Radaszewski v. Telecom Corp./Dissent Heaney

HEANEY, Senior Circuit Judge, dissenting.

I respectfully dissent. The record is more than sufficient to support a prima facie showing that personal jurisdiction over Telecom exists.

Contrux is a wholly owned subsidiary of Telecom. It was organized as a nonunion subsidiary to take advantage of the lower wage and benefit package that such status would permit. It was initially capitalized for only $ 25,000, even though it was to operate as a nationwide motor carrier with equipment valued at $ 1,000,000 or more. Tractors and trailers were purchased for Contrux by Telecom. Telecom assumed ultimate responsibility for the payment of the purchase price. Moreover, Telecom periodically advanced money to Contrux for operating expenses or guaranteed payment for such expenses, taking as security for its advances a mortgage on all the tangible assets of Contrux. Contrux's debt to Telecom eventually totaled over $ 750,000, all of which was secured in 1985 by a mortgage on all of Contrux's assets, leaving little or nothing for unsecured or judgment creditors.

Contrux had a negative net worth and net operating losses each of the four years [p312]  that it was actively in business. Most important business decisions involving Contrux were made by Telecom because Contrux had neither the working capital nor the unencumbered assets to permit it to make decisions on its own. In every respect on the basis of the record now before us, Contrux was nothing but a shell corporation established by Telecom to permit it to operate as a nonunion carrier without regard to the consequences that might occur to those who did business with Contrux or those who might be affected by its actions.

Telecom does not challenge the above facts. Rather, it argued that because Contrux obtained $ 1,000,000 in liability insurance through Telecom, Contrux had sufficient funds to meet its obligations to tort claimants. The district judge rejected this contention, stating:

Whether a corporation is undercapitalized is a question of fact which turns on the nature of the business of the corporation and the risks that business necessarily faces. . ..

Upon review of all the pleadings and evidentiary materials, the court concludes that plaintiff and Flexi-Van have made a prima facie showing that Contrux was undercapitalized from its inception. This showing has not been rebutted by Telecom's sole assertion that Contrux procured liability insurance in conformity with federal regulation. Furthermore, Telecom has never directly disputed the specific allegations of undercapitalization that have been made by plaintiff and Flexi-Van. As for showing that Contrux was undercapitalized for an improper purpose, the court finds that the evidence submitted on this issue has failed to resolve this material factual dispute. Given that a determination of a corporation's financial status is a question of fact, the court finds that the question is best left for the trier of fact to resolve.

The majority rejects the district court's analysis, reasoning that Contrux had liability insurance and thus was considered financially responsible under the applicable federal regulations. In my view, Contrux's liability insurance is a relevant factor to be considered, but a fact finder after a trial might well find that this factor alone does not require a verdict for the defendant.

There are many unanswered questions about the $ 10,000,000 excess coverage policy purchased from the Integral Insurance Company. First, was Integral solvent at the time the insurance was purchased. The record reveals that Integral incurred large operating losses in 1983 and 1984, that it did not receive a Best rating in 1984 because a substantial portion of its business was reinsured with reinsurers not licensed by the United States, and that it did not receive a Best rating in 1985 because it could not meet minimum standards. The record further reveals that Telecom paid only $ 4,000 for the $ 11,000,000 policy procured through its own subsidiary insurance agency. It seems to me that these facts raise an issue as to whether Integral was solvent at the time of purchase and that the issue is one to be developed at trial. Second, what did Telecom know about Integral when it made the purchase. If it knew or reasonably should have known that it was insolvent or nearly so at the time the coverage was purchased, then the insurance did little or nothing to enhance the economic viability of Contrux.

The majority asks why anyone would want to buy insurance from an insolvent company. An answer readily comes to mind. The purchase was a cheap way of complying with federal regulations and furthered the illusion to all concerned that Contrux was a viable company able to meet its responsibilities. The record does not show that the federal regulating agency determines whether an insurance company is capable of meeting the claims that may be valid against it. The regulation is apparently satisfied simply by filing proof of insurance. Surely Telecom could have determined Integral's ability to meet lawful claims if it had inquired. This issue could be fully developed at trial.

As the matter now stands, the innocent victim may have to bear most of the costs of his disabling injuries without having the opportunity to prove that Contrux was intentionally [p313]  undercapitalized. I believe this is wrong and inconsistent with Missouri law. I would thus remand for trial.