IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

No. 96-30780

K.B.R., INC.,

Plaintiff-Appellant- Cross-Appellee,

versus

L.A. SMOOTHIE CORP.,

Defendant-Appellee- Cross-Appellant

and

A. ALBERT GARDES and STANTON MIDDLETON, III,

Defendants-Appellees

Appeal from the United States District Court For the Eastern District of Louisiana (95-CV-116)

January 22, 1998

Before REYNALDO G. GARZA, SMITH, and WIENER, Circuit Judges.

PER CURIAM:*

Plaintiff-Appellant-Cross-Appellee K.B.R., Inc. (KBR) appeals

the district court’s amended judgment rendered following the motion

* Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. for a new trial filed by Defendant-Appellee L.A. Smoothie

Corporation (LASC) and Defendants-Appellees A. Albert Gardes and

Stanton Middleton, III (collectively, Defendants). In its amended

judgment, the district court vacated its previous finding of fraud

and its determination that the corporate veil should be pierced,

and held LASC —— but not Gardes or Middleton —— liable for breach

of contract only. Discerning no reversible error in the district

court’s resolution, we affirm.

I

FACTS AND PROCEEDINGS This case stems from a failed joint venture (Venture) between

two corporations —— KBR and LASC —— to create and operate a

smoothie store at the corner of Canal Street and St. Charles Avenue

in New Orleans. The events leading to this appeal began in 1992

when Richard Kirschman, the sole shareholder of KBR, and Gardes and

Middleton, LASC’s shareholders,1 began discussing commercial rental

space on Canal Street as a possible location for a smoothie store.2

The parties had done business together previously.

Middleton and Gardes, on behalf of LASC, attempted to lease

the space in conjunction with a sublease to a third party. The

1 For a period of time, Middleton’s father, now deceased, was a LASC shareholder. 2 For the benefit of those who may not know, a smoothie is a made-to-order beverage blended from a number of available ingredients as selected by the purchaser, and can be obtained from an authorized vendor only.

2 lessor, the Pickwick Club, requested a financial statement from

LASC. In response, Middleton and Gardes supplied a financial

statement roughly estimating the business’s possibilities, which

prompted the lessor to require their personal guaranties of the

lease. When the potential sublease failed to materialize, LASC

abandoned the potential location. According to the Defendants,

Kirschman thereafter encouraged them to rent and occupy the entire

space alone and to form a joint venture partnership between LASC

and KBR.

In late 1992, LASC and KBR formed the Venture as set forth in

their jointly-drafted Joint Venture Agreement (Agreement); each was

represented by counsel. KBR agreed to contribute $75,000 to

construct, furnish, equip and stock the store, and LASC agreed to

ensure that these start-up tasks were accomplished according to a

comprehensive plan and thereafter to conduct the store’s daily

operations.

LASC engaged Woodward Construction (Woodward) to build out the

store for a contract price of $42,975. The Defendants assert that

Woodward requested and received a Venture check of $15,475, which

was recorded in the Venture checkbook, when Woodward commenced

construction. Woodward erroneously credited this check for work

done on the City Park store, a different smoothie store in which

KBR and Kirschman had no interest.

The Venture’s store at Canal and St. Charles was outfitted

3 with both new and used equipment obtained from another smoothie

shop which was closing. The initial inventory comprised new goods.

LASC maintains that of Kirschman’s $75,000, $42,975 went to

construction, $8,800 went to new equipment, and $7,000 went to

inventory, leaving $16,000 for the remainder of the equipment.

Middleton and Gardes contend that they entered the Venture in

reliance on Kirschman’s known expertise in Canal Street business.

They insist that neither Kirschman nor his counsel requested

financial information prior to executing the Agreement; by the same

token, they made no investigation to determine whether Kirschman

could meet his initial financial commitments. LASC maintains that

it did not have financial information available for its stores at

that time, but that commencement of the Venture could have been

delayed pending acquisition of such information had it been

required.

In contrast, Kirschman contends that in entering the Venture

he relied on LASC’s pro forma projections —— given to induce his

investment —— and on LASC’s statement of financial condition

provided to the lessor. He maintains that both documents contained

false information and failed to disclose material information.

