standing, not to its
capacity.  Although capacity must be
raised by verified denial, standing can be raised at any time.  See Austin Nursing Ctr., Inc. v. Lovato,
171 S.W.3d 845, 849 (Tex. 2005). 
We also note that the issue of whether Boccard
could assert the alter ego claim was adjudicated prior to trial in a motion for
summary judgment proceeding in Boccard’s favor.  At that point, there was no longer a need for
a verified denial.  See Basic Capital Mgmt., Inc. v. Dynex
Commercial, Inc., 348 S.W.3d 894, 899 (Tex. 2011) (holding that “there was
no longer any reason for a verified pleading” regarding capacity after issue
had been adjudicated in summary judgment proceeding). 
 


[7]
        It is noteworthy that, in Trenwick America
Litigation Trust v. Ernst & Young, L.L.P., the Delaware Chancery Court concluded
that a subsidiary corporation’s board was “free to take action in aid of its
parent’s business strategy” “[i]n the absence of any
indication that they would be causing [the subsidiary corporation] to violate
legal obligations owed to others.”  906 A.2d 168, 201 (Del. Ch. 2006).  The court observed that directors of a
wholly-owned subsidiary’s board may follow the parent’s instruction “unless
those instructions required the board to violate the legal rights of others.”  Id. at 202.  The Trenwick court explained
that a narrow circumstance exists in which a subsidiary’s directors would owe a
separate duty to the subsidiary itself, in addition to their fiduciary duty of
loyalty owed to the parent corporation: “At most, one might conceive that the
directors of a wholly-owned subsidiary owe a duty to the subsidiary not to take
action benefiting a parent corporation that they know will render the
subsidiary unable to meet its legal obligations.”  Id. at 203.  Thus, the
corporate dynamics of a parent and its subsidiary shift when a parent uses its
subsidiary for profit and, as part of that process, renders the subsidiary
insolvent and unable to meet its legal obligations to others.  A scenario common in the context of alter ego
claims and alleged in this case.  
 


[8]
        The Supreme Court of Louisiana
made the following observation regarding Anadarko:
 
          The Anadarko
ruling has been criticized as having been extended beyond its original intent.  In First
American Corp. v. Al–Nahyan, 17 F. Supp. 2d 10,
26 (D.D.C. 1998), the federal district court restricted Anadarko’s statement to its narrow factual confines and rejected an
interpretation which would result in a subsidiary’s directors owing no duties
to the subsidiary itself.  First American held, instead, that “the
directors of a wholly-owned subsidiary owe the corporation fiduciary duties,
just as they would any other corporation.”  In accord is Collins v. Kohlberg and Company (In re Southwest Supermarkets, LLC),
376 B.R. 281, 283 (Bankr. D. Ariz. 2007), where the
federal bankruptcy court agreed Anadarko’s
statement in this regard had been interpreted in an overly broad manner.  Instead, the court there held Delaware law, at
issue in Anadarko, would impose
fiduciary duties on the officers and directors of a wholly owned subsidiary
that run directly to the subsidiary itself, and not only to its sole
shareholder.  In fact, the federal
bankruptcy court found Anadarko’s
extension beyond its facts would yield shocking results in certain
circumstances.
 
          Wooley v. Lucksinger, 61 So.3d 507, 589–90 (La. 2011)
(footnotes omitted).


[9]
        In one frequently cited case, Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d
1339, 1348–49 (7th Cir. 1987), the Seventh Circuit held that
Illinois law provided a bankruptcy trustee with the right to bring an alter ego
action; however, the Illinois Supreme Court questioned that ruling in a
decision holding that a corporation may not sue its parent corporation under an
alter ego theory.  In re Rehabilitation of Centaur Ins. Co.,
632 N.E.2d 1015, 1018–19
(Ill. 1994).


[10]
      Because
this issue is dispositive, we do not address Raytheon’s remaining three
issues.  See Tex. R. App. P.
47.1.