According to the Defendants, however, the pro forma consisted of

nothing more than Middleton and Gardes’ rough estimate of

anticipated expenses and necessary sales level, and that the pro

forma had been prepared when Kirschman was trying to convince them

4 to lease the downtown space. Kirschman asserts that Middleton and

Gardes made false representations as to LASC’s estimated sales and

expenses, their smoothie expertise, and the existence of a

comprehensive plan. Further, Kirschman asserts that the Defendants

failed to disclose that the Venture store would be equipped in part

with used fixtures from a store of theirs that was closing and that

their stores had been unprofitable. Finally, Kirschman emphasizes

that he relied on the Agreement’s anti-commingling provision in

choosing to invest.

The Venture proved unsuccessful. KBR insists that Gardes and

Middleton’s management skills were deficient and that they kept

improper records, even failing for well over six months to obtain

the financial data needed to determine whether the business was

operating successfully. The Defendants, in contrast, assert that

they did all that they could to ensure a successful Venture; they

blame the Venture’s failure on obstacles unique to the Canal Street

location, which led to an increase in the costs of goods sold and

caused sales to suffer. The Defendants contend that, even though

both parties were aware of the store’s problems before its first

financial reports were released in July 1993, Kirschman encouraged

continued operation.

In March 1994, KBR initiated an arbitration action to void the

Agreement and recover damages, alleging fraud. In November 1994,

the Defendants filed a petition in state court to enjoin the

arbitration. That court granted a temporary restraining order and

5 stayed the pending arbitration. KBR then dismissed the arbitration

proceeding and filed suit in federal district court on a revised

claim, alleging violations of federal and state securities laws.

The Defendants filed a summary judgment motion, seeking a

determination that the Agreement was not a security under the 1934

Securities Act and that, therefore, federal jurisdiction was

improper. The district court denied the motion.

Following a non-jury trial, the district court, in April 1996,

entered judgment for KBR against the Defendants in solido for

damages, interest, and attorney’s fees, finding them liable for

fraud, violations of federal securities law, and breach of

contract. The court determined that, as the parties intended that

KBR would not have any management role in the Venture, the

Agreement was an investment contract under the 1933 Securities Act.

It further determined that Kirschman had relied on the anti-

commingling provision of the Agreement in making his investment

decision and would not have agreed to the alleged violative use of

his contribution, i.e., commingling. The court concluded that

KBR’s consent to the Agreement was vitiated by fraud, entitling it

to rescission and damages. Finally, the court pierced the

corporate veil, holding Gardes and Middleton personally liable to

KBR for the damages owed by LASC.

After the Defendants filed a motion for a new trial, the court

entered an amended judgment, holding LASC liable for breach of

contract only and vacating the previous holdings of fraud and veil

6 piercing, thus relieving the individual defendants from personal

liability. In reversing its earlier decision, the court concluded

that Kirschman did not rely on the Agreement’s anti-commingling

provision. Further, the court found that representations in the

pro forma made before the Venture was formed did not rise to the

level of fraud, and that changes in the figures for costs of goods

sold did not cause further damage to the Venture and did not amount

to fraud. The court also determined that as the commingling caused

no financial harm to the Venture, it did not constitute fraud; but

that the commingling was a breach of the Agreement, making LASC

liable to KBR for damages. Finally, the court found that, as no

legal fraud was proven, KBR was not entitled to pierce the

corporate veil. Both parties timely appealed.

II

ANALYSIS

KBR asserts that the district court erred as a matter of law

in granting the Defendants’ motion for a new trial. It also

complains that the court erred in finding that Kirschman did not

rely on the Agreement’s commingling provision in making his

investment decision. KBR argues further that the court erred in

determining that the Defendants had not committed fraud in the

inducement of a contract and that no securities fraud existed. KBR

contends that, even assuming that there was no fraudulent conduct,

the corporate veil should be pierced, as Gardes and Middleton

7 failed to observe corporate formalities. On cross appeal, the

Defendants contend that the district court erred in awarding

$52,531 in damages to KBR.

We have now heard the arguments of able counsel, studied their

appellate briefs, reviewed the record on appeal, and considered the

applicable law. From this review, we are satisfied that the

district court committed no reversible error and that the only

argument meriting further discussion is whether the corporate veil

should be pierced to hold Middleton and Gardes personally liable

for LASC’s judgment debt.

A. STANDARD OF REVIEW

The decision to disregard a corporate entity “depends upon the

trial court’s findings of fact.”3 We have noted that “[r]esolution

of the alter ego issue is heavily fact-specific and, as such, is

peculiarly within the province of the trial court.”4 As such, we

apply a clearly erroneous standard of review.5

B. APPLICABLE LAW

As a general rule, corporations are distinct legal entities,

separate from the individuals who own them, as a result of which

3 Talen’s Landing, Inc. v. M/V Venture, II,

(5th Cir. 1981). 4 United States v. Jon-T Chems., Inc.,

(5th Cir. 1985). 5

8 the shareholders are not liable for the debts of the corporation.6

This generality is grounded in the theory that insulation of

shareholders from personal liability promotes business and industry

by allowing investors to use the corporate form to make investments

while shielding their personal wealth from business risks.7 Only

in exceptional circumstances may a creditor of the corporation

reach a shareholder by piercing the corporate veil and thereby

render the individual liable for the corporation’s debts or

obligations.8 One such exception is when the corporation is deemed

the “alter ego” of the shareholder. This usually involves

situations in which the shareholder has practiced fraud or deceit

on a third party by acting through the corporation.9 The corporate

veil may be pierced in the absence of fraud, though, when the

shareholders disregard the corporate entity to such an extent that

the corporation ceases to be distinguishable from its

shareholders;10 but when fraud or deceit is lacking, “other

circumstances must be so strong as to clearly indicate that the

6 LSA-R.S. 12:93(B); Riggins v. Dixie Shoring Co. Inc.,

(La. 1991). 7 Riggins,

. 8

. 9 Riggins,

; American Bank of Welch v. Smith Aviation, Inc.,

(La.App. 3d Cir. 1983). 10 Riggins,

.

9 corporation and shareholder[s] operated as one.”11

Courts consider a number of factors in determining whether to

pierce the corporate veil, including (1) commingling of corporate

and shareholder funds; (2) failure to follow statutory formalities

for incorporating and transacting corporate affairs;

(3) undercapitalization; (4) failure to provide separate bank

accounts and bookkeeping records; and (5) failure to hold regular

shareholder and director meetings.12 No one factor carries the most

weight; the “totality of the circumstances is determinative.”13

C. PIERCING THE CORPORATE VEIL

KBR insists that here the corporate veil should be pierced, as

Gardes and Middleton both committed fraud and failed to follow

corporate formalities. It argues that the district court

erroneously reversed its original determination that LASC’s

corporate veil should be pierced because the court harbored the

erroneous belief that a corporate veil could not be pierced absent

a finding of fraud. KBR correctly points out that, even when no

fraudulent conduct has occurred, the corporate veil can be pierced

for failure to observe corporate formalities. Relying on the

11 Cahn Elec. Appliance Co., Inc. v. Harper,

(La.App. 2d Cir. 1983; Kingsman Enters. v. Bakerfield Elec. Co.,

(La.App. 1st Cir. 1976). 12 Riggins,

(citing Smith-Hearron v. Frazier, Inc.,

(La.App. 2d Cir. 1977); Kingsman,

). 13 Riggins,

.

10 factors listed above, KBR urges that the corporate veil should be

pierced because there was evidence of commingling, undercapitali-

zation, and failure to observe corporate formalities.

Specifically, KBR notes that regular shareholders and

directors meetings were not held; and that LASC’s minutes reveal

that the corporation held only annual meetings and had failed to do

even that since 1991. Additionally, KBR points out that the

corporation commingled funds by transferring money back and forth

between LASC and L.A. Smoothie Franchise, Inc. (a company founded

by Gardes and Middleton for the development of LASC franchises)

whenever either needed money. KBR notes further that the court

found that the Woodward payment constituted commingling of funds.

Finally, KBR urges that LASC was undercapitalized, observing that

it was unable to make its initial capital contribution to the

Venture in December 1992 and that Venture funds were used to pay

some costs of construction of LASC’s City Park store and rent for

LASC’s Severn Street store.

The Defendants counter that they did not disregard the

corporate entity. They acknowledge that commingling, lack of

written minutes of meetings, and borrowing funds from L.A. Smoothie

Franchise, Inc. are asserted by KBR, but insist that these

incidents are insufficient to entitle KBR to pierce the corporate

veil. Instead, argue the Defendants, the evidence indicates that

LASC was at all times operated as a corporation. The Defendants

maintain that, as LASC (1) was incorporated and maintained its

11 corporate status with the state; (2) filed corporate tax returns;

(3) maintained banking and accounting records for a small business

corporation; and (4) maintained by-laws and produced minutes of

meetings, the district court did not err in declining to pierce

LASC’s corporate veil.

As a preliminary matter, we disagree with KBR’s contention

that the reason the district court refused to pierce the corporate

veil was its improper belief that the corporate form cannot be

disregarded absent fraud. Although the district court did state

that “[a]s the Court has now found that no legal fraud was proved,

KBR is not entitled to pierce the corporate veil and hold Gardes

and Middleton personally liable for the damages it has sustained,”

this language is not tantamount to a declaration by the district

court that the corporate veil cannot be pierced absent fraud;

rather, it reflects the court’s conclusion that in the absence of

fraud the remaining circumstances of this case do not merit

piercing the corporate veil.

As we agree with the district court’s conclusion that there

was no fraud, we analyze the evidence of corporate behavior to

determine whether Middleton and Gardes disregarded the corporate

form to such an extent that they cannot hide behind the corporate

name.14 To begin with, we here have two business corporations, one

14 Chaney v. Godfrey,

(La.App. 2d Cir. 1988)(In this suit against the corporation and its four shareholders for breach of an alleged contract, “[s]ince the plaintiffs do not assert that the individual shareholders committed

12 on each side ——— KBR and LASC —— all of whose shareholders were

fully aware that the business transaction they sought to confect

was to be a joint venture of their respective corporations. After

reviewing the Agreement, the Assignment for Assumption of Lease,

and other documents and correspondence in the record, we conclude

that sufficient indicia of “corporateness” existed to support the

district court’s determination not to pierce the corporate veil.

The Louisiana Supreme Court opinion in Riggins v. Dixie

Shoring Company15 is instructive. There, the court reversed the

state court of appeal’s determination that the state trial court

was justified in concluding that the corporate form should be

disregarded and the major shareholder held liable. The Louisiana

Supreme Court noted several factors considered by the state trial

court in support of its decision to pierce the corporate veil:

“1) employees being paid in cash with no records maintained of

this; 2) checks from customers of the business that were made out

to O.P. and Reginald Bajoie [majority shareholder and his son]

individually instead of to the corporation; 3) no corporate minutes

kept; 4) property belonging to O.P. Bajoie individually was used by

fraud, they have a heavy burden of proving that the shareholders disregarded the corporate entity to such an extent that it ceased to be distinguishable from themselves.”); Welch,

(“In the absence of fraud on the part of the Smiths [defendants], plaintiff had a heavy burden of proving that they disregarded the corporate entity to such an extent that it ceased to be distinguishable from themselves.”) 15

(1991).

13 the corporation without compensation to O.P.; 4) over $100,000

disappeared without explanation between the end of 1986 and the

filing of the bankruptcy petition; 6) some of the same equipment

used by the corporation . . . being used by the successor business

. . .; 7) disbursements made to employees without complete

documentation; 8) failure to show that the cash received by cashing

the checks made out to the Bajoies individually was deposited into

the corporate accounts; and 9) inexact testimony . . . about how

cash was handled.”16

The state trial court also considered facts which militated

against piercing the corporate veil. These included: “1) for many

years the corporation operated under the corporate name; 2) the

corporation maintained checking accounts and filed the appropriate

tax returns under the corporate name; 3) the corporation showed

profits and paid federal income taxes; 4) the plaintiff testified

that he understood that he was dealing with the corporate entity

and not O.P. and Reginald individually; 5) O.P. held informal

meetings with Reginald about business operations which amounted to

a form of Board of Directors meetings; 6) the corporation was

properly incorporated under the laws of Louisiana; 7) the

corporation had gross receipts of $280,403 in 1985 and $251,963 in

1986; 8) corporate checking accounts were maintained from which

significant corporate disbursements were made; and 9) substantial

16

.

14 sums of money were maintained in the corporate checking

accounts . . . .”17

In ruling that the corporate veil should not have been

pierced, the Louisiana Supreme Court relied on a number of factors,

including, but not limited to, the following points. First, there

was no evidence that Bajoie used the corporate form to perpetrate

fraud. Second, even though some corporate formalities —— like

Board of Directors meetings —— were not followed, most formalities,

such as maintaining corporate bank accounts and filing corporate

tax returns, had been followed. Furthermore, when corporate

formalities such as board meetings were not followed, the

shareholders “still ran the corporation basically on a corporate

footing; for example, they regularly met informally about business

operations which, especially given that this was a small, closely

held corporation, sufficed to satisfy the spirit of the

requirement.”18 Third, contracts were routinely entered into in the

name of the corporation, including those with the plaintiffs, who

understood and believed they were contracting with the corporation.

Fourth, the court noted that the record did not support the alleged

diversion of corporate assets prior to filing the bankruptcy

petition. Finally, the Louisiana Supreme Court declared that the

uncompensated use of Bajoie’s tools and land by the corporation, as

17

. 18

.

15 well as the failure to keep corporate minutes or maintain a cash

journal, were not sufficient derelictions to support piercing the

corporate veil when viewed in light of the totality of the

circumstances.

Applying Riggins to the totality of the circumstances of the

instant case, we conclude that the district court did not commit

clear error in refusing to pierce the corporate veil. When the

time came to formalize this business deal, the Agreement plainly

reflected that two corporations were the only parties forming the

joint venture. The Agreement was signed by Middleton and Kirschman

in their respective corporate capacities. Moreover, Kirschman

signed individually for the express but limited purposes of

sections 2.8(f) [confidentiality and noncompetition] and 4.1 [KBR’s

initial contribution], and Middleton and Gardes signed individually

for purposes of section 4.2 [LASC’s initial contribution] only.

As for the conduct of business after the Venture had been

formed, LASC entered an Assignment and Assumption of Lease

Agreement with the Venture in December 1992. In this transaction,

Middleton, the assignor, signed the document in his capacity as

LASC President; Middleton and Kirschman both signed for the

Venture, the assignee, in their respective corporate capacities

with KBR and LASC; and Middleton, Gardes, and Kirschman each signed

individually as guarantors of the lease. Kirschman cannot be heard

to complain that LASC failed to act in its corporate capacity when

both he and Middleton, as corporate officers, signed an agreement

16 with its lessor, The Pickwick Club, assigning LASC’s lease to the

Venture. Moreover, Kirschman, as a leasing agent with Latter &

Blum, had represented The Pickwick Club in finding a lessee for the

building. Later, as Pickwick’s agent, Kirschman addressed a

facsimile transmission to LASC regarding lease compliance. And

additional documents in the record reflect correspondence between

two corporate entities.19

When addressing the observation of corporate formalities,

commentators have generally recognized that adherence must be

substantial, but that 100 percent observation is not required.20

We also recognize that this was a small business formed and

operated by closely-held corporations that were owned by three

individuals who had dealt with one another in the past; and that in

such circumstances parties tend to follow fewer formalities

without, however, eschewing corporateness altogether. Neither does

Louisiana corporate law require perfection;21 maintaining

19 We recognize that there are also documents addressed to Middleton and Gardes solely as Venture representatives (not LASC representatives), referring to them as “Stan” and “Al”, and signed by Kirschman on behalf of KBR. See, Plaintiff’s Exhibit 18; Defendant’s Exhibit 34h(13). It is important to note, however, that it was Kirschman who assumed a more informal tone in this correspondence rather than Middleton or Gardes. 20 Riggins,

(La. 1992)(Dennis J., concurring in the denial of rehearing)(citing H. HENN & J. ALEXANDER, LAWS OF CORPORATIONS § 146, at 347 (3d ed. 1983)). 21 See e.g., Chaney,

(circumstances were insufficient to clearly indicate that shareholders and corporation acted as one despite evidence that shareholders often informally met to discuss business without sending notice of a meeting,

17 formalities is not sacrosanct but is merely an indicia of reliance,

absent fraud.

Both KBR and LASC were fully aware that this was to be a

business venture entered into by their respective corporations.

Absent a conclusion of either fraud or alter ego, Kirschman cannot

bypass the corporation and satisfy LASC’s obligation from the

assets of Middleton and Gardes. Instead, he may recover damages

only from the corporation; if that pocket proves to be empty, so be

it.

III

CONCLUSION

After a thorough review of the record, we conclude that, in

the Venture, LASC simply was not the “alter ego” of its

shareholders and that the Defendants did not disregard the

corporate entity to such an extent that it was not —— or ceased to

be —— distinguishable from its shareholders. The district court

did not commit clear error when on reconsideration it determined

that there was no fraud and that the corporate veil should not be

pierced. Accordingly, we

AFFIRM.

minutes were not usually kept, and resolutions were reduced to writing only when required by financial institutions).

18